SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-22635
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Racing Champions Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4088307
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
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(Address of principal executive offices)
Registrant's telephone number, including area code: 630-790-3507
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
On September 30, 1999, there were outstanding 16,432,683 shares of the
Registrant's $.01 par value common stock.
<PAGE>
RACING CHAMPIONS CORPORATION
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
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Page
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Item 1. Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 1999 and 1998 and for the
Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
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Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS:
- ---------------------------------------------------
Cash and cash equivalents. . . . . . . . . . . . . . $ 13,995 $ 6,242
Accounts receivable, net . . . . . . . . . . . . . . 65,875 22,208
Inventory, net . . . . . . . . . . . . . . . . . . . 39,534 14,228
Other current assets . . . . . . . . . . . . . . . . 11,905 4,376
Property and equipment, net. . . . . . . . . . . . . 37,665 13,387
Excess purchase price over net assets acquired, net. 136,134 99,726
Other non-current assets . . . . . . . . . . . . . . 4,269 337
-------------------- -------------------
Total assets. . . . . . . . . . . . . . . . . . . $ 309,377 $ 160,504
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
- ---------------------------------------------------
Accounts payable and accrued expenses. . . . . . . . $ 49,226 $ 21,259
Bank term loans. . . . . . . . . . . . . . . . . . . 115,000 22,000
Line of credit . . . . . . . . . . . . . . . . . . . 27,000 12,000
Other liabilities. . . . . . . . . . . . . . . . . . 11,682 2,663
-------------------- -------------------
Total liabilities . . . . . . . . . . . . . . . . 202,908 57,922
Stockholders' equity . . . . . . . . . . . . . . . . 106,469 102,582
-------------------- -------------------
Total liabilities and stockholders' equity. . . . $ 309,377 $ 160,504
==================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ----------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $ 82,631 $ 50,604 $ 175,390 $ 121,936
Cost of sales . . . . . . . . . . . . . . . . 47,250 23,351 97,834 54,602
------------ ------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . 35,381 27,253 77,556 67,334
Selling, general and administrative expenses. 25,090 16,260 60,753 41,253
Amortization of intangible assets . . . . . . 947 666 2,578 1,998
Restructuring and other charges . . . . . . . - - 6,400 -
Merger related costs. . . . . . . . . . . . . - - - 5,525
------------ ------------ ------------ ------------
Operating income. . . . . . . . . . . . . . . 9,344 10,327 7,825 18,558
Interest expense. . . . . . . . . . . . . . . 2,563 625 5,144 2,159
Other expense . . . . . . . . . . . . . . . . 9 71 78 223
------------ ------------ ------------ ------------
Income before income taxes. . . . . . . . . . 6,772 9,631 2,603 16,176
Income tax expense. . . . . . . . . . . . . . 2,897 3,856 1,209 6,566
------------ ------------ ------------ ------------
Income before extraordinary item. . . . . . . 3,875 5,775 1,394 9,610
Extraordinary charge for early extinguishment
of debt, net of tax benefit of $1,188. . . . - - - 1,782
------------ ------------ ------------ ------------
Net income. . . . . . . . . . . . . . . . . . $ 3,875 $ 5,775 $ 1,394 $ 7,828
============ ============ ============ ============
Net income per share before
Extraordinary item:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.36 $ 0.09 $ 0.60
============ ============ ============ ============
Diluted. . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.35 $ 0.08 $ 0.59
============ ============ ============ ============
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.36 $ 0.09 $ 0.49
============ ============ ============ ============
Diluted. . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.35 $ 0.08 $ 0.48
============ ============ ============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . 16,417 15,971 16,245 15,964
Diluted. . . . . . . . . . . . . . . . . . . 16,694 16,430 16,611 16,396
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
--------------------------
1999 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 1,394 $ 7,828
Depreciation and amortization . . . . . . . . . . . . . . 8,091 4,440
Deferred taxes and interest . . . . . . . . . . . . . . . 1,322 1,521
Gain/loss on sale of assets . . . . . . . . . . . . . . . (11) -
Provision for allowances for doubtful accounts. . . . . . 704 37
Other . . . . . . . . . . . . . . . . . . . . . . . . . . - 6
Changes in operating assets and liabilities . . . . . . . (12,953) (10,188)
------------ ------------
Net cash (used in) provided by operating activities . (1,453) 3,644
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . (6,722) (4,516)
Proceeds from disposal of property and equipment. . . . . 1,596 189
Purchase price of Ertl, net of cash acquired. . . . . . . (92,997) -
Purchase price in excess of net assets acquired . . . . . - (554)
Increase in other non-current assets. . . . . . . . . . . (3,222) (109)
------------ ------------
Net cash used in investing activities . . . . . . . . (101,345) (4,990)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net. . . . . . . . . . . . . . . . . 108,000 2,992
Issuance of common stock. . . . . . . . . . . . . . . . . 2,321 138
Payments on acquisition loans . . . . . . . . . . . . . . - (3,250)
Expense recognized under option grants. . . . . . . . . . 17 -
------------ ------------
Net cash provided by (used in) financing activities . 110,338 (120)
Effect of exchange rate on cash . . . . . . . . . . . 213 -
------------ ------------
Net increase (decrease) in cash and cash equivalents. 7,753 (1,466)
------------ ------------
Cash and cash equivalents, beginning of period . . . . . . 6,242 10,203
------------ ------------
Cash and cash equivalents, end of period . . . . . . . . . $ 13,995 $ 8,737
============ ============
Supplemental information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,426 $ 1,486
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,707 $ 4,571
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Racing
Champions Corporation ("the Company") and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated.
The accompanying condensed consolidated financial statements have been prepared
by management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of September 30, 1999, the results of
operations for the three month and nine month periods ended September 30, 1999
and the cash flows for the nine month period ended September 30, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
related notes included in the Company's Form 10-K for the year ended December
31, 1998.
The results of operations for the three month and nine month periods ended
September 30, 1999 are not necessarily indicative of the operating results for
the full year.
NOTE 2 - BUSINESS COMBINATIONS
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of the Ertl Company, Inc. and certain of its affiliates
("Ertl") for approximately $95 million. This transaction has been accounted for
under the purchase method of accounting and accordingly, the operating results
of Ertl have been included in the Company's consolidated financial statements
since the date of acquisition. The purchase was funded with a draw-down on the
Company's credit facility (Note 6). The excess of the aggregate purchase price
over the fair market of net assets acquired of approximately $39 million is
being amortized over 40 years.
The following unaudited pro forma consolidated results of operations for the
nine months ended September 30, 1999 and 1998 assume that the Ertl acquisition
occurred as of January 1 of each year (in thousands, except per share data):
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
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<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . $ 210,369 $ 251,156
Income (loss) before extraordinary item. (2,512) 3,415
Net income (loss). . . . . . . . . . . . (2,512) 1,633
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . $ (0.15) $ 0.10
Diluted. . . . . . . . . . . . . . . . $ - $ 0.10
</TABLE>
6
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Pro forma data does not purport to be indicative of the results that would have
been obtained had this acquisition actually occurred at the beginning of the
periods presented and is not intended to be a projection of future results.
On June 12, 1998, a subsidiary of the Company merged with Wheels Sports Group,
Inc. ("Wheels"), subsequently renamed Racing Champions South, Inc. The merger
was effected by exchanging 2.7 million shares of the Company's common stock for
all of the outstanding common stock of Wheels. Each share of Wheels was
exchanged for 0.51 shares of the Company's common stock. In addition,
outstanding Wheels' warrants and stock options were converted at the same
exchange ratio into warrants and options to purchase the Company's common stock.
The merger has been accounted for as a pooling-of-interests. Accordingly, all
prior period consolidated financial statements presented have been restated to
include the results of operations, financial position and cash flows of Wheels
as though it had always been a part of the Company. Certain reclassifications
were made to the Wheels financial statements to conform to the Company's
presentations.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements immediately after the merger
follow.
<TABLE>
<CAPTION>
Six months ended
June 30, 1998
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<S> <C>
Net sales:
Racing Champions . . . . . $ 48,855
Wheels . . . . . . . . . . 23,856
Intercompany sales . . . . (1,379)
------------------
Combined . . . . . . . . . $ 71,332
==================
Net income:
Racing Champions . . . . . $ 4,212
Wheels . . . . . . . . . . (2,074)
Intercompany eliminations
and tax adjustments . . . (81)
------------------
Combined . . . . . . . . . $ 2,057
==================
</TABLE>
In connection with the merger, the Company recorded a second quarter charge to
operating expenses of $5.5 million ($3.3 million after taxes, or $0.20 per
diluted common share) for direct and other merger-related costs of $2.1 million
and $3.4 million pertaining to the merger and restructuring of the Companies'
combined operations.
Merger transaction costs consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Restructuring costs included severance for terminated employees and exit and
agreement extension costs.
7
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NOTE 3 - RESTRUCTURING AND OTHER CHARGES
In the second quarter of 1999, the Company recorded restructuring and other
charges of $6.4 million. These charges related to the Company's alignment of
operations, product lines and direct marketing efforts with the consolidation
plans for those same areas at Ertl. Approximately $2.2 million of the charges
relate to the re-focusing of the direct mail programs, $3.8 million relates to
the reduction and consolidation of product lines and the remaining $0.4 million
relates to operational consolidation, including severance and relocation costs.
During the quarter ended September 30, 1999, approximately $1.2 million of the
charges related to direct mail, $0.8 million of the charges related to reduction
and consolidation of product lines, and $0.1 million of the charges related to
severance and relocation were expended.
NOTE 4 - 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 Racing Champions Limited to RCI.
The acquisitions were accounted for using the purchase method of accounting.
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.
NOTE 5 - COMMON STOCK
Authorized and issued shares and par values of the Company's voting common stock
are as follows:
<TABLE>
<CAPTION>
Shares outstanding at Shares outstanding at
Authorized shares Par Value September 30, 1999 December 31, 1998
----------------- ---------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Voting Common Stock 28,000,000 $ .01 16,432,683 16,060,998
</TABLE>
NOTE 6 - DEBT
In connection with the acquisition of Ertl, the Company entered into a new
credit agreement, amended on August 30, 1999, which provides for a five year
revolving loan, five year term loan, and the issuance of letters of credit. The
revolving loan allows the Company to borrow up to $60.0 million at any time
prior to March 31, 2004. At September 30, 1999, the Company had $27.0 million
outstanding on the revolving loan. The term loan, in the principal amount of
$115.0 million, is due in scheduled quarterly payments beginning June 30, 2000
with final maturity on March 31, 2004. All borrowings under the credit facility
are secured by substantially all of the assets of the Company.
The term loan and the revolving loan bear interest, at the Company's option, at
an alternate base rate plus a margin that varies between 0.00% and 1.25% or at a
LIBOR rate plus margin that varies between 0.75% and
8
<PAGE>
2.25%. The applicable margin is based on the Company's ratio of consolidated
debt to consolidated EBITDA and at September 30, 1999 was 1.00% for base rate
loans and 2.00% for LIBOR loans. The credit agreement also requires the Company
to pay a commitment fee determined by the ratio of consolidated debt to
consolidated EBITDA. At September 30, 1999, the commitment fee was 0.375% per
annum on the average daily unused portion of the revolving loan.
Under the terms of the Company's credit agreement, the Company is required to
comply with certain financial and non-financial covenants. As of September 30,
1999, the Company was in compliance with all of these covenants.
The Company's credit agreement also requires that the Company maintain an
interest rate protection agreement. Effective June 3, 1999, the Company entered
into an interest rate collar transaction covering $35 million of its debt, with
a cap based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement,
which has quarterly settlement dates, is in effect through June 3, 2002. During
the third quarter of 1999, the effect of this agreement was insignificant.
