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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, 1998
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.)
4707 E. Baseline Road
Phoenix, Arizona 85040
(602) 337-3700
(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) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark 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. [ ]
The aggregate market value of Common Stock held by nonaffiliates of the
registrant (14,495,355 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 15, 1998, was
$510,055,304. 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 to be an admission that such officers,
directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of December 15, 1998, there were outstanding 16,657,632 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 1999 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, 1998
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.........................................................1
ITEM 2. PROPERTIES......................................................28
ITEM 3. LEGAL PROCEEDINGS...............................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................30
ITEM 6. SELECTED FINANCIAL DATA.........................................31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............41
ITEM 11. EXECUTIVE COMPENSATION..........................................41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................42
SIGNATURES ................................................................45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................F-1
---------------------------------
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding the
Company's "expectations," "anticipation," "intentions," "beliefs," or
"strategies" regarding the future. Forward-looking statements also include
statements regarding revenue, margins, expenses, and earnings analysis for
fiscal 1999 and thereafter; future products or product development; the
Company's product and distribution channel development strategies; potential
acquisitions or strategic alliances; the success of particular product or
marketing programs; revenue generated as a result of licensing arrangements; and
liquidity and anticipated cash needs and availability. All forward-looking
statements included in this Report are based on information available to the
Company as of the filing date of this Report, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from the forward-looking statements. Among the
factors that could cause actual results to differ materially are the factors
discussed in Item 1, "Special Considerations."
-i-
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company is a worldwide leader in the design and sale of licensed
motorsports collectible and consumer products. 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 under
license arrangements with popular race car drivers (including seven-time Winston
Cup champion Dale Earnhardt, three-time Winston Cup champion Jeff Gordon, 1989
Winston Cup champion Rusty Wallace, eight-time National Hot Rod Association
("NHRA") Funny Car champion John Force, and Formula One champions Jacques
Villeneuve and Mika Hakkinen), car owners, car sponsors, automobile
manufacturers, and the National Association for Stock Car Auto Racing
("NASCAR"). Third parties manufacture all of the Company's motorsports
collectibles and most of the Company's apparel and souvenirs, generally
utilizing the Company's designs, tools, and dies.
The Company markets its products to approximately 11,500 specialty
retailers throughout the world, either directly or through its wholesale
distributor network; to motorsports enthusiasts directly through its Racing
Collectibles Club of America (the "Collectors' Club"), which had approximately
148,000 members as of September 30, 1998; and through mobile trackside souvenir
stores, promotional programs for corporate sponsors, and fan clubs. The Company
also distributes certain of its products to mass-market retailers through its
in-house sales force and wholesale distributors. In addition, the Company has a
license agreement with Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and
game manufacturer, covering the exclusive sale by Hasbro of a line of
motorsports-related products in the mass-merchandise market. The Company plans
to begin electronic commerce sales of its products through its recently acquired
"goracing.com" web site as well as the nascar.com web site during calendar 1999.
The Company's products and other programs capitalize on the rapidly growing
popularity of motorsports. See Item 1, "Business - Industry Overview." 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. During fiscal 1997, fiscal 1998, and the first quarter of
fiscal 1999, the Company entered into long-term licensing arrangements with a
number of the most popular motorsports licensors, including drivers Dale
Earnhardt, Jeff Gordon, and Rusty Wallace; team owners Robert Yates Racing,
Inc., Richard Childress Racing Enterprises, Inc., Joe Gibbs Racing, Inc., and
Dale Earnhardt, Inc.; and NASCAR and Championship Auto Racing Teams ("CART").
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, teams, and sponsors significantly enhance the collectible value
and marketability of its products. The Company also 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.
Historically, the Company designed and marketed die-cast collectibles
featuring NASCAR drivers and vehicles. The Company has aggressively expanded its
lines of die-cast collectibles to include replicas of motorsports vehicles from
Formula One, NHRA drag racing, NASCAR's "Busch" and "Craftsman Truck" racing
series, CART racing, United States Auto Club ("USAC") racing, and "World of
Outlaws" sprint car racing. In fiscal 1997, the Company began an aggressive
program to expand its product offerings and distribution channels through a
series of strategic acquisitions and licensing arrangements. The following table
sets forth certain information with respect to those acquisitions, which
represent an aggregate base purchase price, including assumed liabilities but
excluding contingent payments, of approximately $142.8 million.
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RECENT ACQUISITIONS
ACQUISITIONS(1) DATE BUSINESS
- ------------------------------ ------------ -----------------------------------
Sports Image, Inc. November Markets and distributes licensed
1996 motorsports apparel and souvenirs;
trackside sales; Dale Earnhardt
fan club
Motorsport Traditions January Markets and distributes licensed
Limited Partnership and 1997 motorsports apparel and souvenirs;
Creative Marketing and trackside sales
Promotions, Inc.
Robert Yates Promotions, Inc. July 1997 Markets and distributes licensed
motorsports apparel and souvenirs;
trackside sales
Image Works, Inc. July 1997 Manufactures and markets licensed
motorsports apparel through the
mass-merchandise markets
Motorsports collectibles August 1997 Manufactures and markets licensed
product lines of Simpson "mini-helmets" and
Products, Inc. other motorsports collectibles and
souvenirs
Assets related to sales of December Markets and distributes licensed
merchandise licensed by 1997 motorsports apparel and souvenirs;
NASCAR driver Rusty Wallace trackside sales
Assets related to motorsports December Manufactures and markets "Revell"
die-cast collectible 1997 licensed die-cast
product lines of collectibles; strategic alliance
Revell-Monogram, Inc. with Revell involving
extensive product licensing and
distribution arrangements
Brookfield Collectors Guild, January Markets and distributes licensed
Inc. 1998 motorsports collectibles
and ensembles
Chase Racewear, L.L.C. May 1998 Licensed motorsports apparel and
accessories
Paul's Model Art/MiniChamps August 1998 Markets and distributes die-cast
replicas of Formula One and GT race
cars as well as factory production
cars, driver figurines, and other
motorsports collectibles
Performance Plus September Develops and markets
Nutritional, L.L.C. 1998 driver-endorsed nutritional
products, including vitamins,
energy bars, and energy drinks
Intellectual Properties October Creates and develops promotional
Group, Inc. 1998 programs for corporate sponsors of
motorsports
Tech 2000 Worldwide, Inc. November Operates the "goracing.com"
1998 Internet web site; designs,
develops, implements, and
maintains motorsports-related and
other Internet web sites,
including electronic commerce
capabilities
- -----------------
(1) The acquisitions listed consist of the purchase of assets of Sports Image,
Inc. ("Sports Image"); the purchase of assets of Motorsport Traditions
Limited Partnership and the stock of Creative Marketing and Promotions,
Inc. (together, "Motorsport Traditions"); the purchase of stock of Robert
Yates Promotions, Inc. ("RYP"); the purchase of assets of Image Works, Inc.
("Image Works"); the purchase of motorsports collectibles-related assets of
Simpson Products, Inc. ("Simpson"); the purchase of assets related to sales
of merchandise licensed by Rusty Wallace ("Wallace") (the "Rusty Wallace
Acquisition"); the purchase of assets from Revell-Monogram, Inc. ("Revell")
(the "Revell Acquisition"); the purchase of assets from Brookfield
Collectors Guild, Inc. ("Brookfield"); the acquisition of 80% of the
membership interests of Chase Racewear, L.L.C. ("Chase"); the acquisition
of an 80% interest in Paul's Model Art, GmbH, MiniChamps, GmbH, Lang
Miniaturen, GmbH, and Spielwaren Danhausen, GmbH (collectively
"MiniChamps"); the acquisition of 58% of the membership interests of
Performance Plus Nutritional, L.L.C. ("Performance Plus"); the purchase of
stock of Intellectual Properties Group, Inc. ("IPG"); and the purchase of
stock of Tech 2000 Worldwide, Inc. ("Tech 2000").
During fiscal 1998, the Company continued to expand 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
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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 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 and services 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.
BUSINESS
INDUSTRY OVERVIEW
Motorsports racing consists of several distinct segments, each with its
own organizing bodies and events. The largest segment in the United States, in
terms of attendance and media exposure, is stock car racing, which is dominated
by NASCAR. The other principal segments in the United States are drag racing,
with NHRA the most prominent organizing body, and Indy car racing, controlled by
CART and the Indy Racing League ("IRL"). According to USA Today, motorsports
racing is the fastest growing spectator sport in the United States. The
following table summarizes attendance figures for motorsports in the United
States, based on the most current published statistics:
<TABLE>
<CAPTION>
AVERAGE
ATTENDANCE PER
TOTAL ATTENDANCE EVENT
---------------------------------- NUMBER OF -------------------
PERCENTAGE EVENTS
1996 1997 INCREASE 1996/1997 1996 1997
---------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
All U.S.
Motorsports. 15,430,637 16,861,291 9.27% 215/230 71,770 73,310
NASCAR...... 5,588,069 6,091,356 9.01% 31/32 180,260 190,355
NHRA........ 1,869,437 2,168,481 16.00% 19/22 98,391 98,567
CART........ 2,366,440 2,491,050 5.27% 16/17 147,902 146,532
IRL......... 1,144,002 1,347,000 17.74% 5/8 228,800 168,375
</TABLE>
Internationally, the Federation Internationale de l'Automobile governs
motorsports and administers the Formula One Grand Prix championship. Formula One
racing uses handcrafted, open-wheeled cars that look similar to Indy racers but
are the most technologically advanced and expensive racing vehicles in the
world. According to The Wall Street Journal, more than 300 million people attend
or tune in to each of 17 Grand Prix events held each year in Europe, Asia,
Canada, and South America.
Motorsports events also have achieved significant success on television in
the United States, 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 joined forces to
launch Speedvision, a motorsports cable network. USA Today reports that TV
ratings are growing even faster than attendance. According to Nielson Media
Research reports, more than 115 million people tuned in to NASCAR's televised
events in 1997. The Company believes that the new super speedways in Los
Angeles, California; Dallas/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.
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Large corporate advertisers have recognized the growing popularity of
motorsports. According to NASCAR, more than 70 of the Fortune 500 companies
utilize motorsports sponsorship or other activities as part of their marketing
strategies. Published reports indicate that corporate sponsors were expected to
spend an estimated $1.1 billion on motorsports marketing programs in the United
States in 1998, with NASCAR teams and venues attracting an estimated $476
million. The Wall Street Journal reports that Formula One attracts more than
$750 million per year from sponsors. The increasing popularity of motorsports
also has created significant demand among its patrons for a variety of
race-related merchandise and souvenirs. Industry reports indicate that total
NASCAR-related merchandise sales (which includes various product categories in
addition to the types of products sold by the Company) increased from
approximately $80 million in 1990 to approximately $770 million in 1997. These
reports state that industry insiders estimate that total NASCAR-related
merchandise sales will increase to approximately $1.0 billion by 2000.
GROWTH STRATEGY
The Company pursues a strategy designed to continue its leadership
position in the motorsports collectible and consumer products industry and to
provide top race car drivers and other licensors with a broad range of
revenue-producing opportunities throughout their careers. 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.
Enhancing Existing and Introducing New Products
The Company continually seeks to enhance its existing products and to
introduce new products designed to appeal to enthusiasts of every major racing
series. During the last two years, the Company has expanded its lines of
die-cast collectibles to include Formula One, NHRA drag racing, and NASCAR's
"Busch" and "Craftsman Truck" racing series. The Company continually expands its
product offerings by developing and introducing new lines of collectible
products, such as the higher-priced "Elite" series of die-cast collectibles,
which feature detailed equipment such as spark plug wires, braided hoses, and
realistic suspension systems. The Revell Acquisition provides the Company with
additional lines of high-quality die-cast motorsports collectibles that the
Company markets under various well-recognized "Revell" trademarks at price
points that differ from those of the Company's other die-cast product lines. The
Company also has expanded its consumer product offerings to include licensed
motorsports apparel, souvenirs, nutritional supplements, and other consumer
products. In addition, the Company participates in the retail mass-merchandise
market through a license agreement with Hasbro, under which Hasbro manufactures
and markets, with the Company's assistance, a line of motorsports products that
do not compete with the Company's core products.
The Company believes that its ongoing investment in tooling enables it to
produce die-cast products of higher quality and detail than those produced by
its competitors. The Company has invested more than $30.2 million in its
proprietary tooling, which contributes significantly to the quality of the
Company's products and is critical to imparting the high level of detail and
quality that collectors demand. The Company intends to continue investing in its
proprietary tooling in order to upgrade and expand existing product lines and to
add new products. The Company strives to enhance the demand for and to increase
the value of its collectible products by offering limited numbers of each item.
Expanding and Strengthening Licensing Arrangements
The Company focuses on expanding and strengthening its relationships with
existing licensors as well as entering into licensing arrangements with
additional motorsports personalities in order to further solidify its position
as the leader in the motorsports marketplace. The Company believes that its
licensing arrangements with top race car drivers (including Dale Earnhardt, Jeff
Gordon, Rusty Wallace, Dale Jarrett, and John Force), car owners, manufacturers,
sanctioning bodies, and corporate sponsors provide the Company with a
competitive advantage. These licensing arrangements enable the Company to
manufacture and distribute distinctive collectibles and other products to the
growing market of motorsports enthusiasts.
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Pursuing Strategic Acquisitions or Alliances
The Company seeks to acquire existing businesses and to enter into
strategic alliances that it believes will enable it to introduce new products or
expand its product lines, to leverage or expand its licensing arrangements, or
to improve its distribution channels. In evaluating a proposed acquisition
candidate, the Company considers a number of factors, including the quality of
its management; its historical operating results and future earnings potential;
the unique characteristics of its products, license rights, or distribution
channels; the size and anticipated growth of the market it serves and its
relative position in that market; and competitive factors. Following each
acquisition, the Company takes steps to enhance the operating efficiencies of
the acquired business. In evaluating a potential strategic alliance, the Company
analyzes the potential synergies that the alliance can provide; the strength of
the alliance partner's product lines, marketing capabilities, manufacturing
capacities, or distribution channels; and the potential opportunities presented
by the alliance.
Expanding Existing and Identifying New Distribution Channels
The Company plans to continue to expand its existing distribution channels
and to identify new distribution channels. Prior to the Company's fiscal 1997
and 1998 acquisitions, the Company distributed its products primarily to
approximately 5,000 specialty retailers in the United States through its
wholesale distribution network and directly to motorsports enthusiasts through
its Collectors' Club. The Company intends to continue to develop new programs
designed to enhance sales through the Collectors' Club and its wholesale
distribution network. The fiscal 1997 acquisitions of Sports Image and
Motorsport Traditions, which distributed products directly to many of those
5,000 specialty retailers, added complementary distribution channels, such as
mobile trackside souvenir stores and fan clubs, and provide the Company with the
opportunity to cross-market its die-cast, apparel, and souvenir products through
all of its distribution channels. As a result of the acquisition of MiniChamps
in fiscal 1998, the Company intends to utilize MiniChamps' international
wholesale distribution network to expand sales of its products throughout the
world. In addition, the acquisition of Tech 2000 and the goracing.com web site
provides the Company with the technology and expertise required to develop
electronic commerce sales via the Internet.
