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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
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Commission file number 0-22635
Racing Champions Corporation
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(Exact name of Registrant as Specified in Its Charter)
Delaware 36-4088307
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 630-790-3507
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
NA NA
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Issuer
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 disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive
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proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the Registrant's common stock held by
nonaffiliates as of March 13, 1998: $65,907,132
Number of shares of the Registrant's common stock outstanding as of March
13, 1998: 13,242,382
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
GENERAL
Racing Champions Corporation ("Racing Champions" or the "Company") is a
leading producer and marketer of collectibles. Racing Champions is best known
for its 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. Since its inception in 1989, Racing Champions has
capitalized on the growing popularity of motor sports by offering an expanding
line of high quality, affordable racing replicas targeted toward racing fans
and adult collectors. Beginning in 1996, Racing Champions successfully
expanded into non-racing collectibles by introducing the Racing Champions Mint
line of die cast replicas of classic and late-model vehicles. Racing Champions
continued this expansion in 1997 with the introduction of additional lines of
non-racing vehicle replicas and two new lines of collectible pewter figures.
In 1998, Racing Champions plans to introduce Racing Champions Authentics, a new
line of die cast vehicle replicas sold exclusively at hobby and collector
shops, limited edition racing replicas relating to NASCAR's 50th anniversary,
additional lines of racing and classic and custom vehicle replicas, and a new
line of collectible pewter figures. From 1990, Racing Champions' first full
year of operations, through 1997, Racing Champions' net sales grew from
approximately $5 million to $77 million.
Racing Champions is a holding company which was formed as a Delaware
corporation in April 1996 by an investor group (the "Investor Group") led by
Willis Stein & Partners, L.P., a private investment fund, for the purpose of
consummating a recapitalization (the "Recapitalization") which involved the
acquisition by Racing Champions of both Racing Champions, Inc., a privately
held Illinois corporation formed in 1989 (together with an affiliated company,
the "RCI Group"), and Racing Champions Limited, a privately held Hong Kong
corporation formed simultaneously in 1989 (together with certain affiliated
companies, the "RCL Group"). The RCI Group and the RCL Group, while under
different ownership, effectively operated as one entity with the RCI Group
managing the licensing, product development and
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sales operations, and the RCL Group managing the overseas manufacturing and
shipping operations. The RCI Group was owned equally by Robert E. Dods and
Boyd L. Meyer. The RCL Group was owned by Peter K.K. Chung. Messrs. Dods,
Meyer and Chung continue to serve as senior executives of Racing Champions and
collectively own approximately 29.5% of the outstanding shares of the Company's
common stock, par value $0.01 per share (the "Common Stock").
COLLECTIBLES INDUSTRY
The collectibles industry is composed of numerous niche markets served by
a wide variety of producers and distributors. Collectible products include
figurines, dolls, ceramic buildings, prints, plates, glass, ornaments, steins,
music boxes, trading cards and die cast items, including vehicles. Collectible
products are generally of high quality, produced in limited quantities and
targeted to adults. According to the Collectibles Industry Report for 1997 by
Unity Marketing, an independent market research firm, the collectibles industry
generated customer sales of approximately $9.2 billion in the United States in
1996. This represented a 15.0% increase from 1995 and a 30% increase from
1994. Demographic trends are expected to positively impact the industry, as
the baby boom generation ages and has higher discretionary income that can be
spent on leisure goods such as collectibles. Racing Champions is currently
focused on the following two segments of the collectibles market.
DIE CAST VEHICLE REPLICAS
The die cast vehicle industry generated consumer sales of approximately
$1.2 billion in the United States in 1996. Die cast vehicles include airplanes,
trains, tractors, and most significantly, automobiles and trucks and have been
produced for many years by a wide variety of companies. While a significant
percentage of die cast products have historically been sold as toys, an active
base of adult die cast collectors has developed over time. Various secondary
markets for die cast vehicles have subsequently developed with a number of
periodicals regularly reporting the secondary market value of a wide variety of
die cast vehicles.
Classic and Custom Vehicle Replicas. The primary market of classic and
custom die cast vehicle replicas is comprised of boys ages five and over and
adults. Collectible periodicals have for many years included die cast vehicles
such as 1:64 scale cars originally produced by Matchbox(R). While collector
interest in die cast cars continues, Racing Champions believes that the quality
of new 1:64 scale vehicles has declined over the years as other manufacturers
reduced features and costs in order to compete on a price basis with toys.
Racing Champions has targeted its classic and custom vehicle replicas to adult
collectors who make multiple purchases of die cast vehicles because of their
affinity for automobiles and trucks, the authenticity of the replicas and the
fun of collecting.
Racing Replicas. Due to the popularity of motor sports, racing replicas
emerged as a significant and growing category of the die cast vehicle industry.
The racing replica industry's primary market is racing fans and adult
collectors. Racing Champions believes that its customers are predominately
male with approximately 80% age 24 and older. These fans are attracted to
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racing replicas due to the highly detailed, precise nature of the replicas and
the popularity of racing and the teams, drivers and sponsors represented by the
replicas. Established secondary markets exist for racing replica products,
including Racing Champions', with market values reported in collector magazines
such as Becketts, Die Cast Digest and Tuff Stuff's RPM.
Racing Champions believes that demand for racing replicas will continue to
increase as the interest in motor sports grows. The North American motor
sports industry currently enjoys a large and growing spectator base with total
attendance in 1996 exceeding 15.4 million at 215 sanctioned events. By
comparison, approximately 14.6 million people attended the 240 NFL regular
season games. The most popular of the motor sports circuits is the NASCAR
Winston Cup Series. From 1990 to 1996, attendance at Winston Cup events
increased from approximately 3.3 million to 5.5 million, an increase of
approximately 67%. During the same period, sales of NASCAR licensed
merchandise have increased from $60 million to $770 million, a compound annual
growth rate of approximately 53%. Racing Champions has contributed to this
growth and has been NASCAR's leading licensee since 1992. Overall Nielsen
ratings for Winston Cup telecasts increased approximately 20% from 1994 to 1996
and household viewership increased approximately 27% for the same period. The
growth in motor sports in general, and NASCAR in particular, is expected to
continue for a number of reasons, including: (i) the opening of new
superspeedways in the Dallas/Ft. Worth and Los Angeles markets and the
inclusion of these markets in the 1997 Winston Cup Series; (ii) the expansion
and upgrade of many existing motor sports facilities throughout the U.S.; (iii)
the conducting of IRL and other non-NASCAR events at traditional NASCAR venues;
and (iv) increased television exposure in response to favorable ratings
increases.
COLLECTIBLE FIGURES AND FIGURINES
Collectible figures and figurines are the largest category within the
collectibles industry with over $3 billion in consumer sales in 1996. These
figures and figurines are produced in various mediums including acrylic,
plastic, porcelain, crystal and pewter and depict characters from a wide
variety of themes including nostalgia, entertainment, sports and wildlife. The
majority of this market includes higher quality figures and figurines which are
generally intended for display. These items are often offered in limited
edition sets, which enhances their collectibility. A portion of this market
includes collectible "action" figures, which typically are plastic, and
represent characters from comics, movies, television shows or professional
sports. Established secondary markets exist for collectible action figures,
with market values reported in collector magazines such as White's Collecting
Figures and Action Figure Digest.
Comic Book Characters. Comic books have been an entertainment medium
since their inception in the late 1930's. Many of today's favorite mythical
characters were created in the pages of comic books, including such popular
superheroes as Batman, Superman and Spiderman. Related entertainment products
such as movies and television programs increase the reach of comic book
characters to a wide spectrum of consumers and collectors. Comic books and
comic book characters have grown into a significant adult collectibles category
as a result of comic books' 60 year history, unique and imaginative characters
and thousands of published titles. The comic book character market primarily
attracts adult males and is supported through national and
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regional collector shows, auctions and dedicated publications such as
Overstreets Price Guides, Wizard Magazine and Fan Magazine.
Sports Collectibles. The sports collectible and memorabilia business has
grown over the last decade from primarily trading cards to encompass a large
variety of products including autographed equipment, pictures and replica
figures. The collector base consists of both children and adults, the majority
of whom are male. Sports memorabilia and collectible products are in high
demand due to the increase in media exposure and the celebrity status afforded
past and present athletes. Collector shows, auctions and dedicated
publications such as Becketts and Sports Collectors Digest help support the
growth in secondary market trading of sports collectibles and memorabilia which
has further enhanced collector interest in the category.
Star Trek Collectibles. With five television series, eight motion
pictures and more than 500 fan publications, Star Trek has developed into one
of the most popular and enduring entertainment and collectible franchises.
More than 200 licensees currently sell a wide variety of Star Trek merchandise
ranging from chess sets to 3-D collector plates. Paramount, the producer of
Star Trek, estimates that Star Trek products have generated more than $2.5
billion at retail since the inception of the first Star Trek television series
in the late 1960's.
PENDING ACQUISITION OF WHEELS SPORTS GROUP, INC.
Racing Champions has entered into an Agreement and Plan of Merger with
Wheels Sports Group, Inc. ("Wheels"), dated as of December 4, 1997, as amended
(the "Merger Agreement"), pursuant to which Racing Champions will acquire
Wheels in a tax-free reorganization. Wheels is a marketer and distributor of
officially licensed NASCAR-related merchandise, including collectibles, apparel
and souvenirs. The Merger Agreement contemplates that Racing Champions'
acquisition of Wheels will be effected by the merger of a wholly owned
subsidiary of Racing Champions into Wheels (the "Merger") pursuant to which the
stockholders of Wheels will receive 0.70 shares of Common Stock in exchange for
each outstanding share of Wheels common stock.
The obligations of the parties to cause the Merger to be consummated are
subject to the satisfaction or waiver in writing of certain conditions,
including approval by the stockholders of Wheels and Racing Champions, the
filing and effectiveness of a registration statement on Form S-4 with the
Securities and Exchange Commission which will include the joint proxy
statement/prospectus that will be used to solicit proxies from the stockholders
of Wheels and Racing Champions, and the receipt of necessary regulatory
approvals and other matters. Because there are significant conditions
remaining to be satisfied with respect to the pending Merger, no assurance can
be given that the Merger will be consummated or, if consummated, that the terms
of the Merger will be as presently contemplated.
BUSINESS STRATEGY
Racing Champions' objectives are to (i) expand its racing replica business
by capitalizing on the growing popularity of motor sports; (ii) leverage its
brand name, reputation with collectors and established distribution and
manufacturing relationships by developing new collectible
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products; and (iii) supplement its internal growth through the pursuit of
strategic acquisitions. Racing Champions' primary strategies for achieving
these objectives are as follows:
Focus on Collectible Racing Replicas. Racing Champions is uniquely
focused on developing collectible scaled die cast vehicle replicas, with an
emphasis on racing vehicles that compete in NASCAR racing events, one of the
fastest growing sports in the United States. Racing Champions believes that it
had the largest domestic share in 1997 of the collectible scaled die cast
racing replica category. Key to that achievement is the commitment of Racing
Champions to fostering the collectibility of its products, including carefully
managing quantities produced and continually freshening product offerings by
staggering release dates. Sales of Racing Champions' collectible NASCAR racing
replicas increased by more than 29% in 1997. In 1996, Racing Champions took its
expertise in racing die cast replicas and applied it to develop new lines of
non-racing vehicle replicas. Racing Champions' non-vehicle racing replicas
currently includes seven product lines and generated over $11 million of sales
in 1997.
Authenticity Through Licensing. Much of Racing Champions' success is
based upon its expertise in producing highly detailed collectibles with a
reputation for quality workmanship and authenticity. Producing authentic
collectibles generally requires Racing Champions to secure licensing agreements
with representatives of the item or person to be replicated. For example,
Racing Champions' NASCAR die cast racing replicas require licensing agreements
with that sport's organizing body, team owners, drivers, sponsors and vehicle
manufacturers, among others. Currently, Racing Champions maintains licenses
with over 90% of NASCAR teams. After the consummation of the Merger, Racing
Champions expects that Wheels' licensing arrangements will complement Racing
Champions' licensing arrangements and that the combined company will be well
positioned to pursue licenses with top drivers.
Primarily Mass Merchant Distribution. Racing Champions distributes its
products primarily through mass merchant retailers such as K-Mart, Target, Toys
'R' Us and Wal-Mart, which provides a strong demographic fit with Racing
Champions' targeted customers - male adults over age 25. By focusing on this
high volume channel of distribution, Racing Champions realizes substantial
economies of scale. By controlling product and selling costs, Racing Champions
can sell at reduced prices without adversely affecting quality. Racing
Champions has also consistently increased shelf space for its products, with
displays for Racing Champions' products in over 20,000 retail locations.
Maintain Dedicated External Manufacturing Relationships. Racing Champions
maintains long-standing relationships with independent, dedicated suppliers in
China for the production of its die cast products. Racing Champions Limited,
the Company's Hong Kong subsidiary (the "Hong Kong Subsidiary"), closely
oversees and coordinates production. Racing Champions believes that its
relationships with its suppliers provide many advantages, including
flexibility, reliability and lower costs. Within the last 12 months, two of
Racing Champions' suppliers have developed new facilities in the Racing
Industrial Zone (the "RIZ Complex") in China. Additional suppliers of Racing
Champions are in the process of developing facilities in the RIZ Complex. The
Hong Kong Subsidiary intends to establish an office in the RIZ Complex to house
its graphic design, engineering, quality control, production scheduling and
administrative personnel. Racing
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Champions believes that the development of the RIZ Complex should allow
increased production, greater efficiency and potential cost savings with
respect to the manufacture of Racing Champions' products.
Strong Growth Through New Products and New Distribution Channels. Key to
Racing Champions' growth strategy is the continuous development of new,
innovative products. For example, since 1996, Racing Champions has created and
expanded its non-racing die cast vehicle replica category to include seven
product lines which generated net sales of $11 million in 1997. After the
consummation of the Merger, the business of Wheels, a leading distributor and
marketer of NASCAR-licensed merchandise, will further broaden Racing Champions'
product offerings while adding significant distribution channels for Racing
Champions' die cast racing replicas.
Pursue Strategic Acquisitions. Racing Champions intends to supplement
internal growth through the pursuit of acquisitions to add new products and
extend Racing Champions' market reach. Racing Champions intends to focus its
acquisition strategy on companies like Wheels that complement Racing Champions'
collectible product offerings.
Experienced Management Team. Behind the success of Racing Champions is a
group of executives with nearly 100 years of combined experience in the
collectibles, consumer products and racing industries. The Racing Champions
management team includes Robert E. Dods, Racing Champions' President, and Boyd
L. Meyer, Racing Champions' Executive Vice President, who co-founded the RCI
Group in 1989 and maintain a significant equity interest in Racing Champions.
PRODUCTS
Racing Champions produces products in the die cast racing replica, classic
and custom vehicle replica and collectible figure categories. Since 1989,
Racing Champions has continually introduced new products and expanded its
product lines. Racing Champions' current products were introduced in the
following years:
<TABLE>
<CAPTION>
YEAR OF
INTRODUCTION PRODUCTS
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<S> <C>
1989 1:64 stock car
1990 1:87 team transporter
1991 1:64 team transporter; 1:24 stock car
1993 1:24 pit stop display; 1:64 and 1:24 Premier Edition
stock cars
1994 1:64 Indy style race car; 1:24 Indy style race car;
1:64 sprint car; 1:24 sprint car
1995 1:64 racing truck; 1:24 stock car with opening hood;
1:24 racing truck; 1:18 stock car with opening hood;
1:9 racing motorcycle; 1:24 top fuel dragster
1996 1:64 stock car with opening hood; 1:144 stock car;
1:64 top
</TABLE>
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<TABLE>
<S> <C>
fuel dragster; 1:64 funny car; 1:64 pro stock drag
racer; 1:24 funny car; 1:24 pro stock drag racer;
1:64 Racing Champions Mint
1997 1:144 racing truck; 1:144 team transporter;
1:144 top fuel dragster; 1:144 funny car; 1:144 pro
stock drag racer; 1:24 Hot Rod Collection; 1:64 Hot Rod
Collection; 1:144 Hot Rod Collection; Comic Book
Champions pewter figures; Sports Champions pewter
figures; 1:144 Racing Champions Mint; 1:144 Truckin USA
transporter; 1:144 Dukes of Hazzard vehicles; 1:64
Stock Rods; 1:24 Stock Rods; 1:144 Stock Rods; 1:64
Police USA Collection.
</TABLE>
RACING REPLICAS
Racing Champions' racing replicas include a comprehensive line of scaled
stock cars, trucks and team transporters representing most of the vehicles
competing in the current year's NASCAR Winston Cup Series, Busch Grand National
Series and Truck Series by Craftsman. Racing Champions also produces replicas
from other popular racing series including NHRA drag racing, CART and IRL Indy
style racing and World of Outlaws sprint car racing. In 1997, Racing Champions
produced over 1,000 different styles of racing replicas, including various
sizes such as 1:18, 1:24, 1:64, 1:87 and 1:144 scale. A 1:24 scale stock car
replica is approximately eight inches long whereas a 1:64 scale stock car
replica is approximately three inches long. Racing Champions' racing replicas
generally retail at prices ranging from $1 to $30.
NASCAR Vehicles. The NASCAR product line covers stock cars in the Winston
Cup and Busch Grand National Series and racing trucks in the NASCAR Truck
Series by Craftsman. NASCAR stock cars were Racing Champions' initial offering
in the collectible racing replica category. NASCAR products include race cars
and trucks, team transporters and pit stop displays which are produced in
various sizes including 1:18, 1:24, 1:64, 1:87 and 1:144 scale. The NASCAR
product line is produced in an annual Regular Edition as well as special
editions. The special editions are differentiated by more detailed painting,
special packaging and limited edition, serial numbered production runs. In
connection with NASCAR's 50th Anniversary celebration in 1998, Racing Champions
will launch four limited edition 50th Anniversary product lines in unique gold
packaging. Racing Champions also plans to introduce its Signature Drivers
Series in 1998. The Signature Driver Series will consist of 1:64 and 1:24
scale stock cars and 1:64 scale transporters which will feature opening hoods,
intricately designed interiors and engines, and driver-specific packaging.
Racing Champions has entered into licenses with various NASCAR stock car and
truck teams, drivers, agents and sponsors, which allow Racing Champions to
replicate race cars and race trucks and team transporters for over 100 teams.
Indy Style Cars. Racing Champions began production of Indy style cars in
1994. Indy style car products are produced in 1:24 and 1:64 scale sizes.
Racing Champions has entered into licenses which allow Racing Champions to
replicate over 30 cars. Racing Champions also holds a license from the
Indianapolis Motor Speedway to produce special event related vehicles.
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World of Outlaws Sprint Cars. Racing Champions began production of the
World of Outlaws sprint car racing product line in 1994. Sprint car products
are produced in 1:24 and 1:64 scale sizes. Racing Champions has entered into
licenses which allow Racing Champions to replicate over 30 cars.
National Hot Rod Association Drag Racers. Racing Champions introduced its
NHRA product line in 1995. NHRA products are currently produced in 1:24, 1:64
and 1:144 scale sizes. This product line includes licenses for the top fuel,
funny car and pro stock drag racing divisions which allow Racing Champions to
replicate over 55 vehicles.
CLASSIC AND CUSTOM VEHICLE REPLICAS
Racing Champions Mint. In early 1996, Racing Champions introduced the
Racing Champions Mint product line. The Racing Champions Mint is a new concept
building on Racing Champions' racing replica success but still focusing on the
collectible die cast vehicle market. Each month Racing Champions issues an
assortment of six serial numbered, highly detailed 1:64 scale replicas of
classic and late model cars and trucks in color schemes matching those used on
the actual vehicle. Each new issue is sequentially numbered and includes
releases of new models and new paint schemes. The replicas are selected from
actual vehicles manufactured over the past five decades. The limited
production of these replicas enhances their collectibility.
In 1997, Racing Champions introduced a 1:144 scale version of the Racing
Champions Mint. Also in 1997, Racing Champions entered into an agreement with
Petersen Publishing Company which allows for the use of the Motor Trend
Magazine trade name and trademarks on the Racing Champions Mint product line.
Racing Champions believes that the Motor Trend name increases the authenticity
of this product line and creates additional interest with collectors and
automobile enthusiasts. In addition, Racing Champions currently promotes this
product line in Motor Trend Magazine and on Motor Trend's cable television
show.
Hot Rod Collection. Due to the success of Racing Champions Mint and
consumer feedback, Racing Champions launched in early 1997 a new line of
collectible die cast hot rod car replicas. The Racing Champions Hot Rod
Collection is based on an exclusive license with Petersen Publishing Company's
Hot Rod Magazine and includes custom designed hot rod cars in 1:24 and 1:64
scale sizes. In addition to the license, Racing Champions will promote this
product line in Hot Rod Magazine and on Hot Rod Magazine's cable television
show and Power Tour of various U.S. cities. Like Racing Champions Mint, new
Hot Rod Collection models and styles will be released in monthly assortments.
Each vehicle in the Racing Champions Hot Rod Collection is produced in limited
quantity and includes a serial number to enhance collectibility.
Other. Racing Champions introduced several additional lines in 1997 to
continue the expansion of its non-racing vehicle replica category, and Racing
Champions plans to introduce new non-racing vehicle replica lines in 1998.
Racing Champions introduced Stock Rods in 1997, which features the graphics of
current NASCAR stock cars on replicas of modern and vintage cars. In 1997,
Racing Champions also launched the Truckin USA line, which features
over-the-road transporters, and Police USA, which features police vehicles from
various U.S. cities and
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states from the 1930's to the 1990's. In 1998, Racing Champions plans to debut
the WCW and Hot Country Steel lines to complement the Truckin USA and Police
USA lines. Hot Country Steel will depict country music stars on "hot" cars,
while WCW vehicles will contain graphics associated with popular wrestlers in
versions from two popular wrestling associations, WCW and NWO.
COLLECTIBLE PEWTER FIGURES
In 1997, Racing Champions introduced a new product category, collectible
pewter figures. High quality pewter figures had not previously been widely
available through mass merchants. Racing Champions initially focused on two
proven and highly recognizable licensed properties -- comic book characters and
popular athletes. Products in this category are released in continuing series.
Replicas of individual comic book characters and popular athletes are produced
in limited production runs and will not be repeated. In order to further
collectibility, all products are hand numbered and sold with a certificate of
authenticity. In 1998, Racing Champions plans to introduce a new line of Star
Trek collectible pewter figures and vehicles.
Comic Book Champions. In early 1997, Racing Champions began producing the
Comic Book Champions line of collectible pewter replicas, and shipped the first
Comic Book Champions replicas in March 1997. Comic Book Champions is a series
of pewter replicas of comic book characters in action poses. Each figure is
mounted on a die cast stand in front of an encased miniature reproduction of a
comic book cover on which the character appeared. Comic Book Champions will be
produced in Gold, Silver and Modern Age series, representing different eras of
comic book publishing. Racing Champions has separate, nonexclusive licensing
agreements with Marvel Characters, Inc. and DC Comics to use the likenesses of
certain comic book characters and the reproductions of the comic book covers
for this product. Figures in the initial releases included Superman(R),
Batman(R), Spiderman(R), Captain America(R), the Incredible Hulk(R) and the
Joker(R).
Sports Champions. In 1997, Racing Champions began producing the Sports
Champions line of collectible pewter replicas, and shipped the first Sports
Champions replicas in May 1997. Sports Champions is a series of pewter
replicas of popular athletes. Each replica is mounted on a die cast stand in
front of an encased miniature reproduction of a Sports Illustrated magazine
cover on which the athlete appeared. Racing Champions has a licensing
agreement with Sports Illustrated to use its trade name and the reproductions
of its magazine covers. Racing Champions has entered into licensing agreements
with several major sports leagues (including the National Football League,
Major League Baseball and the National Hockey League) and has entered into
licenses with several professional athletes to use their likenesses on the
Sports Champions replicas. Racing Champions anticipates entering into
licensing agreements with additional sports figures as the Sports Champions
product line is developed. The initial releases of the Sports Champions line
included Muhammad Ali, Frank Thomas, Ken Griffey, Jr., and Joe Montana, among
others.
Star Trek Champions. Racing Champions plans to introduce a new line of
collectible pewter figures and vehicles based on the Star Trek motion pictures
in the second quarter of 1998.
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Racing Champions has a licensing agreement with Viacom Consumer Products, Inc.
to use the likenesses of characters and vehicles from the Star Trek motion
pictures. Initially, Racing Champions will release a monthly series of Star
Trek Champions collectibles with pewter replicas of legendary characters and
vehicles from the first eight Star Trek motion pictures, including Captain
James T. Kirk(TM), Mr. Spock(TM), Captain Picard(TM) and The U.S.S.
Enterprise(TM). Each hand sculpted figure is cast in pewter and mounted on a
die cast stand in front of a mini framed cell replica from the specific Star
Trek movie. Each figure is a unique one time release and is of limited
production.
LICENSES
Racing Champions markets virtually all of its products under licenses from
other parties. These licenses are generally limited in scope and duration and
authorize the sale of specific licensed products on a nonexclusive basis for a
limited period of time. Racing Champions has over 450 licenses with various
race team owners, drivers, sponsors and agents, generally for terms of 1 to 3
years. Racing Champions' racing replicas are also officially licensed by major
race sanctioning bodies including NASCAR, CART, IRL, NHRA and World of Outlaws.
Although Racing Champions generally does not pursue exclusive licenses, Racing
Champions' licensing arrangements with NASCAR and World of Outlaws were
exclusive through December 31, 1997. Racing Champions has renewed its license
agreement with NASCAR on a nonexclusive basis for three years commencing on
January 1, 1998. Certain competitors have licensed the NASCAR trademark on a
nonexclusive basis for use on racing replicas, and Racing Champions anticipates
that other competitors may also license the NASCAR trademark on a nonexclusive
basis for use on racing replicas in 1998, which could result in increased
competition for Racing Champions' NASCAR racing replicas. Racing Champions
also has license agreements with the major automobile and truck manufacturers,
including Chevrolet, Ford, Oldsmobile, Pontiac, Buick, Cadillac, Dodge,
Chrysler and Kenworth. Racing Champions operates an office in Charlotte, North
Carolina to maintain its licenses for racing replicas for vehicles competing in
the various NASCAR and World of Outlaws series.
Racing Champions has entered into additional licensing arrangements in
connection with the development of its Comic Book Champions and Sports
Champions product lines. Racing Champions has separate licensing agreements
with Marvel Characters, Inc. and DC Comics (a division of Time Warner
Entertainment Company L.P.) to use the likenesses of certain comic book
characters and the reproductions of comic book covers on which they have
appeared. The license agreement with Marvel Characters, Inc. expires on
December 31, 1999, while the license agreement with DC Comics expires on
December 31, 1998. Racing Champions also has a licensing agreement with Sports
Illustrated to use its trade name and the reproductions of magazine covers
which expires on June 30, 1999. Racing Champions has also entered into a
license agreement with Viacom Consumer Products, Inc. in connection with Racing
Champions' planned development of a line of collectible pewter replicas of
characters and vehicles from the Star Trek motion pictures and television
series. Racing Champions has entered into licenses with the National Football
League, Major League Baseball and the National Hockey League to produce its
Sports Champions replicas. Racing Champions has entered into licensing
agreements with several professional athletes to use their likenesses on the
Sports Champions replicas, and
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anticipates entering into licensing agreements with additional professional
athletes as the Sports Champions product line is developed.
Royalty rates for racing replicas vary by racing category but generally
range in aggregate for all licensors from 12% to 19% of Racing Champions' sales
price. Certain special or limited edition products may carry higher royalty
rates. Royalty rates related to non-racing vehicle replicas range in aggregate
from 3% to 10% of Racing Champions' sales price. For collectible pewter
figures Racing Champions expects to pay royalty rates in aggregate from 10% to
23% of Racing Champions' sales price depending on the number of parties
involved and the market value of the property or athlete. Royalties are
generally paid on a quarterly basis.
PATENTS AND TRADEMARKS
Racing Champions has registered several trademarks with the U.S. Patent
and Trademark Office, including the marks Racing Champions(TM), Sports
Champions(TM) and Racing Champions Mint(TM). Other trademark registrations are
currently pending, including Comic Book Champions and Collectible Champions.
Racing Champions holds U.S. patents for its trading card display stand and
model vehicle and for its unique packaging system which includes a die cast
vehicle, emblem and display stand. Racing Champions also has a patent
application pending for its pewter packaging system which includes a figurine
mounted on a display stand in front of a graphic reproduction associated with
the figurine. Racing Champions believes that there is significant value in its
Racing Champions trade name and trademark and plans to build additional value
through increased customer awareness of many of Racing Champions' other trade
names and trademarks.
SALES AND DISTRIBUTION
In 1997, approximately 78% of Racing Champions' net sales were
distributed through national and regional retail chains including K-Mart,
Target, Toys 'R' Us, Wal-Mart, Hills, Meijers and ShopKo. Racing Champions'
products are sold at more than 20,000 retail outlets throughout North America.
Racing Champions utilizes electronic data interchange with its major retail
customers to monitor retail inventories and point of sale information and
receive and process customer orders.
In addition, Racing Champions sells to a limited number of wholesale
customers which as a group represented approximately 10% of net sales for 1997.
The wholesale channel distributes Racing Champions' products to hobby and
collector shops throughout North America. Racing Champions' sales to this
channel on a percentage basis have been declining as its distribution through
major national and regional retailers has increased.
Racing Champions also distributes products through the premium/promotional
distribution channel. In total, this channel represented approximately 12% of
net sales for 1997. Premium/promotional customers include Texaco, John Deere,
Citgo, Kellogg's, Procter & Gamble and Snap-On Tools. Racing Champions'
premium/promotional customers offer Racing Champions' customized products to
their customers through their own distribution outlets (e.g.,
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<PAGE> 13
Texaco, John Deere and Citgo), through special promotions (e.g., Kellogg's and
Procter & Gamble) or with the purchase of their product (e.g., Snap-On Tools).
In total, Racing Champions sells to approximately 300 customers. Racing
Champions' internal sales force provides direct customer contact with virtually
all of Racing Champions' retail and wholesale accounts. This sales force is
supplemented by six external sales representative organizations which are
divided geographically. These external sales representative organizations
provide more frequent and wider customer service and solicitation of the
national and regional retailers and support approximately 58% of Racing
Champions' 1997 net sales. Racing Champions' internal sales force complements
the external sales force by providing a more limited direct relationship
between Racing Champions and the accounts assigned to the external sales force.
In addition, certain large accounts are designated as "house accounts" and are
handled exclusively by Racing Champions' internal sales staff. Sales
representatives generally earn commissions of 3% to 8% of the net sales price
from their accounts, and their commissions are not affected by the involvement
of Racing Champions' internal sales force with a customer or sale.
MARKETING
Racing Champions' marketing program is directed toward collectors and
potential new customers that fit the demographic profile of Racing Champions'
target market. The focus of Racing Champions' marketing plan is to increase
awareness of Racing Champions' product offerings and brand name. Racing
Champions utilizes the following media in its marketing plan.
Advertising. Racing Champions places advertisements in collector's
publications with high, specific market penetration such as die cast collector
publications and figure collector publications. Racing Champions also
advertises in national publications read by its targeted collectors and
enthusiasts, such as NASCAR Magazine, Die Cast Digest, Hot Rod Magazine, Motor
Trend, DC and Marvel comic books, and Sports Illustrated. In early 1998,
Racing Champions began television advertising.
Public Relations. Racing Champions has developed a sustained public
relations effort to build relationships with editors at collector publications.
Ongoing product notices keep editors abreast of changing products, increase
Racing Champions' credibility and market acceptance, and encourage the
editorial staffs of these publications to give adequate coverage to Racing
Champions' products.
Co-op Advertising. Racing Champions works closely with retail chains to
plan and execute ongoing retailer driven promotions and advertising. The
programs usually involve promotion of Racing Champions' products in retail
customers' print circulars, mailings and catalogs.
Direct Consumer. The Internet is an increasingly important part of Racing
Champions' marketing plan as collectors have quickly adopted the Internet as a
preferred way to communicate with other enthusiasts about their hobby. Racing
Champions has established a proprietary World Wide Web site
(www.racingchamps.com) on the Internet which highlights its products, lists
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<PAGE> 14
product release dates and collects information directly from consumers. Racing
Champions also gathers customer information through customer letters, e-mail,
telephone calls and product surveys. Racing Champions uses this customer
information for market research and dissemination of new product information.
In 1998, Racing Champions is testing direct marketing of products through
newspaper and magazine inserts.
COMPETITION
Racing Champions believes that it had the largest domestic share in 1997
of the collectible scaled die cast racing replica category. Racing Champions
competes with the other producers of collectible scaled die cast racing
replicas, such as Action Performance Companies, Inc., which generally
distribute their products through direct marketing, collector clubs and
wholesalers who, in turn, distribute through hobby and collector shops. In
contrast, most of Racing Champions' products are distributed through the mass
merchant channel of distribution. Mattel and Hasbro have also recently entered
the racing replica market and distribute competing die cast racing replicas in
the mass merchant channel of distribution.
Racing Champions also competes with the producers of miniature die cast
toy vehicles such as Matchbox(R) and Hot Wheels(R) who, like Racing Champions,
principally distribute through the mass merchant channel. In this market,
Racing Champions competes with Tyco Toys, Inc. (Matchbox), Mattel, Inc. (Hot
Wheels), Lewis Galoob Toys, Inc. (Micro Machines(R)), Playing Mantis (Johnny
Lightning(R)) and Road Champs, Inc. as well as other domestic and foreign
producers of miniature die cast toy vehicles. Many of Racing Champions'
competitors have greater financial, technical, marketing and other resources
than Racing Champions.
Racing Champions believes that its competitive position is enhanced by a
number of factors, including product quality, features, pricing and diversity,
its ability to recognize trends in its product markets and anticipate shifts in
consumer preferences, its success in designing and marketing new products, the
availability of adequate sources of manufacturing capacity and the ability of
its third party manufacturers to meet delivery schedules, and its ability to
renew existing licenses and to enter into new licenses. In addition, Racing
Champions has sought to develop brand loyalty, to produce products with a
proven track record of collectibility, and to capture shelf space at leading
mass merchants and other retailers.
MANUFACTURING
Hong Kong Office. The Hong Kong Subsidiary is located in Kowloon, Hong
Kong and employs 58 people who oversee all aspects of Racing Champions' product
manufacturing activities. The Hong Kong Subsidiary sources raw materials and
packaging, performs engineering and graphic art functions, executes the
production schedule, provides on-site quality control, facilitates third-party
safety testing and coordinates the delivery of shipments for export from Hong
Kong to the United States.
Die Cast Vehicle Manufacturing. Virtually all of Racing Champions' die
cast vehicle products are manufactured by five independently owned factories
located in China. All of these
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<PAGE> 15
factories (the "Dedicated Manufacturers") are exclusively dedicated to
manufacturing Racing Champions' products and all are privately owned by
independent Chinese entrepreneurs. All products are manufactured to Racing
Champions' specifications using molds and tooling that are owned by Racing
Champions. The Dedicated Manufacturers own the manufacturing equipment and
machinery, and purchase raw materials, hire workers and plan production which
includes subassemblies, final assemblies and packaging. Racing Champions
purchases fully assembled and packaged finished goods in master cartons for
distribution to its customers. Most of the Dedicated Manufacturers have been
supplying Racing Champions for more than five years. Racing Champions'
purchases in 1997 from the Dedicated Manufacturers, Win Yield, Sharp Success,
Sunrise, Shun Fung and Remax were 34%, 24%, 18%, 9% and 5%, respectively, of
Racing Champions' total purchases of die cast vehicle replicas.
The Dedicated Manufacturers have been and will continue upgrading their
manufacturing facilities. With oversight from Racing Champions, the Dedicated
Manufacturers have located a site in Dongguan (approximately 50 miles from Hong
Kong) named the Racing Industrial Zone (the "RIZ Complex") which, when fully
developed, will serve as a complex in which each independent Dedicated
Manufacturer will operate a free standing factory facility. The factory
facilities at the RIZ Complex are being developed by a third party who is
leasing the factory facilities to the Dedicated Manufacturers. Currently, two
of the Dedicated Manufacturers, Remax and Sunrise, have moved into their
factory facilities in the RIZ Complex and are manufacturing there. Win Yield
plans to move to the RIZ Complex in April 1998. Sharp Success and Shun Fung
expect to move there over the next 12 months. Racing Champions intends to
establish an office in the RIZ Complex. This office will house many of the
functions that are currently performed in Racing Champions' Kowloon, Hong Kong
office as well as provide more direct oversight and coordination of the
production activities.
Pewter Figures Manufacturing. Racing Champions manages the entire product
development process. Racing Champions contracts with outside sculptors to
develop individual sculptures that are used in the manufacturing process.
Racing Champions provides the final sculptures to outside manufacturers for
production. All sculptures and tools are returned to Racing Champions after
final production has been completed.
Product Development. New product development is constantly occurring as
Racing Champions seeks to improve quality, update styles and add product lines.
New product design and updates are generally initiated domestically. The
designing process can take several days or a number of months depending upon
whether the process involves an enhancement to an existing product or a new
product design. Racing Champions has been able to develop new products and
make design changes quickly due to its rapid approval process, integrated Hong
Kong Subsidiary and dedicated manufacturing.
Tooling. Racing Champions is continuously developing new tooling and
molds to produce its die cast and pewter products. Racing Champions'
engineering staff works closely with outside tool makers to design and create
new tooling. Depending on the size and complexity of the model, tools can cost
from $20,000 to $120,000. Racing Champions often produces back-up tools for
high volume models. Racing Champions owns all of its tools and provides them
to
15
<PAGE> 16
the manufacturers during production. Tools are returned to Racing Champions
when a product is no longer in production and are stored for future use or
destroyed.
Graphics. Existing product enhancements typically include graphics
changes to the vehicles for new color schemes, sponsor changes and/or driver
changes and revisions to product packaging. Graphics changes are photographed
and forwarded to the Hong Kong Subsidiary for incorporation into Racing
Champions' product line. Racing Champions' graphic arts personnel will
redesign the car decorating process in order to reflect the graphics changes.
All changes are reviewed domestically by Racing Champions personnel and samples
are sent to racing teams and sponsors prior to production for their approval.
Product Safety. Racing Champions' products are designed, manufactured,
packaged and labeled to conform with the safety requirements of the American
Society for Testing and Materials and the Consumer Product Safety Commission
and are periodically reviewed and approved by independent safety testing
laboratories. Racing Champions carries product liability insurance coverage
with a limit of $11.0 million per occurrence. As of December 31, 1997, Racing
Champions has never received a product liability claim.
EMPLOYEES
As of December 31, 1997, Racing Champions had 96 employees, 94 of whom
were employed full-time. Racing Champions emphasizes the recruiting and
training of high quality personnel and, to the extent possible, promotes people
from within Racing Champions. Racing Champions' employees are not covered by
collective bargaining agreements, and Racing Champions considers its employee
relations to be good. Racing Champions' continued success will depend in part
on its ability to attract, train and retain qualified personnel at all of its
locations.
ITEM 2. PROPERTIES
Racing Champions' facilities are as follows:
<TABLE>
<CAPTION>
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
----------- ----------- -------- ----------------
<S> <C> <C> <C>
Corporate
Headquarters........ 12,280 Glen Ellyn, Illinois October 2000
Foreign
Headquarters........ 7,900 Kowloon, Hong Kong July 1998
Warehouse........... 19,183 Chicago, Illinois December 1998
Licensing Office.... 600 Charlotte, North Carolina Month-to-Month
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On June 5, 1997, Petty Enterprises, Inc. filed a civil action in North
Carolina state court naming Racing Champions, Inc. ("RCI") as a defendant. The
complaint relates to Racing Champions' production and sale of racing replicas
bearing trademarks and trade names owned by
16
<PAGE> 17
the plaintiff under a license agreement and makes a number of allegations
regarding unauthorized production, advertisement, use and sale by Racing
Champions of such trademarks and trade names. The plaintiff seeks an
unspecified amount of compensatory and punitive damages and also seeks a court
order that Racing Champions cease production, sale or promotion of products
bearing the plaintiff's trademarks or trade names and deliver all such products
to the plaintiff for destruction. The Company filed an answer on June 30,
1997, denying all claims and asserting a counterclaim with respect to
approximately $80,000 of unpaid receivables. On July 12, 1997, the plaintiff
filed a reply denying the Company's counterclaim. The Company subsequently
removed the case to the U.S. District Court for the Middle District of North
Carolina. Discovery is proceeding in the case, and trial is currently
scheduled for January 11, 1999. Racing Champions intends to vigorously defend
the claims, although no assurances can be given as to the outcome of this
matter.
In the normal course of business Racing Champions also may be involved in
various legal proceedings from time to time. Racing Champions does not believe
it is currently involved in any claim or action the ultimate disposition of
which would have a material adverse effect on Racing Champions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"RACN". The following table sets forth the high and low closing sale prices
for the Common Stock as reported by the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
QUARTER HIGH LOW
- ------- ---- ---
<S> <C> <C>
Second (from June 12, 1997)....... $16.125 $14.500
Third............................. 17.375 11.500
Fourth............................ 13.500 6.813
</TABLE>
At December 31, 1997, there were approximately 72 holders of record of
Common Stock.
The Company has not paid any cash dividends on its Common Stock. The
Company intends to retain any earnings for use in the operation and expansion
of its business and, therefore, does not anticipate paying any cash dividends
in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data with respect to
Racing Champions for each of the periods indicated. The selected financial data
for the fiscal year ended March 31, 1994 for the Predecessor -- RCL Group are
derived from unaudited combined financial statements, which are not included
herein. The data for the year ended December 31, 1993 for the Predecessor --
RCI Group are derived from audited combined financial statements which are not
included herein. The data for the years ended December 31, 1994 and 1995 and
for the four months ended April 30, 1996 are derived from the combined
financial statements of the Predecessor -- RCI Group, which have been audited
by Arthur Andersen LLP, independent public accountants. The data for the fiscal
years ended March 31, 1995 and 1996 and for the one month ended April 30, 1996
for the Predecessor -- RCL Group are derived from combined financial statements
which have been audited by Ernst & Young, independent auditors. The statement
of income data for the eight months ended December 31, 1996 and for the year
ended December 31, 1997 are derived from Racing Champions' consolidated
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants.
The pro forma financial data for the year ended December 31, 1996, which
give effect to the Recapitalization, the initial public offering of Common
Stock completed on June 17, 1997 (the "Offering") and the application of the
net proceeds from the Offering as if each had occurred on January 1, 1996, are
presented for informational purposes only and are not necessarily indicative of
the results of the future operations of Racing Champions or the actual results
that would have been achieved had the Recapitalization, the Offering and the
application of the net proceeds from the Offering occurred on such date. The
pro forma financial data for the year ended
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<PAGE> 19
December 31, 1997, which give effect to the Offering and the application of the
net proceeds from the Offering as if each had occurred on January 1, 1997, are
also presented for informational purposes only and are not necessarily
indicative of the results of future operations of Racing Champions or the
actual results that would have been achieved had the Offering and the
application of the estimated net proceeds from the Offering occurred on such
date.
All of the data set forth below are qualified by reference to, and should
be read in conjunction with, the consolidated financial statements of Racing
Champions and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
------------------------------------------------------------------------------------------------
Predecessor - RCI Group (1) Racing Champions Pro Forma
---------------------------------------- -------------------------- -------------------------
Four months Eight months Year Year Year
Years Ended December 31, Ended ended ended ended ended
--------------------------- April 30, December 31, December 31, December 31, December 31,
1993 1994 1995 1996(2) 1996(2) 1997 1996(2) 1997
------- ------- ------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales..................... $31,047 $43,268 $48,592 $16,614 $49,385 $76,562 $65,999 $76,562
Gross profit.................. 14,151 18,056 23,036 7,210 28,019 44,377 37,532 44,376
Operating income.............. 6,141 8,565 9,724 108 11,236 18,500 11,478 18,500
Net income (3)................ $ 5,722 $ 8,224 $ 9,392 $ 72 $ 2,551 $ 7,876 $ 5,082 $ 9,850
Net income available to
common stockholders......... $ 1,895 $ 7,397 $ 5,082 $ 9,850
Per Share Data:
Net income
Basic....................... $ 0.24 $ 0.71 $ 0.38 $ 0.74
Diluted..................... $ 0.23 $ 0.69 $ 0.37 $ 0.73
Weighted average common
shares and common share
equivalents outstanding (4)
Basic....................... 7,885 10,449 13,242 13,242
Diluted..................... 8,212 10,777 13,571 13,571
<CAPTION>
Predecessor - RCI Group (1)
--------------------------------------
One
Month
Fiscal years ended March 31, Ended
--------------------------- April 30,
1994 1995 1996 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Statement of Income Data:
Net sales................... $18,399 $22,331 $37,322 $3,852
Gross profit................ 4,801 5,288 7,085 752
Operating income............ 1,949 2,066 2,725 507
Net income (5).............. $ 1,690 $ 2,079 $ 2,603 $ 488
<CAPTION>
December 31, 1997
-----------------
Actual
-----------------
<S> <C>
Balance Sheet Data:
Working capital............. $ (275)
Total assets................ 114,778
Total debt.................. 20,600
Total stockholders'
equity...................... 79,092
</TABLE>
- -----------------
(1) On April 30, 1996 Racing Champions acquired the RCI Group and the RCL
Group in the Recapitalization. Accordingly, certain information provided
for the predecessor groups is not
19
<PAGE> 20
comparable to the data of Racing Champions due to the effects of certain
purchase accounting adjustments and the financing related to the
Recapitalization. Also, the data from the predecessor groups are derived
from different fiscal year ends and are not comparable. Prior to the
Recapitalization, the RCL Group included Bergen Services Inc. ("Bergen"),
an entity that did not have any tangible assets or conduct any operations.
Racing Champions did not acquire Bergen pursuant to the Recapitalization.
(2) Data for the four months ended April 30, 1996 and pro forma statement of
income data for the year ended December 31, 1996 include a nonrecurring
incentive bonus expense of $2.4 million incurred in connection with the
Recapitalization, and data for the eight months ended December 31, 1996
and pro forma statement of income data for the year ended December 31,
1996 include a purchase accounting inventory write-up adjustment of $1.4
million as a result of the Recapitalization. Excluding the effects of the
nonrecurring incentive bonus expense and the inventory write-up
adjustment, Racing Champions' pro forma gross profit, operating income,
net income and net income per share for the year ended December 31, 1996
would have been (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Net sales.......................... $65,999 100.0%
Gross profit....................... 38,899 58.9
Operating income................... 15,234 23.1
Net income......................... 7,336 11.1
Net income per share (Basic)....... $ 0.55 --
Net income per share (Diluted)..... $ 0.54 --
</TABLE>
(3) Net income of the RCI Group does not include a provision for federal
income taxes as a result of the S corporation status for certain entities
in this group during the periods from January 1, 1992 to April 30, 1996.
(4) Weighted average shares outstanding has been computed using the treasury
stock method which includes dilutive Common Stock equivalents as if
outstanding during the respective periods.
(5) Net income of the RCL Group includes a provision for Hong Kong income
taxes at an effective rate of 16.5% for certain entities and no
provisions for other entities which were structured as tax-free British
Virgin Islands entities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Corporate and Product History. Racing Champions is a leading producer and
marketer of collectibles. The Company is best known for its extensive line of
officially licensed die cast replicas of actual race cars and related vehicles
from popular professional racing series, including NASCAR, NHRA, CART, IRL and
World of Outlaws. The majority of Racing Champions' products are sold through
mass retailers, such as Wal-Mart, K-Mart, Target and Toys'R'Us.
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<PAGE> 21
Racing Champions has maintained strong profit margins while selling through the
mass retail channel by offering high quality, collectible products, managing
product availability, continuously updating its products, diligently
controlling costs and realizing economies of scale.
Racing Champions' predecessors, the RCI Group and the RCL Group, each
began operations in 1989 with an initial product line of die cast vehicles,
including racing car replicas. The RCI Group, owned by Robert E. Dods and Boyd
L. Meyer, operated Racing Champions' domestic operations, while the RCL Group,
owned by Peter K.K. Chung, operated Racing Champions' foreign operations. In
1990, Racing Champions shifted its focus to collectible stock car replicas and
in 1991 obtained the license to use the NASCAR trademark and logo on its
products and packaging. Racing Champions' initial racing replicas proved to be
popular with racing fans and adult collectors with net sales growing from $5.4
million in 1990 to $32.3 million in 1991. By 1992, many of Racing Champions'
retail customers had overestimated short-term consumer demand for racing
replicas and placed significant orders for Racing Champions' products as well
as for competitive products of varying quality and authenticity introduced by
new entrants to the racing replica market.
While Racing Champions' net sales grew dramatically to $45.8 million in
1992, significant excess inventories of racing replicas had built up at many of
Racing Champions' major customers. As a result, Racing Champions anticipated
reduced sales in 1993 and, in response, limited its production level.
In order to preserve the collector base it had already established and to
further differentiate itself from new market entrants producing lower quality
products, Racing Champions took several steps to enhance the collectibility of
its products in 1993. These steps included introducing annual editions,
limiting the number of units produced, staggering release dates, adding serial
numbers to certain production runs and generally improving quality. Despite a
net sales decline to $31.0 million in 1993, combined operating income as a
percentage of net sales increased.
Over the next three years, Racing Champions experienced considerable
growth in its NASCAR product line and through its introduction of collectible
racing replicas from other major professional racing series. Racing Champions
believes that the measures it undertook from 1993 through 1996 have
significantly enhanced the Racing Champions brand name, thereby increasing
demand for the Company's products. In turn, Racing Champions' mass merchant
customers have responded by providing increased shelf space for Racing
Champions' product lines. Racing Champions believes that its significantly
broader product lines, enhanced brand name recognition among collectors and
retailers and increased shelf space have positioned it to compete favorably in
its principal channel of distribution.
On April 30, 1996, the Investor Group led by Willis Stein & Partners,
L.P., a private investment fund, consummated the Recapitalization in which
Racing Champions was formed as a new holding company for the purpose of
acquiring the domestic operations of the RCI Group and the foreign operations
of the RCL Group. This acquisition was accounted for using the purchase method
of accounting. The acquisition costs in excess of the fair value of net assets
of the
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<PAGE> 22
acquired businesses (goodwill) is being amortized on a straight-line basis over
a 40-year period for financial reporting purposes and for income tax purposes
is deducted over a 15-year period. After the consummation of the
Recapitalization, management owned approximately 45.6% of the Common Stock,
while members of the Investor Group owned approximately 54.4%.
Later in 1996, Racing Champions successfully expanded into non-racing
collectibles by introducing the Racing Champions Mint line of high quality
classic and late-model die-cast vehicle replicas. Racing Champions continued
this expansion in 1997 by introducing the Racing Champions Hot Rod Collection,
a line of collectible die-cast hot rod replicas which is supported by licensing
and marketing agreements with Petersen Publishing Company's Hot Rod Magazine.
Beginning in 1997, Racing Champions targeted comic book and sports
enthusiasts and figure collectors with two new lines of collectible pewter
figures, marketed under the names Comic Book Champions and Sports Champions,
and manufactured under licensing agreements with Marvel Characters, Inc., DC
Comics (a division of Time Warner Entertainment Company L.P.) and Sports
Illustrated. A third line, based on the popular Star Trek motion pictures and
television series, will debut in 1998.
Sales and Expenses. Racing Champions' sales are recognized as products
are shipped. Racing Champions does not sell its products on consignment and
ordinarily accepts returns only for defective merchandise. Returns have
historically not been significant. In certain instances, where retailers are
unable to resell the quantity of products which they have purchased from Racing
Champions, Racing Champions may, in accordance with industry practice, assist
retailers in selling such excess inventory by offering credits and other price
concessions. These credits and other price concessions, typically evaluated
and issued annually, have not had a material effect on Racing Champions'
historical financial statements.
Mass merchant retailers purchase Racing Champions' products either in the
United States with credit terms ranging from 30 to 120 days or directly in Hong
Kong with payment made by irrevocable letter of credit or wire transfer. By
acquiring the products in Hong Kong, many of Racing Champions' retail customers
are able to realize efficiencies with respect to cost and logistics. Because
Racing Champions incurs significantly lower distribution and administrative
costs with respect to direct shipments to customers from Hong Kong, a price
discount of approximately 15% to 25% is granted. As a result, Hong Kong
shipments have lower gross profit margins than domestic shipments. Therefore,
the annual fluctuations in the mix of United States versus Hong Kong shipments
will affect year-to-year comparability of net sales and gross profit margins.
However, Racing Champions believes that the operating income margin is
comparable for Hong Kong shipments due to the saved distribution and
administrative costs. For the years ended December 31, 1994, 1995, 1996 and
1997, Hong Kong shipments constituted 28.7%, 44.9%, 52.8% and 60.2%
respectively, of net sales.
Racing Champions' three largest expense categories are cost of sales,
royalties and sales commissions. Cost of sales consists primarily of purchases
of finished products from Racing Champions' manufacturing suppliers. Royalties
vary by product category and are paid on a quarterly basis. Multiple royalties
may be paid on a product to various licensors. In 1997,
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<PAGE> 23
aggregate royalties by product ranged from approximately 3% to 19% of Racing
Champions' selling price. Sales commissions ranging from 3% to 8% of net sales
are paid quarterly to Racing Champions' external sales representative
organizations. In 1997, sales subject to commissions represented 58.4% of
total net sales.
The following is a discussion and analysis of Racing Champions
Corporation's financial condition, results of operations, liquidity and capital
resources. The discussion and analysis should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
elsewhere herein.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain items
reflected in the Consolidated Statements of Income of Racing Champions and its
predecessors and the percentage of net sales represented by these items.
RACING CHAMPIONS CORPORATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Pro forma
--------------------------------------- ---------------------------------------
Year ended Year ended
Year ended Eight months ended December 31, 1997 December 31, 1996
December 31, 1997 December 31, 1996 (Unaudited) (Unaudited)
----------------- ----------------- ----------------- -----------------
(in thousands, except per share data) Amount Percent Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $76,562 100.0% $49,385 100.0% $76,562 100.0% $65,999 100.0%
Cost of sales 32,186 42.0 21,366 43.3 32,186 42.0 27,100 41.1
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 44,376 58.0 28,019 56.7 44,376 58.0 38,899 58.5
Selling, general and administrative expense 23,660 30.9 15,244 30.9 23,660 30.9 21,426 32.5
Amortization of intangible assets 2,216 2.9 1,539 3.1 2,216 2.9 2,239 3.4
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 18,500 24.2 11,236 22.7 18,500 24.2 15,234 23.1
Interest expense 5,126 6.7 6,738 13.6 1,884 2.5 2,907 4.4
Other expenses 200 0.3 153 0.3 200 0.3 101 0.2
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,174 17.2 4,345 8.8 16,416 21.4 12,226 18.5
Income tax expense 5,298 6.9 1,794 3.6 6,566 8.6 4,890 7.4
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,876 10.3% $ 2,551 5.2% $ 9,850 12.8% $ 7,336 11.1%
===================================================================================================================================
Net income available to common stockholders $ 7,397 9.7% $ 1,895 3.8% $ 9,850 12.8% $ 7,336 11.1%
===================================================================================================================================
Net income per common share:
Basic $0.71 -- $0.24 -- $0.74 -- $0.55 --
Diluted $0.69 -- $0.23 -- $0.73 -- $0.54 --
Weighted average shares outstanding:
Basic 10,449 -- 7,885 -- 13,242 -- 13,242 --
Diluted 10,777 -- 8,212 -- 13,571 -- 13,571 --
</TABLE>
Pro forma data for 1997 assume the Offering occurred on January 1, 1997.
Pro forma data for 1996 assume the Offering occurred on January 1, 1996. Pro
forma data for 1996 also includes an adjustment for a non-recurring bonus of
$2.4 million and an inventory write-up adjustment of $1.4 million associated
with the Recapitalization.
23
<PAGE> 24
RCI GROUP
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------- Four Months Ended
1994 1995 April 30, 1996
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... $43,268 100.0% $48,592 100.0% $16,614 100.0%
Cost of sales..................... 25,212 58.3 25,556 52.6 9,404 56.6
------- ------- ------- ------- ------- -------
Gross profit................... 18,056 41.7 23,036 47.4 7,210 43.4
Selling, general and
administrative expense............ 9,941 21.9 13,312 27.4 4,713 28.4
Nonrecurring bonus expense ....... -- -- -- -- 2,389 14.4
------- ------- ------- ------- ------- -------
Operating income............... 8,565 19.8 9,724 20.0 108 0.6
Interest expense 211 0.5 133 0.3 20 0.1
Other expense (income)............ (219) (0.5) 5 -- (23) (0.1)
------- ------- ------- ------- ------- -------
Income before income taxes..... 8,573 19.8 9,586 19.7 111 0.6
Income tax expense................ 349 0.8 194 0.4 39 0.2
------- ------- ------- ------- ------- -------
Net income..................... $ 8,224 19.0% $ 9,392 19.3% $ 72 0.4%
======= ======= ======= ====== ======= =======
</TABLE>
RCL GROUP
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------- One Month Ended
1995 1996 April 30, 1996
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... $22,331 100.0% $37,322 100.0% $3,852 100.0%
Cost of sales..................... 17,043 76.3 30,237 81.0 3,100 80.5
------- ----- ------- ----- ------ -----
Gross profit................... 5,288 23.7 7,085 19.0 752 19.5
Selling, general and
administrative expense............ 3,222 14.4 4,360 11.7 245 6.4
------- ----- ------- ----- ------ -----
Operating income............... 2,066 9.3 2,725 7.3 507 13.1
Interest expense 55 0.3 130 0.3 13 0.3
Other expense (income)............ (113) (0.5) (179) (0.5) (28) (0.7)
------- ----- ------- ----- ------ -----
Income before income taxes..... 2,124 9.5 2,774 7.5 522 13.5
Income tax expense................ 45 0.2 171 0.5 34 0.9
------- ----- ------- ----- ------ -----
Net income..................... $ 2,079 9.3% $ 2,603 7.0% $ 488 12.6%
======= ======= ======= ====== ======= =======
</TABLE>
RACING CHAMPIONS CORPORATION
PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1996
Net sales. Net sales increased $10.6 million, or 16.1%, to $76.6 million
for the year ended December 31, 1997 from $66.0 million for the year ended
December 31, 1996. This increase was primarily due to 29.9% growth in the
NASCAR racing replicas partially offset decreases by in other racing replicas
and in other non-vehicle products, 15.4% growth in classic and custom vehicles,
$4.5 million of sales attributable to the collectible pewter figures category,
a new product introduction in 1997, and a slight increase in prices in 1997.
24
<PAGE> 25
Gross profit. Gross profit increased $5.5 million, or 14.1%, to $44.4
million for the year ended December 31, 1997 from $38.9 million for the year
ended December 31, 1996. The gross profit margin (as a percentage of net
sales) decreased to 58.0% in 1997 from 58.9% in 1996. This decrease is due to
the increase in Hong Kong shipments (to 60.2% of net sales in 1997 from 52.8%
of net sales in 1996) which have a lower gross profit margin than domestic
shipments. There were no major changes in the components of cost of sales in
1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.3 million, or 10.7%, to $23.7 million for
the year ended December 31, 1997 from $21.4 million for the year ended December
31, 1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 30.9% for the year ended December 31, 1997 from 32.5% for
the year ended December 31, 1996. The decrease in selling, general and
administrative expenses as a percentage of net sales was a result of spreading
selling and administrative expenses over higher sales volume. Amortization
expense of $2.2 million for each of the twelve month periods ended December 31,
1997 and 1996, respectively, related to intangible assets created in the
Recapitalization.
Operating income. Operating income increased $3.3 million, or 21.7%, to
$18.5 million for the year ended December 31, 1997, from $15.2 million for the
year ended December 31, 1996. As a percentage of net sales, operating income
increased to 24.2% for the year ended December 31, 1997 from 23.1% for the year
ended December 31, 1996.
Interest expense. Interest expense of $1.9 million and $2.9 million for
the years ended December 31,1997 and 1996, respectively, related primarily to
bank term loans and subordinated debt incurred in connection with the
Recapitalization.
Income tax. Income tax expense for the year ended December 31, 1997 and
December 31, 1996 include provisions for Federal, state and Hong Kong income
taxes at an effective rate of 40.0%.
YEAR ENDED DECEMBER 31, 1997
Net sales. Net sales were $76.6 million for the year ended December 31,
1997. Net sales for the year ended December 31, 1997 included three product
categories -- racing vehicle replicas, classic and custom vehicles and
collectible pewter figures.
Gross profit. Gross profit was $44.4 million for the year ended December
31, 1997. The gross profit margin (as a percentage of net sales) was 58.0%.
Net sales from Hong Kong shipments, which generate lower gross margins due to
price discounts, were 60.2% of net sales for the year ended December 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $23.7 million for the year ended December 31,
1997. As a percentage of net sales, selling, general and administrative
expenses were 30.9%. Amortization expense of $2.2 million or
25
<PAGE> 26
2.9% of net sales for the year ended December 31, 1997, related to intangible
assets created in connection with the Recapitalization.
Operating income. Operating income for the year ended December 31, 1997
was $18.5 million or 24.2% of net sales. Excluding the amortization of
intangible assets, operating income was $20.7 million or 27.1% of net sales.
Interest expense. Interest expense of $5.1 million for the year ended
December 31, 1997, related primarily to bank term loans and subordinated debt
incurred in connection with the Recapitalization.
Income tax. Income tax expense for the year ended December 31, 1997
includes provisions for Federal, state and Hong Kong income taxes at an
effective rate of 40.2%.
EIGHT MONTHS ENDED DECEMBER 31, 1996
Net sales. Net sales were $49.4 million for the eight months ended
December 31, 1996. Net sales for the RCI Group and the RCL Group for the eight
months ended December 31, 1995 were $39.4 million. Net sales for the eight
months ended December 31, 1996 included shipments of racing vehicle replicas
and Racing Champions Mint products.
Gross profit. Gross profit was $28.0 million for the eight months ended
December 31, 1996. The gross profit margin was 56.7%. Included as a reduction
to gross profit was a purchase accounting inventory write-up adjustment which
resulted in an additional $1.4 million of cost of sales. Excluding the impact
of the inventory write-up adjustment, gross profit for the eight months ended
December 31, 1996 was $29.4 million or 59.5% of net sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $15.2 million in the eight months ended December
31, 1996. As a percentage of net sales, selling, general and administrative
expenses were 30.9%. Amortization expense of $1.5 million or 3.1% of net sales
in the eight months ended December 31, 1996 relates to intangible assets
created in connection with the Recapitalization.
Operating income. Operating income for the eight months ended December
31, 1996 was $11.2 million or 22.8% of net sales. Excluding the impact of the
inventory write-up adjustment and the amortization of intangible assets,
operating income was $14.1 million or 28.6% of net sales.
Interest expense. Interest expense was $6.7 million in the eight months
ended December 31, 1996. Interest expense related primarily to bank term loans
and subordinated debt incurred in connection with the Recapitalization.
Income tax. Income tax expense for the eight months ended December 31,
1996, includes provisions for Federal, state and Hong Kong income taxes at an
effective rate of 41.3%.
26
<PAGE> 27
RCI GROUP
FOUR MONTHS ENDED APRIL 30, 1996
Net sales. Net sales were $16.6 million for the four months ended April
30, 1996. This period includes the first quarter of the year which has
historically been a lower volume quarter. Net sales for the RCI Group and the
RCL Group for the four months ended April 30, 1995 were $9.2 million. Net
sales for the four months ended April 30, 1996 included racing vehicle replicas
and the initial shipments of Racing Champions Mint products.
Gross profit. Gross profit was $7.2 million for the four months ended
April 30, 1996. The gross profit margin was 43.4%.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.7 million in the four months ended April 30,
1996. As a percentage of net sales, selling, general and administrative
expenses were 28.4%. Non-recurring bonus expense of $2.4 million or 14.4% of
net sales in the four months ended April 30, 1996 related to a one time payment
of incentive compensation in connection with the Recapitalization.
Operating income. Operating income for the four months ended April 30,
1996 was $108,000 or 0.6% of net sales. Excluding the impact of the
non-recurring bonus expense, operating income was $2.5 million or 15.0% of net
sales.
Interest expense. Interest expense was $20,000 in the four months ended
April 30, 1996. Interest expense related primarily to short-term working
capital bank loans.
Income tax. Income tax expense for the four months ended April 30, 1996
includes only a provision for state replacement taxes as the entities in the
RCI Group were S corporations and therefore not subject to Federal income
taxes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales. Net sales increased $5.3 million, or 12.2%, to $48.6 million
for 1995 from $43.3 million for 1994. The sales growth for 1995 was
attributable to (i) strong growth in the NASCAR racing replica category ($6.5
million), as Racing Champions expanded its NASCAR stock car product offerings
and introduced NASCAR racing trucks, and (ii) increases from other racing
replica product lines ($1.7 million) including the introduction in late 1995 of
NHRA top fuel dragster replicas. These increases were partially offset by a
decrease in a line of vintage automobile and airplane die cast coin banks ($2.9
million) produced by another company and resold to wholesalers by Racing
Champions. The sales increase in 1995 was accomplished despite the negative
impact on first quarter sales due to delays by the vehicle manufacturers in
finalizing stock car designs that in turn delayed Racing Champions' ability to
complete tooling on new models.
27
<PAGE> 28
Gross profit. Gross profit increased $4.9 million, or 27.1%, to $23.0
million for 1995 from $18.1 million for 1994. The gross margin increased to
47.4% in 1995 from 41.7% in 1994. The increase in gross margin was due to a
2.5% price increase in 1995 coupled with stable product costs and a benefit of
1.7% from decorating and design efficiencies. In addition, gross profit
benefited by approximately 1.5% as a percent of net sales when Racing
Champions' products were classified as import duty free beginning January 1,
1995, a reduction from 7.0% of product cost in 1994.
Selling, general and administrative expense. Selling, general and
administrative expenses increased $3.8 million, or 40.0%, to $13.3 million for
1995 from $9.5 million for 1994. As a percentage of net sales, selling,
general and administrative expenses increased to 27.4% in 1995 from 21.9% in
1994. The increase in selling, general and administrative expenses was a
result of higher royalty expenses which increased 4.8% (as a percentage of net
sales) due to increased rates on new product categories and specialty
promotional programs. The remainder of the increase was attributable to
commissions expense which increased as a result of a higher percentage of total
sales being made to customers assisted by outside sales representatives.
Operating income. Operating income increased $1.2 million, or 14.1%, to
$9.7 million for 1995 from $8.5 million for 1994. As a percentage of net
sales, operating income increased to 20.0% for 1995 from 19.8% for 1994.
Income tax. Income tax expense for 1995 and 1994 includes provisions for
state replacement taxes for the RCI Group as these entities were S corporations
and therefore not subject to Federal income taxes.
RCL GROUP
ONE MONTH ENDED APRIL 30, 1996
Net sales. Net sales were $3.9 million for the one month ended April 30,
1996. Net sales consisted of related party sales to the RCI Group of $1.3
million. The remaining net sales (non-RCI Group sales) are redundant with the
net sales from Hong Kong shipments recorded by the RCI Group for April of 1996.
Gross profit. Gross profit was $752,000 for the one month ended April 30,
1996. The gross profit margin was 19.5%.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $245,000 in the one month ended April 30, 1996.
As a percentage of net sales, selling, general and administrative expenses was
6.4%.
Operating income. Operating income for the one month ended April 30, 1996
was $507,000 or 13.1% of net sales.
28
<PAGE> 29
Interest expense. Interest expense was $13,000 in the one month ended
April 30, 1996. Interest expense related primarily to short-term working
capital bank loans.
Income tax. Income tax expense for the one month ended April 30, 1996
includes a provision for Hong Kong income taxes on certain entities in the RCL
Group while certain entities were tax free British Virgin Islands entities.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Net sales. Net sales increased $15.0 million, or 67.3%, to $37.3 million
for 1996 from $22.3 million for 1995. The sales growth for 1996 was
attributable to growth in NASCAR racing replica sales. Net sales consisted of
related party sales to the RCI Group of $11.3 million and $10.3 million in 1996
and 1995, respectively. The remaining net sales (non-RCI Group sales) are
redundant with the net sales from Hong Kong shipments recorded by the RCI
Group.
Gross profit. Gross profit increased $1.8 million, or 34.0%, to $7.1
million for 1996 from $5.3 million for 1995. The gross profit margin decreased
to 19.0% in 1996 from 23.7% in 1995. The decrease was due to an increase from
53.8% of 1995 net sales to 69.7% of 1996 net sales in non-RCI Group sales which
generate lower gross profit margins than sales to the RCI Group.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.2 million, or 35.5%, to $4.4 million for
1996 from $3.2 million for 1995. As a percentage of net sales, selling general
and administrative expenses decreased to 11.7% in 1996 from 14.4% in 1995. The
decrease in selling, general and administrative expenses as a percentage of net
sales was a result of an increase in the percentage of net sales represented by
non-RCI Group sales, which has the effect of spreading administrative expenses
over higher sales volumes.
Operating income. Operating income increased $659,000 or 31.9%, to $2.7
million in 1996 from $2.1 million for 1995. As a percentage of net sales,
operating income decreased to 7.3% for 1996 from 9.3% for 1995.
Interest expense. Interest expense increased to $130,000 for 1996 from
$55,000 for 1995. The increase was due to the bank working capital loans and
capital lease obligations.
Income tax. Income tax expense for 1996 and 1995 includes provisions for
Hong Kong income taxes on certain RCL Group entities while certain entities
were tax free British Virgin Islands entities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $12.6 million during the
year ended December 31, 1997. This was primarily due to earnings from
operations. Capital expenditures for the year ended December 31, 1997 were
approximately $3.8 million, of which approximately $3.2 million was for molds
and tooling.
29
<PAGE> 30
On June 17, 1997, the Company revised and amended its credit agreement
with BankBoston, N.A. and certain other lenders. The revised and amended
credit agreement provides for a revolving loan, a five year term loan and the
issuance of letters of credit. The revolving loan allows the Company to borrow
up to $5.0 million at any time prior to June 28, 2002, based upon levels of the
Company's accounts receivable, inventory and cash flows and the amount of
letter of credit exposure. The Company had $5.0 million outstanding under the
revolving loan at December 31, 1997. The term loan in the principal amount of
$22.0 million is due in scheduled quarterly payments with final maturity on
June 28, 2002. All borrowings under the credit agreement are secured by
substantially all of the assets of the Company.
