U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File Number 0-21630
Action Performance Companies, Inc.
----------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0704792
------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2401 W. 1st St., Tempe, AZ 85281
--------------------------------
(Address of Principal Executive Offices)
(602) 894-0100
--------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes xx No
----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 13,713,485 shares of common
stock (as of May 12, 1997).
<PAGE>
PART I, ITEM 1 FINANCIAL STATEMENTS
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and September 30, 1996
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash.................................................. $ 2,978,623 $ 4,983,382
Accounts receivable, net of allowance for doubtful
accounts of $895,140 and $256,324, respectively..... 11,965,253 7,496,988
Inventories........................................... 13,810,128 5,833,812
Deferred income taxes................................. 1,031,619 1,031,619
Prepaid royalties..................................... 3,886,237 2,295,505
Prepaid expenses and other assets..................... 784,773 739,723
----------- -----------
Total current assets................................ 34,456,633 22,381,029
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation of $4,783,858 and $3,362,939, respectively 12,451,260 8,188,441
GOODWILL, net of accumulated amortization of $504,405 and
$9,519, respectively.................................. 33,310,042 56,370
NOTES RECEIVABLE AND OTHER ASSETS....................... 1,301,021 1,022,794
----------- -----------
$81,518,956 $31,648,634
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable...................................... $ 6,489,336 $ 2,188,343
Accrued royalties..................................... 2,942,881 1,180,038
Line of credit........................................ 4,500,000 -
Income taxes payable.................................. 243,052 521,547
Accrued expenses and other............................ 1,078,708 397,529
----------- -----------
Total current liabilities........................... 15,253,977 4,287,457
LONG TERM DEBT:
Notes payable......................................... 21,398,183 -
Other long term debt.................................. 906,516 364,725
----------- -----------
Total long term debt................................ 22,304,699 364,725
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding.......... - -
Common stock, $.01 par value, 25,000,000 shares
authorized; 13,713,485 and 12,609,769 shares,
respectively, issued and outstanding................ 137,135 126,098
Additional paid-in capital............................ 31,938,922 18,991,296
Retained earnings..................................... 11,884,223 7,879,058
----------- -----------
Total shareholders' equity.......................... 43,960,280 26,996,452
----------- -----------
$81,518,956 $31,648,634
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
2
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six and Three Month Periods Ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31 March 31
------------------------ -------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Sales:
Collectibles..................... $23,521,573 $17,046,904 $13,650,006 $ 9,349,603
Apparel and souvenirs............ 18,333,520 725,328 13,121,088 416,393
Promotional ..................... 1,354,826 - 1,304,666 -
Other............................ 267,759 - 226,716 -
----------- ----------- ----------- -----------
Net sales..................... 43,477,678 17,772,232 28,302,476 9,765,996
Cost of sales....................... 26,301,654 10,583,762 17,521,215 5,818,946
----------- ----------- ----------- -----------
Gross profit........................ 17,176,024 7,188,470 10,781,261 3,947,050
Selling, general and
administrative expenses........... 9,750,462 3,966,700 6,198,741 2,094,966
----------- ----------- ----------- -----------
Income from operations.............. 7,425,562 3,221,770 4,582,520 1,852,084
Other income (expense):
Interest income and other, net.... 166,154 188,424 94,237 86,715
Interest expense.................. (916,441) (47,407) (615,035) (38,970)
----------- ----------- ----------- -----------
Total other income (expense).... (750,287) 141,017 (520,798) 47,745
----------- ----------- ----------- -----------
Income before provision for
income taxes...................... 6,675,275 3,362,787 4,061,722 1,899,829
Provision for income taxes.......... 2,670,110 1,345,115 1,624,690 759,932
----------- ----------- ----------- -----------
NET INCOME.......................... $ 4,005,165 $ 2,017,672 $ 2,437,032 $ 1,139,897
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Primary........................... $ 0.29 $ 0.16 $ 0.17 $ 0.09
============ =========== =========== ===========
Fully Diluted .................... $ 0.29 $ 0.16 $ 0.17 $ 0.09
============ =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary........................... 13,786,339 12,861,232 14,129,020 12,913,288
============ ============ =========== ===========
Fully Diluted .................... 13,799,126 12,948,412 14,129,067 12,983,544
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Shares Paid-In Retained
Issued Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1996 12,609,769 $126,098 $18,991,296 $ 7,879,058 $26,996,452
---------- -------- ----------- ----------- -----------
Common stock issued upon
exercise of options............ 169,998 1,700 745,035 - 746,735
Common stock issued upon
purchase of business........... 746,218 7,462 9,604,636 - 9,612,098
Issuance Of Common Stock ....... 187,500 1,875 2,597,955 - 2,599,830
Net Income...................... - - - 4,005,165 4,005,165
---------- -------- ----------- ---------- -----------
BALANCE, March 31, 1997 13,713,485 $137,135 $31,938,922 $11,884,223 $43,960,280
========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 1997 and 1996
(Unaudited)
1997 1996
------------ -----------
Cash Flows from Operating Activities:
Net Income ................................ $ 4,005,165 $ 2,017,672
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization .......... 1,915,805 714,760
Change in assets and liabilities:
Accounts receivable .................. 1,153,522 (1,213,978)
Inventories .......................... (2,794,169) (1,295,244)
Prepaid royalties .................... (1,590,732) (1,205,751)
Prepaid expenses and other assets .... (171,366) (363,550)
Accounts payable ..................... (736,421) 321,928
Income taxes payable ................. (278,495) (872,228)
Accrued royalties and other .......... 981,956 4,868
----------- -----------
Net cash provided by (used in)
operating activities ............... 2,485,265 (1,891,523)
Cash Flows from Investing Activities:
Acquisition of property and equipment ... (3,635,416) (2,377,549)
Proceeds from sale of equipment ......... 110,781 --
Cash acquired in purchase of business ... 1,140,363 --
----------- -----------
Net cash used in investing activities . (2,384,272) (2,377,549)
Cash Flows from Financing Activities:
Borrowings on line of credit ............ 4,378,583 3,235,599
Payments on line of credit .............. (5,278,583) (3,235,599)
Proceeds from issuance of common stock .. 3,346,565 867,513
Payments on notes payable ............... (4,419,984) --
Principal payments on capital lease
obligation and other ................... (132,333) (48,828)
----------- -----------
Net cash provided by (used in)
financing activities ................. (2,105,752) 818,685
----------- -----------
Decrease in Cash ........................ (2,004,759) (3,450,387)
Cash, Beginning of Period ............... 4,983,382 6,759,984
----------- -----------
Cash, End of Period ..................... $ 2,978,623 $ 3,309,597
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
5
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(1) INTERIM FINANCIAL REPORTING
The accompanying unaudited Consolidated Financial Statements for Action
Performance Companies, Inc. (the "Company")have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for the periods
presented have been made. The results of operations for the six-month period
ended March 31, 1997 are not necessarily indicative of the operating results
that may be expected for the entire year ending September 30, 1997. Certain
prior period amounts have been reclassified to conform to the March 31, 1997
presentation. These financial statements should be read in conjunction with the
Company's Form 10-KSB for the fiscal year ended September 30, 1996.
(2) INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or market,
and consist of the following at March 31, 1997:
Raw materials.............................. $ 1,902,282
Finished goods............................. 11,907,846
-----------
$13,810,128
===========
(3) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to ten years.
Property and equipment consist of the following at March 31, 1997:
Tooling and molds.......................... $11,167,958
Furniture, fixtures and equipment.......... 3,331,961
Autos and trucks........................... 1,908,301
Leasehold improvements..................... 826,898
-----------
17,235,118
Less - accumulated depreciation............ 4,783,858
-----------
$12,451,260
===========
The cost of renewals and betterments that materially extend the useful lives of
assets or increase their productivity are capitalized.
(4) NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average number of
common shares and common share equivalents outstanding using the treasury stock
method, except when common share equivalents have an antidilutive effect. All
share amounts and per share data have been restated to reflect the two-for-one
stock split effected as a stock dividend on May 28, 1996.
(5) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the six months ended March 31, 1997 and 1996 included
interest of $427,629 and $42,758, respectively, and income taxes of $2,981,000
and $2,270,000, respectively.
6
<PAGE>
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image, Inc. ("Sports Image") for
approximately $30,000,000, consisting of a $24,000,000 promissory note due
January 2, 1997 and 403,361 shares of the Company's common stock. On January 8,
1997, the Company acquired the business and substantially all of the assets and
assumed specified liabilities of Motorsport Traditions Limited Partnership
("MTL") and acquired all of the capital stock of Creative Marketing &
Promotions, Inc. ("CMP" and, together with MTL, "Motorsport Traditions") for
approximately $13,000,000. The consideration paid for Motorsport Traditions
consisted of (i) cash in the amount of $5,400,000; (ii) a promissory note in the
principal amount of $1,600,000 issued by a wholly owned subsidiary of the
Company; and (iii) an aggregate of 342,857 shares of the Company's Common Stock.
Non-cash financing, investing, and operating activities for the six months ended
March 31, 1997 include (i) a $9,612,098 increase to common stock issued for the
acquisitions; (ii) a $38,391,771 increase of debt and liabilities incurred or
assumed in the acquisitions; and (iii) a $13,114,948 increase of assets, net of
cash acquired in the acquisitions.
Investing activities for the six-month period ended March 31, 1997 included the
sale of approximately $556,000 in equipment for cash proceeds of approximately
$111,000 and notes receivable of approximately $445,000.
(6) INCOME TAXES
Income taxes for the six-month period ended March 31, 1997 were calculated by
applying the estimated effective tax rate for the fiscal year to the income
before taxes.
(7) BUSINESS COMBINATIONS
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image. The purchase price was
approximately $30,000,000, consisting of a $24,000,000 promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock. On January 2,
1997, the Company repaid the $24,000,000 promissory note with the proceeds from
the issuance of senior notes and a portion of the borrowings under the Company's
new credit facility. See Note 8. Sports Image sells and distributes a variety of
licensed motorsports products through wholesale distributor networks, corporate
sponsors, and mobile trackside stores. Terms of this acquisition were determined
by arms-length negotiations between representatives of Sports Image and
representatives of the Company. In fiscal 1996, the Company derived 16% of its
net sales from Sports Image, a distributor of the Company's die-cast collectible
products. Sports Image had sales of approximately $41,800,000 of apparel,
die-cast replicas, souvenirs, and other motorsports consumer products during the
period from January 1, 1996 to November 7, 1996 (which includes sales of
die-cast collectibles purchased from the Company at an aggregate cost of
approximately $5,800,000). This transaction was accounted for as a purchase.
