<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
RACING CHAMPIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 5090 36-4088307
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
800 ROOSEVELT ROAD
BUILDING C, SUITE 320
GLEN ELLYN, ILLINOIS 60137
(630) 790-3507
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
ROBERT E. DODS
PRESIDENT
RACING CHAMPIONS CORPORATION
800 ROOSEVELT ROAD
BUILDING C, SUITE 320
GLEN ELLYN, ILLINOIS 60137
(630) 790-3507
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
MICHAEL T. PEPKE, ESQ. ROBERT W. WALTER, ESQ.
JAMES M. BEDORE, ESQ. BERLINER, ZISSER, WALTER & GALLEGOS, P.C.
REINHART, BOERNER, VAN DEUREN, ONE NORWEST CENTER
NORRIS & RIESELBACH, S.C. 1700 LINCOLN STREET, SUITE 4700
1000 NORTH WATER STREET, SUITE 2100 DENVER, CO 80203-4547
MILWAUKEE, WI 53202 (303) 830-1700
(414) 298-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED(1) REGISTERED(2) PER SHARE(3) OFFERING PRICE(3) FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par Value $.01 Per Share.......... 3,557,916 $13.00 $46,252,908 $13,645
=================================================================================================================================
</TABLE>
(1) This Registration Statement relates to securities of Racing Champions
Corporation issuable to holders of common stock, par value $.01 per share
("Wheels Common Stock"), of Wheels Sports Group, Inc. ("Wheels"), in the
proposed merger of a wholly owned subsidiary of Racing Champions Corporation
with and into Wheels (the "Merger").
(2) Based upon 6,976,303, the maximum number of shares of Wheels Common Stock to
be exchanged for shares of common stock, par value $0.01 per share, of
Racing Champions Corporation ("Racing Champions Common Stock") pursuant to
the Merger, multiplied by 0.51, the exchange ratio in the Merger, assuming
solely for purposes of calculating the registration fee that (i) all
outstanding Wheels stock options are exercised prior to the effective time
of the Merger, and (ii) all outstanding warrants exercisable for shares of
Wheels Common Stock are exercised prior to the effective time of the Merger.
The exchange ratio in the Merger is subject to adjustment based upon the
average closing price of shares of Racing Champions Common Stock on the
Nasdaq National Market for the 10 trading days prior to the closing of the
Merger (the "Racing Champions Closing Price"). The Registration Statement
covers any additional shares of Racing Champions Common Stock which may be
required to be issued by reason of such adjustments.
(3) Calculated in accordance with Rule 457(f)(1) under the Securities Act of
1933, as amended (the "Securities Act"), based on the aggregate market value
on April 17, 1998 of the maximum number shares of Wheels Common Stock to be
exchanged in connection with the Merger and computed by dividing (a) the
product of (i) the average of the high and low prices per share of Wheels
Common Stock as reported on the Nasdaq National Market on April 17, 1998
($6.63) and (ii) 6,976,303, representing the maximum number of shares of
Wheels Common Stock to be exchanged in connection with the Merger, by (b)
3,557,916, representing the maximum number of shares of Racing Champions
Common Stock to be issued in connection with the Merger, assuming that the
Racing Champions Closing Price is $12.00, the closing price of Racing
Champions Common Stock as reported by the Nasdaq National Market on April
17, 1998.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
RACING CHAMPIONS CORPORATION
800 Roosevelt Road
Building C, Suite 320
Glen Ellyn, Illinois 60137
630-790-3507
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of the Stockholders
of Racing Champions Corporation ("Racing Champions"), to be held at
on June 12, 1998, at 10:00 a.m., local time. A notice of the
Annual Meeting, a proxy card and a joint proxy statement/prospectus containing
information about the matters to be acted upon at the Annual Meeting are
enclosed. All holders of Racing Champions' outstanding shares of Common Stock as
of May 7, 1998 (the "Record Date"), will be entitled to notice of and to vote at
the Annual Meeting.
At the Annual Meeting, you will be asked to consider and to vote upon the
following matters:
(1) A proposal (the "Merger Proposal") to approve and adopt an Amended
and Restated Agreement and Plan of Merger (the "Merger Agreement"), dated
as of December 4, 1997, by and among Racing Champions, WSG Acquisition,
Inc., a wholly owned subsidiary of Racing Champions ("Acquisition"), and
Wheels Sports Group, Inc. ("Wheels") and the issuance of shares of Common
Stock, par value $0.01 per share, of Racing Champions ("Racing Champions
Common Stock"), pursuant to the Merger Agreement. Pursuant to the Merger
Agreement, Acquisition will be merged with and into Wheels (the "Merger")
with Wheels being the surviving corporation and becoming a wholly owned
subsidiary of Racing Champions. If the Merger Agreement is approved and the
Merger becomes effective, each outstanding share of Common Stock of Wheels
("Wheels Common Stock") (other than shares of Wheels Common Stock, if any,
not converted because of the exercise of dissenters' appraisal rights and
other than shares of Wheels Common Stock, if any, held by Wheels, Racing
Champions or Acquisition, which are to be canceled as part of the Merger)
will be converted into the right to receive 0.51 of a share of Racing
Champions Common Stock, subject to adjustment as provided in the Merger
Agreement. Approval of the Merger Proposal requires the affirmative vote of
the holders of a majority of the shares of Racing Champions Common Stock
cast in person or by proxy at the Annual Meeting.
(2) A proposal (the "Capitalization Amendment Proposal") to approve
and adopt an amendment to the Amended and Restated Certificate of
Incorporation of Racing Champions which would increase the total number of
authorized shares of Racing Champions Common Stock from 20,000,000 to
28,000,000 shares. Approval of the Capitalization Amendment Proposal
requires the affirmative vote of the holders of a majority of all
outstanding shares of Racing Champions Common Stock.
(3) The election of 11 directors for the ensuing year. Three of the
nominees, Randy C. Baker, Randy E. Duncan and Victor H. Shaffer, have been
nominated pursuant to the Merger Agreement and their election is
conditioned upon the approval of the Merger Proposal and the Capitalization
Proposal at the Annual Meeting. In the event that the Merger Proposal and
the Capitalization Amendment Proposal are not approved, the proxies will
not be voted for these three nominees and will be voted only for the eight
incumbent directors. Approval of any of the nominees for director requires
a plurality of the votes cast at the Annual Meeting.
(4) The ratification of the appointment of Arthur Andersen LLP,
independent public accountants, as auditors of Racing Champions for its
fiscal year ending December 31, 1998. Approval of the ratification of
independent auditors requires the affirmative vote of a majority of the
shares of Racing Champions Common Stock represented in person or by proxy
at the Annual Meeting and entitled to vote thereon.
(5) A proposal to amend the Racing Champions Corporation Stock
Incentive Plan (the "Incentive Plan") to increase the aggregate number of
shares of Racing Champions Common Stock that may be issued or transferred
upon exercise, payment or vesting of stock options granted under such plan
from
<PAGE> 3
311,852 to 600,000. Approval of the amendment to the Incentive Plan
requires the affirmative vote of a majority of the shares of Racing
Champions Common Stock represented in person or by proxy at the Annual
Meeting and entitled to vote thereon.
Details of the matters to be acted upon at the Annual Meeting and other
important information are set forth in the accompanying Joint Proxy
Statement/Prospectus which you are urged to read carefully. The consummation of
the Merger is subject to the satisfaction of certain closing conditions as
described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed Merger. In addition, the Board of Directors has
received the opinion of its financial advisor, Robert W. Baird & Co.
Incorporated, to the effect that the Exchange Ratio established by the Merger
Agreement is fair, from a financial point of view, to Racing Champions.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL
OF THE MERGER PROPOSAL, THE CAPITALIZATION AMENDMENT PROPOSAL, EACH PERSON
NOMINATED TO SERVE AS A MEMBER OF RACING CHAMPIONS' BOARD OF DIRECTORS, THE
RATIFICATION OF ARTHUR ANDERSEN LLP AS RACING CHAMPIONS' INDEPENDENT AUDITORS
AND THE AMENDMENT TO THE INCENTIVE PLAN.
Whether or not you plan to attend the Annual Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Annual Meeting, you may revoke such proxy and vote
in person if you wish, even if you have previously returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Very truly yours,
Robert E. Dods
President
, 1998
2
<PAGE> 4
RACING CHAMPIONS CORPORATION
NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD
ON JUNE 12, 1998
To the Stockholders of Racing Champions Corporation:
The annual meeting of the stockholders of Racing Champions Corporation
("Racing Champions") will be held at on June 12, 1998, at 10:00
a.m., local time (the "Annual Meeting"), for the following purposes:
(1) To consider and vote upon a proposal (the "Merger Proposal") to
approve and adopt an Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement"), dated as of December 4, 1997, by and among Racing
Champions, WSG Acquisition, Inc., a wholly owned subsidiary of Racing
Champions ("Acquisition"), and Wheels Sports Group, Inc. ("Wheels") and the
issuance of shares of Common Stock, par value $0.01 per share, of Racing
Champions ("Racing Champions Common Stock"), pursuant to the Merger
Agreement. Pursuant to the Merger Agreement, Acquisition will be merged
with and into Wheels (the "Merger") with Wheels being the surviving
corporation and becoming a wholly owned subsidiary of Racing Champions. If
the Merger Agreement is approved and the Merger becomes effective, each
outstanding share of Common Stock of Wheels ("Wheels Common Stock") (other
than shares of Wheels Common Stock, if any, not converted because of the
exercise of dissenter's appraisal rights and other than shares of Wheels
Common Stock, if any, held by Wheels, Racing Champions or Acquisition,
which are to be canceled as part of the Merger) will be converted into the
right to receive 0.51 of a share of Racing Champions Common Stock, subject
to adjustment as provided in the Merger Agreement. A copy of the Merger
Agreement is attached as Exhibit A to the accompanying Joint Proxy
Statement/Prospectus.
(2) To consider and vote upon a proposal (the "Capitalization
Amendment Proposal") to approve and adopt an amendment ("the
"Capitalization Amendment") to the Amended and Restated Certificate of
Incorporation of Racing Champions which would increase the total number of
authorized shares of Racing Champions Common Stock from 20,000,000 to
28,000,000 shares. A copy of the Capitalization Amendment is attached as
Exhibit F to the accompanying Joint Proxy Statement/Prospectus.
(3) To consider and vote upon the election of 11 directors for the
ensuing year. Three of the nominees, Randy C. Baker, Randy E. Duncan and
Victor H. Shaffer, have been nominated pursuant to the Merger Agreement and
their election is conditioned upon the approval of the Merger Proposal and
the Capitalization Proposal at the Annual Meeting. In the event that the
Merger Proposal and the Capitalization Amendment Proposal are not approved,
the proxies will not be voted for these three nominees and will be voted
only for the eight incumbent directors.
(4) To consider and vote upon the ratification of the appointment of
Arthur Andersen LLP, independent public accountants, as auditors of Racing
Champions for its fiscal year ending December 31, 1998.
(5) To consider and vote upon a proposal to approve an amendment to
the Racing Champions Corporation Stock Incentive Plan (the "Incentive
Plan") to increase the aggregate number of shares of the Racing Champions
Common Stock that may be issued or transferred upon exercise, payment or
vesting of stock options granted under such plan from 311,852 to 600,000. A
copy of the Incentive Plan, as proposed to be amended, is attached as
Exhibit G to the accompanying Joint Proxy Statement/Prospectus.
(6) To transact such other business as may properly come before the
Annual Meeting or any adjournment or adjournments thereof.
<PAGE> 5
The close of business on May 7, 1998 is the record date for the Annual
Meeting and only stockholders of record at that time will be entitled to notice
of and to vote at the Annual Meeting or any adjournment or adjournments thereof.
Your attention is called to the Joint Proxy Statement/Prospectus
accompanying this Notice for a more complete statement regarding the matters to
be acted upon at the Annual Meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE
"FOR" APPROVAL OF THE MERGER PROPOSAL, THE CAPITALIZATION AMENDMENT PROPOSAL,
EACH PERSON NOMINATED TO SERVE AS A MEMBER OF RACING CHAMPIONS' BOARD OF
DIRECTORS, THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS RACING
CHAMPIONS' INDEPENDENT AUDITORS AND THE AMENDMENT TO THE INCENTIVE PLAN.
By Order of the Board of Directors,
Curtis W. Stoelting
Secretary
Glen Ellyn, Illinois
, 1998
YOUR VOTE IS IMPORTANT. ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE
ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY
NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE ANNUAL MEETING.
2
<PAGE> 6
WHEELS SPORTS GROUP, INC.
149 Gasoline Alley Drive
Mooresville, North Carolina 28115
704-662-6442
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the Stockholders
of Wheels Sports Group, Inc. ("Wheels"), to be held at
on June 12, 1998, at 10:00 a.m., local time.
A notice of the Special Meeting, a proxy card and a Joint Proxy
Statement/Prospectus containing information about the matters to be acted upon
at the Special Meeting are enclosed. All holders of Wheels' outstanding shares
of Common Stock as of May 7, 1998 (the "Record Date"), will be entitled to
notice of and to vote at the Special Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal (the "Merger Proposal") to approve and adopt an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement"), dated as of December 4,
1997, by and among Wheels, Racing Champions Corporation ("Racing Champions") and
WSG Acquisition, Inc., a wholly owned subsidiary of Racing Champions
("Acquisition"), pursuant to which Acquisition will be merged with and into
Wheels (the "Merger"). If the Merger Agreement is approved and the Merger
becomes effective, each outstanding share of Common Stock of Wheels ("Wheels
Common Stock") (other than shares of Wheels Common Stock, if any, not converted
because of the exercise of dissenters' appraisal rights and other than shares of
Wheels Common Stock, if any, held by Wheels, Racing Champions or Acquisition,
which are to be canceled as part of the Merger) will be converted into the right
to receive 0.51 of a share of Racing Champions Common Stock, subject to
adjustment as provided in the Merger Agreement. Approval of the Merger Proposal
requires the affirmative vote of the holders of a majority of all outstanding
shares of Wheels Common Stock.
Details of the Merger Proposal and other important information are set
forth in the accompanying Joint Proxy Statement/Prospectus which you are urged
to read carefully. The consummation of the Merger is subject to the satisfaction
of certain closing conditions as described in greater detail in the accompanying
Joint Proxy Statement/Prospectus.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed Merger. In addition, the Board of Directors has
received the opinion of its financial advisor, Morgan Keegan & Company, Inc.,
that the aggregate consideration to be received by stockholders of Wheels in
connection with the Merger is fair to such holders from a financial point of
view.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL
OF THE MERGER PROPOSAL.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Special Meeting, you may revoke such proxy and vote
in person if you wish, even if you have previously returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Very truly yours,
Victor H. Shaffer
Chief Executive Officer
, 1998
<PAGE> 7
WHEELS SPORTS GROUP, INC.
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS TO BE HELD
ON JUNE 12, 1998
To the Stockholders of Wheels Sports Group, Inc.:
A special meeting of the stockholders of Wheels Sports Group, Inc.
("Wheels") will be held at on June 12, 1998,
at 10:00 a.m., local time (the "Special Meeting"), for the following purposes:
(1) To consider and vote upon a proposal (the "Merger Proposal") to
approve and adopt an Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement"), dated as of December 4, 1997, by and among Wheels,
Racing Champions Corporation ("Racing Champions") and WSG Acquisition,
Inc., a wholly owned subsidiary of Racing Champions ("Acquisition"),
pursuant to which Acquisition will be merged with and into Wheels (the
"Merger"). If the Merger Agreement is approved and the Merger becomes
effective, each outstanding share of Common Stock of Wheels ("Wheels Common
Stock") (other than shares of Wheels Common Stock, if any, not converted
because of the exercise of dissenters' appraisal rights and other than
shares of Wheels Common Stock, if any, held by Wheels, Racing Champions or
Acquisition, which are to be canceled as part of the Merger) will be
converted into the right to receive 0.51 of a share of Racing Champions
Common Stock, subject to adjustment as provided in the Merger Agreement. A
copy of the Merger Agreement is attached as Exhibit A to the accompanying
Joint Proxy Statement/Prospectus.
(2) To transact such other business as may properly come before the
Special Meeting or any adjournment or adjournments thereof.
The close of business on May 7, 1998 is the record date for the Special
Meeting and only stockholders of record at that time will be entitled to notice
of and to vote at the Special Meeting or any adjournment or adjournments
thereof.
Your attention is called to the Joint Proxy Statement/Prospectus
accompanying this Notice for a more complete statement regarding the matters to
be acted upon at the Special Meeting. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE "FOR" APPROVAL OF THE MERGER PROPOSAL.
By Order of the Board of Directors,
W. Conrad Powell
Secretary
Mooresville, North Carolina
, 1998
YOUR VOTE IS IMPORTANT. ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE
SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY
NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE> 8
JOINT PROXY STATEMENT
OF
RACING CHAMPIONS CORPORATION
AND
WHEELS SPORTS GROUP, INC.
FOR THE ANNUAL MEETING OF HOLDERS OF SHARES OF COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF RACING CHAMPIONS CORPORATION
JUNE 12, 1998
FOR THE SPECIAL MEETING OF HOLDERS OF SHARES OF COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF WHEELS SPORTS GROUP, INC.
JUNE 12, 1998
---------------------
PROSPECTUS OF RACING CHAMPIONS CORPORATION
SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE
This Joint Proxy Statement/Prospectus is being furnished to holders of
shares of Common Stock ("Racing Champions Common Stock") of Racing Champions
Corporation, a Delaware corporation ("Racing Champions"), in connection with the
solicitation of proxies by the Board of Directors of Racing Champions (the
"Racing Champions Board") for use at the annual meeting of holders of Racing
Champions Common Stock to be held on June 12, 1998, at
commencing at 10:00 a.m. local time, and at
any adjournment or postponement thereof (the "Racing Champions Annual Meeting").
This Joint Proxy Statement/Prospectus is also being furnished to holders of
shares of Common Stock ("Wheels Common Stock") of Wheels Sports Group, Inc., a
North Carolina corporation ("Wheels"), in connection with the solicitation of
proxies by the Board of Directors of Wheels (the "Wheels Board") for use at the
special meeting of stockholders of Wheels to be held on June 12, 1998,
at commencing at 10:00 a.m. local time, and at
any adjournment or postponement thereof (the "Wheels Special Meeting").
(Continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 19 FOR A DISCUSSION OF CERTAIN
FACTORS THAT THE EXISTING HOLDERS OF SHARES OF WHEELS COMMON STOCK AND HOLDERS
OF SHARES OF RACING CHAMPIONS COMMON STOCK SHOULD CONSIDER IN CONNECTION WITH
THE MATTERS THEY ARE BEING ASKED TO VOTE UPON, INCLUDING, WITH RESPECT TO THE
HOLDERS OF SHARES OF WHEELS COMMON STOCK, THEIR PROSPECTIVE INVESTMENT IN SHARES
OF RACING CHAMPIONS COMMON STOCK.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/ PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This Joint Proxy Statement/Prospectus and accompanying forms of proxy are
first being mailed to holders of shares of Racing Champions Common Stock and to
holders of shares of Wheels Common Stock on or about , 1998.
The date of this Joint Proxy Statement/Prospectus is , 1998.
<PAGE> 9
(Continued from previous page)
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Racing Champions with respect to shares of Racing Champions Common Stock to be
issued (i) in connection with the Merger (as defined herein) in exchange for
outstanding shares of Wheels Common Stock, and (ii) upon exercise of various
options and warrants to acquire shares of Wheels Common Stock, which options and
warrants will be modified and adjusted at the Effective Time (as defined herein)
to permit them to become exercisable to acquire shares of Racing Champions
Common Stock. In the Merger, subject to the terms of the Amended and Restated
Agreement and Plan of Merger, dated as of December 4, 1997 and executed on April
23, 1998 (the "Merger Agreement"), each outstanding share of Wheels Common Stock
will be converted into the right to receive whole shares of Racing Champions
Common Stock and a cash payment in lieu of fractional shares based upon an
exchange ratio (the "Exchange Ratio") determined as follows: (a) the Exchange
Ratio will equal 0.51 shares of Racing Champions Common Stock for each share of
Wheels Common Stock if the average closing price of Racing Champions Common
Stock on the Nasdaq National Market for the 10 trading days prior to the date of
consummation of the Merger (the "Racing Champions Closing Price") is greater
than or equal to $7.50 per share and less than or equal to $14.00 per share; (b)
the Exchange Ratio will equal $3.825 divided by the Racing Champions Closing
Price if the Racing Champions Closing Price is less than $7.50 per share; and
(c) the Exchange Ratio will equal $7.14 divided by the Racing Champions Closing
Price if the Racing Champions Closing Price is greater than $14.00 per share.
Shares of Racing Champions Common Stock are currently quoted on the Nasdaq
National Market under the symbol RACN. Shares of Wheels Common Stock are
currently quoted on the Nasdaq National Market under the symbol WHEL. On
December 4, 1997, the last trading day ending prior to the public announcement
of the execution of the original Agreement and Plan of Merger, dated as of and
executed on December 4, 1997, among Racing Champions, Wheels and Acquisition
(the "Original Merger Agreement"), the closing sale price of Racing Champions
Common Stock was $7.25 per share and the closing sale price of Wheels Common
Stock was $6.125 per share. On , 1998, the closing sale price of
Racing Champions Common Stock was $ per share and the closing sale
price of Wheels Common Stock was $ per share. Because the market price
of Racing Champions Common Stock is subject to fluctuation, the value of the
shares of Racing Champions Common Stock that holders of shares of Wheels Common
Stock will receive in the Merger may increase or decrease prior to and after the
Merger. See "RISK FACTORS -- Exchange Ratio in the Merger."
As a result of the Merger, holders of shares of Wheels Common Stock or
rights to acquire shares of Wheels Common Stock will receive shares of Racing
Champions Common Stock or rights to acquire shares of Racing Champions Common
Stock, which in the aggregate will represent up to 3,557,916 shares of Racing
Champions Common Stock assuming an Exchange Ratio of 0.51. Those shares will
account for approximately 20.3% of the total of approximately 17,538,084 shares
of Racing Champions Common Stock estimated to be outstanding immediately after
the effective time of the Merger on a fully diluted basis, which includes such
3,557,916 shares of Racing Champions Common Stock issuable in connection with
the Merger, 517,786 shares of Racing Champions Common Stock reserved for
issuance upon exercise of outstanding stock options, 220,000 shares of Racing
Champions Common Stock expected to be reserved for issuance in connection with
the grant of stock options to Wheels employees upon the consummation of the
Merger and 13,242,382 shares of Racing Champions Common Stock outstanding on May
7, 1998.
Approval of the Merger Agreement and the issuance of shares of Racing
Champions Common Stock thereunder is being sought by Racing Champions as the
issuer of a security traded on the Nasdaq National Market to comply with the
provisions of Section 4460(i) of Schedule D of the By-Laws of the National
Association of Securities Dealers, Inc. (the "Nasdaq Rule") which requires
issuers of Nasdaq National Market securities to obtain stockholder approval of
certain issuances of securities in connection with the acquisition of the stock
or assets of another company. Although approval of the Merger Agreement by the
holders of shares of Racing Champions Common Stock is not required under the
Delaware General Corporation Law to consummate the Merger, obtaining approval by
the holders of shares of Racing Champions Common Stock of the issuance of shares
of Racing Champions Common Stock under the Merger Agreement pursuant to the
Nasdaq Rule is a condition to each party's obligation to consummate the Merger.
2
<PAGE> 10
AVAILABLE INFORMATION
Each of Racing Champions and Wheels is subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Racing Champions has filed a Registration Statement on Form S-4 (including the
exhibits and amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with the Commission
covering the Racing Champions securities to be issued to Wheels securityholders
in the Merger. As permitted by the rules and regulations of the Commission, this
Joint Proxy Statement/Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. Reference is made to the
Registration Statement and to the exhibits thereto for further information.
Statements contained herein concerning any documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto, as well as the
reports, proxy statements and other information filed with the Commission by
Racing Champions or Wheels under the Exchange Act, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Such reports and other information
filed with the Commission by Racing Champions or Wheels are also available at
the Commission's site on the World Wide Web at http:\\www.sec.gov.
All information contained in this Joint Proxy Statement/Prospectus
concerning Wheels and its subsidiaries has been supplied by Wheels and all other
information has been supplied by Racing Champions.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE
OFFERING OF STOCK MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RACING
CHAMPIONS, WHEELS OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
STOCK, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON
TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF STOCK MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS JOINT
PROXY STATEMENT/PROSPECTUS OR THE AFFAIRS OF RACING CHAMPIONS OR WHEELS SINCE
THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO SUCH DATE.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... 3
SUMMARY..................................................... 9
Parties to the Merger Agreement............................. 9
Racing Champions Corporation.............................. 9
Wheel Sports Group, Inc................................... 10
WSG Acquisition, Inc...................................... 11
The Meetings................................................ 11
Date, Time and Location................................... 11
Purpose of the Meetings................................... 11
Record Date, Quorum and Vote Required..................... 11
The Merger Proposal......................................... 12
The Merger................................................ 12
The Merger Agreement...................................... 15
Interests of Certain Persons in the Merger................ 17
The Capitalization Amendment Proposal....................... 17
Other Proposals to be Considered at the Racing Champions
Annual Meeting............................................ 17
Historical Trading Information of Racing Champions Common
Stock and Wheels Common Stock............................. 18
RISK FACTORS................................................ 19
Consumer Acceptance of Products............................. 19
Competition................................................. 19
Dependence on Licensing Arrangements........................ 20
No Assurances that Businesses Can be Combined
Successfully.............................................. 20
Reliance on Key Suppliers................................... 20
Risks of Foreign Manufacturing.............................. 21
Trading Status of China..................................... 21
Risks Relating to Hong Kong................................. 21
Foreign Currency Risk....................................... 21
Dependence on Significant Customers; Concentration of
Accounts Receivable....................................... 22
Reliance on Key Personnel................................... 22
Seasonal Product Development and Sales...................... 22
Product Liability and Other Claims.......................... 22
Control by Principal Stockholders........................... 23
Possible Volatility of Stock Price.......................... 23
Dividend Policy............................................. 23
Government Regulation....................................... 23
Exchange Ratio in the Merger................................ 23
Shares Eligible for Future Sale............................. 24
Holding Company Structure................................... 24
Certain Anti-Takeover Provisions............................ 24
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES SELECTED
FINANCIAL DATA............................................ 25
WHEELS SPORTS GROUP, INC. AND SUBSIDIARIES SELECTED
FINANCIAL DATA............................................ 28
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 30
MATTERS RELATING TO STOCKHOLDER APPROVALS................... 36
The Racing Champions Annual Meeting......................... 36
Proposals to be Considered at the Racing Champions Annual
Meeting................................................ 36
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The Merger Proposal....................................... 36
The Capitalization Amendment Proposal..................... 36
Election of Directors..................................... 36
Ratification of Auditors.................................. 36
Amendment to Incentive Plan............................... 36
Record Date, Quorum and Vote Required..................... 36
Proxies................................................... 37
The Wheels Special Meeting.................................. 37
Proposal to be Considered at the Wheels Special Meeting... 37
The Merger Proposal....................................... 37
Record Date, Quorum and Vote Required..................... 37
Proxies................................................... 38
THE MERGER PROPOSAL......................................... 39
Background of the Merger.................................... 39
Reasons of Racing Champions for Engaging in the Merger...... 41
Opinion of Financial Advisor to Racing Champions............ 42
Reasons of Wheels for Engaging in the Merger................ 46
Opinion of Financial Advisor to Wheels...................... 48
The Merger.................................................. 51
Effects of the Merger..................................... 52
Effective Time............................................ 52
Exchange Ratio............................................ 52
Fractional Shares......................................... 53
Procedures for Exchange of Certificates................... 53
Effect of the Merger on Wheels Stock Options.............. 54
Restrictions on Stock Transfer............................ 54
Accounting Treatment...................................... 55
Nasdaq National Market Listing Requirement................ 55
Hart-Scott-Rodino......................................... 55
Other Regulatory Approvals................................ 55
The Merger Agreement........................................ 56
General................................................... 56
Effective Time............................................ 56
Merger Consideration...................................... 56
Representations and Warranties............................ 57
Cooperation............................................... 57
Conduct of Business Pending Closing....................... 57
Limitation on Third Party Acquisitions.................... 59
Designation of Racing Champions Directors................. 59
Conditions to Consummation of the Merger.................. 60
Termination............................................... 61
Termination Fee and Expenses.............................. 62
Amendments and Waivers.................................... 63
Stockholder Option Agreement................................ 63
Certain Federal Income Tax Consequences of the Merger to
Wheels' Stockholders...................................... 64
Dissenters' Rights.......................................... 65
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 68
Composition of Racing Champions Board..................... 68
Employment Agreements with Certain Wheels Executive
Officers............................................... 68
High Performance Payment.................................. 68
Loan Guarantees........................................... 68
New Racing Champions Options.............................. 69
</TABLE>
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CAPITALIZATION AMENDMENT PROPOSAL........................... 70
General..................................................... 70
Purpose and Effect of Proposed Amendment.................... 70
Vote Required for Approval.................................. 71
Racing Champions Board Recommendation....................... 71
ELECTION OF DIRECTORS....................................... 71
Recommendation.............................................. 71
Information Concerning Nominees............................. 71
Board of Directors and Board Committees..................... 73
Compensation of Directors................................... 73
Other Executive Officers and Key Employees.................. 73
Compensation Committee Report on Executive Compensation..... 74
Executive Compensation...................................... 76
Stock Performance Graph..................................... 80
Section 16(a) Beneficial Ownership Reporting Compliance..... 80
Certain Relationships and Related Transactions.............. 81
APPOINTMENT OF INDEPENDENT AUDITORS......................... 82
PROPOSAL TO AMEND THE RACING CHAMPIONS CORPORATION
STOCK INCENTIVE PLAN........................................ 83
Purpose and Effect of Proposed Amendment.................... 83
Proposed Amendment........................................ 83
Purpose of the Proposed Amendment......................... 83
Description of Incentive Plan............................... 83
Incentive Plan Benefits..................................... 84
Vote Required for Approval.................................. 84
Board of Directors Recommendation........................... 84
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 84
Authorized Capital Stock.................................... 85
Common Stock................................................ 85
Board Authorized Preferred Stock............................ 85
Voting Rights............................................... 85
Directors................................................... 85
Number.................................................... 85
Removal of Directors...................................... 86
Election of Directors..................................... 86
Dissenters' Rights.......................................... 86
Derivative Actions.......................................... 87
Amendment of Charter and By-Laws............................ 87
Advance Notice for Raising Business or Making Nominations at
Annual Meetings........................................... 87
Indemnification and Limitation of Liability................. 88
Provisions Applicable to Business Combinations and Changes
in Control................................................ 89
Vote Required for Extraordinary Transactions................ 90
Stockholder Consent in Lieu of Meeting...................... 90
ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS........... 91
Description of Business..................................... 91
General................................................... 91
Collectibles Industry..................................... 91
Business Strategy......................................... 93
Products.................................................. 94
Licenses.................................................. 96
Patents and Trademarks.................................... 97
Sales and Distribution.................................... 97
Marketing................................................. 98
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Competition............................................... 99
Manufacturing............................................. 99
Employees................................................. 100
Facilities................................................ 100
Regulation and Legal Matters.............................. 101
Management's Discussion and Analysis of Financial
Condition................................................. 101
Overview.................................................. 101
Results of Operations..................................... 103
Liquidity and Capital Resources........................... 108
Year 2000 Compliance...................................... 109
Recently Issued Accounting Pronouncements................. 109
Principal Stockholders...................................... 109
ADDITIONAL INFORMATION REGARDING WHEELS..................... 111
Business.................................................... 111
The Acquired Companies.................................... 111
Industry and Market Overview.............................. 112
Business Strategy......................................... 113
Collectible Sports Trading Cards.......................... 114
Distribution of NASCAR Merchandise........................ 117
Trackside Sales and Hospitality Management................ 117
Marketing and Sales....................................... 117
Competition............................................... 119
Proprietary Rights........................................ 119
Employees................................................. 120
Facilities................................................ 121
Litigation................................................ 121
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 122
Overview.................................................. 122
Results of Operations..................................... 124
Liquidity and Capital Resources........................... 126
Seasonality............................................... 128
Inflation................................................. 128
Change in Accountant...................................... 128
Accounting Pronouncements................................. 129
Year 2000 Compliance...................................... 129
Principal Stockholders...................................... 130
LEGAL MATTERS............................................... 131
EXPERTS..................................................... 131
STOCKHOLDER PROPOSALS....................................... 131
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
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EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Amended and Restated Agreement and Plan of Merger, dated as
of December 4, 1997, among Racing Champions Corporation, WSG
Acquisition, Inc. and Wheels Sports Group, Inc.
Exhibit B -- Stockholder Agreement, dated as of December 4, 1997, as
amended, between Racing Champions Corporation and Howard L.
Correll, Jr.
Exhibit C -- Opinion of Robert W. Baird & Co. Incorporated
Exhibit D -- Opinion of Morgan Keegan & Company, Inc.
Exhibit E -- Article 13 of the North Carolina Business Corporation Act
Exhibit F -- Form of Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Racing Champions Corporation
Exhibit G -- Racing Champions Corporation Stock Incentive Plan, as
proposed to be amended
</TABLE>
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Joint Proxy Statement/Prospectus. Unless indicated otherwise,
the information contained in this Joint Proxy Statement/Prospectus with respect
to Racing Champions (i) gives effect to the recapitalization consummated on
April 30, 1996 in which Racing Champions was formed as a holding company to
acquire the RCI Group and the RCL Group, and (ii) has been restated to give
retroactive effect to a stock split of 7.885261 shares for each share of Racing
Champions Common Stock effected on April 9, 1997. Unless otherwise indicated,
all information contained in this Joint Proxy Statement/Prospectus with respect
to Wheels gives effect to (i) the acquisition by Wheels of Diamond Sports Group,
Inc. ("Diamond") on June 30, 1997, (ii) the acquisition by Wheels of Green's
Racing Souvenirs, Inc. ("GRS") on October 17, 1997, (iii) the acquisition by
Wheels of High Performance Sports Marketing, Inc. ("High Performance") on
October 24, 1997, (iv) the acquisition by Wheels of the two corporate partners
of Press Pass Partners ("Press Pass") on December 31, 1997 and (v) a
recapitalization in connection with Wheels' reincorporation in North Carolina on
December 20, 1996. Unless indicated otherwise, references to "Racing Champions"
are to Racing Champions Corporation and its subsidiaries, including the
operations of the RCI Group and the RCL Group prior to April 30, 1996, and
references to "Wheels" are to Wheels Sports Group, Inc. and its subsidiaries,
including the operations of Diamond, GRS, High Performance and Press Pass prior
to their respective acquisition dates. "NASCAR(R)" is a registered trademark of
the National Association of Stock Car Auto Racing, Inc. ("NASCAR").
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements with respect to the financial conditions, results of operations and
businesses of Racing Champions and Wheels and, assuming the consummation of the
Merger, the combined company. These forward-looking statements involve certain
risks and uncertainties, and any such statement is qualified in its entirety by
reference to the following cautionary statements. In connection with the Merger,
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: (i) expected cost savings from the Merger may not be fully
realized or realized within the expected time frame; (ii) costs or difficulties
related to the integration of the businesses of Racing Champions and Wheels may
be greater than expected; (iii) revenues following the Merger may be lower than
expected; (iv) competition in the markets for die cast vehicle replicas, sports
trading cards, other collectibles or other NASCAR-related merchandise or
hospitality services may increase significantly; or (v) general economic
conditions, either nationally or in the regions in which the combined company
will conduct business, may be less favorable than expected. Further information
on other factors which could affect the financial condition or results of
operations of Racing Champions after the Merger is described under the heading
"RISK FACTORS" and elsewhere in this Joint Proxy Statement/Prospectus.
PARTIES TO THE MERGER AGREEMENT
RACING CHAMPIONS CORPORATION
Racing Champions 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(TM) line of high quality die cast replicas of classic and
late-model vehicles. Racing Champions continued this expansion in 1997 by
introducing 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 replicas 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
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intends to further its growth by (i) continuing to capitalize on the growing
popularity of motor sports, (ii) leveraging its brand name, reputation with
collectors, and established distribution and manufacturing relationships by
developing new collectible products, and (iii) supplementing Racing Champions'
internal growth through the pursuit of strategic acquisitions.
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 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 Racing Champions Common Stock.
Racing Champions' principal executive offices are located at 800 Roosevelt
Road, Building C, Suite 320, Glen Ellyn, Illinois 60137 and its telephone number
is (630) 790-3507. Racing Champions maintains World Wide Web sites at
www.collectchamps.com and www.racingchamps.com.
WHEELS SPORTS GROUP, INC.
Wheels designs, markets and distributes premium quality collectible sports
trading cards primarily featuring race drivers, team owners and crew chiefs
active in NASCAR-sanctioned racing events. Wheels has license agreements
covering its premium quality collectible sports trading cards with substantially
all of NASCAR's drivers and teams. Wheels' generally produces between three or
four premium quality collectible sports trading card limited issues each year
and markets each issue to a network of distributors, brokers and specialty hobby
dealers located principally throughout the southeast United States. Wheels
estimates that customers in the hobby channel such as distributors and hobby
dealers, sports memorabilia shops, sports trading card stores and toy stores
historically accounted for approximately 85% of sales, with the remaining 15% of
sales accounted for by the retail channel, which consists of distributors and
brokers who resell collectible sports trading cards to mass merchandisers,
wholesale clubs and variety stores. Wheels also sells its collectible sports
trading cards to members of the Wheels Club, a membership club organized by
Wheels, and to businesses for use in corporate promotions.
During 1997, Wheels acquired Press Pass, High Performance, GRS and Diamond
in order to expand its collectible sports trading card business and to establish
additional NASCAR-related businesses. Wheels acquired Press Pass in December
1997 to expand Wheels' collectible sports trading card business. Press Pass
designs, markets and distributes collectible sports trading cards, primarily for
the NASCAR market, and has license agreements with many of NASCAR's top drivers
and teams, including Dale Earnhardt, Jeff Gordon, Dale Jarrett and Terry
LaBonte. Press Pass sells its collectible sports trading cards to specialty
hobby dealers, to national mass market retailers, including Wal-Mart, K-Mart and
Target, and through the Press Pass VIP Club, a membership club established by
Press Pass which has recently been combined with the Wheels Club and renamed the
VIP Club. Wheels acquired High Performance in October 1997 to diversify Wheels'
NASCAR-related business operations. High Performance is licensed by certain
NASCAR race drivers, team owners and sponsors to distribute T-shirts, hats,
apparel, souvenirs and other merchandise to convenience stores, mass market
retailers such as Wal-Mart and K-Mart, grocery stores, auto dealerships and
other retail outlets. High Performance markets its NASCAR licensed merchandise
through its own sales and distribution personnel and through approximately 40
independent distributors who primarily service the convenience store channel.
Wheels established trackside retail operations during 1997 through its
acquisitions of GRS and Diamond. GRS and Diamond operate tractor-trailer rigs
for the trackside sale of NASCAR-related merchandise. In 1998, Wheels expects to
operate 13 trailers at the 33 races which will comprise the 1998 Winston Cup
Series. The acquisition of Diamond has also enabled Wheels to offer corporate
hospitality programs at certain NASCAR events.
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Wheels was incorporated in South Carolina in February 1992 under the name
Wheels Racing, Inc. and was reincorporated under its present name in North
Carolina in December 1996. Its principal executive offices are located at 149
Gasoline Alley Drive, Mooresville, North Carolina 28115, and its telephone
number is (704) 662-6442.
WSG ACQUISITION, INC.
WSG Acquisition, Inc. ("Acquisition") is a wholly owned subsidiary of
Racing Champions formed solely for the purpose of the Merger. Acquisition has
not engaged in any business activity other than the Merger. The principal
executive offices of Acquisition are located at 800 Roosevelt Road, Building C,
Suite 320, Glen Ellyn, Illinois 60137 and its telephone number is (630)
790-3507.
THE MEETINGS
DATE, TIME AND LOCATION
Racing Champions. The Racing Champions Annual Meeting will be held on June
12, 1998, at 10:00 a.m., local time, at .
Wheels. The Wheels Special Meeting will be held on June 12, 1998, at 10:00
a.m., local time, at .
PURPOSE OF THE MEETINGS
Racing Champions Annual Meeting. The purpose of the Racing Champions
Annual Meeting is to consider and vote upon: (1) a proposal to approve and adopt
the Merger Agreement and the issuance of shares of Racing Champions Common Stock
pursuant to the Merger Agreement (the "Merger Proposal"); (2) a proposal to
approve and adopt an amendment (the "Capitalization Amendment") to the Amended
and Restated Certificate of Incorporation of Racing Champions (the "Racing
Champions Charter") which would increase the total number of authorized shares
of Racing Champions Common Stock from 20,000,000 to 28,000,000 shares (the
"Capitalization Amendment Proposal"); (3) the election of 11 directors for the
ensuing year; (4) the ratification of the appointment of Arthur Andersen LLP,
independent public accountants, as auditors of Racing Champions for its fiscal
year ending December 31, 1998; and (5) a proposal to amend the Racing Champions
Corporation Stock Incentive Plan (the "Incentive Plan") to increase the
aggregate number of shares of Racing Champions Common Stock that may be issued
or transferred upon exercise, payment or vesting of stock options granted under
the Incentive Plan from 311,852 to 600,000.
Wheels Special Meeting. The purpose of the Wheels Special Meeting is to
consider and vote upon the Merger Proposal.
RECORD DATE, QUORUM AND VOTE REQUIRED
Racing Champions Annual Meeting. Only holders of record of shares of
Racing Champions Common Stock at the close of business on May 7, 1998 (the
"Racing Champions Record Date") are entitled to notice of and to vote at the
Racing Champions Annual Meeting. On that date, there were 13,242,382 shares of
Racing Champions Common Stock outstanding, with each share entitled to cast one
vote at the Racing Champions Annual Meeting. The presence, in person or by
proxy, of the holders of a majority of the outstanding shares of Racing
Champions Common Stock at the Racing Champions Annual Meeting is necessary to
constitute a quorum. Pursuant to the Nasdaq Rule, approval of the Merger
Proposal requires the affirmative vote of a majority of the shares of Racing
Champions Common Stock cast in person or by proxy at the Special Meeting. Under
the Delaware General Corporation Law ("DGCL"), the Racing Champions Charter and
the Amended and Restated By-Laws of Racing Champions (the "Racing Champions By-
Laws"), approval of the Capitalization Amendment Proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of
Racing Champions Common Stock. Any of the 11 nominees for director who receive a
plurality of the votes cast will be elected. Approval of the ratification of the
independent auditors and approval of the amendment to the Incentive Plan each
requires the affirmative vote of a majority of the
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<PAGE> 19
shares of Racing Champions Common Stock represented in person or by proxy at the
Racing Champions Annual Meeting and entitled to vote thereon. All of Racing
Champions' executive officers and directors, who collectively own 7,111,485
shares of Racing Champions Common Stock (including an aggregate of 3,032,680
shares of Racing Champions Common Stock with respect to which certain directors
of Racing Champions share voting and investment power), representing
approximately 53.7% of the outstanding shares of Racing Champions Common Stock,
have indicated their intent to vote for approval and adoption of the Merger
Proposal and the Capitalization Proposal, election of each person nominated to
serve as a member of the Racing Champions Board, ratification of Arthur Andersen
LLP as Racing Champions' independent auditors and the amendment to the Incentive
Plan. See "ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS -- Principal
Stockholders."
Wheels Special Meeting. Only holders of record of shares of Wheels Common
Stock at the close of business on May 7, 1998 (the "Wheels Record Date") are
entitled to notice of and to vote at the Wheels Special Meeting. On that date,
there were 5,280,253 shares of Wheels Common Stock outstanding, with each share
entitled to cast one vote at the Wheels Special Meeting. The presence, in person
or by proxy, of the holders of a majority of the outstanding shares of Wheels
Common Stock at the Wheels Special Meeting is necessary to constitute a quorum.
Under the North Carolina Business Corporation Act ("NCBCA"), the Articles of
Incorporation of Wheels (the "Wheels Charter") and the By-Laws of Wheels (the
"Wheels By-Laws"), approval of the Merger Proposal requires the affirmative vote
of the holders of a majority of the outstanding shares of Wheels Common Stock.
Concurrently with the execution of the Merger Agreement, Racing Champions
entered into a Stockholder Option Agreement with Howard L. Correll, Jr., Wheels'
former Chief Executive Officer and President (the "Principal Stockholder"),
pursuant to which the Principal Stockholder agreed to cause all of his shares of
Wheels Common Stock to be voted in favor of the Merger Proposal and to grant
Racing Champions an option to purchase all of the shares of Wheels Common Stock
owned by the Principal Stockholder upon the occurrence of certain events. See
"THE MERGER PROPOSAL -- Stockholder Option Agreement." The Principal Stockholder
owns 689,737 shares of Wheels Common Stock (excluding 82,500 shares of Wheels
Common Stock subject to currently exercisable stock options which will be
subject to the Stockholder Option Agreement to the extent that the Principal
Stockholder exercises such options), representing approximately 13.1% of the
shares of Wheels Common Stock outstanding as of the Wheels Record Date. All of
Wheels other executive officers and directors, who collectively own 1,745,600
shares of Wheels Common Stock, representing approximately 33.1% of the
outstanding shares of Wheels Common Stock, have indicated their intent to vote
for approval and adoption of the Merger Proposal.
THE MERGER PROPOSAL
THE MERGER
Certain Effects of the Merger. Pursuant to the Merger Agreement,
Acquisition will merge into Wheels, with Wheels being the surviving corporation
(the "Surviving Corporation") and becoming a wholly owned subsidiary of Racing
Champions. Each outstanding share of Wheels Common Stock (other than shares of
Wheels Common Stock, if any, not converted because of the exercise of
dissenters' appraisal rights and other than shares of Wheels Common Stock, if
any, held by Wheels, Racing Champions or Acquisition, which are to be canceled
as part of the Merger) will be converted into the right to receive whole shares
of Racing Champions Common Stock and a cash payment in lieu of fractional shares
based upon the Exchange Ratio determined as follows: (a) the Exchange Ratio will
equal 0.51 shares of Racing Champions Common Stock for each share of Wheels
Common Stock if the Racing Champions Closing Price is greater than or equal to
$7.50 per share and less than or equal to $14.00 per share; (b) the Exchange
Ratio will equal $3.825 divided by the Racing Champions Closing Price if the
Racing Champions Closing Price is less than $7.50 per share; and (c) the
Exchange Ratio will equal $7.14 divided by the Racing Champions Closing Price if
the Racing Champions Closing Price is greater than $14.00 per share. The
consideration to be received by Wheels' stockholders pursuant to the Merger
Agreement is sometimes referred to herein as the "Merger Consideration." Each
outstanding share of Acquisition's no par value common stock (the "Acquisition
Shares") will be converted into one share of common stock of the Surviving
Corporation.
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Procedures for Exchange of Certificates. Promptly after the Effective
Time, a letter of transmittal and instructions for surrendering stock
certificates evidencing shares of the Wheels Common Stock will be mailed to each
holder of shares of Wheels Common Stock for use in exchanging such holder's
stock certificates for the Merger Consideration to which such holder is entitled
under the Merger Agreement. HOLDERS OF WHEELS COMMON STOCK SHOULD NOT SEND ANY
STOCK CERTIFICATES WITH THEIR PROXY CARDS.
Treatment of Options and Warrants. Pursuant to the Merger Agreement, each
outstanding option, warrant or other right to purchase shares of Wheels Common
Stock (a "Wheels Stock Option") will be assumed by Racing Champions at the
Effective Time and will become an option, warrant or other right (a "Replacement
Option") to purchase a number of shares of Racing Champions Common Stock equal
to the product arrived at by multiplying the Exchange Ratio by the number of
shares of Wheels Common Stock subject to such Wheels Stock Option. Each
Replacement Option will have an exercise price per share of Racing Champions
Common Stock equal to a price obtained by dividing the exercise price per share
of such Wheels Stock Option by the Exchange Ratio. The Merger Agreement provides
that Racing Champions will not be required to issue more than 3,557,916 shares
of Racing Champions Common Stock in connection with the Merger, including shares
of Racing Champions Common Stock issuable upon exercise of any Replacement
Options, if the Exchange Ratio is 0.51.
Background of the Merger. See "THE MERGER PROPOSAL -- Background of the
Merger" for a description of the background of the Merger. The Racing Champions
Board has determined that the terms of the Merger are fair to, and in the best
interests of, Racing Champions and its stockholders. The Racing Champions Board
has unanimously approved the Merger Agreement and recommends that stockholders
vote FOR the Merger Proposal.
The Wheels Board has determined that the terms of the Merger are fair to,
and in the best interests of, Wheels and its stockholders. The Wheels Board has
unanimously approved the Merger Agreement and recommends that stockholders vote
FOR the Merger Proposal.
Opinions of Financial Advisors. Racing Champions has retained Robert W.
Baird & Co. Incorporated ("Baird") as its financial advisor in connection with
the Merger. See "THE MERGER PROPOSAL -- Background of the Merger." Certain of
the fees payable to Baird are contingent on the effectiveness of the Merger. See
"THE MERGER PROPOSAL -- Opinion of Financial Advisor to Racing Champions." Baird
delivered to the Racing Champions Board on April 9, 1998 its oral opinion
(subsequently confirmed in writing by an opinion dated as of April 9, 1998) to
the effect that, as of such date and based upon and subject to the assumptions,
factors and limitations set forth therein, the Exchange Ratio established by the
Merger Agreement was fair to Racing Champions from a financial point of view.
Baird's opinion is directed only to the fairness from a financial point of view
of the Exchange Ratio to Racing Champions, does not address any other aspect of
the Merger and does not constitute a recommendation to any stockholder as to how
such stockholder should vote at the Racing Champions Annual Meeting. A copy of
the opinion of Baird, which sets forth the assumptions made, matters considered
and limits on the review undertaken in connection therewith, is attached as
Exhibit C to this Joint Proxy Statement/Prospectus and is incorporated herein by
reference. Such opinion should be read carefully in its entirety by holders of
Racing Champions Common Stock. See "THE MERGER PROPOSAL -- Opinion of Financial
Advisor to Racing Champions."
Wheels has retained Morgan Keegan & Company, Inc. ("Morgan Keegan") as its
financial advisor in connection with the Merger. See "THE MERGER
PROPOSAL -- Background of the Merger." Certain of the fees payable to Morgan
Keegan are contingent on the effectiveness of the Merger. See "THE MERGER
PROPOSAL -- Opinion of Financial Advisor to Wheels." Morgan Keegan delivered to
the Wheels Board on April 9, 1998 its oral opinion (subsequently confirmed in
writing by an opinion dated as of April 10, 1998) to the effect that, as of the
date of the opinion and based upon and subject to the assumptions, factors and
limitations set forth therein, the Merger Consideration to be received by the
Wheels stockholders in the Merger was fair to the stockholders of Wheels from a
financial point of view. This opinion is directed only to the fairness from a
financial point of view of the Merger Consideration to the holders of Wheels
Common Stock, does not address any other aspect of the Merger and does not
constitute a recommendation to any
13
<PAGE> 21
Wheels stockholder as to how such Wheels stockholder should vote at the Wheels
Special Meeting. A copy of the opinion of Morgan Keegan, which sets forth the
assumptions made, matters considered and limits on the review undertaken in
connection therewith, is attached as Exhibit D to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Such opinion
should be read carefully in its entirety by holders of Wheels Common Stock. See
"THE MERGER PROPOSAL -- Opinion of Financial Advisor to Wheels."
Accounting Treatment. The Merger is intended to be treated as a
"pooling-of-interests" for accounting purposes. Under the pooling-of-interests
method of accounting, the historical basis of the assets and liabilities of
Racing Champions and Wheels will be combined at the Effective Time and carried
forward at their previously recorded amounts. The stockholders' equity accounts
of Racing Champions and Wheels will be combined on Racing Champions'
consolidated balance sheet, and no goodwill or other intangible assets will be
created. Financial statements of Racing Champions issued after the Merger will
be restated retroactively to reflect the consolidated operations of Racing
Champions and Wheels as if the Merger had taken place prior to the periods
covered by such financial statements. See "THE MERGER PROPOSAL -- Accounting
Treatment."
Appraisal Rights of Dissenting Stockholders. The holders of shares of
Racing Champions Common Stock (in their capacities as such) will not have rights
as dissenting stockholders by reason of the Merger, or by any vote or abstention
on the Merger Proposal or the Capitalization Amendment Proposal, nor will they
be entitled to receive any cash payment in respect of such shares of Racing
Champions Common Stock by reason of any of the foregoing.
The holders of shares of Wheels Common Stock who vote against or abstain
from voting on approval of the Merger Proposal and file a demand for appraisal
prior to the Wheels Special Meeting have the right to receive a cash payment
from Wheels (as the corporation surviving the Merger) for the fair value of
their shares of Wheels Common Stock (exclusive of any appreciation or
depreciation in anticipation of the Merger unless exclusion would be
inequitable). In order to exercise such rights, a holder of shares of Wheels
Common Stock must comply with the requirements set forth in Article 13 of the
NCBCA, the full text of which is set forth as Exhibit E to this Joint Proxy
Statement/Prospectus. See "DISSENTERS' RIGHTS."
FAILURE OF THE HOLDERS OF SHARES OF WHEELS COMMON STOCK TO COMPLY FULLY
WITH THE SPECIAL REQUIREMENTS OF THE NCBCA WITH REGARD TO DISSENTERS' APPRAISAL
RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
Holders of shares of Wheels Common Stock and Racing Champions Common Stock
should keep in mind that, in the event of a lawsuit alleging that the Wheels
Board or the Racing Champion Board breached its fiduciary duties in connection
with the Merger or otherwise challenging the fairness of the Merger, Wheels or
Racing Champions may be able to argue that stockholder approval of the Merger
constitutes a ratification of such transactions and use such ratification as a
defense in the lawsuit.
Certain Federal Income Tax Consequences of the Merger to Holders of Wheels
Common Stock. It is intended that the Merger will constitute a tax-free
reorganization for federal income tax purposes and, accordingly, that no gain or
loss will be recognized by any holders of shares of Wheels Common Stock on the
conversion of their shares of Wheels Common Stock solely into shares of Racing
Champions Common Stock by reason of the Merger. Gain, if any, may be recognized
by holders of shares of Wheels Common Stock by reason of the receipt by such
holders of cash in lieu of fractional shares of Racing Champions Common Stock.
The foregoing summary of certain federal income tax consequences of the Merger
to holders of shares of Wheels Common Stock is based on an opinion to Wheels and
its stockholders provided by its counsel Berliner Zisser Walter & Gallegos, P.C.
Such opinion is based in part on certain representations of the parties. See
"THE MERGER PROPOSAL -- Federal Income Tax Consequences." NO PRIVATE LETTER
RULING IS BEING SOUGHT FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO ANY
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AND HOLDERS OF SHARES OF WHEELS
COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES TO THEM OF THE MERGER. IN
ADDITION, TAX-FREE TREATMENT IN THE MERGER MAY DEPEND IN PART ON THE ACCURACY OF
REPRESENTATIONS THAT MAY BE GIVEN BY WHEELS AND BY CERTAIN HOLDERS OF WHEELS
COMMON STOCK REGARDING THEIR INTENTIONS AS TO RESALES OF SHARES OF RACING
CHAMPIONS COMMON STOCK. IF SUCH REPRESENTATIONS PROVE TO BE INACCURATE, ALL THE
HOLDERS OF SHARES OF WHEELS COMMON
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<PAGE> 22
STOCK MAY BE SUBJECT TO TAXATION ON THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE
OF SHARES OF RACING CHAMPIONS COMMON STOCK RECEIVED IN THE MERGER AND THE BASIS
OF SUCH PERSONS IN THE SHARES OF WHEELS COMMON STOCK HELD BY THEM. NEITHER
RACING CHAMPIONS NOR WHEELS IS ABLE TO PROVIDE ASSURANCES THAT TAX-FREE
TREATMENT WILL BE OBTAINED BY ANY HOLDERS OF SHARES OF WHEELS COMMON STOCK.
Restrictions on Stock Transfer. Shares of Racing Champions Common Stock
received by certain persons deemed to be "affiliates" of Wheels prior to the
Merger for purposes of Rule 145 under the Securities Act will be subject to the
restrictions imposed by such rule. See "THE MERGER PROPOSAL -- Terms of the
Merger Agreement -- Restrictions on Transferability of Racing Champions Common
Stock." In accordance with Rules 144 and 145 under the Securities Act, an
affiliate of Racing Champions or an affiliate of Wheels receiving Racing
Champions Common Stock issued in connection with the Merger may not publicly
sell such issued shares, except pursuant to volume and manner of sale
limitations and other requirements specified therein or pursuant to an effective
registration statement under the Securities Act.
Commission guidelines regarding qualifying for the pooling of interests
method of accounting limit the sales of shares of the acquiring company and
acquired company by affiliates of either company in a business combination such
as the Merger. These guidelines indicate that the pooling of interests method of
accounting will generally not be challenged on the basis of sales by such
affiliates if these persons do not dispose of any of the shares of the
corporation they own or any shares of the corporation they receive in connection
with the merger during the period beginning thirty days prior to the merger and
ending when financial results covering at least thirty days of post-merger
operations of the combined entity have been published. Racing Champions and
Wheels have agreed in the Merger Agreement to use their reasonable best efforts
to obtain customary agreements from their respective affiliates concerning the
above-described rules and guidelines.
THE MERGER AGREEMENT
Effective Time of the Merger. The Merger will become effective (the
"Effective Time") upon the filing of Articles of Merger with the Secretary of
State of the State of North Carolina. The filing of Articles of Merger will
occur after all conditions to the Merger contained in the Merger Agreement have
been satisfied or waived. Racing Champions, Acquisition and Wheels anticipate
that the Merger will be consummated promptly following the Racing Champions
Annual Meeting and the Wheels Special Meeting. See "THE MERGER -- The Merger
Agreement -- General" and " -- Effective Time."
Designation of Racing Champions Directors. The Merger Agreement provides
for Racing Champions and Wheels to use reasonable efforts to cause the Racing
Champions Board immediately after the Effective Time to include Randy C. Baker,
Randy E. Duncan and Victor H. Shaffer. Pursuant to this provision, Messrs.
Baker, Duncan and Shaffer have been nominated for election as directors at the
Racing Champions Annual Meeting. See "ELECTION OF DIRECTORS."
Conditions to Consummation of the Merger. The respective obligations of
Wheels, Racing Champions and Acquisition to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of various closing conditions.
Such conditions include, among others, (i) the requisite approval of the Merger
Proposal, the Capitalization Amendment Proposal and the amendment to the
Incentive Plan at the Racing Champions Annual Meeting, (ii) the requisite
approval of the Merger Proposal at the Wheels Special Meeting, (iii) receipt of
satisfactory opinions with respect to the tax-free nature of the Merger, (iv)
exercise of dissenters' rights by holders of not more than 5% of the outstanding
shares of Wheels Common Stock, and (v) the correctness in all material respects
of the representations and warranties of the parties to the Merger Agreement.
See "THE MERGER PROPOSAL -- The Merger Agreement -- Conditions to Consummation
of the Merger" and " -- Termination."
Termination of the Merger Agreement. The Merger Agreement may, under
specified circumstances, be terminated and the Merger abandoned at any time
prior to the Effective Time, notwithstanding approval of the Merger Proposal by
the stockholders of Racing Champions or Wheels. The Merger Agreement requires
Wheels to pay Racing Champions a termination fee (the "Termination Fee") of $4.0
million (approximately $0.76 per share of Wheels Common Stock) if (a) Wheels
terminates the Merger Agreement because the Wheels Board determines, in its good
faith reasonable judgment, after consultation with and based upon the
15
<PAGE> 23
written opinion of legal counsel, that such termination is required in order to
comply with its fiduciary duties by reason of any Superior Proposal (as defined
in the Merger Agreement) and Wheels has complied with the other terms of its
covenant in the Merger Agreement not to solicit offers with respect to any Third
Party Acquisition (as defined in the Merger Agreement) of Wheels, (b) Racing
Champions or Wheels terminates the Merger Agreement because Wheels fails to
obtain the requisite vote of its stockholders in favor of the Merger Proposal or
Wheels fails to convene a meeting of its stockholders to consider approval of
the Merger Proposal within 25 days after the date the Registration Statement is
declared effective, (c) Racing Champions terminates the Merger Agreement because
(i) the Wheels Board withdraws or modifies in a manner adverse to Racing
Champions or Acquisition its recommendation or approval of the Merger Agreement
or the Merger, (ii) the Wheels Board makes any recommendation with respect to a
Third Party Acquisition of Wheels other than a recommendation to reject such
Third Party Acquisition of Wheels, (iii) Wheels violates its covenant not to
solicit offers with respect to any Third Party Acquisition of Wheels or (iv) a
Third Party Acquisition of Wheels occurs or Wheels enters into any agreement
with respect to a Third Party Acquisition of Wheels, (d) Racing Champions
terminates the Merger Agreement because of (i) a failure to consummate the
Merger by July 31, 1998 or (ii) a material breach by Wheels of any of its
representations and warranties or covenants in the Merger Agreement, if prior to
or within twelve months of the date of such termination Wheels enters into an
agreement with respect to a Third Party Acquisition of Wheels or a Third Party
Acquisition of Wheels occurs, or (e) either Racing Champions or Wheels
terminates the Merger Agreement because of a permanent injunction or court
action preventing or prohibiting the Merger if prior to or within 12 months of
the date of such termination Wheels enters into an agreement with respect to a
Third Party Acquisition of Wheels or a Third Party Acquisition of Wheels occurs.
In addition, if the Merger Agreement is terminated by Racing Champions
because of a material breach by Wheels of any of its representations and
warranties or covenants in the Merger Agreement, then, unless Wheels is required
to pay the Termination Fee, Wheels must reimburse Racing Champions, Acquisition
and their affiliates for up to $1.0 million of actual out-of-pocket expenses
incurred by any of them or on their behalf in connection with the transactions
contemplated by the Merger Agreement.