The term loan and the revolving term loan bear interest, at the Company's
option, at BankBoston's base rate plus a margin that varies between 0.00% and
0.75% or at a reserve adjusted Eurodollar rate plus margin that varies between
1.50% and 2.25%. The applicable margin is based on the Company's financial
performance and is currently 0.00% for base rate loans and 1.50% for Eurodollar
loans. The credit agreement requires the Company to pay a commitment fee of
0.50% per annum on the average daily unused portion of the revolving loan.
BankBoston's Hong Kong branch has made available to the Hong Kong
Subsidiary a line of credit of up to $5.0 million. Amounts borrowed under this
line of credit bear interest at the bank's cost of funds plus 2% and are
cross-guaranteed by Racing Champions, Inc. and the Hong Kong Subsidiary. At
December 31, 1997 the Hong Kong subsidiary had no outstanding borrowings under
this line of credit.
The Company's anticipated debt service obligations under the existing
credit facilities for 1998 for scheduled interest and principal payments and
repayment of the outstanding line of credit borrowings are approximately $10.3
million. Average annual debt service obligations under these same facilities
through September 2001 are approximately 4.8 million. In connection with the
proposed Merger with Wheels, the Company anticipates replacing Wheels' current
credit facility with borrowings from the Company's bank group. The Wheels
credit facility consists of a term loan in the amount of $7.7 million and a
revolving loan of up to $10.0 million. Estimated annual debt service
obligations of the Company including the Wheels credit facility would be
approximately $5.3 million through September 2003.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the timing of
the racing season. Due to seasonal increases in demand for the Company's
racing replicas, working capital financing requirements are usually highest
during the third quarter and fourth quarters. The Company expects that capital
expenditures during 1998, principally for molds and tooling, will be
approximately $4.0 million. The Company believes that its cash flow from
operations, cash on hand and borrowings under the credit agreement will be
sufficient to meet its working capital and capital expenditure requirements and
provide the Company with adequate liquidity to meet anticipated operating needs
for the foreseeable future. However, any significant future product or
property acquisitions (including up-front licensing payments) may require
additional debt or equity financing.
30
<PAGE> 31
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In early 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 SFAS 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 Racing Champions.
YEAR 2000 COMPLIANCE
Racing Champions is reviewing its current computer applications with
respect to the year 2000 issue. Racing Champions does not believe that the
costs to modify its computer applications with respect to year 2000 compliance
with have a material effect on Racing Champions' financial condition or results
of operations. Racing Champions is currently unable to determine the effect on
Racing Champions of year 2000 compliance by its customers or suppliers.
FORWARD-LOOKING STATEMENTS
A number of the matters discussed in this report that are not historical
or current facts deal with potential future circumstances and developments.
The Company's actual results and future developments could differ materially
from the results or developments expressed in, or implied by, these
forward-looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
but are not limited to, the following: (1) the Company's growth is dependent
upon its ability to continue to conceive, design, source and market new
products and upon continuing market acceptance of its existing and future
products; (2) competition in the markets for the Company's products may
increase significantly; (3) the Company is dependent upon continuing licensing
arrangements with race team owners, drivers, sponsors, agents, vehicle
manufacturers, major race sanctioning bodies and other licensers; (4) there are
significant conditions remaining to be satisfied with respect to the Company's
pending acquisition of Wheels and no assurance can be given that such
acquisition will be consummated or, if consummated, that the terms of the
acquisition will be as presently contemplated; (5) the Company relies upon six
independently owned factories located in China to manufacture its racing
replicas and certain other products; (6) the Company is dependent upon the
continuing willingness of leading retailers to purchase and provide shelf space
for the Company's products.; and (7) general economic conditions in the
Company's markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and notes thereto are
filed under this item beginning on page F-2 of this report.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for each of the quarters in the year ended December 31, 1997. All quarterly
information was obtained from unaudited consolidated financial statements not
otherwise contained herein. The Company believes that all necessary
adjustments have been made to present fairly the quarterly information when
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere herein. The operating results for any quarter are
not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
----------------------------------------------------
(in thousands, except per share amount) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $15,187 $22,945 $22,487 $15,943
Cost of sales 6,493 9,351 9,212 7,129
- -----------------------------------------------------------------------------------------------------
Gross profit 8,694 13,594 13,275 8,814
Selling, general and administrative expenses 5,171 6,562 6,523 5,404
Amortization of intangible assets 554 554 554 554
- -----------------------------------------------------------------------------------------------------
Operating income 2,969 6,478 6,198 2,856
Interest expense 2,380 2,114 319 313
Other expense 43 45 65 47
- -----------------------------------------------------------------------------------------------------
Income before income taxes 546 4,319 5,814 2,496
Income tax expense 218 1,732 2,327 1,021
- -----------------------------------------------------------------------------------------------------
Net income $ 328 $ 2,587 $ 3,487 $ 1,475
=====================================================================================================
Net income available to common stockholders $ 79 $ 2,362 $ 3,487 $ 1,475
=====================================================================================================
Net income per common share:
Basic $ 0.01 $ 0.26 $ 0.26 $ 0.11
Diluted $ 0.01 $ 0.25 $ 0.26 $ 0.11
Weighted average shares outstanding:
Basic 7,885 9,004 13,242 13,242
Diluted 8,214 9,333 13,597 13,569
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth unaudited quarterly results of operations
for each of the quarters in the eight months ended December 31, 1996. Data for
the second quarter 1996 begins May 1 and includes an inventory write-up
adjustment of $1.4 million associated with the Recapitalization. All quarterly
information was obtained from unaudited consolidated financial statements not
otherwise contained herein. The Company believes that all necessary
adjustments have been made to present fairly the quarterly information when
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere herein. The operating results for any quarter are
not necessarily indicative of the results for any future period.
32
<PAGE> 33
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED DECEMBER 31, 1996
---------------------------------------
(in thousands, except per share amount) 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $13,664 $23,034 $12,687
Cost of sales 6,733 9,376 5,257
- -----------------------------------------------------------------------------------------------------
Gross profit 6,931 13,658 7,430
Selling, general and administrative expenses 3,993 6,705 4,546
Amortization of intangible assets 384 576 579
- -----------------------------------------------------------------------------------------------------
Operating income 2,554 6,377 2,305
Interest expense 1,735 2,506 2,497
Other expense 42 51 60
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 777 3,820 (252)
Income tax expense (benefit) 422 1,727 (355)
- -----------------------------------------------------------------------------------------------------
Net income $ 355 $ 2,093 $ 103
=====================================================================================================
Net income (loss) available to common stockholders $ 198 $ 1,857 $ (160)
=====================================================================================================
Net income (loss) per common share:
Basic $ 0.02 $ 0.24 $ (0.02)
Diluted $ 0.02 $ 0.23 $ (0.02)
Weighted average shares outstanding:
Basic 7,885 7,885 7,885
Diluted 8,203 8,214 8,214
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
33
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- -------- -------------------------------------
<S> <C> <C>
Robert E. Dods......... 49 President and Director
Boyd L. Meyer.......... 55 Executive Vice President and Director
Peter K.K. Chung....... 44 President of Racing Champions
Limited and Director
Curtis W. Stoelting.... 38 Vice President -- Finance and
Operations and Secretary
John F. Olsen.......... 46 Vice President -- Sales
Peter J. Henseler...... 39 Vice President -- Marketing
M. Kevin Camp.......... 40 Vice President -- Licensing and
Assistant Secretary
Avy H. Stein........... 42 Director
Samuel B. Guren........ 51 Director
Daniel M. Gill......... 34 Director
John S. Bakalar........ 50 Director
John J. Vosicky........ 49 Director
</TABLE>
Robert E. Dods has served as a director and as President of Racing
Champions since April 1996. Mr. Dods co-founded RCI in 1989, and has served as
President of RCI since inception. Prior to founding RCI in 1989 Mr. Dods and
Boyd L. Meyer owned and operated Dods-Meyer, Ltd., a manufacturers'
representative agency which focused on selling products to mass merchants.
Boyd L. Meyer has served as a director and as Executive Vice President of
Racing Champions since April 1996. Mr. Meyer co-founded RCI in 1989, and has
served as Executive Vice President of RCI since inception. Prior to founding
RCI in 1989 Mr. Meyer and Robert E. Dods owned and operated Dods-Meyer, Ltd., a
manufacturers' representative agency which focused on selling products to mass
merchants.
Peter K.K. Chung has served as a director of Racing Champions and as
President of Racing Champions Limited since April 1996. Mr. Chung formed the
RCL Group in 1989 to handle the overseas operating activities of RCI and has
served as President of Racing Champions Limited since inception. Prior to 1989
Mr. Chung was a contract manufacturer for various products for export from
China to the United States and Europe.
Curtis W. Stoelting has served as Vice President -- Finance and Operations
and Secretary of Racing Champions since April 1996. Mr. Stoelting has also
served as Vice President --
34
<PAGE> 35
Finance and Operations of RCI since 1994. Prior to joining RCI, Mr. Stoelting
was employed for 12 years by Arthur Andersen LLP in Chicago, most recently as a
Senior Manager. Mr. Stoelting is a Certified Public Accountant.
John F. Olsen has served as Vice President -- Sales of Racing Champions
since April 1996. Mr. Olsen has also served as Vice President -- Sales of RCI
since 1993. Prior to joining RCI, Mr. Olsen worked for a sales representative
organization located in New York and in this capacity represented the Racing
Champions line since 1989.
Peter J. Henseler has served as Vice President -- Marketing of Racing
Champions since April 1996. Mr. Henseler has also served as Vice President --
Marketing of RCI since March 1996. Prior to joining RCI, Mr. Henseler was a
director of marketing for McDonald's Corporation since 1989, and was most
recently responsible for in-store merchandising and worldwide trademark
licensing.
M. Kevin Camp has served as Vice President -- Licensing and Assistant
Secretary of Racing Champions since April 1996. Mr. Camp has also served as
Vice President -- Licensing of RCI since 1994. Prior to joining RCI, Mr. Camp
held various positions over a 10 year period while employed by NASCAR, most
recently serving as director of licensing and marketing.
Avy H. Stein has served as a director since April 1996. Mr. Stein is a
founder and Managing Director of Willis Stein & Partners, L.P. Along with Mr.
Willis, Mr. Stein is responsible for managing Willis Stein. Prior to founding
Willis Stein & Partners, L.P., Mr. Stein served as a Managing Director of
Continental Illinois Venture Corporation from 1989 through 1994, where Mr.
Stein, along with Mr. Willis, was responsible for managing Continental's
private equity investment activities. Mr. Stein is a director of Tremont
Corporation, Petersen Publishing Company and UC Television Network Corp.
Samuel B. Guren has served as a director since April 1996. Mr. Guren is a
Managing Director of Baird Capital Partners, an affiliate of Robert W. Baird &
Co. Incorporated. Prior to joining Baird Capital Partners in February 1996,
Mr. Guren was a co-founder and managing partner of venture funds affiliated
with William Blair & Company.
Daniel M. Gill has served as a director since April 1996. Mr. Gill is a
founder and Managing Director of Willis Stein & Partners, L.P. Prior to
founding Willis Stein & Partners L.P. Mr. Gill served as a Managing Director
of Continental Illinois Venture Corporation from 1989 through 1994, where Mr.
Gill was responsible for initiating and structuring acquisitions, working with
portfolio company management teams on an on-going basis and arranging for the
disposition of portfolio investments.
John S. Bakalar has served as a director since October 1997. Mr. Bakalar
is currently a private investor. From May 1993 to November 1997, Mr. Bakalar
was President and Chief Operating Officer of Rand-McNally, Inc., a printing and
publishing company, and from prior to 1993 until May 1993 Mr. Bakalar was
Executive Vice President and Chief Financial Officer of
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<PAGE> 36
Rand-McNally, Inc. Mr. Bakalar also currently serves as an Advisory Partner of
Willis Stein & Partners, L.P.
John J. Vosicky has served as a director since October 1997. Mr. Vosicky
has been the Executive Vice President and Chief Financial Officer of Comdisco
Inc., a technology services company, since July 1994. Mr. Vosicky was Senior
Vice President and Chief Financial Officer of Comdisco Inc. from November 1985
to July 1994. Mr. Vosicky serves as a director of Comdisco Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Racing Champions' directors and executive officers, and persons who own more
than 10% of a registered class of Racing Champions' equity securities, to file
with the Commission initial reports of beneficial ownership and reports of
changes in beneficial ownership of Racing Champions' equity securities. The
rules promulgated by the Commission under Section 16(a) of the Exchange Act
require those persons to furnish Racing Champions with copies of all reports
filed with the Commission pursuant to Section 16(a). Based solely upon a
review of such forms actually furnished to Racing Champions, and written
representations of certain of Racing Champions' directors and executive
officers that no forms were required to be filed, all directors, executive
officers and 10% stockholders of Racing Champions have filed with the
Commission on a timely basis all reports required to be filed under Section
16(a) of the Exchange Act, except that Howard A. Schacter, the Company's Vice
President - Communications, filed a Form 5 on February 16, 1998 to report the
purchase of 1,200 shares of Common Stock in June 1997.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information concerning compensation
paid to, earned by or awarded to Racing Champions' Chief Executive Officer and
each of Racing Champions' four other most highly compensated executive officers
in fiscal 1997 for the years indicated below. The persons named in the table
are sometimes referred to herein as the "named executive officers."
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<PAGE> 37
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(2) OPTIONS (#) COMPENSATION
- -------------------------------------------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Robert E. Dods, President................... 1997 $500,000 $ -- -- $ --
1996 333,333 -- -- --
Boyd L. Meyer, Executive Vice President .... 1997 500,000 -- -- --
1996 333,333 -- -- --
Peter K.K. Chung, President of Racing 1997 500,000 -- -- --
Champions Limited........................... 1996 333,333 -- -- --
Curtis W. Stoelting, Vice President - 1997 150,000 245,066 33,653 5,943 (3)
Finance and Operations and Secretary........ 1996 100,178 139,072 83,008 1,381 (3)
John F. Olsen, Vice President - Sales....... 1997 125,000 171,546 25,338 6,919 (4)
1996 83,511 80,350 41,504 2,024 (4)
</TABLE>
- -------------------------
(1) For 1996, all amounts are limited to compensation paid or earned after
the Recapitalization on April 30, 1996.
(2) Consists of amounts paid pursuant to the Racing Champions' 1996 Key
Employees Performance Compensation Plan. See "-- 1996 Key Employees
Performance Compensation Plan."
(3) For 1996, consists of premiums paid by Racing Champions for term life
insurance under which Mr. Stoelting is the beneficiary. For 1997,
consists of $1,193 of premiums paid by Racing Champions for term life
insurance under which Mr. Stoelting is the beneficiary and $4,750 of
matching contributions under the Racing Champions Savings Plan.
(4) For 1996, consists of premiums paid by Racing Champions for term life
insurance under which Mr. Olsen is the beneficiary. For 1997, consists of
$2,169 of premiums paid by Racing Champions for term life insurance under
which Mr. Olsen is the beneficiary and $4,750 of matching contributions
under the Racing Champions Savings Plan.
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<PAGE> 38
OPTIONS GRANTED DURING 1997
The following table provides certain information regarding stock options
granted to the named executive officers of Racing Champions during the year
ended December 31, 1997.
OPTIONS/SAR GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---------------------- ---------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Curtis W. Stoelting... 33,653(1) 21.6% $14.00 June 11, 2007 $296,299 $750,879
John F. Olsen......... 25,338(2) 16.3 14.00 June 11, 2007 222,974 565,291
</TABLE>
(1) Options with respect to 22,473 shares were fully exercisable upon grant
and options with respect to 20% of 11,180 shares become exercisable on
June 11 of each year from 1998 to 2002.
(2) Options with respect to 16,953 shares were fully exercisable upon grant
and options with respect to 20% of 8,385 shares become exercisable on June
11 of each year from 1998 to 2002.
FISCAL YEAR-END OPTION VALUES
The following table provides certain information regarding the value of
unexercised options held by the named executive officers at December 31, 1997.
No named executive officer exercised any options during the year ended December
31, 1997.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
YEAR-END YEAR-END
----------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
- ----------------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Curtis W. Stoelting.... 39,075 77,586 $126,507 $506,014
John F. Olsen.......... 25,254 41,588 63,254 253,007
</TABLE>
(1) Calculated based on closing sale price of $7.75 per share on December
31, 1997.
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<PAGE> 39
1996 KEY EMPLOYEES STOCK OPTION PLAN
On April 30, 1996 in connection with the Recapitalization, the Company's
Board of Directors adopted, and Racing Champions' stockholders subsequently
approved, the 1996 Key Employees Stock Option Plan (the "Stock Option Plan").
Under the Stock Option Plan, the Board of Directors, or the Compensation
Committee of the Board of Directors if so designated by the Board of Directors,
may grant options to purchase up to 415,041 shares of Common Stock to
executives or other key employees of Racing Champions. Options granted under
the Stock Option Plan may be either "incentive stock options," which qualify
for special tax treatment under the Internal Revenue Code, or nonqualified
stock options. Options will expire at such time as the Board of Directors or
Compensation Committee determines, provided that no stock option may be
exercised later than the tenth anniversary (the fifth anniversary in certain
cases) of the date of its grant. Options cannot be exercised until the vesting
period, if any, specified by the Board of Directors or Compensation Committee
has expired. Options are not transferable other than by will or the laws of
descent and distribution, and may be exercised during the life of the employee
only by him or her. No options may be granted under the Stock Option Plan
after December 31, 2005, which is the date the Stock Option Plan terminates.
However, any options outstanding on December 31, 2005 will remain in effect in
accordance with their terms. Racing Champions does not intend to grant
additional options under the Stock Option Plan.
The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than
100% (110% for certain stockholders) of the fair market value of the Common
Stock on the date such option is granted. Payment of the exercise price may be
made in cash or by the surrender of shares of Common Stock having a fair market
value on the date of exercise equal to the exercise price.
Options to purchase 332,033 shares have been granted to certain employees
of Racing Champions under the Stock Option Plan. Each of these options become
exercisable 20% each year over five years commencing on the first anniversary
of the date of grant.
STOCK INCENTIVE PLAN
On April 8, 1997, the Board of Directors adopted, and Racing Champions'
stockholders approved, the Racing Champions Corporation Stock Incentive Plan
(the "Incentive Plan"). Under the Incentive Plan, the Board of Directors, or
the Compensation Committee of the Board of Directors if so designated by the
Board of Directors, may grant options to purchase up to 311,852 shares of
Common Stock to executives or other key employees of Racing Champions. Options
granted under the Stock Option Plan may be either "incentive stock options,"
which qualify for special tax treatment under the Internal Revenue Code, or
nonqualified stock options. Options will expire at such time as the Board of
Directors or Compensation Committee determines, provided that no stock option
may be exercised later than the tenth anniversary (the fifth anniversary for
certain stockholders) of the date of its grant. Options cannot be exercised
until the vesting period, if any, specified by the Board of Directors or
Compensation Committee has expired. Options are not transferable other than by
will or the laws of descent and distribution, and may be exercised during the
life of the employee only by him or her. No options
39
<PAGE> 40
may be granted under the Incentive Plan after April 8, 2007, which is the date
the Incentive Plan terminates. However, any options outstanding on April 8,
2007 will remain in effect in accordance with their terms.
The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than
100% (110% for certain stockholders) of the fair market value of the Common
Stock on the date such option is granted. Payment of the exercise price may be
made in cash or by the surrender of shares of Common Stock having a fair market
value on the date of exercise equal to the exercise price.
In the discretion of the Board of Directors or the Compensation Committee,
any option granted under the Incentive Plan may be accompanied by a reload
option. A reload option may be granted to an optionee who pays for the
exercise of all or part of an option with shares of Common Stock. The reload
options represent an additional option to acquire the same number of shares of
Common Stock as is used by the optionee to pay for the exercise of his
underlying option. A reload option is subject to all of the terms and
conditions of the underlying option, except that the exercise price for a
reload option will be at least equal to 100% of the fair market value of the
Common Stock covered thereby on the date the reload option is granted (i.e.,
the date the underlying option is exercised). The reload option may only be
exercised if the option period of the underlying option to which the reload
option relates has not expired.
In 1997, Racing Champions granted options to purchase 155,753 shares of
Common Stock with an exercise price of $14 per share to officers and key
employees of Racing Champions, including options to purchase up to 78,852
shares of Common Stock that were accompanied by reload options.
EMPLOYEE STOCK PURCHASE PLAN
The Racing Champions Corporation Employee Stock Purchase Plan (the "Stock
Purchase Plan") is designed to comply with section 423 of the Internal Revenue
Code and will provide employees of Racing Champions and its subsidiaries with
the right to purchase shares of Common Stock directly from Racing Champions
through payroll deductions at a purchase price of at least 95% of fair market
value of the Common Stock. Up to 200,000 shares of Common Stock may be offered
under the Stock Purchase Plan in a series of quarterly offerings beginning on
July 1, 1997 and terminating on December 31, 2001. Each participant may elect
to have up to 10% of his base salary invested in Common Stock pursuant to the
Stock Purchase Plan, subject to a limit of $25,000 per year based upon the fair
market value of stock on the date of grant.
1996 KEY EMPLOYEES PERFORMANCE COMPENSATION PLAN
On April 30, 1996 the Board of Directors adopted the 1996 Key Employees
Performance Compensation Plan (the "Performance Compensation Plan"). Under the
Performance Compensation Plan, certain executive officers and other key
employees of Racing Champions will be entitled to receive a cash bonus in the
first quarter of 1997 based upon Racing Champions' consolidated earnings before
income taxes, depreciation and amortization from April 30, 1996 to
40
<PAGE> 41
December 31, 1996. On April 8, 1997, the Board of Directors amended the
Performance Compensation Plan to provide an additional cash bonus to
participants in the first quarter of 1998 based upon Racing Champions'
consolidated earnings before income taxes, depreciation and amortization from
January 1, 1997 to December 31, 1997.
EMPLOYMENT AGREEMENTS
On April 30, 1996 Racing Champions entered into separate employment
agreements with Messrs. Dods, Meyer, Stoelting and Olsen, and the Hong Kong
Subsidiary entered into an employment agreement with Mr. Chung (collectively,
the "Employment Agreements"). The Employment Agreements with Messrs. Dods,
Meyer and Chung each has a term of three years, and the Employment Agreements
with Messrs. Stoelting and Olsen each has a term of two years. Pursuant to the
Employment Agreements, Messrs. Dods, Meyer, Chung, Stoelting and Olsen will
receive base salaries of $500,000, $500,000, $500,000, $150,000 and $125,000,
respectively, and are entitled to participate in the Performance Compensation
Plan and the Stock Option Plan. The Employment Agreements with Messrs. Dods,
Meyer and Chung also provide that the executive officer is eligible to
participate in any medical, health, dental, disability and life insurance
policy as are in effect for the other two most senior executives of Racing
Champions, while the Employment Agreements with Messrs. Stoelting and Olsen
provide that the executive officer is eligible to participate in any medical,
health, dental, disability and life insurance policy as are in effect for other
senior management of Racing Champions excluding Messrs. Dods, Meyer and Chung.
Pursuant to the Employment Agreements, each executive officer has agreed not to
compete with Racing Champions during employment and for a period of two years
following termination of employment and has agreed to maintain the
confidentiality of Racing Champions' proprietary information and trade secrets.
Under the Employment Agreements, Racing Champions may terminate the
executive officer's employment upon the executive officer's death or disability
or if the Board of Directors determines that termination is in Racing
Champions' best interests. The executive officer may resign and terminate the
Employment Agreement at any time. If the executive officer's employment is
terminated for disability or death, Racing Champions is required to continue to
pay the executive officer, his designated beneficiary or estate, whichever is
applicable, the base salary for a period of six months after his termination of
employment. If employment is terminated by Racing Champions without cause or
by the executive officer with good reason, the executive officer is entitled to
receive payment of his base salary until the later of the first anniversary of
the date of termination or the end of his employment term under the Employment
Agreement. In addition, in the event of termination for death, disability, by
Racing Champions without cause or by the executive officer with good reason,
the executive officer is entitled to receive all fringe benefits under his
Employment Agreement accrued prior to the termination date. If employment is
terminated by Racing Champions for cause or by the executive officer without
good reason, the executive officer is not entitled to receive any base salary
or fringe benefits for periods after the termination date.
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<PAGE> 42
COMPENSATION OF DIRECTORS
Directors who are employees of Racing Champions or are affiliates of
members of the Investor Group receive no compensation for services as members
of either the Company's Board of Directors or committees thereof. Other
directors receive an annual retainer of $7,500, payable in cash, and receive a
fee of $1,000 for each Board meeting attended and $1,000 for each committee
meeting attended. Such fees for attendance at Board meetings and committee
meetings may not exceed $1,000 per day.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of December 31, 1997 by: (i) each of
Racing Champions' directors and named executive officers; (ii) all directors
and executive officers of Racing Champions as a group; and (iii) each person or
other entity known by Racing Champions to own beneficially more than 5% of the
outstanding Racing Champions Common Stock. Except as otherwise indicated in
the footnotes, each of the holders listed below has sole voting and investment
power over the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
COMMON COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED
------------------------------------ ------------ ------------
<S> <C> <C>
Robert E. Dods...................... 1,303,701 9.8%
Boyd L. Meyer(1).................... 1,303,701 9.8
Daniel M. Gill(2)................... 2,381,249 18.0
Peter K. K. Chung(3)................ 1,303,701 9.8
Samuel B. Guren(4).................. 651,431 4.9
Avy H. Stein(5)..................... 2,381,249 18.0
John S. Bakalar..................... -- --
John J. Vosicky..................... 10,000 *
Curtis W. Stoelting(6).............. 137,640 1.0
John F. Olsen(7).................... 44,967 *
Willis Stein & Partners, L.P.(8).... 2,381,249 18.0
All directors and executive
officers as a group
(12 persons)(9)..................... 7,226,322 54.1
</TABLE>
------------
* Denotes less than 1%.
(1) Includes 343,798 shares of Common Stock held by the Meyer
Family Limited Partnership, for which Mr. Meyer serves as a general
partner and shares voting and investment power with members of his
immediate family who are the other general partners.
42
<PAGE> 43
(2) Represents shares of Common Stock held by Willis Stein &
Partners, L.P. Mr. Gill may be deemed to beneficially own the
shares of Common Stock owned by Willis Stein & Partners, L.P. by
virtue of his status as a Founding Member of Willis Stein &
Partners, L.L.C., the general partner of Willis Stein & Partners,
L.P.
(3) Represents shares of Common Stock held by a corporation
controlled by Mr. Chung.
(4) Represents shares of Common Stock held by Baird Capital
Partners II Limited Partnership and BCP II Affiliates Fund Limited
Partnership, entities for which Mr. Guren serves as a Managing
Director and shares voting and investment power with the other
Managing Directors. Mr. Guren disclaims beneficial ownership in all
shares of Common Stock held by Baird Capital Partners II Limited
Partnership or BCP II Affiliates Fund Limited Partnership.
(5) Represents shares of Common Stock held by Willis Stein &
Partners, L.P. Mr. Stein may be deemed to beneficially own the
shares of Common Stock owned by Willis Stein & Partners, L.P. by
virtue of his status as a Founding Member of Willis Stein &
Partners, L.L.C., the general partner of Willis Stein & Partners,
L.P.
(6) Includes 39,075 shares of Common Stock subject to stock
options which are currently exercisable.
(7) Includes 25,254 shares of Common Stock subject to stock
options which are currently exercisable.
(8) The general partner of Willis Stein & Partners, L.P. is
Willis Stein & Partners, L.L.C., a Delaware limited liability
company, of which John R. Willis, Avy H. Stein, Daniel M. Gill, Beth
F. Johnston, and Daniel H. Blumenthal are the Founding Members.
Each such person may, through Willis Stein & Partners, L.L.C., be
deemed to share the power to direct the voting and disposition of
all of the Common Stock held by Willis Stein & Partners, L.P. The
address of Willis Stein & Partners, L.P. is 227 West Monroe Street,
Suite 4300, Chicago, Illinois 60606.
(9) Includes (i) 1,303,701 shares of Common Stock held by a
corporation controlled by Mr. Chung, (ii) 343,798 shares of Common
Stock held by the Meyer Family Limited Partnership, for which Mr.
Meyer serves as a general partner and shares voting and investment
power with members of his immediate family who are the other general
partners, (iii) 2,381,249 shares of Common Stock for which Messrs.
Gill and Stein share voting and investment power and 651,431 shares
of
43
<PAGE> 44
Common Stock for which Mr. Guren shares voting and investment power
(Messrs. Gill, Stein and Guren disclaim beneficial ownership in
such shares of Common Stock) and (iv) 114,837 shares of Common
Stock subject to stock options which are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1996, pursuant to the Recapitalization, Racing Champions issued
$38.2 million of Series A Junior Subordinated Promissory Notes (the "Series A
Junior Notes"), $1.2 million of Series B Junior Subordinated Promissory Notes
(the "Series B Junior Notes"), $6.7 million of Series A Preferred Stock and
$1.2 million of Series B Preferred Stock to the Investor Group and Racing
Champions' senior management, including Robert E. Dods, Boyd L. Meyer, Peter
K.K. Chung, Curtis W. Stoelting, John F. Olsen, Peter J. Henseler and M. Kevin
Camp. On June 17, 1997, Racing Champions used a part of the proceeds from the
Offering to repay all amounts outstanding under the Series A Junior Notes and
the Series B Junior Notes and to redeem all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock. In connection with the repayment
of the notes and the redemption of the preferred stock, Racing Champions paid
$7.5 million to Mr. Dods, $7.5 million to Mr. Meyer, $7.5 million to Mr. Chung,
$649,000 to Mr. Stoelting, $130,000 to Mr. Olsen, $130,000 to Mr. Henseler and
$130,000 to Mr. Camp. Racing Champions also paid $19.6 million to Willis Stein
& Partners, L.P., an entity affiliated with Avy H. Stein and Daniel M. Gill,
two directors of Racing Champions, and an aggregate of $5.4 million to two
entities affiliated with Samuel B. Guren, a director of Racing Champions.
Racing Champions leases warehouse space from D. W. Realty, Inc., a
corporation wholly owned by William L. Dods, brother of Robert E. Dods,
President and a director of Racing Champions. The amount of the lease payments
for the year ended December 31, 1997 was $68,814 and Racing Champions currently
pays rent of $5,490 per month. Racing Champions believes that the terms of
this lease are no less favorable to Racing Champions than could have been
obtained from an unaffiliated third party.
Eric Meyer, son of Boyd L. Meyer, Executive Vice President and a director
of Racing Champions, is a principal of Reicher-Goerdt-Meyer Sales and
Marketing, Inc. ("Reicher Goerdt"), one of Racing Champions' external sales
representative organizations. For year ended December 31, 1997, Eric Meyer was
allocated approximately $168,239 of the sales commissions paid by Racing
Champions to Reicher Goerdt. Racing Champions pays sales commissions to
Reicher Goerdt at the same rate and on no more favorable terms than for Racing
Champions' other sales representative organizations.
James Chung, brother of Peter K.K. Chung, President of Racing Champions
Limited and a director of Racing Champions, owns 70% of Sunrise, one of the
manufacturers utilized by Racing Champions. For the year ended December 31,
1997, Racing Champions paid $5,242,441 to Sunrise for the purchase of die cast
vehicle replicas. Racing Champions expects to continue to make purchases from
Sunrise during 1998. Racing Champions believes that the terms for the purchase
of products from Sunrise are no less favorable to Racing Champions than could
have been obtained from an unaffiliated party.
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<PAGE> 45
Racing Champions loaned $120,758 to Peter J. Henseler, Vice President --
Marketing of Racing Champions, on April 30, 1996, evidenced by a promissory
note that bears interest at 8% per year. Mr. Henseler used the proceeds of
this loan to purchase 19,713 shares of Common Stock and shares of preferred
stock and promissory notes of Racing Champions which were retired on June 17,
1997 using a part of the proceeds of Racing Champions' initial public offering.
These securities were pledged as collateral for the note. As of March 31,
1997, $98,599 of principal and interest was outstanding under this note. On
April 8, 1997, Mr. Henseler repaid all outstanding amounts under this note.
Willis Stein & Partners, L.P., a stockholder of Racing Champions, owns
approximately 28% of the equity securities of Petersen Holdings, L.L.C.
("Holdings") and 47% of the common stock of Brightview Communications Group,
Inc. ("Brightview"). Holdings and Brightview in turn own all of the equity
securities of Petersen Publishing Company, L.L.C. ("Petersen"). In addition,
Willis Stein & Partners, L.P. has the contractual ability to control the
policies and operations of Petersen. Racing Champions has entered into
licensing and marketing arrangements with Petersen in connection with the
Racing Champions Mint and Racing Champions Hot Rod Collection and made payments
of approximately $181,497 during the year ended December, 31 1997 to Petersen
in connection with these licenses.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Exhibits:
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
2.1 Agreement and Plan of Merger, dated as of December 4,
1997, among the Company, WSG Acquisition, Inc. and
Wheels Sports Group, Inc.
2.2 First Amendment to Agreement and Plan of Merger, dated
as of February 2, 1998, among the Company, WSG
Acquisition, Inc. and Wheels Sports Group, Inc.
2.3 Second Amendment to Agreement and Plan of Merger,
dated as of February 3, 1998, among the Company, WSG
Acquisition, Inc. and Wheels Sports Group, Inc.
2.4 Stockholder Agreement, dated as of December 4, 1997,
between the Company and Howard L. Correll, Jr.
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<PAGE> 46
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
3.1 Amended and Restated Certificate of Incorporation of
the Company (2)
3.2 Amended and Restated By-Laws of the Company (1)
10.1 Asset and Stock Purchase Agreement, dated as of April
30, 1996, among the Company, Racing Champions, Inc.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc.,
Hosten Investment Limited and Banerjan Company
Limited (1)
10.2 Stockholders Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc., Hosten
Investment Limited, Curt Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
10.3 Registration Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc., Hosten
Investment Limited, Curt Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
46
<PAGE> 47
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.4 Executive Securities Agreement, dated as of April 30,
1996, by and among the Company, Curt Stoelting, John
Olsen, Peter Henseler, Kevin Camp, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer and Peter Chung (1)
10.5 Securities Purchase Agreement, dated as of April 30,
1996, by and among the Company, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Curt Stoelting, John Olsen, Peter Henseler and Kevin
Camp (1)
10.6 Amendment No. 1 to Securities Purchase Agreement, dated
as of April 30, 1996, by and among the Company,
Willis Stein & Partners, L.P. and certain other
purchasers of the Company's stock (1)
10.7 Securities Purchase Agreement, dated as of April 30,
1996, by and between the Company and Dods-Meyer, Ltd.(1)
10.8 Amended and Restated Credit Agreement, dated as
of June 17, 1997, by and among the Company, Racing
Champions, Inc., BankBoston, N.A., as lender and agent,
and the other lenders party thereto
10.9 Amended and Restated Guarantee and Security Agreement,
dated as of June 17, 1997, by and among the
Company, Racing Champions, Inc. and BankBoston, N.A., as
agent
10.10 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and Robert
Dods (1)
47
<PAGE> 48
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.11 Employment Agreement, dated as of April 30, 1996, by
and between Racing Champions, Inc. and Boyd Meyer (1)
10.12 Employment Agreement, dated as of April 30, 1996, by
and between Banerjan Company Limited and Peter Chung (1)
10.13 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and Curt
Stoelting (1)
10.14 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and Peter
Henseler (1)
10.15 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and John Olsen (1)
10.16 Employment Agreement, dated as of April 30, 1996, by
and between Racing Champions, Inc. and Kevin Camp (1)
10.17 1996 Key Employees Stock Option Plan (1)
10.18 1996 Key Employees Performance Compensation Plan (1)
10.19 Amendment No. 1 to 1996 Key Employees Performance
Compensation Plan (1)
10.20 Racing Champions Corporation Stock Incentive Plan (1)
10.21 Racing Champions Corporation Employee Stock Purchase
Plan (1)
21 Subsidiaries of the Company
24 Power of Attorney (included as part of the signature
page hereof)
27 Financial Data Schedule
48
<PAGE> 49
- -------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-22493) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-22635) and incorporated herein
by reference.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months
ended December 31, 1997.
(c) Financial statement schedules.
49
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Racing Champions Corporation and Subsidiaries:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Racing Champions
Corporation included in this annual report and issued our report thereon dated
February 10, 1998. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule of Valuation
and Qualifying Accounts is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subject to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 10, 1998
50
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Racing Champions, Inc. and Dods-Meyer, Ltd.:
We have audited in accordance with generally accepted auditing
standards, the combined financial statements of Racing Champions, Inc. and
Dods-Meyer, Ltd. and issued our report thereon dated February 15, 1997. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of Valuation and Qualifying Accounts
is presented for purposes of additional analysis and is not a part of the basic
financial statements. This schedule has been subject to the auditing
procedures applied to the audits of the basic financial statements and, in our
opinion, fairly states in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1997
<PAGE> 52
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ----------------------------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances deducted from related accounts
receivable balance sheet accounts of,
Racing Champions, Inc. and Dods-Meyer,
Ltd.
Year-ended December 31, 1994............. $240,000 $ -- $-- $ -- $240,000
Year-ended December 31, 1995............. 240,000 -- -- 40,000 200,000
Four months ended April 30, 1996 ........ 200,000 37,000 -- -- 257,000
Racing Champions Corporation
Eight months ended December 31, 1996..... 257,000 43,000 -- -- 300,000
Year ended December 31, 1997 ............ 300,000 -- -- -- 300,000
</TABLE>
51
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RACING CHAMPIONS CORPORATION
By /s/ Robert E. Dods
---------------------------------
Robert E. Dods, President
Date: March 26, 1998
Each person whose signature appears below hereby appoints Robert E. Dods
and Curtis W. Stoelting, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign
any or all amendments to the Form 10-K and file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated
/s/ Robert E. Dods President and March 26, 1998
- ------------------------ Director (Principal
Robert E. Dods Executive Officer)
/s/ Boyd L. Meyer Executive Vice President March 26, 1998
- ------------------------ and Director
Boyd L. Meyer
/s/ Curtis W. Stoelting Vice President - Finance March 26, 1998
- ------------------------ and Operations and
Curtis W. Stoelting Secretary (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Peter K.K. Chung Director March 26, 1998
- ------------------------
Peter K.K. Chung
/s/ Samuel B. Guren Director March 26, 1998
- ------------------------
Samuel B. Guren
52
<PAGE> 54
/s/ Avy H. Stein Director March 26, 1998
- ------------------------
Avy H. Stein
/s/ Daniel M. Gill Director March 26, 1998
- ------------------------
Daniel M. Gill
/s/ John S. Bakalar Director March 26, 1998
- ------------------------
John S. Bakalar
/s/ John J. Vosicky Director March 26, 1998
- ------------------------
John J. Vosicky
53
<PAGE> 55
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997............... F-3
Consolidated Statements of Income for the eight months ended December 31,
1996 and the year ended December 31, 1997............................................... F-4
Consolidated Statements of Stockholders' Equity for the eight months ended
December 31, 1996 and the year ended December 31, 1997.................................. F-5
Consolidated Statements of Cash Flows for the eight months ended
December 31, 1996 and the year ended December 31, 1997.................................. F-6
Notes to Consolidated Financial Statements for the eight months ended
December 31, 1996 and the year ended December 31, 1997.................................. F-7
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
Report of Independent Public Accountants................................................ F-17
Combined Balance Sheets as of December 31, 1995 and April 30, 1996...................... F-18
Combined Statements of Income for the years ended December 31, 1994 and
1995, and for the four months ended April 30, 1996...................................... F-19
Combined Statements of Shareholders' Investment for the years ended
December 31, 1994 and 1995, and for the four months ended April 30, 1996................ F-20
Combined Statements of Cash Flows for the years ended December 31, 1994
and 1995 and for the four months ended April 30, 1996................................... F-21
Notes to Combined Financial Statements for the years ended December 31, 1994
and 1995 and for the four months ended April 30, 1996................................... F-22
RACING CHAMPIONS LIMITED, HOSTEN INVESTMENT LIMITED,
GARNETT SERVICES INC., BERGEN SERVICES INC.
Report of Independent Auditors.......................................................... F-25
Combined Balance Sheets as of March 31, 1995 and 1996 and April 30, 1996................ F-26
Combined Statements of Income for the years ended March 31, 1995 and
1996 and for the one month ended April 30, 1996......................................... F-27
Combined Statements of Changes in Shareholders' Equity for the years ended
March 31, 1995 and 1996 and for the one month ended April 30, 1996...................... F-28
Combined Statements of Cash Flows for the years ended March 31, 1995 and
1996 and for the one month ended April 30, 1996......................................... F-29
Notes to Combined Financial Statements.................................................. F-30
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Racing Champions Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of RACING CHAMPIONS
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the year ended December 31, 1997, and for the eight
months 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 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Racing Champions Corporation
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997, and for
the eight months ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 10, 1998
F-2
<PAGE> 57
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1997 1996
- ---------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,463,434 $ 5,897,911
Accounts receivable, net of allowance for doubtful accounts of $300,000 11,226,609 5,359,473
Note receivable from officer - 120,758
Inventory 1,700,675 1,264,317
Deferred and prepaid taxes 145,813 1,255,131
Prepaid expenses 1,158,205 343,210
-------------- -------------
Total current assets 20,694,736 14,240,800
-------------- -------------
Property and equipment:
Tooling 9,962,090 6,717,375
Other equipment 1,878,768 1,349,973
-------------- -------------
11,840,858 8,067,348
Less- Accumulated depreciation (2,829,989) (839,282)
-------------- -------------
9,010,869 7,228,066
Excess purchase price over net assets acquired, net 84,946,274 87,139,838
Other assets 125,713 471,334
-------------- -------------
Total assets $ 114,777,592 $ 109,080,038
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 3,489,170 $ 1,777,690
Accrued expenses 5,716,383 5,757,175
Accrued royalties 2,814,380 1,890,857
Due to stockholders - 945,373
Line of credit 5,000,000 -
Current maturities of bank term notes 3,950,000 6,200,000
Senior subordinated debt to stockholders - 8,020,000
-------------- -------------
Total current liabilities 20,969,933 24,591,095
Bank term notes, less current maturities 11,650,000 30,700,000
Junior subordinated debt to stockholders - 39,441,054
Deferred interest on junior subordinated debt - 1,938,083
Deferred income taxes 3,065,210 996,575
-------------- -------------
Total liabilities 35,685,143 97,666,807
-------------- -------------
Stockholders' equity:
Preferred stock, Series A, $.01 par value, no shares authorized, issued,
or outstanding at December 31, 1997, and 100,000 shares authorized,
66,668 issued and outstanding at December 31, 1996, with a liquidation
value of $7,223,107 at December 31, 1996 - 556,974
Preferred stock, Series B, $.01 par value, no shares authorized,
issued, or outstanding at December 31, 1997, and 20,000 shares
authorized, 11,952 issued and outstanding at December 31, 1996, with a liquidation
value of $1,294,333 at December 31, 1996 - 99,853
Common stock, voting, $.01 par value, 20,000,000 shares authorized,
13,242,382 and 6,948,156 shares issued and outstanding at December
31, 1997 and 1996, respectively 132,424 69,482
Common stock, nonvoting, $.01 par value, no shares authorized, issued, or
outstanding at December 31, 1997, and 1,000,000 shares authorized,
937,084 issued and outstanding at December 31, 1996 - 9,371
Additional paid-in capital 69,667,564 8,782,383
Retained earnings 9,292,461 1,895,168
-------------- -------------
Total stockholders' equity 79,092,449 11,413,231
-------------- -------------
Total liabilities and stockholders' equity $ 114,777,592 $ 109,080,038
============== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets
F-3
<PAGE> 58
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $76,562,382 $49,384,893
Cost of sales, related party 5,242,441 3,990,651
Cost of sales, other 26,943,269 17,374,793
------------ -----------
Gross profit 44,376,672 28,019,449
Selling, general and administrative expenses 23,660,433 15,244,449
Amortization of intangible assets 2,216,278 1,539,101
------------ -----------
Operating income 18,499,961 11,235,899
Interest expense 5,125,953 6,737,725
Other expense 200,401 153,471
------------ -----------
Income before income taxes 13,173,607 4,344,703
Income tax expense 5,297,892 1,793,495
------------ -----------
Net income 7,875,715 2,551,208
Dividends accrued on preferred stock 478,422 656,040
------------ -----------
Net income available to common stockholders $ 7,397,293 $ 1,895,168
============ ===========
Net income per common share:
Basic earnings per share $0.71 $0.24
============ ===========
Diluted earnings per share $0.69 $0.23
============ ===========
Weighted average shares outstanding:
Basic 10,448,780 7,885,240
Diluted 10,777,483 8,211,588
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE> 59
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1996 $ 78,853 $ 787 $ 8,782,383 $ - $ 8,862,023
Net income - - - 2,551,208 2,551,208
Accrued dividends - 656,040 - (656,040) -
-------- ----------- ----------- --------- ------------
Balance, December 31, 1996 78,853 656,827 8,782,383 1,895,168 11,413,231
Net income - - - 7,875,715 7,875,715
Accrued dividends - 478,422 - (478,422) -
Initial public offering 53,571 - 68,746,418 - 68,799,989
Redemption of preferred stock - (1,135,249) (7,861,237) - (8,996,486)
-------- ----------- ----------- ---------- ------------
Balance, December 31, 1997 $132,424 $ - $69,667,564 $9,292,461 $ 79,092,449
======== =========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 60
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,875,715 $ 2,551,208
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 1,990,702 826,052
Amortization on intangible assets 2,216,280 1,539,099
Amortization of deferred financing costs 462,587 745,820
Deferred income taxes 2,072,172 884,190
Deferred interest on junior subordinated debt 1,375,890 1,938,083
Changes in operating assets and liabilities-
Accounts receivable (5,867,136) (654,921)
Inventory (436,358) 1,647,698
Prepaid expenses 290,786 (220,591)
Accounts payable and accrued expenses 2,594,211 1,572,972
------------ ------------
Net cash provided by operating activities 12,574,849 10,829,610
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (3,773,509) (2,348,107)
Cash used for acquisitions, net - (27,781,355)
Issuance of note receivable (50,000) -
------------ ------------
Net cash used by investing activities (3,823,509) (30,129,462)
------------ ------------
Cash flows from financing activities:
Stock issued for cash - 5,661,309
Initial public offering 68,799,989 -
Redemption of preferred stock (7,862,000) -
Cash dividends paid on preferred stock (1,134,486) -
Proceeds from bank term loans 8,000,000 40,000,000
Payment on bank term loans (29,300,000) (3,100,000)
Net borrowings on line of credit 5,000,000 -
Proceeds from issuance of junior subordinated notes - 21,570,570
Payment of junior subordinated notes (39,441,054) -
Payment of deferred interest on junior subordinated notes (3,403,651) -
Payment of senior subordinated notes (8,020,000) -
Payment of three day notes - (38,934,116)
Decrease in due to stockholders (945,373) -
Decrease in note receivable from officer 120,758 -
------------ ------------
Net cash provided (used) by financing activities (8,185,817) 25,197,763
------------ ------------
Net increase in cash and cash equivalents 565,523 5,897,911
Cash and cash equivalents, beginning of period 5,897,911 -
------------ ------------
Cash and cash equivalents, end of period $ 6,463,434 $ 5,897,911
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 7,031,305 $ 5,422,846
Cash paid for taxes during the period 1,792,649 4,339,689
============ ============
Supplemental disclosure of noncash transactions:
Issuance of stock for acquisitions $ - $ 3,200,713
Issuance of junior subordinated notes for acquisitions - 17,870,484
Issuance of senior subordinated notes for acquisitions - 8,020,000
Issuance of three day notes for acquisitions - 38,934,116
Issuance of stock and junior subordinated note to officer for note
receivable - 120,758
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE> 61
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Racing Champions Corporation ("RCC") and Subsidiaries (collectively "the
Company") is a producer and marketer of collectibles. The Company is known
for its extensive line of officially licensed, high quality collectible
replicas of actual race cars and related vehicles from the most popular
U.S. professional racing series, including NASCAR stock car racing,
National Hot Rod Association drag racing, Championship Auto Racing Teams
and Indy Racing League Indy-style racing and World of Outlaws sprint car
racing. The Company also produces and markets classic and custom vehicles
and collectible pewter figures. Products are manufactured in numerous
styles for the following customer bases: national and regional retail
chains; collector and hobby shops and premium sales to corporations.
Racing Champions, Inc., a wholly owned subsidiary of Racing Champions
Corporation, has license agreements with the major U.S. automotive
manufacturers and most of the major motor sport sanctioning bodies,
sponsors, team owners and their drivers, as well as entertainment and
media companies for their well known characters and properties. The
Company sells its products primarily in North America. Racing Champions
Limited ("RCL"), a wholly owned Hong Kong subsidiary of RCI, oversees the
production of the Company's products.
2. RECAPITALIZATION
On April 30, 1996, an investor group consummated a recapitalization (the
"Recapitalization") which involved the following: (a) the Company's
purchase of all of the outstanding stock of Racing Champions, Inc. ("RCI")
and substantially all of the assets of Dods-Meyer, Ltd. ("DML")
(collectively the "RCI Group"); (b) the acquisition by Banerjan Company
Limited (subsequently renamed Racing Champions Limited) of substantially
all of the assets of Racing Champions Limited, Garnett Services, Inc. and
Hosten Investment Limited (collectively the "RCL Group"); and (c) the
contribution by the Company of all the outstanding stock of the Hong Kong
subsidiary to RCI.
The Recapitalization was financed with $40,000,000 of bank borrowings and
the issuance to management and the investor group of $8,020,000 of senior
subordinated notes, $38,245,820 of Series A junior subordinated notes,
$1,195,233 of the Company's Series B preferred stock, $118,840 of the
Company's nonvoting common stock and $881,160 of the Company's common
stock.
The acquisitions were accounted for using the purchase method of
accounting. The acquisitions involved the following: (a) the Company's
purchase of all the outstanding stock of RCI in exchange for the issuance
by the Company of three day notes for $10,630,014, senior subordinated
notes of $1,327,808, Series A junior subordinated notes of $2,746,848 and
Series B junior subordinated Notes of $295,330; (b) the Company's purchase
of substantially all of the assets DML for a cash payment of $1,728,107,
and the issuance by the Company of three-day notes for $28,304,102, senior
subordinated notes of $4,025,525, Series A junior subordinated notes of
$8,369,985, Series B; juniors subordinated notes of $899,904, 2,422.06
shares of Series A preferred stock at a price of $100 per share, 11,952.33
shares of Series B preferred stock at a price of $100 per share, 1,354,908
shares of common stock at a price of $0.13 per share and 937,084 shares of
nonvoting common stock at a price of $0.13 per share; (c) the Company's
purchase of substantially all of the assets of RCL for a cash payment of
$1,500,000; (d) the Company's purchase of substantially
F-7
<PAGE> 62
all of the assets of Hosten Investment Limited for a cash payment of
$50,000; and (e) the Company's purchase of substantially all of the assets
of Garnett Services, Inc. for a cash payment of $17,976,667, and the
issuance by the Company of senior subordinated notes of $2,666,667, Series
A junior subordinated notes of $5,558,417, 13,163.36 shares of Series A
preferred stock at a price of $100 per share, and 1,145,996 shares of
common stock at a price of $0.13 per share.
The excess purchase price over the book value of the net assets acquired
was $93,547,442. Of this excess $88,663,805 has been recorded as an
intangible asset and is being amortized on a straight-line basis over 40
years and $4,883,637 was recorded as inventory and property and equipment.
3. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION/TRANSACTIONS
The financial statements consolidate the accounts of RCC and its wholly
owned subsidiaries. All intercompany items and transactions have been
eliminated.
Foreign subsidiary assets and liabilities are translated at the rates of
exchange at the balance sheet date while income statement accounts are
translated at the average exchange rates in effect during the period.
Exchange gains and losses resulting from translations for the year ended
December 31, 1997, and the eight months ended December 31, 1996, were
insignificant; however, if they were significant, the Company would have
recorded such gains and losses in stockholders' equity in a cumulative
adjustment account.
Transactions in foreign currencies are translated into the local currency
at the rates which prevailed at the time of the transactions. Gains and
losses on foreign currency transactions are included in income. For the
year ended December 31, 1997, and the eight months ended December 31,
1996, gains and losses of such transactions were insignificant.
REVENUE RECOGNITION
The Company recognizes revenue based upon shipment of product to
customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Such investments are
valued at market prices.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
INVENTORY
Inventory consists of finished goods and is 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 have been recorded at their fair value as of the
date of the Recapitalization. Items purchased after the Recapitalization
were recorded at cost. Depreciation is computed using the straight-line
F-8
<PAGE> 63
method for financial statement purposes. Accelerated methods are used for
income tax purposes. The estimated useful lives used in computing
depreciation for financial statement purposes are as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTIONS ESTIMATED USEFUL LIVES
----------------------------- --------------------------
<S> <C>
Tooling 4-8 years
Furniture and office equipment 7 years
Leasehold improvements 3-10 years
Computer systems 5 years
==========================
</TABLE>
EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED
Excess of purchase price over net assets acquired is amortized over 40
years on a straight-line basis and is tax deductible over 15 years. The
Company periodically evaluates the carrying value of goodwill for possible
impairment based upon expected future undiscounted operating cash flows.
Amortization expense relating to excess of purchase price over the net
assets as of December 31, 1997, and for the eight months ended December
31, 1996, was approximately $2,100,000 and $1,400,000, respectively.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to trade accounts receivable and
is subject to the financial conditions of certain major customers in which
there were three customers accounting for approximately 22%, 16% and 11%
of net sales for the year ended December 31, 1997, and 17%, 19% and 15% of
net sales for the eight months ended December 31, 1996. Additionally, at
December 31, 1997, four customers accounted for approximately 16%, 16%,
12% and 11% of accounts receivable and at December 31, 1996, three
customers accounted for approximately 27%, 14%, and 13% of accounts
receivable. The Company does not require collateral or other security to
support customers' receivables. The Company conducts periodic reviews of
its customers' financial conditions and vendor payment practices to
minimize collection risks on trade accounts receivable. The Company has
purchased insurance which covers a portion of its receivables from major
customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, accounts payable, accrued
expenses and notes payable approximate fair value because of the
short-term nature of the items. The carrying values of the line of credit
and the term loan approximate their fair value primarily due to the
floating interest rates associated with the debt instrument.
ACCOUNTING FOR STOCK-BASED COMPENSATION
With respect to stock options granted to employees, SFAS No. 123 permits
companies to continue using the accounting method promulgated by the
Accounting Principles Board Opinion No. 25 ("APB No. 25") "Accounting for
Stock Issued to Employees," to measure compensation or to adopt the fair
value based method prescribed by SFAS No. 123. The Company has elected to
continue to measure compensation cost under APB No. 25. If the APB No. 25
method is continued, pro forma disclosures are required as if SFAS No. 123
accounting provisions were followed.
F-9
<PAGE> 64
NET INCOME PER SHARE
In December, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share." The following table discloses the
provisions set forth in SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
--------------------------------------------
WEIGHTED PER
NET AVERAGE SHARE
INCOME SHARES AMOUNT
---------- ---------- ---------
<S> <C> <C> <C>
Basic net income per share
Net income available to common stockholders $7,397,293 10,448,780 $0.71
=====
Plus effect of dilutive securities
Stock options - 328,703
----------- -----------
Diluted net income per share
Net income available to common stockholders
plus assumed conversions
$7,397,293 10,777,483 $ .69
========== =========== =====
</TABLE>
Options to purchase 185,753 shares of common stock at a price ranging between
$14 and $15 per share were outstanding during 1997, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
The options, which expire from June 11, 2007, through October 23, 2007, were
still outstanding at the end of 1997.
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED
DECEMBER 31, 1996
------------------------------------------
WEIGHTED PER
NET AVERAGE SHARE
INCOME SHARES AMOUNT
-------- ---------- ---------
<S> <C> <C> <C>
Basic net income per share
Net income available to common stockholders $1,895,168 7,885,240 $0.24
=====
Plus effect of dilutive securities
Stock options - 326,348
---------- ----------
Diluted net income per share
Net income available to common stockholders
plus assumed conversions $1,895,168 8,211,588 $0.23
========== ========= =====
</TABLE>
F-10
<PAGE> 65
4. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Pretax income
United States $13,028,555 $4,247,843
Foreign 145,052 96,860
----------- ----------
$13,173,607 $4,344,703
=========== ==========
</TABLE>
The significant components of income tax expense are as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ --------------
<S> <C> <C>
Current
Federal $2,733,091 $ 749,095
State 482,310 160,210
Foreign 10,319 -
------------ --------------
3,225,720 909,305
------------ --------------
Deferred
Federal 1,736,604 730,005
State 306,460 137,626
Foreign 29,108 16,559
------------ --------------
2,072,172 884,190
------------ --------------
$5,297,892 $ 1,793,495
============ ==============
</TABLE>
A reconciliation of statutory Federal tax rate and actual effective income
tax rate is as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Statutory rate 34.0% 34.0%
State taxes, net of Federal benefit 4.8 4.8
Other 1.4 2.5
------------ -------------
Effective rate 40.2% 41.3%
============ =============
</TABLE>
F-11
<PAGE> 66
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -----------
<S> <C> <C>
Deferred income tax assets
Valuation allowances $ 108,848 $ 112,385
------------- -----------
Deferred income tax liabilities
Intangible assets 2,452,633 732,416
Property and equipment 612,577 264,159
------------- -----------
Total deferred income tax liabilities 3,065,210 996,575
------------- -----------
$2,956,362 $ 884,190
============= ===========
</TABLE>
5. DEBT
In conjunction with its initial public offering, the Company revised and
amended its bank agreement on June 17, 1997. The amended credit agreement
provides for a revolving loan and a five-year term loan. The revolving
loan allows the Company to borrow up to $5 million at any time prior to
June 28, 2002, based upon levels of the Company's accounts receivable,
inventory and cash flows. At December 31, 1997, there were $5,000,000 of
borrowings outstanding on the revolving loan. The term loan is in the
principal amount of $22 million, with final maturity at June 28, 2002. The
outstanding balance on the term loan at December 31, 1997, was
$15,600,000, of which $3,950,000 was current.
Borrowings under the credit agreement bear interest, at the Company's
option, at the bank's base rate plus a margin that varies between 0.0% and
0.75% or at a reserve adjusted Eurodollar rate plus a margin that varies
between 1.5% and 2.25%. All amounts outstanding under the credit agreement
are secured by substantially all of the assets of the Company. Under the
agreement, the Company is subject to certain financial covenants relating
to, among other things, maintenance of financial ratios and other
covenants. The Company was in compliance with all its covenants through
the date of this report.
In September, 1997, the Company entered into a two-year interest rate swap
agreement with its primary lender. Under this agreement, the Company
hedges on a quarterly basis, a notional amount ranging between $7 million
and $10 million through September, 1999, at a reserve adjusted Euro-rate
of 6.20%. During 1997, the impact of this agreement was immaterial.
The Company's Hong Kong subsidiary entered into a credit agreement with a
bank that provides for a line of credit of up to $5 million. Amounts
borrowed under this line of credit bear interest at the bank's cost of
funds plus 2% and are cross-guaranteed by RCI and RCL. As of December 31,
1997 and 1996, there were no outstanding borrowings under this line of
credit.
F-12
<PAGE> 67
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Term Loans A and B payable to the bank, bearing interest ranging from
8.25% to 8.75% as of December 31, 1996, interest payable every
quarter, repaid in 1997 $ - $36,900,000
Senior subordinated notes payable to stockholders, interest at a
designated bank's base rate, repaid in 1997 - 8,020,000
Series A junior Subordinated notes payable to stockholders, interest at 12%; 40%
of interest earned is payable each March 1, June 1, September 1 and December
1, repaid in 1997 - 38,245,820
Series B junior Subordinated notes payable to stockholders; interest at 12%; 40%
of interest earned is payable each March 1, June 1, September 1 and December
1, repaid in 1997 - 1,195,234
Term loan payable to the bank, bearing interest at 7.1875% as of
December 31, 1997, with principal in amounts varying from $940,000 to
$1,250,000, plus interest, payable quarterly through September, 2001 15,600,000 -
------------ ------------
15,600,000 84,361,054
Less- Current maturities 3,950,000 14,220,000
------------ ------------
$11,650,000 $70,141,054
============ ============
</TABLE>
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31-
<S> <C>
1999 $ 4,375,000
2000 4,875,000
2001 2,400,000
-------------
Total long-term debt $11,650,000
=============
</TABLE>
6. LEGAL PROCEEDINGS
The Company has certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. Management
believes that the probable resolution of such contingencies will not
materially affect the financial position or the results of the Company's
operations.
7. CAPITAL STOCK
On April 9, 1997, the Company issued a 7.885261-for-one stock split of
common stock and increased in the number of authorized shares to
20,000,000 shares of voting common stock and 1,000,000 shares of nonvoting
common stock. The accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
On June 17, 1997, the Company sold 5,357,142 shares of its common stock in
an initial public offering. The net proceeds to the Company from the sale
of the stock were approximately $69 million, after deduction of
commissions and offering expenses. Approximately $9 million of the net
proceeds was used to redeem
F-13
<PAGE> 68
preferred stock issued in the Recapitalization; $43 million was used to
repay shareholder notes issued in the Recapitalization; and $17 million
was used to repay bank borrowings incurred in connection with the
Recapitalization.
In connection with the Recapitalization that occurred in April, 1996, the
Company issued preferred stock, which accrued dividends at 12% per year.
On June 17, 1997, the Company filed its Restated Certificate of
Incorporation to eliminate the Series A preferred stock, Series B
preferred stock, and nonvoting common stock. All nonvoting common stock
was exchanged on a 1 for 1 basis for common stock of the Company.
8. STOCK OPTIONS
The Company has adopted a 1996 Employee Stock Option Plan for its key
employees. The Employee Stock Option Plan is administered by the Board of
Directors. The Company has reserved 415,041 shares of common stock for
issuance under the plan. On April 30, 1996, and June 1, 1996, the Company
granted 311,281 and 20,752 options, respectively, to purchase shares of
common stock at an exercise price equal to fair market value as determined
by the Board of Directors in connection with the Recapitalization. These
options vest equally over a five-year period. The options will expire on
the earlier of the tenth anniversary of the date of grant or 30 days after
the date of termination of the employees' employment with the Company.
In April, 1997, the Company adopted the Racing Champions Corporation Stock
Incentive Plan, under which the Board of Directors may grant options to
purchase up to 311,852 shares of common stock to executives or key
employees of the Company. On June 11 and October 23, 1997, the Company
granted 149,753 and 6,000 options, respectively, to purchase shares of
common stock at an exercise price equal to fair market value. Part of
these options vested immediately and the rest vest over a five-year
period. These options expire on the tenth anniversary of the date of
grant.
<TABLE>
<CAPTION>
The stock option activity for the Company's stock option plan is as follows:
WEIGHTED
AVERAGE
PRICE EXERCISE
SHARES RANGES PRICE
---------- ------------- -----------
<S> <C> <C> <C>
Outstanding at May 1, 1996
Granted 332,033 $ 0.13 $0.13
---------- ------------- -----------
Outstanding as of December 31, 1996 332,033 $ 0.13 $0.13
Granted 155,753 $14.00 $14.00
---------- ------------- -----------
Outstanding as of December 31, 1997 487,786 $0.13-$14.00 $4.56
========== ============= ===========
Options exercisable at December 31, 1996 -
==========
Options exercisable at December 31, 1997 145,258 $7.66
========== ===========
</TABLE>
The Company also issued 30,000 options to an outside sales representative
on August 13, 1997, at an exercise price equal to fair market value. These
options vest ratably over the term of the contract that the Company has
with this sales representative, which is approximately three years.
Compensation expense associated with these options at December 31, 1997,
was insignificant. The weighted average fair value of these options at the
date of grant was $6.91 per share, based upon the assumptions described
below using the Black - Scholes option pricing model. At December 31,
1997, none of these options were exercisable.
F-14
<PAGE> 69
In determining pro forma net income available to common stockholders in
accordance with SFAS No. 123, the fair value of each option is estimated
on the date of grant based on the Black-Scholes option pricing model
assuming, among other things, no dividend yield, a risk free rate of 6.04%
to 6.56% and 6.87% to 7.03% in 1997 and 1996, respectively, volatility
factor of 41% and 0% for options granted in 1997 and 1996, respectively,
and expected life of 10 years. The weighted average fair value of options
granted under the Company's stock plans for the year ended December 31,
1997 and the eight months ended December 31, 1996, was $8.95 and $.06 per
share, respectively. As of December 31, 1997, the weighted average
remaining contractual life of all options was approximately nine years.
For the year ended December 31, 1997, and for the eight months ended
December 31, 1996, net income available to common stockholders and diluted
earnings per share were $7,397,293 and $0.69 and $1,895,168 and $0.23,
respectively. Under SFAS No. 123, pro forma net income available to common
stockholders and pro forma diluted earnings per share for the year ended
December 31, 1997, and for the eight months ended December 31, 1996, would
have been $6,904,598 and $0.64, and $1,893,493 and $0.23, respectively.
The pro forma disclosure is not likely to be indicative of pro forma
results which may be expected in future years because of the fact that
options vest over several years, compensation expense is recognized as the
options vest and additional awards may be granted.
9. RELATED-PARTY TRANSACTIONS
The Company purchased $5,242,441 and $3,990,651 of product during the year
ended December 31, 1997, and the eight months ended December 31, 1996,
respectively, from a company controlled by a relative of one of the
Company's stockholders.
During the eight months ended December 31, 1996, an officer of the Company
held ownership interests in two of the Company's suppliers. These
interests were disposed of by December 31, 1996. For the eight months
ended December 31, 1996, the Company paid $5.6 million and $5.7 million to
these suppliers, respectively, for purchases of die cast vehicle replicas.
The Company leases warehouse space, from a party related to a director of
the Company. Rent expense for the year ended December 31, 1997, and the
eight months ended December 31, 1996, was $68,814 and $41,440
respectively.
During the eight months ended December 31, 1996 the Company leased
office space from a party related to a director of the Company.
Rent expense for the eight months ended December 31, 1996 was $241,036.
The Company pays sales commissions to an external sales representative
organization, of which one of the principals of this organization is a
relative of an officer/director of the Company. For the year ended
December 31, 1997, and the eight months ended December 31, 1996,
commissions of $168,239 and $85,393, respectively, were allocated to the
related principal.
10. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) savings plan as of December, 1996, which
became effective on January 1, 1997, Employees' meeting certain
eligibility requirements, as defined, may contribute up to 15% of pre-tax
gross wages, subject to certain restrictions. The Company will make
matching contributions of 50% of the employees contributions up to 5% of
employee wages. In 1997, the Company's contributions were approximately
$46,000.
11. RECENTLY ISSUED PRONOUNCEMENTS
In early 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
F-15
<PAGE> 70
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.
12. SUBSEQUENT EVENT
On December 5, 1997, the Company announced execution of a definitive
agreement, which provides that Wheels Sports Group, Inc., a recently
consolidated group of marketers and distributors of officially licensed
NASCAR-related merchandise, will be acquired by Racing Champions. The
acquisition, which is subject to due diligence, stockholder approval, and
other customary closing conditions, is expected to close in the first half
of 1998. The transaction is planned as a stock-for-stock exchange and will
be accounted for as a pooling of interests. Under the terms of the
agreement, each of Wheels Sports Group, Inc's. outstanding shares of
common stock, (approximately 5.3 million shares outstanding at December
31, 1997), will be exchanged for 0.70 shares of the Company's common
stock.
