SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended September 30, 1997
Commission file number 0-21630
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ACTION PERFORMANCE COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
ARIZONA 86-0704792
(State of Incorporation) (I.R.S. Employer Identification No.)
2401 West First Street
Tempe, Arizona 85281
(602) 894-0100
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) 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 X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Issuer's revenues for its most recent fiscal year: $130,380,000.
The aggregate market value of Common Stock held by nonaffiliates of the
registrant (13,868,740 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 15, 1997, was
$458,535,216. For purposes of this computation, all officers, directors and 10%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors or
10% beneficial owners are, in fact, affiliates of the registrant.
As of December 15, 1997, there were outstanding 16,012,471 shares of
registrant's Common Stock, par value $.01 per share.
Documents incorporated by reference: Portions of the registrant's definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
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ACTION PERFORMANCE COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES..................................................18
ITEM 3. LEGAL PROCEEDINGS...........................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.............................21
ITEM 6. SELECTED FINANCIAL DATA.....................................22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........30
ITEM 11. EXECUTIVE COMPENSATION......................................30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..............................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.........................................31
SIGNATURES ............................................................34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
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PART I
ITEM 1. BUSINESS
Overview
The Company is the leader in the design and sale of licensed
motorsports collectible and consumer products in the United States. The
Company's products include die-cast scaled replicas of motorsports vehicles,
apparel (including t-shirts, hats, and jackets), and souvenirs. The Company
markets its products pursuant to license arrangements with popular race car
drivers (including exclusive license arrangements with seven-time Winston Cup
champion Dale Earnhardt, 1995 and 1997 Winston Cup champion Jeff Gordon, and
seven-time National Hot Rod Association ("NHRA") Funny Car champion John Force),
car owners, car sponsors, automobile manufacturers, and the National Association
for Stock Car Auto Racing ("NASCAR"). The Company's motorsports collectibles and
most of the Company's apparel and souvenirs are manufactured by third parties,
generally utilizing the Company's designs, tools, and dies. The Company screen
prints and embroiders a portion of the licensed motorsports apparel that it
sells.
The Company markets its products to approximately 5,000 specialty
retailers either directly or through its wholesale distributor network; to
motorsports enthusiasts directly through its Racing Collectibles Club of America
(the "Collectors' Club"), which currently has approximately 107,000 members; and
through mobile trackside souvenir stores, promotional programs for corporate
sponsors, and fan clubs. In December 1996, the Company entered into a license
agreement with Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and game
manufacturer, covering the exclusive sale by Hasbro of a new line of
motorsports-related products in the mass-merchandise market.
The Company's products and other programs capitalize on the rapidly
growing popularity of motorsports. USA Today reports that motorsports racing is
the fastest growing spectator sport in the United States with attendance at
NASCAR Winston Cup events more than doubling in the past decade from 75,643 per
event in 1985 to approximately 180,000 in 1996. Approximately 5.6 million fans
attended the 31 races of the Winston Cup series in 1996. USA Today also reports
that TV ratings are growing even faster than attendance, with more than 100
million people tuning in to NASCAR's televised events each year. According to
NASCAR, more than 70 of the Fortune 500 companies utilize motorsports
sponsorship or advertising as part of their marketing strategies.
Historically, the Company has designed and marketed die-cast
collectibles featuring NASCAR drivers and vehicles. In 1995, the Company began
expanding its lines of die-cast collectibles to include other types of
motorsports vehicles, including NHRA drag racing, NASCAR's new "Super Truck"
racing series, United States Auto Club ("USAC") racing, and "World of Outlaws"
sprint car racing. During fiscal 1997, the Company expanded its product
offerings by acquiring Sports Image, Inc. ("Sports Image"), Motorsport
Traditions Limited Partnership and Creative Marketing and Promotions, Inc.
(together, "Motorsport Traditions"), and Robert Yates Promotions, Inc. ("RYP"),
which market and distribute licensed motorsports products including apparel and
souvenirs; Image Works, Inc., which manufactures and markets licensed
motorsports apparel through the mass-merchandise markets ("Image Works"); and
the motorsports collectibles-related assets of Simpson Products, Inc.
("Simpson"). As a result of these acquisitions, the Company now markets and
distributes licensed motorsports apparel and other souvenir items featuring the
likeness of Dale Earnhardt, Jeff Gordon, Darrell Waltrip, Bobby Labonte, and
other popular drivers. During fiscal 1997, the Company also expanded its
development of promotional programs for corporate sponsors of motorsports, which
feature the Company's products and which are intended to increase the brand
awareness of the products and services of the corporate sponsors. The Company
also has begun to represent a number of 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 has continued to take significant steps that are intended
to add new product lines and distribution channels to capitalize on the growing
demand for licensed motorsports products but will not compete with sales of the
Company's existing products. As part of these ongoing efforts, in October 1997
the Company announced that it has agreed to acquire the assets related to the
motorsports die-cast collectible product lines of
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Revell-Monogram, Inc. ("Revell") and to enter into a strategic alliance with
Revell involving extensive product licensing and distribution arrangements. In
October 1997, the Company also entered into a ten-year license agreement with
Richard Childress Racing Enterprises, Inc. ("RCR") with respect to various
rights used in connection with Dale Earnhardt licensed products. On December 9,
1997, the Company acquired certain assets and assumed certain liabilities
related to sales of motorsports merchandise licensed by NASCAR Winston Cup
driver Rusty Wallace and entered into a seven-year license agreement for the
name and likeness of Mr. Wallace (the "Rusty Wallace Acquisition").
The Company focuses on developing long-term relationships with the
most popular drivers, car owners, car sponsors, car manufacturers, and others in
the various top racing categories. The Company continually strives to strengthen
its relationships with licensors and to develop opportunities to market
innovative licensed collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with popular
NASCAR and other motorsports personalities and sponsors significantly enhance
the collectible value and marketability of its products. The Company believes
that it will be able to leverage its relationships to attract additional drivers
in order to generate increased revenue for the Company as well as increased
earnings for the drivers.
The Company pursues a strategy designed to enhance its leadership
position in the motorsports collectible and consumer products industry. Key
aspects of this strategy include (i) continuing to enhance its existing products
and introduce new products that appeal to racing enthusiasts, (ii) expanding and
strengthening its licensing arrangements, (iii) pursuing strategic acquisitions
and alliances, (iv) expanding existing and identifying new distribution
channels, and (v) developing promotional programs for corporate sponsors.
The Company was incorporated in Arizona in 1992. The Company's
principal executive offices are located at 4707 East Baseline Road, Phoenix,
Arizona 85040, and its telephone number is (602) 337-3700. As used herein, the
term "Company" refers to Action Performance Companies, Inc. and its subsidiaries
and operating divisions. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
Industry Overview
Motorsports racing in the United States consists of several distinct
segments, each with its own organizing bodies and events. The largest segment,
in terms of attendance and media exposure, is stock car racing, which is
dominated by NASCAR. The other principal segments are drag racing, with NHRA the
most important organizing body, and Indy car racing, controlled by the Indy
Racing League and Championship Auto Racing Teams.
According to USA Today, motorsports racing is the fastest growing
spectator sport in the United States. Approximately 15.4 million people attended
motorsports' premier events in 1996, almost three times the 1981 attendance.
Approximately 5.6 million fans attended the 31 races in the NASCAR Winston Cup
series in 1996, representing attendance of approximately 180,000 per event, more
than double the 75,643 attendance per Winston Cup event in 1985. Published
reports estimate that attendance at NASCAR Winston Cup events in 1997 exceeded
6.0 million fans. NHRA attendance also has grown significantly in recent years,
reaching total attendance of almost 1.9 million in 1996. Motorsports events also
have achieved significant success on television, with coverage of NASCAR and
NHRA races provided by broadcast and cable television networks, such as ABC,
CBS, ESPN, TBS, and TNN, in addition to regional sports networks. Several
leading cable companies have joined forces recently to launch Speedvision, a
motorsports cable network. USA Today reports that TV ratings are growing even
faster than attendance, with more than 100 million people tuning into NASCAR's
televised events in 1996. The Company believes that the recent construction of
new superspeedways in Los Angeles, California, Ft. Worth, Texas, Las Vegas,
Nevada, and other major cities will stimulate continued growth in the
motorsports industry through increased exposure to new racing enthusiasts and
markets.
The growing popularity of motorsports has been recognized by corporate
America. According to NASCAR, more than 70 of the Fortune 500 companies utilize
motorsports sponsorship or other activities as part of their marketing
strategies.
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Products and Services
Die-Cast Scaled Replica Vehicles
The Company designs and markets scaled replicas of motorsports-related
vehicles that are constructed using die-cast bodies and chassis with free
wheeling deluxe wheels and tires. The Company markets its die-cast racing
collectibles pursuant to approximately 300 active licenses with race car
drivers, owners, and sponsors as well as under license agreements with NASCAR,
Ford Motor Company, and several divisions of General Motors Corp. The die-cast
collectibles offered by the Company relate to stock car, NHRA drag racing,
"Super Truck" racing, USAC racing, and "World of Outlaws" sprint car racing. The
Company's die-cast collectibles consist of (i) 1:64th and 1:24th scale replicas
of actual racing vehicles, which are approximately three inches and eight inches
long, respectively; (ii) 1:96th and 1:64th scale racing vehicle transporters;
(iii) a 1:16th scale pit wagon; and (iv) 1:24th scale dually trucks with
trailers. The Company's die-cast replicas typically range in price at retail
from approximately $9.00 to $75.00 per item, depending on size, type of vehicle,
and level of detail. A 1:24th scale replica of an actual racing vehicle
typically retails for $35.00. The Company offers its die-cast collectibles
primarily through its wholesale distributor network to specialty retailers,
through its Collectors' Club, through mobile trackside stores, and through
corporate promotional programs. See Item 1, "Business - Sales and Distribution."
Historically, the Company has designed and marketed die-cast
collectibles featuring drivers and vehicles from the NASCAR Winston Cup series.
During fiscal 1995, the Company began the development of several new lines of
die-cast collectibles featuring replicas of vehicles from other popular
motorsports. The Company successfully introduced its line of Winston NHRA Top
Fuel Dragsters and a line of die-cast collectible replicas from the popular new
NASCAR "Super Truck" series in fiscal 1995 and introduced its line of Top Fuel
Funny Car replicas in fiscal 1996. In addition, during the second half of fiscal
1997 the Company introduced the "Elite" series of die-cast replicas of NASCAR
racing vehicles, which feature highly detailed equipment such as spark plug
wires, braided hoses, and realistic suspension systems. The Company sells the
Elite series of collectibles exclusively through the Collectors' Club for
approximately $75.00 per replica.
The Company enhances the collectible value and appeal of its products
through various measures. These measures include (i) designing die-cast
collectibles that include features that are not offered by the Company's
competitors; (ii) limiting the quantities of each item that it produces and
sells; (iii) specifying on the packaging material of certain die-cast
collectibles the quantity of that limited-edition item actually produced; (iv)
offering certain items only through its Collectors' Club; and (v) designing and
developing new packaging concepts to improve the display of each collectible
item.
Motorsports Consumer Products
The Company markets various licensed motorsports apparel, souvenir,
and other consumer products, including t-shirts, jackets, hats, license plate
brackets, mugs, pins, and key chains. Each of the motorsports consumer products
generally features the name, likeness, and car number of a popular race car
driver. The Company intends to acquire licenses with additional drivers and to
develop new motorsports consumer products, including items bearing the "NASCAR"
name and logo in connection with the Company's license agreement with NASCAR.
The Company's licensed motorsports apparel items utilize unique and creative
designs that are printed or applied to high-quality shirts, hats, jackets, and
other products. The Company designs and sells its motorsports apparel products
in sizes ranging from infant to youth to men's and women's adult sizes. The
Company designs its motorsports consumer products primarily for high-volume
distribution through retail outlets, mobile trackside stores, and promotional
programs with corporate sponsors of racing teams and racing events. See Item 1,
"Business - Sales and Distribution."
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Mass-Merchandise License
The Company licenses Hasbro to produce a new line of
motorsports-related products specifically designed for the mass-merchandise
market. Under this license, Hasbro currently markets a line of die-cast replicas
of racing vehicles, which was jointly developed by the Company and Hasbro, under
the "Winner's Circle" brand name. The mass-market die-cast products manufactured
and marketed by Hasbro are completely distinct from the Company's current
products and do not compete directly with the Company's limited-edition
motorsports die-cast collectible products. Under the agreement, Hasbro also will
market other licensed motorsports products, including radio-controlled cars,
slot car sets, games (such as electronic and CD-ROM interactive games), plush
toys, figurines, play sets, walkie talkies, and other items similar to products
that Hasbro currently markets under the "Kenner," "Tonka," and "Milton Bradley"
brand names.
The Company believes that the license agreement with Hasbro allows the
Company to capitalize on opportunities in the mass-merchandise market. The
agreement will enable the Company to remain focused on its core business of
designing and marketing motorsports collectibles, apparel, and souvenir products
while enabling the Company to benefit from Hasbro's retail mass-merchandise
marketing expertise and resources. The agreement also provides a means of
expanding the Company's product offerings without committing substantial
resources to manufacturing and marketing activities or subjecting it to the
risks inherent in the mass-merchandise market.
Corporate Promotional Programs
The Company provides comprehensive marketing services designed to
create corporate promotional programs for large corporate sponsors that
advertise in motorsports. Many corporations sponsor racing vehicles or events
and advertise at motorsports events and in motorsports-related media in order to
increase awareness of their brands among consumers and to encourage consumers to
purchase their products. The Company provides design services, graphic artists,
and the capacity to deliver a wide array of promotional products, such as
die-cast replicas, t-shirts, and hats. The corporate sponsors use these products
either as free or low-cost awards with the purchase of their own products or in
sweepstakes or other promotions. The Company also provides in-house marketing
and distribution support for its promotional programs, including in-bound order
processing, order fulfillment, sweepstakes processing, and redemption programs.
Die-cast replica vehicles sold as promotional items are not sold through the
Company's wholesale distribution network or through its Collectors' Club.
Action Sports Management
The Company represents a number of top 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 provides a number of services designed to enable
drivers to maximize revenue opportunities throughout their careers. Since the
commencement of its sports management business in fiscal 1996, the Company has
entered into exclusive agreements to represent six-time Winston NHRA Funny Car
champion John Force and other popular drag racing drivers, including Darrell
Alderman, Mike Dunn, Scott Geoffrion, and Darrell Gwynn. As a result of the
Company's ability to represent drivers effectively in obtaining favorable
licensing arrangements and other revenue opportunities, the Company believes
that it is well-positioned to attract and retain top race car drivers.
Sales and Distribution
The Company markets its die-cast collectibles to approximately 5,000
specialty retailers through its wholesale distributor network, through its
Collectors' Club, through mobile trackside stores, and through corporate
promotional programs. The Company markets its motorsports consumer products
primarily through direct trackside sales to race fans; through an in-house sales
force and independent representatives to approximately 5,000 specialty retailers
and to major discount and department stores, retail automotive product outlets,
and convenience stores; and through promotional programs with corporate
sponsors.
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Wholesale Distribution
The Company markets its die-cast collectibles on a wholesale basis
through approximately 40 distributors operating in the United States. The
distributors solicit orders for the Company's die-cast products from
approximately 5,000 specialty retailers throughout the United States. The
retailers include stores specializing in motorsports collectibles and apparel
and stores specializing in other sports collectible items. Employees of the
Company attend trade shows in an effort to attract new distributors and
retailers to its network. The Company advertises its die-cast collectibles in
newspapers and magazines covering motorsports and the collectibles markets.
These advertisements encourage consumers to contact the nearest retailers to
purchase the Company's die-cast collectibles. The Company also takes measures to
increase consumer awareness of its products through radio and television
advertising, including promotion of its collectibles on "home shopping"
television programs and advertising during popular television programs of
interest to motorsports enthusiasts.
The Company utilizes its distributor network as well as an in-house
sales force and independent representatives to market its motorsports apparel,
souvenirs, and other consumer products on a wholesale basis to the same
specialty retailers that sell its die-cast collectibles. The Company's in-house
sales force and independent representatives also market certain motorsports
consumer products on a wholesale basis to automobile sections in major discount
and department stores such as Wal-Mart and K-Mart, to automotive retail stores,
and to convenience stores.
Collectors' Club
The Company markets certain of its die-cast collectibles exclusively
through its Collectors' Club. Members of the Company's Collectors' Club pay a
lifetime membership fee that entitles them to receive membership premiums, a
quarterly magazine, catalogs, and other special sales materials highlighting the
Company's collectibles and other products. Membership in the Collectors' Club
increased from approximately 22,000 members in September 1994 to approximately
100,000 members as of September 30, 1997. The Company strives to increase
collector interest in its products and to enhance its products' value as
collectibles by (i) offering certain items exclusively through its Collectors'
Club; (ii) producing a limited number of each collectible; and (iii) limiting
the number of a particular item that each member may purchase. Following the
acquisitions of Sports Image and Motorsport Traditions, the Company began
developing a line of licensed motorsports apparel and souvenirs to offer
exclusively through its Collectors' Club. The Company advertises its Collectors'
Club in publications that focus on motorsports or the collectibles industry and
through limited radio and television advertisements. During 1996, the Company
increased its advertising on cable television during televised motorsports
events and related programming in order to enhance its exposure to motorsports
enthusiasts.
The Company employs customer service representatives and an automated
call distribution telephone system to take membership applications, take
customer orders, and handle customer inquiries. The Company utilizes an advanced
telephone and computer system that combines telemarketing functions,
computerized order processing, and automated warehouse operations to answer and
process telephone orders to its Collectors' Club more effectively and
efficiently and to accommodate the significant growth in club membership in
recent years. The system also enables the Company to track the effectiveness of
each advertisement and to target its marketing and advertising programs
accurately for enhanced impact.
Trackside Sales
Average attendance at NASCAR Winston Cup racing events grew to
approximately 180,000 fans per race during 1996. Following the Rusty Wallace
Acquisition, the Company owns and operates 25 fully equipped mobile trackside
stores to capitalize on this large base of potential customers. Some or all of
the Company's mobile trackside stores travel to each NASCAR Winston Cup race (34
events in 1997) as well as to other selected racing events. Each mobile
trackside store is decorated with the logos and color scheme of a particular
racing team and driver and sells a complete assortment of licensed motorsports
apparel, souvenirs, and die-cast collectibles dedicated
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to that team and driver. These mobile stores represent the only trackside
opportunities for racing enthusiasts to purchase motorsports products using the
name and likeness of the driver and racing team featured in each store.
Corporate Promotional Programs
The Company creates promotional programs for large corporate sponsors
of motorsports. The Company plans to pursue future promotional programs and
currently is in discussions with major race car drivers and corporate sponsors
in its effort to develop such programs. See Item 1, "Business - Products and
Services - Corporate Promotional Programs."
Design and Production
Die-cast Scaled Replica Vehicles
The Company designs each die-cast collectible that it markets. The
Company's design artists take numerous photographs of the actual racing cars,
trucks, and other vehicles to be produced as die-cast replicas. Working from
these photographs, the Company's artists and engineers use computer software to
create detailed scale renderings of the vehicles. After approval of the
rendering by the vehicle owner, driver, or racing team sponsor, the Company
supplies computerized renderings to its manufacturer in the Peoples' Republic of
China ("China"). The manufacturer produces a sample or model, which the Company
then inspects for quality and detail. After final approval, the manufacturer
produces the die-cast replicas, packages them, and ships the finished products
to the Company or, in certain instances, directly to the Company's customers.
The Company's die-cast collectibles are manufactured under an
exclusive agreement with a third-party manufacturer in China. The term of the
agreement currently extends through December 31, 1997 and automatically renews
for successive one-year terms unless terminated by either party by giving
written notice to the other party at least 90 days prior to the end of the
then-current term. The Company owns a significant portion of the tooling that
the third-party manufacturer uses to produce die-cast collectibles for the
Company and has partial control over the production of its die-cast collectibles
under the manufacturing agreement. The Company invested approximately $2.6
million and $7.0 million in tooling for its proprietary line of die-cast
collectibles in fiscal 1996 and fiscal 1997, respectively. The Company believes
the breadth and quality of the tooling program provides the Company with a
competitive advantage in the motorsports collectible market. The Company intends
to make additional investments in tooling in order to support the growth of its
business. The Company also devotes a significant amount of time and effort to
the production of its die-cast collectibles to ensure that the resulting
products display a level of quality and detail that is superior to competing
products, including opening hoods and trunks, detailed engines, working
suspensions, and pad printing instead of stickers or decals. The Company
believes that its overseas manufacturer of die-cast collectibles is dedicated to
high quality and productivity as well as support for new product development. An
affiliate of the Company's China-based die-cast manufacturer currently owns
450,000 shares of the Company's Common Stock. The Company believes that this
ownership interest further aligns the interests of the manufacturer with those
of the Company.
Motorsports Consumer Products
The Company currently designs substantially all of its licensed
motorsports apparel, souvenirs, and other consumer products and arranges for the
manufacture of most of such products on a purchase order basis with third-party
manufacturers located primarily in the United States. As a result of its recent
acquisition of Image Works, the Company now screen prints and embroiders a
portion of the licensed motorsports apparel that it sells. The Company's graphic
artists and product designers seek to develop unique products and artistic
designs that will appeal to motorsports enthusiasts and distinguish the
Company's apparel and souvenir products from those of its competitors. The
Company's artists and designers also work closely with the third-party
manufacturers in order to ensure that the products conform to design
specifications and meet or exceed quality requirements. The Company believes
that a number of alternative manufacturers for each of these products is readily
available in the event that
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the Company is unable to obtain products from any particular manufacturer. The
Company owns the tooling and dies used to manufacture certain of its motorsports
consumer products. As the Company develops new motorsports consumer products
that require specialized tooling, the Company intends to build or purchase the
new tooling that will be required to permit the third-party manufacturers to
produce those items.
Licenses
Product Licenses
The Company focuses on developing long-term relationships with and
engages in comprehensive efforts to license the most popular drivers and car
owners in each top racing category, their sponsors, and others in the
motorsports industry. The Company currently has licenses with approximately 300
race car drivers, car owners, and car sponsors as well as with NASCAR, Ford
Motor Company, several divisions of General Motors Corp., and PACCAR, Inc. (the
manufacturer of Kenworth and Peterbilt trucks). The Company continually strives
to strengthen its relationships with licensors and to develop opportunities to
market innovative collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with top race car
drivers, such as seven-time Winston Cup champion Dale Earnhardt, 1995 and 1997
Winston Cup champion Jeff Gordon, six-time NHRA Funny Car champion John Force,
Kenny Bernstein, Rusty Wallace, Dale Jarrett, Mark Martin, Bill Elliot, and
Bobby Labonte, significantly enhance the collectible value and marketability of
its products. By aligning itself with top racing personalities and providing a
broad range of revenue opportunities, the Company believes that it will be able
to leverage those relationships to attract additional drivers in order to
generate increased revenue for the Company as well as increased earnings for the
drivers.
Except for its licenses with Dale Earnhardt, Jeff Gordon, Rusty
Wallace, and certain race car team owners, as described below, the licenses with
race car drivers generally provide for a term of one year and permit the Company
to use the driver's name, photograph or likeness, and autograph; the licenses
with race car owners generally provide for a term of one year and permit the
Company to use the car number and colors; the licenses with manufacturers
provide for terms of two or more years and permit the Company to reproduce the
cars or trucks themselves; and the license agreements with various sponsors
generally provide for terms of one to three years and permit the Company to
reproduce the sponsors' decals and logos as they appear on the cars or trucks.
Depending upon the particular agreement, the individual licenses either renew
automatically, may be renewed or extended upon written request by the Company,
or expire at the end of the specified term. The agreements with the drivers, car
owners, car and truck manufacturers, and car sponsors provide for payments by
the Company to the licensors of either (i) a fixed dollar amount, which may
include a substantial advance to the licensor; (ii) a fixed amount per item sold
by the Company pursuant to the license; (iii) a percentage of the net sales for
a program or a percentage of the Company's wholesale price per item sold by the
Company pursuant to the license; or (iv) a combination of the above. License
agreements with certain sponsors do not require payments by the Company to the
licensors because of the advertising value provided to the licensor as a result
of having its decals and logos displayed on the Company's products. The Company
continually strives to renew existing agreements or to enter into new license
agreements with existing or new drivers, car owners, and car sponsors and to
develop new product programs pursuant to its license agreements in its effort to
maintain its leadership position in the motorsports licensed products industry.
Dale Earnhardt License Agreement
In connection with the acquisition of Sports Image, the Company
entered into a license agreement with Dale Earnhardt (the "Earnhardt License")
under which the Company has the right to market licensed motorsports products
utilizing the likeness of Mr. Earnhardt. Under the Earnhardt License, Mr.
Earnhardt also granted the Company the right of first refusal to make, have
made, use, sell, or otherwise distribute any new licensable products that Mr.
Earnhardt becomes aware of and approves for marketing. The Earnhardt License
also provides that Mr. Earnhardt will not personally market and will not permit
others to market, through the same channels of distribution used by the Company,
any products bearing his likeness that are the same as or similar to products
marketed by the Company
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under the Earnhardt License. The term of the Earnhardt License extends to
November 2011 and from year to year thereafter unless terminated by either
party.
Jeff Gordon License and Endorsement Agreements
In connection with the acquisition of Motorsport Traditions, the
Company acquired the exclusive rights to manufacture and market various apparel
and souvenir products bearing the name, likeness, and signature of Jeff Gordon
and the likeness of his race car under a license agreement with an affiliate of
Mr. Gordon (the "Gordon Apparel and Souvenir License"). The Gordon Apparel and
Souvenir License expires on December 31, 2000, subject to renewal by agreement
between the parties. The Gordon Apparel and Souvenir License requires the
Company to pay the licensor royalties based on a percentage of the wholesale
price of licensed products sold by the Company, with minimum royalty payments
each year during the term of the agreement.
In connection with the acquisition of Motorsport Traditions, the
Company also entered into a license agreement (the "Gordon Die-Cast License")
with an affiliate of Jeff Gordon. Pursuant to the Gordon Die-Cast License, the
Company has the exclusive right to manufacture and market die-cast replicas of
Mr. Gordon's race car and related vehicles. The Gordon Die-Cast License expires
on December 31, 2000. The Gordon Die-Cast License requires the Company to pay
the licensor royalties based on a percentage of the wholesale price of licensed
products sold by the Company, with minimum royalty payments each year during the
term of the agreement.
In connection with the Gordon Die-Cast License, the Company entered
into a personal service and endorsement agreement with Jeff Gordon and an
affiliate of Mr. Gordon (the "Endorsement Agreement"). During the term of the
Endorsement Agreement, which expires on December 31, 2000, the Company will have
the right to use Mr. Gordon's name, likeness, signature, and endorsement in
connection with the advertisement, promotion, and sale of the die-cast
collectibles to be produced under the Gordon Die-Cast License.
Rusty Wallace License Agreement
In connection with the Rusty Wallace Acquisition in December 1997, the
Company entered into a license agreement (the "Wallace License") with an
affiliate of Rusty Wallace. Pursuant to the Wallace License, the Company has a
right of first refusal to make, have made, use, sell, or otherwise distribute
any new licensable products that bear the name or likeness of Mr. Wallace. The
Wallace License also provides that Mr. Wallace will not personally market and
will not permit others to market, through the same channels of distribution used
by the Company, any products bearing his likeness that are the same as or
similar to products marketed by the Company under the Wallace License. The
Wallace License requires the Company to pay the licensor royalties based on a
percentage of the wholesale price of licensed products sold by the Company, with
minimum royalty payments each year during the term of the agreement if certain
minimum sales requirements are met. The Wallace License expires on December 31,
2004, subject to two five-year renewal options by agreement between the parties.
Significant Team Owner Licenses
During fiscal 1997, the Company entered into license agreements with
several of the most popular NASCAR race car team owners, including Robert Yates
Racing, Inc. ("Yates"), Richard Childress Racing Enterprises, Inc.
("Childress"), Joe Gibbs Racing, Inc. ("Gibbs"), and Dale Earnhardt, Inc.
("DEI"). These licenses provide the Company with a right of first refusal to
market products bearing the likeness of Yates' "#28" and "#88" Winston Cup cars;
Childress' "#3" and "#31" Winston Cup and other racing vehicles; Gibbs' "#18"
Winston Cup car and a second car beginning in 1998; and DEI's "#14" Winston Cup
car and other racing vehicles. To the extent that the Company exercises its
right of first refusal, the license agreements also provide that the licensor
will not directly market and will not permit others to market, through the same
distribution channels used by the Company, any of the licensed products. The
license agreements with Yates, Childress, Gibbs, and DEI provide for terms of
15, 10, 5, and 3 years, respectively. Each of the license agreements with the
team owners requires the Company to pay the licensor royalties
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based on a percentage of the wholesale price of licensed products sold by the
Company. Certain of the license agreements also provide for minimum royalty
payments to the licensors.
Hasbro License Agreement
The license agreement between the Company and Hasbro (the "Hasbro
License") covers the exclusive sale by Hasbro in the mass-merchandise market of
specific motorsports-related products for which the Company has or will secure
exclusive or non-exclusive licenses from race car drivers, owners,
manufacturers, and sponsors. The Company believes that the Hasbro License
provides the Company with a source of revenue from the mass-merchandise market
without committing substantial resources to manufacturing and marketing
activities or subjecting the Company to the risks inherent in the
mass-merchandise market. Under the Hasbro License, the Company is responsible
for acquiring and maintaining the license rights with the licensors, and Hasbro
is responsible for all costs and other arrangements relating to tooling,
manufacturing, transportation, marketing, distribution, and sales of licensed
products. Hasbro will be responsible for and will pay or reimburse the Company
for all license fees and royalties, including advances and guarantees, paid to
licensors for licensed products. The licensed products consist of (i) die-cast
replicas of motorsports vehicles and a 1:18th-scale plastic toy car, for which
Hasbro pays a specified royalty, and (ii) all other products that Hasbro may
market as licensed motorsports products, including, for example,
radio-controlled cars, slot car sets, games (including electronic and CD-ROM
interactive games), plush toys, figurines, play sets, walkie talkies, and other
products, for which Hasbro pays a specified royalty. Hasbro currently markets
similar products under the "Kenner," "Tonka," "Milton Bradley," and other brand
names. Hasbro will pay the Company guaranteed minimum annual royalty payments of
$500,000 to $1.0 million, depending on certain circumstances.
Hasbro's initial focus under the Hasbro License has been to develop,
with the Company's assistance, a line of motorsports die-cast products for the
retail mass-merchandise market. Hasbro will fund all capital requirements for
this product line and will manufacture, distribute, and market the products
under the "Winner's Circle" brand name. This product line has been recently
introduced to mass-market retailers. The mass-market die-cast products
manufactured and marketed under the Hasbro License are completely distinct from
the Company's current products and do not compete directly with the Company's
limited-edition motorsports die-cast collectible products.
The Hasbro License provides for a term ending on December 31, 2001.
Hasbro may extend the Hasbro License for an additional three-year term, provided
that total wholesale revenue of licensed products exceeds a specified amount
during the initial term.
NASCAR License Agreement
In April 1997, the Company entered into a licensing agreement and
marketing alliance with NASCAR that gives the Company the non-exclusive right to
use the "NASCAR" name and logo on all of its products and product packaging as
well as on related sales, marketing, and promotional materials. The licensing
arrangement became effective immediately for all of the Company's products other
than die-cast products. Beginning on January 1, 1998, the Company also will have
the right to include the NASCAR name and logo on its die-cast products,
packaging, and related materials. Under the NASCAR license, the Company will be
an official licensee of the "NASCAR 50th Anniversary" program and intends to
develop several product lines in connection with that promotion. In addition,
the Company and NASCAR currently are working together to develop other
promotional programs targeted at many of NASCAR's corporate sponsors.
Competition
The motorsports collectible and consumer product industry is extremely
competitive. The Company competes with major domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. The Company believes that Racing Champions, Inc.,
Revell-Monogram, Inc., and The ERTL Company, Inc.
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currently constitute its principal competitors in the die-cast collectible
industry. The Company's motorsports apparel and souvenirs compete with similar
products sold or licensed by drivers, owners, sponsors, and other licensors with
which the Company currently does not have licenses as well as with sports
apparel licensors and manufacturers in general. Emerging companies also may
increase their participation in these markets. The Company's promotional
products compete for advertising dollars against other specialty advertising
programs and media, such as television, radio, newspapers, magazines, and
billboards.
The Company believes that its relationships and licenses with top race
car drivers, car owners, and other popular licensors represent a significant
advantage over its competitors in the motorsports collectible and consumer
products industry. The Company strives to expand and strengthen these
relationships and to develop opportunities to market innovative licensed
collectible and consumer products that appeal to motorsports enthusiasts. The
ability of the Company to compete successfully depends on a number of factors
both within and outside its control, including the quality, features, pricing,
and diversity of its products; the quality of its customer services; its ability
to recognize industry trends and anticipate shifts in consumer demands; its
success in designing and marketing new products; the availability of adequate
sources of manufacturing capacity and the ability of its third-party
manufacturers to meet delivery schedules; its efficiency in filling customer
orders; the continued popularity of the motorsports personalities with whom the
Company has licensing arrangements; its ability to renew existing licensing
arrangements and enter into new licensing arrangements; its ability to develop
and maintain effective marketing programs that enable it to sell its products to
motorsports enthusiasts; product introductions by the Company's competitors; the
number, nature, and success of its competitors in a given market; and general
market and economic conditions.
Backlog
The Company accepts orders from members of its Collectors' Club in
advance of the arrival of certain collectible products from the manufacturers.
The Company had outstanding orders for approximately $5.0 million of such
products as of September 30, 1997.
Trademarks and Patent Rights
Although the Company's business historically has not depended on
trademark or patent protection, the Company recognizes the increasing value of
its various trade names and marks. The Company is taking steps designed to
protect, maintain, and increase the value of its trade names and marks. The
Company does, however, license valuable trademarks and other rights from third
parties. See Item 1, "Business - Licenses."
Insurance
The Company maintains a $2.0 million product liability insurance
policy to cover the sale of its die-cast and other products. The Company
maintains an additional $5.0 million in commercial umbrella liability coverage.