On January 8, 1997, the Company acquired the business and substantially all of
the assets and assumed specified liabilities of Motorsport Traditions from 1995
Nascar Winston Cup Champion driver Jeff Gordon, Kenneth R. Barbee, certain
entities controlled by Mr. Barbee, and certain other persons. The effective date
of the acquisition of Motorsport Traditions is January 1, 1997. The purchase
price paid by the Company for Motorsport Traditions consisted of (i) cash in the
amount of $5,400,000; (ii) a promissory note in the principal amount of
$1,600,000 issued by a wholly owned subsidiary of the Company; and (iii) an
aggregate of 342,857 shares of the Company's Common Stock. The promissory note
bears interest at 4% per annum, matures on December 31, 1998, and has been
guaranteed by the Company. The terms of the acquisition, including the valuation
of the assets, liabilities, and capital stock acquired by the Company, were
determined by arms-length negotiations between representatives of the sellers
and representatives of the Company. Motorsport Traditions sells and distributes
licensed motorsports products through a network of wholesale distributors and
mobile trackside stores. Prior to the acquisitions, MTL and CMP together
generated approximately $33,000,000 in annual revenues from their design,
manufacturing, and sales and distribution activities. This transaction was
accounted for as a purchase.
Unaudited pro forma income statement data
The following unaudited pro forma combined financial information of Action
Performance Companies, Inc. for the six-month period ended March 31, 1997, gives
effect to the acquisitions of Sports Image and Motorsport
7
<PAGE>
Traditions, as if they had occurred on October 1, 1996 using the purchase method
of accounting for business combinations. The unaudited pro forma combined
financial information presented herein does not purport to represent what the
Company's actual results of operations would have been had the acquisitions of
Sports Image and Motorsport Traditions occurred on that date or to project the
Company's results of operations for any future period.
Six Months Ended
March 31, 1997
--------------
(Unaudited)
Net Sales $54,948,000
Operating Income 7,469,000
Net Income 3,651,000
Net Income Per Common Share $0.26
(8) FINANCING ACTIVITIES
Credit Facility
On January 2, 1997, the Company entered into a $16,000,000 credit facility (the
"Credit Facility") with First Union National Bank of North Carolina. The Credit
Facility consists of a revolving line of credit for up to $10,000,000 through
September 30, 1997, and up to $6,000,000 from September 30, 1997 to March 31,
1998 (the "Line of Credit") and a $6,000,000 letter of credit/bankers'
acceptances facility (the "Letter of Credit/BA Facility"). The Line of Credit
bears interest, at the Company's option, at a rate equal to either (i) the
greater of (a) the bank's publicly announced prime rate or (b) a weighted
average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line of
Credit is guaranteed by Sports Image and Motorsport Traditions. The Company
utilized $4,000,000 of the Line of Credit to provide part of the cash portion of
the purchase price for Motorsport Traditions and an additional $4,000,000 of the
Line of Credit to repay a portion of the $24,000,000 promissory note issued in
connection with the acquisition of Sports Image. The Letter of Credit/BA
facility is available for issuances of letters of credit and eligible bankers'
acceptances in an aggregate amount up to $6,000,000 to enable the Company to
finance purchases of products from its overseas vendors. The Credit Facility
will mature on March 31, 1998. The Credit Facility contains certain provisions
that, among other things, will require the Company to comply with certain
financial ratios and net worth requirements and will limit the ability of the
Company and its subsidiaries to incur additional indebtedness or to sell assets
or engage in certain mergers or consolidations.
Sale of Senior Notes
On January 2, 1997, the Company issued an aggregate of $20,000,000 principal
amount of senior notes (the "Senior Notes") to three insurance companies. The
Senior Notes bear interest at the rate of 8.05% per annum, provide for
semi-annual payments of accrued interest, and will mature on January 2, 1999.
The Company may not prepay the Senior Notes prior to maturity, but will be
required to offer to redeem the Senior Notes in the event of a "Change of
Control" of the Company, as defined in the Senior Notes. The Senior Notes
contain certain provisions that, among other things, will require the Company to
comply with certain financial ratios and net worth requirements and will limit
the ability of the Company and its subsidiaries to incur additional indebtedness
or to sell assets or engage in certain mergers or consolidations. The Senior
Notes are guaranteed by Sports Image and Motorsport Traditions. The Company
utilized the proceeds from the Senior Notes to repay the remainder of the
promissory note issued in connection with the acquisition of Sports Image.
(9) COMMITMENTS AND CONTINGENCIES
The Company is subject to certain asserted and unasserted claims encountered in
the normal course of business. In the opinion of management, the resolution of
these matters will not have a material adverse effect on the Company's financial
position or result of operations.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Overview
The Company designs and markets licensed motorsports products, including
die-cast scaled replicas of motorsports vehicles, apparel, and souvenirs. The
Company also develops promotional programs for sponsors of motorsports that
feature the Company's die-cast replicas or other products and are intended to
increase brand awareness of the products or services of the corporate sponsors.
In addition, the Company represents popular race car drivers in a broad range of
licensing and other revenue-producing opportunities, including product licenses,
corporate sponsorships, endorsement contracts, and speaking engagements. The
Company's motorsports collectibles and consumer products are manufactured by
third parties, generally utilizing the Company's designs, tools, and dies.
The Company was incorporated in Arizona in May 1992 and began marketing
die-cast collectibles in July 1992. In August 1994, the Company acquired certain
assets and liabilities of Fan Fueler, Inc. and began marketing licensed
motorsports consumer products. During fiscal 1994, the Company also conducted
the business of staging M-Car(TM) Grand Prix Races for charitable and other
organizations, in which participating sponsors purchased specialized
gas-powered, one-third scale racing vehicles from the Company. In September
1994, the Company sold the assets and liabilities related to its M-Car(TM)
operations and discontinued its M-Car(TM) Grand Prix Race operations. During
fiscal 1994 and the first two quarters of fiscal 1995, the Company designed and
marketed pedal, electric, and gas-powered mini vehicles, primarily as specialty
promotional items. The Company sold the assets related to its mini vehicle
operations in March 1995.
In November 1996, the Company acquired Sports Image and in January 1997 the
Company acquired Motorsport Traditions, both of which market and distribute
licensed motorsports apparel and other souvenir items. Following these
acquisitions, the Company took a number of actions intended to integrate the
operations of the acquired companies with the Company's existing operations and
to reduce overall selling, general, and administrative expenses associated with
the acquired entities. These actions included consolidating the operations of
Motorsport Traditions with Sports Image's existing operations and facility in
Charlotte, North Carolina; reducing the total number of employees in Charlotte
from 201 in January 1997 to 120 as of May 15, 1997; and integrating the
management information systems of the acquired companies. The Company believes
that these efforts will have a meaningful impact on the Company's results of
operations beginning in the third quarter of fiscal 1997.
In addition to the anticipated cost savings described above, the Company also
believes that the acquisitions of Sports Image and Motorsport Traditions provide
the potential for enhanced revenue opportunities as a result of the synergies
created by expanded product offerings and additional distribution channels. For
example, the Company intends to develop new lines of licensed motorsports
apparel and souvenirs for exclusive sales through its collectors' club. The
Company also believes that Sports Image and Motorsport Traditions will provide
opportunities for additional sales growth of the Company's die-cast products
through trackside sales, promotional programs, and fan clubs.
Prior to the acquisitions of Sports Image and Motorsport Traditions, the
Company's revenue consisted primarily of sales of die-cast collectibles, while
the revenue of Sports Image and Motorsport Traditions consisted primarily of
sales of licensed motorsports apparel and souvenirs. The Company believes that
the increased sales of licensed apparel and souvenirs following the acquisitions
of Sports Image and Motorsport Traditions will result in lower overall gross
margins as a result of lower gross margins generally associated with these
acquired product lines. The Company believes, however, that the effect of these
lower gross margins will be mitigated at least to some extent by cost reductions
and other operational efficiencies associated with the combination of the
acquired entities. The Company also believes that gross and net margins will
increase in the future as a result of the license agreement with Hasbro, which
provides the Company with the opportunity to recognize significant license
royalties without any significant related cost of sales and without committing
9
<PAGE>
substantial capital for manufacturing and marketing activities. In addition, the
Company believes that its new license arrangement with NASCAR will enhance sales
of its existing products as well as provide a number of opportunities for
developing new corporate promotional programs and one or more new fan clubs.
The Company's cost of sales consists primarily of the cost of products
procured from third-party manufacturers, royalty payments to licensors, and
depreciation of tooling and dies. Significant factors affecting the Company's
cost of sales as a percentage of net sales include (i) the overall percentage of
net sales represented by sales of die-cast collectible products, which typically
carry higher gross margins than the Company's other products, (ii) the
percentage of sales of die-cast collectible products represented by sales
through the collectors' club, which typically carry higher gross margins than
sales of such products through wholesale distributors, and (iii) the effect of
amortizing the fixed cost components of cost of sales, primarily depreciation of
tooling and dies, over varying levels of net sales. Selling, general, and
administrative expenses include general corporate expenses as well as goodwill
amortization. The Company recorded goodwill of approximately $33.7 million in
connection with the acquisition of Sports Image and Motorsport Traditions. The
goodwill is being amortized at the rate of $1.4 million per year over 25 years.