The acquisition of Image Works provided the Company with immediate access
to mass merchandising channels for its licensed motorsports apparel and other
products through large retailers, such as Wal-Mart, K-Mart, and Target, as well
as Image Works' catalog merchandising programs targeted at corporate motorsports
sponsors. In addition, the license agreement with Hasbro has provided the
Company with a source of licensing revenue from the mass-merchandise market
without committing substantial resources to manufacturing and marketing
activities. The Company believes that targeting products to specific market
niches identified by its database management systems, distributing its products
through the distribution channels of major corporate sponsors of motorsports,
distributing its products in international markets, and developing on-line
ordering capabilities on its Internet web site will represent increasingly
important new distribution channels in the future.
Developing Corporate Promotional Programs
The Company provides complete marketing services to create corporate
promotional programs for large corporate sponsors. Promotional programs
typically involve special productions of the Company's licensed die-cast
replicas, apparel, souvenirs, or other consumer products as a low-cost or free
award to increase brand awareness and name recognition of the corporate sponsor.
The Company successfully completed large-scale promotional programs featuring
Elvis Presley, Bass Pro Shops, DuPont ChromaLusion paints, the "Small Soldiers"
motion picture, "Batman and Joker," and Coca-Cola during calendar 1998. The
Company plans to expand its efforts to develop promotional programs and
currently is in discussions to develop additional programs with major corporate
sponsors.
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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-spinning wheels and tires. The Company designs its die-cast replicas as
high-quality collectible items and not as toys. The Company markets its die-cast
racing collectibles under approximately 300 active licenses with race car
drivers, team owners, and sponsors as well as under license agreements with
NASCAR, CART, Ford Motor Company, and several divisions of General Motors Corp.
The die-cast collectibles offered by the Company relate to NASCAR Winston Cup,
"Busch," and "Craftsman Truck" racing series; Formula One; NHRA drag racing; GT
and other sports car racing; USAC racing; and "World of Outlaws" sprint car
racing. The Company also produces die-cast replicas of certain factory
production cars. The Company's die-cast collectibles consist primarily of the
following:
------------------------------------------------------------------
SCALE PRODUCT APPROXIMATE SIZE
------------------------------------------------------------------
1:12 Racing Vehicles 15 inches
------------------------------------------------------------------
1:16 Pit Wagon 7 inches
------------------------------------------------------------------
1:18 Racing Vehicles 11 inches
------------------------------------------------------------------
1:24 and 1:25 Racing Vehicles 8 inches
------------------------------------------------------------------
1:24 and 1:25 Dually Trucks with Trailers 26 inches
------------------------------------------------------------------
1:32 Racing Vehicles 6 inches
------------------------------------------------------------------
1:43 Racing Vehicles and 5 inches
Production Cars
------------------------------------------------------------------
1:64 Racing Vehicles 3 inches
------------------------------------------------------------------
1:64 Vehicle Transporters 13 inches
------------------------------------------------------------------
1:96 Vehicle Transporters 9 inches
------------------------------------------------------------------
The Company's die-cast replicas typically range in price at retail from
approximately $10.00 to $85.00 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. Certain of the Company's more highly detailed die-cast
collectibles retail for as much as $400.00. The Company offers its die-cast
collectibles primarily through its wholesale distributor network to specialty
retailers, through its Collectors' Club, through its mobile trackside stores,
and through corporate promotional programs. See Item 1, "Business - Sales and
Distribution."
Historically, the Company designed and marketed die-cast collectibles
featuring drivers and vehicles from the NASCAR Winston Cup series. In recent
years, the Company has expanded its die-cast collectible product lines to offer
vehicles from other popular motorsports, including Winston NHRA drag racing,
NASCAR's "Busch" and "Craftsman Truck" series, Formula One, and CART.
The Company also has developed new die-cast collectible product lines that
feature a variety of unique and appealing collectible items with different
features and at different price points. 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. Elite products also feature
special display packaging that includes a 22-karat gold-plated coin. The Company
sells the Elite series of collectibles exclusively through the Collectors' Club
for approximately $80.00 per replica vehicle. As a result of the Revell
Acquisition in fiscal 1998, the Company now offers "Revell" branded die-cast
collectibles in different scales and with different features than its other
lines of die-cast products. Certain Revell-branded products feature special
packaging that includes a display case and certificate of authenticity. The
Company also offers "Brookfield Collectors Guild" ensembles, which typically
feature a limited edition race car packaged with a crew cab dually pick-up truck
and trailer.
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In fiscal 1998, the Company acquired MiniChamps, which is a leading
European marketer of die-cast replicas of Formula One racing vehicles.
MiniChamps also designs and markets die-cast replicas of GT sportscar racing
vehicles, CART racing vehicles, and certain factory production cars. The Company
intends to combine MiniChamps' high-quality, highly detailed product lines and
licensing arrangements with leading Formula One teams with the Company's
marketing and promotional expertise to expand the markets for the Company's
existing products and to create and market exciting new products in the future.
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, souvenirs, and
other consumer products, including t-shirts, jackets, hats, coffee mugs, pins,
key chains, knives, coolers, and tote bags. 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" and "CART" names and logos in connection with the Company's license
agreements with NASCAR and CART.
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
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."
Other Motorsports Collectible and Specialty Items
In addition to its extensive line of collectible die-cast replicas of
racing vehicles, the Company designs and markets an increasing variety of other
motorsports collectible and specialty products. These products include 1:43 and
1:18 scale plastic driver figurines; 1:12, 1:8, 1:4 and 1:3 scale miniature
replica helmets with simulated Nomex(TM) padded interiors, flip-up visors, and
plastic display cases; 1:24 scale replicas of racing vehicles made from 26% lead
crystal, which feature laser-engraved graphics and engine details formed out of
crystal; limited edition art prints featuring popular drivers and racing themes;
and books featuring drivers and other popular racing personalities.
Mass-Merchandise License
The Company licenses Hasbro to produce a line of motorsports-related
products specifically designed for the mass-merchandise market. See Item 1,
"Business - Licenses." Under this license, Hasbro 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 other products and do not compete directly with the Company's
limited-edition motorsports die-cast collectible products. Under the agreement,
Hasbro may 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 enables the Company to remain focused on its core
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<PAGE> 10
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. For example, in fiscal 1997 the Company
completed a promotional program that appeared on boxes of Wheaties(TM) cereal
and offered two special-edition Dale Earnhardt Wheaties(TM) die-cast replicas, a
t-shirt, and a hat. 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.
In fiscal 1997, the Company began developing and implementing extensive
corporate promotional programs that feature special, one-time themes or events
intended to provide the Company, the corporate sponsor, and other licensors with
unique marketing opportunities. For example, during calendar 1998 the Company,
Miller Brewing Company, and other corporate sponsors implemented a program in
which Rusty Wallace and John Force drove specially painted "Elvis Presley" cars
at selected races; the Company, Robert Yates Racing, Inc., DC Comics, Ford Motor
Company, and Texaco combined to produce the "Showdown in Charlotte" program in
which Dale Jarrett and Kenny Irwin, Jr. drove specially painted "Batman" and
"Joker" race cars; and the Company developed a program for the Coca-Cola Company
in which Dale Earnhardt and Dale Earnhardt, Jr. competed against one another for
the first time at the Coca-Cola 500 in Japan. The Company and the corporate
sponsors market a broad variety of specially designed die-cast vehicles and
other collectibles, apparel, and souvenirs based on these programs. As a result
of the acquisition of IPG in October 1998, the Company intends to expand its
efforts to develop and implement similar large-scale corporate programs in the
future.
Other Products and Services
Fan Clubs. The Company currently operates fan clubs for several popular
race car drivers and for NASCAR, including "Club E," which is the Dale Earnhardt
Fan Club; the Dale Jarrett Fan Club; the Rusty Wallace Fan Club; the Bobby
Labonte Fan Club; the John Force Fan Club; and the NASCAR Fan Club. The fan
clubs operated by the Company had a total of approximately 75,000 members as of
December 1, 1998. Membership packages typically include a quarterly newsletter,
personalized membership card, and exclusive benefits and discounts that are
provided only to club members. Fan club members also may purchase an exclusive
membership kit that includes an embroidered logo hat, lapel pin, and 1:64th
scale die-cast car. The Company provides to fan club members unique product
offerings and other benefits that it does not offer through any other
distribution channels.
Chase-branded Apparel. During fiscal 1998, the Company acquired an 80%
interest in Chase, a motorsports-related apparel and licensing company. Chase
creates and markets apparel and clothing accessories that bear "Chase" brand
marks including "Chase Authentics," "Competitor's View," and a stylized "C."
Several of the top NASCAR drivers (including Dale Earnhardt, Jeff Gordon, Rusty
Wallace, Dale Jarrett, Terry Labonte, and Bobby Labonte) have agreed that,
subject to certain exceptions, they will ensure that licensed apparel products
bearing their names, likenesses, or signatures will also bear "Chase" brand
marks. These drivers also have agreed to endorse Chase-branded apparel as the
exclusive trackside apparel of top NASCAR drivers.
Performance-Plus Nutritional Products. Through its 58% ownership interest
in Performance Plus, the Company now markets the Performance Plus Nutritional
line of products as the officially licensed nutritional
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<PAGE> 11
supplement of NASCAR. Performance Plus nutritional supplements include a 24-hour
adult multivitamin and mineral supplement; "Power 3" energy drinks; "Hi
Performance" energy bars; and a chewable children's multivitamin shaped to look
like Dale Earnhardt's race car and packaged with a toy Dale Earnhardt race car.
Mr. Earnhardt granted Performance Plus a 15-year license to use his name,
signature, and license in connection with Performance Plus nutritional products.
Mr. Earnhardt also entered into a 15-year exclusive endorsement agreement with
Performance Plus under which he will endorse Performance Plus nutritional
products.
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 NASCAR drivers Dale Jarrett
and Kenny Irwin, Jr. and NHRA Funny Car champion John Force. 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 worldwide to approximately
11,500 specialty retailers through its wholesale distributor network, through
its Collectors' Club, through its 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.
Wholesale Distribution
Die-Cast Collectibles. The Company markets its die-cast collectibles on a
wholesale basis through approximately 28 distributors operating in the United
States and approximately 65 distributors operating in approximately 40 countries
throughout the world. The distributors solicit orders for the Company's die-cast
products from approximately 5,000 specialty retailers throughout the United
States and approximately 6,500 specialty retailers in other countries throughout
the world. The retailers include stores specializing in motorsports collectibles
and apparel and stores specializing in other sports collectible items. As a
result of the Revell Acquisition, the Company markets certain of the Company's
die-cast collectibles to hobby shops that sell Revell's model kits. 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 (such as QVC Network's "For Race Fans Only" program) and
advertising during popular television programs of interest to motorsports
enthusiasts.
Consumer Products. The Company's in-house sales force and independent
representatives market certain motorsports consumer products on a wholesale
basis to major discount and department stores, such as Wal-Mart, K-Mart, and
Target, to automotive retail stores, and to convenience stores. The Company also
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.
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 a membership kit, 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
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members in September 1994 to approximately 148,000 members as of September 30,
1998. 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 developed 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.
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 verifies the callers' membership status and credit card
number, allows club members to check product availability without placing an
order, and informs members whether a desired product is in stock or the Company
is taking pre-orders. 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 190,000 fans per race during 1997. The Company currently operates
22 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 1998) 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 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. In
connection with the Revell Acquisition, the Company acquired the exclusive
rights to market "Revell" plastic model kits at trackside stores at all NASCAR,
NHRA, and other major motorsports events throughout the United States.
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."
Electronic Commerce Sales
In November 1998, the Company acquired Tech 2000, which operates the
goracing.com Internet website. Goracing.com, which currently attracts
approximately 12.0 million "impressions" per month, is the official online
"home" of 12 motorsports sanctioning bodies and provides in-depth coverage of 20
professional racing series, including NASCAR, CART, Formula One, and NHRA.
Goracing.com also provides motorsports-related multimedia content and search
capabilities, racing event and television coverage schedules, chat rooms,
contests, and other popular online features. The Company's artists, web
designers, systems specialists, and sales and marketing personnel currently are
designing and developing "SpeedMall.com" as a state-of-the-art virtual shopping
mall that will be linked to the traffic generated by goracing.com. SpeedMall
will feature the Company's products as well as motorsports and other
automotive-related products and services offered by other companies. The Company
and its various operating divisions will serve as the "anchor tenants" of
SpeedMall. The Company plans to "lease" more than 200 virtual retail stores in
SpeedMall, including opportunities for other motorsports-related specialty
stores, on-line banking services, travel agencies, interactive arcades, and
entertainment facilities. The Company currently anticipates that SpeedMall will
debut in February 1999.
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During 1998, the Company entered into a 15-year electronic commerce
alliance with NASCAR. Under this alliance, NASCAR intends to develop and
maintain an Internet website that will offer NASCAR-related merchandise to the
public (the "NASCAR Mall"). The Company has agreed to make available for sale on
the NASCAR Mall any NASCAR-licensed products that the Company offers on
SpeedMall or any other websites that the Company operates. The Company generally
must offer products on the NASCAR Mall under the same terms that it offers on
its websites. The Company will pay NASCAR royalty payments based on a percentage
of the wholesale price of products sold by the Company through the NASCAR Mall.
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 one of its manufacturers in the People's
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 (other than products produced by
MiniChamps and products sold under the "Brookfield" trademarks) are manufactured
under an exclusive agreement with a third-party manufacturer in China. The term
of the agreement currently extends through December 31, 1999 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. This tooling includes the tooling and dies utilized to
manufacture the Revell-trademarked lines of die-cast products, which the Company
recently relocated to its primary manufacturer's facility from the facilities of
two unaffiliated third-party manufacturers in China. The Company invested
approximately $7.0 million in fiscal 1997 and $17.0 million in fiscal 1998 in
tooling for its proprietary line of die-cast collectibles. 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. Although the
Company believes that there are alternative manufacturing arrangements available
if needed, there are significant risks inherent in relying on a single
manufacturer for a substantial portion of its die-cast products. See Item 1,
"Business - Special Considerations - Dependence on Third Parties for
Manufacturing." 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.
The Company obtains the die-cast collectibles marketed by MiniChamps and
die-cast collectibles sold under the "Brookfield" trademarks from three other
manufacturers in China. The Company currently does not have a formal, long-term
arrangement with any of these manufacturers.