The Company also maintains a $6.0 million insurance policy to cover its molds
and dies located at its third-party manufacturer in China and a $5.0 million
insurance policy to cover lost revenue in the event of certain interruptions of
business with its overseas manufacturer of die-cast collectibles. The Company
believes its insurance coverage is adequate.
Employees
As of December 15, 1997, the Company had 418 full-time employees. The
Company has experienced no work stoppages and is not a party to a collective
bargaining agreement. The Company believes that it maintains good relations with
its employees.
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Executive Officers
The following table sets forth certain information regarding each of
the executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Fred W. Wagenhals...................... 56 Chairman of the Board, President, and
Chief Executive Officer
Tod J. Wagenhals....................... 33 Executive Vice President, Secretary, and Director
Charles C. Blossom, Jr................. 47 Vice President Chief Operating Officer, and Director
Christopher S. Besing.................. 37 Vice President, Chief Financial Officer,
Treasurer, and Director
</TABLE>
Fred W. Wagenhals has served as Chairman of the Board, President, and
Chief Executive Officer of the Company since November 1993 and served as
Chairman of the Board and Chief Executive Officer from May 1992 until September
1993 and as President from July 1993 until September 1993. Mr. Wagenhals
co-founded Racing Champions, Inc. in April 1989 and served as a director of that
company until April 1993. From October 1990 until May 1992, Mr. Wagenhals served
as Chairman of the Board and Chief Executive Officer of Race Z, Inc. and Action
Performance Sales, Inc. ("APS"), which were engaged in sales of promotional
products and collectible items related to the racing industry.
Tod J. Wagenhals has served as Executive Vice President of the Company
since July 1995, as a director of the Company since December 1993, and as
Secretary of the Company since November 1993. Mr. Wagenhals served as a Vice
President of the Company from September 1993 to July 1995. Mr. Wagenhals served
in various marketing capacities with the Company from May 1992 until September
1993 and with APS from October 1991 until May 1992. Mr. Wagenhals was National
Accounts Manager of Action Products, Inc. from January 1989 to October 1991. Mr.
Wagenhals is the son of Fred W. Wagenhals.
Charles C. Blossom, Jr. has served as Vice President, Chief Operating
Officer, and as a director of the Company since November 1997. Mr. Blossom
served as Senior Vice President -- Sales and Marketing of the Company from July
1997 to November 1997. From January 1996 to July 1997, Mr. Blossom was engaged
in providing professional business consulting services. From October 1992 to
January 1996, Mr. Blossom served as President of Mac Tools, a $300 million
subsidiary of The Stanley Works, which manufactures and distributes tools and
equipment to the automotive aftermarket. Mr. Blossom served as Vice President --
Sales and Marketing of Mac Tools from May 1992 to October 1992, and as Vice
President -- Air Tool Operations from September 1989 to May 1992. From December
1983 to September 1989, Mr. Blossom owned and operated American Pneumatic
Technologies, Inc. before selling that business to Mac Tools.
Christopher S. Besing has served as a Vice President and the Chief
Financial Officer of the Company since joining the Company in January 1994, as a
director of the Company since May 1995, and as Treasurer of the Company since
February 1996. Prior to joining the Company, Mr. Besing held several financial
and accounting positions with Orbital Sciences Corporation ("OSC") from
September 1986 to December 1993, most recently as Director of Accounting and
Controller of OSC's Launch Systems Group in Chandler, Arizona. Prior to joining
OSC, Mr. Besing was employed as an accountant with Arthur Andersen & Co. from
January 1985 to August 1986. Mr. Besing is a Certified Public Accountant.
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SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in
this Report, should be carefully considered in evaluating the Company and its
business.
Certain Factors That Could Adversely Affect Operating Results
The Company's operating results are affected by a wide variety of
factors that could adversely impact its net sales and operating results. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify trends in the motorsports collectibles and
consumer markets and to create and introduce products on a timely basis that
take advantage of those trends and that compete effectively on the basis of
price and consumer tastes and preferences; its ability to identify popular
motorsports personalities and to enter into and maintain mutually satisfactory
licensing arrangements with them; the racing success of the key motorsports
personalities with whom the Company has license arrangements; the Company's
ability to design and arrange for the timely production and delivery of its
products, the market acceptance of the Company's products; the level and timing
of orders placed by customers; seasonality; the popularity and life cycles of
and customer satisfaction with products designed and marketed by the Company;
and competition and competitive pressures on prices.
New motorsports collectible and consumer products frequently can be
successfully marketed for only a limited time. The Company's ability to increase
its sales and marketing efforts to stimulate customer demand and its ability to
monitor third-party manufacturing arrangements in order to maintain satisfactory
delivery schedules and product quality are important factors in its long-term
prospects. A slowdown in demand for the Company's products as a result of
ineffective marketing efforts, manufacturing difficulties, changing cultural and
demographic trends or consumer tastes and spending patterns, economic
conditions, or other broad-based factors could adversely affect the Company's
operating results.
Dependence on License Arrangements
The Company markets its products pursuant to licensing arrangements
with race car drivers, race car owners, race car sponsors, automobile
manufacturers, and NASCAR. The licensing arrangements vary in scope and duration
and generally authorize the sale of specified licensed products for short
periods of time. In some cases, the license agreements provide for the payment
of minimum royalties or other fixed amounts, so that the Company may have
significant payment obligations with respect to a particular agreement
regardless of the level of sales of products licensed under that agreement or
the profitability of those sales. The success of licensing arrangements depends
on many factors, including the reasonableness of license fees in relationship to
revenue generated by sales of licensed products, the continued popularity of
licensors, and the absence of their sickness, incapacity, or death. The
termination, cancellation, or inability to renew material licensing
arrangements, or the inability to develop and enter into new licensing
arrangements, would have a material adverse effect on the Company. See Item 1,
"Business Licenses."
Dependence on Third Parties for Manufacturing
The Company depends upon third parties to manufacture all of its
motorsports collectibles and most of its consumer products. Although the Company
owns most of the tools, dies, and molds utilized in the manufacturing processes
of its collectible products and owns the tooling and dies used to manufacture
certain of its consumer products, the Company has limited control over the
manufacturing processes themselves. As a result, any difficulties encountered by
the third-party manufacturers that result in product defects, production delays,
cost overruns, or the inability to fulfill orders on a timely basis could have a
material adverse effect on the Company.
The Company does not have long-term contracts with its third-party
manufacturers. Although the Company believes it would be able to secure other
third-party manufacturers to produce its products as a result of its ownership
of the molds and tools used in the manufacturing process, the Company's
operations would be adversely affected
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if it lost its relationship with any of its current suppliers (including
particularly its manufacturer of die-cast products, which currently utilizes one
facility in China to produce all of the Company's die-cast products) or if its
current suppliers' operations or sea or air transportation with its China-based
die-cast manufacturer were disrupted or terminated even for a relatively short
period of time. The Company's tools, dies, and molds are located at the
facilities of its third-party manufacturers, and, accordingly, significant
damage to such facilities (particularly the facility used by its die-cast
product manufacturer in China) could result in the loss of or damage to a
material portion of its key tools, dies, and molds in addition to production
delays while new facilities were being arranged and replacement tools, dies, and
molds were being produced. The Company does not maintain an inventory of
sufficient size to provide protection for any significant period against an
interruption of supply, particularly if it were required to obtain alternative
sources of supply.
Although the Company does not itself purchase the raw materials used
to manufacture its products, it is potentially subject to variations in the
prices it pays its third-party manufacturers for products depending on what they
pay for the raw materials. In this regard, the Company understands that the
price of zinc, a principal raw material in its die-cast replicas, has increased
substantially over the last several years, although to date these price
increases have not been reflected in increases in the prices the Company pays
for its die-cast replicas.
Integration of Business Operations
The Company has completed a number of acquisitions during and
subsequent to fiscal 1997. Following these acquisitions, the Company has
substantially consolidated the operations of the various acquired entities,
several of which were based in the same city and marketed substantially
identical types of products through substantially identical channels of
distribution, into Company's existing operations in Phoenix, Arizona or the
operations of Sports Image in Concord, North Carolina. There can be no assurance
that the Company will be able to complete effectively the integration of the
operations of the acquired companies with the Company's operations, to manage
effectively the combined operations of the acquired businesses, to achieve the
Company's operating and growth strategies with respect to these businesses, to
obtain increased revenue opportunities as a result of the anticipated synergies
created by expanded product offerings and additional distribution channels, or
to reduce the overall selling, general, and administrative expenses associated
with the acquired operations. The integration of the management, operations, and
facilities of the acquired companies and any other businesses the Company may
acquire in the future could involve unforeseen difficulties, which could have a
material adverse effect on the Company's business, financial condition, and
operating results.
The Company has conducted due diligence reviews of each of the
acquired businesses and has received representations and warranties regarding
each of the acquired businesses. There can be no assurance, however, that
unforeseen liabilities will not arise in connection with the operation of the
acquired businesses or future acquired businesses or that any contractual or
other remedies available to the Company will be sufficient to compensate the
Company in the event unforeseen liabilities arise. For example, the Company
recently was named as a defendant in a lawsuit based upon actions alleged to
have been taken by several of the newly acquired businesses prior to the
Company's acquisitions of those entities. The Company currently is unable to
quantify the amount of liability, if any, that it may incur as a result of the
lawsuit. See Item 3, "Legal Proceedings."
The Company anticipates using the opportunities created by the
combination of its acquired operations to effect what the Company believes will
be substantial cost savings, including a reduction in operating expenses as a
result of the elimination of duplicative sales, marketing, administrative,
warehouse, and distribution facilities, functions, and personnel. Significant
uncertainties, however, accompany any business combination, and there can be no
assurance that the Company will be able to achieve its anticipated integration
of facilities, functions, and personnel in order to achieve operating
efficiencies or otherwise realize cost savings as a result of the recent
acquisitions or future acquisitions. The inability to achieve the anticipated
cost savings could have a material adverse effect on the Company's business,
financial condition, and operating results.
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Management of Growth
Since 1993, the Company's business operations have undergone
significant changes and growth, including its emphasis on and the expansion of
its collectible product lines, acquisition of its motorsports consumer products
lines, and significant investments in tooling and licensing arrangements. The
Company's ability to manage effectively any significant future growth, however,
will require it to integrate successfully the operations of any acquired
businesses with the Company's operations and to enhance further its operational,
financial, and management systems; to expand its facilities and equipment; to
receive products from third-party manufacturers on a timely basis; and to
successfully hire, train, retain, and motivate additional employees. The failure
of the Company to manage its growth on an effective basis could have a material
adverse effect on the Company's business, financial condition, and operating
results. In August 1997, the Company relocated its corporate headquarters to a
new, 140,000 square foot facility in Phoenix, Arizona. The Company also recently
entered into a lease for a new 121,000 square foot facility in Concord, North
Carolina, for its operations based in that area. The Company may be required to
increase staffing and other expenses as well as make expenditures on capital
equipment and manufacturing sources in order to meet the anticipated demand of
its customers. Sales of the Company's collectible and consumer products are
subject to changing consumer tastes, and customers for the Company's promotional
items generally do not commit to firm orders for more than a short time in
advance. The Company's profitability would be adversely affected if the Company
increases its expenditures in anticipation of future orders that do not
materialize. Certain customers may increase orders for the Company's products on
short notice, which would place an excessive short-term burden on the Company's
resources.
Rapid Market Changes
The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition, seasonality, and a constant need
to create and market new products. Demand for motorsports collectible and
consumer products depends upon the popularity of certain drivers and other
personalities, themes, cultural and demographic trends, marketing and
advertising expenditures, and general economic conditions. Because these factors
can change rapidly, customer demand also can shift quickly. New motorsports
collectible and consumer products frequently can be successfully marketed for
only a limited time. The Company may not always be able to respond to changes in
customer tastes and demands because of the amount of time and financial
resources that may be required to bring new products to market. The inability to
respond quickly to market changes could have a material adverse effect on the
Company's business, financial condition, and operating results. See Item 1,
"Business Products and Services."
Dependence on New Products
The Company's operating results depend to a significant extent on its
ability to continue to develop and introduce new products on a timely basis that
compete effectively on the basis of price and that address customer tastes,
preferences, and requirements. The success of new product introductions depends
on various factors, including proper new product selection, successful sales and
marketing efforts, timely production and delivery of new products, and consumer
acceptance of new products. There can be no assurance that any new products will
receive or maintain substantial market acceptance. The failure of the Company to
design, develop, and introduce popular products on a timely basis would
adversely affect its future operating results. See Item 1, "Business - Products
and Services."
Competition
The motorsports collectible and consumer products markets are
extremely competitive. The Company competes with major domestic and
international companies, some of which have greater market recognition and
substantially greater financial, technical, marketing, distribution, and other
resources than the Company possesses. The Company believes that Racing
Champions, Inc., Revell-Monogram, Inc., and The ERTL Company, Inc. currently
constitute its principal competitors in the motorsports die-cast replica
industry. The Company's motorsports apparel and souvenirs compete with similar
products sold or licensed by drivers, owners, sponsors, and other licensors with
14
<PAGE>
which the Company currently does not have licenses as well as with sports
apparel licensors and manufacturers in general. Emerging companies also may
increase their participation in these motorsports markets. The Company's
promotional programs must compete for advertising dollars against other
specialty advertising programs and media, such as television, radio, newspapers,
magazines, and billboards. The Company competes primarily on the basis of the
current popularity of the race car drivers and others with whom it has licenses
and its ability to obtain favorable licensing arrangements with other popular
licensors; the appeal of its products; and the cost, design, and delivery
schedules of its products. There can be no assurance that the Company will
continue to be able to compete successfully in the future. See Item 1, "Business
- - Competition."
Potential Regulation of Corporate Sponsorship
Tobacco and alcohol companies provide a significant amount of
advertising and promotional support of racing events, drivers, and car owners.
In August 1996, the U.S. Food and Drug Administration (the "FDA") published
final regulations that will substantially restrict tobacco industry sponsorship
of sporting events, including motorsports, beginning in 1998. In April 1997, a
federal district judge ruled that the FDA did not have the authority to regulate
tobacco marketing. That ruling, if upheld on appeal, would have the effect of
overturning the FDA regulations. In addition to the FDA regulations, however,
certain major manufacturers of tobacco products have reached a proposed
settlement with attorneys general of a number of states that have filed lawsuits
against such tobacco product manufacturers. The terms of those settlements
include potential voluntary restrictions on advertising by the tobacco industry.
The final terms of some or all of those settlements will be subject to approval
by the United States Congress and the President of the United States. The FDA
regulations, if ultimately approved, and any other legislation, regulations, or
other initiatives, including the pending settlement negotiations, that limit or
prohibit advertisements of tobacco and alcohol products at sporting events,
including racing events, could ultimately affect the popularity of motorsports,
which could have a material adverse effect on the Company. The Company believes,
however, that other major consumer products companies would quickly replace
tobacco and alcohol companies as sponsors of motorsports in the event that
advertisement of those products declines.
Seasonal Fluctuations in Sales
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. Seasonal fluctuations in quarterly sales
may require the Company to take temporary measures, including changes in its
personnel levels, borrowing amounts, and production and marketing activities,
and could result in unfavorable quarterly earnings comparisons. The Company
believes, however, that holiday sales of its products are increasing, which has
the effect of reducing seasonal fluctuations in its sales.
International Trade, Exchange, and Financing
The Company obtains its die-cast collectibles and other replicas under
a manufacturing arrangement with a third-party manufacturer in China. The
Company believes that production of its die-cast products overseas enables the
Company to obtain these items on a cost basis that enables the Company to market
them profitably. The Company's reliance on its third-party manufacturer to
provide personnel and facilities in China, and the Company's maintenance of
equipment and inventories abroad, expose it to certain economic and political
risks, including the business and financial condition of the third-party
manufacturer, political and economic conditions abroad, and the possibility of
expropriation, supply disruption, currency controls, and exchange fluctuations
as well as changes in tax laws, tariffs, and freight rates. Protectionist trade
legislation in either the United States or foreign countries, such as a change
in the current tariff structures, export compliance laws, or other trade
policies, could adversely affect the Company's ability to purchase its products
from foreign suppliers or the price at which the Company can obtain those
products.
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<PAGE>
All of the Company's purchases from its foreign manufacturers are
denominated in United States dollars. As a result, the foreign manufacturers
bear any risks associated with exchange rate fluctuations subsequent to the date
the Company places its orders with those manufacturers. Although the October
1997 financial crisis in Asia did not result in any short-term changes in the
prices that the Company pays for its die-cast products, an extended period of
financial pressure on overseas markets or a devaluation of the Chinese currency
that results in a financial setback to the Company's overseas manufacturer could
have an adverse impact on the Company's operations. Purchases of die-cast
products from the China-based manufacturer of those products generally require
the Company to provide an international letter of credit in an amount equal to
the purchase order. Although the Company currently has in place financing
arrangements in an amount that it considers adequate for anticipated purchase
levels, the inability to fund any letter of credit required by a supplier would
have an adverse impact on the Company's operations.
Under the terms of its license agreement with Hasbro, Hasbros royalty
payments to the Company for sales by Hasbro in foreign countries are based on
the exchange rates in effect on the last day of the calendar quarter for which
such royalties are owed. As a result, the Company bears any risks that may be
associated with exchange rate fluctuations between the date on which Hasbro
records overseas sales of products subject to the license agreement and the last
day of the calendar quarter in which the sales are made. The Company does not
currently believe that royalties from overseas sales of products by Hasbro will
represent a material percentage of the Company's total revenue. As a result, the
Company does not currently anticipate that it will engage in hedging
transactions intended to offset potential adverse consequences of exchange rate
fluctuations with respect to royalty payments due from Hasbro for sales in
foreign countries.
Possible Need for Additional Capital to Support Growth
The Company's business operations have grown considerably in recent
years as a result of an increase in the number of licensing arrangements with
race car drivers, car owners, sponsors, automobile manufacturers, and others;
expansion of the Company's product offerings, including additional lines of
die-cast replicas that have required substantial investments in new tooling; and
significant acquisitions of complementary businesses. The Company has financed
this growth through cash generated by operations, by debt and equity financings,
and by issuing additional shares of Common Stock for acquisitions. Continued
rapid growth, whether externally through additional acquisitions or internally
through new licensing arrangements or new product offerings, could require
substantial additional capital in excess of funds available to the Company
through its existing credit facility, cash generated by operations, and the
proceeds of the public offering completed in July 1997. The timing and amount of
any such capital requirements cannot be predicted at this time. Although the
Company has been able to obtain adequate financing on acceptable terms in the
past, there can be no assurance that such financing will continue to be
available on acceptable terms. If such financing is not available on
satisfactory terms, the Company may be unable to expand its business at the rate
desired and its operating results may be adversely affected. Debt financing
increases expenses and must be repaid regardless of operating results. Equity
financing could result in additional dilution to existing shareholders.
Dependence on Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management, including Fred W. Wagenhals, the Company's
Chairman of the Board, President, and Chief Executive Officer. The loss of
services of one or more of its key employees, particularly Mr. Wagenhals, could
have a material adverse effect on the Company. The Company maintains key person
insurance on the life of Mr. Wagenhals in the amount of $3.0 million. The
Company does not maintain such insurance on any of its other officers.
Possible Volatility of Stock Price
The market price of the Company's Common Stock has increased
dramatically during the last three years. See Item 5, "Market for the
Registrants' Common Equity and Related Stockholder Matters." The period was
marked
16
<PAGE>
by generally rising stock prices, extremely favorable industry conditions, and
substantially improved operating results by the Company. There can be no
assurance that these favorable conditions will continue. The trading price of
the Company's Common Stock in the future could be subject to wide fluctuations
in response to quarterly variations in operating results of the Company, actual
or anticipated announcements of new products by the Company or its competitors,
changes in analysts' estimates of the Company's financial performance, general
conditions in the markets in which the Company competes, worldwide economic and
financial conditions, and other events or factors. The stock market also has
experienced extreme price and volume fluctuations that have particularly
affected the market prices for many rapidly expanding companies and that often
have been unrelated to the operating performance of such companies. These broad
market fluctuations and other factors may adversely affect the market price of
the Company's Common Stock.
Litigation
The Company is one of approximately 30 defendants in a lawsuit in
which the state of Arizona seeks recovery of certain clean-up costs under
federal and state environmental laws. The Company was recently named as a
defendant in a class action lawsuit alleging that the defendants engaged in
certain price fixing and other anti-competitive activities in violation of
federal antitrust laws. The Company also is a defendant in a lawsuit alleging
breach of contract, fraud, trademark infringement, and other claims with respect
to licenses for certain of its die-cast products. The Company is actively
defending these lawsuits. In the event a decision adverse to the Company is
rendered in any of these lawsuits, the resolution of such matter could have a
material adverse effect on the Company's business, financial condition, and
operation results. The Company's financial statements currently reflect no
provision for any of these lawsuits. See Item 3, "Legal Proceedings" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Rights to Acquire Shares; Potential Issuance of Additional Shares
As of December 15, 1997, options to acquire a total of 1,137,710
shares were outstanding under the Company's 1993 Stock Option Plan (the "1993
Plan"). During the terms of such options, the holders thereof will have the
opportunity to profit from an increase in the market price of Common Stock, with
resulting dilution in the interests of holders of Common Stock. The existence of
such stock options could adversely affect the terms on which the Company can
obtain additional financing, and the holders of such options can be expected to
exercise such options at a time when the Company, in all likelihood, would be
able to obtain additional capital by offering shares of its Common Stock on
terms more favorable to the Company than those provided by the exercise of such
options.
Shares Eligible for Future Sale; Potential Depressive Effect on Stock Price
Sales of substantial amounts of Common Stock by shareholders of the
Company, or even the potential for such sales, may have a depressive effect on
the market price of the Common Stock. Of the 16,012,471 shares of Common Stock
outstanding, approximately 13,356,750 shares currently are eligible for resale
in the public market without restriction or further registration unless held by
an "affiliate" of the Company, as that term is defined under the Securities Act
of 1933, as amended (the "Securities Act"). The approximately 2,655,700
remaining shares of Common Stock outstanding are "restricted securities," as
that term is defined in Rule 144 under the Securities Act, and may be sold only
in compliance with Rule 144, pursuant to registration under the Securities Act,
or pursuant to an exemption therefrom. An aggregate of approximately 492,200
shares of such "restricted securities" have been registered for resale pursuant
to a registration statement. In addition, an aggregate of approximately
2,100,500 shares held by certain officers and directors currently are available
for sale under Rule 144.
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not currently anticipate that it will pay dividends in the foreseeable
future. Instead, the Company intends to apply its earnings to the expansion and
development of its business.
17
<PAGE>
Change in Control Provisions
The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles"), Amended and Restated Bylaws, and Arizona law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when those attempts
may be in the best interests of shareholders. The Restated Articles also
authorize the Board of Directors, without shareholder approval, to issue one or
more series of preferred stock, which could have voting, liquidation, dividend,
conversion, or other rights that adversely affect or dilute the voting power of
the holders of Common Stock.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Report under the
headings "Business," "Special Considerations," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," concerning future,
proposed, and anticipated activities of the Company, certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the motorsports
industry in general, and other statements contained in this Report regarding
matters that are not historical facts are forward-looking statements, as such
term is defined in the Securities Act. Forward-looking statements, by their very
nature, include risks and uncertainties, many of which are beyond the Company's
control. Accordingly, actual results may differ, perhaps materially, from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include those discussed elsewhere
under this Item 1, "Business - Special Considerations."
ITEM 2. PROPERTIES
The Company leases a newly constructed, approximately 140,000 square
foot building in Phoenix, Arizona. The Company uses approximately 38,000 square
feet of this facility for its corporate headquarters and approximately 102,000
square feet for warehouse space and packaging operations. The initial term of
the lease expires in August 2007, with two five-year renewal options. The
Company has two options to extend the term for five years each. The Company
currently is seeking to sublease its previous Tempe facility, but there can be
no assurance that it will be able to do so on favorable terms or at all.
The Company also leases a 25,000 square foot facility in Charlotte,
North Carolina. The Company uses approximately 5,000 square feet of the
Charlotte facility for offices and approximately 20,000 square feet for
warehouse space and packaging operations. The term of the lease for the
Charlotte facility expires in April 1998. The Company also leases approximately
10,000 square feet of off-site storage space in Concord, North Carolina.
The Company has entered into a lease for a newly constructed,
approximately 121,000 square foot facility in Concord, North Carolina for its
operations in that area. The Company will utilize approximately 42,000 square
feet of the new facility for offices and approximately 79,000 square feet for
warehouse space and distribution operations. The initial term of the lease is 20
years, with four five-year renewal options. The Company anticipates that it will
occupy the new facility in April 1998.
The Company currently leases two facilities in Atlanta, Georgia, for
its Image Works operations. One facility consists of approximately 77,400 square
feet, of which the Company utilizes approximately 14,000 square feet for offices
and approximately 63,400 square feet for manufacturing and warehouse operations.
The lease on this facility expires in January 1999. The second facility consists
of approximately 21,900 square feet, of which the Company utilizes approximately
19,400 square feet for warehouse and distribution operations and approximately
2,500 square feet for offices. The lease on this facility expires in February
1999.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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 hazardous 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 loss to be approximately $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.
A lawsuit, purportedly on behalf of Action Products, Inc. ("API"), a
dissolved Arizona corporation, was instituted on December 22, 1995 against the
Company, Fred W. Wagenhals, and others in the United States District Court for
the District of Arizona. The complaint requested damages, including punitive and
treble damages in an unspecified amount. The complaint alleged that the Company,
Mr. Wagenhals, and others breached contractual and other duties to API and
appropriated certain business opportunities of API and further claimed that
these activities were part of a fraudulent scheme. In July 1997, the Company,
Mr. Wagenhals, the other defendants, and the plaintiff settled the lawsuit for a
$4.9 millon payment by the Company to the plaintiff and the execution of mutual
releases. In connection with the proposed settlement, Mr. Wagenhals waived any
claims that he may have to the settlement proceeds as an approximately 20%
shareholder of APl.
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. The lawsuits allege that the
defendants engaged in price fixing and other anti-competitive activities in
violation of federal anti-trust laws. The Company was named as a defendant based
upon actions alleged to have been taken by Sports Image, Inc., a North Carolina
corporation ("Sports Image N.C.") and Creative Marketing & Promotions, Inc.
("CMP") prior to the Company's acquisitions of the assets and capital stock,
respectively, of those entities. The actions were subsequently consolidated by
order of the court. The caption of the consolidated action is "In re Motorsports
Merchandise Antitrust Litigation" and the files are maintained under Master File
No. 1-97-CV-0569-CC. On May 30, 1997, a consolidated amended complaint was
filed, which deleted the Company as a defendant with respect to claims based
upon actions alleged to have been taken by Sports Image N.C. and named the
Company's wholly owned subsidiary, Sports Image, Inc., an Arizona corporation
("Sports Image AZ"), as a defendant with respect to those claims. The Company
remains a defendant with respect to claims based upon actions alleged to have
been taken by CMP. On July 31, 1997, the Company acquired all of the outstanding
capital stock of RYP, which is another defendant in this matter. Accordingly,
the Company has assumed the defense of this matter with respect to claims based
upon actions
19
<PAGE>
alleged to have been taken by RYP and has agreed to be responsible for and to
pay any costs, fees, expenses, damages, payments, credits, rebates, and
penalties arising out of this matter with respect to RYP, up to an aggregate of
$400,000 (the "$400,000 Cap"). The $400,000 Cap excludes attorneys fees and
certain other costs and expenses that the Company may incur in defending or
settling this matter. 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. On August 1, 1997, answers were
filed on behalf of the Company and Sports Image AZ denying the allegations of
the complaint. Pursuant to an agreement between the plaintiffs and Sports Image
AZ to toll the running of the statute of limitations with respect to any claims
against Sports Image AZ, on November 17, 1997 the plaintiffs filed a motion to
dismiss Sports Image AZ from the case without prejudice. The parties currently
are conducting class discovery. The Company intends to vigorously defend the
claims asserted in the amended and consolidated complaint.
On June 4, 1997, Petty Enterprises, Inc. Licensing Division filed a
lawsuit against the Company and Fred W. Wagenhals in the General Court of
Justice for Randolph County, North Carolina. The complaint alleges that the
Company engaged in activities that resulted in common law trademark
infringement, fraud, unfair competition, "palming off" unauthorized goods as
authorized products, marketing unlicensed products, misappropriation of business
opportunities, breach of contract, unjust enrichment, conversion, and violations
of the North Carolina Unfair and Deceptive Trade Practices Act and the Lanham
Act. In particular, the plaintiff alleges that the Company manufactured and sold
products in quantities greater than the amounts permitted under certain license
agreements, manufactured and sold certain products for which it did not have
licenses, misrepresented the number of licensed products actually manufactured
and sold, and underpaid royalties to the licensors. The complaint also alleges
that these acts constitute a pattern of improper activity. The complaint
requests an unspecified amount of actual damages plus treble and punitive
damages, as well as injunctive relief. On July 3, 1997, the Company and Mr.
Wagenhals were successful in removing the case to the United States District
Court for the Middle District of North Carolina. On July 11, 1997, each of the
Company and Mr. Wagenhals filed an answer denying the plaintiff's allegations
and each filed counterclaims against the plaintiff for breach of contract,
breach of a prior settlement agreement between the plaintiff and the Company,
violations of the North Carolina Unfair and Deceptive Trade Practices Act,
defamation and damage to reputation, and tortious interference with prospective
business relationships. On July 18, 1997, the Company and Mr. Wagenhals
collectively filed a third-party complaint against Brett Nelson, an affiliate of
the plaintiff, alleging violations of the North Carolina Unfair and Deceptive
Trade Practices Act, defamation and damage to reputation, and tortious
interference with actual and prospective business relationships. On August 8,
1997, Mr. Nelson filed an answer denying the allegations against him. After the
Court denied motions to dismiss by all parties, the plaintiff filed its amended
complaint and the Company and Mr. Wagenhals filed their respective amended
answer and counterclaims. The amended complaint and the amended answer and
counterclaims contain essentially the same allegations and defenses as the
original pleadings. The parties currently are in the early stages of discovery.
The Company and Mr. Wagenhals intend to vigorously pursue their counterclaims
and the third-party complaint and to vigorously defend this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share (the "Common
Stock") has been quoted on the Nasdaq National Market under the symbol "ACTN"
since April 27, 1993. The following table sets forth the quarterly high and low
closing sale prices of the Company's Common Stock for the calendar periods
indicated on the Nasdaq National Market, as adjusted for the two-for-one stock
split effected as a stock dividend on May 28, 1996.
Common Stock
------------
High Low
---- ---
1995:
First Quarter ............................ $ 3.69 $ 2.38
Second Quarter ........................... 4.63 3.19
Third Quarter ............................ 9.25 4.25
Fourth Quarter ........................... 9.81 6.13
1996:
First Quarter ............................ $11.63 $ 6.38
Second Quarter ........................... 20.50 10.75
Third Quarter ............................ 14.75 9.75
Fourth Quarter ........................... 19.50 12.50
1997:
First Quarter ............................ $24.25 $16.50
Second Quarter ........................... 29.00 18.00
Third Quarter ............................ 36.13 25.38
Fourth Quarter (through December 15, 1997) 33.84 23.00
As of December 15, 1997, there were approximately 200 holders of record
and approximately 5,000 beneficial owners of the Company's Common Stock. On
December 15, 1997, the closing sales price of the Company's Common Stock on the
Nasdaq National Market was $33.06 per share.
On August 1, 1997, the Company issued 8,180 shares of Common Stock
valued at $23.02 per share to Dale Jarrett in connection with a personal
services contract entered into by the Company and Mr. Jarrett on that date. The
Company issued the shares without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act.
On August 8, 1997, the Company issued an aggregate of 19,324 shares of
Common Stock valued at $22.59 per share to E. J. Simpson as a portion of the
license fee pursuant to a license agreement entered into by the Company and Mr.
Simpson on that date. The Company issued the shares without registration under
the Securities Act in reliance on Section 4(2) of the Securities Act.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for
the five years ended September 30, 1997 are derived from the Company's
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected financial data should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales:
Collectibles .................... $ 11,558 $ 12,802 $ 23,443 $ 40,904 $ 63,846
Apparel and souvenirs ........... -- 143 1,190 1,961 60,430
Promotional ..................... -- -- -- 1,351 5,085
Other(1)(2) ..................... 3,550 3,924 1,498 -- 1,019
--------- --------- --------- --------- ---------
Net sales(3) ................. 15,108 16,869 26,131 44,216 130,380
Cost of sales ...................... 9,730 10,488 15,882 25,296 80,995
--------- --------- --------- --------- ---------
Gross profit ....................... 5,378 6,381 10,249 18,920 49,385
Selling, general and administrative
expenses ........................ 6,552 5,808 6,115 9,262 31,250
Settlement costs ................... -- -- -- -- 5,400(5)
Amortization of goodwill and other
intangibles ..................... -- -- 4 4 1,286
--------- --------- --------- --------- ---------
Income (loss) from operations ...... (1,174) 573 4,130 9,654 18,135
Interest income (expense) and other,
net ............................. (66) (164) 24 216 (1,225)
--------- --------- --------- --------- ---------
Income (loss) before provision for
(benefit from) income taxes ..... (1,240) 409 4,154 9,870 16,910
Provision for (benefit from) income
taxes ........................... (69) (224) 1,384 3,917 6,764
--------- --------- --------- --------- ---------
Net income (loss) .................. $ (1,171) $ 633 $ 2,770 $ 5,953 $ 10,146
========= ========= ========= ========= =========
Net income (loss) per common
share, assuming full dilution(4) $ (0.21) $ 0.08 $ 0.25 $ 0.46 $ 0.69
========= ========= ========= ========= =========
Weighted average number of
common shares, assuming full
dilution(4) ..................... 5,662 9,640 11,570 13,069 14,671
Consolidated Balance Sheet Data
(at end of period):
Working capital .................... $ 3,186 $ 5,699 $ 11,922 $ 18,094 $ 56,975
Total assets ....................... 8,565 11,656 23,351 31,649 141,325
Total debt ......................... 452 266 288 365 22,586
Shareholders' equity ............... 5,744 6,909 18,890 26,996 103,168
</TABLE>
- ---------------------
(1) Includes the revenue of the Company's M-CarTM operations through the
discontinuation of those operations in September 1994 and the revenue
of the Company's mini vehicle operations through the discontinuation of
those operations in March 1995.
(2) Includes royalty and license fees beginning in fiscal 1997.