NOTE 7 - PER SHARE INFORMATION
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial condition,
results of operations, liquidity and capital resources. The discussion and
analysis should be read in conjunction with the Company's unaudited consolidated
financial statements and notes thereto included elsewhere herein.
The Company acquired The Ertl Company, Inc. and certain of its affiliates
("Ertl") on April 13, 1999, in a transaction accounted for under the purchase
method of accounting. Accordingly, the operations of Ertl are included in the
Company's operations from the date of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net sales. Net sales increased $32.0 million, or 63.2%, to $82.6 million for
the three months ended September 30, 1999 from $50.6 million for the three
months ended September 30, 1998. The increase was attributable to the
acquisition of Ertl. Sales in the Racing Champions brand die cast collectibles
category decreased approximately $22 million, quarter to quarter. Sales
decreased in all areas within the die cast category, with especially weak
performance in NASCAR, as compared to strong sales in third quarter of 1998 of
last year's NASCAR 50th Anniversary line. Other die cast collectible sales,
excluding NASCAR, were down as the presence of Star Wars products continues to
clog the retail channel. Sales of other Racing Champions products decreased
approximately $2 million, quarter to quarter, mostly due to planned reductions
based on focusing product lines and reducing low volume SKU's in the apparel and
souvenirs category.
Gross profit. Gross profit increased $8.1 million, or 29.7%, to $35.4 million
for the three months ended September 30, 1999 from $27.3 million for the three
months ended September 30, 1998. The gross profit margin (as a percentage of
net sales) decreased to 42.8% in 1999 compared to 53.9% in 1998. The Company
earned a higher gross profit margin in the third quarter of 1998, mostly due to
the special 50th Anniversary NASCAR die-cast and souvenir products that carried
higher gross profit margins. The low volume in all product categories in the
third quarter of 1999 negatively impacted the Company's gross profit margin for
that period. Also, the addition of the Ertl operations, with a lower gross
profit margin (in the range of 40% to 45%) than the traditional Racing Champions
gross profit margin, contributed to the decrease in gross profit margin. There
were no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.8 million, or 54.0%, to $25.1 million for
the three months ended September 30, 1999 from $16.3 million for the three
months ended September 30, 1998. The increase in selling, general and
administrative expenses is due to the addition of the Ertl operations. As a
percentage of net sales, selling, general and administrative expenses decreased
to 30.4% for the three months ended September 30, 1999 from 32.1% for the three
months ended September 30, 1998. The Company reduced operating expenses as a
percent of sales through personnel reductions, scaling back discretionary
expenses and the integration of operations in Hong Kong and China and the United
States.
10
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Operating income. Operating income decreased $1.0 million, or 9.7%, to $9.3
million for the three months ended September 30, 1999 from $10.3 million for the
three months ended September 30, 1998. As a percentage of net sales, operating
income decreased to 11.3% for the three months ended September 30, 1999 from
20.4% for the three months ended September 30, 1998. The decrease in operating
income is primarily a result of the low sales volume in the third quarter of
1999.
Interest expense. Interest expense of $2.6 million for the three months ended
September 30, 1999 and $0.6 million for the three months ended September 30,
1998 related primarily to bank term loans and line of credit. The increase in
interest expense, quarter to quarter, is due to increased borrowings in 1999 in
connection with the acquisition of Ertl.
Income tax. Income tax expense for the three months ended September 30, 1999,
and September 30, 1998 include provisions for federal, state and Hong Kong
income taxes at an effective rate of 42.7% and 40.0%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net sales. Net sales increased $53.5 million, or 43.9%, to $175.4 million for
the nine months ended September 30, 1999 from $121.9 million for the nine months
ended September 30, 1998. The increase was attributable to the acquisition of
Ertl. The Racing Champions brand die cast collectibles category decreased
approximately $23 million as compared to the nine months ended September 30,
1998. Within the die cast category, sales decreased primarily in the NASCAR
area, with weak performance for the nine months ended September 30, 1999 as
compared to strong sales for the nine months ended September 30, 1998 of last
year's NASCAR 50th Anniversary line. Other die cast collectibles sales were
down as the presence of Star Wars products continues to clog the retail channel.
Sales of other Racing Champions products decreased approximately $10 million,
mostly due to planned reductions based on focusing product lines and reducing
low volume SKU's in the apparel and souvenirs category.
Gross profit. Gross profit increased $10.3 million, or 15.3%, to $77.6 million
for the nine months ended September 30, 1999 from $67.3 million for the nine
months ended September 30, 1998. The gross profit margin (as a percentage of
net sales) decreased to 44.2% in 1999 compared to 55.2% in 1998. The Company
earned a higher gross profit margin for the nine months ended September 30,
1998, mostly due to the special 50th Anniversary NASCAR die-cast and souvenir
products that carried higher gross margins. The low volume in all product
categories in the second and third quarters of 1999 negatively impacted the
Company's gross profit margin year to date in 1999. Also, the addition of the
Ertl operations, with a lower gross profit margin (in the range of 40% to 45%)
than the traditional Racing Champions gross profit margin, contributed to the
decrease in gross profit margin in 1999. There were no major changes in the
components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $19.5 million, or 47.2%, to $60.8 million for
the nine months ended September 30, 1999 from $41.3 million for the nine months
ended September 30, 1998. The increase in selling, general and administrative
expenses is due to the addition of the Ertl operations. As a percentage of net
sales, selling, general and administrative expenses increased to 34.6% for the
nine months ended September 30, 1999 from 33.8% for the nine months ended
September 30, 1998. The slight increase as a percentage of net sales is due to
both the addition of the Ertl expenses and a result of spreading fixed costs
over lower volume.
11
<PAGE>
Operating income. Operating income decreased $10.8 million, or 58.1%, to $7.8
million for the nine months ended September 30, 1999 from $18.6 million for the
nine months ended September 30, 1998. As a percentage of net sales, operating
income decreased to 4.5% for the nine months ended September 30, 1999 from 15.2%
for the nine months ended September 30, 1998. The decrease in operating income
is primarily a result of the $6.4 million in restructuring and other charges
taken by the Company during the second quarter. These charges relate to the
alignment of the Racing Champions' operations, product lines and direct
marketing efforts with the consolidated plans for those same areas of Ertl. The
operating margin was also negatively impacted by the low sales volume in the
second and third quarters.
Interest expense. Interest expense of $5.1 million for the nine months ended
September 30, 1999 and $2.2 million for the nine months ended September 30, 1998
related primarily to bank term loans and line of credit. The increase in
interest expense, year to year, is due to increased borrowings in 1999 in
connection with the acquisition of Ertl.
Income tax. Income tax expense for the nine months ended September 30, 1999,
and September 30, 1998 include provisions for federal, state and Hong Kong
income taxes at an effective rate of 46.4% and 40.6%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's operations used net cash of $1.5 million during the nine months
ended September 30, 1999. Capital expenditures for the nine months ended
September 30, 1999 were approximately $6.7 million, of which approximately $4.3
million was for molds and tooling.
On April 13, 1999, in conjunction with the Company's acquisition of Ertl, the
Company paid all outstanding amounts on its old credit facility and entered into
a new credit facility, which was amended on August 30, 1999. The new credit
agreement provides for a revolving loan, a five year term loan and the issuance
of letters of credit. The revolving loan allows the Company to borrow up to
$60.0 million at any time prior to March 31, 2004. At September 30, 1999, the
Company had $27.0 million outstanding on the revolving loan. The term loan in
the principal amount of $115.0 million is due in scheduled quarterly payments
beginning June 30, 2000 with final maturity on March 31, 2004. All borrowings
under the credit facility are secured by substantially all of the assets of the
Company.
The term loan and the revolving term loan bear interest, at the Company's
option, at an alternate base rate plus a margin that varies between 0.00% and
1.25% or at a LIBOR rate plus margin that varies between 0.75% and 2.25%. The
applicable margin is based on the Company's ratio of consolidated debt to
consolidated EBITDA and at September 30, 1999 was 1.00% for base rate loans and
2.00% for LIBOR loans. The credit agreement also requires the Company to pay a
commitment fee determined by the ratio of consolidated total debt to
consolidated EBITDA. At September 30, 1999, the commitment fee was 0.375% per
annum on the average daily unused portion of the revolving loan.
Under the terms of the Company's credit agreement, the Company is required to
comply with certain financial and non-financial covenants. As of September 30,
1999, the Company was in compliance with all of these covenants.
12
<PAGE>
The Company's anticipated debt service obligations under the new credit
facilities for the remainder of 1999 for scheduled interest payments are
approximately $3.0 million. Average annual debt service obligations under these
same facilities through March 2004 are approximately $34.7 million.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the seasonality
related to sales. Due to seasonal increases in demand for the Company's
products, working capital financing requirements are usually highest during the
third and fourth quarters. The Company expects that capital expenditures during
1999, principally for molds and tooling, will be approximately $9.0 million.
The Company believes that its cash flow from operations, cash on hand and
borrowings under the credit agreement will be sufficient to meet its working
capital and capital expenditure requirements and provide the Company with
adequate liquidity to meet anticipated operating needs for the foreseeable
future. However, any significant future product or property acquisitions
(including up-front licensing payments) may require additional debt or equity
financing.
YEAR 2000 PREPARATIONS
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because
the Year 1900 could also be translated as two zeroes, systems which use two
digits could read the date incorrectly for a number of date-sensitive
applications, resulting in potential calculation errors or the shutdown of major
systems. The Company has undertaken various initiatives intended to ensure that
its computer hardware and software and other systems will function properly with
respect to dates in the Year 2000 and thereafter. The systems subject to
potential Year 2000 issues include not only information technology ("IT")
systems, such as accounting and data processing, order processing and
communications systems, but also non-IT systems, such as alarm systems, fax
machines or other miscellaneous systems.
The Company's State of Readiness. The Company's Year 2000 compliance program
- -----------------------------------
has focused on two initiatives: (1) a review of significant internal IT and
non-IT systems to determine the extent of potential Year 2000 issues and to
effect necessary upgrades with respect to Year 2000 compliance, and (2) the
circulation of surveys to the Company's major vendors and customers to assess
their Year 2000 readiness.
The Company's main internal systems, including IT systems such as financial
systems and core order processing systems, and non-IT systems have been tested
and are currently Year 2000 compliant, except for one upgrade in process with
respect to the Company's Hong Kong subsidiary which the Company expects to
complete before December 31, 1999.
The Company has circulated surveys to approximately 100 of its key third party
vendors and customers. None of the surveys which have been returned indicate
significant Year 2000 compliance issues. The Company has also successfully
completed tests of its electronic order-processing system with its significant
customers. The Company expects to continue to analyze Year 2000 risks relating
to its key vendors and customers based on the completed surveys and other
communications.
13
<PAGE>
Costs to Address the Company's Year 2000 Issues. The majority of the Company's
- ------------------------------------------------
internal Year 2000 issues have been or will be corrected through systems
upgrades for other business purposes or normal maintenance contracts. The cost
of such upgrades has been approximately $250,000. The Company does not expect
to incur significant additional costs to upgrade its internal systems for Year
2000 compliance.
Risks to the Company for Year 2000 Issues. The Company believes that its
- ------------------------------------------------
reasonably likely worse case scenario would be to revert to manual order
processing for orders currently processed through EDI systems and the Company's
internal order processing systems. The Company will continue to monitor the
Year 2000 compliance of its customers and vendors. A number of risks relating
to the Year 2000 issue may be out of the Company's control, including reliance
on outside links for essential services such as communications and power. There
can be no assurance that a failure of systems of third parties on which the
Company's systems and operations will rely to be Year 2000 compliant will not
have a material adverse effect on the Company's business, financial condition or
operating results.