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Motorsports Consumer Products
The Company currently obtains substantially all of its licensed
motorsports apparel, souvenirs, and other consumer products on a purchase order
basis from approximately 190 third-party manufacturers and suppliers located
primarily in the United States. The Company also screen prints and embroiders a
portion of the licensed motorsports apparel that it sells. The apparel and
souvenir suppliers present product ideas and artistic designs to the Company.
The Company then selects those unique products and artistic designs that it
believes will appeal to motorsports enthusiasts and distinguish the Company's
apparel and souvenir products from those of its competitors. The Company engages
in a bidding process for certain items, such as embroidered hats or t-shirt
blanks, in order to negotiate favorable prices and other terms. The Company also
purchases and resells certain finished items, such as tote bags and coolers,
from companies that have licenses for those items with the drivers and other
licensors.
The Company works closely with the third-party apparel and souvenir
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 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
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 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 significantly enhance the
collectible value and marketability of its products. By aligning itself with top
racing personalities and providing them with 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.
Significant Driver License and Endorsement Agreements; Significant Team Owner
Licenses
During fiscal 1997 and 1998, the Company entered into long-term license
agreements with NASCAR Winston Cup champions Dale Earnhardt, Jeff Gordon, and
Rusty Wallace and NHRA Funny Car champion John Force. These licenses generally
provide the Company with a right of first refusal to market certain die-cast,
apparel, and other products bearing the driver's name and likeness. The license
agreements also generally provide that to the extent that the Company exercises
its right of first refusal, the driver 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 or similar to
products marketed by the Company. Each of the license agreements requires the
Company to pay the licensor royalties 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 each year during the term
of the agreement.
In October 1998, the Company also entered into an amended personal service
and endorsement agreement with Jeff Gordon and an affiliate of Mr. Gordon (the
"Endorsement Agreement"). During the term of the Endorsement Agreement, the
Company has 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 and other products approved by Mr. Gordon and produced by
the Company. The Endorsement Agreement expires on December 31, 2005.
During fiscal 1997, the Company entered into license agreements with
several of the most popular NASCAR race car team owners (the "Team Owner
Licenses"), including Robert Yates Racing, Inc.; Richard
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Childress Racing Enterprises, Inc.; Joe Gibbs Racing, Inc.; and Dale Earnhardt,
Inc. The Team Owner Licenses provide the Company with either the exclusive right
or a right of first refusal to market products bearing the likeness and number
of each owner's Winston Cup cars and other racing vehicles. To the extent that
the Company exercises its right of first refusal, the Team Owner Licenses
provide that the licensor will not permit others to market, through the same
distribution channels used by the Company, any of the licensed products. Certain
of the Team Owner Licenses also provide that the licensors will not directly
market any of the licensed products through such channels. Each of the license
agreements with the team owners requires the Company to pay the licensor
royalties 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.
The following table sets forth certain information with respect to the
license agreements with the drivers and team owners described above:
LICENSOR DRIVER EXPIRATION DATE
-------- ------ ---------------
Dale Earnhardt and Dale Earnhardt November 7, 2011
Dale Earnhardt, Inc.
JG Motorsports, Inc. Jeff Gordon December 31, 2005
Rusty Wallace, Inc. Rusty Wallace December 31, 2004
John Force Racing John Force January 10, 2001
Robert Yates Racing, Inc. Dale Jarrett December 31, 2012
Kenny Irwin, Jr.
Richard Childress Racing Dale Earnhardt December 31, 2007
Enterprises, Inc. Mike Skinner
Redline Sports Marketing, Bobby Labonte December 31, 2002
Inc. (Joe Gibbs race team) Tony Stewart
Dale Earnhardt, Inc. Steve Park December 31, 2000
Dale Earnhardt, Jr.
Ron Hornaday
Additional Product Licenses
In addition to the driver and team owner licenses described above, the
Company currently maintains approximately 300 licenses with various other
drivers, car owners, sponsors, and manufacturers. Other popular drivers under
license with the Company include NASCAR Winston Cup driver Terry Labonte; NHRA
drag racers Kenny Bernstein and Joe Amato; Formula One drivers Jacques
Villeneuve and Mike Hakkinen; and NASCAR Craftsman Truck series drivers Ron
Hornaday, Mike Bliss, and Rick Carelli. The Company also has licenses with
popular car owners and car sponsors as well as with NASCAR, CART, Ford Motor
Company, several divisions of General Motors Corp., and PACCAR, Inc. (the
manufacturer of Kenworth and Peterbilt trucks). These licenses generally provide
for the following:
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- --------------------------------------------------------------------------------
LICENSES WITH LICENSES WITH LICENSES WITH
RACE CAR DRIVERS RACE CAR OWNERS MANUFACTURERS
- --------------------------------------------------------------------------------
TERM : One to three years. One to three years. Two or more
years.
- --------------------------------------------------------------------------------
RIGHTS GRANTED: Use of the driver's name, Use of the car Right to
photograph, likeness, and number and colors. reproduce the
autograph. cars or trucks.
- --------------------------------------------------------------------------------
RENEWAL: Individual agreements Same. Same.
either renew
automatically, may be
renewed or extended upon
written request by the
Company, or expire at the
end of the specified term.
- --------------------------------------------------------------------------------
PAYMENTS TO Either (i) a fixed dollar Same. Same.
LICENSORS: 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.
- --------------------------------------------------------------------------------
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. Although the Company directly or
indirectly pays license fees to the primary sponsors of most of the racing
vehicles, the 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.
Revell License Agreement
In connection with the Revell Acquisition, the Company entered into a
license agreement with Revell (the "Revell License") that gives the Company the
exclusive right to use the "Revell Racing," "Revell Select," and "Revell
Collection" trademarks in connection with sales of NASCAR, NHRA, and certain
other motorsports-related die-cast collectibles in the United States and Canada.
In addition, the Company has a non-exclusive right under the Revell License to
use the Revell trademarks described above in connection with up to $5.0 million
per year of sales of NASCAR, NHRA, and certain other motorsports-related
die-cast products outside the United States and Canada. The term of the Revell
License runs through December 31, 2007, at which time it will automatically
renew for successive one-year terms unless either party elects to terminate by
giving written notice at least 90 days prior to the end of the initial term or
any successive one-year term.
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
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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
is responsible for and pays or reimburses 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 pays 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 funds all capital requirements for this product
line and manufactures, distributes, and markets 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
During fiscal 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 NASCAR-related products and product
packaging as well as on related sales, marketing, and promotional materials.
Under the NASCAR license, the Company is an official licensee of the "NASCAR
50th Anniversary" program and has developed several product lines in connection
with that promotion, including the "NASCAR 50th Anniversary 1998 Ford Taurus"
die-cast collectible.
During fiscal 1998, the Company and NASCAR expanded the scope of the
licensing arrangement to enable the Company to develop and operate the NASCAR
Fan Club for NASCAR. In addition, the Company and NASCAR currently are working
together to develop other promotional programs targeted at many of NASCAR's
corporate sponsors.
The Company pays NASCAR royalty payments based on a percentage of the
wholesale price of licensed products sold by the Company, with minimum royalty
payments in each year through 2000. The licensing arrangement expires on (i)
October 7, 2003 with respect to licensed products that bear both the NASCAR mark
and the name, image, or likeness of a NASCAR driver, team, or track, and (ii) on
December 31, 2000 with respect to all other licensed products. The license
agreement with NASCAR will automatically renew for two additional five-year
terms unless it has been terminated in accordance with its terms.
CART License Agreement
In November 1998, the Company entered into a license agreement with the
licensing affiliate of CART (the "CART License"). Because CART provides the
licensing rights of the sanctioning body as well as all participating drivers,
race teams, and tracks, the CART License provides the Company with (i) exclusive
(subject to certain pre-existing licenses) licensing rights to the CART and
"FedEx Championship Series" logos; (ii) exclusive (subject to certain
pre-existing licenses) licensing rights to five of the top race teams (currently
Newman/Haas Racing, PacWest Racing Group, Target/Chip Ganassi Racing, Team
Green, Inc. and Team Rahal,
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Inc.) and their drivers; and (iii) non-exclusive licensing rights for a minimum
of 75% of the other teams and drivers participating in CART-sanctioned race
events.
The rights granted permit the Company to develop and market a line of
CART-based die-cast collectible vehicles consistent with its existing die-cast
product lines. The CART License also grants the Company the exclusive rights to
market or sublicense a broad range of CART-based toy products, including plastic
and remote control vehicles, action figures, miniature helmets, board games,
plush toys, and puzzles.
The Company will pay the licensor royalty payments 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. The CART License
expires on December 31, 2003. The Company will have the right to renew the CART
License for an additional five-year term if certain minimum sales requirements
are achieved.
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's motorsports die-cast collectibles compete
with die-cast and other motorsports collectibles and, to a certain extent,
die-cast replicas of motorsports vehicles that are sold through mass retail
channels. 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. See Item 1, "Business - Special Considerations."
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 $25.0 million 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
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interruptions of business with its overseas manufacturer of die-cast
collectibles. The Company believes its insurance coverage is adequate.
EMPLOYEES
As of December 15, 1998, the Company had 622 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.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding each of the
executive officers of the Company.
NAME AGE POSITION HELD
---- --- -------------\
Fred W. Wagenhals.......... 57 Chairman of the Board, President,
and Chief Executive Officer
Tod J. Wagenhals........... 34 Executive Vice President,
Secretary, and Director
Christopher S. Besing...... 38 Vice President, Chief Financial
Officer, Treasurer, and Director
David A. Husband........... 29 Vice President - Finance and
Accounting and Chief Accounting
Officer
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.
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.
David A. Husband has served as a Vice President - Finance and
Accounting and as the Chief Accounting Officer of the Company since May
1998. Mr. Husband was employed as an accountant with Arthur Andersen LLP
from July 1992 to May 1998, where he was primarily engaged in auditing
publicly held companies. Mr. Husband 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.
A VARIETY OF FACTORS COULD ADVERSELY AFFECT OPERATING RESULTS
A wide variety of factors could adversely impact the Company's operating
results. These factors include the following:
- the Company's ability to identify trends in the motorsports
collectibles and consumer markets and to create and introduce on a
timely basis products and services that take advantage of those trends
and that compete effectively on the basis of price and consumer tastes
and preferences;
- the Company's ability to identify popular motorsports personalities,
teams, and other licensors and to enter into and maintain mutually
satisfactory licensing arrangements with them;
- the racing success of the key motorsports personalities, teams, and
other licensors 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 or services;
- 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.
Many of the factors described above are beyond the control of the Company.
THE COMPANY DEPENDS ON LICENSE ARRANGEMENTS
The Company markets its products under licensing arrangements with race car
drivers, race car owners, race car sponsors, automobile and truck manufacturers,
NASCAR, CART, and other entities. The licensing arrangements vary in scope and
duration, but generally authorize the Company to sell specified licensed
products for short periods of time. Some license agreements require the Company
to pay minimum royalties or other fixed amounts 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. In addition, the Company's ability to
enforce its rights under licensing agreements with non-U.S. licensors may be
limited by the interpretation and enforcement of those agreements under the laws
of countries other than the United States. The termination, cancellation, or
inability to renew or enforce material licensing arrangements, or the inability
to develop and enter into or enforce new licensing arrangements, would have a
material adverse effect on the Company.
THE COMPANY DEPENDS ON THIRD PARTIES FOR MANUFACTURING
The Company depends upon third parties to manufacture all of its
motorsports collectibles and most of its consumer products. In particular, the
Company relies on one manufacturer, which operates a single facility in China,
to produce most of its die-cast 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, which result in product
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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. Because it owns most of the tools and dies used in the
manufacturing process, the Company believes it would be able to secure other
third-party manufacturers to produce its products. The Company's operations
would be adversely affected, however, by the loss of its relationship with
certain of its current suppliers (including particularly its primary
manufacturer of die-cast products), by the disruption or termination of the
operations of its current suppliers, or by the disruption or termination of sea
or air transportation with its China-based die-cast manufacturers, even for a
relatively short period of time. For example, MiniChamps has experienced
significant delays in completing production of certain 1998 product lines as a
result of the transition of those products to new manufacturers. Those delays
resulted from the time required to move and install the tools, dies, and molds
at the new manufacturers' facilities as well as the additional time required to
train the new manufacturers' personnel and to achieve satisfactory quality
control levels.
Significant damage to the facilities of the Company's third-party
manufacturers (particularly the facilities used by its die-cast product
manufacturers in China) could result in the loss of or damage to a material
portion of the Company's 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.
The Company does not itself purchase the raw materials used to manufacture
most of its products. The Company, however, may be subject to variations in the
prices it pays its third-party manufacturers for products, depending on their
raw materials costs. Although to date the Company has been able to increase the
prices at which it sells its products in order to cover the increased prices
that it pays for such products, the Company may not be able to continue to pass
along such price increases to its customers in the future.
THE COMPANY FACES RISKS ASSOCIATED WITH ACQUISITIONS AND INTEGRATION OF
BUSINESS OPERATIONS
The Company completed a number of acquisitions during fiscal 1997, fiscal
1998, and the first quarter of fiscal 1999. Except for the recent acquisition of
Tech 2000, the Company has consolidated substantially all of the operations of
the U.S.-based acquired entities into the Company's operations in Phoenix,
Arizona and the Charlotte, North Carolina, vicinity. The Company continues to
coordinate and integrate certain of the product development, sales and
marketing, administrative, licensing, and other operations of MiniChamps with
its U.S. operations. The Company cannot provide assurance that it will be able
to
- complete effectively the integration of the operations of the acquired
companies with its operations;
- manage effectively the combined operations of the acquired businesses;
- achieve its operating and growth strategies with respect to these
businesses;
- obtain increased revenue opportunities as a result of the anticipated
synergies created by expanded product offerings and additional
distribution channels;
- reduce the overall selling, general, and administrative expenses
associated with the acquired operations; or
- obtain, renew, or extend licensing agreements necessary to
successfully continue and expand 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.
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<PAGE> 22
The Company conducts due diligence reviews of each acquired business and
receives representations and warranties regarding each acquired business.
Unforeseen liabilities and difficulties, however, can arise in connection with
the operation of acquired businesses. For example, during 1997 the Company was
named as a defendant in a lawsuit based upon actions alleged to have been taken
by several 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." Contractual or other remedies available to the Company may not be
sufficient to compensate it in the event unforeseen liabilities or other
difficulties arise. In addition, the Company's ability to enforce its rights or
remedies in connection with acquisitions of businesses outside the United States
may be limited by the interpretation and enforcement of those agreements under
the laws of countries other than the United States.