(3) Fiscal 1997 results include the results of operations of Sports Image,
Motorsports Traditions, RYP, Image Works, and Simpson, beginning as of
their respective dates of acquisition. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
(4) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996.
(5) Represents a one-time charge of approximately $5.4 million for
settlement costs and related legal and other expenses. See Item 3,
"Legal Proceedings."
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<PAGE>
ITEM 7. 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 most of the
Company's apparel and souvenirs are manufactured by third parties, generally
utilizing the Company's designs, tools, and dies. The Company screen prints and
embroiders a portion of the licensed motorsports apparel that it sells.
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-CarTM 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-CarTM
operations and discontinued its M-CarTM 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 marketed and
distributed licensed motorsports apparel, die-cast collectibles and other
souvenir items. In July 1997, the Company acquired RYP, which had operations
similar to those of Sports Image and Motorsport Traditions, and Image Works,
which manufacturers and markets licensed motorsports apparel through the
mass-merchandising markets. The Company acquired certain assets and assumed
certain liabilities related to the mini-helmet collectible business of Simpson
in August 1997. 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 and warehouse facilities of Motorsport
Traditions and RYP with Sports Image's existing operations and facility in
Charlotte, North Carolina; consolidating the operations of Simpson into the
Company's headquarters in Phoenix, Arizona; eliminating duplicative personnel
functions; and integrating the management information systems of the acquired
companies. These efforts had a meaningful impact on the Company's results of
operations beginning in the second half of fiscal 1997.
In addition to the cost savings described above, the Company believes
that the fiscal 1997 acquisitions provide the potential for enhanced revenue
opportunities as a result of the synergies created by expanded product offerings
and additional distribution channels. For example, in fiscal 1997 the Company
began developing new lines of licensed motorsports apparel and souvenirs for
exclusive sales through its Collectors' Club. The Company also believes that
these acquisitions 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 fiscal 1997 acquisitions, the Company's revenue consisted
primarily of sales of die-cast collectibles, and the revenue of the acquired
businesses consisted primarily of sales of licensed motorsports apparel and
souvenirs. Promotional revenue consists of sales of products developed for
corporate promotion programs. The Company's fiscal 1997 revenue includes royalty
income as a result of the license agreement with Hasbro.
23
<PAGE>
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. 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 and by the license agreement with Hasbro. The agreement with
Hasbro provides the Company with a source of license royalties without
significant related cost of sales. In addition, the license agreement provides
the Company with access to the mass-merchandise market without committing
capital for manufacturing and with limited marginal expenditures for
administrative and marketing activities.
Selling, general, and administrative expenses include general corporate
expenses as well as goodwill amortization. The Company recorded goodwill of
approximately $47.7 million in connection with the fiscal 1997 acquisitions. The
goodwill is being amortized at the rate of $1.9 million per year over 25 years.
The Company anticipates that it will continue to achieve a reduction in selling,
general, and administrative expenses as a percentage of sales as a result of
consolidation and the cost-reduction efforts described above.
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>
Year Ended September 30,
-----------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales
Collectibles ................................. 76.5% 75.9% 89.7% 92.5% 49.6%
Apparel and souvenirs ........................ -- 0.8 4.6 4.4 46.2
Promotional .................................. -- -- -- 3.1 3.4
Other ........................................ 15.7 23.3 5.7 -- 0.8
----- ----- ----- ----- -----
Net Sales .................................. 100.0 100.0 100.0 100.0 100.0
Cost of sales ................................... 64.4 62.2 60.8 57.2 62.1
----- ----- ----- ----- -----
Gross profit .................................... 35.6 37.8 39.2 42.8 37.9
Selling, general and administrative
expenses ..................................... 43.4 34.4 23.4 21.0 18.9
Settlement costs ................................ -- -- -- -- 4.1
Amortization of goodwill and other
intangibles .................................. -- -- -- -- 1.0
----- ----- ----- ----- -----
Income (loss) from operations ................... (7.8) 3.4 15.8 21.8 13.9
Interest income (expense) and other, net ........ (0.4) (1.0) 0.1 0.5 (0.9)
----- ----- ----- ----- -----
Income (loss) before provision for
(benefit from) income taxes .................. (8.2) 2.4 15.9 22.3 13.0
Provision for (benefit from) income taxes ....... (0.4) (1.4) 5.3 8.8 5.2
----- ----- ----- ----- -----
Net income (loss) ............................... (7.8)% 3.8% 10.6% 13.5% 7.8%
===== ===== ===== ===== =====
</TABLE>
24
<PAGE>
Fiscal Year Ended September 30, 1997 Compared with Fiscal Year Ended September
30, 1996
Net sales increased 195% to $130.4 million for the year ended September
30, 1997 from $44.2 million for the year ended September 30, 1996. The Company
attributes the improvement in sales during fiscal 1997 primarily to (i) revenue
from Sports Image and Motorsport Traditions, which were acquired by the Company
during the first and second quarters of fiscal 1997, respectively, (ii) the
Company's ability to capitalize on the continued strong growth in the base of
motorsports enthusiasts and to produce and sell increased quantities of
souvenirs, apparel, and die-cast collectible goods; and (iii) an increase in
Collectors' Club membership. The number of members in the Collectors' Club
increased to approximately 100,000 members from approximately 72,000 members at
September 30, 1997 and September 30, 1996, respectively.
Gross profit increased to $49.4 million in fiscal 1997 from $18.9
million in fiscal 1996, representing 37.9% and 42.8% of net sales, respectively.
The decrease in gross profit as a percentage of net sales resulted from
increased sales of apparel and souvenirs, which typically provide lower margins
than sales of the Company's collectible products.
Selling, general and administrative expenses increased to $24.6 million
in fiscal 1997 from $9.3 million in fiscal 1996, representing 18.9% and 21.0% of
net sales, respectively. The decrease in such expenses as a percentage of sales
resulted primarily from cost savings achieved with the integration and
consolidation of operations for the acquired entities of Sports Image and
Motorsport Traditions. The integration and consolidation included the relocation
of Motorsport Traditions into Sport Image's facility, the integration of
management information systems, and a reduction in excess labor.
Settlement costs of $5.4 million for the year ended September 30, 1997
resulted from a one-time charge for the API settlement and related legal
charges. This settlement represents 4.1% of net sales. See Item 3, "Legal
Proceedings."
Amortization of goodwill and other intangibles increased to $1.3
million for the year ended September 30, 1997 from $4,000 for the year ended
September 30, 1996. The increase in amortization of goodwill and other
intangibles is related to the acquisitions of Sports Image, Motorsport
Traditions, and other entities. The Company recorded goodwill and other
intangible assets of $47.7 million in connection with the fiscal 1997
acquisitions. The Company is amortizing the goodwill and other intangible assets
over a period of 15 to 25 years.
The change in interest income (expense) and other, net, was primarily
attributable to an increase in interest expense of approximately $2.0 million
related to debt incurred in connection with the acquisitions of Sports Image and
Motorsport Traditions.
Fiscal Year Ended September 30, 1996 Compared with Fiscal Year Ended September
30, 1995
Net sales increased 69.2% to $44.2 million for the year ended September
30, 1996 from $26.1 million for the year ended September 30, 1995. The $18.1
million increase in net sales resulted primarily from an increase of $17.5
million in collectible sales. The increase in collectible sales is primarily
attributable to (i) the continued expansion of the collectible market and the
Company's ability to produce and sell increased quantities of collectibles; (ii)
an increase in the number of members in the Collectors' Club (which increased to
approximately 72,000 members from approximately 40,000 members at September 30,
1996 and September 30, 1995, respectively); and (iii) sales from recently
introduced product lines.
Gross profit increased to $18.9 million in fiscal 1996 from $10.2
million in fiscal 1995, representing 42.8% and 39.2% of net sales, respectively.
The increase in gross profit as a percentage of net sales resulted primarily
from (i) the effect of higher sales volume on fixed cost components of cost of
sales, primarily depreciation charges related to the Company's tooling
equipment; and (ii) increased sales through the Collectors' Club, which
typically carry higher margins.
25
<PAGE>
Selling, general, and administrative expenses increased to $9.3 million
in fiscal 1996 from $6.1 million in fiscal 1995, representing 21.0% and 23.4% of
net sales, respectively. The increase in such expenses resulted from increased
expenditures for sales and marketing, particularly increased advertising
consistent with the Company's strategy to increase Collectors' Club memberships
and distributor sales.
Interest income (expense) and other, net, increased to approximately
$216,000 in fiscal 1996 from approximately $24,000 in fiscal 1995. This change
resulted primarily from the conversion of the 10% Convertible Subordinated
Debentures (the "Debentures") into shares of the Company's Common Stock during
fiscal 1995.
The provision for income taxes in fiscal 1996 resulted in an effective
tax rate of approximately 39.7% compared with an effective tax rate of
approximately 33.3% in fiscal 1995. The increase in the effective tax rate
occurred primarily as a result of the utilization of net operating loss
carryforwards in fiscal 1995.
Pro Forma Results of Operations
The following table sets forth the unaudited pro forma income statement
data of the Company for the years ended September 30, 1996 and 1997, giving
effect to the acquisitions of Sports Image, Motorsport Traditions, RYP, Image
Works, and Simpson as if they had occurred on October 1, 1995, using the
purchase method of accounting for business combinations. The unaudited pro forma
income statement data presented herein does not purport to represent what the
Company's actual results of operations would have been had those acquisitions
occurred on that date or to project the Company's results of operations for any
future period.
(in thousands, except per share data)
Year Ended Year Ended
September 30, September 30,
1996 1997
------------- -------------
(Unaudited) (Unaudited)
Net sales .......................... $137,930 $158,977
Net income(1) ...................... 8,419 9,338
Net income per common share(1) ..... $ 0.61 $ 0.63
- ----------------------
(1) Pro forma amounts for fiscal 1997 reflect the one-time charge of
approximately $5.4 million for legal settlement costs and related
expenses.
The pro forma results shown above 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.
The difference in earnings per share on a pro forma basis for fiscal 1997 is
primarily attributable to lower gross margins as a result of the write-down of
inventory by Motorsport Traditions immediately prior to the date of acquisition.
The Company has implemented improvements to the management and control of
inventories of the acquired companies intended to reduce the need for seasonal
adjustments to inventory. The pro forma results of operations for the years
ended September 30, 1997 and 1996 reflect the amortization of goodwill and other
intangibles arising from the fiscal 1997 acquisitions and include additional
interest expense associated with the financing of the acquisitions of Sports
Image and Motorsport Traditions.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the period ended September 30,
1997. All quarterly information was obtained from unaudited financial statements
not otherwise contained herein. The Company believes that all necessary
adjustments have been made to present fairly the quarterly information when read
in conjunction with the Consolidated Financial Statements and Notes
26
<PAGE>
thereto included elsewhere in this Report. The operating results for any quarter
are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Fiscal 1996
----------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... $ 8,006 $ 9,766 $12,283 $14,161
Gross profit ........................ 3,241 3,947 5,424 6,308
Income from operations .............. 1,370 1,852 2,938 3,494
Net income .......................... $ 878 $ 1,140 $ 1,777 $ 2,158
Net income per common share, assuming
full dilution .................... $ 0.07 $ 0.09 $ 0.14 $ 0.16
Weighted average number of common
shares, assuming full dilution ... 12,840 12,984 13,150 13,128
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997
----------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... $15,175 $28,302 $39,632 $47,270
Gross profit ........................ 6,395 10,781 14,684 17,525
Income from operations .............. 2,843 4,583 2,349 8,361
Net income .......................... $ 1,568 $ 2,437 $ 1,098 $ 5,043
Net income per common share, assuming
full dilution .................... $ 0.12 $ 0.17 $ 0.08 $ 0.31
Weighted average number of common
shares, assuming full dilution ... 13,476 14,129 14,430 16,450
</TABLE>
The Company's revenue and operating results may be subject to quarterly
and other fluctuations as a result of a variety of factors. As a result of the
fiscal 1997 acquisitions, the Company believes that quarter-to-quarter
comparisons of its past financial results may not necessarily be meaningful and
should not be relied upon as an indication of future performance.
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 $57.0 million at
September 30, 1997 from $18.1 million at September 30, 1996. The increase of
$38.9 million is primarily attributable to the Company's 1997 public offering
described below, the working capital acquired from the Company's fiscal 1997
acquisitions (primarily the purchases of Sports Image and Motorsport
Traditions), and results from operations.
Capital expenditures for the year ended September 30, 1997 totaled
approximately $11.1 million, of which approximately $7.0 million was utilized
for the Company's continued investment in tooling.
On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro at a price of $14.50 per share, with net proceeds to the
Company of approximately $2.6 million. The Company has
27
<PAGE>
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.
On June 24, 1997, the Company sold 1,770,000 shares of Common Stock in
connection with an underwritten public offering. The Company sold an additional
315,000 shares of its common stock on July 17, 1997 pursuant to the exercise of
the underwriters' over-allotment option. The net proceeds to the Company from
this offering were approximately $49.8 million, after deducting estimated
offering expenses and underwriting discounts and commissions.
During the year ended September 30, 1997, the Company issued 296,092
shares of Common Stock upon the exercise of stock options, resulting in total
proceeds to the Company of approximately $1.7 million.
In November 1996, the Company purchased substantially all of the assets
and assumed certain liabilities of Sports Image. 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 a $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 Company utilized
a portion of the proceeds of the June 1997 public offering described below to
repay its outstanding indebtedness under the Line of Credit. The Company had no
outstanding borrowings under the Line of Credit as of September 30,1997. The
Letter of Credit/BA Facility, as amended in April 1997, is available for
issuances of letters of credit and eligible bankers' acceptances in an aggregate
amount up to $10.0 million to enable the Company to finance purchases of
products from its overseas vendors. The Company had outstanding purchase
commitments of approximately $3.5 million under the Letter of Credit/BA Facility
as of September 30, 1997. The Credit Facility will mature on March 31, 1998. The
Credit Facility contains certain provisions that, among other things, require
the Company to comply with certain financial ratios and net worth requirements
and limit the ability of the Company and its subsidiaries to incur additional
indebtedness, to sell assets, or to engage in certain mergers or consolidations.
On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of senior notes to three insurance companies (the "Senior
Notes"). The Senior Notes bear interest at the rate of 8.05% per annum, provide
for semi-annual payments of accrued interest, and mature on January 2, 1999. The
Company may not prepay the Senior Notes prior to maturity, but must 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
28
<PAGE>
things, require the Company to comply with certain financial ratios and net
worth requirements and limit the ability of the Company and its subsidiaries to
incur additional indebtedness, 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.
On July 22, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Image Works. The consideration paid by the
Company for the purchased assets consisted of (i) $4.25 million in cash plus
(ii) a three-year promissory note that provides for a minimum principal amount
of $750,000, with additional contingent payments of up to an aggregate of $1.4
million based upon the attainment of certain revenue objectives through
September 30, 2000. Image Works designs and manufactures screen printed and
embroidered motorsports apparel items for distribution through mass retailers
and corporate accounts. Image Works generated approximately $20.0 million in
revenue during calendar 1996. The terms of this acquisition were determined by
arms-length negotiations between representatives of Image Works and
representatives of the Company.
On July 31, 1997, the Company acquired all of the outstanding common
stock of RYP for cash of $5.7 million. RYP sells licensed motorsports products
through mobile trackside stores and generated approximately $5.0 million in
revenue during calendar 1996. In connection with the acquisition of RYP, the
Company entered into a 15-year license agreement with Robert Yates Racing, Inc.
See Item 1, "Business -- Licenses." The terms of this acquisition were
determined by arms-length negotiations between representatives of RYP and
representatives of the Company.
On August 8, 1997, the Company acquired certain assets and assumed
certain liabilities related to the licensed mini-helmet collectible business of
Simpson. The consideration paid by the Company for the purchased assets
consisted of approximately $653,000 in cash, with additional contingent payments
of up to an aggregate of $1.5 million based upon the attainment of certain
revenue objectives. In connection with the purchase of the assets and assumption
of liabilities of Simpson, the Company also entered into a 25-year license
agreement with respect to certain rights used in connection with the purchased
assets. Pursuant to the license agreement, the Company paid the licensor an
initial license fee consisting of cash plus 19,324 shares of the Company's
Common Stock. The terms of this acquisition were determined by arms-length
negotiations between representatives of the seller and representatives of the
Company.
The Company is a defendant in various lawsuits. See Item 3, "Legal
Proceedings." 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
results of operation and 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 additional acquisitions.
However, the Company way 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 effect on the Company's business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and
reports thereon, commencing at page F-1 of this report, which financial
statements, report, notes and data are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to directors of the
Company is incorporated herein by reference to the definitive Proxy Statement to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") for the Company's 1998 Annual Meeting of
Shareholders. The information required by this Item relating to executive
officers of the Company is included in Item 1, "Business Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Shareholders.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Statement Schedules
(1) Financial Statements are listed in the Index to Consolidated
Financial Statements on page F-1 of this Report.
(2) No Financial Statement Schedules are included because such
schedules are not applicable, are not required, or because
required information is included in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
Exhibit
Number Exhibit
- ------ -------
1.0 Form of Underwriting Agreement(1)
3.1 First Amended and Restated Articles of Incorporation of Registrant(2)
3.2 Amended and Restated Bylaws of Registrant(2)
4.1 Form of Certificate of Common Stock(3)
10.4.2 1993 Stock Option Plan, as amended and restated through January 16,
1997(4)
10.8 Form of Indemnification Agreement entered into with the Directors of
the Registrant(3)
10.21 Lease between the Company and F.W. Investments dated January 1, 1994(5)
10.24.1 Commercial Credit Agreement dated March 6, 1995 between the Company and
the Hong Kong and Shanghai Banking Corporation Limited(6)
10.24.2 Optional Advance Time Note (Loans Against Imports) dated March 6, 1995
between the Company and the Hong Kong and Shanghai Banking
Corporation(6)
10.25 Bill of Sale and Asset Purchase Agreement between the Company, Fan
Fueler, Inc., Peter LaMonica, and Fred Miller, III dated August 12,
1994(7)
10.26 Bill of Sale and Asset Purchase Agreement between the Company, M-Car,
Incorporated, and Robert Scott Tremonti dated September 29, 1994(7)
10.27 Manufacturing Agreement between the Company and Early Light
International (Holdings) Ltd. dated December 5, 1994(7)
10.29 Asset Purchase Agreement dated March 31, 1995 between the Company and
Motorsports Promotion, Inc.(6)
10.30 Promissory Note dated March 31, 1995 between Motorsports Promotions,
Inc., as borrower, and the Company, as lender(6)
10.31 Security Agreement dated March 31, 1995 between Motorsports Promotions,
Inc., as debtor, and the Company, as secured party(6)
10.32 Credit Agreement by and between the Company and Wells Fargo HSBC Trade
Bank, N.A.(8)
10.33 Asset Purchase Agreement dated as of November 7, 1996, among Action
Performance Companies, Inc., SII Acquisition, Inc., Sports Image, Inc.,
and R. Dale Earnhardt and Teresa H. Earnhardt(9)
10.34 Promissory Note dated November 7, 1996, in the principal amount of
$24,000,000 issued by SII Acquisition, Inc., as Maker, to Sports Image,
Inc., as Payee, together with Guarantee of Action Performance
Companies, Inc.(9)
31
<PAGE>
Exhibit
Number Exhibit
- ------ -------
10.35 Security Agreement dated November 7, 1996, between Sports Image, Inc.
and SII Acquisition, Inc.(9)
10.36 Registration Agreement dated as of November 7, 1996, among Action
Performance Companies, Inc., Sports Image, Inc., and R. Dale Earnhardt
and Teresa H. Earnhardt(9)
10.37 License Agreement dated as of November 7, 1996, among SII Acquisition,
Inc., Dale Earnhardt, and Action Performance Companies, Inc.(9)
10.38 Employment Agreement dated as of November 7, 1996, between Action
Performance Companies, Inc. and Joe Mattes(9)
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.(10)
10.40 Exchange Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(10)
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.(10)
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)
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)
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.(10)
10.45 Registration Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(10)
10.46 Employment Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and Kenneth R. Barbee(10)
10.47 Consulting Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and John Bickford(10)
10.48 Common Stock Purchase Agreement dated January 16, 1997, between Hasbro,
Inc. and Action Performance Companies, Inc.(11)
10.49 Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies, Inc.
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc.
11.1 Computation of Primary Earnings Per Share
11.2 Computation of Fully Diluted Earnings Per Share
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- ---------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 and Amendment No. 1 thereto (Registration No. 333-27485).
(2) Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended March 31, 1996, as filed with the Securities and Exchange
Commission on May 2, 1996.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1997, as filed with the Securities and Exchange
Commission on May 15, 1997.
32
<PAGE>
Exhibit
Number Exhibit
- ------ -------
(5) Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended March 31, 1994, as filed with the Securities and Exchange
Commission on May 16, 1994.
(6) Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended March 31, 1995, as filed with the Securities and Exchange
Commission on May 15, 1995.
(7) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended September 30, 1994, as filed with the Securities and Exchange
Commission on December 22, 1994.
(8) Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended June 30, 1996, as filed with the Securities and Exchange
Commission on August 14, 1996.
(9) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on November 22, 1996, as amended by
Form 8-K/A filed on January 13, 1997.
(10) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on January 23, 1997, as amended by
Form 8-K/A filed on February 24, 1997.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333- 22943).
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ACTION PERFORMANCE COMPANIES, INC.
Date: December 17, 1997 /s/ Fred W. Wagenhals
-----------------------------------------
Fred W. Wagenhals, Chairman of the Board,
President, and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Fred W. Wagenhals Chairman of the Board, President, and Chief December 17, 1997
- --------------------------------- Executive Officer (Principal Executive Officer)
Fred W. Wagenhals
/s/ Tod J. Wagenhals Executive Vice President, Secretary, and Director December 17, 1997
- ---------------------------------
Tod J. Wagenhals
/s/ Christopher S. Besing Vice President, Chief Financial Officer, Treasurer, December 17, 1997
- --------------------------------- and Director (Principal Financial and
Christopher S. Besing Accounting Officer)
/s/ Melodee L. Volosin Director - Wholesale Division and Director December 17, 1997
- ---------------------------------
Melodee L. Volosin
Vice President - Strategic Alliances and Director December __, 1997
- ---------------------------------
John S. Bickford
/s/ Jack M. Lloyd Director December 17, 1997
- ---------------------------------
Jack M. Lloyd
/s/ Robert H. Manschot Director December 17, 1997
- ---------------------------------
Robert H. Manschot
Chief Operating Officer and Director December __, 1997
- ---------------------------------
Charles C. Blossom, Jr.
</TABLE>
34
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Public Accountants........................... F-2
Consolidated Balance Sheets as of September 30, 1997 and 1996...... F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1997, 1996, and 1995.................... F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1997, 1996, and 1995.................... F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1996, and 1995.................... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Action Performance Companies, Inc.:
We have audited the accompanying consolidated balance sheets of ACTION
PERFORMANCE COMPANIES, INC. (an Arizona corporation) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Action Performance Companies,
Inc. and subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
November 18, 1997, except with respect
to matters discussed in Note 13 as to
which the date is December 10, 1997.
F-2
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(in thousands, except share data)
ASSETS 1997 1996
- ------ -------- --------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 29,318 $ 4,983
Accounts receivable, net of allowance for
doubtful accounts of $837 and $256,
respectively ...................................... 17,802 7,497
Inventories, net ................................... 17,855 5,834
Prepaid royalties .................................. 4,967 2,295
Prepaid expenses and other assets .................. 2,603 1,772
-------- --------
Total current assets ............................. 72,545 22,381
PROPERTY AND EQUIPMENT, net .......................... 20,017 8,188
GOODWILL AND OTHER INTANGIBLES, net .................. 46,409 56
NOTES RECEIVABLE AND OTHER ASSETS .................... 2,354 1,024
-------- --------
$141,325 $ 31,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 6,680 $ 2,188
Accrued royalties .................................. 5,098 1,180
Accrued expenses and other ......................... 3,792 920
-------- --------
Total current liabilities ........................ 15,570 4,288
LONG-TERM DEBT:
Notes payable ...................................... 20,602 --
Other long-term debt ............................... 1,984 365
-------- --------
Total long-term debt ............................. 22,586 365
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; 15,952,083 and 12,609,769 shares
issued and outstanding, respectively .............. 160 126
Additional paid-in capital ......................... 84,984 18,991
Retained earnings .................................. 18,025 7,879
-------- --------
Total shareholders' equity ....................... 103,169 26,996
-------- --------
$141,325 $ 31,649
======== ========
The accompanying notes are an integral part of these consolidated
balance sheets
F-3
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales:
Collectibles....................................... $ 63,846 $ 40,904 $ 23,443
Apparel and souvenirs .............................. 60,430 1,961 1,190
Promotional ........................................ 5,085 1,351 --
Other .............................................. 1,019 -- 1,498
-------- -------- --------
Net sales ........................................ 130,380 44,216 26,131
Cost of sales ........................................ 80,995 25,296 15,882
-------- -------- --------
Gross profit ......................................... 49,385 18,920 10,249
Operating expenses:
Selling, general and
administrative expenses .......................... 24,564 9,262 6,115
Settlement costs ................................... 5,400 -- --
Amortization of goodwill and
other intangibles ................................ 1,286 4 4
-------- -------- --------
Total operating expenses ......................... 31,250 9,266 6,119
-------- -------- --------
Income from operations ............................... 18,135 9,654 4,130
Other income (expense):
Interest income and other, net ..................... 796 296 208
Interest expense ................................... (2,021) (80) (184)
-------- -------- --------
Total other income (expense) ..................... (1,225) 216 24
-------- -------- --------
Income before provision for
income taxes ....................................... 16,910 9,870 4,154
Provision for income taxes ........................... 6,764 3,917 1,384
-------- -------- --------
NET INCOME........................................... $ 10,146 $ 5,953 $ 2,770
======== ======== ========
NET INCOME PER COMMON SHARE:
Primary ............................................ $ 0.69 $ 0.46 $ 0.27
======== ======== ========
Fully diluted ...................................... $ 0.69 $ 0.46 $ 0.25
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary ............................................ 14,624 13,028 10,116
======== ======== ========
Fully diluted ...................................... 14,671 13,069 11,570
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Common
------------------------- --------------------- Stock
Shares Amount Shares Amount Subscribed
---------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1994 .................... 7,873,846 $ 79 -- $-- $ 125
Common stock issued upon
conversion of debentures ..................... 1,485,676 15 -- -- --
Issuance of convertible preferred stock ........ -- -- 500 -- --
Common Stock issued under consulting agreement . 200,000 2 -- -- --
Common stock issued for common stock subscribed 100,000 1 -- -- (125)
Common stock issued upon exercise
of options ................................... 541,000 5 -- -- --
Tax benefit from stock options ................. -- -- -- -- --
Redemption of warrants ......................... -- -- -- -- --
Common stock issued upon exercise of warrants .. 1,020,886 10 -- -- --
Net income ..................................... -- -- -- -- --
---------- ---------- ---------- ---- -------
BALANCE, September 30, 1995 .................... 11,221,408 $ 112 500 $-- $--
---------- ---------- ---------- ---- -------
Common stock issued upon conversion
of convertible preferred stock ............... 1,000,000 10 (500) -- --
Common stock issued upon exercise
of options ................................... 239,247 2 -- -- --
Tax benefit from stock options ................. -- -- -- -- --
Common stock issued upon exercise of warrants .. 149,114 2 -- -- --
Net income ..................................... -- -- -- -- --
---------- ---------- ---------- ---- -------
BALANCE, September 30, 1996 .................... 12,609,769 $ 126 -- $-- $--
---------- ---------- ---------- ---- -------
Common stock issued in conjunction with
purchase of businesses ....................... 765,542 8 -- -- --
Common stock issued upon exercise
of options ................................... 296,092 3 -- -- --
Common stock issued in public offering ......... 2,085,000 21 -- -- --
Tax benefit from stock options ................. -- -- -- -- --
Issuance of common stock in private placements . 195,680 2 -- -- --
Net income ..................................... -- -- -- -- --
---------- ---------- ---------- ---- -------
BALANCE, September 30, 1997 .................... 15,952,083 $ 160 -- $-- $--
========== ========== ========== ==== =======
<CAPTION>
(Accumulated
Additional Deficit)
Paid-In Retained
Capital Earnings Total
---------- --------- ---------
<S> <C> <C> <C>
BALANCE, September 30, 1994 .................... $ 7,549 $ (844) $ 6,909
Common stock issued upon
conversion of debentures ..................... 2,433 -- 2,448
Issuance of convertible preferred stock ........ 2,000 -- 2,000
Common Stock issued under consulting agreement . 248 -- 250
Common stock issued for common stock subscribed 124 -- --
Common stock issued upon exercise
of options ................................... 1,275 -- 1,280
Tax benefit from stock options ................. 716 -- 716
Redemption of warrants ......................... (404) -- (404)
Common stock issued upon exercise of warrants .. 2,911 -- 2,921
Net income ..................................... -- 2,770 2,770
--------- --------- ---------
BALANCE, September 30, 1995 .................... $ 16,852 $ 1,926 $ 18,890
--------- --------- ---------
Common stock issued upon conversion
of convertible preferred stock ............... (10) -- --
Common stock issued upon exercise
of options ................................... 801 -- 803
Tax benefit from stock options ................. 838 -- 838
Common stock issued upon exercise of warrants .. 510 -- 512
Net income ..................................... -- 5,953 5,953
--------- --------- ---------
BALANCE, September 30, 1996 .................... $ 18,991 $ 7,879 $ 26,996
--------- --------- ---------
Common stock issued in conjunction with
purchase of businesses ....................... 10,041 -- 10,049
Common stock issued upon exercise
of options ................................... 1,708 -- 1,711
Common stock issued in public offering ......... 49,822 -- 49,843
Tax benefit from stock options ................. 1,651 -- 1,651
Issuance of common stock in private placements . 2,771 -- 2,773
Net income ..................................... -- 10,146 10,146
--------- --------- ---------
BALANCE, September 30, 1997 .................... $ 84,984 $ 18,025 $ 103,169
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ................................... $ 10,146 $ 5,953 $ 2,770
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............. 4,477 1,692 906
Change in assets and liabilities, net of
businesses acquired:
Accounts receivable ...................... (3,623) (3,440) (1,400)
Inventories .............................. (5,009) (3,143) (701)
Prepaid royalties ........................ (2,672) (1,186) (471)
Prepaid expenses and other assets ........ (665) 922 (441)
Accounts payable ......................... (1,633) 565 859
Accrued royalties ........................ 2,395 320 (81)
Accrued expenses and other ............... 917 (823) 1,535
-------- -------- --------
Net cash provided by operating activities 4,333 860 2,976
Cash Flows from Investing Activities:
Purchase of property and equipment ......... (11,192) (3,879) (3,024)
Proceeds from sale of equipment ............ 321 -- 150
Acquisition of businesses, less
cash acquired ............................. (11,082) -- --
-------- -------- --------
Net cash used in investing activities .... (21,953) (3,879) (2,874)
Cash Flows from Financing Activities:
Borrowings on line of credit ............... 4,879 5,222 2,895
Payments on line of credit ................. (10,279) (5,222) (2,895)
Net proceeds from issuance of common stock,
stock options, and warrants ............... 54,327 1,315 3,767
Issuance of convertible preferred stock .... -- -- 2,000
Payments on long-term debt ................. (6,972) (105) (312)
Collections on notes receivable ............ -- 32 69
-------- -------- --------
Net cash provided by financing activities . 41,955 1,242 5,524
-------- -------- --------
Net change in cash and cash equivalents .... 24,335 (1,777) 5,626
Cash and cash equivalents,
beginning of year ......................... 4,983 6,760 1,134
-------- -------- --------
Cash and cash equivalents, end of year ..... $ 29,318 $ 4,983 $ 6,760
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996, and 1995
(1) THE COMPANY
Operations
Action Performance Companies, Inc. (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
most of the Company's apparel and souvenirs are manufactured by third parties,
generally utilizing the Company's designs, tools, and dies. The Company screen
prints and embroiders a portion of the licensed motorsports apparel that it
sells.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Certain reclassifications have been made in prior period financial statements to
conform to the current presentation.
Revenue Recognition
The Company recognizes revenue upon shipment. Customer deposits received in
advance of delivery are deferred and recognized when the related product is
shipped.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. The carrying amounts of long-term debt and amounts outstanding
under the Company's line of credit approximate fair value based on current
market prices for similar debt instruments and bank lines of credit. Fair value
estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
F-7
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market, and consist of the following at September 30, 1997 and 1996 (in
thousands):
1997 1996
------- -------
Purchased components ................. $ 2,418 $ 262
Finished goods ....................... 15,437 5,572
------- -------
$17,855 $ 5,834
======= =======
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 September 30, 1997 and 1996
(in thousands):
1997 1996
-------- --------
Tooling and molds ........................ $ 15,237 $ 8,190
Furniture, fixtures and equipment ........ 6,667 2,501
Autos and trucks ......................... 2,578 342
Leasehold improvements ................... 2,066 518
-------- --------
26,548 11,551
Less - accumulated depreciation .......... (6,531) (3,363)
-------- --------
$ 20,017 $ 8,188
======== ========
Property and equipment includes assets acquired under capital leases of
approximately $1.9 million and $300,000 at September 30, 1997 and 1996,
respectively.
Maintenance and repairs of approximately $277,000, $64,000 and $55,000 for the
years ended September 30, 1997, 1996 and 1995, respectively, were charged to
expense as incurred. The cost of renewals and betterments that materially extend
the useful lives of assets or increase their productivity are capitalized.
Goodwill and Other Intangibles
Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations and is amortized on the straight-line method over
twenty-five years. Other intangibles are amortized on the straight-line method
over their estimated useful lives, which ranges from fifteen to twenty-five
years. The Company continually evaluates whether later events and circumstances
have occurred, subsequent to acquisition, that indicate the remaining estimated
useful lives of intangible assets may warrant revision or that the remaining
balance may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from an asset to be held and used in
operations is less than the carrying value of the asset, an impairment loss must
be recognized in the amount of the difference between the carrying value and the
fair value. Amortization expense of $1.3 million, $4,000, and $4,000 is included
in selling, general and administrative expenses for the years ended September
30, 1997, 1996 and 1995, respectively. Accumulated amortization of goodwill and
other intangibles was approximately $1.3 million and $10,000 as of September 30,
1997 and 1996, respectively.