F-16
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Racing Champions, Inc. and Dods-Meyer, Ltd.:
We have audited the accompanying combined balance sheets of RACING
CHAMPIONS, INC. (an Illinois corporation) and DODS-MEYER, LTD. (an Illinois
corporation) as of December 31, 1995 and April 30, 1996, and the related
combined statements of income, shareholders' investment and cash flows for the
years ended December 31, 1994 and 1995 and for the four months ended April 30,
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 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, the financial statements referred to above present
fairly, in all material respects, the combined financial position of Racing
Champions, Inc. and Dods-Meyer, Ltd. as of December 31, 1995 and April 30, 1996,
and the results of their operations and their cash flows for the years ended
December 31, 1994 and 1995 and for the four months ended April 30, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1997
F-17
<PAGE> 72
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $2,461,234 $ 255,466
Accounts receivable, net of allowance for doubtful
accounts of $200,000 and $257,000 in 1995 and 1996,
respectively........................................... 3,495,736 3,569,178
Inventory................................................ 711,743 1,553,075
Other current assets..................................... 170,228 453,939
------------ -----------
Total current assets................................... 6,838,941 5,831,658
------------ -----------
Property and equipment:
Tooling.................................................. 4,317,008 5,246,778
Other equipment.......................................... 398,575 418,969
------------ -----------
4,715,583 5,665,747
Less-accumulated depreciation............................ 3,284,576 3,644,575
------------ -----------
1,431,007 2,021,172
------------ -----------
Total assets....................................... $8,269,948 $7,852,830
============ ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable......................................... $ 83,510 $ 548,040
Accrued expenses......................................... 1,901,413 1,447,239
Accrued bonus............................................ -- 2,501,439
Accrued royalties........................................ 1,477,506 863,673
Accrued distributions.................................... 500,000 811,344
Due to related party..................................... 900,522 1,500,489
Note payable to related party............................ 1,120,000 1,140,000
------------ -----------
Total current liabilities.............................. 5,982,951 8,812,224
------------ -----------
Shareholders' investment:
Common stock, Racing Champions, Inc., no par value,
5,000 shares authorized, 1,000 shares issued and
outstanding............................................ 400 400
Common stock, Dods-Meyer, Ltd., no par value, 10,000
shares authorized, 1,000 shares issued and
outstanding............................................ 1,000 1,000
Additional paid-in capital............................... 9,600 9,600
Retained earnings (deficit).............................. 2,275,997 (970,394)
------------ -----------
Total sahreholders' investment.............................. 2,286,997 (959,394)
------------ -----------
Total liabilities and shareholders' investment..... $8,269,948 $7,852,830
============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE> 73
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- APRIL 30,
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
Net sales............................. $43,267,924 $48,592,178 $16,614,029
Cost of sales, related party.......... 25,212,148 25,556,121 9,403,514
----------- ------------ -----------
Gross profit........................ 18,055,776 23,036,057 7,210,515
Selling, general and administrative
expenses............................ 9,491,222 13,312,053 4,713,344
Nonrecurring bonus expense............ -- -- 2,389,218
----------- ------------ -----------
Operating income.................... 8,564,554 9,724,004 107,953
Interest expense...................... (210,876) (132,758) (20,000)
Other income.......................... 218,985 141,932 36,299
Other expense......................... -- (147,292) (13,452)
----------- ------------ -----------
Income before income taxes.......... 8,572,663 9,585,886 110,800
Income tax expense.................... 348,699 193,500 39,000
----------- ------------ -----------
Net income.......................... $ 8,223,964 $9,392,386 $ 71,800
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE> 74
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS INVESTMENT
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 1,400 $ 9,600 $ (1,840,353) $ (1,829,353)
Net income -- -- 8,223,964 8,223,964
Distributions -- -- (4,000,000) (4,000,000)
----------- ----------- -------------- -------------
Balance, December 31, 1994 1,400 9,600 2,383,611 2,394,611
Net income -- -- 9,392,386 9,392,386
Distributions -- -- (9,500,000) (9,500,000)
----------- ----------- -------------- -------------
Balance, December 31, 1995 1,400 9,600 2,275,997 2,286,997
Net income -- -- 71,800 71,800
Distributions -- -- (3,318,191) (3,318,191)
----------- ----------- -------------- -------------
Balance, April 30, 1996 $ 1,400 $ 9,600 $ (970,394) $ (959,394)
=========== =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 75
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------- APRIL 30,
1994 1995 1996
-------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 8,223,964 $ 9,392,386 $ 71,800
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation......................................... 678,583 711,778 359,999
Deferred income taxes................................ 196,256 -- --
Changes in operating assets and liabilities
Accounts receivable................................ (274,665) (895,104) (73,442)
Inventory.......................................... 602,899 (379,348) (841,332)
Other current assets............................... 32,694 (170,228) (283,711)
Accounts payable and accrued expenses.............. (395,462) 1,115,250 1,897,962
Due to related party............................... (51,254) 496,484 599,967
-------------- --------------- -------------
Net cash provided by operating activities........ 9,013,015 10,271,218 1,731,263
-------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................... (1,128,788) (1,076,826) (950,164)
-------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank note.................................. (50,000) (950,000) --
Change in shareholders' notes payable.................. (1,615,000) -- 20,000
Distributions to shareholders.......................... (3,100,000) (9,900,000) (3,006,847)
-------------- --------------- -------------
Net cash used in financing activities............ (4,765,000) (10,850,000) (2,986,847)
-------------- --------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................... 3,119,227 (1,655,608) (2,205,768)
Cash and cash equivalents, beginning of period............ 997,615 4,116,842 2,461,234
-------------- --------------- -------------
Cash and cash equivalents, end of period.................. $ 4,116,842 $ 2,461,234 $ 255,466
============== =============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period............... $ 220,340 $ 72,758 $ --
Cash paid for taxes during the period.................. 871,395 88,968 --
============== =============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 76
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE FOUR MONTHS ENDED APRIL 30, 1996
1. DESCRIPTION OF BUSINESS
Racing Champions, Inc. ("RCI") and Dods-Meyer, Ltd. ("DML")
(collectively "the Company") is a leading producer and marketer of collectible
scaled die cast vehicle replicas. The Company is best known for its extensive
line of officially licensed, high-quality collectible replicas of actual race
cars and related vehicles from the most popular U.S. professional racing series,
including NASCAR stock car racing, National Hot Rod Association drag racing,
Championship Auto Racing Teams and Indy Racing League Indy-style racing, World
of Outlaws sprint car racing as well as Honda and Kawasaki racing motorcycles.
Products are manufactured in numerous styles for the following customer bases:
national and regional retail chains, collector and hobby shops and premium sales
to corporations. RCI has license agreements with the major U.S. automotive
manufacturers and most of the major motor sport sponsors, team owners and their
drivers.
RCI sells its products primarily in North America through sales
representatives of DML, which is owned by shareholders of RCI, Racing Champions
Limited ("RCL"), a Hong Kong company owned by a related party, oversees the
production of RCI products.
On April 30, 1996, the Company was part of a recapitalization which
involved the Company and RCL and other affiliates of RCL, whereby a new holding
company, Racing Champions Corporation, acquired all stock of RCI and all
operating assets of DML.
2. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The financial statements combine the accounts of RCI and DML after
elimination of intercompany items and transactions.
REVENUE RECOGNITION
The Company recognizes revenue based upon shipment of product to
customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalent. Such investments are valued
at market prices.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-22
<PAGE> 77
INVENTORY
Inventory consists of finished goods and is 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 recorded at cost. Depreciation is computed
using the straight-line method for financial statement purposes with estimated
useful lives for tooling of two years and for other equipment of five to ten
years. Accelerated methods are used for income tax purposes.
INCOME TAXES
DML has elected to be treated as an S Corporation under the Internal
Revenue Code pursuant to which profits and losses are allocated to the
shareholders for inclusion in their personal tax returns. As of January 1, 1994,
RCI elected to be treated as an S Corporation. Accordingly, a deferred tax asset
of $196,256 was charged to tax expense as of January 1, 1994. The remaining tax
expense for 1995 and 1996 is due to Illinois replacement taxes.
RELATED-PARTY TRANSACTIONS
RCL's beneficial owner is a warrant holder in RCI. The stock purchase
warrant was issued in 1993 and allows the holder to purchase 500 shares of
common stock for an aggregate price of $1,000,000 and contains certain
anti-dilution provisions. The warrant is exercisable on December 30, 2003, or
upon the occurrence of certain events including a change in control, as defined,
or a filing of a registration statement for an initial public offering of the
Company's common stock. At December 31, 1995 and 1994, RCI had 500 shares of
common stock held in reserve for the exercise of this warrant. This warrant was
canceled on April 30, 1996 as part of the recapitalization of the Company.
In addition to payments related to the purchase of products, RCI paid
RCL fees of 30.5% of the cost of product shipped, which amounted to $1,772,000
in 1994, $2,123,414 in 1995 and $831,832 in 1996 which have been included in
Cost of sales, Related party, on the accompanying Combined Statements of Income.
STOCK DIVIDEND
On December 20, 1994, RCI's shareholders and directors declared a
24-to-1 stock dividend to shareholders of RCI's common stock, thereby effecting
a 24-to-1 stock split. This split has been retroactively reflected in the
accompanying financial statements.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to trade accounts receivable
and is subject to the financial conditions of certain major customers in which
one customer accounted for approximately 11% of net sales for the year ended
December 31, 1994, two customers accounted for approximately 15% and 10% of net
sales for the year ended December 31, 1995 and three customers accounted for
approximately 16%, 15% and 15% of net sales for the four months ended April 30,
1996. The Company does not require collateral or other security to support
customers' receivables. The Company conducts periodic reviews of its customers'
financial conditions and vendor payment practices to minimize collection risks
on trade accounts receivable. The Company insures its receivables for major
customers with a third party.
F-23
<PAGE> 78
3. NOTES PAYABLE
During 1995, the Company entered into a revolving line of credit
agreement with a bank which extends through April, 1996. The maximum amount of
borrowings was the lesser of $4,000,000 or the collateral availability, as
defined in the agreement. The agreement required maintenance of certain
covenants and was secured by substantially all of the assets of the Company. As
of April 30, 1996, there was no outstanding balance on this line of credit. On
April 30, 1996, as part of the recapitalization (see Note 1) this agreement was
canceled.
The Company has an unsecured promissory note payable to a related party
(a former shareholder) of $1,120,000 and $1,140,000 at December 31, 1995, and
April 30, 1996, respectively, including accrued interest. Interest charged at 6%
is payable at maturity.
4. STOCK OPTION PLAN
During 1994, RCI established a stock option plan, under which up to 100
shares of RCI's common stock may be granted to key employees. Under this Plan,
options to purchase a total of 74.76 shares of RCI common stock at $3,960 per
share were issued during 1994. The options were issued at an exercise price
equal to fair market value. The options are exercisable upon the earlier of a
change in control of RCI, as defined, or an initial public offering of RCI's
common stock. The options expire five years from the date they become
exercisable. The options outlined above were canceled in connection with the
recapitalization (see Note 1).
F-24
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
The Shareholders
Racing Champions Limited,
(Incorporated in Hong Kong with limited liability)
Hosten Investment Limited,
(Incorporated in Hong Kong with limited liability)
Garnett Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)
Bergen Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)
We have audited the accompanying combined balance sheets of Racing
Champions Limited, Hosten Investment Limited, Garnett Services Inc. and Bergen
Services Inc. (hereinafter collectively referred to as "the Racing Champions
Limited Group" or "the RCL Group") as of March 31, 1995, 1996 and April 30, 1996
and the related combined statements of income, changes in shareholders' equity
and cash flows for each of the two years in the period ended March 31, 1996 and
the one month period ended April 30, 1996. These financial statements are the
responsibility of the RCL Group's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
RCL Group as of March 31, 1995, 1996 and April 30, 1996, and the combined
results of its operations and its cash flows for each of the two years in the
period ended March 31, 1996 and for the one month period ended April 30, 1996 in
conformity with accounting principles generally accepted in the United States of
America.
ERNST & YOUNG
Hong Kong
February 19, 1997
F-25
<PAGE> 80
RACING CHAMPIONS LIMITED GROUP
COMBINED BALANCE SHEETS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
APRIL 30,
------------
NOTES 1995 1996 1996
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 43,277 $ 301,240 $ 50,875
Trade receivables, net................................. 996,405 1,739,938 1,470,941
Prepayments, deposits and other receivables............ 577,134 282,213 237,122
Amount due from Racing Champions, Inc. ("RCI")......... 596,828 442,660 572,434
Amount due from affiliates............................. 9 1,032,754 -- 111,965
------------ ------------- ------------
Total current assets................................. 3,246,398 2,766,051 2,443,337
Fixed assets.............................................. 8 & 13 474,461 433,952 411,699
Other asset............................................... 3 -- -- 879,690
Deferred income taxes..................................... 4,560 60,440 65,713
------------ ------------- ------------
Total assets....................................... $ 3,725,419 $ 3,260,443 $ 3,800,439
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts, secured............................... 12 $ 320,384 $ -- $ --
Current portion of obligations under capital lease..... 13 49,596 148,151 147,888
Accounts payable and accrued liabilities............... 7 794,598 723,655 992,660
Amount due to affiliates............................... 9 -- 218,790 --
Income tax payable..................................... 38,872 136,768 151,086
------------ ------------- ------------
Total current liabilities............................ 1,203,450 1,227,364 1,291,634
Long-term obligations under capital lease................. 13 72,834 175,320 163,237
------------ ------------- ------------
Total liabilities.................................. 1,276,284 1,402,684 1,454,871
Contingencies and commitments............................. 16
Shareholders' equity:
Share capital.......................................... 14 129,369 129,369 129,369
Retained earnings...................................... 2,319,766 1,728,390 2,216,199
------------ ------------- ------------
Total shareholders' equity........................... 2,449,135 1,857,759 2,345,568
------------ ------------- ------------
Total liabilities and shareholders' equity......... $ 3,725,419 $ 3,260,443 $ 3,800,439
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-26
<PAGE> 81
RACING CHAMPIONS LIMITED GROUP
COMBINED STATEMENTS OF INCOME
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
---------------------------------- APRIL 30,
NOTES 1995 1996 1996
--------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Sales:
Related party -- RCI..................... $10,316,438 $11,308,084 $1,304,352
Other customers.......................... 12,014,547 26,013,536 2,547,775
-------------- -------------- ------------
Total sales............................ 22,330,985 37,321,620 3,852,127
-------------- -------------- ------------
Cost of sales:
Related party purchases.................. 15 (8,161,941) (11,245,727) (1,719,700)
Other purchases.......................... (4,776,869) (7,643,479) (307,945)
Commission paid to RCI................... 15 (5,777,498) (13,745,461) (1,331,278)
-------------- -------------- ------------
Total cost of sales.................... (18,716,308) (32,634,667) (3,358,923)
-------------- -------------- ------------
Commission received from RCI................ 15 1,673,212 2,398,325 258,387
-------------- -------------- ------------
Gross profit........................... 5,287,889 7,085,278 751,591
Depreciation of fixed assets................ (360,177) (392,079) (29,268)
Selling and administrative expenses......... 15 (2,861,294) (3,968,028) (215,760)
-------------- -------------- ------------
Operating income....................... 2,066,418 2,725,171 506,563
Financial expenses, net..................... 4 & 15 (55,239) (130,004) (12,755)
Other income, net........................... 5 113,085 178,534 28,512
-------------- -------------- ------------
Income before income taxes............. 2,124,264 2,773,701 522,320
Income taxes................................ 6 (45,312) (170,677) (34,511)
-------------- -------------- ------------
Net income............................. $2,078,952 $2,603,024 $487,809
============== ============== ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-27
<PAGE> 82
RACING CHAMPIONS LIMITED GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
COMBINED RETAINED
SHARE CAPITAL EARNINGS TOTAL
------------- ----------- ----------
<S> <C> <C> <C>
Balance at March 31, 1994.......................... $129,369 $2,868,872 $2,998,241
Net income...................................... -- 2,078,952 2,078,952
Dividends....................................... -- (2,628,058) (2,628,058)
------------- ----------- ----------
Balance at March 31, 1995.......................... 129,369 2,319,766 2,449,135
Net income...................................... -- 2,603,024 2,603,024
Dividends....................................... -- (3,194,400) (3,194,400)
------------- ----------- ----------
Balance at March 31, 1996.......................... 129,369 1,728,390 1,857,759
Net income...................................... -- 487,809 487,809
------------- ----------- ----------
Balance at April 30, 1996.......................... $129,369 $2,216,199 $2,345,568
============= =========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-28
<PAGE> 83
RACING CHAMPIONS LIMITED GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
------------------------------- ENDED
1995 1996 APRIL 30, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 2,078,952 $ 2,603,024 $ 487,809
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on disposal of fixed assets............................ (51,809) (147,616) --
Depreciation................................................. 360,177 392,079 29,268
Deferred income taxes........................................ (29,961) (55,880) (5,273)
Decrease (increase) in assets:
Trade receivables, net..................................... (107,845) (743,533) 268,997
Prepayments, deposits and other receivables................ (201,268) 294,921 45,091
Amount due from RCI........................................ 7,348 154,168 (129,774)
Amount due from affiliates................................. (679,856) 1,032,754 (111,965)
Tax refund................................................. 240,642 -- --
Increase (decrease) in liabilities:
Amounts due to affiliates.................................. -- 218,790 (218,790)
Accounts payable and accrued liabilities................... 63,950 (70,943) 269,005
Income taxes payable....................................... 38,355 97,896 14,318
-------------- -------------- --------------
Net cash provided by operating activities................ 1,718,685 3,775,660 648,686
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets..................................... (75,914) (35,390) (7,015)
Purchase of other asset...................................... -- -- (879,690)
Proceeds from disposal of fixed assets....................... 139,715 162,995 --
-------------- -------------- --------------
Net cash provided by (used in) investing activities...... 63,801 127,605 (886,705)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayment) of bank overdrafts...................... 320,384 (320,384) --
Dividends paid............................................... (2,628,058) (3,194,400) --
Net payments under finance lease............................. (112,426) (130,518) (12,346)
-------------- -------------- --------------
Net cash used in financing activities.................... (2,420,100) (3,645,302) (12,346)
Net increase (decrease) in cash and cash equivalents..... (637,614) 257,963 (250,365)
Cash and cash equivalents, at beginning of year................. 680,891 43,277 301,240
-------------- -------------- --------------
Cash and cash equivalents, at end of year....................... $ 43,277 $ 301,240 $ 50,875
============== ============== ==============
SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Interest paid................................................ $ 41,735 $ 67,038 $ 4,666
Income taxes paid............................................ 36,918 128,661 25,466
Inception of a capital lease contract........................ 112,894 331,559 --
============== ============== ==============
</TABLE>
The accompanying notes are an integral part
of these combined financial statements
F-29
<PAGE> 84
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Racing Champions Limited ("RCL"), Bergen Services Inc. ("BSI"), and
Hosten Investments ("HIL") were formed in 1989, 1989 and 1991, respectively to
act as purchasing and sales agents of collectible scaled replicas of race cars
and other vehicles for Garnett Services Inc. ("GSI"). BSI and GSI were
incorporated in the British Virgin Islands ("BVI"), and RCL and HIL were
incorporated in Hong Kong. RCL, BSI, GSI and HIL are collectively referred to as
"the Racing Champions Limited Group" or "the RCL Group".
Substantially all the RCL Group's products are sold to Racing
Champions, Inc. ("RCI"), a related party, and other customers in the United
States of America. Effective on May 1, 1996, the operations of RCL, HIL and GSI
have been acquired by Racing Champions, Inc.
2. BASIS OF PRESENTATION
The combined financial statements of the RCL Group have been prepared
based on the historical financial statements of the RCL Group of companies for
the years ended March 31, 1995 and 1996 and for one month ended April 30, 1996,
in accordance with accounting principles generally accepted in the United States
of America. All significant intercompany balances and transactions have been
eliminated.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(A) FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight-line basis
to write off the cost less estimated residual value of each asset over its
estimated useful life. The principal annual rates used for this purpose are as
follows:
Leasehold improvements.................. 25%
Furniture and fixtures.................. 20%
Office equipment........................ 20%
Motor vehicles.......................... 30%
(B) INCOME TAXES
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
F-30
<PAGE> 85
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(C) FOREIGN CURRENCY TRANSLATION
The RCL Group's functional currency is Hong Kong dollars ("HK$").
Foreign currency transactions and monetary assets and liabilities denominated in
foreign currencies are translated into HK$ at the respective applicable rates of
exchange. Monetary assets and liabilities denominated in foreign currencies are
translated into HK$ at the applicable rate of exchange at the balance sheet
date. The resulting exchange gains or losses are credited or charged to the
statements of income.
The financial statements of the RCL Group where the HK$ is the
functional currency have been translated into U.S. dollars for reporting purpose
in accordance with FASB Statement No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement accounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported separately as a
component of shareholders' equity.
(D) OTHER ASSET
Other asset consists of a golf club membership debenture that is stated
at purchase cost which approximates its fair market value.
(E) REVENUE RECOGNITION
Revenue from the sale of the RCL Group's products is recognized when
the products are shipped to customers.
(F) RETIREMENT BENEFITS
The RCL Group participates in a defined contribution retirement plan
administered by an insurance company (the "Retirement Plan"). All staff covered
under the Retirement Plan are entitled to a lump sum payment, payable by the
insurance company, upon their retirement equal to the sum of employees'
contributions plus the employer's contribution. The RCL Group is required to
make contributions to the Retirement Plan at a rate of 5% of the salaries of its
existing staff. The retirement benefits contributions are charged to the
statements of income as services are provided.
Contributions made to the retirement plan during the years ended March
31, 1995, 1996 and one month ended April 30, 1996 were $17,322, $17,540 and
$1,068, respectively.
(G) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks with a term to maturity of three months or less at the date of
acquisition.
F-31
<PAGE> 86
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(H) 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
4. FINANCIAL EXPENSES, NET
Financial expenses, net consist of:
<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
------------------------ APRIL 30,
1995 1996 1996
--------- ---------- ---------
<S> <C> <C> <C>
Interest income............. $ 32,915 $ 13,982 $ 61
Interest expenses on:
Bank overdrafts.......... (28,315) (46,598) (2,843)
Capital leases........... (13,420) (20,440) (1,823)
Bank charges................ (46,419) (76,948) (8,150)
--------- ---------- ---------
$(55,239) $(130,004) $(12,755)
========= ========== =========
</TABLE>
5. OTHER INCOME, NET
Other income, net consists of:
<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
----------------------- APRIL 30,
1995 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Foreign exchange gains/(losses), net $(20,564) $ 3,265 $ 51
Gains on disposal of fixed assets 51,809 147,616 --
Miscellaneous income 81,840 27,653 28,461
---------- ---------- ----------
$113,085 $178,534 $28,512
========== ========== ==========
</TABLE>
F-32
<PAGE> 87
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
6. INCOME TAXES
The companies in the RCL Group operate both in Hong Kong and other
jurisdictions. Details of the related provision for income taxes are as follows:
<TABLE>
<CAPTION>
One Month
Years Ended March 31, Ended
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income before income taxes:
Hong Kong.............................. $ 322,039 $ 1,182,021 $ 209,159
Other jurisdictions.................... 1,802,225 1,591,680 313,161
------------ ------------ ------------
$ 2,124,264 $ 2,773,701 $ 522,320
============ ============ ============
Income tax provision:
Current:
Hong Kong........................... $ 75,273 $ 226,557 $ 39,784
Other jurisdictions................. -- -- --
------------ ------------ ------------
75,273 226,557 39,784
------------ ------------ ------------
Deferred, Hong Kong.................... (29,961) (55,880) (5,273)
------------ ------------ ------------
$ 45,312 $ 170,677 $ 34,511
============ ============ ============
</TABLE>
Income earned by BSI and GSI outside the BVI is not subject to tax.
Those companies carrying on business in Hong Kong are subject to Hong
Kong profits tax on their income arising in or derived from Hong Kong after
adjusting for income and expense items which are not assessable or deductible
for income tax purposes. As such, current income taxes are calculated at a
statutory tax rate of 16.5%.
F-33
<PAGE> 88
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income before
income taxes is as follows:
<TABLE>
<CAPTION>
One Month
Years Ended March 31, Ended
---------------------------- April 30,
1995 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
Statutory Hong Kong tax rates:............ 16.5% 16.5% 16.5%
------------ ------------ -----------
Computed expected tax expense............. $ 350,503 $ 457,661 $ 86,183
Lower tax rate of BVI companies........... (297,367) (262,627) (51,672)
Non-deductible/(taxable) items:
Gains on disposal of fixed assets...... (8,548) (24,357) --
Expenses............................... 724 -- --
------------ ------------ -----------
$ 45,312 $ 170,677 $ 34,511
============ ============ ===========
</TABLE>
Deferred income taxes represent temporary differences on depreciation
allowance of fixed assets. No valuation allowance for deferred income tax assets
has been recorded.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
<TABLE>
<CAPTION>
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Accounts payable.......................... $ 734,443 $ 552,361 $ 818,856
Accrued liabilities....................... 60,155 171,294 173,804
------------ ------------ ------------
$ 794,598 $ 723,655 $ 992,660
============ ============ ============
</TABLE>
8. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Leasehold improvements.................... $ 506,553 $ 510,285 $ 510,285
Furniture and fixtures.................... 249,495 255,391 255,391
Office equipment.......................... 258,198 253,319 260,334
Motor vehicles............................ 487,677 453,239 453,239
------------ ------------ -------------
1,501,923 1,472,234 1,479,249
Less: Accumulated depreciation........... (1,027,462) (1,038,282) (1,067,550)
------------ ------------ -------------
$ 474,461 $ 433,952 $ 411,699
============ ============ =============
</TABLE>
F-34
<PAGE> 89
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
9. AMOUNT DUE FROM (TO) AFFILIATES
Amounts due from (to) affiliates consist of:
<TABLE>
<CAPTION>
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Amounts due from (to) directors........... $ (96,460) $ 450,385 $ 34,605
Amounts due from shareholders............. 121,839 117,455 956,112
Amounts due from (to) related
companies.............................. 1,007,375 (786,630) (878,752)
------------ ------------ ------------
$ 1,032,754 $ (218,790) $ 111,965
============ ============ ============
</TABLE>
Amounts due to/from directors and shareholders relate to short-term
advances. Amounts due to/from related companies pertain to short-term advances
to related parties described in Notes 1 and 15.
10. CONCENTRATION OF RISKS
Financial instruments which potentially subject the RCL Group to a
concentration of credit risk consist of cash deposits and trade receivables.
(i) Cash deposits
The RCL Group places its cash deposits with international banks in
Hong Kong.
(ii) Trade receivables
As of April 30, 1996, approximately 28.0% and 48.8% of the total trade
receivables balance were due from Racing Champions, Inc. and the two other
largest customers, respectively. The RCL Group does not have a policy of
requiring collateral for trade receivables.
Racing Champions, Inc. and the second largest customers account for
approximately 46% and 10%; 30% and 23%; 34% and 22% of net sales, respectively,
for each of the two years ended March 31, 1995 and 1996 and one month period
ended April 30, 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments are set out as follows:
(i) Cash deposits
The cash deposits are stated at cost which approximates market value.
(ii) Trade receivables and amounts due from related companies
F-35
<PAGE> 90
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
Trade receivables and the amounts due from related companies are stated
at their book value less provision for doubtful debts, which approximates the
fair market value.
(iii) Other asset
Other asset is stated at purchase cost which approximates its fair
value based on current market value.
(iv) Other financial instruments
All other financial instruments are stated at their book value
which approximates their fair values.
12. BANKING FACILITIES
The RCL Group has banking facilities of $13,628,719 for overdrafts and
trade finance. Unused facilities as of April 30, 1996 amounted to $13,628,719.
The banking facilities of the RCL Group were secured by mortgages over
a director's personal leasehold land and buildings and corporate guarantees
given by the RCL Group and two directors totaling $8,150,065.
The bank overdrafts carry interest at 2.5% above the Hong Kong prime
lending rate, a weighted average of 11.5% as of April 30, 1996.
13. CAPITAL LEASES
The RCL Group leases motor vehicles under capital leases. Leases
meeting certain specific criteria are accounted for as the acquisition of an
asset. The principal amounts of leases that have been capitalized were as
follows:
<TABLE>
<CAPTION>
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Motor vehicles............................ $ 487,677 $ 453,239 $ 453,239
Less: Accumulated amortization........... (361,278) (172,414) (183,745)
------------ ------------ ------------
$ 126,399 $ 280,825 $ 269,494
============ ============ ============
</TABLE>
Amortization of the leased assets is included in depreciation expenses.
F-36
<PAGE> 91
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
At April 30, 1996, future minimum payments under capital leases with
initial terms of one year or more consisted of the following:
<TABLE>
<S> <C>
Year ending April 30:
1996.......................................................... $ 170,026
1997.......................................................... 170,026
1998.......................................................... 16,603
--------------
Total minimum lease payments..................................... 356,655
Less: Interest elements.......................................... (45,530)
--------------
Present value of net minimum lease payments...................... 311,125
Less: current portion............................................ (147,888)
--------------
Long term portion................................................ $ 163,237
==============
</TABLE>
14. SHARE CAPITAL
Share capital represented an aggregate amount of the nominal value of
issued share capital of RCL, HIL, GSI and BSI as follows:
<TABLE>
<CAPTION>
RCL HIL BSI GSI
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Authorized share capital........ US$129,366 US$1,293.66 US$50,000 US$50,000
Issued share capital............ US$129,366 US$ .26 US$ 2 US$ 1
Stated value per share.......... US$ .13 US$ .13 US$ 1 US$ 1
</TABLE>
15. RELATED PARTY BALANCES AND TRANSACTIONS
The RCL Group paid commissions to RCI on all shipments to customers
other than RCI. These commissions represented the gross profit earned on these
sales. The RCL Group received agency fee income from RCI on all shipments based
upon a percentage of the cost of the items sold.
A significant proportion of RCL Group's products was purchased from
vendors who were either directly or indirectly, and partially owned by the RCL
Group's shareholders. Also, RCL Group paid rents to affiliated companies of
$539,385, $554,274 and $40,065 for the years ended March 31, 1995 and 1996 and
the one month ended April 30, 1996, respectively.
16. CONTINGENCIES AND COMMITMENTS
The RCL Group had the following capital commitments and contingencies:
(i) The RCL Group had bills discounted with recourse amounting to
$498,327, $63,087 and $256,668 as of March 31, 1995, March 31, 1996 and
April 30, 1996, respectively.
(ii) The RCL Group had guarantees of banking facilities granted to
a director amounting to $1,936,879, $1,888,191 and $2,018,111 as of March
31, 1995, March 31, 1996 and April 30, 1996, respectively.
F-37
<PAGE> 92
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(iii) Operating leases:
The RCL Group leases land and buildings under non-cancelable
operating lease arrangements. Future minimum payments under non-cancelable
operating leases with initial terms of one year or more consisted of the
following at April 30, 1996.
<TABLE>
<S> <C>
For the year ended April 30,
1997...................................... $ 59,931
1998...................................... 186,287
----------
$ 246,218
==========
</TABLE>
Rental expenses under all operating leases were $539,385 and
$554,274 for the years ended March 31, 1995 and 1996, respectively, and
$40,065 for the one month ended April 30, 1996.
17. POST BALANCE SHEET EVENTS
Subsequent to the balance sheet date, on May 1, 1996, RCL, HIL, GSI
(the "Companies") and Racing Champions, Inc. ("RCI") entered into an asset and
stock purchase agreement (the "Agreement"). Pursuant to the Agreement, the
Companies agreed to sell certain of their assets and liabilities with a net book
value of $647,229 at April 30, 1996 to Banerjan Company Limited ("Banerjan"), a
wholly-owned subsidiary of RCI for total consideration of $29,213,420.
Thereafter, the Companies ceased business and the name of Racing Champions
Limited was released to Banerjan Company Limited, which was renamed Racing
Champions Limited, a wholly-owned subsidiary of RCI.
F-38
<PAGE> 93
EXHIBIT INDEX
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
2.1 Agreement and Plan of Merger, dated as
of December 4, 1997, among the Company,
WSG Acquisition, Inc. and Wheels Sports
Group, Inc.
2.2 First Amendment to Agreement and Plan
of Merger, dated as of February 2,
1998, among the Company, WSG Acquisition,
Inc. and Wheels Sports Group, Inc.
2.3 Second Amendment to Agreement and Plan
of Merger, dated as of February 3,
1998, among the Company, WSG Acquisition,
Inc. and Wheels Sports Group, Inc.
2.4 Stockholder Agreement, dated as of
December 4, 1997, between the Company and
Howard L. Correll, Jr.
3.1 Amended and Restated Certificate of
Incorporation of the Company (2)
3.2 Amended and Restated By-Laws of
the Company (1)
10.1 Asset and Stock Purchase Agreement,
dated as of April 30, 1996, among the
Company, Racing Champions, Inc., Robert
Dods, Boyd Meyer, Peter Chung, Dods-Meyer,
Ltd., Racing Champions Limited, Garnett
Services, Inc., Hosten Investment
Limited and Banerjan Company Limited (1)
<PAGE> 94
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
10.2 Stockholders Agreement, dated as of
April 30, 1996, by and among the
Company, Willis Stein & Partners,
L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund
Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc.,
Hosten Investment Limited, Curt
Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
10.3 Registration Agreement, dated as
of April 30, 1996, by and among the
Company, Willis Stein & Partners,
L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund
Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc.,
Hosten Investment Limited, Curt
Stoelting, John Olsen, Peter Henseler
and Kevin Camp (1)
10.4 Executive Securities Agreement, dated as
of April 30, 1996, by and among the
Company, Curt Stoelting, John Olsen, Peter
Henseler, Kevin Camp, Willis Stein
& Partners, L.P., Baird Capital Partners
II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer and Peter Chung (1)
10.5 Securities Purchase Agreement, dated as
of April 30, 1996, by and among the
Company, Willis Stein & Partners, L.P.,
Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund
Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Curt Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
ii
<PAGE> 95
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
10.6 Amendment No. 1 to Securities Purchase
Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein
& Partners, L.P. and certain other
purchasers of the Company's stock (1)
10.7 Securities Purchase Agreement, dated as
of April 30, 1996, by and between the
Company and Dods-Meyer, Ltd. (1)
10.8 Amended and Restated Credit Agreement,
dated as of June 17, 1997, by and among
the Company, Racing Champions, Inc.,
BankBoston, N.A., as lender and agent,
and the other lenders party thereto
10.9 Amended and Restated Guarantee and
Security Agreement, dated as of June 17,
1997, by and among the Company, Racing
Champions, Inc. and BankBoston, N.A.,
as agent
10.10 Employment Agreement, dated as of April
30, 1996, by and between Racing Champions,
Inc. and Robert Dods (1)
10.11 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Boyd Meyer (1)
10.12 Employment Agreement, dated as of April 30,
1996, by and between Banerjan Company
Limited and Peter Chung (1)
10.13 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Curt Stoelting (1)
10.14 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Peter Henseler (1)
iii
<PAGE> 96
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
10.15 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and John Olsen (1)
10.16 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Kevin Camp (1)
10.17 1996 Key Employees Stock Option Plan (1)
10.18 1996 Key Employees Performance Compensation
Plan (1)
10.19 Amendment No. 1 to 1996 Key Employees
Performance Compensation Plan (1)
10.20 Racing Champions Corporation Stock Incentive
Plan (1)
10.21 Racing Champions Corporation Employee Stock
Purchase Plan (1)
21 Subsidiaries of the Company
24 Power of Attorney (included as part of the
signature page hereof)
27 Financial Data Schedule
- -------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-22493) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-22635) and incorporated herein
by reference.
iv
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 4, 1997
AMONG
WHEELS SPORTS GROUP, INC.,
RACING CHAMPIONS CORPORATION
AND
WSG ACQUISITION, INC.
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER
1.01 The Merger 1
1.02 Effective Time 2
1.03 Closing of the Merger 2
1.04 Effects of the Merger 2
1.05 Certificate of Incorporation and By-Laws 2
1.06 Directors 2
1.07 Officers 3
1.08 Conversion of Shares 3
1.09 Appraisal Rights 3
1.10 Exchange of Certificates 4
1.11 Stock Options, Warrants and Other Rights 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.01 Organization and Qualification; Subsidiaries 8
2.02 Capitalization of the Company and its Subsidiaries 9
2.03 Authority Relative to this Agreement 10
2.04 SEC Reports; Financial Statements 11
2.05 Information Supplied 12
2.06 Consents and Approvals; No Violations 12
2.07 Contracts; No Defaults 13
2.08 No Undisclosed Liabilities; Absence of Changes 14
2.09 Litigation 15
2.10 Compliance with Applicable Law 15
2.11 Employee Benefit Plans; Labor Matters 16
2.12 Environmental Laws and Regulations 17
2.13 Taxes 18
2.14 Intellectual Property; Software 19
2.15 Certain Business Practices 20
2.16 Vote Required 20
2.17 Tax Treatment; Pooling 20
2.18 Affiliates 21
i
<PAGE> 3
2.19 Opinion of Financial Adviser 21
2.20 Brokers 21
2.21 Title to Properties 21
2.22 Affiliate Transactions 22
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
AND ACQUISITION
3.01 Organization and Qualification; Subsidiaries 22
3.02 Capitalization of Parent and its Subsidiaries 23
3.03 Authority Relative to this Agreement 24
3.04 SEC Reports; Financial Statements 25
3.05 Information Supplied 25
3.06 Consents and Approvals; No Violations 26
3.07 Contracts; No Defaults 26
3.08 No Undisclosed Liabilities; Absence of Changes 27
3.09 Litigation 27
3.10 Compliance with Applicable Law 28
3.11 Employee Benefit Plans; Labor Matters 29
3.12 Environmental Laws and Regulations 30
3.13 Tax Matters 30
3.14 Intellectual Property; Software 31
3.15 Certain Business Practices 32
3.16 Vote Required 33
3.17 Tax Treatment; Pooling 33
3.18 Opinion of Financial Adviser 32
3.19 Brokers 33
3.20 No Prior Activities 33
3.21 Title to Properties 33
3.22 Affiliate Transactions 33
ARTICLE IV
COVENANTS
4.01 Conduct of Business of Parent and the Company 34
4.02 Preparation of S-4 and the Proxy Statement 37
4.03 Other Potential Acquirers of the Company 37
4.04 Comfort Letters 39
4.05 Meetings of Stockholders 39
ii
<PAGE> 4
4.06 Nasdaq Listing 40
4.07 Access to Information 40
4.08 Additional Agreements; Reasonable Efforts 41
4.09 Public Announcements 41
4.10 Indemnification 41
4.11 Notification of Certain Matters 42
4.12 Affiliates; Pooling; Tax-Free Reorganization 42
4.13 Parent Board 43
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
5.01 Conditions to Each Party's Obligations to Effect
the Merger 43
5.02 Additional Conditions to the Obligations of the
Company 44
5.03 Additional Conditions to the Obligations of Parent
and Acquisition 45
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
6.01 Termination 47
6.02 Effect of Termination 49
6.03 Fees and Expenses 50
6.04 Amendment 51
6.05 Extension; Waiver 51
6.06 Definition of Third Party Acquisition with Respect
to Parent 51
ARTICLE VII
MISCELLANEOUS
7.01 Nonsurvival of Representations and Warranties 52
7.02 Entire Agreement; Assignment 52
7.03 Validity 52
7.04 Notices 52
7.05 Governing Law 53
7.06 Descriptive Headings 53
iii
<PAGE> 5
7.07 Parties in Interest 53
7.08 Certain Definitions 53
7.09 Personal Liability 54
7.10 Specific Performance 54
7.11 Counterparts 55
7.12 No Rule of Construction 55
EXHIBITS
Exhibit A Form of Stockholder Agreements
Exhibit B Form of Company Pooling Letters
Exhibit C Form of Rule 145 Letters
Exhibit D Form of Parent Pooling Letters
Exhibit E Form of Opinion of Counsel to Parent
Exhibit F Form of Opinion of Counsel to the Company
iv
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as
of December 4, 1997 is among WHEELS SPORTS GROUP, INC., a North Carolina
corporation (the "Company"), RACING CHAMPIONS CORPORATION, a Delaware
corporation ("Parent"), and WSG ACQUISITION, INC., a North Carolina corporation
and a wholly owned subsidiary of Parent ("Acquisition").
WHEREAS, the Boards of Directors of Parent, Acquisition and
the Company have each duly and unanimously (i) determined that the Merger (as
defined below) is in the best interests of their respective stockholders, (ii)
approved the Merger in accordance with the terms of this Agreement and (iii)
resolved to recommend approval of the Merger by their respective shareholders;
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition and inducement to Parent's willingness to enter
into this Agreement, Parent is entering into agreements with certain holders of
shares of the Company's common stock, par value $0.01 per share (the "Shares"),
in the form attached hereto as Exhibit A (the "Stockholder Agreements");
WHEREAS, for federal income tax purposes it is intended that
the Merger qualify a reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the
Merger be accounted for as a pooling of interests.
NOW THEREFORE in consideration of the premises and the
representations, warranties, covenants and agreements herein contained and
intending to be legally bound hereby, the Company, Parent and Acquisition hereby
agree as follows:
ARTICLE I
THE MERGER
1.01. The Merger. At the Effective Time (as defined below) and
upon the terms and subject to the conditions of this Agreement and in accordance
with the North Carolina Business Corporation Act ("NCBC"), Acquisition shall be
<PAGE> 7
merged with and into the Company (the "Merger"). Following the Merger, the
Company shall continue as the surviving corporation (the "Surviving
Corporation") and the separate corporate existence of Acquisition shall cease.
The Merger is intended to qualify as a tax-free reorganization under Section 368
of the Code.
1.02. Effective Time. Subject to the terms and conditions set
forth in this Agreement, a Certificate of Merger (the "Merger Certificate")
shall be duly executed and acknowledged by Acquisition and the Company and
thereafter delivered to the Secretary of State of the State of North Carolina
for filing pursuant to the NCBC on the Closing Date (as defined in Section
1.03). The Merger shall become effective at such time as a properly executed and
certified copy of the Merger Certificate is duly filed in accordance with the
NCBC or such later time as Parent and the Company may agree upon and set forth
in the Merger Certificate (the time the Merger becomes effective being referred
to herein as the "Effective Time").
1.03. Closing of the Merger. The closing of the Merger (the
"Closing") will take place at a time and on a date (the "Closing Date") to be
specified by the parties, which shall be no later than the second business day
after satisfaction of the latest to occur of the conditions set forth in Article
V at the offices of Parent, unless another time, date or place is agreed to in
writing by the parties hereto.
1.04. Effects of the Merger. The Merger shall have the effects
set forth in the NCBC. Without limiting the generality of the foregoing and
subject thereto, at the Effective Time all the properties, rights, privileges,
powers and franchises of the Company and Acquisition shall vest in the Surviving
Corporation and all debts, liabilities and duties of the Company and Acquisition
shall become the debts, liabilities and duties of the Surviving Corporation.
1.05. Certificate of Incorporation and By-Laws. The
Certificate of Incorporation of Acquisition in effect at the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation until
amended in accordance with applicable law, except that the name of the Surviving
Corporation shall be "Wheels Sports Group, Inc." The bylaws of Acquisition in
effect at the Effective Time shall be the bylaws of the Surviving Corporation
until amended in accordance with applicable law.
1.06. Directors. The directors of Acquisition at the Effective
Time shall be the initial directors of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and bylaws of the
Surviving
2
<PAGE> 8
Corporation until such director's successor is duly elected or
appointed and qualified.
1.07. Officers. The officers of the Company at the Effective
Time shall be the initial officers of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and bylaws of the
Surviving Corporation until such officer's successor is duly elected or
appointed and qualified.
1.08. Conversion of Shares.
(a) Subject to Section 1.09, at the Effective Time
each share of the Company's common stock, $.01 par value per share (the
"Shares") which is issued and outstanding immediately prior to the Effective
Time (other than Shares held in the Company's treasury or by any of the
Company's subsidiaries and Shares held by Parent, Acquisition or any other
subsidiary of Parent) shall, by virtue of the Merger and without any action on
the part of Acquisition, the Company or the holder thereof, be converted into
the right to receive 0.80 (the "Exchange Ratio") of a share of Parent's common
stock, $.01 par value per share (the "Parent Common Stock"; the shares of Parent
Common Stock to be issued hereunder, the "Merger Consideration"). If, between
the date of this Agreement and the Effective Time, the outstanding shares of
Parent Common Stock or the Shares shall have been changed into a different
number of shares or a different class by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares, then the Exchange Ratio shall be correspondingly adjusted to reflect
such stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares.
(b) At the Effective Time, each outstanding share of
the common stock, $.01 par value per share, of Acquisition shall be converted
into one share of common stock, $.01 par value per share, of the Surviving
Corporation.
(c) At the Effective Time, each Share held in the
treasury of the Company and each Share held by Parent, Acquisition or any
subsidiary of Parent, Acquisition or the Company immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of Acquisition, the Company or the holder thereof, be canceled, retired and
cease to exist, and no shares of Parent Common Stock shall be delivered with
respect thereto.
1.09. Appraisal Rights. Notwithstanding Section 1.08, Shares
which are issued and outstanding immediately prior to the Effective Time and
held by a holder who has not voted in favor of the Merger or consented thereto
in
3
<PAGE> 9
writing and who has demanded appraisal for such Shares in accordance with the
NCBC ("Dissenting Shares") shall not be converted into a right to receive the
Merger Consideration, but rather the holder thereof shall only be entitled to
such appraisal rights as are granted by the NCBC. If after the Effective Time
such holder fails to perfect or withdraws or loses its right to appraisal, such
Shares shall be treated as if they had been converted as of the Effective Time
into the right to receive the Merger Consideration payable in respect of such
Shares pursuant to Section 1.08, without any interest thereon. The Company shall
give Acquisition and Parent prompt notice of any demands received by the Company
for appraisal of Shares prior to the Effective Time, and Acquisition shall have
the right to participate in all negotiations and proceedings with respect to
such demands. Prior to the Effective Time, the Company shall not, except with
the prior written consent of Parent or as otherwise required by law, make any
payment with respect to, or settle or offer to settle, any such demands.
1.10. Exchange of Certificates.
(a) From time to time following the Effective Time,
as required by subsections (b) and (c) below, Parent shall deliver to Boston
EquiServe, or such other agent or agents as may be appointed by Parent and
Acquisition (the "Exchange Agent") for the benefit of the holders of Shares for
exchange in accordance with this Agreement through the Exchange Agent: (i) the
Merger Consideration, consisting of certificates representing the appropriate
number of shares of Parent Common Stock and (ii) cash to be paid in lieu of
fractional shares of Parent Common Stock (such shares of Parent Common Stock and
such cash are hereinafter referred to as the "Exchange Fund") issuable pursuant
to Section 1.08 in exchange for outstanding Shares.
(b) As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Shares (the "Certificates") whose shares were converted
into the right to receive the Merger Consideration pursuant to Section 1.08: (i)
a letter of transmittal (which shall specify that delivery shall be effected and
risk of loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Merger Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent together with such letter of transmittal duly executed and
completed in accordance with the instructions thereon, and such other documents
as may reasonably be requested by Parent or the Exchange Agent, and subject to
any applicable withholding of taxes,
4
<PAGE> 10
the holder of such Certificate shall be entitled to receive in exchange therefor
the Merger Consideration and, if applicable, a check representing the cash
consideration to which such holder may be entitled on account of a fractional
share of Parent Common Stock which such holder has the right to receive pursuant
to the provisions of this Article I, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Shares which
is not registered in the transfer records of the Company, the Merger
Consideration may be issued to a transferee if the Certificate representing such
Shares is presented to the Exchange Agent accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
1.10, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the Merger Consideration
and cash in lieu of any fractional shares of Parent Common Stock as contemplated
by this Section 1.10.
(c) No dividends or other distributions declared or
made after the Effective Time with respect to Parent Common Stock with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 1.10(f) until the holder of record of such
Certificate shall surrender such Certificate. Subject to the effect of
applicable laws, following surrender of any such Certificate there shall be paid
to the record holder of the certificates representing whole shares of Parent
Common Stock issued in exchange therefor without interest: (i) at the time of
such surrender the amount of any cash payable in lieu of a fractional share of
Parent Common Stock to which such holder is entitled pursuant to Section 1.10(f)
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock and (ii) at the appropriate payment date the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Parent Common Stock.
(d) In the event that any Certificate for Shares
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange therefor upon the making of an affidavit of that fact by the holder
thereof such shares of Parent Common Stock and cash in lieu of fractional shares
if any as may be required pursuant to this Agreement, provided, however, that
Parent or its Exchange Agent may, in its sole discretion, require the delivery
of a suitable bond or indemnity.
5
<PAGE> 11
(e) All shares of Parent Common Stock and cash issued
upon the surrender for exchange of Shares in accordance with the terms hereof
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such Shares, and there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the Shares
which were outstanding immediately prior to the Effective Time. If after the
Effective Time Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
(f) No fractions of a share of Parent Common Stock
shall be issued in the Merger. In lieu thereof, each holder of Shares otherwise
entitled to a fraction of a share of Parent Common Stock shall, upon surrender
of his or her Certificate or Certificates, be entitled to receive an amount of
cash (without interest) determined by multiplying (x) the average closing sale
price for Parent Common Stock as reported by the Nasdaq National Market during
the 20 consecutive business days ending on the fifth business day prior to the
Effective Time by (y) the fractional share interest to which such holder would
otherwise be entitled. The parties acknowledge that payment of the cash
consideration in lieu of issuing fractional shares was not separately bargained
for consideration but merely represents a mechanical rounding off for purposes
of simplifying the corporate and accounting complexities which would otherwise
be caused by the issuance of fractional shares.
(g) Any portion of the Exchange Fund which remains
undistributed to the holders of Certificates for six months after the Effective
Time shall be delivered to Parent upon its demand, and any holders of
Certificates who have not previously surrendered their Certificates in
accordance with this Article I shall thereafter look only to Parent for payment
of the Merger Consideration and any cash to be paid in lieu of fractional shares
of Parent Common Stock. Notwithstanding the foregoing, neither Parent nor the
Company shall be liable to any holder of Shares or Parent Common Stock as the
case may be for such shares (or dividends or distributions with respect thereto)
or cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.11. Stock Options, Warrants and Other Rights.
(a) Schedule 1.11 sets forth a list of each
outstanding option, warrant or other right to purchase or acquire Shares (a
"Company Stock Option" or collectively the "Company Stock Options") issued
pursuant to the 1996 Omnibus Stock Plan or pursuant to any other contract or
arrangement (collectively, the "Company Plans") and outstanding as of the date
of this Agreement, whether
6
<PAGE> 12
or not fully vested, and sets forth with respect to each Company Stock Option
the option exercise price, the number of shares subject to the Company Stock
Option, any related stock appreciation rights, the dates of grant, vesting,
exercisability and expiration of the Company Stock Option. At the Effective
Time, each outstanding Company Stock Option shall be converted as of the
Effective Time into options, warrants or rights, as the case may be, to purchase
shares of Parent Common Stock in accordance with the terms of this Section 1.11.
(b) Each outstanding Company Stock Option outstanding
immediately prior to the Effective Time shall be assumed at the Effective Time
by the Surviving Corporation and converted automatically into an option, warrant
or right, as the case may be, to purchase shares of Parent Common Stock (a "New
Option") in an amount and at an exercise price determined in accordance with
Schedule 1.11. Notwithstanding anything herein to the contrary, in the case of
any Company Stock Option to which Section 421 of the Code applies by reason of
its qualification under Section 422 of the Code ("incentive stock options" or
"ISOs") the option price, the number of shares purchasable pursuant to such
option and the terms and conditions of exercise of such option shall be
determined in order to comply with Section 424(a) of the Code.
(c) As soon as practicable after the Effective Time,
Parent shall deliver to the holders of Company Stock Options appropriate notices
setting forth such holders' rights and that the Company Plans evidencing the
grants of such Options shall continue in effect on the same terms and conditions
(subject to any adjustments which may be required by this Section 1.11 after
giving effect to the Merger and to such further changes which may be necessary
to cause the Company Stock Options to conform to the requirements of Parent's
stock option plans). Parent shall use reasonable efforts to ensure, to the
extent required by and subject to the provisions of such plans, that Company
Stock Options which qualified as incentive stock options prior to the Effective
Time continue to qualify as incentive stock options of Parent after the
Effective Time.
(d) Parent shall take all corporate action necessary
to reserve for issuance a sufficient number of shares of Parent Common Stock for
delivery upon exercise of New Options assumed in accordance with this Section
1.11. As soon as it is permitted to do so after the Effective Time, Parent shall
file a registration statement on Form S-8 (or any successor or other appropriate
forms) with respect to all shares of Parent Common Stock issuable under the
Company Plans which may be registered on Form S-8, and shall use reasonable
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
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prospectuses contained therein) for so long as such New Options remain
outstanding.
(e) At or before the Effective Time, the Company
shall cause to be effected any amendments to the Company Plans and the Company
Stock Options which may be necessary in order to give effect to the provisions
of this Section 1.11, and will use reasonable efforts to obtain the consent of
any holder of Company Stock Options necessary to effect any such amendments.
(f) Subject to adjustment as provided in Section
1.08(a), in no event shall Parent be required to issue more than 5,498,357
shares of Parent Common Stock in connection with the Merger, including shares of
Parent Common Stock issuable upon exercise of any New Options.
ARTICLE II
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of Parent
and Acquisition as follows:
2.01. Organization and Qualification; Subsidiaries.
(a) Section 2.01 of the Disclosure Schedule delivered
by the Company to Parent (the "Company Disclosure Schedule") identifies each
subsidiary of the Company as of the date hereof and its respective jurisdiction
of incorporation or organization, as the case may be. Except as set forth in
Section 2.01 of the Company Disclosure Schedule, the Company does not have any
interest in any corporation, partnership, limited liability company, business
trust or other business entity. Each of the Company and its subsidiaries is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has all requisite power
and authority to own, lease and operate its properties and to carry on its
businesses as now being conducted. The Company has heretofore delivered to
Acquisition or Parent accurate and complete copies of the Certificate of
Incorporation and bylaws (or similar governing documents), as currently in
effect, of the Company and its subsidiaries.
(b) Each of the Company and its subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such
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jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not have a Material Adverse Effect on the Company (as
defined below). When used in connection with the Company or its subsidiaries,
the term "Material Adverse Effect on the Company" means any change or effect (i)
that is or is reasonably likely to be materially adverse to the business,
results of operations, condition (financial or otherwise) or prospects of the
Company and its subsidiaries, taken as whole, or (ii) that would adversely
affect the ability of the Company, Parent or Acquisition to consummate the
transactions contemplated by this Agreement in accordance with its terms.
2.02. Capitalization of the Company and its Subsidiaries.
(a) The authorized capital stock of the Company
consists of 15,000,000 Shares, of which, as of the date of this Agreement,
4,680,253 Shares were issued and outstanding, and 5,000,000 shares of preferred
stock, none of which are outstanding. All of the outstanding Shares have been
validly issued and are fully paid, nonassessable and free of preemptive
rights. As of the date of this Agreement, 1,672,192 Shares were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding Company Stock Options. Except as disclosed in Section
2.02 of the Company Disclosure Schedule, between October 31,1997 and the date
hereof, no shares of the Company's capital stock have been issued other than
pursuant to Company Stock Options already in existence on such date, and
between October 31,1997 and the date hereof no Company Stock Options have been
granted. Except as set forth above, as of the date hereof and as of the
Effective Time, there are outstanding: (i) no shares of capital stock or other
voting securities of the Company, (ii) no securities of the Company or its
subsidiaries convertible into or exchangeable for shares of capital stock or
voting securities of the Company, (iii) no options, warrants, subscriptions,
calls, rights or other agreements to acquire from the Company or its
subsidiaries, and no obligations of the Company or its subsidiaries to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company and (iv) no
equity equivalent interests or rights to acquire equity equivalent interests in
the ownership or earnings of the Company or its subsidiaries or other similar
rights (collectively "Company Securities"). As of the date hereof, there are no
outstanding obligations of the Company or its subsidiaries to repurchase,
redeem or otherwise acquire any Company Securities. Except as set forth in
Section 2.02(a) of the Company Disclosure Schedule, there are no stockholder
agreements, voting trusts or other agreements or understandings to which the
Company is a party or by which it is bound relating to the voting or
registration of any shares of capital stock of the Company or other Company
Securities, and to
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the knowledge of the Company, no such agreements have been entered into by
shareholders of the Company.
(b) All of the outstanding capital stock of the
Company's subsidiaries is owned by the Company, directly or indirectly, free and
clear of any Lien (as defined below) or any other limitation or restriction
(including any restriction on the right to vote or sell the same except as may
be provided as a matter of law). There are no securities of the Company or its
subsidiaries convertible into or exchangeable for, no options or other rights to
acquire from the Company or its subsidiaries and no other contract,
understanding, arrangement or obligation (whether or not contingent) providing
for, the issuance or sale, directly or indirectly, of any capital stock or other
ownership interests in or any other securities of any subsidiary of the Company.
There are no outstanding contractual obligations of the Company or its
subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares
of capital stock or other ownership interests in any subsidiary of the Company.
For purposes of this Agreement, "Lien" means, with respect to any asset
(including without limitation any security), any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset.
(c) Except as set forth on Section 2.02(c) of the
Company Disclosure Schedule, none of the awards, grants or other agreements with
respect to the Company Stock Options have provisions which accelerate the
vesting or right to exercise such options upon the execution of this Agreement
(including documents attached as Exhibits hereto), the consummation of the
transactions contemplated hereby (or thereby) or any other "change of control"
events.
(d) The Shares constitute the only class of equity
securities of the Company or its subsidiaries registered or required to be
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
2.03. Authority Relative to this Agreement.
(a) The Company has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of the Company (the "Company
Board") and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby except the approval and adoption of this Agreement by the
holders of a majority of the outstanding Shares. This Agreement has been duly
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and validly executed and delivered by the Company and constitutes a valid, legal
and binding agreement of the Company, enforceable against the Company in
accordance with its terms.
(b) The Company Board (at a meeting duly called and
held) has unanimously (i) approved this Agreement, the Option Agreement and the
Voting Agreements, (ii) determined that the transactions contemplated hereby and
thereby are in the best interests of the holders of the Shares and (iii)
resolved to recommend that the stockholders of the Company approve and adopt the
Merger and this Agreement. The resolutions of the Company Board taking the
actions described in the preceding sentence have not been rescinded, withdrawn,
amended or otherwise modified, remain in full force and effect, and constitute
the only action of the Company Board with respect to the Merger or the other
transactions contemplated by this Agreement.
2.04. SEC Reports; Financial Statements.
(a) Except as set forth in Section 2.04(a) of the
Company Disclosure Schedule, since the April 16, 1997 effective date of the
Company's registration statement on Form SB-2 (the "Registration Statement"),
the Company has timely filed all required forms, reports and documents (together
with the Registration Statement, the "Company SEC Reports") with the Securities
and Exchange Commission (the "SEC"), each of which has complied in all material
respects with all applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act") and the Exchange Act, each as in effect on the
dates such forms, reports and documents were filed. None of such Company SEC
Reports, including, without limitation, any financial statements or schedules
included or incorporated by reference therein, contained when filed or as of the
date hereof any untrue statement of a material fact or omitted to state a
material fact required to be stated or incorporated by reference therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. The consolidated financial statements
of the Company included in the Company SEC Reports fairly present, in conformity
with generally accepted accounting principles ("GAAP") applied on a consistent
basis (except as may be indicated in the notes thereto), the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and their consolidated results of operations and changes in
financial position for the periods then ended, except that in the case of the
unaudited consolidated financial statements included in any Form 10-QSB, the
presentation and disclosures conform with the applicable rules of the Exchange
Act and include all adjustments necessary to conform to GAAP requirements with
respect to interim financial statements.
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(b) The Company has heretofore delivered to Parent or
promptly will deliver to Parent a complete and correct copy of all Company SEC
Reports and any amendments or modifications which are required to be filed with
the SEC but have not yet been filed with the SEC to the Company SEC Reports or
to agreements, documents or other instruments which previously had been filed by
the Company with the SEC pursuant to the Exchange Act.
2.05. Information Supplied. None of the information supplied
or to be supplied by the Company for inclusion or incorporation by reference in
(a) the registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger (the
"S-4"), or (b) the joint proxy statement to be distributed in connection with
Parent's and the Company's meeting of stockholders to vote upon this Agreement
(the "Proxy Statement") will, in the case of the S-4, at the time the S-4 is
filed with the SEC, at the time it becomes effective under the Securities Act,
at the time of the filing of any post-effective amendments thereto and at the
Effective Time, and, in the case of the Proxy Statement, at the time of the
mailing of the Proxy Statement or any amendments or supplements thereto, and at
the respective times of the meetings of the Company and Parent to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading provided, however, that the Company
makes no representation or warranty concerning information supplied or to be
supplied by Parent for inclusion or incorporation by reference to the S-4.
2.06. Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under the Securities Act, the Exchange Act, state securities or blue sky laws,
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act") or the By-Laws of the National Association of Securities Dealers, Inc.
(the "NASD") and the filing and recordation of the Merger Certificate as
required by the NCBC, no filing with or notice to and no permit, authorization,
consent or approval of any United States or foreign court or tribunal, or
administrative, governmental or regulatory body, agency or authority (a
"Governmental Entity") is necessary for the execution and delivery by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby, except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings or give such
notice would not have a Material Adverse Effect on the Company. Neither the
execution, delivery and performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby will (i)
conflict with or result in any breach of
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any provision of the respective Certificate of Incorporation or bylaws (or
similar governing documents) of the Company or any of its subsidiaries, (ii)
except as set forth in Section 2.06 of the Company Disclosure Schedule, result
in a violation or breach of or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration or Lien) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (iii) except as set forth in Section 2.06
of the Company Disclosure Schedule, violate any order, writ, injunction, decree,
law, statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their respective properties or assets except, in the case
of (ii) or (iii), for violations, breaches or defaults which, individually or in
the aggregate, would not have a Material Adverse Effect on the Company.
2.07. Contracts; No Defaults.
(a) Section 2.07 of the Company Disclosure Schedule
sets forth a true and complete list of each note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of its subsidiaries is now a party or by which any of them or
any of their respective properties or assets may be bound and which is material
to the Company and its subsidiaries taken as a whole (each, a "Company
Contract"). Each Company Contract is a legal, valid and binding obligation of
the Company or its subsidiary, as the case may be, and is in full force and
effect.
(b) Except as set forth in Section 2.07 of the
Company Disclosure Schedule, none of the Company or its subsidiaries is in
breach, default or violation (and no event has occurred which with notice or the
lapse of time or both would constitute a breach, default or violation) of any
term, condition or provision of (i) its Certificate of Incorporation or bylaws
(or similar governing documents), (ii) any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of its subsidiaries is now a party or by which any of them or
any of their respective properties or assets may be bound or (iii) any order,
writ, injunction, decree, law, statute, rule or regulation applicable to the
Company or any of its subsidiaries or any of their respective properties or
assets except in the case of (ii) or (iii), for violations, breaches or defaults
that would not, individually or in the aggregate, have a Material Adverse Effect
on the Company.
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(c) To the knowledge of the Company, no other party
to any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which the Company or any of its subsidiaries
is now a party or by which any of them or any of their respective properties or
assets may be bound is in breach, default or violation (and no event has
occurred which with notice or the lapse of time or both would constitute a
breach, default or violation) of any term, condition or provision of any such
note, bond, mortgage, indenture, lease, contract, agreement or other instrument
or obligation, except for violations, breaches or defaults that would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
2.08. No Undisclosed Liabilities; Absence of Changes. Except
as and to the extent publicly disclosed by the Company in the Company SEC
Reports or as set forth in Section 2.08 of the Company Disclosure Schedule, none
of the Company or its subsidiaries has any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be required
by generally accepted accounting principles to be reflected on a consolidated
balance sheet of the Company (including the notes thereto), other than
liabilities incurred in the ordinary course of business since September 30,
1997, none of which, individually or in the aggregate, would have a Material
Adverse Effect on the Company. Except as set forth in Section 2.08 of the
Company Disclosure Schedule, since September 30, 1997:
(a) there have been no events changes or effects with
respect to the Company or its subsidiaries having or which reasonably could be
expected, individually or in the aggregate, to have a Material Adverse Effect on
the Company;
(b) neither the Company nor any of its subsidiaries
has conducted its business and operations other than in the ordinary course and
consistent with past practices or taken any actions that would have violated or
been inconsistent with the provisions of Section 4.01 if it had been in effect;
(c) no party (including the Company or any of its
subsidiaries) has accelerated, terminated, modified or canceled (prior to the
expiration of its term) any material agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) to which the
Company or any of its subsidiaries is a party or by which any of its assets are
bound; and
(d) neither the Company nor any of its subsidiaries
has entered into any commitment or other agreement to do any of the foregoing.
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2.09. Litigation. Except as set forth in Section 2.09 of the
Company Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its subsidiaries or any of their respective properties or
assets before any Governmental Entity which individually or in the aggregate
could reasonably be expected to have a Material Adverse Effect on the Company or
could reasonably be expected to prevent or delay the consummation of the
transactions contemplated by this Agreement. Except as set forth in Section 2.09
of the Company Disclosure Schedule, none of the Company or its subsidiaries is
subject to any outstanding order, writ, injunction or decree which could
reasonably be expected to have a Material Adverse Effect on the Company or could
reasonably be expected to prevent or delay the consummation of the transactions
contemplated hereby.
2.10. Compliance With Applicable Law. Except as set forth in
Section 2.10 of the Company Disclosure Schedule, the Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all governmental entities necessary for the lawful conduct of their
respective businesses (the "Company Permits") except for failures to hold such
permits, licenses, variances, exemptions, orders and approvals which would not
have a Material Adverse Effect on the Company. Except as set forth in Section
2.10 of the Company Disclosure Schedule, the Company and its subsidiaries are in
compliance with the terms of the Company Permits except where the failure so to
comply would not have a Material Adverse Effect on the Company. Except as set
forth in Section 2.10 of the Company Disclosure Schedule, the businesses of the
Company and its subsidiaries are not being conducted in violation of any law,
ordinance or regulation of the United States or any foreign country or any
political subdivision thereof or of any Governmental Entity, except (i) that no
representation or warranty is made in this Section 2.10 with respect to
Environmental Laws (as defined in Section 2.12 below) and (ii) for violations or
possible violations of any United States or foreign laws, ordinances or
regulations which do not, and insofar as reasonably can be foreseen in the
future, will not result in any charges, assessments, levies, fines or other
liabilities being imposed upon or incurred by the Company that will equal
$250,000 for any single violation or $1 million in the aggregate. Except as set
forth in Section 2.10 of the Company Disclosure Schedule, no investigation or
review by any Governmental Entity with respect to the Company or its
subsidiaries is pending or, to the knowledge of the Company, threatened nor, to
the knowledge of the Company, has any Governmental Entity indicated an intention
to conduct the same, other than such investigations or reviews as would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
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2.11. Employee Benefit Plans, Labor Matters.
(a) Section 2.11 (a) of the Company Disclosure
Schedule sets forth a true and complete list of all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) and all bonus, stock, option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other fringe or
employee benefit plans, programs or arrangements and any current or former
employment or executive compensation or severance agreements written or
otherwise maintained or contributed to for the benefit of or relating to any
employee of the Company, any trade or business (whether or not incorporated)
which is a member of a controlled group including the Company or which is under
common control with the Company within the meaning of Section 414 of the Code
(an "ERISA Affiliate"), as well as each plan with respect to which the Company
or an ERISA Affiliate could incur liability under Section 4069 (if such plan has
been or were terminated) or Section 4212(c) of ERISA (together the "Employee
Plans"), excluding former agreements under which the Company has no remaining
obligations and any of the foregoing that are required to be maintained by the
Company under the laws of any foreign jurisdiction. The Company has delivered to
Parent a copy of: (i) the most recent annual report on Form 5500 filed with the
Internal Revenue Service (the "IRS") for each Employee Plan where such report is
required and (ii) the documents and instruments governing each such Employee
Plan (other than those referred to in Section 4(b)(4) of ERISA). No event has
occurred and, to the knowledge of the Company, there currently exists no
condition or set of circumstances in connection with which the Company or any of
its subsidiaries could be subject to any material liability under the terms of
any Employee Plans, ERISA, the Code or any other applicable law, including,
without limitation, any liability under Title IV of ERISA.
(b) Section 2.11(b) of the Company Disclosure
Schedule sets forth a true and complete list of: (i) all employment agreements;
(ii) all agreements with consultants who are individuals obligating the Company
to make annual cash payments in an amount exceeding $50,000; (iii) all severance
agreements, programs and policies of the Company with or relating to its
employees except programs and policies required to be maintained by law; and
(iv) all plans, programs, agreements and other arrangements of the Company with
or relating to its employees which contain change in control provisions. The
Company has delivered to Parent copies (or descriptions in detail reasonably
satisfactory to Parent) of all such agreements, plans, programs and other
arrangements.
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(c) Except as disclosed in Section 2.11(c) of the
Company Disclosure Schedule, there will be no payment, accrual of additional
benefits, acceleration of payments or vesting in any benefit under any Employee
Plan or any agreement or arrangement disclosed under this Section 2.11 solely by
reason of entering into or in connection with the transactions contemplated by
this Agreement.
(d) No Employee Plan that is a welfare benefit plan
within the meaning of Section 3(1) of ERISA provides benefits to former
employees of the Company or its ERISA Affiliates other than pursuant to Section
4980B of the Code.
(e) There are no controversies pending or, to the
knowledge of the Company, threatened between the Company or any of its
subsidiaries and any of their respective employees which controversies have or
may reasonably be expected to have a Material Adverse Effect on the Company.
Neither the Company nor any of its subsidiaries is a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by the Company or its subsidiaries except as disclosed in Section
2.11(e) of the Company Disclosure Schedule nor does the Company know of any
activities or proceedings of any labor union to organize any such employees. The
Company has no knowledge of any strikes, slowdowns, work stoppages, lockouts or
threats thereof by or with respect to any employees of the Company or any of its
subsidiaries.
2.12. Environmental Laws and Regulations.
(a) Except as set forth in Section 2.12(a) of the
Company Disclosure Schedule: (i) each of the Company and its subsidiaries is in
material compliance with all applicable federal, state, local and foreign laws
and regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) (collectively "Environmental Laws"),
which compliance includes, but is not limited to, the possession by the Company
and its subsidiaries of all material permits and other governmental
authorizations required under applicable Environmental Laws and compliance with
the terms and conditions thereof; (ii) none of the Company or its subsidiaries
has received written notice of or, to the knowledge of the Company, is the
subject of any action, cause of action, claim, investigation, demand or notice
by any person or entity alleging material liability under or non-compliance with
any Environmental Law (an "Environmental Claim"); and (iii) to the knowledge of
the Company, there are
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no circumstances that are reasonably likely to prevent or interfere with such
material compliance in the future.
(b) Except as disclosed in Section 2.12(b) of the
Company Disclosure Schedule, there are no Environmental Claims which could
reasonably be expected to have a Material Adverse Effect on the Company that are
pending or, to the knowledge of the Company, threatened against the Company or
its subsidiaries or, to the knowledge of the Company, against any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has or may have retained or assumed either contractually or by
operation of law.
2.13. Taxes.
(a) Definitions. For purposes of this
Agreement:
(i) the term "Tax" (including "Taxes") means
(A) all federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs, duties or other
taxes, fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts with respect
thereto, (B) any liability for payment of amounts described in clause (A)
whether as a result of transferee liability, of being a member of an affiliated,
consolidated, combined or unitary group for any period, or otherwise through
operation of law, and (C) any liability for the payment of amounts described in
clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax
allocation agreement or any other express or implied agreement to indemnify any
other person; and
(ii) the term "Tax Return" means any return,
declaration, report, statement, information statement and other document
required to be filed with respect to Taxes.
(b) Except as set forth in Section 2.13(b) of the
Company Disclosure Schedule, the Company and its subsidiaries have accurately
prepared and timely filed all Tax Returns they are required to have filed. Such
Tax Returns are accurate and correct in all material respects and do not contain
a disclosure statement under Section 6662 of the Code (or any predecessor
provision or comparable provision of state, local or foreign law).
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(c) The Company and its subsidiaries have paid all
Taxes (whether or not shown on any Tax Return) they are required to have paid
and have accrued on the Company's most recent financial statements, all Taxes
required to be accrued in accordance with GAAP.
(d) Except as set forth in Section 2.13(d) of the
Company Disclosure Schedule, no audit or material claim for assessment or
collection of Taxes is presently being conducted or asserted against the Company
or its subsidiaries and neither the Company nor any of its subsidiaries is a
party to any pending audit, action, proceeding, or investigation by any
governmental taxing authority nor does the Company have knowledge of any such
threatened audit, action, proceeding or investigation.