If the Merger Agreement is terminated (a) by Racing Champions or Wheels
because Racing Champions fails to obtain the requisite vote of its stockholders
in favor of the Merger Proposal or Racing Champions fails to convene a meeting
of its stockholders to consider approval of the Merger Proposal within 25 days
after the date the Registration Statement is declared effective, (b) by Wheels
because of a material breach by Racing Champions or Acquisition of any of their
respective representations and warranties or covenants in the Merger Agreement,
or (c) by Wheels because (i) the Racing Champions Board withdraws or modifies in
a manner adverse to Wheels its recommendation or approval of the Merger
Agreement or the Merger, (ii) the Racing Champions Board makes any
recommendation with respect to a Third Party Acquisition of Racing Champions
other than a recommendation to reject such Third Party Acquisition of Racing
Champions or (iii) a Third Party Acquisition of Racing Champions occurs or
Racing Champions enters into any agreement with respect to a Third Party
Acquisition of Racing Champions, then Racing Champions must reimburse Wheels and
its affiliates for up to $1.0 million of actual out-of-pocket expenses incurred
by any of them or on their behalf in connection with the transactions
contemplated by the Merger Agreement. See "THE MERGER -- The Merger
Agreement -- Termination" and "-- Merger Termination Fee and Expenses."
Certain of the events permitting termination of the Merger Agreement will
also cause Racing Champions' option to purchase all of the shares of Wheels
Common Stock owned by the Principal Stockholder to become exercisable. See "THE
MERGER PROPOSAL -- Stockholder Option Agreement."
Governmental Approvals. The obligations of Racing Champions, Acquisition
and Wheels to consummate the Merger are subject to compliance with certain
reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"). See "THE MERGER PROPOSAL -- The
Merger -- Hart-Scott-Rodino."
Amendments to the Merger Agreement. The Merger Agreement may not be
amended except by action of Wheels, Racing Champions and Acquisition set forth
in an instrument in writing signed on behalf of each of the parties. After
approval of the Merger Agreement by the stockholders of Wheels and without the
further
16
<PAGE> 24
approval of such stockholders, no amendment may be made which would require the
approval of the stockholders of Wheels under applicable law. See "THE
MERGER -- The Merger Agreement -- Amendments and Waivers."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Wheels Board with respect to the
Merger Proposal, stockholders of Wheels should be aware that certain members of
management and Board of Directors of Wheels have certain interests in the Merger
that are in addition to the interests of stockholders of Wheels generally. Such
interests include: (a) the appointment of three current directors and/or
executive officers of Wheels as directors of Racing Champions following the
Merger, (b) the execution at closing of employment agreements with Racing
Champions by certain of the executive officers of Wheels, (c) the obligation of
Racing Champions to issue options to purchase up to 220,000 shares of Racing
Champions Common Stock under the Incentive Plan to certain of the officers,
directors and key employees of Wheels (the "New Options"), (d) the completion of
the Merger will cause the release of funds from an escrow account which will
allow Wheels to pay $2.75 million to certain of its executive officers as the
final installment of Wheels' purchase price in the High Performance acquisition,
and (e) the possible repayment of certain debt of Wheels which has been
guaranteed by certain executive officers of Wheels. See "INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
THE CAPITALIZATION AMENDMENT PROPOSAL
The Capitalization Amendment Proposal involves a proposed amendment to
Article 4 of the Racing Champions Charter to increase the number of authorized
shares of Racing Champions Common Stock by 8,000,000 shares, from 20,000,000
shares to 28,000,000 shares (the "Capitalization Amendment"). As of the Racing
Champions Record Date, there were 13,242,382 shares of Racing Champions Common
Stock issued outstanding, and 517,786 shares reserved for issuance upon exercise
of outstanding stock options. Assuming the issuance of up to 3,557,916 shares of
Racing Champions Common Stock, or rights to acquire shares of Racing Champions
Common Stock, in connection with the Merger, and giving effect to the obligation
of Racing Champions to issue up to 220,000 New Options, Racing Champions would
only have 2,461,916 shares of Racing Champions Common Stock available for
issuance in future transactions or for other corporate purposes. The 8,000,000
additional shares of Racing Champions Common Stock would be available for
issuance by the Racing Champions Board in connection with future financings and
acquisitions, incentive compensation plans, and for other purposes as authorized
by the Racing Champions Board without (in many cases) obtaining any further
approval by a vote of the holders of shares of capital stock of Racing
Champions. If approved by the requisite vote of the holders of Racing Champions
Common Stock, Racing Champions intends to effect the Capitalization Amendment
regardless of whether the Merger is consummated. The Racing Champions Board
recommends a vote FOR the Capitalization Amendment Proposal. See "THE
MERGER -- Conditions to the Merger" and "THE CAPITALIZATION AMENDMENT PROPOSAL."
See also Exhibit F attached to this Joint Proxy Statement/Prospectus for the
text of the Capitalization Amendment.
OTHER PROPOSALS TO BE CONSIDERED AT THE RACING CHAMPIONS ANNUAL MEETING
In addition to the Merger Proposal and the Capitalization Amendment
Proposal, holders of shares of Racing Champions Common Stock will also be asked
to consider and vote upon the election of 11 directors. See "ELECTION OF
DIRECTORS."
Holders of shares of Racing Champions Common Stock will also be asked to
consider and vote upon a proposal to approve an amendment to the Incentive Plan
to increase the aggregate number of shares of the Racing Champions Common Stock
that may be issued or transferred upon exercise, payment or vesting of stock
options granted under such plan from 311,852 to 600,000. A copy of the Incentive
Plan, as proposed to be amended, is attached as Exhibit G hereto. See "PROPOSAL
TO AMEND THE RACING CHAMPIONS CORPORATION STOCK INCENTIVE PLAN."
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<PAGE> 25
Finally, holders of shares of Racing Champions Common Stock will be asked
to consider and vote upon the ratification of the appointment of Arthur Andersen
LLP, independent public accountants, as auditors of Racing Champions for its
fiscal year ending December 31, 1998. See "APPOINTMENT OF INDEPENDENT AUDITORS."
HISTORICAL TRADING INFORMATION OF RACING CHAMPIONS
COMMON STOCK AND WHEELS COMMON STOCK
The Racing Champions Common Stock and the Wheels Common Stock are both
traded on the Nasdaq National Market under the symbols "RACN" and "WHEL,"
respectively. Neither Racing Champions nor Wheels has ever paid dividends on its
respective Common Stock. At the close of business on the Racing Champions Record
Date, there were approximately holders of record of outstanding shares of
Racing Champions Common Stock. At the close of business on the Wheels Record
Date, there were approximately holders of record of outstanding shares of
Wheels Common Stock. The following table sets forth the high and low closing
sale prices for Racing Champions Common Stock and Wheels Common Stock as
reported by the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
RACING CHAMPIONS WHEELS
COMMON STOCK COMMON STOCK
----------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------- -----
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Quarter
Second(1)............................................ $16.125 $14.50 $ 8.25 $6.25
Third................................................ 17.375 11.50 10.50 6.00
Fourth............................................... 13.50 6.813 11.875 5.50
YEAR ENDING DECEMBER 31, 1998:
Quarter
First................................................ 11.063 7.813 7.75 5.75
</TABLE>
- ---------------
(1) Trading in Wheels Common Stock commenced on April 16, 1997 and trading in
Racing Champions Common Stock commenced on June 12, 1997.
The information presented in the table below sets forth the closing sale
prices as reported by the Nasdaq National Market for Racing Champions Common
Stock and Wheels Common Stock on December 4, 1997, the last trading day
preceding the public announcement of the execution of the Original Merger
Agreement, and on , 1998, together with the equivalent value per
share of Wheels Common Stock of the shares of Racing Champions Common Stock to
be received in the Merger, in each case calculated by multiplying the closing
sale prices of Racing Champions Common Stock on such dates by an assumed
Exchange Ratio of 0.51 shares of Racing Champions Common Stock for each share of
Wheels Common Stock. The Exchange Ratio is subject to adjustment if the Racing
Champions Closing Price is less than $7.50 per share or greater than $14.00 per
share. See "THE MERGER PROPOSAL -- The Merger -- Exchange Ratio."
<TABLE>
<CAPTION>
RACING
CHAMPIONS WHEELS EQUIVALENT
COMMON COMMON VALUE
STOCK STOCK PER SHARE
--------- ------ ----------
<S> <C> <C> <C>
Closing Sale Price, December 4, 1997....................... $7.25 $6.125 $3.70
Closing Sale Price, , 1998.......................
</TABLE>
No assurance can be given as to the market price of Racing Champions Common
Stock if and when the Merger is consummated. Wheels stockholders are urged to
obtain current market quotations.
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<PAGE> 26
RISK FACTORS
The following risk factors may be relevant to a consideration of the
transactions contemplated by the Merger Proposal, and of the future financial
resources and business prospects of Racing Champions or the value of Racing
Champions Common Stock.
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements with respect to the financial conditions, results of operations and
businesses of Racing Champions and Wheels and, assuming the consummation of the
Merger, the combined company. These forward-looking statements involve certain
risks and uncertainties, and any such statement is qualified in its entirety by
reference to the following cautionary statements.
In connection with the Merger, 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: (i) expected cost savings from
the Merger may not be fully realized or realized within the expected time frame;
(ii) costs or difficulties related to the integration of the businesses of
Racing Champions and Wheels may be greater than expected; (iii) revenues
following the Merger may be lower than expected; (iv) competition in the markets
for die cast vehicle replicas, sports trading cards, other collectibles or other
NASCAR-related merchandise or hospitality services may increase significantly;
or (v) general economic conditions, either nationally or in the regions in which
the combined company will conduct business, may be less favorable than expected.
Further information on other factors which could affect the financial condition
or results of operations of Racing Champions after the Merger is described in
this section below and elsewhere in this Joint Proxy Statement/ Prospectus.
Racing Champions and Wheels caution that the foregoing lists of important
factors are not exclusive and do not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of Racing Champions
or Wheels.
CONSUMER ACCEPTANCE OF PRODUCTS
The markets for Racing Champions' products are subject to rapidly changing
consumer preferences. Racing Champions' historical growth has been based in part
on the growing interest in racing and motor sports and the evolution of the
preferences of racing enthusiasts and collectors toward Racing Champions'
products. A decline in the popularity of racing and motor sports or a change in
consumer preferences could have a material adverse effect on Racing Champions.
Racing Champions' future growth will depend in large part upon its ability to
continue to conceive, design, source and market new products and upon continuing
market acceptance of its existing and future products. Significant delays in the
introduction of, or the failure to introduce, new products or additions to its
existing product lines or the failure of Racing Champions' existing or future
products to maintain or receive substantial market acceptance could also have a
material adverse effect on Racing Champions. In 1997, Racing Champions
introduced a collection of pewter figures, its first significant non-vehicle
product. In 1998, Racing Champions plans to introduce a new line of die cast
vehicle replicas sold exclusively at hobby and collector shops. There can be no
assurance that such products will achieve consumer acceptance. See "ADDITIONAL
INFORMATION REGARDING RACING CHAMPIONS -- Business -- Products."
COMPETITION
Racing Champions operates in a highly competitive market. Racing Champions
competes with several larger domestic and foreign companies, such as Mattel,
Inc. ("Mattel") and Hasbro, Inc. ("Hasbro") which entered the racing replica
market in 1997, and with other producers of racing replicas. Certain of the
other producers of racing replicas, such as Action Performance Companies, Inc.,
generally distribute their products through direct marketing, collector clubs
and wholesalers who in turn distribute through hobby and collector shops. Racing
Champions distributes products primarily through national retailers and mass
merchants including K-Mart, Target, Toys 'R' Us and Wal-Mart, although in 1998
Racing Champions plans to introduce a new line of die cast vehicle replicas
distributed by Racing Champions exclusively through the hobby and collector
channels. Mattel and Hasbro also distribute their racing replicas through
national retailers. Racing
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<PAGE> 27
Champions also competes with domestic and foreign producers of scaled die cast
toy vehicles. Many of Racing Champions' competitors have greater financial,
technical, marketing and other resources than Racing Champions. There can be no
assurance that Racing Champions will continue to be able to compete successfully
in the future. See "ADDITIONAL INFORMATION REGARDING RACING
CHAMPIONS -- Business -- Competition."
DEPENDENCE ON LICENSING ARRANGEMENTS
Racing Champions markets virtually all of its products under licenses from
other parties. For example, Racing Champions markets its racing replicas
pursuant to licensing arrangements with race team owners, drivers, sponsors,
agents, vehicle manufacturers and major racing series sanctioning bodies. Racing
Champions markets its collectible figures pursuant to licensing arrangements
with popular sports figures and creators of certain comic book characters. These
licensing arrangements are generally limited in scope and duration and generally
authorize the sale of specific licensed products on a nonexclusive basis for a
limited period of time. The termination, cancellation or inability to renew
certain of Racing Champions' existing licensing arrangements, or the inability
to develop and enter into new licensing arrangements, could have a material
adverse effect on Racing Champions.
As a result of increased competition among manufacturers for licenses,
Racing Champions may, in the future, be required to pay licensors higher
royalties and higher minimum guaranteed payments in order to obtain or retain
attractive properties for development of existing and new product lines. This
increased competition could have an adverse effect on the profitability of these
licenses. In addition, exclusive or other licensing arrangements granted to
competitors or other parties could limit Racing Champions' future ability to
produce replicas of certain characters, athletes, vehicles, drivers and
sponsors, including replicas of vehicles or entities currently being produced.
For example, competitors currently have licenses with Dale Earnhardt, Jeff
Gordon and other popular drivers which restrict Racing Champions' ability to
produce replicas of these drivers' racing vehicles.
Racing Champions held the exclusive license to use the NASCAR trademark on
die cast racing replicas and related packaging from 1992 through 1997. Racing
Champions 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. This could result
in increased competition for Racing Champions' NASCAR racing replicas. See
"ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS -- Business -- Licenses."
NO ASSURANCES THAT BUSINESSES CAN BE COMBINED SUCCESSFULLY
The integration of the operations of Racing Champions and Wheels following
the Merger will require the dedication of management resources, which will
temporarily detract from attention to the day-to-day business of the combined
company. The combination of the two companies will also require the coordination
of geographically separated organizations, integrating personnel with disparate
business backgrounds and combining two different corporate cultures. The process
of combining the two organizations may cause an interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have an adverse effect on the revenues and operating results of the
combined company, at least in the near term. The combined company's ability to
manage its growth effectively will require it to continue to improve its
operational and financial systems and controls, and to attract, retain, motivate
and manage employees effectively.
RELIANCE ON KEY SUPPLIERS
Racing Champions depends upon six independently owned factories located in
China to manufacture its racing replicas and certain other products. As a
result, any difficulties encountered by the independent manufacturers which
result in product defects, production delays, cost overruns or the inability to
fulfill orders
20
<PAGE> 28
on a timely basis could have a material adverse effect on Racing Champions. Any
significant accident, labor dispute or other disruption at one or more of these
factories also could adversely affect Racing Champions' business. See
"ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS -- Business -- Manufacturing"
and "-- Risks of Foreign Manufacturing."
RISKS OF FOREIGN MANUFACTURING
Racing Champions is subject to numerous risks inherent in foreign
manufacturing, including the following: fluctuations in currency exchange rates;
economic and political instability; restrictive actions by foreign governments;
the laws and policies of the United States affecting the importation of goods
(including duties, quotas and taxes); and trade and foreign tax laws.
Substantially all of Racing Champions' products are subject to United
States duties and regulations pertaining to the importation of goods. Currently,
Racing Champions' products are imported duty free. The United States may, from
time to time, impose new duties, tariffs, quotas or other charges or
restrictions, or adjust presently prevailing quotas, duties or tariff levies,
which could adversely affect Racing Champions' business, financial condition or
results of operations or its ability to continue to import products at current
or increased levels. From time to time, Racing Champions may also be involved in
disputes with the United States Customs Service regarding the amount of duty to
be paid, the value of merchandise to be reported or other customs regulations
with respect to certain of Racing Champions' imports, which may result in the
payment of additional duties and/or penalties. Racing Champions cannot predict
what regulatory changes may occur or the type or amount of any financial impact
on Racing Champions which those changes may have in the future.
TRADING STATUS OF CHINA
China, where all of Racing Champions' products are manufactured, is
currently afforded "Most Favored Nation" status and generally is not subject to
discriminatory United States duties. The "Most Favored Nation" status of China
was last renewed in June of 1997 and is reviewed on an annual basis. Various
commercial and legal practices widespread in China, including the handling of
intellectual properties, are under review by the United States government and,
accordingly, the duty treatment of goods imported from China is subject to
political uncertainties. To the extent China ceases to have "Most Favored
Nation" status or its exports become subject to political retaliation, the cost
of importing products from China could increase significantly. Racing Champions
could also be subject to the imposition of retaliatory tariffs or other import
restrictions such as quotas as a result of a trade dispute between China and the
United States. These increased tariffs or other restrictions could be imposed
whether or not the trade dispute itself involves products of the type imported
by Racing Champions. Such increased tariffs or other trade restrictions could
also have a material adverse effect on Racing Champions.
RISKS RELATING TO HONG KONG
Racing Champions conducts operations in Hong Kong through its Hong Kong
subsidiary, Racing Champions Limited (the "Hong Kong Subsidiary"). On July 1,
1997, sovereignty over Hong Kong was transferred from the United Kingdom to
China, and Hong Kong became a Special Administrative Region of China. At the
present time, Racing Champions is unable to predict the effect, if any, that
such change will have on Racing Champions' or the Hong Kong Subsidiary's
business, financial condition or results of operations.
FOREIGN CURRENCY RISK
Racing Champions' sales are denominated in U.S. dollars. Racing Champions'
purchases of finished goods from the Chinese manufacturers are denominated in
Hong Kong dollars. Expenses for these manufacturers are often denominated in
Chinese Renminbi. Racing Champions is subject to a variety of risks associated
with changes among the relative values of the U.S. dollar, the Hong Kong dollar
and Renminbi. Any material increase in the value of the Hong Kong dollar or
Renminbi relative to the U.S. dollar would
21
<PAGE> 29
increase Racing Champions' expenses and therefore could have a material adverse
effect on Racing Champions. Since 1983, the Hong Kong government has maintained
a policy of linking the U.S. dollar and the Hong Kong dollar. There can be no
assurance that this link will be continued, although Racing Champions is not
aware of any intention of the Hong Kong government or China to abandon the link.
There has been significant volatility in the exchange rates of Renminbi to U.S.
dollars in recent years. Over the last five years, the Renminbi has experienced
significant devaluation against most major currencies. Racing Champions does not
hedge foreign currency risk.
DEPENDENCE ON SIGNIFICANT CUSTOMERS; CONCENTRATION OF ACCOUNTS RECEIVABLE
Racing Champions' success is, in part, dependent upon the continuing
willingness of leading retailers to purchase and provide shelf space for Racing
Champions' products. For example, during 1997, approximately 16%, 11%, 8% and
22% of Racing Champions' net sales were made to K-Mart, Target, Toys 'R' Us and
Wal-Mart, respectively. Racing Champions does not have long-term contracts with
its customers. An adverse change in Racing Champions' relationship with or the
financial viability of one or more of these customers could have a material
adverse effect on Racing Champions. In addition, certain of these retailers
generally purchase large quantities of Racing Champions' products on credit,
which may cause a concentration of accounts receivable among some of Racing
Champions' largest customers. Any inability or unwillingness to pay these
accounts receivable when due by one or more of Racing Champions' largest
customers could adversely affect Racing Champions' financial condition. Although
Racing Champions maintains credit insurance to reduce the risk associated with
the accounts receivable from 16 of its major customers, the amount of this
insurance generally does not cover the total amount of the accounts receivable
from any particular customer. See "ADDITIONAL INFORMATION REGARDING RACING
CHAMPIONS -- Business -- Sales and Distribution."
RELIANCE ON KEY PERSONNEL
Racing Champions relies heavily on its senior managers, including Robert E.
Dods, Boyd L. Meyer and Peter K.K. Chung (the "Founding Managers"). Although
Racing Champions has entered into employment agreements with the Founding
Managers that extend through April 30, 1999, there can be no assurance that
Racing Champions will be able to retain them or its other key employees in the
future. The loss of the services of any of the Founding Managers could have a
material adverse effect on Racing Champions. Racing Champions maintains a
$2,000,000 key man life insurance policy on each of the Founding Managers. See
"ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS -- Management."
SEASONAL PRODUCT DEVELOPMENT AND SALES
Racing Champions generally must adjust the styles of its racing replicas
each year to accurately replicate the various vehicles competing in major racing
series. Generally in the fourth quarter, Racing Champions commences this process
of product development for the coming year by obtaining information about new
race cars. From that point until the release date of the particular replica
during the racing season, Racing Champions, along with its Hong Kong Subsidiary
and the foreign manufacturers, must complete the production process, including
the design of prototypes for the new racing replicas, the production of new
tooling, if any, and the manufacture of the racing replicas, and deliver the
racing replicas to retailers. Any inability by Racing Champions to deliver the
new racing replicas to retailers by the start of the racing season could have a
material adverse effect on Racing Champions. Racing Champions' sales of racing
replicas are also seasonal, with 62.1% of Racing Champions' net sales and 74.7%
of its net income on average over the three fiscal years ended December 31,
1997, occurring during the second and third quarters. See "ADDITIONAL
INFORMATION REGARDING RACING CHAMPIONS -- Business -- Manufacturing."
PRODUCT LIABILITY AND OTHER CLAIMS
Racing Champions faces product liability risks relating to the use of
Racing Champions' products. Although Racing Champions has not experienced any
material product liability costs or claims, Racing Champions carries a policy of
product liability insurance against such contingencies. Racing Champions may
22
<PAGE> 30
also be subject to other legal claims, such as unfair competition or trademark
infringement. Any legal claims, if brought, could materially adversely affect
the business or financial condition of Racing Champions.
CONTROL BY PRINCIPAL STOCKHOLDERS
Assuming the issuance of the maximum number of shares of Racing Champions
Common Stock issuable in the Merger at an Exchange Ratio of 0.51, the executive
officers and directors of Racing Champions collectively will beneficially own
approximately 47.5% of the outstanding shares of Racing Champions Common Stock
following the Merger (including 423,636 shares of Racing Champions Common Stock
expected to be beneficially owned after the Merger by three directors of Wheels
who are nominees for election as directors of Racing Champions and 3,032,680
shares of Racing Champions Common Stock as to which certain directors of Racing
Champions have shared voting and investment power). This share ownership would
permit these stockholders, if they chose to act together, to influence the
election of Racing Champions' directors and other actions requiring stockholder
approval. See "ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS -- Principal
Stockholders."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has in the past experienced price and volume fluctuations
that have at times been unrelated to corporate operating performance. Such
market volatility may adversely affect the market price of shares of Racing
Champions Common Stock. Other factors, such as fluctuations in quarterly
operating results, changes in trade policy between China and the United States
and evolving business prospects of Racing Champions' customers and competitors,
also could cause the market price of shares of Racing Champions Common Stock to
fluctuate substantially.
DIVIDEND POLICY
Racing Champions currently anticipates that all of its earnings will be
retained for development and expansion of Racing Champions' business and does
not anticipate paying any cash dividends on shares of Racing Champions Common
Stock in the foreseeable future.
GOVERNMENT REGULATION
Racing Champions is subject to numerous federal and state health, safety,
tax and other regulations. No assurance can by given that current government
regulations or future regulatory changes will not adversely affect Racing
Champions. In addition, certain of Racing Champions' tax positions could be
subject to examination and challenge by the Internal Revenue Service.
EXCHANGE RATIO IN THE MERGER
The Exchange Ratio in the Merger is fixed at 0.51 shares of Racing
Champions Common Stock for each share of Wheels Common Stock if the Racing
Champions Closing Price is greater than or equal to $7.50 per share and less
than or equal to $14.00 per share. If the Racing Champions Closing Price is less
than $7.50 per share, the Exchange Ratio will equal $3.825 divided by the Racing
Champions Closing Price. If the Racing Champions Closing Price is greater than
$14.00 per share, the Exchange Ratio will equal $7.14 divided by the Racing
Champions Closing Price. The market price of Racing Champions Common Stock
and/or Wheels Common Stock may vary significantly from the price as of the date
of execution of the Merger Agreement, the date of this Joint Proxy
Statement/Prospectus or the date on which the stockholders of Wheels vote on the
Merger Proposal at the Wheels Special Meeting due to, among other factors,
changes in the business, operations or prospects of Racing Champions or Wheels,
the market's perception of the synergies expected to be achieved by the Merger,
the market's assessment of the likelihood that the Merger will be consummated
and general economic conditions. Because the Exchange Ratio is fixed at 0.51 if
the Racing Champions Closing Price is greater than or equal to $7.50 per share
and less than or equal to $14.00 per share, the value of the Racing Champions
Common Stock to be issued in connection with the Merger may be higher or lower
than the value of such securities at the time the Merger Agreement was
negotiated or approved by the Wheels
23
<PAGE> 31
stockholders at the Wheels Special Meeting. In addition, if the Exchange Ratio
is adjusted because the Racing Champions Closing Price is less than $7.50 per
share or more than $14.00 per share, the Racing Champions Closing Price may not
reflect the value of shares of Racing Champions Common Stock at the Effective
Time because it is based on the average closing price of shares of Racing
Champions Common Stock over the 10 trading days prior to the Effective Time.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Racing Champions Common Stock in the public
market could adversely affect the market price of Racing Champions Common Stock.
Assuming the issuance of up to 3,557,916 shares of Racing Champions Common Stock
in connection with the Merger (including rights to acquire shares of Wheels
Common Stock which will be converted into rights to acquire shares of Racing
Champions Common Stock in the Merger), Racing Champions will have 16,800,298
shares of Racing Champions Common Stock outstanding. Of these shares, 9,307,916
shares of Racing Champions Common Stock (including up to 3,557,916 shares to be
issued in the Merger) will be freely tradable in the market, except for shares
held by "affiliates" of Racing Champions which are subject to the resale
limitations (excluding the holding period requirement) of Rule 144 under the
Securities Act and shares of Racing Champions Common Stock received by certain
persons deemed to be affiliates of Wheels prior to the Merger which will be
subject to the restrictions imposed by Rules 144 and 145 under the Securities
Act. The other 7,492,382 shares of Racing Champions Common Stock outstanding as
of the date of this Joint Proxy Statement/Prospectus are subject to Rule 144
resale limitations until April 30, 1998, at which time such shares will be
freely tradeable in the market, except for shares held by "affiliates" of Racing
Champions which are subject to the resale limitations (excluding the holding
period requirements) of Rule 144 under the Securities Act.
HOLDING COMPANY STRUCTURE
Because Racing Champions is a holding company that conducts its business
operations through its subsidiaries, Racing Champions depends on its
subsidiaries for dividends and other cash distributions to pay Racing Champions'
expenses and to pay dividends to holders of shares of Racing Champions Common
Stock. Racing Champions' credit agreement ("Credit Agreement") with the First
National Bank of Boston, as agent, and certain other lenders, specifies the
conditions under which dividends, loans and cash distributions may be made from
Racing Champions' subsidiaries to Racing Champions. Profits generated by such
operating entities may not be available to Racing Champions while the loans
under the Credit Agreement are outstanding.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Racing Champions Charter and the Racing Champions
By-Laws and of the DGCL could discourage potential acquisition proposals and
delay or prevent a change in control of Racing Champions. Such provisions could
diminish the opportunities for a stockholder to participate in potential
premiums associated with tender offers or other acquisitions of Racing Champions
or Racing Champions Common Stock. These provisions include certain advance
notice procedures for nominations of candidates for election as directors and
for stockholder proposals to be considered at stockholders' meetings. In
addition, section 203 of the DGCL could delay or prevent consummation of an
acquisition transaction between Racing Champions and certain significant
stockholders if the Racing Champions Board does not approve such acquisition
transaction in advance. See "COMPARATIVE RIGHTS OF STOCKHOLDERS."
24
<PAGE> 32
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
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 unaudited selected financial data have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments, necessary
to present fairly Racing Champions' combined financial position and results of
operations for the periods presented. The data for the year ended December 31,
1993 for the Predecessor -- RCI Group is 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 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, 1997, which
give effect to the initial public offering of Racing Champions Common Stock
completed on June 17, 1997 (the "Racing Champions Offering") and the application
of the net proceeds from the Racing Champions Offering as if it had occurred on
January 1, 1997, are 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 Racing Champions
Offering and the application of the net proceeds from the Racing Champions
Offering occurred on such date.
25
<PAGE> 33
All of the data set forth below are qualified by reference to, and should
be read in conjunction with, the Financial Statements of Racing Champions and
Notes thereto and "ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS
- -Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR -- RCI GROUP(1) RACING CHAMPIONS PRO FORMA
----------------------------------------- ---------------------------- ------------
FOUR MONTHS EIGHT
ENDED MONTHS
YEARS ENDED DECEMBER 31, APRIL 30, ENDED YEAR ENDED YEAR ENDED
--------------------------- 1996 DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 (2) 1996 1997 1997
------- ------- ------- ----------- ------------ ------------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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 $76,562
Gross profit........................... 14,151 18,056 23,036 7,210 28,019 44,376 44,376
Operating income....................... 6,141 8,565 9,724 108 11,236 18,500 18,500
Net income(3).......................... $ 5,722 $ 8,224 $ 9,392 $ 72 2,551 7,876 9,850
Net income available to common
stockholders......................... $ 1,895 $ 7,397 $ 9,850
PER SHARE DATA:
Net income
Basic................................ $ 0.24 $ 0.71 $ 0.74
Diluted.............................. $ 0.23 $ 0.69 $ 0.73
Cash dividends......................... -- -- --
Book value............................. $ 0.35 $ 7.34 --
Weighted average common shares and
common share equivalents outstanding
Basic................................ 7,885 10,449 13,242
Diluted(4)........................... 8,212 10,777 13,571
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR -- RCL GROUP(1)
-----------------------------------------
ONE
FISCAL YEARS ENDED MONTH
MARCH 31, ENDED
--------------------------- APRIL 30,
1994 1995 1996 1996
------- ------- ------- -----------
<S> <C> <C> <C> <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>
<S> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.......................
Gross profit....................
Operating income................
Net income(5)...................
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
-----------------
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Working capital........................................... $ (275)
Total assets.............................................. 114,777
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 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 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
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
26
<PAGE> 34
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, 1993 to April 30, 1996.
(4) Weighted average diluted shares outstanding has been computed using the
treasury stock method which includes dilutive Racing Champions 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.
27
<PAGE> 35
WHEELS SPORTS GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected financial data with respect to
Wheels for each of the periods indicated. The selected financial data for the
year ended December 31, 1993, are derived from unaudited combined financial
statements, which are not included herein. The unaudited selected financial data
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly Wheels' combined financial
position and results of operations for the periods presented. The data for the
year ended December 31, 1994 are derived from the audited financial statements
which are not included herein. The data for the years ended December 31, 1995
and 1996 are derived from the consolidated financial statements of Wheels that
give retroactive effect to the mergers of Wheels and Diamond on June 30, 1997,
and of Wheels and GRS on October 4, 1997, which have been accounted for as
poolings-of-interests. The consolidated financial statements for the years ended
December 31, 1996 and 1995 have been audited by Coopers & Lybrand LLP,
independent accountants. The data for the year ended December 31, 1997, are
derived from the consolidated financial statements of Wheels which have been
audited by Arthur Andersen LLP, independent public accountants.
The pro forma financial data for the year ended December 31, 1997, which
give effect to the initial public offering of Wheels Common Stock completed on
April 16, 1997 (the "Wheels Offering"), the application of the net proceeds from
the Wheels Offering and the acquisition by Wheels of High Performance and Press
Pass, as if each had occurred on January 1, 1997, are presented for
informational purposes only and are not necessarily indicative of the results of
future operations of Wheels or the actual results that would have been achieved
had the Wheels Offering and the application of the net proceeds from the Wheels
Offering and the acquisition by Wheels of High Performance, and Press Pass
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 Wheels and
notes thereto and "ADDITIONAL INFORMATION REGARDING WHEELS -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED ----------------
DECEMBER 31, YEAR ENDED
------------------------------------------------ DECEMBER 31,
1993 1994 1995 1996 1997 1997(1)(2)(3)(4)
------ ------ ------ ------ ------------ ----------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................................................ $2,316 $4,336 $4,784 $7,523 $ 7,491 $29,043
Gross profit............................................. 842 1,440 1,722 2,955 726 6,739
Operating income (loss).................................. 291 475 (42) 863 (5,238) (5,460)
Net income (loss) from continuing operations............. $ 291 $ 464 $ (65) $ 820 $(5,332) $(7,099)
PER SHARE DATA:
Net income (loss) from continuing operations
Basic.................................................. $ 0.13 $ 0.20 $(0.03) $ 0.29 $ (1.35) $ (1.44)
Diluted................................................ $ 0.13 $ 0.20 -- $ 0.29 -- --
Cash dividends........................................... $ 0.09 $ 0.18 $ 0.07 $ 0.01 $ 0.11 --
Book value............................................... $ 0.23 $ 0.26 $ 0.14 $ 0.36 $ 2.54 --
Weighted average common shares and common share
equivalents outstanding
Basic.................................................. 2,325 2,325 2,446 2,805 3,961 4,931
Diluted................................................ 2,325 2,325 -- 2,805 -- --
</TABLE>
28
<PAGE> 36
<TABLE>
<CAPTION>
ACTUAL
DECEMBER 31,
1997
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $(4,344)
Total assets.................. 28,800
Total debt.................... 13,826
Total stockholders' equity.... 10,091
</TABLE>
- ---------------
(1) Data for Wheels for the year ended December 31, 1997, includes the following
nonrecurring items: (1) charges for the discontinued home decor product
lines, including the goodwill related to Wheels' acquisition of Emerald
Sports Group, Inc. ("Emerald") of $0.7 million, (2) expenses related to the
1997 acquisitions which were treated as pooling of interests of $0.3
million, (3) accounting and audit fees of $0.5 million related to
acquisition and year end accounting and auditing work, (4) one-time bonus
payments of $0.2 million, and (5) a net loss from the Wheels trading card
operations of $2.9 million which includes approximately $0.7 million related
to defective product. The management of Wheels' trading card operations is
being assumed by the Press Pass trading card management team.
(2) Data for High Performance for the year ended December 31, 1997, included in
the Wheels pro forma data, includes the following nonrecurring items: (1)
one-time bonus payments of $1.6 million, which primarily relates to a
transfer of equity ownership to a key employee immediate by prior to the
Wheels acquisition of High Performance, (2) liquidation of discontinued
product lines which generated $1.0 million in sales and $1.3 million in cost
of sales in 1997, and (3) costs of $0.3 million incurred with the
integration of the other Wheels acquisitions into the High Performance
facility in Mooresville.
(3) Data for Press Pass for the year ended December 31, 1997, included in the
Wheels pro forma data, includes the following nonrecurring items: (1)
compensation and rent expense of $0.6 million and (2) the impact of a
discontinued product line which generated minimal net sales and $0.5 in cost
of sales in 1997.
(4) Excluding the effects of the nonrecurring items in notes 1 through 3,
Wheels' pro forma net sales, gross profit, operating income, net income from
continuing operations and net income from continuing operations per share
for the year ended December 31, 1997, would have been (amounts in thousands,
except per share data):
<TABLE>
<CAPTION>
PRO FORMA
--------------------
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Net sales................................................... $24,925 100.0%
Gross profit................................................ 8,413 33.8%
Operating income............................................ 2,313 9.3%
Net income from continuing operations....................... 232 0.9%
Net income from continuing operations per share -- basic.... $ 0.05 --
Net income from continuing operations per share --
diluted................................................... $ 0.05 --
</TABLE>
29
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
(the "Unaudited Pro Forma Information") gives effect to the Merger under the
pooling of interests method of accounting. The Unaudited Pro Forma Information
is presented to reflect the estimated impact of the Merger and the assumed
Exchange Ratio of 0.51 shares of Racing Champions Common Stock for each share of
Wheels Common Stock issued and outstanding at the Effective Time.
The Unaudited Pro Forma Information for 1997 gives effect to the Merger and
additionally presents the data as if Wheels' acquisitions of High Performance
and Press Pass had been consummated as of the beginning of the period presented
for the unaudited pro forma condensed combined statement of income. The 1997
Unaudited Pro Forma Information was also prepared to illustrate the Racing
Champions Offering and the Wheels Offering and the application of the net
proceeds of the Racing Champions Offering and the Wheels Offering as of the
beginning of the period presented.
The Unaudited Pro Forma Condensed Combined Statement of Income Information
for 1995 is not presented herein as the information would include only
historical Wheels information as Racing Champions was not formed prior to the
Recapitalization on April 30, 1996. The equivalent combined pro forma basic net-
loss per share for 1995 is $(0.01).
The Unaudited Pro Forma Information is not necessarily indicative of the
results of the future operations of either entity or the actual results that
would have occurred had the Merger been consummated as of the beginning of the
income statement periods presented. The Unaudited Pro Forma Information should
be read in conjunction with the historical consolidated financial statements of
Racing Champions and the historical consolidated financial statements of Wheels,
High Performance and Press Pass included in this Joint Proxy
Statement/Prospectus. See also "RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA," "ADDITIONAL INFORMATION REGARDING RACING
CHAMPIONS -- Management's Discussion and Analysis of Financial Condition and
Results of Operations," "WHEELS SPORTS GROUP, INC. AND SUBSIDIARIES SELECTED
FINANCIAL DATA," "ADDITIONAL INFORMATION REGARDING WHEELS -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
30
<PAGE> 38
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------- PRO FORMA PRO FORMA
RACING COMBINING PRO FORMA OFFERING
CHAMPIONS WHEELS ADJUSTMENTS COMBINED ADJUSTMENTS
--------- ------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net sales(9)(10)(11)(12).......................... $76,562 $ 7,491 $ -- $84,053 $ --
Cost of sales(9)(10)(11).......................... 32,186 6,058 (893)(1) 37,351 --
Defective product(9).............................. -- 707 -- 707 --
------- ------- ------- ------- -------
Gross profit(12).................................. 44,376 726 893 45,995 --
Selling, general and administrative expense....... 23,660 2,323 893(1) 26,876 --
Nonrecurring expenses(9)(10)(11)(12).............. -- 3,641 -- 3,641 --
Amortization of intangible assets................. 2,216 -- -- 2,216 --
------- ------- ------- ------- -------
Operating income (loss)(12)....................... 18,500 (5,238) -- 13,262 --
Interest expense (income)......................... 5,126 94 -- 5,220 (3,242)(3)
Other expense..................................... 200 -- -- 200 --
------- ------- ------- ------- -------
Income (loss) before income taxes................. 13,174 (5,332) -- 7,842 3,242
Income tax expense (benefit)...................... 5,298 -- (2,133)(2) 3,165 1,268(3)
------- ------- ------- ------- -------
Net income (loss) from continuing
operations(12).................................. 7,876 (5,332) 2,133 4,677 1,974
Discontinued operations(9)........................ -- 1,460 (584)(2) 876 --
------- ------- ------- ------- -------
Net income (loss)................................. $ 7,876 $(6,792) $ 2,717 $ 3,801 $ 1,974
======= ======= ======= ======= =======
Net income (loss) from continuing operations per
share(12):
Basic........................................... $ 0.75 $ 0.36
Diluted......................................... $ 0.73 $ 0.34
Weighted average shares outstanding:
Basic........................................... 10,449 2,693(14) 13,142 2,793(15)
Diluted......................................... 10,777 2,845(14) 13,622 2,794(15)
Equivalent net income from continuing operations
per share(13):
Basic........................................... $ 0.18
Diluted......................................... $ 0.17
<CAPTION>
COMPANIES ACQUIRED
------------------------------------- TOTAL
HIGH PRESS PRO FORMA PRO FORMA
PERFORMANCE PASS ADJUSTMENTS(4) COMBINED
----------- ------ -------------- ---------
<S> <C> <C> <C> <C>
Net sales(9)(10)(11)(12).......................... $12,890 $8,662 $ -- $105,605
Cost of sales(9)(10)(11).......................... 9,913 5,626 (324)(5) 52,566
Defective product(9).............................. -- -- -- 707
------- ------ ------- --------
Gross profit(12).................................. 2,977 3,036 324 52,332
Selling, general and administrative expense....... 1,440 1,906 324(5) 30,546
Nonrecurring expenses(9)(10)(11)(12).............. 1,900 558 -- 6,099
Amortization of intangible assets................. -- -- 431(6) 2,647
------- ------ ------- --------
Operating income (loss)(12)....................... (363) 572 (431) 13,040
Interest expense (income)......................... 26 -- 1,519(7) 3,523
Other expense..................................... -- -- -- 200
------- ------ ------- --------
Income (loss) before income taxes................. (389) 572 (1,950) 9,317
Income tax expense (benefit)...................... -- -- (534)(8) 3,899
------- ------ ------- --------
Net income (loss) from continuing
operations(12).................................. (389) 572 (1,416) 5,418
Discontinued operations(9)........................ -- -- -- 876
------- ------ ------- --------
Net income (loss)................................. $ (389) $ 572 $(1,416) $ 4,542
======= ====== ======= ========
Net income (loss) from continuing operations per
share(12):
Basic........................................... $ 0.34
Diluted......................................... $ 0.33
Weighted average shares outstanding:
Basic........................................... 15,935
Diluted......................................... 16,416
Equivalent net income from continuing operations
per share(13):
Basic........................................... $ 0.17
Diluted......................................... $ 0.17
</TABLE>
- ---------------
(1) Reclassifies certain Wheels accounts to provide consistent presentation
with Racing Champions.
(2) Reflects the tax benefit available to the total combined company's income
from the net operating loss of Wheels and the discontinued operations of
Wheels.
31
<PAGE> 39
(3) Reflects the effect on interest expense, net of income taxes at 40.0%, of
the receipt of the Racing Champions Offering proceeds of $69.7 million.
The application of those proceeds reduces outstanding borrowings under
term loans by approximately $16.9 million with an interest rate of 8.38%,
reduces junior subordinated debt by approximately $41.4 million with an
interest rate of 12.00% and reflects the expected lower interest rate of
7.18% on the remaining outstanding borrowings of approximately $26.0
million.
(4) Pro forma adjustments reflect the purchases of High Performance and Press
Pass as if the purchases were made on January 1, 1997.
(5) Reclassifies certain High Performance and Press Pass accounts to provide
consistent presentation with Racing Champions.
(6) Provides for the pro forma increase from January 1, 1997, in amortization
expense based on amortizing the goodwill associated with the purchases of
High Performance and Press Pass of $17.2 million over 40 years.
(7) Reflects the effect on interest expense of the incurrence of $4.9 million
in debt to effect the High Performance acquisition and $4.8 million in
debt to effect the Press Pass acquisition. $7.7 million of the debt used
to finance these acquisitions bears interest at the London Interbank
Offering Rate plus 3.0%, or approximately 8.8% for the year ended December
31, 1997, $1.0 million of the debt bears interest at 8.0% and the other
$1.0 million of debt bears interest at 10.0%. This amount also includes
$0.3 million for amortization of deferred financing costs of $1.6 million
and $0.3 million for amortization of debt discount of $1.6 million
incurred to obtain financing to effect the acquisitions of High
Performance and Press Pass.
(8) Reflects the net tax benefit available to the total combined company's
income from the net operating loss of High Performance, offset by the tax
expense on the income of Press Pass, at an effective rate of 40.0%, after
adjustments for interest as noted in note 7 above.
(9) Data for Wheels includes the following nonrecurring items: (1) charges for
the discontinued operations of World of Racing, Inc. ("World of Racing")
of $1.5 million, (2) charges for the discontinued home decor product
lines, including the goodwill related to the Emerald acquisition of $0.7
million, (3) expenses related to the 1997 acquisitions which were treated
as pooling of interests of $0.3 million, (4) accounting and audit fees of
$0.5 million related to acquisition and year end accounting and auditing
work, (5) one-time bonus payments of $0.2 million, and (6) a net loss from
the Wheels' trading card operations of $2.9 million which includes
approximately $0.7 million related to defective products. The management
of Wheels' trading card operations is being assumed by the Press Pass
trading card management team.
(10) Data for High Performance includes the following nonrecurring items: (1)
liquidation of discontinued product lines which generated $1.0 million in
sales and $1.3 million in cost of sales in 1997, (2) one-time bonus
payments of $1.6 million, which primarily relate to a transfer of equity
ownership to a key employee immediately prior to the Wheels acquisition of
High Performance, and (3) costs of $0.3 million incurred in connection
with the integration of the other Wheels acquisitions into the High
Performance facility in Mooresville.
(11) Data for Press Pass includes the following nonrecurring items: (1) the
impact of a discontinued product line which generated minimal net sales
and $0.5 million in cost of sales in 1997 and (2) compensation and rent
expense of $0.6 million.
32
<PAGE> 40
(12) Excluding the effects of the nonrecurring items in notes 9 through 11, net
sales, gross profit, operating income, net income from continuing
operations and net income from continuing operations per share for the year
ended December 31, 1997, would have been (amounts in thousands except per
share data):
<TABLE>
<CAPTION>
TOTAL
PRO FORMA COMBINED
----------------------
PERCENT OF
AMOUNT NET SALES
-------- ----------
<S> <C> <C>
Net sales.............................................. $101,487 100.0%
Gross profit........................................... 52,790 52.0%
Operating income....................................... 20,813 20.5%
Net income from continuing operations.................. 10,081 9.9%
Basic net income from continuing operations per
share................................................. $ 0.63 --
Diluted net income from continuing operations per
share................................................. $ 0.61 --
</TABLE>
(13) Equivalent pro forma combined net income per share was calculated by
multiplying the pro forma combined net income per share by an assumed
Exchange Ratio of 0.51 shares of Racing Champions Common Stock for each
share of Wheels Common Stock, so that the per share amount is equated to
the respective value for one share of Wheels Common Stock. Diluted
weighted average shares outstanding is based on the treasury stock method,
calculated at Racing Champions' average share price in 1997, $12.98.
(14) Reflects the number of shares of Racing Champions Common Stock to be
issued in the Merger assuming an Exchange Ratio of 0.51 shares of Racing
Champions Common Stock for each share of Wheels Common Stock.
(15) Reflects the pro rata shares of Racing Champions Common Stock issued in
the Racing Champions Offering that are not reflected in the historical
weighted average shares outstanding.
33
<PAGE> 41
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA TOTAL
RACING COMBINING PRO FORMA
CHAMPIONS(1) WHEELS(2) ADJUSTMENTS COMBINED
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................................ $49,385 $7,523 $ -- $56,908
Cost of sales........................................ 19,999 4,568 (720)(3) 23,847
Inventory adjustment................................. 1,367 -- -- 1,367
------- ------ ------ -------
Gross profit......................................... 28,019 2,955 720 31,694
Selling, general and administrative expense.......... 15,244 2,092 720(3) 18,056
Amortization of intangible assets.................... 1,539 -- -- 1,539
------- ------ ------ -------
Operating income..................................... 11,236 863 -- 12,099
Interest expense..................................... 6,738 43 -- 6,781
Other expense........................................ 153 -- -- 153
------- ------ ------ -------
Income before income taxes........................... 4,345 820 -- 5,165
Income tax expense................................... 1,794 -- 272(4) 2,066
------- ------ ------ -------
Net income........................................... $ 2,551 $ 820 $ (272) $ 3,099
======= ====== ====== =======
Net income per share:
Basic.............................................. $ 0.32 $ 0.29
Diluted............................................ $ 0.31 $ 0.28
Weighted average shares outstanding:
Basic.............................................. 7,885 2,693(5) 10,578
Diluted............................................ 8,212 2,845(5) 11,057
Equivalent net income per share(6):
Basic.............................................. $ 0.15
Diluted............................................ $ 0.14
</TABLE>
- ---------------
(1) Data for the Racing Champions is for the eight months ended December 31,
1996.
(2) Data for Wheels is for the 12 months ended December 31, 1996, and includes
Diamond and GRS, which were acquisitions accounted for as poolings of
interests on June 30, 1997, and October 4, 1997, respectively. Results for
Diamond and GRS combined are as follows: net sales of $2.7 million, gross
profit of $1.0 million and an operating loss of $0.1 million. Data for
Wheels does not include the 1997 purchases of High Performance and Press
Pass.
(3) Reclassifies certain Wheels accounts to provide consistent presentation with
Racing Champions.
(4) Increases the provision for income taxes to 40% for the income that was
taxed at lower rates or not subject to income tax as a result of S
corporation status.
(5) Reflects the number of shares of Racing Champions Common Stock to be issued
in the Merger assuming an Exchange Ratio of 0.51 shares of Racing Champions
Common Stock for each share of Wheels Common Stock. Diluted weighted average
shares outstanding is based on the treasury stock method calculated at
Racing Champions' average share price in 1997, $12.98.
(6) Equivalent pro forma combined net income per share was calculated by
multiplying the pro forma combined net income per share by an assumed
Exchange Ratio of 0.51 shares of Racing Champions Common Stock for each
share of Wheels Common Stock, so that the per share amount is equated to the
respective value for one share of Wheels Common Stock.
34
<PAGE> 42
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA TOTAL
RACING HISTORICAL MERGER PRO FORMA
CHAMPIONS WHEELS ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 6,463 $ 440 $ 6,903
Restricted cash........................................ -- 3,300 3,300
Accounts receivable, net............................... 11,227 1,248 12,475
Intercompany balances.................................. -- -- --
Inventory.............................................. 1,701 2,711 4,412
Other current assets................................... 1,304 575 1,879
-------- ------- ------- --------
Total current assets............................ 20,695 8,274 28,969
Property and equipment, net............................ 9,011 1,512 10,523
Excess purchase price over net assets acquired, net.... 84,946 17,205 102,151
Deferred financing costs............................... -- 1,680 1,680
Other assets........................................... 125 129 254
-------- ------- ------- --------
Total assets.................................... $114,777 $28,800 -- $143,577
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 12,020 $ 4,251 $ 4,000(1) $ 20,271
Due to stockholders/officers........................... -- 5,250 5,250
Notes payable and lines of credit...................... 5,000 2,230 7,230
Current maturities of long-term debt................... 3,950 266 4,216
Other current liabilities.............................. -- 622 622
-------- ------- ------- --------
Total current liabilities............................ 20,970 12,619 4,000 37,589
Long-term portion of capital leases.................... -- 10 10
Long-term debt, less current maturities................ 11,650 6,080 17,730
Deferred income taxes.................................. 3,065 -- 3,065
-------- ------- ------- --------
Total liabilities............................... 35,685 18,709 4,000 58,394
STOCKHOLDERS' EQUITY:
Common stock........................................... 132 52 184
Warrants outstanding................................... -- 2,376 2,376
Additional paid-in capital............................. 69,668 14,542 84,210
Retained earnings (accumulated deficit)................ 9,292 (6,879) (4,000)(1) (1,587)
-------- ------- ------- --------
Total stockholders' equity...................... 79,092 10,091 (4,000) 85,183
-------- ------- ------- --------
Total liabilities and stockholders' equity...... $114,777 $28,800 $ -- $143,577
======== ======= ======= ========
Per Share Data:
Book value per share................................... $5.35
Equivalent book value per share(3)..................... $2.73
Weighted average shares outstanding -- basic........... 15,935
</TABLE>
- ---------------
(1) The pro forma merger adjustments represent an accrual for the estimated $4.0
million in transaction costs related to the Merger. These estimated
transaction costs are not reflected in the pro forma combined statement of
income.
(2) The unaudited pro forma condensed balance sheet assumes that the Merger
qualifies as a tax-free reorganization for federal income tax purposes.
(3) Equivalent book value per share was calculated by multiplying the pro forma
combined book value per share by an assumed Exchange Ratio of 0.51 shares of
Racing Champions Common Stock for each share of Wheels Common Stock, so that
the per share amount is equated to the respective value for one share of
Wheels Common Stock.
35
<PAGE> 43
MATTERS RELATING TO STOCKHOLDER APPROVALS
THE RACING CHAMPIONS ANNUAL MEETING
Proposals to be Considered at the Racing Champions Annual Meeting. At the
Racing Champions Annual Meeting, holders of shares of Racing Champions Common
Stock will consider and vote upon the Merger Proposal, the Capitalization
Amendment Proposal, the election of 11 directors, the ratification of Arthur
Andersen LLP as Racing Champions' independent auditors, the amendment to the
Incentive Plan and such other matters as may properly come before the Racing
Champions Annual Meeting.
The Merger Proposal. The Merger Proposal seeks approval of the Merger
Agreement and the issuance of shares of Racing Champions Common Stock pursuant
to the Nasdaq Rule. The Merger Proposal is subject to approval pursuant to the
Nasdaq Rule because the present or proposed issuance of shares of Racing
Champions Common Stock, or of securities convertible into or exercisable for
shares of Racing Champions Common Stock, in connection with the Merger will
result in an increase of certain specified percentages of the outstanding shares
and voting power of Racing Champions Common Stock outstanding immediately before
the Merger.
The Capitalization Amendment Proposal. The Capitalization Amendment
Proposal involves the proposed amendment to Article 4 of the Racing Champions
Charter to increase the number of authorized shares of Racing Champions Common
Stock by 8,000,000 shares, from 20,000,000 shares to 28,000,000 shares.
Election of Directors. At the Racing Champions Annual Meeting, the holders
of Racing Champions Common Stock will vote upon the election of 11 directors.
The nominees, if elected, will serve until the 1999 Annual Meeting of
Stockholders of Racing Champions and until their successors have been elected
and qualified. Three of the nominees, Randy C. Baker, Randy E. Duncan and Victor
H. Shaffer, have been nominated pursuant to the Merger Agreement and their
election is conditioned upon the approval of the Merger Proposal and the
Capitalization Proposal at the Racing Champions Annual Meeting. In the event
that the Merger Proposal and the Capitalization Amendment Proposal are not
approved, the proxies will not be voted for these three nominees and will only
be voted for the eight incumbent directors.
Ratification of Auditors. At the Racing Champions Annual Meeting, the
holders of Racing Champions Common Stock will vote upon the ratification of the
appointment of Arthur Andersen LLP, independent public accountants, as auditors
of Racing Champions for its fiscal year ending December 31, 1998.
Amendment to Incentive Plan. At the Racing Champions Annual Meeting, the
holders of Racing Champions Common Stock will vote upon an amendment to the
Incentive Plan to increase the aggregate number of shares of Racing Champions
Common Stock that may be issued or transferred upon exercise, payment or vesting
of stock options granted under such plan from 311,852 to 600,000.
Record Date, Quorum and Vote Required. The record date for the Racing
Champions Annual Meeting is the close of business on May 7, 1998. At that date,
there were 13,242,382 shares of Racing Champions Common Stock outstanding. Each
share of Racing Champions Common Stock entitles its holder to one vote
concerning all matters properly coming before the Racing Champions Annual
Meeting. Any stockholder entitled to vote may vote either in person or by duly
authorized proxy. A majority of the shares entitled to vote, represented in
person or by proxy, will constitute a quorum. Abstentions and broker non-votes
(i.e., shares held by brokers in street name, voting on certain matters due to
discretionary authority or instructions from the beneficial owner but not voting
on other matters due to lack of authority to vote on such matters without
instructions from the beneficial owner) are counted for the purpose of
establishing a quorum. Pursuant to the Nasdaq Rule, the Merger Proposal must be
approved and adopted by the holders of at least a majority of the shares of
Racing Champions Common Stock cast in person or by proxy at the Racing Champions
Annual Meeting. Accordingly, abstentions and broker non-votes will not be
counted for purposes of determining whether the Merger Proposal has received the
requisite approval of stockholders. Under the DGCL, the Racing Champions Charter
and the Racing Champions By-Laws, approval of the Capitalization Amendment
Proposal requires the affirmative vote of the holders of at least a majority of
the outstanding shares of Racing
36
<PAGE> 44
Champions Common Stock, the election of each of the 11 nominees for director
requires the affirmative vote of a plurality of the votes cast at the Racing
Champions Annual Meeting and approval of the ratification of the independent
auditors and the amendment to the Incentive Plan each requires the affirmative
vote of a majority of the shares of Racing Champions Common Stock represented in
person or by proxy at the Racing Champions Annual Meeting and entitled to vote
thereon. Accordingly, abstentions and broker non-votes will have the same effect
as a vote "AGAINST" approval of the Capitalization Amendment Proposal and will
not count toward the determination of whether the ratification of independent
auditors is approved, the amendment to the Incentive Plan is approved or
directors are elected. Votes will be tabulated by Boston EquiServe as inspector
of election.
Proxies. All shares of Racing Champions Common Stock represented by
properly executed proxies received prior to or at the Racing Champions Annual
Meeting and not revoked will be voted in accordance with the instructions
indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL
BE VOTED FOR APPROVAL OF THE MERGER PROPOSAL, FOR APPROVAL OF THE CAPITALIZATION
AMENDMENT PROPOSAL, FOR THE ELECTION OF EACH PERSON NOMINATED TO SERVE AS A
MEMBER OF THE RACING CHAMPIONS BOARD (OR, IN THE EVENT THAT THE MERGER PROPOSAL
AND THE CAPITALIZATION AMENDMENT PROPOSAL ARE NOT APPROVED, FOR THE ELECTION OF
THE EIGHT INCUMBENT DIRECTORS), FOR THE RATIFICATION OF THE APPOINTMENT OF
RACING CHAMPIONS' INDEPENDENT AUDITORS AND FOR APPROVAL OF THE AMENDMENT TO THE
INCENTIVE PLAN AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON SUCH
OTHER MATTERS AS MAY PROPERLY BE PRESENTED AT THE RACING CHAMPIONS ANNUAL
MEETING.
A stockholder may revoke his, her or its proxy at any time prior to its use
by delivering to the Secretary of Racing Champions a signed notice of revocation
or a later dated and signed proxy or by attending the Racing Champions Annual
Meeting and voting in person. Attendance at the Racing Champions Annual Meeting
will not in itself constitute the revocation of a proxy.
Expenses in connection with the solicitation of proxies from the Racing
Champions stockholders will be paid by Racing Champions. Upon request, Racing
Champions will reimburse brokers, dealers and banks or their nominees, for
reasonable expenses incurred in forwarding copies of the proxy material to the
beneficial owners of shares which such persons hold of record. Solicitation of
proxies will be made principally by mail. Proxies may also be solicited in
person, or by telephone or facsimile, by officers and regular employees of
Racing Champions who will receive no additional compensation in connection with
the solicitation.
THE WHEELS SPECIAL MEETING
Proposal to be Considered at the Wheels Special Meeting. At the Wheels
Special Meeting, holders of shares of Wheels Common Stock will consider and vote
upon the Merger Proposal.
The Merger Proposal. The Merger Proposal seeks approval of the Merger
Agreement.
Record Date, Quorum and Vote Required. The record date for the Wheels
Special Meeting is the close of business on May 7, 1998. At that date, there
were 5,280,253 shares of Wheels Common Stock outstanding. Each share of Wheels
Common Stock entitles its holder to one vote concerning all matters properly
coming before the Wheels Special Meeting. Any stockholder entitled to vote may
vote either in person or by duly authorized proxy. A majority of the shares
entitled to vote, represented in person or by proxy, will constitute a quorum.
Abstentions and broker non-votes (i.e., shares held by brokers in street name,
voting on certain matters due to discretionary authority or instructions from
the beneficial owner but not voting on other matters due to lack of authority to
vote on such matters without instructions from the beneficial owner) are counted
for the purpose of establishing a quorum. Under the NCBCA, the Wheels Charter
and the Wheels By-Laws, for the Merger Proposal to be approved by stockholders,
the Merger Proposal must be approved and adopted by the holders of at least a
majority of the outstanding shares of Wheels Common Stock. Accordingly,
abstentions and broker non-votes have the same effect as a vote "AGAINST"
approval of the Merger Proposal. Votes will be tabulated by American Securities
Transfer & Trust, Inc. as inspector of election.
37
<PAGE> 45
Proxies. All shares of Wheels Common Stock represented by properly
executed proxies received prior to or at the Wheels Special Meeting and not
revoked will be voted in accordance with the instructions indicated in such
proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR
APPROVAL OF THE MERGER PROPOSAL AND, IN THE DISCRETION OF THE PERSONS NAMED IN
THE PROXY, ON SUCH OTHER MATTERS AS MAY PROPERLY BE PRESENTED AT THE WHEELS
SPECIAL MEETING.
A stockholder may revoke his, her or its proxy at any time prior to its use
by delivering to the Secretary of Wheels a signed notice of revocation or a
later dated and signed proxy or by attending the Wheels Special Meeting and
voting in person. Attendance at the Wheels Special Meeting will not in itself
constitute the revocation of a proxy.
Expenses in connection with the solicitation of proxies from the Wheels
stockholders will be paid by Wheels. Upon request, Wheels will reimburse
brokers, dealers and banks or their nominees, for reasonable expenses incurred
in forwarding copies of the proxy material to the beneficial owners of shares
which such persons hold of record. Solicitation of proxies will be made
principally by mail. Proxies may also be solicited in person, or by telephone or
facsimile, by officers and regular employees of Wheels who will receive no
additional compensation in connection with the solicitation.
38
<PAGE> 46
THE MERGER PROPOSAL
BACKGROUND OF THE MERGER
The terms of the Merger Agreement are the result of arms' length
negotiations between representatives of Racing Champions and representatives of
Wheels. The following describes the background of the discussions between Racing
Champions and Wheels leading up to the execution of the Original Merger
Agreement on December 4, 1997 and the execution of the Merger Agreement on April
23, 1998.
On October 31, 1997, Howard L. Correll, the former Chief Executive Officer
and President of Wheels, and Wheels legal counsel met in Chicago, Illinois with
Robert E. Dods and Curtis W. Stoelting, the President of Racing Champions and
the Vice President of Finance and Operations of Racing Champions, respectively,
to discuss a possible merger or other business transaction between the
companies. Representatives of Baird, Racing Champions' financial advisor, and
Morgan Keegan, Wheels' financial advisor, also attended the meeting. Although no
proposals were made as to the price or structure of a possible transaction,
Racing Champions and Wheels expressed their mutual interest in considering a
combination of the companies. At this meeting, it was agreed that Racing
Champions and Wheels would each commence a due diligence investigation of the
other company and that Wheels would prepare a proposal for a transaction between
the companies. Racing Champions and Wheels executed a confidentiality agreement
following this meeting.
On November 6, 1997, counsel for Wheels delivered certain due diligence
documents to counsel for Racing Champions. On November 9, 1997, counsel for
Wheels requested certain due diligence information with respect to Racing
Champions. On November 8, 1997, counsel for Wheels delivered a draft merger
agreement to counsel for Racing Champions. The draft merger agreement
contemplated the merger of Wheels into a newly formed wholly owned subsidiary of
Racing Champions. On November 11, 1997, discussions were suspended due to the
companies' inability to reach an understanding with respect to the structure and
general terms of the possible transaction.