License Agreements
Royalties paid under various licensing agreements are recorded as expense at the
time the related sales are made.
F-8
<PAGE>
Supplemental Cash Flow Information
The supplemental cash flow disclosures and non-cash transactions for the years
ended September 30, 1997, 1996, and 1995 are as follows (in thousands):
1997 1996 1995
------- ------- -------
Supplemental disclosures:
Interest paid ............................... $ 1,505 $ 79 $ 268
Income taxes paid ........................... 5,396 3,992 42
Non-cash transactions:
Common stock issued in acquisitions ......... $10,049 $ -- $ --
Debt and liabilities incurred or
assumed in acquisitions ................... 44,446 -- --
Acquisition of property and equipment
under capital leases ...................... 1,402 233 338
Tax benefits on various common
stock options ............................. 1,651 838 --
Conversion of debentures .................... -- -- 2,600
Common stock issued for common
stock subscribed .......................... -- -- 125
Sale of equipment for note receivable ....... 446 -- --
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. The calculation of
fully diluted net income per common share includes adjustments for interest
expense and equivalent shares related to the 10% Convertible Subordinated
Debentures, if dilutive. The calculation of fully diluted net income per common
share for the years ended September 30, 1997, 1996, and 1995 are as follows (in
thousands, except per share data):
1997 1996 1995
------- ------- -------
Shares:
Weighted average number of common
shares outstanding .......................... 14,047 11,789 9,087
Additional shares assuming conversion of:
Stock options ............................... 624 573 601
Warrants .................................... -- 40 598
Convertible debentures ...................... -- -- 784
Preferred stock ............................. -- 667 500
------- ------- -------
Weighted average shares outstanding ........... 14,671 13,069 11,570
======= ======= =======
Net income .................................... $10,146 $ 5,953 $ 2,770
Add:
Interest expense on convertible
debentures (assuming conversion) .......... -- -- 101
------- ------- -------
Net income attributable to fully diluted
weighted average shares outstanding ......... $10,146 $ 5,953 $ 2,871
======= ======= =======
Fully diluted earnings per share .............. $ 0.69 $ 0.46 $ 0.25
======= ======= =======
F-9
<PAGE>
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," was issued by the Financial Accounting Standards Board in March 1995, and
adopted by the Company during the year ended September 30, 1997. The adoption of
SFAS No. 121 did not impact the Company's financial position or results of
operations.
Effective October 1, 1996, the Company adopted the disclosure option of SFAS No.
123, "Accounting for Stock-based Compensation." As permitted by SFAS No. 123,
the Company has not changed to the fair value method of accounting for
stock-based compensation and will continue to use Accounting Principles Board
Opinion No. 25 for measurement and recognition of stock-based transactions. SFAS
No. 123 requires companies that do not choose to account for stock-based
compensation as prescribed by the statement to disclose the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted. See Note
11.
Accounting Pronouncements Not Yet Required to be Adopted
In fiscal 1998, the Company will be required to adopt SFAS No. 128, "Earnings
per Share," issued by the Financial Accounting Standards Board. Upon adoption of
SFAS No. 128, the Company will present basic earnings per share and diluted
earnings per share. Basic earnings per share will be computed based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share will be computed based on the weighted average number of
shares outstanding during the period, increased by the effect of stock options,
warrants, and other dilutive securities using the treasury stock method. The
adoption of SFAS No. 128 is not expected to have a material effect on the
Company's financial statements.
In fiscal 1998, the Company will be required to adopt SFAS No. 130, "Reporting
Comprehensive Income," issued by the Financial Accounting Standards Board. SFAS
No. 130, establishes standards for reporting and display of comprehensive income
and its components in an entity's financial statements. The objective of SFAS
No. 130 is to give the effect of all changes in the equity of an enterprise that
result from transactions and other economic events of the period. Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS No. 130 does not address issues of recognition or measurement for
comprehensive income and its components. As a result, SFAS No. 130 will not have
an impact on the financial condition or results of operation of the Company upon
adoption.
(3) ACQUISITIONS AND DISPOSALS
Disposition of Mini Vehicle Assets
In March 1995, the Company sold certain of its assets related to its mini
vehicle product line to Motorsports Promotions, Inc. ("MPI"), an unrelated
company. The assets sold consisted primarily of accounts receivable, inventory,
tooling, and equipment. The purchase agreement provided for total consideration
of $1,324,712, consisting of $237,567 in cash, assumed liabilities of $52,891,
and a promissory note of $1,034,254, subject to certain adjustments. Effective
November 1995, the Company and MPI agreed to adjust the total consideration to
be paid by MPI to $1,051,646. The Company recorded a non-operating gain of
approximately $290,000 on this transaction in the second quarter of fiscal 1995.
As a result of the purchase price adjustment described above, the Company
reduced the gain such that no gain or loss was recorded on this transaction for
fiscal 1995. During 1997, the Company exchanged its promissory note for an
equity position in MPI. No gain or loss was recorded on the transaction.
Acquisition of Sports Image, Inc.
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image, Inc.("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 valued at
$12.10 per share. 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 4.
Sports Image sells and distributes a variety of licensed motorsports products
through wholesale distributor networks, corporate sponsors, and mobile trackside
stores. In fiscal 1996, the Company derived 16% of its net
F-10
<PAGE>
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.
Acquisitions of Motorsport Traditions Limited Partnership and Creative Marketing
& Promotions, Inc.
On January 8, 1997, the Company acquired the business and substantially all of
the assets and assumed certain liabilities of Creative Marketing & Promotions,
Inc. and Motorsport Traditions Limited Partnership (collectively "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 was 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 valued at
$13.80 per share. The promissory note bears interest at 4% per annum, matures on
December 31, 1998, and has been guaranteed by the Company. Motorsport Traditions
sells and distributes licensed motorsports products through a network of
wholesale distributors and mobile trackside stores. Prior to the acquisitions,
Motorsport Traditions generated approximately $33,000,000 in annual revenue from
its design, manufacturing, and sales and distribution activities. This
transaction was accounted for as a purchase.
Acquisition of Robert Yates Promotions, Inc.
In July 1997, the Company acquired all of the outstanding common stock of Robert
Yates Promotions, Inc. ("RYP") for $5.7 million in cash. RYP sells licensed
motorsports products through trackside trailers, and generated approximately
$5.0 million in revenue during calendar year 1996. Concurrent with the
acquisition of RYP, the Company entered into a 15-year license agreement with
Robert Yates Racing, Inc. ("Yates Racing"). Pursuant to the license agreement,
the Company will pay royalties for the use of certain trademark rights
associated with Yates Racing Nascar Winston Cup teams. This transaction was
accounted for as a purchase. RYP is a defendant in certain litigation. The
purchase price is preliminary with respect to such litigation. See Note 10.
Acquisition of Image Works, Inc.
In July 1997, the Company acquired substantially all of the assets and assumed
certain liabilities of Image Works, Inc. ("Image Works"). The Company paid $4.25
million in cash and issued a three-year promissory note for a minimum principal
amount of $750,000, with additional contingent payments of up to an aggregate of
$1.4 million based upon the attainment of certain revenue objectives through
September 30, 2000. Image Works designs and manufactures screen printed and
embroidered motorsports apparel items for distribution through mass retailers
and corporate accounts. Image Works generated approximately $22.0 million in
revenue during calendar year 1996. This transaction was accounted for as a
purchase.
Acquisition of Simpson Products, Inc.
In August 1997, the Company acquired certain assets and assumed certain
liabilities related to the licensed mini-helmet collectible business of Simpson
Products, Inc. ("Simpson"). The consideration paid by the Company for the
purchased assets consisted of approximately $653,000 in cash, with additional
contingent payments of up to an aggregate of $1.5 million based upon the
attainment of certain revenue objectives. In connection with the purchase of the
assets and assumption of liabilities of Simpson, the Company also entered into a
25-year license agreement with respect to certain rights used in connection with
the purchased assets. This transaction was accounted for as a purchase.
F-11
<PAGE>
Unaudited Pro Forma Statements of Operations
The following unaudited pro forma combined statements of operations data for the
years ended September 30, 1997 and 1996 present the results of operations of the
Company as if the acquisitions of the businesses acquired during fiscal 1997 had
occurred as of October 1, 1995. Pro forma results are as follows (in thousands,
except per share data):
1997 1996
-------- --------
Revenues .............................. $158,977 $137,930
Net income ............................ 9,338 8,419
Net income per common share ........... $ 0.63* $ 0.61
* Includes a one time charge of $5.4 million, or $0.22 per share, for
legal settlement costs.
(4) FINANCING ACTIVITIES
Long-term debt at September 30, 1997 and 1996 consists of the following (in
thousands):
1997 1996
-------- --------
Senior notes, interest at 8.05% payable semi-
annually, principal payable January 1999, secured
by assets of certain subsidiaries ....................... $ 20,000 $ --
Note payable to an individual, principal and interest
at 4% payable monthly through December 31, 1998,
unsecured ............................................... 988 --
Note payable to an individual, interest imputed at
8%, payable annually through November 2000,
unsecured ............................................... 644 --
Note payable to an individual, interest imputed at
8%, payable in equal installments through 2011,
unsecured ............................................... 565 --
Obligations under capital leases of vehicles and
equipment, interest from 8.0% to 9.5%, payable monthly .. 1,863 482
-------- --------
Total ................................................... 24,060 482
Less: current portion .................................. (1,474) (117)
-------- --------
$ 22,586 $ 365
======== ========
Credit Facility
On January 2, 1997, the Company entered into a $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 for up to $10.0 million
through September 30, 1997, and up to $6.0 million from September 30, 1997 to
March 31, 1998 (the "Line of Credit") 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 Company utilized
a portion of the proceeds of the June 1997 public offering described in Note 5
to repay its outstanding indebtedness under the Line of Credit. The Company had
no outstanding borrowings under the Line of Credit as of September 30, 1997. The
Letter of Credit/BA Facility, as amended in April
F-12
<PAGE>
1997, is available for issuances of letters of credit and eligible bankers'
acceptances in an aggregate amount up to $10.0 million to enable the Company to
finance purchases of products from its overseas vendors. The Company had
outstanding purchase commitments of approximately $3.5 million under the Letter
of Credit/BA Facility as of September 30, 1997.
Debt Covenants
The Company's senior notes and Credit Facility agreements contain certain
provisions that, among other things, 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. At September 30, 1997, the
Company was in compliance with all such covenants.
Future Maturities of Long-Term Debt
Aggregate future maturities of long-term debt are as follows (in thousands):
Year Ended
September 30,
-------------
1998 $ 1,474
1999 20,843
2000 666
2001 347
2002 310
Thereafter 420
-------
Total $24,060
=======
(5) SHAREHOLDERS' EQUITY
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.
10% Convertible Subordinated Debentures
During the year ended September 30, 1995, the Company issued 1,485,676 shares of
Common Stock upon conversion of an aggregate of $2.6 million of principal amount
of 10% Convertible Subordinated Debentures (the "Debentures"), at a conversion
price of $1.75 per share, including 1,014,272 shares issued upon conversion of
an aggregate of $1,775,000 of principal amount of the Debentures that were
outstanding in April 1995 when the Company announced that it would redeem all of
the Debentures that remained outstanding on May 31, 1995, pursuant to the terms
of the Debentures.
Convertible Preferred Stock
In March 1995, the Company completed the sale of 500 shares of Class A
Convertible Preferred Stock (the "Preferred Stock") to an affiliate of its
principal manufacturer of die-cast collectibles, for a purchase price of $2.0
million. The sale was effected primarily as a long-term strategic transaction
intended to align the interests of the manufacturer with those of the Company.
The shares were converted into an aggregate of 1,000,000 shares of Common Stock
during May 1996.
Redemption of Warrants
On May 31, 1995, the Company redeemed warrants to purchase an aggregate of
1,614,731 shares of its Common Stock. The redemption price was $.25 per warrant,
or an aggregate payment of $403,683, pursuant to the terms of such warrants.
Prior to the redemption, each warrant entitled the holder to purchase two shares
of the Company's Common Stock at an exercise price of $3.75 per share. Certain
holders of such warrants exercised warrants to purchase an aggregate of 163,670
shares of Common Stock prior to the redemption, resulting in total proceeds to
the Company of approximately $613,000.
F-13
<PAGE>
Issuance of Stock in Private Placements
In January 1997, the Company sold 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. In August 1997, the Company issued (i) 8,180 shares
of Common Stock valued at $23.02 per share to Dale Jarrett in connection with a
three-year personal services contract, and (ii) 19,324 shares of Common Stock
valued at $22.59 to E.J. Simpson as a portion of the license fee pursuant to a
license agreement.
1997 Public Offering
On June 24, 1997, the Company sold 1,770,000 shares of its Common Stock in
connection with an underwritten public offering. On July 17, 1997, the Company
sold an additional 315,000 shares of its Common Stock pursuant to the exercise
of the underwriters' over-allotment option. The net proceeds to the Company from
this offering were approximately $49.8 million, after deducting estimated
offering expenses and underwriting discounts and commissions.
Stock Options
Under the Company's 1993 Stock Option Plan (the "Plan"), the Board of Directors
may from time to time grant to key employees, consultants, and independent
contractors who provide valuable services to the Company (i) incentive stock
options and non-statutory stock options to purchase shares of the Company's
Common Stock, (ii) stock appreciation rights, (iii) shares of the Company's
Common Stock, or (iv) cash awards. The Plan also includes an automatic program
providing for automatic grants of stock options to non-employee directors of the
Company. The exercise price for all incentive stock options granted under the
Plan may not be less than the fair market value of the Company's Common Stock on
the date of the grant, except that the option price may not be less than 110% of
the fair market value of the Company's Common Stock on the date of the grant in
the case of incentive stock options granted to any person possessing more than
10% of the combined voting power of the Company's Common Stock or any parent or
subsidiary corporation. In the case of non-statutory stock options, the exercise
price may not be less than 85% of the fair market value of the Company's Common
Stock on the date of the grant. Options granted under the Plan generally have a
six-year term. Options that were granted prior to July 1995 are fully vested and
exercisable. The option agreements for options granted beginning in July 1995
generally provide that one-third of the options vest and become exercisable on
each of the first, second, and third anniversaries of the date of grant. A total
of 2,750,000 shares of Common Stock may be issued pursuant to the Plan. The Plan
expires in 2001.
(6) RELATED PARTY TRANSACTIONS
The Company currently leases a building in Tempe, Arizona, containing
approximately 46,000 square feet, which the Company utilized for its corporate,
administrative, sales offices, and warehouse facilities prior to September 1997.
Fred W. Wagenhals, a shareholder and officer of the Company, currently owns a
one-third interest in F.W. Investments, a partnership that owns this facility.
The Company paid F.W. Investments rent of approximately $183,000, $177,000, and
$177,000 for the years ended September 30, 1997, 1996, and 1995 respectively.
The Company is currently marketing the property for a sub-lease arrangement with
unaffiliated third parties.
(7) EMPLOYEE BENEFIT PLANS
In October 1994, the Company established a defined contribution plan that
qualifies as a cash or deferred profit sharing plan under Sections 401(a) and
401(k) of the Internal Revenue Code. The plan is available to substantially all
domestic employees. Under the plan, participating employees may defer from 1% to
15% of their pre-tax compensation. The Company contributes fifty cents for each
dollar contributed by the employee, with a maximum contribution of 2% of the
employee's defined compensation. In addition, the plan provides for an annual
employer profit sharing contribution in such amounts as the Board of Directors
may determine. The
F-14
<PAGE>
Company expensed approximately $41,000 under the plan for the year ended
September 30, 1997 and $26,000 in each of the years ended September 30, 1996 and
1995.
The Company has no other programs that require payment by the Company of
post-employment benefits to current or retired employees.
(8) INCOME TAXES
The Company provides for income taxes under SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities and the tax rates in effect when these differences are expected
to reverse. The principal differences arise as a result of the use of
accelerated depreciation and amortization methods for federal income tax
reporting purposes, certain inventory costs required to be capitalized for tax
purposes, certain reserves expensed currently for financial reporting purposes,
and compensation not yet deductible for tax purposes.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. The
ultimate realization of this deferred tax asset depends on the Company's ability
to generate sufficient taxable income in the future. A valuation allowance has
not been recorded as of September 30, 1997.
Net operating loss carryovers for federal income tax purposes of approximately
$856,000 at September 30, 1994, were fully utilized in the year ended September
30, 1995.
The provision for income taxes consists of the following for the years ended
September 30 (in thousands):
1997 1996 1995
------- ------- -------
Current, net of operating loss carryover:
Federal ............................... $ 5,828 $ 3,258 $ 1,050
State ................................. 822 753 275
------- ------- -------
6,650 4,011 1,325
Deferred income taxes ..................... 114 (94) 13
Utilization of net operating loss
carryforward ............................ -- -- 340
Change in valuation allowance ............. -- -- (294)
------- ------- -------
Provision for income taxes ................ $ 6,764 $ 3,917 $ 1,384
======= ======= =======
Reconciliation of the federal income tax rate to the Company's effective rate
for the years ended September 30 are as follows:
1997 1996 1995
------ ------ ------
Statutory federal rate .................... 35.00% 34.00% 34.00%
State taxes, net of federal benefit ....... 4.65% 5.03% 5.53%
Non-deductible expense .................... .35% .66% 0.86%
Change in valuation reserve ............... -- -- (7.06%)
------ ------ ------
40.00% 39.69% 33.33%
====== ====== ======
F-15
<PAGE>
The components of deferred taxes are as follows at September 30 (in thousands):
1997 1996
------- -------
Deferred tax assets (liabilities):
Accelerated tax depreciation ............. $ (391) $ (216)
Accelerated tax amortization ............. (306) --
Inventory cost capitalization ............ 547 156
Vacation accrual ......................... 27 13
Valuation reserves ....................... 794 197
Deferred compensation .................... 247 882
------- -------
Net deferred tax asset ................. $ 918 $ 1,032
======= =======
(9) LEGAL SETTLEMENT
In June 1997, the Company agreed to settle a breach of contract suit with Action
Products, Inc. for $4.9 million (the "API Settlement"). Pursuant to the API
Settlement, in July 1997 the Company made a payment of $4.9 million to the
plaintiff, and all parties executed mutual releases. The accompanying financial
statements include a charge of $5.4 million for the API Settlement and related
legal fees.
(10) COMMITMENTS AND CONTINGENCIES
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 hazardous
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. Should the Company's
defense prove unsuccessful, the Company currently estimates the potential loss
to be approximately $800,000. No provision with respect to this matter has been
made in the financial statements.
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. The lawsuits allege that the defendants engaged in
price fixing and other anti-competitive activities in violation of federal
anti-trust laws. The Company was named as a defendant based upon actions alleged
to have been taken by Sports Image, Inc., a North Carolina corporation ("Sports
Image N.C.") and Creative Marketing & Promotions, Inc. ("CMP") prior to the
Company's acquisitions of the assets and capital stock, respectively, of those
entities. The actions were subsequently consolidated by order of the court. The
caption of the
F-16
<PAGE>
consolidated action is "In re Motorsports Merchandise Antitrust Litigation" and
the files are maintained under Master File No. 1-97-CV-0569-CC. On May 30, 1997,
a consolidated amended complaint was filed, which deleted the Company as a
defendant with respect to claims based upon actions alleged to have been taken
by Sports Image N.C. and named the Company's wholly owned subsidiary, Sports
Image, Inc., an Arizona corporation ("Sports Image AZ"), as a defendant with
respect to those claims. The Company remains a defendant with respect to claims
based upon actions alleged to have been taken by CMP. On July 31, 1997, the
Company acquired all of the outstanding capital stock of RYP, which is another
defendant in this matter. Accordingly, the Company has assumed the defense of
this matter with respect to claims based upon actions alleged to have been taken
by RYP and has agreed to be responsible for and to pay any costs, fees,
expenses, damages, payments, credits, rebates, and penalties arising out of this
matter with respect to RYP, up to an aggregate of $400,000 (the "$400,000 Cap").
The $400,000 Cap excludes attorneys fees and certain other costs and expenses
that the Company may incur in defending or settling this matter. 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. On August 1, 1997, answers were filed on behalf of the Company and
Sports Image AZ denying the allegations of the complaint. Pursuant to an
agreement between the plaintiffs and Sports Image AZ to toll the running of the
statute of limitations with respect to any claims against Sports Image AZ, on
November 17, 1997 the plaintiffs filed a motion to dismiss Sports Image AZ from
the case without prejudice. The parties currently are conducting class
discovery. The Company intends to vigorously defend the claims asserted in the
amended and consolidated complaint.
On June 4, 1997, Petty Enterprises, Inc. Licensing Division filed a lawsuit
against the Company and Fred W. Wagenhals in the General Court of Justice for
Randolph County, North Carolina. The complaint alleges that the Company engaged
in activities that resulted in common law trademark infringement, fraud, unfair
competition, "palming off" unauthorized goods as authorized products, marketing
unlicensed products, misappropriation of business opportunities, breach of
contract, unjust enrichment, conversion, and violations of the North Carolina
Unfair and Deceptive Trade Practices Act and the Lanham Act. In particular, the
plaintiff alleges that the Company manufactured and sold products in quantities
greater than the amounts permitted under certain license agreements,
manufactured and sold certain products for which it did not have licenses,
misrepresented the number of licensed products actually manufactured and sold,
and underpaid royalties to the licensors. The complaint also alleges that these
acts constitute a pattern of improper activity. The complaint requests that an
unspecified amount of actual damages plus treble and punitive damages, as well
as injunctive relief. On July 3, 1997, the Company and Mr. Wagenhals were
successful in removing the case to the United States District Court for the
Middle District of North Carolina. On July 11, 1997, each of the Company and Mr.
Wagenhals filed an answer denying the plaintiff's allegations and each filed
counterclaims against the plaintiff for breach of contract, breach of a prior
settlement agreement between the plaintiff and the Company, violations of the
North Carolina Unfair and Deceptive Trade Practices Act, defamation and damage
to reputation, and tortious interference with prospective business
relationships. On July 18, 1997, the Company and Mr. Wagenhals collectively
filed a third-party complaint against Brett Nelson, an affiliate of the
plaintiff, alleging violations of the North Carolina Unfair and Deceptive Trade
Practices Act, defamation and damage to reputation, and tortious interference
with actual and prospective business relationships. On August 8, 1997, Mr.
Nelson filed an answer denying the allegations against him. After the Court
denied motions to dismiss by all parties, the plaintiff filed its amended
complaint and the Company and Mr. Wagenhals filed their respective amended
answer and counterclaims. The amended complaint and the amended answer and
counterclaims contain essentially the same allegations and defenses as the
original pleadings. The parties currently are in the early stages of discovery.
The Company and Mr. Wagenhals intend to vigorously pursue their counterclaims
and the third-party complaint and to vigorously defend this lawsuit.
The Company leases certain equipment and office space under noncancellable
operating leases. Rent expense related to these lease agreements totaled
approximately $935,000, $437,000 and $352,000 for the fiscal years ended
September 30, 1997, 1996, and 1995 respectively.
F-17
<PAGE>
Future lease payments under the noncancellable leases are approximately as
follows (in thousands):
Year Ending
September 30,
-------------
1998 $ 2,286
1999 1,813
2000 1,483
2001 1,124
2002 1,078
Thereafter 4,765
-------
Total $12,549
=======
The Company is subject to certain other 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 results of operations.
(11) STOCK OPTION PLAN
The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to the fair value of the Company's
Common Stock on the date of grant (See Note 5 for a general discussion of the
Company's Stock Option Plan). The Company adopted SFAS No. 123 for disclosure
purposes in fiscal 1997. For SFAS No. 123 purposes, the fair value of each
option grant has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rates
ranging between 5.29% and 6.34%; expected life of three years; dividend rate of
0.0%; and expected volatility of 51.88%. Using these assumptions, the fair value
of the stock options granted is $1,614,623 and $908,153 for the years ended
September 30, 1997 and 1996, respectively. These amounts would be amortized as
compensation expense over the vesting period of the options. Options generally
vest equally over three years. Had compensation costs been determined consistent
with SFAS No. 123, utilizing the assumptions detailed above, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
1997 1996
---------- ---------
Net Income:
As Reported ....................... $ 10,146 $ 5,953
Pro Forma ......................... $ 9,305 $ 5,650
Primary EPS:
As Reported ....................... $ 0.69 $ 0.46
Pro Forma ......................... $ 0.64 $ 0.43
Fully Diluted EPS:
As Reported ....................... $ 0.69 $ 0.46
Pro Forma ......................... $ 0.63 $ 0.43
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation cost may
not be representative of that expected in future years.
F-18
<PAGE>
A summary of the status of the Company's stock option plan at September 30, 1997
and 1996 and for the years then ended is presented in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------ ------------------------
Wtd Wtd Wtd
Number Avg Number Avg Number Avg
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,110,053 $ 4.16 1,111,200 $ 2.90 1,252,000 $ 2.07
Granted ........... 220,250 17.76 240,700 9.28 400,200 $ 4.78
Exercised ......... (296,092) 5.80 (239,247) 3.45 (541,000) $ 2.37
Canceled .......... (1,501) 9.43 (2,600) 5.25 --
--------- --------- --------- -------- --------- --------
Outstanding at
end of year ...... 1,032,710 6.58 1,110,053 4.16 1,111,200 $ 2.90
Options exercisable
at end of year ... 714,950 3.09 881,774 2.91 1,051,000 $ 2.79
Options available
for grant......... 396,951 365,700 103,800
Weighted average
fair value of
options granted... $ 7.33 $ 3.77
</TABLE>
Options outstanding and exercisable by price range as of September 30, 1997 are
as follows:
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- --------------------------------- ----------------------
$ 1.25 - $ 5.25 655,010 2.17 $ 2.38 597,723 $ 2.16
$ 6.50 - $10.63 194,950 4.75 9.76 79,483 9.34
$14.88 - $19.50 182,750 5.42 18.25 37,744 15.33
--------- ---- ------ --------- -------
$ 1.25 - $19.50 1,032,710 3.23 $ 6.58 714,950 $ 3.09
========= ==== ====== ========= =======
(12) SUBSEQUENT EVENTS
On October 3, 1997, the Company entered into a ten-year license agreement with
Richard Childress Racing Enterprises, Inc. ("RCR") with respect to various
rights used in connection with Dale Earnhardt licensed products. In connection
with this agreement, the Company paid RCR a license fee consisting of cash plus
34,940 shares of the Company's Common Stock. The license agreement also requires
the Company to pay to RCR certain minimum annual royalties during the term of
the agreement, plus royalties based on sales of licensed products in each year
during the term of the agreement.
In November 1997, the Company agreed in principle to purchase the assets and to
assume certain liabilities of the motorsport die-cast collectible business of
Revell Monogram, Inc. ("Revell") for approximately $15.0 million in cash. The
proposed transaction will include a ten-year license agreement that will enable
the Company to use certain "Revell" trademarks in connection with sales of
certain die-cast products, as well as other arrangements with respect to
licensing, manufacturing, and distributing various products by both the Company
and Revell. The agreement also includes a minimum contingent payment of $10.0
million over a ten-year period, based upon the attainment of certain future
financial objectives. The acquisition is subject to the completion of due
diligence and the preparation and execution of definitive agreements. Revell's
design and manufacturing activities for motorsport die-cast collectibles
generated approximately $16.2
F-19
<PAGE>
million in revenue during calendar year 1996. This transaction will be accounted
for as a purchase.
(13) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT
On December 9, 1997, the Company acquired certain assets and assumed certain
liabilities related to sales of motorsports merchandise licensed by NASCAR
Winston Cup driver Rusty Wallace from an affiliate of Mr. Wallace. The purchase
price paid by the Company for the acquired assets consists of cash of $6.0
million, of which $2.5 million was paid at the closing and the remaining $3.5
million will be paid during fiscal 1998. In connection with the acquisition of
the assets and assumption of the liabilities, the Company entered into a
seven-year license agreement with another affiliate of Mr. Wallace for the name
and likeness of Mr. Wallace and acquired a five-year sublicense with a wholly
owned subsidiary of Penske Motorsports, Inc. The license agreement and
sublicense agreement both contain options that permit the Company to renew for
two five-year terms. The license agreement with the affiliate of Mr. Wallace
requires the Company to pay royalties on sales of licensed products, plus a
license fee if sales of licensed products exceed a specified amount each year
during the initial term of the license. The terms of the transaction were
determined by arms-length negotiations between the respective representatives of
the seller, the sublicensor and its parent, and the Company. This transaction
will be accounted for as a purchase.
F-20
STANDARD FORM
INDUSTRIAL LEASE
(SINGLE TENANT)
Landlord HEWSON/BRECKNER-BASELINE, L.L.C., an Arizona limited liability company
------------------------------------------------------------------------
Tenant ACTION PERFORMANCE COMPANIES, INC., an Arizona corporation
--------------------------------------------------------------------------
Dated as of April 8, 1997
TABLE OF CONTENTS
1. Defined Terms............................................................1
2. Leased Premises..........................................................2
(a) Property to be Leased...........................................2
(b) Reserved Rights of Landlord.....................................2
3. Completion of Premises...................................................2
(a) Plans...........................................................2
(b) Scheduled Commencement Date; Delays Caused by Tenant............3
(c) Remedy..........................................................3
(d) Changes.........................................................3
(e) Ready for Occupancy.............................................4
(f) Construction Representative.....................................4
(g) Early Entry.....................................................4
(h) Quality of Construction.........................................4
(i) Tenant Improvement Allowance. ..................................5
4. Term.....................................................................5
5. Rent.....................................................................6
(a) Fixed Rent......................................................6
(b) Adjustments. ..................................................6
(c) Pro Rata Rent...................................................6
(d) Net Lease.......................................................6
6. Security.................................................................6
(a) Security Deposit................................................6
(b) Lien and Security Interest. ...................................7
7. Use......................................................................7
(a) General.........................................................7
(b) Compliance with Law.............................................7
(c) Existing Title and Condition of Premises........................7
(d) Signs...........................................................8
(e) Governmental Regulation.........................................8
8. Maintenance and Repairs..................................................8
(a) Tenant's Maintenance............................................8
(b) Landlord's Obligations to Repair................................8
(c) Surrender.......................................................9
<PAGE>
9. Utilities................................................................9
10. Alterations and Additions................................................9
(a) Limitation......................................................9
(b) Liens..........................................................10
(c) Removal........................................................10
11. Insurance...............................................................10
(a) General Liability..............................................10
(b) Extended Coverage..............................................10
(c) Policies.......................................................11
(d) Waiver of Subrogation..........................................11
(e) Tenant's Contents..............................................11
(f) Workmen's Compensation.........................................11
(g) Rental Income Insurance........................................12
12. Indemnity; Exemption of Landlord from Liability.........................12
(a) General........................................................12
(b) Tenant's Business..............................................12
13. Damage or Destruction; Obligation to Rebuild............................12
(a) Landlord's Obligation to Rebuild...............................12
(b) Abatement of Rent..............................................12
(c) Option to Terminate............................................13
(d) Uninsured Casualties...........................................13
(e) Damage Near End of Term........................................13
(f) Tenant's Waiver................................................13
14. Taxes and Assessments...................................................14
(a) Payment........................................................14
(b) Definition.....................................................14
(c) Separate Assessment............................................14
(d) Personal Property..............................................14
(e) Rent Tax.......................................................14
(f) Declaration. .................................................14
(g) Project Assessments............................................14
(h) Right to Contest...............................................15
15. Condemnation............................................................15
(a) Rent Reduction or Lease Termination............................15
(b) Award..........................................................15
(c) Temporary Condemnation.........................................15
16. Assignment and Subletting...............................................16
(a) Consent........................................................16
(b) Tenant's Continuing Liability..................................16
(c) Information....................................................16
(d) Excess Sublease Rental.........................................16
(e) Release........................................................17
(f) Controlled Entity..............................................17
(g) Attorneys' Fees................................................17
17. Defaults; Remedies......................................................17
(a) Defaults.......................................................17
(b) Remedies.......................................................18
(c) Late Charges...................................................20
(d) Payment or Performance by Landlord.............................21
-ii-
<PAGE>
18. Miscellaneous...........................................................21
(a) Estoppel Certificates..........................................21
(b) Landlord's Liability...........................................22
(c) Construction...................................................22
(d) Interest on Past-Due Obligations...............................22
(e) Time of Essence................................................22
(f) Counterparts. ................................................22
(g) Incorporation of Prior Agreements; Amendments..................22
(h) Notices........................................................22
(i) Waivers........................................................23
(j) Recording......................................................23
(k) Holding Over...................................................23
(l) Covenants and Conditions.......................................23
(m) Binding Effect.................................................23
(n) Subordination..................................................23
(o) Attorneys' Fee.................................................24
(p) Landlord's Access..............................................24
(q) Auctions. ....................................................24
(r) Merger.........................................................24
(s) Joint and Several Liability....................................24
(t) Individual Liability...........................................24
(u) Attornment.....................................................24
(v) Lenders Right to Cure..........................................25
(w) Revisions to Lease. ..........................................25
(x) Administrative Charge..........................................25
(y) Estimated Payments.............................................25
19. Toxic Materials.........................................................26
(a) Definitions....................................................26
(b) Prohibition on Hazardous Materials.............................26
(c) Exception to Prohibition.......................................26
(d) Compliance with Environmental Laws.............................27
(e) Environmental Notices..........................................27
(f) Tenant's Environmental Indemnity...............................27
(g) Remedial Work at Tenant's Expense..............................27
(h) Landlord's Option..............................................28
(i) Injunctive Relief..............................................28
(j) Self-Help......................................................28
(k) Other Tenants and Owners.......................................28
(l) Environmental Inspection.......................................28
(m) Surrender of Premises - Environmental Considerations...........29
(n) Landlord's Environmental Indemnity.............................29
(o) Remedial Work at Landlord's Expense............................29
Exhibit A The Site Plan for Premises
Exhibit B Legal Description of Property
Exhibit C Space Plan for Tenant Improvements
Exhibit D Certain Tenant Improvements to be Furnished by Landlord
Exhibit E Parking Plan
Exhibit F Option to Extend Term
Exhibit G Hazardous Materials
Exhibit H Tenant's Sign Plan
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1. Defined Terms. Each reference in this Lease to any of the following
terms shall incorporate the data stated for that term. Other terms are as
defined in the Lease.