As described above, the Company anticipates that it will achieve a significant
reduction in selling, general, and administrative expenses as a percentage of
sales as a result of the cost-reduction efforts taken following the acquisitions
of Sports Image and Motorsport Traditions.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total revenue represented by certain expense and revenue items.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Collectibles .................. 54.1% 95.9% 48.2% 95.7%
Apparel and souvenirs ......... 42.2% 4.1% 46.4% 4.3%
Promotional ................... 3.1% 0.0% 4.6% 0.0%
Other ......................... 0.6% 0.0% .8% 0.0%
------ ------ ------ ------
Net sales ................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 60.5% 59.6% 61.9% 59.6%
------ ------ ------ ------
Gross Profit .......................... 39.5% 40.4% 38.1% 40.4%
Selling, general and administrative
expenses ............................. 22.4% 22.3% 21.9% 21.5%
------ ------ ------ ------
Income from operations ................ 17.1% 18.1% 16.2% 18.9%
Interest income (expense) and other,net (1.7%) 0.8% (1.8%) .5%
------ ------ ------ ------
Income before benefit from
(provision for) income taxes ......... 15.4% 18.9% 14.4% 19.4%
Benefit from (provision for)
income taxes ................ (6.2%) (7.5%) (5.8%) (7.7%)
------ ------ ------ ------
Net income ............................ 9.2% 11.4% 8.6% 11.7%
</TABLE>
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
Net sales increased 189.8% to $28.3 million for the three months ended
March 31, 1997 from $9.8 million for the three months ended March 31, 1996. The
Company attributes the improvement in sales during the second quarter of fiscal
1997 primarily to (i) additional revenue streams from Sports Image and
Motorsport Traditions, which were acquired by the Company during the first and
second quarters of fiscal 1997, respectively; (ii) the continued expansion of
the die-cast collectible market and the Company's ability to produce and sell
increased quantities of collectibles; and (iii) an increase in collectors' club
membership. The number of members in the collectors' club increased from
approximately 56,000 members to approximately 86,000 members at March 31, 1996
and March 31, 1997, respectively.
Gross profit increased to $10.8 million for the three months ended
March 31, 1997, from $3.9 million for the three months ended March 31, 1996,
representing 38.1% and 40.4% of net sales, respectively. The decrease in gross
profit percentage for the three-month period ended March 31, 1997 resulted from
the increased sales of apparel and souvenirs, which typically provide lower
margins than sales of the Company's collectible products. The decrease was
partially offset by improved gross margins related to sales of the Company's
die-cast collectibles.
10
<PAGE>
Selling, general and adminstrative expenses increased to $6.2 million for the
three-month period ended March 31, 1997 from $2.1 million for the three months
ended March 31, 1996, representing 21.9% and 21.5% of net sales, respectively.
The increase in such expenses resulted primarily from (i) the operating expenses
of Sports Image and Motorsport Traditions, which the Company acquired in the
first and second quarters of fiscal 1997; (ii) increased sales and marketing
expenditures, particularly increased advertising consistent with the Company's
strategy to increase collectors' club memberships and distributor sales; and
(iii) an increase of $340,000 in goodwill amortization associated with the
acquisition of Sports Image and Motorsport Traditions.
The change in interest income (expense) and other, net, was primarily
attributable to an increase in interest expense of $576,000 related to debt
incurred in connection with the acquisitions of Sports Image and Motorsport
Traditions.
Six Months Ended March 31, 1997 Compared with Six Months Ended March 31, 1996
Net sales increased 144.4% to $43.5 million for the six months ended March
31, 1997 from $17.8 million for the six months ended March 31, 1996. The Company
attributes the improvement in sales during the first six months of fiscal 1997
primarily to (i) additional revenue streams from Sports Image and Motorsport
Traditions, which were acquired by the Company during the first and second
quarters of fiscal 1997, respectively; (ii) the continued expansion of the
die-cast collectible market and the Company's ability to produce and sell
increased quantities of collectibles; and (iii) an increase in collectors' club
membership. The number of members in the collectors' club increased from
approximately 56,000 members to approximately 86,000 members at March 31, 1996
and March 31, 1997, respectively.
Gross profit increased to $17.2 million for the six months ended March 31,
1997 from $7.2 million for the six months ended March 31, 1996, representing
39.5% and 40.5% of net sales, respectively. The decrease in the gross profit as
a percentage of net sales for the six-month period ended March 31, 1997 resulted
from increased sales of apparel and souvenirs, which typically provide lower
margins than sales of the Company's collectible products. The decrease was
partially offset by improved gross margins related to sales of the Company's
die-cast collectibles.
Selling, general and adminstrative expenses increased to $9.8 million for the
six-month period ended March 31, 1997 from $4.0 million for the six-months ended
March 31, 1996, representing 22.4% and 22.3% of net sales, respectively. The
increase in such expenses resulted primarily from (i) the operating expenses of
Sports Image and Motorsport Traditions, which the Company acquired in the first
and second quarters of fiscal 1997; (ii) increased sales and marketing
expenditures, particularly increased advertising consistent with the Company's
strategy to increase collectors' club memberships and distributor sales; and
(iii) an increase of $493,000 in goodwill amortization associated with the
acquisition of Sports Image and Motorsport Traditions.
The change in interest income (expense) and other, net, was primarily
attributable to an increase in interest expense of $869,000 related to debt
incurred in connection with the acquisitions of Sports Image and Motorsport
Traditions.
Pro Forma Results of Operations
The Company had pro forma net income for the six months ended March 31,
1997 of $3.7 million, or $0.26 per share, compared with actual net income of
$4.0 million, or $0.29 per share. The difference in earnings per share on a pro
forma basis for the six months ended March 31, 1997 is primarily attributable to
lower gross margins as a result of the liquidation of inventory following the
end of the 1996 racing season by the acquired entities prior to the date of
acquisition. The Company intends to improve the management and control of
inventories of the acquired companies in order to reduce the need for seasonal
adjustments to inventory. The pro forma results of operations for the six months
ended March 31, 1997 reflect the amortization of goodwill arising from the
acquisitions of Sports Image and Motorsport Traditions and include additional
interest expense associated with the financing of these acquisitions. The pro
forma results do not account for efficiencies gained upon the consolidation of
operations, including the elimination of duplicative functions and reduction of
salaries expense and other related costs.
Seasonality
Because the auto racing season is concentrated between the months of February
and November, the second and third calendar quarters of each year (the Company's
third and fourth fiscal quarters) generally are characterized by higher sales of
motorsports products. The Company believes, however, that holiday sales of its
products are increasing, which has the effect of reducing seasonal fluctuations
in its sales.
Liquidity and Capital Resources
The Company's working capital position increased to $19.2 million at
March 31, 1997 from $18.1 million at September 30, 1996. The increase of $1.1
million is primarily attributable to the Company's results of operations and
working capital acquired from the purchase of Sports Image and Motorsports
Tradition by the Company.
Capital expenditures for the six months ended March 31, 1997 totaled
approximately $3.6 million, of which approximately $3.0 million was utilized for
the Company's continued investment in tooling.
11
<PAGE>
On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro, Inc. at a price of $14.50 per share, with net proceeds
to the Company of approximately $2.6 million. The Company has agreed that, in
the event that Hasbro sells such shares at a price lower than $14.50 per share
during the one-year period ending on April 16, 1998, the Company will reimburse
Hasbro for the amount of such loss, plus interest.
During the six months ended March 31, 1997, the Company issued 169,998
shares of Common Stock upon the exercise of employee stock options, resulting in
total proceeds to the Company of approximately $747,000.
In November 1996, the Company purchased substantially all of the assets
and assumed certain liabilities of Sports Image, Inc. The purchase price was
approximately $30.0 million, consisting of a $24.0 million promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock. On January 2,
1997, the Company repaid the promissory note with the proceeds from the issuance
of senior notes and a portion of the borrowings under the credit facility
described below. The terms of this acquisition were determined by arms-length
negotiations between representatives of Sports Image and representatives of the
Company. In fiscal 1996, the Company derived approximately 16% of its net sales
from Sports Image, a distributor of the Company's die-cast collectible products.
In January 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Motorsport Traditions Limited Partnership and
acquired all of the capital stock of Creative Marketing & Promotions, Inc. for
approximately $13.0 million, consisting of cash in the amount of $5.4 million, a
promissory note in the principal amount of $1.6 million, and an aggregate of
342,857 shares of the Company's Common Stock. The terms of the acquisitions were
determined by arms-length negotiations between representatives of the sellers
and representatives of the Company.
On January 2, 1997, the Company entered into the $16.0 million credit
facility (the "Credit Facility") with First Union National Bank of North
Carolina. The Credit Facility consists of a revolving line of credit (the "Line
of Credit") for up to $10.0 million through September 30, 1997 and up to $6.0
million from September 30, 1997 to March 31, 1998, and a $6.0 million letter of
credit/bankers' acceptances facility (the "Letter of Credit/BA Facility"). The
Line of Credit bears interest, at the Company's option, at a rate equal to
either (i) the greater of (a) the bank's publicly announced prime rate or (b) a
weighted average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line
of Credit is guaranteed by Sports Image and Motorsport Traditions. The Company
utilized $4.0 million of the Line of Credit to provide part of the cash portion
of the purchase price for Motorsport Traditions and an additional $4.0 million
of the Line of Credit to repay a portion of the $24.0 million promissory note
issued in connection with the acquisition of Sports Image. The Letter of
Credit/BA Facility is available for issuances of letters of credit and eligible
bankers' acceptances in an aggregate amount up to $6.0 million to enable the
Company to finance purchases of products from its overseas vendors. The Company
had outstanding purchase commitments of approximately $5.4 million under the
Letter of Credit/BA Facility as of March 31, 1997. The Credit Facility will
mature on March 31, 1998. The Credit Facility contains certain provisions that,
among other things, will require the Company to comply with certain financial
ratios and net worth requirements and will limit the ability of the Company and
its subsidiaries to incur additional indebtedness or to sell assets or engage in
certain mergers or consolidations.
12
<PAGE>
On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of senior notes (the "Senior Notes") to three insurance
companies. The Senior Notes bear interest at the rate of 8.05% per annum,
provide for semi-annual payments of accrued interest, and will mature on January
2, 1999. The Company may not prepay the Senior Notes prior to maturity, but will
be required to offer to redeem the Senior Notes in the event of a "Change of
Control" of the Company, as defined in the Senior Notes. The Senior Notes
contain certain provisions that, among other things, will require the Company to
comply with certain financial ratios and net worth requirements and will limit
the ability of the Company and its subsidiaries to incur additional indebtedness
or to sell assets or engage in certain mergers or consolidations. The Senior
Notes are guaranteed by Sports Image and Motorsport Traditions. The Company
utilized the proceeds from the Senior Notes to repay the remainder of the
promissory note issued in connection with the acquisition of Sports Image.
The Company is a defendant in various lawsuits. The Company has made no
provision in its financial statements with respect to these matters. The
imposition of damages in one or more of the cases against the Company could have
a material adverse effect on the Company's financial position.
The Company believes that its current cash resources, the Credit
Facility, and expected cash flow from operations will be sufficient to fund the
Company's capital needs during the next 12 months at its current level of
operations, apart from capital needs resulting from any additional acquisitions.