(e) Except as set forth in Section 2.13(e) of the
Company Disclosure Schedule, neither the Company nor any of its subsidiaries is
a party to any agreement, contract, arrangement or plan that has resulted or
would result, separately or in the aggregate, in connection with this Agreement
or any change of control of the Company or any of its subsidiaries, in the
payment of any "excess parachute payments" within the meaning of Section 280G of
the Code.
2.14 Intellectual Property; Software.
(a) Except as set forth on Section 2.14 of the
Company Disclosure Schedule, the Company and its subsidiaries are the sole and
exclusive owners of, or possess adequate licenses or other valid rights to use,
all material patents, patent applications, patent rights, trademarks, trademark
rights, trade names, trade name rights, copyrights, service marks, trade
secrets, registrations for and applications for registration of trademarks,
service marks and copyrights, technology and know-how, rights in computer
software and other proprietary rights and information and all technical and user
manuals and documentation made or used in connection with any of the foregoing,
used or held for use in connection with the business of the Company or any of
its subsidiaries as currently conducted (collectively, the "Company Intellectual
Property"), free and clear of all Liens except as set forth on Section 2.14 of
the Company Disclosure Schedule and except minor imperfections of title and
encumbrances, if any, which are not substantial in amount, do not materially
detract from the value of the Company Intellectual Property subject thereto and
do not impair the operations of any of the Company and its Subsidiaries. Section
2.14 of the Company Disclosure Schedule sets forth a true and complete list of
all Company Intellectual Property.
(b) All grants, registrations and applications for
Company Intellectual Property that are used in and are material to the conduct
of the
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Company's business (i) are valid, subsisting, in proper form and enforceable,
and have been duly maintained, including the submission of all necessary filings
and fees in accordance with the legal and administrative requirements of the
appropriate jurisdictions and (ii) have not lapsed, expired or been abandoned,
and no grant, registration or license therefor is the subject of any legal or
governmental proceeding before any registration authority in any jurisdiction.
(c) To the knowledge of the Company, there are no
conflicts with or infringements of any Company Intellectual Property by any
third party. The conduct of the business of the Company and its subsidiaries as
currently conducted does not conflict with or infringe in any way any
proprietary right of any third party, which conflict or infringement would have
a Material Adverse Effect on the Company, and there is no claim, suit, action or
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any of its subsidiaries (i) alleging any such conflict or
infringement with any third party's proprietary rights, or (ii) challenging the
ownership, use, validity or enforceability of the Company Intellectual Property.
2.15. Certain Business Practices. None of the Company, any of
its subsidiaries or any directors, officers, agents or employees of the Company
or any of its subsidiaries has: (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
2.16. Vote Required. The affirmative vote of the holders of a
majority of the outstanding Shares is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve and adopt this
Agreement.
2.17. Tax Treatment; Pooling. Neither the Company nor, to the
knowledge of the Company, any of its affiliates has taken or agreed to take
action that would prevent the Merger from (a) constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code or (b) being
treated for financial accounting purposes as a pooling of interests in
accordance with generally accepted accounting principles and the rules,
regulations and interpretations of the SEC (a "Pooling Transaction"). Within 10
days after the date of this Agreement, the Company will obtain from each of its
directors, officers and affiliates a letter agreement substantially in the form
of Exhibit B.
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2.18. Affiliates. Except for the directors and executive
officers of the Company, each of whom is listed in Section 2.18 of the Company
Disclosure Schedule, there are no persons who, to the knowledge of the Company,
may be deemed to be affiliates of the Company under Rule 145 of the Securities
Act ("Company Affiliates"). Concurrently with the execution and delivery of this
Agreement, the Company has delivered to Parent an executed letter agreement
substantially in the form of Exhibit C hereto from each of the Company
Affiliates.
2.19. Opinion of Financial Adviser. Morgan Keegan & Company
(the "Company Financial Adviser") has delivered to the Company Board its written
opinion dated the date of this Agreement to the effect that as of such date the
Merger Consideration is fair to the holders of Shares from a financial point of
view.
2.20. Brokers. No broker, finder or investment banker (other
than the Company Financial Adviser, a true and correct copy of whose engagement
agreement has been provided to Acquisition or Parent) is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
2.21 Title to Properties.
(a) Section 2.21(a) of the Company Disclosure
Schedule lists all real property owned and leased by the Company or any of its
subsidiaries. The Company and its subsidiaries have good title to all of the
tangible properties and tangible assets, real and personal, owned by the Company
or its subsidiaries, as the case may be, free and clear of all Liens except for
(i) Liens listed on Section 2.21(a) of the Company Disclosure Schedule, (ii)
Liens for taxes not yet due and payable, and (iii) such other imperfections of
title, if any, as do not materially detract from the value of or interfere with
the present use of the property affected thereby.
(b) The leases for the real property described on
Section 2.21(a) of the Company Disclosure Schedule are in full force and effect
and the Company holds a valid and existing leasehold interest under each of the
leases. The Company has delivered to Parent complete and accurate copies of each
of the leases described on Section 2.21(a) of the Company Disclosure Schedule.
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2.22 Affiliate Transactions. Except as set forth in Section
2.22 of the Company Disclosure Schedule or as disclosed in the Company SEC
Reports, there are no, and since January 1, 1997, there have not been any,
material contracts or other transactions between the Company or any of its
subsidiaries on the one hand, and any (a) officer or director of the Company or
any of its subsidiaries, (b) record or beneficial owner of five percent or more
of the voting securities of the Company or (c) Affiliate of any such officer,
director or record or beneficial owner, on the other hand.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF PARENT AND ACQUISITION
Parent and Acquisition hereby represent and warrant to the
Company as follows:
3.01. Organization and Qualification; Subsidiaries.
(a) Section 3.01 of the Disclosure Schedule delivered
by Parent and Acquisition to the Company (the "Parent Disclosure Schedule")
identifies each subsidiary of the Parent as of the date hereof and its
respective jurisdiction of incorporation or organization, as the case may be.
Except as set forth in Section 3.01 of the Parent Disclosure Schedule, Parent
does not have any interest in any corporation, partnership, limited liability
company, business, trust or other business entity. Each of Parent and its
subsidiaries is duly organized, validly existing and in good standing under the
laws of its jurisdiction or incorporation or organization, and each has all
requisite power and authority to own, lease and operate its properties and to
carry on its businesses as now being conducted. Parent has heretofore delivered
to the Company accurate and complete copies of the Certificate of Incorporation,
By-Laws or other applicable charter document as currently in effect of Parent
and its subsidiaries.
(b) Each of Parent and its subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not have a Material Adverse Effect on Parent. When used
in connection with Parent or Acquisition the term "Material Adverse Effect on
Parent" means any change or effect that is: (i) materially adverse to the
business, results of operations, condition (financial or otherwise) or prospects
of Parent and its subsidiaries, taken as a whole, or (ii) that may adversely
affect the ability of
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Parent, Acquisition or the Company to consummate the transactions contemplated
by this Agreement in accordance with its terms.
3.02. Capitalization of Parent and its Subsidiaries.
(a) The authorized capital stock of Parent consists
of 20,000,000 shares of Parent Common Stock, of which, as of the date of this
Agreement, 13,242,382 shares of Parent Common Stock were issued and outstanding.
All of the outstanding shares of Parent Common Stock have been validly issued
and are fully paid, nonassessable and free of preemptive rights. As of the date
of this Agreement, 486,785 shares of Parent Common Stock were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding options. Except as disclosed in Section 3.02 of the
Parent Disclosure Schedule, between October 31, 1997 and the date hereof, no
shares of Parent's capital stock have been issued other than pursuant to stock
options already in existence on such date and except for grants of stock options
to employees officers and directors in the ordinary course of business
consistent with past practice, and between October 31, 1997 and the date hereof,
no further stock options have been granted. Except as set forth above and as of
the Effective Time, there are outstanding: (i) no shares of capital stock or
other voting securities of Parent, (ii) no securities of Parent or its
subsidiaries convertible into or exchangeable for shares of capital stock, or
voting securities of Parent, (iii) no options, warrants, subscriptions, calls,
rights or other agreements to acquire from Parent or its subsidiaries and no
obligations of Parent or its subsidiaries to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Parent and (iv) no equity equivalent interests or rights to
acquire equity equivalent interests in the ownership or earnings of Parent or
its subsidiaries or other similar rights (collectively "Parent Securities"). As
of the date hereof, there are no outstanding obligations of Parent or any of its
subsidiaries to repurchase, redeem or otherwise acquire any Parent Securities.
Except as set forth in Section 3.02(a) of Parent Disclosure Schedule, there are
no stockholder agreements, voting trusts or other agreements or understandings
to which Parent is a party or by which it is bound relating to the voting of any
shares of capital stock of Parent or other Parent Securities, and to the
knowledge of the Parent, no such agreements have been entered into by the
stockholders of the Parent.
(b) All of the outstanding capital stock of Parent's
subsidiaries is owned by Parent, directly or indirectly, free and clear of any
Lien or any other limitation or restriction (including any restriction on the
right to vote or sell the same except as may be provided as a matter of law).
There are no securities of Parent or its subsidiaries convertible into or
exchangeable for, no
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options or other rights to acquire from Parent or its subsidiaries and no other
contract, understanding, arrangement or obligation (whether or not contingent)
providing for, the issuance or sale, directly or indirectly, of any capital
stock or other ownership interests in or any other securities of any subsidiary
of Parent. There are no outstanding contractual obligations of Parent or its
subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares
of capital stock or other ownership interests in Parent or in any subsidiary of
Parent.
(c) The Parent Common Stock constitutes the only
class of equity securities of Parent or its subsidiaries registered or required
to be registered under the Exchange Act.
3.03. Authority Relative to this Agreement.
(a) Each of Parent and Acquisition has all necessary
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the boards of directors of Parent and
Acquisition and by Parent as the sole stockholder of Acquisition and no other
corporate proceedings on the part of Parent or Acquisition are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby
except the approval and adoption by the stockholders of Parent of: (i) this
Agreement and (ii) an amendment to the Parent's Certificate of Incorporation
increasing the authorized shares of Parent Common Stock from 20,000,000 shares
to 28,000,000 shares (the "Parent Amendment to Certificate"). This Agreement has
been duly and validly executed and delivered by each of Parent and Acquisition
and constitutes a valid, legal and binding agreement of each of Parent and
Acquisition enforceable against each of Parent and Acquisition in accordance
with its terms.
(b) The Parent Board of Directors (at a meeting duly
called and held or by duly executed written consents in lieu of a meeting) has
unanimously (i) approved this Agreement, the Option Agreement and the Voting
Agreements, (ii) determined that the transactions contemplated hereby and
thereby are in the best interests of the holders of shares of Parent Common
Stock and (iii) resolved to recommend that the stockholders of Parent approve
and adopt the Merger and this Agreement. The resolutions of the Company Board
taking the actions described in the preceding sentence have not been rescinded,
withdrawn, amended or otherwise modified, remain in full force and effect, and
constitute the only action of the Company Board with respect to the Merger or
the other transactions contemplated by this Agreement.
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3.04. SEC Reports; Financial Statements.
(a) Except as set forth in Section 3.04(a) of Parent
Disclosure Schedule since the June 11, 1997 effective date of the Parent's
registration statement on Form S-1 (the "Parent Registration Statement"), Parent
has timely filed all required forms, reports and documents (together with the
Parent Registration Statement, the "Parent SEC Reports") with the SEC, each of
which has complied in all material respects with all applicable requirements of
the Securities Act and the Exchange Act, each as in effect on the dates such
forms, reports and documents were filed. None of such Parent SEC Reports,
including, without limitation, any financial statements or schedules included or
incorporated by reference therein, contained when filed or as of the date hereof
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein in light of the circumstances under which they
were made not misleading. The consolidated financial statements of Parent
included in the Parent SEC Reports fairly present in conformity with GAAP
applied on a consistent basis (except as may be indicated in the notes thereto)
the consolidated financial position of Parent and its consolidated subsidiaries
as of the dates thereof and their consolidated results of operations and changes
in financial position for the periods then ended, except that in the case of the
unaudited consolidated financial statements included in any Form 10-Q, the
presentation and disclosures conform with the applicable rules of the Exchange
Act and include all adjustments necessary to conform to GAAP requirements with
respect to interim financial statements.
(b) Parent has heretofore delivered to the Company or
promptly will deliver to the Company a complete and correct copy of all Parent
SEC Reports and any amendments or modifications which are required to be filed
with the SEC but have not yet been filed with the SEC to Parent SEC Reports or
to agreements documents or other instruments which previously had been filed by
Parent with the SEC pursuant to the Exchange Act.
3.05. Information Supplied. None of the information supplied
or to be supplied by Parent or Acquisition for inclusion or incorporation by
reference to the S-4 or the Proxy Statement will, in the case of the S-4, at the
time the S-4 is filed with the SEC, at the time it becomes effective under the
Securities Act, at the time of the filing of any post-effective amendments
thereto and at the Effective Time, and, in the case of the Proxy Statement, at
the time of the mailing of the Proxy Statement or any amendments or supplements
thereto, and at the respective times of the meetings of the Company and Parent
to be held in connection with the
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Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading. The S-4 will comply as to form in all material respects
with the provisions of the Securities Act and the rules and regulations
thereunder; provided, however, that Parent makes no representation or warranty
concerning information supplied or to be supplied by the Company for inclusion
or incorporation by reference to the S-4.
3.06. Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents, and approvals as may be required
under the Securities Act, the Exchange Act, state securities or blue sky laws,
the HSR Act or the By-Laws of the NASD and the filing and recordation of the
Merger Certificate as required by the NCBC, no filing with or notice to, and no
permit authorization consent or approval of any Governmental Entity is necessary
for the execution and delivery by Parent or Acquisition of this Agreement or the
consummation by Parent or Acquisition of the transactions contemplated hereby,
except where the failure to obtain such permits, authorizations, consents or
approvals or to make such filings or give such notice would not have a Material
Adverse Effect on Parent. Neither the execution, delivery and performance of
this Agreement by Parent or Acquisition nor the consummation by Parent or
Acquisition of the transactions contemplated hereby will: (i) conflict with or
result in any breach of any provision of the respective Certificate of
Incorporation or bylaws (or similar governing documents) of Parent or
Acquisition or any of Parent's other subsidiaries, (ii) except as disclosed in
Section 3.06 of the Parent Disclosure Schedule, result in a violation or breach
of or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, amendment, cancellation or
acceleration or Lien) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Parent or Acquisition or any of Parent's other
subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (iii) except as set forth in Section 3.06
of the Parent Disclosure Schedule, violate any order, writ, injunction, decree,
law, statute, rule or regulation applicable to Parent or Acquisition or any of
Parent's other subsidiaries or any of their respective properties or assets
except, in the case of (ii) or (iii), for violations, breaches or defaults
which, individually or in the aggregate, would not have a Material Adverse
Effect on Parent.
3.07. Contracts; No Defaults.
(a) Section 3.07 of the Parent Disclosure Schedule
sets forth a true and complete list of each note, bond, mortgage, indenture,
lease,
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license, contract, agreement or other instrument or obligation which is
material to the Company and its subsidiaries taken as a whole (each "a Parent
Contract"). Each Parent Contract is a legal, valid and binding obligation of
Parent or its subsidiary, as the case may be and is in full force and effect.
(b) Except as set forth in Section 3.07(b) of the
Parent Disclosure Schedule, none of Parent or any of its subsidiaries is in
breach, default or violation (and no event has occurred which with notice or the
lapse of time or both would constitute a breach, default or violation) of any
term, condition or provision of: (i) its Certificate of Incorporation or bylaws
(or similar governing documents), (ii) any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
Parent or any of its subsidiaries is now a party or by which any of them or any
of their respective properties or assets may be bound or (iii) any order, writ,
injunction, decree, law, statute, rule or regulation applicable to Parent or any
of its subsidiaries or any of their respective properties or assets except, in
the case of (ii) or (iii), for violations, breaches or defaults that would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
(c) To the knowledge of Parent, no other party to any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Parent or any of its subsidiaries is now a
party or by which any of them or any of their respective properties or assets
may be bound is in breach, default or violation (and no event has occurred which
with notice or the lapse of time or both would constitute a breach, default or
violation) of any term, condition or provision of any such note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or
obligation, except for violations, breaches or defaults that would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
3.08. No Undisclosed Liabilities; Absence of Changes. Except
as and to the extent publicly disclosed by Parent in the Parent SEC Reports or
as set forth in Section 3.08 of the Parent Disclosure Schedule, none of Parent
or its subsidiaries has any liabilities or obligations of any nature, whether or
not accrued, contingent or otherwise that would be required by generally
accepted accounting principles to be reflected on a consolidated balance sheet
of Parent and its consolidated subsidiaries (including the notes thereto), other
than liabilities incurred in the ordinary course of business since September 30,
1997, none of which, individually or in the aggregate, would have a Material
Adverse Effect on Parent. Except as publicly disclosed by Parent in the Parent
SEC Reports or as set forth in Section 3.08 of the Parent Disclosure Schedule,
since September 30, 1997;
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(a) there have been no events changes or effects with
respect to Parent or its subsidiaries having or which could reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect on
Parent.
(b) neither Parent nor any of its subsidiaries has
conducted its business and operations other than in the ordinary course and
consistent with past practices or taken any actions that would have violated or
been inconsistent with the provisions of Section 4.01 if it had been in effect;
(c) no party (including Parent or any of its
subsidiaries) has accelerated, terminated, modified or canceled (prior to the
expiration of its term) any material agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) to which Parent or
any of its subsidiaries is a party or by which any of its assets are bound; and
(d) neither Parent nor any of its subsidiaries has
entered into any commitment or other agreement to do any of the foregoing.
3.09. Litigation. Except as set forth in Section 3.09 of the
Parent Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of Parent threatened, against Parent
or any of its subsidiaries or any of their respective properties or assets
before any Governmental Entity which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect or could reasonably be
expected to prevent or delay the consummation of the transactions contemplated
by this Agreement. Except as set forth in Section 3.09 of the Parent Disclosure
Schedule, none of Parent or its subsidiaries is subject to any outstanding
order, writ, injunction or decree which could reasonably be expected to have a
Material Adverse Effect on Parent or could reasonably be expected to prevent or
delay the consummation of the transactions contemplated hereby.
3.10. Compliance With Applicable Law. Except as set forth in
Section 3.10 of the Parent Disclosure Schedule, Parent and its subsidiaries hold
all permits, licenses, variances, exemptions, orders and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses (the "Parent Permits") except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which would not have a
Material Adverse Effect on Parent. Except as set forth in Section 3.10 of the
Parent Disclosure Schedule, , Parent and its subsidiaries are in compliance with
the terms of the Parent Permits except where the failure so to comply would not
have a Material Adverse Effect on Parent. Except as set forth in Section 3.10 of
the Parent Disclosure Schedule,, the businesses of Parent and its subsidiaries
are not being conducted in violation of any law, ordinance or regulation of the
United States or any foreign country or any
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political subdivision thereof or of any Governmental Entity, except: (i) that no
representation or warranty is made in this Section 3.10 with respect to
Environmental Laws and (ii) for violations or possible violations of any United
States or foreign laws, ordinances or regulations which do not, and insofar as
reasonably can be foreseen in the future, will not result in any charges,
assessments, levies, fines or other liabilities being imposed upon or incurred
by the Company that will equal $250,000 for any single violation or $2 million
in the aggregate. Except as set forth in Section 3.10 of the Parent Disclosure
Schedule, no investigation or review by any Governmental Entity with respect
to Parent or its subsidiaries is pending or, to the knowledge of Parent,
threatened nor, to the knowledge of Parent, has any Governmental Entity
indicated an intention to conduct the same, other than in each case those which
Parent reasonably believes will not have a Material Adverse Effect on Parent.
3.11. Employee Benefit Plans; Labor Matters.
(a) With respect to each employee benefit plan,
program, arrangement and contract (including, without limitation, any "employee
benefit plan," as defined in Section 3(3) of ERISA) maintained or contributed to
by Parent or any of its subsidiaries or with respect to which Parent or any of
its subsidiaries could incur liability under Section 4069, 4212(c) or 4204 of
ERISA (the "Parent Benefit Plans") no event has occurred and, to the knowledge
of Parent, there currently exists no condition or set of circumstances in
connection with which Parent or any of its subsidiaries could be subject to any
material liability under the terms of the Parent Benefit Plans, ERISA, the Code
or any other applicable law. There is no pending or threatened labor dispute,
strike or work stoppage against Parent or any of its subsidiaries which may
reasonably be expected to have a Material Adverse Effect on Parent.
(b) Section 3.11(b) of the Parent Disclosure Schedule
sets forth a true and correct list of: (i) all employment agreements; (ii) all
agreements with consultants who are individuals obligating Parent to make annual
cash payments in an amount exceeding $50,000; (iii) all severance agreements,
programs and policies of Parent with or relating to its employees except
programs and policies required to be maintained by law; and (iv) all plans,
programs, agreements and other arrangements of Parent with or relating to its
employees which contain change in control provisions. Parent has delivered to
the Company copies (or descriptions in detail reasonably satisfactory to the
Company) of all such agreements, plans, programs and other arrangements.
(c) Except as disclosed in Section 3.11(c) of the
Parent Disclosure Schedule, there will be no payment, accrual of additional
benefits,
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acceleration of payments or vesting in any benefit under any Employee Plan or
any agreement or arrangement disclosed under this Section 3.11 solely by reason
of entering into or in connection with the transactions contemplated by this
Agreement.
(d) There are no controversies pending or, to the
knowledge of Parent, threatened between Parent or any of its subsidiaries and
any of their respective employees which controversies have or may reasonably be
expected to have a Material Adverse Effect on Parent. Neither Parent nor any of
its subsidiaries is a party to any collective bargaining agreement or other
labor union contract applicable to persons employed by Parent or its
subsidiaries except as disclosed in Section 3.11(d) of the Parent Disclosure
Schedule nor does Parent know of any activities or proceedings of any labor
union to organize any such employees. Parent has no knowledge of any strikes,
slowdowns, work stoppages, lockouts or threats thereof by or with respect to any
employees of Parent or any of its subsidiaries.
3.12. Environmental Laws and Regulations.
(a) Except as set forth in Section 3.12(a) of the
Parent Disclosure Schedule, (i) each of Parent and its subsidiaries is in
material compliance with all Environmental Laws which compliance includes, but
is not limited to, the possession by Parent and its subsidiaries of all material
permits and other governmental authorizations required under applicable
Environmental Laws and compliance with the terms and conditions thereof; (ii)
none of Parent or its subsidiaries has received written notice of or, to the
knowledge of Parent, is the subject of any material Environmental Claim; and
(iii) to the knowledge of Parent, there are no circumstances that are reasonably
likely to prevent or interfere with such material compliance in the future.
(b) Except as publicly disclosed set forth in Section
3.12(b) of the Parent Disclosure Schedule, there are no Environmental Claims
which could reasonably be expected to have a Material Adverse Effect on Parent
that are pending or, to the knowledge of Parent, threatened against Parent or
any of its subsidiaries or, to the knowledge of Parent, against any person or
entity whose liability for any Environmental Claim Parent or its subsidiaries
has or may have retained or assumed either contractually or by operation of law.
3.13. Tax Matters.
(a) Except as set forth in Section 3.13(a) of the
Parent Disclosure Schedule, Parent and its subsidiaries have accurately prepared
and
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timely filed all Tax Returns they are required to have filed. Such Tax Returns
are accurate and correct in all material respects and do not contain a
disclosure statement under Section 6662 of the Code (or any predecessor
provision or comparable provision of state, local or foreign law).
(b) Parent and its subsidiaries have paid all Taxes
(whether or not shown on any Tax Return) they are required to have paid and have
accrued on Parent's most recent financial statements all Taxes required to be
accrued in accordance with GAAP.
(c) Except as set forth in Section 3.13(c) of the
Parent Disclosure Schedule, no audit or material claim for assessment or
collection of Taxes is presently being conducted or asserted against Parent or
its subsidiaries and neither Parent nor any of its subsidiaries is a party to
any pending audit action, proceeding, or investigation by any governmental
taxing authority nor does Parent have knowledge of any such threatened audit
action, proceeding or investigation.
3.14. Intellectual Property; Software.
(a) Except as set forth on Section 3.14 of the Parent
Disclosure Schedule, the Parent and its subsidiaries are the sole and exclusive
owners of, or possess adequate licenses or other valid rights to use, all
material patents, patent applications, patent rights, trademarks, trademark
rights, trade names, trade name rights, copyrights, service marks, trade
secrets, registrations for and applications for registration of trademarks,
service marks and copyrights, technology and know-how, rights in computer
software and other proprietary rights and information and all technical and user
manuals and documentation made or used in connection with any of the foregoing,
used or held for use in connection with the businesses of the Parent or any of
its subsidiaries as currently conducted (collectively, the "Parent Intellectual
Property"), free and clear of all Liens except as set forth on Section 3.14 of
the Parent Disclosure Schedule and except minor imperfections of title and
encumbrances, if any, which are not substantial in amount, do not materially
detract from the value of the Parent Intellectual Property subject thereto and
do not impair the operations of any of the Parent and its subsidiaries. Section
3.14 of the Parent Disclosure Schedule sets forth a true and complete list of
all Parent Intellectual Property.
(b) All grants, registrations and applications for
Parent Intellectual Property that are used in and are material to the conduct of
the Parent's business (i) are valid, subsisting, in proper form and enforceable,
and have been duly maintained, including the submission of all necessary filings
and fees in accordance with the legal and administrative requirements of the
appropriate
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jurisdictions and (ii) have not lapsed, expired or been abandoned, and no grant,
registration or license therefor is the subject of any legal or governmental
proceeding before any registration authority in any jurisdiction.
(c) To the knowledge of the Parent, there are no
conflicts with or infringements of any Parent Intellectual Property by any third
party. The conduct of the businesses of the Parent and its Subsidiaries as
currently conducted does not conflict with or infringe in any way any
proprietary right of any third party, which conflict or infringement would have
a Material Adverse Effect on Parent, and there is no claim, suit, action or
proceeding pending or, to the knowledge of the Parent, threatened against the
Parent or any of its subsidiaries (i) alleging any such conflict or infringement
with any third party's proprietary rights, or (ii) challenging the ownership,
use, validity or enforceability of the Parent Intellectual Property.
3.15. Certain Business Practices. None of the Parent, any of
its subsidiaries or any directors, officers, agents or employees of Parent or
any of its subsidiaries has: (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
3.16. Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of Parent Common Stock is the only vote of
the holders of any class or series of Parent's capital stock necessary to
approve and adopt this Agreement, the Merger and the Parent Amendment to
Certificate.
3.17. Tax Treatment; Pooling. Neither Parent, Acquisition nor,
to the knowledge of Parent, any of its affiliates has taken, proposes to take,
or has agreed to take any action that would prevent the Merger: (a) from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code or (b) from being treated as a Pooling Transaction for financial
accounting purposes. Within 10 days after the date of this Agreement, Parent
will obtain from each of its directors, officers and affiliates a letter
agreement substantially in the form of Exhibit D.
3.18. Opinion of Financial Adviser. Robert W. Baird & Co.
Incorporated (the "Parent Financial Adviser") has delivered to the Board of
Directors of Parent its opinion dated as of the date of this Agreement to the
effect
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that as of such date the Merger Consideration contemplated by the Merger is fair
to the holders of shares of Parent Common Stock from a financial point of view.
3.19. Brokers. No broker, finder or investment banker (other
than the Parent Financial Adviser) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Parent or Acquisition.
3.20. No Prior Activities. Except for obligations incurred in
connection with its incorporation or organization or the negotiation and
consummation of this Agreement and the transactions contemplated hereby,
Acquisition has neither incurred any obligation or liability nor engaged in any
business or activity of any type or kind whatsoever or entered into any
agreement or arrangement with any person.
3.21 Title to Properties.
(a) Section 3.21(a) of the Parent Disclosure Schedule
lists all real property owned and leased by Parent or any of its subsidiaries.
Parent and its subsidiaries have good title to all of the tangible properties
and tangible assets, real and personal, owned by Parent or its subsidiaries, as
the case may be, free and clear of all Liens except for (i) Liens listed on
Section 3.21(a) of the Parent Disclosure Schedule, (ii) Liens for taxes not yet
due and payable, and (iii) such other imperfections of title, if any, as do not
materially detract from the value of or interfere with the present use of the
property affected thereby.
(b) The leases for the real property described on
Section 3.21(a) of the Parent Disclosure Schedule are in full force and effect
and Parent holds a valid and existing leasehold interest under each of the
leases. Parent has delivered to the Company complete and accurate copies of each
of the leases described on Section 3.21(a) of the Parent Disclosure Schedule.
3.22 Affiliate Transactions. Except as set forth in Section
3.22 of the Parent Disclosure Schedule or as disclosed in the Parent SEC
Reports, there are no, and since January 1, 1997, there have not been any,
material contracts or other transactions between Parent or any of its
subsidiaries on the one hand, and any (a) officer or director of Parent or any
of its subsidiaries, (b) record or beneficial owner of five percent or more of
the voting securities of Parent or (c) Affiliate of any such officer, director
or record or beneficial owner, on the other hand.
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ARTICLE IV
COVENANTS
4.01. Conduct of Business of Parent and the Company.
(a) Except as contemplated by this Agreement or as
described in Section 4.01 of the Parent Disclosure Schedule or Section 4.01 of
the Company Disclosure Schedule, as the case may be, during the period from the
date hereof to the Effective Time, Parent and the Company will, and will cause
each of their subsidiaries to, conduct their operations in the ordinary course
of business consistent with past practice and, to the extent consistent
therewith, with no less diligence and effort than would be applied in the
absence of this Agreement, seek to preserve intact their current business
organizations, keep available the services of their current officers and
employees and preserve their relationships with customers, suppliers and others
having business dealings with them to the end that goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing, except as otherwise expressly provided in this
Agreement or as described in Section 4.01 of the Parent Disclosure Schedule or
Section 4.01 of the Company Disclosure Schedule, as the case may be, prior to
the Effective Time none of Parent, the Company nor any of their subsidiaries
will, without the prior written consent of the other party:
(i) amend its Certificate of Incorporation
or bylaws (or other similar governing instrument);
(ii) authorize for issuance, issue, sell,
deliver or agree or commit to issue sell or deliver (whether through the
issuance or granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise) any stock of any class or any other securities (except
bank loans) or equity equivalents (including, without limitation, any stock
options or stock appreciation rights) except for the issuance and sale of
securities pursuant to previously granted options, warrants or other rights;
(iii) split, combine or reclassify any
shares of its capital stock, declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof),
make any other actual, constructive or deemed distribution in respect of its
capital stock or otherwise make any payments to stockholders in their capacity
as such, or redeem or otherwise acquire any of its securities or any securities
of any of their subsidiaries;
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(iv) except as may be required as a result
of a change in law or in GAAP, change any of the accounting principles or
practices used by it;
(v) revalue in any material respect any of
its assets including without limitation writing down the value of inventory or
writing-off notes or accounts receivable other than in the ordinary course of
business;
(vi) settle or compromise any pending or
threatened suit, action or claim which (i) relates to the transactions
contemplated hereby or (ii) the settlement or compromise of which could have a
Material Adverse Effect on Parent or the Company;
(vii) take any action which would jeopardize
(A) the treatment of Parent's acquisition of the Company as a pooling of
interests for accounting purposes; or (B) qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code; or
(viii) enter into any commitment or other
agreement to do any of the foregoing.
(b) Without limiting the generality of the foregoing,
except as otherwise expressly provided in this Agreement or as described in
Section 4.01 of the Company Disclosure Schedule, prior to the Effective Time
neither the Company nor any of its subsidiaries will, without the prior written
consent of Parent:
(i) adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other reorganization (other than the Merger);
(ii) alter through merger, liquidation,
reorganization, restructuring or any other fashion the corporate structure of
ownership of any subsidiary;
(iii) (A) incur or assume any long-term or
short-term debt or issue any debt securities except for borrowings under
existing lines of credit in the ordinary course of business; (B) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person except in the
ordinary course of business consistent with past practice and except for
obligations of subsidiaries incurred in the ordinary course of business; (C)
make any loans, advances or capital contributions to or investments in any other
person (other than to
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subsidiaries or customary loans or advances to employees, in each case in the
ordinary course of business consistent with past practice); (D) pledge or
otherwise encumber shares of its capital stock or shares of its subsidiaries'
capital stock; or (E) mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any material Lien thereupon (other than
Tax Liens for Taxes not yet due);
(iv) except as may be required by law, enter
into adopt or amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase, pension, retirement,
deferred compensation, employment, severance or other employee benefit
agreement, trust, plan, fund or other arrangement for the benefit or welfare of
any director, officer or employee in any manner or increase in any manner the
compensation or fringe benefits of any director, officer or employee or pay any
benefit not required by any plan and arrangement as in effect as of the date
hereof; provided, however, that this paragraph (iv) shall not prevent the
Company or its subsidiaries from (A) entering into employment agreements or
severance agreements with new employees in the ordinary course of business and
consistent with past practice or (B) increasing annual compensation and/or
providing for or amending bonus arrangements for employees for calendar 1997 in
the ordinary course of year-end compensation reviews consistent with past
practice (to the extent that such compensation increases and new or amended
bonus arrangements do not result in a material increase in benefits or
compensation expense to the Company);
(v) acquire, sell, lease or dispose of any
assets in any single transaction or series of related transactions having a fair
market value in excess of $500,000 in the aggregate (other than in the ordinary
course of business consistent with past practices);
(vi) (A) acquire (by merger, consolidation
or acquisition of stock or assets) any corporation, partnership or other
business organization or division thereof or any equity interest therein; (B)
enter into any contract or agreement other than in the ordinary course of
business consistent with past practice which would be material to the Company
and its subsidiaries taken as a whole; or (C) authorize any new capital
expenditure or expenditures which individually is in excess of $200,000 or in
the aggregate are in excess of $1,000,000; provided that none of the foregoing
shall limit any capital expenditure required pursuant to existing customer
contracts;
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(vii) make any tax election or settle or
compromise any income tax liability material to the Company and its subsidiaries
taken as a whole; or
(viii) enter into any commitment or other
agreement to do any of the foregoing.
4.02. Preparation of S-4 and the Proxy Statement. The Company
and Parent shall promptly prepare and file with the SEC the Proxy Statement and
Parent shall promptly prepare and file with the SEC the S-4 in which the Proxy
Statement will be included. Each of Parent and the Company shall use its
reasonable best efforts to have the S-4 declared effective under the Securities
Act as promptly as practicable after such filing. Parent shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
now not so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of Parent Common Stock in the Merger and
the Company shall furnish all information concerning the Company and the holders
of Shares as may be reasonably requested in connection with any such action.
Each of the Company and Parent agree that the information supplied or to be
supplied by it for inclusion or incorporation by reference in the S-4 will not,
at the time it is filed with the SEC and at the time it is declared effective
under the Securities Act, contain any untrue statement of a material fact or on
it to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
4.03. Other Potential Acquirers of the Company.
(a) The Company, its affiliates and their respective
officers, directors, employees, representatives and agents shall immediately
cease any discussions or negotiations with any parties with respect to any Third
Party Acquisition (as defined below). Neither the Company or any of its
affiliates nor any of its or their respective officers, directors, employees
representatives or agents to, directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with or provide any
information to any person or group (other than Parent and Acquisition or any
designees of Parent and Acquisition) concerning any Third Party Acquisition;
provided, however, that nothing in this Section 4.03(a) shall prevent the
Company Board from taking and disclosing to the Company's stockholders a
position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to any unsolicited tender offer. The Company shall promptly
notify Parent in the event it receives any proposal or inquiry concerning a
Third Party Acquisition, including the terms and conditions thereof and the
identity of the party submitting such proposal, and shall advise
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Parent from time to time of the status and any material developments concerning
the same.
(b) Except as set forth in this Section 4.03(b), the
Company Board shall not withdraw or modify in a manner adverse to Parent its
recommendation of the transactions contemplated hereby or approve or recommend,
or cause the Company to enter into any agreement with respect to, any Third
Party Acquisition. Notwithstanding the foregoing, if the Company Board by a
majority vote determines in its good faith reasonable judgment, after
consultation with and based upon the written opinion of legal counsel that it is
required to do so in order to comply with its fiduciary duties, the Company
Board may withdraw its recommendation of the transactions contemplated hereby or
approve or recommend a Superior Proposal, but in each case only: (i) after
providing reasonable written notice to Parent (a "Notice of Superior Proposal")
advising Parent that the Company Board has received a Superior Proposal,
specifying the material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal, (ii) after the Company has
received from the person making such Superior Proposal (and delivers to Parent)
an executed confidentiality agreement in reasonably customary form, and (iii) if
Parent does not, within five business days of Parent's receipt of the Notice of
Superior Proposal, make an offer which the Company Board by a majority vote
determines in its good faith reasonable judgment (based on the written advice of
a financial adviser of nationally recognized reputation, which may also be the
Company Financial Advisor) to be as favorable to the Company's stockholders as
such Superior Proposal; provided, however, that the Company shall not be
entitled to enter into any agreement with respect to a Superior Proposal unless
and until this Agreement is terminated by its terms pursuant to Section 6.01.
(c) For the purposes of this Agreement, when used
with respect to the Company "Third Party Acquisition" means the occurrence of
any of the following events: (i) the acquisition of the Company by merger or
otherwise by any person (which includes a "person" as such term is defined in
Section 13(d)(3) of the Exchange Act) other than Parent, Acquisition or any
affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of
more than 20% of the total assets of the Company and its subsidiaries taken as
a whole; (iii) the acquisition by a Third Party of 20% or more of the
outstanding Shares; (iv) the adoption by the Company of a plan of liquidation
or the declaration or payment of an extraordinary dividend; (v) the repurchase
by the Company or any of its subsidiaries of more than 20% of the outstanding
Shares; or (vi) the acquisition by the Company or any subsidiary by merger,
purchase of stock or assets, joint venture or otherwise of a direct or indirect
ownership interest or investment in any business whose annual revenues, net
income or assets is equal or
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greater than 20% of the annual revenues, net income or assets of the Company.
For purposes of this Agreement, when used with respect to the Company a
"Superior Proposal" means any bona fide proposal to acquire directly or
indirectly for consideration consisting of cash and/or securities more than 50%
of the Shares then outstanding or all or substantially all the assets of the
Company and otherwise on terms which the Company Board by a majority vote
determines in its reasonable good faith judgment (based on the written advice of
a financial adviser of nationally recognized reputation) to be more favorable to
the Company's stockholders than the Merger.
4.04. Comfort Letters.
(a) Parent shall use all reasonable efforts to cause
Arthur Anderson LLP and Ernst & Young to each deliver a letter dated not more
than five days prior to the date on which the S-4 shall become effective and
addressed to the Company and Parent and their respective Boards of Directors in
form and substance reasonably satisfactory to the Company and customary in scope
and substance for agreed-upon procedures letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the S-4 and the Proxy Statement.
(b) The Company shall use all reasonable efforts to
cause Coopers & Lybrand L.L.P. to deliver a letter dated not more than five days
prior to the date on which the S-4 shall become effective and addressed to
Parent and the Company and their respective Boards of Directors in form and
substance reasonably satisfactory to Parent and customary in scope and substance
for agreed upon procedures letters delivered by independent accountants in
connection with registration statements and proxy statements similar to the S-4
and the Proxy Statement.
4.05. Meetings of Stockholders.
(a) The Company shall take all action necessary in
accordance with the NCBC and its Certificate of Incorporation and bylaws to duly
call, give notice of, convene and hold the Company Stockholders Meeting as soon
as practicable after the S-4 has been declared effective under the Securities
Act to consider and vote upon the adoption and approval of this Agreement and
the transactions contemplated hereby. The stockholder votes required for the
adoption and approval of the transactions contemplated by this Agreement shall
be the vote required by the NCBC and the Company's Certificate of Incorporation
and bylaws. The Company will, through its Board of Directors, recommend to its
stockholders approval of such matters subject to the provisions of Section
4.03(b).
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(b) The Parent shall take all action necessary in
accordance with the Delaware General Corporation Law (the "DGCL") and its
Certificate of Incorporation and bylaws to duly call, give notice of, convene
and hold the Parent Stockholders Meeting as soon as practicable after the S-4
has been declared effective under the Securities Act to consider and vote upon
the adoption and approval of this Agreement, the transactions contemplated
hereby and the Parent Amendment to Certificate. The stockholder votes required
for the adoption and approval of the transactions contemplated by this Agreement
shall be the vote required by the DGCL, the Parent's Certificate of
Incorporation and bylaws and applicable rules and regulations of The Nasdaq
Stock Market, Inc.
4.06. Nasdaq Listing. Parent shall cause the shares of
Parent Common Stock to be issued in the Merger to be approved for listing on
the Nasdaq National Market, subject to official notice of issuance, prior to
the Effective Time.
4.07. Access to Information.
(a) Between the date hereof and the Effective Time,
the Company will give Parent and its authorized representatives and Parent will
give the Company and its authorized representatives reasonable access to all
employees, plants, offices, warehouses and other facilities and to all books and
records of itself and its subsidiaries; will permit the other party to make such
inspections as such party may reasonably require; will furnish promptly to the
other a complete and correct copy of each report, schedule and other document
filed or received by it pursuant to the requirements of the federal securities
laws, and will cause its officers and those of its subsidiaries to furnish the
other party with such financial and operating data and other information with
respect to the business and properties of itself and its subsidiaries as the
other party may from time to time reasonably request.
(b) Between the date hereof and the Effective Time,
the Company shall furnish to Parent and Parent will furnish to the Company
within 25 business days after the end of each calendar month (commencing with
November 1997) an unaudited balance sheet of the party furnishing such
information as of the end of the such month and the related statements of
earnings, stockholders' equity and, within 25 business days after the end of
each calendar quarter, cash flows for the quarter then ended, each prepared in
accordance with generally accepted accounting principles in conformity with the
practices consistently applied by such party with respect to its monthly
financial statements. All the foregoing shall be in accordance with the books
and records of the party furnishing such information and shall fairly present
its financial position (taking into account the differences
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between the monthly and quarterly statements prepared by such party in
conformity with its past practices) as of the last day of the period then ended.
(c) Parent and Acquisition will hold and will cause
its consultants and advisers to hold in confidence all documents and information
furnished to it by or on behalf of the Company in connection with the
transactions contemplated by this Agreement pursuant to the terms of that
certain Confidentiality Agreement entered into between the Company and Parent
dated October 31, 1997 (the "Confidentiality Agreement"). The Company will hold
and will cause its consultants and advisers to hold in confidence all documents
and information furnished to it by or on behalf of Parent or Acquisition in
connection with the transactions contemplated by this Agreement pursuant to the
terms of the Confidentiality Agreement.
4.08. Additional Agreements; Reasonable Efforts. Subject to
the terms and conditions herein provided, each of the parties hereto agrees to
use all reasonable efforts to take or cause to be taken all action and to do or
cause to be done all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation, (i)
cooperating in the preparation and filing of the Proxy Statement and the S-4,
any filings that may be required under the HSR Act and any amendments to any
thereof; (ii) obtaining consents of all third parties and Governmental Entities
necessary, proper or advisable for the consummation of the transactions
contemplated by this Agreement; (iii) contesting any legal proceeding relating
to the Merger; and (iv) executing any additional instruments necessary to
consummate the transactions contemplated hereby. If at any time after the
Effective Time any further action is necessary to carry out the purposes of this
Agreement, the proper officers and directors of each party hereto shall take all
such necessary action.
4.09. Public Announcements. Parent, Acquisition and the
Company, as the case may be, will consult with one another before issuing any
press release or otherwise making any public statements with respect to the
transactions contemplated by this Agreement, including, without limitation, the
Merger, and shall not issue any such press release or make any such public
statement prior to such consultation except as may be required by applicable law
or by obligations, pursuant to any listing agreement with The Nasdaq Stock
Market, Inc., or as determined by Parent, Acquisition or the Company, as the
case may be.
4.10. Indemnification. For a period of four years, after the
Effective Time, the Surviving Corporation shall indemnify and hold harmless (and
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shall also advance expenses as incurred to the fullest extent permitted under
applicable law to) each person who is now or has been prior to the date hereof
or who becomes prior to the Effective Time an officer or director of the Company
or any of the Company's subsidiaries (the "Indemnified Persons") to the fullest
extent that the Company would have been permitted under its Certificate of
Incorporation and By-Laws as in effect as of the date hereof. Each Indemnified
Person is intended to be a third party beneficiary of this Section 4.10 and may
specifically enforce its terms. This Section 4.10 shall not limit or otherwise
adversely affect any rights any Indemnified Person may have under any agreement
with the Company or under the Company's Certificate of Incorporation or bylaws
as presently in effect.
4.11. Notification of Certain Matters. The Company shall give
prompt notice to Parent and Acquisition, and Parent and Acquisition shall give
prompt notice to the Company, of (i) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time and (ii)
any material failure of the Company, Parent or Acquisition, as the case may be,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 4.11 shall not cure such breach or
non-compliance or limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
4.12. Affiliates; Pooling; Tax-Free Reorganization.
(a) The Company shall use all reasonable efforts to
obtain from any Company Affiliate who has not previously executed such letter
agreement, and from any person who may be deemed to have become a Company
Affiliate after the date of this Agreement and on or prior to the Effective
Time, a letter agreement substantially in the form of Exhibit C hereto as soon
as practicable.
(b) Each party hereto shall use all reasonable
efforts to cause the Merger to be treated for financial accounting purposes as a
Pooling Transaction and shall not take and shall use all reasonable efforts to
prevent any affiliate of such party from taking any actions which could prevent
the Merger from being treated for financial accounting purposes as a Pooling
Transaction.
(c) The Company, on the one hand, and Parent and
Acquisition, on the other hand, shall execute and deliver to legal counsel to
the Company and Parent certificates in form and substance reasonably
satisfactory to
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the Company and Parent (the "Tax Certificates"), at such time or times as
reasonably requested by such legal counsel in connection with its delivery of an
opinion with respect to the transactions contemplated hereby and the Company and
Parent shall each provide a copy thereof to the other parties hereto. Prior to
the Effective Time, none of the Company, Parent or Acquisition shall take or
cause to be taken any action which would cause to be untrue (or fail to take or
cause not to be taken any action which would cause to be untrue) any of the
representations in the Tax Certificates.
4.13 Parent Board. The Company and Parent shall use reasonable
efforts to cause the Board of Directors of Parent (the "Parent Board")
immediately after the Effective Time to be comprised of eight members designated
by Parent and six members designated by the Company (collectively, the "Parent
Directors"). The Company and Parent shall use reasonable efforts to reach a
mutually satisfactory stockholders agreement (the "Stockholders Agreement")
providing for the continuation of Parent Directors as all of the members of the
Parent Board for three years after the Effective Time, subject to adjustment to
the extent required or advisable in the event of material acquisitions,
financings or similar transactions by Parent after the Effective Time.
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
5.01. Conditions to Each Party's Obligations to Effect the
Merger. The respective obligations of each party hereto to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) This Agreement shall have been approved and
adopted by the requisite vote of the stockholders of the Company;
(b) This Agreement and the Parent Amendment to
Certificate shall have been approved and adopted by the requisite vote of the
stockholders of Parent;
(c) No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
enforced by any United States court or United States governmental authority
which prohibits, restrains, enjoins or restricts the consummation of the Merger;
(d) Any waiting period applicable to the Merger under
the HSR Act shall have terminated or expired and any other governmental or
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regulatory notices or approvals required with respect to the transactions
contemplated hereby shall have been either filed or received;
(e) The S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order and Parent shall have received all state securities laws or
"blue sky" permits and authorizations necessary to issue shares of Parent Common
Stock in exchange for Shares in the Merger; and
(f) The shares of Parent Common Stock issuable to the
Company stockholders pursuant to this Agreement and such other shares required
to be reserved for issuance in connection with the Merger shall have been
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
5.02. Additional Conditions to the Obligations of the Company.
The obligation of the Company to effect the Merger is subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions:
(a) Each of the representations of Parent and
Acquisition contained in this Agreement or in any other document delivered
pursuant hereto shall be true and correct in all material respects at and as of
the Effective Time with the same effect as if made at and as of the Effective
Time (except to the extent such representations specifically related to an
earlier date, in which case such representations shall be true and correct as of
such earlier date) and, at the Closing, Parent and Acquisition shall have
delivered to the Company a certificate to that effect;
(b) Each of the covenants and obligations of Parent
and Acquisition to be performed at or before the Effective Time pursuant to the
terms of this Agreement shall have been duly performed in all material respects
at or before the Effective Time and, at the Closing, Parent and Acquisition
shall have delivered to the Company a certificate to that effect;
(c) The Company shall have received the opinion of
tax counsel to the Company to the effect that (i) the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code; (ii) each of Parent, Acquisition and the Company will be a
party to the reorganization within the meaning of Section 368(b) of the Code;
and (iii) no gain or loss for Federal income tax purposes will be recognized by
a stockholder of the Company as a result of the Merger with respect to Shares
converted solely into the
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Merger Consideration, and such opinion shall not have been withdrawn or modified
in any material respect;
(d) The Company shall have received the opinion of
legal counsel to Parent as to the matters set forth in Exhibit E;
(e) Parent shall have obtained the consent or
approval of each person whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or credit
agreement, note, mortgage, indenture, lease, or other agreement or instrument,
except those for which failure to obtain such consents and approvals would not,
in the reasonable opinion of the Company, individually or in the aggregate, have
a Material Adverse Effect on Parent; and
(f) There shall have been no events, changes or
effects with respect to Parent or its subsidiaries having or which could
reasonably be expected to have a Material Adverse Effect on Parent.
5.03. Additional Conditions to the Obligations of Parent and
Acquisition. The respective obligations of Parent and Acquisition to effect the
Merger are subject to the satisfaction at or prior to the Effective Time of the
following additional conditions:
(a) Each of the representations of the Company
contained in this Agreement or in any other document delivered pursuant hereto
shall be true and correct in all material respects at and as of the Effective
Time with the same effect as if made at and as of the Effective Time (except to
the extent such representations specifically related to an earlier date, in
which case such representations shall be true and correct as of such earlier
date) and, at the Closing, the Company shall have delivered to Parent and
Acquisition a certificate to that effect;
(b) Each of the covenants and obligations of the
Company to be performed at or before the Effective Time pursuant to the terms of
this Agreement shall have been duly performed in all material respects at or
before the Effective Time and, at the Closing, the Company shall have delivered
to Parent and Acquisition a certificate to that effect;
(c) Parent shall have received from each affiliate of
the Company referred to in Section 2.18 an executed copy of the letter attached
hereto as Exhibit C;
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(d) The shares of Parent Common Stock issuable to the
Company stockholders pursuant to this Agreement and such other shares required
to be reserved for issuance in connection with the Merger shall have been
authorized for listing on the Nasdaq National Market upon official notice of
issuance;
(e) Parent shall have received the opinion of tax
counsel to Parent to the effect that (i) the Merger will be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code and (ii) each of Parent, Acquisition and the Company will be a party to
the reorganization within the meaning of Section 368(b) of the Code, and such
opinion shall not have been withdrawn or modified in any material respect;
(f) Parent shall have received the opinion of legal
counsel to the Company as to the matters set forth in Exhibit F;
(g) Parent shall have received the opinion of its
certified public accountants stating that the Merger will be accounted for under
generally accepted accounting principles as a Pooling Transaction, and such
opinion shall not have been withdrawn or modified in any material respect;
(h) The Company shall have obtained the consent or
approval of each person whose consent or approval shall be required in order to
permit the succession by the Surviving Corporation pursuant to the Merger to any
obligation, right or interest of the Company or any subsidiary of the Company
under any loan or credit agreement, note, mortgage, indenture, lease or other
agreement or instrument, except for those for which failure to obtain such
consents and approvals would not, in the reasonable opinion of Parent,
individually or in the aggregate, have a Material Adverse Effect on the
Surviving Corporation;
(i) persons holding not more than 5% of the issued
and outstanding Shares as of the Effective Time shall have exercised dissenters
rights in accordance with the requirements and procedures set forth in the NCBC;
(j) There shall have been no events, changes or
effects with respect to the Company or its subsidiaries having or which could
reasonably be expected to have a Material Adverse Effect on the Company;
(k) The Company shall have obtained all amendments
and consents required pursuant to Section 1.11(e) and Schedule 1.11;
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<PAGE> 52
(l) Parent shall have received duly executed and
delivered employment and noncompetition agreements, in form and substance
reasonably satisfactory to Parent, from certain officers and employees of the
Company and its subsidiaries; and
(m) Holders of approximately 19.9% of the outstanding
Shares shall have duly executed and delivered Stockholder Agreements in
substantially the form attached as Exhibit A hereto and no such holder shall
have failed to comply with any of the material terms of the Stockholder
Agreement.
ARTICLE VI
TERMINATION; AMENDMENT; WAIVER
6.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time whether before
or after approval and adoption of this Agreement by the Company's stockholders
or Parent's stockholders:
(a) by mutual written consent of Parent, Acquisition
and the Company;
(b) by either Parent or the Company, if the Merger
has not been consummated by April 30, 1998, unless the failure to so consummate
the Merger by such date shall have been caused by the action or failure to act
of the party seeking to terminate this Agreement, which action or failure to act
constitutes a breach of this Agreement;
(c) by either Parent or the Company, if any permanent
injunction or action by any court of competent jurisdiction or other
governmental entity of competent jurisdiction preventing or prohbiting the
Merger shall have become final and nonappealable, provided, however, that the
party seeking to terminate this Agreement pursuant to this Section 6.01(c) shall
have used all reasonable efforts to remove such injunction or overturn such
action;
(d) by Parent if:
(i) there has been a material breach of any
representation or warranty of the Company set forth in this Agreement, and the
Company has not cured such breach within 20 business days after written notice
of such breach is given by Parent to the Company;
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<PAGE> 53
(ii) there shall have been a material breach
by the Company of any of its covenants or agree in this Agreement, and the
Company has not cured such breach within 20 business days after written notice
of such breach is given by Parent to the Company;
(iii) the Company Board (x) withdraws or
modifies in a manner adverse to Parent or Acquisition its recommendation or
approval with respect to this Agreement or the Merger, (y) makes any
recommendation with respect to a Third Party Acquisition (including making no
recommendation or stating an inability to make a recommendation), other than a
recommendation to reject such Third Party Acquisition, or (z) takes any action
prohibited by Section 4.03;
(iv) any Third Party Acquisition occurs or
the Company or any of its subsidiaries or Affiliates enters into any agreement
with respect to a Third Party Acquisition;
(v) the Company shall have convened a
meeting of its stockholders to vote upon the Merger and shall have failed to
obtain the requisite vote of its stockholders at such meeting (including any
adjournments thereof) or the Company fails to convene such a meeting by April
30, 1998;
(vi) Parent shall have convened a meeting of
its stockholders to vote upon the Merger and shall have failed to obtain the
requisite vote of its stockholders at such meeting (including any adjournments
thereof); or
(vii) Parent shall have given written notice
to the Company not later than 60 days after the date of this Agreement
specifying that Parent, upon completion by Parent and its representatives of a
due diligence investigation of the Company and its subsidiaries, is not
reasonably satisfied as to the operations of the Company and its subsidiaries
and their respective businesses, assets and prospects.
(e) by the Company if:
(i) there has been a material breach of any
representation or warranty of Parent or Acquisition set forth in this Agreement,
and neither Parent nor Acquisition has cured such breach within 20 business days
after written notice of such breach is given by the Company to Parent;
(ii) there shall have been a material breach
by Parent or Acquisition of any of their respective covenants or agreements set
forth
48
<PAGE> 54
in this Agreement, and Parent or Acquisition, as the case may be, has not cured
such breach within 20 business days after written notice of such breach is given
by the Company to Parent;
(iii) the Parent Board withdraws or modifies
in a manner adverse to the Company its recommendation or approval with respect
to this Agreement or the Merger;
(iv) the Parent Board makes any
recommendation with respect to a Third Party Acquisition (as defined in Section
6.06) (including making no recommendation or stating an inability to make a
recommendation), other than a recommendation to reject such Third Party
Acquisition;
(v) any Third Party Acquisition occurs with
respect to Parent or Parent or any of its Subsidiaries or Affiliates enters into
an agreement with respect to any Third Party Acquisition;
(vi) Parent shall have convened a meeting of
its stockholders to vote upon the Merger and shall have failed to obtain the
requisite vote of its stockholders at such meeting (including any adjournments
thereof) or Parent fails to convene such a meeting by April 30, 1998;
(vii) the Company shall have convened a
meeting of its stockholders to vote upon the Merger and shall have failed to
obtain the requisite vote of its stockholders at such meeting (including any
adjournments thereof); or
(viii) the Company Board has received a
Superior Proposal and has complied with the provisions of Section 4.03(b)
(provided that the termination described in this Section 6.01(d)(viii) shall not
be effective unless and until the Company shall have paid to Parent in full the
fee described in Section 6.03(a)).
6.02. Effect of Termination. In the event of the termination
and abandonment of this Agreement pursuant to Section 6.01, this Agreement shall
forthwith become void and have no effect without any liability on the part of
any party hereto or its affiliates, directors, officers or stockholders other
than the provisions of this Section 6.02 and Sections 4.07(c) and 6.03 hereof.
Nothing contained in this Section 6.02 shall relieve any party from liability
for any breach of this Agreement.
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<PAGE> 55
6.03. Fees and Expenses.
(a) In the event that this Agreement shall have been
terminated:
(i) by Parent pursuant to Section
6.01(d)(iii), (iv) or (v) or by the Company pursuant to Section 6.01(e)(vii) or
(viii); or
(ii) (x) by Parent pursuant to Section
6.01(b) or Section 6.01(d)(i) or (ii) or (y) by Parent or the Company pursuant
to Section 6.01(c), and prior to or within twelve months of the date of such
termination the Company shall have directly or indirectly entered into an
agreement with respect to a Third Party Acquisition or a Third Party Acquisition
occurs;
then in each such case Parent and Acquisition would suffer
direct and substantial damages, which damages cannot be determined with
certainty. To compensate Parent and Acquisition for such damages the Company
shall pay the amount of $4 million as liquidated damages (the "Parent Liquidated
Damages") (x) within five business days after the termination of this Agreement
in the case of the occurrence of any event described in Section 6.03(a)(i)
above, or (y) concurrently with or prior to the execution of an agreement with
respect to a Third Party Acquisition or the occurrence of a Third Party
Acquisition described in Section 6.03(a)(ii) above. It is specifically agreed
that the Parent Liquidated Damages represent liquidated damages and not a
penalty.
(b) Upon the termination of this Agreement pursuant
to Sections 6.01(d)(i), (ii) or (v) or Section 6.01(e)(vii) (other than a
termination requiring the Company to pay the Parent Liquidated Damages), in
addition to all other remedies that Parent, Acquisition or their affiliates may
have as a result of such termination, the Company shall reimburse Parent,
Acquisition and their affiliates (not less than 10 business days after a
submission of statements therefor) for all actual, documented out-of-pocket fees
and expenses not to exceed $1 million reasonably incurred by any of them or on
their behalf in connection with the Merger and the consummation of all
transactions contemplated by this Agreement (including, without limitation, fees
payable to investment bankers, counsel to any of the foregoing and accountants).
(c) Upon the termination of this Agreement pursuant
to Sections 6.01(e)(i), (ii), (iii), (iv), (v) or (vi) or Section 6.01(d)(vi),
in addition to all other remedies that the Company or its affiliates may have as
a result of such termination, Parent shall reimburse the Company and its
affiliates (not less than 10 business days after a submission of statements
therefor) for all actual, documented
50
<PAGE> 56
out-of-pocket fees and expenses not to exceed $1 million reasonably incurred by
any of them or on their behalf in connection with the Merger and the
consummation of all transactions contemplated by this Agreement (including,
without limitation, fees payable to investment bankers, counsel to any of the
foregoing and accountants).
(d) Except as specifically provided in this Section
6.03, each party shall bear its own expenses in connection with this Agreement
and the transactions contemplated hereby, except that (i) the expenses incurred
in connection with printing the Registration Statement and the Proxy Statement,
(ii) the filing fee with the SEC relating to the Registration Statement or the
Proxy Statement and (iii) the filing fee in connection with filings under the
HSR Act by Parent, the Company or any of their respective Affiliates will be
shared equally by Parent and the Company.
6.04. Amendment. This Agreement may be amended by action taken
by the Company, Parent and Acquisition at any time before or after approval of
the Merger by the stockholders of the Company but after any such approval no
amendment shall be made which requires the approval of such stockholders under
applicable law without such approval. This Agreement (including the Parent
Disclosure Schedule and the Company Disclosure Schedule) may be amended only by
an instrument in writing signed on behalf of the parties hereto.
6.05. Extension; Waiver. At any time prior to the Effective
Time, each party hereto may (i) extend the time for the performance of any of
the obligations or other acts of the other party, (ii) waive any inaccuracies in
the representations and warranties of the other party contained herein or in any
document certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any party hereto to any such extension or
waiver shall be valid only if set forth in an instrument, in writing, signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
6.06 Definition of Third Party Acquisition with Respect to
Parent. For the purposes of this Agreement, when used with respect to Parent
"Third Party Acquisition" means the occurrence of any of the following events:
(i) the acquisition of Parent by a merger in which the current stockholders of
Parent do not own greater than 50% of the voting equity securities of the
surviving corporation by any person (which includes a "person" as such term is
defined in Section 13(d)(3) of the Exchange Act) other than an Affiliate of
Parent (a "Third Party"); (ii) the acquisition by a Third Party of substantially
all of the total assets
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<PAGE> 57
of the Parent and its subsidiaries taken as a whole; or (iii) the acquisition by
a Third Party of more than 50% of the outstanding shares of Parent Common Stock.
ARTICLE VII
MISCELLANEOUS
7.01. Nonsurvival of Representations and Warranties. The
representations and warranties made herein shall not survive beyond the
Effective Time or a termination of this Agreement. This Section 7.01 shall not
limit any covenant or agreement of the parties hereto which by its terms
requires performance after the Effective Time.
7.02. Entire Agreement; Assignment. This Agreement (including
the Parent Disclosure Schedule and the Company Disclosure Schedule) (a)
constitutes the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all other prior agreements and
understandings both written and oral between the parties with respect to the
subject matter hereof and (b) shall not be assigned by operation of law or
otherwise; provided, however, that Acquisition may assign any or all of its
rights and obligations under this Agreement to any subsidiary of Parent, but no
such assignment shall relieve Acquisition of its obligations hereunder if such
assignee does not perform such obligations.
7.03. Validity. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected thereby and to
such end the provisions of this Agreement are agreed to be severable.
7.04. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by
facsimile or by registered or certified mail (postage prepaid, return receipt
requested) to each other party as follows:
if to the Company: Wheels Sports Group, Inc.
1368 Salisbury Road
Mocksville, NC 27028
Fax: 704-634-3500
Attn: Howard L. Correll, Jr.
52
<PAGE> 58
with a copy to: Berliner Zisser Walter & Gallegos, P.C.
1700 Lincoln Street, Suite 4700
Denver, CO 80203
Fax: 303-830-1705
Attn: Robert W. Walter, Esq.
if to Parent or Acquisition: Racing Champions Corporation
800 Roosevelt Road
Building C, #320
Glen Ellyn, IL 60137
Fax: 630-790-0406
Attn: Robert E. Dods
with a copy to: Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, S.C.
1000 North Water Street
P.O. Box 92900
Milwaukee, Wisconsin 53202-0900
Fax: 414-298-8097
Attn: James M. Bedore, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
7.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
the principles of conflicts of law thereof.
7.06. Descriptive Headings. The descriptive headings herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
7.07. Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto and its successors and
permitted assigns and, except as provided in Sections 4.10 and 7.02, nothing in
this Agreement express or implied is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
7.08. Certain Definitions. For the purposes of this
Agreement the term:
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<PAGE> 59
(a) "Affiliate" means a person that, directly or
indirectly, through one or more intermediaries controls, is controlled by or is
under common control with the first-mentioned person;
(b) "Business day" means any day other than a day on
which the Nasdaq Stock Market is closed;
(c) "Capital stock" means common stock, preferred
stock, partnership interests, limited liability company interests or other
ownership interests entitling the holder thereof to vote with respect to matters
involving the issuer thereof;
(d) "Knowledge" or "known" means, with respect to any
matter in question, the actual knowledge of such matter of any executive officer
of the Company or Parent, as the case may be;
(e) "Person" means an individual, corporation,
partnership, limited liability company, association, trust, unincorporated
organization or other legal entity; and
(f) "Subsidiary" or "subsidiaries" of the Company,
Parent, the Surviving Corporation or any other person means any corporation,
partnership, limited liability company, association, trust, unincorporated
association or other legal entity of which the Company, Parent, the Surviving
Corporation or any such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or indirectly,
50% or more of the capital stock the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of such
corporation or other legal entity, provided, however, that the Company's
subsidiaries shall be deemed to include Sales Solutions, Inc., Synergy
Marketing, Inc. and J/B Press Pass, Inc.
7.09. Personal Liability. This Agreement shall not create or
be deemed to create or permit any personal liability or obligation on the part
of any direct or indirect stockholder of the Company or Parent or any officer,
director, employee, agent, representative or investor of any party hereto.
7.10. Specific Performance. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties, for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of
54
<PAGE> 60
competent jurisdiction to compel performance of such party's obligations and to
the granting by any court of the remedy of specific performance of its
obligations hereunder; provided, however, that if a party hereto is entitled to
receive any payment or reimbursement of expenses pursuant to Section 6.03(a),
(b) or (c) it shall not be entitled to specific performance to compel the
consummation of the Merger.
7.11. 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 shall constitute one and the same agreement.
7.12. No Rule of Construction. The parties acknowledge that
this Agreement was initially prepared by the Company, and that all parties have
read and negotiated the language used in this Agreement. The parties agree that,
because all parties participated in negotiating and drafting this Agreement, no
rule of construction shall apply to this Agreement which construes ambiguous
language in favor of or against any party by reason of that party's role in
drafting this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed on its behalf as of the day and year first above
written.
WHEELS SPORTS GROUP, INC.
BY /s/ Howard L. Correll, Jr.
---------------------------
Its Chief Executive Officer
RACING CHAMPIONS CORPORATION
BY /s/ Robert E. Dods
---------------------------
Its President
WSG ACQUISITION, INC.
BY /s/ Robert E. Dods
---------------------------
Its President
55
<PAGE> 1
EXHIBIT 2.2
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT (the "Amendment") to the AGREEMENT AND
PLAN OF MERGER, dated as of December 4, 1997 (the "Merger Agreement") is entered
into as of the 2nd day of February, 1998 by and among WHEELS SPORTS GROUP, INC.,
a North Carolina corporation (the "Company"), RACING CHAMPIONS CORPORATION, a
Delaware corporation ("Parent"), and WSG ACQUISITION, INC., a North Carolina
corporation and a wholly owned subsidiary of Parent ("Acquisition").
RECITAL
The Company, Parent and Acquisition mutually desire to amend
the Merger Agreement in the manner set forth in this Amendment.
AGREEMENTS
In consideration of the recital and the agreements set forth
in the Merger Agreement as amended hereby, the parties agree:
1. Section 6.01(d)(vii) of the Merger Agreement is amended to
read in its entirety as follows:
(vii) Parent shall have given written notice to the
Company not later than February 10, 1998 specifying that Parent, upon
completion by Parent and its representatives of a due diligence investigation
of the Company and its subsidiaries, is not reasonably satisfied as to the
operations of the Company and its subsidiaries and their respective businesses,
assets and prospects.
2. Except as amended by this Amendment, the Merger Agreement
remains in effect, unchanged and binding upon the parties thereto.
3. This Amendment may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which shall
constitute one and the same agreement.
<PAGE> 2
4. The Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of law thereof.
RACING CHAMPIONS
CORPORATION
BY /s/ Curtis W. Stoelting
------------------------------------
Curtis W. Stoelting, Vice President-
Finance and Operations and Secretary
WSG ACQUISITION, INC.
BY /s/ Curtis W. Stoelting
------------------------------------
Curtis W. Stoelting, Vice President,
Treasurer and Secretary
WHEELS SPORTS GROUP, INC.
BY /s/ Howard L. Correll, Jr.
-----------------------------------
Howard. L. Correll, Jr., President
2
<PAGE> 1
EXHIBIT 2.3
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT (the "Amendment") to the AGREEMENT AND
PLAN OF MERGER, dated as of December 4, 1997, as amended (the "Merger
Agreement") is entered into as of the 3rd day of February, 1998 by and among
WHEELS SPORTS GROUP, INC., a North Carolina corporation (the "Company"), RACING
CHAMPIONS CORPORATION, a Delaware corporation ("Parent"), and WSG ACQUISITION,
INC., a North Carolina corporation and a wholly owned subsidiary of Parent
("Acquisition").
RECITAL
The Company, Parent and Acquisition mutually desire to amend
the Merger Agreement in the manner set forth in this Amendment.
AGREEMENTS
In consideration of the recital and the agreements set forth
in the Merger Agreement as amended hereby, the parties agree:
1. Section 1.08(a) of the Merger Agreement is amended to read
in its entirety as follows:
(a) Subject to Section 1.09, at the Effective Time
each share of the Company's common stock, $.01 par value per share (the
"Shares") which is issued and outstanding immediately prior to the Effective
Time (other than Shares held in the Company's treasury or by any of the
Company's subsidiaries and Shares held by Parent, Acquisition or any other
subsidiary of Parent) shall, by virtue of the Merger and without any action
on the part of Acquisition, the Company or the holder thereof, be converted
into the right to receive 0.70 (the "Exchange Ratio") of a share of Parent's
common stock, $.01 par value per share (the "Parent Common Stock"; the shares
of Parent Common Stock to be issued hereunder, the "Merger Consideration"). If,
between the date of this Agreement and the Effective Time, the outstanding
shares of Parent Common Stock or the Shares shall have been changed into a
different number of shares or a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination
or exchange of shares, then the Exchange Ratio shall be correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
<PAGE> 2
2. Except as amended by this Amendment, the Merger Agreement
remains in effect, unchanged and binding upon the parties thereto.
3. This Amendment may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which shall
constitute one and the same agreement.