The Company strives to take advantage of the opportunities created by the
combination of acquired operations to achieve significant revenue opportunities
and substantial cost savings, including increased product offerings and
decreased operating expenses as a result of the elimination of duplicative
facilities and personnel associated with sales, marketing, administrative,
warehouse, and distribution functions. Significant uncertainties, however,
accompany any business combination. The Company may not be able to achieve
revenue increases; integrate its facilities, functions, and personnel in order
to achieve operating efficiencies; or otherwise realize cost savings as a result
of acquisitions. The inability to achieve revenue increases or cost savings
could have a material adverse effect on the Company's business, financial
condition, and operating results.
As part of its acquisition strategy, the Company frequently engages in
discussions with various motorsports-related and other businesses regarding
their potential acquisition by the Company. In connection with these
discussions, the Company and each potential acquisition candidate exchange
confidential operational and financial information, conduct due diligence
inquiries, and consider the structure, terms, and conditions of the potential
acquisition. In certain cases, the prospective acquisition candidate agrees not
to discuss a potential acquisition with any other party for a specific period of
time and agrees to take other actions designed to enhance the possibility of the
acquisition. Potential acquisition discussions frequently take place over a
longer period of time and often involve difficult business integration and other
issues, including in some cases retention of management personnel and related
matters. As a result of these and other factors, a number of potential
acquisitions that from time to time appear likely to occur may not result in
binding legal agreements and may not be consummated.
THE COMPANY MUST EFFECTIVELY MANAGE ITS GROWTH
Since 1993, the Company's business operations have undergone significant
changes and growth, including the expansion of its collectible product lines,
the acquisition of its motorsports consumer products lines, the acquisition or
development of expanded distribution channels, and significant investments in
tooling and licensing arrangements. 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 order to
manage effectively any significant future growth, the Company must
- integrate successfully the operations of any acquired businesses with
the Company's operations and further enhance its operational,
financial, and management systems;
- expand its facilities and equipment;
- design, develop, produce, and receive products from third-party
manufacturers on a timely basis;
- develop and maintain its various distribution channels in order to
maximize product sales volumes and profit margins;
- effectively manage inventory levels; and
- successfully hire, train, retain, and motivate additional employees.
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<PAGE> 23
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 it 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.
THE COMPANY MUST RESPOND TO 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 a wide variety of factors, including the
following:
- the popularity of certain drivers, teams, and other licensors;
- the popularity of current product concepts or 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'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. Because of the amount
of time and financial resources that may be required to bring new products to
market, the Company may not always be able to accurately forecast required
inventory levels or to respond to changes in customer tastes and demands. The
Company could experience a material adverse effect on its business, financial
condition, and operating results if it is unable to respond quickly to market
changes or a slowdown in demand for its products as a result of ineffective
marketing efforts, manufacturing difficulties, changing cultural and demographic
trends, changing consumer tastes and spending patterns, economic conditions, or
other broad-based factors.
THE COMPANY DEPENDS ON NEW PRODUCTS AND SERVICES
The Company's operating results depend to a significant extent on its
ability to continue to develop and introduce on a timely basis new products and
services that compete effectively in terms of price and that address customer
tastes, preferences, and requirements. The success of new product and service
introductions depends on various factors, including the following:
- proper new product selection;
- successful sales and marketing efforts;
- timely production and delivery of new products; and
- consumer acceptance of new products.
New products or services may not receive or maintain substantial market
acceptance. The failure of the Company to design, develop, and introduce popular
products and services on a timely basis would adversely affect its future
operating results.
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COMPETITION
The motorsports collectible and consumer products markets are extremely
competitive. The Company competes with major domestic and international
companies. Some of these competitors have greater market recognition and
substantially greater financial, technical, marketing, distribution, and other
resources than the Company.
The Company's motorsports die-cast collectibles compete with die-cast and
other motorsports collectibles and, to a certain extent, die-cast replicas of
motorsports vehicles that are sold through mass retail channels. 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 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 current popularity of the race car drivers, teams, and others with
whom it has licenses;
- its ability to obtain favorable licensing arrangements with other
popular licensors;
- the appeal of its products and services; and
- the cost, design, and delivery schedules of its products and services.
The Company cannot provide assurance that it will continue to be able to compete
successfully in the future.
REGULATION OF CORPORATE SPONSORSHIP MAY ADVERSELY AFFECT THE MOTORSPORTS
INDUSTRY
Tobacco and alcohol companies provide a significant amount of advertising
and promotional support of racing events, drivers, and car owners. In 1996, the
U.S. Food and Drug Administration (the "FDA") published final regulations that
would substantially restrict tobacco industry sponsorship of sporting events,
including motorsports. 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. The
FDA regulations, if ultimately approved, and any other legislation, regulations,
or other initiatives 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's business and operating results.
In November 1998, certain major manufacturers of cigarettes and smokeless
tobacco products (the "Participating Manufacturers") and the attorneys general
of 46 states (the "Settling States") agreed to settle certain lawsuits filed by
more than 40 of the Settling States and potential claims that could be brought
by the remaining Settling States (the "Settlement"). The terms of the
Settlement, among other things, limit sponsorship of racing events by the
Participating Manufacturers and, subject to certain limited exceptions,
eliminate outdoor advertising of tobacco products and any marketing or
distribution of tobacco brand name merchandise. The Settlement, however, permits
the Participating Manufacturers to engage in one "Brand Name Sponsorship" of
racing events in any 12-month period. For purposes of the Settlement,
sponsorship of a single national or multi-state series or tour (e.g., the
Winston Cup championship) or sponsorship of one or more events within a single
national or multi-state series or tour constitutes one Brand Name Sponsorship.
In addition, promoting a driver or team in any event or series that is not
sponsored by the Participating Manufacturer constitutes one Brand Name
Sponsorship. In connection with any Brand Name Sponsorship, the Participating
Manufacturers may
- promote an event on apparel or merchandise sold at the site of an
event;
- promote the brand name on a vehicle used by a driver or team in an
event; and
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- use outdoor signs at the site of an event to promote the event,
provided that such promotion begins no more than 90 days prior to the
start of the initial event of the series and ends within 10 days after
the last sponsored event of the series.
The Participating Manufacturers may not refer to any Brand Name Sponsorship
event, driver, or team in its other advertisements of tobacco products.
The terms of the Settlement will limit or prohibit the Company's ability
to sell licensed motorsports collectible and consumer products that include a
tobacco brand name following the expiration of existing license agreements for
those products. The Company currently does not anticipate that the restrictions
on sales of products that bear a tobacco brand name will have a material adverse
effect on its operating results. The limitations on tobacco company sponsorship
imposed by the Settlement and any further limitations imposed on tobacco or
alcohol sponsorship of racing events, however, could ultimately affect the
popularity of motorsports, which could have a material adverse effect on the
Company's business and operating results. Domestic and international tobacco
advertisers heavily subsidize certain NASCAR, NHRA, CART, and Formula One racing
series and teams, and those series and teams may be challenged to find similar
sponsorships. 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.
THE COMPANY EXPERIENCES 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 calendar
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.
THE COMPANY FACES RISKS ASSOCIATED WITH ITS INTERNATIONAL OPERATIONS,
INTERNATIONAL TRADE, EXCHANGE, AND FINANCING
The Company obtains its die-cast collectibles and other replicas under
manufacturing arrangements with third-party manufacturers in China. The Company
believes that the overseas production of its die-cast products enables the
Company to obtain these items on a cost basis that allows the Company to market
them profitably. In addition, as a result of the acquisition of MiniChamps, the
Company now maintains operations in Germany and markets motorsports collectible
products throughout the world. The Company's reliance on its third-party
manufacturers to provide personnel and facilities in China, and the Company's
maintenance of personnel, equipment, and inventories abroad, expose it to
certain economic and political risks.
These risks include the following:
- management of a multi-national organization;
- compliance with local laws and regulatory requirements, as well as
changes in such laws and requirements;
- restrictions on the repatriation of funds;
- employment and severance issues;
- overlap of tax issues;
- the business and financial condition of the third-party manufacturers;
- political and economic conditions abroad; and
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- the possibility of
-- expropriation or nationalization of assets
-- supply disruptions
-- currency controls
-- exchange rate fluctuations
-- 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.
All of the Company's purchases from its foreign manufacturers are
denominated in U.S. dollars or in Hong Kong dollars, which are pegged to the
U.S. dollar. 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 financial crisis that began in
Asia in October 1997 has not resulted in any short-term changes in the prices
that the Company pays for its die-cast products as of the date of this Report,
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 manufacturers could have an adverse impact on the Company's operations.
Purchases of die-cast products from the China-based manufacturers 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.
Substantially all of the Company's sales are denominated in either U.S.
dollars or Deutschmarks. As a result, international customers for the Company's
products bear any risks associated with exchange rate fluctuations subsequent to
the date the order is placed. The Company, however, may experience losses as a
result of exchange rate fluctuations between the dollar and the Deutschmark. In
the future, the Company may seek to limit such exposure by entering into forward
foreign exchange contracts or engaging in similar hedging strategies. Any
currency exchange strategy may be unsuccessful in avoiding exchange-related
losses, and the failure to manage currency risks effectively may have a material
adverse effect on the Company's business, financial condition, and operating
results. In addition, revenue of the Company earned in foreign countries may be
subject to taxation by more than one jurisdiction, which would adversely affect
the Company's earnings.
Beginning in January 1999, a new currency called the "Euro" will be
introduced in certain Economic and Monetary Union ("EMU") countries. All EMU
countries are expected to be operating with the Euro as their single currency by
2002. Although a significant amount of uncertainty exists as to the effect the
Euro currency will have on the marketplace generally, the Company currently does
not believe that introduction of the Euro will create a material adverse effect
on the Company's business or operating results. The Company intends to monitor
the impact, if any, that introduction of the Euro currency will have on its
internal systems and the sale of its products and to take appropriate actions to
address those issues if required. The Company cannot predict the impact, if any,
that introduction of the Euro will have on its business, financial condition, or
results of operations.
Under the terms of its license agreement with Hasbro, Hasbro's 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 currently
does not 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 currently does not 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.
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THE COMPANY MAY REQUIRE ADDITIONAL CAPITAL TO SUPPORT GROWTH
The Company's business operations have grown considerably in recent
years as a result of various factors, including the following:
- 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, debt
and equity financings, and the issuance of Common Stock in 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 cash resources, cash
generated by operations, and funds available to the Company through its existing
credit facility. The Company cannot predict the timing and amount of any such
capital requirements at this time. Although the Company has been able to obtain
adequate financing on acceptable terms in the past when necessary, such
financing may not 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, which may adversely affect the
Company's operating results. Debt financing increases expenses and must be
repaid regardless of operating results. Equity financing could result in
additional dilution to existing shareholders.
THE COMPANY DEPENDS ON MANAGEMENT AND OTHER 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.
THE COMPANY HAS SIGNIFICANT INDEBTEDNESS
As of September 30, 1998, the Company had outstanding approximately
$135.6 million of indebtedness. This indebtedness includes $20.0 million
principal amount of senior notes that mature on January 2, 1999, $100.0 million
principal amount of 4 3/4% Convertible Subordinated Notes due 2005 (the
"Notes"), and approximately $15.6 million of other secured and unsecured
indebtedness. The Company intends to use available cash resources to repay the
$20.0 million principal amount of senior notes at maturity. The Company in the
future may face risks related to servicing its debt obligations as interest or
principal payments are due. If the Company is unable to service its debt, it
will be required to restructure or refinance its debt or pursue alternative
sources of financing, which may include selling additional equity securities.
The Company may not be able to successfully implement alternative strategies on
satisfactory terms in the event that it becomes necessary to do so.
VOLATILITY OF MARKET PRICE OF COMMON STOCK AND NOTES
The market price of the Company's Common Stock has increased
dramatically during the last three years. See Item 5, "Market for the
Registrant's Common Equity and Related Stockholder Matters." The period was
marked by generally rising stock prices, extremely favorable industry
conditions, and substantially improved operating results by the Company. These
favorable conditions may not continue. The trading price of the Company's Common
Stock in the future could be subject to wide fluctuations in response to a
number of factors, including the following:
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- 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 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.
The trading price of the Notes will depend on the factors described
above as well as on other factors, such as prevailing interest rates,
perceptions of the Company's creditworthiness, the market price of the Company's
Common Stock into which the Notes are convertible, and the market for similar
securities. As a result, the market price of the Notes may trade at a discount
from their principal amount based on such factors.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES
The Notes are general unsecured obligations, subordinated in right of
payment to all existing and future senior indebtedness of the Company. As a
result of such subordination, in the event of any insolvency, liquidation or
reorganization of the Company or upon acceleration of the Notes due to an event
of default (as defined in the Indenture governing the Notes), the assets of the
Company will be available to pay obligations on the Notes only after the
administrative expenses of any bankruptcy proceeding and all senior
indebtedness, if any, has been paid in full. As a result, there may not be
sufficient assets remaining to pay amounts due on the Notes and any other
subordinated indebtedness of the Company then outstanding. The Indenture does
not prohibit or limit the incurrence of additional indebtedness, including
senior indebtedness, by the Company. The incurrence of such indebtedness could
adversely affect the Company's ability to pay its obligations under the Notes.
In addition, the Notes are not guaranteed by any subsidiary of the Company. As a
result, the Notes effectively rank junior to all creditors of the subsidiaries
of the Company.
Upon the occurrence of certain adverse events, each holder of Notes may
require the Company to repurchase all or a portion of such holder's Notes. If
such an event were to occur, the Company may not have sufficient financial
resources or may not be able to arrange financing to pay the repurchase price
for all Notes tendered by holders thereof. The Company's ability to repurchase
the Notes in such event may be limited by law, the Indenture, and the terms of
other agreements relating to borrowings that constitute senior indebtedness, as
such indebtedness or agreements may be entered into, replaced, supplemented, or
amended from time to time. The Company may be required to refinance senior
indebtedness in order to make any such repurchase payments. If the Company is
prohibited from repurchasing the Notes, such failure would constitute an event
of default under the Indenture, which may constitute a further default under
certain of the Company's existing agreements relating to borrowings and the
terms of other indebtedness that the Company may enter into from time to time.
In such circumstances, the subordination provisions in the Indenture would
prohibit payments to the holders of the Notes. Furthermore, the Company may not
have the financial ability to repurchase the Notes in the event that maturity of
senior indebtedness is accelerated as a result of a default under the applicable
loan or similar agreement. The repurchase of Notes under the circumstances
described above, or the inability of the Company to repurchase Notes as
required, could have a material adverse affect on the Company's financial
condition and operating results.
LITIGATION
In March 1998, the Company settled one lawsuit and reached an agreement
to settle another lawsuit. The Company took a one-time charge of approximately
$950,000 in the second quarter of fiscal 1998 with respect
26
<PAGE> 29
to one of these settlements. The final terms of the pending settlement are
subject to the execution of a definitive settlement agreement by the respective
parties.
During 1997, the Company was 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. See Item 3,
"Legal Proceedings." The Company is actively defending this lawsuit. A decision
adverse to the Company in this lawsuit 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 this lawsuit.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries to represent years in the date code
field. Computer systems and products that do not accept four-digit year entries
will need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years.