However, the Company may be required to obtain additional capital to fund its
planned growth during the next 12 months and beyond. Potential sources of any
such capital may include the proceeds from the exercise of outstanding options,
bank financing, strategic alliances, and additional offerings of the Company's
equity or debt securities. There can be no assurance that such capital will be
available from these or other potential sources, and the lack of such capital
could have a material adverse affect on the Company's business.
-------------------------------------
This report contains forward-looking statements, including statements
regarding the Company's business strategies, the Company's business, and the
industry in which the Company operates. These forward-looking statements are
based primarily on the Company's expectations and are subject to a number of
risks and uncertainties, some of which are beyond the Company's control. Actual
results could differ materially from the forward-looking statements as a result
of numerous factors, including those set forth in the Company's Form 10-KSB for
the year ended September 30, 1996, as filed with the Securities and Exchange
Commission.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation and Environmental Matters
On May 17, 1993, the state of Arizona (the "State") instituted
a lawsuit against the Company and 29 other defendants in the
United States district Court for the District of Arizona. The
State seeks recovery of certain clean-up costs under federal
and state environmental laws. Specifically, the State seeks
recovery of expenses that it has incurred to date for an
environmental investigation and clean-up of property formerly
used as a site for recycling hazardous wastes. The State
alleges that the property has been contaminated with hazardous
substances. In addition, the State seeks a declaratory
judgment that the Company and the other defendants are jointly
and severally liable for all future costs incurred by the
State for investigative and remedial activities, and seeks a
mandatory permanent injunction requiring the Company to
undertake appropriate assessment and remedial action at the
property. The State has not specified the amounts it seeks to
collect from the Company. The State alleges that F.W. Leisure
Industries, Inc. and/or F.W. & Associates, Inc. were
predecessors of the Company that produced and arranged for the
transportation of hazardardous substances to the property
involved in the lawsuit. The Company is defending this lawsuit
on various bases including that F.W. Leisure Industries, Inc.
and/or F.W. & Associates, Inc. were not predecessors of the
Company and that neither the Company nor any predecessor of
the Company has ever produced or transported hazardous
substances as alleged by the State. The State has settled a
portion of its claims with respect to a large number of the
other defendants to the lawsuit. The Company is not a party to
that settlement. On February 1, 1995, a number of the
defendants that agreed to the settlement with the State were
granted leave to file, and subsequently did file a cross-claim
against the company seeking indemnity from the Company based
on the same predecessor liability theory asserted by the
State. The parties have conducted discovery limited to the
issue of any defendant's status as a responsible party and
regarding the Company's status as a successor corporation.
On March 25, 1997, the Court ruled that under federal
environmental law the Company would be treated as the
successor to F.W. & Associates, Inc., and/or F.W. Leisure
Industries, Inc. The Company may appeal this ruling at the
appropriate time. Discovery is now ongoing with regard to the
merits of the underlying environmental claims and the amount
of those claims. The Company currently estimates the potential
range of loss to be between $400,000 and $800,000 in the event
that its defense proves unsuccessful. The Company has made no
provision in its financial statements with respect to this
matter.
On March 4, 1997, two class action lawsuits were filed against
the Company and approximately 28 other defendants in the
United States District Court for the Northern District of
Georgia (Civil Action Nos. 1:97-CV-0569-RCF and
1:97-CV-0570-RCF). The lawsuits allege that the defendants
engaged in price fixing and other anti-competitive activities
in violation of federal anti-trust laws. The Company has been
named as a defendant based upon actions alleged to have been
taken by Sports Image, Inc. and Creative Marketing &
Promotions, Inc. prior to the Company's acquisitions of those
entities. The plaintiffs have requested injunctive relief and
monetary damages of three times an unspecified amount of
damages that the plaintiffs claim to have actually suffered. A
motion to consolidate these lawsuits into one action is
pending. The Company intends to vigorously defend these
lawsuits.
ITEM 2. Changes in Securities
On January 8, 1997, the Company issued an aggregate of 57,143
shares of Common Stock to Motorsport Traditions Limited
Partnership ("MTL") and certain affiliates of MTL as a portion
of the consideration paid by the Company for the business and
assets of MTL acquired by the Company. On January 8, 1997, the
Company also issued an aggregate of 285,714 shares of Common
Stock valued at an aggregate of $5,000,000 to Jeffery M.
Gordon and Kenneth R. Barbee in exchange for all of the
outstanding capital stock of Creative Marketing and
Promotions, Inc. On January 16, 1997, the Company sold 187,500
shares of Common Stock to Hasbro, Inc. at a price of $14.50
per share. The shares of Common Stock were issued without
registration in reliance on the exemption provided by Section
4(2) under the Securities Act of 1933, as amended.
ITEM 3. Defaults Upon Securities
Not applicable
ITEM 4. Submissions of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
14
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.4.2 1993 Stock Option Plan, as amended and
restated through January 17, 1997
10.39 Asset Purchase Agreement dated as of January
1, 1997, among Action Performance Companies,
Inc., MTL Acquisition, Inc., Motorsport
Traditions Limited Partnership, Midland
Leasing, Inc., and Motorsports By Mail,
Inc.(1)
10.40 Exchange Agreement dated as of January 1,
1997, among Action Performance Companies,
Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(1)
10.41 Promissory Note dated January 1, 1997, in the
principal amount of $1,600,000 issued by MTL
Acquisition, Inc., as Maker, to Motorsport
Traditions Limited Partnership, as Payee,
together with Guarantee of Action Performance
Companies, Inc.(1)
10.42 Note Purchase Agreement dated as of January
2, 1997, among Action Performance Companies,
Inc., Jefferson-Pilot Life Insurance Company,
Alexander Hamilton Life Insurance Company of
America, and First Alexander Hamilton Life
Insurance Company, together with form of
Note, form of Subsidiary Guaranty, and form
of Subsidiary Joinder
10.43 Credit Agreement dated as of January 2, 1997,
among Action Performance Companies, Inc.,
Sports Image, Inc., MTL Acquisition, Inc.,
and First Union National Bank of North
Carolina
10.44 Registration Agreement dated as of January 1,
1997, among Action Performance Companies,
Inc., Motorsport Traditions Limited
Partnership, Midland Leasing, Inc., and
Motorsports By Mail, Inc.(1)
10.45 Registration Agreement dated as of January 1,
1997, among Action Performance Companies,
Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(1)
10.46 Employment Agreement dated as of January 1,
1997, between Action Performance Companies,
Inc. and Kenneth R. Barbee(1)
10.47 Consulting Agreement dated as of January 1,
1997, between Action Performance Companies,
Inc. and John Bickford(1)
10.48 Common Stock Purchase Agreement dated January
16, 1997, between Hasbro, Inc. and Action
Performance Companies, Inc.(2)
11.1 Computation of Primary Earnings Per Share
11.2 Computation of Fully Diluted Earnings Per
Share
27 Financial Data Schedule
--------------
(1) Incorporated by reference to the Registrant's Form
8-K dated January 8, 1997 filed with the Securities and
Exchange Commission on January 23, 1997, as amended by
Form 8-K/A filed on February 24, 1997.
(2) Incorporated by reference to the Registrant's
Registration Statement on Form S-3 (Registration No.
333-22943) as filed with the Securities and Exchange
Commission on March 7, 1997 and declared effective on
March 12, 1997.
(b)Reports on Form 8-K
On January 23, 1997, the Company filed a Current Report
on Form 8-K dated January 8, 1997, as amended by Form
8-K/A filed on February 24, 1997, reporting the
acquisition of Motorsport Traditions Limited Partnership
and Creative Marketing and Promotions, Inc.
15
<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.
ACTION PERFORMANCE COMPANIES, INC.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ Fred W. Wagenhals Chairman of the Board, President, and May 14, 1997
- --------------------- Chief Executive Officer
Fred W. Wagenhals (Principal Executive Officer)
/s/ Christopher S. Besing Vice President, Chief Financial Officer, May 14, 1997
- ------------------------- Treasurer, and Director (Principal
Christopher S. Besing Financial and Accounting Officer)
</TABLE>
EXHIBIT 10.4.2
--------------
ACTION PERFORMANCE COMPANIES, INC.
SECOND AMENDED AND RESTATED
1993 STOCK OPTION PLAN
(as amended through January 16, 1997)
ARTICLE I
General
Section 1.1 Purpose of Plan; Term
(a) Background. On December 9, 1992, the Board of Directors of
Action Performance Companies, Inc., an Arizona corporation, adopted the 1993
Stock Option Plan (as adopted and as subsequently amended, the "Plan"), which
was approved by the shareholders of the Company on December 9, 1992. On January
14, 1993, the Plan was subsequently amended and restated (the "First Restated
Plan"). The First Restated Plan was approved by the shareholders of the Company
on January 14, 1993. On January 11, 1994, the Board of Directors amended and
restated the Plan (the "Second Restated Plan"). The Second Restated Plan was
approved by the shareholders of the Company on July 12, 1994. On January 4,
1995, the Board of Directors made a technical amendment to the Plan that did not
require shareholder approval. On July 3, 1995, the Board of Directors amended
the Plan (the "Third Restated Plan"). The Third Restated Plan was approved by
the shareholders of the Company on February 28, 1996. On September 4, 1996, (the
"Effective Date") and January 16, 1997, the Board of Directors amended the Plan
as stated herein (the "Fourth Restated Plan"). Any Options outstanding under the
First Restated Plan, the Second Restated Plan, or the Third Restated Plan shall
remain valid and unchanged. The effective date of the Fourth Restated Plan shall
be September 4, 1996; provided, however, that if this Fourth Restated Plan is
not approved by the shareholders by September 4, 1997, this Fourth Restated Plan
shall not become effective and the Third Restated Plan shall remain in effect.
(b) General Purpose. The purpose of the Plan is to further the
interests of Action Performance Companies, Inc., an Arizona corporation (the
"Company"), and its shareholders by encouraging key persons associated with the
Company (or parent or subsidiary corporations of the Company) to acquire shares
of the Company's common stock, thereby acquiring a proprietary interest in its
business and an increased personal interest in its continued success and
progress. Such purpose shall be accomplished through the Discretionary Program
set forth in Article II hereof and the Automatic Program as specified in Article
III hereof by providing for the granting of options to acquire the Company's
common stock ("Options"), the direct granting of the Company's common stock
("Stock Awards"), the granting of stock appreciation rights ("SARs"), or the
granting of other cash awards ("Cash Awards") (Stock Awards, SARs and Cash
Awards shall be collectively referred to herein as "Awards"). A "parent
corporation" for purposes of this Plan is any corporation in the unbroken chain
of corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below. A "subsidiary corporation" for purposes of this Plan is any
corporation in the unbroken chain of corporations starting with the employer
corporation, where, at each link of the chain, the corporation and the link
above owns at least 50 percent of the combined voting power of all classes of
stock in the corporation below.