The Company's Year 2000 Contingency Plans. The Company's information systems
- -------------------------------------------
department will be staffed over the January 1, 2000 weekend and the Company
expects to make personnel available to handle issues that may arise. To the
extent that unanticipated compliance issues arise with respect to the Company's
internal systems, the Company believes that it will be able to implement
alternative IT systems or manual systems.
FORWARD-LOOKING STATEMENTS
A number of the matters discussed in this report that are not historical or
current facts deal with potential future circumstances and developments. The
Company's actual results and future developments could differ materially from
the results or developments expressed in, or implied by, these forward-looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, but are not
limited to, the following: (1) the Company's growth is dependent upon its
ability to continue to conceive, design, source and market new products and upon
continuing market acceptance of its existing and future products; (2)
competition in the markets for the Company's products may increase
significantly; (3) the Company is dependent upon continuing licensing
arrangements with race team owners, drivers, sponsors, agents, vehicle
manufacturers, major race sanctioning bodies and other licensers; (4) the
Company's assessment of the Year 2000 issue, including its identification,
assessment, remediation and testing efforts, the dates on which the Company
believes it will complete such efforts and the costs associated with such
efforts, is based upon management's estimates, which were derived from numerous
assumptions regarding future events, available resources, third-party
remediation plans, the accuracy of testing of the affected systems and other
factors, and no assurance can be given that these estimates will prove correct
or that actual results will not differ materially from currently anticipated;
(5) the Company relies upon five independently owned factories located in China
to manufacture its racing replicas and certain other products; (6) the Company
is dependent upon the continuing willingness of leading retailers to purchase
and provide shelf space for the Company's products; (7) the Company's ability to
integrate and assimilate the business of Ertl; and (8) general economic
conditions in the Company's markets.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's credit agreement requires that the Company maintain an interest
rate protection agreement. Effective June 3, 1999, the Company entered into an
interest rate collar transaction covering $35 million of its debt, with a cap
based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement, which has
quarterly settlement dates, is in effect through June 3, 2002. During the third
quarter of 1999, the effect of this agreement was insignificant.
Based on the Company's interest rate exposure on variable rate borrowings at
September 30, 1999, a one-percentage-point increase in average interest rates on
the Company's borrowings would increase future interest expense by approximately
$120,000 per month.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 23, 1999, a proposed class action lawsuit was filed in U.S.
District Court in the Southern District of California against the Company. The
complaint alleges that the certain of the Company's trading cards constitute an
illegal gambling scheme in violation of the Racketeer Influenced and Corrupt
Organizations Act and California's unfair competition law. Plaintiffs seek an
unspecified amount of damages and also an order enjoining the alleged illegal
gambling scheme. On October 26, 1999, the Company filed a motion to dismiss the
suit or, in the alternative, to transfer venue to the District Court in the
Western District of North Carolina. The Company anticipates that a hearing on
its motion will be held in January 2000. The Company expects to vigorously
defend against the action, although no assurances can be given as to the outcome
of this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company during the
third quarter of 1999.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 0-22635) filed by the
Company with the Securities and Exchange Commission on March 29, 1999).
3.2 First Amendment to Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File
No. 0-22635) filed by the Company with the Securities and Exchange Commission on
March 29, 1999).
16
<PAGE>
3.3 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 0-22635) filed by the Company with the
Securities and Exchange Commission on August 14, 1998).
10.1 First Amendment to Credit Agreement, dated as of August 30, 1999,
among the Company, Racing Champions, Inc., Racing Champions South, Inc., Racing
Champions Worldwide Limited, Green's Racing Souvenirs, Inc., RCNA Holdings,
Inc., The Ertl Company, Inc., Ertl Direct, Inc., First Union National Bank, as
agent and lender, and the other lenders party thereto.
10.2 Security Agreement, dated as of August 30, 1999, among the
Company, Racing Champions, Inc., Racing Champions South, Inc., Racing Champions
Worldwide Limited, Green's Racing Souvenirs, Inc., RCNA Holdings, Inc., The Ertl
Company, Inc., Ertl Direct, Inc., and First Union National Bank, as agent and
lender.
27 Financial Data Schedule.
(b) Reports on Form 8-K: none in the third quarter of 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 12th day of November, 1999.
RACING CHAMPIONS CORPORATION
By /s/ Robert E. Dods
----------------------------------
Robert E. Dods, Chief Executive Officer
By /s/ Curtis W. Stoelting
----------------------------------------
Curtis W. Stoelting, Executive Vice President-
Finance and Operations and Secretary
18
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "First Amendment") dated as
---------------
of August 30, 1999, is to that Credit Agreement dated as of April 13, 1999 (as
amended and modified from time to time, the "Credit Agreement"; terms used but
----------------
not otherwise defined herein shall have the meanings provided in the Credit
Agreement), by and among RACING CHAMPIONS, INC., an Illinois corporation
("RCI"), and RACING CHAMPIONS SOUTH, INC., a North Carolina corporation ("RCS"),
---
(each of RCI and RCS individually a "U.S. Borrower", and collectively, the "U.S.
------------- ----
Borrowers"), RACING CHAMPIONS WORLDWIDE LIMITED, a corporation organized under
- ---------
the laws of the United Kingdom (the "U.K. Borrower"; together with the U.S.
-------------
Borrowers, the "Borrowers"), the Guarantors identified therein, the several
---------
banks and other financial institutions identified therein (the "Lenders"), and
-------
FIRST UNION NATIONAL BANK, a national banking association, as administrative
agent for the Lenders hereunder (in such capacity, the "Administrative Agent").
--------------------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Lenders have established a $175,000,000 secured credit
facility for the benefit of the Borrowers pursuant to the terms of the Credit
Agreement;
WHEREAS, the Borrowers wish to amend the Credit Agreement to modify certain
provisions contained therein;
WHEREAS, the Required Lenders have agreed to the requested amendment on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
A. The Credit Agreement is amended in the following respects:
1. (a) The pricing grid in the definition of "Applicable
Percentage" is deleted in its entirety and following substituted therefor:
<PAGE>
<TABLE>
<CAPTION>
Alternate LIBOR Rate Margin for
Base Rate U.S. Revolving Loans, U.K.
Margin for Revolving Loans, Term Loans
Leverage U.S. Revolving Loans and Letter of Commitment
Level Ratio and Term Loans Credit Fee Fee
<S> <C> <C> <C> <C>
I greater than or equal
to 3.25 to 1.0 1.25% 2.25% .400%
--------------------- --------------------- ---------------------------- -----------
II less than 3.25 to 1.0
but greater than 3.00
to 1.00 1.00% 2.00% .375%
--------------------- --------------------- ---------------------------- -----------
III less than 3.00 to 1.0
but greater than or
equal to 2.50 to 1.0 .50% 1.50% .300%
--------------------- --------------------- ---------------------------- -----------
IV less than 2.50 to 1.0
but greater than or
equal to 2.00 to 1.0 .25% 1.25% .275%
--------------------- --------------------- ---------------------------- -----------
V less than 2.00 to 1.0
but greater than or
equal to 1.50 to 1.0 .00% 1.00% .250%
--------------------- --------------------- ---------------------------- -----------
VI less than 1.50 to 1.0 .00% .75% .225%
- ----- --------------------- --------------------- ---------------------------- -----------
</TABLE>
(b) From the date of this First Amendment written above through the
next Interest Determination Date, the Applicable Percentage shall be based on
Level II. On such next Interest Determination Date, the Applicable Percentage
shall be based on the Level set forth above that correlates with the Leverage
Ratio demonstrated in the compliance certificate delivered by the Company for
the quarter ended September 30, 1999 and shall remain at least equal to or
greater than such Applicable Margin through the quarter ended March 31, 2000.
2. Section 5.9(a) of the Credit Agreement is hereby amended by deleting
subsection (a) in its entirety and the following substituted therefor:
(a) Leverage Ratio. The Leverage Ratio, as of the last day of each
---------------
fiscal quarter of the Company and its Subsidiaries occurring during each of the
periods set forth below shall be less than or equal to the following:
2
<PAGE>
<TABLE>
<CAPTION>
Period Ratio
- ----------------------------------------- ------------
<S> <C>
Closing Date through June 30, 1999 3.00 to 1.00
July 1, 1999 through December 31, 1999 3.50 to 1.00
January 1, 2000 through March 31, 2000 3.25 to 1.00
April 1, 2000 through June 30, 2000 3.00 to 1.00
July 1, 2000 through September 30, 2000 2.75 to 1.00
October 1, 2000 through December 31, 2001 2.50 to 1.00
January 1, 2002 through December 31, 2002 2.25 to 1.00
January 1, 2003 and thereafter 2.00 to 1.00
</TABLE>
3. Section 5.9(b) of the Credit Agreement is hereby amended by deleting
subsection (b) in its entirety and the following substituted therefor:
(b) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as
-----------------------------
of the last day of each fiscal quarter of the Company and its Subsidiaries
occurring during each of the periods set forth below shall be greater than or
equal to the following:
<TABLE>
<CAPTION>
Period Ratio
- ----------------------------------------- ------------
<S> <C>
Closing Date through December 31, 1999 1.25 to 1.00
January 1, 2000 through December 31, 2000 1.10 to 1.00
January 1, 2001 through March 31, 2001 1.15 to 1.00
April 1, 2001 and thereafter 1.25 to 1.00
</TABLE>
4. Section 5.9(c) of the Credit Agreement is hereby amended by deleting
subsection (c) in its entirety and the following substituted therefor:
(c) The Interest Coverage Ratio as of the last day of each fiscal
quarter of the Company and its Subsidiaries occurring during the periods set
forth below shall be greater than or equal to the following:
<TABLE>
<CAPTION>
Period Ratio
- --------------------------------------- ------------
<S> <C>
Closing Date until June 30, 1999 3.50 to 1.00
July 1, 1999 through March 31, 2000 2.50 to 1.00
April 1, 2000 through June 30, 2000 2.75 to 1.00
July 1, 2000 through September 30, 2000 3.25 to 1.00
October 1, 2000 and thereafter 4.00 to 1.00
</TABLE>
5. Section 5.9 of the Credit Agreement is hereby amended by adding the
following clause (d) thereto immediately following clause (c):
3
<PAGE>
(d) Limitation on Consolidated Capital Expenditures. Consolidated
---------------------------------------------------
Capital Expenditures as of the last day of each fiscal year of the Company and
its Subsidiaries occurring during the periods set forth below shall be less than
or equal to the following:
July 1, 1999 through December 31, 1999 $ 6,000,000
January 1, 2000 and thereafter $12,000,000
6. (a) The definition of "Consolidated EBIT" is hereby deleted in its
entirety and the following substituted therefor:
"Consolidated EBIT" means, for any period, the sum of (i) Consolidated Net
------------------
Income for such period, plus (ii) an amount which, in the determination of
Consolidated Net Income for such period, has been deducted for (A) Consolidated
Interest Expense, (B) total federal, state, local and foreign income, value
added and similar taxes, and (C) cost savings add-backs resulting from
non-recurring charges related to acquisitions as set forth on Schedule 1.1(c)
attached hereto, and (D) other adjustments to Consolidated EBIT reasonably
acceptable to the Required Lenders.
(b) The Schedules to the Credit Agreement are hereby amended by adding
Annex I attached hereto as Schedule 1.1(c) to the Credit Agreement and the
add-backs set forth therein are hereby approved by the Administrative Agent and
the Lenders party hereto. It is further agreed, that the delivery by the Company
of its compliance certificate for the quarter ended June 30, 1999 may have
resulted in an Event of Default for non-compliance with certain financial
covenants if the Company were unable to include the foregoing approved add-backs
in its calculations. Therefore, the Administrative Agent and the Lenders party
hereto hereby waive any such Event of Default relating to the Company's
inclusion of those certain add-backs set forth on Annex I hereto prior to the
approval of such add-backs by the Administrative Agent and the Required Lenders
herein and consent to the inclusion of such add-backs in the compliance
certificate for the quarter ended June 30, 1999.