4. The Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of law thereof.
RACING CHAMPIONS
CORPORATION
BY /s/ Curtis W. Stoelting
------------------------------------
Curtis W. Stoelting, Vice President-
Finance and Operations and Secretary
WSG ACQUISITION, INC.
BY /s/ Curtis W. Stoelting
------------------------------------
Curtis W. Stoelting, Vice President,
Treasurer and Secretary
WHEELS SPORTS GROUP, INC.
BY /s/ Howard L. Correll, Jr.
-----------------------------------
Howard. L. Correll, Jr., President
2
<PAGE> 1
EXHIBIT 2.4
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT dated as of the 4th day of December, 1997 ("this
Agreement"), by and between the Principal Stockholder (as defined herein) of
Wheels Sports Group, Inc., a North Carolina corporation (the "Company"), and
Racing Champions Corporation, a Delaware corporation ("Parent").
RECITALS
A. Parent, Parent's wholly owned subsidiary, WSG Acquisition, Inc., a
Delaware corporation ("Acquisition"), and the Company have entered into an
Agreement and Plan of Merger dated as of December 4, 1997 (the "Merger
Agreement") which provides, among other things, that Acquisition will merge
with and into the Company on the terms and subject to the conditions set forth
in the Merger Agreement (the "Merger").
B. As a condition to the willingness of Parent and Acquisition to enter
into the Merger Agreement, the Principal Stockholder has agreed to grant Parent
an option to purchase all Option Shares and an irrevocable proxy with respect
to all Option Shares over which the Principal Stockholder possesses voting
power, upon the terms and subject to the conditions of this Agreement.
C. The Board of Directors of the Company has approved the Merger and the
acquisition of Option Shares by Parent pursuant to this Agreement.
The parties therefore agree as follows:
1. Certain Definitions.
(a) The term "Principal Stockholder", as used herein, shall mean Mr.
Howard L. Correll, Jr. and each of the Persons set forth on the signature pages
hereof as Correll Owners, and each reference to the Principal Stockholder is
intended to encompass both Mr. Howard L. Correll, Jr. and each of such Persons.
The term "Option Shares", as used herein, shall mean any and all shares of the
Company's Stock, par value $.01 per share (the "Common Stock") now owned and/or
subsequently acquired by the Principal Stockholder through purchase, gift,
stock splits, stock dividends and exercise of stock options.
(b) "Affiliate" shall, with respect to any Person, mean any other Person
that controls, is controlled by or is under common control with the former.
<PAGE> 2
The term "control" and correlative terms shall have the meanings ascribed to
them in Rule 405 under the Securities Act.
(c) "Permitted Transferee" means, with respect to any particular Correll
Owner, (i) Mr. Howard L. Correll, Jr. and his spouse, lineal descendants,
executor, administrator or testamentary trustee; (ii) any trust established
solely for the benefit of any of the Persons named in clause (i); (iii) any
partnership, the general or limited partners of which include only Persons
named in clauses (i) and (ii); or (iv) any Person controlled, directly or
indirectly, by Mr. Howard L. Correll, Jr.
(d) "Person" shall mean an individual, partnership, limited liability
company, corporation, joint stock company, trust, estate, joint venture,
association or unincorporated organization, or any other entity or
organization, including a government or political subdivision or any agency or
instrumentality thereof.
(e) "Subsidiary" shall mean any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar
functions are directly or indirectly owned by a Person.
(f) Other capitalized terms used but not defined in this Agreement shall
have the meanings assigned to such terms in the Merger Agreement.
2. Grant of Option. The Principal Stockholder hereby grants to Parent an
irrevocable option (the "Option") to purchase all of the Option Shares which
shall be not less than the number (as adjusted pursuant to Section 6 of this
Agreement) of Option Shares reflected next to the Principal Stockholder's name
on the signature page of this Agreement, and Parent will, subject to the
provisions hereof, purchase and pay for such Option Shares by issuing to
Principal Stockholder .8 (eight-tenths) fully paid and nonassessable shares of
Parent Common Stock for each Option Share (the "Exercise Price").
3. Exercise of Option. The Option may be exercised by Parent, in whole at
any time or in part from time to time from and after the date of this Agreement
upon the occurrence or non-occurrence of any event listed on Annex I. In the
event Parent wishes to exercise all or any part of the Option, Parent shall
send a written notice to the Principal Stockholder specifying the number of
Option Shares Parent intends to purchase and the place, date and time (but not
later than 10 business days from the date such notice is given) for the
2
<PAGE> 3
closing of such purchase. Parent's obligations to purchase and pay for Option
Shares upon any exercise of the Option are subject to the expiration or
termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "Hart-Scott Act"). Upon
request of Parent, the Principal Stockholder shall promptly take all action
required to effect all necessary filings by the Principal Stockholder under the
Hart-Scott Act.
4. Registration of Parent Company Stock.
(a) The Principal Stockholder agrees not to transfer or otherwise dispose
of the shares of Parent Company Stock, or any interest therein, without first
providing to Parent an opinion of counsel for the Principal Stockholder,
reasonably satisfactory in form and substance to counsel for Parent, to the
effect that such transfer or disposition will not violate the Securities Act of
1933, as amended (the "Securities Act"), or any applicable state law governing
the offer and sale of securities, and the rules and regulations thereunder. The
Principal Stockholder further agrees to the placement of the following legend
on the certificate(s) representing the shares:
"The Shares represented by this certificate have not been registered
under either (i) the Securities Act of 1933 (the "Act") or (ii) any
applicable state law governing the offer and sale of securities. No
transfer or other disposition of these Shares, or of any interest
therein, may be made except pursuant to an effective registration
statement under the Act and such other state laws, unless the issuer has
received an opinion of counsel, reasonably satisfactory to the issuer, to
the effect that such transfer or other disposition of these Shares, or of
any interest therein, will not violate the Act, such other state laws,
and the rules and regulations promulgated thereunder."
provided that upon provision to Parent of any opinion of counsel for the
Principal Stockholder, reasonably satisfactory in form and substance to counsel
for Parent, to the effect that such legend is no longer required under the
provisions of the Securities Act or applicable state securities laws, Parent
shall promptly cause new certificates representing such shares to be issued to
the Principal Stockholder against surrender of such legended certificates.
(b) Notwithstanding the foregoing, Parent shall include such issuance of
shares of Parent Common Stock in the Registration Statement on Form S-4 being
filed pursuant to the Merger Agreement.
(c) If the shares of Parent Common Stock are not otherwise registered as
provided in paragraph (b) of Section 4, upon the demand of the
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<PAGE> 4
Principal Stockholder, Parent agrees to effect two registrations of shares
held by the Principal Stockholder under the Securities Act. In each such case:
(i) each registration statement and each prospectus included therein or
relating to the shares of Parent Common Stock registered thereunder and each
amendment or supplement thereto shall at all times comply with the requirements
of the Securities Act and will not, at any time, contain any misstatement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading (and if an
event occurs as a result of which a registration statement or prospectus no
longer complies with this subclause (i), Parent shall promptly (A) so notify
the Principal Stockholder and (B) amend such registration statement or
supplement such prospectus so that the requirements of this subclause (i) are
met); (ii) Parent shall register or qualify all such shares under the blue sky
or securities laws of any jurisdiction as the Principal Stockholder may
reasonably request and shall maintain such registrations and qualifications in
effect so long as is necessary to permit the sale of such shares by the
Principal Stockholder in compliance with such laws; (iii) Parent shall supply
to the Principal Stockholder, or its underwriters, such number of prospectuses,
as amended and supplemented from time to time, as the Principal Stockholder may
reasonably request, during the period of nine months after the effectiveness of
the such registration statement or amendment; (iv) shall indemnify and hold the
Principal Stockholder harmless against any and all losses, claims, damages or
liabilities, joint or several, to which the Principal Stockholder may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus referred to in this
paragraph (c) (including any preliminary prospectus contained in any such
registration statement), or any amendment or supplement 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 shall reimburse the Principal Stockholder, on
demand, for any legal or other expenses reasonably incurred by the Principal
Stockholder in connection with investigating or defending any such action or
claim; and (v) at the request of the Principal Stockholder, the Parent will
execute and deliver (A) an agreement with any broker or dealer effecting a sale
(whether as principal or agent) of such shares confirming for the benefit of
such broker or dealer Parent's agreements contained in this Section 3(c) and/or
(B) one or more underwriting agreements with one or more underwriters (whether
acting for themselves or as representative(s) of a group of underwriters)
providing for an underwritten public offering of such shares for the account of
the Principal Stockholder, each such underwriting agreement to contain such
representations, warranties, covenants, agreements and indemnities as are
customary in "firm commitment" underwriting agreements used by so-called
4
<PAGE> 5
"major bracket" investment banking firms for public offerings of common stock
of companies which were not previously subject to the reporting requirements of
section 13 or 15(d) of the Exchange Act and Parent will use its commercially
reasonable efforts to cause the conditions to the underwriters' obligations
thereunder to be satisfied and will otherwise cooperate with the underwriters
in their investigation of Parent's business, property, financial condition and
prospects and in successfully concluding such public offering. In addition to
such demand registrations, in the event Parent effects a registration of Parent
Common Stock for its own account or for any other shareholder of Parent, Parent
shall use its commercially reasonable efforts to include therein all shares
requested by the Principal Stockholder to be so included; provided, however,
that (A) if the managing underwriters in such offering advise Parent in writing
that in their opinion the number of shares of Parent Common Stock requested to
be included in such registration exceeds the number which can be sold in such
offering, Parent will include the securities requested to be included therein
pro rata. Parent will pay all expenses of performing its obligations under
this Section 4(c), except underwriting commissions and (B) the Principal
Stockholder shall be entitled to have its shares of Parent Common Stock
included in no more than two such registrations effected by the Company.
5. Purchase of Option Shares.
(a) At each closing under Section 3 of this Agreement (each a "Closing
Date"), the Principal Stockholder shall deliver to Parent the certificate or
certificates representing the number of Option Shares being purchased in proper
form for transfer, and Parent will, subject to the provisions hereof, deliver
to the Principal Stockholder the Exercise Price and a certificate signed by the
President or Chief Executive Officer of Parent to the effect that Parent and
Acquisition have complied all material respects with all covenants and
agreements set forth in the Merger Agreement and that all representations and
warranties of the Parent and Acquisition under Article III of the Merger
Agreement and of the Parent under Section 7 of this Agreement were true in all
material respects when made.
(b) No certificates or scrip representing less than one share of Parent
Common Stock shall be issued upon the exercise of the Option. In lieu of any
such fractional share, the Principal Stockholder who would otherwise have been
entitled to a fraction of a share of Parent Common Stock upon exercise of the
Option shall be paid at the Closing in cash (without interest) in an amount
equal to such Principal Stockholder's fractional part of a share of Parent
Common Stock multiplied by the last reported sale price of Parent Common Stock,
as reported on the Nasdaq National Market, on the day prior to the Closing
Date.
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<PAGE> 6
6. Certain Option Adjustments.
(a) In the event of any change in the number of issued and outstanding
shares of Common Stock or Parent Common Stock by reason of any stock dividends,
split-up, recapitalization, merger or other change in the corporate or capital
structure of the Company or Parent, as the case may be, Parent and Principal
Stockholder, as the case may be, each shall receive, upon exercise of the
Option: (i) in the case of a change in the Company's capital structure, the
stock or other securities, cash or property which the Principal Stockholder
received or is entitled to receive as a consequence of such change to the
Company's capital structure, or (ii) in the case of a change in Parent's
capital structure, the stock or other securities, cash or property into which
the Parent Common Stock has been converted as a consequence of such change to
the Parent's capital structure.
(b) If, on or after the date hereof, the Company should declare or pay any
cash dividend or other distribution or issue any rights with respect to the
Option Shares, payable or distributable to shareholders of record on a date
prior to the transfer to the name of Parent or its nominee or transferee on the
Company's stock transfer records of the Option Shares purchased pursuant to the
Option, then, without limiting any of the rights of Parent and Acquisition
under the Merger Agreement and without limiting the rights of Parent described
in the preceding paragraph, (i) the purchase price per Option Share payable by
Parent pursuant to the Option will be reduced by the amount of any such cash
dividend or cash distribution, and (ii) the whole of any such non-cash
dividend, distribution or right will be received and held by the Principal
Stockholder for the account of Parent and shall be required to be promptly
remitted and transferred by the Principal Stockholder to Parent of its designee
or transferee, accompanied by appropriate documentation of transfer. Pending
such remittance, Parent shall be entitled to all rights and privileges as owner
of any such non-cash dividend, distribution or right and may withhold the
entire purchase price or deduct from the purchase price the amount or value
thereof, as determined by Parent in its sole discretion.
7. Representations and Warranties of Parent. Parent represents and
warrants to the Principal Stockholder as follows:
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the requisite
corporate power to enter into and perform this Agreement.
(b) Parent has all necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the
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consummation of the transactions contemplated hereby have been duly and validly
authorized by the board of directors of Parent and no other corporate
proceedings on the part of Parent are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by Parent and constitutes a valid,
legal and binding agreement of Parent enforceable against it in accordance with
its terms.
(c) Parent is not subject to or obligated under any provision of (i) its
Certificate of Incorporation or By-Laws, (ii) any contract, (iii) any license,
franchise or permit or (iv) any law, regulation, order, judgment or decree,
which would be breached or violated by its execution, delivery and performance
of this Agreement and the consummation by it of the transactions contemplated
hereby, other than any such breaches or violations which will not, individually
or in the aggregate, have a material adverse effect on the business, operations
or financial condition of Parent and its Subsidiaries, taken as a whole. Other
than in connection with or in compliance with the provisions of the Delaware
General Corporation Law, as amended, the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Hart-Scott Act and
the securities or blue sky laws of the various states, no authorization,
consent or approval of, or filing with, any public body, court or authority is
necessary on the part of Parent for the consummation by Parent of the
transactions contemplated by this Agreement, except for such authorizations,
consents, approvals and filings as to which the failure to obtain or make would
not, individually or in the aggregate, have a material adverse effect on the
business, operations or financial condition of Parent and its subsidiaries,
taken as a whole. Such representations and warranties shall be deemed to be
made again upon and as of the date of any and all Closing Dates under Section 3
of this Agreement.
(d) The authorized capital stock of Parent consists of 20,000,000 shares
of Parent Common Stock, of which, as of the date of this Agreement, 13,242,382
shares of Parent Common stock were issued and outstanding. All of the
outstanding shares of Parent Common Stock are validly issued and are fully
paid, nonassessable and free of preemptive rights. As of the date of this
Agreement, 486,785 shares of Parent Common Stock were reserved for issuance and
issuable upon or with the exercise of outstanding options. Except as disclosed
in Section 3.02 of the Parent Disclosure Schedule, between October 31, 1997 and
the date hereof, no shares of Parent's capital stock have been issued other
than pursuant to stock options already in existence and except for grants of
stock options to employees, officers and directors in the ordinary course of
business consistent with past practice, and between October 31, 1997 and the
date hereof, no other stock options have been granted. Except as set forth
above and as of the Effective Time, there are outstanding: (i) no shares of
capital stock or other voting
7
<PAGE> 8
securities of Parent; (ii) no securities of Parent or its Subsidiaries
convertible into or exchangeable for shares of capital stock, or voting
securities of Parent; (iii) no options, warrants, subscriptions, calls, rights
or other agreements to acquire from Parent or its Subsidiaries and no
obligation of Parent or its subsidiaries to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Parent; and (iv) no equity equivalent interests or rights
to acquire equity equivalent interests in ownership or earnings of Parent or
its Subsidiaries or other similar rights (collectively, "Parent Securities").
As of the date hereof, there are no outstanding obligations of Parent or any of
its subsidiaries to purchase, redeem or otherwise acquire any Parent
Securities. Except as set forth in Section 3.02(a) of the Parent Disclosure
Schedule, there are no stockholder agreements, voting trusts or other
agreements or understandings to which Parent is a party or by which it is bound
relating to the voting of any shares of capital stock of Parent or other Parent
Securities, and to the knowledge of Parent, no such agreements have been
entered into by the stockholders of Parent.
(e) All of the outstanding capital stock of Parent's subsidiaries is owned
by Parent, directly or indirectly, free and clear of any Lien or any other
limitation or restriction (including any restriction on the right to vote or
sell the same except as may be provided as a matter of law). There are no
securities of Parent or its Subsidiaries convertible into or exchangeable for,
no options or other rights to acquire from Parent or its Subsidiaries and no
other contract, understanding, arrangement or obligation (whether or not
contingent) providing for, the issuance or sale, directly or indirectly, of any
capital stock or other ownership interests in or any other securities of any
subsidiary of Parent. There are no outstanding contractual obligations of
Parent or its Subsidiaries to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock or other ownership interests in Parent or
in any subsidiary of Parent.
(f) The Parent Common Stock constitutes the only class of equity
securities of Parent or its Subsidiaries registered or required to be
registered under the Exchange Act.
(g) When issued to the Principal Stockholder upon exercise of the Option,
the shares of Parent Common Stock will be duly issued, fully paid and
nonassessable.
8. Representations and Warranties of the Principal Stockholder.
(a) The Principal Stockholder is the true and lawful owner of 100% of the
Option Shares set forth next to the name of the Principal Stockholder
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<PAGE> 9
on the signature page to this Agreement with full power to vote and dispose of
such Option Shares and there are no restrictions on the Principal Stockholder's
voting rights or rights of disposition pertaining thereto except as set forth
in this Agreement or imposed by federal and state securities law. None of the
Option Shares is subject to any voting trust or other agreement or arrangement
with respect to the voting of such shares.
(b) The execution, delivery and performance by the Principal Stockholder
of this Agreement and the consummation of the transactions contemplated hereby,
do not and will not contravene or constitute a default under or give rise to a
right of termination, cancellation or acceleration of any material right or
obligation of the Principal Stockholder or to a loss of any material benefit of
the Principal Stockholder under any provision of applicable law or regulation
or of any agreement, judgment, injunction, order, decree or other instrument
binding on the Principal Stockholder.
(c) The execution, delivery and performance by the Principal Stockholder
of this Agreement and the consummation of the transactions contemplated by this
Agreement are within the Principal Stockholder's powers and have been duly
authorized by all necessary actions, if any, including all necessary actions by
the trustees, partners, members, officers, directors or shareholders, as
appropriate, of the Principal Stockholder, if the Principal Stockholder is
other than an individual.
(d) This Agreement constitutes a valid and binding agreement of the
Principal Stockholder, enforceable against the Principal Stockholder in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights
generally. If the Principal Stockholder is married and the Option Shares set
forth on the signature pages hereto next to the Principal Stockholder's name
constitute community property under applicable laws, this Agreement has been
duly authorized, executed and delivered by, and constitutes the valid and
binding agreement of, the Principal Stockholder's spouse, enforceable in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights
generally. If this Agreement is being executed in a representative or
fiduciary capacity, the person signing this Agreement has full power and
authority to enter into and perform this Agreement and has obtained any
necessary consents in connection with execution of this Agreement.
(e) The number of Option Shares set forth next to the name of the
Principal Stockholder on the signature page to this Agreement are the only
Option
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<PAGE> 10
Shares owned by the Principal Stockholder. Except as set forth next to the
name of the Principal Stockholder on the signature page to this Agreement, the
Principal Stockholder owns no options to purchase or rights to subscribe for or
otherwise acquire any securities of the Company and has or have no other
interest in or voting rights with respect to any securities of the Company.
(f) No investment banker, broker, finder or other intermediary is or may
be entitled to a commission or fee from Parent, Acquisition, the Company or any
of their respective Subsidiaries in respect of this Agreement based upon any
arrangement or agreement made by or on behalf of the Principal Stockholder.
(g) Other than in connection with or in compliance with the provisions of
the Exchange Act and the Hart-Scott Act, no authorization, consent or approval
of, or any filing with, any public body or authority is necessary for
consummation by him of the transactions contemplated by this Agreement.
(h) When delivered by the Principal Stockholder to Parent upon exercise of
the Option, good, valid and marketable title in and to the Option Shares will
be vested in Parent, free and clear of any claims, liens, encumbrances,
security interests and charges of any nature whatsoever. Such representations
and warranties shall be deemed to be made again upon and as of the date of any
and all Closing Dates under Section 3 of this Agreement.
9. Voting of Option Shares. At any meeting of the stockholders of the
Company, however called, and at every adjournment thereof, or in connection
with any written consent of the stockholders of the Company, the Principal
Stockholder will cause all of its Option Shares to be voted, during the term of
this Agreement, in favor of (i) the Merger and the approval and adoption of the
Merger Agreement, and (ii) all other transactions as to which stockholders of
the Company are called upon to vote to effectuate the Merger. The Principal
Stockholder agrees that during the term of this Agreement, the Principal
Stockholder shall attend or otherwise participate in all duly called
stockholder meetings and any adjournments thereof and in all actions by written
consent of stockholders.
10. No Proxies or Encumbrances. Other than as provided in this Agreement,
the Principal Stockholder, until the termination of this Agreement, shall not
(i) grant any proxies or enter into any voting trust or other agreement or
arrangement with respect to the voting of any of the Option Shares, (ii) sell,
assign, transfer, encumber or otherwise dispose of or enter into any contract,
option or other arrangement or understanding with respect to, the direct or
indirect sale, assignment, transfer, encumbrance or other disposition of any of
its Option
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<PAGE> 11
Shares or any interest therein except for Permitted Transfers to Permitted
Transferees (as such terms are defined below) or (iii) seek or solicit any of
the foregoing. The Principal Stockholder shall notify Parent promptly and
provide all details requested by Parent if the Principal Stockholder shall be
approached or solicited, directly or indirectly, by any Person with respect to
any of the foregoing.
Each transfer of Option Shares to a Permitted Transferee shall constitute
a "Permitted Transfer" only if it is a transfer to a Permitted Transferee of
such Correll Owner and, in the case of a Permitted Transferee, transfer to the
Correll Owner who transferred such securities to the Permitted Transferee or to
other Permitted Transferees of such Correll Owner; provided that, any such
Permitted Transferee shall enter into an agreement supplemental hereto,
consented to in writing by Parent, agreeing to be bound by the terms of this
Agreement; and provided further that no such transfer is in violation of
applicable federal or state securities laws.
11. No Solicitation. The Principal Stockholder shall not, during the term
of this Agreement, directly or indirectly encourage, solicit, participate in or
initiate discussions or negotiations with or provide any non-public information
to (or authorize any other Person to encourage, solicit, participate in or
initiate discussions or negotiations with or provide any non-public information
to) any Person or group (other than Parent and Acquisition or any designees of
Parent or Acquisition) concerning any Third Party Acquisition or any
Acquisition Proposal.
12. Dissenters' Rights. None of the Correll Owners shall, nor shall the
Principal Stockholder permit any Correll Owner to, give notice pursuant to the
NCBC of such Person's intent to demand payment for any Option Shares, or take
any other action to exercise dissenters' rights, if the Merger is effected.
13. Reasonable Efforts. During the term of this Agreement, the Principal
Stockholder shall use reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with
Parent in doing, all things necessary, proper or advisable to consummate and
make effective, in the most expeditious manner practicable, the Merger and the
other transactions contemplated by the Merger Agreement and this Agreement,
including (i) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including any necessary filings under the
Hart-Scott Act relating to the acquisition of the Company or relating to the
acquisition of Parent Common Stock in the Merger and all other necessary
filings with Governmental Entities, if any) and the taking of all reasonable
steps as may be necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity, (ii)
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the obtaining of all necessary consents, approvals or waivers from third
parties, (iii) cooperation in the defense of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging the Merger
Agreement or this Agreement or the consummation of any of the transactions
contemplated by the Merger Agreement and this Agreement, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed, and (iv) the execution and delivery of
any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, the Merger Agreement
and this Agreement.
14. Legend. Simultaneously with the execution of this Agreement, the
Principal Stockholder shall cause all certificates representing Option Shares
to bear in a conspicuous place the following legend:
"The Shares represented by the within certificate may not be sold,
exchanged or otherwise transferred or disposed of except in compliance
with the terms and conditions of that certain Stockholder Agreement dated
as of December 4, 1997, by and between Racing Champions Corporation and
the registered holder of the within Certificate."
15. Expenses. Except as otherwise provided, all costs and expenses
incurred in connection with herewith, this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
16. Amendment; Assignment. This Agreement may not be modified, amended,
altered or supplemented except by a writing signed by Parent and the Principal
Stockholder. Except for a Permitted Transfer as provided in Section 8, no
party to this Agreement may assign any of its rights or obligations under this
Agreement without the prior written consent of the other parties hereto, except
that the rights and obligations of Parent hereunder may be assigned by Parent
to any of its affiliates, but no such transfer shall relieve Parent of its
obligations hereunder if such transferee does not perform such obligations.
17. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and, except as
otherwise provided in this Agreement, shall be deemed to have been duly given
if so given) if delivered in person, by cable, telegram or telex, or sent by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
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If to the Principal Stockholder:
Mr. Howard L. Correll, Jr.
c/o Wheels Sports Group, Inc.
1368 Salisbury Road
Mocksville, NC 27028
Fax: 704-634-3500
with a copy to:
Berliner Zisser Walter & Gallegos, P.C.
1700 Lincoln St., Suite 4700
Denver, CO 80203
fax: 303-830-1705
Attention: Robert W. Walter, Esq.
If to Parent:
Racing Champions Corporation
800 Roosevelt Road
Building C, #320
Glen Ellyn, IL 60137
Attention: Robert E. Dods
with a copy to:
Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c.
1000 North Water Street
P.O. Box 92900
Milwaukee, WI 53202-0900
Fax: 414-298-8097
Attention: James M. Bedore. Esq.
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
18. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed to be an original, but each of which together
shall constitute one and the same document.
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19. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of North Carolina, without
giving effect to the principles of conflicts of laws thereof.
20. Binding Effect. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the heirs, personal representatives,
successors and assigns of the parties hereto. Nothing expressed or referred to
in this Agreement is intended or shall be construed to give any person other
than the parties to this Agreement, or their respective heirs, personal
representatives, successors or assigns, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
21. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof.
22. Termination. This Agreement shall terminate upon the earlier of (a)
the Effective Time (as defined in the Merger Agreement) and (b) the termination
of the Merger Agreement, provided that this Agreement shall not terminate until
45 days after the termination of the Merger Agreement in connection with an
occurrence of an Event (as defined). In the event of the termination of this
Agreement, this Agreement shall forthwith become void and there shall be no
liability on the part of either Parent or the Principal Stockholder under this
Agreement, except that no such termination shall affect the obligations of the
Principal Stockholder or Parent with respect to any prior exercise of the
Option.
23. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
24. Further Assurances. The Principal Stockholder and Parent will, upon
the request of the other, execute and deliver such documents and take such
action reasonably deemed by Parent or the Principal Stockholder, as the case
may be, to be necessary or desirable to more effectively complete and evidence
the sale and transfer of any Option Shares purchased by Parent pursuant to this
Agreement.
25. Miscellaneous. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. References to Sections, subsections
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and clauses refer to Sections, subsections and clauses of this Agreement unless
otherwise stated.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
RACING CHAMPIONS CORPORATION
By: /s/ Robert E. Dods
------------------------------
Correll Owners:
/s/ Howard L. Correll, Jr.
-------------------------------------
Howard L. Correll, Jr.
Correll Owners: Number of Shares Number of Options/Warrants
---------------- --------------------------
Mr. Howard L. Correll, Jr. 689,737 232,500
15
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Annex I
1. The Merger has not been consummated by April 30, 1998, unless the failure
to so consummate the Merger by such date shall have been caused by the
action or failure to act of Parent, which action or failure to act
constitutes a breach of the Merger Agreement.
2. There has been a material breach of any representation or warranty of the
Company set forth in the Merger Agreement and the Company has not cured
such breach within 20 business days after written notice of such breach is
given by Parent to the Company.
3. The Company Board (x) withdraws or modifies in a manner adverse to Parent
or Acquisition its recommendation or approval with respect to the
Agreement or the Merger, (y) makes any recommendation with respect to a
Third Party Acquisition (including making no recommendation or stating an
inability to make a recommendation), other than a recommendation to reject
such Third Party Acquisition, or (z) takes any action prohibited by
Section 4.03.
4. Any Third Party Acquisition occurs or the Company or any of its
subsidiaries or Affiliates enters into any agreement with respect to a
Third Party Acquisition.
5. The Company shall have convened a meeting of its stockholders to vote
upon the Merger and shall have failed to obtain the requisite vote of its
stockholders at such meeting (including any adjournments thereof) or the
Company fails to convene such a meeting by April 30, l998.
<PAGE> 1
Exhibit 10.8
RACING CHAMPIONS, INC.
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of June 17, 1997
BANKBOSTON, N.A., Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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1. Restatement; Definitions; etc.........................................
1.1. Amendment and Restatement.......................................
1.2. Definitions; Certain Rules of Construction......................
2. The Credits...........................................................
2.1. Revolving Credit................................................
2.1.1. Revolving Loan..........................................
2.1.2. Maximum Amount of Revolving Credit......................
2.1.3. Borrowing Requests......................................
2.1.4. Revolving Notes.........................................
2.2. Term Loan Credit................................................
2.2.1. Term Loan...............................................
2.2.2. Term Loan Notes.........................................
2.3. Letters of Credit...............................................
2.3.1. Issuance of Letters of Credit...........................
2.3.2. Requests for Letters of Credit..........................
2.3.3. Form and Expiration of Letters of Credit................
2.3.4. Lenders' Participation in Letters of Credit.............
2.3.5. Presentation............................................
2.3.6. Payment of Drafts.......................................
2.3.7. Uniform Customs and Practice............................
2.3.8. Subrogation.............................................
2.3.9. Modification, Consent, etc..............................
2.4. Application of Proceeds.........................................
2.4.1. Revolving Loan..........................................
2.4.2. Term Loan...............................................
2.4.3. Letters of Credit.......................................
2.4.4. Specifically Prohibited Applications....................
2.5. Nature of Obligations of Lenders to Make Extensions of Credit...
3. Interest; Eurodollar Pricing Options; Fees............................
3.1. Interest........................................................
3.2. Eurodollar Pricing Options......................................
3.2.1. Election of Eurodollar Pricing Options..................
3.2.2. Notice to Lenders and Borrower..........................
3.2.3. Selection of Eurodollar Interest Periods................
3.2.4. Additional Interest.....................................
3.2.5. Violation of Legal Requirements.........................
3.2.6. Funding Procedure.......................................
</TABLE>
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<TABLE>
<S> <C>
3.3. Commitment Fees.................................................
3.4. Letter of Credit Fees...........................................
3.5. Changes in Circumstances; Yield Protection......................
3.5.1. Reserve Requirements, etc...............................
3.5.2. Taxes...................................................
3.5.3. Capital Adequacy........................................
3.5.4. Regulatory Changes......................................
3.5.5. Compensation Claims.....................................
3.5.6. Mitigation..............................................
3.6. Computations of Interest and Fees...............................
4. Payment...............................................................
4.1. Payment at Maturity.............................................
4.2. Scheduled Required Prepayments..................................
4.3. Contingent Required Prepayments.................................
4.3.1. Excess Credit Exposure..................................
4.3.2. Excess Cash Flow........................................
4.3.3. Net Asset Sale Proceeds.................................
4.3.4. Net Equity Proceeds.....................................
4.4. Voluntary Prepayments...........................................
4.5. Letter of Credit................................................
4.6. Reborrowing; Application of Payments. etc.......................
4.6.1. Reborrowing.............................................
4.6.2. Order of Application....................................
4.6.3. Payment with Accrued Interest. etc......................
4.6.4. Payments for Lenders....................................
5. Conditions to Extending Credit........................................
5.1. Conditions on Initial Closing Date..............................
5.1.1. Notes...................................................
5.1.2. Payment of Fees.........................................
5.1.3. Legal Opinions..........................................
5.1.4. Guarantee and Security Agreement: Hong Kong Documents...
5.1.5. Perfection of Security..................................
5.1.6. Public Offering.........................................
5.1.7. Proper Proceedings......................................
5.1.8. General.................................................
5.2. Conditions to Each Extension of Credit..........................
5.2.1. Officer's Certificate...................................
5.2.2. Legality, etc...........................................
6. General Covenants.....................................................
6.1. Taxes and Other Charges; Accounts Payable.......................
6.1.1. Taxes and Other Charges.................................
6.1.2. Accounts Payable........................................
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
6.2. Conduct of Business, etc........................................
6.2.1. Types of Business.......................................
6.2.2. Maintenance of Properties...............................
6.2.3. Statutory Compliance....................................
6.2.4. Compliance with Material Agreements.....................
6.3. Insurance.......................................................
6.3.1. Property Insurance......................................
6.3.2. Liability Insurance.....................................
6.3.3. Key Executive Life Insurance............................
6.4. Financial Statements and Reports................................
6.4.1. Annual Reports..........................................
6.4.2. Quarterly Reports.......................................
6.4.3. Borrowing Base Reports..................................
6.4.4. Other Reports...........................................
6.4.5. Notice of Litigation, Defaults, etc.....................
6.4.6. ERISA Reports...........................................
6.4.7. Other Information; Audit................................
6.5. Certain Financial Tests.........................................
6.5.1. Consolidated Total Debt to Consolidated EBITDA..........
6.5.2. Consolidated EBITDA to Consolidated Interest Expense....
6.5.3. Consolidated Adjusted EBITDA to Consolidated
Fixed Charges...........................................
6.5.4. Consolidated EBITDA.....................................
6.5.5. Capital Expenditures....................................
6.6. Indebtedness....................................................
6.7. Guarantees; Letters of Credit...................................
6.8. Liens...........................................................
6.9. Investments and Acquisitions....................................
6.10. Distributions...........................................
6.11. Asset Dispositions and Mergers..........................
6.12. Lease Obligations.......................................
6.13. Issuance of Stock by Subsidiaries; Subsidiary
Distributions...........................................
6.13.1. Issuance of Stock by Subsidiaries.......................
6.13.2. No Restrictions on Subsidiary Distributions.............
6.14. Voluntary Prepayments of Other Indebtedness.............
6.15. Derivative Contracts....................................
6.16. Negative Pledge Clauses.................................
6.17. ERISA, etc..............................................
6.18. Transactions with Affiliates............................
6.19. Restricted Operations of Company and Banerjan...........
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
7. Representations and Warranties.........................................
7.1. Organization and Business.......................................
7.1.1. The Company.............................................
7.1.2. Subsidiaries............................................
7.1.3. Qualification...........................................
7.1.4. Capitalization..........................................
7.2. Financial Statements and Other Information; Material
Agreements......................................................
7.2.1. Financial Statements and Other Information..............
7.2.2. Material Agreements.....................................
7.3. Agreements Relating to Financing Debt, Investments, etc.........
7.4. Changes in Condition............................................
7.5. Title to Assets.................................................
7.6. Operations in Conformity With Law, etc..........................
7.7. Litigation......................................................
7.8. Authorization and Enforceability................................
7.9. No Legal Obstacle to Agreements.................................
7.10. Defaults........................................................
7.11. Licenses, etc...................................................
7.12. Tax Returns.....................................................
7.13. Certain Business Representations................................
7.13.1. Product Liability Matters..............................
7.13.2. Antitrust..............................................
7.13.3. Consumer Protection....................................
7.13.4. Future Expenditures....................................
7.14. Transactions with Affiliates....................................
7.15. Pension Plans...................................................
7.16. Foreign Trade Regulations; Government Regulation; Margin Stock..
7.16.1. Foreign Trade Regulations..............................
7.16.2. Government Regulation..................................
7.16.3. Margin Stock...........................................
7.17. Disclosure......................................................
8. Defaults..............................................................
8.1. Events of Default...............................................
8.1.1. Payment.................................................
8.1.2. Specified Covenants.....................................
8.1.3. Other Covenants.........................................
8.1.4. Representations and Warranties..........................
8.1.5. Cross Default, etc......................................
8.1.6. Ownership; Liquidation; etc.............................
8.1.8. Judgment................................................
8.1.9. ERISA...................................................
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C>
8.1.10. Bankruptcy, etc.....................................
8.2. Certain Actions Following an Event of Default................
8.2.1. Terminate Obligations to Extend Credit..............
8.2.2. Specific Performance; Exercise of Rights............
8.2.3. Acceleration........................................
8.2.4. Enforcement of Payment; Credit Security; Setoff.....
8.2.5. Cumulative Remedies.................................
8.3. Annulment of Defaults........................................
8.4. Waivers......................................................
9. Expenses; Indemnity.................................................
9.1. Expenses.....................................................
9.2. General Indemnity............................................
9.3. Indemnity With Respect to Letters of Credit..................
10. Operations; Agent...................................................
10.1. Interests in Credits.........................................
10.2. Agent's Authority to Act, etc................................
10.3. Borrower to Pay Agent, etc...................................
10.4. Lender Operations for Advances, Letters of Credit, etc.......
10.4.1. Advances...........................................
10.4.2. Letters of Credit..................................
10.4.3. Agent to Allocate Payments, etc....................
10.4.4. Delinquent Lenders; Nonperforming Lenders..........
10.5. Sharing of Payments, etc.....................................
10.6. Amendments, Consents, Waivers, etc...........................
10.7. Agent's Resignation..........................................
10.8. Concerning the Agent.........................................
10.8.1. Action in Good Faith, etc..........................
10.8.2. No Implied Duties, etc.............................
10.8.3. Validity, etc......................................
10.8.4. Compliance.........................................
10.8.5. Employment of Agents and Counsel...................
10.8.6. Reliance on Documents and Counsel..................
10.8.7. Agent's Reimbursement..............................
10.9. Rights as a Lender...........................................
10.10. Independent Credit Decision..................................
10.11. Indemnification..............................................
11. Successors and Assigns; Lender Assignments and Participations
11.1. Assignments by Lenders.......................................
11.1.1. Assignees and Assignment Procedures................
11.1.2. Terms of Assignment and Acceptance.................
11.1.3. Register...........................................
11.1.4. Acceptance of Assignment and Assumption............
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
11.1.5. Federal Reserve Bank................................
11.1.6. Further Assurances..................................
11.2. Credit Participants.........................................
11.3. Replacement of Lender.......................................
12. Confidentiality....................................................
13. Foreign Lenders....................................................
14. Notices............................................................
15. Course of Dealing; Amendments and Waivers..........................
16. Defeasance.........................................................
17. Venue; Service of Process..........................................
18. WAIVER OF JURY TRIAL...............................................
19. No Strict Construction.............................................
20. General............................................................
</TABLE>
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<PAGE> 8
EXHIBITS
<TABLE>
<S> <C>
2.1.4 - Revolving Note
2.2.2 - Term Loan Note
5.1.4 - Guarantee and Security Agreement
5.2.1 - Officer's Certificate
6.9.2 - Foreign Subsidiary Subordination Agreement
7.1 - Company and its Subsidiaries
7.2.2 - Material Agreements
7.3 - Financing Debt, Certain Investments, etc.
7.13.1 - Product Liability Claims
7.14 - Affiliate Transactions
7.15 - Multi-employer and Defined Benefit Plans
10.1 - Percentage Interests
11.1.1 - Assignment and Acceptance
</TABLE>
1
<PAGE> 9
RACING CHAMPIONS, INC.
AMENDED AND RESTATED CREDIT AGREEMENT
This Agreement dated as of June 17, 1997, is among Racing Champions
Corporation, a Delaware corporation formerly known as Collectible Champions,
Inc., the Subsidiaries of Racing Champions Corporation from time to time party
hereto, including Racing Champions Inc., the Lenders from time to time party
hereto and BankBoston, N.A., formerly known as The First National Bank of
Boston, both in its capacity as a Lender and in its capacity as agent for
itself and the other Lenders. The parties agree as follows:
Recitals: Pursuant to this Agreement, the Lenders are extending to the
Borrower a $5,000,000 revolving credit facility, including a $1,500,000 Letter
of Credit facility, and a $22,000,000 term loan facility. All credit
facilities mature on June 28, 2002. These credit facilities are guaranteed by
the Company and the Company's Subsidiaries and are secured by liens on
substantially all the assets (including stock of Subsidiaries) of the Company
and its Subsidiaries.
1. Restatement; Definitions; etc.
1.1. Amendment and Restatement. Effective as of the Initial Closing Date,
this Agreement amends and restates in its entirety the Credit Agreement dated
as of April 30, 1996, as amended and in effect on the date hereof, among the
Company, its Subsidiaries and a group of lenders for which BankBoston, N.A. is
acting as agent. On the Initial Closing Date the Lenders will make such
assignments and other arrangements among themselves so that the Notes and
Letter of Credit Exposure are held by the Lenders in accordance with their
Percentage Interests. Amounts in respect of interest, commitment fees, Letter
of Credit fees and other amounts payable hereunder shall be payable in
accordance with the terms of the Credit Agreement referred to above as in
effect prior to the amendment and restatement on the Initial Closing Date for
periods prior to the Initial Closing Date and in accordance with this Agreement
(as it amends and restates such Credit Agreement) for periods from and after
the Initial Closing Date.
1.2. Definitions; Certain Rules of Construction. Certain capitalized
terms are used in this Agreement and in the other Credit Documents with the
specific meanings defined below in this Section 1. Except as otherwise
explicitly specified to the contrary or unless the context clearly requires
otherwise, (a) the capitalized term "Section" refers to sections of this
Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this
Agreement, (c) references to a particular
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<PAGE> 10
Section include all subsections thereof, (d) the word "including" shall be
construed as "including without limitation", (e) accounting terms not otherwise
defined herein have the meaning provided under GAAP, (f) references to a
particular statute or regulation include all rules and regulations thereunder
and any successor statute, regulation or rules, in each case as from time to
time in effect and (g) references to a particular Person include such Person's
successors and assigns to the extent not prohibited by this Agreement and the
other Credit Documents. References to "the date hereof" mean the date first
set forth above.
1.3. "Accumulated Benefit Obligations" means the actuarial present value
of the accumulated benefit obligations under any Plan, calculated in accordance
with Statement No. 87 of the Financial Accounting Standards Board.
1.4. "Acquisition" means the following acquisitions consummated on April
30, 1996: (a) the acquisition by the Company of all the stock of the Borrower,
(b) the acquisition by the Borrower of all the assets of Dods-Meyer, Ltd. and
(c) the acquisition by Banerjan of all the assets of Racing Champions Limited,
Garnett Services, Inc. and Hosten Investment Limited.
1.5. "Acquisition Agreement" means the Asset and Stock Purchase Agreement
dated as of April 30, 1996 among the Company, the Borrower, Banerjan and the
Sellers furnished to the Lenders without subsequent modification or amendment
except to the extent permitted hereby.
1.6. "Affected Lender" is defined in Section 11.3.
1.7. "Affiliate" means, with respect to the Company (or any other
specified Person), any other Person directly or indirectly controlling,
controlled by or under direct or indirect common control with the Company (or
such specified Person), and shall include (a) any officer or director of the
Company (or such specified Person) and (b) any Person of which the Company (or
such specified Person) or any Affiliate (as defined in clause (a) above) of the
Company (or such specified Person) shall, directly or indirectly, beneficially
own at least 10% of the outstanding equity securities having the general power
to vote.
1.8. "Agent" means BankBoston in its capacity as agent for the Lenders
hereunder, as well as its successors and assigns in such capacity pursuant to
Section 10.7.
1.9. "Agreement" means this Agreement as from time to time amended,
modified and in effect.
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<PAGE> 11
1.10. "Applicable Margin" means, on each day during the then current
fiscal quarter, the percentage in the table below set opposite the ratio which
(a) Consolidated Total Debt on the last day of the most recent fiscal quarter
for which financial statements have been (or are required to have been)
furnished to the Lenders in accordance with Section 6.4.2 prior to the
beginning of the then current fiscal quarter bore to (b) Consolidated EBITDA
for the period of four consecutive fiscal quarters ended on the last day of
such most recent fiscal quarter:
<TABLE>
<CAPTION>
Base Rate Eurodollar
Ratio of Consolidated Total Debt Applicable Applicable
to Consolidated EBITDA Margin Margin
- --------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Greater than or equal to 300% 0.75% 2.25%
Less than 300% and greater than or equal to 250% 0.50% 2.00%
Less than 250% d greater than or equal to 200% 0.25% 1.75%
Less than 200% 0.00% 1.50%
</TABLE>
1.11. "Applicable Rate" means, at any date:
-------------------------------------
(a) with respect to each portion of the Loan subject to a Eurodollar
Pricing Option, the sum of the Applicable Margin for Eurodollar Pricing
Options plus the Eurodollar Rate with respect to such Eurodollar Pricing
Option; and
(b) with respect to each other portion of the Loan, the sum of the
Applicable Margin for the Base Rate plus the Base Rate;
provided, however, that the Applicable Rate shall be the sum of 3% plus the
Base Rate on the day the Agent notifies the Company that the interest rates
hereunder are increasing as a result of the occurrence and continuance of an
Event of Default until the earlier of such time as (i) such Event of Default is
no longer continuing or (ii) such Event of Default is deemed no longer to exist
pursuant to Section 8.3.
1.12. "Assignee" is defined in Section 11.1.1.
1.13. "Assignment and Acceptance" is defined in Section 11.1.1.
1.14. "Banerjan" means Racing Champions, Limited, a Hong Kong limited
liability company, formerly known as "Banerjan Company Limited," that is a
Wholly Owned Subsidiary of the Borrower.
1.15. "BankBoston" means BankBoston, N.A., formerly known as The First
National Bank of Boston.
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<PAGE> 12
1.16. "Banking Day" means any day other than Saturday, Sunday or a day on
which banks in Boston, Massachusetts or Chicago, Illinois are authorized or
required by law or other governmental action to close and, if such term is used
with reference to a Eurodollar Pricing Option, any day on which dealings are
effected in the Eurodollars in question by first-class banks in the inter-bank
Eurodollar markets in New York, New York.
1.17. "Bankruptcy Code" means Title 11 of the United States Code.
1.18. "Bankruptcy Default" means an Event of Default referred to in
Section 8.1.10.
1.19. "Base Rate" means, on any date, the greater of (a) the rate of
interest announced by BankBoston at the Boston Office as its Base Rate or (b)
the sum of 1/2% plus the Federal Funds Rate.
1.20. "Borrower" means Racing Champions, Inc., an Illinois corporation.
1.21. "Borrowing Base" means, on any date, the sum of:
(a) 85% of Eligible Accounts Receivable,
plus (b) 50% of Eligible Inventory,
in each case as shown on the most recent monthly Borrowing Base report
furnished (or required to have been furnished) to the Lenders in accordance
with 6.4.3.
1.22. "Boston Office" means the principal banking office of BankBoston in
Boston, Massachusetts.
1.23. "By-laws" means all written by-laws, rules, regulations and all
other documents relating to the management, governance or internal regulation
of any Person other than an individual, or interpretive of the Charter of such
Person, all as from time to time in effect.
1.24. "Capital Expenditures" means, for any period, amounts added or
required to be added to the property, plant and equipment or other fixed assets
account on the Consolidated balance sheet of the Company and its Subsidiaries,
prepared in accordance with GAAP, in respect of (a) the acquisition,
construction, improvement or replacement of land, buildings, machinery,
equipment, leaseholds
4
<PAGE> 13
and any other real or personal property, (b) to the extent not included in
clause (a) above, materials, contract labor and direct labor relating thereto
(excluding amounts properly expensed as repairs and maintenance in accordance
with GAAP) and (c) software development costs to the extent not expensed.
1.25. "Capitalized Lease" means any lease which is required to be
capitalized on the balance sheet of the lessee in accordance with GAAP,
including Statement Nos. 13 and 98 of the Financial Accounting Standards Board.
1.26. "Capitalized Lease Obligations" means the amount of the liability
reflecting the aggregate discounted amount of future payments under all
Capitalized Leases calculated in accordance with GAAP, including Statement Nos.
13 and 98 of the Financial Accounting Standards Board.
1.27. "Cash Equivalents" means:
(a) negotiable certificates of deposit, time deposits (including
sweep accounts), demand deposits and bankers' acceptances having a
maturity of 12 months or less and issued by any United States financial
institution having capital and surplus and undivided profits aggregating
at least $100,000,000 and rated at least Prime-1 by Moody's or A-1 by S&P
or issued by any Lender;
(b) corporate obligations having a maturity of 12 months or less and
rated at least Prime-1 by Moody's or A-1 by S&P or issued by any Lender;
(c) any direct obligation of the United States of America or any
agency or instrumentality thereof, or of any state or municipality
thereof, (i) which has a remaining maturity at the time of purchase of
not more than one year or which is subject to a repurchase agreement with
any Lender (or any other financial institution referred to in clause (a)
above) exercisable within one year from the time of purchase and (ii)
which, in the case of obligations of any state or municipality, is rated
at least Aa by Moody's or AA by S&P;
(d) any mutual fund or other pooled investment vehicle rated at
least Aa by Moody's or AA by S&P which invests principally in obligations
described above; and
(e) any similar investments with comparable risk status issued by
Persons located in Hong Kong.
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<PAGE> 14
1.28. "Charter" means the articles of organization, certificate of
incorporation, statute, constitution, joint venture agreement, partnership
agreement, trust indenture, limited liability company agreement or other
charter document of any Person other than an individual, each as from time to
time in effect.
1.29. "Closing Date" means the Initial Closing Date and each other date on
which any extension of credit is made pursuant to Sections 2.1, 2.2 or 2.3.
1.30. "Code" means the federal Internal Revenue Code of 1986.
1.31. "Commitment" means, with respect to any Lender, such Lender's
obligations to extend the credits contemplated by Section 2. The original
Commitments are set forth in Exhibit 10.1 and the current Commitments are
recorded from time to time in the Register.
1.32. "Company" means Racing Champions Corporation, a Delaware corporation
formerly known as Collectible Champions, Inc.
1.33. "Computation Covenants" means Sections 6.5, 6.6.7, 6.6.13, 6.6.14,
6.7.3, 6.9.5, 6.9.7, 6.10.2, 6.11.1, 6.11.4 and 6.12.2.
1.34. "Consolidated" and "Consolidating", when used with reference to any
term, mean that term as applied to the accounts of the Company (or other
specified Person) and all of its Subsidiaries (or other specified group of
Persons), or such of its Subsidiaries as may be specified, consolidated (or
combined) or consolidating (or combining), as the case may be, in accordance
with GAAP and with appropriate deductions for minority interests in
Subsidiaries.
1.35. "Consolidated Adjusted EBITDA" means, for any period:
(a) Consolidated EBITDA,
minus (b) Capital Expenditures;
minus (c) taxes based upon or measured by net income that are actually
paid in cash during such period.
1.36. "Consolidated EBITDA" means, for any period, the total of:
(a) Consolidated Net Income;
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<PAGE> 15
plus (b) all amounts deducted in computing such Consolidated Net
Income in respect of:
(i) depreciation, amortization and other non-cash
expenses and charges,
(ii) Consolidated Interest Expense,
(iii) taxes based upon or measured by net income, and
(iv) fees and expenses payable on or about the
Initial Closing Date with respect to the
Acquisition or the Credit Documents.
1.37. "Consolidated Excess Cash Flow" means, for any period, the total of:
(a) Consolidated EBITDA,
minus (b) the aggregate amount of Capital Expenditures permitted under
Section 6.5.5 for such period,
minus (c) taxes based upon or measured by net income that are actually
paid in cash,
minus (d) Consolidated Fixed Charges (but in no event including
contingent prepayments required by Section 4.3),
minus (e) voluntary prepayments of the Term Loan in accordance with
Section 4.4,
minus (f) voluntary permanent reductions of the Maximum Amount of
Revolving Credit pursuant to Section 2.1.2(b),
minus (g) in the event Consolidated Working Capital Factor is a positive
number, the lesser of:
(i) $1,000,000 or
(ii) Consolidated Working Capital Factor,
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<PAGE> 16
plus (h) in the event Consolidated Working Capital Factor is a
negative number, the lesser of:
(i) $1,000,000 or
(ii) Consolidated Working Capital Factor; provided, however,
that for all purposes of computing Consolidated Excess
Cash Flow, the amount of Consolidated Working Capital
Factor described in this paragraph (h) shall be treated
as a positive number.
1.38. "Consolidated Fixed Charges" means, for any period, the sum of:
(a) Consolidated Interest Expense;
plus (b) the aggregate amount of all mandatory scheduled payments and
sinking fund payments (to the extent reduced by any voluntary
prepayments) with respect to principal paid by the Company and its
Subsidiaries in respect of Consolidated Total Debt, including payments in
the nature of principal under Capitalized Leases, but in no event
including contingent prepayments required by Section 4.3;
plus (c) any mandatory dividends required to be paid in cash by the
Company or any of its Subsidiaries to third parties.
1.39. "Consolidated Interest Expense" means, for any period, (a) the
aggregate amount of interest expense (other than PIK Interest), including in
any event commitment fees, payments in the nature of interest under Capitalized
Leases, net payments under Interest Rate Protection Agreements and letter of
credit fees and expenses, accrued by the Company and its Subsidiaries in
accordance with GAAP on a Consolidated basis minus (b) to the extent included
in the foregoing clause (a), amortization of Indebtedness financing costs.
1.40. "Consolidated Net Income" means, for any period, the net income (or
loss) of the Company and its Subsidiaries, determined in accordance with GAAP
on a Consolidated basis; provided, however, that Consolidated Net Income shall
not include:
(a) the income (or loss) of any Person accrued prior to the date
such Person becomes a Subsidiary or is merged into or consolidated with
the Company or any of its Subsidiaries;
8
<PAGE> 17
(b) the income (or loss) of any Person (other than a Subsidiary) in
which the Company or any of its Subsidiaries has an ownership interest;
provided, however, that (i) Consolidated Net Income shall include amounts
in respect of the income of such Person when actually received in cash by
the Company or such Subsidiary in the form of dividends or similar
Distributions and (ii) Consolidated Net Income shall be reduced by the
aggregate amount of all Investments, regardless of the form thereof, made
by the Company or any of its Subsidiaries in such Person for the purpose
of funding any deficit or loss of such Person;
(c) all amounts included in computing such net income (or loss) in
respect of (i) the write-up of any asset on or after the Initial Closing
Date, including the subsequent amortization or expensing of the
written-up portion of assets, or (ii) the retirement of any Indebtedness
or equity at less than face value after the Initial Closing Date;
(d) non-cash extraordinary or nonrecurring gains and losses;
(e) the income of any Subsidiary to the extent the payment of such
income in the form of a Distribution or repayment of Indebtedness to the
Company or a Wholly Owned Subsidiary is not permitted, whether on account
of any Charter or By-law restriction, any agreement, instrument, deed or
lease or any law, statute, judgment, decree or governmental order, rule
or regulation applicable to such Subsidiary; and
(f) any after-tax gains or losses attributable to returned surplus
assets of any Plan.
1.41. "Consolidated Net Revenue" means, for any period, the net revenues
(including reductions for returns, discounts and commissions) of the Company
and its Subsidiaries in accordance with GAAP on a Consolidated basis.
1.42. "Consolidated Total Debt" means, at any date, all Financing Debt of
the Company and its Subsidiaries on a Consolidated basis.
1.43. "Consolidated Working Capital Factor" means, for any period, the
amount (whether positive or negative) equal to:
9
<PAGE> 18
Assets
(a) Account Receivable:
(i) the amount, if any, by which
accounts receivable at the end of such period were
greater than accounts receivable at the beginning of
such period,
minus (ii) the amount, if any, by which accounts receivable at
the end of such period were less than accounts
receivable at the beginning of such period,
(b) Inventory:
plus (i) the amount, if any, by which inventory at the end of
such period was greater than inventory at the
beginning of such period,
minus (ii) the amount, if any, by which inventory at the end of
such period was less than inventory at the beginning
of such period,
(c) Prepaid Expenses:
plus (i) the amount, if any, by which prepaid expenses at the
end of such period were greater than prepaid expenses
at the beginning of such period,
minus (ii) the amount, is any, by which prepaid expenses at the
end of such period were less than prepaid expenses at
the beginning of such period,
(d) Manufacturers Advances and Manufacturers Notes
Receivable:
plus (i) the amount, if any, by which manufacturers advances
and manufacturers notes receivable at the end of such
period were greater than manufacturers advances and
manufacturers notes receivable at the beginning of
such period,
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<PAGE> 19
minus (ii) the amount, if any, by which manufacturers advances
and manufacturers notes receivable at the end of such
period were less than manufacturers advances and
manufacturers notes receivable at the beginning of
such period,
Liabilities
(e) Accounts Payable:
plus (i) the amount, if any, by which accounts payable at the
end of such period were less than accounts payable at
the beginning of such period,
minus (ii) the amount, if any, by which accounts payable at the
end of such period were greater than accounts payable
at the beginning of such period,
(f) Accrued Expenses:
plus (i) the amount, if any, by which accrued expenses at the
end of such period were less than accrued expenses at
the beginning of such period,
minus (ii) the amount, if any, by which accrued expenses at the
end of such period were greater than accrued expenses
at the beginning of such period,
all with respect to the Company and its Subsidiaries as determined in
accordance with GAAP on a Consolidated basis.
1.44. "Credit Documents" means:
(a) this Agreement, the Notes, each Letter of Credit, each draft
presented or accepted under a Letter of Credit, the Guarantee and
Security Agreement, the Hong Kong Guarantee, the Hong Kong Collateral
Debenture, the fee agreement contemplated by Section 5.1.2 and each
Interest Rate Protection Agreement provided by a Lender (or an Affiliate
of a Lender) to the Company or any of its Subsidiaries, each as from time
to time in effect;
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(b) all financial statements, reports, mortgages, assignments, UCC
financing statements or officer certificates delivered to the Agent or
any of the Lenders by the Company, any of its Subsidiaries or any other
Obligor in connection herewith or therewith; and
(c) any other present or future agreement or instrument from time to
time entered into among the Company, any of its Subsidiaries or any other
Obligor, on one hand, and the Agent, any Letter of Credit Issuer or all
the Lenders, on the other hand, amending or modifying this Agreement or
any other Credit Document referred to above or which is stated to be a
Credit Document, each as from time to time in effect.
1.45. "Credit Obligations" means all present and future liabilities,
obligations and Indebtedness of the Company, any of its Subsidiaries or any
other Obligor owing to the Agent or any Lender (or any Affiliate of a Lender)
under or in connection with this Agreement or any other Credit Document,
including obligations in respect of principal, interest, reimbursement
obligations under Letters of Credit and Interest Rate Protection Agreements
provided by a Lender (or an Affiliate of a Lender), commitment fees, Letter of
Credit fees, amounts provided for in Sections 3.2.4, 3.5 and 9 and other fees,
charges, indemnities and expenses from time to time owing hereunder or under
any other Credit Document (whether accruing before or after a Bankruptcy
Default).
1.46. "Credit Participant" is defined in Section 11.2.
1.47. "Credit Security" means all assets now or from time to time
hereafter subjected to a security interest, mortgage or charge (or intended or
required so to be subjected pursuant to the Guarantee and Security Agreement or
any other Credit Document) to secure the payment or performance of any of the
Credit Obligations, including the assets described in section 3.1 of the
Guarantee and the Security Agreement.
1.48. "Default" means any Event of Default and any event or condition
which with the passage of time or giving of notice, or both, would become an
Event of Default and the filing against the Company or any other Obligor of a
petition commencing an involuntary case under the Bankruptcy Code.
1.49. "Delinquency Period" is defined in Section 10.4.4.
1.50. "Delinquent Lender" is defined in Section 10.4.4.
1.51. "Delinquent Payment" is defined in Section 10.4.4.
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1.52. "Designated Affiliate Equity Proceeds" means, with respect to a
particular covenant or other provision in this Agreement, the proceeds from the
issuance of shares of capital stock of the Company to, or from receipt by the
Company of capital contributions from, members of the Management Group, the
Willis Stein Group or officers, employees and directors of the Obligors, to the
extent that (a) the Company designates in writing to the Agent that such
proceeds will be applied to such covenant or provision and (b) such proceeds
are not then applied to any other covenant or provision.
1.53. "Distribution" means, with respect to the Company (or other
specified Person):
(a) the declaration or payment of any dividend or distribution,
including dividends payable in shares of capital stock of or other equity
interests in the Company (or such specified Person), on or in respect of
any shares of any class of capital stock of or other equity interests in
the Company (or such specified Person);
(b) the purchase, redemption or other retirement of any shares of
any class of capital stock of or other equity interest in the Company (or
such specified Person) or of options, warrants or other rights for the
purchase of such shares, directly, indirectly through a Subsidiary or
otherwise;
(c) any other distribution on or in respect of any shares of any
class of capital stock of or equity or other beneficial interest in the
Company (or such specified Person);
(d) any payment of principal or interest with respect to, or any
purchase, redemption or defeasance of, any Financing Debt of the Company
(or such specified Person) which by its terms or the terms of any
agreement is subordinated to the payment of the Credit Obligations; and
(e) any payment, loan or advance by the Company (or such specified
Person) to, or any other Investment by the Company (or such specified
Person) in, the holder of any shares of any class of capital stock of the
Company (or such specified Person), or any Affiliate of such holder,
including the payment of management and transaction fees and expenses;
provided, however, that the term 'Distribution" shall not include (i) dividends
payable in perpetual common stock of or other similar equity interests in the
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Company (or such specified Person) or (ii) payments in the ordinary course of
business in respect of (A) reasonable compensation paid to employees, officers
and directors, (B) advances and reimbursements to employees for relocation
expenses, travel expenses, drawing accounts and similar expenditures, or (C)
rent paid to, or accounts payable for services rendered or goods sold by,
non-Affiliates that own capital stock of or other equity interests in the
Company (or such specified Person).
1.54. "Domestic Subsidiary" means any Subsidiary that is not a
Foreign Subsidiary.
1.55. "Eligible Accounts Receivable" means, at any date:
(a) the aggregate amount carried as accounts receivable (reduced
in accordance with GAAP for doubtful accounts and customer
returns) on the Consolidated balance sheet of the Company and
its Subsidiaries determined in accordance with GAAP;
minus (b) the aggregate amount of any such accounts receivable that are
more than 60 days past due except to the extent guaranteed by
a Person whose unsecured senior long-term debt obligations
are rated at least Baa by Moody's and BBB by S&P;
minus (c) discounts, commissions and distribution fees payable by the
Company or any Subsidiary (other than to the Company or a
Wholly owned Subsidiary) in respect of such accounts
receivable;
minus (d) the amount of such accounts receivable due from Affiliates;
minus (e) all payments of such accounts receivable to be made in a
currency other than United States Funds that is not freely
convertible into United States Funds or that may not be freely
withdrawn from the country of origin;
minus (f) such accounts receivable subject to Liens other than Liens
securing the Credit Obligations.
1.56. "Eligible Inventory" means, at any date:
(a) the aggregate amount carried as inventory, at
the lower of cost or market value, on the most recent
Consolidated balance
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sheet of the Company and its Subsidiaries in
accordance with GAAP;
minus (b) advance payments from customers reflected on such balance
sheet.
1.57. "Equity Transaction" means any issuance by the Company or any of its
Subsidiaries to any Person (other than any Obligors, their officers, employees
and directors, the Willis Stein Group or the Management Group) of any shares of
its capital stock, other equity interests or options, warrants or other
purchase rights to acquire such capital stock or other equity interests;
provided, however, that in no event shall the Public Offering constitute an
"Equity Transaction".
1.58. "ERISA" means the federal Employee Retirement Income Security Act of
1974.
1.59. "ERISA Group Person" means the Company, any Subsidiary of the
Company and any Person which is a member of the controlled group or under
common control with the Company or any Subsidiary within the meaning of section
414 of the Code or section 4001(a)(14) of ERISA.
1.60. "Eurodollars" means, with respect to any Lender, deposits of United
States Funds in a non-United States office or an international banking facility
of such Lender.
1.61. "Eurodollar Basic Rate" means, for any Eurodollar Interest Period,
the rate of interest at which Eurodollar deposits in an amount comparable to
the portion of the Loan as to which a Eurodollar Pricing Option has been
elected and which have a term corresponding to such Eurodollar Interest Period
are offered to BankBoston by first class banks in the inter-bank Eurodollar
market for delivery in immediately available funds at a Eurodollar Office on
the first day of such Eurodollar Interest Period as determined by BankBoston at
approximately 10:00 a.m. (Boston time) two Banking Days prior to the date upon
which such Eurodollar Interest Period is to commence (which determination by
BankBoston shall, in the absence of manifest error, be conclusive).
1.62. "Eurodollar Interest Period" means any period, selected as provided
in Section 3.2.1, of one, two, three or six months, commencing on any Banking
Day and ending on the corresponding date in the subsequent calendar month so
indicated (or, if such subsequent calendar month has no corresponding date, on
the last day of such subsequent calendar month); provided, however, that
subject to Section 3.2.3, if any Eurodollar Interest Period so selected would
otherwise begin
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or end on a date which is not a Banking Day, such Eurodollar Interest Period
shall instead begin or end, as the case may be, on the immediately preceding or
succeeding Banking Day as determined by the Agent in accordance with the then
current banking practice in the inter-bank Eurodollar market with respect to
Eurodollar deposits at the applicable Eurodollar Office, which determination by
the Agent shall, in the absence of manifest error, be conclusive.
1.63. "Eurodollar Office" means such non-United States office or
international banking facility of any Lender as the Lender may from time to
time select.
1.64. "Eurodollar Pricing Options" means the options granted pursuant to
Section 3.2.1 to have the interest on any portion of the Loan computed on the
basis of a Eurodollar Rate.
1.65. "Eurodollar Rate" for any Eurodollar Interest Period means the rate,
rounded upward to the nearest 1/100%, obtained by dividing (a) the Eurodollar
Basic Rate for such Eurodollar Interest Period by (b) an amount equal to 1
minus the Eurodollar Reserve Rate; provided, however, that if at any time
during such Eurodollar Interest Period the Eurodollar Reserve Rate applicable
to any outstanding Eurodollar Pricing Option changes, the Eurodollar Rate for
such Eurodollar Interest Period shall automatically be adjusted to reflect such
change, effective as of the date of such change to the extent required by the
Legal Requirement implementing the change in the Eurodollar Reserve Rate.
1.66. "Eurodollar Reserve Rate" means the stated maximum rate (expressed
as a decimal) of all reserves (including any basic, supplemental, marginal or
emergency reserve or any reserve asset), if any, as from time to time in
effect, required by any Legal Requirement to be maintained by any Lender
against (a) "Eurocurrency liabilities" as specified in Regulation D of the
Board of Governors of the Federal Reserve System applicable to Eurodollar
Pricing Options, (b) any other category of liabilities that includes Eurodollar
deposits by reference to which the interest rate on portions of the Loan
subject to Eurodollar Pricing Options is determined, (c) the principal amount
of or interest on any portion of the Loan subject to a Eurodollar Pricing
Option or (d) any other category of extensions of credit, or other assets, that
includes loans subject to a Eurodollar Pricing Option by a non-United States
office of any of the Lenders to United States residents.
1.67. "Event of Default" is defined in Section 8.1.
1.68. "Exchange Act" means the federal Securities Exchange Act of 1934.
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1.69. "Federal Funds Rate" means, for any day, the rate equal to the
weighted average (rounded to the nearest 1/8%) of the rates on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, (a) as such weighted average is published for such
day (or, if such day is not a Banking Day, for the immediately preceding
Banking Day) by the Federal Reserve Bank of New York or (b) if such rate is not
so published for such Banking Day, as determined by the Agent using any
reasonable means of determination. Each determination by the Agent of the
Federal Funds Rate shall, in the absence of manifest error, be conclusive.
1.70. "Final Maturity Date" means June 28, 2002.
1.71. "Financial Officer" of the Company (or other specified Person) means
its chief executive officer, chief financial officer, chief operating officer,
chairman, president, controller, treasurer, assistant treasurer or any of its
vice presidents whose primary responsibility is for its financial affairs, all
of whose incumbency and signatures have been certified to the Agent by the
secretary or other appropriate attesting officer of the Company (or such
specified Person).
1.72. "Financing Debt" means each of the items described in clauses (a)
through (f) of the definition of the term "Indebtedness" and, without
duplication, any Guarantees of such items; provided, however, that in no event
will the Junior Subordinated Notes constitute Financing Debt.
1.73. "Foreign Subsidiary" means each Subsidiary that is organized under
the laws of, and conducting its business primarily in a jurisdiction outside
of, the United States of America.
1.74. "Foreign Trade Regulations" means (a) any act that prohibits or
restricts, or empowers the President or any executive agency of the United
States of America to prohibit or restrict, exports to or financial transactions
with any foreign country or foreign national, (b) the regulations with respect
to certain prohibited foreign trade transactions set forth at 22 C.F.R. Parts
120-130 and 31 C.F.R. Part 500 and (c) any order, regulation, ruling,
interpretation, direction, instruction or notice relating to any of the
foregoing.
1.75. "Funding Liability" means (a) any Eurodollar deposit which was used
(or deemed by Section 3.2.6 to have been used) to fund any portion of the Loan
subject to a Eurodollar Pricing Option, and (b) any portion of the Loan subject
to a Eurodollar Pricing Option funded (or deemed by Section 3.2.6 to have been
funded) with the proceeds of any such Eurodollar deposit.
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1.76. "GAAP" means generally accepted accounting principles as from time
to time in effect, including the statements and interpretations of the United
States Financial Accounting Standards Board; provided, however, that for
purposes of compliance with Section 6 (other than Section 6.4) and the related
definitions, "GAAP" means such principles as in effect on December 31, 1996 as
applied by the Company in the preparation of the annual financial statements
referred to in Section 7.2.1(a), and consistently followed, without giving
effect to any subsequent changes thereto.