(c) Options. Options granted under this Plan to employees of
the Company (or parent or subsidiary corporations of the Company) which are
intended to qualify as an "incentive stock option" as defined in section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") will be specified in
the applicable stock option agreement. All other Options granted under this Plan
will be nonqualified options.
A-1
<PAGE>
(d) Rule 16b-3 Plan. With respect to persons subject to
Section 16 of the Securities Exchange Act of 1934, as amended ("1934 Act"), this
Plan is intended to comply with all applicable conditions of Rule 16b-3 (and all
subsequent revisions thereof) promulgated under the 1934 Act. To the extent any
provision of the Plan or action by the Plan Administrator fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Plan Administrator. In addition, the Board may amend the Plan
from time to time as it deems necessary in order to meet the requirements of any
amendments to Rule 16b-3 without the consent of the shareholders of the Company.
(e) Duration of Plan. The term of the Plan is until September
24, 2001. No Option or Award shall be granted under the Plan after that date,
but Options or Awards outstanding on that date shall not be terminated or
otherwise affected by virtue of the Plan's expiration.
Section 1.2 Stock and Maximum Number of Shares Subject to Plan
(a) Description of Stock and Maximum Shares Allocated. The
stock subject to the provisions of the Plan and issuable upon the grant of Stock
Awards or upon the exercise of SARs or Options granted under the Plan are shares
of the Company's common stock (the "Stock"), which may be either unissued or
treasury shares, as the Board may from time to time determine. Subject to
adjustment as provided in Article IV hereof, the aggregate number of shares of
Stock covered by the Plan and issuable thereunder shall be 2,750,000 shares of
Stock.
(b) Calculation of Available Shares. For purposes of
calculating the maximum number of shares of Stock which may be issued under the
Plan: (i) the shares issued (including the shares, if any, withheld for tax
withholding requirements) upon exercise of an Option shall be counted and (ii)
the shares issued (including the shares, if any, withheld for tax withholding
requirements) as a result of a grant of a Stock Award or an exercise of an SAR
shall be counted.
(c) Restoration of Unpurchased Shares. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action by or on behalf of the
Company, again be available under the Plan.
Section 1.3 Administration; Approval; Amendments
(a) Administration of the Discretionary Program. The Eligible
Persons (including all existing Optionholders) under the Discretionary Program
are divided into two groups and there shall be a separate administrator for each
group. One group will be comprised of Eligible Persons that are Affiliates. For
purposes of this Plan, the term "Affiliates" shall mean all "officers" (as that
term is defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors
of the Company and all persons who own ten percent or more of the Company's
issued and outstanding Stock. The power to administer the Discretionary Program
with respect to Eligible Persons that are Affiliates shall be vested exclusively
with the Board or a committee ("Senior Committee") comprised of two or more
Non-Employee Directors which are appointed by the Board. The Senior Committee,
at its sole discretion, may require approval of the Board for specific grants of
Options or Awards under the Grant Program. The second group shall be composed of
all Eligible Persons that are not Affiliates ("Non-Affiliates"), and the power
to administer the Discretionary Program with respect to Non-Affiliates shall be
vested exclusively with the Board. The Board, however, may at any time appoint a
committee (the "Employee Committee") of one or more persons who are members of
the Board and delegate to such Employee Committee the power to administer the
Discretionary Program with respect to the Non-Affiliates. Members of the Senior
Committee and of the Employee Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may at any time terminate all or a portion of the functions of
either the Senior or Employee Committee and reassume all of a portion of powers
and authority previously delegated to that Committee.
A-2
<PAGE>
(b) Plan Administrator. The Senior Committee, the Employee
Committee, and/or the Board, whichever is applicable, shall be referred to
herein as the "Plan Administrator." The Plan Administrator for each administered
group shall have the authority and discretion to select which Eligible Persons
shall participate in the Discretionary Program, to grant Options or Awards under
the Discretionary Program, to establish such rules and regulations as they may
deem appropriate with the proper administration of the Discretionary Program and
to make such determinations under, and issue such interpretations of, the
Discretionary Program and any outstanding Option or Award as they may deem
necessary or advisable. If an Optionholder's status as an Affiliate or
non-Affiliate changes, the Optionholder's Plan Administrator will likewise
change. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in any outstanding Option or Award issued or
granted pursuant to the Discretionary Program.
(c) Automatic Program. Any decisions or interpretations of the
Plan with respect to the Automatic Program shall be made by the Board.
(d) Approval by Shareholders. This Fourth Restated Plan shall
be submitted to the shareholders of the Company for their approval at a regular
or special meeting to be held within 12 months after the adoption of this Fourth
Restated Plan by the Board. Shareholder approval shall be evidenced by the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present in person or by proxy and voting at the meeting. If the
shareholders decline to approve this Fourth Restated Plan at such meeting or if
this Fourth Restated Plan is not approved by the shareholders within 12 months
after its adoption by the Board, this Fourth Restated Plan (and all Options or
Awards granted hereunder after the Effective Date) shall automatically terminate
to the same extent and with the same effect as though this Fourth Restated Plan
had never been adopted. In such instance, the Third Restated Plan shall remain
in effect. If this Fourth Restated Plan is approved by shareholders, all Options
or Awards granted under the Plan to Eligible Persons who are Affiliates shall be
deemed acquired on the date such approval is obtained.
(e) Amendments to Plan. The Board may, without action on the
part of the Company's shareholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided that the Board
may not, without the consent of an Optionholder, take any action which
disqualifies any Option previously granted under the Plan for treatment as an
incentive stock option or which adversely affects or impairs the rights of the
Optionholder of any Option outstanding under the Plan, and further provided
that, except as provided in Section 1.1(d) and Article IV hereof, the Board may
not, without the approval of the Company's shareholders, (i) increase the
aggregate number of shares of Stock subject to the Plan, (ii) reduce the
exercise price at which Options may be granted or the exercise price at which
any outstanding Option may be exercised, (iii) extend the term of the Plan, (iv)
change the class of persons eligible to receive Options or Awards under the
Plan, or (v) materially increase the benefits accruing to participants under the
Plan. Notwithstanding the foregoing, Options or Awards may be granted under this
Plan to purchase shares of Stock in excess of the number of shares then
available for issuance under the Plan if (A) an amendment to increase the
maximum number of shares issuable under the Plan is adopted by the Board prior
to the initial grant of any such Option or Award and within one year thereafter
such amendment is approved by the Company's shareholders and (B) each such
Option or Award granted is not to become exercisable or vested, in whole or in
part, at any time prior to the obtaining of such shareholder approval.
Section 1.4 Participants
(a) Discretionary Program. Options and Awards in the
Discretionary Program may be granted only to persons ("Eligible Persons") who at
the time of grant are (i) key personnel (including officers and directors) of
the Company or parent or subsidiaries of the Company, or (ii) consultants or
independent contractors who provide valuable services to the Company or parent
or subsidiaries of the Company. Notwithstanding the foregoing, (A) incentive
stock options may only be granted to key personnel of the Company (and its
parent or subsidiary) who are also employees of the Company (or its parent or
subsidiary) and (B) the maximum number of
A-3
<PAGE>
shares of stock with respect to which Options or SARs may be granted to any
employee during the term of the Plan shall not exceed 50 percent of the shares
of Stock covered by the Plan. The Plan Administrator shall have full authority
to determine which Eligible Persons in its administered group are to receive
Option grants in the Discretionary Program, the number of shares to be covered
by each such grant, whether the granted Option is to be an incentive stock
option which satisfies the requirements of Section 422 of the Code or a
nonqualified option not intended to meet such requirements, the time or times at
which each such Option is to become exercisable, and the maximum term for which
the Option is to be outstanding. The Plan Administrator shall also have full
authority to determine which Eligible Persons in such group are to receive
Awards under the Discretionary Program and the conditions relating to such
Award.
(b) Automatic Program. Persons eligible to participate in the
Automatic Program shall be limited to non-employee Board members ("Eligible
Directors"). Unless otherwise provided in the Plan, persons who are eligible
under the Automatic Program may also be eligible to receive Options or Awards
under the Discretionary Program.
ARTICLE II
Discretionary Program
Section 2.1 Terms and Conditions of Options
(a) Allotment of Shares. The Plan Administrator shall
determine the number of shares of Stock to be optioned from time to time and the
number of shares to be optioned to any Eligible Person (the "Optioned Shares"),
except that the Board must approve the grant to any Eligible Person of any
Option to purchase more than 50,000 Optioned Shares. The grant of an Option to a
person shall neither entitle such person to, nor disqualify such person from,
participation in any other grant of Options or Stock Awards under this Plan or
any other stock option plan of the Company.
(b) Exercise Price. Upon the grant of any Option, the Plan
Administrator shall specify the option price per share. In no event may the
option price per share for an Option that is not an incentive stock option be
less than 85 percent of the fair market value per share of the Stock on the date
the Option is granted and in no event may the option price per share specified
by a Plan Administrator for an incentive stock option be less than 100 percent
of the fair market value per share of the Stock on the date the Option is
granted (110 percent if Options are intended to be incentive stock options and
are granted to a shareholder who at the time the Option is granted owns or is
deemed to own stock possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company or of any parent or any subsidiary
corporation of the Company).
(c) Individual Stock Option Agreements. Options granted under
the Plan shall be evidenced by option agreements in such form and content as a
Plan Administrator from time to time approves, which agreements shall
substantially comply with and be subject to the terms of the Plan, including the
terms and conditions of this Section 2.1. As determined by a Plan Administrator,
each option agreement shall state (i) the total number of shares to which it
pertains, (ii) the exercise price for the shares covered by the Option, (iii)
the time at which the Options vest and become exercisable and (iv) the Option's
scheduled expiration date. The option agreements may contain such other
provisions or conditions as a Plan Administrator deems necessary or appropriate
to effectuate the sense and purpose of the Plan, including covenants by the
Optionholder not-to-compete and remedies to the Company in the event of the
breach of any such covenant.