7. The definition of "Consolidated EBITDA" is hereby deleted in its
entirety and the following substituted therefor:
"Consolidated EBITDA" means, for any period, the sum of (i) Consolidated
--------------------
Net Income for such period, plus (ii) an amount which, in the determination of
Consolidated Net Income for such period, has been deducted for (A) Consolidated
Interest Expense, (B) total federal, state, local and foreign income, value
added and similar taxes, (C) depreciation, amortization expense and other
non-cash charges, (D) cost savings add-backs resulting from non-recurring
charges related to acquisitions as set forth on Schedule 1.1(c) attached hereto,
and (E) other adjustments to Consolidated EBITDA reasonably acceptable to the
Required Lenders.
4
<PAGE>
8. The definition of "Fixed Charge Coverage Ratio" is hereby amended by
deleting the parenthetical in the third line of the definition and replacing it
with the following:
"(or the twelve month period beginning with the first day of the fiscal
quarter then ended with respect to subsection (b)(ii) below)".
9. (a) Section 6.11 of the Credit Agreement is hereby deleted in
its entirety and the following substituted therefor:
"The Company will not, nor will it permit any Subsidiary to, directly or
indirectly, declare, order, make or set apart any sum for or pay any Restricted
Payment, except (a) to make dividends payable solely in the same class of
Capital Stock of such Person, (b) to make dividends or other distributions
payable to any Credit Party (directly or indirectly through Subsidiaries), (c)
as permitted by Section 6.12 and (d) provided that (i) no Default or Event of
Default has occurred and is continuing at such time or would be directly or
indirectly caused as a result thereof on an actual or pro forma basis, and (ii)
prior to effecting such repurchase, the Company shall have delivered to the
Administrative Agent, a certificate in the form attached hereto as Schedule
--------
6.11, demonstrating that, after giving effect to such contemplated repurchase,
the Company will have minimum liquidity of at least $25 million, then the
Company may repurchase shares of its Capital Stock on the open market in an
aggregate amount not to exceed (a) $10,000,000 in the aggregate from the Closing
Date until April 15, 2000 and (b) $20,000,000 in the aggregate during the term
of this Agreement. Notwithstanding the foregoing, after June 30, 2000, the
Company shall no longer be required to deliver the liquidity certificate
provided for in subclause (d) (ii)."
(b) The Schedules to the Credit Agreement are hereby amended by
adding Annex II attached hereto as Schedule 6.11 to the Credit Agreement.
10. The following definition is added to Section 1.1 of the Credit
Agreement.
"Security Agreement" means the Security Agreement dated as of August 30,
-------------------
1999 given by the Borrowers and the Guarantors to the Administrative Agent, as
amended, modified or supplemented from time to time in accordance with its
terms.
11. The definition of "Security Documents" in the Credit Agreement is
amended by adding the phrase ", the Security Agreement" immediately after the
words "Pledge Agreement" therein.
12. Section 6.1(h) of the Credit Agreement is hereby deleted in its
entirety.
5
<PAGE>
13. Section 6.3 of the Credit Agreement is hereby deleted in its
entirety and the following substituted therefor:
"The Company will not, nor will it permit any Subsidiary to, enter into or
otherwise become or be liable in respect of any Guaranty Obligations (excluding
specifically therefrom endorsements in the ordinary course of business of
negotiable instruments for deposit or collection) other than (i) those in favor
of the Lenders in connection herewith and (ii) Guaranty Obligations by the
Company or its Subsidiaries of Indebtedness permitted under Section 6.1(b) (to
the extent existing on the Closing Date or as set forth on Schedule 6.1(b), as
---------------
it may be amended from time to time) and under Section 6.1 (f)."
14. Schedule 6.1(b) to the Credit Agreement is hereby deleted in its
----------------
entirety and replaced with Annex III attached hereto.
B. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (and Exhibits) remain in full force and effect.
C. The Credit Parties hereby represent and warrant that (a) the
representations and warranties contained in Article III of the Credit Agreement,
as amended hereby are correct in all material respects on and as of the date
hereof as though made on and as of such date and after giving effect to the
amendments contained herein and (b) no Default or Event of Default exists under
the Credit Agreement on and as of the date hereof and after giving effect to the
amendments contained herein.
D. This First Amendment shall become effective upon the satisfaction of
the following conditions precedent:
(a) Execution of First Amendment. The Administrative Agent shall have
-----------------------------
received counterparts of this First Amendment, executed by a duly authorized
officer of each party thereto.
(b) Execution of the Security Agreement. The Administrative Agent
---------------------------------------
shall have received counterparts of the Security Agreement executed by a duly
authorized officer of each party thereto.
(c) Legal Opinion of Counsel. The Administrative Agent shall have
---------------------------
received an opinion of Reinhart, Boerner, VanDeuren, Norris & Rieselbach, S.C.,
counsel for the Credit Parties, dated as of the date hereof and addressed to the
Administrative Agent and the Lenders, in form and substance satisfactory to the
Administrative Agent.
(d) Personal Property Collateral. The Administrative Agent shall have
-----------------------------
received, in form and substance satisfactory to the Administrative Agent:
6
<PAGE>
(i) searches of Uniform Commercial Code filings in the jurisdiction of
the chief executive office of each Credit Party and each jurisdiction where any
Collateral is located or where a filing would need to be made in order to
perfect the Administrative Agent's security in trust in the Collateral, copies
of the financing statements on file in such jurisdictions and evidence that no
Liens exist other than Permitted Liens.
(ii) duly executed UCC financing statements for each appropriate
jurisdiction as necessary, in Administrative Agent's sole discretion, to perfect
the Administrative Agent's security interest in the Collateral.
(e) The Borrowers shall have paid to the Administrative Agent and the
Lenders all amendment and related fees including an amendment fee to all Lenders
party to this First Amendment in the amount of $100,000 on a pro rata basis
among such Lenders.
E. Each of the Credit Parties hereby reaffirms all of its obligations
and duties under the Credit Documents as amended including but not limited to
the Borrowers' obligations under the Credit Agreement and the Guarantors
obligations under the Credit Agreement.
F. The Company agrees to pay all reasonable costs and expenses in
connection with the preparation, execution and delivery of this First Amendment,
including the reasonable fees and expenses of the Administrative Agent's legal
counsel, Moore & Van Allen, PLLC.
G. This First Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original and it
shall not be necessary in making proof of this First Amendment to produce or
account for more than one such counterpart.
H. This First Amendment and the Credit Agreement, as amended hereby,
shall be deemed to be contracts made under, and for all purposes shall be
construed in accordance with the laws of the State of North Carolina.
[Remainder of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this First Amendment to be duly executed and delivered as of the date and year
first above written.
U.S. BORROWERS: RACING CHAMPIONS, INC.,
- ---------------
an Illinois corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name: Curtis W. Stoelting
---------------------
Title: Executive Vice President
---------------------------
RACING CHAMPIONS SOUTH, INC.,
a North Carolina corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name: Curtis W. Stoelting
---------------------
Title: Executive Vice President
---------------------------
U.K. BORROWER: RACING CHAMPIONS WORLDWIDE
- --------------
LIMITED,
a United Kingdom corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name: Curtis W. Stoelting
---------------------
Title: Director
---------------------------
8
<PAGE>
GUARANTORS: RACING CHAMPIONS CORPORATION,
- ----------
a Delaware corporation
GREEN'S RACING SOUVENIRS, INC.,
a Virginia corporation
RCNA HOLDINGS, INC.,
a Delaware corporation
THE ERTL COMPANY, INC.,
a Delaware corporation
ERTL DIRECT, INC.,
a Delaware corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name: Curtis W. Stoelting
---------------------
Title: Executive Vice President
---------------------------
9
<PAGE>
ADMINISTRATIVE AGENT
- ---------------------
AND LENDERS: FIRST UNION NATIONAL BANK,
- -------------
as Administrative Agent and as a Lender
By:/s/ Kent S. Davis
--------------------
Name:Kent S. Davis
---------------
Title:
10
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By:/s/ Kevin L. Gillen
----------------------
Name:Kevin L. Gillen
-----------------
Title:
11
<PAGE>
NORTHERN TRUST COMPANY
By:/s/ Clark Delanois
--------------------
Name:Clark Delanois
---------------
Title:
12
<PAGE>
COMERICA BANK
By:/s/ Andrew R. Craig
----------------------
Name:Andrew R. Craig
-----------------
Title:
13
<PAGE>
MICHIGAN NATIONAL BANK
By:/s/ Eric Haege
----------------------
Name: Eric Haege
-----------------
Title:
14
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Security Agreement") is entered into as of
------------------
August 30, 1999 among RACING CHAMPIONS, INC., an Illinois corporation ("RCI");
---
RACING CHAMPIONS SOUTH, INC., a North Carolina corporation ("RCS") (each of RCI
and RCS individually a "U.S. Borrower" and, collectively, the "U.S. Borrowers");
------------- --------------
RACING CHAMPIONS WORLDWIDE LIMITED, a corporation organized under the laws of
the United Kingdom (the "U.K. Borrower"); together with the U.S. Borrowers, the
-------------
"Borrowers"; the Domestic Subsidiaries of the Borrower indicated on the
---------
signature pages hereto (individually a "Guarantor" and collectively the
---------
"Guarantors"; together with the Borrowers, individually an "Obligor" and
---------- -------
collectively the "Obligors"); and FIRST UNION NATIONAL BANK, in its capacity as
--------
administrative agent (in such capacity, the "Administrative Agent") for the
--------------------
lenders from time to time party to the Credit Agreement described below (the
"Lenders").
-----
R E C I T A L S
---------------
WHEREAS, pursuant to that certain Credit Agreement dated as of April 13,
1999 (as amended, modified, extended, renewed or replaced from time to time, the
"Credit Agreement"), among the Borrowers, the Guarantors, the Lenders and the
-----------------
Administrative Agent, the Lenders have agreed to make Loans and issue Letters of
Credit upon the terms and subject to the conditions set forth therein;
WHEREAS, the Borrowers, Guarantors, the Lenders and the Administrative
Agent have entered in the First Amendment to Credit Agreement dated as of the
date hereof pursuant to which certain terms and conditions of the Credit
Agreement were amended thereby; and
WHEREAS, it is a condition precedent to the effectiveness of the First
Amendment to Credit Agreement and to the continued obligations of the Lenders to
make their respective Loans and to issue Letters of Credit under the Credit
Agreement, as amended, that the Obligors shall have executed and delivered this
Security Agreement to the Administrative Agent for the ratable benefit of the
Lenders.
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Definitions.
-----------
(a) Unless otherwise defined herein, capitalized terms used herein
shall have the meanings ascribed to such terms in the Credit Agreement, and the
following terms which are defined in the Uniform Commercial Code in effect in
the State of North Carolina on the date hereof (the "UCC") are used herein as so
defined: Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, Farm
Products, Fixtures, General Intangibles, Instruments, Inventory, Investment
Property and Proceeds. For purposes of this Security Agreement, the term
<PAGE>
"Lender" shall include any Affiliate of any Lender which has entered into a
Hedging Agreement with the Borrowers.
(b) In addition, the following terms shall have the following
meanings:
"Copyright Licenses": any written agreement, naming any Obligor as
-------------------
licensor, granting any right under any Copyright including, without limitation,
any thereof referred to in Schedule 3.16 to the Credit Agreement.