On November 20 and 24, 1997, the Racing Champions Board met telephonically
to consider whether a modified merger proposal should be presented to Wheels. On
November 24 and 25, 1997, management of Racing Champions and Wheels discussed by
telephone the structure and various other business terms of a proposed merger of
Wheels and Racing Champions. From November 28, 1997 through December 4, 1997,
Wheels and Racing Champions conducted certain due diligence investigations. From
November 24, 1997 through December 4, 1997, management of Wheels had various
informal conversations with the individual members of the Wheels Board
concerning the status of the proposed merger.
On November 28, 1997, counsel for Racing Champions delivered a draft of the
Original Merger Agreement to Wheels and its financial and legal advisors, and on
December 1 and 2, 1997, counsel for the respective companies met in Milwaukee,
Wisconsin to negotiate certain terms of the Original Merger Agreement and
related documents.
On December 3 and 4, 1997, the Racing Champions Board met telephonically to
discuss the terms and conditions of the Merger Agreement and the Merger, various
due diligence issues relating to Wheels and the potential consequences of the
resignation of Coopers & Lybrand L.L.P. as auditors for Wheels. Representatives
of Baird, counsel to Racing Champions and Racing Champions' management
participated in the meetings and made presentations concerning the terms and
conditions of the Merger Agreement. Baird provided certain oral advice
concerning a financial analysis of Wheels and the combined company. On the
evening of December 4, 1997, the Racing Champions Board unanimously authorized
the Merger and the execution and delivery of the Original Merger Agreement.
On December 4, 1997, the Wheels Board met in New York, New York to consider
the terms and conditions of the Original Merger Agreement and the Merger. At
this meeting, Morgan Keegan made an oral presentation to the Wheels Board
regarding the structure of the proposed Merger and its ability to render its
opinion that the Merger Consideration based on an Exchange Ratio of 0.80 is
fair, from a financial point of view, to Wheels stockholders assuming
satisfaction of Morgan Keegan's due diligence investigation and the verification
of various assumptions. Legal counsel to Wheels also participated in the meeting
and made a
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presentation regarding the terms and conditions of the Original Merger
Agreement. On the evening of December 4, 1997, the Wheels Board unanimously
authorized the Merger and the execution and delivery of the Original Merger
Agreement.
On the evening of December 4, 1997, Wheels and Racing Champions executed
the Original Merger Agreement and the proposed Merger was publicly announced.
The Original Merger Agreement permitted Racing Champions to continue its due
diligence investigation of Wheels through February 2, 1998 and to terminate the
Original Merger Agreement at any time on or prior to February 2, 1998 if Racing
Champions was not reasonably satisfied with Wheels' business and financial
condition as a result of Racing Champions' due diligence investigation.
From December 4, 1997 through February 2, 1998, Racing Champions continued
to conduct its due diligence investigation of Wheels in accordance with the
terms of the Original Merger Agreement. On January 22, 1998, the Racing
Champions Board met telephonically to evaluate the results of its ongoing due
diligence investigation of Wheels. Representatives of Baird participated in the
meeting and presented Baird's preliminary analysis of Wheels' financial
condition and its anticipated operating results. As a result of the meeting,
Racing Champions proposed that the Exchange Ratio be reduced from 0.80 to 0.70
and that the due diligence period of Racing Champions be extended beyond
February 2, 1998. Racing Champions also proposed that, after the end of the due
diligence period, Wheels and Racing Champions enter into the Merger Agreement to
amend and restate the Original Merger Agreement and address the outstanding due
diligence issues regarding Wheels and other matters regarding the Merger.
On February 2 and 3, 1998, the Wheels Board met telephonically to discuss
the proposed reduction in the Exchange Ratio and the extension of the Racing
Champions due diligence investigation period. Legal counsel to Wheels
participated in the meetings. Representatives of Morgan Keegan participated in
these meetings and provided the Wheels Board with an analysis of the adjustment
in the Exchange Ratio. Morgan Keegan provided the Wheels Board with the results
of Racing Champions' due diligence which led to the reduction of the Exchange
Ratio proposed by Racing Champions. The Wheels Board approved the reduction of
the Exchange Ratio to 0.70 and the extension of Racing Champions' due diligence
investigation, and on February 3, 1998, the companies executed and delivered an
amendment to the Original Merger Agreement. On February 4, 1998, the amendment
was publicly announced.
During the month of February 1998, counsel for Wheels and counsel for
Racing Champions had numerous conversations with respect to a variety of
transaction-related issues and the terms and conditions of the proposed amended
and restated Merger Agreement. On January 31, 1998, counsel for Racing Champions
delivered a draft of the Merger Agreement to counsel for Wheels. A number of
revised drafts of the Merger Agreement were subsequently circulated during the
month of February. The Racing Champions Board met telephonically on February 9,
1998 and February 16, 1998, to discuss the proposed Merger Agreement and the
status of the proposed Merger. Representatives of Baird participated in these
meetings and provided Baird's preliminary financial analysis of Wheels and the
combination of Racing Champions and Wheels. On February 20, 1998, the Wheels
Board met telephonically to discuss the proposed Merger Agreement. Legal counsel
to Wheels participated in the meeting. After this meeting, a number of open
issues remained regarding the terms of the proposed Merger Agreement, including
the effect on the Exchange Ratio of certain warrants (the "Lender Warrants") to
purchase up to 509,358 shares of Wheels Common Stock issued by Wheels in
connection with Wheels' credit agreement with Credit Agricole Indosuez, an
unaffiliated commercial bank (the "Wheels Lender"). The Lender Warrants were
issued to the Wheels Lender as a condition to the extension of a credit facility
to Wheels on December 31, 1997 in accordance with the customary practices of the
Wheels Lender when extending credit to similarly situated companies. Racing
Champions proposed reducing the Exchange Ratio due to potential dilution from
the Lender Warrants.
At the end of February 1998, Racing Champions and Wheels decided to defer
discussions regarding the Merger Agreement, particularly as it related to the
Exchange Ratio and the potential dilution from the Lender Warrants, until their
receipt of financial results of Wheels for the year ended December 31, 1997
which were expected during the month of March. On March 23, 1998, the Racing
Champions Board met telephonically to discuss the status of the proposed Merger
and a revised analysis of the valuation of Wheels based upon
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Wheels' financial results for the year ended December 31, 1997. Legal counsel
for Racing Champions and representatives of Baird participated in this meeting.
The Racing Champions Board recommended presenting a revised draft of the Merger
Agreement to Wheels providing for an Exchange Ratio of 0.51, subject to
adjustment based upon the closing price of the Racing Champions Common Stock for
the 10 trading days prior to the closing of the Merger.
On March 30, 1998, counsel for Racing Champions delivered to counsel for
Wheels a revised draft of the Merger Agreement reflecting an Exchange Ratio of
0.51 and a provision for adjustment of the Exchange Ratio to the extent that the
Racing Champions Closing Price is less than $7.50 or greater than $14.00. On
April 9, 1998, the Racing Champions Board met telephonically to discuss the
proposed Merger Agreement. Legal counsel for Racing Champions and
representatives of Baird participated in this meeting. At this meeting, Baird
rendered its oral opinion, to the effect that, as of the date of the opinion and
based upon and subject to certain assumptions, factors and limitations set forth
therein, that the Merger Consideration based on an Exchange Ratio of 0.51, and
subject to adjustment as provided in the Merger Agreement, is fair, from a
financial point of view, to Racing Champions. Baird subsequently confirmed its
oral opinion in writing on April 9, 1998. The Racing Champions Board unanimously
approved the execution and delivery of the Merger Agreement. On April 7 and 9,
1998, the Wheels Board met telephonically to discuss the proposed Merger
Agreement. Legal counsel for Wheels and representatives of Morgan Keegan
participated in these meetings. At the April 9 meeting, Morgan Keegan rendered
its oral opinion, to the effect that, as of the date of the opinion and based
upon and subject to certain assumptions, factors and limitations set forth
therein, that the Merger Consideration based on an Exchange Ratio of 0.51, and
subject to adjustment as provided in the Merger Agreement, is fair, from a
financial point of view, to Wheels' stockholders. Morgan Keegan subsequently
confirmed its oral opinion in writing on April 10, 1998. The Wheels Board
approved the proposed Merger Agreement. From April 10 to April 23, Racing
Champions, Wheels and their respective legal counsel resolved a variety of
transaction-related issues regarding the Merger Agreement and related documents.
On April 23, 1998, the companies executed and delivered the Merger Agreement. On
April 23, 1998, the Merger Agreement was publicly announced.
REASONS OF RACING CHAMPIONS FOR ENGAGING IN THE MERGER
Pursuant to a unanimous written consent executed by each of the directors
of Racing Champions on December 4, 1997, the Racing Champions Board determined
that the Merger is in the best interests of the Racing Champions stockholders,
unanimously approved the Original Merger Agreement and the transactions
contemplated by the Original Merger Agreement and unanimously resolved to
recommend that the Racing Champions stockholders vote for approval of the
Original Merger Agreement. Pursuant to a unanimous written consent executed by
each of the directors of Racing Champions on April 9, 1998, the Racing Champions
Board unanimously approved the Merger Agreement and the transactions
contemplated therein and unanimously resolved to recommend that the Racing
Champions stockholders vote for approval of the Merger Agreement. As described
above under "Background of the Merger," at meetings held on December 3, 1997,
December 4, 1997, January 22, 1998, February 9, 1998, February 16, 1998, March
23, 1998 and April 9, 1998, the Racing Champions Board received advice or
presentations from and reviewed the then-current terms of the proposed Merger
with Racing Champions' management and its financial and legal advisors. The
presentations by Racing Champions' advisors described and explained the material
terms and conditions of the proposed Merger as set forth in the drafts of the
Original Merger Agreement and Merger Agreement.
In reaching its conclusion to enter into the Merger Agreement and
recommend that the Racing Champions stockholders vote for approval of the
Merger Agreement, the Racing Champions Board considered the following to be
the material and relevant factors:
(i) The complementary nature of the business and the product offerings
of Wheels and Racing Champions, and the belief of the Racing Champions
Board that the combined company (a) would have a greater market presence
and more extensive licensing arrangements among race team owners, drivers,
sponsors, agents, vehicle manufacturers and major race sanctioning bodies
and (b) would offer a more extensive line of NASCAR-related products
through more diverse channels of distribution.
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(ii) Information regarding the assets, liabilities, financial
condition, results of operations and prospects of Wheels and Racing
Champions as separate entities and on a combined basis. The Racing
Champions Board believed that such information supported its approval of
the Merger Agreement.
(iii) The structure of the transaction, including the expected
accounting treatment of the Merger as a pooling of interests. The Racing
Champions Board believed that if the Merger were to be treated as a
purchase for accounting purposes (with the associated recognition of
goodwill) rather than a pooling of interests, the market view of the Merger
would be less favorable to the holders of Racing Champions Common Stock.
(iv) A comparison of the dilution expected to be experienced by the
current stockholders of Racing Champions as a result of the Merger
Consideration with the Racing Champions Board's view of the earnings
potential of the combined company after the Merger. The Racing Champions
Board viewed this as a favorable factor.
(v) The terms and conditions of the Merger Agreement, including the
amount and the form of the consideration, as well as the parties' mutual
representations, warranties and covenants, and the conditions to their
respective obligations.
(vi) The financial analyses performed by Racing Champions' financial
advisor, Baird. The Racing Champions Board concluded that such analyses
supported its approval of the Merger Agreement.
(vii) The likelihood of consummation of the Merger.
These were all of the material factors that were considered by the Racing
Champions Board in reaching its decision to authorize the execution and delivery
of the Merger Agreement. The Racing Champions Board concluded that each of these
factors favored entering into the Merger Agreement. In view of the wide variety
of factors considered in connection with its evaluation of the terms of the
Merger, the Racing Champions Board did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific factors
considered in reaching its conclusions.
OPINION OF FINANCIAL ADVISOR TO RACING CHAMPIONS
The Racing Champions Board retained Baird to act as its financial advisor
in connection with the Merger and to assist it in its examination of the
fairness, from a financial point of view, of the Exchange Ratio to Racing
Champions. On April 9, 1998, Baird rendered its opinion to the Racing Champions
Board to the effect that, as of such date, the Exchange Ratio was fair, from a
financial point of view, to Racing Champions.
THE FULL TEXT OF BAIRD'S OPINION, DATED APRIL 9, 1998, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS OPINION,
IS ATTACHED AS EXHIBIT D TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO TO RACING
CHAMPIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY RACING CHAMPIONS
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER
PROPOSAL OR THE CAPITALIZATION AMENDMENT PROPOSAL. THE SUMMARY OF BAIRD'S
OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION ATTACHED AS EXHIBIT D. RACING CHAMPIONS STOCKHOLDERS ARE
URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY.
In conducting its investigation and analysis and in arriving at its
opinion, Baird reviewed such information and took into account such financial
and economic factors as it deemed relevant under the circumstances. In that
connection, Baird, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of Racing Champions and Wheels furnished to Baird
for purposes of its analysis, as well as publicly available information
including but not
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limited to Racing Champions' and Wheels' recent filings with the Securities and
Exchange Commission (the "SEC") and research reports on Racing Champions
prepared by the equity analysts of various investment banking firms, including
Baird; (ii) reviewed the draft Merger Agreement in the form presented to the
Racing Champions Board; (iii) compared the financial position and operating
results of Racing Champions and Wheels with those of other publicly traded
companies Baird deemed relevant; (iv) compared the historical market prices and
trading activity of Racing Champions Common Stock and Wheels Common Stock with
those of certain other publicly traded companies Baird deemed relevant; (v)
compared the proposed financial terms of the Merger with the financial terms of
certain other business combinations Baird deemed relevant; and (vi) reviewed
certain potential pro forma effects of the Merger on Racing Champions. Baird
held discussions with members of Wheels' and Racing Champions' senior management
concerning Wheels' and Racing Champions' historical and current financial
condition and operating results, as well as future prospects. Baird also
considered such other information, financial studies, analysis and
investigations and financial, economic and market criteria which Baird deemed
relevant for the preparation of this opinion. Racing Champions and Wheels
determined the Exchange Ratio in arms-length negotiations. Racing Champions did
not place any limitation upon Baird with respect to the procedures followed or
factors considered by Baird in rendering its opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to Baird by or on behalf of Racing Champions and Wheels,
and was not engaged to independently verify any such information. Baird assumed,
with Racing Champions' consent, that (i) all material assets and liabilities
(contingent or otherwise, known or unknown) of Racing Champions and Wheels are
as set forth in their respective financial statements, and the pro forma
adjustments thereto set forth in the draft Joint Proxy Statement/Prospectus
available on the date of such opinion will not be materially altered; (ii) the
Merger will be accounted for as a pooling of interests transaction; (iii) the
strategic and operating benefits currently contemplated by Racing Champions' and
Wheels' management will be realized; and (iv) the Merger will be consummated in
accordance with the terms of the Merger Agreement, without any material
amendment thereto and without waiver by Racing Champions or Wheels of any of the
material conditions to their respective obligations thereunder. Baird also
assumed that the financial forecasts of Racing Champions and Wheels examined by
Baird were reasonably prepared on a basis reflecting the best available
estimates and good faith judgments of Racing Champions' senior management as to
future performance of Racing Champions, and Wheels' senior management as to
future performance of Wheels. In conducting its review, Baird did not undertake
nor obtain an independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Racing Champions or Wheels. Baird's
opinion necessarily is based upon economic, monetary and market conditions as
they existed and could be evaluated on the date of the opinion, and does not
predict or take into account any changes which may have occurred, or information
which may have become available, after the date of such opinion. Baird's opinion
does not constitute an opinion as to the price at which Racing Champions Common
Stock will actually trade at any time.
The following is a summary of the material financial analyses performed by
Baird in connection with rendering its opinion:
Analysis of Wheel's Valuation Premiums. Baird calculated the "Announcement
Price" reflected by the terms of the Merger to be $3.698 for each share of
Wheels Common Stock, obtained by multiplying an Exchange Ratio of 0.51 by the
closing price per share of Racing Champions Common Stock of $7.25 per share on
December 4, 1997. Baird compared the premium which is calculated to holders of
Wheels Common Stock represented by the Announcement Price of $3.698 per share,
to the closing prices for the Wheels Common Stock on December 4, 1997 (one
business day prior to the announcement of the Merger) and on the dates 30 days
and 90 days prior thereto. Baird calculated that the Announcement Price
represented the following premiums to holders of Wheels Common Stock: (i) a
discount of 39.6% from the closing price of $6.125 for the Wheels Common Stock
one day prior to the announcement of the Merger; (ii) a discount of 53.8% from
the closing price of $8.00 for Wheels Common Stock 30 days prior thereto; (iii)
a discount of 43.1% from the closing price of $6.50 for Wheels Common Stock 90
days prior thereto; (iv) a discount of 52.1% from the average closing price of
$7.719 for Wheels Common Stock since its initial public offering on April 16,
1997;
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and (v) a discount of 37.3% from the initial public offering price of $5.90 for
Wheels Common Stock on April 16, 1997.
Analysis of Wheels Valuation Multiples. Baird calculated the "Implied
Price" reflected by the terms of the Merger to be $5.833 for each share of
Wheels Common Stock, obtained by multiplying an Exchange Ratio of 0.51 by the
closing price per share of Racing Champions Common Stock of $11.4375 on April 7,
1998. Baird then calculated the "Implied Consideration" to be $32.1 million,
obtained by multiplying the Implied Price by the total number of outstanding
shares of Wheels Common Stock, including shares issuable upon exercise of stock
options issued prior to September 1, 1997 and warrants, less net proceeds from
the exercise of such stock options and warrants. Baird also included in the
calculation of Implied Consideration Racing Champions options to be granted at
exercise prices not lower than the share price of Racing Champions Common Stock
on the Closing Date. In performing its analysis, Baird used among other things,
pro forma operating statistics for Wheels latest twelve months ("LTM") through
December 31, 1997, reflecting certain operating adjustments, including those
presented in this Joint Proxy Statement/Prospectus ("Pro Forma"). Baird
calculated multiples of the Implied Price to Wheels' LTM fully diluted Pro Forma
earnings per share and its projected net income for calendar years 1998 and 1999
(based on Wheels' management estimates) and multiples of Wheels' "Enterprise
Value" (defined as the market value of the common equity plus the book value of
total pro forma debt, less excess cash and cash equivalents) to its LTM Pro
Forma revenues, its LTM Pro Forma operating income before depreciation and
amortization, interest and taxes ("EBITDA") and its LTM Pro Forma operating
income ("EBIT"). The calculations resulted in ratios of the Implied
Consideration to net income ("P/E Ratios") of 66.9x based on LTM Pro Forma
results, 11.0x based on projected 1998 results and 9.2x based on projected 1999
results. Based on the Implied Consideration, the ratio of Enterprise Value to
LTM Pro Forma revenues was 1.8x, the ratio of Enterprise Value to LTM Pro Forma
EBITDA was 16.3x and the ratio of Enterprise Value to LTM Pro Forma EBIT was
21.5x.
Analysis of Selected Publicly Traded Wheels Comparable Companies. Baird
reviewed certain publicly available financial information as of the most
recently reported period and stock market information as of April 7, 1998 for
certain selected publicly traded companies which Baird deemed relevant. Such
comparable companies consisted of: Action Performance Companies, Inc., Equity
Marketing, Inc., HA-LO Industries, Inc., Play By Play Toys & Novelties, Inc.,
Racing Champions Corporation, Russ Berrie and Company, Inc., Starter
Corporation, Toy Biz, Inc. and Tultex Corporation. For each comparable company,
Baird compared historical and projected net income growth rates and operating
profitability to that of Wheels. Baird noted that Wheels' expected growth rate
from Pro Forma 1997 to 1998 based on Company projections was higher than the
highest rate generated by the comparable companies. For each comparable company,
Baird calculated multiples as of April 7, 1998 of Enterprise Value to LTM
revenues, LTM EBITDA and LTM EBIT. Baird then compared these multiples to the
relevant Wheels multiples based on the Implied Price. An analysis of the
multiples of Enterprise Value to LTM Pro Forma revenues, LTM Pro Forma EBITDA
and LTM Pro Forma EBIT yielded 1.8x, 16.3x and 21.5x, respectively, for Wheels
compared to means of 1.6x, 13.3x and 14.4x, respectively and highs of 3.7x,
24.5x and 28.2x, respectively for Wheels comparable companies. For Wheels and
each comparable company, Baird also calculated P/E ratios as of April 7, 1998
based on market stock prices as of such date and LTM earnings per share and
estimated earnings per share (derived from company projections) for calendar
1998 and 1999. An analysis of the P/E Ratios based on net income for Wheels LTM
Pro Forma, projected 1998 and 1999 yielded 66.9x, 11.0x and 9.2x, respectively,
compared to LTM, 1998 and 1999 means of 22.6x, 16.4x and 12.9x, respectively,
for Wheels comparable companies.
Analysis of Selected Publicly Traded Racing Champions Comparable
Companies. In order to assess the relative public market valuation of the
Racing Champions Common Stock to be used by Racing Champions in exchange for
Wheels Common Stock, Baird reviewed certain publicly available financial
information as of the most recently reported period and stock market information
as of April 7, 1998 for certain selected publicly traded companies which Baird
deemed relevant. Such comparable companies consisted of: Action Performance
Companies, Inc., Department 56, Inc., Empire of Carolina, Inc., Galoob Toys,
Inc., Hasbro, Inc., Mattel, Inc., Play By Play Toys & Novelties, Inc., Russ
Berrie and Company, Inc., Stanhome, Inc., Toy Biz, Inc. and Zindart Limited. For
each comparable company, Baird calculated multiples as of April 7, 1998 of
Enterprise Value to LTM revenues, LTM EBITDA and LTM EBIT. Baird then compared
these multiples to
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the relevant Racing Champions multiples based on a Racing Champions share price
of $11.4375 on April 7, 1998. An analysis of the multiples of Enterprise Value
to LTM revenues, LTM EBITDA and LTM EBIT yielded 2.2x, 7.3x and 9.2x,
respectively, for Racing Champions compared to a range of 0.4x, 7.8x and 9.4x,
respectively on the low end and 3.7x, 24.5x and 27.4x, respectively on the high
end, for Racing Champions comparable companies. For Racing Champions and each
comparable company, Baird also calculated P/E ratios as of April 7, 1998 based
on market stock prices as of such date and LTM earnings per share and estimated
earnings per share (derived from equity research analysts' reports) for calendar
years 1998 and 1999. An analysis of the P/E Ratios based on earnings per share
for Racing Champions LTM, 1998 and 1999 yielded 15.7x, 13.3x and 11.6x,
respectively, compared to LTM, 1998 and 1999 means of 19.3x, 16.0x and 12.6x,
respectively, for Racing Champions comparable companies.
Analysis of Selected Comparable Acquisition Transactions. Baird reviewed
selected transactions involving the acquisition of companies in businesses which
Baird deemed relevant. Such transactions were chosen based on a review of
acquired companies which possessed general business, operating and financial
characteristics representative of companies in the industry in which Wheels
operates. Baird noted that none of the selected transactions reviewed was
identical to the Merger and that, accordingly, the analysis of comparable
transactions necessarily involves complex consideration and judgments concerning
differences in financial and operating characteristics of Wheels and other
factors that would affect the acquisition value of comparable transactions. For
each comparable transaction, Baird calculated multiples of Enterprise Value to
LTM revenues, LTM EBITDA and LTM EBIT; calculated P/E Ratios based on LTM
earnings per share; and calculated the premium paid for the equity in these
transactions over the public market value of the equity at various times prior
to the announcement of such transaction. Baird then compared those multiples and
premiums to the relevant Wheels multiples and premiums based on the Implied
Price. These calculations yielded multiples of Enterprise Value to LTM Pro Forma
revenues, LTM Pro Forma EBITDA and LTM Pro Forma EBIT of 1.8x, 16.3x and 21.5x,
respectively, for Wheels, compared to means of 1.1x, 7.4x and 10.0x,
respectively, and highs of 1.9x, 11.3x and 22.3x, respectively, for the
comparable acquisition transactions. An analysis of the P/E Ratios based on LTM
Pro Forma net income yielded 66.9x for Wheels compared to a mean of 17.5x and a
high of 42.6x for the comparable transactions. An analysis of the Implied Price
to the market value of Wheels shares as of December 4, 1998, 30 days and 90 days
prior thereto, compared to the prices paid for the equity in such comparable
acquisition transactions relative to the market value of equity 1 day, 30 days
and 90 days prior to the announcement date of such transactions, yielded a
discount of 4.8%, a discount of 27.1% and a discount of 10.3%, respectively, for
Wheels, compared to mean premiums of 37.4%, 56.1% and 68.5%, respectively, for
the comparable acquisition transactions.
Contribution Analysis. Baird analyzed Racing Champions' and Wheels'
relative contribution to the combined company with respect to certain
measurements, including revenues, EBITDA, EBIT and net income. As a result of
the Merger, Wheels stockholders will own approximately 17.2% of the fully
diluted Racing Champions Common Stock assuming an Exchange Ratio of 0.510.
Wheels' contribution, based on Wheels' LTM Pro Forma and estimated 1998
statistics, to the combined companies ranges from 24.6% to 34.6% of revenues,
11.0% to 22.5% of EBITDA, 10.3% to 24.8% of EBIT and 4.7% to 20.1% of net
income.
Discounted Cash Flow Analysis. Baird performed a discounted cash flow
analysis of Wheels on a stand alone basis using management projections of future
EBIT for fiscal years 1998 through 2002 and free cash flow without taking into
account cost savings and synergies which may be realized following the Merger.
In such analysis, Baird assumed terminal value multiples of 10.0x to 12.0x EBIT
in the year 2002 and discount rates of 13.0% to 17.0%. Such analysis produced
implied values of Wheels shares ranging from $11.22 to $16.07.
Pro Forma Merger Analysis. Baird prepared pro forma analyses of the
financial impact of the Merger. In conducting its analysis, Baird relied upon
certain assumptions described above and earnings estimates for Wheels (prepared
by Wheels management) and Racing Champions (prepared by Racing Champions
management). Baird compared the earnings per share of Racing Champions Common
Stock, on a stand-alone basis, to the earnings per share of the common stock of
the combined companies on a pro forma basis. The analysis (assuming no
transaction-related expenses) indicated that the proposed transaction would be
accretive to Racing Champions' stockholders on an earnings per share basis in
fiscal years 1998 and 1999. The
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results of the pro forma merger analysis are not necessarily indicative of
future operating results or financial position.
Exchange Ratio Analysis. Baird performed an analysis of the historical
trading ratio between Wheels Common Stock and Racing Champions Common Stock
based on the closing market price per share of Wheels Common Stock relative to
the closing market price per share of Racing Champions Common Stock for each
trading day during the period from June 12, 1997, the date of Racing Champions'
initial public offering, through December 4, 1997. This analysis yielded a
historical trading ratio ranging from a low of 0.390x to a high of 1.220x, with
an average trading ratio during this period of 0.681x. Baird also calculated the
ratio of the per share price on April 7, 1998 of Wheels Common Stock ($6.25) to
the per share closing price on such day of Racing Champions Common Stock
($11.4375). This yielded a trading ratio of 0.546x.
The foregoing summary does not purport to be a complete description of the
analyses performed by Baird or of its presentations to the Racing Champions
Board. The preparation of financial analyses and a fairness opinion is a complex
process and is not necessarily susceptible to partial analyses or summary
description. Baird believes that its analyses (and the summary set forth above)
must be considered as a whole, and that selecting portions of such analyses and
of the factors considered by Baird, without considering all of such analyses and
factors, could create an incomplete view of the processes underlying the
analyses conducted by Baird and its opinion. Baird did not attempt to assign
specific weights to particular analyses. Any estimates contained in Baird's
analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
values of companies do not purport to be appraisals or necessarily to reflect
the prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, Baird does not assume responsibility for
their accuracy.
Baird, as part of its investment banking business, is continually engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. Racing Champions retained
Baird because of its experience and expertise in the valuation of businesses and
their securities in connection with mergers and acquisitions. In the ordinary
course of business, Baird may from time to time trade equity securities of
Racing Champions and Wheels for its own account and for accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Certain affiliates of Baird own shares of Racing Champions
Common Stock. An officer of Baird is a director of the Racing Champions.
Compensation. Pursuant to an engagement letter agreement dated November
11, 1997 between Racing Champions and Baird, Racing Champions agreed to pay
Baird a fee of $125,000, payable upon delivery of its opinion, regardless of the
conclusions reached by Baird in such opinion (such fee to be creditable against
the transaction fee described below) and a transaction fee, payable upon
consummation of the Merger, of $250,000. Racing Champions has also agreed to
reimburse Baird for its reasonable out-of-pocket expenses. Racing Champions has
also agreed to indemnify Baird, its affiliates and their respective directors,
officers, employees and agents and controlling persons against certain
liabilities relating to or arising out of its engagement, including liabilities
under the federal securities laws. In the past, Baird has provided investment
banking services to Racing Champions, including acting as financial advisor in
Racing Champions' 1996 Recapitalization and as lead manager in connection with
Racing Champions' initial public offering in June of 1997, for which Baird
received customary compensation.
REASONS OF WHEELS FOR ENGAGING IN THE MERGER
At a meeting held on December 4, 1997, the Wheels Board determined that the
Merger is in the best interests of the Wheels stockholders, unanimously approved
the Original Merger Agreement and the transactions contemplated by the Original
Merger Agreement and unanimously resolved to recommend that the Wheels
stockholders vote for approval of the Original Merger Agreement. At a meeting
held on April 9, 1998, the Wheels Board unanimously approved the Merger
Agreement and the transactions contemplated therein and unanimously resolved to
recommend that the Wheels stockholders vote for approval of the Merger
Agreement. As described above under "-- Background of the Merger," at meetings
held on December 4,
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1997, February 2, 1998, February 3, 1998, February 20, 1998, April 7, 1998 and
April 9, 1998, the Wheels Board received advice or presentations from and
reviewed the then-current terms of the proposed Merger with, Wheels' management
and its financial and legal advisors. The presentations by Wheels' advisors
described and explained the material terms and conditions of the proposed Merger
as set forth in the drafts of the Original Merger Agreement and the Merger
Agreement.
In reaching its conclusion to enter into the Merger Agreement and recommend
that the Wheels' stockholders vote for approval of the Merger Agreement, the
Wheels Board considered the following factors to be material and relevant:
(i) The belief of the Wheels Board that the complementary business
operations and product offerings of Racing Champions and Wheels would
enable the combined company to (a) achieve a greater presence in their
respective markets, (b) realize certain economies of scale and operating
efficiencies, (c) secure more extensive licensing arrangements among race
team owners, drivers, sponsors, agents, vehicle manufacturers and major
race sanctioning bodies than Wheels would achieve in the absence of the
Merger and (d) offer a more extensive line of NASCAR-related products
through more diverse channels of distribution.
(ii) Information regarding the assets, liabilities, financial
condition, results of operations and prospects of Wheels and Racing
Champions as separate entities and on a combined basis. The Wheels Board
believed that such information supported its approval of the Merger
Agreement.
(iii) The determination of the Wheels Board that the Merger would
enhance Wheels' access to capital which will be required for its continued
growth, as well as the terms and conditions on which such additional
capital would likely be available.
(iv) The belief of the Wheels Board that the expected valuation of
Racing Champions Common Stock to be received by the current Wheels
stockholders would be favorable to the Wheels stockholders based on
historical and projected operating results of Wheels and Racing Champions
and on the new business opportunities which may be recognized by the
combined company.
(v) The belief of the Wheels Board that coverage of the Racing
Champions Common Stock by recognized investment banks and equity analysts
after the Merger would be significantly more extensive than the coverage of
Wheels Common Stock in the absence of the Merger. The Wheels Board believes
that this more extensive coverage will provide a more liquid, less volatile
market for the securities to be received by the Wheels stockholders in the
Merger.
(vi) The terms and conditions of the Merger Agreement, including the
amount and the form of the consideration, as well as the parties' mutual
representations, warranties and covenants, and the conditions to their
respective obligations. The Wheels Board considered that the form of the
consideration in the Merger, which permits holders of Wheels Common Stock
to exchange all of their shares of Wheels Common Stock for registered
shares of Racing Champions Common Stock on a tax-free basis, represents a
favorable transaction for the Wheels stockholders.
(vii) The composition and strength of the senior management of the
combined company.
(viii) The belief of the Wheels Board that the preliminary financial
analyses performed by its financial advisor, Morgan Keegan, support its
approval of the Merger Agreement.
(ix) The structure of the transaction, including the expected
accounting treatment of the Merger as a pooling of interests. The Wheels
Board believed that if the Merger were to be treated as a purchase for
accounting purposes (with the associated recognition of goodwill) rather
than a pooling of interests, the market view of the Merger would be less
favorable to the holders of Wheels Common Stock.
(x) The terms of the Merger Agreement that permit Wheels, under
certain circumstances, to terminate the Merger Agreement and recommend an
unsolicited proposal to acquire Wheels if the Wheels Board determines in
its good faith reasonable judgment, after consultation with and based upon
the written opinion of legal counsel, that such termination is required in
order to comply with its fiduciary duties. In that regard,
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the Wheels Board specifically considered the applicability and amount of
the Termination Fee. See "THE MERGER PROPOSAL -- The Merger
Agreement -- Termination Fee and Expenses." The Wheels Board did not view
the Termination Fee as unreasonably impeding any interested third party
from proposing a superior transaction.
(xi) The likelihood of consummation of the Merger.
These were all of the factors that were considered by the Wheels Board in
reaching its decision to authorize the execution and delivery of the Merger
Agreement. The Wheels Board concluded that each of these factors favored
entering into the Merger Agreement. In view of the wide variety of factors
considered in connection with its evaluation of the terms of the Merger, the
Wheels Board did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in
reaching its conclusions.
OPINION OF FINANCIAL ADVISOR TO WHEELS
Wheels retained Morgan Keegan as its financial advisor to render an opinion
to the Wheels Board concerning the fairness, from a financial point of view, to
Wheels stockholders of the Merger Consideration to be paid pursuant to the
Merger Agreement. Morgan Keegan was retained by Wheels on the basis of, among
other things, its experience and expertise and familiarity with merchandising
companies, the retail industry and Wheels. As part of its investment banking
business, Morgan Keegan is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for various purposes.
On December 4, 1997, at the first meeting of the Wheels Board held to
evaluate the proposed Merger, Morgan Keegan made an oral presentation to the
Wheels Board regarding the structure of the transaction and its ability to
render its opinion that the Merger Consideration is fair, from a financial point
of view, to Wheels stockholders assuming satisfaction of Morgan Keegan's due
diligence investigation and the veracity of various assumptions. On April 9,
1998 at a meeting of the Wheels Board held to evaluate the terms of the proposed
Merger, Morgan Keegan made an oral presentation to the Wheels Board regarding
the structure of the transaction and rendered its oral opinion that the Merger
Consideration is fair, from a financial point of view, to the Wheels
stockholders. Morgan Keegan subsequently confirmed its oral opinion in writing
on April 10, 1998.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN KEEGAN, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED HERETO AS EXHIBIT D AND IS INCORPORATED HEREIN BY REFERENCE. WHEELS
STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. MORGAN
KEEGAN'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO THE WHEELS STOCKHOLDERS,
FROM A FINANCIAL POINT OF VIEW, OF THE MERGER CONSIDERATION TO BE PAID AND DOES
NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE WHEELS SPECIAL MEETING. THE SUMMARY OF THE OPINION OF MORGAN KEEGAN
SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Keegan reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of Wheels and certain senior officers and other
representatives and advisors of Racing Champions concerning the businesses,
operations and prospects of Wheels and Racing Champions. Morgan Keegan examined
certain publicly available business and financial information relating to Wheels
and Racing Champions as well as certain financial forecasts and other data for
Wheels and Racing Champions which were provided to Morgan Keegan by or otherwise
discussed with the respective managements of Wheels and Racing Champions,
including information relating to certain strategic implications and operational
benefits anticipated from the Merger. Morgan Keegan reviewed the financial terms
of the Merger as set forth in the Merger Agreement in relation to, among other
things: the historical and projected earnings and operating data of Wheels and
Racing Champions; the
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<PAGE> 56
capitalization and financial condition of Wheels and Racing Champions; and
current and historical market prices and trading volumes of Wheels Common Stock
and Racing Champions Common Stock. Morgan Keegan analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose businesses Morgan Keegan considered relevant in
evaluating those of Wheels and Racing Champions. Morgan Keegan also considered
the potential pro forma financial impact of the Merger on the new entity which
will result from the merger of Wheels and Racing Champions ("New Racing
Champions"). In addition to the foregoing, Morgan Keegan conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Morgan Keegan deemed appropriate to arrive at its opinion.
Morgan Keegan noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Morgan Keegan as of the date of its opinion.
In conducting its review and rendering its opinion, Morgan Keegan assumed
and relied, without independent verification, upon the accuracy and completeness
of all financial and other information publicly available or furnished to or
otherwise reviewed by or discussed with Morgan Keegan. With respect to financial
forecasts and other information provided to or otherwise reviewed by or
discussed with Morgan Keegan, the managements of Wheels and Racing Champions
advised Morgan Keegan that such forecasts and other information were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the respective managements of Wheels and Racing Champions as to the
future financial performance of Wheels and Racing Champions and the strategic
implications and operational benefits anticipated from the Merger. Morgan Keegan
assumed, with the consent of the Wheels Board, that the Merger will be treated
as a pooling of interests in accordance with generally accepted accounting
principles and as a tax-free reorganization for federal income tax purposes.
Morgan Keegan's opinion relates to the relative values of Wheels and Racing
Champions. Morgan Keegan did not express any opinion as to what the value of the
Racing Champions Common Stock received by current Wheels stockholders actually
will be when issued pursuant to the Merger or the price at which new Racing
Champions Common Stock will trade subsequent to the Merger. In addition, Morgan
Keegan did not make or obtain an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Wheels or Racing Champions
nor did Morgan Keegan make any physical inspection of the properties or assets
of Wheels or Racing Champions. Morgan Keegan was not asked to consider, and its
opinion does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for Wheels or the effect of any
other transaction in which Wheels might engage. In addition, although Morgan
Keegan evaluated the Merger Consideration from a financial point of view, Morgan
Keegan was not asked to and did not recommend the specific consideration payable
in the Merger, which was determined by Wheels and Racing Champions through
arms-length negotiations. No other limitations were imposed by Wheels on Morgan
Keegan with respect to the investigations made or procedures followed by Morgan
Keegan in rendering its opinion.
The following is a summary of the material aspects of the financial and
comparative analyses presented orally by Morgan Keegan to the Wheels Board on
April 9, 1998 (the "Morgan Keegan Report") in connection with its opinion:
Comparable Company Analysis. Morgan Keegan reviewed and compared certain
financial information relating to Wheels to corresponding financial information,
ratios and public market multiples for five publicly traded companies that it
deemed to be comparable to Wheels. The companies which Morgan Keegan used for
purposes of this analysis were Action Performance Companies, Inc., Fotoball USA,
Inc., Global One Distribution & Merchandising, Inc., Racing Champions
Corporation and Zindart Limited. No company used in Morgan Keegan's analysis was
identical to Wheels. Accordingly, Morgan Keegan considered the market multiples
for the composite of comparable companies to be more relevant than the market
multiples of any single company.
Morgan Keegan calculated a range of market multiples for the comparable
companies by dividing adjusted market value (market value based on the closing
price per share on April 8, 1998 plus third-party debt less cash) by each such
company's latest twelve months reported sales, earnings before interest, taxes,
depreciation and amortization ("EBITDA"), earnings before interest and taxes
("EBIT); projected 1998 price to earnings ("P/E") ratios; and by dividing market
value as of April 8, 1998 by each such company's latest twelve months reported
net income and latest reported book value. This analysis indicated that the
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<PAGE> 57
median multiple for sales was 1.4x, for EBITDA was 8.2x, for EBIT was 10.1x, for
net income was 21.9x and for book value was 3.0x. This compared to corresponding
multiples for Wheels of 1.6x sales. For the latest twelve months ended December
31, 1997 ("LTM"), Wheels had negative EBITDA, EBIT, net income and book value.
Morgan Keegan also calculated ranges of implied equity values for Wheels based
upon the comparable company multiples and Wheels LTM financial information. The
median equity values for categories in which Wheels' results were positive were
$30.41 million with respect to sales, and $40.83 million based upon 1998
projected P/E values. In Morgan Keegan's judgment, this comparable company
analysis resulted in an implied equity value range for Wheels of up to $40.83
million, which translates into a maximum Wheels Common Stock valuation of $7.35
per share based upon 1998 projected P/E values. However, the median equity value
based upon LTM operating statistics results in a negative equity value for
Wheels Common Stock.
No company or transaction used in the comparable companies analysis for
comparative purposes is identical to Wheels. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors. Mathematical analysis (such as determining the
average or median) is not, in itself, a meaningful method of using comparable
company data.
Contribution Analysis. Morgan Keegan analyzed the pro forma contribution
of each Wheels and Racing Champions to the LTM and projected twelve months
ending December 31, 1998 ("1998") to the operating results of New Racing
Champions. Morgan Keegan calculated that Wheels would have contributed 27.50% to
pro forma combined LTM net sales; contributed (22.82)% to pro forma combined LTM
EBITDA; contributed (36.55)% to pro forma combined LTM EBIT; had a significant
negative impact on LTM net income and contributed 11.28% to pro forma combined
December 31, 1997 book value. Wheels is projected to contribute 33.97% to pro
forma combined 1998 net sales; 21.74% to pro forma combined 1998 EBITDA; 24.31%
to pro forma combined 1998 EBIT; 19.71% to pro forma combined 1998 net income.
The range of percentage ownership of Wheels stockholders of the combined company
based on the closing price for Racing Champions Common Stock on April 8, 1998 of
$11.94 is 17.21%. Morgan Keegan concluded that from Wheels stockholders'
perspective, Wheels' percentage contribution to net sales, gross profit,
operating cash flow, operating income, net income and book value compares
favorably with the percentage ownership of the combined company proposed as
Merger Consideration.
Discounted Cash Flow Analysis. Morgan Keegan performed a discounted cash
flow analysis of the projected free cash flow of Wheels for calendar years 1998
through 2002, based on operating projections provided by Wheels management.
Using this information, Morgan Keegan calculated a range of equity values for
Wheels based on the sum of (i) the present value of the free cash flows of
Wheels and (ii) the present value of the estimated terminal value for Wheels
assuming that it was sold at the end of fiscal year 2002. In performing its
discounted cash flow analysis, Morgan Keegan assumed, among other things,
discount rates of 19% to 29% and terminal multiples of EBITDA of 5.0x to 8.0x.
Those discount rates and terminal multiples reflect Morgan Keegan's qualitative
judgments concerning the specific risk associated with such an investment and
the historical and projected operating performance of Wheels. Such analysis
implied an equity value range for Wheels of $21.28 million to $46.94 million
which translates into an implied price per share of Wheels Common Stock of
between $3.83 and $8.45.
Pro Forma Earnings Per Share Analysis. Morgan Keegan also analyzed the
effect of the Merger on the financial projections of New Racing Champions based
on the Merger Consideration to be paid to Wheels stockholders pursuant to the
Merger Agreement. Wheels stand alone projections for 1998 and 1999 were compared
with pro forma projections for Racing Champions to determine New Racing
Champions earnings per share and other measures of profitability. The pro forma
earnings per share figures derived from this calculation were then compared to
Wheels projected earnings per share in order to determine the degree of
dilution, if any, to Wheels stockholders subsequent to the Merger. The results
of the analysis indicated that the Merger of Wheels and Racing Champions would
result in accretion to the equivalent projected earnings per share of Wheels
Common stock.
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Exchange Ratio Analysis. Morgan Keegan analyzed the historical stock
trading price relationship between Wheels and Racing Champions since the Racing
Champions Offering completed on June 12, 1997 until just prior to the Morgan
Keegan Report. Based on its analysis, Morgan Keegan calculated an average
exchange ratio (Wheels stock price divided by Racing Champions stock price) of
0.562 as compared to an assumed Exchange Ratio of 0.510 based on the closing
prices of Wheels and Racing Champions Common Stock for the 10 trading days prior
to the day before the date of the delivery of the Opinion, an average exchange
ratio of 0.605 for the 30 trading days prior to the day before the date of the
delivery of the opinion, an average exchange ratio of 0.664 for the 60 trading
days prior to the day before the date of the delivery of the opinion, an average
exchange ratio of 0.723 for the 90 trading days prior to the day before the date
of the delivery of the opinion and an average exchange ratio of 0.694 since the
Racing Champions Offering on June 12, 1997 until the day before the date of the
delivery of this opinion.
The summary of the Morgan Keegan Report set forth above does not purport to
be a complete description of the presentation by Morgan Keegan of the Morgan
Keegan Report to the Wheels Board or of the analyses performed by Morgan Keegan.
The preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. Morgan Keegan believes that its analyses and
the summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or of the above
summary, without considering all factors and analyses, would create an
incomplete view of the process underlying the analyses set forth in the Morgan
Keegan Report and its opinion. In addition, Morgan Keegan may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to represent the actual value of Wheels or the combined
company.
In performing its analyses, Morgan Keegan made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Wheels or Racing
Champions. The analyses performed by Morgan Keegan are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Morgan Keegan's analysis of the fairness, from a
financial point of view, of the exchange ratio received by Wheels stockholders
and were discussed with the Wheels Board at its April 9, 1998 meeting. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, Morgan Keegan's presentation to the Wheels Board and its opinion was one
of many factors taken into consideration by the Wheels Board in making its
determination to approve the Merger Agreement.
In addition to rendering the opinion, Morgan Keegan has in the past
provided investment banking services to Wheels, for which it received customary
fees. In the ordinary course of its business, Morgan Keegan makes a market in
Wheels Common Stock and may trade such securities for its own account and for
the account of its customers and may at any time hold a short or long position
in such securities. Morgan Keegan has expressed no opinion as to the prices at
which shares of Racing Champions Common Stock may trade following completion of
the Merger.
Wheels has agreed to pay Morgan Keegan a fee of $125,000 for providing a
fairness opinion pursuant to an engagement letter. This portion of Morgan
Keegan's fee is not contingent upon the closing of the transaction. In addition,
upon the closing of the transaction, Morgan Keegan will receive an additional
financial advisory fee of $125,000. Wheels also has agreed to reimburse Morgan
Keegan for its reasonable out-of-pocket expenses including reasonable legal fees
and expenses and to indemnify Morgan Keegan against certain liabilities,
including liabilities under the federal securities laws.
THE MERGER
The following information describes the material aspects of the Merger.
This description does not purport to be complete and is qualified in its
entirety by reference to the exhibits hereto, including the Merger Agreement,
which is attached to this Joint Proxy Statement/Prospectus as Exhibit A and is
incorporated herein by reference. All stockholders are urged to read Exhibit A
in its entirety.
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The Racing Champions Board has unanimously approved the Merger Agreement
and recommended approval and adoption of the Merger Proposal by its stockholders
and has determined that the transactions contemplated by the Merger Agreement
are fair to, and in the best interests of, Racing Champions' stockholders. See
"THE MERGER PROPOSAL -- Reasons of Racing Champions for Engaging in the Merger."
The Wheels Board has unanimously approved the Merger Agreement and
recommended approval and adoption of the Merger Proposal by its stockholders and
has determined that the transactions contemplated by the Merger Agreement are
fair to, and in the best interests of, Wheels' stockholders. See "THE MERGER
PROPOSAL -- Reasons of Wheels for Engaging in the Merger."
Effects of the Merger. Upon consummation of the Merger, (a) Acquisition
will merge with and into Wheels, with Wheels being the Surviving Corporation;
(b) Wheels will become a wholly owned subsidiary of Racing Champions; (c) each
share of Wheels Common Stock outstanding immediately prior to the Effective Time
(other than shares of Wheels Common Stock, if any, not converted because of the
exercise of dissenters' appraisal rights and other than shares of Wheels Common
Stock, if any, held by Wheels, Racing Champions or Acquisition) will be
converted into the right to receive whole shares of Racing Champions Common
Stock and a cash payment in lieu of fractional shares based upon the Exchange
Ratio determined as described under "-- Exchange Ratio" below; (d) each share of
Wheels Common Stock outstanding immediately prior to the Effective Time and held
by Wheels as treasury shares or by Racing Champions or Acquisition will be
canceled and retired without consideration; and (e) each Acquisition Share will
be converted into one share of Common Stock of the Surviving Corporation.
Each certificate previously representing shares of Wheels Common Stock will
thereafter represent only the right to receive the Merger Consideration to which
such certificate is entitled pursuant to the Merger Agreement. Certificates
previously representing shares of Wheels Common Stock may be exchanged for the
Merger Consideration as provided below. Each share of Wheels Common Stock held
by Racing Champions, Acquisition or Wheels will be canceled and retired and no
payment will be made with respect thereto.
For a description of the procedures for exchanging certificates
representing shares of Wheels Common Stock, see "-- Procedures for Exchange of
Certificates."
Effective Time. If the Merger Agreement is adopted by the requisite vote
of the stockholders of Wheels and Racing Champions and the other conditions to
the Merger are satisfied (or waived to the extent permitted), the Merger will be
consummated and effective upon the filing of Articles of Merger with the
Secretary of State of the State of North Carolina. The date and time the Merger
is effective is referred to herein as the "Effective Time."
The Merger Agreement provides that the parties will cause the Effective
Time to occur as promptly as practicable after the approval of the Merger
Agreement by the stockholders of Wheels and Racing Champions and the
satisfaction (or waiver, if permissible) of the other conditions set forth in
the Merger Agreement. In certain circumstances, Racing Champions or Wheels may
terminate the Merger Agreement prior to the Effective Time, whether before or
after approval and adoption of the Merger Agreement by the stockholders of
Wheels or Racing Champions. See " -- The Merger Agreement -- Termination."
Exchange Ratio. Each share of Wheels Common Stock that is issued and
outstanding at the Effective Time (other than shares of Wheels Common Stock, if
any, not converted because of the exercise of dissenters' appraisal rights and
other than shares of Wheels Common Stock, if any, held by Wheels, Racing
Champions or Acquisition, which are to be canceled as part of the Merger) will
be converted into and become the right to receive whole shares of Racing
Champions Common Stock and a cash payment in lieu of fractional shares based
upon the Exchange Ratio determined as follows: (a) the Exchange Ratio will equal
0.51 shares of Racing Champions Common Stock for each share of Wheels Common
Stock if the Racing Champions Closing Price is greater than or equal to $7.50
per share and less than or equal to $14.00 per share; (b) the Exchange Ratio
will equal $3.825 divided by the Racing Champions Closing Price if the Racing
Champions Closing Price is less than $7.50 per share; and (c) the Exchange Ratio
will equal $7.14 divided by the Racing Champions Closing Price if the Racing
Champions Closing Price is greater than $14.00 per share.
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The following table indicates, based on the assumed Racing Champions
Closing Prices indicated, the aggregate number of shares of Racing Champions
Common Stock which would be issuable in the Merger, the resulting aggregate
value of the Merger Consideration and the resulting adjusted Exchange Ratio.
<TABLE>
<CAPTION>
NUMBER OF SHARES
ASSUMED RACING OF RACING CHAMPIONS AGGREGATE
CHAMPIONS CLOSING COMMON STOCK VALUE OF
PRICE TO BE ISSUED MERGER CONSIDERATION EXCHANGE RATIO
- ----------------- ------------------- -------------------- --------------
<S> <C> <C> <C>
$20.00 2,490,541 $49,810,824 0.357
18.00 2,767,268 49,810,824 0.397
16.00 3,113,177 49,810,824 0.446
14.00 3,557,916 49,810,824 0.510
12.00 3,557,916 42,694,992 0.510
10.00 3,557,916 35,579,160 0.510
8.00 3,557,916 28,463,328 0.510
7.50 3,557,916 26,684,370 0.510
6.00 4,447,395 26,684,370 0.638
4.00 6,671,093 26,684,370 0.956
</TABLE>
The Merger Agreement also provides that if, prior to the Effective Time,
the outstanding shares of Racing Champions Common Stock or Wheels Common Stock
are 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 will be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
Fractional Shares. No fractional share of Racing Champions Common Stock or
certificates or scrip will be issued in connection with the Merger. In lieu
thereof, each holder of shares of Wheels Common Stock otherwise entitled to a
fraction of a share of Racing Champions Common Stock will, upon surrender of his
or her certificate or certificates representing shares of Wheels Common Stock,
be entitled to receive an amount of cash (without interest) determined by
multiplying (a) the average closing sale price for Racing Champions 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 (b) the
fractional share interest to which such holder would otherwise be entitled.
Arrangements will be made with the Exchange Agent (as defined below) pursuant to
which holders of shares of Wheels Common Stock otherwise entitled to fractional
shares will be paid.
Procedures for Exchange of Certificates. Immediately prior to the
Effective Time, Racing Champions will deposit, or will cause to be deposited,
with a bank or trust company to be designated by Racing Champions (the "Exchange
Agent") stock certificates representing the aggregate number of shares of Racing
Champions Common Stock into which the shares of Wheels Common Stock outstanding
immediately prior to the Effective Time have been converted in accordance with
the terms of the Merger Agreement (the "Exchange Fund"). Pursuant to irrevocable
instructions, the Exchange Agent will deliver out of the Exchange Fund the
portion of the Merger Consideration associated with the outstanding shares of
Wheels Common Stock pursuant to the Merger Agreement.
At or after the Effective Time there will be no transfers of shares of
Wheels Common Stock on the stock transfer books of Wheels.
Promptly after the Effective Time, Racing Champions will instruct the
Exchange Agent to mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented outstanding shares of
Wheels Common Stock (the "Certificates") (a) a letter of transmittal in
customary form (which will specify that delivery will be effected, and risk of
loss and title to the Certificates will pass, only upon proper delivery of the
Certificates to the Exchange Agent), and (b) 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
a letter of transmittal, duly executed, and any other documents as may be
required pursuant to such instructions, the holder of a Certificate will be
entitled to receive in exchange therefor certificates representing the shares of
Racing Champions Common Stock and
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cash in lieu of fractional shares, if any, to which such Certificate is
entitled. The Certificate so surrendered will forthwith be canceled. In the
event of a transfer of ownership of shares of Wheels Common Stock which is not
registered in the stock transfer records of Wheels, it shall be a condition to
such exchange that a Certificate representing the proper number of shares of
Wheels Common Stock be presented by a transferee 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, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon surrender the Merger
Consideration to which such Certificate is entitled.
STOCKHOLDERS OF WHEELS SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO THE
EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL AND SHOULD NOT RETURN THEIR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
Any portion of the Exchange Fund remaining undistributed 180 days after the
Effective Time will be returned to Racing Champions, and after this date any
holders of unsurrendered shares of Wheels Common Stock will be able to look only
to Racing Champions for any portion of the Exchange Fund to which they are
entitled. Racing Champions will not be liable to any holder of shares of Wheels
Common Stock for Merger Consideration delivered to a public official pursuant to
any abandoned property, escheat or similar law.
Effect of the Merger on Wheels Stock Options. Pursuant to the Merger
Agreement, each outstanding Wheels Stock Option will be assumed by Racing
Champions at the Effective Time and will become a Replacement Option to purchase
a number of shares of Racing Champions Common Stock equal to the product arrived
at by multiplying the Exchange Ratio by the number of shares of Wheels Common
Stock subject to such Wheels Stock Option. Each Replacement Option will have an
exercise price per share of Racing Champions Common Stock equal to a price
obtained by dividing the exercise price per share of the Wheels Common Stock at
which such Wheels Stock Option is exercisable immediately prior to the Effective
Time by the Exchange Ratio. The Merger Agreement provides that Wheels will cause
to be effected any amendments to Wheels' stock option plans and the Wheels Stock
Options which may be necessary in order to give effect to the conversion of such
Wheels Stock Options into Replacement Options pursuant to the Merger Agreement,
and will use reasonable efforts to obtain the consent of any holder of Wheels
Stock Options necessary to effect any such amendments. Receipt by Wheels of all
such consents is a condition to the obligation of Racing Champions and
Acquisition to consummate the Merger. The Merger Agreement provides that Racing
Champions will not be required to issue more than 3,557,916 shares of Racing
Champions Common Stock in connection with the Merger, including shares of Racing
Champions Common Stock issuable upon exercise of any Replacement Options, if the
Exchange Ratio is 0.51.
Restrictions on Stock Transfer. Shares of Racing Champions Common Stock
received by certain persons deemed to be "affiliates" of Wheels prior to the
Merger for purposes of Rule 145 under the Securities Act will be subject to the
restrictions imposed by such rule. In accordance with Rules 144 and 145 under
the Securities Act, an affiliate of Racing Champions or an affiliate of Wheels
receiving Racing Champions Common Stock issued in connection with the Merger may
not publicly sell such issued shares, except pursuant to volume and manner of
sale limitations and other requirements specified therein or pursuant to an
effective registration statement under the Securities Act.
Commission guidelines regarding qualifying for the pooling of interests
method of accounting limit the sales of shares of the acquiring company and
acquired company by affiliates of either company in a business combination such
as the Merger. These guidelines indicate that the pooling of interests method of
accounting will generally not be challenged on the basis of sales by such
affiliates if these persons do not dispose of any of the shares of the
corporation they own or any shares of the corporation they receive in connection
with the merger during the period beginning thirty days prior to the merger and
ending when financial results covering at least thirty days of post-merger
operations of the combined entity have been published. Racing Champions and
Wheels have agreed in the Merger Agreement to use their reasonable best efforts
to obtain customary agreements from their respective affiliates concerning the
above-described rules and guidelines.
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Accounting Treatment. Racing Champions and Wheels anticipate that the
Merger will be accounted for using the pooling of interests method of
accounting. Under this method of accounting, holders of shares of Wheels Common
Stock will be deemed to have combined their existing voting common stock
interest with that of holders of shares of Racing Champions Common Stock by
exchanging their shares for shares of Racing Champions Common Stock.
Accordingly, the book value of the assets, liabilities and stockholders' equity
of Wheels, as reported on its consolidated balance sheet, will be carried over
to the consolidated balance sheet of Racing Champions and no goodwill will be
created. Results of operations of Racing Champions will include the results of
both Racing Champions and Wheels for the entire fiscal year in which the Merger
occurs; however, expenses incurred to effect the Merger must be treated by the
combined company as current charges against income in the period in which the
Merger occurs.
The unaudited pro forma financial information contained in this Joint Proxy
Statement/Prospectus has been prepared using the pooling of interests accounting
method to account for the Merger. See "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION."
Nasdaq National Market Listing Requirement. The obligations of Wheels,
Racing Champions and Acquisition to consummate the Merger are subject to the
condition that the shares of Racing Champions Common Stock issuable to Wheels'
stockholders pursuant to the Merger 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.
Hart-Scott-Rodino. The Merger is subject to the requirements of the HSR
Act, which provides that certain acquisition transactions (including the Merger)
may not be consummated until certain information has been furnished to the
Antitrust Division of the United Stated Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") and certain waiting
period requirements have been satisfied. Racing Champions and Wheels each will
file with the Antitrust Division and the FTC a Notification and Report Form with
respect to the Merger. Under the HSR Act, the Merger may not be consummated
until the expiration of a waiting period of at least 30 days following the
receipt of each filing, unless the waiting period is earlier terminated by the
FTC and the Antitrust Division or unless the waiting period is extended by a
request for additional information.
The FTC and the Antitrust Division frequently scrutinize the legality of
transactions such as the Merger under the antitrust laws. At any time before or
after the Effective Time, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the Merger or seeking the divestiture of
Wheels by Racing Champions, in whole or in part, or the divestiture of
substantial assets of Wheels, Racing Champions or their respective subsidiaries.
State Attorneys General and private parties may also bring legal actions under
the federal or state antitrust laws under certain circumstances. There can be no
assurance that a challenge to the proposed Merger on antitrust grounds will not
be made or of the result if such a challenge is made.
Other Regulatory Approvals. Other than the Nasdaq National Market listing
requirement described above, compliance with the HSR Act, the filing of certain
documents to effect the Merger under the NCBCA and compliance with certain
requirements of federal and state securities laws, Racing Champions and Wheels
are not aware of any federal or state regulatory requirements that must be
complied with or federal or state regulatory approvals that must be obtained by
them prior to the consummation of the Merger. Should any other approval or
action be required, it is presently contemplated that such approval or action
would be sought. There can be no assurance that any such approval or action, if
needed, could be obtained and, if such approvals or actions are obtained, there
can be no assurance as to the timing thereof.
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THE MERGER AGREEMENT
The following discussion of the Merger Agreement is qualified in its
entirety by reference to the complete text of the Merger Agreement, which is
included in this Joint Proxy Statement/Prospectus as Exhibit A (exclusive of all
exhibits and schedules) and is incorporated herein by reference.
General. The Merger Agreement provides for the merger of Acquisition into
Wheels. Wheels will be the Surviving Corporation of the Merger and, as a result
of the Merger, Racing Champions will own all of the Surviving Corporation's
Common Stock. In the Merger, the stockholders of Wheels, other than stockholders
exercising dissenters' rights of appraisal, Racing Champions, Acquisition and
Wheels, will receive the Merger Consideration described below.
Effective Time. The Effective Time of the Merger will occur upon the
filing of Articles of Merger with the Secretary of State of the State of North
Carolina. It is anticipated that Articles of Merger will be filed promptly after
the approval and adoption of the Merger Agreement by the stockholders of Wheels
at the Wheels Special Meeting and by the stockholders of Racing Champions at the
Racing Champions Annual Meeting. Such filing will be made, however, only upon
satisfaction or waiver of all conditions to the Merger contained in the Merger
Agreement.
Merger Consideration. In connection with the Merger, each outstanding
share of Wheels Common Stock at the Effective Time (other than shares of Wheels
Common Stock not converted because of the exercise of dissenters' rights, if
any, and other than shares of Wheels Common Stock, if any, held by Wheels,
Racing Champions or Acquisition, which are to be canceled as part of the Merger)
will be converted into the right to receive whole shares of Racing Champions
Common Stock and a cash payment in lieu of fractional shares based upon the
Exchange Ratio determined as follows: (a) the Exchange Ratio will equal 0.51
shares of Racing Champions Common Stock for each share of Wheels Common Stock if
the Racing Champions Closing Price is greater than or equal to $7.50 per share
and less than or equal to $14.00 per share; (b) the Exchange Ratio will equal
$3.825 divided by the Racing Champions Closing Price if the Racing Champions
Closing Price is less than $7.50 per share; and (c) the Exchange Ratio will
equal $7.14 divided by the Racing Champions Closing Price if the Racing
Champions Closing Price is greater than $14.00 per share. Instructions with
regard to the surrender of certificates formerly representing shares of Wheels
Common Stock, together with the letter of transmittal to be used for that
purpose, will be mailed to stockholders as soon as practicable after the
Effective Time. The Exchange Agent shall deliver a stock certificate
representing the shares of Racing Champions Common Stock to each holder of
shares of Wheels Common Stock outstanding at the Effective Time and pay, by
check or draft, any cash in lieu of fractional shares to which such holder is
entitled as soon as practicable following receipt from such holder of a duly
executed letter of transmittal, together with certificates formerly representing
shares of Wheels Common Stock and any other items specified by the letter of
transmittal.