(d) Option Period. Unless otherwise provided in the Stock
Option Agreement, the term of each Option shall be ten years from the date of
grant. No Option granted under the Plan that is intended to be an incentive
stock option shall be exercisable for a period in excess of 10 years from the
date of its grant (five years if the Option is granted to a shareholder who at
the time the Option is granted owns or is deemed to own stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of
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its parent or any subsidiary corporation), subject to earlier termination in the
event of termination of employment, retirement or death of the Optionholder. An
Option may be exercised in full or in part at any time or from time to time
during the term of the Option or provide for its exercise in stated installments
at stated times during the Option's term.
(e) Vesting; Limitations. The time at which the Optioned
Shares vest with respect to a participant shall be in the discretion of that
participant's Plan Administrator. Notwithstanding the foregoing, to the extent
an Option is intended to qualify as an incentive stock option under the Code,
the aggregate fair market value (determined as of the respective date or dates
of grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the Code during any one calendar year shall not exceed the sum of
$100,000 (referred to herein as the "$100,000 Limitation"). To the extent that
any person holds two or more Options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability as an
incentive stock option shall be applied on the basis of the order in which such
Options are granted.
(f) No Fractional Shares. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Option granted under the Plan.
(g) Method of Exercising Options; Full Payment. Options shall
be exercised by written notice to the Company, addressed to the Company at its
principal place of business. Such notice shall state the election to exercise
the Option and the number of shares with respect to which it is being exercised,
and shall be signed by the person exercising the Option. Such notice shall be
accompanied by payment in full of the exercise price for the number of shares
being purchased. Upon the exercise of any Option, the Company shall deliver, or
cause to be delivered, to the Optionholder a certificate or certificates
representing the shares of Stock purchased upon such exercise as soon as
practicable after payment for those shares has been received by the Company. If
an Option is exercised pursuant to Section 2.1(l) hereof by any person other
than the Optionholder, such notice shall be accompanied by appropriate proof of
the right of such person to exercise the Option. All shares that are purchased
and paid for in full upon the exercise of an Option shall be fully paid and
non-assessable. Except as provided in Section 2.1(h) hereof, the aggregate
Option price shall be payable in one of the alternative forms specific below:
(i) full payment in cash or check made payable to the
Company's order;
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the exercise date (as determined in
accordance with Section 4.2 hereof); or
(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(h) Financial Assistance to Optionholders. The Plan
Administrator, with the approval of the Board, may allow the paying of the
exercise price of an Option granted under the Discretionary Program in the
following manner: (i) the extension of a loan to the Optionholder by the
Company; (ii) the payment by the Optionholder of the exercise price in
installments; or (iii) the guarantee by the Company of a loan obtained by the
Optionholder from a third party. The terms of any loans, installment payments or
guarantees, including the interest rate and terms of repayment, and collateral
requirements, if any, shall be determined by the Board in its sole
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discretion. Subject to the applicable margin requirements, any loans,
installment payments or guarantees authorized by the Board pursuant to the Plan
may be granted without security, but the maximum credit available not shall
exceed the exercise price or the Option Shares plus any federal and/or state
income tax liability incurred in connection with the exercise of the Option.
(i) Rights of a Shareholder. An Optionholder shall have no
rights as a shareholder with respect to shares covered by his Option until the
date a stock certificate is issued to him. No adjustment will be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
(j) Repurchase Right. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to an Option. Any repurchase right of the Company shall be
exercisable by the Company (or its assignees) upon such terms and conditions as
the Plan Administrator may specify in the Stock Repurchase Agreement evidencing
such right. The Plan Administrator may also in its discretion establish as a
term and condition of one or more Options granted under the Plan that the
Company shall have a right of first refusal with respect to any proposed sale or
other disposition by the Optionholder of any shares of Stock issued upon the
exercise of such Options. Any such right of first refusal shall be exercisable
by the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(k) Termination of Incentive Stock Options.
(i) Termination of Service. Except as otherwise
provided by the Board, if any Optionholder ceases to be in Service to the
Company for a reason other than death or disability and the Option held by such
Optionholder is an incentive stock option, such Optionholder (or such
Optionholder's successors in the case of the Optionholder's death) may, within
90 days after the date of termination of such Service, but in no event after the
Option's stated expiration date, exercise some or all of the Options that the
Optionholder was entitled to exercise on the date the Optionholder's Service
terminated; provided, that (i) if the Optionholder's Service is terminated by
the Company in its good faith judgment, for cause, including the commission of a
crime by the Optionholder or for reasons involving moral turpitude, an act by
the Optionholder which tends to bring the Company into disrepute, or negligent,
fraudulent or willful misconduct by the Optionholder, or (ii) if after the
Service of the Optionholder is terminated, the Optionholder commits acts
detrimental to the Company's interests, then the Option shall be immediately
cancelled and shall thereafter be void for all purposes.
(ii) Disability. Except as otherwise provided by the
Board, if any Optionholder ceases to be in Service to the Company by reason of
permanent disability within the meaning of Section 22(e)(3) of the Code (as
determined by the applicable Plan Administrator), the Optionholder shall have 12
months after the date of termination of Service (or such lesser period as
determined by the Plan Administrator and set forth in the Stock Option
Agreement), but in no event after Optionholder's Option's stated expiration
date, to exercise Options that the Optionholder was entitled to exercise on the
date the Optionholder's Service terminated as a result of disability.
(iii) Death of Optionholder. Except as otherwise
provided by the Board, if an Optionholder dies while in the Company's Service,
the Optionholder's vested Options that are incentive stock options on the date
of death shall be exercisable within three months of such death (or such lesser
period as determined by the Plan Administrator and set forth in the Stock Option
Agreement) or until the stated expiration date of the Optionholder's Option,
whichever occurs first, by the person or persons ("successors") to whom the
Optionholder's rights pass under a will or by the laws of descent and
distribution. An Option may be exercised and payment of the option price made in
full by the successors only after written notice to the Company specifying the
number of shares to be purchased. Such notice shall state that the Option price
is being paid in full in the manner specified in Section 2.1(g) hereof. As soon
as practicable after receipt by the Company of such notice and of payment in
full of the Option price, a certificate or certificates representing such shares
shall be registered in the
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name or names specified by the successors in the written notice of exercise and
shall be delivered to the successors.
(l) Termination of Nonqualified Options. Any Options which are
not incentive stock options and which are exercisable at the time an
Optionholder ceases to be in Service to the Company shall remain exercisable for
such period of time thereafter as determined by the Plan Administrator and set
forth in the documents evidencing the Options. In the absence of any provision
in such documents, the Option shall remain exercisable (i) for a period of one
year after termination resulting from death or permanent disability within the
meaning of Section 22(e)(3) of the Code (as determined by the Plan
Administrator); (ii) for no period should the Optionholder be discharged for
cause; and (iii) for 90 days after termination for any other reason; provided
however, that no Option shall be exercisable after the Option's stated
expiration date.
(m) Other Plan Provisions Still Applicable. If an Option is
exercised upon the termination of Service, disability, or death of an
Optionholder under this Section 2.1, the other provisions of the Plan shall
still be applicable to such exercise.
(n) Definition of "Service." For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder shall be deemed to be in "Service" to the Company so long as such
individual renders services on a periodic basis to the Company (or to any parent
or subsidiary corporation) in the capacity of an employee or an independent
consultant or advisor. The Optionholder shall be considered to be an employee
for so long as such individual remains in the employ of the Company or one or
more of its parent or subsidiary corporations.
(o) Nonassignability. Except as otherwise allowed by the Board
and set forth in a Stock Option Agreement, no Option granted under the Plan or
any of the rights and privileges conferred thereby shall be assignable or
transferable by an Optionholder other than by will or the laws of descent and
distribution, and such Option shall be exercisable during the Optionholder's
lifetime only by the Optionholder. If an Option is assignable or transferrable,
such assignment or transfer cannot occur unless (i) the Board has consented in
writing to the proposed transfer and transferee, and (ii) the transferee enters
into a written stock option agreement with the Company.
(p) Cancellation of Options. Each Plan Administrator shall
have the authority to effect, at any time and from time to time, with the
consent of the affected Optionholders, the cancellation of any or all
outstanding Options granted under the Discretionary Program by that Plan
Administrator and to grant in substitution therefore new Options under the Plan
covering the same or different numbers of shares of Stock as long as such new
Options have an exercise price per share of Stock no less than the minimum
exercise price as set forth in Section 2.1(b) hereof on the new grant date.
Section 2.2 Terms and Conditions of Stock Awards
(a) Eligibility. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. The grant of a Stock Award to a Person shall
neither entitle such person to, nor disqualify such person from participation
in, any other grant of options or awards by the Company, whether under this Plan
or under any other stock option or award plan of the Company.
(b) Award for Services Rendered. Stock Awards shall be granted
in recognition of an Eligible Person's past services to the Company. The grantee
of any such Stock Award shall not be required to pay any consideration to the
Company upon receipt of such Stock Award, except as may be required to satisfy
applicable employment taxes and income tax withholding requirements.
(c) Conditions to Award. All Stock Awards shall be subject to
such terms, conditions,
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restrictions, or limitations as the applicable Plan Administrator deems
appropriate, including, by way of illustration but not by way of limitation,
restrictions on transferability, requirements of continued employment,
individual performance or the financial performance of the Company, or payment
by the recipient of any applicable employment or withholding taxes. Such Plan
Administrator may modify or accelerate the termination of the restrictions
applicable to any Stock Award under the circumstances as it deems appropriate.
Notwithstanding the foregoing, any Stock received by an affiliate pursuant to a
Stock Award must be held for a period of six months after the grant of such
Stock Award.
(d) Award Agreements. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
Section 2.3 Terms and Conditions of SARs
(a) Eligibility. All Eligible persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of an SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) Award of SARs. Concurrently with or subsequent to the
grant of any Option to purchase one or more shares of Stock, a Plan
Administrator may award to the Optionholder with respect to each share of Stock,
a related SAR permitting the Optionholder to be paid the appreciation on the
Stock underlying the Option in lieu of exercising the Option. In addition, a
Plan Administrator may award to any Eligible Person an SAR permitting the
Eligible Person to be paid the appreciation on a designated number of shares of
the Stock, whether or not such Shares are actually issued.
(c) Conditions to SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions of transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR Agreements. A Plan Administrator may require as a
condition to the grant of an SAR that the recipient of such SAR enter into an
SAR agreement in such form and content as that Plan Administrator from time to
time approves.