--------------
"Copyrights": (a) all registered United States copyrights in all
----------
Works, now existing or hereafter created or acquired, all registrations and
recordings thereof, and all applications in connection therewith, including,
without limitation, registrations, recordings and applications in the United
States Copyright office including, without limitation, any thereof referred to
in Schedule 3.16 to the Credit Agreement, and (b) all renewals thereof
--------------
including, without limitation, any thereof referred to in Schedule 3.16 to the
-------------
Credit Agreement.
"Patent License": all agreements, whether written or oral, providing
---------------
for the grant by or to an Obligor of any right to manufacture, use or sell any
invention covered by a Patent, including, without limitation, any thereof
referred to in Schedule 3.16 to the Credit Agreement.
--------------
"Patents": (a) all letters patent of the United States or any other
-------
country and all reissues and extensions thereof, including, without limitation,
any thereof referred to in Schedule 3.16 to the Credit Agreement, and (b) all
-------------
applications for letters patent of the United States or any other country and
all divisions, continuations and continuations-in-part thereof, including,
without limitation, any thereof referred to in Schedule 3.16 to the Credit
-------------
Agreement.
"Secured Obligations": the collective reference to the following:
--------------------
(a) In the case of each Borrower, the prompt performance and
observance by the Borrower of all obligations of the Borrower under the Credit
Agreement, the Notes, this Security Agreement and the other Credit Documents to
which the Borrower is a party;
(b) In the case of the Guarantors, the prompt performance and
observance by the Guarantors of all obligations of the Guarantors under the
Credit Agreement, this Security Agreement and the other Credit Documents to
which any Guarantor is a party, including, without limitation, its guaranty
obligations arising under Article X of the Credit Agreement; and
(c) All other indebtedness, liabilities and obligations of any
kind or nature, now existing or hereafter arising, owing from any Obligor to any
Lender or the Administrative Agent, howsoever evidenced, created, incurred or
acquired, whether primary, secondary, direct, contingent, or joint and several,
including, without limitation, all liabilities arising under Hedging Agreements
and all obligations and liabilities incurred in connection with collecting and
enforcing the Secured Obligations.
2
<PAGE>
"Trademark License": means any agreement, written or oral, providing
------------------
for the grant by or to an Obligor of any right to use any Trademark, including,
without limitation, any thereof referred to in Schedule 3.16 to the Credit
-------------
Agreement.
"Trademarks": (a) all trademarks, trade names, corporate names,
----------
company names, business names, fictitious business names, trade styles, service
marks, logos and other source or business identifiers, and the goodwill
associated therewith, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith (excluding intent to use trademark applications), whether in the
United States Patent and Trademark Office or in any similar office or agency of
the United States, any State thereof or any other country or any political
subdivision thereof, or otherwise, including, without limitation, any thereof
referred to in Schedule 3.16 to the Credit Agreement, and (b) all renewals
--------------
thereof.
"Work": any work which is subject to copyright protection pursuant to
----
Title 17 of the United States Code.
2. Grant of Security Interest in the Collateral. To secure the prompt
---------------------------------------------
payment and performance in full when due, whether by lapse of time,
acceleration, mandatory prepayment or otherwise, of the Secured Obligations,
each Obligor hereby grants to the Administrative Agent, for the benefit of the
Lenders, a continuing security interest in, and a right to set off against, any
and all right, title and interest of such Obligor in and to the following,
whether now owned or existing or owned, acquired, or arising hereafter
(collectively, the "Collateral"):
----------
(a) all Accounts;
(b) all Chattel Paper;
(c) all Copyrights;
(d) all Copyright Licenses;
(e) all Deposit Accounts;
(f) all Documents;
(g) all Equipment;
(h) all Fixtures;
(i) all General Intangibles;
(j) all Instruments;
3
<PAGE>
(k) all Inventory;
(l) all Investment Property;
(m) all Patents;
(n) all Patent Licenses;
(o) all Trademarks;
(p) all Trademark Licenses;
(q) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks, and related data processing software (owned by
such Obligor or in which it has an interest) that at any time evidence or
contain information relating to any Collateral or are otherwise necessary or
helpful in the collection thereof or realization thereupon; and
(r) to the extent not otherwise included, all Proceeds and
products of any and all of the foregoing.
The Obligors and the Administrative Agent, on behalf of the Lenders, hereby
acknowledge and agree that the security interest created hereby in the
Collateral (i) constitutes continuing collateral security for all of the Secured
Obligations, whether now existing or hereafter arising and (ii) is not to be
construed as an assignment of any Copyrights, Copyright Licenses, Patents,
Patent Licenses, Trademarks or Trademark Licenses.
3. Provisions Relating to Accounts.
----------------------------------
(a) Anything herein to the contrary notwithstanding, each of the
Obligors shall remain liable under each of the Accounts to observe and perform
all the conditions and obligations to be observed and performed by it
thereunder, all in accordance with the terms of any agreement giving rise to
each such Account. Neither the Administrative Agent nor any Lender shall have
any obligation or liability under any Account (or any agreement giving rise
thereto) by reason of or arising out of this Security Agreement or the receipt
by the Administrative Agent or any Lender of any payment relating to such
Account pursuant hereto, nor shall the Administrative Agent or any Lender be
obligated in any manner to perform any of the obligations of an Obligor under or
pursuant to any Account (or any agreement giving rise thereto), to make any
payment, to make any inquiry as to the nature or the sufficiency of any payment
received by it or as to the sufficiency of any performance by any party under
any Account (or any agreement giving rise thereto), to present or file any
claim, to take any action to enforce any performance or to collect the payment
of any amounts which may have been assigned to it or to which it may be entitled
at any time or times.
4
<PAGE>
(b) Once during each calendar year or at any time after the occurrence
and during the continuation of an Event of Default, the Administrative Agent
shall have the right, but not the obligation, to make test verifications of the
Accounts in any manner and through any medium that it reasonably considers
advisable, and the Obligors shall furnish all such assistance and information as
the Administrative Agent may require in connection with such test verifications.
At any time and from time to time, upon the Administrative Agent's request and
at the expense of the Obligors, the Obligors shall cause independent public
accountants or others satisfactory to the Administrative Agent to furnish to the
Administrative Agent reports showing reconciliations, aging and test
verifications of, and trial balances for, the Accounts. The Administrative
Agent in its own name or in the name of others may communicate with account
debtors on the Accounts to verify with them to the Administrative Agent's
satisfaction the existence, amount and terms of any Accounts.
4. Representations and Warranties. Each Obligor hereby represents and
--------------------------------
warrants to the Administrative Agent, for the benefit of the Lenders, that so
long as any of the Secured Obligations remain outstanding or any Credit Document
or Hedging Agreement is in effect or any Letter of Credit shall remain
outstanding, and until all of the Commitments shall have been terminated:
(a) Chief Executive Office; Books & Records. Each Obligor's chief
---------------------------------------
executive office and chief place of business are (and for the prior four months
have been) located at the locations set forth on Schedule 3.19(c) to the Credit
----------------
Agreement, and each Obligor keeps its books and records at such locations.
(b) Location of Collateral. The location of all Collateral owned
-----------------------
by each Obligor is as shown on Schedule 3.19(b) to the Credit Agreement.
-----------------
(c) Ownership. Each Obligor is the legal and beneficial owner of
---------
its Collateral and has the right to pledge, sell, assign or transfer the same.
Each Obligor's legal name is as shown in this Security Agreement and no Obligor
has in the past four months changed its name, been party to a merger,
consolidation or other change in structure or used any tradename not disclosed
on Schedule 3.16 to the Credit Agreement.
--------------
(d) Security Interest/Priority. This Security Agreement creates a
--------------------------
valid security interest in favor of the Administrative Agent, for the benefit of
the Lenders, in the Collateral of such Obligor and, when properly perfected by
filing or otherwise, shall constitute a valid perfected security interest in
such Collateral, to the extent such security interest can be perfected by filing
or otherwise under the UCC, free and clear of all Liens except for Permitted
Liens.
(e) Farm Products. None of the Collateral constitutes, or is the
--------------
Proceeds of, Farm Products.
(f) Accounts. (i) Each Account of the Obligors and the papers and
--------
documents relating thereto are genuine and in all material respects what they
purport to be, (ii) each Account arises out of (A) a bona fide sale of goods
sold and delivered by such Obligor (or is in
5
<PAGE>
the process of being delivered) or (B) services theretofore actually rendered by
such Obligor to the account debtor named therein, (iii) no Account of an Obligor
is evidenced by any Instrument or Chattel Paper unless such Instrument or
Chattel Paper has been heretofore endorsed over and delivered to the
Administrative Agent and (iv) no surety bond was required or given in connection
with any Account of an Obligor or the contracts or purchase orders out of which
they arose.
(g) Inventory. No Inventory is held by an Obligor pursuant to
---------
consignment, sale or return, sale on approval or similar arrangement.
(h) Intellectual Property.
----------------------
(i) Schedule 3.16 to the Credit Agreement includes all Copyrights,
-------------
Copyright Licenses, Patents, Patent Licenses, Trademarks and Trademark Licenses
owned by the Obligors in their own names as of the date hereof and all
tradenames used by the Obligors as of the date hereof.
(ii) To the best of each Obligor's knowledge, each Copyright,
Patent and Trademark of such Obligor is valid, subsisting, unexpired,
enforceable and has not been abandoned, and such Obligor is legally entitled to
use each of its tradenames.
(iii) Except as set forth in Schedule 3.16 to the Credit
--------------
Agreement, none of such Copyrights, Patents and Trademarks is the subject of any
licensing or franchise agreement.
(iv) No holding, decision or judgment has been rendered by any
Governmental Authority which would limit, cancel or question the validity of any
Copyright, Patent or Trademark.
(v) To the best of each Obligor's knowledge, no action or
proceeding is pending seeking to limit, cancel or question the validity of any
Copyright, Patent or Trademark, or which, if adversely determined, would have a
material adverse effect on the value of any Copyright, Patent or Trademark.
(vi) To the best of each Obligor's knowledge, all applications
pertaining to the Copyrights, Patents and Trademarks of each Obligor have been
duly and properly filed, and all registrations or letters pertaining to such
Copyrights, Patents and Trademarks have been duly and properly filed and issued,
and all of such Copyrights, Patents and Trademarks are valid and enforceable.
(vii) No Obligor has made any assignment or agreement in conflict
with the security interest of the Administrative Agent in the Copyrights,
Patents or Trademarks of each Obligor hereunder.
6
<PAGE>
5. Covenants. Each Obligor covenants that, so long as any of the
---------
Secured Obligations remain outstanding or any Credit Document or Hedging
Agreement is in effect or any Letter of Credit shall remain outstanding, and
until all of the Commitments shall have been terminated, such Obligor shall:
(a) Other Liens. Defend the Collateral against the claims and
------------
demands of all other parties claiming an interest therein other than Permitted
Liens, keep the Collateral free from all Liens, except for Permitted Liens, and
not sell, exchange, transfer, assign, lease or otherwise dispose of the
Collateral or any interest therein, except as permitted under the Credit
Agreement.
(b) Preservation of Collateral. Keep the Collateral in good
----------------------------
order, condition and repair and not use the Collateral in violation of the
provisions of this Security Agreement or any other agreement relating to the
Collateral or any policy insuring the Collateral or any applicable statute, law,
bylaw, rule, regulation or ordinance.
(c) Instruments/Chattel Paper/Documents. If any amount payable
------------------------------------
under or in connection with any of the Collateral in an amount in excess of
$500,000 shall be or become evidenced by any Instrument or Chattel Paper, or if
any Property comprising Collateral in an amount in excess of $500,000 shall be
stored or shipped subject to a Document, immediately notify the Administrative
Agent of the existence thereof, and upon the Administrative Agent's request,
deliver such Instrument, Chattel Paper or Document to the Administrative Agent,
duly endorsed in a manner satisfactory to the Administrative Agent, to be held
as Collateral pursuant to this Security Agreement.