Each outstanding Acquisition Share will automatically be converted into one
share of common stock, par value $.01 per share, of the Surviving Corporation.
WHEELS STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES FOR SHARES OF
WHEELS COMMON STOCK WITH THE ENCLOSED PROXY CARD.
After the Effective Time, the holder of a certificate formerly representing
shares of Wheels Common Stock shall cease to have any rights as a stockholder of
Wheels, and such holder's sole right will be to receive the Merger Consideration
with respect to such shares. If the Merger Consideration is to be delivered to a
person other than the person in whose name the surrendered certificate is
registered, it will be a condition of delivery that the certificate so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the person requesting such delivery shall pay any transfer or other taxes
required by reason of such delivery or establish to the satisfaction of the
Surviving Corporation that such taxes have been paid or are not applicable. No
transfer of shares of Wheels Common Stock outstanding immediately prior to the
Effective Time will be made on the stock transfer books of the Surviving
Corporation after the Effective Time. Certificates formerly representing shares
of Wheels Common Stock presented to the Surviving Corporation after the
Effective Time will be canceled in exchange for the Merger Consideration to
which such shares are entitled.
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Representations and Warranties. The Merger Agreement contains various
representations and warranties relating to, among other things, (a) corporate
organization, existence, good standing and power and authority to own and
operate properties and carry on business; (b) corporate power and authority to
enter into, and the due, valid and binding execution and delivery of, the Merger
Agreement; (c) the absence of any violations of applicable law by Wheels or
Racing Champions; (d) consents and approvals of public bodies relating to the
Merger; (e) the Merger not resulting in conflicts with respect to the charter or
By-Laws, breaches of any agreements or instruments or violations of orders
relating to Wheels, Racing Champions or Acquisition; (f) the capital structure
of Wheels and Racing Champions; (g) the fair presentation of financial
statements of Wheels and Racing Champions; (h) the absence of certain material
adverse changes concerning Wheels or Racing Champions; (i) certain matters
relating to litigation or other claims involving Wheels or Racing Champions; (j)
certain matters pertaining to federal, state and local taxes and employee
benefit plans of Wheels and Racing Champions; (k) the absence of defaults under
or terminations of Wheels' or Racing Champions' material contracts; (l) certain
matters pertaining to the intellectual property rights of Wheels and Racing
Champions; (m) the compliance with applicable legal requirements of the reports
filed by Wheels or Racing Champions with the Commission; (n) certain matters
relating to the properties owned or leased by Wheels or Racing Champions; (o)
certain matters relating to the anticipated tax treatment and accounting
treatment of the Merger; (p) certain matters relating to transactions with
affiliates by Wheels or Racing Champions; and (q) certain matters pertaining to
the ownership and control of Acquisition and the lack of prior activities by
Acquisition.
None of the representations and warranties described above survive the
Effective Time.
Cooperation. Each of the parties to the Merger Agreement has agreed to use
its reasonable best efforts to take all such action as may be necessary or
appropriate to effectuate the Merger under the NCBCA, including cooperation in
the preparation and filing of this Joint Proxy Statement/Prospectus, expiration
or termination of governmental filings and waiting period requirements, and
execution of any additional instruments reasonably necessary to effect the
transactions contemplated by the Merger Agreement.
Conduct of Business Pending Closing. Pursuant to the Merger Agreement,
each of Wheels and Racing Champions has agreed, except as expressly contemplated
by the Merger Agreement or consented to in writing by the other party, to
conduct their respective 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 the Merger
Agreement, seek to preserve intact their respective current business
organizations, keep available the services of their respective current officers
and employees and preserve their respective 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. In addition,
each of Wheels and Racing Champions has agreed that, except as contemplated by
the Merger Agreement or consented to in writing by the other party, neither
Wheels nor Racing Champions will do any of the following:
(a) amend its Certificate of Incorporation or By-Laws (or other
similar governing instrument);
(b) 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;
(c) 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;
(d) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
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(e) 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;
(f) settle or compromise any pending or threatened suit, action or
claim which (i) relates to the transactions contemplated by the Merger
Agreement or (ii) the settlement or compromise of which could have a
material adverse effect on Wheels or Racing Champions;
(g) take any action which would jeopardize (A) the treatment of Racing
Champions' acquisition of Wheels as a pooling of interests for accounting
purposes; or (B) the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code; or
(h) enter into any commitment or other agreement to do any of the
foregoing.
In addition, Wheels has agreed that, except as contemplated by the Merger
Agreement or consented to in writing by Racing Champions, Wheels will not do any
of the following:
(a) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization (other than the Merger);
(b) alter through merger, liquidation, reorganization, restructuring
or any other fashion the corporate structure of ownership of any
subsidiary;
(c) (i) 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; (ii) 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; (iii) make any
loans, advances or capital contributions to or investments in any other
person (other than to subsidiaries or customary loans or advances to
employees, in each case in the ordinary course of business consistent with
past practice); (iv) pledge or otherwise encumber shares of its capital
stock or shares of its subsidiaries' capital stock; or (v) 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);
(d) except as may be required by law, enter into, adopt, 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; except for (i) entering into employment agreements or
severance agreements with new employees in the ordinary course of business
and consistent with past practice or (ii) increases in annual compensation
and/or amendments to 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 Wheels);
(e) 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);
(f) (i) 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; (ii) enter into any
contract or agreement other than in the ordinary course of business
consistent with past practice which would be material to Wheels and its
subsidiaries taken as a whole; or (iii) 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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(g) make any tax election or settle or compromise any income tax
liability material to Wheels and its subsidiaries taken as a whole; or
(h) enter into any commitment or other agreement to do any of the
foregoing.
Limitation on Third Party Acquisitions. The Merger Agreement also provides
that Wheels and its officers, directors, employees, agents and advisors will
immediately cease any discussions or negotiations with any parties with respect
to any Third Party Acquisition of Wheels (as defined below). Wheels may not,
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with or provide information to any person or group
concerning any Third Party Acquisition of Wheels. Wheels is required to notify
Racing Champions promptly if any inquiry or proposal with respect to a Third
Party Acquisition of Wheels is made and to advise Racing Champions from time to
time of the status and any material developments concerning any such inquiry or
proposal.
The Wheels Board may withdraw or modify its recommendation of the
transactions contemplated by the Merger Agreement or approve or recommend, or
cause Wheels to enter into any agreement with respect to, any Third Party
Acquisition of Wheels, only if the Wheels 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, but only (i) after providing reasonable written
notice to Racing Champions (a "Notice of Superior Proposal") advising Racing
Champions that Wheels has received a Superior Proposal (as defined below),
specifying the material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal, (ii) after Wheels has
received from the person making such Superior Proposal (and delivers to Racing
Champions) an executed confidentiality agreement in reasonably customary form,
and (iii) if Racing Champions does not, within five business days of Racing
Champions' receipt of the Notice of Superior Proposal, make an offer which the
Wheels 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) to be as favorable to Wheels' stockholders as such Superior
Proposal; provided, however, that Wheels shall not be entitled to enter into any
agreement with respect to a Superior Proposal unless and until the Merger
Agreement is terminated by its terms.
The Merger Agreement defines "Third Party Acquisition of Wheels" as the
occurrence of any of the following events: (i) the acquisition of Wheels 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 Racing Champions,
Acquisition or any affiliate thereof (a "Third Party"); (ii) the acquisition by
a Third Party of more than 20% of the total assets of Wheels and its
subsidiaries taken as a whole; (iii) the acquisition by a Third Party of 20% or
more of the outstanding shares of Wheels Common Stock; (iv) the adoption by
Wheels of a plan of liquidation or the declaration or payment of an
extraordinary dividend; (v) the repurchase by Wheels or any of its subsidiaries
of more than 20% of the outstanding shares of Wheels Common Stock; or (vi) the
acquisition by Wheels 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 greater than 20% of the annual revenues, net income or assets of Wheels. The
Merger Agreement defines a "Superior Proposal" as any bona fide proposal to
acquire directly or indirectly for consideration consisting of cash and/or
securities more than 50% of the shares of Wheels Common Stock then outstanding
or all or substantially all the assets of Wheels and otherwise on terms which
the Wheels 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 Wheels' stockholders than the
Merger.
Designation of Racing Champions Directors. The Merger Agreement provides
for Racing Champions and Wheels to use reasonable efforts to cause the Racing
Champions Board immediately after the Effective Time to include Randy C. Baker,
Randy E. Duncan and Victor H. Shaffer (the "Wheels Designees"). Pursuant to this
provision, Messrs. Baker, Duncan and Shaffer have been nominated for election as
directors of Racing Champions at the Racing Champions Annual Meeting. See
"ELECTION OF DIRECTORS." The Merger Agreement also provides that any Wheels
Designee who is an employee of Wheels or any of its subsidiaries shall agree to
resign from the Racing Champions Board immediately upon ceasing employment at
any time after the Effective Time, and that the remaining Wheels Designees will
fill any vacancy on the
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Racing Champions Board created by the resignation of any Wheels Designee at any
time prior to the first anniversary of the consummation of the Merger.
Conditions to Consummation of the Merger. The Merger Agreement provides
that the obligations of the parties to effect the Merger are subject to the
satisfaction or waiver at or prior to the Effective Time of the following
conditions: (a) Wheels' stockholders shall have approved the Merger Proposal;
(b) Racing Champions' stockholders shall have approved the Merger Proposal, the
Capitalization Amendment Proposal and the amendment to the Incentive Plan; (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 governmental or
regulatory notices or approvals required with respect to the transactions
contemplated by the Merger Agreement shall have been either filed or received;
(e) the Registration Statement 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 Racing Champions shall have received all state securities laws or
"blue sky" authorizations necessary to issue shares of Racing Champions Common
Stock in exchange for shares of Wheels Common Stock in the Merger; and (f) the
shares of Racing Champions Common Stock issuable to Wheels' stockholders
pursuant to the Merger 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.
Wheels' obligation to effect the Merger is also subject to the
satisfaction, at or prior to the Effective Time, of certain additional
conditions, any or all of which may be waived in whole or in part by Wheels,
including without limitation, the following: (a) each of the representations of
Racing Champions and Acquisition contained in the Merger Agreement or in any
other document delivered pursuant to the Merger Agreement shall be true and
correct in all material respects 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); (b) each of
the covenants and obligations of Racing Champions and Acquisition to be
performed at or before the Effective Time pursuant to the terms of the Merger
Agreement shall have been duly performed in all material respects at or before
the Effective Time; (c) Wheels shall have received the opinion of tax counsel to
Wheels 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
Internal Revenue Code; (ii) each of Wheels, Racing Champions and Acquisition
will be a party to the reorganization within the meaning of Section 368(b) of
the Internal Revenue Code; and (iii) no gain or loss for Federal income tax
purposes will be recognized by a stockholder of Wheels as a result of the Merger
with respect to shares of Wheels Common Stock converted solely into the Merger
Consideration; (d) Wheels shall have received the opinion of legal counsel to
Racing Champions; (e) Racing Champions shall have obtained the consent or
approval of each person whose consent or approval shall be required in
connection with the transactions contemplated by the Merger Agreement, except
those consents and approvals which the failure to obtain would not, in the
reasonable opinion of Wheels, individually or in the aggregate, have a material
adverse effect on Racing Champions; (f) there shall have been no events, changes
or effects with respect to Racing Champions or its subsidiaries having or which
could reasonably be expected to have a material adverse effect on Racing
Champions; and (g) Wheels shall have received the written fairness opinion of
Morgan Keegan, dated prior to the date of this Joint Proxy Statement/Prospectus.
The obligation of Racing Champions and Acquisition to effect the Merger is
also subject to the satisfaction, at or prior to the Effective Time, of certain
additional conditions, any or all of which may be waived in whole or in part by
Racing Champions, including, without limitation, the following: (a) each of the
representations of Wheels contained in the Merger Agreement or in any other
document delivered pursuant to the Merger Agreement shall be true and correct in
all material respects 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); (b) each of
the covenants and obligations of Wheels to be performed at or before the
Effective Time pursuant to the terms of the Merger Agreement shall have been
duly performed in all material respects at or before the Effective Time; (c)
Racing Champions shall have received from each affiliate of Wheels an executed
copy of a letter regarding compliance with Rule 145 under the
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Exchange Act; (d) Racing Champions shall have received the opinion of tax
counsel to Racing Champions 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 Internal Revenue Code and (ii) each of Wheels, Racing
Champions and Acquisition will be a party to the reorganization within the
meaning of Section 368(b) of the Internal Revenue Code; (e) Racing Champions
shall have received the opinion of legal counsel to Wheels; (f) the Commission
shall not have objected to the disclosure of the accounting treatment of the
Merger as a pooling of interests in the Registration Statement; (g) Wheels 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 Wheels or any
subsidiary of Wheels, except for those consents or approvals which the failure
to obtain would not, in the reasonable opinion of Racing Champions, individually
or in the aggregate, have a material adverse effect on the Surviving
Corporation; (h) persons holding not more than 5% of the issued and outstanding
shares of Wheels Common Stock as of the Effective Time shall have exercised
dissenters rights in accordance with the requirements and procedures set forth
in the NCBCA; (i) there shall have been no events, changes or effects with
respect to Wheels or its subsidiaries having or which could reasonably be
expected to have a Material Adverse Effect on Wheels; (j) Wheels shall have
obtained all amendments and consents required to effect the substitution of
warrants, options and other rights to purchase Racing Champions Common Stock for
warrants, options and other rights to purchase Wheels Common Stock; (k) Racing
Champions shall have received duly executed and delivered employment and
noncompetition agreements, in form and substance reasonably satisfactory to
Racing Champions, from certain officers and employees of Wheels and its
subsidiaries; (l) Racing Champions shall have received the written fairness
opinion of Baird, dated prior to the date of this Joint Proxy Statement/
Prospectus; (m) certain holders of registration rights with respect to
securities of Wheels shall have agreed to terminate such rights effective upon
the Effective Time; (n) Wheels' shall have entered into a severance agreement
with Howard L. Correll, Jr., its former Chairman, Chief Executive Officer and
President, in form and substance reasonably satisfactory to Racing Champions;
and (o) certain employment and consulting agreements entered into by Wheels
shall have been terminated at or prior to the Effective Time without any payment
of additional compensation other than amounts earned through the date of
termination.
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, notwithstanding approval of
the Merger Agreement by the stockholders of Wheels or Racing Champions:
(a) by mutual written consent of Racing Champions, Acquisition and
Wheels;
(b) by either Racing Champions or Wheels, if the Merger has not been
consummated by July 31, 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 the Merger Agreement, which action or
failure to act constitutes a breach of the Merger Agreement;
(c) by either Racing Champions or Wheels, if any permanent injunction
or action by any court of competent jurisdiction or other governmental
entity of competent jurisdiction preventing or prohibiting the Merger shall
have become final and nonappealable if the party seeking to terminate the
Merger Agreement pursuant to this paragraph shall have used all reasonable
efforts to remove such injunction or overturn such action;
(d) by Racing Champions if: (i) there has been a material breach of
any representation or warranty of Wheels set forth in the Merger Agreement,
and Wheels has not cured such breach within 20 business days after written
notice of such breach is given by Racing Champions to Wheels; (ii) there
has been a material breach by Wheels of any of its covenants or agreements
set forth in the Merger Agreement, and Wheels has not cured such breach
within 20 business days after written notice of such breach is given by
Racing Champions to Wheels; (iii) the Wheels Board (x) withdraws or
modifies in a manner adverse to Racing Champions or Acquisition its
recommendation or approval with respect to the Merger Agreement or the
Merger, (y) makes any recommendation with respect to a Third Party
Acquisition of Wheels (including making no recommendation or stating an
inability to make a recommendation), other than a recommendation to reject
such Third Party Acquisition of Wheels, or (z) takes any action prohibited
by
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the covenant in the Merger Agreement summarized under "-- Limitation on
Third Party Acquisitions" above; (iv) any Third Party Acquisition of Wheels
occurs or Wheels or any of its subsidiaries or affiliates enters into any
agreement with respect to a Third Party Acquisition of Wheels; (v) Wheels
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 Wheels fails to
convene such a meeting within 25 days after the date the Registration
Statement is declared effective; or (vi) Racing Champions 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).
(e) by Wheels if: (i) there has been a material breach of any
representation or warranty of Racing Champions or Acquisition set forth in
the Merger Agreement, and neither Racing Champions nor Acquisition has
cured such breach within 20 business days after written notice of such
breach is given by Wheels to Racing Champions; (ii) there shall have been a
material breach by Racing Champions or Acquisition of any of their
respective covenants or agreements set forth in the Merger Agreement, and
Racing Champions 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 Wheels to Racing Champions; (iii) the Racing Champions Board withdraws
or modifies in a manner adverse to Wheels its recommendation or approval
with respect to the Merger Agreement or the Merger; (iv) the Racing
Champions Board makes any recommendation with respect to a Third Party
Acquisition of Racing Champions (as defined below) (including making no
recommendation or stating an inability to make a recommendation), other
than a recommendation to reject such Third Party Acquisition of Racing
Champions; (v) any Third Party Acquisition of Racing Champions occurs or
Racing Champions or any of its subsidiaries or affiliates enters into an
agreement with respect to any Third Party Acquisition of Racing Champions;
(vi) Racing Champions 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
Racing Champions fails to convene such a meeting within 25 days after the
date the Registration Statement is declared effective; (vii) Wheels 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 Wheels Board
has received a Superior Proposal and has complied with the covenant in the
Merger Agreement summarized under "-- Limitation on Third Party
Acquisitions" above (provided that the termination described in this
paragraph (viii) is not effective unless and until Wheels shall have paid
to Racing Champions in full the Termination Fee).
The Merger Agreement defines a "Third Party Acquisition of Racing
Champions" as the occurrence of any of the following events: (i) the acquisition
of Racing Champions by a merger in which the current stockholders of Racing
Champions 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
Racing Champions (a "Third Party"); (ii) the acquisition by a Third Party of
substantially all of the total assets of Racing Champions and its subsidiaries
taken as a whole; or (iii) the acquisition by a Third Party of more than 50% of
the outstanding shares of Racing Champions Common Stock.
In the event of the termination of the Merger Agreement and the Merger for
any reason, the Merger Agreement will become void, all rights of each party
thereto shall cease and none of Wheels, Racing Champions, Acquisition or their
respective officers, directors, stockholders, agents or advisors will have any
liability except for the provisions in the Merger Agreement with respect to
payment of the Termination Fee and expenses described below. In addition, the
termination of the Merger Agreement does not affect the parties' obligations
under the Confidentiality Agreement, which obligations survive such termination.
Termination Fee and Expenses. Pursuant to the Merger Agreement, Wheels
must pay Racing Champions a Termination Fee of $4.0 million (or approximately
$0.76 per share of Wheels Common Stock outstanding on the Wheels Record Date) if
the Merger Agreement is terminated (i) by Wheels pursuant to the sections of the
Merger Agreement described in paragraphs (e)(vii) or (e)(viii) of the above
section, (ii) by Racing Champions pursuant to the sections of the Merger
Agreement described in paragraphs
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(d)(iii), (iv) or (v) of the above section, (iii) by Racing Champions pursuant
to the sections of the Merger Agreement described in paragraphs (b), (d)(i) or
(d)(ii) of the above section and prior to or within twelve months of the date of
such termination Wheels shall have directly or indirectly entered into an
agreement with respect to a Third Party Acquisition of Wheels or a Third Party
Acquisition of Wheels occurs, or (iv) by Wheels or Racing Champions pursuant to
the section of the Merger Agreement described in paragraph (c) of the above
section and prior to or within twelve months of the date of such termination
Wheels shall have directly or indirectly entered into an agreement with respect
to a Third Party Acquisition of Wheels or a Third Party Acquisition of Wheels
occurs. If the Merger Agreement is terminated pursuant to the sections of the
Merger Agreement described in paragraphs (d)(i) or (d)(ii) of the above section,
then, unless Wheels is required to pay the Termination Fee, Wheels must
reimburse Racing Champions, Acquisition and their affiliates for up to $1.0
million of actual out-of-pocket expenses incurred by any of them or on their
behalf in connection with the transactions contemplated by the Merger Agreement.
If the Merger Agreement is terminated pursuant to the sections of the Merger
Agreement described in paragraphs (d)(vi), (e)(i), (e)(ii), (e)(iii), (e)(iv),
(e)(v) or (e)(vi) of the above section, then Racing Champions must reimburse
Wheels and its affiliates for up to $1.0 million of actual out-of-pocket
expenses incurred by any of them or on their behalf in connection with the
transactions contemplated by the Merger Agreement. If the Merger Agreement is
terminated for any other reason, each party must bear its own expenses, except
that (i) the expenses incurred in connection with printing the Registration
Statement and this Joint Proxy Statement/ Prospectus, (ii) the filing fee with
the Commission relating to the Registration Statement or this Joint Proxy
Statement/Prospectus and (iii) the filing fee in connection with filings, if
any, under the Hart-Scott Rodino Antitrust Improvements Act by Racing Champions
or Wheels will be shared equally by Wheels and Racing Champions. If the Merger
is consummated, all expenses will be paid by the Surviving Corporation.
Amendments and Waivers. At any time prior to the Effective Time
(notwithstanding any stockholder approval) if authorized by Racing Champions,
Acquisition and Wheels and to the extent permitted by law, (a) the parties to
the Merger Agreement may, by written agreement, modify, amend or supplement any
term or provision of the Merger Agreement, and (b) any term or provision of the
Merger Agreement may be waived by any party which is entitled to the benefits
thereof, provided that after such stockholder approval, no amendment may be made
which would require the approval of the stockholders of Wheels under applicable
law unless such amendment is approved by the stockholders of Wheels.
STOCKHOLDER OPTION AGREEMENT
Concurrently with the execution of the Merger Agreement, Racing Champions
entered into the Stockholder Option Agreement with the Principal Stockholder.
Subject to the terms and conditions set forth therein, the Stockholder Option
Agreement grants Racing Champions an option to purchase all of the shares of
Wheels Common Stock owned by the Principal Stockholder by issuing to the
Principal Stockholder 0.51 shares of Racing Champions Common Stock for each
share of Wheels Common Stock purchased pursuant to the Stockholder Option
Agreement. The Principal Stockholder owns 689,737 shares of Wheels Common Stock
(excluding 82,500 shares of Wheels Common Stock subject to currently exercisable
stock options which will be subject to the Stockholder Option Agreement to the
extent that the Principal Stockholder exercises such options), representing
approximately 13.1% of the shares of Wheels Common Stock outstanding as of the
Wheels Record Date. Racing Champions may exercise the option upon the occurrence
of any of the following events (each, an "Option Event"):
(a) The Merger has not been consummated by July 31, 1998, unless the
failure to so consummate the Merger by such date shall have been caused by
the action or failure to act of Racing Champions, which action or failure
to act constitutes a breach of the Merger Agreement.
(b) There has been a material breach of any representation or warranty
of Wheels set forth in the Merger Agreement and Wheels has not cured such
breach within 20 business days after written notice of such breach is given
by Racing Champions to Wheels.
(c) The Wheels Board (x) withdraws or modifies in a manner adverse to
Racing Champions or Acquisition its recommendation or approval with respect
to the Merger Agreement or the Merger,
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(y) makes any recommendation with respect to a Third Party Acquisition of
Wheels (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 of the
Merger Agreement.
(d) Any Third Party Acquisition of Wheels occurs or Wheels or any of
its subsidiaries or affiliates enters into any agreement with respect to a
Third Party Acquisition of Wheels.
(e) Wheels 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 Wheels
fails to convene such a meeting within 25 days after the date the
Registration Statement is declared effective.
Pursuant to the Stockholder Option Agreement, the Principal Stockholder
also agreed to cause all of his shares of Wheels Common Stock to be voted in
favor of the Merger Proposal and all other transactions as to which stockholders
of Wheels are called upon to vote to effectuate the Merger.
The Stockholder Option Agreement expires upon the earliest to occur of (i)
the Effective Time and (ii) the termination of the Merger Agreement, provided
that the Stockholder Option Agreement does not terminate for 45 days after the
termination of the Merger Agreement in connection with the occurrence of an
Option Event.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO WHEELS' STOCKHOLDERS
The receipt of an opinion of each party's legal counsel, in form and
substance reasonably satisfactory to such party with respect to the tax
consequences described below, is a condition to such party's obligation to
consummate the Merger.
Wheels will receive an opinion of its counsel, Berliner Zisser Walter &
Gallegos, P.C. that (i) the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code; (ii) each of Wheels, Racing Champions and Acquisition
will be a party to the reorganization within the meaning of Section 368(b) of
the Internal Revenue Code; and (iii) no gain or loss for Federal income tax
purposes will be recognized by a stockholder of Wheels as a result of the Merger
with respect to shares of Wheels Common Stock converted solely into the Merger
Consideration.
Racing Champions will receive an opinion of its counsel, Reinhart, Boerner,
Van Deuren, Norris & Rieselbach, s.c., that (i) the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code and (ii) each of Wheels, Racing Champions
and Acquisition will be a party to the reorganization within the meaning of
Section 368(b) of the Internal Revenue Code.
These tax opinions will be based upon certain customary representations and
warranties referred to in the opinion letters and will be expressly contingent
upon satisfaction of the "continuity of interest" requirement of the Treasury
Regulations. In general, the "continuity of interest" requirement is considered
satisfied if 50% or more of the capital stock issued in a merger is held by the
recipient stockholders of the acquired entity following the merger other than
under a plan or intent to dispose of such shares. To address the satisfaction of
this requirement for the Merger to be treated as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code, the Merger
Agreement provides that Wheels and Racing Champions will use reasonable efforts
to obtain such written representations as may reasonably be requested by legal
counsel in rendering such tax opinions. Racing Champions will have no obligation
to monitor compliance with any representations delivered by former holders of
shares of Wheels Common Stock. No ruling will be requested from any federal,
state, local or other taxing authority, including the Internal Revenue Service
with respect to the tax consequences of the Merger.
Provided that the Merger constitutes a tax-free reorganization, the
adjusted tax basis of the Racing Champions Common Stock received (and fractional
share interests deemed received) by a stockholder of Wheels pursuant to the
Merger will be the same as the adjusted tax basis of the shares of Wheels Common
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Stock surrendered in exchange therefor. The holding period of the Racing
Champions Common Stock received (and fractional share interests deemed received)
by a stockholder of Wheels as a result of the Merger will include the holding
period of the shares of Wheels Common Stock surrendered in exchange therefor,
provided that such Wheels Common Stock is held as a capital asset by the Wheels
stockholder at the time of the Merger. In addition, a stockholder of Wheels who
receives cash in lieu of a fractional interest in Racing Champions Common Stock
will be treated as if the fractional share were distributed in the Merger and
then as having received a cash distribution in redemption of such fractional
share, resulting in gain or loss upon receipt of such cash taxed as provided in
Section 302 of the Internal Revenue Code.
The foregoing may not be applicable to a holder of shares of Wheels Common
Stock who received shares of Racing Champions Common Stock as employee
compensation or pursuant to the exercise of an employee stock option.
THE FOREGOING IS A SUMMARY DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER WITHOUT CONSIDERATION OF THE PARTICULAR FACTS AND
CIRCUMSTANCES OF ANY HOLDER OF SHARES OF WHEELS COMMON STOCK OR WHEELS STOCK
OPTIONS. EACH HOLDER OF SHARES OF, AND HOLDER OF OPTIONS TO ACQUIRE SHARES OF,
WHEELS COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO HIM OR HER, AND ALSO AS TO ANY
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES. NEITHER RACING CHAMPIONS NOR
WHEELS CAN PROVIDE ANY ASSURANCE THAT THE TAX TREATMENT DESCRIBED ABOVE WILL BE
OBTAINED BY HOLDER OF SHARES OF WHEELS COMMON STOCK OR HOLDERS OF WHEELS STOCK
OPTIONS.
DISSENTERS' RIGHTS
In accordance with Article 13 of the NCBCA ("Article 13"), if the proposed
Merger is approved and consummated, holders of shares of Wheels Common Stock who
neither vote for nor consent in writing to the Merger Proposal will have the
right to receive the "fair value" of their shares of Wheels Common Stock in cash
(exclusive of any appreciation or depreciation in anticipation of the Merger
unless exclusion would be inequitable) if they fully comply with the provisions
of Article 13.
The following is a brief summary of the procedures set forth in Article 13
which are required to be followed by holders of shares of Wheels Common Stock
who wish to dissent from the Merger and exercise their statutory dissenters'
rights. This summary is qualified in its entirety by reference to Article 13,
the complete text of which is attached to this Joint Proxy Statement/Prospectus
as Exhibit E. Holders of shares of Wheels Common Stock who desire to exercise
appraisal rights of dissenting stockholders with respect to the Merger are
advised to seek independent counsel. This Joint Proxy Statement/Prospectus
constitutes notice to holders of shares of Wheels Common Stock concerning the
availability of dissenters' rights under Article 13.
Holders of shares of Wheels Common Stock who desire to exercise their
appraisal rights must satisfy all of the conditions of Article 13. A written
notice of intent to demand payment must be filed with Wheels before the taking
of the vote on the Merger Proposal at the Wheels Special Meeting. This written
notice of intent to demand payment must be in addition to and separate from any
abstention or any vote, in person or by proxy, cast against approval of the
Merger Proposal.
NEITHER VOTING AGAINST, ABSTAINING FROM VOTING, NOR FAILING TO VOTE ON THE
MERGER PROPOSAL WILL CONSTITUTE A NOTICE OF INTENT TO DEMAND PAYMENT WITHIN THE
MEANING OF ARTICLE 13.
Holders of shares of Wheels Common Stock electing to exercise their
dissenters' rights under Article 13 must NOT vote for approval of the Merger
Proposal at the Wheels Special Meeting. If a holder of shares of Wheels Common
Stock returns a signed proxy but does not specify therein a vote AGAINST
approval of the Merger Proposal or an instruction to abstain, the proxy will be
voted FOR approval of the Merger Proposal, which will have the effect of waiving
the dissenters' rights of that holder of shares of Wheels Common Stock.
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Abstaining from voting or voting against the approval of the Merger Proposal
will NOT constitute a waiver of such stockholder's dissenters' rights.
A notice of intent to demand payment must be executed by the holder of
record of shares of Wheels Common Stock as to which dissenters' rights are to be
exercised. With respect to shares of Wheels Common Stock which are owned of
record by a voting trust or by a nominee, the beneficial owner of such shares
may exercise dissenters' rights if such beneficial holder also submits to Wheels
the record holder's written consent to the exercise of dissenters' rights with
respect to all shares of which he is the beneficial holder. A record owner, such
as a broker, who holds shares of Wheels Common Stock as a nominee for others,
may exercise dissenters' rights with respect to the shares held for all or less
than all beneficial owners of shares as to which he or she is the record owner.
In such case, the written notice of intent to demand payment submitted by such
broker as record owner must set forth the number of shares of Wheels Common
Stock covered by such notice of intent to demand payment. If the number of
shares is not expressly stated, the notice of intent to demand payment will be
presumed to cover all shares of Wheels Common Stock outstanding and held in the
name of such record owner.
If the Merger Agreement is approved at the Wheels Special Meeting, Wheels
must, within 10 days after the consummation of the Merger, notify all holders
who timely executed and delivered an intent to demand payment and who did not
vote in favor of the Merger Proposal of the date by which they must make a
demand for payment of the fair value of their shares, which date may not be
fewer than 30 nor more than 60 days after the date the notice is mailed. Each
dissenting holder must send a written demand for payment to Wheels in accordance
with the instructions contained in Wheels' notice. After receipt of the payment
demand, Wheels must make an offer of payment to each dissenting holder of
Wheels' estimate of the "fair value" of the shares, plus accrued interest to the
date of payment, and send such offer to each dissenting holder along with
financial and other information in support of Wheels' estimate of fair value.
Each holder receiving Wheels' offer of payment has 30 days after the date of the
offer to provide Wheels with a written objection to the amount of Wheels' offer
and to provide Wheels with the holder's own estimate of the fair value of the
shares. If Wheels and the dissenting holder do not agree upon a value to be
paid, the holder may commence within 60 days after the date of such holder's
payment demand an appraisal proceeding by filing an action in the state superior
court located in the county where Wheels has its principal place of business.
Upon the filing of such an action and proper service on Wheels, Wheels must pay
to the holder the amount it estimated in its offer to be the fair value of the
shares, plus interest accrued to the date of payment.
Any notice or demand for payment pursuant to Article 13 should be mailed to
W. Conrad Powell, Secretary, Wheels Sports Group, Inc., 149 Gasoline Alley
Drive, Mooresville, North Carolina 28115. All proper objections or demands must
be received by Wheels on or prior to the date on which they are required to be
delivered.
HOLDERS OF SHARES OF WHEELS COMMON STOCK CONSIDERING SEEKING APPRAISAL
SHOULD KEEP IN MIND THAT THE FAIR VALUE OF THEIR SHARES DETERMINED UNDER ARTICLE
13 COULD BE MORE, THE SAME, OR LESS THAN THE MERGER CONSIDERATION THEY ARE TO
RECEIVE PURSUANT TO THE MERGER AGREEMENT IF THEY DO NOT SEEK APPRAISAL OF THEIR
SHARES.
The cost of the appraisal proceeding may be determined by the Court and
taxed against the parties as the Court deems equitable in the circumstances.
Upon application of a dissenting holder of shares of Wheels Common Stock, the
Court may order that all or a portion of the expenses incurred by any such
dissenting holder in connection with the appraisal proceeding, including without
limitation reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares of Wheels Common Stock entitled
to appraisal. In the absence of such a determination or assessment, each party
bears his own expenses.
THE SUMMARY SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF
THE PROVISIONS OF THE NCBCA RELATING TO THE RIGHTS OF DISSENTING HOLDERS OF
SHARES OF WHEELS COMMON STOCK AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE APPLICABLE SECTIONS OF THE NCBCA, WHICH ARE INCLUDED AS EXHIBIT E TO THIS
JOINT PROXY STATEMENT/PROSPECTUS. HOLDERS
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OF SHARES OF WHEELS COMMON STOCK INTENDING TO EXERCISE THEIR DISSENTERS' RIGHTS
ARE URGED TO REVIEW CAREFULLY EXHIBIT E AND TO CONSULT WITH LEGAL COUNSEL SO AS
TO BE IN STRICT COMPLIANCE THEREWITH.
If holders of more than 5% of the shares of Wheels Common Stock outstanding
immediately prior to the Effective Time properly exercise dissenters' rights,
Racing Champions will have the right to decline to consummate the Merger. See
"THE MERGER PROPOSAL -- The Merger Agreement -- Conditions to Consummation of
the Merger."
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Wheels Board with respect to the
Merger Proposal, Wheels stockholders should be aware that certain members of
Wheels' management and the Wheels Board have certain interests in the
transactions contemplated thereby that are in addition to the interests of
stockholders of Wheels generally.
COMPOSITION OF RACING CHAMPIONS BOARD
The Merger Agreement provides for Racing Champions and Wheels to use
reasonable efforts to cause the Racing Champions Board immediately after the
Effective Time to include Randy C. Baker, Randy E. Duncan and Victor H. Shaffer.
Pursuant to this provision, Messrs. Baker, Duncan and Shaffer have been
nominated for election as directors of Racing Champions at the Racing Champions
Annual Meeting. See "ELECTION OF DIRECTORS."
EMPLOYMENT AGREEMENTS WITH CERTAIN WHEELS EXECUTIVE OFFICERS
It is a condition to the obligation of Racing Champions and Acquisition to
consummate the Merger that certain officers and employees of Wheels enter into
employment and noncompetition agreements. Racing Champions currently anticipates
that Randy C. Baker, Randy E. Duncan, Victor H. Shaffer, David W. Dupree, Robert
J. Bove and Harold E. Green will enter into employment and noncompetition
agreements and that the compensation and benefit terms of such agreements will
be comparable to the current compensation and benefits received by such
individuals from Wheels. In addition, the agreements with Randy C. Baker and
David W. Dupree will provide for bonus payments in the amounts of $170,000 and
$30,000, respectively, as compensation for the efforts of Messrs. Baker and
Dupree with respect to the integration of the business of Wheels and the
business of High Performance.
HIGH PERFORMANCE PAYMENT
The consideration payable by Wheels in connection with its acquisition of
High Performance included a $3.25 million cash payment (the "Final Cash
Payment") which was due at the time of closing but which has been deferred.
Wheels is obligated to make the Final Cash Payment to the former stockholders of
High Performance, Randy C. Baker and David W. Dupree. Mr. Baker is an executive
officer and was a director of Wheels until March 4, 1998 and Mr. Dupree is an
executive officer of Wheels. On December 31, 1997, Wheels used a portion of the
proceeds under Wheels' credit facility pursuant to the credit agreement, dated
as of December 31, 1997, with the Wheels Lender to fund a $3.3 million escrow
account. In April 1998, Wheels negotiated the release of $500,000 from escrow as
partial satisfaction of the Final Cash Payment. In addition, Wheels agreed to
pay an extension fee of $450,000 to Messrs. Baker and Dupree, $250,000 of which
was paid on April 23, 1998. The remaining $200,000 is to be paid upon payment of
the remaining Final Cash Payment. Upon the occurrence of certain events,
including the consummation of the Merger, the funds held in escrow will be
released to Wheels and used to fund the balance of the Final Cash Payment.
Accordingly, the consummation of the Merger may accelerate the date on which the
payment of the balance of the Final Cash Payment is made and will provide Wheels
with the funds in the escrow account to make such payment. If the Merger is not
consummated, it is not certain if Wheels would be able to pay the balance of the
Final Cash Payment. In addition, Howard L. Correll, Jr., Randy E. Duncan, Terry
J. Powell and W. Conrad Powell have pledged an aggregate of 1,000,000 shares of
Wheels Common Stock to secure the payment of the Final Cash Payment. Any
termination of the Merger Agreement constitutes a default under the pledge
agreement. Each of Randy E. Duncan and W. Conrad Powell is an executive officer
and director of Wheels, Terry J. Powell is a director of Wheels and Howard L.
Correll, Jr. is an executive officer and director of Wheels.
LOAN GUARANTEES
Howard L. Correll, Jr., Randy C. Baker and Randy E. Duncan, each of whom is
an executive officer and director of Wheels, have each guaranteed Wheels'
obligations under a $700,000 unsecured loan from The People Bank (the "Peoples
Bank Note"). Consummation of the Merger could benefit the guarantors of the
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Peoples Bank Note, particularly if Racing Champions should decide to cause
Wheels to prepay the Peoples Bank Note.
Racing Champions has guaranteed $600,000 of borrowings under Wheels' credit
facility with the Wheels Lender in exchange for a guaranty fee of $12,000.
NEW RACING CHAMPIONS OPTIONS
Pursuant to the Merger Agreement, Racing Champions will grant the New
Options to purchase up to 220,000 shares of Racing Champions Common Stock to
certain directors, officers and other key employees of Wheels on the date of the
consummation of the Merger. Racing Champions agreed to issue the New Options
after the Effective Time to provide certain of the Wheels' employees with stock
option participation in 1998 consistent with Racing Champions' customary
arrangements with its executive officers and other key employees. New Options to
purchase 98,172 shares will have an exercise price equal to the closing sale
price of shares of Racing Champions Common Stock on the Nasdaq National Market
on the date of grant, New Options to purchase 55,241 shares will have an
exercise price equal to the greater of $10.00 and the closing sale price of
Racing Champions Common Stock on the date of grant and New Options to purchase
66,587 shares will have an exercise price equal to the greater of $12.00 and the
closing sale price of Racing Champions Common Stock on the date of grant.
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CAPITALIZATION AMENDMENT PROPOSAL
GENERAL
The Racing Champions Charter currently provides that the aggregate number
of shares of all classes of capital stock which Racing Champions has authority
to issue is 20,000,000 shares of Racing Champions Common Stock.
As of the Racing Champions Record Date, Racing Champions had issued and
outstanding 13,242,382 shares of Racing Champions Common Stock. In addition,
Racing Champions has reserved 517,786 shares of Racing Champions Common Stock
for issuance upon exercise of outstanding stock options granted, primarily to
officers and employees, pursuant to Racing Champions' existing stock option
plans. Accordingly, as of the Racing Champions Record Date, Racing Champions had
available for issuance (i.e., not subject to contingent issuance commitments or
that it had not reserved for other purposes) approximately 6,239,832 authorized
shares of Racing Champions Common Stock.
PURPOSE AND EFFECT OF PROPOSED AMENDMENT
Under the Merger Agreement, the maximum number of shares of Racing
Champions Common Stock issuable in connection with the Merger (including shares
of Racing Champions Common Stock issuable upon exercise of options and warrants
to acquire Wheels Common Stock which are to be converted into and replaced by
options and warrants to acquire Racing Champions Common Stock in the Merger) is
3,557,916 shares if the Exchange Ratio is 0.51. In addition, the Merger
Agreement provides that Racing Champions will issue up to 220,000 New Options in
connection with the Merger. Accordingly, Racing Champions will have only
2,461,916 authorized shares of Racing Champions Common Stock available for
issuance after the consummation of the Merger if the Exchange Ratio is 0.51. The
Merger Agreement provides that the obligations of both Racing Champions and
Wheels to consummate the Merger are conditioned upon Racing Champions obtaining
stockholder approval of the Capitalization Amendment Proposal.
The Racing Champions Board approved, and voted to recommend to the holders
of Racing Champions Common Stock the adoption at the Racing Champions Annual
Meeting of the Capitalization Amendment to amend Article 4 of the Racing
Champions Charter to increase the number of shares of Racing Champions Common
Stock which Racing Champions has authority to issue from 20,000,000 to
28,000,000. The full text of the Capitalization Amendment is attached hereto as
Exhibit F and incorporated herein by this reference.
The Racing Champions Board believes that it is in the best interests of
Racing Champions and its stockholders to increase the number of authorized
shares of Racing Champions Common Stock in order to provide shares for issuance
in connection with possible future public or private financings, issuances of
stock to potential strategic business partners, acquisitions and for such other
general corporate purposes as may arise. Adoption of the Capitalization
Amendment would create approximately 10,461,916 shares of Racing Champions
Common Stock in excess of those represented by currently outstanding shares,
those shares currently reserved to satisfy estimated future contingent issuance
obligations of Racing Champions under presently existing agreements and
instruments, and those shares expected to be issued in connection with the
Merger. Such additional authorized shares of Racing Champions Common Stock would
be available for future issuance by Racing Champions in transactions or for
purposes authorized by the Racing Champions Board with or without, as required,
the need to obtain any further approval of such future issuances by a vote of
the holders of shares of Racing Champions Common Stock.
Future issuances of shares of Racing Champions Common Stock may not require
the approval of the stockholders of Racing Champions. As a result, the Racing
Champions Board could issue shares of Racing Champions Common Stock in a manner
that might have the effect of discouraging or making it more difficult for a
third party to acquire control of Racing Champions through a tender offer or
proxy solicitation or to effect a merger or other business combination that is
not favored by the Racing Champions Board. In addition, issuance of such shares
of Racing Champions Common Stock may increase the number of shares of Racing
Champions Common Stock that may become available for sale in the public market
and could adversely
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<PAGE> 78
affect the price of Racing Champions Common Stock in the public market. See
"RISK FACTORS -- Shares Eligible for Future Sale." Holders of shares of Racing
Champions Common Stock do not have preemptive rights or other rights to
subscribe for additional shares in the event that the Racing Champions Board
determines to issue additional shares of Racing Champions Common stock in the
future.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the outstanding shares of Racing
Champions Common Stock on the Racing Champions Record Date is required to
approve and adopt the Capitalization Amendment Proposal.
RACING CHAMPIONS BOARD RECOMMENDATION
The Racing Champions Board recommends that holders of shares of Racing
Champions Common Stock vote FOR the Capitalization Amendment Proposal. All
shares of Racing Champions Common Stock represented by properly executed proxies
received prior to or at the Racing Champion Special Meeting and not revoked will
be voted FOR this proposal unless a vote against or an abstention with respect
to this proposal is specifically indicated. If the Capitalization Amendment
Proposal is adopted by the requisite vote of the holders of shares of Racing
Champions Common Stock, Racing Champions intends to effect the Capitalization
Amendment regardless of whether the Merger is consummated.
ELECTION OF DIRECTORS
Pursuant to the Racing Champions By-Laws, the Racing Champions Board shall
consist of not less than three nor more than 15 directors, as determined from
time to time by resolution of the Racing Champions Board. The Racing Champions
Board has fixed the size of the Racing Champions Board at 11 directors and has
nominated 11 persons for election at the Racing Champions Annual Meeting to
serve for a term of one year expiring in 1999. Eight of the persons nominated by
the Racing Champions Board are incumbent directors and the other three nominees
have been nominated pursuant to the Merger Agreement to serve as directors of
Racing Champions conditioned upon the approval of the Merger Proposal and the
Capitalization Amendment Proposal at the Racing Champions Annual Meeting. If the
Merger Proposal and the Capitalization Amendment Proposal are not approved at
the Racing Champions Annual Meeting, the proxies will not be voted for these
three nominees and will be voted only for the eight incumbent directors. Racing
Champions anticipates that the nominees listed in this Joint Proxy
Statement/Prospectus will be candidates when the election is held. However, if
for any reason a nominee is not a candidate at that time, proxies will be voted
for a substitute nominee designated by Racing Champions (except where a proxy
withholds authority with respect to the election of directors).
RECOMMENDATION
THE RACING CHAMPIONS BOARD RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES
DESCRIBED BELOW AT THE RACING CHAMPIONS ANNUAL MEETING.
INFORMATION CONCERNING NOMINEES
Based upon information from the respective directors, set forth below is
information with respect to each of the individuals who are the nominees to the
Racing Champions Board.
Robert E. Dods. Mr. Dods, 49, has served as a director and as President of
Racing Champions since April 1996. Mr. Dods co-founded Racing Champions, Inc.
("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. Mr. Meyer, 56, 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
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<PAGE> 79
Dods-Meyer, Ltd., a manufacturers' representative agency which focused on
selling products to mass merchants.
Peter K.K. Chung. Mr. Chung, 44, 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.
Avy H. Stein. Mr. Stein, 42, 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. Mr. Guren, 51, 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. Mr. Gill, 34, 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. Mr. Bakalar, 50, 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
Rand-McNally, Inc. Mr. Bakalar also currently serves as an Advisory Partner of
Willis Stein & Partners, L.P.
John J. Vosicky. Mr. Vosicky, 49, 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.
Randy C. Baker. Mr. Baker, 38, has served as Chief Operating Officer of
Wheels since the acquisition of High Performance on October 17, 1997, and also
served as a director of Wheels from February 2, 1998 to March 4, 1998. Mr. Baker
co-founded High Performance in May 1996 and served as a director and as the
President and Chief Executive Officer of High Performance until it was acquired
by Wheels in October 1997. In May 1991, Mr. Baker founded RCB Enterprises, a
sourcing company for NASCAR-related souvenirs, novelties and apparel. Mr. Baker
has served as a director and as the President and Chief Executive Officer of RCB
Enterprises since its inception. From November 1985 to April 1991, Mr. Baker was
a buyer for Brody Co., Inc. which owned and operated a chain of specialty retail
stores and which also managed certain department stores located in North
Carolina.
Randy E. Duncan. Mr. Duncan, 37, has served as a director and Executive
Vice President of Wheels since August 1997. Mr. Duncan co-founded Diamond in
July 1995 and has served as a director and as the President of Diamond since
that time. From November 1994 through June 1995, Mr. Duncan was employed by
Wheels in sales and marketing positions. From 1989 through October 1994, Mr.
Duncan held various sales and marketing positions with Motorsports Traditions, a
distributor of NASCAR-related merchandise.
Victor H. Shaffer. Mr. Shaffer, 37, has served as the Chief Executive
Officer of Wheels since March 1998 and as a Vice President of Wheels since the
acquisition of Press Pass on December 31, 1997. Mr. Shaffer has also served as a
director of Wheels since February 2, 1998. Mr. Shaffer was a founder of Press
Pass and
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served as its Chief Executive Officer and President from its inception in August
1992 until December 31, 1997. From November 1990 to July 1992, Mr. Shaffer was
employed as Vice President of Marketing by Pro Set Inc., a privately held
trading card company. From 1986 to 1990, Mr. Shaffer was employed by Campus
Network, Inc., initially as a Director of Marketing and subsequently as Senior
Vice President of Sales and Marketing.
BOARD OF DIRECTORS AND BOARD COMMITTEES
The Racing Champions Board held five meetings in 1997. During 1997, all
directors attended at least 75% of the meetings of the Racing Champions Board
and committees thereof of which they were a member. The Racing Champions Board
has standing audit and compensation committees.
Audit Committee. The Audit Committee is comprised of Messrs. Gill
(Chairman), Bakalar and Vosicky. The Audit Committee is responsible for
recommending to the Racing Champions Board the appointment of independent
auditors, reviewing the scope of annual audit activities of the auditors,
approving the audit fee payable to the auditors and reviewing audit results. The
Audit Committee held one meeting in 1997.
Compensation Committee. The Compensation Committee is comprised of Messrs.
Stein (Chairman), Dods, Guren and Vosicky. The Compensation Committee reviews
and recommends to the Racing Champions Board the compensation structure for
Racing Champions' officers and other managerial personnel, including salary
rates, participation in incentive compensation and benefit plans, fringe
benefits, noncash perquisites and other forms of compensation. The Compensation
Committee also administers the Racing Champions 1996 Key Employees Stock Option
Plan and the Incentive Plan. The Compensation Committee did not hold any
meetings in 1997.
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 Racing Champions Board 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.
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Information concerning the officers of Racing Champions who are not
directors is set forth below.
Curtis W. Stoelting. Mr. Stoelting, 38, has served as Vice
President -- Finance and Operations and Secretary of Racing Champions since
April 1996. Mr. Stoelting has also served as Vice President -- 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. Mr. Olsen, 46, 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. Mr. Henseler, 39, 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. Mr. Camp, 40, 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.
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Douglas M. Dickson. Mr. Dickson, 39, has served as Vice
President -- Product Development of Racing Champions since October 1997. Prior
to joining Racing Champions, Mr. Dickson held product development positions in
the toy, consumer electronics and medical equipment industries.
Helena Lo. Ms. Lo, 38, has served as Finance and Administration Manager of
Racing Champions Limited since 1989. Ms. Lo received a bachelor's degree in
Business Administration and prior to joining Racing Champions Limited, Ms. Lo
was employed by a chartered accounting firm.
Kelvin Ng. Mr. Ng, 37, has served as Engineering Manager of Racing
Champions Limited since 1989. Mr. Ng is a degreed mechanical engineer with
extensive experience in replicating vehicles.
Rose Lam. Ms. Lam, 35, has served as Marketing and Customer Service
Manager of Racing Champions Limited since 1989. Prior to joining RCL, Ms. Lam
pursued various studies and received a bachelor's degree in economics.
Jody L. Taylor. Ms. Taylor, 29, has served as Controller since June 1996.
Prior to joining Racing Champions, Ms. Taylor was employed for five years by
Arthur Andersen LLP in Chicago, most recently as a manager. Ms. Taylor is a
Certified Public Accountant.
Michael A. Midtgaard. Mr. Midtgaard, 32, has served as Operations Manager
of Racing Champions, Inc. since 1994. Prior to 1994, Mr. Midtgaard served RCI
for over three years in various operations and systems areas.
Patrick A. Meyer. Mr. Meyer, 29, has served as National Sales Manager of
Racing Champions since July 1996. Prior to joining Racing Champions, Mr. Meyer
was employed as a sales representative by a seller of computer hardware from
1993 to 1996 and as a sales representative by Adolph Coors Company from 1991 to
1993. Patrick A. Meyer is the son of Boyd L. Meyer.
Racing Champions' executive officers include Messrs. Dods, Meyer, Chung,
Stoelting, Olsen, Henseler and Camp. The executive officers of Racing Champions
generally hold office for one year terms and until their successors are elected
and qualified.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Racing Champions' Compensation Committee (the "Compensation Committee"),
which is comprised of four members of the Racing Champions Board, is responsible
for considering and approving compensation arrangements for senior management of
Racing Champions, including Racing Champions' executive officers. The objectives
of the Compensation Committee in establishing compensation arrangements for
senior management are to: (i) attract and retain key executives who are
important to the continued success of Racing Champions; and (ii) provide strong
financial incentives, at reasonable cost to the stockholders, for senior
management to enhance stockholder value.
The primary components of Racing Champions' executive compensation program
are (i) base salary, (ii) incentive compensation bonuses and (iii) stock
options.
Base Salaries. The base salaries of Racing Champions' executive officers
have been set by their respective employment agreements entered into in April
1996. Each of the employment agreements provides that Racing Champions may
increase the executive officer's base salary throughout the term or any renewal
term of the agreement. During 1997, each executive officer received the minimum
base salary set forth in their respective employment agreements. In the future,
the Compensation Committee will consider appropriate increases in the base
salaries of Racing Champions' executive officers based on individual performance
and comparative industry compensation levels.
Incentive Bonuses. Racing Champions maintains the 1996 Key Employees
Performance Compensation Plan (the "Performance Compensation Plan"), the purpose
of which is to provide incentive compensation to certain executive officers and
other key employees in a form which relates the financial reward to an increase
in the value of Racing Champions to its stockholders. Participants under the
Performance Compensation Plan are entitled to receive a cash bonus during the
first quarter of 1998 based upon Racing Champions'
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consolidated earnings before income taxes, depreciation and amortization for the
year ended December 31, 1997 ("1997 EBITDA"). Pursuant to the Performance
Compensation Plan, a bonus pool was created equal to 5.12% of 1997 EBITDA,
subject to a minimum requirement of $19.0 million of 1997 EBITDA. The bonus pool
was then allocated among the participants in the Performance Compensation Plan
based on specified percentages.
Stock Incentive Plan. In 1997, Racing Champions established the Incentive
Plan. The Incentive Plan authorizes the Compensation Committee to grant stock
options to officers and other key employees. In June 1997, the Compensation
Committee granted options to purchase Racing Champions Common Stock to the named
executive officers as shown in the Summary Compensation Table.
Compensation of the Chief Executive Officer. During 1997, Mr. Dods
received a base salary as provided in his employment agreement. Mr. Dods does
not participate in the Performance Compensation Plan. Mr. Dods was not awarded
any stock options under the Incentive Plan in 1997. The Compensation Committee
believes that the size of Mr. Dods existing holdings of Racing Champions Common
Stock places Mr. Dods potential benefits in alignment with stockholder
interests.
COMPENSATION COMMITTEE:
Avy H. Stein (Chairman)
Robert E. Dods
Samuel B. Guren
John J. Vosicky
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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."
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS (#) COMPENSATION
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert E. Dods.......................... 1997 $500,000 $ -- -- $ --
President 1996 333,333 -- -- --
Boyd L. Meyer........................... 1997 500,000 -- -- --
Executive Vice President 1996 333,333 -- -- --
Peter K.K. Chung........................ 1997 500,000 -- -- --
President of Racing Champions Limited 1996 333,333 -- -- --
Curtis W. Stoelting..................... 1997 150,000 245,066 33,653 5,943(3)
Vice President -- Finance 1996 100,178 139,072 83,008 1,381(3)
and Operations and Secretary
John F. Olsen........................... 1997 125,000 171,546 25,338 6,919(4)
Vice President -- Sales 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 may designate the beneficiary. For 1997,
consists of $1,193 of premiums paid by Racing Champions for term life
insurance under which Mr. Stoelting may designate 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 may designate the beneficiary. For 1997,
consists of $2,169 of premiums paid by Racing Champions for term life
insurance under which Mr. Olsen may designate the beneficiary and $4,750 of
matching contributions under the Racing Champions Savings Plan.
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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 GRANT REALIZABLE VALUE
---------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED FOR OPTION TERM
OPTIONS TO 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
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ------------------------------- ----------------------------
<S> <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.
1996 Key Employees Stock Option Plan. On April 30, 1996 in connection with
the Recapitalization, the Racing Champions Board adopted, and Racing Champions'
stockholders subsequently approved, the 1996 Key Employees Stock Option Plan
(the "Stock Option Plan"). Under the Stock Option Plan, the Racing Champions
Board, or the Compensation Committee of the Racing Champions Board if so
designated by the Racing Champions Board, may grant options to purchase up to
415,041 shares of Racing Champions 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 Racing Champions Board 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 Racing
Champions 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 Racing
Champions Common Stock having a fair market value on the date of exercise equal
to the exercise price.
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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 Racing Champions Board
adopted, and Racing Champions' stockholders approved, the Incentive Plan. Under
the Incentive Plan, the Racing Champions Board, or the Compensation Committee of
the Racing Champions Board if so designated by the Racing Champions Board, may
grant options to purchase up to 311,852 shares of Racing Champions Common Stock
to executives or other key employees of Racing Champions. At the Racing
Champions Annual Meeting, Racing Champions stockholders will be asked to
consider and vote upon a proposal to amend the Incentive Plan to increase the
number of shares available for issuance under the Incentive Plan to 600,000. See
"PROPOSAL TO AMEND THE RACING CHAMPIONS CORPORATION STOCK INCENTIVE PLAN."
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
Racing Champions Board 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 Racing Champions
Board 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 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 Racing Champions Board 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 Racing
Champions 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 Racing
Champions Common Stock having a fair market value on the date of exercise equal
to the exercise price.
In the discretion of the Racing Champions Board 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 Racing Champions Common
Stock. The reload options represent an additional option to acquire the same
number of shares of Racing Champions 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 Racing Champions 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
Racing Champions Common Stock with an exercise price of $14 per share to
officers and key employees of Racing Champions under the Incentive Plan,
including options to purchase up to 78,852 shares of Racing Champions 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 Racing
Champions Common Stock directly from Racing Champions through payroll deductions
at a purchase price of at least 95% of fair market value of the Racing Champions
Common Stock. Up to 200,000 shares of Racing Champions 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 Racing Champions
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
Racing Champions Board of Directors adopted the Performance Compensation Plan.
Under the Performance Compensation Plan,
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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 December 31, 1996. On April 8, 1997, the
Racing Champions Board 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 Racing Champions Board 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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STOCK PERFORMANCE GRAPH
The chart below shows a comparison of the cumulative return since June 12,
1997 had $100 been invested at the close of business on June 11, 1997 in each of
the Racing Champions Common Stock, the Nasdaq Composite Index (all issuers), and
a peer group constructed by Racing Champions comprised of the following publicly
traded producers and distributors of collectibles or die cast vehicle replicas:
Action Performance Companies, Inc., Department 56, Inc., Empire of Carolina,
Lewis Galoob Toys, Inc., Hasbro, Inc., Mattel Inc., Play by Play Toys &
Novelties Inc., Russ Berrie & Co. Inc., Stanhome Inc., Toy Biz, Inc. and Zindart
Limited (the "Peer Group").
CUMULATIVE TOTAL RETURN COMPARISON*
RACING CHAMPIONS VERSUS PUBLISHED INDICES (NASDAQ COMPOSITE INDEX AND THE PEER
GROUP)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD RACING NASDAQ COMPOSITE
(FISCAL YEAR COVERED) CHAMPIONS** INDEX THE PEER GROUP
<S> <C> <C> <C>
JUNE 11, 1997 100 100 100
DECEMBER 31, 1997 49 112 116
</TABLE>
- ---------------
* Total return assumes reinvestment of dividends.
** The closing price of Racing Champions Common Stock on June 12, 1997 was
$15.75, and the closing price on December 31, 1997 was $7.75.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act 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
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have filed with the Commission on a timely basis all reports required to be
filed under Section 16(a) of the Exchange Act.
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 Racing Champions
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 these 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, Peter K.K. Chung's brother, 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.
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 Racing Champions 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 the Racing
Champions Offering. These securities were pledged as collateral for the note. As
of March 31, 1998, $98,599 was outstanding under this note. On April 14, 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.
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APPOINTMENT OF INDEPENDENT AUDITORS
The Racing Champions Board, upon recommendation of the Audit Committee, has
selected Arthur Andersen LLP to be Racing Champions' auditors for the 1998
fiscal year. Although this appointment is not required to be submitted to a vote
of stockholders, Racing Champions believes it appropriate as a matter of policy
to request that the stockholders ratify the appointment. If stockholder
ratification is not received, the Board of Directors may reconsider the
appointment. It is expected that a representative of Arthur Andersen LLP will be
present at the Racing Champions Annual Meeting and will have the opportunity to
make a statement if he desires to do so and will be available to respond to
appropriate questions.
The Racing Champions Board recommends a vote "FOR" ratification of Arthur
Andersen LLP as independent auditors for the purpose of auditing the financial
statements of the Racing Champions for fiscal 1998.
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PROPOSAL TO AMEND THE RACING CHAMPIONS CORPORATION
STOCK INCENTIVE PLAN
PURPOSE AND EFFECT OF PROPOSED AMENDMENT
Proposed Amendment. Subject to stockholder approval, the Racing Champions
Board has amended the Incentive Plan to increase from 311,852 to 600,000 the
aggregate number of shares of Racing Champions Common Stock that may be issued
or transferred thereunder upon the exercise or payment of stock options.
Purpose of Proposed Amendment. Racing Champions recognizes the importance
of attracting and retaining key employees of merit and stimulating the active
interest of those individuals in the development and financial success of Racing
Champions. The Racing Champions Board believes that the Incentive Plan is
critically important to the furtherance of these objectives. The Racing
Champions Board also believes that, through the Incentive Plan, Racing Champions
is able to enhance the prospects for its business activities and objectives and
more closely align the interests of key employees with those of stockholders by
offering key employees the opportunity to participate in Racing Champions'
future through proprietary interests in Racing Champions.
As of the Racing Champions Record Date, and absent stockholder approval of
the proposed amendment to increase the aggregate number of shares of Racing
Champions Common Stock available for issuance or transfer under the Incentive
Plan, there would be only 156,099 shares of Racing Champions Common Stock
remaining available for issuance with respect to additional stock options.
Pursuant to the Merger, Racing Champions expects to grant New Options to
purchase 220,000 shares of Racing Champions Common Stock to employees of Wheels.
There are not enough shares of Racing Champions Common Stock available for
issuance under the Incentive Plan to provide for the grant of the New Options.