(a) Landlord and Landlord's HEWSON/BRECKNER-BASELINE, L.L.C.
Address (subparagraph c/o Hewson Properties, Inc.
18(h)): 4636 East University Drive, Suite 265
Phoenix, AZ 85034
(b) Tenant and Tenant's ACTION PERFORMANCE COMPANIES, INC.,
Address for Notices an Arizona corporation
(subparagraph 18(h)): Until Commencement Date:
2401 West First Street
Tempe, AZ 85281
Attn: Mr. Chris Bening
After Commencement Date:
4707 East Baseline Road
Phoenix, AZ 85034
Attn: Mr. Chris Bening
See subparagraph 18(h) for additional
notices
(c) Street Address of Pre- 4707 East Baseline Road
mises (paragraph 2): Phoenix, AZ 85034
(d) Leased Premises The real property described in Exhibit
B attached hereto and all improvements
now or hereafter located thereon,
including an existing building (the
"Building") which will contain
approximately 138,110 square feet of
rentable space (117,410 square feet of
floor area and 20,700 square feet of
mezzanine area); the parking areas to
be provided to Tenant in accordance
with the provisions of Exhibit E
"Parking Plan" attached hereto; and
the area described in subparagraph
3(a) below and designated on Exhibits
A and E as "Future Parking Area"; all
as designated on the Site Plan
attached hereto as Exhibit A (the
"Premises").
(e) Landlord's Construction Michael Corbett
Representative (subpara-
graph 3(f)):
(f) Tenant's Construction Irving Bush
Representative (subpara-
graph 3(f)):
(g) Term (paragraph 4): One hundred twenty (120) months
(h) Scheduled Commencement 12:01 a.m. on August 15, 1997
Date (paragraph 4):
(i) Fixed Rent (subpara- Months 1-60 $67,510.00
graph 5(a)): Months 61-120 $76,316.00
(j) Rental Period (sub- Monthly
paragraph 5(a)):
<PAGE>
(k) Security Deposit (sub- $67,510.00
paragraph 6(a)):
(l) Permitted Uses (para- General office and warehouse use,
graph 7): together with any other uses permitted
by law upon the prior written consent
of the Landlord as provided in
paragraph 7
(m) Liability Insurance $2,000,000
(subparagraph 11(a)):
(n) Project The Pointe South Mountain Business
Park
2. Leased Premises.
(a) Property to be Leased. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, subject to the terms and conditions contained
herein, (i) that certain real property located at the street address set forth
in paragraph 1 hereof and more particularly described in Exhibit B attached
hereto and incorporated herein by this reference (the "Property"); (ii) the
improvements located on the Property, including the Building (the "Existing
Improvements"); and (iii) those improvements to be constructed on the Property
in accordance with the provisions of paragraph 3 below and more particularly
described in Exhibits C and D attached hereto and incorporated herein by this
reference (the "Tenant Improvements"). The Existing Improvements and the Tenant
Improvements are hereinafter sometimes referred to collectively as the
"Improvements", and the Property and the Improvements are sometimes hereinafter
collectively referred to as the "Premises". The Premises includes the area
designated on Exhibit A as "Unpaved Future Parking Area" and Tenant, subject to
the approvals and other provisions of subparagraph 10(a) below, shall have the
right, at Tenant's sole expense, to pave such area for additional parking;
provided, however, the paving and other parking area improvements shall not be
removed at the expiration of the Term of this Lease.
(b) Reserved Rights of Landlord. Notwithstanding the foregoing,
Landlord reserves the right from time to time, without unreasonable interference
with Tenant's use, to grant easements on, or dedicate portions of, the Premises
for public utilities without Tenant's consent, provided that no such grant or
dedication shall unreasonably interfere with Tenant's use of the Premises or
otherwise cause Tenant to incur cost or expense.
3. Completion of Premises.
(a) Plans. Landlord and Tenant have approved the space plan attached
hereto as Exhibit C for the interior of the Building. Landlord's architect will
also prepare preliminary plans and outline specifications (the "Preliminary
Tenant Improvement Plans") for the construction of improvements (the "Tenant
Improvements") in and to the Building in accordance with the space plan, which
Tenant Improvements are described on Exhibit D attached hereto and by this
reference made a part hereof. Landlord and Tenant will expeditiously review the
Preliminary Tenant Improvement Plans prepared by Landlord's architect. Within
ten (10) days after delivery to Tenant of the Preliminary Tenant Improvement
Plans, as approved by Landlord, which approval shall not be unreasonably
withheld, Tenant shall set forth in writing, with particularity and precision,
any revisions which Tenant wishes to have made to the Preliminary Tenant
Improvement Plans, which revisions shall be subject to Landlord's approval,
which approval shall not be unreasonably withheld. Landlord's architect will
then make the appropriate revisions and submit the revised Preliminary Tenant
Improvement Plans to both Landlord and Tenant. If Tenant wishes to have any
additional revisions made to the revised Preliminary Tenant Improvement Plans,
Tenant shall set forth such revisions in writing, with precision and
particularity, and deliver the revisions to Landlord and Landlord's architect
within ten (10) days after delivery to Tenant of such revised Preliminary Tenant
Improvement Plans. Landlord's architect shall make the appropriate revisions and
the further revised plans shall be deemed the Preliminary Tenant Improvement
Plans for the following provisions and paragraphs of this Article 3 and
subparagraph 3(a).
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Landlord shall thereafter cause to be prepared final plans and
specifications (the "Final Tenant Improvement Plans") substantially in
conformity with the Preliminary Tenant Improvement Plans and Exhibits C and D,
which need not include working detail drawings. The term "Tenant Improvement
Plans" shall hereinafter mean the Preliminary Tenant Improvement Plans and, when
prepared, the Final Tenant Improvement Plans. The Final Tenant Improvement Plans
shall be delivered to Tenant as soon as reasonably possible after preparation
thereof, subject to any period of delay encountered by Landlord in such
preparation as a result of requests by Tenant for changes in the Final Tenant
Improvement Plans after preparation thereof. Within ten (10) days after delivery
of the Final Tenant Improvement Plans, Tenant shall set forth in writing, with
particularity and precision, any corrections or changes necessary to bring the
Final Tenant Improvement Plans into substantial conformity with the Preliminary
Tenant Improvement Plans and Exhibits C and D, except that Tenant may not object
to any logical development or refinement of the Preliminary Tenant Improvement
Plans. Failure to deliver to Landlord written notice of any such corrections or
changes within said ten (10) day period shall constitute approval of the Final
Tenant Improvement Plans by Tenant. Following such approval of the Final Tenant
Improvement Plans, both parties shall endorse approval for filing purposes
thereon, in duplicate; thereafter changes may be made only in accordance with
subparagraph (d) below; and Landlord shall employ Landlord's contractor to
construct the Tenant Improvements.
(b) Scheduled Commencement Date; Delays Caused by Tenant. Landlord, at
its sole expense, shall proceed diligently with construction and completion of
the Tenant Improvements substantially in accordance with the Tenant Improvement
Plans ("Landlord's Work"). Landlord shall complete the Tenant Improvements and
they shall be Ready for Occupancy (as defined below) by Tenant not later than
the Scheduled Commencement Date set forth in paragraph 1 above; provided,
however, that such Scheduled Commencement Date shall be extended for a period of
time equal to the period of any delay or delays encountered by Landlord
affecting construction because of fire, earthquake, inclement weather, or other
acts of God, acts of the public enemy, riot, insurrection, governmental
regulations of the sales of materials or supplies or the transportation thereof,
strikes or boycotts, shortages of material or labor, Tenant's early entry under
the provisions of subparagraph (g) below, changes in the Tenant Improvement
Plans pursuant to subparagraph (d) below, or any other cause beyond the control
of Landlord; and provided, further, the financial inability of Landlord to
perform Landlord's construction obligations shall not be deemed a cause beyond
the control of the Landlord.
(c) Remedy. If the Premises are not Ready for Occupancy on or before
the Scheduled Commencement Date as extended pursuant to subparagraph (b) above,
the sole remedy of Tenant shall be the option to terminate this Lease by the
delivery to Landlord of written notice within ten (10) days after the day three
(3) months following the Scheduled Commencement Date, as extended, if the
Premises are not Ready for Occupancy prior to the giving of such written notice.
Anything in the foregoing to the contrary notwithstanding, if periods of delay
attributable solely to events described in the second sentence of subparagraph
(b) above (exclusive of those described in subparagraphs (d) or (g) or otherwise
caused by Tenant or Tenant's agents, employees, contractors or licensees) cause
the Scheduled Commencement Date to be extended for periods totaling more than
six (6) months after the initial Scheduled Commencement Date, then Tenant, as
Tenant's sole remedy, shall also have the option to terminate this Lease by the
delivery to Landlord of written notice within ten (10) days after the Scheduled
Commencement Date has been extended for periods totaling six (6) months solely
as a result of events described in the second sentence of subparagraph (d) above
(exclusive of those described in subparagraphs (d) or (g) or otherwise caused by
Tenant or Tenant's agents, employees, contractors or licensees).
(d) Changes. Tenant shall have the right to request changes in the
Tenant Improvement Plans (including but not limited to changes intended to
reduce the anticipated costs of constructing the Tenant Improvements), which
request shall not be unreasonably denied; provided, however, (i) such right
shall not be exercised unreasonably, (ii) no such request shall effect any
structural change in the Building, (iii) Tenant shall pay any additional cost
incurred by Landlord required to implement such change, including without
limitation loss of rents calculated as provided in subparagraph 5(a) below for
any delay period, architectural fees, increase in construction costs and any
other charges payable hereunder caused by delay, with all said costs
3
<PAGE>
to be paid immediately upon demand by Landlord (except that any payment for loss
of rents shall be payable at the time provided in subparagraph 5(a) below that
such rents would have been payable if such delay had not occurred), (iv) except
as provided in clause (v) below, such requests shall constitute an agreement on
the part of Tenant to accept any delay in completion caused by reviewing,
processing and implementing any such request and/or changes, and (v) changes in
the Tenant Improvement Plans will be authorized only by written agreement
setting forth any additional cost and expense and additional time required to
complete the Tenant Improvements as a result thereof. If Landlord believes that
any such change may cause a delay in completion of the Tenant Improvements,
Landlord will notify Tenant and such change shall be performed only if the
parties agree in writing to extend the date for completion of the Tenant
Improvements by the number of days of such anticipated delay and set forth the
effect of such delay upon the commencement of rent. If Landlord and Tenant do
not enter into such an agreement, Tenant may withdraw its request for a change
and the Scheduled Commencement Date shall not be extended except to the extent
of any temporary delay resulting from the cessation of those activities, if any,
which (A) would have been inconsistent with the requested change or (B) could
not be engaged in because the subject work would have been affected by the
pending change requested.
(e) Ready for Occupancy. The Premises shall be deemed to be ready for
occupancy ("Ready for Occupancy") when the architect or engineer in charge of
the work of construction certifies: (i) that the work of construction has been
substantially completed in accordance with the Tenant Improvement Plans; and
(ii) the date of such completion. Landlord shall diligently complete, as soon as
reasonably possible, any items of work and adjustment not completed when the
Premises are Ready for Occupancy.
(f) Construction Representative. In connection with the original
construction of the Premises each party shall be bound by its Construction
Representative set forth in paragraph 1 above. A party may designate a
substitute Construction Representative by giving written notice to the other
party.
(g) Early Entry. With the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed, Tenant may, at any time
prior to the commencement of the Term, at its sole risk, enter upon and install
such trade fixtures and equipment in the Premises as it may elect; provided,
however, that (i) Tenant's early entry shall not interfere with Landlord's work
of construction or cause labor difficulties; (ii) Tenant shall execute an
indemnity agreement in favor of Landlord in form and substance reasonably
satisfactory to Landlord; and (iii) Tenant shall pay for and provide evidence of
insurance reasonably satisfactory to Landlord. Tenant shall not use the Premises
for the storage of inventory or otherwise commence the operation of business
prior to the commencement of the Term without the express prior written consent
of Landlord.
(h) Quality of Construction. All work shall be done in a good and
workmanlike manner and in compliance with all applicable laws and lawful
ordinances, bylaws, regulations and orders of governmental authority and of the
insurers of the Improvements. No part of the Building or the Improvements shall
encroach on adjacent properties and the construction thereof shall not violate
any recorded covenants, conditions or restrictions applicable to the Project or
the Premises. Landlord assumes no liability for special, consequential or
incidental damages of any kind. There are no representations, warranties or
guaranties, express or implied, including warranties of merchantability or use
of the Premises, except as are expressly set forth herein. Tenant hereby waives
the benefit of any rule that disclaimers of warranty shall be construed against
Landlord.
For one (1) year from the Commencement Date, Landlord, at its cost and
expense, will promptly correct: (i) any of the Landlord's Work found to be
defective or failing to conform to this Lease; (ii) any defects in the
construction, design, workmanship or materials used in the Premises or the
plumbing, electrical, heating, ventilation, air conditioning or building
equipment serving the Premises; and (iii) any defects in Landlord's Work or the
structural elements of the Premises required to be corrected by governmental
authorities. Landlord hereby assigns to Tenant, for the term of the Lease and to
the extent of Tenant's obligations hereunder, all warranties relating to the
equipment and facilities required to be maintained by Tenant, and Landlord, at
the request and expense of Tenant, will cooperate with Tenant to enforce same.
Landlord will execute such further
4
<PAGE>
instruments of assignment of such warranties as may be reasonably requested by
Tenant from time to time.
(i) Tenant Improvement Allowance. The cost of constructing the Tenant
Improvements (including but not limited to the costs for plans, permits and fees
as more particularly described in Exhibit D) shall be paid by Landlord;
provided, however, if the amount expended for constructing the Tenant
Improvements is or will be more than $1,450,000, Tenant hereby agrees to
reimburse Landlord for all costs incurred in connection with the Tenant
Improvements except for $1,450,000 which is the Landlord's allowance (the
"Allowance") and, except as otherwise provided herein, is Landlord's entire
monetary obligation for the Tenant Improvements; and provided, further, any
excess costs incurred as a result of the fault or neglect of Landlord or of
Landlord's contractors, employees or agents shall be borne entirely by Landlord
and Tenant shall be responsible for all costs incurred in connection with
Landlord's Work as a result of the fault or neglect of Tenant. Tenant shall pay
any costs which are Tenant's responsibility hereunder (the "Excess Costs") on a
pro rata basis with Landlord's payments for design and construction of the
Tenant Improvements, so that Landlord will always have paid a share of the total
costs then incurred which is equal to the percentage which the Allowance is of
the sum of the Allowance and Excess Costs, as then determined, and Tenant will
always have paid a share of the total costs for the Tenant Improvements then
incurred which is equal to the percentage which the Excess Costs, as then
determined, is to the sum of the Allowance and the Excess Costs, as then
determined. Determination(s) of the amount of the Excess Costs may be made from
time to time prior to, during or after construction. Tenant shall make such
payments, including any adjustments necessary to maintain the Tenant's
appropriate share of the total costs as a result of subsequent determinations,
based upon requisitions setting forth in reasonable detail the reason for such
Excess Costs and the amount thereof, together with any other information
reasonably requested by Tenant, and the amounts owing by Tenant shall be paid by
Tenant to Landlord within ten (10) days after receipt of each such requisition
and other information. Except as otherwise provided herein, Tenant shall have
complete responsibility for the cost of the Tenant Improvements and for the
construction by Tenant of any other improvements and alterations to the Premises
in connection with Tenant's occupancy thereof, Tenant agreeing to accept the
same "AS IS", subject only to the construction by Landlord of the Tenant
Improvements and any other obligation of Landlord under this Lease. Landlord
shall promptly furnish to Tenant estimates of the anticipated costs of the
various elements of the Tenant Improvements as such estimates are received by
Landlord. If Tenant believes that the amount of any estimate is excessive Tenant
may request changes in the Tenant Improvement Plans in accordance with
subparagraph (d) above. On or before sixty (60) days after completion of the
Tenant Improvements, Landlord will provide a final reconciliation of the
Allowance, the Excess Costs and the total costs of the Tenant Improvements and
each party shall promptly thereafter make any payment to the other party which
is necessary to effect the correct allocation of the total costs of the Tenant
Improvements as provided in this subparagraph.
(j) Permits. Landlord shall be solely responsible for the procuring of
all building and other permits, licenses and approvals and certificates of
occupancy necessary for construction of the Tenant Improvements and for the
occupancy of the Premises as constructed in accordance with the Tenant
Improvement Plans. If Landlord determines that any activities or installations
by Tenant or Tenant's agents, employees, contractors or licensees have, will or
are likely to result in any delays or failures to obtain any such permits,
licenses or approvals, Landlord will promptly notify Tenant in writing and
Landlord will not be responsible for any delays caused by such activities or
installations.
4. Term. The Term of this Lease, which shall be for the period set
forth in paragraph 1 above (sometimes hereinafter referred to as the "Initial
Term"), shall commence on the first to occur of the following dates (the
"Commencement Date"):
(a) The Scheduled Commencement Date set forth in paragraph 1 above (as
it may be extended pursuant to the terms of paragraph 3 above); or
(b) The date upon which Tenant actually commences to do business in the
Premises.
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Notwithstanding the foregoing, in the event that the Premises are not Ready for
Occupancy by the Scheduled Commencement Date, then such Scheduled Commencement
Date shall be extended until such time as the Premises are Ready for Occupancy,
but Tenant shall pay to Landlord amounts equal to the Fixed Rent which would
have been owing during the period of any delays in the Commencement Date caused
by Tenant or Tenant's agents, employees, contractors or licensees, including but
not limited to delays resulting from the exercise of Tenant's rights under
subparagraph 3(d) above. In addition, the Term of this Lease shall be subject to
extension as provided in Exhibit F attached hereto.
5. Rent.
(a) Fixed Rent. Tenant shall pay Landlord as fixed rent for the
Premises a sum equal to the Fixed Rent set forth in paragraph 1 on or before the
first day of each and every calendar month during the Term of this Lease, except
that Fixed Rent for the first full calendar month of the Term shall be payable
simultaneously with the execution of this Lease by Tenant.
(b) Adjustments. INTENTIONALLY DELETED.
(c) Pro Rata Rent. Rent for any period during the Term which is for
less than one month shall be a pro rata portion of the Rental Period
installment. Rent shall be payable, without deduction or offset, in lawful money
of the United States to Landlord at the address stated herein or to such other
persons or at such other places as Landlord may designate in writing; provided,
however, if Tenant obtains a judgment against Landlord on the basis of a default
by Landlord in the performance of Landlord's obligations under this Lease,
Tenant may offset amounts owing under such judgment against amounts owing by
Tenant to Landlord under this Lease, but such offset rights may not be exercised
against any lender holding a lien on the Premises, either before or after an
acquisition of the Premises by such lender, or after any sale of the Premises at
a foreclosure or other sale of the Premises pursuant to exercise of the lender's
lien rights against the Property.
(d) Net Lease. This Lease is what is commonly called a "net lease", it
being understood that Landlord shall receive the Rent set forth in this
paragraph free and clear of any and all impositions, taxes, liens, charges or
expenses of any nature whatsoever in connection with its ownership and leasing
of the Premises except those expenses specifically designated in this Lease to
be borne by Landlord. In addition to the Rent provided in this paragraph, Tenant
shall pay all impositions, taxes, insurance premiums, operating charges, costs
and expenses which arise or may be contemplated under any provisions of this
Lease during the Term. All of such charges, costs and expenses shall constitute
additional rent, and upon the failure of Tenant to pay any of such costs,
charges or expenses, Landlord shall have the same rights and remedies as
otherwise provided in this Lease for the failure of Tenant to pay Rent. It is
the intention of the parties hereto that Tenant shall in no event be entitled to
any abatement of or reduction in Rent or additional rent payable hereunder,
except as expressly provided herein. Any present or future law to the contrary
shall not alter this agreement of the parties.
6. Security.
(a) Security Deposit. Tenant shall deposit with Landlord, prior to
Landlord being obligated to commence construction of the Tenant Improvements,
the Security Deposit set forth in paragraph 1 above as security for Tenant's
faithful performance of Tenant's obligations hereunder. If Tenant fails to pay
Rent or any other charges payable by Tenant hereunder, or otherwise defaults
with respect to any provision of this Lease, Landlord may at its option use,
apply or retain all or any portion of the Security Deposit (i) to remedy
Tenant's defaults in the payment of Rent or any other sums payable by Tenant
pursuant to the terms hereof, (ii) to repair any damage to the Premises, (iii)
to clean and otherwise maintain the Premises, or (iv) to compensate Landlord for
any other loss or damage which Landlord may suffer thereby. If Landlord so uses
or applies all or any portion of the Security Deposit, Tenant shall, within ten
(10) days after written demand therefor, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to the full amount hereinabove stated
and Tenant's failure to do so shall be
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a breach of and a default under this Lease. Landlord shall not be required to
keep the Security Deposit separate from its general accounts. If Tenant is not
in default of Tenant's obligations hereunder at the expiration of the Term and
the Security Deposit has not been previously refunded to Tenant as hereinafter
provided, the Security Deposit, or so much thereof as has not theretofore been
applied by Landlord, shall be returned, without payment of interest or other
increment for its use, to Tenant (or, at Landlord's option, to the last
assignee, if any, of Tenant's interest hereunder) at the expiration of the Term
hereof, after Tenant has vacated the Premises. In addition, if Tenant is not in
default of Tenant's obligations hereunder upon that date which is two (2) years
after the Commencement Date, the full Security Deposit shall be returned to
Tenant, without payment of interest or other increment for its use, promptly
after written request therefor by Tenant and Tenant shall no longer be obligated
to maintain a Security Deposit with Landlord.
(b) Lien and Security Interest. INTENTIONALLY DELETED.
7. Use.
(a) General. The Premises shall be used and occupied only for the
Permitted Uses set forth in paragraph 1 above and for no other purpose without
Landlord's prior written consent. Landlord, upon request for such consent, shall
not withhold such consent so long as Landlord is given such information as
Landlord may reasonably request concerning such other use and such other use
shall not increase materially the amount of, scope of or potential liability to
Landlord from Environmental Activities (as defined in subparagraph 19(a) below)
on the Premises.
(b) Compliance with Law. Tenant shall, at Tenant's sole cost and
expense, comply with all present and future laws, ordinances, orders,
declarations of covenants and restrictions, rules, regulations and requirements
of all federal, state and municipal governments, courts, departments,
commissions, boards and officers, and any national or local Board of Fire
Underwriters, or any other body exercising functions similar to those of any of
the foregoing, foreseen or unforeseen, ordinary as well as extraordinary, which
may be applicable to the Premises, and the sidewalk, curbs and vaults adjoining
the Premises or to the use or manner of use of the Premises, whether or not such
law, ordinance, order, rule, regulation or requirement shall necessitate
structural changes or improvements, or the removal of any encroachments or
projections, ornamental, structural or otherwise, onto or over the streets or
sidewalks adjacent to the Premises, or onto or over other property contiguous or
adjacent thereto. Tenant shall obtain any required certificates or permits with
respect to its particular use of the Premises, the Improvements and the Property
within thirty (30) days from the Commencement Date and shall deliver a copy
thereof to Landlord within such thirty (30) day period; provided, however,
Landlord shall obtain any certificate of occupancy required for the shell of the
Building and the general occupancy of any improvements to the Premises to be
made by Landlord pursuant to paragraph 3 above. Tenant shall not use or permit
the use of the Premises in any manner that will tend to create waste or a
nuisance.
(c) Existing Title and Condition of Premises. Tenant hereby accepts the
Premises and this Lease subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, subject to all covenants, conditions and restrictions affecting the
Property, Project or Premises and subject to all liens, claims and encumbrances
currently existing against the Premises or any part thereof, including all
matters disclosed by any of the foregoing or by any exhibits attached hereto;
provided, however, such acceptance shall not negate any obligations of Landlord
with respect to the Premises under this Lease. Landlord, in accordance with (and
except as otherwise provided in) subparagraph 8(b) below, shall be responsible
for causing the roof and bearing walls of the Premises to be in good condition
and repair at the Commencement Date and shall also cause the heating,
ventilating and air conditioning system, the plumbing system and the electrical
system to be in good operating condition as of the Commencement Date. All such
systems shall be deemed in the condition required at the Commencement Date
unless Tenant gives Landlord written notice of any defects in such systems on or
before one hundred twenty (120) days after the Commencement Date. Except for any
representation or warranty which may be specifically set forth in this Lease,
Tenant acknowledges that neither Landlord nor Landlord's agents have made any
representations or
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warranties as to the Premises, including without limitation, any representation
or warranty as to condition or fitness of the Building or the suitability of the
Building for the conduct of Tenant's business.
(d) Signs. Tenant shall not erect or install on any exterior or
interior window, any door, or any exterior wall any signs, advertising media,
placards, trademarks, drapes, screens, tinting materials, shades, blinds or
similar items, without first securing Landlord's written permission, which
permission shall not be unreasonably withheld if the signs comply with the
following standards. All signs shall comply with all applicable governmental
requirements, shall conform to the design, motif and decor of the Project and
shall be in good taste, as determined in Landlord's reasonable discretion.
Landlord hereby approves the sign plan for the Premises attached hereto as
Exhibit H. Tenant shall properly maintain all approved signs. Upon expiration of
the Lease, Tenant promptly shall remove all signs placed in and around the
Premises by Tenant and shall repair any damage to the Premises caused by the
removal of such signs. Landlord may also require Tenant to erect an exterior
identifying sign in form and substance satisfactory to Landlord, which sign
shall also be subject to all of the other provisions of this subparagraph (d).
(e) Governmental Regulation. In addition to the general obligation of
Tenant to comply with laws and without limitation thereof, Landlord shall not be
liable to Tenant nor shall this Lease be affected if any parking privileges
appurtenant to or on the Premises or the Building are impaired by reason of any
moratorium, initiative, referendum, statute, regulation, or other governmental
decree or action which could in any manner prevent or limit the parking rights
of Tenant hereunder. Any governmental charges or surcharges or other monetary
obligations imposed relative to parking rights with respect to the Premises or
the Building shall be considered as Property Taxes and shall be payable by
Tenant under the provisions of paragraph 14 hereof.
8. Maintenance and Repairs.
(a) Tenant's Maintenance. Tenant shall, at Tenant's sole cost and
expense, keep and maintain the Premises, including, without limitation, the roof
and outside wall surfaces, the subfloors and floor coverings, any and all
alterations and additions made by Tenant pursuant to the provisions hereof, all
walks, driveways, parking and loading areas, lawns and landscaping, fences and
signs located in the areas which are adjacent to or included with the Premises,
in all respects in good repair and in a clean and safe condition. Tenant shall,
at Tenant's own expense, immediately replace all interior, exterior or other
glass in or about the Premises that may be broken during the Term with glass at
least equal to the specification and quality of the glass so replaced. If Tenant
fails to perform Tenant's obligations under this subparagraph, Landlord may at
its option enter upon the Premises after ten (10) days prior written notice to
Tenant and put the same in good order, condition and repair, and the cost
thereof together with interest thereon at the rate of fifteen percent (15%) per
annum shall become due and payable as additional rental to Landlord together
with Tenant's next monthly Rent payment. Nothing herein shall imply any duty
upon the part of Landlord to do any such work and the performance thereof by
Landlord shall not constitute a waiver of Tenant's default in failing to perform
the same. Landlord may, during the progress of any such work in or on the
Premises, keep and store therein all necessary materials, tools, supplies and
equipment. Landlord shall not be liable for the inconvenience, annoyance,
disturbance, loss of business or other damage of Tenant by reason of making such
repairs or the performance of any such work, or on account of bringing
materials, tools, supplies or equipment into or through the Premises during the
course thereof, and the obligations of Tenant under this Lease shall not be
affected thereby.
(b) Landlord's Obligations to Repair. Landlord shall, at its expense,
after written notice from Tenant, repair in a prompt and diligent manner any
damage to structural portions of the roof and bearing walls of the Premises;
provided, however, that if such damage is caused by an act or omission of Tenant
or Tenant's agents, invitees, employees or contractors, then such repairs shall,
to the extent not covered by the insurance maintained by Tenant under the
provisions of this Lease, be at Tenant's expense, payable to Landlord pursuant
to this paragraph. There shall be no abatement of Rent during the performance of
such work. Landlord shall not be liable to Tenant for injury or damage that may
result from any defect in the construction or conditions of
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the Premises and Tenant shall seek recovery for such injury or damage solely
from Tenant's insurance and/or any other persons or entities which may be liable
to Tenant; provided, however, Landlord shall comply with its warranty
obligations under paragraph 3 of this Lease. Tenant waives any right to make
repairs at the expense of Landlord under any law, statute or ordinance now or
hereafter in effect unless Tenant has given Landlord written notice of the need
for such repairs, such repairs are the obligation of Landlord under this Lease
and Landlord has failed to make the needed repairs within a reasonable period of
time after the receipt of such notice. Tenant expressly acknowledges that any
repairs to the walls of the Improvements relating to maturity or weathering of
construction materials, as contrasted to damage to the structural integrity of
the bearing walls, shall be the responsibility of the Tenant. If Landlord or
Tenant performs any repairs or replacement work pursuant to this subparagraph
(b) or other provisions of this Lease (except paragraph 3) which would be deemed
a capital expenditure to the Premises under generally accepted accounting
principles, then (i) the cost of the capital expenditure shall be amortized,
with interest at the rate of ten percent (10%) per annum, over the period of
their useful life; (ii) the cost, with interest, attributable on such amortized
basis to the remaining Term of the Lease, including, if applicable, the First
and Second Extended Terms, shall be payable by Tenant to Landlord; and (iii)
such amount shall be payable in equal monthly installments at the time each
payment of Fixed Rent is due under this Lease, including but not limited to
payments during the First or Second Extended Terms if Tenant exercises its
option(s) to extend the Term of this Lease under Exhibit F.
(c) Surrender. On the last day of the Term, or on any sooner
termination of this Lease, Tenant shall surrender the Premises to Landlord in
the same condition as when received, broom clean, ordinary wear and tear alone
excepted; provided, however, Tenant may leave certain alterations and
improvements on the Premises in accordance with subparagraphs 10(a) and 10(c)
below. Tenant shall repair any damage to the Premises occasioned by the removal
of Tenant's alterations and improvements (including, without limitation, its
trade fixtures, furnishings and equipment), which repair shall include, without
limitation, the patching and filling of holes and repair of structural damage.
9. Utilities. Tenant shall pay for water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. Landlord represents and warrants that each utility now
supplied to the Premises or to be supplied upon completion of the Tenant
Improvements will be separately metered. Landlord reserves the right to grant
easements on the Premises for public utilities, and to dedicate for public
utility purposes portions thereof, without Tenant's consent provided that no
such grant or dedication shall interfere with Tenant's use of the Premises or
otherwise cause Tenant to incur cost or expense. From time to time upon
Landlord's demand, Tenant shall execute, acknowledge and deliver to Landlord, in
accordance with Landlord's instructions, any and all documents or instruments
necessary to effect Tenant's covenants herein.
10. Alterations and Additions.
(a) Limitation. Tenant shall not, without Landlord's prior written
consent, make any alterations, improvements, additions, or utility installations
(which term "utility installations" shall include ducting, power panels,
fluorescent fixtures, space heaters, conduits and wiring) in, on or about the
Premises, except for interior nonstructural alterations to the Premises costing
less than Fifty Thousand Dollars ($50,000) in the aggregate over any one (1)
year period. As a condition to giving such consent, Landlord may require that
Tenant agree to (i) remove any such alterations, improvements, additions or
utility installations at the expiration of the Term and restore the Premises to
their prior condition or, in the alternative, (ii) require that such
alterations, improvements, additions or utility installations shall become the
property of Landlord and shall be left by Tenant upon the expiration of the
Term; provided, however, Landlord may not require that Tenant remove any of the
foregoing items which are typically installed for office and/or warehouse use
such as normal partitions, offices and shelving, but items such as, without
limitation, foundations, hoists and refrigeration equipment shall not be deemed
items typically installed in an office or warehouse. As a further condition to
giving such consent, Landlord may require Tenant to provide Landlord, at
Tenant's sole cost and expense, lien and completion bonds
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or other adequate security in an amount equal to one hundred five percent (105%)
of the estimated cost of such improvements to insure Landlord against any
liability for mechanics' and materialmen's liens and to insure completion of the
work.
(b) Liens. Tenant shall keep the Premises, the Building and the
Property free from any liens arising out of any work performed or alleged to
have been performed for Tenant's account on the Premises or materials furnished
to the Premises for Tenant's account. Tenant shall give Landlord not less than
ten (10) days notice prior to the commencement of any work on the Premises, and
Landlord shall have the right to post notices of non-responsibility in or on the
Premises as provided by law.
(c) Removal. Unless Landlord requires their removal as set forth in
subparagraph (a) above or otherwise consents to such removal, all alterations,
improvements, additions and utility installations which may be made on or to the
Premises shall become the property of Landlord and remain upon and be
surrendered with the Premises at the expiration of the Term. Notwithstanding the
provisions of this subparagraph (c), Tenant's shelving, machinery and equipment,
other than that which is affixed to the Premises so that it cannot be removed
without material damage to the Premises, shall remain the property of Tenant and
may be removed by Tenant subject to the provisions of subparagraph 8(c) above.
11. Insurance.
(a) General Liability. Tenant at its sole cost and expense, but for the
mutual benefit of Landlord, Landlord's property manager (if any) and Tenant as
named insureds, shall maintain commercial general liability insurance
("Liability Insurance") on an "occurrence basis" against claims for "personal
injury," including without limitation, bodily injury, death or property damage,
occurring upon, in or about the Premises and on, in or about the adjoining
sidewalks, streets and passageways and for all other areas appurtenant thereto,
such insurance to afford immediate minimum protection, at the time of the
inception of this Lease, and at all times during the Term, to a limit of not
less than Two Million Dollars ($2,000,000) with respect to personal injury or
death to any one or more persons or to damage to property. Such insurance shall
also include coverage against liability for bodily injury or property damage
arising out of the use, by or on behalf of Tenant, or any other person or
organization, of any owned, non-owned, leased or hired automotive equipment in
the conduct of any and all operations called for under this Lease. The limits of
said insurance shall not, however, limit the liability of Tenant hereunder.