(d) Change in Location. Not, without providing 30 days prior
--------------------
written notice to the Administrative Agent and without filing such amendments to
any previously filed financing statements as the Administrative Agent may
require, (a) change the location of its chief executive office and chief place
of business (as well as its books and records) from the locations set forth on
Schedule 3.19(c) to the Credit Agreement, (b) change the location of its
----------------
Collateral from the locations set forth for such Obligor on Schedule 3.16(b) to
----------------
the Credit Agreement, or (c) change its name, be party to a merger,
consolidation or other change in structure or use any tradename other than as
disclosed on Schedule 3.19 to the Credit Agreement or in connection with mergers
or consolidations allowed pursuant to the Credit Agreement.
(e) Inspection. Upon reasonable notice, and during reasonable
----------
hours, at all times allow the Administrative Agent or its representatives to
visit and inspect the Collateral as set forth in Section 5.6 of the Credit
Agreement.
(f) Perfection of Security Interest. Execute and deliver to the
---------------------------------
Administrative Agent such agreements, assignments or instruments (including
affidavits, notices, reaffirmations and amendments and restatements of existing
documents, as the Administrative Agent may reasonably request) and do all such
other things as the Administrative Agent may reasonably deem necessary or
appropriate (i) to assure to the Administrative Agent its security interests
7
<PAGE>
hereunder, including (A) such financing statements (including renewal
statements) or amendments thereof or supplements thereto or other instruments as
the Administrative Agent may from time to time reasonably request in order to
perfect and maintain the security interests granted hereunder in accordance with
the UCC, (B) with regard to Copyrights, a Notice of Grant of Security Interest
in Copyrights for filing with the United States Patent and Trademark Office in
the form of Schedule 5(f)(i) attached hereto, (C) with regard to Patents, a
-----------------
Notice of Grant of Security Interest in Patents for filing with the United
States Patent and Trademark Office in the form of Schedule 5(f)(ii) attached
-----------------
hereto and (D) with regard to Trademarks, a Notice of Grant of Security Interest
in Trademarks for filing with the United States Patent and Trademark Office in
the form of Schedule 5(f)(iii) attached hereto, (ii) to consummate the
-------------------
transactions contemplated hereby and (iii) to otherwise protect and assure the
Administrative Agent of its rights and interests hereunder. To that end, each
Obligor agrees that the Administrative Agent may file one or more financing
statements disclosing the Administrative Agent's security interest in any or all
of the Collateral of such Obligor without, to the extent permitted by law, such
Obligor's signature thereon, and further each Obligor also hereby irrevocably
makes, constitutes and appoints the Administrative Agent, its nominee or any
other person whom the Administrative Agent may designate, as such Obligor's
attorney in fact with full power and for the limited purpose to sign in the name
of such Obligor any such financing statements, or amendments and supplements to
financing statements, renewal financing statements, notices or any similar
documents which in the Administrative Agent's reasonable discretion would be
necessary, appropriate or convenient in order to perfect and maintain perfection
of the security interests granted hereunder, such power, being coupled with an
interest, being and remaining irrevocable so long as the Credit Agreement is in
effect or any amounts payable thereunder or under any other Credit Document, any
Letter of Credit or any Hedging Agreement shall remain outstanding, and until
all of the Commitments thereunder shall have terminated. Each Obligor hereby
agrees that a carbon, photographic or other reproduction of this Security
Agreement or any such financing statement is sufficient for filing as a
financing statement by the Administrative Agent without notice thereof to such
Obligor wherever the Administrative Agent may in its sole discretion desire to
file the same. In the event for any reason the law of any jurisdiction other
than North Carolina becomes or is applicable to the Collateral of any Obligor or
any part thereof, or to any of the Secured Obligations, such Obligor agrees to
execute and deliver all such instruments and to do all such other things as the
Administrative Agent in its sole discretion reasonably deems necessary or
appropriate to preserve, protect and enforce the security interests of the
Administrative Agent under the law of such other jurisdiction (and, if an
Obligor shall fail to do so promptly upon the request of the Administrative
Agent, then the Administrative Agent may execute any and all such requested
documents on behalf of such Obligor pursuant to the power of attorney granted
hereinabove). If any Collateral is in the possession or control of an Obligor's
agents and the Administrative Agent so requests, such Obligor agrees to notify
such agents in writing of the Administrative Agent's security interest therein
and, upon the Administrative Agent's request, instruct them to hold all such
Collateral for the Lenders' account and subject to the Administrative Agent's
instructions. Each Obligor agrees to mark its books and records to reflect the
security interest of the Administrative Agent in the Collateral.
8
<PAGE>
(g) Treatment of Accounts. Upon an Event of Default, not grant or
---------------------
extend the time for payment of any Account, or compromise or settle any Account
for less than the full amount thereof, or release any person or property, in
whole or in part, from payment thereof, or allow any credit or discount thereon,
other than as normal and customary in the ordinary course of an Obligor's
business.
(h) Covenants Relating to Copyrights.
-----------------------------------
(i) Employ the Copyright for each Work with such notice of
copyright as may be required by law to secure copyright protection.
(ii) Not do any act or knowingly omit to do any act whereby any
material Copyright may become invalidated and (A) not do any act, or knowingly
omit to do any act, whereby any material Copyright may become injected into the
public domain; (B) notify the Administrative Agent immediately if it knows, or
has reason to know, that any material Copyright may become injected into the
public domain or of any adverse determination or development (including, without
limitation, the institution of, or any such determination or development in, any
court or tribunal in the United States or any other country) regarding an
Obligor's ownership of any such Copyright or its validity; (C) take all
necessary steps as it shall deem appropriate under the circumstances, to
maintain and pursue each application (and to obtain the relevant registration)
and to maintain each registration of each material Copyright owned by an Obligor
including, without limitation, filing of applications for renewal where
necessary; and (D) promptly notify the Administrative Agent of any material
infringement of any material Copyright of an Obligor of which it becomes aware
and take such actions as it shall reasonably deem appropriate under the
circumstances to protect such Copyright, including, where appropriate, the
bringing of suit for infringement, seeking injunctive relief and seeking to
recover any and all damages for such infringement.
(iii) Not make any assignment or agreement in conflict with the
security interest in the Copyrights of each Obligor hereunder.
(i) Covenants Relating to Patents and Trademarks.
-------------------------------------------------
(i) (A) Continue to use each material Trademark on each and every
trademark class of goods applicable to its current line as reflected in its
current catalogs, brochures and price lists in order to maintain such Trademark
in full force free from any claim of abandonment for non-use, (B) maintain as in
the past the quality of products and services offered under such material
Trademark, (C) employ such material Trademark with the appropriate notice of
registration, (D) not adopt or use any mark which is confusingly similar or a
colorable imitation of such Trademark unless the Administrative Agent, for the
ratable benefit of the Lenders, shall obtain a perfected security interest in
such mark pursuant to this Security Agreement, and (E)
9
<PAGE>
not (and not permit any licensee or sublicensee thereof to) do any act or
knowingly omit to do any act whereby any material Trademark may become
invalidated.
(ii) Not do any act, or omit to do any act, whereby any Patent may
become abandoned or dedicated.
(iii) Notify the Administrative Agent and the Lenders immediately
if it knows, or has reason to know, that any application or registration
relating to any material Patent or material Trademark may become abandoned or
dedicated, or of any adverse determination or development (including, without
limitation, the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office or any court or
tribunal in any country) regarding an Obligor's ownership of any material Patent
or material Trademark or its right to register the same or to keep and maintain
the same.
(iv) Whenever an Obligor, either by itself or through an agent,
employee, licensee or designee, shall file an application for the registration
of any Patent or Trademark with the United States Patent and Trademark Office,
an Obligor shall report such filing to the Administrative Agent and the Lenders
within 45 days after the last day of the fiscal quarter in which such filing
occurs. Upon request of the Administrative Agent, an Obligor shall execute and
deliver any and all agreements, instruments, documents and papers as the
Administrative Agent may request to evidence the Administrative Agent's and the
Lenders' security interest in any Patent or Trademark and the goodwill and
general intangibles of an Obligor relating thereto or represented thereby.
(v) Take all reasonable and necessary steps, including, without
limitation, in any proceeding before the United States Patent and Trademark
Office, to maintain and pursue each application (and to obtain the relevant
registration) and to maintain each registration of all material Patents and
material Trademarks, including, without limitation, filing of applications for
renewal, affidavits of use and affidavits of incontestability.
(vi) Promptly notify the Administrative Agent and the Lenders
after it learns that any material Patent or material Trademark included in the
Collateral is infringed, misappropriated or diluted by a third party and
promptly take such actions as it shall reasonably deem appropriate under the
circumstances to protect such Patent or Trademark.
(vii) Not make any assignment or agreement in conflict with the
security interest in the Patents or Trademarks of each Obligor hereunder.
(j) New Patents, Copyrights and Trademarks. Provided the
------------------------------------------
Administrative Agent within 45 days after the last day of the fiscal quarter in
which such filing occurs with (i) a listing of all applications filed with any
United States filing office, if any, for new Copyrights, Patents
10
<PAGE>
or Trademarks (together with a listing of the issuance of registrations or
letters on present applications), which new applications and issued
registrations or letters shall be subject to the terms and conditions hereunder,
and (ii) (A) with respect to Copyrights, a duly executed Notice of Security
Interest in Copyrights, (B) with respect to Patents, a duly executed Notice of
Security Interest in Patents, (C) with respect to Trademarks, a duly executed
Notice of Security Interest in Trademarks or (D) such other duly executed
documents as the Administrative Agent may request in a form acceptable to
counsel for the Administrative Agent and suitable for recording to evidence the
security interest in the Copyright, Patent or Trademark which is the subject of
such new application.
(k) Insurance. Insure, repair and replace the Collateral of such
---------
Obligor as set forth in the Credit Agreement. All insurance proceeds shall be
subject to the security interest of the Administrative Agent hereunder.
6. Advances by Lenders. On failure of any Obligor to perform any of
---------------------
the covenants and agreements contained herein, the Administrative Agent may, at
its sole option and in its sole discretion, perform the same and in so doing may
expend such sums as the Administrative Agent may reasonably deem advisable in
the performance thereof, including, without limitation, the payment of any
insurance premiums, the payment of any taxes, a payment to obtain a release of a
Lien or potential Lien, expenditures made in defending against any adverse claim
and all other expenditures which the Administrative Agent or the Lenders may
make for the protection of the security hereof or may be compelled to make by
operation of law. All such sums and amounts so expended shall be repayable by
the Obligors on a joint and several basis promptly upon timely notice thereof
and demand therefor, shall constitute additional Secured Obligations and shall
bear interest from the date said amounts are expended at the default rate
specified in Section 2.7 of the Credit Agreement. No such performance of any
covenant or agreement by the Administrative Agent or the Lenders on behalf of
any Obligor, and no such advance or expenditure therefor, shall relieve the
Obligors of any default under the terms of this Security Agreement, the other
Credit Documents or any Hedging Agreement. The Lenders may make any payment
hereby authorized in accordance with any bill, statement or estimate procured
from the appropriate public office or holder of the claim to be discharged
without inquiry into the accuracy of such bill, statement or estimate or into
the validity of any tax assessment, sale, forfeiture, tax lien, title or claim
except to the extent such payment is being contested in good faith by an Obligor
in appropriate proceedings and against which adequate reserves are being
maintained in accordance with GAAP.
7. Events of Default.
-------------------
The occurrence of an event which under the Credit Agreement would
constitute an Event of Default shall be an Event of Default hereunder (an "Event
-----
of Default").