1.77. "Guarantee" means, with respect to the Company (or other specified
Person):
(a) any guarantee by the Company (or such specified Person) of the
payment or performance of, or any contingent obligation by the Company
(or such specified Person) in respect of, any Indebtedness or other
obligation of any primary obligor;
(b) any other arrangement whereby credit is extended to a primary
obligor on the basis of any promise or undertaking of the Company (or
such specified Person), including any binding "comfort letter" or "keep
well agreement" written by the Company (or such specified Person), to a
creditor or prospective creditor of such primary obligor, to (i) pay the
Indebtedness of such primary obligor, (ii) purchase an obligation owed by
such primary obligor, (iii) pay for the purchase or lease of assets or
services regardless of the actual delivery thereof or (iv) maintain the
capital, working capital, solvency or general financial condition of such
primary obligor;
(c) any liability of the Company (or such specified Person), as a
general partner of a partnership in respect of Indebtedness or other
obligations of such partnership;
(d) any liability of the Company (or such specified Person) as a
joint venturer of a joint venture in respect of Indebtedness or other
obligations of such joint venture;
(e) any liability of the Company (or such specified Person) with
respect to the tax liability of others as a member of a group (other than
a group consisting solely of the Company and its Subsidiaries) that is
consolidated for tax purposes; and
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(f) reimbursement obligations, whether contingent or matured, of the
Company (or such specified Person) with respect to letters of credit,
bankers acceptances, surety bonds, other financial guarantees and
Interest Rate Protection Agreements,
whether or not any of the foregoing are reflected on the balance sheet of the
Company (or such specified Person) or in a footnote thereto; provided, however,
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The amount of any Guarantee and the
amount of Indebtedness resulting from such Guarantee shall be the maximum
amount that the guarantor may become obligated to pay in respect of the
obligations (whether or not such obligations are outstanding at the time of
computation) and, for purposes of covenant calculations, shall be without
duplication of guaranteed Indebtedness that is already included in such
calculations.
1.78. "Guarantee and Security Agreement" is defined in Section 5.1.4.
1.79. "Guarantor" means the Company, Banerjan and each Subsidiary which
subsequently becomes party to the Guarantee and Security Agreement or any other
Credit Document as a Guarantor.
1.80. "Hong Kong Collateral Debenture" means the Debenture dated as of
April 30, 1996, as from time to time in effect, from Banerjan to the Agent.
1.81. "Hong Kong Guarantee" means the Guarantee Agreement dated as of
April 30, 1996, as from time to time in effect, from Banerjan to the Agent.
1.82. "Indebtedness" means all obligations, contingent or otherwise, which
in accordance with GAAP are required to be classified upon the face of the
balance sheet of the Company (or other specified Person) as liabilities, but in
any event including (without duplication):
(a) borrowed money;
(b) indebtedness evidenced by notes, debentures or similar
instruments;
(c) Capitalized Lease Obligations;
(d) the deferred purchase price of assets or securities, including
related noncompetition and consulting obligations, payable in cash (other
than ordinary trade accounts payable in the ordinary course of business);
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(e) mandatory redemption or dividend rights on capital stock (or
other equity) required to be paid in cash;
(f) reimbursement obligations, whether contingent or matured, with
respect to letters of credit, bankers acceptances, surety bonds, other
financial guarantees and Interest Rate Protection Agreements (without
duplication of other Indebtedness supported or guaranteed thereby);
(g) liabilities secured by any Lien existing on property owned or
acquired by the Company (or such specified Person), whether or not the
liability secured thereby shall have been assumed; and
(h) all Guarantees in respect of Indebtedness of others.
1.83. "Indemnified Party" is defined in Section 9.2.
1.84. "Initial Closing Date" means June 17, 1997 or such other date prior
to June 30, 1997 agreed to by the Company and the Agent as the first Closing
Date hereunder.
1.85. "Interest Rate Protection Agreement" means any interest rate swap,
interest rate cap, interest rate hedge or other contractual arrangement that
converts variable interest rates into fixed interest rates, fixed interest
rates into variable interest rates or other similar arrangements.
1.86. "Investment" means, with respect to the Company (or other specified
Person):
(a) any share of capital stock, partnership or other equity
interest, evidence of Indebtedness or other security issued to the
Company (or other specified Person) by any other Person;
(b) any loan, advance or extension of credit by the Company (or
other specified Person) to, or contribution to the capital of, any other
Person;
(c) any Guarantee by the Company (or other specified Person) of the
Indebtedness of any other Person;
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(d) any acquisition by the Company (or other specified Person) of
all, or any division or similar operating unit of, the business of any
other Person or the assets comprising such business,
division or unit; and
(e) any other similar investment.
The investments described in the foregoing clauses (a) through (e) shall
be included in the term "Investment" whether they are made or acquired by
purchase, exchange, issuance of stock or other securities, merger,
reorganization or any other method; provided, however, that the term
"Investment" shall not include (i) current trade and customer accounts
receivable for property leased, goods furnished or services rendered in the
ordinary course of business and payable in accordance with customary trade
terms, (ii) deposits, advances or prepayments to suppliers or licensors for
property leased or licensed, goods furnished or services rendered in the
ordinary course of business, (iii) advances to employees for travel,
entertainment and relocation expenses, drawing accounts and similar
expenditures, (iv) stock or other securities acquired in connection with the
satisfaction or enforcement of Indebtedness or claims due to the Company (or
such specified Person) or as security for any such Indebtedness or claim or (v)
demand deposits in banks or similar financial institutions.
In determining the amount of outstanding Investments:
(A) the amount of any Investment shall be the cost thereof minus any
returns of capital in cash on such Investment (determined in accordance
with GAAP without regard to amounts realized as income on such
Investment);
(B) the amount of any Investment in respect of a purchase described
in clause (d) above shall include the amount of any Financing Debt
assumed in connection with such purchase or secured by any asset acquired
in such purchase (whether or not any Financing Debt is assumed) or for
which any Person that becomes a Subsidiary is liable on the date on which
the securities of such Person are acquired, and shall be reduced to the
extent of any reduction in such Financing Debt; and
(C) no Investment shall be increased as the result of an increase in
the undistributed retained earnings of the Person in which the Investment
was made or decreased as a result of an equity interest in the losses of
such Person.
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1.87. "Legal Requirement" means any present or future requirement imposed
upon any of the Lenders or the Company and its Subsidiaries by any law,
statute, rule, regulation, directive, order, decree, guideline (or any
interpretation thereof by courts or of administrative bodies) of the United
States of America, or any jurisdiction in which any Eurodollar Office is
located or any state or political subdivision of any of the foregoing, or by
any board, governmental or administrative agency, central bank or monetary
authority of the United States of America, any jurisdiction in which any
Eurodollar Office is located, or any political subdivision of any of the
foregoing. Any such requirement imposed on any of the Lenders not having the
force of law shall be deemed to be a Legal Requirement for purposes of Section
3 if such Lender reasonably believes that compliance therewith is in the best
interest of such Lender.
1.88. "Lender" means each of the Persons listed as lenders on the
signature page hereto, including BankBoston in its capacity as a Lender and
such other Persons who may from time to time own a Percentage Interest in the
Credit Obligations, but the term "Lender" shall not include any Credit
Participant.
1.89. "Lending Officer" means such individuals whom the Agent may
designate by notice to the Company from time to time as an officer who may
receive telephone requests for borrowings under Section 2.1.3.
1.90. "Letter of Credit" is defined in Section 2.3.1.
1.91. "Letter of Credit Exposure" means, at any date, the sum of (a) the
aggregate face amount of all drafts that may then or thereafter be presented by
beneficiaries under all Letters of Credit then outstanding, (b) the aggregate
face amount of all drafts that the Letter of Credit Issuer has previously
accepted under Letters of Credit but has not paid.
1.92. "Letter of Credit Issuer" means, for any Letter of Credit,
BankBoston or any other Lender designated by the Company to issue such Letter
of Credit in accordance with Section 2.3.
1.93. "Lien" means, with respect to the Company (or any other specified
Person):
(a) any lien, encumbrance, mortgage, pledge, charge or security
interest of any kind upon any property or assets of the Company (or such
specified Person), whether now owned or hereafter acquired, or upon the
income or profits therefrom;
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(b) the acquisition of, or the agreement to acquire, any property or
asset upon conditional sale or subject to any other title retention
agreement, device or arrangement (including a Capitalized Lease);
(c) the sale, assignment, pledge or transfer for security of any
accounts, general intangibles or chattel paper of the Company (or such
specified Person), with or without recourse; and
(d) the transfer of any tangible property or assets for the purpose
of subjecting such items to the payment of previously outstanding
Indebtedness in priority to payment of the general creditors of the
Company (or such specified Person).
1.94. "Loan" means, collectively, the Revolving Loan and the Term Loan.
1.95. "Management Group" means each of the Sellers and those members of
management of the Company or any of its Subsidiaries party to the Stockholders
Agreement dated April 30, 1996 among the Company and the stockholders of the
Company as of the Initial Closing Date, as from time to time in effect.
1.96. "Margin Stock" means "margin stock" within the meaning of
Regulations G, T, U or X of the Board of Governors of the Federal Reserve
System.
1.97. "Material Adverse Change" means, since any specified date or from
the circumstances existing immediately prior to the happening of any specified
event, a material adverse change in (a) the business, assets, financial
condition or income of the Company and its Subsidiaries (on a Consolidated
basis) or (b) the rights and remedies of the Agent and the Lenders under the
Credit Documents.
1.98. "Material Agreements" is defined in Section 7.2.2.
1.99. "Maximum Amount of Revolving Credit" is defined in Section 2.1.2.
1.100. "Moody's" means Moody's Investors Service, Inc.
1.101. "Multiemployer Plan" means any Plan that is a "multiemployer plan"
as defined in section 4001(a)(3) of ERISA.
1.102. "Net Asset Sale Proceeds" means the cash proceeds of the sale or
disposition of assets (including by way of merger) by the Company or any of its
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Subsidiaries net of (a) any Indebtedness permitted by Section 7.6.7
(Capitalized Leases and purchase money indebtedness) secured by assets being
sold in such transaction required to be paid from such proceeds, (b) taxes
that, as estimated by the Company in good faith, will be required to be paid by
the Company or any of its Subsidiaries in cash as a result of, and within 15
months after such sale or disposition, (c) reasonable reserves for liabilities
resulting from the sale of assets and (d) all reasonable fees, commissions and
expenses of the Company or any of its Subsidiaries payable in connection with
such sale or disposition; provided, however, that "Net Asset Sale Proceeds"
shall not include cash proceeds of (i) asset sales permitted by clauses (a) and
(b) of Section 6.11.1, (ii) asset sales permitted by clause (c) of Section
6.11.1, the proceeds of which are not expended within 30 days to make Capital
Expenditures permitted by Section 6.5.5, (iii) mergers permitted by Section
6.11.2 or (iv) sales of accounts receivable permitted by Section 6.11.6.
1.103."Net Equity Proceeds" means the cash proceeds received by the
Company or any of its Subsidiaries in connection with any Equity Transaction
(net of reasonable out-of-pocket fees and expenses).
1.104. "Nonfacility Letter of Credit Exposure" means, at any date, the sum
of (a) the aggregate face amount of all drafts that may then or thereafter be
presented by beneficiaries under all letters of credit permitted by Section
6.7.4 then outstanding, plus (b) the aggregate face amount of all drafts that
the issuers of such letters of credit have previously accepted under such
letters of credit but have not paid.
1.105. "Nonperforming Lender" is defined in Section 10.4.4.
1.106. "Notes" means, collectively, the Revolving Notes and the Term Loan
Notes.
1.107. "Obligor" means the Borrower, each Guarantor and each Person
guaranteeing or providing collateral for the Credit Obligations.
1.108. "Overdue Reimbursement Rate" means, at any date, the highest
Applicable Rate then in effect.
1.109. "Payment Date" means the last Banking Day of each March, June,
September and December occurring after the Initial Closing Date.
1.110. "PBGC" means the Pension Benefit Guaranty Corporation or any
successor entity.
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1.111. "Percentage Interest" means (a) at all times when no Event of
Default under Section 8.1.1 and no Bankruptcy Default exists, the ratio that
the respective Commitments of the Lenders bear to the total Commitments of all
Lenders as from time to time in effect and reflected in the Register, and (b)
at all other times, the ratio that the respective amounts of the outstanding
Credit Obligations (including Letter of Credit Exposure) owing to the Lenders
in respect of extensions of credit under Section 2 bear to the total
outstanding Credit Obligations owing to all Lenders.
1.112. "Performing Lender" is defined in Section 10.4.4
1.113. "Person" means any present or future natural person or any
corporation, association partnership, joint venture, limited liability, joint
stock or other company, business trust, trust, organization, business or
government or any governmental agency or political subdivision thereof.
1.114. "PIK Interest" means any accrued interest payments on Financing
Debt that are postponed, evidenced by book-entry accrual or made through the
issuance of "payment-in-kind" notes or other securities, all in accordance with
the terms of such Financing Debt; provided, however, that in no event shall PIK
Interest include payments made with cash or Cash Equivalents.
1.115. "Plan" means, at any date, any pension benefit plan subject to
Title IV of ERISA maintained, or to which contributions have been made or are
required to be made, by any ERISA Group Person within six years prior to such
date.
1.116. "Public Offering" is defined in Section 5.1.6.
1.117. "Register" is defined in Section 11.1.3.
1.118. "Replacement Lender" is defined in Section 11.3.
1.119. "Required Lenders" means, with respect to any approval, consent,
modification, waiver or other action to be taken by the Agent or the Lenders
under the Credit Documents which require action by the Required Lenders, such
Lenders as own at least a majority of the Percentage Interests; provided,
however, that with respect to any matters referred to in the proviso to Section
10.6, Required Lenders means such Lenders as own at least the respective
portions of the Percentage Interests required by Section 10.6.
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1.120. "Revolving Loan" is defined in Section 2.1.4.
1.121. "Revolving Notes" is defined in Section 2.1.4.
1.122. "S&P" means Standard & Poor's Ratings Group, a division of McGraw
Hill Corporation.
1.123. "Sellers" means Boyd L. Meyer, Robert E. Dods, Peter Chung,
Dods-Meyer, Ltd.. Racing Champions Limited, Garnett Services, Inc. and Hosten
Investment Limited.
1.124. "Securities Act" means the federal Securities Act of 1933.
1.125. "Specified Event of Default" means, collectively, a Bankruptcy
Default, an Event of Default under Section 8.1.1 and an Event of Default
arising under Section 8.1.2 as a result of the failure by the Company or any of
its Subsidiaries to perform or observe any of the provisions of Sections 6.5
through 6.12.
1.126. "Subsidiary" means any Person of which the Company (or other
specified Person) shall at the time, directly or indirectly through one or more
of its Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold at
least 50% of the partnership, joint venture or similar interests or (c) be a
managing general partner or managing joint venturer.
1.127. "Tax" means any present or future tax, levy, duty, impost,
deduction, withholding or other charges of whatever nature at any time required
by any Legal Requirement (a) to be paid by any Lender or (b) to be withheld or
deducted from any payment otherwise required hereby to be made to any Lender,
in each case on or with respect to its obligations hereunder, the Loan, any
payment in respect of the Credit Obligations or any Funding Liability not
included in the foregoing; provided, however, that the term "Tax" shall not
include taxes imposed upon or measured by the net income of such Lender (other
than withholding taxes that are not creditable for the jurisdiction imposing
such withholding taxes against taxes imposed upon or measured by the net income
of such Lender) or franchise taxes.
1.128. "Term Loan" is defined in Section 2.2.1.
1.129. "Term Loan Note" is defined in Section 2.2.2.
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1.130. "Tranche" means each of the Revolving Loan and the Term Loan,
considered as a separate credit facility.
1.131. "Uniform Customs and Practice" is defined in Section 2.3.7.
1.132. "United States Funds" means such coin or currency of the United
States of America as at the time shall be legal tender therein for the payment
of public and private debts.
1.133. "Wholly Owned Subsidiary" means any Subsidiary of which all of the
outstanding capital stock (or other shares of beneficial interest) entitled to
vote generally (other than directors' qualifying shares and, in the case of
Foreign Subsidiaries, shares required by Legal Requirements to be held by
foreign nationals) is owned by the Company (or other specified Person)
directly, or indirectly through one or more Wholly Owned Subsidiaries.
1.134. "Willis Stein Group" means (a) Willis Stein & Partners, L.P.,
Nassau Capital Partners L.P., NAS Partners I L.L.C., Baird Capital Partners II
Limited Partnership and BCP II, Affiliates Fund Limited Partnership, (b)
Affiliates of any of the Persons described in the foregoing clause (a) and (c)
members, managers and limited and general partners of the Persons described in
the foregoing clause (a) and investors in funds managed by Persons described in
the foregoing clause (b).
2. The Credits.
2.1. Revolving Credit.
2.1.1. Revolving Loan. Subject to all the terms and conditions of
this Agreement and so long as no Default exists, from time to time on and
after the Initial Closing Date and prior to the Final Maturity Date, the
Lenders will, severally in accordance with their respective Commitments
in the Revolving Loan, make loans to the Borrower in such amounts as may
be requested by the Borrower in accordance with Section 2.1.3. The sum
of the aggregate principal amount of loans made under this Section 2.1.1
at any one time outstanding plus the Letter of Credit Exposure shall in
no event exceed the lesser of (a) the Borrowing Base or (b) the Maximum
Amount of Revolving Credit. In no event will the principal amount of
loans at any one time outstanding made by any Lender pursuant to this
Section 2.1 exceed such Lender's Commitment with respect to the Revolving
Loan.
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2.1.2. Maximum Amount of Revolving Credit. The term "Maximum Amount
of Revolving Credit" means, on any date, the lesser of (a) (i) $5,000,000
minus (ii) to the extent not used to reduce the Term Loan in accordance
with Section 4.3, Net Asset Sale Proceeds described in Section 4.3.3 and
Net Equity Proceeds described in Section 4.3.4, minus (iii) to the extent
not used to reduce the Term Loan in accordance with Section 4.3.2, 50 %
of Consolidated Excess Cash Flow, or (b) the amount (in an integral
multiple of $100,000) to which the then applicable amount shall have been
irrevocably reduced from time to time by notice from the Borrower to the
Agent.
2.1.3. Borrowing Requests. The Borrower may from time to time
request a loan under Section 2.1.1 by providing to the Agent a notice
(which may be given by a telephone call received by a Lending Officer if
promptly confirmed in writing). Such notice must be not later than noon
(Boston time) on the first Banking Day (third Banking Day if any portion
of such loan will be subject to a Eurodollar Pricing Option on the
requested Closing Date) prior to the requested Closing Date for such
loan. The notice must specify (a) the amount of the requested loan
(which shall be not less than $100,000) and (b) the requested Closing
Date therefor (which shall be a Banking Day). Upon receipt of such
notice, the Agent will promptly inform each other Lender (by telephone or
otherwise). Each such loan will be made at the Boston Office by
depositing the amount thereof to the general account of the Borrower with
the Agent or as otherwise directed by the Borrower. In connection with
each such loan, the Borrower shall furnish to the Agent a certificate in
substantially the form of Exhibit 5.2.1.
2.1.4. Revolving Notes. The aggregate principal amount of the loans
outstanding from time to time under this Section 2.1 is referred to as
the "Revolving Loan". The Revolving Loan shall be deemed owed to each
Lender having a Commitment therein severally in accordance with such
Lender's Percentage Interest therein, and all payments thereon shall be
for the account of each Lender in accordance with its Percentage Interest
therein. The Borrower's obligations to pay each Lender's Percentage
Interest in the Revolving Loan shall be evidenced by a separate note of
the Borrower in substantially the form of Exhibit 2.1.4 (the "Revolving
Notes"), payable to each Lender in accordance with such Lender's
Percentage Interest in the Revolving Loan.
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2.2. Term Loan Credit.
2.2.1. Term Loan. Subject to all the terms and conditions of this
Agreement and so long as no Default exists, on the Initial Closing Date
the Lenders will, in accordance with their respective Commitments in the
Term Loan, severally lend $35,000,000 to the Borrower as a term loan.
The aggregate principal amount of the loans made pursuant to this Section
2.2.1 at any one time outstanding is referred to as the "Term Loan". In
connection with the Term Loan, the Borrower shall furnish to the Agent a
certificate in substantially the form of Exhibit 5.2.1.
2.2.2. Term Loan Notes. The Term Loan shall be made at the Boston
Office by depositing the amount of such loan to the general account of
the Borrower with the Agent against delivery to the Agent of the separate
term notes of the Borrower (the "Term Loan Notes") payable to the
respective Lenders. The Term Loan Note issued to each Lender shall be in
a principal amount equal to such Lender's Percentage Interest in the Term
Loan, and shall be in substantially the form of Exhibit 2.2.2.
2.3. Letters of Credit.
2.3.1. Issuance of Letters of Credit. Subject to all the terms and
conditions of this Agreement and so long as no Default exists, from time
to time on and after the Initial Closing Date and prior to the Final
Maturity Date, the Letter of Credit Issuer will issue for the account of
the Borrower one or more irrevocable documentary or standby letters of
credit (the "Letters of Credit"). Letter of Credit Exposure plus the
Revolving Loan shall in no event exceed the lesser of (a) the Borrowing
Base or (b) the Maximum Amount of Revolving Credit. Letter of Credit
Exposure shall not exceed $1,500,000 minus Nonfacility Letter of Credit
Exposure at any one time outstanding.
2.3.2. Requests for Letters of Credit. The Borrower may from time
to time request a Letter of Credit to be issued by providing to the
Letter of Credit Issuer (and the Agent if the Letter of Credit Issuer is
not the Agent) a notice which is actually received not less than three
Banking Days prior to the requested Closing Date for such Letter of
Credit specifying (a) the amount of the requested Letter of Credit, (b)
the beneficiary thereof, (c) the requested Closing Date and (d) the
principal terms of the text for such Letter of Credit. Each Letter of
Credit will be issued by forwarding it to the Borrower or to such other
Person as directed in writing by the Borrower. In connection with the
issuance of any Letter of Credit, the Borrower shall
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furnish to the Letter of Credit Issuer (and the Agent if the Letter of
Credit Issuer is not the Agent) a certificate in substantially the form
of Exhibit 5.2.1 and any customary application forms required by the
Letter of Credit Issuer, which forms shall be used to obtain the
information provided by the Borrower therein and which, in the case of
conflict with this Agreement, shall be subject to the provisions of this
Agreement.
2.3.3. Form and Expiration of Letters of Credit. Each Letter of
Credit issued under this Section 2.3 and each draft accepted or paid
under such a Letter of Credit shall be issued, accepted or paid, as the
case may be, by the Letter of Credit Issuer at its principal office. No
Letter of Credit shall provide for the payment of drafts drawn
thereunder, and no draft shall be payable, at a date which is later than
the earlier of (a) the date 12 months after the date of issuance or (b)
the Final Maturity Date. Each Letter of Credit and each draft accepted
under a Letter of Credit shall be in such form and minimum amount, and
shall contain such terms, as the Letter of Credit Issuer and the Borrower
may agree upon at the time such Letter of Credit is issued, including a
requirement of not less than three Banking Days after presentation of a
draft before payment must be made thereunder.
2.3.4. Lenders' Participation in Letters of Credit. Upon the
issuance of any Letter of Credit, a participation therein, in an amount
equal to each Lender's Percentage Interest in the Revolving Loan, shall
automatically be deemed granted by the Letter of Credit Issuer to each
such Lender on the date of such issuance and such Lenders shall
automatically be obligated, as set forth in Section 10.4, to reimburse
the Letter of Credit Issuer to the extent of their respective Percentage
Interests in the Revolving Loan for all obligations incurred by the
Letter of Credit Issuer to third parties in respect of such Letter of
Credit not reimbursed by the Borrower. The Letter of Credit Issuer will
send to each Lender (and the Agent if the Letter of Credit Issuer is not
the Agent) a confirmation regarding the participations in Letters of
Credit outstanding during such month.
2.3.5. Presentation. The Letter of Credit Issuer may accept or pay
any draft presented to it, regardless of when drawn and whether or not
negotiated, if such draft, the other required documents and any
transmittal advice are presented to the Letter of Credit Issuer and dated
on or before the expiration date of the Letter of Credit under which such
draft is drawn. Except insofar as instructions actually received may be
given by the Borrower in writing expressly to the contrary with regard
to, and prior to, the Letter of Credit Issuer's issuance of any Letter of
Credit for the account of the Borrower and such contrary instructions are
reflected in such Letter
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of Credit, the Letter of Credit Issuer may honor as complying with the
terms of the Letter of Credit and with this Agreement any drafts or other
documents otherwise in order signed or issued by an administrator,
executor, conservator, trustee in bankruptcy, debtor in possession,
assignee for benefit of creditors, liquidator, receiver or other legal
representative of the party authorized under such Letter of Credit to
draw or issue such drafts or other documents.
2.3.6. Payment of Drafts. At such time as a Letter of Credit
Issuer makes any payment on a draft presented or accepted under a Letter
of Credit, the Borrower will on demand pay to such Letter of Credit
Issuer in immediately available funds the amount of such payment. Unless
the Borrower shall otherwise pay to the Letter of Credit Issuer the
amount required by the foregoing sentence, such amount shall be
considered a loan under Section 2.1.1 and part of the Revolving Loan as
if the Borrower had paid in full the amount required with respect to the
Letter of Credit by borrowing such amount under Section 2.1.1.
2.3.7. Uniform Customs and Practice. The Uniform Customs and
Practice for Documentary Credits (1993 Revision), International Chamber
of Commerce Publication No. 500, and any subsequent revisions thereof
approved by a Congress of the International Chamber of Commerce and
adhered to by the Letter of Credit Issuer (the "Uniform Customs and
Practice"), shall be binding on the Borrower and the Letter of Credit
Issuer except to the extent otherwise provided herein, in any Letter of
Credit or in any other Credit Document. Anything in the Uniform Customs
and Practice to the contrary notwithstanding:
(a) Neither the Borrower nor any beneficiary of any Letter of
Credit shall be deemed an agent of any Letter of Credit Issuer.
(b) With respect to each Letter of Credit, neither the Letter of
Credit Issuer nor its correspondents shall be responsible for or shall
have any duty to ascertain (unless the Letter of Credit Issuer or such
correspondent is grossly negligent or willful in failing so to
ascertain):
(i) the genuineness of any signature;
(ii) the validity, form, sufficiency, accuracy, genuineness
or legal effect of any endorsements;
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(iii) delay in giving, or failure to give, notice of arrival,
notice of refusal of documents or of discrepancies in respect of
which any Letter of Credit Issuer refuses the documents or any
other notice, demand or protest;
(iv) the performance by any beneficiary under any Letter of
Credit of such beneficiary's obligations to the Borrower;
(v) inaccuracy in any notice received by the Letter of Credit
Issuer;
(vi) the validity, form, sufficiency, accuracy, genuineness
or legal effect of any instrument, draft, certificate or other
document required by such Letter of Credit to be presented before
payment of a draft if such instrument, draft, certificate or other
document appears on its face to comply with the requirements of
the Letter of Credit, or the office held by or the authority of
any Person signing any of the same; or
(vii) failure of any instrument to bear any reference or
adequate reference to such Letter of Credit, or failure of any
Person to note the amount of any instrument on the reverse of such
Letter of Credit or to surrender such Letter of Credit or to
forward documents in the manner required by such Letter of Credit.
(c) The occurrence of any of the events referred to in the Uniform
Customs and Practice or in the preceding clauses of this Section 2.3.7
shall not affect or prevent the vesting of any of the Letter of Credit
Issuer's rights or powers hereunder or the Borrower's obligation to make
reimbursement of amounts paid under any Letter of Credit or any draft
accepted thereunder.
(d) The Borrower will promptly examine (i) each Letter of Credit
(and any amendments thereof) sent to it by the letter of Credit Issuer
and (ii) all instruments and documents delivered to it from time to time
by the Letter of Credit Issuer. The Borrower will notify the Letter of
Credit Issuer of any claim of noncompliance by notice actually received
within three Banking Days after receipt by the Borrower of any of the
foregoing documents, the Borrower being conclusively deemed to have
waived any such claim against such Letter of Credit Issuer and its
correspondents unless such notice is given. The Letter of Credit Issuer
shall have no obligation or responsibility to send any such Letter of
Credit or any such instrument or document to the Borrower.
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(e) In the event of any conflict between the provisions of this
Agreement and the Uniform Customs and Practice, the provisions of this
Agreement shall govern.
2.3.8. Subrogation. Upon any payment by a Letter of Credit Issuer
under any Letter of Credit and until the reimbursement of such Letter of
Credit Issuer by the Borrower with respect to such payment, the Letter of
Credit Issuer shall be entitled to be subrogated to, and to acquire and
retain, the rights which the Person to whom such payment is made may have
against the Borrower, all for the benefit of the Lenders. The Borrower
will take such action as the Letter of Credit Issuer may reasonably
request, including requiring the beneficiary of any Letter of Credit to
execute such documents as the Letter of Credit Issuer may reasonably
request, to assure and confirm to the Letter of Credit Issuer such
subrogation and such rights, including the rights, if any, of the
beneficiary to whom such payment is made in accounts receivable,
inventory and other properties and assets of any Obligor.
2.3.9. Modification, Consent, etc. If the Borrower requests or
consents in writing to any modification or extension of any Letter of
Credit, or waives any failure of any draft, certificate or other document
to comply with the terms of such Letter of Credit, and if the Letter of
Credit Issuer consents thereto, the Letter of Credit Issuer shall be
entitled to rely on such request, consent or waiver. This Agreement
shall be binding upon the Borrower with respect to such Letter of Credit
as so modified or extended, and with respect to any action taken or
omitted by such Letter of Credit Issuer pursuant to any such request,
consent or waiver.
2.4. Application of Proceeds.
2.4.1. Revolving Loan. Subject to Section 2.4.4, the Borrower will
apply the proceeds of the Revolving Loan for working capital and other
lawful corporate purposes of the Company and its Subsidiaries.
2.4.2. Term Loan. The Borrower will apply the proceeds of the Term
Loan for lawful corporate purposes of the Company and its Subsidiaries.
2.4.3. Letters of Credit. Letters of Credit shall be issued only
for such lawful corporate purposes as the Borrower has requested in
writing
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and to which the Letter of Credit Issuer consents, which consent shall
not be unreasonably withheld.
2.4.4. Specifically Prohibited Applications. The Borrower will not,
directly or indirectly, apply any part of the proceeds of any extension
of credit made pursuant to the Credit Documents to purchase or to carry
Margin Stock in amounts that would result in a violation of Rules G, T, U
or X of the Board of Governors of the Federal Reserve System or to any
transaction prohibited by the Foreign Trade Regulations, by other Legal
Requirements applicable to the Lenders or by the Credit Documents.
2.5. Nature of Obligations of Lenders to Make Extensions of Credit. The
Lenders' obligations to extend credit under this Agreement are several and are
not joint or joint and several. If on any Closing Date any Lender shall fail
to perform its obligations under this Agreement, the aggregate amount of
Commitments to make the extensions of credit under this Agreement shall be
reduced by the amount of unborrowed Commitment of the Lender so failing to
perform and the Percentage Interests shall be appropriately adjusted. Lenders
that have not failed to perform their obligations to make the extensions of
credit contemplated by Section 2 may, if any such Lender so desires, assume, in
such proportions as such Lenders may agree, the obligations of any Lender who
has so failed and the Percentage Interests shall be appropriately adjusted.
The provisions of this Section 2.5 shall not affect the rights of the Borrower
against any Lender failing to perform its obligations hereunder.
3. Interest; Eurodollar Pricing Options: Fees.
3.1. Interest. The Loan shall accrue and bear interest at a rate per
annum which shall at all times equal the Applicable Rate. Prior to any stated
or accelerated maturity of the Loan, the Borrower will, on each Payment Date,
pay the accrued and unpaid interest on the portion of the Loan which was not
subject to a Eurodollar Pricing Option. On the last day of each Eurodollar
Interest Period or on any earlier termination of any Eurodollar Pricing Option,
the Borrower will pay the accrued and unpaid interest on the portion of the
Loan which was subject o the Eurodollar Pricing Option which expired or
terminated on such date. In the case of any Eurodollar Interest Period longer
than three months, the Borrower will also pay the accrued and unpaid interest
on the portion of the Loan subject to the Eurodollar Pricing Option having such
Eurodollar Interest Period at three-month intervals, the first such payment to
be made on the last Banking Day of the three-month period which begins on the
first day of such Eurodollar Interest Period. On the stated or any accelerated
maturity of the Loan, the Borrower will pay all accrued and unpaid
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interest on the Loan, including any accrued and unpaid interest on any portion
of the Loan which is subject to a Eurodollar Pricing Option. Upon the
occurrence and during the continuance of an Event of Default, the Lenders may
require accrued interest to be payable at monthly intervals. All payments of
interest hereunder shall be made to the Agent for the account of each Lender in
accordance with such Lender's Percentage Interest.
3.2. Eurodollar Pricing Options.
3.2.1. Election of Eurodollar Pricing Options. Subject to all of
the terms and conditions hereof and so long as no Default exists, the
Borrower may from time to time, by irrevocable notice to the Agent
actually received not less than three Banking Days prior to the
commencement of the Eurodollar Interest Period selected in such notice,
elect to have such portion of the Loan as the Borrower may specify in
such notice accrue and bear interest during the Eurodollar Interest
Period so selected at the Applicable Rate computed on the basis of the
Eurodollar Rate. In the event the Borrower at any time fails to elect a
Eurodollar Pricing Option under this Section 3.2.1 for any portion of the
Loan, such portion of the Loan will accrue and bear interest at the
Applicable Rate based on the Base Rate. Simultaneous elections by the
Borrower for the same Eurodollar Interest Period of a portion of either
the Revolving Loan or the Term Loan or both of them on a combined basis
shall be deemed to be the election of a single Eurodollar Pricing Option.
No election of a Eurodollar Pricing Option shall become effective:
(a) if, prior to the commencement of any such Eurodollar Interest
Period, the Agent determines that (i) the electing or granting of the
Eurodollar Pricing Option in question would violate a Legal Requirement,
(ii) Eurodollar deposits in an amount comparable to the principal amount
of the Loan as to which such Eurodollar Pricing option has been elected
and which have a term corresponding to the proposed Eurodollar Interest
Period are not readily available in the inter-bank Eurodollar market, or
(iii) by reason of circumstances affecting the inter-bank Eurodollar
market, adequate and reasonable methods do not exist for ascertaining the
interest rate applicable to such deposits for the proposed Eurodollar
Interest Period; or
(b) if any Lender shall have advised the Agent by telephone or
otherwise at or prior to noon (Boston time) on the second Banking Day
prior to the commencement of such proposed Eurodollar Interest Period
(and shall have subsequently confirmed in writing) that, after reasonable
efforts to determine the availability of such Eurodollar deposits, such
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Lender reasonably anticipates that Eurodollar deposits in an amount equal
to the Percentage Interest of such Lender in the portion of the Loan as
to which such Eurodollar Pricing Option has been elected and which have a
term corresponding to the Eurodollar Interest Period in question will not
be offered in the Eurodollar market to such Lender at a rate of interest
that does not exceed the anticipated Eurodollar Basic Rate (unless the
foregoing results from a deterioration subsequent to the date hereof in
the creditworthiness of such Lender or a change in the availability of
Eurodollar markets to such Lender pursuant to legal or regulatory
restrictions).
3.2.2. Notice to Lenders and Borrower. The Agent will promptly
inform each Lender (by telephone or otherwise) of each notice received by
it from the Borrower pursuant to Section 3.2.1 and of the Eurodollar
Interest Period specified in such notice. Upon determination by the
Agent of the Eurodollar Rate for such Eurodollar Interest Period or in
the event such election shall not become effective, the Agent will
promptly notify the Borrower and each Lender (by telephone or otherwise)
of the Eurodollar Rate so determined or why such election did not become
effective, as the case may be.
3.2.3. Selection of Eurodollar Interest Periods. Eurodollar
Interest Periods shall be selected so that:
(a) the minimum portion of the Loan subject to any Eurodollar
Pricing Option shall be $5,000,000;
(b) no more than six Eurodollar Pricing Options shall be
outstanding at any one time;
(c) a portion of the Term Loan equal to or greater than the amount
of the next mandatory prepayment required by Section 4.2 shall not be
subject to a Eurodollar Pricing Option on the date such mandatory
prepayment is required to be made; and
(d) no Eurodollar Interest Period with respect to any part of the
Loan subject to a Eurodollar Pricing Option shall expire later than the
Final Maturity Date.
3.2.4. Additional Interest. If any portion of the Loan subject to a
Eurodollar Pricing Option is repaid, or any Eurodollar Pricing Option is
terminated for any reason (including acceleration of maturity), on a date
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which is prior to the last Banking Day of the Eurodollar Interest Period
applicable to such Eurodollar Pricing Option, the Borrower will pay to
the Agent for the account of each Lender in accordance with such Lender's
Percentage Interest, in addition to any amounts of interest otherwise
payable hereunder, an amount equal to the present value (calculated in
accordance with this Section 3.2.4) of interest for the unexpired portion
of such Eurodollar Interest Period on the portion of the Loan so repaid,
or as to which a Eurodollar Pricing Option was so terminated, at a per
annum rate equal to the excess, if any, of (a) the Eurodollar Basic Rate
applicable to such Eurodollar Pricing Option minus (b) the rate of
interest obtainable by the Agent upon the purchase of debt securities
customarily issued by the Treasury of the United States of America which
have a maturity date approximating the last Banking Day of such
Eurodollar Interest Period. The present value of such additional
interest shall be calculated by discounting the amount of such interest
for each day in the unexpired portion of such Eurodollar Interest Period
from such day to the date of such repayment or termination at a per annum
interest rate equal to the interest rate determined pursuant to clause
(b) of the preceding sentence, and by adding all such amounts for all
such days during such period. The determination by the Agent of such
amount of interest shall, in the absence of manifest error, be
conclusive. For purposes of this Section 3.2.4, if any portion of the
Loan which was to have been subject to a Eurodollar Pricing Option is not
outstanding on the first day of the Eurodollar Interest Period applicable
to such Eurodollar Pricing Option other than for reasons described in
Section 3.2.1, the Borrower shall be deemed to have terminated such
Eurodollar Pricing Option.
3.2.5. Violation of Legal Requirements. If any Legal Requirement
shall prevent any Lender from funding or maintaining through the purchase
of deposits in the interbank Eurodollar market any portion of the Loan
subject to a Eurodollar Pricing Option or otherwise from giving effect to
such Lender's obligations as contemplated by Section 3.2, (a) the Agent
may by notice to the Borrower terminate all of the affected Eurodollar
Pricing Options, (b) the portion of the Loan subject to such terminated
Eurodollar Pricing Options shall immediately bear interest thereafter at
the Applicable Rate computed on the basis of the Base Rate and (c) the
Borrower shall make any payment required by Section 3.2.4.
3.2.6. Funding Procedure. The Lenders may fund any portion of the
Loan subject to a Eurodollar Pricing Option out of any funds available to
the Lenders. Regardless of the source of the funds actually used by any
of the Lenders to fund any portion of the Loan subject to a Eurodollar
Pricing
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Option, however, all amounts payable hereunder, including the interest
rate applicable to any such portion of the Loan and the amounts payable
under Sections 3.2.4 and 3.5, shall be computed as if each Lender had
actually funded such Lender's Percentage Interest in such portion of the
Loan through the purchase of deposits in such amount of the type by which
the Eurodollar Basic Rate was determined with a maturity the same as the
applicable Eurodollar Interest Period relating thereto and through the
transfer of such deposits from an office of the Lender having the same
location as the applicable Eurodollar Office to one of such Lender's
offices in the United States of America.
3.3. Commitment Fees. In consideration of the Lenders' commitments
to make the extensions of credit provided for in Section 2.1, while such
commitments are outstanding, the Borrower will pay to the Agent for the
account of the Lenders in accordance with the Lenders' respective
Commitments in the Revolving Loan, on each Payment Date and on the Final
Maturity Date, an amount equal to accrued interest computed at the rate
of 0.50% per annum on the amount by which (a) the average daily Maximum
Amount of Revolving Credit during the three-month period or portion
thereof ending on such Payment Date exceeded (b) the sum of (i) the
average daily Revolving Loan during such period or portion thereof plus
(ii) the average daily Letter of Credit Exposure during such period or
portion thereof.
3.4. Letter of Credit Fees. The Borrower will pay to the Agent for
the account of each of the Lenders, in accordance with the Lenders'
respective Percentage Interests, on each Payment Date, a Letter of Credit
fee equal to interest at a per annum rate equal to the Applicable Margin
then in effect for Eurodollar Pricing Options with respect to the
Revolving Loan on the average daily Letter of Credit Exposure during the
three-month period or portion thereof ending on such Payment Date. The
Borrower will pay to the Letter of Credit Issuer customary service
charges and expenses for its services in connection with the Letters of
Credit at the times and in the amounts from time to time in effect in
accordance with its general rate structure, including reasonable fees and
expenses relating to issuance, amendment, negotiation, cancellation and
similar operations.
3.5. Changes in Circumstances; Yield Protection.
3.5.1. Reserve Requirements; Etc. If after the date hereof any
Legal Requirement shall (a) impose, modify, increase or deem applicable
any insurance assessment, reserve, special deposit or similar requirement
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<PAGE> 47
against any Funding Liability or the Letters of Credit, (b) impose,
modify, increase or deem applicable any other requirement or condition
with respect to any Funding Liability or the Letters of Credit, or (c)
change the basis of taxation of Funding Liabilities or payments in
respect of any Letter of Credit (other than changes in the rate of taxes
measured by the overall net income of such Lender) and the effect of any
of the foregoing shall be to increase materially the cost to any Lender
of issuing, making, funding or maintaining its respective Percentage
Interest in any portion of the Loan subject to a Eurodollar Pricing
Option or any Letter of Credit, to reduce materially the amounts received
or receivable by such Lender under this Agreement or to require such
Lender to make any material payment or forego any material amounts
otherwise payable to such Lender under this Agreement (other than any Tax
or any reserves that are included in computing the Eurodollar Reserve
Rate), then such Lender may claim compensation from the Borrower under
Section 3.5.5.
3.5.2. Taxes. All payments of the Credit Obligations shall be made
without setoff or counterclaim and free and clear of any deductions,
including deductions for Taxes, unless the Borrower is required by law to
make such deductions. If after the date hereof (a) any Lender shall be
subject to any Tax with respect to any payment of the Credit Obligations
or its obligations hereunder or (b) the Borrower shall be required to
withhold or deduct any Tax on any payment on the Credit Obligations, then
such Lender may claim compensation from the Borrower under Section 3.5.5.
Whenever Taxes must be withheld by the Borrower with respect to any
payments of the Credit Obligations, the Borrower shall promptly furnish
to the Agent for the account of the applicable Lender official receipts
(to the extent that the relevant governmental authority delivers such
receipts) evidencing payment of any such Taxes so withheld. If the
Borrower fails to pay any such Taxes when due or fails to remit to the
Agent for the account of the applicable Lender the required receipts
evidencing payment of any such Taxes so withheld or deducted, the
Borrower shall indemnify the affected Lender for any incremental Taxes
and interest or penalties that may become payable by such Lender as a
result of any such failure. In the event any Lender receives a refund of
any Taxes for which it has received payment from the Borrower under this
Section 3.5.2, such Lender shall promptly pay the amount of such refund
to the Borrower, together with any interest thereon actually earned by
such Lender.
3.5.3. Capital Adequacy. If any Lender shall determine in good
faith that compliance by such Lender with any Legal Requirement regarding
capital adequacy of banks or bank holding companies has or
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<PAGE> 48
would have the effect of reducing the rate of return on the capital of
such Lender and its Affiliates as a consequence of such Lender's
commitment to make the extensions of credit contemplated hereby, or such
Lender's maintenance of the extensions of credit contemplated hereby, to
a level below that which such Lender could have achieved but for such
compliance (taking into consideration the policies of such Lender and its
Affiliates with respect to capital adequacy immediately before such
compliance and assuming that the capital of such Lender and its
Affiliates was fully utilized prior to such compliance) by an amount
deemed by such Lender to be material, then such Lender may claim
compensation from the Borrower under Section 3.5.5.
3.5.4. Regulatory Changes. If any Lender shall determine that (a)
any change in any Legal Requirement (including any new Legal Requirement)
after the date hereof shall (i) reduce the amount of any sum received or
receivable by such Lender with respect to the Loan or the Letters of
Credit or the return to be earned by such Lender on the Loan or the
Letters of Credit, (ii) impose a cost on such Lender or any Affiliate of
such Lender that is attributable to the making or maintaining of, or such
Lender's commitment to make, its portion of the Loan or the Letters of
Credit, or (iii) require such Lender or any Affiliate of such Lender to
make any payment on, or calculated by reference to, the gross amount of
any amount received by such Lender under any Credit Document (other than
Taxes or income or franchise taxes), and (b) such reduction, increased
cost or payment shall not be fully compensated for by an adjustment in
the Applicable Rate or the Letter of Credit fees, then such Lender may
claim compensation from the Borrower under Section 3.5.5.
3.5.5. Compensation Claims. Within 30 days after the receipt by the
Borrower of a certificate from any Lender setting forth why it is
claiming compensation under this Section 3.5 and computations (in
reasonable detail) of the amount thereof, the Borrower shall pay to such
Lender such additional amounts as such Lender sets forth in such
certificate as sufficient fully to compensate it on account of the
foregoing provisions of this Section 3.5, together with interest on such
amount from the 30th day after receipt of such certificate until payment
in full thereof at the Overdue Reimbursement Rate. The determination by
such Lender of the amount to be paid to it and the basis for computation
thereof hereunder shall, in the absence of manifest error, be conclusive.
In determining such amount, such Lender may use any reasonable averaging
and attribution methods. The Borrower shall be entitled to replace any
such Lender in accordance with Section 11.3.
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<PAGE> 49
3.5.6. Mitigation. Each Lender shall take such commercially
reasonable steps as it may determine are not disadvantageous to it,
including changing lending offices to the extent feasible, in order to
reduce amounts otherwise payable by the Borrower to such Lender pursuant
to Sections 3.2.4 and 3.5 or to make Eurodollar Pricing Options available
under Sections 3.2.1 and 3.2.5. In addition, the Borrower shall not be
responsible for costs (a) arising more than 90 days prior to receipt by
the Borrower of the certificate from the affected Lender pursuant to
Section 3.5 or (b) arising from the termination of Eurodollar Pricing
Options more than 90 days prior to the demand by the Agent for payment
under Section 3.2.4.
3.6. Computations of Interest and Fees. For purposes of this Agreement,
interest, commitment fees and Letter of Credit fees (and any other amount
expressed as interest or such fees) shall be computed on the basis of a 360-day
year for actual days elapsed. If any payment required by this Agreement
becomes due on any day that is not a Banking Day, such payment shall, except as
otherwise provided in the Eurodollar Interest Period, be made on the next
succeeding Banking Day. If the due date for any payment of principal is
extended as a result of the immediately preceding sentence, interest shall be
payable for the time during which payment is extended at the Applicable Rate.
4. Payment.
4.1. Payment at Maturity. On the Final Maturity Date or any accelerated
maturity of the Loan, the Borrower will pay to the Agent for the account of the
Lenders an amount equal to the Loan and Letter of Credit Exposure, together
with all accrued and unpaid interest and fees. In respect thereto and all
other Credit Obligations then outstanding.
4.2. Scheduled Required Prepayments. On the last Banking Day of June 1997
and on each Payment Date thereafter and on the Final Maturity Date, the
Borrower will pay to the Agent or the account of the Lenders as a prepayment of
the Term Loan the lesser of (a) the amount set forth in the table below for
such date or (b) the amount of the Term Loan then outstanding.
<TABLE>
<CAPTION>
Payment Date Amount
- ---------------------------- ----------
<S> <C>
June 1997 through March 1998 $950,000
June 1998 through March 1999 $1,000,000
June 1999 through March 2000 $1,125,000
June 2000 through March 2001 $1,250,000
</TABLE>
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<PAGE> 50
June 2001 through Final Maturity Date $940,000
4.3. Contingent Required Prepayments.
4.3.1. Excess Credit Exposure. If at any time the Revolving Loan
exceeds the limits set forth in Section 2.1, the Borrower shall within
one Banking Day pay the amount of such excess to the Agent for the
account of the Lenders. If at any time the Letter of Credit Exposure
exceeds the limits set forth in Section 2.5, the Borrower shall within
one Banking Day pay the amount of such excess to the Agent for the
account of the Lenders to be applied as provided in Section 4.5.
4.3.2. Excess Cash Flow. Within three Banking Days after the date
annual financial statements have been (or are required to have been)
furnished by the Company to the Lenders in accordance with Section 6.4.1,
the Borrower shall prepay the Loan to be applied as provided in Section
4.6.2 in an amount equal to the lesser of (a) 50% of Consolidated Excess
Cash Flow for its most recently completed fiscal year or (b) the amount
of the Loan.
4.3.3. Net Asset Sale Proceeds. Within three Banking Days after the
receipt by the Company and its Subsidiaries of Net Asset Sale Proceeds,
the Borrower shall pay to the Agent as a prepayment of the Loan to be
applied as provided in Section 4.6.2 the lesser of (a) the amount of such
Net Asset Sale Proceeds or (b) the amount of the Loan.
4.3.4. Net Equity Proceeds. Within three Banking Days after the
receipt by the Company or any of its Subsidiaries of Net Equity Proceeds,
the Borrower shall pay to the Agent as a prepayment of the Loan to be
applied as provided in Section 4.6.2 the lesser of (a) the amount of such
Net Equity Proceeds or (b) the amount of the Loan.
4.4. Voluntary Prepayments. In addition to the prepayments required
by Sections 4.2 and 4.3, the Borrower may from time to time prepay all or
any portion of the Loan (in a minimum amount of $100,000 and an integral
multiple of $100,000, or such lesser amount as is then Outstanding)
without premium or penalty of any type (except as provided in Section
3.2.4 with respect to the early termination of Eurodollar Pricing
Options). The Borrower shall give the Agent at least one Banking Day
prior notice of its intention to prepay, specifying the date of payment
the total amount and portion of the Loan to be paid on such date and the
amount of interest to be paid with such prepayment.
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<PAGE> 51
4.5. Letters of Credit. If on the Final Maturity Date or any
accelerated maturity of the Credit Obligations the Lenders shall be
obligated in respect of a Letter of Credit or a draft accepted under a
Letter of Credit, the Borrower will either:
(a) prepay such obligation by depositing with the Agent an
amount of cash, or
(b) deliver to the Agent a standby letter of credit
(designating the Agent as beneficiary and issued by a bank and on
terms reasonably acceptable to the Agent),
in each case in an amount equal to the portion of the then Letter of
Credit Exposure issued for the account of the Borrower. Any such cash so
deposited and the cash proceeds of any draw under any standby Letter of
Credit so furnished, including any interest thereon, shall be returned by
the Agent to the Borrower only when, and to the extent that, the amount
of such cash held by the Agent exceeds the Letter of Credit Exposure at
such time and no Default then exists; provided, however, that if an Event
of Default occurs and the Credit Obligations become or are declared
immediately due and payable, the Agent may apply such cash, including any
interest thereon, to the payment of any of the Credit Obligations as
provided in section 3.5.6 of the Guarantee and Security Agreement.
4.6. Reborrowing; Application of Payments, etc.
4.6.1. Reborrowing. The amounts of the Revolving Loan
prepaid pursuant to Section 4.4 may be reborrowed from time to
time prior to the Final Maturity Date in accordance with Section
2.1, subject to the limits set forth therein. No other portion of
the Loan prepaid hereunder may be reborrowed.
4.6.2. Order of Application. Prepayments of the Loan made
pursuant to Sections 4.3.2, 4.3.3 and 4.3.4 shall be applied as
follows: first to the Term Loan, then any balance to the Revolving
Loan. Contingent required prepayments of the Term Loan made
pursuant to Sections 4.3.2, 4.3.3 or 4.3.4 shall be applied to the
installments required to be made pursuant to Section 4.2 in the
inverse order thereof so that no partial prepayment pursuant to
such Sections shall reduce the next scheduled mandatory prepayment
under Section 4.2. Voluntary prepayments of the Term Loan made
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<PAGE> 52
pursuant to Section 4.4 shall be applied to the installments
required to be made pursuant to Section 4.2 pro rata in the
chronological order thereof. Any prepayment of the Term Loan or
the Revolving Loan shall be applied first to the portion of the
Loan not then subject to Eurodollar Pricing Options, then the
balance of any such prepayment shall be applied to the portion of
the Loan then subject to Eurodollar Pricing Options, in the
chronological order of the respective maturities thereof (or as
the Borrower may otherwise specify in writing), together with any
payments required by Section 3.2.4.
4.6.3. Payment with Accrued Interest, Etc. Upon all
prepayments of the Term Loan, the Borrower shall pay to the Agent
the principal amount to be prepaid, together with unpaid interest
in respect thereof accrued to the date of prepayment. Notice of
prepayment having been given in accordance with Section 4.4, and
whether or not notice is given of prepayments pursuant to Sections
4.2 and 4.3, the amount specified to be prepaid shall become due
and payable on the date specified for prepayment.
4.6.4. Payments for Lenders. All payments of principal
hereunder shall be made to the Agent for the account of the
Lenders in accordance with the Lenders' respective Percentage
Interests in the portion of the Loan so paid.
5. Conditions to Extending Credit.
5.1. Conditions on Initial Closing Date. The obligations of the Lenders
to make any extension of credit pursuant to Section 2 shall be subject to the
satisfaction, on or before the Initial Closing Date, of the conditions set
forth in this Section 5.1 as well as the further conditions in Section 5.2. If
the conditions set forth in this Section 5.1 are not met on or prior to the
Initial Closing Date, the Lenders shall have no obligation to make any
extensions of credit hereunder.
5.1.1. Notes. The Borrower shall have duly executed and delivered
to the Agent the appropriate Notes for each Lender.
5.1.2. Payment of Fees. The Borrower shall have paid to the Agent
the fees contemplated by the separate agreement between the Agent and the
Borrower dated on or prior to the date hereof.
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<PAGE> 53
5.1.3. Legal Opinions. On the Initial Closing Date, the Lenders
shall have received from the following counsel their respective opinions
with respect to the transactions contemplated by the Credit Documents,
which opinions shall be in form and substance satisfactory to the
Required Lenders:
(a) Reinhart, Boerner, Van Deuren, Norris & Rieselbach, S.C.,
special counsel to the Company.
(b) Ropes & Gray, special counsel for the Agent.
The Company authorizes and directs its counsel to furnish the
foregoing opinions.
5.1.4. Guarantee and Security Agreement; Hong Kong Documents. Each
of the Borrower and the Guarantors (other than Banerjan) shall have duly
authorized, executed and delivered to the Agent an amended and restated
Guarantee and Security Agreement in substantially the form of Exhibit
5.1.4 (the "Guarantee and Security Agreement"). Banerjan shall have duly
authorized, executed and delivered to the Agent amendments to the Hong
Kong Collateral Debenture and the Hong Kong Guarantee.
5.1.5. Perfection of Security. Each Obligor shall have duly
authorized, executed, acknowledged, delivered, filed, registered and
recorded such security agreements notices, financing statements and other
instruments as the Agent may have requested in order to perfect the Liens
purported or required pursuant to the Credit Documents to be created in
the Credit Security.
5.1.6. Public Offering.
(a) The Company shall have received at least $60,000,000 in
aggregate net proceeds from the sale by it of not more than 45% of its
common stock in a public offering registered under the Securities Act
(the "Public Offering").
(b) The Company shall have furnished to the Agent a copy of each of
(i) the Registration Statement on Form S-1, together with all amendments
thereto, filed by the Company with the Securities and Exchange Commission
with respect to the Public Offering, (ii) the final Prospectus issued by
the Company with respect to the Public Offering and (iii) all other
material agreements to which the Company or any of its Subsidiaries is
45
<PAGE> 54
party, in each case in connection with the Public Offering, and all such
documents shall be in form and substance reasonably satisfactory to the
Agent.
(c) With a portion of the proceeds of the Public Offering, the
Company and the Borrower shall have paid in full all subordinated debt
described in Exhibit 7.3 and repaid at least $3,900,000 of the Loan under
this Agreement.
(d) Contemporaneously with the making by the Lenders of the first
extension of credit under Section 2, the Agent shall have received a
certificate of a Financial Officer to the effect that the Public Offering
has been consummated and to the effect that each of the conditions set
forth in this Section 5.1.6 has been satisfied.
5.1.7. Proper Proceedings. This Agreement, each other Credit
document and the transactions contemplated hereby and thereby shall have
been authorized by all necessary corporate or other proceedings. All
necessary consents, approvals and authorizations of any governmental or
administrative agency or any other Person of any of the transactions
contemplated hereby or by any other Credit Document shall have been
obtained and shall be in full force and effect.
5.1.8. General. All legal and corporate proceedings in connection
with the transactions contemplated by this Agreement shall be
satisfactory in form and substance to the Agent and the Agent shall have
received copies of all documents, including certified copies of the
Charter and By-Laws of the Company and the other Obligors, records of
corporate proceedings, certificates as to signatures and incumbency of
officers and opinions of counsel, which the Agent may have reasonably
requested in connection therewith such documents where appropriate to be
certified by proper corporate or governmental authorities.
5.2. Conditions to Each Extension of Credit. The obligations of the
Lenders to make any extension of credit pursuant to Sections 2.1, 2.2 and 2.3
shall be subject to the satisfaction, on or before the Closing Date for such
extension of credit, of the following conditions:
5.2.1. Officer's Certificate. The representations and warranties
contained in Section 7 shall be true and correct in all material respects
on and as of such Closing Date with the same force and effect as though
made on and as of such date (except as to any representation or warranty
which
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<PAGE> 55
refers to a specific earlier date); no Default shall exist on such
Closing Date prior to or immediately after giving effect to the requested
extension of credit; no Material Adverse Change shall have occurred since
the Initial Closing Date; and the Borrower shall have furnished to the
Agent in connection with the requested extension of credit a certificate
to these effects, in substantially the form of Exhibit 5.2.1, signed by a
Financial Officer.
5.2.2. Legality, Etc. The making of the requested extension of
credit shall not (a) subject any Lender to any penalty or special tax
(other than a Tax for which the Borrower is required to reimburse the
Lenders under Section 3.5) or (b) be prohibited by any Legal Requirement.
6. General Covenants. Each of the Borrower and the Guarantors covenants that,
until all of the Credit Obligations shall have been paid in full and until the
Lenders' commitments to extend credit under this Agreement and any other Credit
Document shall have been irrevocably terminated, the Company and its
Subsidiaries will comply with the following provisions:
6.1. Taxes and Other Charges; Account Payable.
6.1.1. Taxes and Other Charges. Each of the Company and its
Subsidiaries shall duly pay and discharge, or cause to be paid and
discharged, before the same becomes in arrears, all taxes, assessments
and other governmental charges imposed upon such Person and its
properties, sales or activities, or upon the income or profits therefrom,
as well as all claims for labor, materials or supplies which if unpaid
might by law become a Lien upon any of its property; provided, however,
that any such tax, assessment, charge or claim need not be paid if the
validity or amount thereof shall at the time be contested in good faith
by appropriate proceedings and if such Person shall, in accordance with
GAAP, have set aside on its books adequate reserves with respect thereto.
6.1.2. Accounts Payable. Each of the Company and its Subsidiaries
shall promptly pay when due, or in conformity with customary trade terms,
all accounts payable incident to the operations of such Person not
referred to m Section 6.1.1; provided, however, that any such
Indebtedness need not be paid if the validity or amount thereof shall at
the time be contested in good faith and if such Person shall, in
accordance with GAAP, have set aside on its books adequate reserves with
respect thereto.
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6.2. Conduct of Business, etc.
6.2.1. Types of Business. The Company and its Subsidiaries shall
engage only in the business of (a) acquiring, developing, manufacturing,
distributing, licensing or marketing consumer collectible products and
(b) other activities related thereto.
6.2.2. Maintenance of Properties. Each of the Company and its
Subsidiaries:
(a) shall keep its properties in such repair, working order and
condition, and shall from time to time make such repairs, replacements,
additions and improvements thereto as are reasonably necessary for the
efficient operation of its businesses and shall comply at all times in
all material respects with all material franchises, licenses and leases
to which it is party so as to prevent any loss or forfeiture thereof or
thereunder, except where failure to comply has not resulted, and does not
create a material risk of resulting, in the aggregate in any Material
Adverse Change; and
(b) shall do all things necessary to preserve, renew and keep in
full force and effect and in good standing its legal existence and
authority necessary to continue its business; provided, however, that
this Section 6.2.2(b) shall not prevent the merger, consolidation or
liquidation of Subsidiaries permitted by Section 6.11.
6.2.3. Statutory Compliance. Each of the Company and its
Subsidiaries shall comply in all material respects with all valid and
applicable statutes, laws, ordinances, zoning and building codes and
other rules and regulations of the United States of America, of the
states and territories thereof and their counties, municipalities and
other subdivisions and of any foreign country or other jurisdictions
applicable to such Person, except where failure so to comply has not
resulted, and does not create a material risk of resulting, in the
aggregate in any Material Adverse Change.
6.2.4. Compliance with Material Agreements. Each of the Company and
its Subsidiaries shall comply in all material respects with the Material
Agreements (to the extent not in violation of the other provisions of
this Agreement or any other Credit Document). Without the prior written
consent of the Required Lenders, no Material Agreement shall be amended,
modified, waived or terminated in any manner that would result in a
violation of this Agreement or any other Credit Document.
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6.3. Insurance.
6.3.1. Property Insurance. Each of the Company and its Subsidiaries
shall keep its assets which are of an insurable character insured by
financially sound and reputable insurers against theft and fraud and
against loss or damage by fire, explosion and hazards insured against by
extended coverage to the extent, in amounts and with deductibles at least
as favorable as those generally maintained by businesses of similar size
engaged in similar activities.
6.3.2. Liability Insurance. Each of the Company and its
Subsidiaries shall maintain with financially sound and reputable insurers
insurance against liability for hazards, risks and liability to persons
and property, including product liability insurance, to the extent, in
amounts and with deductibles at least as favorable as those generally
maintained by businesses of similar size engaged in similar activities;
provided, however, that it may effect workers' compensation insurance or
similar coverage with respect to operations in any particular state or
other jurisdiction through an insurance fund operated by such state or
jurisdiction or by meeting the self-insurance requirements of such state
or jurisdiction.
6.3.3. Key Executive Life Insurance. The Company shall maintain
with financially sound and reputable insurers life insurance policies on
each of Boyd L. Meyer, Robert E. Dods and Peter Chung in an amount of at
least $2,000,000, each in form reasonably satisfactory to the Agent.
6.4. Financial Statements and Reports. Each of the Company and its
Subsidiaries shall maintain a system of accounting in which correct entries
shall be made of all transactions in relation to their business and affairs in
accordance with generally accepted accounting practice. The fiscal year of the
Company and its Subsidiaries shall end on December 31 in each year and the
fiscal quarters of the Company and its Subsidiaries shall end on March 31, June
30, September 30 and December 31 in each year.
6.4.1. Annual Reports. The Company shall furnish to the Lenders as
soon as available, and in any event within 90 days after the end of each
fiscal year, the Consolidated and Consolidating balance sheets of the
Company and its Subsidiaries as at the end of such fiscal year, the
Consolidated and Consolidating statements of income and Consolidated
statements of changes in shareholders' equity and of cash flows of the
Company and its Subsidiaries for such fiscal year (all in reasonable
detail)
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and together with comparative figures for the immediately preceding
fiscal year, all accompanied by:
(a) Reports of independent certified public accountants of
recognized national standing reasonably satisfactory to the Required
Lenders containing no material qualifications to the effect that they
have audited the foregoing Consolidated financial statements in
accordance with generally accepted auditing standards and that such
consolidated financial statements present fairly, in all material
respects, the financial position of the Company and its Subsidiaries
covered thereby at the dates thereof and the results of their operations
for the periods covered thereby in conformity with GAAP.
(b) The statement of such accountants that they have caused this
Agreement to be reviewed and that in the course of their audit of the
Company and its Subsidiaries no facts have come to their attention that
cause them to believe that any Default exists under Sections 6.5 through
6.19 or, if such is not the case, specifying such Default and the nature
thereof. This statement is furnished by such accountants with the
understanding that the examination of such accountants cannot be relied
upon to give such accountants knowledge of any such Default except as it
relates to accounting or auditing matters within the scope of their
audit.
(c) A certificate of the Company signed by a Financial Officer to
the effect that such officer has caused this Agreement to be reviewed and
has no knowledge of any Default, or if such officer has such knowledge,
specifying such Default and the nature thereof, and what action the
Company has taken, is taking or proposes to take with respect thereto.
(d) Computations by the Company comparing the financial statements
referred to above with the most recent budget for such fiscal year
furnished to the Lenders in accordance with Section 6.4.4.
(e) Computations by the Company demonstrating, as of the end of
such fiscal year, compliance with the Computation Covenants, certified by
a Financial Officer.
(f) Calculations, as at the end of such fiscal year, of (i) the
Accumulated Benefit Obligations for each Plan covered by Title IV of
ERISA (other than Multiemployer Plans) and (ii) the fair market value of
the assets of such Plan allocable to such benefits.
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(g) Supplements to Exhibits 7.1, 7.3, 7.13.1 and 7.14 and exhibit
3.3 to the Guarantee and Security Agreement showing any changes in the
information set forth in such exhibits not previously furnished to the
Lenders in writing, as well as any changes in the Charter, Bylaws or
incumbency of officers of the Obligors from those previously certified to
the Agent.
(h) In the event of a change in GAAP after the Initial Closing
Date, computations by the Company, certified by a Financial Officer,
reconciling the financial statements referred to above with financial
statements prepared in accordance with GAAP as applied to the other
covenants in Section 6 and related definitions.
6.4.2. Quarterly Reports. The Company shall furnish to the Lenders
as soon as available and, in any event, within 45 days after the end of
each of the first three fiscal quarters of the Company, the internally
prepared Consolidated and Consolidating balance sheets of the Company and
its Subsidiaries as of the end of such fiscal quarter, the Consolidated
and Consolidating statements of income and Consolidated statements of
changes in shareholders' equity and of cash flows of the Company and its
Subsidiaries for such fiscal quarter and for the portion of the fiscal
year then ended (all in reasonable detail) and together with comparative
figures for the same period in the preceding fiscal year, all accompanied
by:
(a) A certificate of the Company signed by a Financial Officer to
the effect that such financial statements have been prepared in
accordance with GAAP and present fairly, in all material respects, the
financial position of the Company and its Subsidiaries covered thereby at
the dates thereof and the results of their operations for the periods
covered thereby, subject only to normal year-end audit adjustments and
the addition of footnotes.
(b) A certificate of the Company signed by a Financial Officer to
the effect that such officer has caused this Agreement to be reviewed and
has no knowledge of any Default, or if such officer has such knowledge,
specifying such Default and the nature thereof and what action the
Company has taken, is taking or proposes to take with respect thereto.
(c) Computations by the Company comparing the financial statements
referred to above with the most recent budget for the period covered
thereby furnished to the Lenders in accordance with Section 6.4.4.
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(d) Computations by the Company demonstrating, as of the end of
such quarter, compliance with the Computation Covenants, certified by a
Financial Officer.
(e) Supplements to Exhibits 7.1, 7.3, 7.13.1 and 7.14 and exhibit
3.3 to the Guarantee and Security Agreement showing any changes in the
information set forth in such exhibits not previously furnished to the
Lenders in writing, as well as any changes in the Charter, Bylaws or
incumbency of officers of the Obligors from those previously certified to
the Agent.
(f) In the event of a change in GAAP after the Initial Closing
Date, computations by the Company, certified by a Financial Officer,
reconciling the financial statements referred to above with financial
statements prepared in accordance with GAAP as applied to the other
covenants in Section 6 and related definitions.
6.4.3. Borrowing Base Reports. The Company shall furnish to the
Lenders, as soon as available and, in any event (a) within 10 days after
the end of each month, or (b) within 10 days following any request by the
Agent if more frequently than monthly, but not more frequently than once
per week, a certificate of a Financial Officer supplying computations of
the Borrowing Base at the end of such month (or week, as the case may
be).
6.4.4. Other Reports. The Company shall promptly furnish to the
Lenders:
(a) As soon as prepared and in any event within 30 days after the
beginning of each fiscal year, an annual budget for such fiscal year of
the Company and its Subsidiaries.
(b) Any material updates of such budget delivered to the Company's
Board of Directors for their review.
(c) Any management letters furnished to the Company or any of its
Subsidiaries by the Company's auditors.
(d) All monthly financial statements furnished generally to the
shareholders of the Company.
(e) Such registration statements, proxy statements and reports,
including Forms S-l, S-2, S-3, S-4, 10-K, 10-Q and 8-K, as may be filed
by
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the Company or any of its Subsidiaries with the Securities and Exchange
Commission.
(f) Any 90-day letter or 30-day letter from the federal Internal
Revenue Service (or the equivalent notice received from state or other
taxing authorities) asserting tax deficiencies against the Company or any
of its Subsidiaries.
6.4.5. Notice of Litigation, Defaults, etc. Promptly after any
Financial Officer acquires knowledge thereof, the Company shall furnish
to the Lenders notice of any litigation or any administrative or
arbitration proceeding (a) which creates a material risk of resulting,
after giving effect to any applicable insurance, in the payment by the
Company and its Subsidiaries of more than $500,000 or (b) which results,
or creates a material risk of resulting, in a Material Adverse Change.
Promptly after any Financial Officer acquires knowledge thereof, the
Company shall notify the Lenders of the existence of any Default or
Material Adverse Change, specifying the nature thereof and what action
the Company or any Subsidiary has taken, is taking or proposes to take
with respect thereto.
6.4.6. ERISA Reports. The Company shall furnish to the Lenders as
soon as available the following items with respect to any Plan:
(a) any request for a waiver of the funding standards or an
extension of the amortization period,
(b) any reportable event (as defined in section 4043 of ERISA),
unless the notice requirement with respect thereto has been waived by
regulation,
(c) any notice received by any ERISA Group Person that the PBGC has
instituted or intends to institute proceedings to terminate any Plan, or
that any Multiemployer Plan is insolvent or in reorganization,
(d) notice of the possibility of the termination of any Plan by its
administrator pursuant to section 4041 of ERISA, and
(e) notice of the intention of any ERISA Group Person to withdraw,
in whole or in part, from any Multiemployer Plan.
6.4.7. Other Information; Audit. From time to time at reasonable
intervals upon written request of any authorized officer of any Lender,
each
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of the Company and its Subsidiaries shall furnish to the Lenders such
other information (in a form substantially consistent with the
information historically prepared by the Company) regarding the business,
assets, financial condition or income of the Company and its Subsidiaries
as such officer may reasonably request, including copies of all tax
returns and material licenses, agreements, leases and instruments to
which any of the Company or its Subsidiaries is party. The Lenders'
authorized officers and representatives shall have the right during
normal business hours upon reasonable notice and at reasonable intervals
to examine the books and records of the Company and its Subsidiaries, to
make copies and notes therefrom for the purpose of ascertaining
compliance with or obtaining enforcement of this Agreement or any other
Credit Document. The Agent, upon reasonable advance notice, may
undertake to have the Company and its Subsidiaries reviewed by the
Agent's commercial financial examiners one time per year in the absence
of an Event of Default and upon its request upon the occurrence and
during the continuance of an Event of Default.