The proposed amendments to the Incentive Plan would make sufficient shares of
Racing Champions Common Stock available for issuance with respect to the New
Options and would make an additional 224,247 shares of Racing Champions Common
Stock available for issuance in connection with future option grants. The
absence of an adequate number of shares of Racing Champions Common Stock
available for issuance or transfer under the Incentive Plan restricts both the
ability and the flexibility of Racing Champions to effectively attract and
retain and adequately compensate key employees. The Racing Champions Board
believes that it is both necessary and desirable to increase from 311,852 to
600,000 the aggregate number of shares of Racing Champions Common Stock
available for issuance or transfer under the Incentive Plan in order to allow
the grant of the New Options under the Incentive Plan and to continue to
maintain the effectiveness of the Incentive Plan.
DESCRIPTION OF INCENTIVE PLAN
The following description of the Incentive Plan is qualified in its
entirety by reference to the Incentive Plan, as proposed to be amended, which is
attached hereto as Exhibit G.
Under the Incentive Plan, as proposed to be amended, the Racing Champions
Board, or the Compensation Committee of the Racing Champions Board if so
designated by the Racing Champions Board, may grant options to purchase up to
600,000 shares of Racing Champions Common Stock to executives or other key
employees of Racing Champions. Options granted under the Incentive 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 Racing Champions Board 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
Racing Champions Board 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 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 Racing Champions Board or
the Compensation Committee, but for incentive stock options cannot be less than
100% (110% for certain stockholders) of the
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fair market value of the Racing Champions 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 Racing Champions Common Stock having a fair market value
on the date of exercise equal to the exercise price.
In the discretion of the Racing Champions Board 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 Racing Champions Common
Stock. The reload options represent an additional option to acquire the same
number of shares of Racing Champions 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 Racing Champions 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.
INCENTIVE PLAN BENEFITS
Set forth in the table below are the numbers of stock options granted in
fiscal 1997 to each of the named executive officers and certain groups.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION OR GROUP OPTIONS
- -------------------------- ---------
<S> <C>
Robert E. Dods, President................................... --
Boyd L. Meyer, Executive Vice President..................... --
Peter K.K. Chung, President of Racing Champions Limited..... --
Curtis W. Stoelting, Vice President -- Finance and
Operations and Secretary.................................. 33,653
John F. Olsen, Vice President -- Sales...................... 25,338
All executive officers, as a group.......................... 109,667
All directors who are not executive officers, as a group.... --
All employees as a group.................................... 155,753
</TABLE>
The types of awards and amounts thereof that may be granted under the
Incentive Plan to the above-named individuals and groups in the future are not
determinable at this time.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the shares of Racing Champions Common
Stock present in person or by proxy at the Racing Champions Annual Meeting is
required for approval of the proposed amendment to the Incentive Plan.
BOARD OF DIRECTORS RECOMMENDATION
The Racing Champions Board recommends a vote "FOR" approval of the proposed
amendment to the Incentive Plan.
COMPARATIVE RIGHTS OF STOCKHOLDERS
As a result of the Merger, stockholders of Wheels, whose rights are now
governed primarily by the NCBCA, the Wheels Charter and the Wheels By-Laws will
become stockholders of Racing Champions, a Delaware corporation, and as such
their rights will be governed by the DGCL, the Racing Champions Charter and
Racing Champions By-Laws. Certain differences arise from the change in governing
law as well as from distinctions between the Wheels Charter and the Wheels
By-Laws and the Racing Champions Charter and the Racing Champions By-Laws. The
material differences in the rights of stockholders of Wheels and Racing
Champions are discussed below. The following comparison of certain provisions of
the DGCL and the Racing Champions Charter and By-Laws, on the one hand, the
NCBCA and the Wheels Charter and By-Laws, on
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the other, does not purport to be a complete statement of the differences which
may affect the rights of stockholders.
AUTHORIZED CAPITAL STOCK
The Wheels Charter provides that Wheels has authority to issue 15,000,000
shares of Wheels Common Stock and 5,000,000 shares of Preferred Stock, par value
$.01 per share. The Racing Champions Charter provides that Racing Champions has
the authority to issue 20,000,000 shares of Racing Champions Common Stock. If
the Capitalization Amendment Proposal is approved by Racing Champions
stockholders at the Racing Champions Annual Meeting, Racing Champions will have
the authority to issue 28,000,000 shares of Racing Champions Common Stock.
COMMON STOCK
Holders of Racing Champions Common Stock do not have preemptive rights, or
any subscription, redemption or conversion privileges. Holders of Racing
Champions Common Stock are entitled to participate ratably in dividends on
Racing Champions Common Stock, if any, as declared by the Racing Champions
Board, and are entitled to share ratably in all assets available for
distribution to stockholders in the event of liquidation or dissolution of
Racing Champions. The outstanding shares of Racing Champions Common Stock are,
and the shares of Racing Champions Common Stock to be issued in connection with
the Merger in exchange for outstanding shares of Wheels Common Stock will be,
legally issued, fully paid and nonassessable.
Holders of Wheels Common Stock do not have preemptive rights or any
subscription, redemption or conversion privileges. Holders of Wheels Common
Stock are entitled to participate ratably in dividends on Wheels Common Stock,
if any, as declared by the Wheels Board, and are entitled to share ratably in
all assets available for distribution to stockholders in the event of
liquidation or dissolution of Wheels.
BOARD AUTHORIZED PREFERRED STOCK
Under the Wheels Charter, the Wheels Board is authorized to issue, without
further stockholder approval, up to 5,000,000 shares of preferred stock from
time to time in one or more series and to fix the powers, designations,
preferences or other rights of the shares and the qualifications, limitations
and restrictions of such shares. Preferred stock issued by Wheels may rank prior
to Wheels Common Stock as to dividend rights, liquidation preferences, or both,
may have full or limited voting rights (including multiple voting rights and
voting rights as a class) and may be convertible into shares of Wheels Common
Stock. The Racing Champions Charter does not authorize the Racing Champions
Board to issue preferred stock.
VOTING RIGHTS
All voting rights in Racing Champions and Wheels are presently vested in
the holders of Racing Champions Common Stock and Wheels Common Stock,
respectively. Each share of Racing Champions Common Stock and each share of
Wheels Common Stock is entitled to one vote on all matters presented to the
stockholders. The voting rights vested in holders of Wheels Common Stock are
subject to the authority granted in the Wheels Charter to the Wheels Board to
issue preferred stock with voting rights. The issuance of preferred stock with
voting rights could affect the voting rights of the holders of Wheels Common
Stock. The Racing Champions Charter does not authorize the issuance of any
preferred stock.
DIRECTORS
Number. The Racing Champions By-Laws provide that the number of directors
will not be less than three nor more than 15. The Racing Champions Board
currently consists of eight members. At the Effective Time, the size of the
Racing Champions Board will be expanded to 11 members in order to allow the
election of three members designated by Wheels. The Racing Champions Charter
provides that the Racing Champions Board has the exclusive right to fill
vacancies in the Racing Champions Board, including vacancies created by
expansion of the Racing Champions Board or the removal of a director, and that
any director
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elected to fill a vacancy shall serve until the next election of the class for
which such director shall have been chosen.
The Wheels Charter provides that the number of directors will not be less
than three nor more than 12. The Wheels Board currently consists of eight
members.
Removal of Directors. The Racing Champions By-Laws provide that directors
may be removed from office with or without cause only by the holders of a
majority of the outstanding shares then entitled to vote at an election of
directors.
The Wheels By-Laws provide that directors may be removed from office with
or without cause by a vote of stockholders holding a majority of the shares
entitled to vote at an election of directors.
Election of Directors. The DGCL permits, but does not require, the
adoption of a "classified" board of directors with staggered terms under which
part of the board of directors is elected each year for a maximum term of three
years. The Racing Champions Charter does not provide for such a "classified"
board of directors. The DGCL provides that a corporation's directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at a meeting and entitled to vote on the election of
directors. Under the DGCL, stockholders of a corporation may not elect directors
by cumulative voting unless the corporation's certificate of incorporation so
provides. The Racing Champions Charter does not provide for cumulative voting.
The NCBCA permits, but does not require, the adoption of a "classified"
board of directors with staggered terms under which part of the board of
directors is elected each year for a maximum term of three years. The Wheels
Charter provides that if the number of directors of Wheels is fixed by the
Wheels Board at six or more, the directors' terms of office shall be staggered
by dividing the total number of directors into two or three groups, with each
group containing one-half or one-third of the total. The Wheels Board has not
taken any action to implement a classified board and does not intend to take any
such action prior to the consummation of the Merger. The NCBCA provides that a
corporation's directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at a meeting and entitled to
vote on the election of directors. Under the NCBCA, stockholders of a
corporation may not elect directors by cumulative voting unless the
corporation's certificate of incorporation so provides. The Wheels Charter does
not provide for cumulative voting.
DISSENTERS' RIGHTS
Under the DGCL, a stockholder of a corporation participating in certain
merger and similar transactions may, under certain circumstances, receive cash
in the amount of the fair value of his shares (as determined by a court) in lieu
of the consideration he would otherwise receive in the merger. Unless a
corporation's certificate of incorporation provides otherwise, the DGCL does not
require that such dissenters' rights of appraisal be afforded with respect to a
merger or consolidation (i) to stockholders of a corporation, the shares of
which are either listed on a national securities exchange or the Nasdaq National
Market or widely held (by more than 2,000 stockholders), if the stockholders of
such corporation receive only shares of the surviving corporation or of a listed
or widely held corporation (plus cash in lieu of any fractional shares), or (ii)
to stockholders of a corporation surviving a merger, if no vote of such
stockholders is required to approve the merger because, pursuant to Section
251(f) of the DGCL, the agreement of merger does not amend the certificate of
incorporation of the surviving corporation, each share of stock of the surviving
corporation outstanding immediately prior to the effective date of the merger is
to be identical to outstanding or treasury shares of the surviving corporation
after the effective date of the merger and the number of shares of common stock
into which securities to be issued in the merger can be converted does not
exceed 20% of the shares of common stock of the surviving corporation
outstanding immediately prior to the merger. The Racing Champions Charter does
not provide for appraisal rights and thus holders of shares of Racing Champions
Common Stock (in light of the fact that such shares are traded on the Nasdaq
National Market) may not be entitled to appraisal rights in certain
circumstances.
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Under the NCBCA, a stockholder of a North Carolina corporation may have
dissenters' rights in connection with the consummation of a merger in which the
corporation participates, the consummation of the sale of all or substantially
all of the corporation's assets, certain amendments to the articles of
incorporation of the corporation and similar transactions. The NCBCA does not
provide for any exception to the application of dissenters' rights for a
corporation whose shares are traded on a national securities exchange or the
Nasdaq National Market or otherwise widely held. The application of dissenters'
rights under North Carolina law with respect to the Merger is described herein
under "DISSENTERS' RIGHTS."
DERIVATIVE ACTIONS
Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, a Delaware corporation. The DGCL provides that a
stockholder must aver in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he or she first makes a demand on
the corporation that it bring suit and such demand is refused, unless it is
shown that such demand would have been futile.
Under the NCBCA, a stockholder of a North Carolina corporation may
institute a lawsuit in the name of the corporation upon meeting certain
requirements, including the requirement of making a written demand upon the
corporation to take appropriate action and refraining from filing a lawsuit with
respect to such demand until 90 days expires following such demand, unless the
corporation notifies the stockholder that it rejected the demand or irreparable
injury would result to the corporation by waiting for the 90 days to expire.
AMENDMENT OF CHARTER AND BY-LAWS
The DGCL requires a vote of the corporation's Board of Directors followed
by the affirmative vote of a majority of the outstanding stock of each class
entitled to vote for any amendment to the Certificate of Incorporation, unless a
greater level of approval is required by the Certificate of Incorporation. The
Racing Champions Charter does not require a greater level of approval. If any
amendment would alter the powers, preferences or special rights of a particular
class or series of stock so as to affect them adversely, the class or series
shall be given the power to vote as a class notwithstanding the absence of any
specifically enumerated power in the Certificate of Incorporation. The DGCL also
states that the power to adopt, amend or repeal the By-Laws of a corporation
shall be in the stockholders entitled to vote, provided that the corporation in
its Certificate of Incorporation may confer such power on the Board of Directors
in addition to the stockholders. The Racing Champions Charter expressly
authorizes the Racing Champions Board to adopt, amend or repeal the Racing
Champions By-Laws, provided that: (i) no By-Law adopted by stockholders may be
amended, repealed or readopted by the Racing Champions Board if the By-Law so
adopted so provides; and (ii) a By-Law adopted or amended by the stockholders
that fixes a greater or lower quorum requirement or a greater voting requirement
for the Racing Champions Board than otherwise provided in the DGCL may not be
amended or repealed by the Racing Champions Board unless the By-Law expressly
provides that it may be amended or repealed by a specified vote of the Racing
Champions Board.
Under the NCBCA, stockholders can amend or repeal a corporation's bylaws,
even though the bylaws can be amended by the board of directors. In the absence
of a provision in the articles of incorporation or the bylaws requiring
stockholder action to amend the bylaws, the board of directors is authorized to
amend them without stockholder approval, except that the board of directors may
not adopt, repeal or amend a bylaw adopted, repealed or amended by the
stockholders, unless the articles of incorporation or a bylaw adopted by the
stockholders authorizes the board of directors to adopt, amend or repeal that
particular bylaw or the bylaws generally. The Wheels Charter does not require
stockholder action to amend the Wheels By-Laws.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT ANNUAL MEETINGS
The Racing Champions By-Laws establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders of
Racing Champions and for nominations by stockholders of candidates for election
as directors at an annual meeting or a special meeting at which directors are to
be elected. Subject to any other applicable requirements, including, without
limitation, Rule 14a-8 under the
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Exchange Act, or any successor provision, only such business may be conducted at
an annual meeting of stockholders as has been brought before the meeting by, or
at the direction of, the Racing Champions Board, or by a stockholder who has
provided the Secretary of Racing Champions timely written notice of the
stockholder's intention to bring such business before the meeting. Only persons
who are nominated by, or at the direction of, the Racing Champions Board, or who
are nominated at the meeting by a stockholder who has given timely written
notice to the Secretary of Racing Champions prior to the meeting at which
directors are to be elected, will be eligible for election as directors of
Racing Champions.
All such notices must include: (i) a representation that the person sending
the notice is a stockholder of record and will remain such through the record
date for the meeting; (ii) the name and address, as they appear on Racing
Champions' books, of such stockholder; (iii) the class and number of the Racing
Champions' shares which are owned beneficially and of record by such
stockholder; and (iv) a representation that such stockholder intends to appear
in person or by proxy at such meeting to make the nomination or move for the
consideration of other business set forth in the notice. Notice as to proposals
with respect to any business to be brought before the meeting other than the
election of directors shall also set forth the text of the proposal and may set
forth any statement in support thereof that the stockholder wishes to bring to
the attention of Racing Champions, and shall specify any material interest of
such stockholder in such business. Notice as to nominations of a director shall
identify the nominee and include the written consent of each nominee to serve as
a director if so elected.
The Wheels By-Laws do not provide for a similar advance notice procedure
for stockholder proposals or nominations at an annual meeting.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The DGCL provides that a corporation may limit or eliminate a director's
personal liability for monetary damages to the corporation or its stockholders,
except for liability (i) for any breach of the director's duty of loyalty to
such corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for paying a dividend or approving a stock repurchase in violation of
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. The Racing Champions Charter provides
that, to the full extent provided by law, a director will not be personally
liable for monetary damages to such corporation or its stockholders for or with
respect to any acts or omissions in the performance of his or her duties as a
director of such corporation.
Under the DGCL, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interest of, the corporation,
and, with respect to any criminal action or proceeding, if they had no
reasonable cause to believe their conduct was unlawful. The Racing Champions
Charter and the Racing Champions By-Laws provide to directors and officers
indemnification to the full extent provided by law, thereby affording the
directors and officers of Racing Champions the protections available to
directors and officers of Delaware corporations. Article VII of the Racing
Champions By-Laws also provides that expenses incurred by a person in defending
a civil or criminal action, suit or proceeding by reason of the fact that he or
she is or was a director or officer shall be paid in advance of the final
disposition of such action, suit or proceeding, upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by
Racing Champions as authorized by relevant Delaware law.
The Wheels Charter and the Wheels By-Laws provide protection to its
officers and directors against monetary liability for actions taken by them in
the performance of their duties as officers and directors and exonerate
directors from monetary liability for such actions. The exoneration from
monetary liability does not apply to actions taken by a director who knew at the
time of the act or omission that the action was clearly in conflict with the
best interests of Wheels, to liability for unlawful distributions approved by a
director or to any
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transaction from which the director received an improper benefit. The Wheels
By-Laws, as well as the statutory law of North Carolina, afford broad protection
from liability and indemnification from expense. An officer or director who is
wholly successful in defending a claim is generally entitled to full
indemnification for expenses incurred in the defense. One who is partially
successful may be entitled to indemnification for the amount of any judgment as
well as payment of expenses, provided that the individual did not violate his or
her statutory duty to Wheels. In any event, the court hearing a matter has
authority to determine whether the person accused is entitled to
indemnification. Wheels has purchased a directors and officers liability
insurance policy that provides coverage to Wheels and to its officers and
directors for actions taken by them in the ordinary course of their duties.
PROVISIONS APPLICABLE TO BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Under Section 203 of the DGCL, certain "business combinations" between a
Delaware corporation, whose stock generally is publicly traded or held of record
by more than 2,000 stockholders, and an "interested stockholder" are prohibited
for a three-year period following the date that such stockholder became an
interested stockholder, unless (i) the business combination was approved by the
board of directors of the corporation before the other party to the transaction
became an interested stockholder, (ii) upon consummation of the transaction that
made it an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a confidential
right to tender or vote stock held by the plan), or (iii) the business
combination was approved by the board of directors of the corporation and
ratified by holders of 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the corporation's directors.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any stockholder who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock.
Because Willis Stein & Partners, L.P. became an "interested stockholder" of
Racing Champions before the amendment and restatement of the Racing Champions
Charter effective June 17, 1997, Willis Stein & Partners, L.P. is exempted from
the operation of Section 203 of the DGCL.
Under the NCBCA, no business combination (defined to include any merger,
consolidation, share exchange or sale of all or any substantial part of the
corporation's assets) involving a corporation (such as Wheels) which has a class
of securities registered under the Exchange Act and any entity that is the
beneficial owner, directly or indirectly, of more than 20% of the corporation's
voting shares may be consummated unless the holders of 95% of the outstanding
voting shares approve the business combination. This provision does not apply if
the parties comply with certain requirements specified in the NCBCA relating to
the value of the consideration paid in the business combination, the composition
of the corporation's board of directors, the disclosure to stockholders
regarding the business combination and other procedural matters.
When a corporation (such as Wheels) is incorporated in North Carolina and
has substantial assets in North Carolina, its principal place of business or a
principal office within North Carolina, a class of securities registered under
the Exchange Act and more than 10% of its stockholders resident in North
Carolina or more than 10% of its shares held by North Carolina residents, any
acquisition which, along with previous holdings, gives the acquiror at least 20%
of the corporation's voting stock triggers a stockholder approval mechanism. If
the acquiror files a statutorily required disclosure statement, requests a
special meeting of stockholders at which all disinterested stockholders (those
not affiliated with the acquiror) consider and vote upon whether the acquiror
shall have voting rights with respect to the shares of such corporation held by
it and agrees to pay all costs incurred in connection with such meeting, then
the corporation must call such a meeting within
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10 days and hold such meeting within 50 days of such request. Without
stockholder approval, the shares acquired by the acquiror have no voting rights.
If the shares held by acquiror are accorded voting rights pursuant to the
procedure described above and the acquiror beneficially owns more than 50% of
the corporation's outstanding shares, each of the corporation's other
stockholders have the right to require that the corporation redeem their shares
at a price not less than the highest price per share paid by the acquiror for
any of its shares.
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger or consolidation of a
corporation, except that, unless required by its Certificate of Incorporation,
no authorizing stockholder vote is required of a corporation surviving a merger
if (a) such corporation's Certificate of Incorporation is not amended to any
respect by the merger; (b) each share of stock of such corporation outstanding
immediately prior to the effective date of the merger will be an identical
outstanding or treasury share of the surviving corporation after the effective
date of the merger; and (c) the number of shares to be issued in the merger does
not exceed 20% of such corporation's outstanding common stock immediately prior
to the effective date of the merger. The Racing Champions Charter does not
require a greater percentage vote for such actions. Stockholder approval is also
not required under the DGCL for mergers or consolidations in which a parent
corporation merges or consolidates with a subsidiary of which it owns at least
90% of the outstanding shares of each class of stock.
The NCBCA requires the affirmative vote of a majority of votes entitled to
be cast by each voting group entitled to vote thereon to authorize any merger or
consolidation of a corporation, except that, unless required by its Articles of
Incorporation, no authorizing stockholder vote is required of a corporation
surviving a merger if: (a) such corporation's Articles of Incorporation are not
amended to any respect by the merger; (b) each share of stock of such
corporation outstanding immediately prior to the effective date of the merger
will be an identical outstanding or treasury share of the surviving corporation
after the effective date of the merger; (c) the number of voting shares to be
issued in the merger does not exceed 20% of such corporation's outstanding
voting shares immediately prior to the effective date of the merger; and (d) the
number of participating shares to be issued in the merger does not exceed 20% of
such corporation's outstanding participating shares immediately prior to the
effective date of the merger. The Wheels Charter does not require a greater
percentage vote for such actions. Stockholder approval is also not required
under the NCBCA for mergers or consolidations in which a parent corporation
merges or consolidates with a subsidiary of which is owns at least 90% of the
outstanding shares of each class of stock.
STOCKHOLDER CONSENT IN LIEU OF MEETING
Under the DGCL and the NCBCA, unless otherwise provided in the Certificate
or Articles of Incorporation, any action required to be taken or which may be
taken at any annual or special meeting of stockholders may be taken without a
meeting if a consent in writing is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize such action at a meeting at which all shares entitled to vote were
present and voted. Neither the Racing Champions Charter nor the Wheels Charter
imposes any limitations on actions of stockholders by written consent.
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ADDITIONAL INFORMATION REGARDING RACING CHAMPIONS
DESCRIPTION OF BUSINESS
General
Racing Champions 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 replicas 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.
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 30.0% 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 classic and custom die cast
vehicle replicas primary market 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 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
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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 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
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generated more than $2.5 billion at retail since the inception of the first Star
Trek television series in the late 1960's.
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 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 -- adult males 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 dedicated suppliers in China for the production of its die cast
products. 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 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 classic and custom 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
producer of NASCAR-licensed merchandise, will further
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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
-------------------- --------
<C> <S>
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
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
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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 introduced its Signature Drivers Series in
1998. The Signature Drivers Series consists of 1:64 and 1:24 scale stock cars
and 1:64 scale transporters which 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.
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
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from various U.S. cities and 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. 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,
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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(R) 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
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(TM) and Collectible Champions(TM).
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.
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<PAGE> 105
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., 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
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.
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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 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
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<PAGE> 107
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 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 the date of this Joint Proxy
Statement/Prospectus, 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.
Facilities
Racing Champions' facilities are as follows:
<TABLE>
<CAPTION>
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
- ----------- ----------- -------- ----------------
<S> <C> <C> <C>
Glen Ellyn,
Corporate Headquarters................ 12,280 Illinois October 2000
Foreign Headquarters.................. 7,900 Kowloon, Hong Kong July 1998
Warehouse............................. 19,183 Chicago, Illinois December 1998
</TABLE>
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Regulation and Legal Matters
On June 5, 1997, Petty Enterprises, Inc. filed a civil action in North
Carolina state court naming RCI as a defendant. The complaint relates to Racing
Champions' production and sale of racing replicas bearing trademarks and trade
names owned by 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. Racing Champions 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 Racing Champions' counterclaim. Racing Champions
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of Racing Champions' financial
condition and results of operations should be read in conjunction with the
Racing Champions' consolidated Financial Statements and Notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus. The matters discussed in
this section that are not historical or current facts deal with potential future
circumstances and developments. Such forward-looking statements include, but are
not limited to, the development and market acceptance for new products, trends
in the results of Racing Champions' operations and Racing Champions' anticipated
capital requirements and capital resources. Racing Champions' actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below as well as those discussed under the caption "Risk
Factors" and elsewhere in this Joint Proxy Statement/Prospectus.
Overview
Corporate and Product History. Racing Champions 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 popular professional racing series, including NASCAR, NHRA, CART,
IRL and World of Outlaws. The majority of its products are sold through mass
merchants, such as K-Mart, Target, Toys 'R' Us and Wal-Mart. Racing Champions
has maintained strong profit margins while selling through the mass merchant
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, which
included racing car replicas. The RCI Group was owned by Robert E. Dods and Boyd
L. Meyer and operated Racing Champions' domestic operations and the RCL Group
was owned by Peter K.K. Chung and 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
of these
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excess inventories, 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 lower
quality new market entrants, Racing Champions took several steps to enhance the
collectibility of Racing Champions 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 Racing
Champions' 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 consummated the Recapitalization in
which a new holding company, Racing Champions Corporation, acquired the domestic
operations of the RCI Group and the foreign operations of the RCL Group. This
acquisition was accounted for using the purchase method. The acquisition costs
in excess of the fair value of net assets of the acquired businesses (goodwill)
is being amortized on a straight-line basis over a 40-year period 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 Racing Champions
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(TM) 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(TM), a new line of collectible die cast hot rod car replicas which is
supported by licensing and marketing arrangements 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,
which are supported by 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' product
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.
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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, aggregate royalties by
product ranged from approximately 3% to 19% of Racing Champions' selling price,
and averaged approximately 15.7%. 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.
Results of Operations
The following tables set forth for the periods indicated certain items
reflected in the 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
--------------------------------------- ---------------------------------------
EIGHT MONTHS YEAR ENDED YEAR ENDED
YEAR ENDED ENDED DECEMBER 31, 1997 DECEMBER 31, 1996
DECEMBER 31, 1997 DECEMBER 31, 1996 (UNAUDITED) (UNAUDITED)
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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 58.9
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 Racing Champions Offering occurred on
January 1, 1997. Pro forma data for 1996 assume the Racing Champions 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.
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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.......... 9,491 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 by decreases 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.
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
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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 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 on
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
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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%.
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.
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
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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.
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, 1995
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
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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
Racing Champions' 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.
On June 17, 1997, Racing Champions revised and amended its credit agreement
with BankBoston, N.A. and certain other lenders (the "Racing Champions Credit
Facility"). The Racing Champions Credit Facility provides for a revolving loan,
a five year term loan and the issuance of letters of credit. The revolving loan
allows Racing Champions to borrow up to $5 million at any time prior to June 28,
2002, based upon levels of Racing Champions' accounts receivable, inventory and
cash flows and the amount of letter of credit exposure. Racing Champions 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 Racing Champions.
The term loan and the revolving term loan bear interest, at Racing
Champions' 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 Racing Champions'
financial performance and is currently 0.00% for base rate loans and 1.50% for
Eurodollar loans. The Racing Champions Credit Facility requires Racing Champions
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 Racing Champions' 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 its Hong Kong subsidiary. As of
December 31, 1997, the Hong Kong subsidiary had no outstanding borrowings under
this line of credit.
Racing Champions' anticipated debt service obligations under 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, Racing Champions anticipates replacing Wheels' current credit
facility with borrowings from Racing Champions' 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 Racing
Champions including the Wheels credit facility would be approximately $5.3
million through September 2003.
Racing Champions has met its working capital needs through funds generated
from operations and available borrowings under the credit agreement. Racing
Champions' working capital requirements fluctuate during the year based on the
timing of the racing season. Due to seasonal increases in demand for Racing
Champions' racing replicas, working capital financing requirements are usually
highest during the third and
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fourth quarters. Racing Champions estimates that capital expenditures during
1998, principally for molds and tooling, will be approximately $4.0 million.
Racing Champions 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 Racing Champions 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.
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 will
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.
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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Racing Champions Common Stock as of March 31, 1998 by: (i) each of
Racing Champions' directors, director nominees and named executive officers;
(ii) all directors, director nominees 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 *
Randy C. Baker................................... -- --
Randy E. Duncan.................................. -- --
Victor H. Shaffer................................ -- --
Curtis W. Stoelting(6)........................... 154,242 1.2
John F. Olsen(7)................................. 53,268 *
Willis Stein & Partners, L.P.(8)................. 2,381,249 18.0
All directors, nominees and executive officers as
a group (15 persons)(9)........................ 7,267,827 54.2
</TABLE>
- ---------------
* Denotes less than 1%.
(1) Includes 343,798 shares of Racing Champions 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.
(2) Represents shares of Racing Champions 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 by virtue of his
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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 Racing Champions Common Stock held by a corporation
controlled by Mr. Chung.
(4) Represents shares of Racing Champions 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 Racing Champions
Common Stock held by Baird Capital Partners II Limited Partnership or BCP II
Affiliates Fund Limited Partnership.
(5) Represents shares of Racing Champions Common Stock held by Willis Stein &
Partners, L.P. Mr. Stein may be deemed to beneficially own the shares of
Racing Champions Common Stock owned by Willis Stein 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 55,677 shares of Racing Champions Common Stock subject to stock
options which are currently exercisable.
(7) Includes 33,555 shares of Racing Champions 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 Racing Champions 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 Racing Champions Common Stock held by a
corporation controlled by Mr. Chung, (ii) 343,798 shares of Racing Champions
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 Racing Champions Common Stock for which Messrs.
Gill and Stein share voting and investment power and 651,431 shares of
Racing Champions Common Stock for which Mr. Guren shares voting and
investment power (Messrs. Gill, Stein and Guren disclaim beneficial
ownership in such shares of Racing Champions Common Stock) and (iv) 156,342
shares of Racing Champions Common Stock subject to stock options which are
currently exercisable.
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ADDITIONAL INFORMATION REGARDING WHEELS
BUSINESS
Wheels designs, markets and distributes premium quality collectible sports
trading cards primarily featuring the race drivers, team owners and crew chiefs
active in NASCAR-sanctioned racing events. Wheels has license agreements
covering its premium quality collectible sports trading cards with substantially
all of NASCAR's drivers and teams. Wheels generally produces between three or
four premium quality collectible sports trading card limited issues each year
and markets each issue to a network of distributors, brokers and specialty hobby
dealers located principally throughout the southeast United States. Wheels
estimates that customers in the hobby channel such as distributors and hobby
dealers, sports memorabilia shops, sports trading card stores and toy stores
have historically accounted for approximately 85% of sales, with the remaining
15% of sales accounted for by the retail channel, which consists of distributors
and brokers who resell collectible sports trading cards to mass merchandisers,
wholesale clubs and variety stores. Wheels has also sold its collectible sports
trading cards to members of the Wheels Club, a membership club organized by
Wheels, and to businesses for use in corporate promotions. Wheels' collectible
sports trading cards are generally priced for sale in the premium and
high-priced market. Each issue of Wheels' collectible sports trading cards
includes standard sets and "premium insert" card sets, which may be divided into
"parallel" sets. According to the January 1998 edition of Sports Cards Magazine
and Price Guide, seven collectible insert cards produced by Wheels or Press Pass
in 1997 were among the top 10 premium insert cards for NASCAR race drivers and
six standard cards produced in 1997 were among the top 10 issues for NASCAR race
drivers. According to Sports Cards Magazine and Price Guide, the selection of
the top 10 trading cards reflects increasing retail prices in the secondary
market as well as the trading card industry's most popular and most frequently
purchased trading cards. In addition to NASCAR, Wheels produced draft pick
collectible trading card sets in 1997 for leading college basketball and
football players, which it expects to continue in future years.
The Acquired Companies
In order to expand its collectible sports trading card business and to
enter into additional NASCAR related businesses, during 1997 Wheels acquired
Press Pass, High Performance, GRS and Diamond (collectively, the "Acquired
Companies"). Wheels and each of the Acquired Companies, which are described
below, have consolidated their operations in Mooresville, North Carolina. In
January 1997, Wheels also acquired World of Racing to offer participants the
opportunity to play a fantasy NASCAR race game through telephone, fax and the
internet. Wheels discontinued the operations of World of Racing effective June
30, 1997. Wheels also acquired Emerald in August 1997 through a merger of
Emerald into Diamond. Accordingly, references to Diamond also include Emerald.
Press Pass. On December 31, 1997, Wheels acquired the two corporate
partners of Press Pass, a general partnership based in Dallas, Texas. Press Pass
was formed in 1993 to design, market and distribute collectible sports trading
cards, primarily for the NASCAR market. Press Pass has license agreements with
many of NASCAR's top drivers and teams, including Dale Earnhardt, Jeff Gordon,
Dale Jarrett and Terry LaBonte. Press Pass sells its collectible sports trading
cards to specialty hobby dealers and national mass market retailers, including
Wal-Mart, K-Mart and Target. Press Pass sells to the hobby channel on a direct
basis and also through a network of approximately 30 wholesale distributors. The
hobby channel and mass market retail channel have each historically accounted
for approximately 50% of Press Pass' total revenues. Press Pass also sells
collectible sports trading cards through the Press Pass VIP Club, a membership
club established by Press Pass which has recently been combined with the Wheels
Club and renamed the VIP Club. In 1997 Sports Cards Magazine and Price Guide
recognized Press Pass cards as insert single of the year, regular issue single
of the year and racing set of the year in the NASCAR category. Also in 1996,
Press Pass received the Sports Cards Magazine and Price Guide award for best
innovation in the sports card trading industry for the "Burning Rubber" issue,
which had pieces of tires used in Winston Cup races embedded in the premium
insert cards. Press Pass was the third leading producer of NASCAR collectible
trading cards during 1995, the second leading producer during 1996 and the
leading producer during 1997. In addition to NASCAR, Press Pass has produced
draft pick collectible trading cards for leading football and basketball players
since 1995.
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High Performance. In order to diversify its NASCAR-related business
operations, Wheels acquired High Performance in October 1997. High Performance
is licensed by certain NASCAR race drivers, team owners and sponsors to
distribute T-shirts, hats, apparel, souvenirs and other merchandise to
convenience stores, mass market retailers such as Wal-Mart and K-Mart, grocery
stores, auto dealerships and other retail outlets. High Performance markets its
NASCAR licensed merchandise through its own sales and distribution personnel and
through approximately 40 independent distributors who primarily service the
convenience store channel. As of January 31, 1998, Wheels estimates that its
High Performance merchandise was carried in approximately 10,000 of the
estimated 125,000 convenience stores located in the United States. Wheels
estimates that the convenience store channel and mass market retailers each
accounted for approximately 25% of High Performance's total revenues during
1997, with remaining revenues attributable to grocery stores, drug stores,
special promotions, trackside sales and other retail outlets.
Diamond and GRS. Wheels established trackside retail operations during
1997 through its acquisitions of GRS and Diamond. During the 1997 Winston Cup
Series, GRS and Diamond each operated three tractor-trailer rigs for the
trackside sale of NASCAR-related merchandise. In 1998, Wheels expects to operate
13 trailers at the 33 races which will comprise the 1998 Winston Cup Series. In
1998, Wheels will be the exclusive trackside vendor of T-shirts, hats, apparel,
collectible sports trading cards, die cast vehicle replicas, souvenirs and other
merchandise for 11 NASCAR teams and corporate sponsors, including the McDonald's
team and driver Bill Elliott, Coors Light and driver Sterling Marlin, Exide
Batteries and driver Jeff Burton, R.J. Reynolds and driver Jimmy Spencer, First
Union and driver Wally Dallenbach and the Cartoon Network. Wheels will also
operate the trackside licensed souvenir programs for both Chevrolet and Ford.
The acquisition of Diamond has also enabled Wheels to offer corporate
hospitality programs at certain NASCAR events. During the 1998 Winston Cup
Series, Wheels will manage the trackside corporate hospitality programs for
Ferguson Enterprises and Goody's Pharmaceuticals, a division of Block Drug
Company, Inc. The Ferguson Enterprises hospitality program will cover 11 of the
Winston Cup races during 1998, while the Goody's program will cover two races.
At each event, Wheels will be responsible for coordinating and obtaining
corporate suites or hospitality tents, tickets to the event, passes to tour the
track pits and other track facilities, food and beverages, and NASCAR related
merchandise and souvenirs for a specified number of guests. During 1997, Diamond
managed corporate hospitality programs at nine events covering a total of
approximately 2,700 guests. During 1998, Wheels expects to manage corporate
hospitality programs at 11 events covering a total of approximately 3,500
guests.
Industry and Market Overview
The NASCAR Racing Market. NASCAR, which sanctions all races that
constitute the Winston Cup and the Busch Grand National Stock Car Series, has
enjoyed significant increases in popularity and media exposure, leading to
greater visibility for the race drivers, team owners and crew chiefs active in
NASCAR racing. Attendance at NASCAR Winston Cup Series events has significantly
exceeded attendance growth experienced by other major sports. The entire 1997
Winston Cup Series was broadcast to national television audiences by television
networks and cable channels, and also received extensive national radio
coverage.
Collectible Sports Trading Card Industry. According to the Sports Card
Manufacturers Association, Inc. ("SCMA"), a trade organization comprised of the
four largest manufacturers of collectible sports trading cards, the collectible
sports trading card market generated sales of approximately $560 million in
1995, which equates to retail sales of approximately $900 million. Sales of
collectible sports trading cards are most directly influenced by the popularity
of the related sport, which is most effectively measured by fan attendance,
media ratings and exposure. In the late 1980's, sales of collectible sports
trading cards experienced significant growth, increasing from $250 million in
1988 to approximately $982 million in 1991. This significant increase in sales
was accompanied by changes in the market, as the number of distributors and
dealers expanded and as demand caused major sports organizations and players
associations to expand the number of licensees entitled to produce and
distribute collectible sports trading cards. The increase in competition which
resulted from an expansion of the number of licensees was accompanied by entry
into the collectible sports trading card market of speculators who sought to
capitalize on increasing values of collectible sports trading cards. As a
result, the collectible sports trading card market became over-extended, with
sales declining from $982 million in 1991 to
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approximately $767 million in 1993. Thereafter, the Major League Baseball strike
and the National Hockey League work stoppage in 1994 caused a further decline in
sales of collectible sports trading cards, with 1995 sales declining to
approximately $560 million, according to the SCMA.
As a result of the events which took place from 1991 through 1994, there
has been a significant consolidation of the collectible sports trading card
industry. Several collectible sports card manufacturers ceased operations or
declared bankruptcy in 1995 and 1996, and Wheels is aware of several other
collectible sports trading card manufacturers experiencing severe financial
difficulties. Wheels believes that the industry consolidation, which is still
ongoing, will result in the market being dominated by the four full line
collectible sports trading card manufacturers and certain regional manufacturers
that will target specific sports or types of products in smaller, segmented
markets.
While players associations and participants in sporting events such as
NASCAR races have an incentive to maximize their exposure through media such as
collectible sports trading cards, participants in these sports also recognize
that the ability of collectible sports trading card manufacturers to pay
guaranteed and other royalties is directly related to the level of competition
and profitability of the cards or other media. As a result of the consolidation
in the collectible sports trading card industry, and because the players
associations and sports participants are familiar with the difficulties
encountered by the remaining manufacturers in the industry, Wheels believes it
is unlikely that a significant number of additional licenses will be issued in
the near future for manufacturers of collectible sports trading cards.
Consequently, Wheels believes that the limited number of licenses from NASCAR
drivers, team owners and crew chiefs that will be available for collectible
sports trading cards will serve as a barrier to additional competition to some
degree.
Wheels believes that customers for its premium collectible sports trading
cards are primarily comprised of collectors who select collectible sports
trading cards based on their scarcity, creative design, innovative product
attributes and likelihood of higher aftermarket value. Collectors typically
track aftermarket values through Beckett Monthly, which publishes secondary
market values for collectible sports trading cards in price guides covering
baseball, football, basketball, hockey, motor sports and future stars. Although
collectible sports trading cards are sold through several distribution channels,
including hobby dealers, mass merchandisers, convenience stores and other
outlets, Wheels believes that the vast majority of collectible sports trading
cards sold through retail outlets other than hobby dealers are priced in the low
and mid-price market. Conversely, Wheels believes that a vast majority of sales
of premium and high-priced collectible sports trading cards are made through
hobby dealers.
Business Strategy
Wheels' strategy is to enhance its position as a niche designer and
marketer of premium collectible sports trading cards and to expand into
additional NASCAR-related markets to capitalize on the growth now being
experienced in NASCAR racing. Key elements of Wheels' strategy include:
- Diversify NASCAR-Related Activities. Wheels has aggressively diversified
its operations through the acquisition of NASCAR-related businesses in
order to capitalize on market opportunities created by NASCAR's growth.
Wheels has executed its diversification strategy by acquiring Press Pass,
a leading competitor in the collectible trading card market; High
Performance, a distributor of NASCAR licensed merchandise; and Diamond
and GRS, companies engaged in trackside sales and hospitality management
at NASCAR events. Wheels has entered into the Merger Agreement with
Racing Champions in order to further diversify the product offerings of
the combined companies.
- Exploit Marketing and Distribution Opportunities. Wheels will attempt to
increase revenues by exploiting marketing and distribution opportunities
which have been created by the acquisition of the Acquired Companies.
Each of the Acquired Companies has expertise and relationships covering
different marketing strategies and distribution channels. For example,
High Performance and Press Pass have significant experience and
relationships with mass market retailers, a distribution channel which
Wheels has not fully exploited. In addition, Diamond and GRS are engaged
primarily in trackside activities, thereby providing a distribution
channel for all of Wheels' NASCAR products.
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Wheels intends to apply its enhanced marketing and distribution
capabilities across all product lines in order to increase sales in its
distribution channels.
- Integrate Acquired Companies. Execution of Wheels' diversification
strategy requires that operations of the Acquired Companies be
effectively integrated with Wheels. Consolidation of physical facilities
is substantially complete, as Wheels and each of the Acquired Companies
are now based in Mooresville, North Carolina. As part of the ongoing
integration of the Acquired Companies, Wheels will attempt to identify
and achieve certain economies of scale and operating efficiencies which
would not otherwise be available to Wheels or any of the Acquired
Companies on an individual basis.
- Expand License Arrangements. Wheels will seek to preserve and enhance
its relationship with NASCAR team owners and drivers in order to maintain
the license agreements required for producing and marketing collectible
sports trading cards, apparel and other products. Wheels also intends to
aggressively pursue new license arrangements in order to expand the High
Performance product lines and the range of trackside opportunities which
are available to Wheels.
- Emphasize Product Differentiation. Wheels and Press Pass have each
issued their collectible sports trading cards in limited production runs
with Wheels' products generally premium priced and with Press Pass'
products covering a wider range of prices. Wheels believes that limited
production and high quality have enhanced the marketability of Wheels and
Press Pass collectible sports trading cards and have enabled both Wheels
and Press Pass to achieve brand recognition among their network of
distributors, brokers and hobby dealers. Wheels intends to continue its
emphasis on the collectibility of its sports trading cards through
increased penetration of all price segments and limited production of
trading card products.
- Continue Commitment to Creative Design and Latest Production
Technologies. Wheels believes that sales of collectible sports trading
cards is significantly influenced by the creative design of cards and the
production technologies utilized during the production process. As a
manufacturer of premium priced collectible sports trading cards, Wheels
intends to continue the use of innovative designs and unusual materials in
both Wheels and Press Pass cards. Wheels also plans to continue its
practice of using production techniques such as microetching, embossing
and lamination in order to add to the attractiveness and creative appeal
of Wheels' collectible sports trading cards.
Collectible Sports Trading Cards
Both Wheels and Press Pass are leaders in the NASCAR collectible sports
trading card market and both have been innovative in their designs. Each has
produced its collectible sports trading cards using various production
techniques and premium quality materials to enhance the appearance,
attractiveness and collectibility of its products. Each has used materials in
its cards consistent with an issue's theme such as snakeskin in the Viper issue,
small precious jewels in the Crown Jewels and Crown Jewels Elite issues, sharks
teeth in the Race Sharks issue and pieces of rubber taken from actual NASCAR
race car tires in the Burning Rubber issue. They have introduced innovations
such as season-long interactive cards, prism cards, 24-carat gold signature
cards, embossed cards and holofoil cards. According to the January 1998 edition
of Sports Cards Magazine and Price Guide, seven or more collectible insert cards
produced by Wheels or Press Pass in 1997 were among the top 10 premium insert
cards for NASCAR race drivers and six or more standard cards produced in 1997
were among the top 10 issues for NASCAR race drivers. According to Sports Cards
Magazine and Price Guide, the selection of the top 10 trading cards reflects
increasing retail prices in the secondary market as well as the trading card
industry's most popular and most frequently purchased trading cards. In addition
to NASCAR, Wheels produced draft pick collectible trading card sets in 1997 for
leading college basketball and football players, which it expects to continue in
future years. In 1995 and 1996, Wheels also issued two regular sets of
collectible sports trading cards featuring rodeo professionals who were active
in the Professional Rodeo Cowboys Association and other rodeo activities. Wheels
has discontinued its professional rodeo collectible sports trading card
activities. Press Pass is one of the largest producers of National Football
League and National Basketball Association draft pick trading cards. Draft pick
cards feature leading college players who are expected to be selected in the NFL
and the NBA drafts each year.
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The following table sets forth information concerning collectible sports
trading card sets produced by Wheels and Press Pass with original issue dates in
1994 through 1997 which featured NASCAR race drivers, team owners and crew
chiefs or football and basketball draft picks:
WHEELS
<TABLE>
<CAPTION>
1994 1995 1996 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
High Gear I High Gear I Viper Race Sharks
Harry Gant Farewell Tour Crown Jewels Crown Jewels Elite Viper
Power Pack Team Sets Knight Quest Predator
High Gear II Jurassic Park Racing
Rookie Thunder
Basketball Draft
Picks
</TABLE>
PRESS PASS
<TABLE>
<CAPTION>
1994 1995 1996 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Press Pass Race Cards Press Pass Race Press Pass Race Cards Press Pass Race Cards
Press Pass VIP Cards Press Pass Premium Press Pass Football
Press Pass Optima XL Press Pass Premium Press Pass Premium Draft Picks
Press Pass VIP Football Draft Picks Press Pass Premium
Press Pass Premium Press Pass Paydirt Press Pass VIP
Basketball Draft Press Pass VIP Press Pass Action
Picks Press Pass M Force Vision
Press Pass Optima XL Press Pass Basketball Press Pass Basketball
Draft Picks Draft Picks
Press Pass Double Threat
Basketball Draft Picks
</TABLE>
The production of collectible sports trading cards begins with the
conceptualization and design of a card issue. Management at Wheels and Press
Pass have historically been responsible for the conceptualization of a card
issue, but outside consultants have also been used in the design process.
Moreover, both in-house personnel and outside consultants have been used in the
development of mock-ups as the design process nears completion. Each issue of
collectible sports trading cards is produced in "premium insert" sets. Premium
insert sets carry an additional price premium. During the design process, a
photographer secures photographs which will be used on the sports trading cards.
Under certain license agreements, Wheels must have a licensor's approval prior
to the use of a particular photograph and, therefore, the photographer generally
secures a wide variety of photos from which the licensor may choose. After the
preparation of a template of the licensor personality which is then digitized,
Wheels provides a computer disk to a printer which includes all images to appear
on the cards. During this time, Wheels must coordinate the activities of the
printer with those of other contractors such as foil stampers and inkjetters,
who are responsible for the placement of foil, other special effects and inkjet
numbering on trading cards. Following printing, foil stamping, inkjetting and
the placement of any other special effects on the cards, the card sheets are
delivered to a packager for cutting, collating and packaging.
Wheels relies on outside suppliers for photographs and for printing, foil
stamping, inkjetting and cutting, collating and packaging of trading cards.
Although Wheels seeks price quotes from several suppliers for each primary
function in order to assure competitive pricing, Wheels has generally found that
the establishment of close relationships with its suppliers has been beneficial
both to Wheels and to the supplier. Wheels does not maintain written supply
agreements with any of its suppliers and believes that a number of alternate
suppliers are available for each of the primary functions necessary for
production of collectible sports trading cards.
The production process generally requires from 90 to 180 days from
conceptualization of a card issue to shipment. Production delays are sometimes
experienced due to a variety of factors such as irregularities in foil stamping,
chipping of trading cards during the cutting process, and printing errors.
Wheels experienced significant returns in 1997 as a result of a packaging error
committed by Wheels' principal supplier of cutting, collating and packaging
services. Wheels has filed suit against the supplier seeking damages in
connection with
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<PAGE> 123
the excess returns. Should Wheels experience errors in the production process in
the future, delivery of collectible sports trading cards could be delayed and
Wheels could incur additional expenses if it were required to seek an alternate
supplier or to reprint a card.
Due to the 90 to 180 day lead time required for the production of
collectible sports trading cards, Wheels is required to develop production
forecasts for the sale of new products. In order to limit the risk of over-
production of a collectible sports trading card issue and in order to develop
accurate production forecasts, Wheels develops promotional cards and sales
materials for each trading card issue which are used to solicit orders from
distributors and dealers. Wheels generally receives orders totaling between 85%
and 95% of the total number of collectible sports trading cards to be printed in
an issue. Orders are subject to cancellation by the customer at any time before
or after issuance of collectible sports trading cards. The actual size of the
print run varies based on Wheels' past sales experience, anticipated residual
sales following an issue, the time or year in which the issue is to be delivered
and other sales-related considerations. For example, Wheels will frequently
produce trading cards in excess of orders for collectible trading card issues
which are marketed and sold during the racing season. Excess production also
allows Wheels flexibility in responding to reorders received from distributors
or dealers. While Wheels is unable to forecast reorders from distributors or
dealers with respect to any one issue, Wheels' prior sales experience has
indicated that Wheels will receive reorders from certain of its distributors or
dealers in some trading card issues. In the event production forecasts do not
correctly estimate demand for collectible sports trading cards, Wheels may be
required to write down excess inventory or may miss potential market
opportunities. There can be no assurance that production forecasts will
accurately estimate demand for particular trading card issues.
Wheels maintains a close relationship with its distributors and seeks input
from its distributors with respect to the design and expected demand for
collectible trading sets. Historically both Wheels and Press Pass have held
periodic meetings with its distributors, attended industry trade shows and
evaluated competitive products in an effort to identify market opportunities for
new products. Although neither Wheels nor Press Pass has maintained a formal
research and development effort, management has been active in identifying
opportunities in collectible sports trading cards for NASCAR and draft pick
personalities on a continuous basis.
Wheels anticipates continued limited production runs of each collectible
sports trading card issue and expects to produce collectible sports trading
cards under both the "Press Pass" and "Wheels" brand names. However, all trading
card operations are being consolidated in order to realize certain efficiencies
and economies of scale. For example, Wheels anticipates the acquisition of Press
Pass will result in more efficient use of personnel, a reduction in royalty
costs as a result of certain shared license arrangements, a reduction in fees
payable to independent contractors as a greater portion of design and production
work is performed in-house and possible volume pricing discounts. Wheels intends
to coordinate the release of up to ten different trading card issues throughout
each year so as to minimize competition between cards produced under the
"Wheels" and "Press Pass" names. The determination of the number of issues to be
produced in any particular year will depend on a number of factors including but
not limited to, demand for particular trading card issues and sets within the
issue, input received from distributors, developments in the collectible sports
trading card industry and within NASCAR, and Wheels' success in maintaining and
securing license agreements from draft pick athletes and the race drivers, team
owners and crew chiefs in NASCAR racing.
Wheels will continue to closely monitor production volume of each set of
trading cards with a view toward maintaining the collectibility of its trading
cards. Wheels believes, based on information published by Beckett Monthly price
guides, that both Wheels' and Press Pass' collectible sports trading cards have
competed favorably in the secondary market. Wheels anticipates that production
of collectible sports trading cards will continue to be limited on a per-issue
basis to assure maintenance of the brand image associated with its products.
Wheels has no control over values of collectible sports trading cards in the
secondary market, which are established by market forces and which are reported
upon by collectible sports card price guides such as Beckett Monthly. In the
event interest among collectors in Wheels' or Press Pass' sports trading cards
declines for any reason, sales could decrease, perhaps substantially. Moreover,
because the interest of collectors in Wheels' or Press Pass' collectible sports
trading cards is in part dependent upon interest in NASCAR racing, a decline in
interest in NASCAR racing could directly affect demand for Wheels' products.
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<PAGE> 124
Distribution of NASCAR Merchandise
As a result of its acquisition of High Performance in October 1997, Wheels
distributes NASCAR-related merchandise to convenience stores, mass market
retailers such as Wal-Mart and K-Mart, grocery stores, drug stores and other
retail outlets. During 1997, merchandise distributed by High Performance
included T-shirts, hats, jackets, die cast vehicle replicas, sunglasses, golf
balls, key chains, can coolers, bumper stickers, license plates and souvenirs.
Wheels' right to distribute NASCAR-related merchandise is generally based upon
licenses or sub-licenses granted by NASCAR team owners, drivers or corporate
sponsors. NASCAR-related merchandise is generally designed in-house, subject to
final approval by the respective licensor, but Wheels relies on outside
manufacturers for substantially all High Performance production work. Wheels
utilizes a number of domestic and Asian manufacturers and suppliers for High
Performance merchandise, and does not believe it is dependent on any particular
manufacturer or supplier.
Wheels distributes High Performance merchandise through a network of
independent sales representatives, independent distributors or "rack jobbers,"
and in-house sales and marketing employees. Sales to the convenience store
market are made primarily through a network of approximately 40 rack jobbers,
who are responsible for managing, and generally handle the purchase and delivery
of, all products within a specified category to convenience stores. The rack
jobber is assigned certain shelf or rack space in which to display the products
which are managed by the rack jobber. Rack jobbers purchase merchandise from
Wheels on a cash basis or on limited credit terms for resale to the convenience
stores which they service. Wheels maintains an "at will" relationship with rack
jobbers which may be terminated at any time by either party.
In addition to rack jobbers, High Performance established a network of
approximately 30 independent sales representatives during the second half of
1997. The independent sales representatives sell merchandise to rack jobbers or
directly to convenience stores on a commission basis. Wheels' own sales and
marketing staff oversees the activities of rack jobbers and independent sales
representatives, is generally responsible for direct sales made to mass market
retailers and grocery stores, and creates product promotions and display stands
for use by retail outlets. And finally, High Performance merchandise will be
marketed through the trackside division of Wheels commencing in the 1998 racing
season.
Trackside Sales and Hospitality Management
Wheels established trackside sales and hospitality management programs
during 1997 through its acquisition of Diamond and GRS. Wheels expects to
operate 13 trailers at the 33 races scheduled for the 1998 Winston Cup Series,
and will be the exclusive trackside vendor of T-shirts, hats, apparel,
collectible sports trading cards, die cast vehicle replicas, souvenirs and other
merchandise for 11 NASCAR teams and corporate sponsors, including the McDonald's
team and driver Bill Elliot, Coors Light and driver Sterling Marlin, Exide
Batteries and driver Jeff Burton, R.J. Reynolds and driver Jimmy Spencer, First
Union and driver Wally Dallenbach and the Cartoon Network. Wheels will also
operate the 1998 trackside souvenir programs for Chevrolet and Ford.
During the 1998 Winston Cup Series, Wheels will manage the trackside
corporate hospitality programs for Ferguson Enterprises and Goody's
Pharmaceuticals, a division of Block Drug Company, Inc. The Ferguson Enterprises
hospitality program will cover 11 of the Winston Cup races during 1998, while
the Goody's program will cover two races. At each event, Wheels will be
responsible for coordinating and obtaining corporate suites or hospitality
tents, tickets to the event, passes to tour the racetrack pits and other track
facilities, food and beverages, and NASCAR-related merchandise and souvenirs for
a specified number of guests. During 1997 Diamond managed corporate hospitality
programs at nine events covering a total of approximately 2,700 guests. During
1998 Wheels expects to manage corporate hospitality programs at 11 events for a
total of approximately 3,500 guests.
Marketing and Sales
Wheels' marketing strategy with respect to collectible sports trading cards
is to increase sales by selectively expanding the number of distributors and
dealers, increasing penetration of the retail market, developing new and
innovative collectible sports trading card products for the NASCAR market, and
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increasing market penetration in the corporate promotions market. As of January
31, 1998, Wheels employed eight individuals responsible for marketing and sales
of collectible sports trading cards and used a network of approximately 25
independent manufacturers' representatives for outside sales. Wheels' marketing
and sales employees are responsible for implementing sales programs,
coordinating with Wheels' distributor and dealer networks, customer service, and
participating in industry trade shows.
Wheels collectible sports trading card sales have historically been
concentrated in the hobby market, which accounted for approximately 85% of such
revenues during the three year period ended December 31, 1997. The mass market
channel has accounted for the remainder of such revenues. In contrast, Press
Pass revenues have historically been divided approximately equally between the
hobby and mass market channels. Sales to the hobby market are made through hobby
distributors or directly to hobby dealers. As of January 31, 1998, Wheels and
Press Pass each had relationships with approximately 30 hobby distributors.
Commencing in 1998, Wheels and Press Pass collectible sports trading card
marketing and distribution activities will be coordinated in order to realize
certain efficiencies and take advantage of their combined resources and
expertise. The release and distribution of new card sets throughout the year
will be timed so as to minimize competition between cards produced under the
"Wheels" and " Press Pass" brand names. In addition, Wheels intends to exploit
Press Pass' experience and success with mass market retailers in order to
increase Wheels' revenues attributable to the mass market channel.
Wheels and Press Pass have each developed their own membership club.
Members of the Wheels Club and Press Pass VIP Club receive newsletters and other
product materials from Wheels and Press Pass, and are given the ability to
purchase collectible sports trading cards and other products sold exclusively to
members. In January 1998, the Wheels Club and Press Pass VIP Club were combined
and renamed as the VIP Club. Wheels expects to continue to develop the VIP Club
as an additional channel through which exclusive collectible sports trading
cards and other NASCAR-related products can be sold.
High Performance's NASCAR merchandise sales have historically been
concentrated in the southeast United States. Wheels estimates that convenience
stores and mass market retailers each accounted for approximately 25% of High
Performance's revenues in 1997. High Performance's largest mass market retail
account during the year ended December 31, 1997 was K-Mart, which accounted for
approximately 50% of High Performance's mass market revenues during such year.
The remaining revenues were attributable to other mass market retail accounts,
grocery stores, drug stores, corporate promotions, trackside events and other
retail outlets. Wheels estimates that its merchandise is currently available in
approximately 10,000 of the estimated 125,000 convenience stores located in the
United States.
Wheels' marketing strategy with respect to NASCAR-related merchandise is to
increase sales in the convenience store and mass market retail channels by
expanding its network of rack jobbers and independent sales representatives,
increasing the number of product promotions which can be offered throughout the
year in order to increase revenues at existing retail outlets, and obtaining
license rights from additional NASCAR race drivers, team owners and sponsors in
order to broaden product lines. Marketing and sales of NASCAR-related
merchandise are coordinated by 14 employees who oversee the activities of
independent rack jobbers and sales representatives, handle direct sales to mass
market retailers, develop and implement sales programs and participate in
convenience store trade shows.
Wheels' marketing strategy with respect to trackside retail sales has been
to expand the number of tractor-trailer rigs at each NASCAR event from six to
thirteen and to ensure timely and reliable set-up of trackside retail operations
at each event. Wheels has also attempted to increase the variety of the products
offered and offer those products at a competitive price. Obtaining agreements
for trackside hospitality is based primarily on personal relationships within
the NASCAR industry and the quality of the service provided. The trackside
hospitality market generally consists of small, privately-owned operators and
Wheels intends to seek additional agreements to expand its presence in the
trackside hospitality market. Wheels' personnel manage both the trackside retail
operations and the trackside hospitality.
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Competition
Competition in the collectible sports trading card market is intense and is
based primarily on collectibility, brand recognition, product features, pricing,
customer service, quality and creativity. Wheels currently views one of the four
full line collectible sports trading card manufacturers, Upper Deck, as its
primary competition. Of the three remaining full line companies, two recently
announced their withdrawal from the NASCAR market and one never produced
NASCAR-related collectible sports trading cards. Upper Deck is larger than
Wheels and has a longer operating history, better name recognition, and greater
financial, marketing and other resources than Wheels. Although the number of
competitors active in the collectible sports trading card market has recently
declined due to industry consolidation, Wheels does not believe that competition
in the trading card industry has lessened. The NASCAR race drivers, team owners
and crew chiefs with whom Wheels has licenses also have the ability to grant
additional licenses, thereby increasing the number of firms active in Wheels'
primary market. Wheels believes that its ability to compete effectively in the
future will be based more on collectibility, creative design and quality, as
opposed to price. Wheels' ability to compete based on these factors will depend
to some extent on its ability to gauge demand and respond to market trends,
identify consumer preferences, and maintain product innovation.
Competition in the distribution of NASCAR-related merchandise to
convenience stores, mass market retailers and other retail outlets is intense
and is primarily based on product appeal, ability to capture shelf or rack
space, timely distribution, price and quality. Competition is also based on the
ability to obtain license agreements with NASCAR race drivers, team owners and
sponsors authorizing the right to use the name, photograph, likeness, autograph
or image of the NASCAR personality on specific product lines to be sold through
specific distribution channels or retail outlets. Wheels considers Action
Performance Companies, Inc., a manufacturer of die cast racing replicas and
distributor of other NASCAR-related products, to be a significant competitor in
the distribution of licensed NASCAR-related merchandise. Because competition for
limited shelf and rack space in convenience stores and mass market retailers is
not limited to products in the NASCAR category, Wheels believes that it competes
generally with distributors of a wide range of soft goods, novelties, souvenirs
and similar products.
Wheels believes that competition in the trackside retail market is based
primarily on the ability to secure license agreements with NASCAR race drivers,
team owners and sponsors, timely and reliable set-up of trackside retail
operations at each event, personal relationships within the NASCAR industry,
quality and variety of product offerings, customer service and price. Wheels
considers Action Performance Companies, Inc. to be the largest competitor in the
trackside retail market. Wheels expects that during the 1998 Winston Cup Series
it will be the second largest competitor in this market. Wheels considers the
ability to obtain favorable license agreements and the capital investment
required in tractor-trailer rigs to be the principal barriers to entry in the
market. Competition in the trackside hospitality market is based primarily on
customer service and personal relationships within the NASCAR industry. The
trackside hospitality market is highly fragmented and generally consists of
small, privately-owned operators. Wheels believes that it is a significant
competitor in the trackside hospitality market.
Proprietary Rights
Wheels considers its license agreements, trademarks and trade names to be
material to its business. The Wheels and Press Pass names and logos have been
registered with United States Patent and Trademark Office for trading card
applications. Wheels and Press Pass have also registered or filed trademark
applications for various names and logos which relate to their various trading
card sets. Wheels has not adopted a formal intellectual property protection
program, and currently relies on a combination of trademark, copyright and trade
secret protection and license agreements to establish and protect its
proprietary rights.