(b) Extended Coverage. Tenant, at its sole cost and expense, shall keep
the Improvements insured during the Term for the mutual benefit of Landlord and
Tenant as named insureds, against loss or damage by fire and lightning and
against loss or damage by other risks embraced by coverage, of the type now
known as the broad form of extended coverage, including but not limited to fire,
riot and civil commotion, vandalism and malicious mischief, special extended
perils (all risk) and sprinkler leakage, and against such other risks or hazards
as Landlord may from time to time reasonably designate, in amounts sufficient to
prevent Landlord or Tenant from becoming a co-insurer under the terms of the
applicable policies, but in any event in an amount not less than the full
replacement cost of the Improvements, without deduction for physical
depreciation, and with not more than Two Thousand Five Hundred Dollars ($2,500)
deductible from the loss payable for any casualty. The policies of insurance
carried in accordance with this paragraph shall contain a "Replacement Cost
Endorsement." Such full replacement cost shall be determined from time to time,
but not more frequently than once in any twelve (12) consecutive calendar months
(except in the event of substantial changes or alterations to the Improvements
undertaken by Tenant as permitted hereunder) upon the written request of
Landlord by an appraiser, architect or contractor who shall be mutually and
reasonably acceptable to Landlord and Tenant. A copy of any such determination
shall promptly be sent to Landlord, and subject to the approval of such
determination by Landlord, the insurance maintained in this paragraph shall be
adjusted to the new full replacement cost. Said insurance shall provide for
payment for loss thereunder to Landlord or, at Landlord's request, to the holder
of any mortgage or deed of trust on the Premises but the proceeds thereof shall
be applied as provided in paragraph 13 below.
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(c) Policies. Insurance required hereunder shall be by companies rated
AX or better in "Best's Insurance Guide" licensed to do business in the state in
which the Premises are located and acceptable to Landlord and the holder of any
mortgage or deed of trust on the Premises or any part or portion thereof. Tenant
shall deliver to Landlord copies of policies of such insurance or certificates
evidencing the existence and amounts of such insurance with loss payable clauses
satisfactory to Landlord. No such policy shall be cancelable or subject to
reduction of coverage or other modification except after thirty (30) days
written notice to Landlord. Tenant shall, within ten (10) days of the expiration
of such policies, furnished Landlord with renewals or "binders" thereof, or
Landlord may order such insurance and charge the cost thereof to Tenant, which
amount shall be payable by Tenant upon demand. Each such policy or certificate
therefor issued by the insurer shall to the extent obtainable contain (i) a
provision that no act or omission of Tenant which would otherwise result in
forfeiture or reduction of the insurance therein provided shall affect or limit
the obligation of the insurance company to pay the amount of any loss sustained
and (ii) an agreement by the insurer that such policy shall not be canceled
without at least thirty (30) days prior written notice by registered mail to
Landlord. Tenant shall not do or permit to be done anything which shall
invalidate the insurance policies referred to herein. If Tenant shall fail to
procure and maintain any insurance required to be maintained by it by virtue of
any provision of this paragraph, Landlord may, but shall not be required to,
procure and maintain the same, but at the expense of Tenant.
(d) Waiver of Subrogation. Landlord and Tenant each hereby waive any
and all rights of recovery against the other, or against the partners, officers,
employees, agents and representatives of the other, for loss of or damage to
such waiving party or its property or the property of the other under its
control to the extent that such loss or damage is insured against under any
insurance policy in force at the time of such loss or damage. Tenant shall, upon
obtaining the policies of insurance required hereunder, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
(e) Tenant's Contents. Tenant shall assume the risk of damage to any
fixtures, goods, inventory, merchandise, equipment, furniture and leasehold
improvements which remain the property of Tenant or as to which Tenant retains
the right of removal from the Premises, and Landlord shall not be liable for
injury to Tenant's business or any loss of income therefrom relative to such
damage. Tenant shall maintain the following insurance coverage with respect to
such items during the Term:
(i) Against fire, extended coverage, and vandalism and
malicious mischief perils in an amount not less than ninety percent
(90%) of the full replacement cost thereof;
(ii) Broad form boiler and machinery insurance on a blanket
repair and replacement basis with limits per accident not less than the
replacement cost of all leasehold improvements and of all boilers,
pressure vessels, air conditioning equipment, miscellaneous electrical
apparatus and all other insurable objects owned or operated by the
Tenant or by others (other than Landlord) on behalf of Tenant in the
Premises, or relating to or serving the Premises; and;
(iii) Business interruption insurance in such an amount as
will reimburse Tenant for direct or indirect loss of earnings
attributable to all such perils insured against in subparagraphs
11(e)(i) and (ii) hereinabove.
(f) Workmen's Compensation. Tenant shall, at its own cost and expense,
keep and maintain in full force and effect during the Term, a policy or policies
of workmen's compensation insurance covering all Tenant's employees working in
the Premises, and shall furnish Landlord with certificates thereof.
(g) Rental Income Insurance. Tenant shall obtain and keep in force
during the term of this Lease a policy of rental income insurance in an amount
adequate to cover Fixed Rent and Adjustments for a period of twelve (12) months,
with loss payable to Landlord, which insurance
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shall also cover all real estate taxes and insurance costs for which Tenant is
obligated hereunder during such twelve (12) month period.
12. Indemnity; Exemption of Landlord from Liability.
(a) General. In addition to any other obligations of Tenant hereunder,
including the obligations of Tenant to provide insurance, Tenant shall indemnify
and hold Landlord harmless for, from and against any and all claims arising from
Tenant's use of the Premises, or from the conduct of Tenant's business or from
any activity, work or things done, permitted or suffered by Tenant in or about
the Premises or elsewhere and shall further indemnify and hold Landlord harmless
for, from and against any and all claims arising from any breach or default in
the performance of any obligation on Tenant's part to be performed under the
terms of this Lease, or arising from any negligence of Tenant, or any of
Tenant's agents, contractors, or employees, and for, from and against all costs,
attorneys' fees, expenses and liabilities incurred in the defense of any such
claim or any action or proceeding brought thereon; and in case any action or
proceeding be brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord shall defend the same at Tenant's expense by counsel
satisfactory to Landlord; provided, however, the foregoing indemnity shall not
apply to claims made as a result of the active negligence or intentional
misconduct of Landlord. Tenant, as a material part of the consideration to
Landlord for Landlord's execution of this Lease, also hereby assumes all risk of
damage to property or injury to persons in, upon or about the Premises arising
from any cause whatsoever; hereby waives all claims in respect thereof against
Landlord; and agrees that all claims with respect thereto shall be made solely
against any insurance carried by Tenant and/or against any other persons or
entities which may be liable for such claims; provided, however, the assumption,
waiver and agreement set forth in this sentence shall not negate or diminish the
warranty obligations of Landlord set forth in paragraph 3 of this Lease.
(b) Tenant's Business. In addition to any other obligation of Tenant
hereunder, including any obligation of Tenant to provide insurance, Tenant
hereby agrees that Landlord shall not be liable for injury to Tenant's business
or any loss of income therefrom or for damage to the goods, wares, merchandise
or other property of Tenant, Tenant's employees, invitees, customers, or any
other person in or about the Premises, nor shall Landlord be liable for injury
to the person of Tenant or Tenant's employees, agents or contractors, whether
such damage or injury is caused by or results from fire, steam, electricity,
gas, water or rain, or from the breakage, leakage, obstruction or other defects
of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause whatsoever, resulting from conditions arising
upon the Premises, or from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
inaccessible to Tenant. Instead, Tenant shall seek recovery for any such injury,
loss or damage solely from any insurance carried by Tenant and/or from any other
persons or entities which may be liable to Tenant for such injury, loss or
damage.
13. Damage or Destruction; Obligation to Rebuild.
(a) Landlord's Obligation to Rebuild. If the Premises are damaged or
destroyed during the Term, Landlord shall, except as hereinafter provided,
diligently repair or rebuild them to substantially the condition in which they
existed immediately prior to such damage or destruction; provided that any
damage which is estimated in good faith by Landlord to be under Two Thousand
Five Hundred Dollars ($2,500.00) shall be repaired by Tenant, and Landlord shall
reimburse Tenant upon demand for expenses incurred in such repair work to the
extent of any proceeds received by Landlord from extended coverage insurance
maintained pursuant to paragraph 11 above.
(b) Abatement of Rent. Rent due and payable hereunder shall be abated,
but only to the extent of any proceeds received by Landlord from rental income
insurance maintained pursuant to paragraph 11 above, during the period
commencing with such damage or destruction and ending with the substantial
completion by Landlord of the work of repair or reconstruction which Landlord is
obligated or undertakes to do; provided, however, if such abatement period is
sixty (60) days or more, Tenant's obligation to pay Rent shall not commence
until the earlier of (i)
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occupancy of the damaged portion of the Premises by Tenant, or (ii) thirty (30)
days after Landlord gives Tenant written notice of the approximate date that the
work of repair or restoration will be substantially complete.
(c) Option to Terminate. If the Improvements are damaged or destroyed
to the extent that the same cannot, with reasonable diligence, be fully repaired
or restored by Landlord within one hundred eighty (180) days after the date of
the damage or destruction, Tenant shall have the option to terminate this Lease
by written notice given to Landlord within thirty (30) days after the date of
the damage or destruction. If the Building, including the Premises, can be fully
repaired or restored within the one hundred eighty (180) day period, or if it is
determined that such repair or restoration cannot be made within said period but
Tenant does not elect to terminate within thirty (30) days from the date of said
damage or destruction, this Lease shall remain in full force and effect and
Landlord shall diligently repair and restore the damage as soon as reasonably
possible.
(d) Uninsured Casualties. Notwithstanding anything contained herein to
the contrary, in the event of damage to or destruction of all or any portion of
the Improvements which is not fully covered (except for deductible amounts) by
the insurance proceeds received by Landlord under the insurance policies
required to be maintained pursuant to paragraph 11 above, or in the event that
any portion of such insurance proceeds must be paid over to or are retained by
the holder of any mortgage or deed of trust on the Property or Premises,
Landlord may terminate this Lease by written notice to Tenant, given within
thirty (30) days after the date of notice to Landlord that said damage or
destruction is not so covered or that the proceeds are not available for repair
of the damage or destruction; provided, however, within a period of twenty (20)
days after receipt of Landlord's termination notice, Tenant may, by written
notice given to Landlord, make available to Landlord, for repair or restoration
but without any reimbursement by Landlord, the funds necessary to effect the
complete repair and restoration and, in such event, Landlord's notice of
termination shall be rescinded. If Landlord does not elect to terminate this
Lease or Tenant makes available the funds for repair or restoration as above
provided, the Lease shall remain in full force and effect and the Improvements
shall be repaired and rebuilt in accordance with the provisions for repair set
forth in subparagraph 13(a) above.
(e) Damage Near End of Term. If the Improvements are partially
destroyed or damaged during the last eighteen (18) months of the Term, as such
Term may have been extended pursuant to Exhibit F to this Lease, and the cost to
repair or restore the Premises shall be Three Hundred Fifty Thousand Dollars
($350,000) or greater, either Landlord or Tenant may, at its option, cancel and
terminate this Lease as of the date of occurrence of such damage by giving
written notice to the other party of such election to do so within thirty (30)
days after the date of occurrence of such damage; provided, however, if the
damage or destruction occurs during the thirteenth (13th) to eighteenth (18th)
month prior to the expiration of the Initial Term or First Extended Term (as
defined in Exhibit F) and Tenant then retains, but has not yet exercised, its
option to extend the Term for an additional five-year period pursuant to Exhibit
F, Tenant may elect, by written notice to Landlord given on or before the
earlier of (i) the date which is sixty (60) days after receipt of Landlord's
notice of termination, or (ii) one (1) year prior to expiration of the Initial
Term or First Extended Term, as applicable, to exercise its option to extend the
Term for an additional five-year period as provided in Exhibit F and, in such
event, any notice of termination given by Landlord shall be rescinded and this
Lease shall continue in full force and effect.
(f) Tenant's Waiver. With respect to any destruction which Landlord is
obligated to repair or may elect to repair under the terms of this paragraph,
Tenant hereby waives all right to terminate this Lease pursuant to rights
otherwise presently or hereafter accorded by the provisions of Arizona Revised
Statutes Section 33-343 or other applicable laws to tenants, except as expressly
otherwise provided herein.
14. Taxes and Assessments.
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(a) Payment. Tenant shall pay all Property Taxes (as defined below)
applicable to the Premises during the Term. Each payment shall be made at least
ten (10) days prior to the delinquency date of such payment; provided, however,
that if (i) in connection with any financing obtained by Landlord on the
Premises or any portion thereof, Landlord is required to pay into an impound
account any sums due as Property Taxes, and (ii) Tenant has at any time
committed a default under paragraph 17 of this Lease by failing to pay when due
and prior to the expiration of any applicable cure period any monetary amounts
to be paid by Tenant under this Lease, then Tenant shall pay such sums to
Landlord in satisfaction of Tenant's obligations to pay such sums due as
Property Taxes as additional rent and without deduction or offset on or before
the first day of each and every month during which said sums are required to be
impounded. Tenant shall promptly furnish Landlord with evidence satisfactory to
Landlord that Property Taxes have been paid. If any Property Taxes due with
respect to the Premises shall cover any period of time prior to or after the
expiration of the Term, Tenant's share of such Property Taxes shall be equitably
prorated to cover only the period of time within the tax fiscal year during
which this Lease shall be in effect. If Tenant shall fail to pay any Property
Taxes, Landlord shall have the right, but not the obligation, to pay the same,
in which case Tenant shall repay such amount to Landlord with Tenant's next Rent
installment.
(b) Definition. As used herein, the term "Property Taxes" shall include
any form of general or special assessment, license fee, levy penalty, or tax
(other than inheritance or estate taxes) imposed by any authority having the
direct or indirect power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
district, or any part or parts thereof, or against any legal or equitable
interest of Landlord in the Premises or any part thereof or against Landlord's
right to rent or other income therefrom (but exclusive of taxes levied on or
computed by reference to Landlord's net income as a whole), or against
Landlord's business of leasing the Premises, it being the intention of the
parties hereto that the Rent to be paid hereunder shall be paid to Landlord
absolutely net, without deduction of any nature whatsoever, foreseeable or
unforeseeable.
(c) Separate Assessment. Landlord warrants that the Premises
constitutes all of one or more tax parcels for the purposes of assessment of
real property taxes by the State of Arizona, and that no portion of the Premises
is jointly assessed with any other real property as a single tax parcel.
(d) Personal Property. Tenant shall pay prior to delinquency all taxes
assessed against and levied upon trade fixtures, furnishings, equipment and all
other personal property contained on the Premises or elsewhere. Tenant shall
cause such trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the Premises.
(e) Rent Tax. Tenant shall pay to Landlord a sum equal to the amount
which Landlord is required to pay or collect by reason of any privilege tax,
sales tax, gross proceeds tax, rent tax, or like tax levied, assessed or imposed
by any governmental authority or subdivision thereof, upon or measured by any
Rent, Reimbursable Expense, or other charges or sums required to be paid or
improvements to be made by Tenant under this Lease. Such sum shall be paid
simultaneously with the payment by Tenant to Landlord of the Fixed Rent or other
charge to which such tax is attributable or, in the case of a tax not
attributable to Fixed Rent or other charges, at such time as Landlord shall
demand payment thereof. Nothing contained in this Lease shall require Tenant to
pay any franchise, corporate, estate, inheritance, succession, or transfer tax
of Landlord or any tax upon the net income of Landlord.
(f) Declaration. INTENTIONALLY DELETED.
(g) Project Assessments. Tenant shall pay to Landlord or the owner or
manager of the Project, as Landlord may direct, prior to delinquency any and all
charges, assessments, fees or other costs of any type which are due and payable
by Landlord or other occupant of the Premises as a result of the inclusion of
the Premises in the Project, including but not limited to those payable under
any covenants, conditions, restrictions or declarations affecting the Premises.
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(h) Right to Contest. Either party, at its expense, will have the right
to contest the legality, validity or amount of any Property Taxes or the
assessments or valuations upon which same are based by appropriate proceedings
prosecuted in good faith. Such contest may be made in the name of Landlord or
Tenant, or both, and if requested by Tenant, Landlord will actively at Tenant's
expense participate in such contest. Landlord will be notified of any such
contest by Tenant and will cooperate with Tenant and, if required, join Tenant
in any such proceedings. No such contest, however, shall permit any tax owing to
become delinquent or subject the Premises to a lien for delinquent taxes alleged
to be due and owing.
15. Condemnation.
(a) Rent Reduction or Lease Termination. If the Premises or any portion
thereof is taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs (the "Condemnation
Date") and the Rent shall be reduced (as of the Condemnation Date) as provided
below. If (i) more than ten percent (10%) of the floor area of any building
comprising the Improvements or more than twenty-five percent (25%) of the land
area of the Property which is not occupied by any such building is taken by
condemnation, and (ii) as a result of such taking by condemnation the balance of
the Premises remaining after such condemnation is not reasonably suitable for
the use to which the Premises were being put immediately prior to the
condemnation, Tenant may, at Tenant's option, to be exercised in writing only
within ten (10) days after Landlord shall have given Tenant written notice of
such taking (or in the absence of such notice, within ten (10) days of the
Condemnation Date) terminate this Lease as of the Condemnation Date. If Tenant
does not terminate this Lease in accordance with the foregoing, or in the event
that that portion of the Premises taken by condemnation is not sufficiently
large so as to give rise to the right to terminate this Lease as above provided,
this Lease shall remain in full force and effect as to the portion of the
Premises remaining, except that the Fixed Rent shall be reduced (as of the
Condemnation Date) in the proportion that the floor area of the Building taken
by condemnation bears to the total floor area of the Building.
(b) Award. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Landlord, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Tenant
shall be entitled to any award specifically attributed by the condemning
authority to loss or damage to Tenant's trade fixtures and removable personal
property or to Tenant's relocation costs. In the event that this Lease is not
terminated by reason of such condemnation, Landlord shall, to the extent of
severance damages received by Landlord in connection with such condemnation and
not paid to or retained by the holder of any mortgage or deed of trust on the
Property or the Premises, repair any damage to the Premises caused by such
condemnation except to the extent that Tenant has been reimbursed therefor by
the condemning authority (in which event such reimbursement to Tenant shall also
be applied to such repair). Tenant shall pay any amount in excess of such
severance damages required to complete such repair; provided, however, if the
severance damages are not sufficient to pay all of the repair costs and if any
specific item of repair work shall be expected to have a useful life which
extends beyond the term of this Lease (including the term of any options which
Tenant may have the right to exercise), then Tenant shall be obligated to pay
with respect to the identifiable cost of such item of repair only the portion of
the total cost of such item of repair which bears the same ratio to the total
cost of such item of repair as the remaining term of this Lease (as determined
on the Condemnation Date and including the term of any options which the Tenant
may have the right to exercise) bears to the reasonably anticipated useful life
of such item of repair.
(c) Temporary Condemnation. If the temporary use of the whole or any
part of the Premises shall be taken by condemnation, the Term shall not, except
as hereinafter specifically provided, be reduced or affected in any way, and
Tenant in such event shall continue to pay in full the Rent and other charges
herein reserved, without reduction or abatement, and, except to the extent that
Tenant is prevented from so doing by reason of any order of the condemning
authority,
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shall continue to perform and observe all of the other covenants, conditions and
agreements of this Lease to be performed or observed by Tenant as though such
taking had not occurred. In the event of any such temporary condemnation Tenant
shall, so long as it is otherwise in compliance with the provisions of this
Lease, be entitled to receive for itself any and all awards or payments made for
such use of that portion of the Premises so taken; provided, however, that
Tenant shall repair any and all damages to the Premises (whether or not covered
by any award to Tenant) caused by such temporary condemnation. Anything in the
foregoing to the contrary notwithstanding, if the period of any temporary
condemnation exceeds twelve (12) months and the temporary condemnation
materially interferes with Tenant's use of the Premises, Tenant may, at any time
thereafter prior to the termination of such temporary condemnation, terminate
this Lease by written notice to Landlord, with such termination to have the same
force and effect as if the Term of the Lease had expired as of such date of
termination.
16. Assignment and Subletting.
(a) Consent. Tenant shall not voluntarily or by operation of law
assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any
part of Tenant's interest in this Lease or in the Premises without Landlord's
prior written consent, which consent Landlord shall not unreasonably withhold;
provided, however, (a) Landlord may withhold its consent to such assignment,
transfer, mortgage, subletting or other transfer or encumbrance pursuant to the
preceding sentence for substantive reasons including, without limitation, the
financial condition of the proposed assignee or transferee; and (b) Landlord
shall be obligated to consent to any transfer or assignment which is part of a
merger transaction involving Tenant or which is to a person or entity which
controls Tenant, is controlled by Tenant or is controlled by the same entity as
Tenant. Any attempted assignment, transfer, mortgage, subletting or encumbrance
without such consent shall be void and shall constitute a breach of this Lease.
The consent of Landlord to any one assignment, transfer, mortgage, subletting,
or encumbrance shall not be deemed to be a consent to any subsequent assignment,
transfer, mortgage, subletting, or encumbrance.
(b) Tenant's Continuing Liability. Regardless of Landlord's consent, no
subletting or assignment shall alter the primary liability of Tenant to pay the
Rent or release Tenant of Tenant's obligation to perform all other obligations
to be performed by Tenant hereunder unless Landlord's written consent shall so
specifically provide, and Landlord under no circumstances shall be obligated to
release Tenant from any such liability. The acceptance of rent by Landlord from
any other person shall not be deemed to be a waiver by Landlord of any provision
hereof.
(c) Information. In connection with any proposed assignment or
sublease, Tenant shall submit to Landlord in writing:
(i) The name of the proposed assignee or sublessee;
(ii) Such information as to the financial responsibility and
standing of said assignee or sublessee as Landlord may reasonably
require; and
(iii) All of the terms and conditions upon which the proposed
assignment or subletting is to be made.
(d) Excess Sublease Rental. If for any sublease or assignment, Tenant
receives rent or other consideration, either directly or indirectly (by
performance of Tenant's obligations or otherwise) and either initially or over
the Term of the sublease or assignment, in excess of the Fixed Rent, Adjustments
and additional rent called for hereunder, or in the case of the sublease or
assignment of a portion of the Premises, in excess of such Fixed Rent,
Adjustments and additional rent fairly allocable to such portion, after
appropriate adjustments to assure that all other payments called for hereunder
are appropriately taken into account, Tenant shall pay to Landlord, at the same
time as Fixed Rent is due hereunder, one-half (1/2) of the excess of each such
payment of rent or other consideration received by Tenant promptly after its
receipt; provided, however, such payment shall be required only with respect to
sums received by Tenant which are
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attributable to periods in an Extended Term (as defined in Exhibit F) during
which Tenant has assigned and/or sublet all or substantially all of the
Premises.
(e) Release. Whenever Landlord conveys its interest in the Premises,
Landlord shall be automatically released from the further performance of
covenants on the part of Landlord herein contained, and from any and all further
liability, obligations, costs and expenses, demands, causes of action, claims or
judgments arising from or growing out of, or connected with this Lease after the
effective date of said release; provided, however, Landlord shall not be
released from the obligations to refund to Tenant the Security Deposit in
accordance with subparagraph 6(a) of this Lease in accordance with the next
sentence hereof unless and until Landlord has either paid the Security Deposit
to the assignee or given the assignee credit for the amount of such Security
Deposit. The effective date of said release shall be the date the assignee
executes an assumption of such an assignment whereby the assignee expressly
agrees to assume all of Landlord's obligations, duties, responsibilities and
liabilities with respect to this Lease. If requested, Tenant shall execute a
form of release and such other documentation as may be required to effect the
provisions of this paragraph.
(f) Controlled Entity. Notwithstanding the provisions of this paragraph
16, Tenant may assign or sublet the Premises, or any portion thereof, without
Landlord's consent, after written notice to Landlord, to any entity which
controls, is controlled by, or is under common ownership with Tenant, or to any
entity resulting from the merger or consolidation with Tenant, or to any person
or entity which acquires all the assets of Tenant as a going concern of the
business that is being conducted on the Premises or all of the outstanding stock
of Tenant, provided that said assignee assumes, in full, the obligations of
Tenant under this Lease. Any such assignment shall not, in any way, affect or
limit the liability of Tenant under the terms of this Lease even if after such
assignment or subletting the terms of this Lease are materially changed or
altered without the consent of Tenant, the consent of whom shall not be
necessary for such change or alteration.
(g) Attorneys' Fees. In the event that Landlord shall consent to a
sublease or assignment under subparagraph (a) above, Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with the giving of such
consent and review of the information submitted by Tenant; provided, however,
the amount of such fees which Tenant shall be obligated to pay in connection
with any single consent shall not exceed Five Hundred Dollars ($500).
17. Defaults; Remedies.
(a) Defaults. The occurrence of any one or more of the following events
shall constitute a material default and material breach of this Lease by Tenant:
(i) INTENTIONALLY DELETED.
(ii) The failure by Tenant to make any payment of Rent or any
other payment required to be made by Tenant hereunder, as and when due,
where such failure shall continue for a period of five (5) working days
after written notice thereof from Landlord to Tenant;
(iii) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or
performed by Tenant, other than those described in subparagraph (ii)
above, where such failure shall continue for a period of thirty (30)
days after written notice thereof from Landlord to Tenant; provided,
however, that if the nature of Tenant's default is such that it is
capable of being cured but more than thirty (30) days are reasonably
required for its cure, then Tenant shall not be deemed to be in default
if Tenant commences such cure within such thirty (30) day period and
thereafter diligently prosecutes such cure to completion; or
(iv) The making by Tenant of any general assignment for the
benefit of creditors, the filing by or against Tenant of a petition for
order of relief in bankruptcy for
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the purpose of bankruptcy liquidation or reorganization under any law
relating to bankruptcy whether now existing or hereafter enacted
(including, without limitation, any petition filed by or against Tenant
under any one or more of the following Chapters of the Bankruptcy
Reform Act of 1978, 11 U.S.C. ss.ss. 101-1330 ("Bankruptcy Code") as
amended: Chapter 7 or Chapter 9 or Chapter 11 or Chapter 12 or Chapter
13) except that, in the case of a filing against Tenant of such a
petition, such filing shall not be a default if the petition is
dismissed or discharged on or before ninety (90) days after the filing
thereof; the appointment of a trustee or receiver to take possession of
all or substantially all of Tenant's assets located at the Premises or
of Tenant's interest in this Lease, where possession is not restored to
Tenant within ninety (90) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where such seizure is
not discharged within ninety (90) days. Unless Landlord's express
written consent thereto is first obtained, in no event shall this
Lease, or any interest herein or hereunder or any estate created
hereby, be assigned or assignable by operation of law or by, in or
under voluntary or involuntary bankruptcy liquidation or reorganization
proceedings or otherwise and in no event shall this Lease or any rights
or privileges hereunder be an asset of Tenant under any bankruptcy
liquidation or reorganization proceedings. Any purported assignment or
transfer in violation of the provisions of this subparagraph (iv) shall
constitute a material default and breach of this Lease by Tenant and in
connection with any such default and breach Landlord shall have the
rights and remedies described in subparagraph (b) below, including,
without limitation, the election to terminate this Lease. As used in
this subparagraph (iv) the words "bankruptcy liquidation or
reorganization proceedings" shall include any proceedings under any law
relating to bankruptcy whether now existing or hereafter enacted
(including, without limitation, proceedings under any one or more of
the Bankruptcy Code as amended: Chapter 7 or Chapter 9 or Chapter 11 or
Chapter 12 or Chapter 13).
(b) Remedies.
(i) In the event of any default and breach by Tenant of any of
its obligations under this Lease and notwithstanding the vacation or
abandonment of the Premises by Tenant, this Lease shall continue in
effect so long as Landlord does not expressly terminate Tenant's right
to possession in any of the manners specified in this paragraph and
Landlord may, at Landlord's option and without limiting Landlord in the
exercise of any other rights or remedies which it may have by reason of
such default and breach, exercise all of its rights and remedies
hereunder, including, without limitation:
(A) the right to declare the Term ended and to
reenter the Premises and take possession thereof and remove
all persons therefrom, and Tenant shall have no further claim
in or to the Premises or under this Lease; or
(B) the right without declaring this Lease ended to
reenter the Premises, take possession thereof, remove all
persons therefrom and occupy or lease the whole or any part
thereof for and on account of Tenant and upon such terms and
conditions and for such rent as Landlord may deem proper and
to collect such rent or any other rent that may hereafter
become payable and apply the same as provided in subparagraph
(ii) below; or
(C) the right, even though Landlord may have relet
the Premises or brought an action to collect Rent and other
charges without terminating this Lease, to thereafter elect to
terminate this Lease and all of the rights of Tenant in or to
the Premises; or
(D) the right, without terminating this Lease, to
bring an action or actions to collect Rent and other charges
hereunder which are from time to time past due and unpaid or
to enforce any other provisions of this Lease imposing
obligations on Tenant, it being understood that the bringing
of any such action or actions shall not terminate this Lease
unless written notice of termination is given;
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provided, however;
(Y) if Tenant is in possession of the Premises,
Landlord shall not be entitled to recover possession of the
Premises by means of a lock-out or other self-help remedy
until there has been a determination by a court of appropriate
jurisdiction that Landlord is entitled to possession or that
Tenant is no longer entitled to possession; and
(Z) Landlord shall not be entitled to exercise, and
hereby waives, any statutory landlord liens with respect to
Tenant's personal property, equipment and fixtures.
(ii) Should Landlord relet the Premises under the provisions
of subparagraph (b)(i)(B) above, Landlord may execute any lease either
in its own name or in the name of Tenant, but Tenant hereunder shall
have no right or authority whatever to collect any rent from the new
tenant. The proceeds of any such reletting shall first be applied to
the payment of the costs and expenses of reletting the Premises,
including without limitation, reasonable brokerage commissions and
alterations and repairs which Landlord, in its sole discretion, deems
reasonably necessary and advisable and to the payment of reasonable
attorneys' fees incurred by Landlord in connection with the Tenant's
default, the retaking of the Premises and such reletting and, second,
to the payment of any indebtedness, other than Rent, due hereunder,
including, without limitation, storage charges owing from Tenant to
Landlord; provided, however, the amount of the proceeds which may be
applied to reimburse Landlord for the cost of repair and restoration of
the Premises in connection with a reletting shall not exceed the costs
necessary to restore the Premises to the condition which would
otherwise have been required at the expiration of the Term of this
Lease, but Tenant acknowledges that Landlord will have no duty to make
any other improvements to the Premises in order to satisfy any
obligation Landlord may have under applicable law to use good faith
efforts to relet the Premises in order to mitigate damages. When such
costs and expenses of reletting have been paid, and if there is no such
indebtedness or such indebtedness has been paid, Tenant shall be
entitled to a credit for the net amount of rental received from such
reletting each month during the unexpired balance of the Term, and
Tenant shall pay Landlord monthly on the first day of each month as
specified herein such sums as may be required to make up the rentals
provided for in this Lease. Nothing contained herein shall be construed
as obligating Landlord to relet the whole or any part of the Premises.
(iii) Should Landlord elect to terminate this Lease under the
provisions of subparagraphs (b)(i)(A) or (C) above, Landlord shall be
entitled to recover immediately from Tenant (in addition to any other
amounts recoverable by Landlord as provided by law), the following
amounts:
(A) the worth at the time of award of the unpaid rent
which had been earned at the time of termination;
(B) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such
rental loss that Tenant proves could have been reasonably
avoided;
(C) the worth at the time of award of the amount by
which the unpaid rent for the balance of the Term after the
time of award exceeds the amount of such rental loss that
Tenant proves could be reasonably avoided; and
(D) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure
to perform its obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom.
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For purposes of computing "the worth at the time of the award" of the
amount specified in subparagraph (b)(iii)(C) above, such amount shall
be discounted at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award. For purposes of computing "the worth at
the time of the award" under subparagraphs (b)(iii)(A) and (b)(iii)(B)
above, an interest rate of ten percent (10%) per annum shall be
utilized.
(iv) If Landlord shall elect to reenter the Premises as
provided above, Landlord shall not be liable for damages by reason of
any reentry so long as Landlord has acted in a reasonable manner in
effecting such reentry. Except for claims based on negligent,
malicious, reckless or willful and wanton acts of Landlord, Tenant
hereby waives all claims and demands against Landlord for damages or
loss arising out of or in connection with any reentering and taking
possession of the Premises and waives all claims for damages or loss
arising out of or in connection with any destruction of or damage to
the Premises and any loss of property belonging to Tenant or to any
other person, firm or corporation which may be in or upon the Premises
at the time of such reentry.
(v) Landlord shall not be deemed to have terminated this
Lease, Tenant's right to possession of the Premises or the liability of
Tenant to pay Rent thereafter to accrue or its liability for damages
under any of the provisions hereof by any reentry hereunder or by any
action in unlawful detainer or otherwise to obtain possession of the
Premises, unless Landlord shall notify Tenant in writing that Landlord
has so elected to terminate this Lease. Tenant agrees that the service
by Landlord of any notice pursuant to the unlawful detainer statutes or
comparable statutes of the state or locality in which the Premises are
located and the surrender of possession pursuant to such notice shall
not (unless Landlord elects to the contrary at the time of or at any
time subsequent to the service of such notice and such election shall
be evidenced by a written notice to Tenant) be deemed to be a
termination of this Lease or of Tenant's obligations hereunder. No
reentry or reletting under this paragraph shall be deemed to constitute
a surrender or termination of this Lease, or of any of the rights,
options, elections, powers and remedies reserved by Landlord hereunder,
or a release of Tenant from any of its obligations hereunder, unless
Landlord shall specifically notify Tenant, in writing, to that effect.
No such reletting shall preclude Landlord from thereafter at any time
terminating this Lease as herein provided.
(vi) All fixtures, furnishings, goods, equipment, chattels or
other personal property of Tenant remaining on the Premises at the time
that Landlord takes possession thereof may at Landlord's election be
stored at Tenant's expense or sold or otherwise disposed of by Landlord
in any manner permitted by applicable law.
(vii) All rights, options, elections, powers and remedies of
Landlord under the provisions of this Lease are cumulative of each
other and of every other right, option, election, power or remedy which
Landlord may otherwise have at law or in equity and all or any of which
Landlord is hereby authorized to exercise. The exercise of one or more
rights, options, elections, powers or remedies shall not prejudice or
impair the concurrent or subsequent exercise of other rights or
remedies Landlord may have upon a breach and default under this Lease
and shall not be deemed to be a waiver of Landlord's rights or remedies
thereupon or to be a release of Tenant from Tenant's obligations
thereon unless such waiver or release is expressed in writing and
signed by Landlord.