During 1997, the Company commenced a program to install new computer
software programs that are intended to integrate the Company's management
information systems throughout its organizational structure, as well as to
comply with "Year 2000" requirements. The Company has experienced delays in
completing this program and currently anticipates that these software systems
will be operational in the second quarter of calendar 1999. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance." The Company believes that its new software
systems will comply with the Year 2000 requirements, and the Company currently
does not anticipate that it will experience any material disruption to its
operations as a result of the failure of any of its systems to function properly
beyond December 31, 1999. The Company cannot provide assurance, however, that it
will successfully complete installation and testing of the new systems prior to
January 1, 2000. In addition, computer systems operated by third parties,
including customers, vendors, credit card transaction processors, and financial
institutions, with which the Company's systems interface may not continue to
properly interface with the Company's systems and may not otherwise be compliant
on a timely basis with Year 2000 requirements. Any failure of the Company's
computer system or the systems of third parties to timely achieve Year 2000
compliance could have a material adverse effect on the Company's business,
financial condition, and operating results.
RIGHTS TO ACQUIRE SHARES; POTENTIAL ISSUANCE OF ADDITIONAL SHARES
As of December 15, 1998, options to acquire a total of approximately
899,340 shares were outstanding under the Company's 1993 Stock Option Plan and
1998 Non-Qualified Stock Option Plan. Holders of such options 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 option holders 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 16,657,632 shares of Common Stock
outstanding as of December 15, 1998, 14,119,663 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
applicable securities laws. The 2,537,969 remaining shares of Common Stock
outstanding are "restricted securities," as that term is defined in Rule 144
under the securities laws, and may be sold only in compliance with Rule 144,
pursuant to registration under the Securities Act, or pursuant to an exemption
therefrom. The Company has registered an aggregate of approximately 455,800
shares of such "restricted securities" for resale pursuant to an effective
registration statements. Affiliates also are subject to certain of the resale
limitations of Rule 144 as promulgated under the securities laws. Generally,
under Rule 144, each person
27
<PAGE> 30
who beneficially owns restricted securities with respect to which at least one
year has elapsed since the later of the date the shares were acquired from the
Company or an affiliate of the Company may, every three months, sell in ordinary
brokerage transactions or to market makers an amount of shares equal to the
greater of 1% of the Company's then-outstanding Common Stock or the average
weekly trading volume for the four weeks prior to the proposed sale of such
shares. An aggregate of approximately 2,101,056 shares held by certain officers
and directors currently are available for sale under Rule 144.
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 laws. 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, "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 currently is seeking to sublease its previous facility in Tempe,
Arizona, 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 newly constructed, approximately 121,000
square foot facility in the Charlotte, North Carolina, vicinity for its
operations in that area. The Company utilizes 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
expires in June 2018, with four five-year renewal options.
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 2001. 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.
The Company owns a newly constructed, approximately 55,000 square foot
facility in Aachen, Germany, for its MiniChamps operations. The Company utilizes
approximately 39,000 square feet of this facility for its European warehouse and
distribution operations, and currently is completing construction of office
space in the remaining 16,000 square feet of the facility. The Company currently
is leasing 5,000 square feet of office space in Aachen, Germany, from the spouse
of Paul G. Lang, a director of the Company.
28
<PAGE> 31
ITEM 3. LEGAL PROCEEDINGS
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 antitrust laws. The alleged class of plaintiffs consists of
all purchasers of souvenirs or merchandise from licensed vendors at any NASCAR
Winston Cup race or supporting event during the period commencing January 1,
1991. 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 the motorsports merchandise
antitrust litigation. 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 will be responsible for costs, fees, expenses, damages, payments,
credits, rebates, and penalties, if any, arising out of this matter with respect
to RYP. The seller of RYP has agreed to be responsible for amounts, if any, in
excess 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 court granted the
motion on March 20, 1998. On March 2, 1998, the plaintiffs filed, pursuant to an
order of the court, a second consolidated amended complaint intended to set
forth certain of the allegations with greater specificity. The Company intends
to vigorously defend the claims asserted in this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
29
<PAGE> 32
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.
<TABLE>
<CAPTION>
COMMON STOCK
------------
HIGH LOW
---- ---
1995:
<S> <C> <C>
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............................................ 38.00 23.00
1998:
First Quarter............................................. $38.88 $30.75
Second Quarter............................................ 37.13 25.91
Third Quarter............................................. 37.25 23.13
Fourth Quarter (through December 15, 1998)................ 36.50 18.63
</TABLE>
As of December 15, 1998, there were approximately 310 holders of record
and approximately 9,400 beneficial owners of the Company's Common Stock. On
December 15, 1998, the closing sales price of the Company's Common Stock on the
Nasdaq National Market was $35.19 per share.
On February 3, 1998, the Company issued 9,486 shares of Common Stock to
Dale Earnhardt and Teresa Earnhardt and 414 shares of Common Stock to Donald G.
Hawk, Jr. in connection with a race car sponsorship. The Company issued the
shares without registration under the Securities Act of 1933 in reliance on
Section 4(2) of the Securities Act.
30
<PAGE> 33
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for
the five years ended September 30, 1998 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,
-------------------------------
1994 1995 1996 1997(1) 1998(2)
---- ---- ---- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Collectibles........................ $ 12,802 $ 23,443 $ 40,904 $ 63,846 $ 129,348
Apparel and souvenirs............... 143 1,190 1,961 60,430 106,712
Other(3)............................ 3,924 1,498 1,351 6,104 15,817
------------ ---------- ---------- --------- ----------
Net sales......................... 16,869 26,131 44,216 130,380 251,877
Cost of sales.......................... 10,488 15,882 25,296 80,995 157,079
------------ ---------- ---------- --------- ----------
Gross profit........................... 6,381 10,249 18,920 49,385 94,798
Selling, general and administrative
expenses............................ 5,808 6,115 9,262 24,564 45,344
Settlement costs (4)................... -- -- -- 5,400 950
Amortization of goodwill and other
intangibles......................... -- 4 4 1,286 4,392
------------ ---------- ---------- --------- ----------
5,808 6,119 9,266 31,250 50,686
------------ ---------- ---------- --------- ----------
Income from operations................. 573 4,130 9,654 18,135 44,112
Interest income (expense) and other,
net................................. (164) 24 216 (1,225) (2,945)
------------ ---------- ---------- --------- ----------
Income before provision for
(benefit from) income taxes......... 409 4,154 9,870 16,910 41,167
Provision for (benefit from) income
taxes............................... (224) 1,384 3,917 6,764 16,391
Minority interest in earnings.......... -- -- -- -- 189
------------ ---------- ---------- --------- ----------
Net income............................. $ 633 $ 2,770 $ 5,953 $ 10,146 $ 24,587
============ ========== ========== ========= ==========
Net income per common
share, assuming dilution(5)......... $ 0.08 $ 0.26 $ 0.46 $ 0.69 $ 1.48
============ ========== ========== ========= ==========
Weighted average number of
common shares, assuming
dilution(5)......................... 9,566 10,899 13,028 14,624 16,647
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(6).. 2.2x 14.8x 44.7x 7.8x 7.3x
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital........................ $ 5,699 $ 11,922 $ 18,094 $ 56,975 $ 86,939
Total assets........................... 11,656 23,351 31,649 141,325 305,934
Total debt............................. 266 288 365 22,586 135,596
Shareholders' equity................... 6,909 18,890 26,996 103,168 136,432
</TABLE>
- --------------------
(1) 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."
31
<PAGE> 34
(2) Fiscal 1998 results include the results of operations of the Rusty
Wallace Acquisition, the Revell Acquisition, and the acquisitions of
Brookfield, Chase, MiniChamps, and Performance Plus, beginning as of
their respective dates of acquisition. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
(3) Includes (a) the revenue of the Company's M-Car(TM) operations through
the discontinuation of those operations in September 1994, (b) the
revenue of the Company's mini vehicle operations through the
discontinuation of those operations in March 1995, and (c) royalty and
license fees beginning in fiscal 1997. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
(4) Represents (a) a one-time charge of approximately $5.4 million for
settlement costs and related legal and other expenses in fiscal 1997,
and (b) a one-time charge of approximately $950,000 for settlement
costs and related legal and other expenses in fiscal 1998.
(5) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996, and restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental
payments on operating leases deemed representative of the interest
factor.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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
that 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. Third parties manufacture all of the Company's motorsports
collectibles and most of the Company's apparel and souvenirs, 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 1993 and 1994, the Company also
conducted the business of staging M-Car(TM) Grand Prix Races for charitable and
other organizations, in which participating sponsors purchased specialized
gas-powered, one-third scale racing vehicles from the Company. In September
1994, the Company sold the assets and liabilities related to its M-Car(TM)
operations and discontinued its M-Car(TM) Grand Prix Race operations. During
fiscal 1993 and 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 manufactures 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 efforts had
a meaningful impact on the Company's results of operations beginning in the
second half of fiscal 1997.
32
<PAGE> 35
In December 1997, the Company completed the Rusty Wallace Acquisition,
in which it acquired assets related to sales of motorsports merchandise licensed
by NASCAR driver Rusty Wallace. The Company and an affiliate of Rusty Wallace
also entered into a seven-year license agreement. See "Business - Licenses." In
December 1997, the Company also completed the Revell Acquisition, in which it
acquired the assets related to certain "Revell" trademarked die-cast products.
The Company and Revell also entered into a 10-year license agreement and a
long-term strategic alliance involving extensive marketing and distribution
arrangements. See "Business Licenses."
In January 1998, the Company acquired the assets and assumed certain
liabilities of Brookfield, which distributes various motorsports collectibles
and other die-cast replicas. In May 1998, the Company acquired a majority
interest in Chase, a motorsports apparel and licensing company that creates and
markets apparel, toiletries, and clothing accessories that bear "Chase" branded
marks. In August 1998, the Company acquired an 80% interest in MiniChamps, which
markets and distributes die-cast replicas of Formula One and GT race cars as
well as factory production cars, driver figurines, and other motorsports
collectibles. In September 1998, the Company acquired a majority interest in
Performance Plus, which develops and markets driver-endorsed nutritional
products, including vitamins, energy bars, and energy drinks.
In addition to the cost savings described above, the Company believes
that the acquisitions described above 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 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 and 1998 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 either die-cast or other
collectibles or licensed motorsports apparel and souvenirs. Promotional revenue
consists of sales of products developed for corporate promotion programs.
Beginning in fiscal 1997, the Company's revenue includes royalty income as a
result of the license agreement with Hasbro.
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 fiscal 1997
acquisitions 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. 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. The
Company recorded goodwill and other intangibles of approximately $50.0 million
in connection with the fiscal 1997 acquisitions and recorded an additional $61.8
million of goodwill and other intangibles from the acquisitions completed in
fiscal 1998. The Company is amortizing the goodwill and other intangibles over
three to 25 years.
33
<PAGE> 36
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,
------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales
Collectibles......................... 75.9% 89.7% 92.5% 49.0% 51.4%
Apparel and souvenirs................ 0.8 4.6 4.4 46.3 42.4
Other................................ 23.3 5.7 3.1 4.7 6.2
------ ------ ------ ------ ------
Net sales.......................... 100.0 100.0 100.0 100.0 100.0
Cost of sales........................... 62.2 60.8 57.2 62.1 62.4
------ ------ ------ ------ ------
Gross profit............................ 37.8 39.2 42.8 37.9 37.6
Selling, general and administrative
expenses............................. 34.4 23.4 21.0 18.8 18.0
Settlement costs(1)..................... -- -- -- 4.2 0.4
Amortization of goodwill and other
intangibles.......................... -- -- -- 1.0 1.7
------ ------ ------ ------ ------
Income from operations.................. 3.4 15.8 21.8 13.9 17.5
Interest income (expense) and other,
net.................................. (1.0) 0.1 0.5 (0.9) (1.2)
------ ------ ------ ------ ------
Income before provision for
(benefit from) income taxes.......... 2.4 15.9 22.3 13.0 16.3
Provision for (benefit from) income
taxes................................ (1.4) 5.3 8.8 5.2 6.5
Minority interest in earnings........... -- -- -- -- 0.1
------ ------ ------ ------ ------
Net income.............................. 3.8% 10.6% 13.5% 7.8% 9.7%
====== ====== ====== ====== ======
</TABLE>
- ------------------
(1) Fiscal 1997 includes a one-time charge of approximately $5.4 million for
costs and legal and other expenses related to the settlement of a lawsuit.
Excluding the one-time charge, fiscal 1997 income from operations, income
before provision for income taxes, and net income would have been
approximately 18.1%, 17.1%, and 10.3% of net sales, respectively. Fiscal
1998 includes a one-time charge of approximately $950,000 for costs and
other expenses related to the settlement of a lawsuit. Excluding the
one-time charge, fiscal 1998 income from operations, income before
provision for income taxes, and net income would have been 17.9%, 16.7%,
and 10.0% of net sales, respectively.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1997
Net sales increased 93.2% to $251.9 million for the year ended
September 30, 1998 from $130.4 million for the year ended September 30, 1997.
The Company attributes the improvement in sales during fiscal 1998 primarily to
(i) revenue from the Company's fiscal 1997 and 1998 acquisitions, (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
membership in the Company's Collectors' Club to approximately 148,000 members at
September 30, 1998 from approximately 100,000 members at September 30, 1997.
Gross profit increased to $94.8 million in fiscal 1998 from $49.4
million in fiscal 1997, representing 37.6% and 37.9% of net sales, respectively.
The decrease in gross profit as a percentage of net sales resulted primarily
from increased sales of die-cast collectibles through wholesale channels, which
typically provide lower margins than sales of such products through the
Collectors' Club.
34
<PAGE> 37
Selling, general and administrative expenses increased to $45.3 million
in fiscal 1998 from $24.6 million in fiscal 1997, representing 18.0% and 18.8%
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 of the businesses acquired in fiscal 1997 and 1998.
The integration and consolidation included the relocation of Motorsport
Traditions into Sports Image's facility, the integration of management
information systems, and a reduction in excess labor.
Amortization of goodwill and other intangibles increased to $4.4
million for fiscal 1998 from $1.3 million for fiscal 1997. 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 intangibles of $50.0 million in connection with the fiscal
1997 acquisitions, and recorded an additional $61.8 million of goodwill and
other intangibles from the acquisitions completed in fiscal 1998. The Company is
amortizing the goodwill and other intangibles over periods of three to 25 years.
Interest income (expense) and other, net, changed to approximately
$(2.9 million) for fiscal 1998 from approximately $(1.2 million) for fiscal
1997. The change was primarily attributable to an increase in interest expense
of approximately $3.5 million related to the issuance of $100.0 million of Notes
in March 1998, offset by an increase in interest income of approximately $1.8
million related to proceeds from the Company's Common Stock offering in June
1997 and the sale of the Notes in March 1998.