- -----------
11
<PAGE>
8. Remedies.
--------
(a) General Remedies. Upon the occurrence of an Event of Default and
-----------------
during continuation thereof, the Lenders shall have, in addition to the rights
and remedies provided herein, in the Credit Documents, in the Hedging Agreements
or by law (including, but not limited to, the rights and remedies set forth in
the Uniform Commercial Code of the jurisdiction applicable to the affected
Collateral), the rights and remedies of a secured party under the UCC
(regardless of whether the UCC is the law of the jurisdiction where the rights
and remedies are asserted and regardless of whether the UCC applies to the
affected Collateral), and further, the Administrative Agent may, with or without
judicial process or the aid and assistance of others, (i) enter on any premises
on which any of the Collateral may be located and, without resistance or
interference by the Obligors, take possession of the Collateral, (ii) dispose of
any Collateral on any such premises, (iii) require the Obligors to assemble and
make available to the Administrative Agent at the expense of the Obligors any
Collateral at any place and time designated by the Administrative Agent which is
reasonably convenient to both parties, (iv) remove any Collateral from any such
premises for the purpose of effecting sale or other disposition thereof, and/or
(v) without demand and without advertisement, notice, hearing or process of law,
all of which each of the Obligors hereby waives to the fullest extent permitted
by law, at any place and time or times, sell and deliver any and all Collateral
held by or for it at public or private sale, by one or more contracts, in one or
more parcels, for cash, upon credit or otherwise, at such prices and upon such
terms as the Administrative Agent deems advisable, in its sole discretion
(subject to any and all mandatory legal requirements). In addition to all other
sums due the Administrative Agent and the Lenders with respect to the Secured
Obligations, the Obligors shall pay the Administrative Agent and each of the
Lenders all reasonable documented costs and expenses incurred by the
Administrative Agent or any such Lender, including, but not limited to,
reasonable attorneys' fees and court costs, in obtaining or liquidating the
Collateral, in enforcing payment of the Secured Obligations, or in the
prosecution or defense of any action or proceeding by or against the
Administrative Agent or the Lenders or the Obligors concerning any matter
arising out of or connected with this Security Agreement, any Collateral or the
Secured Obligations, including, without limitation, any of the foregoing arising
in, arising under or related to a case under the Bankruptcy Code. To the extent
the rights of notice cannot be legally waived hereunder, each Obligor agrees
that any requirement of reasonable notice shall be met if such notice is
personally served on or mailed, postage prepaid, to the Borrowers in accordance
with the notice provisions of Section 9.2 of the Credit Agreement at least 10
days before the time of sale or other event giving rise to the requirement of
such notice. The Administrative Agent and the Lenders shall not be obligated to
make any sale or other disposition of the Collateral regardless of notice having
been given. To the extent permitted by law, any Lender may be a purchaser at
any such sale. To the extent permitted by applicable law, each of the Obligors
hereby waives all of its rights of redemption with respect to any such sale.
Subject to the provisions of applicable law, the Administrative Agent and the
Lenders may postpone or cause the postponement of the sale of all or any portion
of the Collateral by announcement at the time and place of such sale, and such
sale may, without further notice, to the extent permitted by law, be made at the
time and place to which the sale was postponed, or the Administrative Agent and
the Lenders may further postpone such sale by announcement made at such time and
place.
12
<PAGE>
(b) Remedies relating to Accounts. Upon the occurrence of an
--------------------------------
Event of Default and during the continuation thereof, whether or not the
Administrative Agent has exercised any or all of its rights and remedies
hereunder, each Obligor will promptly upon request of the Administrative Agent
instruct all account debtors to remit all payments in respect of Accounts to a
mailing location selected by the Administrative Agent. In addition, the
Administrative Agent or its designee may notify any Obligor's customers and
account debtors that the Accounts of such Obligor have been assigned to the
Administrative Agent or of the Administrative Agent's security interest therein,
and may (either in its own name or in the name of an Obligor or both) demand,
collect (including, without limitation, by way of a lockbox arrangement),
receive, take receipt for, sell, sue for, compound, settle, compromise and give
acquittance for any and all amounts due or to become due on any Account, and, in
the Administrative Agent's discretion, file any claim or take any other action
or proceeding to protect and realize upon the security interest of the Lenders
in the Accounts. Each Obligor acknowledges and agrees that the Proceeds of its
Accounts remitted to or on behalf of the Administrative Agent in accordance with
the provisions hereof shall be solely for the Administrative Agent's own
convenience and that such Obligor shall not have any right, title or interest in
such Proceeds or in any such other amounts except as expressly provided herein.
The Administrative Agent and the Lenders shall have no liability or
responsibility to any Obligor for acceptance of a check, draft or other order
for payment of money bearing the legend "payment in full" or words of similar
import or any other restrictive legend or endorsement or be responsible for
determining the correctness of any remittance. Each Obligor hereby agrees to
indemnify the Administrative Agent and the Lenders from and against all
liabilities, damages, losses, actions, claims, judgments, costs, expenses,
charges and reasonable attorneys' fees suffered or incurred by the
Administrative Agent or the Lenders (each, an "Indemnified Party") because of
-----------------
the maintenance of the foregoing arrangements except as relating to or arising
out of the gross negligence or willful misconduct of an Indemnified Party or its
officers, employees or agents. In the case of any investigation, litigation or
other proceeding, the foregoing indemnity shall be effective whether or not such
investigation, litigation or proceeding is brought by an Obligor, its directors,
shareholders or creditors or an Indemnified Party or any other Person or any
other Indemnified Party is otherwise a party thereto.
(c) Access. In addition to the rights and remedies hereunder,
------
upon the occurrence of an Event of Default and during the continuation thereof,
the Administrative Agent shall have the right to enter and remain upon the
various premises of the Obligors without cost or charge to the Administrative
Agent, and use the same, together with materials, supplies, books and records of
the Obligors for the purpose of collecting and liquidating the Collateral, or
for preparing for sale and conducting the sale of the Collateral, whether by
foreclosure, auction or otherwise. In addition, the Administrative Agent may
remove Collateral, or any part thereof, from such premises and/or any records
with respect thereto, in order to effectively collect or liquidate such
Collateral.
(d) Nonexclusive Nature of Remedies. Failure by the
----------------------------------
Administrative Agent or the Lenders to exercise any right, remedy or option
under this Security Agreement, any other
13
<PAGE>
Credit Document, any Hedging Agreement or as provided by law, or any delay by
the Administrative Agent or the Lenders in exercising the same, shall not
operate as a waiver of any such right, remedy or option. No waiver hereunder
shall be effective unless it is in writing, signed by the party against whom
such waiver is sought to be enforced and then only to the extent specifically
stated, which in the case of the Administrative Agent or the Lenders shall only
be granted as provided herein. To the extent permitted by law, neither the
Administrative Agent, the Lenders, nor any party acting as attorney for the
Administrative Agent or the Lenders, shall be liable hereunder for any acts or
omissions or for any error of judgment or mistake of fact or law other than
their gross negligence or willful misconduct hereunder. The rights and remedies
of the Administrative Agents and the Lenders under this Security Agreement shall
be cumulative and not exclusive of any other right or remedy which the
Administrative Agent or the Lenders may have.
(e) Retention of Collateral. The Administrative Agent may, after
------------------------
providing the notices required by Section 9-505(2) of the UCC or otherwise
complying with the requirements of applicable law of the relevant jurisdiction,
to the extent the Administrative Agent is in possession of any of the
Collateral, retain the Collateral in satisfaction of the Secured Obligations.
Unless and until the Administrative Agent shall have provided such notices,
however, the Administrative Agent shall not be deemed to have retained any
Collateral in satisfaction of any Secured Obligations for any reason.
(f) Deficiency. Subject to applicable law, in the event that the
----------
proceeds of any sale, collection or realization are insufficient to pay all
amounts to which the Administrative Agent or the Lenders are legally entitled,
the Obligors shall be jointly and severally liable for the deficiency, together
with interest thereon at the default rate specified in Section 2.7 of the Credit
Agreement, together with the costs of collection and the reasonable fees of any
attorneys employed by the Administrative Agent to collect such deficiency. Any
surplus remaining after the full payment and satisfaction of the Secured
Obligations shall be returned to the Obligors or to whomsoever a court of
competent jurisdiction shall determine to be entitled thereto.
9. Rights of the Administrative Agent.
--------------------------------------
(a) Power of Attorney. In addition to other powers of attorney
-------------------
contained herein, each Obligor hereby designates and appoints the Administrative
Agent, on behalf of the Lenders, and each of its designees or agents, as
attorney-in-fact of such Obligor, irrevocably and with power of substitution,
with authority to take any or all of the following actions upon the occurrence
and during the continuation of an Event of Default:
(i) to demand, collect, settle, compromise, adjust, give
discharges and releases, all as the Administrative Agent may reasonably
determine;
(ii) to commence and prosecute any actions at any court for the
purposes of collecting any Collateral and enforcing any other right in respect
thereof;
14
<PAGE>
(iii) to defend, settle or compromise any action brought and, in
connection therewith, give such discharge or release as the Administrative Agent
may deem reasonably appropriate;
(iv) to receive, open and dispose of mail addressed to an Obligor
and endorse checks, notes, drafts, acceptances, money orders, bills of lading,
warehouse receipts or other instruments or documents evidencing payment,
shipment or storage of the goods giving rise to the Collateral of such Obligor
on behalf of and in the name of such Obligor, or securing, or relating to such
Collateral;
(v) to sell, assign, transfer, make any agreement in respect of,
or otherwise deal with or exercise rights in respect of, any Collateral or the
goods or services which have given rise thereto, as fully and completely as
though the Administrative Agent were the absolute owner thereof for all
purposes;
(vi) to adjust and settle claims under any insurance policy
relating thereto;
(vii) to execute and deliver all assignments, conveyances,
statements, financing statements, renewal financing statements, security
agreements, affidavits, notices and other agreements, instruments and documents
that the Administrative Agent may determine necessary in order to perfect and
maintain the security interests and liens granted in this Security Agreement and
in order to fully consummate all of the transactions contemplated therein;
(viii) to institute any foreclosure proceedings that the
Administrative Agent may deem appropriate; and
(ix) to do and perform all such other acts and things as the
Administrative Agent may reasonably deem to be necessary, proper or convenient
in connection with the Collateral.
This power of attorney is a power coupled with an interest and shall be
irrevocable (i) for so long as any of the Secured Obligations remain
outstanding, any Credit Document or any Hedging Agreement is in effect or any
Letter of Credit shall remain outstanding and (ii) until all of the Commitments
shall have been terminated. The Administrative Agent shall be under no duty to
exercise or withhold the exercise of any of the rights, powers, privileges and
options expressly or implicitly granted to the Administrative Agent in this
Security Agreement, and shall not be liable for any failure to do so or any
delay in doing so. The Administrative Agent shall not be liable for any act or
omission or for any error of judgment or any mistake of fact or law in its
individual capacity or its capacity as attorney-in-fact except acts or omissions
resulting from its gross negligence or willful misconduct. This power of
attorney is conferred
15
<PAGE>
on the Administrative Agent solely to protect, preserve and realize upon its
security interest in the Collateral.
(b) Performance by the Administrative Agent of Obligations. If
---------------------------------------------------------
any Obligor fails to perform any agreement or obligation contained herein, the
Administrative Agent itself may perform, or cause performance of, such agreement
or obligation, and the expenses of the Administrative Agent incurred in
connection therewith shall be payable by the Obligors on a joint and several
basis pursuant to Section 11 hereof.
(c) Assignment by the Administrative Agent. The Administrative
-----------------------------------------
Agent may from time to time assign the Secured Obligations and any portion
thereof and/or the Collateral and any portion thereof, and the assignee shall be
entitled to all of the rights and remedies of the Administrative Agent under
this Security Agreement in relation thereto.