All of Wheels' business operations are dependent upon the license
agreements it maintains with NASCAR race drivers, team owners and corporate
sponsors. At December 31, 1997, Wheels had in effect a total of over 100 license
agreements covering various products and distribution channels. Wheels believes
that it has trading card licenses in effect with substantially all of NASCAR's
leading drivers in the 1998 racing season. Wheels also has license arrangements
in place covering trackside retail programs to be operated during
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1998 for 11 NASCAR drivers, teams or corporate sponsors, including Bill Elliot
and McDonald's, Sterling Marlin and Coors Light, Jeff Burton and Exide
Batteries, Jimmy Spencer and R.J. Reynolds, Wally Dallenbach and First Union,
Joe Nemechek and Bell South, Jerry Naduea and First Plus Financial, The Cartoon
Network, Ford and Chevrolet. With respect to the distribution of NASCAR-related
merchandise to convenience stores, mass market retailers and other retail
outlets, Wheels is licensed to distribute specified products by various NASCAR
drivers, teams and sponsors.
Wheels' license agreements generally have a term of one to three years,
with certain agreements, particularly those relating to trading cards, having
provisions for automatic year-to-year extensions unless Wheels or the licensor
provides notice of cancellation. The license agreements grant the licensee the
right to use the licensor's name, picture, facsimile signature and biographical
information during the term of the license on specified products. In addition,
certain licenses are restricted to certain distribution channels or retail
outlets. Licenses relating to trading cards are generally non-exclusive and may
be terminated by the licensor for non-payment of royalties and for other
specified causes. The licenses generally provide for percentage royalties based
on sales, and certain licenses provide for minimum guaranteed royalties payable
during the term of the license. Wheels ability to secure licenses from the most
popular NASCAR race drivers, team owners and corporate sponsors is material to
its business. The expiration or non-renewal of a material number of license
agreements, particularly those with leading NASCAR drivers or teams, would have
a material adverse effect on Wheels.
Employees
Wheels had 89 full-time employees as of January 31, 1998. Approximately 14
are engaged in collectible sports trading card operations, approximately 20 are
engaged in the NASCAR merchandise distribution operations, approximately 38 are
engaged in trackside retail and hospitality operations and three are engaged in
corporate purchasing activities. In addition, 14 of Wheels' employees are
engaged in corporate management and administrative activities. None of the
Wheels' employees are subject to collective bargaining agreements. Wheels
believes its employee relations are good.
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Facilities
The following sets forth certain information with respect to the facilities
currently leased by Wheels.
<TABLE>
<CAPTION>
APPROX. CURRENT
SQUARE MONTHLY LEASE
LOCATION FOOTAGE RENTAL LESSOR TERMINATION
- -------- ------- ------- ------ -----------
<S> <C> <C> <C> <C>
149 Gasoline Alley Drive.... 40,000 $16,170 Beale Street Realty, Inc. February 28, 2012
Mooresville, North
Carolina(1)
224 Rolling Hill Road, Suite
9A........................ 2,830 3,098 Athena Associates April 30, 1998
Mooresville, North
Carolina(2)
1727 Seymour Drive.......... 1,600 500 Harold and Rhonda Green October 31, 1998
South Boston, Virginia(3)
123 Associates Lane......... 8,000 3,633 Nanco I, LLC December 31, 1999
Indian Trail, North
Carolina(4)
2079 Highway 601 North...... 4,000 800 Christy Trucking, Inc. October 1, 1997
Mocksville, North
Carolina(5)
1321 Lady Street............ 1,225 1,047 Carolina Properties October 1999
Columbia, South
Carolina(6)............... Building Partnership
14800 Quorum Drive, Suite
420....................... 2,500 3,920 Transwestern Office January 31, 1999
Dallas, Texas(7) Partners I, LLC
</TABLE>
- ---------------
(1) Corporate headquarters and warehouse facility for Wheels and the Acquired
Companies. Beale Street Realty, Inc. is owned by Randy C. Baker, a nominee
for election as a director of Racing Champions. See "ELECTION OF DIRECTORS."
(2) Office facility originally leased by High Performance.
(3) GRS retail location.
(4) Diamond warehouse facility.
(5) Wheels warehouse facility. The term of this lease has been extended on a
month-to-month basis.
(6) Office facility formerly utilized by World of Racing, Inc. Wheels is
attempting to sublease or negotiate a buy-out of the remaining lease term.
(7) Formerly the executive offices of Press Pass. Wheels is attempting to
sublease or negotiate a buy-out of the remaining lease term.
Wheels also owns two properties, both of which are currently listed for
sale. Wheels owns a 13.6 acre parcel of vacant land in Mocksville, North
Carolina which is listed for sale at a price of $170,000 and a 3.6 acre parcel
of vacant land in Mocksville which is listed for sale at a price of $130,000.
Wheels recently sold a 4,800 square foot building on a two acre parcel of land
located in Indian Trail, North Carolina to an unrelated party at a price of
$326,000.
Litigation
Except as described below, Wheels is not a defendant in any material
litigation and is not aware of any threatened or pending legal action which
would have a material adverse effect on Wheels' business, operations or
financial condition.
On May 4, 1997, a proposed class action lawsuit was filed in U.S. District
Court in Georgia against several trackside vendors, including GRS. The complaint
alleges that the defendants have engaged in price fixing activities at certain
NASCAR events in violation of federal anti-trust laws. Plaintiffs seek an
unspecified amount of compensatory and punitive damages and also an order
enjoining the alleged price fixing practices. GRS has entered into a joint
defense agreement with certain co-defendants pursuant to which defense costs are
being reimbursed by defendant Americrown Service Corporation. The existing joint
defense agreement is to remain in effect through class certification
proceedings, which are expected to be completed during late 1998. Wheels expects
that the action will be dismissed if class certification is not obtained. In the
event class
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certification is obtained, Wheels expects that GRS would vigorously defend
against the action, although no assurances can be given as to the outcome of
this matter.
Wheels is aware of a series of actions filed in the State of New York in
1996 and 1997 against certain other manufacturers of collectible sports trading
cards which seek damages against such manufacturers based upon allegations that
the practice of randomly inserting premium insert cards in collectible sports
trading card sets constitutes illegal gaming activity in violation of state and
federal law. Neither Wheels nor Press Pass were named as a defendant in these
actions. Wheels believes that the use of premium insert cards is a standard
industry practice within the collectible sports trading card industry and does
not constitute gaming activity. In particular, Wheels believes that, in contrast
to gaming activities in which the amount to be won is ascertainable at the time
a wager is placed, the value of premium insert cards is not ascertainable and is
not within Wheels' control. While Wheels believes that the manufacturers named
as defendants in these actions will vigorously defend the actions, the course of
this litigation cannot presently be determined. Wheels has in the past used
premium insert cards in its collectible sports trading card issues and may
continue to do so in the future. Wheels may therefore become subject to
litigation of this nature in the future, the outcome of which is not assured.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of Wheels' financial condition and
results of operations should be read in conjunction with Wheels' Consolidated
Financial Statements and Notes thereto appearing elsewhere herein. Those
financial statements include, for all periods presented, the accounts of Wheels
and its subsidiaries, Diamond and GRS, both of which were acquired in 1997 in
transactions accounted for as poolings-of-interests. The accounts of High
Performance and Press Pass, subsidiaries acquired October 24, and December 31,
1997, respectively, in transactions accounted for as purchases, are included in
the Consolidated Balance Sheet at December 31, 1997. The results of operations
of High Performance for the period after October 24, 1997 are included in the
Consolidated Financial Statements. Wheels' financial condition and operating
results for the 1997 fiscal year have been, and for future periods will continue
to be, significantly affected by the operating results of the Acquired
Companies. The matters discussed in this section that are not historical or
current facts deal with potential future circumstances and developments. Such
forward-looking statements include, but are not limited to trends in the results
of Wheels' operations and anticipated capital requirements. Factors that could
cause or contribute to a difference between forward-looking statements and
actual results include those discussed below or elsewhere herein.
Overview
Wheels has engaged in the design, marketing and distribution of premium
quality collectible sports trading cards featuring race drivers, team owners and
crew chiefs active in NASCAR-sanctioned racing events since 1992. Wheels has
issued limited production collectible sports trading cards between three and
four times each year and sells its products to a network of distributors,
brokers and approximately 1,200 specialty hobby dealers located principally
throughout the southeast United States. Wheels estimates that customers in the
hobby channel have accounted for approximately 85% of sales and that customers
in the retail channel have accounted for approximately 15% of sales. Wheels
collectible sports trading cards are also sold to members of a membership club
created by Wheels and to businesses for use in corporate promotions.
Wheels' net sales consist of gross sales less the amount of returns. Sale
terms generally are net 30 days, although Wheels has from time to time offered
extended credit terms to certain of its customers. Sales to hobby dealers are
not generally subject to return privileges, although sales to retail accounts
are generally subject to return privileges. Wheels estimates that a greater
percentage of its returns are accounted for by sales to the retail channel, even
though the retail channel accounts for a significantly smaller percentage of
total net sales. Wheels estimates that approximately 80% to 85% of its 1996 and
1997 hobby channel sales were made to hobby distributors. Three of these
distributors each accounted for in excess of 5% of Wheels' net sales in 1996 and
1997. Wheels believes the hobby channel accounts for a high percentage of sales
of premium and high priced collectible sports trading cards, and that margins on
sales to this channel are generally higher than margins on sales to customers in
the retail channel. Products sold to the hobby channel are generally
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differentiated from products sold to the retail channel by their higher quality
and the inclusion of more attractive and more numerous premium insert cards.
Revenue is recognized at the time of transfer of title of products to the
customer. For those customers entitled to return privileges, a provision for
estimated returns is made in the period in which the related sale is recorded.
Because actual returns may differ from management's estimates, Wheels' recorded
liability for estimated returns may be revised periodically to reflect actual
return experience. During the year ended December 31, 1996, Wheels generated
sales of $615,000 attributable to collectible sports trading cards initially
issued in 1995 or earlier years. In the year ended December 31, 1997, Wheels
generated sales of $96,000 of collectible sports trading cards initially issued
in 1996. A portion of collectible sports trading card sales generated in
subsequent periods is attributable to returns which were subsequently resold by
Wheels. Returns which are resold by Wheels after the initial six months in which
sales are made generally carry closeout prices and correspondingly reduced
margins. Cost of sales includes both the cost to produce the collectible sports
trading cards and royalties paid to race drivers, team owners and crew chiefs.
Costs allocated to production include materials, photographs, printing,
packaging and fulfillment, and variable freight charges.
In order to limit the risk of over-production of a collectible sports
trading card issue and in order to develop accurate production forecasts, Wheels
develops promotional cards and sales materials for each trading card issue which
are used to solicit orders from distributors and dealers. Wheels generally
receives orders totaling between 85% and 95% of the total number of collectible
sports trading cards to be printed in an issue. Orders are subject to
cancellation by the customer at any time before or after issuance of collectible
sports trading cards. The actual size of the print run varies based on Wheels'
past sales experience, anticipated residual sales following an issue, the time
of year in which the issue is to be delivered and other sales-related
considerations. For example, Wheels will frequently produce trading cards in
excess of orders for collectible trading card issues which are marketed and sold
during the racing season. Excess production also allows Wheels flexibility in
responding to reorders received from distributors or dealers. While Wheels is
unable to forecast reorders from distributors or dealers with respect to any one
issue, Wheels' prior sales experience has indicated that Wheels will receive
reorders from certain of its distributors or dealers in some trading card
issues. Wheels writes down its inventory of unsold collectible sports trading
cards at the end of each year to estimated net realizable value. While Wheels
may experience some residual sales of collectible sports trading cards, Wheels
has generally found that sales of NASCAR-related trading cards at full price
will take place substantially within six months of the initial date of issuance.
At December 31, 1997 and December 31, 1996, Wheels had established reserves
for doubtful accounts, returns and allowances of $2,386,000 and $237,000,
respectively. During 1997, it became apparent that a trading card set issued in
late 1996, Crown Jewels Elite, had been improperly packed by Wheels' contract
packer. As a result, substantial quantities of that product which had been
purchased by distributors may not be fit for sale on a retail basis. Although
Wheels has encouraged distributors to continue to sell the product, Wheels has
accepted product returns and issued credits and price concessions. Wheels
recognizes that a significant portion of the improperly packaged card sets will
eventually be returned. Wheels has instituted a suit for damages against the
packager of this card set. Also contributing to the need for an increased
reserve for doubtful accounts, returns and allowances at December 31, 1997 was
an overall weakness in the trading card industry which has reduced the ability
of Wheels' major customers to sell through to retail, thereby increasing the
likelihood of returns or other credits. Several major customers experienced
financial difficulties during the later part of the year, also causing Wheels to
increase its reserves accordingly.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales for certain items derived from Wheels' consolidated financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0%
Cost of sales......................................... 90.3 60.7 64.0
----- ----- -----
Gross margin.......................................... 9.7 39.3 36.0
Selling, general and administrative expenses.......... 75.3 28.6 36.9
Other expenses (income), net.......................... 4.3 (0.8) --
----- ----- -----
Operating income (loss)............................... (69.9) 11.5 (0.9)
Interest expense...................................... 1.3 0.6 0.5
----- ----- -----
Net income (loss) from continuing operations.......... (71.2) 10.9 (1.4)
----- ----- -----
Net income (loss)..................................... (90.7) 10.9 (1.4)
----- ----- -----
</TABLE>
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
Consolidated net sales for the year ended December 31, 1997 were $7,491,000
compared to $7,523,000 for the year ended December 31, 1996, a decrease of
$32,000, or 0.4%. Net sales during 1997 consisted of approximately $2,778,000 in
net sales attributable to trading card operations, approximately $2,113,000 in
net sales by Diamond, $1,566,000 in net sales by GRS, and $1,034,000 in net
sales by High Performance subsequent to its acquisition on October 24, 1997. The
decrease in consolidated net sales was attributable to a decline of $2,005,000
in sales of trading cards, offset by the addition of High Performance, plus an
increase of approximately $1,029,000 in sales by Diamond, and a decrease of
$90,000 in sales by GRS. Trading card sales for 1997 included $480,000 in sales
of the basketball set, Rookie Thunder. The year to year decline in trading card
sales reflects credits, returns and price adjustments of approximately $700,000
relating to Crown Jewels Elite card set, a reduction of $519,000 in sales of
cards produced in prior years, and the inability of any card set issued in 1997
to match the 1996 record setting success of the Viper card set.
Consolidated cost of sales increased $2,197,000 to $6,765,000 in 1997 from
$4,568,000 in 1996. As a percentage of sales, consolidated cost of sales
increased to 90.3% in 1997 from 60.7% in 1996. The increase in cost of sales as
a percentage of sales is primarily attributable to reduced trading card sales,
production of cards in excess of quantities that could be sold at full price,
and increases in minimum royalties that must be paid regardless of actual sales
levels. The increase in cost of sales as a percentage of sales also reflects
strong sales, and resulting low obsolescence charges, of the Viper card set in
early 1996. Diamond's cost of sales increased $420,000 to $1,254,000 in 1997
from $834,000 in 1996. As a percentage of sales, such costs decreased to 59.3%
in 1997 from 76.9% in 1996. GRS's cost of sales declined $149,000 to 45.5% of
sales in 1997 from 52.0% in 1996. As a result of such factors, Wheels'
consolidated gross margin for 1997 was $726,000 compared to $2,955,000 in 1996,
a decrease of $2,229,000 or 75.4%. Trading card margin accounted for 96% of that
decrease, by declining from $1,909,000 to ($933,000). As a percentage of net
sales, consolidated gross margin decreased from 39.3% in 1996 to 9.7% in 1997.
Consolidated selling, general and administrative expenses during 1997 were
$5,643,000 compared to $2,153,000 during 1996, an increase of $3,490,000 or
162.1%. Of this increase, $691,000 represents expenses of High Performance which
was acquired in late 1997, $924,000 represents expenses of Diamond which
significantly expanded its operations in 1997, and $420,000 is an increase in
Wheels' bad debt expense in the trading card business. The balance of the
increase was primarily attributable to increased expenses associated with
Wheels' status as a public company and expenses associated with significant
merger and acquisition activities. As a percentage of sales, consolidated
selling, general and administrative expenses increased to 75.3% in 1997 from
28.6% in 1996.
Other expense for 1997 includes a $350,000 write off of unamortized
goodwill related to the acquisition of Emerald. There was no comparable expense
in 1996.
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As a result of the above, consolidated net loss from continuing operations
for 1997 was $5,332,000 compared to net income from continuing operations of
$820,000 in 1996. However, in connection with Wheels' decision to terminate the
operations of its World of Racing subsidiary, the creator and operator of a
fantasy race game which had been acquired in January 1997, a $428,000 loss from
discontinued operations and a $1,032,000 loss from disposition of discontinued
operations were incurred in 1997. No similar charges were incurred in 1996.
After giving effect to the losses relating to discontinued operations, net loss
for 1997 was $6,792,000 compared to net income of $820,000 in 1996.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Consolidated net sales for the year ended December 31, 1996 were $7,523,000
compared to $4,784,000 in the prior year, an increase of $2,739,000 or 57.3%.
Wheels' net sales increased $1,403,000 or 41.5% to $4,783,000 in 1996 from
$3,380,000 in 1995. Diamond's net sales increased $1,067,000 to $1,084,000 in
1996 from $17,000 in its start-up year of 1995. GRS's net sales increased
$269,000 or 19.4% to $1,656,000 in 1996 from $1,387,000 in 1995. The increase in
net sales by Wheels was primarily due to an increase in average revenue per card
set to approximately $800,000 in 1996 from approximately $680,000 in 1995. The
average revenue per card set increased in part due to a higher average price per
box sold, with per-box prices in 1996 ranging from 18% to 45% higher than the
average price per box in 1995. The remaining difference between the sales per
collectible sports trading card issue and the total sales for 1996 and 1995, was
attributable to the sale of trading cards sold in one year but produced in prior
years.
Consolidated cost of sales increased $1,506,000 or 49.2%, to $4,568,000 in
1996 from $3,062,000 in 1995. As a percentage of sales, consolidated cost of
sales decreased to 60.7% in 1996 from 64.0% in 1995. The decrease in cost of
sales as a percentage of net sales reflects Wheels' securing of lower cost
sources of supply and efficiencies achieved in the production process. In
addition, Wheels was able to negotiate volume discounts with existing suppliers
as a result of increased purchasing levels.
Consolidated gross margin for 1996 was $2,955,000 compared to $1,722,000 in
1995, an increase of $1,233,000 or 71.6%. Of this increase, $742,000 was
attributable to Wheels, $248,000 was attributable to Diamond, and $243,000 was
attributable to GRS. As a percentage of consolidated net sales, gross margin
increased to 39.3% in 1996 from 36.0% in 1995. The increase in gross profit
margin as a percentage of net sales was primarily attributable to improved
control of cost of sales and the sellout of the 1996 Viper issue, which
experienced a return rate of less than 1%. In contrast to returns experienced on
the Viper issue in 1996, Wheels' 1995 issues experienced an average return rate
of 3%.
Consolidated selling, general and administrative expenses for 1996 were
$2,153,000 compared to $1,768,000 for 1995, an increase of $385,000 or 21.8%. As
a percentage of sales, these expenses declined to 28.6% in 1996 from 36.9% in
1995. The decline as a percentage of consolidated net sales was primarily
attributable to a reduction in commission expense related to trading card sales
to the retail market, small reductions in salary and advertising expenses, and
the growth of sales.
Other income increased to $60,000 in 1996 from $3,000 in 1995. This
increase was primarily due to a non-recurring charge in 1995 related to expenses
incurred by High Gear Sports, Inc., an affiliate no longer conducting active
operations. Interest expense increased to $42,000 in 1996 from $23,000 in 1995,
an increase of $19,000 or 83%. The increase in interest expense reflects
primarily the increase in outstanding indebtedness attributable to bank
borrowings and the capital lease obligation on a building acquired by Diamond in
1996.
As a result of the above, net income for 1996 was $820,000 compared to a
net loss of $65,000 in 1995. As a percentage of net sales, net income increased
to 10.9% in 1996 as compared to a net loss of (1.4)% in 1995. As a Subchapter S
corporation, Wheels was not subject to federal and state income taxes prior to
1997.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Net sales increased by $448,000 or 10.3%, to $4,784,000 for 1995 from
$4,336,000 for 1994. This increase was primarily attributable to sales of the
Crown Jewels trading card set issued in 1995, which experienced greater sales
than any of the 1994 card sets. Wheels' 1995 card sets also enjoyed a higher
average price per box
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sold, with Wheels' per-box price for 1995 card sets ranging from 16% to 33%
higher than the average price per box received in 1994.
Cost of sales increased by $167,000, or 5.8% to $3,062,000 in 1995 from
$2,895,000 in 1994. Cost of sales as a percentage of net sales decreased to
64.0% in 1995 from 66.8% in 1994. As a result, gross margin increased to 36.0%
in 1995 from 33.2% in 1994. The increase in gross margin was primarily the
result of the higher sales volume and Wheels' success in controlling the growth
in cost of sales.
Consolidated selling, general and administrative expenses increased
$268,000, or 17.9%, to $1,768,000 for 1995 from $1,500,000 for 1994. As a
percentage of net sales, these expenses rose to 36.9% of sales in 1995 from
34.6% of sales in 1994. The increase was primarily attributable to personnel
additions, increased selling expenses incurred in connection with hobby market
sales, and higher advertising and marketing expenditures.
During 1994, Wheels asserted a claim against one of its suppliers in
connection with errors in the cutting and collating process. As a result of
these errors, Wheels shipped only a portion of a NASCAR trading card set and was
prevented from recognizing anticipated revenue from sales of this card set. In
lieu of litigating its claim, Wheels accepted a $500,000 payment from the
insurance company for the supplier in the year ended December 31, 1994. No
comparable amount was received in 1995.
Liquidity and Capital Resources
As of December 31, 1997, Wheels' principal sources of liquidity included
cash of $440,000 and its Credit Facility (as defined below) with the Wheels
Lender. Under the Credit Facility, Wheels may borrow up to $10 million in
revolving loans, with actual availability of funds depending on a borrowing base
which includes certain accounts receivable and inventories. As of December 31,
1997, the date of the establishment of the Credit Facility, Wheels had drawn
$1,499,000 under the Facility and had a borrowing base permitting draws of an
additional $97,000. As of such date, current assets were $8,274,000 as compared
to current liabilities of $12,618,000. Current liabilities included $5,250,000
in notes payable to former shareholders of the Acquired Companies, of which
notes totaling $3,250,000 are to be repaid through the release of $3,300,000
held pursuant to an escrow agreement with the Wheels Lender. The $3,300,000
appears as restricted cash on Wheels' December 31, 1997 balance sheet. It is
anticipated that Wheels' working capital requirements will be met by borrowing
under the Credit Facility, and that payments on the debts to former stockholders
and other lenders will be made from the escrowed funds and cash flows generated
by operations.
Long-term debt at December 31, 1997, net of current maturities, totaled
$6,080,000, net of unamortized discount of $1,647,300. Of that debt, $5,907,000
is due to the Wheels Lender.
During the year ended December 31, 1997, Wheels' financial condition
changed significantly as a result of its successful initial public offering,
which provided net cash proceeds of $4,732,260. The application of such proceeds
included repayment of $890,000 in short-term debt and a $1,100,000 reduction in
accounts payable and accrued expenses. Of the $890,000 in bank borrowings,
$400,000 had been incurred to fund a distribution to stockholders to pay their
personal tax liabilities on income of Wheels in connection with the termination
of Wheels' status as an S Corporation.
The activities of Wheels' continuing operations used net cash of $2,815,000
during 1997, consisting primarily of the $5,332,000 net loss from continuing
operations reduced by non-cash charges of $2,115,000 and a reduction of $411,000
in cash invested in net operating assets and liabilities. Primary changes in
components of working capital include an increase in accounts payable and
accrued expenses of $404,000, an increase in inventories of $285,000 and a
decrease in accounts receivable of $495,000. Capital expenditures were $522,000
during the year. Payments on debt other than that related to acquisitions were
$680,000 and included payment in full of a capitalized lease obligation in the
amount of $301,000. A distribution of $400,000 was made to Wheels' stockholders
prior to the April 16, 1997 initial public offering to allow them to pay their
tax liability resulting from the Wheels' 1996 income under Subchapter S of the
Internal Revenue Code. Wheels' subsidiary, World of Racing, which is presented
in the financial statements as discontinued operations, used net cash of
$630,000. In total, these activities, none of which was related to Wheels' 1997
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acquisitions, consumed approximately $4,500,000, or substantially all of the
proceeds of the initial public offering.
Wheels' financial condition changed significantly also as a result of
transactions completed in the last quarter of 1997. In particular, Wheels made
significant cash payments in its acquisition of High Performance and Press Pass
and incurred significant fees and expenses in connection with such transactions.
A portion of the funds required to complete such transactions and additional
working capital were obtained under a credit agreement (the "Credit Facility")
entered into by the Wheels Lender on December 31, 1997 with Wheels. The material
financial terms of the High Performance and Press Pass acquisitions and the
Credit Facility are set forth below.
High Performance. On October 3, 1997, Wheels entered into an Agreement and
Plan of Reorganization (the "HP Agreement") with High Performance. The HP
Agreement provided for the merger of High Performance into a wholly-owned
subsidiary of Wheels formed for the sole purpose of completing the merger. The
merger was completed on October 24, 1997.
The consideration paid by Wheels pursuant to the HP Agreement consisted of
cash in the amount of $1.7 million (the "Initial Cash Payment"), 444,445 shares
of Wheels Common Stock and promissory notes in the aggregate principal amount of
$1.0 million (the "HP Notes"). The Company was obligated to make the Final Cash
Payment of $3.25 million at the time of closing. On December 31, 1997, Wheels
used a portion of the proceeds under its Credit Facility to fund a $3.3 million
escrow account. In April 1998, Wheels negotiated the release of $500,000 from
escrow as partial satisfaction of the Final Cash Payment. In addition, Wheels
agreed to pay an extension fee of $450,000 to the former High Performance
stockholders, $250,000 of which was paid on April 23, 1998. The remaining
$200,000 is to be paid upon payment of the remaining Final Cash Payment. Upon
the occurrence of certain events, including the consummation of the Merger, the
funds held in escrow will be released to Wheels and used to fund the balance of
the Final Cash Payment. All principal and accrued interest under the HP Notes is
due on October 24, 1998, subject to prepayment at Wheels' option. The Notes are
unsecured and bear interest at the rate of 10% per annum. The shares of Wheels
Common Stock were issued without registration under the Securities Act, and the
Company granted "piggyback" registration rights to the holders of the Wheels
Common Stock.
In order to fund the Initial Cash Payment, Wheels obtained a $1.7 million
unsecured bank loan from The People's Bank on October 24, 1997. The bank loan
was paid-down and refinanced on December 31, 1997 using borrowings under the
Credit Facility.
Press Pass. On October 3, 1997, Wheels entered into a Merger Agreement and
Plan of Reorganization with Press Pass (the "Press Pass Agreement"), which
provided for the mergers of the two corporate partners of Press Pass into
wholly-owned subsidiaries of Wheels. The mergers were completed on December 31,
1997.
The consideration paid by Wheels pursuant to the Press Pass Agreement
consisted of cash in the amount of $3.1 million, 600,000 shares of Wheels Common
Stock and promissory notes in the aggregate principal amount of $1.0 million
(the "Press Pass Notes"). The Press Pass Notes are secured by a subordinated
lien on the assets of Press Pass, are guaranteed by the two Wheels' subsidiaries
which were parties to the mergers and bear interest at 8% per annum. All
principal and interest is due December 31, 1998, subject to prepayment at
Wheels' option; provided, however, that Wheels may make quarterly payments of
interest only, in which case the Press Pass Notes bear interest at the rate of
4% per annum. The shares of Wheels Common Stock were issued without registration
under the Securities Act, and Wheels granted "piggyback" registration rights to
the holders of the Wheels Common Stock. The cash payment was funded under the
Credit Facility.
Wheels Credit Facility. On December 31, 1997, Wheels and the Wheels Lender
entered into the Credit Facility, which provides Wheels with a $7.7 million term
loan and up to $10.0 million in revolving loans. The availability of revolving
loans is determined by a borrowing base comprised of eligible inventories and
accounts receivable. Borrowings under the Wheels Credit Facility are secured by
substantially all of Wheels' assets. Subject to certain mandatory and voluntary
prepayments, the term loan provides for quarterly payments of principal and
interest commencing in December 1998 and ending in September 2003. All revolving
loans are payable in December 2002.
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At the December 31, 1997 closing under the Credit Facility, Wheels obtained
a $7.7 million term loan and $1.5 million in revolving loans. The revolving loan
proceeds, together with certain existing funds of Wheels, were used to repay
$2.1 million in outstanding secured debt. The term loan proceeds were used to
fund the cash payment made in the Press Pass acquisition, to refinance the loan
from People's Bank, to pay certain expenses incurred in connection with the
Wheels Credit Facility, and to fund a $3.3 million escrow account. Upon the
occurrence of certain events, including the closing of the Merger, the funds
held in escrow will be released to Wheels and used to fund the Final Cash
Payment to the former stockholders of High Performance.
In connection with the Credit Facility, Wheels granted the Wheels Lender
the Lender Warrant to purchase 509,358 shares of Wheels Common Stock at a price
of $3.50 per share. In Wheels' financial statements, the Lender Warrant has been
valued at $1,647,300 and a corresponding amount has been recorded as a debt
discount. The Lender Warrant is exercisable through December 31, 2007. Wheels
has granted "piggyback" and demand registration rights to the holder of the
Lender Warrant.
Under the terms of the Credit Facility, Wheels is required to comply with
certain financial and other covenants which, among other things, place
restrictions on the payment of dividends and require Wheels to achieve certain
financial ratios. The Credit Facility also places significant restrictions on
Wheels' ability to incur additional indebtedness, to create liens or other
encumbrances, to make certain investments or loans and to sell or otherwise
dispose of a substantial portion of assets. Failure to maintain compliance with
these covenants constitutes a default under the terms of the Credit Facility
and, as such, gives the lender the right to accelerate repayment of outstanding
borrowings or seek other remedies of default as provided for in the loan
agreement.
Subsequent to December 31, 1997, Wheels was in violation of substantially
all of the financial covenants under the Credit Facility. Wheels has obtained a
waiver from the Wheels Lender for all violations through April 22, 1998, and has
been successful in obtaining required amendments to certain of these covenants
for fiscal 1998. In management's opinion, Wheels will be able to maintain
compliance with all loan covenants, as amended, of the Credit Facility in 1998.
Seasonality
Wheels' business exhibits some seasonality. Historically, net sales have
been the highest in spring months following commencement of the NASCAR racing
season in late February of each year. Within the NASCAR season, Wheels evaluates
when to ship individual products based on a number of factors including, but not
limited to, competitors' announced shipping dates, consumer demand for similar
products and orders received in advance of release of a new issue. Seasonality
in the businesses of the Acquired Companies will likely increase the effect of
seasonal variations in Wheels' operations. As a result of these factors,
quarterly net sales in future periods may vary and may not be indicative of net
sales in subsequent comparable periods.
Inflation
Wheels believes that inflation has not had a material effect on its
operating results. However, because future increases in inflation may cause
Wheels' suppliers to increase prices of materials and services to Wheels, an
increase in inflation could increase Wheels' cost of sales.
Change in Accountants
Coopers & Lybrand L.L.P. (the "Former Accountants") resigned as independent
accountants for Wheels on December 1, 1997. The Former Accountants reported on
Wheels' financial statements for the fiscal years ended December 31, 1994, 1995
and 1996. The reports of the Former Accountants on the financial statements for
such years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the year ended December 31, 1994 and during all subsequent periods, there
were no disagreements with the Former Accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which
128
<PAGE> 136
disagreements if not resolved to the satisfaction of the Former Accountants
would have caused them to make reference thereto in their report on the
financial statements for such years.
During each of the three years in which the Former Accountants reported on
Wheels' financial statements, Wheels had a single product line and annual
revenues of less than $5 million. During 1997, Wheels acquired five
privately-held companies, expanded its product lines and increased its revenues.
The financial statements of four of the five acquired companies had not
previously been audited and management of the five acquired companies were not
experienced in the preparation of financial statements in accordance with the
rules of the Securities and Exchange Commission. While management of Wheels
believes that internal financial controls were in place, their adequacy and
reliability were not known to the Former Accountants. As a result of the changes
in the size and complexity of Wheels, the Former Accountants determined that
they would be required to expand significantly the scope of their audit.
However, prior to their December 1, 1997 resignation, the Former Accountants had
no discussion with Wheels' management, the Wheels Board or audit committee on
the scope, procedures or any other aspect of the 1997 audit. Consequently, there
were no disagreements between Wheels and the Former Accountants with respect to
the scope or conduct of the 1997 audit.
Effective January 7, 1998, Wheels engaged Arthur Andersen LLP as its
independent auditors.
Accounting Pronouncements
In December 1997, Wheels adopted SFAS No. 128, "Earnings per Share", which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Also in 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 130 and No. 131 are
effective for periods beginning after December 15, 1997. Adoption of these
pronouncements is not expected to have a material impact on the consolidated
financial statements of Wheels.
Year 2000 Compliance
Wheels is reviewing its current computer applications with respect to the
year 2000 issue. Wheels believes that costs associated with year 2000 compliance
will not be material. Wheels is currently unable to determine the effect of year
2000 compliance by its customers or suppliers.
129
<PAGE> 137
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Wheels Common Stock as of March 31, 1998 by: (i) each of Wheels'
directors and executive officers; (ii) all directors and executive officers of
Wheels as a group; and (iii) each person or other entity known by Wheels to own
beneficially more than 5% of the outstanding Wheels 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>
NUMBER OF PERCENT OF
NAME AND ADDRESS(1) SHARES CLASS
- ------------------- --------- ----------
<S> <C> <C>
Howard L. Correll, Jr.(2)................................... 779,237 14.5%
W. Conrad Powell(3)......................................... 549,803 10.0
Randy E. Duncan(4).......................................... 160,500 3.0
Victor H. Shaffer(5)........................................ 144,342 2.7
Randy C. Baker(6)........................................... 427,778 8.0
F. Scott M. Chapman(7)...................................... 12,500 *
David W. Dupree(8).......................................... 81,667 1.5
Robert J. Bove(9)........................................... 33,640 *
Terry J. Powell(10)......................................... 527,303 10.0
Robert G. Tomlinson(11)..................................... 50,000 *
Steven M. Zimmerman(12)..................................... 57,434 1.5
Michael L. Nutting(13)...................................... 133 *
All directors and officers as a group (twelve
persons)(14).............................................. 2,824,337 50.6
</TABLE>
- ---------------
* Denotes less than 1%.
(1) The address for Messrs. Correll, W. Conrad Powell, Baker, Duncan, Shaffer,
Chapman, Dupree and Bove is 149 Gasoline Alley, Mooresville, North Carolina
28115; the address for Terry J. Powell is 23 Sunset Terrace, Asheville,
North Carolina 28801; the address for Mr. Tomlinson is 4600 East 48th
Avenue, Denver, Colorado 80216; the address for Mr. Zimmerman is 212 Candi
Lane, Columbia, South Carolina 29210 and the address for Mr. Nutting is
P.O. Box 484, Winston-Salem, North Carolina 27102.
(2) Includes 120,303 shares of Wheels Common Stock held in escrow subject to
release in 2003 or earlier upon attainment of certain performance
objectives and currently exercisable options to purchase 82,500 shares of
Wheels Common Stock. Also includes currently exercisable options held by
Mr. Correll's spouse, who is an employee of Wheels, to purchase 7,000
shares of Wheels Common Stock. Mr. Correll disclaims beneficial ownership
of options held by his father to purchase 2,000 shares of Wheels Common
Stock.
(3) Includes 90,227 shares of Wheels Common Stock held in escrow subject to
release in 2003 or earlier upon attainment of certain performance
objectives and currently exercisable options to purchase 32,500 shares of
Wheels Common Stock.
(4) Includes currently exercisable options to purchase 15,000 shares of Wheels
Common Stock.
(5) Includes currently exercisable options to purchase 15,000 shares of Wheels
Common Stock.
(6) Includes currently exercisable options to purchase 50,000 shares of Wheels
Common Stock.
(7) Consists solely of currently exercisable options to purchase shares of
Wheels Common Stock.
(8) Includes currently exercisable options to purchase 15,000 shares of Wheels
Common Stock.
(9) Includes currently exercisable options to purchase 10,000 shares of Wheels
Common Stock.
(10) Includes 90,227 shares of Wheels Common Stock held in escrow subject to
release in 2003 or earlier upon attainment of certain performance
objectives and currently exercisable options to purchase 18,500 shares of
Wheels Common Stock.
(11) Consists solely of currently exercisable options to purchase shares of
Wheels Common Stock.
130
<PAGE> 138
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-3
Consolidated Balance Sheet as of December 31, 1996 and
1997................................................... F-4
Consolidated Statement of Income for the eight months
ended December 31, 1996 and the year ended December 31,
1997................................................... F-5
Consolidated Statement of Stockholders' Equity for the
eight months ended December 31, 1996 and the year ended
December 31, 1997...................................... F-6
Consolidated Statement of Cash Flows for the eight months
ended December 31, 1996 and the year ended December 31,
1997................................................... F-7
Notes to Consolidated Financial Statements for the eight
months ended December 31, 1996 and the year ended
December 31, 1997...................................... F-8
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
WHEELS SPORTS GROUP, INC. (FORMERLY WHEELS RACING, INC.) AND
SUBSIDIARIES
Report of Independent Public Accountants.................. F-37
Report of Independent Accountants......................... F-38
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-39
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997....................... F-40
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997........... F-41
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997....................... F-42
Notes to Consolidated Financial Statements................ F-43
</TABLE>
F-1
<PAGE> 139
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HIGH PERFORMANCE SPORTS MARKETING, INC.
Report of Independent Accountants......................... F-59
Balance Sheets as of December 31, 1996 and September 30,
1997................................................... F-60
Statements of Operations for the year ended December 31,
1996 and the nine months ended September 30, 1997...... F-61
Statements of Stockholders' Equity for the year ended
December 31, 1996 and the nine months ended September
30, 1997............................................... F-62
Statements of Cash Flows for the year ended December 31,
1996 and the nine months ended September 30, 1997...... F-63
Notes to Financial Statements............................. F-64
PRESS PASS PARTNERS
Report of Independent Auditors............................ F-68
Balance Sheets as of December 31, 1996 and 1997........... F-69
Statements of Revenues, Expenses and Changes in Partners'
Capital for the years ended December 31, 1995, 1996 and
1997................................................... F-70
Statements of Cash Flows for the years ended December 31,
1995, 1996, and 1997................................... F-71
Notes to Financial Statements............................. F-72
</TABLE>
F-2
<PAGE> 140
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-3
<PAGE> 141
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
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-4
<PAGE> 142
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-5
<PAGE> 143
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-6
<PAGE> 144
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED 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-7
<PAGE> 145
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 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.
F-8
<PAGE> 146
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
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 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>
ESTIMATED
ASSET DESCRIPTIONS USEFUL LIVES
------------------ ------------
<S> <C>
Tooling..................................................... 4-8 years
Furniture and office equipment.............................. 7 years
Leasehold improvements...................................... 3-10 years
Computer systems............................................ 5 years
============
</TABLE>
F-9
<PAGE> 147
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
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-10
<PAGE> 148
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
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>
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>
F-11
<PAGE> 149
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
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>
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
F-12
<PAGE> 150
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
$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.
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>
F-13
<PAGE> 151
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
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 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.
F-14
<PAGE> 152
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
The stock option activity for the Company's stock option plan is as
follows:
<TABLE>
<CAPTION>
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.
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.
F-15
<PAGE> 153
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE EIGHT MONTHS ENDED DECEMBER
31, 1996
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 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 0.51
shares of the Company's common stock.
F-16
<PAGE> 154
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> 155
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 shareholders' 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> 156
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> 157
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> 158
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOUR MONTHS
--------------------------- ENDED
1994 1995 APRIL 30, 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> 159
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.
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.
F-22
<PAGE> 160
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE FOUR MONTHS ENDED APRIL 30, 1996
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.
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
F-23
<PAGE> 161
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE FOUR MONTHS ENDED APRIL 30, 1996
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> 162
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> 163
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> 164
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> 165
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> 166
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>
F-29
<PAGE> 167
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".
(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.
F-30
<PAGE> 168
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(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.
(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>
YEARS ENDED MARCH 31, ONE MONTH 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>
F-31
<PAGE> 169
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
5. OTHER INCOME, NET
Other income, net consists of:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH 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>
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-32
<PAGE> 170
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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-33
<PAGE> 171
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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
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.
F-34
<PAGE> 172
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
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.
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>
F-35
<PAGE> 173
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
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.
(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-36
<PAGE> 174
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Wheels Sports Group, Inc.:
We have audited the accompanying consolidated balance sheet of Wheels
Sports Group, Inc. (a North Carolina corporation) and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wheels Sports Group, Inc. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
April 22, 1998.
F-37
<PAGE> 175
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Wheels Sports Group, Inc.
We have audited the accompanying consolidated balance sheets of Wheels
Sports Group, Inc. (formerly named Wheels Racing, Inc.) and subsidiaries as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Green's Racing Souvenirs, Inc., a wholly owned subsidiary, which
statements reflect total assets constituting 5.9 percent at December 31, 1996,
and revenues constituting 29.0 and 22.0 percent for the years ended, December
31, 1995 and 1996, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Green's
Racing Souvenirs, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Wheels Sports Group,
Inc. and subsidiaries as of December 31, 1996, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 3a, the consolidated financial statements have been
restated to reflect the merger of Diamond Sports Group, Inc. on June 30, 1997,
and the merger of Green's Racing Souvenirs, Inc. on October 4, 1997, both of
which have been accounted for as poolings of interests.
As discussed in Note 12, on December 4, 1997, the Company signed a
definitive agreement to merge with a wholly owned subsidiary of Racing Champions
Corporation.
Coopers & Lybrand, L.L.P.
Greensboro, North Carolina
January 21, 1997, except for Note 3a.
which is dated October 4, 1997
F-38
<PAGE> 176
INDEPENDENT AUDITORS' REPORT
January 15, 1998
Board of Directors
Green's Racing Souvenirs, Inc.
1727 Seymour Drive
South Boston, Virginia 24592
We have audited the accompanying balance sheet of Green's Racing Souvenirs,
Inc., as of December 31, 1996 and 1995, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Green's Racing Souvenirs,
Inc., as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ BURNETT & SNEED
--------------------------------------
Certified Public Accountants
F-39
<PAGE> 177
WHEELS SPORTS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 440,430 $ 317,482
Restricted cash........................................... 3,300,000 --
Accounts receivable, net of allowances of $2,386,000 and
$237,000, respectively................................. 1,247,682 2,123,465
Inventories............................................... 2,710,905 606,406
Prepaid expenses.......................................... 136,342 11,000
Hospitality deposits and other assets..................... 438,289 90,664
----------- ----------
Total current assets................................... 8,273,648 3,149,017
Property and equipment, net................................. 937,770 575,968
Property held for sale...................................... 575,001 127,968
Goodwill, net............................................... 17,204,813 --
Deferred financing costs.................................... 1,679,791 --
Other assets................................................ 128,912 250,961
----------- ----------
Total assets........................................... $28,799,935 $4,103,914
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 265,783 $ 279,768
Current portion of capital lease obligations.............. -- 301,583
Lines of credit........................................... 2,229,776 44,125
Notes and other payables to stockholders.................. 5,250,000 150,000
Accounts payable.......................................... 2,705,249 1,469,624
Accrued expenses.......................................... 1,545,934 388,030
Other current liabilities................................. 621,484 255,844
----------- ----------
Total current liabilities.............................. 12,618,226 2,888,974
Long-term debt, net of unamortized discount of $1,647,300
and $0, respectively...................................... 6,080,290 170,794
Notes payable to stockholders............................... -- 21,635
Capital lease obligations................................... 10,107 12,409
----------- ----------
18,708,623 3,093,812
----------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock: $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock: $0.01 par value, 15,000,000 shares
authorized, 5,280,253 and 2,810,000 shares issued and
outstanding, respectively.............................. 52,803 28,100
Additional paid-in capital................................ 14,541,891 350,479
Retained (deficit) earnings............................... (6,879,422) 739,948
Stock warrants outstanding................................ 2,376,040 --
Stockholder loans and notes receivable.................... -- (108,425)
----------- ----------
Total stockholders' equity............................. 10,091,312 1,010,102
----------- ----------
Total liabilities and stockholders' equity............. $28,799,935 $4,103,914
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-40
<PAGE> 178
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales............................................... $ 7,491,309 $7,523,135 $4,783,610
Cost of sales........................................... 6,765,431 4,568,307 3,061,534
----------- ---------- ----------
Gross margin..................................... 725,878 2,954,828 1,722,076
Selling, general and administrative expenses............ 5,642,992 2,152,637 1,767,538
Other expense (income), net............................. 321,390 (60,325) (3,338)
----------- ---------- ----------
Operating (loss) income................................. (5,238,504) 862,516 (42,124)
Interest expense, net................................... 93,900 42,404 22,833
----------- ---------- ----------
(Loss) income from continuing operations
before income taxes.............................. (5,332,404) 820,112 (64,957)
Income tax provision.................................... -- -- --
----------- ---------- ----------
(Loss) income from continuing operations........... (5,332,404) 820,112 (64,957)
Discontinued operations:
Loss from discontinued operations, net of income
tax benefit of $0................................ 427,730 -- --
Loss from disposition of discontinued operations,
net of income tax benefit of $0.................. 1,032,350 -- --
----------- ---------- ----------
Net (loss) income................................ $(6,792,484) $ 820,112 $ (64,957)
=========== ========== ==========
Pro forma data unaudited (Actual for 1997) (Note 2):
Net (loss) income from continuing operations, as
reported......................................... $(5,332,404) $ 820,112 $ (64,957)
Pro forma income tax expense (benefit)............. -- 328,045 (25,983)
----------- ---------- ----------
Pro forma net (loss) income from continuing
operations....................................... $(5,332,404) $ 492,067 $ (38,974)
=========== ========== ==========
Basic per share data (Note 15):
(Loss) income from continuing operations........... $ (1.35) $ 0.29 $ (0.03)
=========== ========== ==========
Pro forma net (loss) income from continuing
operations....................................... $ (1.35) $ 0.18 $ (0.02)
----------- ---------- ----------
Loss from discontinued operations.................. $ (0.37) $ -- $ --
----------- ---------- ----------
Net (loss) income.................................. $ (1.72) $ 0.29 $ (0.03)
=========== ========== ==========
Weighted average number of shares used
to compute basic per share data....................... 3,960,569 2,804,640 2,446,250
=========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-41
<PAGE> 179
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
STOCKHOLDER
ADDITIONAL RETAINED STOCK LOANS AND
PREFERRED COMMON PAID-IN (DEFICIT) WARRANTS TREASURY NOTES
STOCK STOCK CAPITAL EARNINGS OUTSTANDING STOCK RECEIVABLE TOTAL
--------- ------ ---------- --------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994, as previously
reported................ $-- $ 391,000 $ -- $ 120,573 $ -- $ -- $ -- $ 511,573
Adjustments for Green's
Racing Souvenirs, Inc.
pooling of interests
(175,000 shares)...... -- 1,750 10,809 68,789 -- -- -- 81,348
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1994, as restated....... -- 392,750 10,809 189,362 -- -- -- 592,921
Net loss................ -- -- -- (64,957) -- -- -- (64,957)
Dividend
distributions......... -- -- -- (183,134) -- -- -- (183,134)
Recapitalizations....... -- (369,500) 369,500 -- -- -- -- --
Common stock issued in
connection with
formation of Diamond
Sports Group, Inc.
(485,000 shares)...... -- 4,850 (4,830) -- -- -- -- 20
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1995.................... -- 28,100 375,479 (58,729) -- -- -- 344,850
Treasury stock
acquisition........... -- -- -- -- -- (25,000) -- (25,000)
Stockholder loan
receivable............ -- -- -- -- -- -- (12,989) (12,989)
Note receivable......... -- -- -- -- -- -- (95,436) (95,436)
Treasury stock
retirement............ -- -- (25,000) -- -- 25,000 -- --
Net income.............. -- -- -- 820,112 -- -- -- 820,112
Dividends paid.......... -- -- -- (21,435) -- -- -- (21,435)
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1996.................... -- 28,100 350,479 739,948 -- -- (108,425) 1,010,102
Issuance of common stock
in connection with
purchase of:
World of Racing, Inc.
(310,000 shares).... -- 3,100 616,900 -- -- -- -- 620,000
Emerald Sports Group,
Inc. (65,000
shares)............. -- 650 363,350 -- -- -- -- 364,000
High Performance
Sports Marketing
(444,445 shares).... -- 4,444 3,995,556 -- -- -- -- 4,000,000
Press Pass Partners
(600,000 shares).... -- 6,000 4,194,000 -- -- -- -- 4,200,000
Consolidation of World
of Racing, Inc. ...... -- -- -- -- -- -- 95,436 95,436
Stockholder loan
repayments............ -- -- -- -- -- -- 12,989 12,989
Distribution to
Subchapter S
stockholders.......... -- -- -- (431,337) -- -- -- (431,337)
Adjustment for
converting from
Subchapter S to
Subchapter C for tax
purposes.............. -- -- 395,549 (395,549) -- -- -- --
Issuance of common stock
and stock warrants in
public offering
(1,035,000 shares).... -- 10,350 3,982,784 -- 739,126 -- -- 4,732,260
Issuance of stock
warrants to bank...... -- -- -- -- 1,647,300 -- -- 1,647,300
Stock warrants
exercised............. -- 159 121,587 -- (10,386) -- -- 111,360
Stock options issued.... -- -- 521,686 -- -- -- -- 521,686
Net loss................ -- -- -- (6,792,484) -- -- -- (6,792,484)
--- --------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31,
1997.................... $-- $ 52,803 $14,541,891 $(6,879,422) $2,376,040 $ -- $ -- $10,091,312
=== ========= =========== =========== ========== ======== ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-42
<PAGE> 180
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(6,792,484) $ 820,112 $ (64,957)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) continuing operations --
Loss from discontinued operations and disposition of
discontinued operations............................... 1,460,080 -- --
Depreciation and amortization........................... 161,081 101,189 74,298
Stock option expense.................................... 521,686 -- --
Provision for (reduction in) uncollectible accounts and
returns and allowances................................ 1,068,000 39,000 (63,165)
Write-off of unamortized goodwill related to Emerald
acquisition........................................... 364,000 -- --
(Gain) loss on disposition of assets.................... (9,530) 1,490 (3,684)
CHANGE IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECT
OF CURRENT YEAR ACQUISITIONS:
Decrease (increase) in accounts receivable............ 495,271 (1,382,249) (175,241)
Decrease (increase) in interest receivable and prepaid
expenses............................................ 11,383 (13,468) --
(Increase) decrease in inventories.................... (285,236) (572,556) 7,952
Increase in hospitality deposits and other current
assets.............................................. (324,595) -- --
(Increase) decrease in other noncurrent assets........ (113,505) 62,096 (145,441)
Increase in accounts payable and accrued expenses..... 404,223 1,009,098 447,014
Increase in other current liabilities................. 225,035 86,994 168,850
----------- ----------- ---------
NET CASH (USED IN) PROVIDED BY CONTINUING
OPERATIONS.......................................... (2,814,591) 151,706 245,626
----------- ----------- ---------
NET CASH USED IN DISCONTINUED OPERATIONS.............. (630,000) -- --
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (4,313,575) -- --
Acquisition of property and equipment..................... (371,251) (125,999) (161,438)
Notes receivable originated............................... -- (115,436) --
Notes receivable repayments............................... -- 20,000 --
Acquisition of property held for sale..................... (152,000) -- (115,000)
----------- ----------- ---------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
OPERATIONS.......................................... (4,836,826) (221,435) (276,438)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving loans............................. 1,498,600 -- --
Net (repayments) borrowings under lines of credit and
notes payable........................................... (12,950) 19,000 9,500
Proceeds from long-term debt, net of restricted cash...... 6,470,783 340,047 168,745
Repayments on long-term debt and capital lease
obligations............................................. (2,674,692) (48,346) (46,801)
Loans and advances from stockholders...................... -- 150,000 32,000
Repayment of loans and advances from stockholders......... (171,635) (20,989) (31,381)
Shares issued on formation of Diamond..................... -- -- 20
Purchase of treasury stock................................ -- (25,000) --
Net proceeds (costs) of initial public offering........... 4,981,038 (248,778) --
Proceeds from exercise of warrants........................ 111,360 -- --
Proceeds from receivable from stockholders................ 12,989 -- --
Payment of deferred financing costs....................... (1,379,791) -- --
Distributions to Subchapter S stockholders................ (431,337) (21,435) (183,134)
----------- ----------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF
CONTINUING OPERATIONS............................... 8,404,365 144,499 (51,051)
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 122,948 74,770 (81,863)
Cash and cash equivalents, beginning of period.............. 317,482 242,712 324,575
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 440,430 $ 317,482 $ 242,712
=========== =========== =========
Supplemental disclosure of cash paid for interest........... 149,111 38,183 20,836
=========== =========== =========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Proceeds from long-term debt placed in escrow............. $ 3,330,000 $ -- $ --
=========== =========== =========
Vehicles assumed by stockholders, net book value.......... $ -- $ 2,613 $ 11,038
=========== =========== =========
Vehicle traded in, net book value......................... $ -- $ 18,889 $ 19,704
=========== =========== =========
Long-term debt discharged on vehicle traded in............ $ -- $ 11,237 $ 20,370
=========== =========== =========
Capital lease obligations................................. $ -- $ 314,834 $ --
=========== =========== =========
Long-term debt assumed by stockholders in exchange for
vehicle................................................. $ -- $ -- $ 14,056
=========== =========== =========
Transfer of land improvements to land held for sale....... $ -- $ -- $ 12,968
=========== =========== =========
Acquisitions:
Debt incurred in conjunction with acquisitions............ $ 5,250,000 $ -- $ --
=========== =========== =========
Stock issued to affect acquisitions....................... $ 8,200,000 $ -- $ --
=========== =========== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-43
<PAGE> 181
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
The consolidated financial statements at December 31, 1997, include the
accounts of Wheels Sports Group, Inc. ("Wheels") (formerly Wheels Racing, Inc.)
and its wholly-owned subsidiaries (collectively referred to as the "Company").
All material intercompany balances and transactions have been eliminated. The
Company is a North Carolina corporation originally incorporated in South
Carolina in 1992 under the name of Wheels Racing, Inc. In December 1996, the
Company was reincorporated as a North Carolina corporation under the name Wheels
Sports Group, Inc.
The Company and its subsidiaries are engaged in merchandising NASCAR
oriented products, including apparel, collectible trading cards and accessories
and providing motorsports related hospitality management and corporation
promotions. The Company sells its collectible sports trading cards primarily
through a network of distributors, brokers and specialty hobby dealers located
primarily in the southeast United States. NASCAR oriented apparel includes hats,
shirts and jackets as well as other novelty items which are sold to
mass-merchandise retailers and directly to fans at NASCAR sanctioned events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Although the Company sells its products to a large number of customers, certain
major third-party distributors comprise a significant portion of the customer
base. If the financial condition of these distributors were to significantly
deteriorate, the Company's operating results could be adversely affected. The
largest customer accounted for 19.2% of net sales during 1997. Although the
Company does not require collateral, the Company does perform ongoing
evaluations of its customers' financial condition to reduce credit risk. At
December 31, 1997 and 1996, the Company had recorded allowances for doubtful
accounts of approximately $1,041,000 and $107,000, respectively.
REVENUE RECOGNITION
Revenues and related costs are recognized upon transfer of title of
products to customers. In the case of hospitality and other services, revenue
and related costs are recognized at the time the NASCAR Racing event takes place
and services are rendered. The Company provides for estimated returns from
certain customers who have a right of return. At December 31, 1997 and 1996, the
Company had recorded allowances for estimated returns of approximately
$1,345,000 and $130,000 respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, receivables, accounts payable,
and accrued expenses approximate their fair values due to the short-term nature
of these items. The carrying amounts of the Company's lines of credit, notes and
other payables to stockholders and long-term term debt also approximate their
fair values due either to their short-term nature or the variable interest rates
associated with these debt instruments.
F-44
<PAGE> 182
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method, and market represents the lower of
replacement cost or estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally by using the straight-line method over the estimated useful lives,
ranging from 3 to 20 years.
PROPERTY HELD FOR SALE
Property held for sale consists of land and related improvements and a
building at December 31, 1997, and land and related improvements at December 31,
1996. Property held for sale is stated at the lower of cost or estimated net
realizable value.
INCOME TAXES
The financial statements of the Company for periods prior to 1997 do not
include a provision for income taxes because the taxable income or loss of the
Company was included in the income tax returns of the individual shareholders
under the Company's Subchapter S corporation election. Effective January 1,
1997, the Company converted to Subchapter C corporation status and, as such,
will begin filing federal income tax returns for all periods subsequent to
December 31, 1996. As a result of the conversion to a Subchapter C corporation,
the Company's retained earnings at January 1, 1997, has been reclassified to
additional paid-in capital.
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income taxes are recognized for the expected future tax
consequences of temporary differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities using enacted tax
rates.
For information purposes, the consolidated statements of operations include
a pro forma income tax provision (benefit) on taxable income (loss) for
financial reporting purposes using statutory federal and state rates that would
have resulted if the Company had filed corporate tax returns during 1996 and
1995.
HOSPITALITY DEPOSITS AND DEFERRED REVENUE
The Company makes advances to sponsors of NASCAR functions and receives
monies in advance from its customers, which are treated as advance hospitality
deposits and deferred revenues, respectively, in the Company's consolidated
balance sheets. Deferred revenue recorded at December 31, 1997 and 1996,
amounted to $277,820 and $255,844, respectively, and is included in other
current liabilities on the accompanying consolidated balance sheets.
OTHER ASSETS
Other assets at December 31, 1997, consist primarily of refundable deposits
for leased vehicles. Other assets at December 31, 1996, consisted primarily of
deferred costs associated with the Company's initial public offering. Costs
deferred in connection with the offering of the Company's common stock were
offset against the proceeds of the offering and included in additional paid-in
capital upon successful completion of the offering.
F-45
<PAGE> 183
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired in connection with the acquisitions of High Performance and
Press Pass (Note 3). Goodwill is being amortized over 40 years on a
straight-line basis. Amortization expense for the year ended December 31, 1997,
was approximately $39,300.
The Company periodically evaluates the carrying value of goodwill and other
long-lived assets for possible impairment based upon expected future
undiscounted operating cash flows. In management's opinion, no impairment to the
recoverability of the carrying value of goodwill or other long-lived assets
exists at December 31, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company was required to account for stock
option plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under APB Opinion No. 25, compensation expense related to the
issuance of stock options would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price of the
option.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and to provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
Compensation expense related to stock options granted to nonemployees for
services rendered is recognized over the vesting period based on the fair value
of the options on the date of grant, as prescribed by SFAS No. 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted SFAS No. 128, "Earnings per Share",
which establishes standards for computing and presenting earnings per share.
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Also in 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information."
F-46
<PAGE> 184
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 130 and No. 131 are effective for periods beginning after December 15,
1997. Adoption of these pronouncements is not expected to have a material impact
on the consolidated financial statements of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. BUSINESS COMBINATIONS AND RESTATEMENT:
A. DIAMOND SPORTS GROUP, INC. AND GREEN'S RACING SOUVENIRS, INC.
On June 30, 1997, Wheels Sports Group, Inc. acquired 100% of the common
stock of Diamond Sports Group, Inc. ("Diamond"), a privately-held corporation
located in Charlotte, North Carolina, in exchange for 485,000 shares of the
Company's common stock. Diamond is engaged in merchandising NASCAR-oriented
products and providing motorsports related hospitality management and
corporation promotions.
On October 4, 1997, Wheels Sports Group, Inc., acquired 100% of the common
stock of Green's Racing Souvenirs, Inc. ("GRS"), a privately-held company
located in South Boston, Virginia, in exchange for 175,000 shares of the
Company's common stock. Green's is engaged in merchandising NASCAR oriented
racing souvenirs at race tracks and by mail.
The Diamond and GRS transactions constituted tax-free reorganizations and
each has been accounted for using the pooling of interests method of accounting
for business combinations. Accordingly, all prior period consolidated financial
statements have been restated to include the combined results of operations,
financial position and cash flows of Diamond and GRS. There were no material
transactions between or among Diamond, GRS and the Company prior to the
combination. Certain reclassifications have been made to Diamond's and GRS'
financial statements to conform to the Company's basis of presentation.
Prior to the acquisitions, Diamond and GRS were Subchapter S corporations
and, accordingly, did not pay U.S. federal income taxes. Both corporations will
be included in the Company's federal income tax return effective June 30, 1997
and October 4, 1997, respectively. In connection with the conversion of Diamond
and GRS to Subchapter C corporations, the retained earnings of the respective
companies at the date of acquisition have been reclassified to additional
paid-in capital.
B. WORLD OF RACING, INC.
The Company acquired World of Racing, Inc. ("WOR") through a wholly owned
subsidiary on January 28, 1997, by exchanging 310,000 shares of the Company's
common stock valued at $620,000 for 100% of the common stock of WOR. WOR was a
privately-held South Carolina corporation incorporated in August 1996 to operate
a fantasy race game. The transaction resulted in WOR becoming a wholly-owned
subsidiary of the Company.
Effective June 30, 1997, the Company's Board of Directors voted to
discontinue the operations of WOR and dispose of its assets. The acquisition of
WOR was originally accounted for as a pooling of interests, but the
discontinuance of its operations required the use of purchase accounting. The
$561,914 unamortized goodwill, along with property plant and equipment with a
net book value of approximately $132,000, were written off as of June 30, 1997.
In addition, on June 30, 1997, the Company recorded estimated operating losses
from June 30, 1997, through the end of the phase-out period of approximately
$222,000. Net liabilities of WOR at December 31, 1997, amounted to approximately
$116,000 and are included in other current liabilities on the accompanying
consolidated balance sheet. The loss from operations and the loss on disposition
are presented as discontinued operations on the accompanying consolidated
statement of operations for the year ended
F-47
<PAGE> 185
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997. Net sales of WOR amounted to approximately $174,000 for the
year ended December 31, 1997.