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 at September 30, 1997 from
approximately 72,000 members at September 30, 1996.
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 primarily
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 18.8% 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 Sports Image's facility, the integration of
management information systems, and a reduction in personnel.
Settlement costs of $5.4 million for the year ended September 30, 1997
resulted from a one-time charge for the settlement of a lawsuit and related
legal charges. This settlement represented 4.1% of net sales in fiscal 1997.
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 $50.0 million in connection with the fiscal 1997
acquisitions. The Company is amortizing the goodwill and other intangible assets
over a period of three to 25 years.
Interest income (expense) and other, net, changed to $(1.2 million) in
fiscal 1997 from approximately $216,000 in fiscal 1996. The change was primarily
attributable to an increase in interest expense of
35
<PAGE> 38
approximately $2.0 million related to debt incurred in connection with the
acquisitions of Sports Image and Motorsport Traditions.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth the unaudited pro forma income statement
data of the Company for the fiscal years ended September 30, 1997 and 1998,
giving effect to the acquisitions of Sports Image, Motorsport Traditions, RYP,
Image Works, Simpson, the Rusty Wallace Acquisition, the Revell Acquisition, and
the acquisitions of Brookstone, Chase, MiniChamps, and Performance Plus as if
they had occurred on October 1, 1996, 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales....................................................... $213,954 $283,702
Net income(1)................................................... 13,356 26,728
Net income per common share, assuming dilution(1)............... $ 0.90 $ 1.60
</TABLE>
- --------------------
(1) Pro forma amounts for fiscal 1997 exclude the one-time charge of
approximately $5.4 million, or $0.22 per share, for legal settlement
costs and related charges. Pro forma amounts for fiscal 1998 exclude
the one-time charge of approximately $950,000, or $0.03 per share, for
legal settlement costs and related charges.
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 salary 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 1998, reflect the amortization of goodwill and
other intangibles arising from the fiscal 1997 and fiscal 1998 acquisitions and
include additional interest expense associated with the financing of the
acquisitions of Sports Image, Motorsport Traditions, Chase, and MiniChamps.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the fiscal years ended September
30, 1997 and 1998. 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 thereto included elsewhere in this Report. The operating results for
any quarter are not necessarily indicative of the results for any future period.
36
<PAGE> 39
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1997
-----------
1ST QUARTER 2ND QUARTER 3RD QUARTER(1) 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 dilution................... $ 0.12 $ 0.17 $ 0.08 $ 0.31
Weighted average number of common
shares, assuming dilution........... 13,455 14,129 14,430 16,450
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998
-----------
1ST QUARTER 2ND QUARTER(2) 3RD QUARTER 4TH QUARTER
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $ 42,918 $ 53,155 $ 76,793 $ 79,011
Gross profit........................... 15,056 20,061 29,528 30,052
Income from operations................. 6,375 7,467 15,032 15,237
Net income............................. $ 3,656 $ 4,036 $ 8,548 $ 8,347
Net income per common share,
assuming dilution................... $ 0.22 $ 0.24 $ 0.50 $ 0.49
Weighted average number of common
shares, assuming dilution........... 16,568 16,666 18,766 18,781
</TABLE>
- --------------------
(1) Includes a one-time charge of approximately $5.4 million for costs and
legal and other expenses related to the settlement of a lawsuit.
Excluding the one-time charge, income from operations, net income, and
net income per common share, assuming dilution, for the third quarter
of fiscal 1997 would have been approximately $7,749, $4,338, and $0.30,
respectively.
(2) Includes a one-time charge of approximately $950,000 for costs and
legal and other expenses related to the settlement of a lawsuit.
Excluding the one-time charge, income from operations, net income, and
net income per common share, assuming dilution, for the second quarter
of fiscal 1998 would have been approximately $8,417, $4,606, and $0.28,
respectively.
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 and 1998 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 $86.9 million at
September 30, 1998 from $57.0 million at September 30, 1997. The increase of
$29.9 million is primarily attributable to the private placement of Notes in
March 1998, as described below, and results from operations.
37
<PAGE> 40
Capital expenditures for the year ended September 30, 1998 totaled
approximately $21.7 million, of which approximately $12.9 million was utilized
for the Company's continued investment in tooling.
On October 3, 1997 the Company issued 34,940 shares of Common Stock to
Richard Childress Racing Enterprises, Inc. ("RCR") as a portion of the license
fee pursuant to a license agreement entered into between the Company and RCR on
that date. On February 3, 1998, the Company issued 9,486 shares of Common Stock
to Dale Earnhardt and Teresa Earnhardt and 414 shares of Common Stock to Donald
G. Hawk, Jr. in connection with a race car sponsorship.
During the year ended September 30, 1998, the Company issued 425,990
shares of Common Stock upon the exercise of stock options, resulting in total
proceeds to the Company of approximately $1.6 million.
On January 2, 1997, the Company entered into a credit facility with
First Union National Bank of North Carolina ("First Union"). On August 5, 1998,
the Company entered into an amended and restated credit agreement with First
Union (the "Credit Facility"). The Credit Facility consists of a revolving line
of credit for up to $20.0 million, which includes up to $5.0 million for standby
letters of credit (the "Line of Credit") and a $30.0 million trade letter of
credit/bankers' acceptance facility (the "Letter of Credit/BA Facility"). The
Line of Credit bears interest, at the Company's option, at a rate equal to (i)
the Alternate Base Rate (as described below) plus an applicable margin as
defined in the credit agreement or (ii) LIBOR plus an applicable margin as
defined in the credit agreement. The "Alternate Base Rate" under the Line of
Credit is the greater of (a) the bank's publicly announced prime rate or (b) the
Federal Funds Effective Rate (as defined) plus 0.5%. The Line of Credit matures
on April 1, 2001 with respect to the revolving line of credit portion of the
Line of Credit, and on April 1, 1999 with respect to the standby letter of
credit portion of the Line of Credit and the Letter of Credit/BA Facility,
subject to extensions by First Union. The Credit Facility is guaranteed by the
Company's subsidiaries. The Line of Credit also contains certain provisions that
require the Company to comply with certain financial covenants and that limits
the Company's ability to incur additional indebtedness or make certain
investments, to sell assets, to engage in certain mergers or consolidations, or
to pay dividends. The Company did not have any outstanding borrowings under the
Line of Credit as of September 30, 1998. The Company had outstanding purchase
commitments of approximately $3.7 million under the Letter of Credit/BA Facility
as of September 30, 1998.
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 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 the
Company's subsidiaries. The Company intends to use available cash resources to
repay the Senior Notes at maturity.
On March 24, 1998, the Company sold $100.0 million of 4 3/4%
Convertible Subordinated Notes due 2005. The Notes are convertible, at the
option of the holders, into shares of Common Stock at the initial conversion
price of $48.20 per share, subject to adjustments in certain events. Interest on
the Notes is payable semi-annually on April 1 and October 1 of each year,
beginning October 1, 1998. The Notes mature on April 1, 2005. The Notes are
general unsecured obligations of the Company, subordinated in right of payment
to all existing and future senior indebtedness of the Company, as defined in the
Notes. The Indenture governing the Notes does not limit or prohibit the
incurrence of additional indebtedness, including senior indebtedness, by the
Company or its subsidiaries. The Company, at its option, may redeem the Notes in
whole or in part at any time on or after April 1, 2001, at redemption prices set
forth in the Indenture governing the Notes. Upon the occurrence of a "change in
control" or a "termination of trading," as defined in the Indenture, the holders
of the Notes will have the right to require the Company to repurchase all or any
part of such holders' Notes at 100% of their principal amount, plus accrued and
unpaid interest. The net proceeds to the Company from the offering were
approximately $96.5 million, after deducting offering expenses of approximately
$500,000 and the Initial Purchasers' discount of 3.0%.
38
<PAGE> 41
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 for approximately $6.0 million in cash.
The Company paid $2.5 million at closing and paid the remainder in four
installments during fiscal 1998. In connection with the acquisition, the Company
entered into a seven-year license agreement for the name and likeness of Mr.
Wallace. The terms of this acquisition were determined by arms-length
negotiations between representatives of Mr. Wallace and representatives of the
Company.
On December 19, 1997, the Company completed the Revell Acquisition,
pursuant to which the Company acquired certain assets and assumed certain
liabilities related to Revell's motorsports die-cast collectible product lines.
The preliminary price, which is subject to certain adjustments, consists of an
initial cash payment of $14.8 million and $1.0 million per year for 10 years
beginning on January 1, 1998, provided that certain conditions are met. Revell
had sales of die-cast collectibles of approximately $20.0 million during 1997.
The Company markets the Revell-trademarked products through its existing
distribution channels, but with different features and at different price points
from its current lines of die-cast collectibles. The Company and Revell also
entered into a 10-year license agreement under which the Company has the right
to utilize certain Revell trademarks in connection with sales of its die-cast
products. See Item 1, "Business - Licenses." In addition, the Company and Revell
have formed a long-term strategic alliance under which (i) the Company will
assist Revell to obtain licenses with top race car drivers for Revell's line of
plastic model kits; (ii) Revell has appointed the Company as the exclusive
distributor for trackside sales of Revell plastic model kits and as a
non-exclusive distributor for retail sales of Revell plastic model kits through
the Company's wholesale distribution network; and (iii) the Company will have
certain Revell-trademarked die-cast collectibles manufactured to enable Revell
to fulfill commitments for 1998 mass market sales, and the Company will
manufacture other licensed motorsport die-cast products for Revell's sales as
promotional and premium products. The terms of this acquisition were determined
by arms-length negotiations between representatives of Revell and
representatives of the Company.
On January 8, 1998, the Company acquired certain assets and assumed
certain liabilities of Brookfield. The purchase price consisted of (i)
approximately $800,000 in cash and (ii) up to 27,397 shares of Common Stock,
subject to certain adjustments, to be issued upon completion of certain purchase
price adjustments by the Company and the seller. Brookfield distributes various
motorsport die-cast collectibles as well as various other die-cast replicas. The
terms of this acquisition were determined by arms-length negotiations between
representatives of the seller and representatives of the Company.
On April 20, 1998, the Company made a $1.0 million equity investment in
LBE Technologies, Inc. ("LBET") and entered into a five-year strategic alliance
with LBET. The strategic alliance provides the Company with exclusive
merchandising rights at each of LBET's "NASCAR Silicon Motor Speedway" centers,
which are located in large shopping malls and feature real-time interactive
racing simulators that duplicate on-track racing sensations for participants.
On May 22, 1998 the Company acquired a controlling interest in Chase, a
motorsports-related apparel branding and licensing company. Pursuant to the
terms of the acquisition and operating agreements, the Company acquired an 80%
interest in Chase for an aggregate of $10.0 million in cash. The terms of the
acquisition agreement also include a three-year earn-out payment of up to $4.0
million if certain financial criteria are met. The terms of this acquisition
were determined by arms-length negotiations between representatives of the
sellers and representatives of the Company.
On August 28, 1998, the Company acquired an 80% interest in MiniChamps
for cash of approximately $21.5 million. MiniChamps markets and distributes
die-cast replicas of Formula One and GT race cars as well as factory production
cars, driver figurines, and other motorsports collectibles. MiniChamps generated
revenue of approximately $26.0 million in the 12-month period ended December 31,
1997. The terms of this acquisition were determined by arms-length negotiations
between representatives of the sellers and representatives of the Company.
In September 1998, the Company acquired 58% of the membership interests
of Performance Plus, which develops and markets driver-endorsed nutritional
products, including vitamins, energy bars, and energy drinks. Although the
Company did not make any initial cash payment for its membership interests, it
will provide
39
<PAGE> 42
working capital up to $4.0 million under a line of credit bearing interest at
8%. The Company also will provide management support services to Performance
Plus under an operating agreement for which it will receive a fee based on a
percentage of Performance Plus' revenue.
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 may be required to obtain additional capital to fund its
planned growth during the next 12 months and beyond. Potential sources of any
such capital may include the proceeds from the exercise of outstanding options,
bank financing, strategic alliances, and additional offerings of the Company's
equity or debt securities. There can be no assurance that such capital will be
available from these or other potential sources, and the lack of such capital
could have a material adverse effect on the Company's business.
YEAR 2000 COMPLIANCE
During 1997, the Company commenced a program to install new computer
software programs that are intended to integrate the Company's management
information systems throughout its organizational structure, as well as to
comply with Year 2000 requirements. The Company has experienced delays in
completing this program. As of the filing date of this Report, the installation
program is approximately 75% complete and the Company currently anticipates that
the new software systems will be operational in the second quarter of calendar
1999. The Company believes that its new software systems will comply with the
Year 2000 requirements, and the Company currently does not anticipate that it
will experience any material disruption to its operations as a result of the
failure of any of its systems to function properly beyond December 31, 1999.
Computer systems operated by third parties, including customers,
vendors, credit card transaction processors, and financial institutions, with
which the Company's systems interface may not continue to properly interface
with the Company's systems and may not otherwise be compliant on a timely basis
with Year 2000 requirements. The Company's third-party manufacturers of
die-cast, apparel, and other products do not rely heavily on computer-operated
systems in their manufacturing processes. Accordingly, the Company does not
believe that Year 2000 issues pose a significant risk with respect to the
manufacture of its products. Because the Company's business typically does not
generate a large volume of purchase orders for its products, the Company
believes it could rely on non-automated ordering systems if its vendors'
computer systems fail as a result of Year 2000 issues. Any failure of the
Company's computer system or the systems of third parties to timely achieve Year
2000 compliance, however, could have a material adverse effect on the Company's
business, financial condition, and operating results.
As of the filing date of this Report, the Company has not developed a
contingency plan to address Year 2000 issues. If by April 1, 1999, the Company
has not completed the installation and start-up of its new computer software
systems or it determines that any third party on which it relies will not be
able to adequately address Year 2000 issues, the Company intends to immediately
begin development of an appropriate contingency program.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
40
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto, and
report thereon, commencing at page F-1 of this Report, which financial
statements, notes, and report 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders.
41
<PAGE> 44
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)
4.2 Indenture dated as of March 24, 1998, between Action Performance
Companies, Inc. and First Union National Bank, as Trustee, including
forms of Notes(4)
10.4.2 1993 Stock Option Plan, as amended and restated through January 16,
1997(5)
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(6)
10.27 Manufacturing Agreement between the Company and Early Light
International (Holdings) Ltd. dated December 5, 1994(7)
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(8)
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.(8)
10.35 Security Agreement dated November 7, 1996, between Sports Image, Inc.
and SII Acquisition, Inc.(8)
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(8)
10.37 License Agreement dated as of November 7, 1996, among SII Acquisition,
Inc., Dale Earnhardt, and Action Performance Companies, Inc.(8)
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.(9)
10.40 Exchange Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(9)
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.(9)
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,
42
<PAGE> 45
and First Alexander Hamilton Life Insurance Company, together with form
of Note, form of Subsidiary Guaranty, and form of Subsidiary Joinder(9)
10.42A First Amendment dated as of March 18, 1998 to 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(4)
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(9)
10.43A Amendment and Consent to Credit Agreement dated March 18, 1998, by and
among Action Performance Companies, Inc., various subsidiary
guarantees, and First Union National Bank of North Carolina(4)
10.43B Amended and Restated Credit Agreement dated as of August 5, 1998, among
Action Performance Companies, Inc., certain subsidiaries and
affiliates, as guarantors, and First Union National Bank.