(viii) INTENTIONALLY DELETED.
(c) Late Charges. Tenant hereby acknowledges that late payment by
Tenant to Landlord of Rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
such amount shall be due, Tenant shall pay to Landlord a late charge equal to
five percent (5%) of such overdue amount.
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The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of late payment by Tenant.
Acceptance of such late charge by Landlord shall in no event constitute a waiver
of Tenant's default with respect to such overdue amount, nor prevent Landlord
from exercising any of the other rights and remedies granted hereunder.
(d) Payment or Performance by Landlord. Landlord may, at Landlord's
option and without any obligation to do so, pay any sum or do any act which
Tenant has failed to pay or do at the time Tenant was obligated to make such
payment or perform such act and Landlord shall be entitled to recover from
Tenant, upon demand, all sums expended by Landlord in making such payment or
performing such act, together with interest thereon at the rate provided in
subparagraph 18(d) from the date of expenditure until repaid by Tenant;
provided, however, unless Landlord reasonably deems such payment or performance
by Landlord to be necessary prior to expiration of any applicable cure period
set forth in subparagraph (a) above in order to protect Landlord's interest,
Landlord shall not be entitled to recover such sums and interest from Tenant
unless Landlord waited until after expiration of any applicable cure period for
such non-payment or non-performance set forth in subparagraph (a) above. Any sum
and interest payable by Tenant under this subparagraph (d) shall be deemed
additional rent under this Lease.
18. Miscellaneous.
(a) Estoppel Certificates.
(i) Tenant shall at any time upon not less than ten (10) days
prior written notice from Landlord execute, acknowledge, and deliver to
Landlord a statement in writing certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the
nature of such modification and certifying that this Lease, as so
modified, is in full force and effect) and the date to which the Rent
and other charges are paid in advance, if any, and acknowledging that
there are not, to Tenant's knowledge, any uncured defaults on the part
of Landlord hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any person to
whom it shall be delivered by Landlord including any prospective
purchaser or encumbrancer of the Premises, the Building, the Property,
or any part thereof.
(ii) Tenant's failure to deliver such statement within such
time shall be conclusive upon Tenant that this Lease is in full force
and effect, without modification except as may be represented by
Landlord; that there are no uncured defaults in Landlord's performance;
and that not more than one month's Rent has been paid in advance.
(iii) If Landlord desires to finance or refinance the
Premises, the Building, the Property, or any part thereof, Tenant
hereby agrees to deliver to any lender designated by Landlord such
financial statements of Tenant as may be reasonably required by such
lender. Such statements shall include the past three years financial
statements of Tenant. All such financial statements shall be received
by Landlord in confidence and shall be used only for the purposes
herein set forth.
(iv) Landlord shall at any time upon not less than ten (10)
days prior written notice from Tenant execute, acknowledge, and deliver
to Tenant a statement in writing certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the
nature of such modification and certifying that this Lease, as so
modified, is in full force and effect) and the date to which the Rent
and other charges are paid in advance, if any, and acknowledging that
there are not, to Landlord's knowledge, any uncured defaults on the
part of Tenant hereunder, or specifying such defaults if any are
claimed. Any such statement may be conclusively relied upon by any
person to whom it shall be delivered by Tenant including any
prospective encumbrancer of Tenant's inventory or any part thereof.
Landlord's failure to deliver such statement within such time shall be
conclusive in favor of the prospective encumbrancer that this Lease is
in full force and effect, without modification except as may be
represented by Tenant; that there are no uncured defaults
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in Tenant's performance; and that not more than one month's Rent has
been paid in advance.
(b) Landlord's Liability. The term "Landlord" as used herein shall mean
only the owner or owners at the time in question of the fee title to the
Premises and in the event of any transfer of such title, Landlord herein named
(and in case of any subsequent transfers, the then grantor) shall be relieved
from and after the date of such transfer of all liability as respects Landlord's
obligations thereafter to be performed, provided that any funds in the hands of
Landlord or the then grantor at the time of such transfer in which Tenant has an
interest shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Landlord shall, subject as aforesaid, be binding on
Landlord's successors and assigns only during their respective periods of
ownership.
(c) Construction. Paragraph captions are solely for the convenience of
the parties and shall not be deemed to or be used to define, construe, or limit
the terms hereof. As used in this Lease, the masculine, feminine and neuter
genders shall be deemed to include the others, and the singular number shall be
deemed to include the plural, whenever the context so requires. The invalidity
of any provisions of this Lease as determined by a court of competent
jurisdiction shall in no way affect the validity of any other provision hereof.
This Lease shall be governed by the laws of the state in which the Premises are
located.
(d) Interest on Past-Due Obligations. Except as expressly herein
provided, any amount due to Landlord or Tenant and not paid when due shall bear
interest at the lesser of (i) fifteen percent (15%) per annum or (ii) the
maximum rate permitted by law, from the date due until the date such amount is
paid. Payment of such interest shall be made when such amount is paid. Payment
of such interest shall not excuse or cure any default by Tenant under this
Lease.
(e) Time of Essence. Time is of the essence of this Lease and all of
the covenants and obligations hereof.
(f) Counterparts. INTENTIONALLY DELETED.
(g) Incorporation of Prior Agreements; Amendments. This Lease contains
all agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, which writing shall be
signed by the parties in interest at the time of the modification.
(h) Notices. Any notices, approvals, agreements, certificates, other
documents or communications between the parties hereto required or permitted
under this Lease shall be in writing. Any such communications shall be deemed to
have been duly given or served if delivered in hand or forty-eight (48) hours
after deposit in the United States mail, certified or registered, postage and
fees prepaid, return receipt requested, addressed to the parties at the
addresses set forth in paragraph 1 of this Lease. The address to which any such
communications shall be sent may be changed by either party hereto from time to
time by a notice mailed as aforesaid. A copy of each notice to Tenant shall also
be sent to:
Scott A. Rose, Esq.
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
One East Camelback Road, Suite 1100
Phoenix, AZ 85012-1656
but copies of notices sent in accordance with this sentence are informational
and are not required in order for the notices given to Landlord or Tenant to be
effective.
(i) Waivers. No waiver by Landlord or Tenant of any provision hereof
shall be deemed a waiver of any other provision hereof or of any subsequent
breach by the other party of the same or any other provision. Landlord's or
Tenant's consent to or approval of any act shall
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not be deemed to render unnecessary the obtaining of Landlord's or Tenant's
consent to or approval of any subsequent act by the other party. The acceptance
of Rent hereunder by Landlord shall not be a waiver of any preceding breach by
Tenant of any provision hereof, other than the failure of Tenant to pay the
particular Rent so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such Rent.
(j) Recording. Landlord and Tenant shall, upon the request of either
party, execute, acknowledge and deliver to the other a "short form" memorandum
of this Lease for recording purposes.
(k) Holding Over. If Tenant remains in possession of the Premises or
any part thereof after the expiration of the Term or sooner termination of this
Lease with the express written consent of Landlord and without executing a new
lease, such occupancy shall be construed as a tenancy from month-to-month at a
rental equal to one hundred fifty percent (150%) of the last monthly Rent plus
all other charges payable hereunder, and upon all the terms hereof insofar as
the same are applicable to a month-to-month tenancy. Nothing contained in this
subparagraph shall be construed to grant Tenant the right to holdover without
the express written consent of Landlord.
(l) Covenants and Conditions. Each provision of this Lease performable
by Tenant shall be deemed both a covenant and a condition.
(m) Binding Effect. Subject to any provisions hereof restricting
assignment or subletting by Tenant and subject to the provision of subparagraph
(b) above, this Lease shall bind the parties and their personal representatives,
successors and assigns.
(n) Subordination.
(i) This Lease, at Landlord's option, shall be subordinate to
any ground lease, mortgage, deed of trust, or any other hypothecation
for security now or hereafter placed upon the Premises, the Building or
the Property, or any part or parts thereof, and to any and all advances
made on the security thereof and to all renewals, modifications,
consolidations, replacements and extensions thereof; provided, however,
such subordination shall not be binding on Tenant unless the holder of
the mortgage, deed of trust or other interest to which this Lease is to
be subordinate agrees that, so long as Tenant is not in default
hereunder:
(A) the holder will not disturb Tenant's possession
of the Premises;
(B) the holder agrees that, while it is in possession
of the Premises, it will perform Landlord's obligations under
this Lease which are attributable to the period of such
possession; and
(C) the holder will permit insurance proceeds to be
used for repair and restoration as provided in this Lease.
If any present or future mortgagee, trustee or ground lessor shall at
any time elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and written notice of such election
shall be given to Tenant, this Lease shall be deemed prior to such
mortgage, deed of trust, or ground lease, whether this Lease is dated
prior or subsequent to the date of said mortgage, deed of trust or
ground lease or the date of recording thereof.
(ii) Tenant agrees to execute any documents required to
effectuate such subordination or to make this Lease prior to the lien
of any mortgage, deed of trust or ground lease, as the case may be, and
failing to do so within ten (10) days after written demand, does hereby
make, constitute and irrevocably appoint Landlord as Tenant's attorney
in fact and in Tenant's name, place and stead, to do so; provided,
however, such
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documents shall grant to Tenant the benefits and rights described in
clauses (A), (B) and (C) of subparagraph (n)(i) above.
(o) Attorneys' Fee. If either party brings an action to enforce the
terms hereof or declare rights under this Lease, the prevailing party in the
final adjudication of any such action, on trial or appeal, shall be entitled to
its costs and expenses of suit, including, without limitation, its actual
attorneys' fees, to be paid by the losing party as fixed by the court. In any
situation in which a dispute is settled other than by action or proceeding,
Tenant shall pay all Landlord's costs and attorneys' fees relating thereto.
(p) Landlord's Access. Landlord and Landlord's agents shall have the
right to enter the Premises at reasonable times for the purpose of inspecting
the same, showing the same to prospective purchasers or lenders, and making such
alterations, repairs, improvements or additions to the Premises or the
improvements as Landlord may deem necessary or desirable; provided, however,
except in a situation reasonably deemed by Landlord to be an emergency, Landlord
shall give Tenant not less than twenty-four (24) hours prior written notice of
Landlord's planned entry. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" signs, all without rebate of rent or liability to Tenant.
(q) Auctions. INTENTIONALLY DELETED.
(r) Merger. The voluntary or other surrender of this Lease by Tenant,
or a mutual cancellation thereof, shall not work a merger, and shall, at the
option of Landlord, terminate all or any existing subtenancies or may, at the
option of Landlord, operate as an assignment to Landlord of any or all of such
subtenancies. During any period while Tenant is in default under this Lease,
Landlord, in addition to any other rights and remedies it may have under this
Lease, shall have the right to collect directly from any subtenant all rentals
owing to Tenant under any subtenancy and to apply such rentals to any amounts
owing to Landlord by Tenant and the payment of such amounts by the subtenant
directly to Landlord shall not be a default under the subtenancy.
(s) Joint and Several Liability. Each party signing this Lease as
Tenant shall be jointly and severally liable for the failure on the part of
Tenant to pay any sums due under the terms of this Lease or for the breach by
Tenant or any of the covenants or obligations of Tenant contained herein.
(t) Individual Liability. The obligations of Landlord under this Lease
do not constitute personal obligations of the individual partners, directors,
officers, or shareholders of Landlord, and Tenant shall look solely to the real
estate that is the subject of this Lease and to no other assets of Landlord for
satisfaction of any liability in respect of this Lease and will not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or any of their personal assets for such satisfaction.
(u) Attornment. Tenant shall, in the event any proceedings are brought
for the foreclosure of, or in the event of exercise of the power of sale under
any mortgage or deed of trust made by the Landlord, its successors or assigns,
encumbering the Premises, or any part thereof, or in the event of termination of
the ground lease, if any, and if so requested, attorn to the purchaser upon such
foreclosure or sale or upon any grant of a deed in lieu of foreclosure, and
shall recognize such purchaser as the Landlord under this Lease, so long as such
purchaser grants to Tenant the rights and benefits set forth in clauses (A), (B)
and (C) of subparagraph 18(n)(i) above.
(v) Lenders Right to Cure. Tenant agrees to give the holder of any
mortgage or trust deed encumbering the Premises, by registered mail, a copy of
any notice of default or nonperformance served upon Landlord, provided that
prior to such notice, Tenant has been notified in writing (by way of Assignment
of Rents and Leases or otherwise) of the address of such mortgagee or trust deed
holder. Tenant further agrees that Landlord shall not be in default under
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this Lease unless (i) Tenant has given a written notice to Landlord stating that
Landlord has failed to perform Landlord's obligations under this Lease and (ii)
specifying with particularity the obligations which Landlord has failed to
perform, and Landlord thereafter (A) fails to commence the cure of such default
within thirty (30) days after receipt of such notice or (B) fails to perform any
of its obligations so specified within a reasonable time after Landlord's
receipt of such notice. If Landlord shall fail to commence or cure such
nonperformance in a timely manner as above provided, then such mortgagee or
trust deed holder shall have an additional thirty (30) days within which to cure
the default, or, if such default cannot be cured within that time, then such
additional time as may be necessary if within such thirty (30) days such
mortgagee or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings, if necessary to effect such cure), in
which event this Lease shall not be terminated by Tenant while such remedies are
being so diligently pursued.
(w) Revisions to Lease. INTENTIONALLY DELETED.
(x) Administrative Charge. In addition to Fixed Rent, Adjustments and
other charges hereunder, Tenant shall pay to Landlord an overall administrative
charge of five percent (5%) of any charge which is Tenant's responsibility to
pay, which Landlord pays on behalf of Tenant and for which Landlord subsequently
bills Tenant.
(y) Estimated Payments. If Tenant has at any time during the Term of
this Lease committed a default under paragraph 17 of this Lease by failing to
pay when due and prior to the expiration of any applicable cure period any
monetary amount to be paid by Tenant under this Lease, Landlord may require that
Tenant thereafter during the remaining Term of this Lease pay to Landlord, in
monthly payments due at the time payments of Fixed Rent are due hereunder, the
estimated amounts of the annual premiums for all or a portion of the insurance
to be carried by Tenant and payments of Property Taxes to be made by Tenant
under this Lease; provided, however, if the Landlord requires such estimated
payments and Tenant, for a period of twenty-four (24) consecutive months after
the first time Landlord requires such estimated payments, does not commit a
default under paragraph 17 of this Lease by failing to pay when due and prior to
the expiration of any applicable cure period any monetary amount to be paid by
Tenant under this Lease (including but not limited to such estimated payments),
Tenant, except as otherwise provided in subparagraph 14(a), shall no longer be
required to make such estimated payments unless and until Tenant at any time
thereafter commits a default under paragraph 17 of this Lease by failing to pay
when due and prior to expiration of any applicable cure period any monetary
amount to be paid by Tenant under this Lease. The estimated payments required by
this subparagraph (y) shall be in addition to any impound payments required by
subparagraph 14(a), but Tenant may credit against payments due under this
subparagraph (y) any impound payments made by Tenant pursuant to subparagraph
14(a) to the extent such impound payments apply to the same expense item as an
estimated payment under this subparagraph (y). The amount of each estimated
monthly payment shall be determined by dividing the Landlord's estimate of the
annual amount of the applicable payment, as determined in the exercise of
Landlord's reasonable discretion, by twelve (12). Landlord shall then use the
estimated payments to pay the amounts owing if Tenant is not in default under
this Lease; provided, however, Tenant shall remain fully obligated to pay to
Landlord or directly to the applicable entity, as Landlord may direct, any
deficiency between the amount owing for the applicable insurance premium or
Property Tax and the amount of the estimated payments held by Landlord for
application to such premium or Property Tax. The amount of estimated payments
paid and to be paid by Tenant shall be reconciled on an annual basis, with
appropriate deficiency payments and adjustments to be made or credits given in
the event that the estimated payments result in any underpayment or overpayment
to Landlord by Tenant when the amount of the actual charges for the applicable
premiums and/or Property Taxes are actually determined.
19. Toxic Materials.
(a) Definitions.
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(i) As used in this Lease, the term "Hazardous Material[s]"
means any oil, flammable items, explosives, radioactive materials,
hazardous or toxic substances, material or waste or related materials
including, without limitation, any substances that pose a hazard to the
Premises or to persons on or about the Premises and any substances
defined as or included in the definition of "hazardous substance,"
"hazardous waste," "hazardous material," "toxic substance," "extremely
hazardous waste," "restricted hazardous waste" or words of similar
import, now or subsequently regulated in any way under applicable
federal, state or local laws or regulations, including without
limitation, petroleum-based products, paints, solvents, lead, cyanide,
DDT, printing inks, acids, pesticides, ammonia compounds and other
chemical products, asbestos, PCBs, urea formaldehyde foam insulation,
transformers or other equipment containing dielectric fluid, levels of
polychlorinated biphenyls, or radon gas, and similar compounds, and
including any different products and materials which are subsequently
found to have adverse effects on the environment or the health and
safety of persons.
(ii) As used herein, the term "Environmental Law[s]" means any
one or all of the following: the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act of 1986 (42 U.S.C. ss.ss. 9601 et seq.); the
Resource Conservation and Recovery Act as amended (42 U.S.C. ss.ss.
6901 et seq.); the Safe Drinking Water Act as amended (42 U.S.C. ss.ss.
300f et seq.); the Clean Water Act as amended (33 U.S.C. ss.ss. 1251 et
seq.); the Clean Air Act as amended (42 U.S.C. ss.ss. 7401 et seq.);
the Toxic Substances Control Act as amended (15 U.S.C. ss.ss. 136 et
seq.); the Solid Waste Disposal Act as amended (42 U.S.C. ss.ss. 3251
et seq.); the Hazardous Materials Transportation Act (49 U.S.C. ss.ss.
1801 et seq.); the regulations promulgated under any of the foregoing;
and all other laws, regulations, ordinances, standards, policies, and
guidelines now in effect or hereinafter enacted by any governmental
entity (whether local, state or federal) having jurisdiction or
regulatory authority over the Premises or the Project or over
activities conducted therein and which deal with the regulation or
protection of human health, industrial hygiene or the environment,
including the soil, subsurface soil, ambient air, groundwater, surface
water, and land use.
(iii) As used herein, the term "Environmental Activity[ies]"
means any generation, manufacture, production, pumping, bringing upon,
use, storage, treatment, release, discharge, escaping, emitting,
leaching, disposal or transportation of Hazardous Materials.
(b) Prohibition on Hazardous Materials. Except as specifically provided
in subparagraph (c) below, Tenant shall not cause or permit any Environmental
Activities in, on or about the Premises by Tenant or Tenant's agents, employees,
contractors, assignees, sublessees or invitees (hereinafter cumulatively
referred to as "Tenant's Agents") without the prior written consent of Landlord.
Landlord shall be entitled to take into account such factors or facts as
Landlord may reasonably determine to be relevant in determining whether to
consent to Tenant's proposed Environmental Activity and Landlord may attach
conditions to any such consent if such conditions are reasonably necessary to
protect Landlord's interests in avoiding potential liability upon Landlord or
damage to Landlord's property arising from any Environmental Activity by Tenant
or Tenant's Agents. In no event shall Landlord be required to consent to the
installation or use of any storage tanks on the Premises.
(c) Exception to Prohibition. Notwithstanding the prohibition set forth
in subparagraph (b) above, but subject to Tenant's covenant to comply with all
Environmental Laws and with the other provisions of this paragraph 19, Tenant
may bring upon, keep and use in the Improvements (but not outside the
Improvements) (i) general office supplies typically used in an office or
warehouse in the ordinary course of business, such as copier toner, liquid
paper, glue, ink and janitorial supplies, so long as such supplies are used in
the manner for which they were designed and in such amounts as may be normal for
the business operations conducted by Tenant in the Premises, and (ii) those
Hazardous Materials, if any, described on Exhibit G attached hereto
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<PAGE>
and by this reference made a part hereof so long as Tenant has delivered to
Landlord a description of the handling, storage, use and disposal procedures to
be utilized by Tenant with respect thereto.
(d) Compliance with Environmental Laws. Tenant shall keep and maintain
the Premises in compliance with, and shall not cause or permit the Premises to
be in violation of, any Environmental Laws. All Tenant's activities at the
Premises shall be in accordance with all Environmental Laws. Additionally,
Tenant shall obtain any and all necessary permits for Tenant's activities at the
Premises. Tenant's obligations and liabilities under this paragraph 19 shall
continue so long as Landlord bears any liability or responsibility under the
Environmental Laws for any action that occurs on the Premises during the term of
this Lease.
(e) Environmental Notices. Each party shall immediately notify the
other party of, and upon request from the other party shall provide such other
party with copies of, the following:
(i) Any correspondence, communication or notice, oral or
written, to or from any governmental entity regarding the application
of Environmental Laws to the Premises or Tenant's operations on the
Premises including, without limitation, notices of violation, notices
to comply and citations;
(ii) Any reports filed pursuant to any Environmental Law or
self-reporting requirements;
(iii) Any permits and permit applications; and
(iv) Any change in Tenant's operations on the Premises that
will change or has the potential to change Tenant's or Landlord's
obligations or liabilities under Environmental Laws.
Tenant shall also notify the Landlord of the release of any Hazardous Material
in, on, under, about or above the Premises or the Project.
(f) Tenant's Environmental Indemnity. Tenant shall protect, indemnify,
defend (with counsel satisfactory to Landlord) and hold harmless Landlord and
its directors, officers, partners, employees, agents, lenders, and ground
lessees, if any, and their respective successors and assigns for, from and
against any and all losses, damages, claims, costs, expenses, penalties, fines
and liabilities of any kind (including, without limitation, the cost of any
investigation, remediation and cleanup, and attorneys' fees) which are
attributable to (i) any Environmental Activity on the Premises undertaken or
committed by Tenant or Tenant's Agents or caused by the negligence of such
persons during the Term of this Lease, (ii) any remedial or clean-up work
undertaken by or for Tenant in connection with Tenant's Environmental Activities
or Tenant's compliance with Environmental Laws, or (iii) the breach by Tenant of
any of its obligations and covenants set forth in this paragraph 19. Landlord
shall have the right but not the obligation to join and participate in, and
control, if it so elects, any legal proceedings initiated in connection with the
Environmental Activities of Tenant or Tenant's Agents. Landlord may also
negotiate, defend, approve and appeal any action taken or issued by any
applicable governmental authority with regard to contamination of the Premises
or Project by a Hazardous Material. Any costs or expenses incurred by Landlord
for which Tenant is responsible under this paragraph 19 or for which Tenant has
indemnified Landlord shall be reimbursed by Tenant on demand, as additional rent
and with interest thereon, as provided by subparagraph 17(d) of this Lease. This
indemnity shall survive the termination of this Lease.
(g) Remedial Work at Tenant's Expense. If (i) any Environmental
Activity undertaken by Tenant or Tenant's Agents results in contamination of the
Premises or Project or any portion thereof, or the soil or groundwater
thereunder, or (ii) any investigation, site monitoring, containment, cleanup,
removal, restoration or other remedial work of any kind or nature ("Remedial
Work") is necessary or appropriate due to or in connection with Tenant's use or
occupancy of the Premises, then, subject to Landlord's prior written approval
and any conditions imposed by Landlord, Tenant shall promptly perform all
Remedial Work, at Tenant's
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<PAGE>
sole expense and without abatement of rent, as is necessary to return the
affected portion of the Premises and/or Project and the soil and groundwater to
the condition existing prior to the introduction of the contaminating Hazardous
Material and to otherwise comply with all applicable Environmental Laws.
Landlord's approval of such Remedial Work shall not be unreasonably withheld so
long as such actions will not cause a material adverse effect on the Premises or
the Project during or after expiration of the Lease Term. Landlord shall also
have the right to approve any and all contractors hired by Tenant to perform
such Remedial Work. All such Remedial Work shall be performed in compliance with
all applicable laws, ordinances and regulations and in such a manner as to
minimize any interference with the use and enjoyment of the Premises and
Project. All costs and expenses of such Remedial Work shall be paid by Tenant
including, without limitation, the charges of such contractor(s), and the
reasonable fees and costs of the attorneys and consultants for Landlord incurred
in connection with monitoring or review of such Remedial Work.
(h) Landlord's Option. Landlord may elect, at Landlord's sole
discretion, to perform any Remedial Work. Landlord and Landlord's agents shall
have the right to enter the Premises at all reasonable times to inspect, monitor
and/or perform Remedial Work. All expenses incurred by Landlord in connection
with performing Remedial Work pursuant to subparagraph (g) above are payable by
Tenant, upon Landlord's demand, with interest thereon, as provided by
subparagraph 17(d).
(i) Injunctive Relief. Tenant's failure to abide by the terms of this
paragraph 19 shall be restrainable by injunction.
(j) Self-Help. Landlord shall have the right of "self-help" or similar
remedy in order to minimize any damages, expenses, penalties and related fees or
costs arising from or related to a violation of any Environmental Law with
respect to the Premises or the Project.
(k) Other Tenants and Owners. Other tenants or owners of property in
the Project may be using, handling or storing certain Hazardous Materials in
connection with such tenants' or owners' use of their premises or property. The
failure of another tenant or owner to comply with applicable laws and procedures
could result in a release of Hazardous Materials and contamination to
improvements within the Project or the soil and groundwater thereunder. In the
event of such a release, the tenant or owner responsible for the release, and
not Landlord, shall be responsible for any claim, damage or expense incurred by
Tenant by reason of such contamination and Tenant and Landlord shall each
exhaust all of their respective remedies against such other tenant or owner with
respect to any claim the Tenant or Landlord, as applicable, may have against the
other tenants or owners without any right to seek any recovery against the other
party to this Lease.
(l) Environmental Inspection. Tenant shall, if reasonably required by
Landlord on account of the activities or suspected activities of Tenant or
Tenant's Agents, retain a recognized environmental consultant (the "Consultant")
acceptable to Landlord to conduct an investigation of the Premises and of other
portions of the Project deemed appropriate by Landlord ("Environmental
Assessment") (i) for Hazardous Materials contamination in, about or beneath the
Premises or the Project as a result of such activities and (ii) to assess all
Environmental Activities of Tenant and Tenant's Agents on the Premises or the
Project for compliance with all applicable laws, ordinances and regulations and
for the use of procedures intended to reasonably reduce the risk of a release of
Hazardous Materials. The Environmental Assessment shall be performed in a manner
reasonably calculated to discover the presence of Hazardous Materials
contamination and shall be of a scope and intensity reflective of the general
standards of professional environmental consultants who regularly provide
environmental assessment services in connection with the transfer or leasing of
real property. Additionally, the Environmental Assessment shall take into full
consideration the past and present uses of the Premises and Project and other
factors unique to the Premises and Project. If Landlord obtains the
Environmental Assessment because of the activities of Tenant or Tenant's Agents,
as reasonably demonstrated by Landlord or indicated in the Environmental
Assessment, Tenant shall pay Landlord on demand the cost of the Environmental
Assessment, with interest thereon, as additional rent and in accordance with
28
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subparagraph 17(d). If Landlord so requires, Tenant shall comply, at its sole
cost and expense, with all reasonable recommendations contained in the
Environmental Assessment with respect to Environmental Activities by Tenant or
Tenant's Agents, including any recommendation with respect to the precautions
which should be taken with respect to Environmental Activities on the Premises
or the Project or any recommendations for additional testing and studies to
detect the presence of Hazardous Materials. Tenant covenants to reasonably
cooperate with the Consultant and to allow entry and reasonable access to all
portions of the Premises for the purpose of Consultant's investigation.
(m) Surrender of Premises - Environmental Considerations. Prior to or
after the expiration or termination of the Lease Term, Landlord may have an
Environmental Assessment of the Premises performed in accordance with
subparagraph (l) above. Tenant shall perform, at its sole cost and expense, any
Remedial Work recommended by the Consultant which is necessary to remove,
mitigate or remediate any Hazardous Materials contamination of the Premises or
Project in connection with any Environmental Activities of Tenant or Tenant's
Agents; provided, however, if no such Remedial Work is recommended by the
Consultant as necessary for the above specified reasons, Landlord, and not
Tenant as provided in subparagraph (l) above, shall pay for the cost of the
Environmental Assessment. Prior to surrendering possession of the Premises,
Tenant shall also, unless otherwise directed by Landlord, remove any personal
property, equipment, fixture (except for any fixture installed by Landlord)
and/or storage device or vessel on or about the Premises and/or Project which is
contaminated by or contains Hazardous Materials as a result of the activities of
Tenant or Tenant's Agents and repair all damage to the Premises and the Project
caused by such removal.
(n) Landlord's Environmental Indemnity. Landlord shall protect,
indemnify, defend (with counsel satisfactory to Tenant) and hold harmless Tenant
and its directors, officers, partners, employees and agents, for, from and
against any and all losses, damages, claims, costs, expenses, penalties, fines
and liabilities of any kind (including, without limitation, the cost of any
investigation, remediation and cleanup, and attorneys' fees) which are
attributable to any Environmental Activity on the Premises undertaken or
committed by Landlord or Landlord's Agents (except for Environmental Activities
undertaken by or on behalf of Landlord in the exercise of Landlord's rights
under this paragraph 19) or caused by the negligence of such persons during the
Term of this Lease.
(o) Remedial Work at Landlord's Expense. If (i) any Environmental
Activity undertaken by Landlord or Landlord's Agents results in contamination of
the Premises or any portion thereof, or the soil or groundwater thereunder, or
(ii) any Remedial Work is necessary or appropriate on the Premises due to or in
connection with Environmental Activities by Landlord or Landlord's Agents, and
if such contamination may have any material adverse effect on Tenant's use and
enjoyment of the Premises or impose any liability on Tenant, then Landlord shall
promptly perform all Remedial Work, at Landlord's sole expense, as is necessary
to return the affected portion of the Premises to a condition which no longer
has any material adverse effect on Tenant's use and enjoyment thereof and no
longer exposes potential liability on Tenant. All such Remedial Work shall be
performed in compliance with all applicable laws, ordinances and regulations and
in such a manner as to minimize any interference with the use and enjoyment of
the Premises. All costs and expenses of such Remedial Work shall be paid by
Landlord.
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IN WITNESS WHEREOF, the undersigned have executed this Lease as of the
date and year first above written.
LANDLORD
HEWSON/BRECKNER-BASELINE, L.L.C.,
an Arizona limited liability company
By:__________________________________
HEWSON PROPERTIES, INC.,
a California Corporation
Its: Manager
By:
-----------------------------
Its:
-----------------------------
TENANT
ACTION PERFORMANCE COMPANIES, INC.,
an Arizona corporation
By:__________________________________
Name:________________________________
Title:_______________________________
30
<PAGE>
TENANT ACKNOWLEDGMENTS:
STATE OF ARIZONA )
) ss:
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this _____ day of
April, 1997, by ___________________________, the ___________________________ of
ACTION PERFORMANCE COMPANIES, INC., an Arizona corporation, on behalf of the
corporation.
__________________________________________
NOTARY PUBLIC
My Commission Expires:
__________________________
LANDLORD ACKNOWLEDGMENTS:
- ------------------------
STATE OF ARIZONA )
) ss:
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this _____ day of
April, 1997, by Gary J. Hewson, the Managing Member of HEWSON/BRECKNER-BASELINE,
L.L.C., an Arizona limited liability company, on behalf of the limited liability
company.
__________________________________________
NOTARY PUBLIC
My Commission Expires:
__________________________
STATE OF ARIZONA )
) ss:
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this _____ day of
April, 1997, by _______________________, the _____________________ of HEWSON
PROPERTIES, INC., a California corporation and Manager of
HEWSON/BRECKNER-BASELINE, L.L.C., an Arizona limited liability company, on
behalf of the limited liability company.
__________________________________________
NOTARY PUBLIC
My Commission Expires:
__________________________
31
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EXHIBIT F
4707 E. BASELINE ROAD, PHOENIX, ARIZONA
OPTION TO EXTEND LEASE TERM
First Extended Term
- -------------------
Provided that at the time of exercise Tenant is not in default under
any term or provision of this Lease beyond expiration of any applicable cure
period, then Tenant shall have the option to extend the term of this Lease for
an additional period of five (5) years (the "First Extended Term") upon the same
terms and conditions set forth in this Lease, so far as applicable, except that
the rental for the First Extended Term shall be ninety-five percent (95%) of the
market rent as hereinafter determined for the consummation, at the time of the
exercise of such option, of similar lease transactions for comparable properties
located in the general geographical area in which the Premises are located;
provided, however, the monthly amount of the Fixed Rent during the First
Extended Term shall not be less than the monthly amount of the Fixed Rent
payable during the tenth year of the Initial Term nor more than one hundred
fourteen percent (114%) of the amount of the Fixed Rent payable during the tenth
year of the Initial Term. In the event the Tenant wishes to exercise this option
to extend the term of the Lease, Tenant shall give Landlord written notice of
such election not later than three hundred sixty-five (365) days prior to
expiration of the initial Term.
Second Extended Term
- --------------------
Provided that at the time of exercise Tenant is not in default under
any term or provision of this Lease beyond expiration of any applicable cure
period and Tenant has previously exercised its option for the First Extended
Term, then Tenant shall have the option to extend the term of this Lease (the
"Second Extended Term") for one (1) additional period of five (5) years after
the First Extended Term upon the same terms and conditions set forth in this
Lease, so far as applicable, except that Tenant shall have no additional option
to extend the Term hereof (beyond the Second Extended Term) and the rental rate
for the Second Extended Term shall be ninety-five percent (95%) of the market
rent for the consummation, at the time of the exercise of such option, of
similar lease transactions for comparable properties located in the general
geographical area in which the Premises are located. In the event the Tenant
wishes to exercise this option to extend the term of the Lease, Tenant shall
give Landlord written notice of such election not later than three hundred
sixty-five (365) days prior to expiration of the First Extended Term.