6.5. Certain Financial Tests.
6.5.1. Consolidated Total Debt to Consolidated EBITDA. Consolidated
Total Debt shall not on the last day of any fiscal quarter of the Company
exceed the percentage set forth in the table below of Consolidated EBITDA
for the then most recently completed period of four consecutive fiscal
quarters.
<TABLE>
<CAPTION>
Period Ending Percentage
---------------------------------- ----------
<S> <C>
January 1997 through June 1997 300%
July 1997 through December 1997 275%
January 1998 through December 1998 225%
January 1999 and thereafter 175%
</TABLE>
6.5.2. Consolidated EBITDA to Consolidated Interest Expense. For
each period of four consecutive fiscal quarters, Consolidated EBITDA
shall equal or exceed 300% of Consolidated Interest Expense.
6.5.3. Consolidated Adjusted EBITDA to Consolidated Fixed Charges.
On the last day of each fiscal quarter, Consolidated Adjusted EBITDA for
the period of four consecutive fiscal quarters then ending shall equal or
exceed the percentage of Consolidated Fixed Charges for such period
specified in the table below:
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<PAGE> 63
<TABLE>
<CAPTION>
Period Ending Percentage
- ------------- ----------
<S> <C>
Prior to January 1998 115%
January 1998 and thereafter 125%
</TABLE>
6.5.4. Consolidated EBITDA. For each fiscal quarter of the Company,
Consolidated EBITDA for the period of four consecutive fiscal quarters
then ending shall equal or exceed the amount indicated in the table
below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Amount
- --------------------- -----------
<S> <C>
March 31, 1997 $17,250,000
June 30, 1997 $17,500,000
September 30, 1997 $17,750,000
December 31, 1997 $19,500,000
March 31, 1998 $19,750,000
June 30, 1998 $20,000,000
September 30, 1998 $20,250,000
December 31, 1998 $21,000,000
March 31, 1999 $21,250,000
June 30, 1999 $21,500,000
September 30, 1999 $21,750,000
December 31, 1999 and thereafter $22,500,000
</TABLE>
6.5.5. Capital Expenditures. The aggregate amount of Capital
Expenditures in any fiscal year of the Company shall not exceed the sum
of:
(a) property insurance proceeds received as the result of the
destruction of property, plant or equipment,
plus (b) to the extent not used to make Distributions permitted by
Section 6.10 or prepayments of the Loan required by Section 4.3,
Consolidated Excess Cash Flow for the most recently completed fiscal year
for which financial statements have been (or are required to have been)
furnished to the Lenders in accordance with Section 6.4.1,
plus (c) Designated Affiliate Equity Proceeds,
plus (d) the excess of the amount of Capital Expenditures permitted
to be made under this Section 6.5.5 during the most recently completed
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fiscal year over the amount of Capital Expenditures actually made during
such year,
plus (e) the amount indicated in the table below:
<TABLE>
<CAPTION>
Fiscal Year Ending Amount
- ------------------ ----------
<S> <C>
December 1997 $5,500,000
December 1998 $6,000,000
December 1999 $6,500,000
December 2000 and thereafter $7,000,000
</TABLE>
6.6. Indebtedness. Neither the Company nor any of its Subsidiaries shall
create, incur, assume or otherwise become or remain liable with respect to any
Indebtedness, except the following:
6.6.1. Indebtedness in respect of the Credit Obligations.
6.6.2. Guarantees permitted by Section 6.7.
6.6.3. Current liabilities, other than Financing Debt, incurred in
the ordinary course of business.
6.6.4. To the extent that payment thereof shall not at the time be
required by Section 6.1, Indebtedness in respect of taxes, assessments,
governmental charges and claims for labor, materials and supplies.
6.6.5. Indebtedness secured by Liens of carriers, warehouses,
mechanics and landlords permitted by Sections 6.8.5 and 6.8.6.
6.6.6. Indebtedness in respect of judgments or awards (a) which have
been in force for not more than 10 days past the applicable appeal period
or (b) in respect of which the Company or any Subsidiary shall at the
time in good faith be prosecuting an appeal or proceedings for review
and, in the case of each of clauses (a) and (b), the Company or such
Subsidiary shall have taken appropriate reserves therefor in accordance
with GAAP.
6.6.7. To the extent permitted by Section 6.8.9, Indebtedness in
respect of Capitalized Lease Obligations or secured by purchase money
security interests; provided, however, that the aggregate principal
amount of all Indebtedness permitted by this Section 6.6.7 at any one
time outstanding shall not exceed $1,000,000.
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<PAGE> 65
6.6.8. Indebtedness in respect of deferred taxes arising in the
ordinary course of business.
6.6.9. Indebtedness in respect of inter-company loans and advances
among the Company and its Subsidiaries which are not prohibited by
Section 6.9.
6.6.10. Unfunded pension liabilities and obligations with respect to
Plans so long as the Company is in compliance with Section 6.17.
6.6.11. Indebtedness outstanding on the date hereof and described in
Exhibit 7.3 and (except with respect to any subordinated debt, which
shall be terminated on the Initial Closing Date) all renewals and
extensions thereof not in excess of the amount thereof outstanding
immediately prior to such renewal or extension.
6.6.12. Guaranteed minimum payments under license agreements due
within 12 months.
6.6.13. Notes issued by the Company as payment for the redemption of
stock permitted by Section 6.10.7 in an aggregate amount not exceeding
the sum of $1,500,000 plus Designated Affiliate Equity Proceeds at any
one time outstanding, which notes shall be subordinated to the Credit
Obligations on terms satisfactory to the Required Lenders.
6.6.14. Indebtedness (other than Financing Debt) in addition to the
foregoing; provided, however, that the aggregate amount of all such
Indebtedness at any one time outstanding shall not exceed the sum of
$1,000,000 plus Designated Affiliate Equity Proceeds.
6.7. Guarantees; Letters of Credit. Neither the Company nor any of its
Subsidiaries shall become or remain liable with respect to any Guarantee,
including reimbursement obligations, whether contingent or matured, under
letters of credit or other financial guarantees by third parties, except the
following:
6.7.1. Letters of Credit and Guarantees of the Credit Obligations.
6.7.2. Guarantees by the Company, the Borrower or any Subsidiary of
Indebtedness and other obligations incurred by its Subsidiaries and
permitted by Section 6.6.
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6.7.3. Documentary letters of credit issued by financial
institutions reasonably acceptable to the Required Lenders in the event
the Agent and the other Lenders refuse to issue Letters of Credit
requested by the Borrower at commercially reasonable rates; provided,
however, that the sum of (a) Nonfacility Letter of Credit Exposure plus
Letter of Credit Exposure shall not exceed $1,500,000 at any one time
outstanding.
6.7.4. Contingent liabilities of the Borrower in respect of the
negotiation through BankBoston of irrevocable documentary letters of
credit issued to the Borrower in connection with the sale of products to
its customers F.O.B. Hong Kong in the ordinary course of business.
6.8. Liens. Neither the Company nor any of its Subsidiaries shall create
incur or enter into, or suffer to be created or incurred or to exist, any Lien
(or become contractually committed to do so), except the following:
6.8.1. Liens on the Credit Security that secure the Credit
Obligations.
6.8.2. Liens to secure taxes, assessments and other governmental
charges, to the extent that payment thereof shall not at the time be
required by Section 6.1.
6.8.3. Deposits or pledges made (a) in connection with, or to secure
payment of, workers' compensation, unemployment insurance, old age
pensions or other social security, (b) in connection with casualty
insurance maintained in accordance with Section 6.3,(c) to secure the
performance of bids, tenders, contracts (other than contracts relating to
Financing Debt) or leases, (d) to secure statutory obligations or surety
or appeal bonds, (e) to secure indemnity, performance or other similar
bonds in the ordinary course of business or (f) in connection with
contested amounts to the extent that payment thereof shall not at that
time be required by Section 6.1.
6.8.4. Liens in respect of judgments or awards, to the extent that
such judgments or awards are permitted by Section 6.6.6 but only to the
extent that such Liens are junior to the Liens on the Credit Security
granted to secure the Credit Obligations.
6.8.5. Liens of carriers, warehouses, mechanics and similar Liens,
in each case (a) in existence less than 180 days from the date of
creation thereof and the amount being secured thereby becoming due and
payable or
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\
(b) being contested in good faith by the Company or any Subsidiary in
appropriate proceedings (so long as the Company or such Subsidiary shall,
in accordance with GAAP, have set aside on its books adequate reserves
with respect thereto).
6.8.6. Encumbrances in the nature of (a) zoning restrictions, (b)
easements, (c) restrictions of record on the use of real property, (d)
landlords' and lessors' Liens on rented premises and (e) restrictions on
transfers or assignment of leases, which in each case do not materially
impair the use thereof in the business of the Company or any Subsidiary.
6.8.7. Restrictions under federal and state securities laws on the
transfer of securities.
6.8.8 Restrictions under Foreign Trade Regulations on the transfer
or licensing of certain assets of the Company and its Subsidiaries.
6.8.9. Liens constituting (a) purchase money security interests
(including mortgages, conditional sales, Capitalized Leases and any other
title retention or deferred purchase devices) in real property, interests
in leases or tangible personal property (other than inventory) existing
or created on the date on which such property is acquired or within 180
days thereafter, and (b) the renewal, extension or refunding of any
security interest referred to in the foregoing clause (a) in an amount
not to exceed the amount thereof remaining unpaid immediately prior to
such renewal, extension or refunding; provided, however, that (i) each
such security interest shall attach solely to the particular item of
property so acquired, and the principal amount of Indebtedness (including
Indebtedness in respect of Capitalized Lease Obligations) secured thereby
shall not exceed the cost (including all such Indebtedness secured
thereby, whether or not assumed) of such item of property; and (ii) he
aggregate principal amount of all Indebtedness secured by Liens permitted
by this Section 6.8.9 shall not exceed the amount permitted by Section
6.6.7.
6.8.10. Lens as in effect on the date hereof described in Exhibit
7.3 and securing Indebtedness permitted by Section 6.6.11.
6.8.11. Licenses and sublicenses to other Persons to the extent
permitted by Section 6.11.
6.8.12. Setoff rights of depository banks.
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6.8.13. Security interests in shipping documents, invoices and
warehouse receipts delivered against payment under letters of credit
permitted by Section 6.7.4 to secure the reimbursement obligations of the
Company and its Subsidiaries with respect thereto.
6.8.14. The sale of defaulted accounts receivable pursuant to a
contingent put exercised by the Company and its Subsidiaries under a
non-notification arrangement with a financial institution providing
credit support for accounts receivable.
6.9. Investments and Acquisitions. Neither the Company nor any of its
Subsidiaries shall have outstanding, acquire or hold any Investment (including
any Investment consisting of the acquisition of any business) (or become
contractually committed to do so regardless of compliance with this Agreement),
except the following:
6.9.1. Cash Investments of the Company and its Subsidiaries in (a)
the Borrower or Wholly Owned Subsidiaries which are Guarantors as of the
date hereof and (b) Persons that have become Wholly Owned Subsidiaries
and Guarantors after that date hereof; provided, however, that no such
Investment shall involve the transfer by the Company of any material
assets other than cash.
6.9.2. Intercompany loans and advances among the Company and its
Wholly Owned Subsidiaries to the extent reasonably necessary for
Consolidated tax planning and working capital management; provided,
however, that loans and advances from a Foreign Subsidiary to the Company
or a Domestic Subsidiary must be subordinated to the Credit Obligations
pursuant to a subordination agreement in substantially the form of
Exhibit 6.9.2.
6.9.3. Investments in Cash Equivalents.
6.9.4. Guarantees permitted by Section 6.7.
6.9.5. Loans and advances in an aggregate amount not exceeding
$2,000,000 at any one time outstanding to manufacturers of the Borrower's
products, which loans and advances that exceed 270 days in duration
(including refinancings thereof by additional such loans and advances)
shall be evidenced by promissory notes and pledged to the Agent pursuant
to the Guarantee and Security Agreement or the Hong Kong Collateral
Debenture.
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6.9.6. So long as immediately before and after giving effect thereto
no Event of Default exists when a particular Investment is made,
Investments of the Company and its Wholly Owned Subsidiaries in Foreign
Wholly Owned Subsidiaries; provided, however, that (a) such Investments
shall not involve the transfer of substantial assets from the Company and
its Domestic Subsidiaries to its Foreign Subsidiaries, other than cash,
and (b) Investments of the Company and its Domestic Subsidiaries in
Foreign Subsidiaries made pursuant to this Section after the Initial
Closing Date shall be permitted only to the extent reasonably necessary
for working capital.
6.9.7. Loans by the Company to members of the Management Group and
other officers employees or directors of the Obligors to finance the
purchase of stock in the Company so long as (a) the aggregate principal
amount of such loans does not exceed $1,000,000 at any one time
outstanding and (b) such loans are evidenced by notes that are pledged to
the Agent in accordance with the Guarantee and Security Agreement.
6.9.8. Mergers permitted by Section 6.11.
6.9.9. Investments outstanding on the date hereof and described in
Exhibit 7.3.
6.9.10. So long as immediately after giving effect thereto no
Default exists, Investments made directly from the proceeds of Designated
Affiliate Equity Proceeds.
6.10. Distributions. Neither the Company nor any of its Subsidiaries
shall make any Distribution, except for the following:
6.10.1. Subsidiaries of the Company may make Distributions to the
Borrower or any Wholly Owned Subsidiary of the Company and the Company
may make Investments permitted by Sections 6.9.1 and 6.9.2.
6.10.2. So long as immediately before and after giving effect
thereto no Default exists, the Company may redeem stock owned by
employees, officers and directors of the Obligors in an aggregate amount
since the Initial Closing Date not exceeding the sum of (i) $500,000 in
cash in any fiscal year plus (ii) notes permitted by Section 6.6.14.
6.10.3. Distributions made directly from the proceeds of Designated
Affiliate Equity Proceeds.
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6.10.4. The Company may reimburse members of the Willis Stein Group
for their out-of-pocket expenses in connection with the ongoing
management of the Company and its Subsidiaries.
6.10.5. Cash Distributions to the Company to pay its current
obligations in the ordinary course of business, including the payment of
amounts permitted by Section 6.9 and the other provisions
of this Section 6.10.
6.10.6. Repayment on the Initial Closing Date of subordinated debt
at face value described in Exhibit 7.3.
6.10.7. The Company may repurchase its shares of capital stock owned
by the Willis Stein Group or the Management Group on the Initial Closing
Date as contemplated by the prospectus for the Public Offering.
6.11. Asset Dispositions and Mergers. Neither the Company nor any of
its Subsidiaries shall merge or enter into a consolidation or sell, lease,
sell and lease back, sublease or otherwise dispose of any of its assets
(or become contractually committed to do so), except the following:
6.11.1. The Company and any of its Subsidiaries may sell or
otherwise dispose of (a) inventory and Cash Equivalents in the ordinary
course of business, (b) tangible assets to be replaced in the ordinary
course of business within 12 months by other tangible assets of equal or
greater value and (c) tangible assets that are no longer used or useful
in the business of the Company or such Subsidiary, the fair market value
(or book value if greater) of which shall not exceed $500,000 in any
fiscal year.
6.11.2. Any Wholly Owned Subsidiary of the Company may merge or be
liquidated into the Company or any other Wholly Owned Subsidiary of the
Company so long as after giving effect to any such merger to which the
Borrower is a party the Borrower shall be the surviving or resulting
Person.
6.11.3. Investments permitted by Section 6.9.5.
6.11.4. So long as immediately before and after giving effect
thereto no Default exists, the Company and its Subsidiaries may sell
assets having a fair market value (or book value if greater) not
exceeding
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$1,000,000 in any fiscal year so long as the Net Asset Sale Proceeds
thereof are applied to repay the Loan as required by Section 4.3.3.
6.11.5. Licensing of products and intangible assets for fair value
in the ordinary course of business.
6.11.6. Sales of defaulted accounts receivable permitted by
Section 6.8.15.
6.12. Lease Obligations. Neither the Company nor any of its Subsidiaries
shall be or become obligated as lessee under any lease except (or become
contractually committed to do so), except the following:
6.12.1. Capitalized Leases permitted by Sections 6.6.7 and 6.8.9.
6.12.2. Leases other than Capitalized Leases; provided, however,
that the aggregate fixed rental obligations for any year (excluding
payments required to be made by the lessee in respect of taxes and
insurance whether or not denominated as rent) shall not exceed
$1,500,000.
6.13. Issuance of Stock by Subsidiaries: Subsidiary Distributions.
6.13.1. Issuance of Stock by Subsidiaries. No Subsidiary shall
issue or sell any shares of its capital stock or other evidence of
beneficial ownership to any Person other than (a) the Company or any
Wholly Owned Subsidiary of the Company, which shares shall have been
pledged to the Agent as part of the Credit Security to the extent
required by the Guarantee and Security Agreement and (b) directors of
Subsidiaries as qualifying shares to the extent required by Legal
Requirements and, in the case of Foreign Subsidiaries, shares required by
Legal Requirements to be held by foreign nationals.
6.13.2. No Restrictions on Subsidiary Distributions. Except for
this Agreement and the Credit Documents or to the extent required by law,
neither the Company nor any Subsidiary shall enter into or be bound by
any agreement (including covenants requiring the maintenance of specified
amounts of net worth or working capital) restricting the right of any
Subsidiary to make Distributions or extensions of credit to the Company
(directly or indirectly through another Subsidiary).
6.14. Voluntary Prepayments of Other Indebtedness. Except for the
repayment of subordinated debt described in Exhibit 7.3 on the Initial Closing
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Date, neither the Company nor any of its Subsidiaries shall make any voluntary
prepayment of principal of or interest on any Financing Debt (other than the
Credit Obligations) or make any voluntary redemptions or repurchases of
Financing Debt (other than the Credit Obligations), in each case except in
order to facilitate a refinancing thereof permitted by Section 6.6.
6.15. Derivative Contracts. Neither the Company nor any of its
Subsidiaries shall enter into any Interest Rate Protection Agreement, foreign
currency exchange contract or other financial or commodity derivative contracts
except to provide hedge protection for an underlying economic transaction in
the ordinary course of business.
6.16. Negative Pledge Clauses. Neither the Company nor any of its
Subsidiaries shall enter into any agreement, instrument, deed or lease which
prohibits or limits the ability of the Company or any of its Subsidiaries to
create, incur, assume or suffer to exist any Lien upon any of their respective
properties, assets or revenues, whether now owned or hereafter acquired, or
which requires the grant of any collateral for such obligation if collateral is
granted for another obligation, except the following:
6.16.1. This Agreement and the other Credit Documents.
6.16.2. Covenants in documents creating Liens permitted by
Section 6.8 prohibiting further Liens on the assets encumbered thereby.
6.17. ERISA., Etc. Each of the Company and its Subsidiaries shall comply,
and shall cause all ERISA Group Persons to comply, in all material respects,
with the provisions of ERISA and the Code applicable to each Plan. Each of the
Company and its Subsidiaries shall meet, and shall cause all ERISA Group
Persons to meet, all minimum funding requirements applicable to them with
respect to any Plan pursuant to section 302 of ERISA or section 412 of the
Code, without giving effect to any waivers of such requirements or extensions
of the related amortization periods which may be granted. At no time shall the
Accumulated Benefit Obligations under any Plan that is not a Multiemployer Plan
exceed the fair market value of the assets of such Plan allocable to such
benefits by more than $500,000. The Company and its Subsidiaries shall not
withdraw and shall cause all other ERISA Group Persons not to withdraw, in
whole or in part, from any Multiemployer Plan so as to give rise to withdrawal
liability exceeding $500,000 in the aggregate. At no time shall the actuarial
present value of unfunded liabilities for post-employment health care benefits,
whether or not provided under a Plan, calculated in a manner consistent with
Statement No. 106 of the Financial Accounting Standards Board, exceed $500,000.
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6.18 Transactions with Affiliates. Neither the Company nor any of its
Subsidiaries shall effect any transaction with any of their respective
Affiliates (except for the Company and its Subsidiaries) on a basis less
favorable to the Company and its Subsidiaries than would be the case if such
transaction had been effected with a non-Affiliate.
6.19. Restricted Operation of Company and Banerjan. The Company will
conduct no operations other than acquiring and owning the capital stock of the
Borrower and activities incidental thereto. The Company will own no material
assets other than the stock of the Borrower and cash expected to be spent
within 90 days in the ordinary course of business. Each of Banerjan and any
other Foreign Subsidiary will own no cash or Cash Equivalents other than
amounts expected to be spent within 90 days in the ordinary course of business.
7. Representations and Warranties. In order to induce the Lenders to extend
credit to the Company hereunder, each of the Company and such of its
Subsidiaries as are party hereto from time to time jointly and severally
represents and warrants as of the date hereof and each Closing Date as follows:
7.1. Organization and Business.
7.1.1. The Company. The Company is a duly organized and validly
existing corporation, in good standing under the laws of Delaware, with
all power and authority, corporate or otherwise, necessary to (a) enter
into and perform this Agreement and each other Credit Document to which
it is party, (b) grant the Agent for the benefit of the Lenders the
security interests in the Credit Security owned by it to secure the
Credit Obligations and (c) own its properties and carry on the business
now conducted or proposed to be conducted by it. Certified copies of the
Charter and By-laws of the Company have been previously delivered to the
Agent and are correct and complete. Exhibit 7.1, as from time to time
hereafter supplemented in accordance with Sections 6.4.1 and 6.4.2, sets
forth, as of the later of the date hereof or the end of the most recent
fiscal quarter for which financial statements are required to be
furnished in accordance with such Sections, (i) the jurisdiction of
incorporation of the Company, (ii) the address of the Company's principal
executive office and chief place of business, (iii) each name, including
any trade name, under which the Company conducts its business and (iv)
the jurisdictions in which the Company keeps tangible personal property.
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7.1.2. Subsidiaries. Each Subsidiary of the Company is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized, with all power and authority,
corporate or otherwise, necessary to (a) enter into and perform this
Agreement and each other Credit Document to which it is party, (b) incur
and guarantee the Credit Obligations, (c) grant the Agent for the benefit
of the Lenders the security interest in the Credit Security owned by such
Subsidiary to secure the Credit Obligations and (d) own its properties
and carry on the business now conducted or proposed to be conducted by
it. Certified copies of the Charter and By-laws of each Subsidiary of
the Company have been previously delivered to the Agent and are correct
and complete. Exhibit 7.1, as from time to time hereafter supplemented
in accordance with Sections 6.4.1 and 6.4.2, sets forth, as of the later
of the date hereof or the end of the most recent fiscal quarter for which
financial statements are required to be furnished in accordance with such
Sections, (i) the name and jurisdiction of organization of each
Subsidiary of the Company, (ii) the address of the chief executive office
and principal place of business of each such Subsidiary, (iii) each name
under which each such Subsidiary conducts its business, (iv) each
jurisdiction in which each such Subsidiary keeps tangible personal
property, and (v) the number of authorized and issued shares and
ownership of each such Subsidiary.
7.1.3. Qualification. Each of the Company and its Subsidiaries is
duly and legally qualified to do business as a foreign corporation or
other entity and is in good standing in each state or jurisdiction in
which such qualification is required and is duly authorized, qualified
and licensed under all laws, regulations, ordinances or orders of public
authorities, or otherwise, to carry on its business in the places and in
the manner in which it is conducted, except for failures to be so
qualified, authorized or licensed which would not in the aggregate
result, or create a material risk of resulting, in any Material Adverse
Change.
7.1.4. Capitalization. No options, warrants, conversion rights,
preemptive rights or other statutory or contractual rights to purchase
shares of capital stock or other securities of any Subsidiary now exist,
nor has any Subsidiary authorized any such right, nor is any Subsidiary
obligated in any other manner to issue shares of its capital stock or
other securities.
7.2. Financial Statements and Other Information: Material Agreements.
7.2.1. Financial Statements and Other Information. The Company has
previously furnished to the Lenders copies of the following:
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(a) The audited combined balance sheets of the Borrower and
Dods-Meyer, Ltd. as at December 31 in each of 1995 and 1994 and the
audited combined statements of income, of changes in shareholders' equity
and of cash flows of the Borrower and Dods-Meyer, Ltd. for each of the
three years in the period ended December 31, 1995.
(b) The audited combined balance sheets of Racing Champions
Limited, Garnett Services Inc. and Hosten Investment Limited as at March
31 in each of 1995 and 1994 and the audited combined statements of
income, of changes in shareholders' equity and of cash flows of Racing
Champions Limited, Garnett Services, Inc. and Hosten Investment Limited
for each of the three years in the period ended March 31, 1995 .
(c) The audited Consolidated and unaudited Consolidating balance
sheets of the Company and its Subsidiaries as at December 31, 1996 and
the audited Consolidated and unaudited Consolidating statements of income
and the audited Consolidated statements of changes in shareholders'
equity and of cash flows of the Company and its Subsidiaries for the year
then ended.
(d) The unaudited Consolidated and Consolidating balance sheets of
the Company and its Subsidiaries as at March 31, 1997 and the unaudited
Consolidated statements of income, of changes in shareholders' equity and
of cash flows of the Company and its Subsidiaries for the portion of the
fiscal year then ended.
(e) The three-year financial and operational projections for the
Company and its Subsidiaries dated April 1997.
(f) Calculations demonstrating pro forma compliance with the
Computation Covenants designated by the Agent as of the end of the most
recent month preceding the date hereof.
(g) The Registration Statement on Form S-1, together with all
amendments thereto, filed by the Company with the Securities and Exchange
Commission in connection with the Public Offering.
The audited financial statements (including the notes thereto)
referred to in clauses (a), (b) and (c) above were prepared in accordance
with GAAP and fairly present in all material respects the financial
position of the Persons covered thereby at the respective dates thereof
and the
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results of their operations for the periods covered thereby. The
unaudited Consolidating financial statements referred to in clause (c)
above and the unaudited Consolidated and Consolidating financial
statements referred to in clause (d) above were prepared in accordance
with GAAP and fairly present in all material respects the financial
position of the Company and its Subsidiaries at the respective dates
thereof and the results of their operations for the periods covered
thereby, subject to normal yearend audit adjustment and the addition of
footnotes in the case of interim financial statements. Neither the
Company nor any of its Subsidiaries has any known contingent liability
material to the Company and its Subsidiaries on a Consolidated basis
which is not reflected in the balance sheets referred to in clauses (a),
(b), (c) or (d) above (or delivered pursuant to Sections 6.4.1 or 6.4.2)
or in the notes thereto.
In the Company's judgment, the financial and operational projections
referred to in clause (e) above constitute a reasonable basis as of the
Initial Closing Date for the assessment of the future performance of the
Company and its Subsidiaries during the periods indicated therein, it
being understood that any projected financial information represents an
estimate, based on various assumptions, of future results of operations
which may or may not in fact occur.
The registration statement described in clause (g) above does not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statement contained therein
not misleading in light of the circumstances under which they were made.
7.2.2 Material Agreements. The Company has previously furnished to
the Lenders correct and complete copies, including all exhibits,
schedules and amendments thereto, of the agreements, each as in effect on
the date hereof, listed in Exhibit 7.2.2 (the "Material Agreements").
7.3. Agreements Relating to Financing Debt, Investments, etc. Exhibit
7.3, as from time to time hereafter supplemented in accordance with Sections
6.4.1 and 6.4.2, sets forth (a) the amounts (as of the dates indicated in
Exhibit 7.3, as so supplemented) of all Financing Debt of the Company and its
Subsidiaries exceeding $100,000 and all agreements which relate to such
Financing Debt, (b) all Liens and Guarantees with respect to such Financing
Debt, (c) all agreements which directly or indirectly require the Company or
any Subsidiary to make any Investment exceeding $100,000, (d) material license
agreements with respect to the products of the Company and its Subsidiaries,
including the parties thereto and the expiration dates thereof and (e) all
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trademarks, trade names, service marks, service names and patents registered
with the federal Patent and Trademark Office (or with respect to which
applications for such registration have been filed). The Company has furnished
the Lenders with correct and complete copies of any agreements and information
described in clauses (a), (b), (c), (d) and (e) above requested by the Required
Lenders.
7.4. Changes in Condition. Since December 31, 1996 no Material Adverse
Change has occurred. Between December 31, 1996 and the Initial Closing Date,
neither the Borrower nor either of Banerjan or the Company has entered into any
material transaction outside the ordinary course of business except for the
transactions contemplated by this Agreement and the Material Agreements,
including the Acquisition Agreement.
7.5. Title to Assets. The Company and its Subsidiaries have good and
marketable title to, or license or leasehold rights in, all assets necessary
for or used in the operations of their business as now conducted by them and
reflected in the most recent balance sheet referred to in Section 7.2.1 (or the
balance sheet most recently furnished to the Lenders pursuant to Sections 6.4.1
or 6.4.2), and to all assets acquired subsequent to the date of such balance
sheet, subject to no Liens except for Liens permitted by Section 6.8 and except
for assets disposed of as permitted by Section 6.11.
7.6. Operations in Conformity With Law, etc. The operations of the
Company and its subsidiaries as now conducted or proposed to be conducted are
not in violation of, nor is the Company or its Subsidiaries in default under,
any Legal Requirement presently in effect, except for such violations and
defaults as do not and will not, in the aggregate, result, or create a material
risk of resulting, in any Material Adverse Change. Since the Acquisition, the
Company has received no notice of any such violation or default and has no
knowledge of any basis on which the operations of the Company or its
Subsidiaries, as now conducted and as currently proposed to be conducted after
the date hereof, would be held so as to violate or to give rise to any such
violation or default.
7.7. Litigation. No litigation, at law or in equity, or any proceeding
before any court, board or other governmental or administrative agency or any
arbitrator is pending or, to the knowledge of the Company or any Guarantor,
threatened which is likely to result in any final judgment, order or liability
which, after giving effect to any applicable insurance, has resulted, or is
likely to result, in any Material Adverse Change or which seeks to enjoin the
consummation, or which questions the validity, of any of the transactions
contemplated by this Agreement or any other Credit Document. No judgment,
decree or order of any court, board or other governmental or administrative
agency or any arbitrator has
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been issued against or binds the Company or any of its Subsidiaries which has
resulted, or is likely to result, in any Material Adverse Change.
7.8. Authorization and Enforceability. Each of the Company and each other
Obligor has taken all corporate action required to execute, deliver and perform
this Agreement and each other Credit Document to which it is party. No consent
of stockholders of the Company is necessary in order to authorize the
execution, delivery or performance of this Agreement or any other Credit
Document to which the Company is party. Each of this Agreement and each other
Credit Document constitutes the legal, valid and binding obligation of each
Obligor party thereto and is enforceable against such Obligor in accordance
with its terms, subject to bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting the rights and remedies of
creditors and secured parties and general principles of equity.
7.9. No Legal Obstacle to Agreements. Neither the execution and delivery
of this Agreement or any other Credit Document, nor the making of any
borrowings hereunder, nor the guaranteeing of the Credit Obligations, nor the
securing of the Credit Obligations with the Credit Security, nor the
consummation of any transaction referred to in or contemplated by this
Agreement or any other Credit Document, nor the fulfillment of the terms hereof
or thereof or of any other agreement, instrument, deed or lease contemplated by
this Agreement or any other Credit Document, has constituted or resulted in or
will constitute or result in:
(a) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company, any of its Subsidiaries
or any other Obligor is a party or by which it is bound, or of the
Charter or By-laws of the Company, any of its subsidiaries or any other
Obligor;
(b) the violation of any law, statute, judgment, decree or
governmental order, rule or regulation applicable to the Company, any of
its Subsidiaries or any other Obligor;
(c) the creation under any agreement, instrument, deed or lease of
any Lien (other than Liens on the Credit Security which secure the Credit
Obligations) upon any of the assets of the Company, any of its
Subsidiaries or any other Obligor; or
(d) any redemption, retirement or other repurchase obligation of
the Company, any of its Subsidiaries or any other Obligor under any
Charter, By-law, agreement, instrument, deed or lease.
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No approval, authorization or other action by, or declaration to or filing
with, any governmental or administrative authority or any other Person is
required to be obtained or made by the Company, any of its Subsidiaries or any
other Obligor in connection with the execution, delivery and performance of
this Agreement, the Notes or any other Credit Document, the transactions
contemplated hereby or thereby, the making of any borrowing hereunder, the
guaranteeing of the Credit Obligations or the securing of the Credit
Obligations with the Credit Security, other than filings necessary to perfect
the security interests in the Credit Security.
7.10. Defaults. Neither the Company nor any of its Subsidiaries is in
default under any provision of its Charter or By-laws. Neither the Company nor
any of its Subsidiaries is in default under any provision of any agreement,
instrument, deed or lease to which it is party or by which it or its property
is bound so as to result, or create a material risk of resulting, in any
Material Adverse Change. Neither the Company nor any of its Subsidiaries has
violated any law, judgment, decree or governmental order, rule or regulation,
in each case so as to result, or create a material risk of resulting, in any
Material Adverse Change.
7.11. Licenses, etc. The Company and its Subsidiaries have all patents,
patent applications patent licenses, patent rights, trademarks, trademark
rights, trade names, trade name rights, copyrights, licenses, franchises,
permits, authorizations and other rights as are reasonably necessary for the
conduct of the business of the Company and its Subsidiaries as now conducted by
them. All of the foregoing are in full force and effect in all material
respects, and each of the Company and its Subsidiaries is in substantial
compliance with the foregoing without any known conflict with the valid rights
of others which has resulted, or creates a material risk of resulting, in any
Material Adverse Change. No event has occurred which permits, or after notice
or lapse of time or both would permit, the revocation or termination of any
such license, franchise or other right or which affects the rights of any of
the Company and its Subsidiaries thereunder so as to result or to create a
material risk of resulting, in any Material Adverse Change. No litigation or
other proceeding or dispute exists with respect to the validity or, where
applicable, the extension or renewal, of any of the foregoing which has
resulted, or creates a material risk of resulting, in any Material Adverse
Change.
7.12. Tax Return. Each of the Company and its Subsidiaries has filed all
material tax and information returns which are required to be filed by it and
has paid, or made adequate provision for the payment of, all taxes which have
or may become due pursuant to such returns or to any assessment received by it,
other than taxes and assessments being contested by the Company and its
Subsidiaries in good faith by appropriate proceedings and for which adequate
reserves have been taken in accordance with GAAP. Neither the Company nor any
of its subsidiaries
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knows of any material additional assessments or any basis therefor. The
Company reasonably believes that the charges, accruals and reserves on the
books of the Company and its Subsidiaries in respect of taxes or other
governmental charges are adequate.
7.13. Certain Business Representations.
7.13.1. Product Liability Matters. Exhibit 7.13.1, as from time to
time hereafter supplemented in accordance with Sections 6.4.1 and 6.4.2,
sets forth a listing and description of all products liability claims,
actions, suits or proceedings pending or threatened in writing against
the Company or any Subsidiary.
7.13.2. Antitrust. Each of the Company and its Subsidiaries is in
compliance in all material respects with all federal and state antitrust
laws relating to its business and the geographic concentration of its
business.
7.13.3. Consumer Protection. Neither the Company nor any of its
Subsidiaries is in violation of any rule, regulation, order, or
interpretation of any rule, regulation or order of the Federal Trade
Commission (including truth-in-lending), with which the failure to
comply, in the aggregate, has resulted, or creates a material risk of
resulting, in a Material Adverse Change.
7.13.4. Future Expenditures. Neither the Company nor any of its
Subsidiaries anticipate that the future expenditures, if any, by the
Company and its Subsidiaries needed to meet the provisions of any
federal, state or foreign governmental statutes, orders, rules or
regulations will be so burdensome as to result, or create a material risk
of resulting, in any Material Adverse Change.
7.14. Transactions with Affiliates. Exhibit 7.14, as from time to time
hereafter supplemented in accordance with Sections 6.4.1 and 6.4.2, and Exhibit
7.2.2 set forth all agreements and transactions between the Company, the
Borrower and any other Obligor on the one hand, and any Affiliate of such
Person on the other hand, except for (a) employee bonuses, benefits and
salaries paid in the ordinary course of business and (b) agreements and
transactions involving payments, property and services with a value of less
than $50,000 in the aggregate for each Affiliate since the Acquisition. The
Company has furnished the Lenders with correct and complete copies of any
agreements described on Exhibit 7.14 requested by the Required Lenders.
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7.15. Pension Plans. Each Plan (other than a Multiemployer Plan) and, to
the knowledge of the Company and its Subsidiaries, each Multiemployer Plan is
in material compliance with the applicable provisions of ERISA and the Code.
Each Multiemployer Plan and each Plan that constitutes a "defined benefit plan"
(as defined in ERISA) are set forth in Exhibit 7.15. Each ERISA Group Person
has met all of the funding standards applicable to all Plans that are not
Multiemployer Plans, and no condition exists which would permit the institution
of proceedings to terminate any Plan that is not a Multiemployer Plan under
section 4042 of ERISA. To the best knowledge of the Company and each
Subsidiary, no Plan that is a Multiemployer Plan is currently insolvent or in
reorganization or has been terminated within the meaning of ERISA.
7.16. Foreign Trade Regulations; Government Regulation; Margin Stock.
7.16.1. Foreign Trade Regulations. Neither the execution and
delivery of this Agreement or any other Credit Document, nor the making
by the Company of any borrowings hereunder, nor the guaranteeing of the
Credit Obligations by any Guarantor, nor the securing of the Credit
Obligations with the Credit Security, has constituted or resulted in or
will constitute or result in the violation of any Foreign Trade
Regulation.
7.16.2. Government Regulation. Neither the Company nor any of its
Subsidiaries, nor any Person controlling the Company or any of its
Subsidiaries or under common control with the Company or any of its
Subsidiaries, is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Investment Company Act,
the Interstate Commerce Act or any similar statute or regulation which
regulates the incurring by the Company or any of its Subsidiaries of
Financing Debt as contemplated by this Agreement and the other Credit
Documents.
7.16.3. Margin Stock. Neither the Company nor any of its
Subsidiaries owns any Margin Stock in excess of 25 % of the value of the
assets subject to any negative pledge arrangement.
7.17. Disclosure. Neither this Agreement nor any other Credit Document to
be furnished to the Lenders by or on behalf of the Company or any of its
Subsidiaries in connection with the transactions contemplated hereby or by such
Credit Document contains any untrue statement of material fact or omits to
state a material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances under which they
were made. As of the Initial Closing Date, no fact is actually known to the
Company or any of its Subsidiaries which has resulted, or in the future (so far
as the Company or any of its
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Subsidiaries can reasonably foresee) will result, or creates a material risk of
resulting, in any Material Adverse Change, except to the extent that present or
future general economic conditions may result in a Material Adverse Change.
8. Defaults.
8.1. Events of Default. The following events are referred to as "Events
of Default":
8.1.1. Payment. The Borrower shall fail to make any payment in
respect of: (a) interest or any fee on or in respect of any of the Credit
Obligations owed by it as the same shall become due and payable, and such
failure shall continue for a period of five days, or (b) any Credit
Obligation with respect to payments made by any Letter of Credit Issuer
under any Letter of Credit or any draft drawn thereunder within five days
after demand therefor by such Letter of Credit Issuer or (c) principal of
any of the Credit Obligations owed by it as the same shall become due,
whether at maturity or by acceleration or otherwise.
8.1.2. Specified Covenants. The Company or any of its Subsidiaries
shall fail to perform or observe any of the provisions of Section 6.4.6
or Sections 6.5 through 6.19 and, in the case of a failure to perform or
observe any of the provisions of Section 6.5.1 (Consolidated Total Debt
to Consolidated EBITDA), Designated Affiliate Equity Proceeds shall not
have been applied to reduce Consolidated Total Debt to a level that would
have avoided such failure as of the last day of the then most recently
completed fiscal quarter within 10 days after actual knowledge of such
failure by a Financial Officer.
8.1.3. Other Covenants. The Company, any of its Subsidiaries or any
other Obligor shall fail to perform or observe any other covenant,
agreement or provision to be performed or observed by it under this
Agreement or any other Credit Document, and such failure shall not be
rectified or cured to the written satisfaction of the Required Lenders
within 30 days after the earlier of (a) notice thereof by the Agent to
the Company or (b) a Financial Officer shall have actual knowledge
thereof.
8.1.4. Representations and Warranties. Any representation or
warranty of or with respect to the Company, any of its Subsidiaries or
any other Obligor made to the Lenders or the Agent in, pursuant to or in
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connection with this Agreement or any other Credit Document shall be
materially false on the date as of which it was made.
8.1.5. Cross Default, etc.
(a) The Company or any of its Subsidiaries shall fail to make any
payment when due (after giving effect to any applicable grace periods) in
respect of any Financing Debt (other than the Credit Obligations)
outstanding in an aggregate amount of principal (whether or not due) and
accrued interest exceeding $500,000;
(b) the Company or any of its Subsidiaries shall fail to perform or
observe the terms of any agreement or instrument relating to such
Financing Debt, and such failure shall continue, without having been duly
cured, waived or consented to, beyond the period of grace, if any,
specified in such agreement or instrument, and such failure shall permit
the acceleration of such Financing Debt;
(c) all or any part of such Financing Debt of the Company or any of
its Subsidiaries shall be accelerated or shall become due or payable
prior to its stated maturity (except with respect to voluntary
prepayments thereof) for any reason whatsoever;
(d) any Lien on any property of the Company or any of its
Subsidiaries securing any such Financing Debt shall be enforced by
foreclosure or similar action; or
(e) any holder of any such Financing Debt shall exercise any right
of rescission with respect to the issuance thereof or put or repurchase
rights against any Obligor with respect to such Financing Debt (other
than any such rights that may be satisfied with "payment in kind" notes
or other similar securities).
8.1.6. Ownership; Liquidation; Etc. Except as permitted by Section
6.11:
(a) the Company shall cease to own, directly or indirectly, all the
capital stock of its Subsidiaries other than director qualifying shares
required by Legal Requirements and, in the case of Foreign Subsidiaries,
shares required by Legal Requirements to be owned by foreign nationals;
or
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(b) any Person (other than members of the Willis Stein Group and
the Management Group), together with "affiliates" and "associates" of
such Person within the meaning of Rule 12b-2 of the Exchange Act, or any
"group" including such Person under sections 13(d) and 14(d) of the
Exchange Act, shall acquire after the date hereof beneficial ownership
within the meaning of Rule 13d-3 of the Exchange Act of 50% or more of
the voting stock of the Company; or
(c) the Company or any of its Subsidiaries or any other Obligor
shall initiate any action to dissolve, liquidate or otherwise terminate
its existence.
8.1.7. Enforceability, etc. Any Credit Document shall cease for any
reason (other than the scheduled termination thereof in accordance with
its terms) to be enforceable in accordance with its terms or in full
force and effect; or any party to any Credit Document shall so assert in
a judicial or similar proceeding; or the security interests created by
this Agreement or any other Credit Documents shall cease to be
enforceable and of the same effect and priority purported to be created
hereby.
8.1.8. Judgments. A final judgment (a) which, with other
outstanding final judgments against the Company and its Subsidiaries,
exceeds an aggregate of $500,000 in excess of applicable insurance
coverage after the application of Designated Affiliate Equity Proceeds
made within 10 days after actual knowledge of such final judgment by a
Financial Officer shall be rendered against the Company or any of its
Subsidiaries, or (b) which grants injunctive relief that results, or
creates a material risk of resulting, in a Material Adverse Change and in
either case if, (i) within 60 days after entry thereof, such judgment
shall not have been discharged or execution thereof stayed pending appeal
or (ii) within 60 days after the expiration of any such stay, such
judgment shall not have been discharged.
8.1.9. ERISA. Any "reportable event" (as defined in section 4043 of
ERISA) shall have occurred that reasonably could be expected to result in
termination of a Plan or the appointment by the appropriate United States
District Court of a trustee to administer any Plan or the imposition of a
Lien covering an amount in excess of $500,000 in favor of a Plan; or any
ERISA Group Person shall fail to pay when due amounts aggregating in
excess of $500,000 which it shall have become liable to pay to the PBGC
or to a Plan under Title IV of ERISA; or notice of intent to terminate a
Plan shall be filed under Title IV of
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ERISA by any ERISA Group Person or administrator; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any Plan or a proceeding shall be
instituted by a fiduciary of any Plan against any ERISA Group Person to
enforce section 515 or 4219(c)(5) of ERISA and such proceeding shall not
have been dismissed within 30 days thereafter; or a condition shall exist
by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Plan must be terminated.
8.1.10. Bankruptcy. etc. The Company, any of its Subsidiaries or
any other Obligor shall:
(a) commence a voluntary case under the Bankruptcy Code or
authorize, by appropriate proceedings of its board of directors or other
governing body, the commencement of such a voluntary case;
(b) (i) have filed against it a petition commencing an involuntary
case under the Bankruptcy Code that shall not have been dismissed within
60 days after the date on which such petition is filed, or (ii) file an
answer or other pleading within such 60-day period admitting or failing
to deny the material allegations of such a petition or seeking,
consenting to or acquiescing in the relief therein provided, or (iii)
have entered against it an order for relief in any involuntary case
commenced under the Bankruptcy Code;
(c) seek relief as a debtor under any applicable law, other than
the Bankruptcy Code, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the
rights of creditors, or consent to or acquiesce in such relief;
(d) have entered against it an order by a court of competent
jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or
approving its liquidation or reorganization as a debtor or any
modification or alteration of the rights of its creditors or (iii)
assuming custody of, or appointing a receiver or other custodian for, all
or a substantial portion of its property; or
(e) make an assignment for the benefit of, or enter into a
composition with, its creditors or appoint, or consent to the appointment
of, or suffer to exist a receiver or other custodian for, all or a
substantial portion of its property.
8.2. Certain Actions Following an Event of Default. If any one or more
Events of Default shall occur, then in each and every such case:
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8.2.1. Terminate Obligation to Extend Credit. The Agent on behalf
of the Lenders may (and upon written request of the Required Lenders the
Agent shall) terminate the obligations of the Lenders to make any further
extensions of credit under the Credit Documents by furnishing notice of
such termination to the Company.
8.2.2. Specific Performance: Exercise of Rights. The Agent on
behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) proceed to protect and enforce the Lenders'
rights by suit in equity, action at law and/or other appropriate
proceeding, either for specific performance of any covenant or condition
contained in this Agreement or any other Credit Document or in any
instrument or assignment delivered to the Lenders pursuant to this
Agreement or any other Credit Document, or in aid of the exercise of any
power granted in this Agreement or any other Credit Document or any such
instrument or assignment.
8.2.3. Acceleration. The Agent on behalf of the Lenders may (and
upon written request of the Required Lenders the Agent shall) by notice
in writing to the Borrower (a) declare all or any part of the unpaid
balance of the Credit Obligations then outstanding to be immediately due
and payable, and (b) require the Borrower immediately to deposit with the
Agent in cash an amount equal to the then Letter of Credit Exposure
(which cash shall be held and applied as provided in Section 4.5), and
thereupon such unpaid balance or part thereof and such amount equal to
the Letter of Credit Exposure shall become so due and payable without
presentation, protest or further demand or notice of any kind, all of
which are hereby expressly waived; provided, however, that if a
Bankruptcy Default shall have occurred, the unpaid balance of the Credit
Obligations shall automatically become immediately due and payable.
8.2.4. Enforcement of Payment; Credit Security; Setoff. The Agent
on behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) proceed to enforce payment of the Credit
Obligations in such manner as it may elect, to cancel, or instruct other
Letter of Credit Issuers to cancel, any outstanding Letters of Credit
which permit the cancellation thereof and to realize upon any and all
rights in the Credit Security. The Lenders may offset and apply toward
the payment of the Credit Obligations (and/or toward the curing of any
Event of Default) any Indebtedness from the Lenders to the respective
Obligors, including any Indebtedness represented by deposits in any
account maintained with
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the Lenders, regardless of the adequacy of any security for the Credit
Obligations. The Lenders shall have no duty to determine the adequacy of
any such security in connection with any such offset.
8.2.5. Cumulative Remedies. To the extent not prohibited by
applicable law which cannot be waived, all of the Lenders' rights
hereunder and under each other Credit Document shall be cumulative.
8.3 Annulment of Defaults. Once an Event of Default has occurred, such
Event of Default shall be deemed to exist and be continuing for all purposes of
the Credit Documents until cured by the Company and its Subsidiaries, the
Required Lenders or the Agent (with the consent of the Required Lenders) shall
have waived such Event of Default in writing, stated in writing that the same
has been cured to such Lenders' reasonable satisfaction or entered into an
amendment to this Agreement which by its express terms cures such Event of
Default, at which time such Event of Default shall no longer be deemed to exist
or to have continued. No such action by the Lenders or the Agent shall extend
to or affect any subsequent Event of Default or impair any rights of the
Lenders upon the occurrence thereof. The making of any extension of credit
during the existence of any Default or Event of Default shall not constitute a
waiver thereof.
8.4. Waivers. To the extent that such waiver is not prohibited by the
provisions of applicable law that cannot be waived, each of the Company and the
other Obligors waives:
(a) all presentments, demands for performance, notices of
nonperformance (except to the extent required by this Agreement or any
other Credit Document), protests, notices of protest and notices of
dishonor;
(b) any requirement of diligence or promptness on the part of any
Lender in the enforcement of its rights under this Agreement, the Notes
or any other Credit Document;
(c) any and all notices of every kind and description which may be
required to be given by any statute or rule of law; and
(d) any defense (other than payment in full) which it may now or
hereafter have with respect to its liability under this Agreement, the
Notes or any other Credit Document or with respect to the Credit
Obligations.
9. Expenses; Indemnity.
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9.1. Expenses. Whether or not the transactions contemplated hereby shall
be consummated the Borrower will pay:
(a) all reasonable expenses of the Agent (including the
out-of-pocket expenses related to forming the initial group of Lenders
and reasonable fees and disbursements of the counsel to the Agent) in
connection with the preparation and duplication of this Agreement and
each other Credit Document, examinations by, and reports of, the Agent's
commercial financial examiners and amendments, waivers, consents and
other operations hereunder and thereunder;
(b) all recording and filing fees and transfer and documentary
stamp and similar taxes at any time payable in respect of this Agreement,
any other Credit Document, any Credit Security or the incurrence of the
Credit Obligations; and
(c) all other reasonable expenses incurred by the Lenders or the
holder of any Credit Obligation in connection with the enforcement of any
rights hereunder or under any other Credit Document, including costs of
collection and reasonable attorneys' fees (including a reasonable
allowance for the hourly cost of attorneys employed by the Lenders on a
salaried basis) and expenses.
9.2. General Indemnity. The Borrower shall indemnify the Lenders and the
Agent and hold them harmless from any liability, loss or damage resulting from
the violation by the Borrower of Section 2.4. In addition, the Borrower shall
indemnify each Lender, the Agent, each of the Lenders' or the Agent's
directors, officers and employees, and each Person, if any, who controls any
Lender or the Agent (each Lender, the Agent and each of such directors,
officers, employees and control Persons is referred to as an "Indemnified
Party") and hold each of them harmless from and against any and all claims,
damages, liabilities and reasonable expenses (including reasonable fees and
disbursements of counsel with whom any Indemnified Party may consult in
connection therewith and all reasonable expenses of litigation or preparation
therefor) which any Indemnified Party may incur or which may be asserted
against any Indemnified Party in connection with (a) the Indemnified Party's
compliance with or contest of any subpoena or other process issued against it
in any proceeding involving the Company or any of its Subsidiaries or their
Affiliates, (b) any litigation or investigation involving the Company, any of
its Subsidiaries or their Affiliates, or any officer, director or employee
thereof, (c) the existence or exercise of any security rights with respect to
the Credit Security in accordance with the Credit Documents, or (d) this
Agreement, any other Credit Document or any transaction contemplated hereby or
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thereby; provided, however, that the foregoing indemnity shall not apply to
litigation commenced by the Borrower against the Lenders or the Agent which
seeks enforcement of any of the rights of the Borrower hereunder or under any
other Credit Document and is determined adversely to the Lenders or the Agent
in a final nonappealable judgment or to the extent such claims, damages,
liabilities and expenses result from a Lender's or the Agent's gross negligence
or willful misconduct.
9.3. Indemnity With Respect to Letters of Credit. The Borrower shall
indemnify each Letter of Credit Issuer and its correspondents and hold each of
them harmless from and against any and all claims, losses, liabilities, damages
and reasonable expenses (including reasonable attorneys fees) arising from or
in connection with any Letter of Credit, including any such claim, loss,
liability, damage or expense arising out of any transfer, sale, delivery,
surrender or endorsement of any invoice, bill of lading, warehouse receipt or
other document at any time held by the Agent any other Letter of Credit Issuer
or held for their respective accounts by any of their correspondents in
connection with any Letter of Credit, except to the extent such claims, losses,
liabilities damages and expenses result from gross negligence or willful
misconduct on the part of the Agent or any other Letter of Credit Issuer.
10. Operations; Agent.
10.1. Interests in Credits. The Percentage Interest of each Lender in the
Loan and Letters of Credit, and the related Commitments, shall be computed
based on the maximum principal amount for each Lender as set forth in the
Register, as from time to time in effect. The current Percentage Interests are
set forth in Exhibit 10.1, which may be updated by the Agent from time to time
to conform to the Register.
10.2. Agent's Authority to Act, etc. Each of the Lenders appoints and
authorizes BankBoston to act for the Lenders as the Lenders' Agent in
connection with the transactions contemplated by this Agreement and the other
Credit Documents on the terms set forth herein. In acting hereunder, the Agent
is acting for the account of BankBoston to the extent of its Percentage
Interest and for the account of each other Lender to the extent of the Lenders'
respective Percentage Interests, and all action in connection with the
enforcement of, or the exercise of any remedies (other than the Lenders' rights
of set-off as provided in Section 8.2.4 or in any Credit Document) in respect
of the Credit Obligations and Credit Documents shall be taken by the Agent.
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10.3. Borrower to Pay Agent, etc. The Borrower and each Guarantor shall
be fully protected in making all payments in respect of the Credit Obligations
to the Agent, in relying upon consents, modifications and amendments executed
by the Agent purportedly on the Lenders' behalf, and in dealing with the Agent
as herein provided. The Agent may charge the accounts of the Borrower, on the
dates when the amounts thereof become due and payable, with the amounts of the
principal of and interest on the Loan, any amounts paid by the Letter of Credit
Issuers to third parties under Letters of Credit or drafts presented
thereunder, commitment fees, Letter of Credit fees and all other fees and
amounts owing under any Credit Document.
10.4. Lender Operations for Advances, Letters of Credit, etc.
10.4.1. Advances. On each Closing Date, each Lender shall advance
to the Agent in immediately available funds such Lender's Percentage
Interest in the portion of the Loan advanced on such Closing Date prior
to 12:00 noon (Boston time). If such funds are not received at such
time, but all applicable conditions set forth in Section 5 have been
satisfied, each Lender authorizes and requests the Agent to advance for
the Lender's account pursuant to the terms hereof, the Lender's
respective Percentage Interest in such portion of the Loan and agrees to
reimburse the Agent in immediately available funds for the amount thereof
prior to 2:00 p.m. (Boston time) on the day any portion of the Loan is
advanced hereunder; provided, however, that the Agent is not authorized
to make any such advance for the account of any Lender who has previously
notified the Agent in writing that such Lender will not be performing its
obligations to make further advances hereunder; and provided, further,
that the Agent shall be under no obligation to make any such advance.
10.4.2. Letters of Credit. Each of the Lenders authorizes and
requests each Letter of Credit Issuer to issue the Letters of Credit
provided for in Section 2.3 and to grant each Lender a participation in
each of such Letters of Credit in an amount equal to its Percentage
Interest in the amount of each such Letter of Credit. Promptly upon the
request of the Letter of Credit Issuer, each Lender shall reimburse the
Letter of Credit Issuer in immediately available funds for such Lender's
Percentage Interest in the amount of all obligations to third parties
incurred by the Letter of Credit Issuer in respect of each Letter of
Credit and each draft accepted under a Letter of Credit to the extent not
reimbursed by the Company. The Letter of Credit Issuer will notify each
Lender of the issuance of any Letter of Credit, the amount and date of
payment of any draft drawn or accepted under a Letter of Credit and
whether in connection with the payment of any
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such draft the amount thereof was added to the Revolving Loan or was
reimbursed by the Company.
10.4.3. Agent to Allocate Payments, etc. All payments of principal
and interest in respect of the extensions of credit made pursuant to this
Agreement, reimbursement of amounts paid by any Letter of Credit Issuer
to third parties under Letters of Credit or drafts presented thereunder,
commitment fees, Letter of Credit fees and other fees under this
Agreement shall, as a matter of convenience, be made by the Borrower and
the Guarantors to the Agent in immediately available funds. The share of
each Lender shall be credited to such Lender by the Agent in immediately
available funds in such manner that the principal amount of the Credit
Obligations to be paid shall be paid proportionately in accordance with
the Lenders' respective Percentage Interests in such Credit Obligations,
except as otherwise provided in this Agreement. Under no circumstances
shall any Lender be required to produce or present its Notes as evidence
of its interests in the Credit Obligations in any action or proceeding
relating to the Credit Obligations.
10.4.4. Delinquent Lenders; Nonperforming Lenders. In the event
that any Lender fails to reimburse the Agent pursuant to Section 10.4.1
for the Percentage Interest of such lender (a "Delinquent Lender") in any
credit advanced by the Agent pursuant hereto, overdue amounts (the
"Delinquent Payment") due from the Delinquent Lender to the Agent shall
bear interest, payable by the Delinquent Lender on demand, at a per annum
rate equal to (a) the Federal Funds Rate for the first three days overdue
and (b) the sum of 2% plus the Federal Funds Rate for any longer period.
Such interest shall be payable to the Agent for its own account for the
period commencing on the date of the Delinquent Payment and ending on the
date the Delinquent Lender reimburses the Agent on account of the
Delinquent Payment (to the extent not paid by the Borrower or any
Guarantor as provided below) and the accrued interest thereon (the
''Delinquency Period"), whether pursuant to the assignments referred to
below or otherwise. Upon one Banking Day's notice by the Agent, the
Borrower will pay to the Agent the principal (but not the interest)
portion of the Delinquent Payment. During the Delinquency Period, in
order to make reimbursements for the Delinquent Payment and accrued
interest thereon, the Delinquent Lender shall be deemed to have assigned
to the Agent all interest, commitment fees and other payments made by the
Borrower under Section 3 that would have thereafter otherwise been
payable under the Credit Documents to the Delinquent Lender. During any
other period in which any Lender is not performing its obligations to
extend credit under
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Section 2 (a "Nonperforming Lender"), the Nonperforming Lender shall be
deemed to have assigned to each Lender that is not a Nonperforming Lender
(a "Performing Lender") all principal and other payments made by the
Borrower under Section 4 that would have thereafter otherwise been
payable under the Credit Documents to the Nonperforming Lender. The
Agent shall credit a portion of such payments to each Performing Lender
in an amount equal to the Percentage Interest of such Performing Lender
in an amount equal to the Percentage Interest of such Performing Lender
divided by one minus the Percentage Interest of the Nonperforming Lender
until the respective portions of the Loan owed to all the Lenders are the
same as the Percentage Interests of the Lenders immediately prior to the
failure of the Nonperforming Lender to perform its obligations under
Section 2. The foregoing provisions shall be in addition to any other
remedies the Agent, the Performing Lenders or the Borrower may have under
law or equity against the Delinquent Lender as a result of the Delinquent
Payment or against the Nonperforming Lender as a result of its failure to
perform its obligations under Section 2.
10.5. Sharing of Payments, etc. Each Lender agrees that (a) if by
exercising any right of set-off or counterclaim or otherwise, it shall receive
payment of (i) a proportion of the aggregate amount due with respect to its
Percentage Interest in the Loan and Letter of Credit Exposure which is greater
than (ii) the proportion received by any other Lender in respect of the
aggregate amount due with respect to such other Lender's Percentage Interest in
the Loan and Letter of Credit Exposure and (b) if such inequality shall
continue for more than 10 days, the Lender receiving such proportionately
greater payment shall purchase participations in the Percentage Interests in
the Loan and Letter of Credit Exposure held by the other Lenders, and such
other adjustments shall be made from time to time (including rescission of such
purchases Of participations in the event the unequal payment originally
received is recovered from such Lender through bankruptcy proceedings or
otherwise), as may be required so that all such Payments of principal and
interest with respect to the Loan and Letter of Credit exposure held by the
Lenders shall be shared by the Lenders pro rata in accordance with their
respective Percentage Interests; provided, however, that this Section 10.5
shall not impair the right of any Lender to exercise any right of set-off or
counterclaim it may otherwise have and to apply the amount subject to such
exercise to the payment of Indebtedness of any Obligor other than such
Obligor's Indebtedness with respect to the Loan and Letter of Credit Exposure.
Each Lender that grants a participation in the Credit Obligations to a Credit
Participant shall require as a condition to the granting of such participation
that such Credit Participant agree to share payments received in respect of the
Credit Obligations as provided in this Section 10.5. The provisions of this
Section are for
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the sole and exclusive benefit of the Lenders and no failure of any Lender to
comply with the terms hereof shall be available to any Obligor as a defense to
the payment of the Credit Obligations.
10.6. Amendments, Consents, Waivers, etc. Except as otherwise set forth
herein, the Agent may (and upon the written request of the Required Lenders the
Agent shall) take or refrain from taking any action under this Agreement or any
other Credit Document, including giving its written consent to any modification
of or amendment to and waiving in writing compliance with any covenant or
condition in this Agreement or any other Credit Document (other than an
Interest Rate Protection Agreement) or any Default or Event of Default, all of
which actions shall be binding upon all of the Lenders; provided, however,
that:
(a) Except as provided below, without the written consent of the
Lenders owning at least a majority of the Percentage Interests (other
than Delinquent Lenders during the existence of a Delinquency Period so
long as such Delinquent Lender is treated the same as the other Lenders
with respect to any actions enumerated below), no written modification
of, amendment to, consent with respect to, waiver of compliance with or
waiver of a Default under, any of the Credit Documents (other than an
Interest Rate Protection Agreement) shall be made.
(b) Except as provided below, without the written consent of such
Lenders as own 100% of the Percentage Interests (other than Delinquent
Lenders during the existence of a Delinquency Period so long as such
Delinquent Lender is treated the same as the other Lenders with respect
to any actions enumerated below):
(i) No reduction shall be made in (A) the amount of
principal of the Loan or reimbursement obligations for payments
made under Letters of Credit, (B) the interest rate on the Loan
(other than amendments and waivers that modify defined terms used
in calculating the Applicable Margin or that waive an increase in
the Applicable Rate as a result of an Event of Default) or (C) the
Letter of Credit fees or commitment fees with respect to the
credit facility provided herein.
(ii) No change shall be made in the stated, scheduled time of
payment of all or any portion of the Loan (other than amendments
and waivers that modify defined terms used in calculating
Consolidated Excess Cash Flow) or interest thereon or
reimbursement of payments made under Letters of Credit or fees
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relating to any of the foregoing payable to all of the Lenders and
no waiver shall be made of any Default under Section 8.1.1.
(iii) No increase shall be made in the amount, or extension
of the term, of the stated Commitments beyond that provided for
under Section 2.
(iv) No alteration shall be made of the Lenders' rights of
set-off contained in Section 8.2.4.
(v) No release of any Credit Security or of any Guarantor
shall be made (except that the Agent may release particular items
of Credit Security or particular Guarantors in dispositions
permitted by Section 6.11 and may release all Credit Security
pursuant to Section 16 upon payment in full of the Credit
Obligations and termination of the Commitments without the written
consent of the Lenders).
(vi) No amendment to or modification of this Section 10.6(b)
shall be made.
(c) Without the written consent of such Lenders owning at least a
majority of the Percentage Interests in a particular Tranche (other than
Delinquent Lenders during the existence of a Delinquency Period so long
as such Delinquent Lender is treated the same as the other Lenders with
respect to any actions enumerated below) voting as a separate class, no
change may be made in the allocation of mandatory prepayments under
Section 4.3 between the Term Loan and the Revolving Loan.
10.7. Agent's Resignation. The Agent may resign at any time by giving at
least 60 days' prior written notice of its intention to do so to each other of
the Lenders and the Company and upon the appointment by the Required Lenders of
a successor Agent satisfactory to the Company. If no successor Agent shall
have been so appointed and shall have accepted such appointment within 45 days
after the retiring Agent's giving of such notice of resignation, then the
retiring Agent may with the consent of the Company, which shall not be
unreasonably withheld, appoint Successor Agent which shall be a bank or a trust
company organized under the laws of the United States of America or any state
thereof and having a combined capital, surplus and undivided profit of at least
$100,000,000; provided, however, that any successor Agent appointed under this
sentence may be removed upon the written request of the Required Lenders, which
request shall also appoint a successor Agent satisfactory to the Company. Upon
the appointment of a new
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Agent hereunder, the term "Agent" shall for all purposes of this Agreement
thereafter mean such successor. After any retiring Agent's resignation
hereunder as Agent, or the removal hereunder of any successor Agent, the
provisions of this Agreement shall continue to inure to the benefit of such
Agent as to any actions taken or omitted to be taken by it while it was Agent
under his Agreement.
10.8. Concerning the Agent.
10.8.1. Action in Good Faith, etc. The Agent and its officers,
directors, employees and agents shall be under no liability to any of the
Lenders or to any future holder of any interest in the Credit Obligations
for any action or failure to act taken or suffered in good faith, and any
action or failure to act in accordance with an opinion of its counsel
shall conclusively be deemed to be in good faith. The Agent shall in all
cases be entitled to rely, and shall be fully protected in relying, on
instructions given to the Agent by the required holders of Credit
Obligations as provided in this Agreement.
10.8.3. Validity, etc. The Agent shall not be responsible to any
Lender or any future holder of any interest in the Credit Obligations (a)
for the legality, validity, enforceability or effectiveness of this
Agreement or any other Credit Document, (b) for any recitals, reports,
representations, warranties or statements contained in or made in
connection with this Agreement or any other Credit Document, (c) for the
existence or value of any assets included in any security for the Credit
Obligations, (d) for the effectiveness of any Lien purported to be
included in the Credit Security, (e) for the specification or failure to
specify any particular assets to be included in the Credit Security, or
(f) unless the Agent shall have failed to comply with Section 10.8.1, for
the perfection of the security interests in the Credit Security.
10.8.4. Compliance. The Agent shall not be obligated to ascertain
or inquire as to the performance or observance of any of the terms of
this Agreement or any other Credit Document; and in connection with any
extension of credit under this Agreement or any other Credit Document,
the Agent shall be fully protected in relying on a certificate of the
Company as to the fulfillment by the Company of any conditions to such
extension of credit.
10.8.5. Employment of Agents and Counsel. The Agent may execute any
of its duties as Agent under this Agreement or any other Credit Document
by or through employees, agents and attorneys-in-fact and shall
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not be responsible to any of the Lenders, the Company or any other
Obligor for the default or misconduct of any such agents or
attorneys-in-fact selected by the Agent acting in good faith. The Agent
shall be entitled to advice of counsel concerning all matters pertaining
to the agency hereby created and its duties hereunder or under any other
Credit Document.
10.8.6. Reliance on Documents and Counsel. The Agent shall be
entitled to rely, and shall be fully protected in relying, upon any
affidavit, certificate, cablegram, consent, instrument letter, notice,
order, document, statement, telecopy, telegram, telex or teletype message
or writing reasonably believed in good faith by the Agent to be genuine
and correct and to have been signed, sent or made by the Person in
question, including any telephonic or oral statement made by such Person,
and, with respect to legal matters, upon an opinion or the advice of
counsel selected by the Agent.
10.8.7. Agent's Reimbursement. Each of the Lenders severally agrees
to reimburse the Agent, in the amount of such Lender's Percentage
Interest, for any reasonable expenses not reimbursed by the Borrower or
the Guarantors (without limiting the obligation of the Borrower or the
Guarantors to make such reimbursement): (a) for which the Agent is
entitled to reimbursement by the Borrower or the Guarantors under this
Agreement or any other Credit Document, and (b) after the occurrence of a
Default, for any other reasonable expenses incurred by the Agent on the
Lenders' behalf in connection with the enforcement of the Lenders' rights
under this Agreement or any other Credit Document; provided, however,
that the Agent shall not be reimbursed for any such expenses arising as a
result of its gross negligence or willful misconduct.
10.9. Rights as a Lender. With respect to any credit extended by it
hereunder, BankBoston shall have the same rights, obligations and powers
hereunder as any other Lender and may exercise such rights and powers as though
it were not the Agent, and unless the context otherwise specifies, BankBoston
shall be treated in its individual capacity as though it were not the Agent
hereunder. Without limiting the generality of the foregoing, the Percentage
Interest of BankBoston shall be included in any computations of Percentage
Interests. BankBoston and its Affiliates may accept deposits from, lend money
to, act as trustee for and generally engage in any kind of banking or trust
business with the Company, any of its Subsidiaries or any Affiliate of any of
them and any Person who may do business with or own an equity interest in the
Company, any of its Subsidiaries or any Affiliate of any of them, all as if
BankBoston were not the Agent and without any duty to account therefor to the
other Lenders.
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10.10. Independent Credit Decision. Each of the Lenders acknowledges that
it has independently and without reliance upon the Agent, based on the
financial statements and other documents referred to in Section 7.2, on the
other representations and warranties contained herein and on such other
information with respect to the Company and its Subsidiaries as such Lender
deemed appropriate, made such Lender's own credit analysis and decision to
enter into this Agreement and to make the extensions of credit provided for
hereunder. Each Lender represents to the Agent that such Lender will continue
to make its own independent credit and other decisions in taking or not taking
action under this Agreement or any other Credit Document. Each Lender
expressly acknowledges that neither the Agent nor any of its officers,
directors, employees, agents attorneys-in-fact or Affiliates has made any
representations or warranties to such Lender, and no act by the Agent taken
under this Agreement or any other Credit Document, including any review of the
affairs of the Company and its Subsidiaries, shall be deemed to constitute any
representation or warranty by the Agent. Except for notices, reports and other
documents expressly required to be furnished to each Lender by the Agent under
this Agreement or any other Credit Document, the Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the business, operations, property, condition, financial or
otherwise, or creditworthiness of the Company or any Subsidiary which may come
into the possession of the Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or Affiliates.