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.(9)
10.45 Registration Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(9)
10.46 Employment Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and Kenneth R. Barbee(9)
10.47 Consulting Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and John Bickford(9)
10.48 Common Stock Purchase Agreement dated January 16, 1997, between Hasbro,
Inc. and Action Performance Companies, Inc.(10)
10.49 Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies,
Inc.(11)
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc.(11)
10.51 Asset Purchase Agreement dated as of December 19, 1997, between Action
Performance Companies, Inc. and Revell-Monogram, Inc.(12)
10.52 1998 Non-qualified Stock Option Plan(4)
10.53 Purchase Agreement dated March 18, 1998 among Action Performance
Companies, Inc., NationsBanc Montgomery Securities LLC, CIBC
Oppenheimer Corp., EVEREN Securities, Inc. and Piper Jaffray Inc.(4)
10.54 Registration Rights Agreement dated March 24, 1998, by and among Action
Performance Companies, Inc., NationsBanc Montgomery Securities LLC,
CIBC Oppenheimer Corp., EVEREN Securities, Inc., and Piper Jaffray
Inc.(4)
11.1 Computation of Primary Earnings Per Share
11.2 Computation of Fully Diluted Earnings Per Share
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of Action Performance Companies, Inc.
23.1 Consent of Arthur Andersen LLP
25.1 Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1(13)
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, 1998, as filed with the Securities and Exchange
Commission on May 15, 1998.
43
<PAGE> 46
(5) 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.
(6) 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.
(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 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.
(9) 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.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-22943).
(11) Incorporated by reference to the Registrant's Form 10-K for the year
ended September 30, 1997, as filed with the Securities and Exchange
Commission on December 22, 1997.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-45991).
(13) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-53413).
44
<PAGE> 47
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 28, 1998 /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 28, 1998
- ------------------------------------ Executive Officer (Principal Executive Officer)
Fred W. Wagenhals
/s/ Tod J. Wagenhals Executive Vice President, and Director December 28, 1998
- ------------------------------------
Tod J. Wagenhals
/s/ Christopher S. Besing Vice President, Chief Financial Officer, Treasurer, December 28, 1998
- ------------------------------------ and Director (Principal Financial Officer)
Christopher S. Besing
/s/ David A. Husband Vice President and Chief Accounting Officer December 28, 1998
- ------------------------------------ (Principal Accounting Officer)
David A. Husband
/s/ Melodee L. Volosin Vice President - Wholesale Division and Director December 28, 1998
- ------------------------------------
Melodee L. Volosin
/s/ John S. Bickford Vice President - Strategic Alliances and Director December 28, 1998
- ------------------------------------
John S. Bickford
/s/ Jack M. Lloyd Director December 28, 1998
- ------------------------------------
Jack M. Lloyd
/s/ Robert H. Manschot Director December 28, 1998
- ------------------------------------
Robert H. Manschot
Director December , 1998
- ------------------------------------
Donald G. Hawk, Jr.
/s/ Edward J. Bauman Director December 28, 1998
- ------------------------------------
Edward J. Bauman
/s/ Paul G. Lang Managing Director of MiniChamps and Director December 28, 1998
- ------------------------------------
Paul G. Lang
</TABLE>
45
<PAGE> 48
ACTION PERFORMANCE COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants........................... F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997...... F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1998, 1997, and 1996.................... F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1998, 1997, and 1996.................... F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1998, 1997, and 1996.................... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
<PAGE> 49
ARTHUR ANDERSON 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, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Action Performance Companies,
Inc. and subsidiaries as of September 30, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
November 13, 1998, except with respect
to matters discussed in Note 12 as to
which the date is December 1, 1998.
F-2
<PAGE> 50
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 60,867 $ 29,318
Accounts receivable, net of allowance for
doubtful accounts of $986 and $837,
respectively ...................................... 36,314 17,802
Inventories ........................................ 35,790 17,855
Prepaid royalties .................................. 5,745 4,967
Prepaid expenses and other assets .................. 4,961 2,603
-------- --------
Total current assets ............................. 143,677 72,545
PROPERTY AND EQUIPMENT, net .......................... 46,053 20,017
GOODWILL AND OTHER INTANGIBLES, net .................. 106,146 46,409
OTHER ASSETS, net .................................... 10,058 2,354
-------- --------
$305,934 $141,325
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................... $ 11,430 $ 6,680
Accrued royalties .................................. 10,589 5,098
Accrued expenses and other ......................... 10,973 2,318
Current portion of long-term debt .................. 23,746 1,474
-------- --------
Total current liabilities ........................ 56,738 15,570
-------- --------
LONG-TERM DEBT:
Convertible subordinated notes ..................... 100,000 --
Other long-term debt ............................... 11,850 22,586
-------- --------
Total long-term debt ............................. 111,850 22,586
-------- --------
MINORITY INTEREST .................................... 914 --
-------- --------
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; 16,423,238 and 15,952,083 shares
issued and outstanding, respectively .............. 164 160
Additional paid-in capital ......................... 91,974 84,984
Cumulative translation adjustment .................. 1,682 --
Retained earnings .................................. 42,612 18,025
-------- --------
Total shareholders' equity ....................... 136,432 103,169
-------- --------
$305,934 $141,325
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-3
<PAGE> 51
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales:
Collectibles ............................ $ 129,348 $ 63,846 $ 40,904
Apparel and souvenirs ................. 106,712 60,430 1,961
Other ................................. 15,817 6,104 1,351
--------- --------- ---------
Net sales ........................... 251,877 130,380 44,216
Cost of sales ........................... 157,079 80,995 25,296
--------- --------- ---------
Gross profit ............................ 94,798 49,385 18,920
--------- --------- ---------
Operating expenses:
Selling, general and
administrative expenses ............. 45,344 24,564 9,262
Settlement costs ...................... 950 5,400 --
Amortization of goodwill and
other intangibles ................... 4,392 1,286 4
--------- --------- ---------
Total operating expenses ............ 50,686 31,250 9,266
--------- --------- ---------
Income from operations .................. 44,112 18,135 9,654
--------- --------- ---------
Other income (expense):
Interest income and other, net ........ 2,588 796 296
Interest expense ...................... (5,533) (2,021) (80)
--------- --------- ---------
Total other income (expense) ........ (2,945) (1,225) 216
--------- --------- ---------
Income before provision for
income taxes .......................... 41,167 16,910 9,870
Provision for income taxes .............. 16,391 6,764 3,917
Minority interest in earnings ........... 189 -- --
--------- --------- ---------
NET INCOME .............................. $ 24,587 $ 10,146 $ 5,953
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic ................................. $ 1.52 $ 0.72 $ 0.50
========= ========= =========
Diluted ............................... $ 1.48 $ 0.69 $ 0.46
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................. 16,135 14,047 11,789
========= ========= =========
Diluted ............................... 16,647 14,624 13,028
========= ========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated
financial statements.
F-4
<PAGE> 52
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL CUMULATIVE
COMMON STOCK PREFERRED STOCK PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
------ ------ ------ ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 ....... 11,221,408 $ 112 500 $ -- $ 16,852 $ 1,926 $ --
Common stock issued upon conversion
of convertible preferred stock .. 1,000,000 10 (500) -- (10) -- --
Common stock issued upon exercise
of options ...................... 239,247 2 -- -- 801 -- --
Tax benefit from stock options .... -- -- -- -- 838 -- --
Common stock issued upon exercise
of warrants ...................... 149,114 2 -- -- 510 -- --
Net income ........................ -- -- -- -- -- 5,953 --
---------- ---------- ---------- ------ ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996 ....... 12,609,769 $ 126 -- $ -- $ 18,991 $ 7,879 $ --
Common stock issued in conjunction
with purchase of businesses ...... 765,542 8 -- -- 10,041 -- --
Common stock issued upon exercise
of options ...................... 296,092 3 -- -- 1,708 -- --
Common stock issued in
public offering ................. 2,085,000 21 -- -- 49,822 -- --
Tax benefit from stock options .... -- -- -- -- 1,651 -- --
Issuance of common stock in
private placements ............... 195,680 2 -- -- 2,771 -- --
Net income ........................ -- -- -- -- -- 10,146 --
---------- ---------- ---------- ------ ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 ....... 15,952,083 $ 160 -- $ -- $ 84,984 $ 18,025 $ --
Common stock issued upon exercise
of options ...................... 426,315 4 -- -- 1,633 -- --
Tax benefit from stock options .... -- -- -- -- 4,100 -- --
Issuance of common stock in
private placements .............. 44,840 -- -- -- 1,257 -- --
Cumulative translation adjustment . -- -- -- -- -- -- 1,682
Net income ........................ -- -- -- -- -- 24,587 --
---------- ---------- ---------- ------ ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1998 ....... 16,423,238 $ 164 -- $ -- $ 91,974 $ 42,612 $ 1,682
========== ========== ========== ====== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
BALANCE, SEPTEMBER 30, 1995 ....... $ 18,890
Common stock issued upon conversion
of convertible preferred stock .. --
Common stock issued upon exercise
of options ...................... 803
Tax benefit from stock options .... 838
Common stock issued upon exercise
of warrants ...................... 512
Net income ........................ 5,953
----------
BALANCE, SEPTEMBER 30, 1996 ....... $ 26,996
Common stock issued in conjunction
with purchase of businesses ...... 10,049
Common stock issued upon exercise
of options ...................... 1,711
Common stock issued in
public offering ................. 49,843
Tax benefit from stock options .... 1,651
Issuance of common stock in
private placements ............... 2,773
Net income ........................ 10,146
----------
BALANCE, SEPTEMBER 30, 1997 ....... $ 103,169
Common stock issued upon exercise
of options ...................... 1,637
Tax benefit from stock options .... 4,100
Issuance of common stock in
private placements .............. 1,257
Cumulative translation adjustment . 1,682
Net income ........................ 24,587
----------
BALANCE, SEPTEMBER 30, 1998 ....... $ 136,432
==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 53
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 24,587 $ 10,146 $ 5,953
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............. 11,839 4,477 1,692
Undistributed earnings to minority
shareholders ............................. 189 -- --
Change in assets and liabilities, net of
businesses acquired:
Accounts receivable ...................... (12,937) (3,623) (3,440)
Inventories .............................. (14,406) (5,009) (3,143)
Prepaid royalties ........................ (120) (2,672) (1,186)
Prepaid expenses and other assets ........ (1,233) (665) 922
Accounts payable ......................... (373) (1,633) 565
Accrued royalties ........................ 4,106 2,395 320
Accrued expenses and other ............... 6,004 917 (823)
--------- --------- ---------
Net cash provided by operating activities 17,656 4,333 860
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........ (21,687) (11,192) (3,879)
Proceeds from sale of equipment ............ 383 321 --
Acquisition of businesses and other
intangibles, less cash acquired ........... (55,885) (11,082) --
--------- --------- ---------
Net cash used in investing activities .... (77,189) (21,953) (3,879)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit ............... 9,600 4,879 5,222
Payments on line of credit ................. (9,600) (10,279) (5,222)
Net proceeds from issuance of
common stock .............................. 1,637 54,327 1,315
Issuance of convertible subordinated notes . 100,000 -- --
Payments for offering-related expenses ..... (3,500) -- --
Payments on long-term debt, net ............ (7,096) (6,972) (105)
Issuance of note receivable ................ (150) -- --
Collections on notes receivable ............ 135 -- 32
--------- --------- ---------
Net cash provided by financing
activities ............................... 91,026 41,955 1,242
--------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents ................ 56 -- --
--------- --------- ---------
Net change in cash and cash equivalents .... 31,549 24,335 (1,777)
Cash and cash equivalents,
beginning of year ......................... 29,318 4,983 6,760
--------- --------- ---------
Cash and cash equivalents, end of year ..... $ 60,867 $ 29,318 $ 4,983
========= ========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial
statements.
F-6
<PAGE> 54
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997, and 1996
(1) THE COMPANY
OPERATIONS
Action Performance Companies, Inc., an Arizona corporation, (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 that 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, which are primarily produced in China, 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 wholly owned and majority owned 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and accounts receivable. The Company
places its cash with federally insured institutions and limits the amount of
credit exposure to any one institution. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of customers
comprising the Company's credit base and the geographical dispersion of the
customers.
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.
F-7
<PAGE> 55
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. Except for the Convertible Subordinated Notes, the carrying amounts
of long-term debt approximate fair value based on current market prices for
similar debt instruments. The fair value of the Company's Convertible
Subordinated Notes on September 30, 1998 was $78.1 million based on current
market information. 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.
FOREIGN CURRENCY TRANSLATION
Financial information relating to the Company's foreign subsidiaries is reported
in accordance with FAS No. 52 "Foreign Currency Translation." The financial
statements of non-U.S. subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities of these non-U.S. subsidiaries are
translated at exchange rates in effect as of the end of each balance sheet date,
and related revenues and expenses are translated at average exchange rates in
effect during the period.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid investments with
original maturities of three months or less. Cash equivalents principally
consist of commercial paper and United States Treasury securities.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market, and consist of the following at September 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Purchased components....................... $ 3,252 $ 2,418
Finished goods............................. 32,538 15,437
-------- -------
$ 35,790 $17,855
======== =======
</TABLE>
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 one to ten years.
Property and equipment consist of the following at September 30, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Building and land.......................... $ 6,207 $ -
Tooling and molds.......................... 30,217 15,237
Furniture, fixtures and equipment.......... 15,099 6,667
Autos and trucks........................... 3,158 2,578
Leasehold improvements..................... 2,984 2,066
-------- -------
57,665 26,548
Less - accumulated depreciation............ (11,612) (6,531)
-------- -------
$ 46,053 $20,017
======== =======
</TABLE>
Maintenance and repairs of approximately $697,000, $277,000, and $64,000 for the
years ended September 30, 1998, 1997, and 1996, 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.
F-8
<PAGE> 56
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations and is amortized using the straight-line method over
periods ranging from fifteen to twenty-five years. Other intangibles are
amortized using the straight-line method over their estimated useful lives,
which ranges from three to fifteen years. Amortization expense of $4.4 million,
$1.3 million, and $4,000 is included in the accompanying financial statements
for the years ended September 30, 1998, 1997, and 1996, respectively. The
following table sets forth the components of goodwill and other intangibles as
of September 30, 1998 and 1997, respectively (in thousands).