(e) Exercise. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified in the SAR agreement
by the Plan Administrator.
(f) Amount of Payment. The amount of payment to which the
grantee of an SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the specified shares
of Stock on the date the Option related to the SAR was granted or became
effective, or, if the SAR is not related to any Option, on the date the SAR was
granted or became effective.
(g) Form of Payment. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.3(f) hereof by the fair market value of
a share of Stock on the exercise date of such SAR.
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As soon as practical after exercise, the Company shall deliver to the SAR
grantee a certificate or certificates for such shares of Stock.
(h) Termination of Employment; Death. Sections 2.1(j), (k) and
(l), applicable to Options, shall apply equally to SARs.
(i) Nonassignability. Except as otherwise provided by the
Board and set forth in an SAR Agreement, no SAR granted under the Plan or any of
the rights and privileges conferred thereby shall be assignable or transferable
by a grantee other than by will or the laws of decent and distribution, and such
SAR shall be exercisable during the grantee's lifetime only by the grantee.
Section 2.4 Tax Withholding
(a) General. The Company's obligation to deliver shares of
Stock upon the exercise of Options or the vesting of Awards shall be subject to
the satisfaction of all applicable Federal, State and local income tax and
employment tax withholding requirements.
(b) Shares to Pay for Withholding. A Plan Administrator may,
in its discretion and in accordance with the provisions of this Section 2.4(b)
and such supplemental rules as the Plan Administrator may from time to time
adopt (including the applicable safe-harbor provisions of SEC Rule 16b-3),
provide any or all holders of nonqualified Options or unvested Awards with the
right to use shares of the Company's Stock in satisfaction of all or part of the
federal, state and local income tax and employment tax liabilities incurred by
such holders in connection with the exercise of their Options or the vesting of
their Awards (the "Taxes"). Such right may be provided to any such holder in
either or both of the following formats:
(i) Stock Withholding. The holder of the nonqualified
Option or unvested Award may be provided with the election to have the Company
withhold, from the shares of Stock otherwise issuable upon the exercise of such
nonqualified Option or the vesting of such Award, a portion of those shares with
an aggregate fair market value equal to the percentage of the applicable Taxes
(not to exceed one hundred percent) designated by the holder.
(ii) Stock Delivery. The Plan Administrator may, in
its discretion, provide the holder of the nonqualified Option or the unvested
Award with the election to deliver to the Company, at the time the nonqualified
Option is exercised or the Award vests, one or more shares of Stock previously
acquired by such individual (other than pursuant to the transaction triggering
the Taxes) with an aggregate fair market value equal to the percentage of the
Taxes incurred in connection with such Option exercise or Award vesting (not to
exceed 100 percent) designated by the holder.
Section 2.5 Other Cash Awards
(a) In General. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
(b) Conditions to Award. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
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ARTICLE III
Automatic Program
Section 3.1 Terms and Conditions of Automatic Option Grants
(a) Amount and Date of Grant. Automatic Option Grants shall be
made to each Eligible Director ("Optionholder") as follows:
(i) Annual Grants. Each year on the Annual Grant Date
an Option to acquire 8,000 shares of Stock shall be granted to each Eligible
Director for so long as there are shares of Stock available under Section 1.2
hereof. The "Annual Grant Date" shall be the date of the Company's annual
shareholders meeting. Notwithstanding the foregoing, (A) any Eligible Director
whose term ended on the Annual Grant Date shall not be eligible to receive any
automatic option grants on that Annual Grant Date and (B) any Eligible Director
who has received an Automatic Option Grant pursuant to Section 3.1(a)(ii) on the
same date as the Annual Grant Date or within 30 days prior thereto, shall not be
eligible to receive an Automatic Option Grant on that Annual Grant Date.
(ii) Initial New Director Grants. On the Initial
Grant Date, every new member of the Board who is an Eligible Director and has
not previously been a member of the Board shall be granted an Option to acquire
10,000 shares of Stock as long as there are shares of Stock available under
Section 1.2 hereof. The "Initial Grant Date" shall be the date that an Eligible
Director is first appointed or elected to the Board.
(b) Exercise Price. The exercise price per share of Stock
subject to each Automatic Option Grant shall be equal to 100% of the fair market
value per share of the Stock on the date the Option was granted as determined in
accordance with the valuation provisions of Section 4.2 hereof (the "Option
Price").
(c) Vesting. Each Automatic Option Grant made pursuant to
Section 3.1(a) shall become exercisable and vest immediately upon grant.
(d) Method of Exercise. In order to exercise an Option with
respect to any vested Optioned Shares, an Optionholder (or in the case of an
exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Secretary of the
Company a written notice of exercise signed in writing by the person exercising
the Option specifying the number of shares of Stock with respect to which the
Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 3.1(e) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Option (if other than the Optionholder) has the
right to exercise such Option.
As soon after the exercise date as practical, the Company shall mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
this Option in accordance herewith) a certificate or certificates representing
the Stock for which the Option has been exercised in accordance with the
provisions of this Plan. In no event may any Option be exercised for any
fractional shares.
(e) Payment Price. The aggregate Option price shall be payable
in one of the alternative forms specific below:
(i) full payment in cash or check made payable to the
Company's order; or
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(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the exercise date (as determined in
accordance with Section 4.2 hereof); or
(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(f) Term of Option. Each Option shall expire on the fifth
anniversary of the date on which an Automatic Option Grant was made ("Expiration
Date"). Should an Optionholder's Service as a Board member cease prior to the
Expiration Date for any reason while an Option remains outstanding and
unexercised, then the Option term shall immediately terminate and the Option
shall cease to be outstanding in accordance with the following provisions:
(i) The Option shall immediately terminate and cease
to be outstanding for any shares of Stock which were not vested at the time of
Optionholder's cessation of Board service.
(ii) Should an Optionholder cease, for any reason
other than death, to serve as a member of the Board, then the Optionholder shall
have a 90 day period measured from the date of such cessation of Board service
in which to exercise the Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Option be exercised
after the Expiration Date of such Option.
(iii) Should an Optionholder die while serving as a
Board member or within 90 days after cessation of Board service, then the
personal representative of the Optionholder's estate (or the person or persons
to whom the Option is transferred pursuant to the Optionholder's will or in
accordance with the laws of descent and distribution) shall have a one year
period measured from the date of the Optionholder's cessation of Board service
in which to exercise the Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Option be exercised
after the Expiration Date of such Option.
(g) Limited Transferability. Each Option shall be exercisable
only by Optionholder during Optionholder's lifetime and shall be neither
transferable nor assignable, other than by will or by the laws of descent and
distribution following Optionholder's death.
Section 3.2 Tax Withholding
(a) General. The Company's obligation to deliver Stock upon
the exercise of Options under the Automatic Program shall be subject to the
satisfaction of all applicable federal, state and local income tax withholding
requirements.
(b) Shares to Pay for Withholding. The Board may, in its
discretion and in accordance with the provisions of this Section 3.2(b) and such
supplemental rules as it may from time to time adopt (including the applicable
safe-harbor provisions of SEC Rule 16b-3), provide any or all Optionholders with
the right to use shares of Stock in satisfaction of all or part of the federal,
state and local income tax liabilities incurred by such Optionholders in
connection with the exercise of their Options ("Taxes"). Such right may be
provided to any such Optionholder in either or both of the following formats:
(i) Stock Withholding. The Optionholder may be
provided with the election to have
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the Company withhold, from the Stock otherwise issuable upon the exercise of
such Option, a portion of those shares of Stock with an aggregate fair market
value equal to the percentage of the applicable Taxes (not to exceed 100
percent) designated by the Optionholder.
(ii) Stock Delivery. The Board may, in its
discretion, provide the Optionholder with the election to deliver to the
Company, at the time the Option is exercised, one or more shares of Stock
previously acquired by such individual (other than pursuant to the transaction
triggering the Taxes) with an aggregate fair market value equal to the
percentage of the taxes incurred in connection with such Option exercise (not to
exceed 100 percent) designated by the Optionholder.
ARTICLE IV
Miscellaneous
Section 4.1 Certain Adjustments
(a) Capital Adjustments. The aggregate number of shares of
Stock subject to the Plan, the number of shares covered by outstanding Options
and Awards, the number of shares of Stock covered by unissued Automatic Options,
and the price per share stated in all outstanding Options and Awards shall be
proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of the Company resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without the Company's receipt of consideration therefor in money,
services or property.
(b) Mergers, Etc. If the Company is the surviving corporation
in any merger or consolidation, any Option or Award granted under the Plan shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to the Option or Award would have been entitled prior to the
merger or consolidation. A dissolution or liquidation of the Company shall cause
every Option or Award outstanding hereunder to terminate. A merger or
consolidation in which the Company is not the surviving corporation shall also
cause every Option or Award outstanding hereunder to terminate, but each
Optionholder or grantee of an Award shall have the right, immediately prior to
such merger or consolidation in which the Company is not a surviving
corporation, to exercise his vested Options or Awards in whole or in part,
subject to the other provisions of this Plan.
(c) Change in Control. With respect to any Change in Control,
a Plan Administrator shall have the discretion and authority, exercisable at any
time, whether before or after the Change in Control, to provide for the
automatic acceleration of one or more outstanding Options or Awards granted by
it under the Discretionary Program upon the occurrence of such Change in
Control. A Plan Administrator may also impose limitations upon the automatic
acceleration of such Options or Awards to the extent it deems appropriate. Any
Options or Awards accelerated upon a Change in Control will remain fully
exercisable until the expiration or sooner termination of the Option term.
(d) Incentive Stock Option Limits. The exercisability of any
Options which are intended to qualify as incentive stock options and which are
accelerated under the Plan in connection with a Change in Control shall remain
subject to the $100,000 Limitation and shall vest as quickly as possible without
violating the $100,000 Limitation.
Section 4.2 Calculation of Fair Market Value of Stock
The fair market value of a share of Stock on any relevant date
shall be determined in accordance with the following provisions:
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(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its Nasdaq system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
(b) If the Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Stock on such exchange on the date in question,
then the fair market value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
Section 4.3 Use of Proceeds
The proceeds received by the Company from the sale of Stock
pursuant to the exercise of Options or Awards hereunder, if any, shall be used
for general corporate purposes.