Market Rental
- -------------
Upon receipt by Landlord of a notice that Tenant is exercising an
option to extend the term of the Lease, Landlord and Tenant shall attempt to
determine the market rent for the First or Second Extended Term, as applicable,
with the market rent to reflect both a Fixed Rent as provided in subparagraph
5(a) of the Lease and those adjustments to Fixed Rent during the Extended Term
which are of a type then typical in the rental market and to be based on the
market rental for new leases being executed as of one year prior to the
expiration of the Initial Term or of the First Extended Term, as applicable (the
"Valuation Date"). In determining the market rent for an Extended Term, due
consideration shall be given, among other things, to the length of the Extended
Term; the amount of the Fixed Rent; whether or not such Fixed Rent should be
subject to periodic Consumer Price Index or other adjustments; allowances to
tenants for, and the making by Landlord of, tenant improvements; liability of
tenants for reimbursable expenses; and the respective maintenance
responsibilities of landlords and tenants; provided, however, the effect of all
such considerations shall be reflected in the Fixed Rent and periodic
Adjustments to Fixed Rent; no other provisions of this Lease shall be modified;
and Landlord shall have no tenant improvement construction obligations.
<PAGE>
Landlord, within thirty (30) business days after the Valuation Date,
shall present Tenant in writing with the proposed market rental. If Tenant is
dissatisfied with the proposed market rental presented by Landlord, Tenant may,
by delivery to Landlord of notice within ten (10) business days thereafter,
elect to rescind Tenant's exercise of the option, in which event all rights of
Tenant under this Exhibit C shall terminate, and if such exercise of the option
to extend was made pursuant to the provisions of subparagraph 13(e) above, then
Landlord's notice of termination of the Lease pursuant to subparagraph 13(e)
shall be reinstated. If Tenant does not so rescind Tenant's notice of exercise,
then Tenant shall, within thirty (30) business days after receipt of Landlord's
proposed market rental, either accept the market rental proposed by the Landlord
or present Landlord in writing with its proposed market rental. Within five (5)
business days thereafter, Landlord shall either accept the market rental or
notify Tenant that the proposed market rental is unacceptable. If the proposed
market rental is unacceptable to Landlord, and/or if Landlord and Tenant are
unable to agree as to the renewal fair market rental at least six (6) months
prior to the Expiration Date of the Initial Term or the First Extended Term, as
applicable, Landlord and Tenant will jointly appoint an appraiser to determine
whether the market rental (including adjustment provisions) first proposed by
Landlord or the market rental (including adjustment provisions) first proposed
by Tenant is the rental which most accurately reflects the fair market rental at
the Valuation Date. If Landlord and Tenant fail to agree upon an appraiser
within five (5) months prior to the applicable Expiration Date, such appraiser
will be appointed by the then President of the Local Chapter of The American
Society of Appraisers and will be experienced in the appraisal of office,
commercial and industrial properties in the Phoenix metropolitan area. The
decision of such appraiser will be in writing and in duplicate; will be
delivered to each of the parties to the Lease; and will either select all
aspects of Landlord's first proposal (including adjustment provisions) or of
Tenant's first proposal (including adjustment provisions) as the market rental
provisions most reflective of the market conditions at the Valuation Date. The
market rental provisions selected by the appraiser shall then be the rental rate
provisions for the Extended Term, subject to the limitations and adjustments to
such market rental rate set forth in this Exhibit F for determining the actual
rental payable for each of the First Extended Term and the Second Extended Term,
as applicable. The fee of the appraiser will be paid equally by Landlord and
Tenant. If no determination is made prior to the commencement of an Extended
Term, Tenant will continue to pay to Landlord the Fixed Rent plus Adjustments as
in effect at the end of the term immediately preceding such Extended Term and,
upon such fair market rental being determined, Tenant will pay to Landlord the
difference between the rent already paid by Tenant for the Extended Term and the
actual amount of rent attributable to the Extended Term through the date of such
determination. Upon the determination of the fair market rental as aforesaid,
the parties will enter into an amendment to the Lease stating the Fixed Rent and
any Adjustments for the Extended Term.
2
STATE OF NORTH CAROLINA
LEASE AGREEMENT
COUNTY OF CABARRUS
THIS LEASE AGREEMENT is made and entered into as of the 9th day of
July, 1997, by and between Performance Park Partners, LLC a North Carolina
limited liability company with offices in Charlotte, North Carolina ("Landlord")
and Sports Image, Inc. an Arizona corporation ("Tenant").
PRELIMINARY STATEMENT
A. Landlord is the owner of that certain parcel of land (the "Land")
containing approximately 16.3 acres located on Hudspeth Road (S.R. 1302) near
its intersection with Morehead Road (S.R. 1300) in Cabarrus County, North
Carolina. The Land is depicted on the boundary and division survey dated June 2,
1997 attached hereto as Exhibit A.
B. Landlord shall construct on the Land an office warehouse building
(the "Building") containing approximately 113,755 square feet of floor area,
together with associated improvements such as parking areas, sidewalks,
landscaped areas and utility facilities (collectively, with the Building, the
"Improvements") on the Land. Tenant intends to occupy the Building and use the
other Improvements for office, warehouse and related purposes.
C. The Land, the Building and the other Improvements are referred to
collectively in this Lease as the "Premises." In order to evidence their
agreement regarding Tenant's lease of the Premises, the parties are entering
into this Lease Agreement (this "Lease").
LEASE
NOW, THEREFORE, in consideration of $1.00 paid in hand by Tenant to
Landlord, the mutual covenants and conditions contained in this Lease, including
the covenant to pay rent, and other good and valuable consideration, Landlord
and Tenant hereby agree, for themselves, their successors and assigns, as
follows:
1. Premises. Landlord leases to Tenant and Tenant leases from Landlord
the Premises, for the term and on the terms and conditions set forth in this
Lease.
2. Term. The term of this Lease shall begin on the date that the
substantially completed Premises are delivered to Tenant, as provided in
paragraph 5, and shall end at midnight on the last
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day of the Two Hundred Fortieth (240th) complete calendar month following the
commencement date.
3. Renewal. Provided Tenant is not in default under this Lease, Tenant
shall have the right to renew this Lease for four (4) periods of five (5) years
each. Each renewal period shall be on the same terms and conditions set forth in
this Lease except that Tenant shall have no further renewal rights after the
final renewal period. All references in this Lease to the term of this Lease
shall be deemed to include the renewal periods provided for herein unless the
context clearly indicates a different meaning.
4. Exercise of Renewal. The right of Tenant to renew this Lease shall
be exercised by written notice delivered to Landlord in the manner provided in
paragraph 25 below not less than ninety (90) days prior to the expiration of the
initial term or the then current renewal period, as applicable, after which
Tenant's renewal right shall expire, time being of the essence. Notwithstanding
the foregoing, Tenant's right to exercise its renewal option shall not expire
until ten (10) days after Landlord has delivered notice to Tenant that Tenant
has failed to timely exercise its option to renew.
5. Delivery of Premises. Landlord shall deliver the Premises to Tenant
when the Premises are substantially completed. Landlord and Tenant expect the
Premises to be substantially completed within nine (9) months after commencement
of construction, and Landlord and Tenant agree to exercise reasonable efforts to
meet the expectation. If, however, the Premises are not substantially completed
by the end of the twelfth (12th) month after commencement of construction, and
if such failure to achieve substantial completion is not due to force majeure or
to delays caused by Tenant, Tenant may terminate this Lease by written notice to
Landlord and neither party shall have any further rights or obligations under
this Lease. In this lease, the Premises shall be deemed to be "substantially
completed" on the date the last of the following occurs:
(a) Landlord's contractor states in writing for the benefit of
Tenant that the Premises have been substantially completed in accordance with
the nine (9) page Scope of the Work Specifications of G.L. Wilson Building
Company (the "Contractor") dated May 28, 1997 and the five (5) page site plan,
floor plan, elevation and main and upper level enlarged plan of the Contractor
both attached as Exhibit B to this Lease, subject only to minor punchlist items
that do not materially impair the use of the Premises for their intended
purpose; and
(b) A temporary certificate of occupancy is issued for the
Premises by the appropriate authority, subject only to conditions that do not
materially impair the use of the Premises for their intended purpose.
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Tenant shall inspect the Premises within thirty (30)days after delivery
thereof and submit a written punchlist of construction defects to Landlord. If
Tenant does not submit such punchlist on or before the thirtieth (30th) day
after delivery of the Premises, Tenant shall be deemed to have accepted the
Premises "as is". If Tenant omits any item from such punchlist, Tenant shall be
deemed to have accepted such item "as is". Tenant acknowledges that Landlord
makes no representations or warranties as to the condition of the Premises or
their suitability for any particular purpose, and that Landlord shall have no
responsibility to make any repairs or alterations to the Premises prior to or
after their delivery to Tenant. Tenant shall look to the contractor and not to
Landlord for corrections of punchlist items. Landlord shall assign to Tenant all
of Landlord's rights in, to and under any warranties affecting the Premises.
6. Rent. Tenant shall pay to Landlord as monthly rent the applicable
amount stated below in this paragraph 6, payable in advance on the first day of
each calendar month without deduction or setoff, commencing on the commencement
date of the term of this Lease and continuing throughout the term of this Lease.
If the commencement date falls on a day other than the first day of a calendar
month, the installment of rent payable for the initial partial calendar month
shall be payable on the first day of the following calendar month. All rent
shall be paid to Landlord at the address to which notices to Landlord are given
as set forth in paragraph 25 below, and shall be paid without demand, setoff or
deduction. Rent for any partial month shall be prorated on a daily basis. All
past due rent shall bear interest at the rate of twelve percent (12%) per annum
from the date due until the date paid. The following are the amounts of rent
applicable to the respective portions of the terms of this Lease:
113,755 sq.ft.
Years Monthly Rent Annual Rent (Annual Rent/sq.ft.)
----- ------------ ----------- --------------------
1-2 $ 57,833.33 $688,000 $ 5.69
3-4 $ 61,833.33 $736,000 $ 6.09
5-6 $ 65,833.33 $784,000 $ 6.49
7-8 $ 69,833.33 $832,000 $ 6.88
9-10 $ 73,833.33 $880,000 $ 7.28
Annual rent for each of years 11-20 of the term of this Lease be adjusted as of
the first day of each such year and shall equal the greater of (a) the sum of
(i) annual rent for the immediately preceding year plus (ii) three percent (3%)
of annual rent for the immediately preceding year, or (b) the sum of (i) annual
rent for the immediately preceding year plus (ii) annual rent for the preceding
year multiplied by the percentage increase in "CPI" during the immediately
preceding year, stated as a decimal. "CPI" on each rent adjustment date shall be
measured by the U.S. Department of Labor Consumer Price Index for all Urban
Consumers (U.S. City Average, 1982-84=100) most recently published prior to
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each such date; or if such index is not then in use, by the index most nearly
comparable thereto. Tenant shall pay to Landlord as monthly rent for each of
years 11-20 of the term of this Lease an amount equal to one-twelfth (1/12) of
the applicable annual rent, payable in advance on the first day of each calendar
month without deduction or setoff. Rent for each year of each renewal period, if
any, exercised during the term of this Lease shall be calculated and paid in the
same manner as for years 11-20 of the term of this Lease.
7. Additional Rent. If Tenant does not pay such expenses directly as
provided in this Lease, Tenant shall pay to Landlord, as additional rent, the
following operating expenses incurred by Landlord with respect to the Premises
during the term of this Lease:
(a) All real estate taxes and assessments levied or assessed
against the Premises;
(b) The premiums for all policies of casualty and liability
insurance maintained by Landlord with respect to the Premises;
(c) The cost of all utility services provided to the Premises,
including but not limited to electricity, natural gas, water and sewer
services and trash removal;
(d) The cost of all repairs to the Premises, including any
alterations, structural or otherwise, necessary to comply with
applicable laws; and
(e) All other costs incurred by Landlord in operating and
maintaining the Premises, including but not limited to the cost of
janitorial services, security services, maintenance of landscaped and
paved areas, maintenance of utility systems and other similar
expenditures.
Tenant shall reimburse Landlord for each of the foregoing expenses
within ten (10) days after receipt of a written statement from Landlord,
detailing the expense incurred by Landlord. This paragraph 7 shall not be deemed
either to obligate Landlord to pay any such amounts or to constitute consent by
Landlord to Tenant's failure to pay such amounts directly as required in the
other provisions of this Lease, but this paragraph 7 is intended only to provide
an alternate remedy for the protection of Landlord exercisable by Landlord at
Landlord's sole option and at Landlord's sole discretion in case of Tenant's
failure to pay such amounts directly.
8. Repair and Maintenance. Tenant shall maintain in good condition and
repair the entire Premises, including without
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limitation the Building and other Improvements on the Premises, and all roofs
and exterior walls, landscaping, driveways and parking areas, and shall make all
necessary repairs to the building structure and concealed systems (including
without limitation plumbing, electrical, heating and air conditioning) within or
servicing the Premises. Tenant shall also make any modifications to the Premises
required to comply with applicable legal requirements, including without
limitation the Americans with Disabilities Act.
9. Alterations and Personal Property. Tenant shall have no right to
make any alterations in the Premises without the prior written consent of
Landlord, which shall not be unreasonably withheld, conditioned or delayed.
Tenant shall submit to Landlord a written request for consent to alterations,
and such request shall include a complete description of the proposed scope and
schedule of work, together with complete plans and specifications. Landlord may
withhold, condition or delay its consent if the alterations will decrease the
value of Premises or will violate any applicable laws, ordinances or
restrictions affecting the Premises. If Landlord approves any such alterations,
Tenant must obtain advance written approval from Landlord of plans and
specifications for the work, and shall keep the Premises free and clear of any
lien or claim of lien arising out of any such work occurring, or allegedly
occurring, by, through or under Tenant. Tenant shall immediately pay and
discharge any such lien or claim of lien that is filed. Notwithstanding the
foregoing, Landlord's approval of plans and specifications shall not be required
for any interior, non-structural alteration costing less than $50,000.00.
All trade fixtures and furnishings installed in or attached to the
Premises by and at the expense of Tenant may be removed by Tenant at any time
during the Lease term provided Tenant is not in default hereunder, and provided
that such removal will not damage the Premises or that any damage caused by such
removal will be promptly repaired by Tenant at its expense. Any such property
not so removed before the expiration of the term of this Lease or the earlier
termination of this Lease shall, as Landlord's option, become the property of
Landlord, or shall be removed by Tenant. Tenant shall repair any damage caused
by removal, and these obligations shall survive termination of this Lease or
expiration of the Lease term. All personal property, equipment and trade
fixtures owned by Tenant shall be brought onto the Premises at Tenant's sole
risk, and Tenant hereby releases Landlord from any liability for damage to such
property, no matter how caused.
10. Taxes. Tenant shall pay, prior to delinquency, all real estate
taxes and assessments that are levied or assessed against the Premises during
the term of this Lease. Tenant also shall pay, prior to delinquency, all taxes,
assessments, license fees and other charges of any nature whatsoever that are
levied or assessed against any personal property or equipment of Tenant or are
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otherwise based on Tenant's operations within the Premises during the term of
this Lease. On demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of the payments. All real estate taxes and assessments for
the year in which the term of this Lease commences shall be prorated between
Tenant and Landlord.
11. Utilities and Services. Tenant shall make all arrangements for and
pay for all utilities and services furnished to the Premises, including, without
limitation, gas, electricity, water, sewer and telephone service, and for all
charges for initiation of service therefor. Landlord represents and warrants
that all utilities used by Tenant at the Premises are, or will be at the
commencement of the term of this Lease, separately metered from any other
property.
12. Damage by Casualty or Fire. If the Building or other Improvements
are totally or partially damaged or destroyed by casualty, explosion or fire,
however caused, or by the elements, or by any other casualty covered by a
standard "all-risk" policy of casualty insurance, then the same shall be
promptly restored by Tenant to their previous condition. Such destruction shall
not terminate this Lease. In case of any such damage or destruction, there shall
be no abatement or reduction of rent. Notwithstanding the foregoing, if the
Building is damaged or destroyed to an extent greater than fifty percent (50%)
of the replacement cost thereof during the last two (2) years of the initial
term of this Lease or during the last two (2) years of any renewal period, and
the insurance proceeds available with respect to that damage equal or exceed the
replacement cost of the Building and other Improvements at the time of such
damage or destruction, then Tenant shall have the right to terminate this Lease
by delivery of written notice of such termination to Landlord within thirty (30)
days after such damage or destruction. Upon any such termination, Landlord shall
be entitled to receive all insurance proceeds payable with respect to such
damage or destruction, excluding the proceeds of any separate policy of
insurance maintained by Tenant on its personal property, equipment or trade
fixtures.
13. Insurance. Tenant shall maintain, throughout the term of this
Lease, a policy of "all-risk" property insurance on the Improvements in an
amount equal to the full replacement cost of the Improvements. Tenant also shall
maintain a policy of general public liability insurance with a single limit of
liability of not less than $1,000,000 per occurrence, and shall maintain on all
its personal property, business fixtures and equipment a policy of standard fire
and extended coverage, with vandalism and malicious mischief endorsements, in an
amount sufficient to meet the co-insurance requirements of such policy. All
insurance to be maintained by Tenant under this paragraph 13 shall name Landlord
and the holder of any deed of trust on the Premises as additional insureds, as
their interests may appear. Tenant shall provide Landlord upon request with
certificates (or upon request, copies)
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of the insurance policies required to be maintained under this paragraph 13.
14. Taking for Public Use. If the entire Premises are taken for any
public or any quasi-public use under any statute or by right of eminent domain,
or by private purchase in lieu thereof, then this Lease shall automatically
terminate as of the date that title is vested in the condemning authority. If
any part of the Premises is so taken and Tenant determines in its reasonable
business judgment that the remainder thereof is unusable for the purposes for
which the Premises are leased, then Tenant shall have the right to terminate
this Lease by delivery of written notice to Landlord within ninety (90) days
after the date of such taking, time being of the essence.
If any part of the Premises is so taken and this Lease is not
terminated under the provisions of the preceding paragraph, then the rent shall
be apportioned according to the ratio of the square footage of the floor area of
the Building, if any, taken to the square footage of the floor area of the
Building immediately prior to such taking, and Landlord shall, to the extent
possible with any award of damages from such taking, restore the remaining
portion of the Premises to the extent necessary to render it reasonably suitable
for the purposes for which it is leased, and shall make all repairs to any
Building damaged by such taking to the extent necessary to constitute the
Building a complete architectural unit.
All compensation awarded or paid upon such a total or partial taking of
the Premises shall belong to and be the property of Landlord without any
participation by Tenant; provided, however, that nothing contained herein shall
be construed to preclude Tenant from prosecuting any claim directly against the
condemning authority in such condemnation proceedings for the lost value of
Tenant's leasehold, for loss of business, or for depreciation to, damage to, the
cost of removal of, or the value of stock, trade fixtures, furniture, and other
personal property belonging to Tenant; provided, further, that no such claim
shall diminish or otherwise adversely affect Landlord's award.
15. Indemnity and Waiver. Each party shall protect, indemnify, defend
and save the other party harmless from and against any and all claims, demands,
causes of action and other expenses of any nature whatsoever (including
attorneys' fees), for injury to or death of persons, or loss of or damage to
property, occurring on or about the Premises, or in any manner growing out of or
connected with such party's use and occupancy of said Premises, when not a
result of the negligence or intentional misconduct of the party being
indemnified.
Tenant hereby releases and waives all claims against Landlord, its
agents and employees, for injury or damage to person, property or business
sustained in or about the Premises by Tenant, its
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<PAGE>
agents or employees. Landlord shall not be responsible or liable for any event,
act or omission to the extent covered by insurance maintained by Tenant, or
required by this Lease to be maintained by Tenant, and Tenant shall require its
insurers to include in Tenant's insurance policies effective waivers of
subrogation rights for the benefit of Landlord, its agents and employees.
16. Default. The occurrence of any one of the following shall
constitute a default by Tenant:
(a) Failure to pay rent or any other amount payable under this
Lease within ten (10) days after written notice that such amount is
past due; or
(b) Failure to perform any other provision of this Lease if
the failure to perform is not cured within thirty (30) days after
notice thereof has been given to Tenant; provided, however, that if the
default is not reasonably capable of being cured in thirty (30) days,
Tenant shall not be in default if it commences the cure within that
thirty (30) day period and diligently prosecutes the cure to
completion.
17. Landlord's Remedies. Landlord shall have the following remedies if
Tenant defaults. These remedies are not exclusive; they are cumulative in
addition to any remedies now or later allowed by law.
(a) Landlord shall have the right to terminate Tenant's right
of possession of the Premises without terminating this Lease, and as
long as Landlord does not terminate this Lease, collect rent when due.
Tenant shall surrender possession of the Premises to Landlord and
Landlord shall have the right to enter the Premises after notice to
vacate and after obtaining an order of ejectment or other legal
authority and relet them. Tenant shall be liable immediately to
Landlord for all costs Landlord shall incur in reletting the Premises
including, without limitation, broker's commissions, expenses for
remodeling required by the reletting, and like costs. Reletting can be
for a period shorter or longer than the remaining term of the Lease.
Tenant shall pay to Landlord the rent due under this Lease on the date
that the rent is due, less the rent Landlord receives from any
reletting. No act by Landlord allowed by this paragraph or surrender of
possession of the Premises pursuant to this paragraph shall terminate
this Lease unless Landlord notifies Tenant that Landlord elects to
terminate this Lease. Landlord shall use reasonable efforts to relet
the Premises upon reasonable terms. Tenant shall be responsible only
for the costs of such items as carpet, paint and repair and maintenance
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items for which Tenant was responsible with respect to any reletting
under this paragraph.
(b) Landlord shall have the right to terminate this Lease
without notice to vacate (any right to which is hereby waived by
Tenant) and Tenant's rights to possession of the Premises at any time,
and reenter the Premises as described in subparagraph (a) hereinabove.
No act by Landlord other than the giving notice of termination to
Tenant shall terminate this Lease. Upon termination, Landlord shall
have the right to pursue its remedies at law or in equity to recover of
Tenant all amounts of rent then due or thereafter accruing and such
other damages as are caused by Tenant's default. In particular, but not
by way of limitation, Landlord may choose to accelerate rent due under
this Lease after termination, with the measure of such accelerated rent
being equal to the difference, if any, produced by subtracting the
then-current market rent for the Premises from the rent reserved in
this Lease, multiplying the positive difference, if any, by the
remaining term of this Lease and reducing the product to present value
at the rate paid for United States Treasury Notes in the most recently
completed auction.
Without limiting the foregoing, Tenant shall pay, upon demand, all cost
and expenses, including reasonable attorneys' fees, incurred by Landlord in
enforcing Tenant's obligations under this Lease. Landlord hereby waives all
statutory and common law landlord lien rights with respect to Tenant's personal
property, trade fixtures and inventory.
18. Assignment and Subleasing. Tenant shall not sell, assign, pledge or
hypothecate this Lease or sublease the Premises or any part thereof without the
prior written consent of Landlord, which shall not be unreasonably withheld,
conditioned or delayed. Any sale of the stock of Tenant which effects a change
in the ownership thereof from such ownership as of the date of this Lease shall
be deemed a violation of the foregoing provision unless Landlord consents to the
sale in writing. Consent by Landlord to one assignment or subleasing shall not
destroy or operate as a waiver of the prohibitions contained in this paragraph
as to future assignments or subleases, and all such later assignments or
subleases shall be made only with Landlord's prior written consent. In the event
any assignment of this Lease or sublease of the Premises or any part thereof is
made by Tenant, whether or not the same is consented to by Landlord, Tenant
shall remain directly and primarily liable to Landlord for payment of all rent
and other charges provided in this Lease, and for the faithful performance of
all of the covenants and conditions of this Lease by any assignee or subtenant
to the same extent as if the Lease had not been assigned or the Premises had not
been subleased.
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19. Quiet Enjoyment. Provided Tenant performs all its covenants,
agreements and obligations hereunder, Landlord will warrant and defend Tenant in
the peaceful and quiet enjoyment of the Premises, subject to enforceable
easements, restrictive covenants and rights of way, if any, against the lawful
claims of all persons claiming under Landlord.
20. Use Clause/Compliance by Tenant with Legal Requirements. Tenant
shall use the Premises only for general office and warehouse purposes. Tenant
shall not change the use of the Premises without the prior written consent of
Landlord, which shall not be unreasonably withheld, conditioned or delayed.
Landlord may withhold, condition or delay consent to any change of use which
would violate any applicable law, ordinance, rule or restriction or which would
pose an increased risk of injury or damage to persons or property, including,
without limitation, an increased risk of introduction into or onto the Premises
of Hazardous Materials. Tenant shall obey and comply with all laws, rules,
regulations, ordinances and other legal requirements of all legally constituted
authorities existing at any time during the Lease term. Tenant shall not cause
or permit a nuisance to exist on or about the Premises, and shall at all times
maintain the Premises in clean and attractive condition, properly dispose of all
trash, refrain from burning anything on or about the Premises, refrain from
engaging in any dangerous, illegal or immoral activities on or about the
Premises and obey such other reasonable rules that Landlord may issue from time
to time regarding Tenant's use of the Premises, provided that such rules shall
not materially increase Tenant's obligations under this Lease or impair Tenant's
use of the Premises in accordance with this Lease.
21. Hazardous Materials. Tenant shall not use, generate, manufacture,
produce, store, release, discharge or dispose of on, in, or under the Premises,
or transport to or from the Premises, any Hazardous Materials (as defined
below), or allow any other person or entity to do so, other than in the ordinary
course of Tenant's business on the Premises and in compliance with all local,
state and federal laws, ordinances and regulations relating to Hazardous
Materials. Tenant shall comply with all local, state and federal laws,
ordinances and regulations relating to Hazardous Materials on, in, under or
about the Premises.
Tenant shall promptly notify Landlord should Tenant receive notice of,
or otherwise become aware of, any: (a) pending or threatened environmental
regulatory action against Tenant or the Premises; (b) claims made or threatened
by any third party relating to any loss or injury resulting from any Hazardous
Material; or (c) release or discharge, or threatened release or discharge, of
any Hazardous Material in, on, under or about the Premises.
Tenant agrees to indemnify, defend and hold Landlord harmless from and
against any and all liabilities, claims, demands, costs
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and expenses of every kind and nature (including attorneys' fees) directly or
indirectly attributable to Tenant's failure to comply with this paragraph,
including, without limitation: (a) all consequential damages; and (b) the costs
of any required or necessary repair, cleanup or detoxification of the Premises,
and the preparation and implementation of any closure, remedial or other
required plan. The indemnity contained in this paragraph 21 shall survive the
termination or expiration of this Lease.
As used in this paragraph 21, the term "Hazardous Materials" shall mean
any element, compound, mixture, solution, particle or substance which is
dangerous or harmful or potentially dangerous or harmful to the health or
welfare of life or environment, including but not limited to explosives,
petroleum products, radioactive materials, hazardous wastes, toxic substances or
related materials, including, without limitation: (1) any substances defined as
or included within the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," "toxic substances," "hazardous pollutants" or "toxic
pollutants," as those terms are used in the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Hazardous Materials Transportation Act, the Toxic Substances Control
Act, the Clean Air Act and the Clean Water Act, or any amendments thereto, or
any regulations promulgated thereunder, and any other law or regulation
promulgated by any federal, municipal, state, county or other governmental or
quasi governmental authority and/or agency or department thereof; (2) any "PCBs"
or "PCB items" (as defined in 40 C.F.R. ss.761.3); or (3) any "asbestos" (as
defined in 40 C.F.R. ss.763.63).
22. Limitation on Liability. Tenant shall look solely to the estate and
interest of Landlord in the Premises for the collection of any judgment
requiring the payment of money by Landlord for default or breach by Landlord
under this Lease. Landlord shall be released from any further liability under
this Lease upon a sale of the Premises.
23. Automatic Subordination. This Lease is and shall be subordinate to
any mortgage or deed of trust now of record or recorded after the date of the
Lease affecting the Premises. Tenant shall execute and deliver to Landlord and
Landlord's mortgagee any documentation requested by Landlord to confirm this
subordination within fifteen (15) days after request by Landlord or Landlord's
mortgagee. Landlord shall exercise reasonable efforts to obtain a written
agreement from the holder of any mortgage or deed of trust now of record
affecting the Premises by which such holder agrees not to disturb the tenancy of
Tenant under this Lease so long as Tenant is performing its obligations under
this Lease. In addition, Landlord shall obtain from the holder of any mortgage
or deed of trust recorded after the date of this Lease affecting the Premises a
written agreement by which such holder agrees not to disturb Tenant's tenancy
under this Lease so long as Tenant is
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performing its obligations under this Lease, and Landlord shall exercise
reasonable efforts to obtain in such non-disturbance agreement such holder's
agreement that condemnation and insurance proceeds will be distributed as
provided in this Lease.
24. Waiver. The waiver by Landlord of any breach of any covenant or
agreement herein contained shall not be a waiver of any other default concerning
the same or any other covenant or agreement herein contained. The receipt and
acceptance by Landlord of delinquent or partial rent shall not constitute a
waiver of that or any other default.
25. Notice. Any notice that either party desires or is required to give
the other party shall be in writing and shall be deemed to have been
sufficiently given if either served personally or sent by prepaid, registered or
certified mail, addressed to the other party at the address set forth below:
Landlord: 5257 Pit Road South
P.O. Box 880
Harrisburg, North Carolina 28075
Tenant:
Either party may change its address by notifying the other party of the
change of address in the foregoing manner. Notices may be given by counsel for a
party.
26. Surrender and Holding Over. Upon the expiration or earlier
termination of the Lease term, Tenant shall surrender possession of the Premises
in as good a condition as delivered to it, reasonable wear and tear and damage
by fire and other casualty excepted. If Tenant remains in possession of the
Premises following the expiration or earlier termination of this Lease term with
the consent of Landlord but without any written agreement between the parties,
Tenant shall be only a tenant at will, and there shall be no renewal of this
Lease or exercise of any option by operation of law.
27. Applicable Law. This Lease has been entered into under, and shall
be governed by, the laws of the State of North Carolina.
28. Integration and Binding Effect. The entire agreement, intent and
understanding between Landlord and Tenant is contained in the provisions of this
Lease and any stipulations, representations, promises or agreements, written or
oral, made prior to or contemporaneously with this Lease shall have no legal or
equitable effect or consequence unless reduced to writing
-12-
<PAGE>
herein. The terms "Landlord" and "Tenant" and all pronouns relating thereto
shall be deemed to mean and include corporations, partnerships and individuals
as may fit the context and the masculine gender shall be deemed to include the
feminine and the neuter and the singular number the plural.
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed and sealed in their names as of the day and year first above written.
PERFORMANCE PARK PARTNERS, LLC (SEAL)
By: __________________________(SEAL)
Its: _______________________, Manager
SPORTS IMAGE, INC.
By: _____________________________
Its: _____________________, President
[CORPORATE SEAL]
ATTEST:
____________________________
________ Secretary
-13-
<PAGE>
STATE OF ____________________
COUNTY OF ___________________
I, ________________________________________, a Notary Public for said
County and State, do hereby certify that ___________________________, manager of
Performance Park Partners, LLC, a North Carolina limited liability company,
personally appeared before me this day and acknowledged the due execution of the
foregoing instrument on behalf of the company.
WITNESS my hand and official seal, this the ______ day of
_______________, 1997.
___________________________________
Notary Public
My commission expires:
_____________________
[NOTARIAL SEAL]
STATE OF ____________________
COUNTY OF ___________________
This ______ day of _______________, 1997, personally came before me
___________________________________, who, being by me duly sworn, says that he
is the ________ President of Sports Image, Inc., an Arizona corporation, and
that the seal affixed to the foregoing instrument in writing is the corporate
seal of the company, and that said writing was signed and sealed by him, in
behalf of said corporation, by its authority duly given. And the said ________
President acknowledged the said writing to be the act and deed of said
corporation.
___________________________________
Notary Public
My commission expires:
_____________________
[NOTARIAL SEAL]
<PAGE>
Exhibit B
Description of Plans and Specifications
(attached)
EXHIBIT 11.1
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(in thousands, except per share data)
Years Ended September 30,
---------------------------------
1997 1996 1995
------- ------- -------
Shares:
Weighted average number of common
shares outstanding .................... 14,047 11,789 9,087
Additional shares assuming conversion of:
Stock options ........................ 577 539 351
Warrants ............................. -- 33 178
Preferred stock ...................... -- 667 500
------- ------- -------
Weighted average shares outstanding ..... 14,624 13,028 10,116
Net income .............................. $10,146 $ 5,953 $ 2,770
======= ======= =======
Primary earnings per share .............. $ 0.69 $ 0.46 $ 0.27
======= ======= =======
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.
EXHIBIT 11.2
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(in thousands, except per share data)
Years Ended September 30,
---------------------------------
1997 1996 1995
------- ------- -------
Shares:
Weighted average number of common
shares outstanding .................... 14,047 11,789 9,087
Additional shares assuming conversion of:
Stock options ........................ 624 573 601
Warrants ............................. -- 40 598
Convertible debentures ............... -- -- 784
Preferred stock ...................... -- 667 500
------- ------- -------
Weighted average shares outstanding ..... 14,671 13,069 11,570
Net income .............................. $10,146 $ 5,953 $ 2,770
======= ======= =======
Add:
Interest expense on convertible
debentures (assuming conversion) ...... -- -- 101
------- ------- -------
Net income attributable to fully
diluted weighted average shares
outstanding ........................... $10,146 $ 5,953 $ 2,871
------- ------- -------
Fully diluted earnings per share ........ $ 0.69 $ 0.46 $ 0.25
======= ======= =======
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.
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
registration Statement File Nos. 33-79942, 33-66980, 33-86230, 333-03865,
333-01874 and 333-22943.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
November 18, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit contains summary financial information extracted from the
Registrant's financial statements for the period ended September 30, 1997, and
is qualified in its entirety by reference to such financial statements. This
exhibit shall not be deemed filed for the 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> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 29,318
<SECURITIES> 0
<RECEIVABLES> 18,639
<ALLOWANCES> 837
<INVENTORY> 17,855
<CURRENT-ASSETS> 72,545
<PP&E> 26,548
<DEPRECIATION> 6,531
<TOTAL-ASSETS> 141,325
<CURRENT-LIABILITIES> 15,570
<BONDS> 22,586
0
0
<COMMON> 160
<OTHER-SE> 84,984
<TOTAL-LIABILITY-AND-EQUITY> 141,325
<SALES> 130,380
<TOTAL-REVENUES> 130,380
<CGS> 80,995
<TOTAL-COSTS> 80,995
<OTHER-EXPENSES> 31,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,021
<INCOME-PRETAX> 16,910
<INCOME-TAX> 6,764
<INCOME-CONTINUING> 10,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,146
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