C. EMERALD SPORTS GROUP, INC.
On August 5, 1997, the Company acquired 100% of the common stock of Emerald
Sports Group, Inc. ("Emerald") a recently formed privately-held corporation
located in Charlotte, North Carolina, in exchange for 65,000 shares of its
common stock valued at $364,000. The transaction was accounted for as a purchase
and resulted in excess purchase price over the fair value of net assets acquired
of approximately $408,000.
In December 1997, the Company decided to merge the operations of Emerald
into those of Diamond and to dispose of substantially all of Emerald's assets,
with the exception of inventory, as of December 31, 1997. Accordingly, the
Company has recorded provisions to write-off unamortized goodwill related to the
Emerald acquisition of approximately $364,000, which is included in other
expense on the accompanying consolidated statement of operations for the year
ended December 31, 1997. In addition, certain costs totaling approximately
$200,000 related to the disposal have been accrued at December 31, 1997, and are
included in other current liabilities and other expenses in the accompanying
consolidated financial statements.
D. HIGH PERFORMANCE SPORTS MARKETING, INC.
Effective October 24, 1997, the Company consummated the acquisition of High
Performance Sports Marketing, Inc. ("High Performance"). High Performance is
engaged in the merchandising of NASCAR apparel and souvenirs through mass market
retailers and convenience stores. Consideration paid by the Company consisted of
cash in the amount of $1,672,000, promissory notes totaling $1,000,000, and
444,444 shares of the Company's common stock valued at $4,000,000. In addition,
the terms of the merger agreement required an additional cash payment to be made
at closing of $3,250,000 (the Additional Cash Consideration). Payment of the
Additional Cash Consideration has been extended to 1998 and is to be paid out of
escrowed funds ("Escrowed Funds") established in connection with the Company's
Credit Facility obtained December 31, 1997 (Note 10). Escrowed funds, which are
shown as restricted cash on the accompanying consolidated balance sheet at
December 31, 1997, are scheduled to be released to the former stockholders of
High Performance upon the occurrence of certain events, one of which is the
consummation of the proposed merger discussed in Note 16. In December 1997,
certain officers and directors of the Company executed a pledge agreement under
which an aggregate of approximately 1,000,000 shares of personally-owned stock
of the Company have been pledged to secure payment of the Additional Cash
Consideration.
In April 1998, the Company negotiated the release of $500,000 of Escrowed
Funds as partial satisfaction of the Additional Cash Consideration. In addition,
the Company agreed to pay an extension fee of $450,000 to the former High
Performance stockholders, $250,000 of which was paid on April 22, 1998. The
remaining $200,000 is to be paid upon payment of the remaining Additional Cash
Consideration.
E. PRESS PASS PARTNERS
Effective December 31, 1997, the Company consummated the acquisition of
Press Pass Partners, ("Press Pass") through a transaction in which the two
corporate partners of Press Pass were merged into two newly formed subsidiaries
of the Company. Press Pass is a designer and marketer of collectible trading
cards featuring NASCAR and other sports personalities. Consideration paid by the
Company consisted of cash of $3,100,000, promissory notes totaling $1,000,000,
and 600,000 shares of the Company's common stock valued at $4,200,000.
F-48
<PAGE> 186
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisitions of High Performance and Press Pass have been accounted for
as purchases. Accordingly, the results of operations for each of these entities
since the date of acquisition are included in the Company's consolidated
statement of operations for the year ended December 31, 1997. A summary of the
preliminary allocation of total purchase price to net assets acquired, and
resulting goodwill, is shown below (in thousands):
<TABLE>
<CAPTION>
HIGH
PERFORMANCE PRESS PASS TOTAL
----------- ---------- -----
<S> <C> <C> <C>
Purchase price.................................. $ 9,922 $ 8,300 $18,222
Transaction costs............................... 150 42 192
------- ------- -------
10,072 8,342 18,414
------- ------- -------
Assets acquired................................. 2,349 2,074 4,423
Liabilities assumed............................. (1,709) (1,544) (3,253)
------- ------- -------
Net assets acquired........................ 640 530 1,170
------- ------- -------
Goodwill........................................ $ 9,432 $ 7,812 $17,244
======= ======= =======
</TABLE>
The consolidated financial statements include, for the two companies
acquired in transactions accounted for as poolings of interests, the following
results of operations for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales:
Wheels (1996 and 1995 as previously reported)...... $ 3,812 $4,783 $3,381
Diamond............................................ 2,113 1,084 16
GRS................................................ 1,566 1,656 1,387
------- ------ ------
Combined...................................... $ 7,491 $7,523 $4,784
======= ====== ======
Net (loss) income from continuing operations:
Wheels (1996 and 1995 as previously reported)...... $(5,040) $ 828 $ (124)
Diamond............................................ (419) (80) (22)
GRS................................................ 127 72 81
------- ------ ------
Combined...................................... $(5,332) $ 820 $ (65)
======= ====== ======
</TABLE>
Diamond had unaudited net sales and unaudited net income for the period
from the beginning of 1997 to the date of acquisition of $1,211,996 and $77,474,
respectively, while Green's had unaudited net sales and unaudited net income for
the period from the beginning of 1997 to the date of acquisition of $1,188,191
and $96,193, respectively.
The following summarized pro forma financial information assumes the
acquisitions of High Performance and Press Pass had occurred on January 1 of
each year, excluding discontinued operations of WOR (in thousands except per
share data):
<TABLE>
<CAPTION>
1997 1996
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Pro forma net sales..................................... $29,043 $23,780
Pro forma net (loss) income from continuing
operations............................................ $(7,099) $ 259
Pro forma (loss) earnings per share from continuing
operations............................................ $ (1.44) $ 0.07
</TABLE>
F-49
<PAGE> 187
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma amounts reflect the results of operations for the Company,
the acquired businesses and purchase accounting adjustments to reflect the
amortization of goodwill created in the acquisitions and interest expense on the
additional debt incurred to finance the acquisitions, including amortization of
deferred financing costs and the debt discount (Note 10).
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials and work-in-process....................... $ 197,650 $479,382
Finished goods.......................................... 2,513,255 127,024
---------- --------
$2,710,905 $606,406
========== ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvements.................................. $ 48,331 $ 12,100
Leasehold improvements................................. 29,556 12,745
Office machinery and equipment......................... 483,448 206,868
Equipment.............................................. 342,581 --
Vehicles............................................... 333,826 276,029
Buildings under capital lease.......................... -- 298,879
---------- ---------
1,237,742 806,621
Less accumulated depreciation.......................... (299,972) (230,653)
---------- ---------
$ 937,770 $ 575,968
========== =========
</TABLE>
During 1997, the Company exercised its right to purchase its building under
capital lease for approximately $308,000 and, subsequently, made the building
available for sale. Accordingly, the carrying amount of approximately $308,000
has been reclassified to property held for sale at December 31, 1997. Subsequent
to year-end, the Company sold this building for a purchase price of
approximately $326,000.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Legal and professional fees............................. $ 408,475 $ --
Royalties............................................... 432,852 359,354
Accrued financing costs................................. 300,000 --
Payroll related expenses................................ 280,863 --
Other................................................... 123,744 28,676
---------- --------
$1,545,934 $388,030
========== ========
</TABLE>
7. INCOME TAXES:
The financial statements of the Company for periods prior to 1997 do not
include a provision for income taxes, as the Company had elected to be treated
as a Subchapter S Corporation for federal and state income
F-50
<PAGE> 188
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax purposes. The Company's Subchapter S Corporation election was terminated
effective January 1, 1997, and, upon termination, the Company became fully
subject to federal and state income taxes. In addition, each of the entities
acquired during 1997 was either a Subchapter S Corporation or a partnership
prior to merging with the Company, and as such, the taxable income or loss of
the acquired entities prior to the date of acquisition was included in the
income tax returns of the respective stockholders or corporate partners. Upon
acquisition, the companies are no longer treated as Subchapter S Corporations
for tax purposes and are, therefore, subject to federal and state income taxes.
There was no current or deferred provision for income taxes of continuing
operations for the year ended December 31, 1997. A reconciliation of the
Company's effective income tax rate to the statutory federal income tax rate is
as follows:
<TABLE>
<CAPTION>
1997
------------------
AMOUNT %
------ -
<S> <C> <C>
Amount at statutory federal rate........................... $ 1,866,300 35%
Nondeductible amortization of goodwill..................... (13,800) --
Pooling income, preacquisition............................. 50,200 1
Other...................................................... (7,400) --
Valuation allowance........................................ (1,895,300) (36)
----------- ---
Income tax expense.................................... $ -- 0%
=========== ===
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities at year-end are as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Deferred tax assets:
Expenses not currently deductible......................... $ 1,317,500
Net operating loss carryforwards.......................... 1,831,900
Other..................................................... 22,500
-----------
3,171,900
Valuation allowance....................................... (3,171,900)
-----------
Net deferred tax assets................................ $ --
===========
</TABLE>
Losses incurred during 1997 may be used to offset future taxable income of
the Company. As of December 31, 1997, the Company had a net operating loss
carryforward of approximately $4,600,000 to offset future taxable income which,
if not utilized, will expire in 2012. U.S. tax rules impose certain limitations
on the use of net operating loss carryforwards following certain "changes in
control", as defined by the IRS. During 1997, the Company experienced a "change
in control" resulting in an annual limitation on the use of available net
operating losses of approximately $1,400,000. Furthermore, future sales of
common stock by the Company, or changes in the composition of the principal
stockholders such as that contemplated in the proposed merger discussed in Note
16, could constitute another "change in control" that could further limit the
use of the Company's net operating loss carryforward.
Realization of future tax benefits related to deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income during the net operating loss carryforward period. As required by SFAS
No. 109, the Company has recorded a valuation allowance of approximately
$3,200,000 at December 31, 1997, because, in the Company's assessment, it is
uncertain whether the deferred tax assets will be realized.
F-51
<PAGE> 189
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LINES OF CREDIT:
Lines of credit are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revolving loan facility, $8,501,400 of additional
borrowings available subject to certain restrictions
($97,000 available at December 31, 1997), used to meet
working capital requirements of the Company, secured by
substantially all the assets of the Company, accrued
interest due periodically at LIBOR plus 3% (8.8% at
December 31, 1997), expiring December 31, 2002, maximum
borrowings of $1,498,600 during 1997................... $1,498,600 $ --
Line of credit with a bank, $300,000 of additional
borrowings available, used to meet working capital
requirements of the Company, personally guaranteed by
three stockholders, with accrued interest due monthly
at the prime rate (8.5% at December 31, 1997) expiring
April 29, 1998, maximum borrowings of $700,000 during
1997................................................... 700,000 --
Line of credit with a bank, $160,000 of additional
borrowings available, used to meet working capital
requirements of the Company, personally guaranteed by
certain officers of the Company, with accrued interest
due monthly at the prime rate (8.25% at December 31,
1996) facility closed at the end of 1997............... -- 40,000
Line of credit with a bank, $18,824 of additional
borrowings available, guaranteed by a stockholder, with
accrued interest due monthly at the prime rate plus 1%
(9.5% at December 31, 1997) expiring July 22, 1999..... 31,176 4,125
---------- -------
$2,229,776 $44,125
========== =======
</TABLE>
See Note 10 for a discussion of terms and conditions under the revolving loan
facility.
9. NOTES AND OTHER PAYABLES TO STOCKHOLDERS:
Notes and other payables to stockholders are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Unsecured notes payable to stockholders, issued in
connection with the acquisition of High Performance
(Note 3), bearing interest at 10.0%, principal and
interest due October 24, 1998......................... $1,000,000 $ --
Notes payable to stockholders, issued in connection with
the acquisition of Press Pass (Note 3), bearing
interest at 8.0%, principal and interest due December
31, 1998, secured by a subordinated lien on the assets
of Press Pass......................................... 1,000,000 --
Additional Cash Consideration payable to stockholders in
connection with the acquisition of High Performance
(Note 3), bearing interest at the Federal Funds rate
(5.5% at December 31, 1997), principal and interest
due upon release of Escrowed Funds (Notes 3 and 10)... 3,250,000 --
Note payable to two stockholders, unsecured, issued in
order to meet working capital needs, bearing interest
at 18.0%, principal and interest repaid in 1997....... -- 150,000
---------- --------
$5,250,000 $150,000
========== ========
</TABLE>
F-52
<PAGE> 190
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unsecured notes payable to stockholders represent notes issued to the
former shareholders of High Performance and Press Pass in connection with the
acquisitions of High Performance and Press Pass in 1997, as discussed in Note 3.
See Note 3 and Note 10 for discussion of terms and conditions of the
Additional Cash Consideration payable to the former stockholders of High
Performance.
10. LONG-TERM DEBT:
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term loan payable to bank, net of unamortized discount
of $1,647,300, bearing interest at LIBOR plus 3%
(8.8% at December 31, 1997), principal and interest
payments due quarterly beginning December 1998 and
continuing through September 2003, secured by
substantially all assets of the Company.............. $6,100,483 $ --
Note payable to a bank used to meet working capital
needs, secured by accounts receivable and inventory,
bearing interest at the prime rate (8.25% at December
31, 1996), repaid in 1997............................ -- 250,000
Note payable to a bank used to finance the acquisition
of land, secured by the land, with accrued interest
due monthly at the prime rate (8.5% at December 31,
1997), principal due in full on October 31, 2010..... 115,000 115,000
Notes payable to banks and financing institutions used
to finance the acquisition of vehicles and equipment,
generally due in monthly principal payments ranging
from $303 to $806 plus accrued interest at rates
ranging from 4.9% to 10.7%........................... 130,590 85,562
---------- ---------
$6,346,073 $ 450,562
Less -- Amount due within one year..................... (265,783) (279,768)
---------- ---------
$6,080,290 $ 170,794
========== =========
</TABLE>
On December 31, 1997, the Company established a Credit Facility with Credit
Agricole Indosuez providing a $7.7 million term loan and up to $10 million in
revolving loans (Note 8). The availability of the revolving loans is determined
based upon a borrowing base comprised of eligible inventories and accounts
receivable. Borrowings under the Credit Facility are secured by substantially
all of the Company's assets. The term loan provides for quarterly payments of
principal and interest beginning December 1998 and ending September 2003,
subject to certain mandatory and voluntary prepayment provisions. All revolving
loans are payable in December 2002.
At the December 31, 1997 closing of the Credit Facility, the Company
obtained a $7,747,783 term loan and $1,498,600 in revolving loans. The revolving
loan proceeds, together with existing funds of the Company, were used to repay
$2.1 million in outstanding secured debt. Term loan proceeds of $4.4 million
were used to fund the cash consideration payable under terms of the Press Pass
acquisition, and to pay certain expenses incurred in connection with the Press
Pass and High Performance acquisitions. Additional term loan proceeds of $3.3
million were placed in an escrow account to fund the Additional Cash
Consideration incurred in the High Performance acquisition. Escrowed Funds,
which are shown as restricted cash in the accompanying
F-53
<PAGE> 191
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated balance sheet at December 31, 1997, are scheduled to be released
to the former stockholders upon the occurrence of certain events, one of which
is the consummation of the proposed merger discussed in Note 16.
In connection with establishing the Credit Facility, the Company granted to
Credit Agricole Indosuez a warrant to purchase 509,358 shares of the Company's
common stock at a price of $3.50 per share. The warrant is exercisable through
December 31, 2007. The exercise price and number of shares to be purchased are
subject, from time to time, to certain antidilutive adjustments. The Company has
recorded a discount on long term debt obtained under the Credit Facility based
on the estimated fair value of the warrants at December 31, 1997. The discount
will be amortized and included as a component of interest expense over the term
of the term loans using the effective interest rate method.
The Company also incurred financing costs totaling $1,679,791, which have
been deferred and will be amortized over the term of the Credit Facility.
Under the terms of the Credit Facility, the Company is required to comply
with certain financial and other covenants which, among other things, place
restrictions on the payment of dividends and require the Company to achieve
certain financial ratios. The Credit Facility also places significant
restrictions on the Company's ability to incur additional indebtedness, to
create liens or other encumbrances, to make certain investments or loans and to
sell or otherwise dispose of a substantial portion of assets. Failure to
maintain compliance with these covenants constitutes a default under the terms
of the Credit Facility and, as such, gives the lender the right to accelerate
repayment of outstanding borrowings or seek other remedies of default as
provided for in the loan agreement.
Subsequent to December 31, 1997, the Company was in violation of
substantially all of the financial covenants under the Credit Facility. The
Company has obtained a waiver from the lender for all violations through April
22, 1998, and has been successful in obtaining required amendments to certain of
these covenants for fiscal 1998.
Annual principal payments on long-term debt, are approximately as follows:
<TABLE>
<S> <C>
1998........................................................ $ 265,783
1999........................................................ 930,128
2000........................................................ 1,259,015
2001........................................................ 1,646,404
2002........................................................ 2,033,793
Thereafter.................................................. 1,858,250
----------
$7,993,373
==========
</TABLE>
11. TRANSACTIONS WITH RELATED PARTIES:
In 1996, two directors who are stockholders of the Company guaranteed the
$250,000 note payable to a bank (Note 10). This note was repaid in 1997.
At November 30, 1996, two stockholders, one of whom is a director, loaned
the Company $150,000, with an interest rate of 18% per annum. This loan was
repaid in 1997.
One hundred shares of Wheels Racing, Inc. stock were repurchased by the
Company for $25,000, placed in Treasury and retired during 1996.
The Company leases certain buildings which are owned by stockholders and/or
directors of the Company. These leases are accounted for as operating leases and
have terms from 1 to 15 years. The Company incurred rental expense on these
leases of $51,598 and $15,400 during 1997 and 1996, respectively.
Racing Champions Corporation ("Racing Champions") has guaranteed $600,000
of borrowings of the Company under the Credit Facility.
F-54
<PAGE> 192
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into a lease for a building on October 1, 1996, with a
company owned by three of the former stockholders of Diamond. The lease term was
for three years with an option to purchase the building during the lease term
and a mandatory purchase requirement at the end of 1999. The lease was
capitalized using a rate of 9%. Minimum monthly lease payments were $2,400.
Lease payments, representing interest, made during the years ended December 31,
1997 and 1996, were $19,200 and $9,200. In August 1997, the Company exercised
its right to purchase the building for approximately $308,000; accordingly, the
capital lease obligation has been removed from the books at December 31, 1997.
Land owned by certain stockholders was sold to the Company in October 1995
at its original acquisition cost of $115,000 and is now held for sale.
12. COMMITMENTS AND CONTINGENCIES:
The Company's ability to produce and market its trading cards is based on
its license agreements with various parties. The agreements permit the Company,
on a nonexclusive basis, to use logos, trademarks, facsimile signatures,
biographical data and pictures to produce and sell specified products. The terms
of the various license agreements vary and in some cases require the Company to
pay royalties based upon a specified percentage of sales, with aggregate
guaranteed minimum royalties relating to future periods totaling approximately
$2,010,000 through December 2002. Royalty expense for the years ended December
31, 1997, 1996 and 1995, was $1,217,000, $720,000 and $565,000, respectively.
Although there can be no assurance that new licenses will be granted to the
Company upon expiration of the current agreements, the Company anticipates that
it will be able to obtain new licenses on favorable terms.
In May 1997 a proposed class action lawsuit was filed against several
trackside vendors, including GRS. The complaint alleges that the defendants have
engaged in price fixing activities at certain NASCAR events in violation of
federal anti-trust laws. Plaintiffs seek an unspecified amount of compensatory
and punitive damages and also an order enjoining the alleged price fixing
practices. GRS has entered into a joint defense agreement with certain
co-defendants pursuant to which defense costs are being reimbursed by defendant
Americrown Service Corporation. The existing joint defense agreement is to
remain in effect through class certification proceedings, which are expected to
be completed during late 1998. Wheels expects that the action will be dismissed
if class certification is not obtained. In the event class certification is
obtained, the Company expects that GRS would vigorously defend against the
action, although no assurances can be given as to the outcome of this matter.
The Company is also subject, from time to time, to other legal proceedings
and claims which arise in the ordinary course of its business. Based upon
information currently available, the Company is not aware of any such matters
which are expected to have a material adverse effect on the financial position
or results of operations of the Company.
F-55
<PAGE> 193
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
Rental expense under cancellable and noncancellable operating leases
amounted to $239,615 for the year ended December 31, 1997. Commitments for
future minimum lease payments with terms extending beyond one year at December
31, 1997, for noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 570,577
1999........................................................ 480,609
2000........................................................ 293,070
2001........................................................ 251,252
2002........................................................ 249,296
Thereafter.................................................. 1,940,297
----------
$3,785,101
==========
</TABLE>
EMPLOYMENT AGREEMENT
The Company maintains employment agreements with certain of its executive
officers, the terms of which expire at various times through December 31, 2000.
The agreements contain certain provisions which entitle the officers to receive
lump-sum severance payments and other benefits upon termination of employment
due to a change in control, as defined. The Company's maximum contingent
liability in such an event is approximately $1,600,000 at December 31, 1997.
13. STOCKHOLDERS' EQUITY:
COMMON STOCK
In connection with the reincorporation as a North Carolina corporation on
December 12, 1996, Wheels Racing, Inc. was merged into Wheels Sports Group,
Inc., a newly formed entity established for the purpose of the reincorporation,
through an exchange of 215 shares of Wheels Sports Group, Inc. for each share of
Wheels Racing, Inc. The treasury stock in Wheels Racing, Inc. was retired. The
merger resulted in the existing shares of common stock (prior to 1997 poolings)
totaling 2,128,500 shares issued to shareholders of record. To attain the
desired capitalization for the offering, the Company effected a forward split of
1.01 to 1 to obtain a total common stock of 2,150,000 (prior to 1997 poolings)
shares issued. Prior year financial statements include the effect of this change
in capital structure.
Holders of the Company's common stock are entitled to one vote for each
share held but do not possess cumulative voting rights in the election of
directors. Subject to preferences that are applicable to outstanding preferred
stock, if any, holders of common stock are entitled to share ratably in all
dividends declared by the Company's Board of Directors. Holders of common stock
have no preemptive, conversion or redemption rights.
INITIAL PUBLIC OFFERING AND STOCK WARRANTS
In April 1997, the Company completed an initial public offering of
1,035,000 shares of common stock at a price of $6.00 per share, resulting in net
proceeds of $4,732,260. Included as part of the offering were warrants for the
purchase of an additional 517,500 shares of common stock at an exercise price of
$7.08 per share. The warrants, which were immediately exercisable, expire in
April 2002 and may be redeemed by the Company beginning April 1998 under certain
terms and conditions at a price of $.05 per warrant. Holders of outstanding
warrants issued in connection with the Company's initial public offering have no
voting or other rights as a stockholder of the Company. In addition, the Company
agreed to issue and sell to the underwriter of its public offering, for nominal
consideration, warrants to purchase an aggregate of 90,000 shares of
F-56
<PAGE> 194
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock and an additional 90,000 warrants at a price of $8.70 per share,
commencing April 1998 and expiring in April 2003. Warrants subject to purchase
under warrants issued to the underwriter have terms identical to those sold as
part of the Company's initial public offering. The Company has assigned $739,126
of the total net proceeds of the offering to the value of stock warrants issued.
Further, the Company has entered into an agreement with the underwriter
which provides that, if the underwriter arranges for the purchase or sale of
substantially all of the assets of the Company, or for a merger, consolidation
or acquisition accepted by the Company during the five-year period ending April
2002, the Company will pay the underwriter a fee ranging from 3%-5% of total
consideration received. In connection with this, the Company agreed to pay the
underwriter a consulting fee of $70,000. This amount was accounted for as a cost
of the initial public offering.
STOCKHOLDER LOANS AND NOTE RECEIVABLE
Stockholder loans and note receivable at December 31, 1996, includes a
$95,436 note receivable from World of Racing, Inc., which accrued interest at
10% and was due October 1997. The amount has been eliminated in consolidation
upon the acquisition of World of Racing, Inc. in 1998 (Note 3). Other loans
outstanding at December 31, 1996, represent noninterest bearing advances to
stockholders. All advances were repaid in 1997.
14. STOCK OPTION PLAN:
In 1996, the Company adopted an Omnibus Stock Plan for its key employees,
under which the Company has reserved 1,100,000 shares of common stock for
issuance under the plan. No awards were made under the plan in 1996. In 1997,
425,000 fair market value options, 90,000 discounted options and 275,000 premium
options were issued to employees to purchase shares of the Company's common
stock. All options were vested at December 31, 1997 and have a maximum term of
ten years.
The Company also issued 127,000 options to nonemployees in 1997. Of the
127,000 options, 43,000 were fully vested at December 31, 1997, with the
remainder vesting over a one-year period. Options granted to nonemployees have a
maximum term of ten years. The Company has recorded expense of approximately
$442,000 related to stock options granted to nonemployees in 1997.
The Company accounts for its employee stock-based compensation plan in
accordance with APB Opinion 25 and related interpretations. Accordingly, no
compensation cost has been recognized for stock options granted to employees
with exercise prices at or greater than the fair market value of the underlying
stock on the grant date. The Company has recorded compensation cost of
approximately $80,000 for the year ended December 31, 1997, related to options
issued to employees at a discount. Had compensation cost for the Company's plan
been determined based on the fair value of the awards at the date of grant
consistent with the methodology of SFAS No. 123, the Company would have
recognized approximately $3,141,000 in additional compensation cost for
stock-based compensation awards. The Company's loss and loss per share from
continuing operations would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997
----
<S> <C> <C>
Net loss from continuing operations.................. As reported $(5,332,404)
Pro forma $(8,473,404)
Basic loss from continuing operations per share...... As reported $(1.35)
Pro forma $(2.14)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997: divided yield of 0%; expected volatility 50.4%; risk-free
interest rate of 6.4%; and expected life of 10 years.
F-57
<PAGE> 195
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1997 and changes during the year are presented below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE FAIR VALUE
------------- ------ ---------------- ----------------
<S> <C> <C> <C>
Outstanding at the beginning of year................. -- NA --
Options granted at fair market value................. 445,000 $6.76 $6.76
Options granted at a discount........................ 197,000 $5.02 $5.54
Options granted at a premium......................... 275,000 $6.80 $6.43
Forfeited............................................ (500) $5.90 --
Expired.............................................. (2,000) $5.90 --
-------
Outstanding at the end of year....................... 914,500 $6.40
======= =====
Options exercisable at year end...................... 830,500
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE ----------------------------------
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.02 to $6.38........ 613,500 8.3 $5.91 529,500 $6.05
$7.00 to $8.25........ 301,000 6.0 $7.39 301,000 $7.39
</TABLE>
Subsequent to year-end, the Company canceled 417,000 options issued in
1997. The following table provides pro-forma disclosure of stock options
outstanding at December 31, 1997, after giving effect to the cancelation of
these options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE ----------------------------------
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.02 to $6.38........ 372,500 7.3 $5.61 288,500 $5.78
$7.00 to $8.25........ 125,000 6.5 $6.88 125,000 $6.88
</TABLE>
F-58
<PAGE> 196
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. NET INCOME/LOSS PER SHARE:
As discussed in Notes 13 and 14, the Company issued various stock options
and warrants throughout 1997. Because the Company incurred a loss from
continuing operations for the year ended December 31, 1997, these options and
warrants are antidilutive. Thus, the basic earnings per share shown on the face
of the income statement before and including the effects of discontinued
operations and the effect of pro forma income tax adjustments are the same as
diluted earnings per share. However, for a portion of the options and warrants
outstanding at the end of 1997, the exercise price was less than the average
market price of the Company's common stock during the year. As shown below, had
the Company generated net income from continuing operations, these warrants and
options would have increased the number of shares of common stock outstanding by
98,939. The potential exercise of these options and warrants would have no
impact on the total net income amounts used to calculate earnings per share.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES
--------
<S> <C>
Number of shares used to compute basic earnings per share... 3,960,569
Plus effect of dilutive securities:
Stock options............................................. 78,633
Stock warrants............................................ 20,306
---------
Number of shares to be used to compute diluted earnings per
share..................................................... 4,059,508
=========
</TABLE>
For the years ended December 31, 1996 and 1995, the Company had no
outstanding warrants or options. As such, basic earnings per share is equivalent
to diluted earnings per share.
16. PROPOSED MERGER:
On December 5, 1997, the Company announced execution of a definitive
agreement to merge with a wholly owned subsidiary of Racing Champions, a
publicly owned Delaware corporation headquartered in Glen Ellyn, Illinois. The
transaction is planned as a stock-for-stock exchange to be accounted for as a
pooling of interests. Under the terms of the agreement, as amended, each share
of the Company's outstanding common stock will be exchange for 0.51 shares of
Racing Champions common stock. The merger, which is subject to due diligence,
stockholder approval, and other closing conditions, is expected to close in the
first half of 1998. Also, under terms of the agreement, the Company may be
obligated to pay Racing Champions a termination fee of up to $4,000,000 if the
merger is terminated due to the occurrence of certain events or conditions as
specified in the agreement, one of which is the Company's failure to obtain
necessary stockholder approval of the proposed merger. In management's opinion,
the Company will be successful in complying with the terms and conditions of the
merger agreement, as amended, such that management does not expect to incur a
termination fee obligation in the event the proposed merger is not consummated.
In the event such an obligation is incurred, funding of any such liability would
likely require additional working capital financing.
F-59
<PAGE> 197
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
High Performance Sports Marketing, Inc.:
We have audited the accompanying balance sheets of High Performance Sports
Marketing, Inc. as of September 30, 1997 and December 31, 1996, and the related
statements of operations and stockholders' equity and statements of cash flows
for the nine month period ended September 30, 1997 and the year 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 High Performance Sports
Marketing, Inc. as of September 30, 1997 and December 31, 1996 and the results
of its operations and its cash flows for the nine month period ended September
30, 1997 and the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 10 to the financial statements, on October 24, 1997,
the Company was acquired by Wheels Sports Group, Inc. The financial statements
do not reflect any adjustments arising from the transaction.
Coopers & Lybrand LLP
Greensboro, North Carolina
February 6, 1998
F-60
<PAGE> 198
HIGH PERFORMANCE SPORTS MARKETING, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,104 $ 36,173
Receivables:
Trade, net of allowance of $50,000 at September 30,
1997.................................................. 503,765 339,538
Other.................................................. 10,262 --
Inventories............................................... 1,472,026 672,988
Other current assets...................................... 3,430 --
---------- ----------
Total current assets................................. 2,031,587 1,048,699
Property and equipment, net................................. 341,505 227,204
Other assets................................................ 8,993 9,023
---------- ----------
Total assets......................................... $2,382,085 $1,284,926
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of long term debt......................... $ 116,976 $ 27,239
Line of credit............................................ 350,000 200,000
Accounts payable.......................................... 856,168 809,956
Other accrued expenses.................................... 192,190 129,285
Other current liabilities................................. 36,550 17,210
---------- ----------
Total current liabilities............................ 1,551,884 1,183,690
Long term debt.............................................. 31,085 68,639
---------- ----------
Total liabilities.................................... 1,582,969 1,252,329
---------- ----------
Stockholders' equity:
Common stock, .01 par value, 10,000 shares authorized,
1,147 and 1,000 shares issued and outstanding at
September 30, 1997 and December 31, 1996,
respectively........................................... 11 10
Additional paid in capital................................ 1,220,989 990
Retained earnings/(accumulated deficit)................... (421,884) 31,597
---------- ----------
Total stockholders equity............................ 799,116 32,597
---------- ----------
Total liabilities and stockholders' equity........... $2,382,085 $1,284,926
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE> 199
HIGH PERFORMANCE SPORTS MARKETING, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Net sales................................................... $12,618,421 $8,919,557
Cost of goods sold.......................................... 9,939,131 7,519,499
----------- ----------
Gross profit.............................................. 2,679,290 1,400,058
Selling, general and administrative expenses................ 1,662,530 969,380
Compensation expense for stock award........................ 1,220,000 --
----------- ----------
Operating (loss) income................................... (203,240) 430,678
Other income (expense):
Interest expense.......................................... (24,339) (25,900)
Other net................................................. (1,901) 31,991
----------- ----------
Net (loss) income...................................... $ (229,480) $ 436,769
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE> 200
HIGH PERFORMANCE SPORTS MARKETING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER
31, 1996
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------- PAID-IN PARTNERSHIP (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT) EQUITY
------ ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1995
(unaudited).................... 500 $ 5 $ 495 $(35,866) $ 215,057 $ 179,691
Issuance of common stock......... 500 5 495 -- 500
Adjustment to combine RCB
Enterprise, Inc. and High
Performance Sports Marketing
L.L.C. (Note 1)................ 35,866 (35,866) --
Distributions to owners.......... (584,363) (584,363)
Net income....................... 436,769 436,769
----- --- ---------- -------- --------- ----------
At December 31, 1996............. 1,000 10 990 -- 31,597 32,597
Issuance of common stock for
employee stock award........... 147 1 1,219,999 1,220,000
Distributions to owners.......... (224,001) (224,001)
Net loss......................... (229,480) (229,480)
----- --- ---------- -------- --------- ----------
At September 30, 1997............ 1,147 $11 $1,220,989 $ -- $(421,884) $ 799,116
===== === ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE> 201
HIGH PERFORMANCE SPORTS MARKETING, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (229,480) $ 436,769
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation........................................... 58,471 50,035
Loss on sale of property and equipment................. 5,566 --
Bad debt expense....................................... 50,000
Compensation expense for stock award................... 1,220,000 --
Change in operating assets and liabilities:
Trade receivables.................................... (214,227) 114,709
Other receivables.................................... (10,262) 110,953
Inventories.......................................... (799,038) (545,156)
Other assets......................................... (3,400) (4,308)
Accounts payable and accrued expenses................ 109,117 524,254
Other liabilities.................................... 19,340 (1,865)
---------- ---------
Net cash provided by operating activities......... 206,087 685,391
---------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (199,156) (59,610)
Proceeds from sale of property and equipment.............. 20,818 --
---------- ---------
Net cash used in investing activities............. (178,338) (59,610)
---------- ---------
Cash flows from financing activities:
Distributions to stockholders............................. (224,001) (584,363)
Borrowings under line of credit........................... 350,000 106,000
Proceeds from issuance of long term debt.................. 100,000 --
Payments on line of credit................................ (200,000) --
Payment of long term debt................................. (47,817) (130,224)
Issuance of stock......................................... -- 500
---------- ---------
Net cash used in financing activities............. (21,818) (608,087)
---------- ---------
Increase in cash and cash equivalents....................... 5,931 17,694
Cash and cash equivalents at beginning of year.............. 36,173 18,479
---------- ---------
Cash and cash equivalents at end of year.................... $ 42,104 $ 36,173
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 27,731 $ 22,508
========== =========
Non-cash investing and financing activities:
Long term debt issued for vehicles........................ $ -- $ 65,193
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE> 202
HIGH PERFORMANCE SPORTS MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER
31, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
High Performance Sports Marketing, Inc. (the "Company") is a North Carolina
corporation headquartered in Mooresville, North Carolina. The Company
distributes a variety of licensed NASCAR merchandise including apparel, hats,
and novelties to national retailers, such as convenience stores, grocery stores,
auto dealerships, and other retail chains. The Company is the result of a 1996
merger between RCB Enterprises, Inc. and High Performance Sports Marketing
L.L.C., which were previously affiliated through common interest of the
Company's stockholders. The financial statements of these two entities were
combined at historical cost in a manner similar to a pooling-of-interest since
its operations were under common management and control.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS:
The Company's cash and cash equivalents are placed in major domestic banks
which limits the amount of credit exposure. Periodically throughout the year,
the Company has maintained balances in excess of federally insured limits of
$100,000. Cash equivalents consist of money market funds.
INVENTORIES:
Inventories are stated at lower of cost or market with cost determined by
the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed by
using the straight-line method over the estimated useful lives ranging from 3 to
7 years. Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. The cost
of property and equipment and accumulated depreciation are removed from the
accounts upon retirement or other disposition with any resulting gain or loss
reflected as other income or expense.
FINANCIAL INSTRUMENTS:
The carrying amounts for certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value because of their short maturities.
The estimated fair value of long-term debt is primarily based on quoted market
prices as well as borrowing rates currently available to the Company for bank
loans with similar terms and maturities. The carrying amount of the debt
approximates fair value.
REVENUE RECOGNITION:
Sales and related costs are recognized at the time of shipment to
customers.
INCOME TAXES:
The financial statements do not include a provision for income taxes
because the taxable income or loss is included in the income tax returns of the
individual shareholders under the S corporation election.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-65
<PAGE> 203
HIGH PERFORMANCE SPORTS MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER
31, 1996
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Furniture and fixtures............................... $ 205,099 $141,177
Office machinery and equipment....................... 206,337 71,103
Vehicles............................................. 76,667 111,011
--------- --------
488,103 323,291
Less accumulated depreciation........................ (146,598) (96,087)
--------- --------
$ 341,505 $227,204
========= ========
</TABLE>
4. LINE OF CREDIT:
At September 30, 1997 and December 31, 1996, the Company had a line of
credit with Peoples Bank. This agreement provides a maximum borrowing limit of
$1,000,000 with interest payable monthly at the bank's prime rate (8.5% at
September 30, 1997). Borrowings outstanding under the line at September 30, 1997
and December 31, 1996 were $350,000 and $200,000, respectively. The line is
collateralized by accounts receivable and inventory and expires on April 15,
1998.
5. LONG TERM DEBT:
Long term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Note payable to Peoples Bank for working capital, interest
payable monthly, bearing interest at the bank's prime rate
(8.5%, at September 30, 1997), due January 14, 1998....... $ 92,635 $ --
Note payable to NationsBank, payable in monthly installments
of $600, including principal and interest, bearing
interest at 9.1%.......................................... 20,320 24,060
Note payable to NationsBank, payable in monthly installments
of $982, including principal and interest, bearing
interest at 10.7%......................................... 12,715 20,301
Note payable to United Carolina Bank, payable in monthly
installments of $473, including principal and interest,
bearing interest at 9%.................................... 11,902 15,210
Note payable to GMAC, payable in monthly installments of
$303, including principal and interest, bearing interest
at 4.9%................................................... 10,489 13,695
Note payable to NationsBank, payable in monthly installments
of $510, including principal and interest, bearing
interest at 8%............................................ -- 22,612
-------- -------
148,061 95,878
Less current portion...................................... 116,976 27,239
-------- -------
$ 31,085 $68,639
======== =======
</TABLE>
Each of the notes payable are collateralized by equipment or vehicles, with
the exception of the working capital loan with Peoples Bank which is
collateralized by accounts receivable and inventory.
F-66
<PAGE> 204
HIGH PERFORMANCE SPORTS MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED
DECEMBER 31, 1996
Future minimum payments under long-term agreements as of September 30, 1997
are as follows:
<TABLE>
<S> <C>
October 1, 1997 to December 31, 1997...................... $ 98,139
1998................................................. 24,035
1999................................................. 14,960
2000................................................. 10,927
--------
$148,061
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its building, equipment and certain vehicles under
operating leases that expire at various dates through February 28, 2012. Under
most lease agreements, the Company pays insurance, taxes and maintenance. Rental
expense for operating leases approximated $173,000 and $89,000, respectively,
for the nine month period ended September 30, 1997 and the year ended December
31, 1996, respectively. Minimum rental commitments under all non-cancelable
operating leases with an initial term in excess of one year are as follows:
<TABLE>
<S> <C>
October 1, 1997 to December 31, 1997.................... $ 54,178
1998............................................... 216,714
1999............................................... 207,994
2000............................................... 194,029
2001............................................... 194,029
2002 and thereafter................................ 1,972,628
----------
$2,839,572
==========
</TABLE>
LICENSE AGREEMENTS
The Company's ability to produce and market its products is based on its
license agreements with various parties. The agreements permit the Company, on a
non-exclusive basis, to use logos, trademarks, facsimile signatures, likenesses
of persons, automobiles, etc. to produce and sell specified products. The terms
of the various license agreements vary and in some cases require the Company to
pay royalties based on a specified percentage of net sales (usually 15%), with
aggregate guaranteed minimum royalties relating to future periods totaling
approximately $213,000 through December 31, 1998. Royalty expense for the nine
month period ended September 30, 1997 and for the year ended December 31, 1996
approximated $872,000 and $440,000, respectively. Although there can be no
assurance that new licenses will be granted to the Company upon expiration of
the current agreements, the Company anticipates that it will be able to obtain
new licenses on favorable terms.
7. RELATED-PARTY TRANSACTIONS:
The Company entered into a lease on March 1, 1997 with a company affiliated
through common ownership. Required monthly lease payments are $16,169 and the
lease expires on February 28, 2012. Lease expense on the building approximated
$113,000 for the nine month period ended September 30, 1997.
F-67
<PAGE> 205
HIGH PERFORMANCE SPORTS MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER
31, 1996
8. STOCK BONUS AWARD:
A stock bonus award was granted by the Company to one of the
officers/shareholders of the Company effective on September 30, 1997. The
officer/shareholder received 147 shares of common stock (approximately 12.5%
ownership of the Company) for services rendered in 1997. Compensation expense
was recorded for the award, based on the estimated fair value of the stock, in
the amount of $1,220,000 for the year ended September 30, 1997.
9. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Although the Company sells its products and services to a significant number of
customers, certain major third-party customers comprise substantially all of the
customer base. If the financial condition of these customers significantly
deteriorates, the Company's operating results could be adversely affected. As of
September 30, 1997 and December 31, 1996, approximately 80% and 72%,
respectively of trade receivables were concentrated with three and four
customers, respectively. Although the Company does not require collateral, it
performs ongoing evaluations of its customers' financial condition to reduce
credit risk. In addition, approximately 22% of 1997 net sales for the nine
months ended were to one customer and approximately 24% of 1996 net sales were
to two customers and approximately 24% of 1996 net sales were to two customers.
10. SUBSEQUENT EVENTS:
On October 24, 1997, the Company was acquired by Wheels Sports Group, Inc.,
a public company, for total consideration, in notes payable and cash, of
approximately $10,000,000. These financial statements do not include any
adjustments that might result from this transaction.
F-68
<PAGE> 206
INDEPENDENT AUDITOR'S REPORT
To the Partners of
Press Pass Partners
We have audited the accompanying balance sheets of Press Pass Partners as
of December 31, 1997 and 1996, and the related statements of revenue and
expenses and changes in partners' capital and cash flows for the years ended
December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of 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 Press Pass Partners as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
February 6, 1998
F-69
<PAGE> 207
PRESS PASS PARTNERS
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 186,667 $ 905,546
Accounts and notes receivable-trade, net of allowance for
doubtful accounts of $336,118 and $100,000,
respectively........................................... 866,818 1,433,878
Inventories............................................... 183,232 140,168
Prepaid expenses.......................................... 118,467 69,858
Other current assets...................................... 19,330 --
---------- ----------
1,374,514 2,549,450
Property and equipment, net of accumulated depreciation... 57,618 50,939
Organizational costs, net of accumulated amortization of
$48,478 and $37,680, respectively...................... 1,355 12,152
Receivable from related party............................. 637,427 --
Other assets.............................................. 2,876 5,876
---------- ----------
Total Assets.............................................. $2,073,790 $2,618,417
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Checks drawn against money market funds................... $ 90,220 $ 38,639
Accounts payable.......................................... 487,671 546,903
Accrued payroll and payroll taxes......................... 112,299 41,018
Royalties payable......................................... 138,449 73,335
Reserve for returns....................................... 695,093 584,571
Other accrued liabilities................................. 20,715 40,262
---------- ----------
1,544,447 1,324,728
Commitments and contingencies
Partners' capital........................................... 529,343 1,293,689
---------- ----------
Total Liabilities and Partners' Capital................... $2,073,790 $2,618,417
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE> 208
PRESS PASS PARTNERS
STATEMENTS OF REVENUES, EXPENSES
AND CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues............................................ $ 8,662,193 $7,337,104 $4,805,289
Cost of goods sold...................................... 5,625,664 4,639,285 2,648,671
----------- ---------- ----------
Gross profit............................................ 3,036,529 2,697,819 2,156,618
Selling, general and administrative expenses............ 2,556,415 1,850,200 1,631,920
----------- ---------- ----------
Net operating income.................................... 480,114 847,619 524,698
Other income (expense).................................. 92,228 112,243 127,331
----------- ---------- ----------
Net income.............................................. 572,342 959,862 652,029
Partners' capital, beginning of year.................... 1,293,689 472,257 (179,772)
Capital distributions................................... (1,336,688) (138,430) --
----------- ---------- ----------
Partners' capital, end of year.......................... $ 529,343 $1,293,689 $ 472,257
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE> 209
PRESS PASS PARTNERS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 572,342 $ 959,862 $ 652,029
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation......................................... 25,542 18,302 15,731
Loss on disposal of property and equipment........... -- -- 195
Provision for bad debts.............................. 236,118 74,617 91,327
Change in assets and liabilities
(Increase) decrease in assets
Accounts receivable -- trade....................... 330,940 (736,946) (342,133)
Inventories........................................ (43,064) 103,057 219,806
Prepaid expenses................................... (48,608) (22,283) 6,902
Other assets....................................... 10,797 10,843 10,107
Increase (decrease) in liabilities
Accounts payable................................... (59,232) (51,400) (173,885)
Accrued payroll and payroll taxes.................. 71,282 1,450 12,722
Customer deposits.................................. -- (8,862) (3,637)
Other accrued liabilities.......................... 156,088 199,110 (94,804)
----------- --------- ---------
Net cash provided (used) by operating
activities.................................... 1,252,205 547,750 394,360
----------- --------- ---------
Cash flows from investing activities
Advances to related parties............................. (653,757) -- --
Purchases of property and equipment..................... (32,221) (17,799) (3,912)
----------- --------- ---------
Net cash provided (used) by investing
activities.................................... (685,978) (17,799) (3,912)
----------- --------- ---------
Cash flows from financing activities
Checks drawn against money market funds................. 51,582 (90,602) 91,301
Capital distributions................................... (1,336,688) (138,430) --
----------- --------- ---------
Net cash provided (used) by financing
activities.................................... (1,285,106) (229,032) 91,301
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (718,879) 300,919 481,749
Cash and cash equivalents at beginning of period.......... 905,546 604,627 122,878
----------- --------- ---------
Cash and cash equivalents at end of period................ $ 186,667 $ 905,546 $ 604,627
=========== ========= =========
Supplemental schedule of cash flow information
Cash paid during the year for:
Interest............................................. $ 60 $ -- $ --
=========== ========= =========
Income taxes......................................... $ -- $ -- $ --
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE> 210
PRESS PASS PARTNERS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
Press Pass Partners ("Press Pass"), a Delaware general partnership was
formed January 1, 1994 and is the successor in interest to Press Pass L.P., a
Delaware limited partnership. Press Pass manufactures and distributes sports
trading cards depicting professional race car drivers and draft pick basketball
and football players. Such products include statistical and biographical
information. Press Pass has licenses pursuant to which they presently produce
and market the trading cards. Press Pass also distributes sports memorabilia
extending from autographs to pieces from race cars.
The partnership agreement provides, among other things, for the allocation
of net income or loss. Those allocations are based upon various factors
including the amount of capital contributions plus a specified internal rate of
return. Distributions to partners are based upon an allocation method similar to
that for allocations of net income or loss.
Press Pass grants credit to customers throughout the United States and
Canada.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION:
Certain amounts have been reclassified to conform with current year
presentation.
INVENTORIES:
Inventories are recorded at the lower of cost, as determined by the
weighted average method, or market.
Trading cards are generally produced to correspond to a certain event, year
or sports season. As a result, once the marketing time frame has passed, the
cards have little or no marketability. Accordingly, at December 31, 1997,
inventory of trading cards related to 1997 and prior has been written down to
their estimated net realizable value, and results of operations for 1997 include
a corresponding charge of approximately $688,000. Similar write downs of
approximately $131,000 and $347,500 were charged to 1996 and 1995 results of
operations, respectively.
INCOME TAXES:
Income taxes are not payable by or provided for at the partnership level.
Partners report their proportionate share of partnership taxable income or loss
in their respective tax returns.
ORGANIZATION COSTS:
Organization costs are amortized under the straight-line method over a period of
5 years.
F-73
<PAGE> 211
PRESS PASS PARTNERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
REVENUE RECOGNITION:
Sales of certain card products require partial or full deposits from
customers. Revenue is recognized when the product is shipped. Revenues are shown
net of discounts and estimated sales returns. Estimated returns are accrued in
the period in which the related sales are recorded.
COST OF SALES:
Cost of sales includes prepress, materials, printing, production, slitting,
packaging, and royalties. Estimated royalties are accrued in the period in which
the related sales are recorded. Royalties are paid primarily to drivers, their
representatives, team owners, and other organizations.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is provided using
various accelerated methods over estimated useful lives ranging from 3 to 7
years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Expenditures for betterments and major renewals are capitalized. The
cost of assets sold or retired and the related amounts of accumulated
depreciation are eliminated from the accounts in the year of disposal and the
resulting gains or losses are included in operations.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, Press Pass considers all
interest bearing accounts and highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash..................................................... $ 44,186 $ 4,709
Money market funds (uninsured)........................... 142,481 900,837
-------- --------
$186,667 $905,546
======== ========
</TABLE>
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. No customer
accounted for more than 10% of net sales during the years ended December 31,
1997 and 1995. One major customer accounted for 18% during the year ended
December 31, 1996. Three major customers accounted for 31% and 16% of accounts
receivable at December 31, 1997 and 1996, respectively. The Company does not
require collateral or other security to support customer receivables. The
Company conducts periodic reviews of its customers' financial conditions and
vendor payment practices to minimize collection risks on trade accounts
receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, checks drawn against money
market funds, accounts payable and accrued liabilities approximate fair value
because of the short-term nature of the items.
F-74
<PAGE> 212
PRESS PASS PARTNERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
2. MERGER
On December 31, 1997, Wheels Sports Group, Inc. ("Wheels") acquired the
assets and business of Press Pass through a transaction in which Press Pass' two
corporate partners were merged into two newly formed subsidiaries of Wheels.
Wheels is engaged in merchandising NASCAR oriented products, including apparel,
collectible trading cards and accessories, and providing motor sports-related
hospitality management and corporate promotions. The offices of Press Pass are
being relocated to Mooresville, North Carolina, the headquarters of Wheels.
On December 4, 1997, Wheels signed a definitive agreement to merge with
Racing Champions Corporation ("RCC"), a publicly held Delaware corporation
headquartered in Glen Ellyn, Illinois. RCC is a producer and marketer of
collectible scaled die cast vehicle replicas. The transaction is scheduled to
close during the second quarter of 1998.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Work-in-process.......................................... $153,067 $108,080
Finished goods........................................... 30,165 32,088
-------- --------
$183,232 $140,168
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Office equipment......................................... $111,194 $ 83,121
Furniture and fixtures................................... 20,190 19,325
Leasehold improvements................................... 5,419 5,419
-------- --------
136,803 107,865
Accumulated depreciation................................. 79,185 56,926
-------- --------
$ 57,618 $ 50,939
======== ========
</TABLE>
Depreciation expense was $25,542 and $18,302, and $15,700 for the years
ended December 31, 1997, 1996, and 1995, respectively.
5. COMMITMENTS AND CONTINGENCIES
LICENSING AGREEMENTS:
Memorabilia and trading card sales are permitted under licensing agreements
with the individual race car drivers and with organizations holding licenses
with basketball and football players. The agreements typically call for royalty
payments based on a percentage of net card sales (based on the regular wholesale
price of the cards less discounts, allowances and actual returns). Certain
agreements also call for guaranteed minimum annual payments. The impact on net
sales, operating income, and cash flows due to a loss of any of these
F-75
<PAGE> 213
PRESS PASS PARTNERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
contracts could be significant. Press Pass' current licensing agreements expire
at various dates through 2000. Most agreements contain options to renew. Future
guaranteed minimum royalty payments are as follows:
<TABLE>
<S> <C>
1998...................................................... $616,000
1999...................................................... 81,500
2000...................................................... 50,000
--------
$747,500
========
</TABLE>
OPERATING LEASES:
Press Pass leases office space and equipment under various operating
leases. During the years ended December 31, 1997, 1996, and 1995, Press Pass
incurred rental expense of approximately $63,000, $61,000, and $32,000,
respectively. Future minimum lease payments under these leases are as follows:
<TABLE>
<S> <C>
1998....................................................... $57,580
1999....................................................... 3,920
-------
$61,500
=======
</TABLE>
PREFERRED RETURN:
Under the terms of the partnership agreement, Press Pass has agreed to
provide a preferred return on the capital contributions at a rate of 14%
compounded daily. Payments of the preferred return are contingent upon the
partnership having sufficient cash available from operations to make these
payments. Payment of the preferred return will be made only after Press Pass has
returned total capital contributions to the partners.
LITIGATION:
Press Pass is involved in various legal matters in the normal course of
business. In the opinion of management and outside counsel, none of these
matters should have a material adverse effect on the financial position of Press
Pass.
RESERVE FOR INVENTORY RETURNS:
At December 31, 1997, Press Pass had a reserve for returns of approximately
$695,000. Management's estimate of this reserve is based upon historical trends,
industry trend and specific evaluation of risks associated with customer
accounts. It is reasonably possible that a change in this estimate could occur
in the near term. Management believes that returns will not exceed this
estimate, and if so, they will not have a material adverse impact on the
financial position of Press Pass.
6. RELATED PARTY TRANSACTIONS
Press Pass has advances of $637,427 receivable from Wheels. The advances
are unsecured and non-interest bearing.
7. 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." These statements are
effective for periods beginning after December 15, 1997. Adoption of these
statements is not expected to have a material impact on the financial statements
of Press Pass.
F-76
<PAGE> 214
Exhibit A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 4, 1997
AMONG
WHEELS SPORTS GROUP, INC.,
RACING CHAMPIONS CORPORATION
AND
WSG ACQUISITION, INC.
<PAGE> 215
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER
<TABLE>
<S> <C> <C>
1.01 The Merger 2
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 3
1.07 Officers 3
1.08 Conversion of Shares 3
1.09 Appraisal Rights 4
1.10 Exchange of Certificates 4
1.11 Stock Options, Warrants and Other Rights 7
</TABLE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE> 216
<TABLE>
<S> <C> <C>
2.19 [Intentionally Omitted] 21
2.20 Brokers 21
2.21 Title to Properties 21
2.22 Affiliate Transactions 22
</TABLE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
AND ACQUISITION
<TABLE>
<S> <C> <C>
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 27
3.08 No Undisclosed Liabilities; Absence of Changes 27
3.09 Litigation 28
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 31
3.14 Intellectual Property; Software 31
3.15 Certain Business Practices 32
3.16 Vote Required 32
3.17 Tax Treatment; Pooling 32
3.18 [Intentionally Omitted] 33
3.19 Brokers 33
3.20 No Prior Activities 33
3.21 Title to Properties 33
3.22 Affiliate Transactions 33
</TABLE>
ARTICLE IV
COVENANTS
<TABLE>
<S> <C> <C>
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
</TABLE>
ii
<PAGE> 217
<TABLE>
<S> <C> <C>
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 42
4.11 Notification of Certain Matters 42
4.12 Affiliates; Pooling; Tax-Free Reorganization 42
4.13 Parent Board 43
</TABLE>
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
<TABLE>
<S> <C> <C>
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
</TABLE>
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
<TABLE>
<S> <C> <C>
6.01 Termination 47
6.02 Effect of Termination 50
6.03 Fees and Expenses 50
6.04 Amendment 51
6.05 Extension; Waiver 52
6.06 Definition of Third Party Acquisition with
Respect to Parent 52
</TABLE>
ARTICLE VII
MISCELLANEOUS
<TABLE>
<S> <C> <C>
7.01 Nonsurvival of Representations and Warranties 52
7.02 Entire Agreement; Assignment 52
7.03 Validity 53
7.04 Notices 53
7.05 Governing Law 54
</TABLE>
iii
<PAGE> 218
<TABLE>
<S> <C> <C>
7.06 Descriptive Headings 54
7.07 Parties in Interest 54
7.08 Certain Definitions 54
7.09 Personal Liability 55
7.10 Specific Performance 55
7.11 Counterparts 55
7.12 No Rule of Construction 55
</TABLE>
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
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AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED 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"). Effective as of
April 23, 1998, this Agreement amends and restates the original Agreement
and Plan of Merger, dated as of December 4, 1997, among the Company, Parent and
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:
<PAGE> 220
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
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
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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
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 whole shares of
Parent's common stock, $.01 par value per share (the "Parent Common Stock") in
accordance with this Section 1.08 and a cash payment in lieu of any fractional
shares of Parent Common Stock in accordance with Section 1.10(f) (the shares of
Parent Common Stock and the cash payment in lieu of fractional shares
deliverable by Parent to the holders of Shares are sometimes collectively
referred to herein as the "Merger Consideration"). The number of shares of
Parent Common Stock to be exchanged for each Share issued and outstanding
immediately prior to the Effective Time (and based on there being no more than
6,976,303 Shares issued and outstanding at the Effective Time) shall be based
on an exchange ratio (the "Exchange Ratio") determined as follows:
(i) If the Closing Market Price Per Share of Parent Common Stock is greater
than or equal to $7.50 per share but less than or equal to $14.00 per share, the
Exchange Ratio will be a fixed ratio of 0.51 shares of Parent Common Stock for
each Share issued and outstanding immediately prior to the Effective Time.
(ii) If the Closing Market Price Per Share of Parent Common Stock is
greater than $14.00 per share (the "Ceiling"), the Exchange Ratio will equal
(A) a fixed price of $7.14 per Share, divided by (B) the Closing Market Price
Per Share of Parent Common Stock.
(iii) If the Closing Market Price Per Share of Parent Common Stock is less
than $7.50 per share (the "Floor"), the Exchange Ratio will equal (A) a fixed
price of $3.825 per Share, divided by (B) the Closing Market Price Per Share of
Parent Common Stock.
(iv) The "Closing Market Price Per Share of Parent Common Stock" means the
average closing price per share of Parent Common Stock on the Nasdaq National
Market (as published in the WALL STREET JOURNAL) for each of the ten days
preceding the Closing Date on which any shares of Parent Common Stock traded on
the Nasdaq National Market.
(v) 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.
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(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 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 the Merger
Consideration consisting of: (i) 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
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<PAGE> 223
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, the holder of such Certificate shall be
entitled to receive in exchange therefor the Merger Consideration including, 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 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
9
<PAGE> 224
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.
(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.
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
10
<PAGE> 225
(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 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.
11
<PAGE> 226
(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 with respect to the
Post-Closing Parent Options (as defined in Section 1.11(f) below), 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 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 3,557,916 shares of Parent Common Stock in
connection with the Merger, including (the "Post-Closing Option Number") shares
of Parent Common Stock issuable upon exercise of any New Options, if the
Exchange Ratio is calculated in accordance with Section 1.08(i) and not more
than 220,000 shares of Parent Common Stock upon exercise of any options which
may be issued by Parent after the Effective Time in accordance with part 2 of
Schedule 1.11 (the "Post-Closing Parent Options"). The Company shall take all
necessary and appropriate actions so that the Company Stock Options outstanding
at the Effective Time will not be exercisable for more than 500,000 Shares (the
"Option Limit"), excluding for these purposes (i) warrants exercisable for up to
636,692 Shares issued to the public or the underwriters in April 1997 pursuant
to the Company's initial public offering, and (ii) warrants (the "Indosuez
Warrants") exercisable for up to 509,358 Shares issued by the Company in
connection with the Credit Agreement, dated as of December 31, 1997, among the
Company, Credit Agricole Indosuez, as agent, and the leading institutions listed
therein. If the Company Stock Options outstanding at the Effective Time are in
excess of the Option Limit, Parent may elect to reduce the number of shares of
Parent Common Stock subject to Post-Closing Parent Options by the number of
shares of Parent Common Stock for which the
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Company Stock Options in excess of the Option Limit are exercisable after the
Merger.
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 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.
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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 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
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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 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 and the Stockholder 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
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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.
(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
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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 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
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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.
(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.
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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.
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
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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.
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)
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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.
(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.
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(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 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.
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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).
(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.
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(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 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
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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").
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").
2.19 [Intentionally Omitted.]
2.20. Brokers. No broker, finder or investment banker (other than Morgan
Keegan & Company, Inc., 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.
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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.
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
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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 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
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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 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
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Agreement, (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") and (iii) an
amendment to Parent's Stock Incentive Plan increasing the number of shares of
Parent Common Stock that may be issued under such plan from 311,852 shares to
600,000 shares (the "Parent Amendment to Incentive Plan"). 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 and the Stockholder 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.
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
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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 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
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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, 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
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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;
(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
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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 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 limzitation, 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
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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,
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
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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 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
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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 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.
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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, the Parent Amendment to Certificate and the Parent
Amendment to Incentive Plan.
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.
3.18. [Intentionally Omitted.]
3.19. Brokers. No broker, finder or investment banker (other than Robert
W. Baird & Co. Incorporated) 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.
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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.
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
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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;
(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);
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(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
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);
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(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;
(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
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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 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
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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 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 Andersen LLP
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 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.
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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).
(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,
the Parent Amendment to Certificate and the Parent Amendment to Incentive Plan.
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.
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(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 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.
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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 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
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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. The Company
shall not make any payments to extend, delay or otherwise prevent the exercise
of the Indosuez Warrants, or take any other action to modify or amend the
Indosuez Warrants, without Parents's prior written consent. At or prior to the
Effective Time, the Company will obtain from each of its directors, officers and
affiliates a letter agreement in substantially the form of Exhibit B hereto. At
or prior to the Effective Time, Parent will obtain from each of its directors,
officers and affiliates a letter agreement in substantially the form of Exhibit
D hereto.
(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 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 include Randy C. Baker, Randy E. Duncan and Victor H.
Shaffer (the "Company Designees"). Any Company Designee who is an employee of
the Company or any of its subsidiaries shall agree to resign from the Parent
Board immediately upon ceasing to be employed by Parent, the Company or any of
their respective subsidiaries at any time after the Effective Time, and in the
event that any Company Designee resigns at any time prior to the first
anniversary of the Closing Date, the replacement to fill the vacancy created by
such resignation shall be designated by the majority of the remaining Company
Designees.
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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, the Parent Amendment to Certificate and the Parent
Amendment to Incentive Plan 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 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
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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 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;
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(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; and
(g) The Company shall have received a written opinion of Morgan Keegan &
Company, Inc., dated prior to the date of the distribution of the Proxy
Statement to the stockholders of the Company, to the effect that as of such
date the Merger Consideration is fair to the holders of Shares from a financial
point of view.