(d) The Administrative Agent's Duty of Care. Other than the
--------------------------------------------
exercise of reasonable care to assure the safe custody of the Collateral while
being held by the Administrative Agent hereunder, the Administrative Agent shall
have no duty or liability to preserve rights pertaining thereto, it being
understood and agreed that the Obligors shall be responsible for preservation of
all rights in the Collateral, and the Administrative Agent shall be relieved of
all responsibility for the Collateral upon surrendering it or tendering the
surrender of it to the Obligors. The Administrative Agent shall be deemed to
have exercised reasonable care in the custody and preservation of the Collateral
in its possession if the Collateral is accorded treatment substantially equal to
that which the Administrative Agent accords its own property, which shall be no
less than the treatment employed by a reasonable and prudent agent in the
industry, it being understood that the Administrative Agent shall not have
responsibility for taking any necessary steps to preserve rights against any
parties with respect to any of the Collateral.
10. Application of Proceeds. Upon the occurrence and during the
-------------------------
continuation of an Event of Default, any payments in respect of the Secured
Obligations and any proceeds of the Collateral, when received by the
Administrative Agent or any of the Lenders in cash or its equivalent, will be
applied in reduction of the Secured Obligations as the Agent reasonably
determines, and each Obligor irrevocably waives the right to direct the
application of such payments and proceeds and acknowledges and agrees that the
Administrative Agent shall have the continuing and exclusive right to apply and
reapply any and all such payments and proceeds in the Administrative Agent's
sole discretion, notwithstanding any entry to the contrary upon any of its books
and records.
11. Costs of Counsel. If at any time hereafter, whether upon the
------------------
occurrence of an Event of Default or not, the Administrative Agent employs
counsel to prepare or consider amendments, waivers or consents with respect to
this Security Agreement, or to take action or make a response in or with respect
to any legal or arbitral proceeding relating to this Security Agreement or
relating to the Collateral, or to protect the Collateral or exercise any rights
or remedies under this Security Agreement or with respect to the Collateral,
then the Obligors agree to promptly pay upon demand any and all such reasonable
documented costs and expenses of the Administrative Agent or the Lenders, all of
which costs and expenses shall constitute Secured Obligations hereunder.
16
<PAGE>
12. Continuing Agreement.
---------------------
(a) This Security Agreement shall be a continuing agreement in
every respect and shall remain in full force and effect so long as any of the
Secured Obligations remain outstanding or any Credit Document or Hedging
Agreement is in effect or any Letter of Credit shall remain outstanding, and
until all of the Commitments thereunder shall have terminated (other than any
obligations with respect to the indemnities and the representations and
warranties set forth in the Credit Documents). Upon such payment and
termination, this Security Agreement shall be automatically terminated and the
Administrative Agent and the Lenders shall, upon the request and at the expense
of the Obligors, forthwith release all of its liens and security interests
hereunder and shall execute and deliver all UCC termination statements and/or
other documents reasonably requested by the Obligors evidencing such
termination. Notwithstanding the foregoing all releases and indemnities
provided hereunder shall survive termination of this Security Agreement.
(b) This Security Agreement shall continue to be effective or be
automatically reinstated, as the case may be, if at any time payment, in whole
or in part, of any of the Secured Obligations is rescinded or must otherwise be
restored or returned by the Administrative Agent or any Lender as a preference,
fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar
law, all as though such payment had not been made; provided that in the event
--------
payment of all or any part of the Secured Obligations is rescinded or must be
restored or returned, all reasonable costs and expenses (including without
limitation any reasonable legal fees and disbursements) incurred by the
Administrative Agent or any Lender in defending and enforcing such reinstatement
shall be deemed to be included as a part of the Secured Obligations.
13. Amendments; Waivers; Modifications. This Security Agreement and
------------------------------------
the provisions hereof may not be amended, waived, modified, changed, discharged
or terminated except as set forth in Section 9.1 of the Credit Agreement.
14. Successors in Interest. This Security Agreement shall create a
------------------------
continuing security interest in the Collateral and shall be binding upon each
Obligor, its successors and assigns and shall inure, together with the rights
and remedies of the Administrative Agent and the Lenders hereunder, to the
benefit of the Administrative Agent and the Lenders and their successors and
permitted assigns; provided, however, that none of the Obligors may assign its
-------- -------
rights or delegate its duties hereunder without the prior written consent of
each Lender or the Required Lenders, as required by the Credit Agreement. To
the fullest extent permitted by law, each Obligor hereby releases the
Administrative Agent and each Lender, and its successors and assigns, from any
liability for any act or omission relating to this Security Agreement or the
Collateral, except for any liability arising from the gross negligence or
willful misconduct of the Administrative Agent, or such Lender, or its officers,
employees or agents.
15. Notices. All notices required or permitted to be given under this
-------
Security Agreement shall be in conformance with Section 9.2 of the Credit
Agreement.
17
<PAGE>
16. Counterparts. This Security Agreement may be executed in any
------------
number of counterparts, each of which where so executed and delivered shall be
an original, but all of which shall constitute one and the same instrument. It
shall not be necessary in making proof of this Security Agreement to produce or
account for more than one such counterpart.
17. Headings. The headings of the sections and subsections hereof are
--------
provided for convenience only and shall not in any way affect the meaning or
construction of any provision of this Security Agreement.
18. Governing Law; Submission to Jurisdiction; Venue.
-----------------------------------------------------
(a) THIS SECURITY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or
proceeding with respect to this Security Agreement may be brought in the courts
of the State of North Carolina, or of the United States for the Western District
of North Carolina, and, by execution and delivery of this Security Agreement,
each Obligor hereby irrevocably accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of such courts. Each
Obligor further irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to it at the address
for notices pursuant to Section 9.2 of the Credit Agreement, such service to
become effective 30 days after such mailing. Nothing herein shall affect the
right of the Administrative Agent to serve process in any other manner permitted
by law or to commence legal proceedings or to otherwise proceed against any
Obligor in any other jurisdiction.
(b) Each Obligor hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid actions
or proceedings arising out of or in connection with this Security Agreement
brought in the courts referred to in subsection (a) hereof and hereby further
irrevocably waives and agrees not to plead or claim in any such court that any
such action or proceeding brought in any such court has been brought in an
inconvenient forum.
19. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
----------------------
EACH OF THE PARTIES TO THIS SECURITY AGREEMENT HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS SECURITY AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
20. Severability. If any provision of any of the Security Agreement is
------------
determined to be illegal, invalid or unenforceable, such provision shall be
fully severable and the remaining provisions
18
<PAGE>
shall remain in full force and effect and shall be construed without giving
effect to the illegal, invalid or unenforceable provisions.
21. Entirety. This Security Agreement, the other Credit Documents and
--------
the Hedging Agreements represent the entire agreement of the parties hereto and
thereto, and supersede all prior agreements and understandings, oral or written,
if any, including any commitment letters or correspondence relating to the
Credit Documents, the Hedging Agreements or the transactions contemplated herein
and therein.
22. Survival. All representations and warranties of the Obligors
--------
hereunder shall survive the execution and delivery of this Security Agreement,
the other Credit Documents and the Hedging Agreements, the delivery of the Notes
and the making of the Loans and the issuance of the Letters of Credit under the
Credit Agreement.
23. Other Security. To the extent that any of the Secured Obligations
---------------
are now or hereafter secured by property other than the Collateral (including,
without limitation, real property and securities owned by an Obligor), or by a
guarantee, endorsement or property of any other Person, then the Administrative
Agent and the Lenders shall have the right to proceed against such other
property, guarantee or endorsement upon the occurrence of any Event of Default,
and the Administrative Agent and the Lenders have the right, in their sole
discretion, to determine which rights, security, liens, security interests or
remedies the Administrative Agent and the Lenders shall at any time pursue,
relinquish, subordinate, modify or take with respect thereto, without in any way
modifying or affecting any of them or any of the Administrative Agent's and the
Lenders' rights or the Secured Obligations under this Security Agreement, under
any other of the Credit Documents or under any Hedging Agreement.
24. Joint and Several Obligations of Obligors.
----------------------------------------------
(a) Each of the Obligors is accepting joint and several liability
hereunder in consideration of the financial accommodation to be provided by the
Lenders under the Credit Agreement, for the mutual benefit, directly and
indirectly, of each of the Obligors and in consideration of the undertakings of
each of the Obligors to accept joint and several liability for the obligations
of each of them.
(b) Each of the Obligors jointly and severally hereby irrevocably
and unconditionally accepts, not merely as a surety but also as a co-debtor,
joint and several liability with the other Obligors with respect to the payment
and performance of all of the Secured Obligations arising under this Security
Agreement, the other Credit Documents and the Hedging Agreements, it being the
intention of the parties hereto that all the Obligations shall be the joint and
several obligations of each of the Obligors without preferences or distinction
among them.
(c) Notwithstanding any provision to the contrary contained herein
or in any other of the Credit Documents, to the extent the obligations of a
Guarantor shall be adjudicated to be invalid or unenforceable for any reason
(including, without limitation,
19
<PAGE>
because of any applicable state or federal law relating to fraudulent
conveyances or transfers) then the obligations of each Guarantor hereunder shall
be limited to the maximum amount that is permissible under applicable law
(whether federal or state and including, without limitation, the Bankruptcy
Code).
25. Rights of Required Lenders. All rights of the Administrative Agent
--------------------------
hereunder, if not exercised by the Administrative Agent, may be exercised by the
Required Lenders.
[remainder of page intentionally left blank]
20
<PAGE>
Each of the parties hereto has caused a counterpart of this Security
Agreement to be duly executed and delivered as of the date first above written.
U.S. BORROWERS: RACING CHAMPIONS, INC.,
- ---------------
an Illinois corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name:Curtis W. Stoelting
---------------------
Title:Executive Vice President
--------------------------
RACING CHAMPIONS SOUTH, INC.,
a North Carolina corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name:Curtis W. Stoelting
---------------------
Title:Executive Vice President
--------------------------
U.K. BORROWER: RACING CHAMPIONS WORLDWIDE
- --------------
LIMITED,
a United Kingdom corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name:Curtis W. Stoelting
---------------------
Title:Director
--------
21
<PAGE>
GUARANTORS: RACING CHAMPIONS CORPORATION,
- ----------
a Delaware corporation
GREEN'S RACING SOUVENIRS, INC.,
a Virginia corporation
RCNA HOLDINGS, INC.,
a Delaware corporation
THE ERTL COMPANY, INC.,
a Delaware corporation
ERTL DIRECT, INC.,
a Delaware corporation
By:/s/ Curtis W. Stoelting
--------------------------
Name:Curtis W. Stoelting
---------------------
Title:Executive Vice President
--------------------------
22
<PAGE>
AGENT: FIRST UNION NATIONAL BANK,
- ------
as Administrative Agent and as a Lender
By:/s/ Kent Davis
----------------
Name:Kent Davis
-----------
Title:
23
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 13,995
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<RECEIVABLES> 71,084
<ALLOWANCES> 5,213
<INVENTORY> 39,534
<CURRENT-ASSETS> 131,309
<PP&E> 49,422
<DEPRECIATION> 11,910
<TOTAL-ASSETS> 309,377
<CURRENT-LIABILITIES> 76,226
<BONDS> 142,000
0
0
<COMMON> 190
<OTHER-SE> 90,152
<TOTAL-LIABILITY-AND-EQUITY> 309,377
<SALES> 82,631
<TOTAL-REVENUES> 88,019
<CGS> 39,317
<TOTAL-COSTS> 47,250
<OTHER-EXPENSES> 25,090
<LOSS-PROVISION> 287
<INTEREST-EXPENSE> 2,563
<INCOME-PRETAX> 6,772
<INCOME-TAX> 2,897
<INCOME-CONTINUING> 3,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-BASIC> 0.24
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