10.11. Indemnification. The holders of the Credit Obligations shall
indemnify the Agent and its officers, directors, employees and agents (to the
extent not reimbursed by the Obligors and without limiting the obligation of
any of the Obligors to do so), pro rata in accordance with their respective
Percentage Interests, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind whatsoever which may at any time be imposed on,
incurred by or asserted against the Agent or such Persons relating to or
arising out of this Agreement, any other Credit Document, the transactions
contemplated hereby or thereby, or any action taken or omitted by the Agent in
connection with any of the foregoing; provided, however, that the foregoing
shall not extend to actions or omissions which are taken by the Agent with
gross negligence or willful misconduct.
11. Successors and Assigns: Lender Assignments and Participations. Any
reference in this Agreement or any other Credit Document to any of the parties
hereto shall be deemed to include the successors and assigns of such party, and
all covenants and agreements by or on behalf of the Borrower, the Guarantors,
the Agent or the Lenders that are contained in this Agreement or any other
Credit
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Document shall bind and inure to the benefit of their respective successors and
assigns; provided, however, that (a) the Company and its Subsidiaries may not
assign their rights or obligations under this Agreement or any other Credit
Document except for mergers or liquidations permitted by Section 6.11, and (b)
the Lenders shall be not entitled to assign their respective Percentage
Interests in the credits extended hereunder or their Commitments except as set
forth below in this Section 11.
11.1. Assignments by Lenders.
11.1.1. Assignees and Assignment Procedures. Each Lender may (a)
without the consent of the Agent or the Company if the proposed assignee
is already a Lender hereunder or a Wholly Owned Subsidiary of the same
corporate parent of which the assigning Lender is a Subsidiary, or (b)
otherwise with the consents of the Agent and (so long as no Event of
Default exists) the Company (which consents will not be unreasonably
withheld), in compliance with applicable laws in connection with such
assignment, assign to one or more commercial banks or other financial
institutions (each, an "Assignee") all or a portion of its interests,
rights and obligations under this Agreement and the other Credit
Documents, including all or a portion, which need not be pro rata between
the Loan and the Letter of Credit Exposure, of its Commitment, the
portion of the Loan and Letter of Credit Exposure at the time owing to it
and the Notes held by it, but excluding its rights and obligations as a
Letter of Credit Issuer; provided, however, that:
(i) the aggregate amount of the Commitment of the assigning
Lender subject to each such assignment to any Assignee other than
another Lender (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the
Agent) shall be not less than $5,000,000; and
(ii) the parties to each such assignment shall execute and
deliver to the Agent an Assignment and Acceptance (the "Assignment
and Acceptance") substantially in the form of Exhibit 11.1.1,
together with the Note subject to such assignment and a processing
and recordation fee of $3,500 payable to the Agent by the
assigning Lender or the Assignee.
Upon acceptance and recording pursuant to Section 11.1.4, from and after
the effective date specified in each Assignment and Acceptance (which
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effective date shall be at least five Banking Days after the execution
thereof unless waived by the Agent):
(A) the Assignee shall be a party hereto and, to
the extent provided in such Assignment and Acceptance, have
the rights and obligations of a Lender under this Agreement
and
(B) the assigning Lender shall, to the extent
provided in such assignment, be released from its obligations
under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an
assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto but
shall continue to be entitled to the benefits of Sections
3.2.4, 3.5 and 9, as well as to any fees accrued for its
account hereunder and not yet paid).
11.1.2. Terms of Assignment and Acceptance. By executing and
delivering an Assignment and Acceptance, the assigning Lender and
Assignee shall be deemed to confirm to and agree with each other and the
other parties hereto as follows:
(a) other than the representation and warranty that it is the legal
and beneficial owner of the interest being assigned thereby free and
clear of any adverse claim, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, any other Credit
Document or any other instrument or document furnished pursuant hereto;
(b) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Company and its Subsidiaries or the performance or observance by the
Company or any of its Subsidiaries of any of its obligations under this
Agreement, any other Credit Document or any other instrument or document
furnished pursuant hereto;
(c) such Assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 7.2 or Section 6.4 and such other documents
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and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance;
(d) such Assignee will independently and without reliance upon the
Agent, such assigning Lender or any other Lender, and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action
under this Agreement;
(e) such Assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together
with such powers as are reasonably incidental thereto; and
(f) such Assignee agrees that it will perform in accordance with
the terms of this Agreement all the obligations which are required to be
performed by it as a Lender.
11.1.3. Register. The Agent shall maintain at the Boston Office a
register (the "Register") for the recordation of (a) the names and
addresses of the Lenders and the Assignees which assume rights and
obligations pursuant to an assignment under Section 11.1.1, (b) the
Percentage Interest of each such Lender as set forth in Exhibit 10.1 and
(c) the amount of the Loan and Letter of Credit Exposure owing to each
Lender from time to time. The entries in the Register shall be
conclusive, in the absence of manifest error, and the Borrower, the Agent
and the Lenders may treat each Person whose name is registered therein
for all purposes as a party to this Agreement. The Register shall be
available for inspection by the Company or any Lender at any reasonable
time and from time to time upon reasonable prior notice.
11.1.4. Acceptance of Assignment and Assumption. Upon its receipt
of a completed Assignment and Acceptance executed by an assigning Lender
and an Assignee together with the Note subject to such assignment, and
the processing and recordation fee referred to in Section 11.1.1, the
Agent shall (a) accept such Assignment and Acceptance, (b) record the
information contained therein in the Register and (c) give prompt notice
thereof to the Borrower. Within five Banking Days after receipt of
notice, the Borrower, at its own expense, shall execute and deliver to
the Agent, in exchange for the surrendered Note, a new Note to the order
of such Assignee in a principal amount equal to the applicable Commitment
and Loan assumed by it pursuant to such Assignment and
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Acceptance and, if the assigning Lender has retained a Commitment and
Loan, a new Note to the order of such assigning Lender in a principal
amount equal to the applicable Commitment and Loan retained by it. Such
new Note shall be in an aggregate principal amount equal to the aggregate
principal amount of such surrendered Note, and shall be dated the date of
the surrendered Note which it replaces.
11.1.5. Federal Reserve Bank. Notwithstanding the foregoing
provisions of this Section 11, any Lender may at any time pledge or
assign all or any portion of such Lender's rights under this Agreement
and the other Credit Documents to a Federal Reserve Bank; provided,
however, that no such pledge or assignment shall release such Lender from
such Lender's obligations hereunder or under any other Credit Document.
11.1.6. Further Assurances. The Company and its Subsidiaries shall
sign such documents and take such other actions from time to time
reasonably requested by an Assignee to enable it to share in the benefits
of the rights created by the Credit Documents.
11.2. Credit Participants. Each Lender may, without the consent of the
Company or the Agent, in compliance with applicable laws in connection with
such participation, sell to one or more commercial banks or other financial
institutions (each a "Credit Participant") participations in all or a portion
of its interests, rights and obligations under this Agreement and the other
Credit Documents (including all or a portion of its Commitment, the Loan and
Letter of Credit Exposure owing to it and the Note held by it); provided,
however, that:
(a) such Lender's obligations under this Agreement shall remain
unchanged;
(b) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations;
(c) the Credit Participant shall be entitled to the benefit of the
cost protection provisions contained in Sections 3.2.4, 3.5 and 9, but
shall not be entitled to receive any greater payment thereunder than the
selling Lender would have been entitled to receive with respect to the
interest so sold if such interest had not been sold; and
(d) the Company, the Borrower, the Agent and the other Lenders
shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under this Agreement, and such
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Lender shall retain the sole right as one of the Lenders to vote with
respect to the enforcement of the obligations of the Company relating to
the Loan and Letter of Credit Exposure and the approval of any amendment,
modification or waiver of any provision of this Agreement (other than
amendments, modifications, consents or waivers requiring the consent of
100% of the Lenders described in clause (b) of the proviso to Section
10.6).
Each Obligor agrees, to the fullest extent permitted by applicable law, that
any Credit Participant and any Lender purchasing a participation from another
Lender pursuant to Section 12.5 may exercise all rights of payment (including
the right of set-off), with respect to its participation as fully as if such
Credit Participant or such Lender were the direct creditor of the Obligors and
a Lender hereunder in the amount of such participation.
11.3. Replacement of Lender. In the event that any Lender or, to the
extent applicable, any Credit Participant (the "Affected Lender"):
(a) fails to perform its obligations to fund any portion of the
Loan or to issue any Letter of Credit on any Closing Date when required
to do so by the terms of the Credit Documents or when excused pursuant to
Section 5.2.2(b), or fails to provide it portion of any Eurodollar
Pricing Option pursuant to Section 3.2.1 or on account of a Legal
Requirement as contemplated by Section 3.2.5;
(b) Demands payment under the provisions of Section 3.5 in an
amount the Company deems materially in excess of the amounts with respect
thereto demanded by the other Lenders;
(c) refuses to consent to a proposed extension of the Final
Maturity Date that is consented to by the other Lenders; or
(d) refuses to consent to a proposed amendment, modification,
waiver or other action requiring consent of the holders of 100% of the
Percentage Interests under Section 10.6(b) that is consented to by
Lenders owning at least two-thirds of the Percentage Interests;
then, so long as no Event of Default exists, the Company shall have the right
to seek a replacement lender which is reasonably satisfactory to the Agent (the
"Replacement Lender). The Replacement Lender shall purchase the interests of
the Affected Lender in the Loan, Letters of Credit and its Commitment and shall
assume the obligations of the Affected Lender hereunder and under the other
Credit Documents upon execution by the Replacement Lender of an Assignment
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<PAGE> 103
and Acceptance and the tender by it to the Affected Lender of a purchase price
agreed between it and the Affected Lender (or, if they are unable to agree, a
purchase price in the amount of the Affected Lender's Percentage Interest in
the Loan and Letter of Credit Exposure, or appropriate credit support for
contingent amounts included therein, and all other outstanding credit
obligations then owed to the Affected Lender). No assignment fee pursuant to
Section 11.1.1 (ii) shall be required in connection with such assignment. Such
assignment by the Affected Lender shall be deemed an early termination of any
Eurodollar Pricing Option to the extent of the Affected Lender's portion
thereof, and the Borrower will pay to the Affected Lender any resulting amounts
due under Section 3.2.4. Upon consummation of such assignment, the Replacement
Lender shall become party to this Agreement as a signatory hereto and shall
have all the rights and obligations of the Affected Lender under this Agreement
and the other Credit Documents with Percentage Interest equal to the
Percentage Interest of the Affected Lender, the Affected Lender shall be
released from its obligations hereunder and under the other Credit Documents,
and no further consent or action by any party shall be required. Upon the
consummation of such Assignment, the Borrower, the Agent and the Affected
Lender shall make appropriate arrangements so that new Notes are issued to the
Replacement Lender if it has acquired a portion of the Loan. The Borrower and
the Guarantors shall sign such documents and take such other actions reasonably
requested by the Replacement Lender to enable it to share in the benefits of
the rights created by the Credit Documents. Until the consummation of an
assignment in accordance with the foregoing provisions of this Section 11.3,
the Borrower shall continue to pay to the Affected Lender any Credit
Obligations as they become due and payable.
12. Confidentiality. Each Lender will make no disclosure of confidential
information furnished to it by the Company or any of its Subsidiaries unless
such information shall have become public, except:
(a) in connection with operations under or the enforcement of this
Agreement or any other Credit Document to Persons who have a reasonable
need to be furnished such confidential information and who agree to
comply with the restrictions contained in this Section 12 with respect to
such information;
(b) pursuant to any statutory or regulatory requirement or any
mandatory court order, subpoena or other legal process;
(c) to any parent or corporate Affiliate of such Lender or to any
Credit Participant, proposed Credit Participant or proposed Assignee;
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<PAGE> 104
provided however, that any such Person shall agree to comply with the
restrictions set forth in this Section 12 with respect to such
information;
(d) to its independent counsel, auditors and other professional
advisors with an instruction to such Person to keep such information
confidential; and
(e) with the prior written consent of the Company, to any other
Person.
13. Foreign Lenders. If any Lender is not incorporated or organized under the
laws of the United States of America or a state thereof, such Lender shall
deliver to the Company and the Agent the following:
(a) Two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 or successor form, as the case may be,
certifying in each case that such Person is entitled to receive payments
under this Agreement, the Notes and reimbursement obligations under
Letters of Credit payable to it, without deduction or withholding of any
United States federal income taxes; and
(b) A duly completed Internal Revenue Service Form W-8 or W-9 or
successor form, as the case may be, to establish an exemption from United
States backup withholding tax.
Until such time as the Company and the Agent have received such forms
indicating that payments hereunder are not subject to deduction or withholding
of United States federal income lax, the Borrower shall withhold United States
federal income tax from such payments at the applicable statutory rate and
Section 3.5 shall not apply to such withholding.
Each such Lender that delivers to the Company and the Agent a Form 1001
or 4224 and Form W-8 or W-9 pursuant to this Section 13 further undertakes to
deliver to the Company and he Agent two further copies of Form 1001 or 4224 and
Form W-8 or W-9, or successor applicable form, or other manner of
certification, as the case may be, on or before the date that any such form
expires or becomes obsolete or after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Company and
the Agent. Such Forms 1001 or 4224 shall certify that such Lender is entitled
to receive payments under this Agreement without deduction or withholding of
any United States federal income taxes. Until such time as the Company and the
Agent have received such forms indicating that payments hereunder are not
subject to United
<PAGE> 105
States withholding tax or are subject to such tax at a rate reduced by an
applicable tax treaty, the Borrower shall withhold taxes from such payments at
the applicable statutory rate without regard to Section 3.5. The foregoing
documents need not be delivered in the event any change in treaty, law or
regulation or official interpretation thereof has occurred which renders all
such forms inapplicable or which would prevent such Lender from delivering any
such form with respect to it, or such Lender advises the Company that it is not
capable of receiving payments without any deduction or withholding of United
States federal income tax and, in the case of a Form W-8 or W-9, establishing
an exemption from United States backup Withholding tax. In the event of clause
(ii), the Borrower shall withhold United States federal income tax from
payments to such Lender or Credit Participant in accordance with applicable
law, and Section 3.5 shall not apply to such withholding. For purposes of the
prior sentence, if any such Lender or Credit Participant delivers two duly
completed and executed copies of Form 1001 or Successor form establishing a
reduced withholding tax rate under an applicable tax treaty, the Borrower shall
withhold United States federal income tax from such payments at the reduced
withholding tax rate established in such treaty. Notwithstanding the
foregoing, if a Lender or Credit Participant has delivered the forms required
to be delivered under clauses (i) and (ii) certifying that such Lender or
Credit Participant is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income tax and if,
subsequently any change in treaty, law or regulation or official interpretation
thereof occurs which renders such forms inapplicable or which prevents such
Lender or Credit Participant from delivering any further such forms with
respect to it, then the Borrower shall withhold United States federal income
tax form payments to such Lender or Credit Participant in accordance with
applicable law and Section 3.5 shall apply to such withholding; provided,
however, that if an applicable tax treaty provides for a reduced withholding
tax rate, Section 3.5 shall only apply if such Lender or Credit Participant
delivers two duly completed and executed copies of Form 1001 or successor form
or otherwise complies with any applicable requirements for establishing such
reduced withholding tax rate.
14. Notices. Except as otherwise specified in this Agreement or any other
Credit Document, any notice required to be given pursuant to this Agreement or
any other Credit Document shall be given in writing. Any notice, consent,
approval, demand or other communication in connection with this Agreement or
any other Credit Document shall be deemed to be given if en in writing
(including telex, telecopy or similar teletransmission) addressed as provided
below (or to the addressee at such other address as the addressee shall have
specified by notice actually received by the addresser), and if either (a)
actually delivered in fully legible form to such address (evidenced in the case
of a telex by receipt of the correct answerback) or (b) in the case a letter,
unless actual receipt of the notice is
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required by any Credit Document five days shall have elapsed after the same
shall have been deposited in the United States mails, with first-class postage
prepaid and registered or certified.
If to the Company or any of its Subsidiaries, to it at its address set
forth in Exhibit 7.1 (as supplemented pursuant to Sections 6.4.1 and 6.4.2), to
the attention of the chief financial officer.
If to any Lender or the Agent, to it at its address set forth on the
signature pages of this Agreement or in the Register, with a copy to the Agent.
15. Course of Dealing: Amendments and Waivers. No course of dealing between
any Lender or the Agent, on one hand, and the Borrower or any other Obligor, on
the other hand, shall operate as a waiver of any of the Lenders' or the Agent's
rights under this Agreement or any other Credit Document or with respect to the
Credit Obligations. Each of the Borrower and the Guarantors acknowledges that
if the Lenders or the Agent, without being required to do so by this Agreement
or any other Credit Document, give any notice or information to, or obtain any
consent from, the Borrower or any other Obligor, the Lenders and the Agent
shall not by implication have amended, waived or modified any provision of this
Agreement or any other Credit Document, or created any duty to give any such
notice or information or to obtain any such consent on any future occasion. No
delay or omission on the part of any Lender of the Agent in Exercising any
right under this Agreement or any other Credit Document or with respect to the
Credit Obligations shall operate as a waiver of such right or any other right
hereunder or thereunder. A waiver on any one occasion shall not be construed
as a bar to or waiver of any right or remedy on any future occasion. No
waiver, consent or amendment with respect to this Agreement or any other Credit
Document shall be binding unless it is in writing and signed by the Agent or
the Required Lenders.
16. Defeasance. When all Credit Obligations have been paid, performed and
reasonably determined by the Lenders to have been indefeasibly discharged in
full, and if at the time no Lender continues to be committed to extend any
credit to the Company hereunder or under any Other Credit Document, this
Agreement and the other Credit Documents shall terminate and, at he Company's
written request, accompanied by such certificates and other item as the Agent
shall reasonably deem necessary, the Credit Security shall revert to the
Obligors and the right, title and interest of the Lenders therein shall
terminate. Thereupon, on the Obligor's demand and their cost and expense, the
Agent shall execute proper instruments, acknowledging satisfaction of and
discharging this Agreement and the other Credit Documents, and shall redeliver
to the Obligors any Credit Security then in its
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possession; provided, however, that Sections 3.2.4, 3.5, 9, 10.8.7, 10.11 and
12, shall survive the termination of this Agreement.
17. Venue: Service of Process. Each of the Company and the other Obligors:
(a) Irrevocably submits to the nonexclusive jurisdiction of the
state courts of The Commonwealth of Massachusetts and to the nonexclusive
jurisdiction of the United States District Court for the District of
Massachusetts for the purpose of any suit, action or other proceeding
arising out of or based upon this Agreement or any other Credit Document
or the subject matter hereof or thereof.
(b) Waives to the extent not prohibited by applicable law that
cannot be waived, and agrees not to assert, by way of motion, as a
defense or otherwise, in any such proceeding brought in any of the
above-named courts, any claim that it is not subject personally to the
jurisdiction of such court, that its property is exempt or immune from
attachment or execution, that such proceeding is brought in an
inconvenient forum, that the venue of such proceeding is improper, or
that this Agreement or any other Credit Document, or the subject matter
hereof or thereof, may not be enforced in or by such court.
Each of the Company and the other Obligors consents to service of process in
any such proceeding in any manner at the time permitted by Chapter 223A of the
General Laws of The Commonwealth of Massachusetts and agrees that service of
process by registered or certified mail, return receipt requested, at its
address specified in or pursuant to Section 14 is reasonably calculated to give
actual notice.
18. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT
CANNOT BE WAIVED, EACH OF THE COMPANY, THE OTHER OBLIGORS, THE AGENT AND THE
LENDERS WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF,
DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF
ANY ISSUE, CLAIM OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OTHER
CREDIT DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY CREDIT
OBLIGATION OR IN ANY WAY CONNECTED WITH THE DEALINGS OF THE LENDERS THE AGENT,
THE COMPANY OR ANY OTHER OBLIGOR IN CONNECTION WITH ANY OF THE ABOVE, IN EACH
CASE WHETHER NOW EXISTING OF HEREAFTER ARISING AND WHETHER IN CONTRACT, TORT OR
OTHERWISE. Each of the Company
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and the other Obligors acknowledges that it has been informed by the Agent that
the provisions of this Section 18 constitute a material inducement upon which
each of the Lenders has relied and will rely in entering into this Agreement
and any other Credit Document, and that it has reviewed the provisions of this
Section 18 with its counsel. Any Lender, the Agent, the Company or any other
Obligor may file an original counterpart or a copy of this Section 18 with any
court as written evidence of the consent of the Company, the other Obligors,
the Agent and the Lenders to the waiver of their rights to trial by jury.
19. No Strict Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement and the other Credit Documents with
counsel sophisticated in financing transactions. In the event an ambiguity or
question of intent or interpretation arises, this Agreement and the other
Credit Documents shall be construed as if drafted jointly by the parties and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement and the other
Credit Documents.
20. General. All covenants, agreements, representations and warranties made in
this Agreement or any other Credit Document or in certificates delivered
pursuant hereto or thereto shall be deemed to have been relied on by each
Lender, notwithstanding any investigation made by any Lender on its behalf, and
shall survive the execution and delivery to the Lenders hereof and thereof.
The invalidity or unenforceability of any provision hereof shall not affect the
validity or enforceability of any other provision hereof, and any invalid or
unenforceable provision shall be modified so as to be enforced to the maximum
extent of its validity or enforceability. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement and the other Credit Documents (including any
related fee agreements with the Agent or the Lenders) constitute the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersede all prior and contemporaneous understandings and
agreements, whether written or oral. This Agreement may be executed in any
number of counterparts which together shall constitute one instrument. This
Agreement shall be governed by and construed in accordance with the laws (other
than the conflict of laws rules) of The Commonwealth of Massachusetts.
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
RACING CHAMPIONS CORPORATION
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By____________________________________
Title:
RACING CHAMPIONS, INC.
By____________________________________
Title:
BANKBOSTON, N.A.
By____________________________________
Title:
BankBoston, N.A.
Diversified Finance Division
100 Federal Steet
Boston, Massachusetts 02110
Telecopy: (617) 434-4929
Telex: 940581
LASALLE NATIONAL BANK
By:____________________________________
Vice President
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Telecopy: (312) 904-6225
Telex:
SANWA BUSINESS CREDIT CORPORATION
By:____________________________________
Vice President
Sanwa Business Credit Corporation
One South Wacker Drive
Chicago, Illinois 60606
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<PAGE> 110
Telecopy: (312) 782-6035
Telex:
NORTHERN TRUST BANK
By:____________________________________
Vice President
Northern Trust Bank
One Oakbrook Terrace
Oakbrook Terrace, Illinois 60181
Telecopy: (630) 932-6930
Telex:
102
<PAGE> 1
Exhibit 10.9
==================================================================
RACING CHAMPIONS CORPORATION
RACING CHAMPIONS, INC.
AMENDED AND RESTATED GUARANTEE AND SECURITY AGREEMENT
Dated as of April 30, 1996
As Amended and Restated as of June 17, 1997
BANKBOSTON, N.A., as Agent
==================================================================
<PAGE> 2
TABLE OF CONTENTS
Page
1. Reference to Credit Agreement; Definitions; Certain Rules of Construction
1.1. "Accounts"..................................................1
--------
1.2 "Agreement".................................................1
---------
1.3. "Pledged Indebtedness"......................................1
--------------------
1.4. "Pledged Rights"............................................1
--------------
1.5. "Pledged Securities"........................................2
------------------
1.6. "Pledged Stock".............................................2
-------------
1.7. "UCC".......................................................2
---
2. Guarantee.................................................................2
---------
2.1. Guarantee of Credit Obligations.............................2
-------------------------------
2.2. Continuing Obligation.......................................2
---------------------
2.3. Waivers with Respect to Credit Obligations..................3
------------------------------------------
2.4. Lenders' Power to Waive, etc................................4
----------------------------
2.5. Information Regarding the Borrower, etc.....................5
---------------------------------------
2.6. Certain Guarantor Representations...........................6
---------------------------------
2.7. Subrogation.................................................6
-----------
2.8. Subordination...............................................7
-------------
2.9. Future Subsidiaries; Further Assurances.....................7
---------------------------------------
2.10. Contribution Among Guarantors...............................7
-----------------------------
3. Security..................................................................8
3.1. Credit Security.............................................8
3.1.1. Tangible Personal Property.......................8
--------------------------
3.1.2. Rights to Payment of Money.......................8
--------------------------
3.1.3. Intangibles......................................8
-----------
3.1.4. Pledged Stock....................................8
-------------
3.1.5. Pledged Rights...................................9
--------------
3.1.6. Pledged Indebtedness.............................9
--------------------
3.1.7. Chattel Paper, Instruments and Documents.........9
----------------------------------------
3.1.8. Leases...........................................9
------
3.1.9. Deposit Accounts.................................9
----------------
3.1.10. Collateral.........................................9
----------
3.1.11. Books and Records..................................9
-----------------
3.1.12. Insurance..........................................9
---------
3.1.13. All Other Property.................................9
------------------
3.1.14. Proceeds and Products..............................9
---------------------
3.1.15. Excluded Property ................................10
-----------------
ii
<PAGE> 3
3.2. Additional Credit Security...................................10
3.2.1. Real Property.....................................10
3.2.2. Motor Vehicles and Aircraft.......................11
3.3. Representations, Warranties and Covenants with Respect to
Credit Security..............................................11
3.3.1. Pledged Stock.....................................11
3.3.2. Accounts and Pledged Indebtedness.................11
3.3.3. No Liens or Restrictions on Transfer or Change of
Control...........................................11
-------
3.3.4. Location of Credit Security.......................12
---------------------------
3.3.5. Trade Names.......................................12
-----------
3.3.6. Insurance.........................................12
---------
3.3.7. Modifications to Credit Security..................13
--------------------------------
3.3.8. Delivery of Documents.............................13
---------------------
3.4. Administration of Credit Security............................13
3.4.1. Use of Credit Security............................13
3.4.2. Deposits..........................................14
4. Special Provision Concerning Cash Collateral........................18
5. General.............................................................18
iii
<PAGE> 4
EXHIBITS
3.3 - Obligors; Office and Principal Place of Business; Permitted
Jurisdiction for Personal Tangible Property; Trade Names;
Depository Institutions
iv
<PAGE> 5
RACING CHAMPIONS CORPORATION
RACING CHAMPIONS, INC.
AMENDED AND RESTATED GUARANTEE AND SECURITY AGREEMENT
This Agreement, dated as of June 17, 1997, is among Racing Champions
Corporation, formerly known as Collectible Champions, Inc., a Delaware
corporation (the "Company"), the Subsidiaries of the Company from time to time
party hereto and BankBoston, N.A., formerly known as The First National Bank of
Boston, as agent (the "Agent") for itself and the other Lenders under the Credit
Agreement (as defined below). The parties agree as follows:
1. Reference to Credit Agreement; Definitions; Certain Rules of Construction.
Effective as of the date hereof, this Agreement amends and restates in its
entirety the Guarantee and Security Agreement dated as of April 30, 1996 among
the Company, its Subsidiaries and the Agent. Reference is made to the Amended
and Restated Credit Agreement dated as of the date hereof as from time to time
in effect (the "Credit Agreement"), among the Company, the Subsidiaries of the
Company from time to time party thereto, the Lenders and the Agent. Capitalized
terms defined in the Credit Agreement and not otherwise defined herein are used
herein with the meanings so defined. Certain other capitalized terms are used in
this Agreement as specifically defined below in this Section 1. Except as the
context otherwise explicitly requires, (a) the capitalized term "Section" refers
to sections of this Agreement, (b) the capitalized term "Exhibit" refers to
exhibits to this Agreement, (c) references to a particular Section shall include
all subsections thereof, (d) the word "including" shall be construed as
"including without limitation", (e) terms defined in the UCC and not otherwise
defined herein have the meaning provided under the UCC, (f) references to a
particular statute or regulation include all rules and regulations thereunder
and any successor statute, regulation or rules, in each case as from time to
time in effect and (g) references to a particular Person include such Person's
successors and assigns to the extent not prohibited by this Agreemento and the
other Credit Documents. References to "the date hereof" mean the date first set
forth above.
1.1. "Accounts" is defined in Section 3.1.2.
1.2. "Agreement" means this Guarantee and Security Agreement as from
time to time in effect.
1
<PAGE> 6
1.3. "Pledged Indebtedness" is defined in Section 3.1.6.
1.4. "Pledged Rights" is defined in Section 3.1.5.
1.5. "Pledged Security" means the Pledged Stock, the Pledged
Rights and the Pledged Indebtedness, collectively.
1.6. "Pledged Stock" is defined in Section 3.1.4.
1.7. "UCC" means the Uniform Commercial Code as in effect in
Massachusetts on the date hereof; provided, however, that with respect to the
perfection of the Agent's Lien in the Credit Security and the effect of
nonperfection thereof, the term "UCC" means the Uniform Commercial Code as in
effect in any jurisdiction the laws of which are made applicable by section
9-103 of the Uniform Commercial Code as in effect in Massachusetts.
2. Guarantee.
2.1. Guarantee of Credit Obligation. Each Guarantor unconditionally
guarantees that the Credit Obligations will be performed and paid in full in
cash when due and payable, whether at the stated or accelerated maturity thereof
or otherwise, this guarantee being a guarantee of payment and not of
collectability and being absolute and in no way conditional or contingent. In
the event any part of the Credit Obligations shall not have been so paid in full
when due and payable, each Guarantor will, immediately upon notice by the Agent
or, without notice, immediately upon the occurrence of a Bankruptcy Default, pay
or cause to be paid to the Agent for the account of each Lender in accordance
with the Lenders' respective Percentage Interests therein the amount of such
Credit Obligations which are then due and payable and unpaid. The obligations of
each Guarantor hereunder shall not be affected by the invalidity,
unenforceability or irrecoverability of any of the Credit Obligations as against
any other Obligor, any other guarantor thereof or any other Person. For purposes
hereof, the Credit Obligations shall be due and payable when and as the same
shall be due and payable under the terms of the Credit Agreement or any other
Credit Document notwithstanding the fact that the collection or enforcement
thereof may be stayed or enjoined under the Bankruptcy Code or other applicable
law.
2.2. Continuing Obligation. Each Guarantor acknowledges that the
Lenders have entered into the Credit Agreement (and, to the extent that the
Lenders or the Agent may enter into any future Credit Document, will have
entered into such agreement) in reliance on this Section 2 being a continuing
irrevocable agreement, and such Guarantor agrees that its guarantee may not be
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revoked in whole or in part. The obligations of the Guarantors hereunder shall
terminate when the commitment of the Lenders to extend credit under the Credit
Agreement shall have terminated and all of the Credit Obligations have been
indefeasibly paid in full in cash and discharged; provided, however, that:
(a) if a claim is made upon the Lenders at any time for
repayment or recovery of any amounts or any property received by the
Lenders from any source on account of any of the Credit Obligations and
the Lenders repay or return any amounts or property so received
(including interest thereon to the extent required to be paid by the
Lenders) or
(b) if the Lenders become liable for any part of such claim by
reason of (i) any judgment or order of any court or administrative
authority having competent jurisdiction or (ii) any settlement or
compromise of any such claim,
then the Guarantors shall remain liable under this Agreement for the amounts so
repaid or property so returned or the amounts for which the Lenders become
liable (such amounts being deemed part of the Credit Obligations) to the same
extent as if such amounts or property had never been received by the Lenders,
notwithstanding any termination hereof or the cancellation of any instrument or
agreement evidencing any of the Credit Obligations. Not later than five days
after receipt of notice from the Agent, the Guarantors shall pay to the Agent an
amount equal to the amount of such repayment or return for which the Lenders
have so become liable. Payments hereunder by a Guarantor may be required by the
Agent on any number of occasions.
2.3. Waivers with Respect to Credit Obligations. Except to the extent
expressly required by the Credit Agreement or any other Credit Document, each
Guarantor waives, to the fullest extent permitted by the provisions of
applicable law, all of the following (including all defenses, counterclaims and
other rights of any nature based upon any of the following):
(a) presentment, demand for payment and protest of nonpayment
of any of the Credit Obligations, and notice of protest, dishonor or
nonperformance;
(b) notice of acceptance of this guarantee and notice that
credit has been extended in reliance on such Guarantor's guarantee of
the Credit Obligations;
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(c) notice of any Default or of any inability to enforce
performance of the obligations of the Borrower or any other Person with
respect to any Credit Document, or notice of any acceleration of
maturity of any Credit Obligations;
(d) demand for performance or observance of, and any
enforcement of any provision of the Credit Agreement, the Credit
Obligations or any other Credit Document or any pursuit or exhaustion
of rights or remedies with respect to any Credit Security or against
the Borrower or any other Person in respect of the Credit Obligations
or any requirement of diligence or promptness on the part of the Agent
or the Lenders in connection with any of the foregoing;
(e) any act or omission on the part of the Agent or the
Lenders which may impair or prejudice the rights of such Guarantor,
including rights to obtain subrogation, exoneration, contribution,
indemnification or any other reimbursement from the Borrower or any
other Person, or otherwise operate as a deemed release or discharge;
(f) failure or delay to perfect or continue the perfection of
any security interest in any Credit Security or any other action which
harms or impairs the value of, or any failure to preserve or protect
the value of, any Credit Security;
(g) any statute of limitations or any statute or rule of law
which provides that the obligation of a surety must be neither larger
in amount nor in other respects more burdensome than the obligation of
the principal;
(h) any "single action" or "anti-deficiency" law which would
otherwise prevent the Lenders from bringing any action, including any
claim for a deficiency, against such Guarantor before or after the
Agent's or the Lenders' commencement or completion of any foreclosure
action, whether judicially, by exercise of power of sale or otherwise,
or any other law which would otherwise require any election of remedies
by the Agent or the Lenders;
(i) all demands and notices of every kind with respect to the
foregoing; and
(j) to the extent not referred to above, all defenses (other
than payment) which the Borrower may now or hereafter have to the
payment of
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the Credit Obligations, together with all suretyship defenses, which
could otherwise be asserted by such Guarantor.
Each Guarantor represents that it has obtained the advice of counsel as to the
extent to which suretyship and other defenses may be available to it with
respect to its obligations hereunder in the absence of the waivers contained in
this Section 2.3.
No delay or omission on the part of the Agent or the Lenders in
exercising any right under this Agreement or any other Credit Document or under
any guarantee of the Credit Obligations or with respect to the Credit Security
shall operate as a waiver or relinquishment of such right. No action which the
Agent or the Lenders or the Borrower may take or refrain from taking with
respect to the Credit Obligations, including any amendments thereto or
modifications thereof or waivers with respect thereto, shall affect the
provisions of this Agreement or the obligations of each Guarantor hereunder.
None of the Lenders' or the Agent's rights shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of any Obligor,
or by any noncompliance by the Borrower with the terms, provisions and covenants
of the Credit Agreement, regardless of any knowledge thereof which the Agent or
the Lenders may have or otherwise be charged with.
2.4. Lenders' Power to Waive, etc. Each Guarantor grants to the Agent
and the Lenders full power in their discretion, without notice to or consent of
such Guarantor, such notice and consent being expressly waived to the fullest
extent permitted by applicable law, and without in any way affecting the
liability of such Guarantor under its guarantee hereunder:
(a) To waive compliance with, and any Default under, and to
consent to any amendment to or modification or termination of any terms
or provisions of, or to give any waiver in respect of, the Credit
Agreement, any other Credit Document, the Credit Security, the Credit
Obligations or any guarantee thereof (each as from time to time in
effect);
(b) To grant any extensions of the Credit Obligations (for any
duration), and any other indulgence with respect thereto, and to effect
any total or partial release (by operation of law or otherwise),
discharge, compromise or settlement with respect to the obligations of
the Obligors or any other Person in respect of the Credit Obligations,
whether or not rights against such Guarantor under this Agreement are
reserved in connection therewith;
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(c) To take security in any form for the Credit Obligations,
and to consent to the addition to or the substitution, exchange,
release or other disposition of, or to deal in any other manner with,
any part of any property contained in the Credit Security whether or
not the property, if any, received upon the exercise of such power
shall be of a character or value the same as or different from the
character or value of any property disposed of, and to obtain, modify
or release any present or future guarantees of the Credit Obligations
and to proceed against any of the Credit Security or such guarantees in
any order;
(d) To collect or liquidate or realize upon any of the Credit
Obligations or the Credit Security in any manner or to refrain from
collecting or liquidating or realizing upon any of the Credit
Obligations or the Credit Security; and
(e) To extend credit under the Credit Agreement, any other
Credit Document or otherwise in such amount as the Lenders may
determine, including increasing the amount of credit and the interest
rate and fees with respect thereto, even though the condition of the
Obligors (financial or otherwise, on an individual or Consolidated
basis) may have deteriorated since the date hereof.
2.5. Information Regarding the Borrower, etc. Each Guarantor has made
such investigation as it deems desirable of the risks undertaken by it in
entering into this Agreement and is fully satisfied that it understands all such
risks. Each Guarantor waives any obligation which may now or hereafter exist on
the part of the Agent or the Lenders to inform it of the risks being undertaken
by entering into this Agreement or of any changes in such risks and, from and
after the date hereof, each Guarantor undertakes to keep itself informed of such
risks and any changes therein. Each Guarantor expressly waives any duty which
may now or hereafter exist on the part of the Agent or the Lenders to disclose
to such Guarantor any matter related to the business, operations, character,
collateral, credit, condition (financial or otherwise), income or prospects of
the Borrower or its Affiliates or their properties or management, whether now or
hereafter known by the Agent or the Lenders. Each Guarantor represents warrants
and agrees that it assumes sole responsibility for obtaining from the Borrower
all information concerning the Credit Agreement and all other Credit Document
and all other information as to the Borrower and its Affiliates or their
properties or management as such Guarantor deems necessary or desirable.
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2.6. Certain Guarantor Representation. Each Guarantor represents that:
(a) it is in its best interest and in pursuit of the purposes
for which it was organized as an integral part of the business
conducted and proposed to be conducted by the Company and its
Subsidiaries, and reasonably necessary and convenient in connection
with the conduct of the business conducted and proposed to be conducted
by them, to induce the Lenders to enter into the Credit Agreement and
to extend credit to the Borrower by making the Guarantee contemplated
by this Section 2;
(b) the credit available hereunder will directly or indirectly
inure to its benefit;
(c) by virtue of the foregoing it is receiving at least
reasonably equivalent value from the Lenders for its Guarantee;
(d) it will not be rendered insolvent as a result of entering
into this Agreement;
(e) after giving effect to the transactions contemplated by
this Agreement, it will have assets having a fair salable value in
excess of the amount required to pay its probable liability on its
existing debts as they become absolute and matured;
(f) it has, and will have, access to adequate capital for the
conduct of its business;
(g) it has the ability to pay its debts from time to time
incurred in connection therewith as such debts mature; and
(h) it has been advised by the Agent that the Lenders are
unwilling to enter into the Credit Agreement unless the Guarantee
contemplated by this Section 2 is given by it.
2.7. Subrogation. Each Guarantor agrees that, until the Credit
Obligations are paid in full, it will not exercise any right of reimbursement,
subrogation, contribution, offset or other claims against the other Obligors
arising by contract or operation of law in connection with ally payment made or
required to be made by such Guarantor under this Agreement. After the Payment in
full of the Credit Obligations, each Guarantor shall be entitled to exercise
against the Borrower and the other Obligors all such rights of reimbursement,
subrogation,
<PAGE> 12
contribution and offset, and all such other claims, to the fullest extent
permitted by law.
2.8. Subordination. Each Guarantor covenants and agrees that, after the
occurrence of an Event of Default, all Indebtedness, claims and liabilities then
or thereafter owing by the Borrower or any other Obligor to such Guarantor
whether arising hereunder or otherwise are subordinated to the prior payment in
full of the Credit Obligations and are so subordinated as a claim against such
Obligor or any of its assets, whether such claim be in the ordinary course of
business or in the event of voluntary or involuntary liquidation, dissolution,
insolvency or bankruptcy, so that no payment with respect to any such
Indebtedness, claim or liability will be made or received while any Event of
Default exists.
2.9. Future Subsidiaries; Further Assurances. The Company will from
time to time cause (a) any present Wholly Owned Subsidiary that is not a
Guarantor within 30 days after notice from the Agent or (b) any future Wholly
Owned Subsidiary within 30 days after any such Person becomes a Wholly Owned
Subsidiary, to join this Agreement as a Guarantor pursuant to a joinder
agreement in form and substance satisfactory to the Agent; provided, however,
that in the event such a Wholly Owned Subsidiary is prohibited by any valid law,
statute, rule or regulation from guaranteeing the Credit Obligations, such
guarantee will be limited to the extent necessary to comply with such
prohibition. Each Guarantor will, promptly upon the request of the Agent from
time to time, execute, acknowledge and deliver, and file and record, all such
instruments, and take all such action, as the Agent deems necessary or advisable
to carry out the intent and purpose of this Section 2.
2.10. Contribution Among Guarantors. The Guarantors agree that, as
among themselves in their capacity as guarantors of the Credit Obligations, the
ultimate responsibility for repayment of the Credit Obligations, in the event
that the Borrower fails to pay when due its Credit Obligations, shall be
equitably apportioned, to the extent consistent with the Credit Documents, among
the respective Guarantors (a) in the proportion that each, in its capacity as a
guarantor, has benefited from the extensions of credit to the Borrower by the
Lenders under the Credit Agreement, or (b) if such equitable apportionment
cannot reasonably be determined or agreed upon among the affected Guarantors, in
proportion to their respective net worths determined on or about the date hereof
(or such later date as such Guarantor becomes party hereto). In the event that
any Guarantor, in its capacity as a guarantor, pays an amount with respect to
the Credit Obligations in excess of its proportionate share as set forth in this
Section 2.10, each other Guarantor shall, to the extent consistent with the
Credit Documents, make a contribution payment to such Guarantor in an amount
such that the aggregate
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amount paid by each Guarantor reflects its proportionate share of the Credit
Obligations. In the event of any default by any Guarantor under this Section
2.10, each other Guarantor will bear, to the extent consistent with the Credit
Documents, its proportionate share of the defaulting Guarantor's Obligation
under this Section 2.10. This Section 2.10 is intended to set forth only the
rights and obligations of the Guarantors among themselves and shall not in any
way affect the obligations of any Guarantor to the Lenders under the Credit
Documents (which obligations shall at all times constitute the joint and several
obligations of all the Guarantors).
3. Security.
3.1. Credit Security. As security for the payment and performance of
the Credit Obligations, each Obligor mortgages, pledges and collaterally grants
and assigns to the Agent for the benefit of the Lenders and the holders from
time to time of any Credit Obligation, and a security interest in favor of the
Agent for the benefit of the Lenders and such holders in, all of such Obligor's
right, title and interest in and to (but none of its obligations or liabilities
with respect to) the items and types of present and future property described in
sections 3.1.1 through 3.1.14 (subject, however, to Section 3.1.15), whether now
owned or hereafter acquired, all of which shall be included in the term "Credit
Security":
3.1.1. Tangible Personal Property. All goods, machinery,
equipment, inventory and all other tangible personal property of any
nature whatsoever, wherever located, including raw materials, work in
process, finished parts and products, supplies, spare parts,
replacement parts, merchandise for resale, dies, molds, tools,
computers, tapes, disks and computer equipment.
3.1.2. Rights to Payment of Money. All rights to receive the
payment of money, including accounts and receivables, rights to receive
the payment of money under contracts, franchises, licenses, permits,
subscriptions or other agreements (whether or not earned by
performance), and rights to receive payments from any other source (all
such rights, other than Financing Debt, being referred to herein as
"Accounts").
3.1.3. Intangibles. All of the following (to the extent not
included in Section 3.1.2): (a) contracts, franchises, licenses,
permits, subscriptions and other agreements and all other rights
thereunder; (b) rights granted by others which permit such Obligor to
sell or market items of personal property; (c) United States and
foreign common law and statutory copyrights and rights in literary
property and rights and licenses thereunder;
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<PAGE> 14
(d) trade names, United States and foreign trademarks, service marks,
any registrations thereof and any related good will; (e) United States
and foreign patents and patent applications; (f) computer software,
designs, models, know-how, trade secrets, rights in proprietary
information, formulas, customer lists, backlog, orders, subscriptions,
royalties, catalogues, sales material, documents, good will, inventions
and processes; (g) judgments, causes in action and claims, whether or
not inchoate, and (h) all other general intangibles and intangible
property and all rights thereunder.
3.1.4. Pledged Stock. (a) All shares of capital stock or other
evidence of beneficial interest in any corporation, business trust or
limited liability company, (b) all limited partnership interests in any
limited partnership, (c) all general partnership interests in any
general partnership, (d) all joint venture interests in any joint
venture and (e) all options, warrants and similar rights to acquire
such capital stock or such interests. All such capital stock,
interests, options, warrants and other rights are collectively referred
to as the "Pledged Stock".
3.1.5. Pledged Rights. All rights to receive profits or
surplus of, or other Distributions (including income, return of capital
and liquidating distributions) from, any partnership, joint venture or
limited liability company; including any distributions by any such
Person to partners, joint venturers or members. All such rights are
collectively referred to as the "Pledged Rights".
3.1.6. Pledged Indebtedness. All Financing Debt from time to
time owing to such Obligor from any Person (all such Financing Debt
being referred to as the "Pledged Indebtedness").
3.1.7. Chattel Paper, Instruments and Documents. All chattel
paper, non-negotiable instruments, negotiable instruments and
documents.
3.1.8. Leases. All leases of personal property, whether such
Obligor is the lessor or the lessee thereunder.
3.1.9. Deposit Accounts. All general or special deposit
accounts, including any demand, time, savings, passbook or similar
account maintained by such Obligor with any bank, trust company,
savings and loan association, credit union or similar organization, and
all money, cash and cash equivalents of such Obligor, whether or not
deposited in any such deposit account.
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3.1.10. Collateral. All collateral granted by third party
Obligors to, or held by, such Obligor with respect to the Accounts,
Pledged Securities, chattel paper, instruments, leases and other items
of Credit Security.
3.1.11. Books and Records. All books and records, including
books of account and ledgers of every kind and nature, all
electronically recorded data (including all computer programs, disks,
tapes, electronic data processing media and software used in connection
with maintaining such Obligor's books and records), all files and
correspondence and all receptacles and containers for the foregoing.
3.1.12. Insurance. All insurance policies which insure against
any loss or damage to any other Credit Security.
3.1.13. All Other Property. All other property, assets and
items of value of every kind and nature, tangible or intangible,
absolute or contingent, legal or equitable.
3.1.14. Proceeds and Products. All proceeds, including
insurance proceeds, and products of the items of Credit Security
described or referred to in Sections 3.1.1 through 3.1.13 and, to the
extent not included in the foregoing, all Distributions with respect to
the Pledged Securities.
3.1.15. Excluded Property. Notwithstanding Sections 3.1.1
through 3.1.14, the payment and performance of the Credit Obligations
shall not be secured by:
(a) any contract, license, permit or franchise that validly
prohibits the creation by such Obligor of a security interest in such
contract, license, permit or franchise (or in any rights or property
obtained by such Obligor under such contract, license, permit or
franchise); provided, however, that the provisions of this Section
3.1.15 shall not prohibit the security interests created by this
Agreement from extending to the proceeds of such contract, license,
permit or franchise (or such rights or property) or to the monetary
value of the good will and other general intangibles of the Obligors
relating thereto;
(b) any rights or property to the extent that any valid and
enforceable law or regulation applicable to such rights or property
prohibits the creation of a security interest therein; provided,
however, that the provisions of this Section 3.1.15 shall not prohibit
the security interests created by this Agreement from extending to the
proceeds of such rights or
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property or to the monetary value of the good will and other general
intangibles of the Obligors relating thereto; or
(c) the items described in Section 3.2 (but only in the event
and to the extent the Agent has not specified that such items be
included in the Credit Security pursuant thereto).
In addition, in the event any Obligor disposes of assets to third
parties in a transaction permitted by section 6.11 of the Credit Agreement, such
assets, but not the proceeds or products thereof, shall be released from the
Lien of the Credit Security.
3.2. Additional Credit Security. As additional Credit Security, each
Obligor covenants that it will mortgage, pledge and collaterally grant and
assign to the Agent for the benefit of the Lenders and the holders from time to
time of any Credit Obligation, and will create a security interest in favor of
the Agent for the benefit of the Lenders and such holders in, all of its right,
title and interest in and to (but none of its obligations with respect to) such
of the following present or future items as the Agent may from time to time
specify by notice to such Obligor, whether now owned or hereafter acquired, and
the proceeds and products thereof, except to the extent consisting of rights or
property of the types referred to in Section 3.1.15(a) through (b), subject only
to Liens permitted by Section 3.3.3, all of which shall thereupon be included in
the term "Credit Security":
3.2.1. Real Property. All real property and immovable property
and fixtures, leasehold interests and easements wherever located,
together with any and all estates and interests of such Obligor
therein, including lands, buildings, stores, manufacturing facilities
and other structures erected on such property, fixed plant, fixed
equipment and all permits, rights, licenses, benefits and other
interests of any kind or nature whatsoever in respect of such real and
immovable property
3.2.2. Motor Vehicles and Aircraft. All motor vehicles and
aircraft.
3.3. Representations, Warranties and Covenants with Respect to Credit
Security. Each Obligor severally represents, warrants and covenants with respect
to itself and its respective Credit Security that:
3.3.1. Pledged Stock. All shares of capital stock, limited
partnership interests and similar securities included in the Pledged
Stock are and shall be at all times duly authorized, validly issued,
fully paid and (in the case of capital stock and limited partnership
interests) nonassessable. Each Obligor
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will deliver to the Agent certificates representing the Pledged Stock,
registered, if the Agent so requests, in the name of the Agent or its
nominee, as pledgee, or accompanied by a stock transfer power executed
in blank and, if the Agent so requests, with the signature guaranteed,
all in form and manner satisfactory to the Agent. Pledged Stock that is
not evidenced by a certificate will be registered in the Agent's name
as pledgee on the issuer's records, all in form and substance
satisfactory to the Agent. The Agent may at any time after the
occurrence of an Event of Default transfer into its name or the name of
its nominee, as pledgee, any Pledged Stock. In the event the Pledged
Stock includes any Margin Stock, the Obligors will furnish to the
Lenders Federal Reserve Form U-1 and take such other action as the
Agent may request to ensure compliance with applicable laws.
3.3.2. Accounts and Pledged Indebtedness. All Accounts and
Pledged Indebtedness owed by an Affiliate of any Obligor shall be on
open account and shall not be evidenced by any note or other
instrument; provided, however, that all Pledged Indebtedness owed by an
Affiliate of any Obligor shall, if the Agent requests, be evidenced by
a promissory note, which note shall be delivered to the Agent after
having been endorsed in blank. Each Obligor will, immediately upon the
receipt thereof, deliver to the Agent any promissory note or similar
instrument representing any Account or Pledged Indebtedness, after
having endorsed such promissory note or instrument in blank.
3.3.3. No Liens or Restrictions on Transfer or Change of
Control. All Credit Security shall be free and clear of any Liens and
restrictions on the transfer thereof, including contractual provisions
which prohibit the assignment of rights under contracts except for
Liens permitted by section 6.8 of the Credit Agreement. Without
limiting the generality of the foregoing, each Obligor will in good
faith attempt to exclude from contracts to which it becomes a party
after the date hereof provisions that would prevent such Obligor from
creating a security interest in such contract or any property acquired
thereunder as contemplated hereby. None of the Pledged Stock is subject
to any option to purchase or similar rights of any Person. Except with
the written consent of the Agent, each Obligor will in good faith
attempt to exclude from any agreement, instrument, deed or lease
provisions that would restrict the change of control or ownership of
the Company or any of its Subsidiaries, or create a security interest
in the ownership of the Company or any of its Subsidiaries.
3.3.4. Location of Credit Security. Each Obligor shall at all
times keep its records concerning the Accounts at its chief executive
office and
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principal place of business, which office and place of business shall
be set forth in Exhibit 3.3 or, so long as such Obligor shall have
taken all steps reasonably necessary to perfect the Lenders' security
interest in the Credit Security with respect to such new address, at
such other address as such Obligor may specify by notice actually
received by the Agent not less than 10 Banking Days prior to such
change of address. No Obligor shall at any time keep tangible personal
property of the type referred to in Section 3.1.1 in any jurisdiction
other than the jurisdictions specified in Exhibit 3.3 or, so long as
such Obligor shall have taken all steps reasonably necessary to perfect
the Lenders' security interest in the Credit Security with respect to
such other jurisdiction, other jurisdictions as such Obligor may
specify by notice actually received by the Agent not less than 10 days
prior to moving such tangible personal property into such other
jurisdiction.
3.3.5. Trade Names. No Obligor will adopt or do business under
any name other than its name or names designated in Exhibit 3.3 or any
other name specified by notice actually received by the Agent not less
than 10 Banking Days prior to the conduct of business under such
additional name. Since its incorporation, no Obligor has changed its
corporate name or adopted or conducted business under any trade name
other than a name specified on Exhibit 3.3 (as from time to time
supplemented in accordance with sections 6.4.1 and 6.4.2 of the Credit
Agreement).
3.3.6. Insurance. Each insurance policy included in, or
insuring against loss or damage to, the Credit Security shall name the
Agent as additional insured party or as loss payee. No such insurance
policy shall be cancelable or subject to termination or reduction in
amount or scope of coverage until after at least 30 days' prior written
notice from the insurer to the Agent. At least 10 days prior to the
expiration of any such insurance policy for any reason, each Obligor
shall furnish the Agent with a renewal or replacement policy and
evidence of payment of the premiums therefor when due. Each Obligor
grants to the Agent full power and authority as its attorney-in-fact,
effective upon notice to such Obligor after the occurrence of an Event
of Default, to obtain, cancel, transfer, adjust and settle any such
insurance policy and to endorse any drafts thereon. Any amounts that
the Agent receives under any such policy (including return of unearned
premiums) insuring against loss or damage to the Credit Security prior
to the occurrence of an Event of Default shall be delivered to the
Obligors for the replacement, restoration and maintenance of the Credit
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Security. Any such amounts that the Agent receives after the occurrence
of an Event of Default shall, at the Agent's option, be applied to
payment of the Credit Obligations or to the replacement, restoration
and maintenance of the Credit Security. If any Obligor fails to provide
insurance as required by this Agreement, the Agent may, at its option,
purchase such insurance and such Obligor will on demand pay to the
Agent the amount of any payments made by the Agent or the Lenders for
such purpose, together with interest on the amounts so disbursed from
five Banking Days after the date demanded until payment in full thereof
at the Overdue Reimbursement Rate.
3.3.7. Modifications to Credit Security. Except with the prior
written consent of the Agent, no Obligor shall amend or modify, or
waive any of its rights under or with respect to, any material
Accounts, general intangibles, Pledged Securities or leases if the
effect of such amendment, modification or waiver would be to reduce the
amount of any such items or to extend the time of payment thereof, to
waive any default by any other party thereto, or to waive or impair any
remedies of the Obligors or the Lenders under or with respect to any
such Accounts, general intangibles, Pledged Securities or leases, in
each case other than consistent with past practice in the ordinary
course of business and on an arm's-length basis. Each Obligor will
promptly give the Agent written notice of any request by any Person for
any material credit or adjustment with respect to any Account, general
intangible, Pledged Securities or leases.
3.3.8. Delivery of Documents. Upon the Agent's request, each
Obligor shall deliver to the Agent, promptly upon such Obligor's
receipt thereof, copies of any agreements, instruments, documents or
invoices comprising or relating to the Credit Security. Pending such
request, such Obligor shall keep such items at its chief executive
office and principal place of business (as specified pursuant to
Section 3.3.4).
3.3.9. Perfection of Credit Security. Upon the Agent's request
from time to time, subject to Section 5 hereof, the Obligors will
execute and deliver, and file and record in the proper filing and
recording places, all such instruments, including financing statements,
collateral assignments of copyrights, trademarks and patents, mortgages
or deeds of trust and notations on certificates of title, and will take
all such other action, as the Agent reasonably deems advisable for
confirming to it the Credit Security or to carry out any other purpose
of this Agreement or any other Credit Document.
3.4. Administration of Credit Security. The Credit Security shall be
administered as follows, and if an Event of Default shall have occurred, Section
3.5 shall also apply.
15
<PAGE> 20
3.4.1. Use of Credit Security. Until the Agent provides
written notice to the contrary upon an Event of Default, each Obligor
may use, commingle and dispose of any part of the Credit Security in
the ordinary course of its business, all subject to section 6.11 of the
Credit Agreement.
3.4.2. Deposits. Each Obligor shall keep all its bank and
deposit accounts only with such financial institutions listed on
Exhibit 3.3 (as from time to time supplemented in accordance with
sections 6.4.1 and 6.4.2 of the Credit Agreement).
3.4.3. Distributions on Pledged Securities.
(a) Until an Event of Default shall occur, the respective
Obligors shall be entitled, to the extent permitted by the Credit
Documents, to receive and retain all Distributions on or with respect
to the Pledged Securities (other than Distributions constituting
additional Pledged Securities). All Distributions constituting
additional Pledged Securities will be retained by the Agent (or if
received by any Obligor shall be held by such Person in trust and shall
be immediately delivered by such Person to the Agent in the original
form received, endorsed in blank) and held by the Agent as part of the
Credit Security.
(b) If an Event of Default shall have occurred, all
Distributions on or with respect to the Pledged Securities shall be
retained by the Agent (or if received by any Obligor shall be held by
such Person in trust and shall be immediately delivered by it to the
Agent in the original form received, endorsed in blank) and held by the
Agent as part of the Credit Security or applied by the Agent to the
payment of the Credit Obligations in accordance with Section 3.5.6.
3.4.4. Voting Pledged Securities.
(a) Until an Event of Default shall occur, the respective
Obligors shall be entitled to vote or consent with respect to the
Pledged Securities in any manner not inconsistent with the terms of any
Credit Document, and the Agent will, if so requested, execute
appropriate revocable proxies therefor.
(b) If an Event of Default shall have occurred, if and to the
extent that the Agent shall so notify in writing the Obligor pledging
the Pledged Securities in question, only the Agent shall be entitled to
vote or consent or
16
<PAGE> 21
take any other action with respect to the Pledged Securities (and any
Obligor will, if so requested, execute appropriate proxies therefor).
3.5. Right to Realize upon Credit Security. Except to the extent
prohibited by applicable law that cannot be waived, this Section 3.5 shall
govern the Lender' s and the Agent' s rights to realize upon the Credit Security
if any Event of Default shall have occurred. The provisions of this Section 3.5
are in addition to any rights and remedies available at law or in equity and in
addition to the provisions of any other Credit Document. In the case of a
conflict between this Section 3.5 and any other Credit Document, this Section
3.5 shall govern.
3.5.1. Assembly of Credit Security; Receiver. Each Obligor
shall, upon the Agent's request, assemble the Credit Security and
otherwise make it available to the Agent. The Agent may have a receiver
appointed for all or any portion of the Obligors' assets or business
which constitutes the Credit Security in order to manage, protect,
preserve, sell and otherwise dispose of all or any portion of the
Credit Security in accordance with the terms of the Credit Documents,
to continue the operations of the Obligors and to collect all revenues
and profits therefrom to be applied to the payment of the Credit
Obligations, including the compensation and expenses of such receiver.
3.5.2. General Authority. To the extent specified in written
notice from the Agent to the Obligor in question, each Obligor grants
the Agent full and exclusive power and authority, subject to the other
terms hereof and applicable law, to take any of the following actions
(for the sole benefit of the Agent on behalf of the Lenders and the
holders from time to time of any Credit Obligations, but at such
Obligor's expense):
(a) To ask for, demand, take, collect, sue for and receive all
payments in respect of any Accounts, general intangibles, Pledged
Securities or leases which such Obligor could otherwise ask for,
demand, take, collect, sue for and receive for its own use.
(b) To extend the time of payment of any Accounts, general
intangibles, Pledged Securities or leases and to make any allowance or
other adjustment with respect thereto.
(c) To settle, compromise, prosecute or defend any action or
proceeding with respect to any Accounts, general intangibles, Pledged
Securities or leases and to enforce all rights and remedies thereunder
which such Obligor could otherwise enforce.
17
<PAGE> 22
(d) To enforce the payment of any Accounts, general
intangibles, Pledged Securities or leases, either in the name of such
Obligor or in its own name, and to endorse the name of such Obligor on
all checks, drafts, money orders and other instruments tendered to or
received in payment of any Credit Security.
(e) To notify the third party payor with respect to any
Accounts, general intangibles, Pledged Securities or leases of the
existence of the security interest created hereby and to cause all
payments in respect thereof thereafter to be made directly to the
Agent; provided, however, that whether or not the Agent shall have so
notified such payor, such Obligor will at its expense render all
reasonable assistance to the Agent in collecting such items and in
enforcing claims thereon.
(f) To sell, transfer, assign or otherwise deal in or with any
Credit Security or the proceeds thereof, as fully as such Obligor
otherwise could do.
3.5.3. Marshaling, etc. Neither the Agent nor the Lenders
shall be required to make any demand upon, or pursue or exhaust any of
their rights or remedies against, any Obligor or any other guarantor,
pledgor or any other Person with respect to the payment of the Credit
Obligations or to pursue or exhaust any of their rights or remedies
with respect to any collateral therefor or any direct or indirect
guarantee thereof. Neither the Agent nor the Lenders shall be required
to marshal the Credit Security or any guarantee of the Credit
Obligations or to resort to the Credit Security or any such guarantee
in any particular order, and all of its and their rights hereunder or
under any other Credit Document shall be cumulative. To the extent it
may lawfully do so, each Obligor absolutely and irrevocably waives and
relinquishes the benefit and advantage of, and covenants not to assert
against the Agent or the Lenders, any valuation, stay, appraisement,
extension, redemption or similar laws now or hereafter existing which,
but for this provision, might be applicable to the sale of any Credit
Security made under the judgment, order or decree of any court, or
privately under the power of sale conferred by this Agreement, or
otherwise. Without limiting the generality of the foregoing, each
Obligor (a) agrees that it will not invoke or utilize any law which
might prevent, cause a delay in or otherwise impede the enforcement of
the rights of the Agent or any Lender in the Credit Security, (b)
waives all such laws, and (c) agrees that it will not invoke or raise
as a defense to any enforcement by the Agent or any Lender of any
rights and remedies relating to the Credit Security or the
18
<PAGE> 23
Credit Obligations any legal or contractual requirement with which the
Agent or any Lender may have in good faith failed to comply. In
addition, each Obligor waives any right to prior notice (except to the
extent expressly required by this Agreement or by law) or judicial
hearing in connection with foreclosure on or disposition of any Credit
Security, including any such right which such Obligor would otherwise
have under the Constitution of the United States of America, any state
or territory thereof or any other jurisdiction.
3.5.4. Sales of Credit Security. All or any part of the Credit
Security may be sold for cash or other value in any number of lots at
public or private sale, without demand, advertisement or notice;
provided, however, that unless the Credit Security to be sold threatens
to decline speedily in value or is of a type customarily sold on a
recognized market, the Agent shall give the Obligor granting the
security interest in such Credit Security 10 days' prior written notice
of the time and place of any public sale, or the time after which a
private sale may be made, which notice each of the Obligors and the
Agent agrees to be reasonable. At any sale or sales of Credit Security,
any Lender or any of its respective officers acting on its behalf, or
such Lender's assigns, may bid for and purchase all or any part of the
property and rights so sold, may use all or any portion of the Credit
Obligations owed to such Lender as payment for the property or rights
so purchased, and upon compliance with the terms of such sale may hold
and dispose of such property and rights without further accountability
to the respective Obligors, except for the proceeds of such sale or
sales pursuant to Section 3.5.6. The Obligors acknowledge that any such
sale will be made by the Agent on an "as is" basis with disclaimers of
all warranties, whether express or implied. The respective Obligors
will execute and deliver or cause to be executed and delivered such
instruments, documents, assignments, waivers, certificates and
affidavits, will supply or cause to be supplied such further
information and will take such further action, as the Agent shall
reasonably request in connection with any such sale.
3.5.5. Sale without Registration. If, at any time when the
Agent shall determine to exercise its rights hereunder to sell all or
part of the securities included in the Credit Security, the securities
in question shall not be effectively registered under the Securities
Act (or other applicable law), the Agent may, in its sole discretion,
sell such securities by private or other sale not requiring such
registration in such manner and in such circumstances as the Agent may
deem necessary or advisable in order that such sale may be effected in
accordance with applicable securities laws without such registration
and the related delays, uncertainty and expense.
19
<PAGE> 24
Without limiting the generality of the foregoing, in any event the
Agent may, in its sole discretion, (a) approach and negotiate with a
single purchaser or one or more possible purchasers to effect such
sale, (b) restrict such sale to one or more purchasers each of whom
will represent and agree that such purchaser is purchasing for its own
account, for investment and not with a view to the distribution or sale
of such securities and (c) cause to be placed on certificates
representing the securities in question a legend to the effect that
such securities have not been registered under the Securities Act (or
other applicable law) and may not be disposed of in violation of the
provisions thereof. Each Obligor agrees that such manner of disposition
is commercially reasonable, that it will upon the Agent's request give
any such purchaser access to such information regarding the issuer of
the securities in question as the Agent may reasonably request and that
the Agent and the Lenders shall not incur any responsibility for
selling all or part of the securities included in the Credit Security
at any private or other sale not requiring such registration,
notwithstanding the possibility that a substantially higher price might
be realized if the sale were deferred until after registration under
the Securities Act (or other applicable law) or until made in
compliance with certain other rules or exemptions from the registration
provisions under the Securities Act (or other applicable law). Each
Obligor acknowledges that no adequate remedy at law exists for breach
by it of this Section 3.5.5 and that such breach would not be
adequately compensable in damages and therefore agrees that this
Section 3.5.5 may be specifically enforced.
3.5.6. Application of Proceeds. The proceeds of all sales and
collections in respect of any Credit Security or other assets of any
Obligor, all funds collected from the Obligors and any cash contained
in the Credit Security, the application of which is not otherwise
specifically provided for herein, shall be applied as follows:
First, to the payment of the costs and expenses of such sales
and collections, the reasonable expenses of the Agent and the
reasonable fees and expenses of its special counsel;
Second, any surplus then remaining to the payment of the
Credit Obligations in such order and manner as the Agent may in its
sole discretion determine; provided, however, that any such payment of
Credit Obligations owed to all Lenders shall be proposed Policy rata in
accordance with the respective Percentage Interests of the Lenders in
such Credit Obligations; and
20
<PAGE> 25
Third, any surplus then remaining shall be paid to the
Obligors, subject, however, to the rights of the holder of any then
existing Lien of which the Agent has actual notice.
3.6. Custody of Credit Security. Except as provided by applicable law
that cannot be waived, the Agent will have no duty as to the custody and
protection of the Credit Security, the collection of any part thereof or of any
income thereon or the preservation or exercise of any rights pertaining thereto,
including rights against prior parties, except for the use of reasonable care in
the custody and physical preservation of any Credit Security in its possession.
The Lenders will not be liable or responsible for any loss or damage to any
Credit Security, or for any diminution in the value thereof, by reason of the
act or omission of any agent selected by the Agent acting in good faith.
4. Special Provision Concerning Cash Collateral. Notwithstanding anything to the
contrary contained herein (including, without limitation, pursuant to Section
3.3.9 hereof), until the Agent shall exercise its remedies upon an Event of
Default, no Obligor shall be obligated to perform any act or execute or deliver
any document or instrument which conveys control over such Obligor's cash, Cash
Equivalents or deposit or similar depository accounts.
5. General. Addresses for notices, consent to jurisdiction, jury trial waiver,
defeasance and numerous other provisions applicable to this Agreement are
contained in the Credit Agreement. The invalidity or unenforceability of any
term or provision hereof shall not affect the validity or enforceability of any
other term or provision hereof. The headings in this Agreement are for
convenience of reference only and shall not limit, alter or otherwise affect the
meaning hereof. This Agreement and the other Credit Documents constitute the
entire Understanding of the parties with respect to the subject matter hereof
and thereof and supersede all prior and current understandings and agreements,
whether written or oral. This Agreement is a Credit Document and may be executed
in any number of counterparts, which together shall constitute one instrument.
This Agreement shall be governed by and construed in accordance with the laws
(other than the conflict of laws rules) of the Commonwealth of Massachusetts
except as may be required by the UCC or other applicable laws of other
jurisdictions with respect to matters involving the perfection of the Agent's
Lien on the Credit Security located in such other jurisdictions.
21
<PAGE> 26
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
dated first written above.
RACING CHAMPIONS CORPORATION
By /s/ Curtis W. Stoelting
-------------------------------------
Title: Vice President-Finance and
Operations and Secretary
RACING CHAMPIONS, INC.
By /s/ Curtis W. Stoelting
-------------------------------------
Title: Vice President-Finance and
Operations and Secretary
BANKBOSTON, N.A.
as Agent under the Credit Agreement
By
-------------------------------------
Title: Vice President
22
<PAGE> 1
EXHIBIT 21
Subsidiaries of Racing Champions Corporation
As of December 31, 1997, the subsidiaries of Racing Champions
Corporation were as follows:
Name Jurisdiction of Incorporation
- ---- -----------------------------
Racing Champions, Inc. Illinois
Racing Champions Limited Hong Kong
WSG Acquisition, Inc. North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,463
<SECURITIES> 0
<RECEIVABLES> 11,527
<ALLOWANCES> 300
<INVENTORY> 1,701
<CURRENT-ASSETS> 20,695
<PP&E> 11,841
<DEPRECIATION> 2,830
<TOTAL-ASSETS> 114,778
<CURRENT-LIABILITIES> 20,970
<BONDS> 0
<COMMON> 132
0
0
<OTHER-SE> 69,668
<TOTAL-LIABILITY-AND-EQUITY> 114,778
<SALES> 76,562
<TOTAL-REVENUES> 81,526
<CGS> 27,431
<TOTAL-COSTS> 32,186
<OTHER-EXPENSES> 25,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,126
<INCOME-PRETAX> 13,174
<INCOME-TAX> 5,298
<INCOME-CONTINUING> 7,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,876
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.69
</TABLE>