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 Company Affiliate referred to in
Section 2.18 an executed copy of the letter attached hereto as Exhibit C;
(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;
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(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) SEC shall not have objected to the disclosure of the accounting
treatment of the Merger as a Pooling Transaction in the S-4 at the time the S-4
is declared effective and at the Effective Time;
(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, including, without limitation,
the agreement of each holder of any of Company Stock Options granted after
August 31, 1997 to cancel such Company Stock Options in accordance with
Schedule 1.11 upon the Effective Time;
(l) Parent shall have received duly executed and delivered employment and
noncompetition agreements, in form and substance reasonably
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satisfactory to Parent, from each of Randy C. Baker, Victor H. Shaffer,
Randy E. Duncan, David W. Dupree, Robert J. Bove and Harold E. Green;
(m) Parent shall have received a written opinion of Robert W. Baird & Co.
Incorporated, dated prior to the date of the distribution of the Proxy
Statement to the stockholders of Parent, to the effect 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;
(n) Each holder of registration rights with respect to securities of the
Company (other than (i) the registration rights of Schneider Securities, Inc.
in connection with warrants to purchase 90,000 Shares and 90,000 warrants
exercisable to purchase 45,000 Shares issued in April 1997 in connection with
the Company's initial public offering, and (ii) the registration rights in
connection with the Indosuez Warrants pursuant to the Registration Rights
Agreement, dated as of December 31, 1997, between the Company and the holders
listed therein), shall have agreed to terminate such rights effective upon the
Effective Time;
(o) The Company shall have entered into a severance agreement, in form and
substance reasonably satisfactory to Parent, with Howard L. Correll providing
for no severance benefits to Mr. Correll other than the right to purchase his
company-owned automobile and the reimbursement of reasonable business expenses
incurred by him through March 15, 1998.
(p) Parent shall have received for inclusion in the Proxy Statement all
information (the "Proxy Information") with respect to the Company and its
subsidiaries required for the preparation and filing of the Proxy Statement and
the S-4 in accordance with the applicable rules and regulations of the SEC,
including, without limitation, all financial statements and financial
information, audited where required, of the Company and its subsidiaries, and
all audit reports and consents of independent public accountants with respect
to such financial statements, and the financial condition, results of
operations and other matters disclosed with respect to the Company and its
subsidiaries in the Proxy Information shall be reasonably satisfactory in form
and substance to Parent, provided, however, that any such Proxy Information
shall be deemed to be reasonably satisfactory to Parent unless Parent delivers
written notice to the Company within five business days after the date of
receipt of such Proxy Information by Parent stating which Proxy Information is
not reasonably satisfactory to Parent;
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(q) The Company's certified public accountants shall have concurred with
the amortization of all goodwill reflected on the consolidated financial
statements of the Company and its subsidiaries over a period of not less than
25 years, and such amortization period shall be reflected in all filings made
by the Company with the SEC prior to the Effective Time, including, without
limitation, in the Proxy Statement and the S-4, and the SEC shall not have
objected to the disclosure of the foregoing amortization period in the S-4 at
the time the S-4 is declared effective and at the Effective Time;
(r) All employment or consulting agreements between the Company or any of
its subsidiaries and W. Conrad Powell or Terry J. Powell, including, without
limitation, the Executive Employment Agreement, effective January 1, 1997,
between the Company and W. Conrad Powell and the Consulting Agreement,
effective January 1, 1997, between the Company and Terry J. Powell, shall have
been terminated at or prior to the Effective Time without any payment of
additional compensation other than amounts earned through the date of
termination;
(s) No transaction involving the Company and Sales Solutions, Inc. or any
of its affiliates shall have been completed except with the prior written
consent of Parent; and
(t) Parent shall have received a true and correct list, reasonably
satisfactory to Parent, of each Company Contract.
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;
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(b) by either Parent or the Company, if the Merger has not been
consummated by July 31, 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 prohibiting 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;
(ii) there shall have been a material breach by the Company of any of its
covenants or agreements 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;
(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 within 25 days after the date the S-4
is declared effective; or
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(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).
(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 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 within 25 days after the date the S-4 is
declared effective;
(vii) the Company shall have convened a meeting of its stockholders to
vote upon the Merger and shall have failed to obtain the
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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.
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.
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(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 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
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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 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,
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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.
149 Gasoline Alley Drive
Mooresville, NC 28115
Fax: 704-662-3005
Attn: Victor H. Shaffer
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.
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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:
(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
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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 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.
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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/ Victor H. Shaffer
---------------------------------
Its Chief Executive Officer
---------------------------
RACING CHAMPIONS CORPORATION
BY /s/ Robert E. Dods
---------------------------------
Its President
---------------------------
WSG ACQUISITION, INC.
BY /s/ Robert E. Dods
---------------------------------
Its President
---------------------------
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EXHIBIT B
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.
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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
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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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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
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"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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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
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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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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
9
<PAGE> 286
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
10
<PAGE> 287
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)
11
<PAGE> 288
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:
12
<PAGE> 289
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.
13
<PAGE> 290
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
14
<PAGE> 291
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
-------------------------
President
Correll Owners:
/s/ Howard L. Correll, Jr.
-----------------------------
Howard L. Correll, Jr.
<TABLE>
<CAPTION>
Correll Owners: Number of Shares Number of Options/Warrants
<S> <C> <C>
Mr. Howard L. Correll, Jr. 689,737 232,500
</TABLE>
15
<PAGE> 292
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> 293
EXHIBIT B-1
FIRST AMENDMENT TO STOCKHOLDER AGREEMENT
THIS FIRST AMENDMENT (the "Amendment") to the STOCKHOLDER AGREEMENT, dated
as of December 4, 1997 (the "Stockholder Agreement") is entered into as of the
10th day of April, 1998 by and between HOWARD L. CORRELL, JR. (the "Principal
Stockholder") and RACING CHAMPIONS CORPORATION, a Delaware corporation
("Parent").
RECITAL
The Company and the Principal Stockholder mutually desire to amend this
Stockholder Agreement in the manner set forth in this Amendment.
AGREEMENTS
In consideration of the recital and the agreements set forth in the
Stockholder Agreement as amended hereby, the parties agree:
1. Section 2 of the Stockholder Agreement is amended to read in its
entirety as follows:
1. 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 0.51 fully paid and
nonassessable shares of Parent Common Stock for each Option Share (the
"Exercise Price").
2. Paragraph 1 of Annex I to the Stockholder Agreement is amended to read
in its entirety as follows:
1. The Merger has not been consummated by July 31, 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.
3. Paragraph 5 of Annex I to the Stockholder Agreement is amended to read
in its entirety as follows:
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 within 25 days after the date
the S-4 is declared effective.
4. Except as amended by this Amendment, the Stockholder Agreement remains
in effect, unchanged and binding upon the parties thereto.
5. 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.
6. This Amendment shall be governed by and construed in accordance with the
laws of the State of North Carolina without regard to the principles of
conflicts of law thereof.
RACING CHAMPIONS CORPORATION
By /s/ CURTIS W. STOETTING
------------------------------------
Its: Vice President -- Finance
--------------------------------
and Operations
--------------------------------
/s/ HOWARD L. CORRELL, JR.
--------------------------------------
Howard L. Correll, Jr.
<PAGE> 294
EXHIBIT C
April 9, 1998
Board of Directors
Racing Champions Corporation
800 Roosevelt Road
Building C, Suite 320
Glen Ellyn, IL 60137
Gentlemen:
Racing Champions Corporation ("Parent") proposes to enter into an Agreement
and Plan of Merger (the "Agreement") with Wheels Sports Group, Inc. ("the
Company") and WSG Acquisition, Inc., a direct wholly-owned subsidiary of Parent
("Acquisition"). Pursuant to the Agreement, at the Effective Time (as defined in
the Agreement), Acquisition will be merged with and into the Company (the
"Merger") and each outstanding share of common stock, par value $0.01 per share
("the Shares"), of the Company (other than Shares held in the Company's treasury
or by any of the Company, Parent or Acquisition, or any of their respective
subsidiaries) will be converted solely into the right to receive the number of
shares of common stock, par value $0.01 per share ("Parent Common Stock"), of
Parent equal to the Exchange Ratio (as hereinafter defined).
The "Exchange Ratio" means 0.510 shares of Parent Common Stock; provided
that (i) if the Closing Market Price Per Share (as hereinafter defined) is
greater than $14.00, the Exchange Ratio will equal (A) $7.14, divided by (B) the
Closing Market Price Per Share and (ii) if the Closing Market Price Per Share is
less than $7.50 per share, the Exchange Ratio will equal (A) $3.825, divided by
(B) the Closing Market Price Per Share. The "Closing Market Price Per Share"
means the average closing price per share of Parent Common Stock on the Nasdaq
National Market (as published in the Wall Street Journal) for each of the ten
trading days preceding the closing date of the Merger.
You have requested our opinion as to the fairness, from a financial point
of view, of the Exchange Ratio to Parent.
Robert W. Baird & Co. Incorporated ("Baird"), as part of its investment
banking business, is engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors, as we have deemed relevant under the circumstances. In
that connection, we have, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of Parent and the Company furnished to us for
purposes of our analysis, as well as publicly available information including
but not limited to Parent's and the Company's most recent filings with the
Securities and Exchange Commission and research reports on Parent prepared by
the equity analysts of various investment banking firms, including Baird; (ii)
reviewed the draft Agreement in the form presented to Parent's Board of
Directors on the date hereof; (iii) compared the financial position and
operating results of Parent and the Company with those of other publicly traded
companies we deemed relevant; (iv) compared the historical market prices and
trading activity of Parent Common Stock and Company Common Stock with those of
certain other publicly traded companies we deemed relevant; (v) compared the
proposed financial terms of the Merger with the financial terms of certain other
business combinations we deemed relevant; and (vi) reviewed certain potential
pro forma effects of the Merger on Parent. We have held discussions with members
of the Company's and Parent's senior management concerning the Company's and
Parent's historical and current financial condition and operating results, as
well as future prospects. We have also considered such other information,
financial
<PAGE> 295
Racing Champions Corporation
April 9, 1998
Page 2
studies, analysis and investigations and financial, economic and market criteria
which we deemed relevant for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of all of the financial and other information that was publicly
available or provided to us by or on behalf of Parent and the Company, and have
not been engaged to independently verify any such information. We have assumed,
with your consent, that (i) all material assets and liabilities (contingent or
otherwise, known or unknown) of Parent and the Company are as set forth in their
respective financial statements, and the pro forma adjustments thereto set forth
in the draft Joint Proxy Statement/Prospectus available on the date of such
opinion will not be materially altered; (ii) the Merger will be accounted for as
a pooling of interests transaction, (iii) the strategic and operating benefits
currently contemplated by Parent's and the Company's management will be realized
and (iv) the Merger will be consummated in accordance with the terms of the
Agreement, without any material amendment thereto and without waiver by Parent
or the Company of any of the material conditions to their respective obligations
thereunder. We have also assumed that the financial forecasts of Parent and the
Company examined by us were reasonably prepared on a basis reflecting the best
available estimates and good faith judgments of Parent's senior management as to
future performance of Parent, and the Company's senior management as to future
performance of the Company. In conducting our review, we have not undertaken nor
obtained an independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Parent or the Company. Our opinion
necessarily is based upon economic, monetary and market conditions as they exist
and can be evaluated on the date hereof, and does not predict or take into
account any changes which may occur, or information which may become available,
after the date hereof.
Our opinion has been prepared at the request and for the information of the
Board of Directors of Parent, and shall not be used for any other purpose or
disclosed to any other party without the prior written consent of Baird;
provided, however, that this letter may be reproduced in full in the Joint Proxy
Statement / Prospectus relating to the Merger. This opinion does not address the
relative merits of the Merger and any other potential transactions or business
strategies considered by Parent's Board of Directors, and does not constitute a
recommendation to any shareholder of Parent as to how any such shareholder
should vote with respect to the Merger or related matters. In addition, we
express no opinion as to the price at which Parent Common Stock or Company
Common Stock will trade at any time. Baird will receive a fee from Parent for
rendering this opinion and a fee in the event the Merger is completed. In the
past, we have provided investment banking services to Parent, including acting
as (i) financial advisor in connection with Parent's 1996 recapitalization and
(ii) lead manager in connection with the 1997 initial public offering of Parent
Common Stock. Baird received customary compensation for the above-mentioned
services.
In the ordinary course of our business, we may from time to time trade the
securities of Parent or the Company for our own account or the accounts of our
customers and, accordingly, may at any time hold long or short positions in such
securities. Baird is a market maker for Parent Common Stock. Certain affiliates
of Baird own shares of Parent Common Stock. An officer of Baird is also a
director of Parent.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair, from a financial point of view, to
Parent.
Very truly yours,
ROBERT W. BAIRD & CO. INCORPORATED
<PAGE> 296
EXHIBIT D
[LETTERHEAD OF MORGAN KEEGAN & COMPANY, INC.]
April 10, 1998
Board of Directors
Wheels Sports Group, Inc.
149 Gasoline Alley
Mooresville, NC 28115
Gentlemen:
The Board of Directors of Wheels Sports Group, Inc. ("Wheels" the "Company"
or the "Seller"), has requested our opinion as to the fairness, from a financial
point of view, to the Company's shareholders of the consideration to be paid in
connection with the proposed acquisition by Racing Champions Corporation ("RCC")
of all of the Company's outstanding shares.
You have advised us that, pursuant to the Agreement, WSG Acquisition, Inc.
will be merged with and into the Seller, and the Seller will become a wholly
owned subsidiary of RCC. The Agreement provides that, upon consummation of the
Transaction, each issued and outstanding share of the Seller's Common Stock,
$0.01 par value (the "Seller Common Stock"), will be converted into the right to
receive 0.51 of a share of RCC Common Stock. The shares of RCC Common Stock
issuable to the holders of the issued and outstanding shares of the Seller
Common Stock pursuant to the terms of the Agreement are hereinafter referred to
collectively as the "Transaction Consideration."
Morgan Keegan & Company, Inc. ("Morgan Keegan"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for various purposes.
In connection with our opinion, we have (1) held discussions with various
members of management and representatives of the Company and RCC concerning
historical and current operations, financial condition and future prospects; (2)
reviewed historical consolidated financial and operating data that was publicly
available or furnished to us by the Company and RCC; (3) reviewed internal
financial analyses, financial and operating forecasts, reports and other
information prepared by officers and representatives of the Company and RCC; (4)
reviewed certain publicly available information concerning the trading of, and
the trading market for, the Company's and RCC's shares; (5) reviewed certain
publicly available information with respect to certain other companies that we
believe to be comparable to the Company and the trading markets for such other
companies' securities; (6) analyzed the projected financial impact which is
projected to occur as a result of the combination of Wheels and RCC; (7)
reviewed certain publicly available information concerning the terms of certain
other transactions that we deemed relevant to our inquiry; and (8) reviewed the
draft Amended and Restated Agreement and Plan of Merger in the form presented to
Wheels' Board of Directors (the "Agreement") among Wheels, RCC, and WSG
Acquisition, Inc.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have assumed and relied
upon the accuracy and completeness of the representations and warranties
contained in the Agreement. We have not been engaged to, and have not
independently attempted to, verify any of such information. With respect to the
financial and operational forecasts made available to us by the management of
the Company and RCC as used in our analysis, we have assumed that such financial
and operational
<PAGE> 297
Wheels Sports Group, Inc.
April 10, 1998
Page 2
forecasts, including those relating to the acquisition of additional licensing
programs and new distribution opportunities have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the matters covered thereby. We have not been engaged
to assess the achievability of such projections or the assumptions on which they
were based and express no view as to such projections or assumptions. In
addition, we have not conducted a physical inspection or appraisal of any of the
assets, properties or facilities of the Company nor have we been furnished with
any such evaluation or appraisal. We have assumed, with your consent that: (i)
the strategic and operating benefit's presently anticipated by management by RCC
and Wheels will be realized from the Merger; (ii) the Merger will be accounted
for under the pooling-of-interests method of accounting and will be treated as a
tax-free organization, and (iii) all material liabilities contingent or
otherwise (known or unknown) are as set forth in the consolidated financial
statements.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date,
including the prices at, or trading range within which, the Company's or RCC's
shares may trade following the date of this letter. In addition, our opinion is,
in any event, limited to the fairness, as of the date hereof, from a financial
point of view, of the consideration to be paid to the Company's shareholders
pursuant to the Transaction and does not address the underlying business
decision to effect the Transaction or any other terms of the Transaction. We
have also assumed that the conditions to the Transaction as set forth in the
Agreement would be satisfied and that the Transaction would be consummated on a
timely basis in the manner contemplated by the Agreement.
Our services in connection with the Transaction have included providing
financial advisory services to the Company in connection with its acquisition of
High Performance Sports Marketing, Inc. and Press Pass Partners, financial
advisory services to the Company in connection with its existing third party
lender, financial advisory services in connection with the Transaction, and
rendering this opinion to the Board of Directors of the Company. We will receive
a fee for our financial advisory services and for rendering this opinion, and
the Company has also agreed to indemnify us under certain circumstances. In the
ordinary course of our business, we serve as a market maker for the Company's
Common Stock and trade shares for our own account and the accounts of our
customers. Accordingly, we may at any time hold long or short positions in the
Company's Common Stock.
It is understood that this opinion is not to be quoted or referred to, in
whole or in part (including excerpts or summaries), in any filing, report,
document, release or other communication used in connection with the Transaction
(unless required to be quoted or referred to by applicable regulatory
requirements), nor shall this opinion be used for any other purposes, without
our prior written consent, which consent shall not be unreasonably withheld. Our
opinion is directed to the Board of Directors of the Company and does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote at any proposed Shareholders' meeting held in connection
with the Transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
consideration to be paid in connection with the Transaction is fair, from a
financial point of view, to the Company's shareholders.
Yours very truly,
/s/ MORGAN KEEGAN & COMPANY, INC.
MORGAN KEEGAN & COMPANY, INC.
<PAGE> 298
EXHIBIT E
ARTICLE 13.
DISSENTERS' RIGHTS.
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
SECTION 55-13-01. DEFINITIONS. IN THIS ARTICLE:
(1) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when
and in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion
would be inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at a rate that is fair and
equitable under all the circumstances, giving due consideration to the
rate currently paid by the corporation on its principal bank loans, if
any, but not less than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 55-13-02. RIGHT TO DISSENT.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation
(other than a parent corporation in a merger under G.S. 55-11-04) is a
party unless (i) approval by the shareholders of that corporation is not
required under G.S. 55-11-03(g) or (ii) such shares are then redeemable
by the corporation at a price not greater than the cash to be received in
exchange for such shares;
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(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired,
unless such shares are then redeemable by the corporation at a price not
greater than the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than as permitted by G.S.
55-12-01, including a sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed in
cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's shares because
it (i) alters or abolishes a preferential right of the shares; (ii)
creates, alters, or abolishes a right in respect of redemption, including
a provision respecting a sinking fund for the redemption or repurchase,
of the shares; (iii) alters or abolishes a preemptive right of the holder
of the shares to acquire shares or other securities; (iv) excludes or
limits the right of the shares to vote on any matter, or to cumulate
votes; (v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under G.S. 55-6-04: or (vi) changes the corporation into a
nonprofit corporation or cooperative organization;
(5) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
SECTION 55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder.
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SECTIONS 55-13-04 TO 55-13-19: RESERVED FOR FUTURE CODIFICATION PURPOSES.
Part 2. Procedure for Exercise of Dissenters' Rights.
SECTION 55-13-20. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters'
rights under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02
is taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this
section, such failure shall not invalidate any corporate action taken: but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters rights under G.S.
55-13-02 unless he voted for such corporate action.
SECTION 55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this Article.
SECTION 55-13-22. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail
by registered or certified mail, return receipt requested, a written
dissenters' notice to all shareholders who satisfied the requirements of G.S.
55-13-21.
(b) The dissenters' notice must be sent no later than l0 days after the
corporate action was taken, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
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(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after
the date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
SECTION 55-13-23. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22
must demand payment and deposit his share certificates in accordance with the
terms of the notice.
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
SECTION 55-13-24. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
SECTION 55-13-25. OFFER OF PAYMENT.
(a) As soon as the proposed corporate action is taken, or upon receipt of
a payment demand, the corporation shall offer to pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment, and shall
pay this amount to each dissenter who agrees in writing to accept it in full
satisfaction of his demand.
(b) The offer of payment must be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of
offer of payment, an income statement for that year, a statement of cash
flows for that year, and the latest available interim financial
statements, if any;
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(2) A statement of the corporation's estimate of the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
G.S. 55-13-28; and
(5) A copy of this Article.
SECTION 55-13-26. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
SECTION 55-13-27. RESERVED FOR FUTURE CODIFICATION PURPOSES.
SECTION 55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S
OFFER OR FAILURE TO PERFORM.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate or reject the corporation's offer under G.S. 55-13-25 and
demand payment of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under G.S.
55-13-25 is less than the fair value of his shares or that the interest
due is incorrectly calculated;
(2) The corporation fails to make payment to a dissenter who
accepts the corporation's offer under G.S. 55-13-25 within 30 days after
the dissenter's acceptance; or
(3) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the
date set for demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation offered payment for his
shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the
corporation has failed to perform timely. A dissenter who fails to notify the
corporation of his demand under subsection (a) within such 30-day period shall
be deemed to have withdrawn his dissent and demand for payment.
SECTION 55-13-29: RESERVED FOR FUTURE CODIFICATION PURPOSES.
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Part 3. Judicial Appraisal of Shares
SECTION 55-13-30. COURT ACTION.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the date of his
payment demand under G.S. 55-13-28 and petition the court to determine the fair
value of the shares and accrued interest. Upon service upon it of the petition
filed with the court, the corporation shall pay to the dissenter the amount
offered by the corporation under G.S. 55-13-25.
(a1) If the dissenter does not commence the proceeding within the 60-day
period, the dissenter shall have an additional 30 days to either (i) accept in
writing the amount offered by the corporation under G.S. 55-13-25, upon which
the corporation shall pay such amount to the dissenter in full satisfaction of
his demand, or (ii) withdraw his demand for payment and resume the status of a
nondissenting shareholder. A dissenter who takes no action within such 30-day
period shall be deemed to have withdrawn his dissent and demand for payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether
or not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The parties are entitled to the
same discovery rights as parties in other civil proceedings. However, in a
proceeding by a dissenter in a public corporation, there is no right to a trial
by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
SECTION 55-13-31. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall
assess the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
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(2) Against either the corporation or a dissenter, in favor of
either or any other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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EXHIBIT F
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
RACING CHAMPIONS CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation has determined that
it is advisable and in the best interests of the Corporation that the
Certificate of Incorporation of the Corporation be amended by deleting the
current text of ARTICLE FOUR thereof and substituting in lieu thereof the
following:
ARTICLE FOUR
The total number of shares of stock which the Corporation has authority to
issue is 28,000,000 shares of Common Stock, par value $.01 per share.
SECOND: That in accordance with section 222 of the General Corporation Law
of the State of Delaware, at a meeting of the stockholders of the Corporation
duly held on , 1998, the holders of the majority of the issued and
outstanding shares of capital stock of the Corporation voted in favor of such
amendment.
THIRD: That the foregoing amendment was duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Robert E. Dods, its President, and attested by Curtis W. Stoelting,
its Secretary, on this day of , 1998.
RACING CHAMPIONS CORPORATION
BY
--------------------------------------
Robert E. Dods, President
Attest:
--------------------------------------
Curtis W. Stoelting, Secretary
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EXHIBIT G
RACING CHAMPIONS CORPORATION
1997 STOCK INCENTIVE PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
1.1 Establishment. Racing Champions Corporation, a Delaware corporation
(the "Company"), hereby establishes a stock option plan for employees and others
providing services to the Company, as described herein, which shall be known as
the Racing Champions Corporation 1997 Stock Incentive Plan (the "Plan"). It is
intended that certain of the options issued pursuant to the Plan to employees of
the Company may constitute incentive stock options within the meaning of section
422 of the Internal Revenue Code, and that other options issued pursuant to the
Plan shall constitute nonstatutory options. The Board shall determine which
options are to be incentive stock options and which are to be nonstatutory
options and shall enter into option agreements with recipients accordingly.
1.2 Purpose. The purpose of the Plan is to provide a means for the Company
to attract and retain competent personnel and to provide to participating
directors, officers and other key employees long term incentives for high levels
of performance by providing them with a means to acquire a proprietary interest
in the Company's success.
ARTICLE II.
DEFINITIONS
2.1 Definitions. For purposes of this Plan, the following terms shall be
defined as follows:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means the definition of Cause in Optionee's employment
agreement, if any, with the Company. If no such employment agreement or
definition in such agreement exists, Cause means (i) breach by Optionee of
any covenant not to compete or confidentiality agreement with the Company,
(ii) failure by Optionee to substantially perform his duties to the
reasonable satisfaction of the Board, (iii) serious misconduct by Optionee
which is demonstrably and substantially injurious to the Company, (iv)
fraud or dishonestly by Optionee with respect to the Company, (v) material
misrepresentation by Optionee to a stockholder or director of the Company
or (vi) acts of negligence by Optionee in performance of Optionee's duties
that are substantially injurious to the Company. The Board, by majority
vote, shall make the determination of whether Cause exists.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(d) "Commission" means the Securities and Exchange Commission or any
successor agency.
(e) "Committee" means the Committee provided for by Article IV hereof,
which may be created at the discretion of the Board.
(f) "Company" means Racing Champions Corporation, a Delaware
corporation.
(g) "Consultant" means any person or entity, including an officer or
director of the Company who provides services (other than as an Employee)
to the Company and includes a Qualified Director, as defined below.
(h) "Date of Exercise" means the date the Company receives notice, by
an Optionee, of the exercise of an Option pursuant to section 9.1 of this
Plan. Such notice shall indicate the number of shares of Stock the Optionee
intends to purchase upon exercise of an Option.
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(i) "Employee" means any person, including an officer or director of
the Company, who is employed by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
(k) "Fair Market Value" means the fair market value of Stock upon
which an Option is granted under this Plan, as determined by the Board. If
the Stock is traded on an over-the-counter securities market or national
securities exchange, "Fair Market Value" shall mean an amount equal to the
average of the highest and lowest reported sales prices of the Stock
reported on such over-the-counter market or such national securities
exchange on the applicable date or, if no sales of Stock have been reported
for that date, on the next preceding date for which sales where reported.
(l) "Incentive Stock Option" means an Option granted under this Plan
which is intended to qualify as an "incentive stock option" within the
meaning of section 422 of the Code.
(m) "IRS" means the Internal Revenue Service, or any successor agency.
(n) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option within the
meaning of section 422 of the Code. Nonstatutory Options may be granted at
such times and subject to such restrictions as the Board shall determine
without conforming to the statutory rules of section 422 of the Code
applicable to incentive stock options.
(o) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified period of time.
For purposes of this Plan, an Option may be an Incentive Stock Option, a
Nonstatutory Option or a Reload Option.
(p) "Optionee" means an Employee or Consultant holding an Option under
the Plan.
(q) "Parent Corporation" shall have the meaning set forth in section
424(e) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(r) "Qualified Director" means a director who is both (a) a
"Non-Employee Director" as defined in Rule 16b-3(b)(3)(i), as promulgated
by the Commission under the Exchange Act, or any successor definition
adopted by the Commission, and (b) an "Outside Director" as defined by
section 162(m) of the Code and the regulations promulgated thereunder, or
any successor definition adopted by the IRS.
(s) "Reload Option" means an Option granted pursuant to section 8.1 of
this Plan.
(t) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission
under Section 16(b) of the Exchange Act, as amended from time to time.
(u) "Significant Stockholder" means an individual who, within the
meaning of section 422(b)(6) of the Code, owns stock possessing more than
ten percent of the total combined voting power of all classes of stock of
the Company. In determining whether an individual is a Significant
Stockholder, an individual shall be treated as owning stock owned by
certain relatives of the individual and certain stock owned by corporations
in which the individual is a partner, and estates or trusts of which the
individual is a beneficiary, all as provided in section 424(d) of the Code.
(v) "Stock" means the Common Stock, par value $.01 per share, of the
Company.
2.2 Gender and Number. Except when otherwise indicated by the context, any
masculine terminology when used in this Plan also shall include the feminine
gender and the definition of any term herein in the singular shall also include
the plural.
ARTICLE III.
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility and Participation. All Employees are eligible to
participate in this Plan and receive Incentive Stock Options and/or Nonstatutory
Options. All Consultants are eligible to participate in this Plan
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and receive Nonstatutory Options hereunder. Optionees in the Plan shall be
selected by the Board from among those Employees and Consultants who, in the
opinion of the Board, are in a position to contribute materially to the
Company's continued growth and development and to its long-term financial
success.
ARTICLE IV.
ADMINISTRATION
4.1 Administration. The Board shall be responsible for administering the
Plan.
The Board is authorized to interpret the Plan, to prescribe, amend, and
rescind rules and regulations relating to the Plan, to provide for conditions
and assurances deemed necessary or advisable to protect the interests of the
Company, and to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations or other actions made or
taken by the Board pursuant to the provisions of this Plan shall be final and
binding and conclusive for all purposes and upon all persons.
At the discretion of the Board, this Plan may be administered by a
Committee which shall be a compensation committee of the Board, consisting
solely of two or more Qualified Directors. The members of such Committee may be
directors who are eligible to receive Options under this Plan, but Options may
be granted to such persons only by action of the full Board and not by action of
the Committee. Such Committee shall have full power and authority, subject to
the limitations of the Plan and any limitations imposed by the Board, to
construe, interpret and administer this Plan and to make determinations which
shall be final, conclusive and binding upon all persons, including, without
limitation, the Company, the stockholders, the directors and any persons having
any interests in any Options which may be granted under this Plan and, by
resolution providing for the creation and issuance of any such Option, to fix
the terms upon which, the time or times at or within which, and the price or
prices at which any such shares may be purchased from the Company upon the
exercise of such Option, which terms, time or times and price or prices shall,
in every case, be set forth or incorporated by reference in the instrument or
instruments evidencing such Option, and shall be consistent with the provisions
of the Plan.
The Board may from time to time remove members from, or add members to, the
Committee. The Board may terminate the Committee at any time. Vacancies on the
Committee, howsoever caused, shall be filled by the Board. The Committee shall
select one of its members as Chairman, and shall hold meetings at such times and
places as the Chairman may determine. A majority of the Committee at which a
quorum is present, or acts reduced to or approved in writing by all of the
members of the Committee, shall be the valid acts of the Committee. A quorum
shall consist of two-thirds of the members of the Committee.
Where the Committee has been created by the Board, references herein to
actions to be taken by the Board shall be deemed to refer to the Committee as
well, except where limited by this Plan or by the Board.
The Board shall have all of the enumerated powers of the Committee but
shall not be limited to such powers. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.
4.2 Special Provisions for Grants to Officers or Directors. Rule 16b-3
provides that the grant of a stock option to a director or officer of a company
subject to the Exchange Act will be exempt from the provisions of Section 16(b)
of the Exchange Act if the conditions set forth in Rule 16b-3 are satisfied.
Unless otherwise specified by the Board, grants of Options hereunder to
individuals who are officers or directors of the Company for purposes of Section
16(b) of the Exchange Act shall be made in a manner that satisfies the
conditions of Rule 16b-3.
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ARTICLE V.
STOCK SUBJECT TO THE PLAN
5.1 Number. The total number of shares of Stock hereby made available and
reserved for issuance under the Plan shall be 600,000. The aggregate number of
shares of Stock available under this Plan shall be subject to adjustment as
provided in section 5.3. The total number of shares of Stock may be authorized
but unissued shares of Stock, or shares acquired by purchase as directed by the
Board from time to time in its discretion, to be used for issuance upon exercise
of Options granted hereunder.
5.2 Unused Stock; Payment with Stock. If an Option shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares of Stock subject thereto shall (unless the Plan shall have terminated)
become available for other Options under the Plan. In addition, upon the full or
partial payment of any option price by the transfer to the Company of shares of
Stock pursuant to section 7.7, upon satisfaction of tax withholding obligations
with shares of Stock pursuant to section 15.1 or any other payment made or
benefit realized under this Plan by the transfer or relinquishment of shares of
Stock, only the net number of shares of Stock actually issued or transferred by
the Company, after subtracting the number of shares of Stock so transferred or
relinquished, will be charged against the maximum share limitation set forth in
section 5.1 above.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification or other similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the Option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate Option price to be paid therefor upon
exercise of the Option.
ARTICLE VI.
DURATION OF THE PLAN
6.1 Duration of the Plan. The Plan shall be in effect for ten years from
the date of its approval by the Company's stockholders. Any Options outstanding
at the end of such period shall remain in effect in accordance with their terms.
The Plan shall terminate before the end of such period if all Stock subject to
the Plan has been purchase pursuant to the exercise of Options granted under the
Plan.
ARTICLE VII.
TERMS OF STOCK OPTIONS
7.1 Grant of Options. Subject to section 5.1, Options may be granted to
Employees or Consultants at any time and from time to time as determined by the
Board; provided, however, that Consultants may receive only Nonstatutory Options
and may not receive Incentive Stock Options. The Board shall have complete
discretion in determining the number of Options granted to each Optionee. In
making such determinations, the Board may take into account the nature of
services rendered by such Employee or Consultant, their present and potential
contributions to the Company, and such other factors as the Board in its
discretion shall deem relevant. The Board shall also determine whether an Option
is to be an Incentive Stock Option or a Nonstatutory Option.
In the cases of Incentive Stock Options, the total Fair Market Value
(determined at the date of grant) of shares of Stock with respect to which
Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year under all plans of the Company under which incentive
stock options may be granted (and all such plans of any Parent Corporation and
any subsidiary corporations of the Company) shall not exceed $100,000.
(Hereinafter, this requirement is sometimes referred to as the "$100,000
Limitation.")
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<PAGE> 310
Nothing in this Article VII of the Plan shall be deemed to prevent the
grant of Options permitting exercise in excess of the maximums established by
the preceding paragraph where such excess amount is treated as a Nonstatutory
Option.
7.2 No Tandem Options. Where an Option granted under this Plan is intended
to be an Incentive Stock Option, the Option shall not contain terms pursuant to
which the exercise of the Option would affect the Optionee's right to exercise
another Option, or vice versa, such that the Option intended to be an Incentive
Stock Option would be deemed a tandem stock option within the meaning of the
regulations under section 422 of the Code.
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the Board on the date of grant, each Option shall be
evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by section 11.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; in the case of an Incentive Stock Option, a provision implementing
the $100,000 Limitation; and any other terms and conditions as shall be
determined by the Board at the time of grant of the Option.
All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.
7.4 Option Price. No Incentive Stock Option granted pursuant to this Plan
shall have an Option price that is less than the Fair Market Value of Stock on
the date the Option is granted. Incentive Stock Options granted to Significant
Stockholders shall have an Option price of not less than 110 percent of the Fair
Market Value of Stock on the date of grant. The Option price for Nonstatutory
Options shall be established by the Board.
7.5 Term of Options. Each Option shall expire at such time as the Board
shall determine when it is granted, provided, however, that no Option shall be
exercisable later than the tenth anniversary date of its grant.
7.6 Exercise of Options. Options granted under this Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment. Payment for all shares of Stock shall be made at the time that
an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Such payment may be made in cash,
outstanding shares of Stock, in combinations thereof, or any other method of
payment approved by the Board; provided, however, that (i) the deposit of any
withholding tax shall be made in accordance with applicable law and (ii) that
such shares of Stock used to pay the exercise price have been held by the
Participant for at least six months prior to the exercise date. If shares of
Stock are being used in part or full payment for the shares to be acquired upon
exercise of the Option, such shares shall be valued for the purpose of such
exchange as of the date of exercise of the Option at the Fair Market Value of
the shares. Any certificates evidencing shares of Stock used to pay the purchase
price shall be accompanied by stock powers duly endorsed in blank by the
registered holder of the certificate (with signatures thereon guaranteed). In
the event the certificates tendered by the holder in such payment cover more
shares than are required for such payment, the certificate shall also be
accompanied by instructions from the holder to the Company's transfer agent with
regard to the disposition of the balance of the shares covered thereby.
ARTICLE VIII.
RELOAD OPTIONS
8.1 Grants of Reload Options. Concurrently with any award of Options, the
Board may grant Reload Options to purchase a number of shares of Stock equal to
the sum of (i) the number of outstanding shares of
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<PAGE> 311
Stock used to exercise the underlying Option pursuant to section 7.7, and (ii)
the number of shares of Stock used to satisfy any tax withholding requirement
incident to the exercise of the underlying Options pursuant to section 15.1. If
the Board grants Reload Options in connection with a grant of Options, the
Option Agreement with respect to such underlying Options shall state that Reload
Options have been granted with respect to the underlying Options. Upon exercise
of an underlying Option, the Reload Option will be evidenced by an amendment to
the underlying Option Agreement. No additional Reload Options will be granted to
the Optionee when Options are exercised pursuant to the terms of this Plan
following termination of the Optionee's employment.
8.2 Terms of Reload Options. A Reload Option will be subject to all of the
terms and conditions of the underlying Option, except that (i) the option price
per share of Stock purchasable under a Reload Option shall be equal to the Fair
Market Value of the Stock at time of grant upon exercise of the underlying
Option, and (ii) the term of the Reload Option will equal the remaining option
term of the underlying Option.
ARTICLE IX.
WRITTEN NOTICE, ISSUANCE OF STOCK CERTIFICATES, STOCKHOLDER PRIVILEGE
9.1 Written Notice. An Optionee wishing to exercise an Option shall give
written notice to the Company, in the form and manner prescribed by the Board.
Full payment for the Options exercised, as provided in section 7.7 above, must
accompany the written notice.
9.2 Issuance of Stock Certificate. As soon as practicable after the receipt
of written notice and payment, the Company shall deliver to the Optionee or to a
nominee of the Optionee a certificate or certificates for the requisite number
of shares of Stock.
9.3 Privileges of a Stockholder. An Optionee or any other person entitled
to exercise an Option under this Plan shall not have stockholder privileges with
respect to any Stock covered by the Option until the date of issuance of a stock
certificate for such Stock.
ARTICLE X.
TERMINATION OF EMPLOYMENT OR SERVICES
Except as otherwise expressly specified by the Board, all Options granted
under this Plan shall be subject to the following termination provisions.
10.1 Death. If an Optionee's employment in the case of an Employee, or
provision of services as a Consultant in the case of a Consultant, terminates by
reason of death, the Option may thereafter be exercised at any time prior to the
expiration date of the Option or within 12 months after the date of such death,
whichever period is the shorter, by the person or persons entitled to do so
under the Optionee's will or, if the Optionee shall fair to make a testamentary
disposition of an Option or shall die intestate, the Optionee's legal
representative or representatives. The Option shall be exercisable only to the
extent that such Option was exercisable as of the date of death.
10.2 Termination Other Than for Cause or Due to Death. In the event of an
Optionee's termination of employment in the case of an Employee, or termination
of the provision of services as a Consultant in the case of a Consultant, other
than for Cause or by reason of death, the Optionee may exercise such portion of
his Option as was exercisable by him at the date of such termination (the
"Termination Date") at any time within three months of the Termination Date;
provided, however, that where the Optionee is an Employee, and is terminated due
to disability within the meaning of Code section 422, he may exercise such
portion of his Option as was exercisable by him on his Termination Date within
one year of his Termination Date. In any event, the Option cannot be exercised
after the expiration of the original term of the Option. Options not exercised
within the applicable period specified above shall terminate.
In the case of an Employee, a change of duties or position within the
Company, if any, shall not be considered a termination of employment for
purposes of this Plan. The Option Agreements may contain such
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provisions as the Board shall approve with respect to the effect of approved
leaves of absence upon termination of employment.
10.3 Termination for Cause. In the event of an Optionee's termination of
employment in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company for Cause, any Option or Options held by him under the Plan, to the
extent not exercised before such termination, shall forthwith terminate.
ARTICLE XI.
RIGHTS OF OPTIONEES
11.1 Service. Nothing in this Plan shall interfere with or limit in any way
the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Employee any right to
continue in the employ of the Company, or upon any Consultant any right to
continue to provide services to the Company.
11.2 Nontransferability. Options granted under this Plan shall be
nontransferable by the Optionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
ARTICLE XII.
AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN
12.1 Amendment, Modification and Termination of the Plan. The Board may at
any time terminate and from time to time may amend or modify the Plan provided,
however, that no such action of the Board, without approval of the stockholders,
may:
(a) increase the total amount of Stock which may be purchased through
Options granted under the Plan, except as provided in Article V;
(b) change the class of Employees or Consultants eligible to receive
Options; or
(c) extend the maximum exercise period under section 7.5.
No amendment, modification or termination of the Plan shall in any manner
adversely affect any outstanding Option under the Plan without the consent of
the Optionee holding the Option.
ARTICLE XIII.
ACQUISITION, MERGER AND LIQUIDATION
13.1 Acquisition. Notwithstanding anything herein to contrary, in the event
that an Acquisition (as defined below) occurs with respect to the Company, the
Company shall have the option, but not the obligation, to cancel Options
outstanding as of the effective date of Acquisition, whether or not such Options
are then exercisable, in return for payment to the Optionees for each Option of
an amount equal to a reasonable, good faith estimate of an amount (hereinafter
the "Spread") equal to the difference between the net amount per share payable
in the Acquisition, or as a result of the Acquisition, less the exercise price
per share of the Option. In estimating the Spread, appropriate adjustments to
give effect to the existence of the options shall be made, such as deeming the
Options to have been exercised, with the Company receiving the exercise price
payable thereunder, and treating the shares receivable upon exercise of the
Options as being outstanding in determining the net amount per share. For
purposes of this section, an "Acquisition" shall mean any transaction in which
substantially all of the Company's assets are acquired or in which a controlling
amount of the Company's outstanding shares are acquired, in each case by a
single person or entity or an affiliated group of persons and/or entities. For
purposes of this section a controlling amount shall mean more than 50% of the
issued and outstanding shares of stock of the Company. The Company shall have
such an option regardless of how the Acquisition is effectuated, whether by
direct purchase, through a merger or
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<PAGE> 313
similar corporate transaction, or otherwise. In cases where the acquisition
consists of the acquisition of assets of the Company, the net amount per share
shall be calculated on the basis of the net amount receivable with respect to
shares upon a distribution and liquidation by the Company after giving effect to
expenses and charges, including but not limited to taxes, payable by the Company
before the liquidation can be completed.
Where the Company does not exercise its option under this section 13.1, the
remaining provisions of this Article XIII shall apply, to the extent applicable.
13.2 Merger or Consolidation. Subject to section 13.1 and to any required
action by the stockholders, if the Company shall be the surviving corporation in
any merger or consolidation, any Option granted hereunder shall pertain to and
apply to the securities to which a holder of the number of shares of Stock
subject to the Option would have been entitled in such merger or consolidation.
13.3 Other Transactions. Subject to section 13.1, dissolution or a
liquidation of the Company or a merger and consolidation in which the Company is
not the surviving corporation shall cause every Option outstanding hereunder to
terminate as of the effective date of the dissolution, liquidation, merger or
consolidation. However, the Optionee either (i) shall be offered a firm
commitment whereby the resulting or surviving corporation in a merger or
consolidation will tender to the Optionee an option (the "Substitute Option") to
purchase its shares on terms and conditions both as to number of shares and
otherwise, which will substantially preserve to the Optionee the rights and
benefits of the Option outstanding hereunder granted by the Company, or (ii)
shall have the right immediately prior to such dissolution, liquidation, merger,
or consolidation to exercise any unexercised Options whether or not then
exercisable, subject to the provisions of this Plan. The Board shall have
absolute and uncontrolled discretion to determine whether the Optionee has been
offered a firm commitment and whether the tendered Substitute Option will
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder. In any event, any Substitute Option for an Incentive
Stock Option shall comply with the requirements of the Code.
ARTICLE XIV.
SECURITIES REGISTRATION
14.1 Securities Registration. In the event that the Company shall deem it
necessary or desirable to register under the Securities Act of 1933, as amended,
or any other applicable statute, any Options or any Stock with respect to which
an Option may be or shall have been granted or exercised, or to qualify any such
Options or Stock under the Securities Act of 1933, as amended, or any other
statute, then the Optionee shall cooperate with the Company and take such action
as is necessary to permit registration or qualification of such Options or
Stock.
Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he is acquiring such
shares for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, and (b) that before any
transfer in connection with the resale of such shares, he will obtain the
written opinion of counsel to the Company, or other counsel acceptable to the
Company, that such shares may be transferred. The Company may also require that
the certificates representing such shares contain legends reflecting the
foregoing.
ARTICLE XV.
TAX WITHHOLDING
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state and local withholding tax requirements.
Unless otherwise determined by the Board, withholding obligations may be settled
with Stock, including Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company, its subsidiaries
and affiliates
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shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment otherwise due to the participant.
ARTICLE XVI.
INDEMNIFICATION
16.1 Indemnification. To the extent permitted by law, each person who is or
shall have been a member of the Board shall be indemnified and held harmless by
the Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be a party or in which he
may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid by him in settlement thereof, with
the Company's approval, or paid by him in satisfaction of judgment in any such
action, suit or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
articles of incorporation or bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
ARTICLE XVII.
REQUIREMENTS OF LAW
17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the state of Delaware.
ARTICLE XVIII.
COMPLIANCE WITH CODE
18.1 Compliance with Code. Incentive Stock Options granted hereunder are
intended to qualify as "incentive stock options" under the Code section 422. If
any provision of this Plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code. Options granted hereunder to any person who is a "covered employee"
under Code section 162(m) at any time when the Company is subject to Code
section 162(m) are intended to qualify as performance-based compensation within
the meaning of Code section 162(m)(4)(C). If any provision of this Plan is
susceptible to more than one interpretation, such interpretation shall be given
thereto as is consistent with Options granted under this Plan to such "covered
employees" being treated as performance-based compensation under Code section
162(m).
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Set forth below is a description of certain provisions of the Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") of
Racing Champions Corporation (the "Company"), the Amended and Restated By-Laws
of the Company (the "By-Laws") and the Delaware General Corporation Law
("DGCL"). This description is qualified in its entirety by reference to the
Certificate of Incorporation, the By-Laws and the DGCL.
The Certificate of Incorporation provides that, to the full extent provided
by law, a director will not be personally liable to the Company or its
stockholders for or with respect to any acts or omissions in the performance of
his or her duties as a director. The DGCL provides that a corporation may limit
or eliminate a director's personal liability for monetary damages to the
corporation or its stockholders, except for liability (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of section 174 of the DGCL or (iv) with respect to any
transaction from which the director derived an improper personal benefit.
Under the DGCL, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. With respect to actions by or in the right
of the corporation as a derivative action, section 145 of the DGCL provides that
a corporation may indemnify directors, officers and other persons as described
above, except if such person has been adjudged to be liable to the corporation,
unless the court in which such action or suit was brought determines in view of
all of the circumstances of the case that such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
Article V of the By-Laws provides for the mandatory indemnification of
directors, officers, employees or agents of the Company to the full extent
permitted by the DGCL. The By-Laws also contain a nonexclusivity clause which
provides in substance that the indemnification rights under the Amended and
Restated By-Laws shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any agreement with the
Company, any By-Law or otherwise.
The DGCL permits and Article V of the By-Laws authorizes the Company to
purchase and maintain insurance on behalf of any director, officer, employee or
agent of the Company against any liability asserted against or incurred by them
in such capacity or arising out of their status as such whether or not the
Company would have the power to indemnify such director, officer, employee or
agent against such liability under the applicable provisions of the DGCL, the
Certificate of Incorporation or the By-Laws.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as
of December 4, 1997, by and among the Company, WSG
Acquisition, Inc. and Wheels Sports Group, Inc.(1)
2.2 -- Stockholder Agreement, dated as of December 4, 1997, as
amended, by and between the Company and Howard L. Correll,
Jr.(2)
</TABLE>
II-1
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
3.1 -- Amended and Restated Certificate of Incorporation.(3)
3.2 -- Amended and Restated By-Laws.(4)
4.1 -- Amended and Restated Certificate of Incorporation (same as
Exhibit 3.1).(4)
4.2 -- Amended and Restated By-Laws (same as Exhibit 3.2).(4)
5 -- Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c.(5)
10.1 -- Asset and Stock Purchase Agreement, dated as of April 30,
1996, by and 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.(4)
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.(4)
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.(4)
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.(4)
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.(4)
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.(4)
10.7 -- Securities Purchase Agreement, dated as of April 30, 1996,
by and between the Company and Dods-Meyer, Ltd.(4)
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.(6)
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.(6)
10.10 -- Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Robert Dods.(4)
10.11 -- Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Boyd Meyer.(4)
10.12 -- Employment Agreement, dated as of April 30, 1996, by and
between Banerjan Company Limited and Peter Chung.(4)
10.13 -- Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Curt Stoelting.(4)
</TABLE>
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<PAGE> 317
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
10.14 -- Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Peter Henseler.(4)
10.15 -- Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and John Olsen.(4)
10.16 -- Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Kevin Camp.(4)
10.17 -- 1996 Key Employees Stock Option Plan.(4)
10.18 -- 1996 Key Employees Performance Compensation Plan.(4)
10.19 -- Amendment No. 1 to 1996 Key Employees Performance
Compensation Plan.(7)
10.20 -- Racing Champions Corporation 1997 Stock Incentive Plan.(7)
10.21 -- Racing Champions Corporation Employee Stock Purchase Plan(8)
21 -- Subsidiaries of the Company.(6)
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Ernst & Young.
23.4 -- Consent of Coopers & Lybrand L.L.P.
23.5 -- Consent of Cheshier & Fuller L.L.P.
23.6 -- Consent of Burnett Sneed.
23.7 -- Consent of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. (included in its opinion filed as Exhibit 5
hereto).(5)
24 -- Power of Attorney (included as part of the signature page
hereof).
99.1 -- Consent of Randy C. Baker, director nominee.
99.2 -- Consent of Randy E. Duncan, director nominee.
99.3 -- Consent of Victor H. Shaffer, director nominee.
99.4 -- Form of Proxy for the Company's annual meeting of
stockholders.
99.5 -- Form of Proxy for the special meeting of stockholders of
Wheels Sports Group, Inc.
</TABLE>
- ---------------
(1) Filed as Exhibit A to the Joint Proxy Statement/Prospectus and incorporated
herein by reference.
(2) Filed as Exhibit B to the Joint Proxy Statement/Prospectus and incorporated
herein by reference.
(3) Filed on August 14, 1997 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.
(4) Filed on February 27, 1997 as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-22493) and incorporated herein by
reference.
(5) To be filed by amendment.
(6) Filed on March 27, 1998 as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 0-22635) and
incorporated herein by reference.
(7) Filed on June 9, 1997 as an exhibit to Pre-Effective Amendment No. 3 to the
Company's Registration Statement on Form S-1 (File No. 333-22493) and
incorporated herein by reference.
(8) Filed on April 11, 1997 as an exhibit to Pre-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-1 (File No. 333-22493) and
incorporated herein by reference.
II-3
<PAGE> 318
(b) Financial Statement Schedules.
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- -------- -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant undertakes as follows:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 319
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Glen Ellyn, State of
Illinois, on the 23rd day of April, 1998.
RACING CHAMPIONS CORPORATION
By: /s/ ROBERT E. DODS
------------------------------------
Robert E. Dods
President
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 (including post-effective amendments or any abbreviated
Registration Statement, and any amendments thereto, filed pursuant to Rule
462(b) under the Securities Act of 1933) to the Registration Statement 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 Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT E. DODS President and Director April 23, 1998
- ----------------------------------------------------- (Principal Executive Officer)
Robert E. Dods
/s/ BOYD L. MEYER Executive Vice President and April 23, 1998
- ----------------------------------------------------- Director
Boyd L. Meyer
/s/ PETER K.K. CHUNG Director April 23, 1998
- -----------------------------------------------------
Peter K.K. Chung
/s/ SAMUEL B. GUREN Director April 23, 1998
- -----------------------------------------------------
Samuel B. Guren
/s/ AVY H. STEIN Director April 23, 1998
- -----------------------------------------------------
Avy H. Stein
/s/ DANIEL M. GILL Director April 23, 1998
- -----------------------------------------------------
Daniel M. Gill
/s/ JOHN S. BAKALAR Director April 23, 1998
- -----------------------------------------------------
John S. Bakalar
/s/ JOHN J. VOSICKY Director April 23, 1998
- -----------------------------------------------------
John J. Vosicky
/s/ CURTIS W. STOELTING Vice President -- Finance and April 23, 1998
- ----------------------------------------------------- Operations and Secretary
Curtis W. Stoelting (Principal Accounting Officer
and Principal Financial
Officer)
</TABLE>
II-5
<PAGE> 320
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 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
II-6
<PAGE> 321
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders 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 the financial data required to be set forth in relation
to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1997
II-7
<PAGE> 322
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 57,000 -- -- 257,000
Racing Champions Corporation
Eights months ended December 31,
1996............................... 257,000 43,000 -- -- 300,000
Year ended December 31, 1997.......... 300,000 -- -- -- 300,000
</TABLE>
II-8
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Public Accountants
Re: Racing Champions Corporation
Form S-4 Registration Statement
As independent public accountants, we hereby consent to the use of our
reports dated February 10, 1998 and February 15, 1997 and to all references to
our Firm included in or made a part of this Registration Statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
April 23, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Charlotte, North Carolina
April 23, 1998
<PAGE> 1
EXHIBIT 23.3
Consent of Independent Auditors
We consent to the reference of our firm under the captions "Selected Financial
Data of Racing Champions Corporation and subsidiaries" and "Experts" and to the
use of our report dated February 19, 1997, with respect to the Combined
Financial Statements of Racing Champions Limited Group for the two years ended
March 31, 1995 and 1996 and for the one month ended April 30, 1996, in the
Registration Statement (Form S-4) dated April 21, 1998 and the related
Prospectus of Racing Champions Corporation.
/s/ Ernst & Young
Ernst & Young
Hong Kong
April 21, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Wheels Sports Group, Inc.
We consent to the inclusion in this registration statement on Form S-4 of our
reports on:
- - Our audits of the consolidated financial statements of Wheels Sports Group,
Inc. dated January 21, 1997, except for Note 3A, which is dated October 4,
1997.
- - Our audits of the financial statements of High Performance dated February
6, 1998.
We also consent to the reference of our firm under the captions "Experts" and
"Selected Financial Data."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
April 21, 1998
<PAGE> 1
EXHIBIT 23.5
Independent Auditors' Consent
We consent to the use in this Registration Statement of Racing Champions
Corporation on Form S-4 of our report dated February 6, 1998 (relating to the
financial statements of Press Pass Partners) appearing in the Joint Proxy
Statement/Prospectus, which is part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Joint Proxy
Statement/Prospectus.
/s/ Cheshier & Fuller, L.L.P.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
April 21, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Burnett & Sneed
Burnett & Sneed
South Boston, Virginia
April 23, 1998
<PAGE> 1
EXHIBIT 99.1
Racing Champions Corporation
800 Roosevelt Road
Building C, Suite 320
Glen Ellyn, IL 60137
Gentlemen:
I have consented to be nominated for election as a member of the Board of
Directors of Racing Champions Corporation ("Racing Champions"), conditioned
upon the consummation of the merger between Wheels Sports Group, Inc. and WSG
Acquisition, Inc., a wholly owned subsidiary of Racing Champions. I hereby
consent to the identification of me as a director nominee and to the use
of information regarding me in the Joint Proxy Statement/Prospectus forming a
part of the Registration Statement on Form S-4 of Racing Champions. I also
consent to the filing of this letter as an exhibit to the Registration
Statement on Form S-4 of Racing Champions.
Yours very truly,
/s/ Randy C. Baker
------------------------------
Randy C. Baker
Date: 4/23/98
-------------------------
<PAGE> 1
EXHIBIT 99.2
Racing Champions Corporation
800 Roosevelt Road
Building C, Suite 320
Glen Ellyn, IL 60137
Gentlemen:
I have consented to be nominated for election as a member of the Board of
Directors of Racing Champions Corporation ("Racing Champions"), conditioned
upon the consummation of the merger between Wheels Sports Group, Inc. and WSG
Acquisition, Inc., a wholly owned subsidiary of Racing Champions. I hereby
consent to the identification of me as a director nominee and to the use of
information regarding me in the Joint Proxy Statement/Prospectus forming a part
of the Registration Statement on Form S-4 of Racing Champions. I also consent
to the filing of this letter as an exhibit to the Registration Statement on
Form S-4 of Racing Champions.
Yours very truly,
/s/ Randy E. Duncan
-------------------------------
Randy E. Duncan
Date: 4/23/98
--------------------------
<PAGE> 1
EXHIBIT 99.3
Racing Champions Corporation
800 Roosevelt Road
Building C, Suite 320
Glen Ellyn, IL 60137
Gentlemen:
I have consented to be nominated for election as a member of the Board of
Directors of Racing Champions Corporation ("Racing Champions"), conditioned
upon the consummation of the merger between Wheels Sports Group, Inc. and WSG
Acquisition, Inc., a wholly owned subsidiary of Racing Champions. I hereby
consent to the identification of me as a director nominee and to the use of
information regarding me in the Joint Proxy Statement/Prospectus forming a part
of the Registration Statement on Form S-4 of Racing Champions. I also consent
to the filing of this letter as an exhibit to the Registration Statement on
Form S-4 of Racing Champions.
Yours very truly,
/s/ Victor H. Shaffer
-----------------------------
Victor H. Shaffer
Date: 4/23/98
------------------------
<PAGE> 1
EXHIBIT 99.4
PROXY
RACING CHAMPIONS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert E. Dods and Curtis W. Stoelting, or
either one of them, with full power of substitution and resubstitution, as
proxy or proxies of the undersigned to attend the Annual Meeting of
Stockholders of Racing Champions Corporation to be held on June 12, 1998 at
10:00 a.m., local time, at [LOCATION], and at any adjournment thereof, there to
vote all shares of Common Stock which the undersigned would be entitled to vote
if personally present as specified upon the following matters and in their
discretion upon such other matters as may properly come before the meeting.
1. APPROVAL AND ADOPTION OF AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER, DATED AS OF DECEMBER 4, 1997, BY AND AMONG RACING CHAMPIONS
CORPORATION, WSG ACQUISITION, INC. AND WHEELS SPORTS GROUP, INC. AND THE
ISSUANCE OF SHARES OF COMMON STOCK OF RACING CHAMPIONS CORPORATION
PURSUANT THERETO.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. APPROVAL AND ADOPTION OF AN AMENDMENT TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF RACING CHAMPIONS CORPORATION TO INCREASE
THE TOTAL NUMBER OF AUTHORIZED SHARES OF COMMON STOCK OF RACING CHAMPIONS
CORPORATION FROM 20,000,000 TO 28,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. APPROVAL AND ADOPTION OF PROPOSED AMENDMENT TO THE RACING CHAMPIONS
CORPORATION STOCK INCENTIVE PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. ELECTION OF DIRECTORS (terms expiring at the 1999 Annual Meeting)
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees
contrary below) listed below
1.-ROBERT E. DODS 2.-BOYD L. MEYER 3.-PETER K.K. CHUNG 4.-AVY H. STEIN
5.-DANIEL M. GILL 6.-SAMUEL B. GUREN 7.-JOHN S. BAKALAR 8.-JOHN J. VOSICKY
9.-RANDY C. BAKER 10.-RANDY E. DUNCAN 11.-VICTOR H. SHAFFER
PLEASE NOTE THAT THIS PROXY WILL NOT BE VOTED TO ELECT RANDY C. BAKER,
RANDY E. DUNCAN OR VICTOR H. SHAFFER UNLESS PROPOSAL 1 AND PROPOSAL 2
ABOVE ARE APPROVED BY STOCKHOLDERS AT THE ANNUAL MEETING.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
the number(s) of the nominee(s) on the space provided below.)
________________________________________________________________________
5. TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS AUDITORS FOR RACING
CHAMPIONS CORPORATION FOR YEAR ENDING DECEMBER 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
(continued on reverse side)
<PAGE> 2
PROXY NO. NO. OF SHARES
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and accompanying Joint Proxy Statement/Prospectus,
ratifies all that said proxies or their substitutes may lawfully do by virtue
hereof, and revokes all former proxies.
Please sign exactly as your name appears hereon, date and return this Proxy.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO GRANT AUTHORITY TO
APPROVE AND ADOPT THE MERGER AGREEMENT, TO APPROVE AND ADOPT THE AMENDMENT TO
THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, TO ELECT THE NOMINEES AS
DIRECTORS, TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS AUDITORS AND TO
APPROVE THE AMENDMENT TO THE RACING CHAMPIONS CORPORATION STOCK INCENTIVE PLAN.
IF OTHER MATTERS COME BEFORE THE MEETING, THIS PROXY WILL BE VOTED IN
ACCORDANCE WITH THE BEST JUDGMENT OF THE PROXIES APPOINTED.
DATED: ___________________, 1998
____________________________________
(SIGNATURE OF STOCKHOLDER)
____________________________________
(SIGNATURE IF JOINTLY HELD)
If signing as attorney, executor, administrator,
trustee or guardian, please add you full title
as such. If shares are held by two or more
persons, all holders must sign the Proxy.
2
<PAGE> 1
EXHIIBT 99.5
PROXY
WHEELS SPORTS GROUP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Victor H. Shaffer and Randy E. Duncan, or
either one of them, with full power of substitution and resubstitution, as
proxy or proxies of the undersigned to attend the Special Meeting of
Stockholders of Wheels Sports Group, Inc. to be held on June 12, 1998 at 10:00
a.m., local time, at [LOCATION], and at any adjournment thereof, to vote
all shares of Common Stock which the undersigned would be entitled to vote if
personally present as specified upon the following matter and in their
discretion upon such other matters as may properly come before the meeting.
1. APPROVAL AND ADOPTION OF AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER, DATED AS OF DECEMBER 4, 1997, BY AND AMONG RACING CHAMPIONS
CORPORATION, WSG ACQUISITION, INC. AND WHEELS SPORTS GROUP, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
(continued on reverse side)
<PAGE> 2
PROXY NO. NO. OF SHARES
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and accompanying Joint Proxy Statement/Prospectus,
ratifies all that said proxies or their substitutes may lawfully do by virtue
hereof, and revokes all former proxies.
Please sign exactly as your name appears hereon, date and return this Proxy.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO GRANT AUTHORITY TO
APPROVE AND ADOPT THE MERGER AGREEMENT. IF OTHER MATTERS COME BEFORE THE
MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE BEST JUDGMENT OF THE
PROXIES APPOINTED.
DATED: ___________________, 1998
____________________________________
(SIGNATURE OF STOCKHOLDER)
____________________________________
(SIGNATURE IF JOINTLY HELD)
If signing as attorney, executor, administrator,
trustee or guardian, please add you full title
as such. If shares are held by two or more
persons, all holders must sign the Proxy.
2