Section 4.4 Regulatory Approvals
The implementation of the Plan, the granting of any Option or
Award hereunder, and the issuance of Stock upon the exercise of any such Option
or Award shall be subject to the procurement by the Company of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the Options or Awards granted under it and the Stock issued pursuant to it.
Section 4.5 Indemnification
In addition to such other rights of indemnification as they
may have, the members of the Plan Administrator shall be indemnified and held
harmless by the Company, to the extent permitted under applicable law, for, from
and against all costs and expenses reasonably incurred by them in connection
with any action, legal proceeding to which any member thereof may be a party by
reason of any action taken, failure to act under or in connection with the Plan
or any rights granted thereunder and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any such
action, suit or proceeding, except a judgment based upon a finding of bad faith;
provided that upon the institution of any such action, suit or proceeding a
Board member shall in writing give the Company notice thereof an opportunity, at
its own expense, to handle and defend the same before such Board member
undertakes to handle and defend it on his or her own behalf.
Section 4.6 Plan Not Exclusive
This Plan is not intended to be the exclusive means by which
the Company may issue options or warrants to acquire its Stock, stock awards or
any other type of award. To the extent permitted by applicable law, any such
other option, warrants or awards may be issued by the Company other than
pursuant to this Plan without shareholder approval.
A-13
<PAGE>
Section 4.7 Governing Law
The Plan shall be governed by, and all questions arising
hereunder shall be determined in accordance with, the laws of the State of
Arizona.
Section 4.8 Securities Restrictions
(a) Legend on Certificates. Except as provided in Section
4.8(c) hereof, all certificates representing shares of Stock issued upon
exercise of Options or Awards granted under the Plan shall be endorsed with a
legend reading as follows:
The shares of Common Stock evidenced by this certificate have
been issued to the registered owner in reliance upon written
representations that these shares have been purchased solely
for investment. These shares may not be sold, transferred or
assigned unless in the opinion of the Company and its legal
counsel such sale, transfer or assignment will not be in
violation of the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
(b) Private Offering for Investment Only. Except as provided
in Section 4.8(c) hereof, the Options and Awards are and shall be made available
only to a limited number of present and future key executives and key employees
who have knowledge of the Company's financial condition, management and its
affairs. The Plan is not intended to provide additional capital for the Company,
but to encourage ownership of Stock among the Company's key personnel. By the
act of accepting an Option or Award, each grantee agrees (i) that, any shares of
Stock acquired will be solely for investment not with any intention to resell or
redistribute those shares and (ii) such intention will be confirmed by an
appropriate certificate at the time the Stock is acquired. The neglect or
failure to execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) Registration Statement. If a Registration Statement
covering the shares of Stock issuable upon exercise of options granted under the
Plan as filed under the Securities Exchange Act of 1933, as amended, and as
declared effective by the Securities Exchange Commission, the provisions of
Sections 4.8(a) and (b) shall terminate during the period of time that such
Registration Statement, as periodically amended, remains effective.
Section 4.9 Definitions
The following capitalized terms used in this Plan shall have
the meaning described below:
"Affiliates" shall mean all "officers" (as that term is
defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the
Company and all persons who own 10 percent or more of the Company's issued and
outstanding Stock.
"Annual Grant Date" shall mean the date of the Company's
annual shareholder meeting.
"Automatic Option Grant" shall mean those automatic option
grants made pursuant to the Automatic Program on the Annual Grant Date, on the
Initial Grant Date, and on the date that the Second Restated Plan was approved
by the shareholders of the Company.
"Automatic Program" shall mean that portion of the Plan
relating to the Options issued automatically under Article III hereof.
"Award" shall mean a Stock Award, SAR or Cash Award.
A-14
<PAGE>
"Board" shall mean the Board of Directors of the Company.
"Cash Award" shall mean an award to be paid in cash and
granted under Section 2.5 hereunder.
"Change in Control" shall mean (i) a person or related group
of persons, other than the Company or a person that directly or indirectly
controls, is controlled by, or under common control with the Company, acquires
ownership of 40 percent or more of the Company's outstanding common stock
pursuant to a tender or exchange offer which the Board of Directors recommends
that the Company's shareholders not accept, or (ii) the change in the
composition of the Board occurs such that those individuals who were elected to
the Board at the last shareholders' meeting at which there was not a contested
election for Board membership subsequently ceased to comprise a majority of the
Board by reason of a contested election.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company" shall mean Action Performance Companies, Inc., an
Arizona corporation.
"Discretionary Program" shall mean that portion of the Plan
relating to the Options and Awards issued in the discretion of the Plan
Administrator pursuant to Article II hereof.
"Effective Date" shall mean September 4, 1996.
"Eligible Directors" shall mean non-employee Board members.
"Eligible Persons" shall mean those persons who, at the time
that the Option or Award is granted, are (i) key personnel (including officers)
of the Company or parent or subsidiaries of the Company, or (ii) consultants or
independent contractors who provide valuable services to the Company or parent
or subsidiaries of the Company.
"Employee Committee" shall mean that committee appointed by
the Board to administer the Plan with respect to the Non-Affiliates and
comprised of two or more persons who are members of the Board and/or officers of
the Company.
"First Restated Plan" shall mean the Plan amended through
January 14, 1993 as approved by the Board and the shareholders of the Company on
January 14, 1993.
"Fourth Restated Plan" shall mean the Plan approved by the
Board on the Effective Date, as amended through January 16, 1997.
"Initial Grant Date" shall mean the date that an Eligible
Director is first appointed or elected to the Board.
"Non-Affiliates" shall mean all Eligible Persons who are not
Affiliates.
"Non-Employee Directors" shall mean those Directors who
satisfy the definition of "Non-Employee Director" under Rule 16b-3(b)(3)(i)
promulgated under the 1934 Act.
"$100,000 Limitation" shall mean the limitation in which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its parent or subsidiary
corporations) may for the first time be exercisable as incentive stock options
under the Code during any one calendar year shall not exceed the sum of
$100,000.
A-15
<PAGE>
"Optionholder" shall mean an Eligible Person or Eligible
Director to whom Options have been granted.
"Optioned Shares" shall be those shares of Stock to be
optioned from time to time to any Eligible Person or Eligible Director.
"Options" shall mean options granted under the Plan to acquire
Stock.
"Plan" shall mean this stock option plan for Action
Performance Companies, Inc.
"Plan Administrator" shall mean (a) either the Board or the
Senior Committee, with respect to the administration of the Plan as it relates
to Affiliates and (b) either the Board or the Employee Committee, with respect
to the administration of the Plan as it relates to Non-Affiliates.
"SAR" shall mean stock appreciation rights granted pursuant to
Section 2.3 hereunder.
"Second Effective Date" shall mean January 11, 1994.
"Second Restated Plan" shall mean the Plan approved by the
Board on January 11, 1994 and approved by the Company's shareholders on July 12,
1994.
"Senior Committee" shall mean that committee appointed by the
Board to administer the Plan with respect to the Affiliates and comprised of two
or more Non-Employee Directors.
"Service" shall have the meaning set forth in Section 2.1(n)
hereof.
"Stock" shall mean shares of the Company's common stock which
may be unissued or treasury shares as the Board may from time to time determine.
"Stock Awards" shall mean Stock directly granted under the
Plan.
"Third Restated Plan" shall mean the Plan approved by the
Board on July 3, 1995 and approved by the Company's shareholders on February 28,
1996.
EXECUTED this 16th day of January, 1997.
ACTION PERFORMANCE COMPANIES,
INC., an Arizona corporation
By: /s/ Fred W. Wagenhals
---------------------------------
Its: President
---------------------------------
ATTESTED BY:
/s/ Tod Wagenhals
- -------------------------
Secretary
A-16
EXHIBIT 11.1
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares
Weighted average number of common
shares outstanding 13,234,930 11,341,864 13,579,433 11,391,780
Additional shares assuming conversion of:
Stock Options 551,409 477,048 549,587 482,182
Warrants -- 42,320 -- 39,326
Preferred Stock -- 1,000,000 -- 1,000,000
----------- ----------- ----------- -----------
Weighted average shares outstanding 13,786,339 12,861,232 14,129,020 12,913,288
=========== =========== =========== ===========
Net Income $ 4,005,165 $ 2,017,672 $ 2,437,032 $ 1,139,897
=========== =========== =========== ===========
Primary Earnings Per Share $ 0.29 $ 0.16 $ 0.17 $ 0.09
=========== =========== =========== ===========
</TABLE>
All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996.
16
EXHIBIT 11.2
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares
Weighted average number of common
shares outstanding 13,234,930 11,341,864 13,579,433 11,391,780
Additional shares assuming conversion of:
Stock Options 564,196 557,504 549,634 547,174
Warrants -- 49,044 -- 44,590
Preferred Stock -- 1,000,000 -- 1,000,000
----------- ----------- ----------- -----------
Weighted average shares 13,799,126 12,948,412 14,129,067 12,983,544
=========== =========== =========== ===========
outstanding
Net Income $ 4,005,165 $ 2,017,672 2,437,032 1,139,897
=========== =========== =========== ===========
Fully Diluted Earnings
Per Share $ 0.29 $ 0.16 $ 0.17 $ 0.09
=========== =========== =========== ===========
</TABLE>
All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit contains summary financial
information extracted from the Registrant's
financial statements for the period ended March
31, 1997, and is qualified in its entirety by
reference to such financial statements. This
exhibit shall not be deemed filed for purposes of
Section 11 of the Securities Act of 1933 and
Section 18 of the Securities Exchange Act of 1934,
or otherwise subject to the liability of such
Sections, nor shall it be deemed a part of any
other filing which incorporates this report by
reference, unless such other filing expressly
incorporates this Exhibit by reference.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,979
<SECURITIES> 0
<RECEIVABLES> 12,860
<ALLOWANCES> 895
<INVENTORY> 13,810
<CURRENT-ASSETS> 34,457
<PP&E> 17,235
<DEPRECIATION> 4,784
<TOTAL-ASSETS> 81,519
<CURRENT-LIABILITIES> 15,254
<BONDS> 22,305
0
0
<COMMON> 137
<OTHER-SE> 31,939
<TOTAL-LIABILITY-AND-EQUITY> 81,519
<SALES> 43,478
<TOTAL-REVENUES> 43,478
<CGS> 26,302
<TOTAL-COSTS> 26,302
<OTHER-EXPENSES> 9,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 916
<INCOME-PRETAX> 6,675
<INCOME-TAX> 2,670
<INCOME-CONTINUING> 4,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,005
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