<TABLE>
<CAPTION>
Amortization
Period (Years) 1998 1997
-------------- ---- ----
<S> <C> <C> <C>
3-5 $ 2,190 $ -
6-10 11,247 -
11-15 11,855 6,263
16-25 86,542 41,431
-------- -------
111,834 47,694
Less accumulated amortization (5,688) (1,285)
-------- -------
$106,146 $46,409
======== =======
</TABLE>
LICENSE AGREEMENTS
Royalties paid under various licensing agreements are recorded as expense at the
time the related sales are made.
LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Under SFAS No. 121, long-lived
assets and certain identifiable intangible assets to be held and used in
operations are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be fully recoverable. An impairment
loss is recognized if the sum of the expected long-term undiscounted cash flows
is less than the carrying amount of the long-lived assets being evaluated.
SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental cash flow disclosures and non-cash transactions for the years
ended September 30, 1998, 1997, and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures:
Interest paid ....................... $ 4,690 $ 1,505 $ 79
Income taxes paid ................... 10,600 5,396 3,992
Non-cash transactions:
Common stock issued in acquisitions . $ -- $10,049 $ --
Debt and liabilities incurred or
assumed in acquisitions ........... 29,002 44,446 --
Acquisition of property and equipment
under notes payable and
capital leases .................... 2,961 1,515 233
Tax benefits on various common
stock options ..................... 4,100 1,651 838
Common stock issued in connection
with licensing and sponsorship
agreements ........................ 1,257 -- --
Sale of equipment for note receivable . 35 446 --
</TABLE>
F-9
<PAGE> 57
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. The
Company's Convertible Subordinated Notes (see Note 4) were antidilutive for the
fiscal year ended September 30, 1998. 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 diluted net income per common share
for the years ended September 30, 1998, 1997, and 1996 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Shares:
Weighted average number of common
shares outstanding .................... 16,135 14,047 11,789
Additional shares assuming conversion of:
Stock options ......................... 512 577 539
Warrants .............................. -- -- 33
Preferred stock ....................... -- -- 667
------- ------- -------
Diluted weighted average shares
outstanding ........................... 16,647 14,624 13,028
======= ======= =======
Net income attributable to diluted
weighted average shares outstanding ... $24,587 $10,146 $ 5,953
======= ======= =======
Diluted earnings per share .............. $ 1.48 $ 0.69 $ 0.46
======= ======= =======
</TABLE>
ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED
In fiscal 1999, the Company will be required to adopt SFAS No. 130, "Reporting
Comprehensive Income," issued by the Financial Accounting Standards Board. The
adoption of SFAS No. 130 is not expected to have a material effect on the
Company's financial position or results of operations.
In fiscal 1999, the Company will be required to adopt SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", issued by the
Financial Accounting Standards Board. The adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial position or
results of operations.
In fiscal 2000, the Company will be required to adopt SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," issued by the Financial
Accounting Standards Board. Statement No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The new statement requires all derivatives to be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Company believes the adoption of Statement No. 133 will not have any
material impact in the Company's financial position or results of operations.
(3) ACQUISITIONS AND LICENSING AGREEMENTS
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. 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 sales from Sports Image, a
distributor of the Company's die-cast collectible products. Sports Image had
sales of approximately $41.8 million 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
F-10
<PAGE> 58
die-cast collectibles purchased from the Company at an aggregate cost of
approximately $5.8 million). 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 substantially all of the assets and
assumed certain liabilities of Motorsport Traditions Limited Partnership and
acquired all of the stock of Creative Marketing & Promotions, Inc. (collectively
"Motorsport Traditions"). 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 $5.4 million; (ii)
a promissory note in the principal amount of $1.6 million 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
$33.0 million 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. 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. See Note 10. The purchase price is
preliminary with respect to such litigation.
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. The Company paid the $750,000 and $1.4 million contingent
payments in May 1998. 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 COLLECTIBLE BUSINESS FROM 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> 59
LICENSING AGREEMENT WITH RICHARD CHILDRESS RACING ENTERPRISES, INC.
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.
ACQUISITION OF RUSTY WALLACE MERCHANDISE PROGRAM
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 consisted of cash of $6.0 million, of which $2.5 million was paid at the
closing and the remaining $3.5 million was 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 additional 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. This
transaction was accounted for as a purchase.
ACQUISITION OF DIE-CAST DIVISION OF REVELL MONOGRAM, INC.
On December 19, 1997, the Company acquired the assets and assumed certain
liabilities related to the motorsports die-cast collectible product lines of
Revell-Monogram, Inc. ("Revell"). The preliminary price of $24.8 million, which
is subject to certain adjustments, consists of an initial cash payment of $14.8
million and $1.0 million per year for 10 years, which is treated as a note
payable with an imputed interest rate of 8% in the accompanying financial
statements. Revell distributed die-cast collectibles through a network of
wholesale distributors and a collectible club, which together generated die-cast
collectible sales of approximately $20.0 million during 1997. The Company and
Revell also entered into a 10-year license agreement under which the Company has
the right to utilize certain "Revell" trademarks in connection with sales of its
die-cast products. This transaction was accounted for as a purchase.
ACQUISITION OF BROOKFIELD COLLECTORS GUILD, INC.
On January 8, 1998, the Company acquired certain assets and assumed certain
liabilities of Brookfield Collectors Guild, Inc. ("Brookfield"). The purchase
price consisted of (i) approximately $800,000 in cash and (ii) up to 27,397
shares of Common Stock, subject to certain adjustments, to be issued upon
completion of certain purchase price adjustments by the Company and the seller.
Brookfield distributed various motorsports die-cast collectibles and ensembles
as well as various other die-cast replicas. This transaction was accounted for
as a purchase.
ACQUISITION OF MINORITY INTEREST IN LBE TECHNOLOGIES, INC.
On April 20, 1998, the Company made a $1.0 million equity investment in LBE
Technologies, Inc. ("LBET") and entered into a five-year strategic alliance. The
strategic alliance provides the Company with exclusive merchandising rights at
each of LBET's "NASCAR Silicon Motor Speedway" centers.
F-12
<PAGE> 60
ACQUISITION OF CONTROLLING INTEREST IN CHASE RACEWEAR, LLC
On May 22, 1998, the Company acquired a controlling interest in Chase Racewear,
L.L.C. ("Chase"), a North Carolina motorsports-related apparel branding and
licensing company. Pursuant to the terms of the acquisition and operating
agreements, the Company acquired an 80% interest in Chase for an aggregate of
$10.0 million in cash. The terms of the acquisition agreement also include a
three-year earn-out payment of up to $4.0 million if certain financial criteria
are met. This transaction was accounted for as a purchase.
ACQUISITION OF CONTROLLING INTEREST IN MINICHAMPS
On August 31, 1998, the Company acquired a majority interest in Paul's Model
Art, GmbH; MiniChamps, GmbH; Lang Miniaturen, GmbH; and Spielwaren Danhausen,
GmbH (collectively referred to as "MiniChamps") by purchasing an 80% interest
for approximately $21.5 million in cash. MiniChamps designs and markets die-cast
scaled replicas of motor vehicles, including models of Formula One and GT race
cars as well as factory production cars. Its products are marketed pursuant to
licensing agreements with race car drivers, team owners, and car manufacturers.
MiniChamps generated revenue of approximately $25.0 million during 1997. This
transaction was accounted for as a purchase.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA
The following unaudited pro forma combined statements of operations data for the
years ended September 30, 1998 and 1997 present the results of operations of the
Company as if the acquisitions of the businesses acquired during fiscal 1997 and
fiscal 1998 had occurred as of October 1, 1996. Pro forma results are as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
1998* 1997*
-------- --------
<S> <C> <C>
Revenues............................... $283,702 $213,954
Net income............................. 26,728 13,356
Net income per common share, diluted... $ 1.60 $ 0.90
</TABLE>
* Excludes charges for legal settlement costs of $950,000, or $0.03 per share,
in fiscal 1998 and $5.4 million, or $0.22 per share, in fiscal 1997.
(4) FINANCING ACTIVITIES
Long-term debt at September 30, 1998 and 1997 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Senior notes, interest at 8.05% payable semi-annually, principal payable January
1999, secured by the Company's subsidiaries .................................... $ 20,000 $ 20,000
4 3/4% Convertible Subordinated Notes due 2005 ................................. 100,000 --
Unsecured notes payable, interest ranging
from 4% to 8% .................................................................. 7,458 2,197
Notes payable, interest ranging from 7.9% to 8.5%,
secured by property and equipment .............................................. 7,839 1,409
Obligations under capital leases of vehicles and
equipment, interest from 8.0% to 9.5%, payable monthly ......................... 299 454
--------- ---------
Total .......................................................................... 135,596 24,060
Less: current portion ......................................................... (23,746) (1,474)
--------- ---------
$ 111,850 $ 22,586
========= =========
</TABLE>
F-13
<PAGE> 61
CONVERTIBLE SUBORDINATED NOTES
On March 24, 1998, the Company sold $100.0 million of 4 3/4% Convertible
Subordinated Notes due 2005 (the "Notes"). The Notes are convertible, at the
option of the holders, into shares of Common Stock at the initial conversion
price of $48.20 per share, subject to adjustments in certain events. The Notes
are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future senior indebtedness of the Company, as
defined in the Notes. The Indenture governing the Notes does not limit or
prohibit the incurrence of additional indebtedness, including senior
indebtedness, by the Company or its subsidiaries. The Company, at its option,
may redeem the Notes in whole or in part at any time on or after April 1, 2001,
at redemption prices set forth in the Indenture governing the Notes. Upon the
occurrence of a "change in control" or a "termination of trading," as defined in
the Indenture, the holders of the Notes will have the right to require the
Company to repurchase all or any part of such holders' Notes at 100% of their
principal amount, plus accrued and unpaid interest. The net proceeds to the
Company from this offering were approximately $96.5 million, after deducting
offering expenses and the Initial Purchasers' discount of 3.0%. The offering
expenses and Initial Purchasers discount are included in other assets in the
accompanying financial statements and are being amortized into interest expense
using the effective interest rate method.
CREDIT FACILITY
On January 2, 1997 the Company entered into a credit facility with First Union
National Bank of North Carolina ("First Union"). On August 5, 1998, the Company
entered into an amended and restated credit agreement with First Union (the
"Credit Facility"). The Credit Facility consists of a revolving line of credit
for up to $20.0 million, which includes up to $5.0 million for standby letters
of credit (the "Line of Credit") and a $30.0 million letter of credit/bankers'
acceptance facility (the "Letter of Credit/BA Facility"). The Company did not
have any outstanding borrowings under the Line of Credit as of September 30,
1998. The Company had outstanding purchase commitments of approximately $3.7
million under the Letter of Credit/BA Facility as of September 30, 1998. The
Line of Credit bears interest, at the Company's option, at a rate equal to (i)
the Alternate Base Rate (as described below) plus an applicable margin as
defined in the credit agreement or (ii) LIBOR plus an applicable margin as
defined in the credit agreement. The "Alternate Base Rate" under the Line of
Credit is the greater of (a) the bank's publicly announced prime rate or (b) the
Federal Funds Effective Rate (as defined) plus 0.5%. The Line of Credit matures
on April 1, 2001 with respect to the revolving line of credit portion of the
Line of Credit, and on April 1, 1999 with respect to the standby letter of
credit portion of the Line of Credit and the Letter of Credit/BA Facility,
subject to extensions by First Union. The Credit Facility is guaranteed by the
Company's subsidiaries.
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, pay dividends,
sell assets, or engage in certain mergers or consolidations.
FUTURE MATURITIES OF LONG-TERM DEBT
Aggregate future maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
1999 $ 23,746
2000 1,997
2001 1,662
2002 1,941
2003 1,503
Thereafter 104,747
--------
Total $135,596
========
</TABLE>
F-14
<PAGE> 62
(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.
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.
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. In October 1997, the Company issued 34,940 shares of Common
Stock valued at $28.62 per share to Richard Childress Racing, Inc. See Note (3).
In February 1998, the Company issued 9,900 shares of Common Stock valued at
$26.00 per share in connection with a race car sponsorship.
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 offering
expenses and underwriting discounts and commissions.
STOCK OPTIONS
Under the Company's 1993 Stock Option Plan (the "1993 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 1993 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 1993 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 1993 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 1993 Plan. The 1993 Plan
expires in 2001.
Under the Company's 1998 Non-qualified Stock Option Plan (the "1998 Plan"), the
Board of Directors may from time to time grant to key employees of the Company,
other than directors or executive officers, non-statutory stock options to
purchase shares of the Company's Common Stock. The exercise price, term, vesting
conditions, and other terms for all stock options granted under the 1998 Plan
will be determined at the time of grant by the Board of Directors or a board
committee appointed to administer the 1998 Plan. A total of 500,000 shares of
Common Stock may be issued pursuant to the 1998 Plan. The 1998 Plan expires in
2008.
F-15
<PAGE> 63
A summary of the status of the Company's stock option plans at September 30,
1998, 1997, and 1996 and for the years then ended is presented in the table
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
Wtd Wtd
Number Avg Number Avg Number Wtd 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. 1,032,710 $ 6.58 1,110,053 $ 4.16 1,111,200 $ 2.90
Granted............ 503,500 27.92 220,250 17.76 240,700 9.28
Exercised.......... (425,990) 4.01 (296,092) 5.80 (239,247) 3.45
Canceled........... (179,409) 30.63 (1,501) 9.43 (2,600) 5.25
Outstanding at
end of year....... 930,811 14.61 1,032,710 6.58 1,110,053 4.16
Options exercisable
at end of year.... 563,058 9.79 714,950 3.09 881,774 2.91
Options available
for grant......... 572,860 396,951 365,700
Weighted average
fair value of
options granted... $11.74 $ 7.33 $ 3.77
</TABLE>
Options outstanding and exercisable by price range as of September 30, 1998 are
as follows:
<TABLE>
<CAPTION>
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
- --------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.25 - $11.04 447,307 2.32 $ 4.92 407,232 $ 6.22
$11.05 - $22.09 171,169 4.43 18.41 69,825 18.49
$22.10 - $36.81 312,335 6.74 26.40 86,001 28.22
------- ---- ------ ------- ------
$ 1.25 - $36.81 930,811 4.20 $14.61 563,058 $ 9.79
======= ==== ====== ======= ======
</TABLE>
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. 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 54.715%. Using these
assumptions, the fair value of the stock options granted, net of cancellations,
is $3,553,957, $1,614,623, and $908,153 for the years ended September 30, 1998,
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net Income:
As Reported............................. $ 24,587 $ 10,146 $ 5,953
Pro Forma............................... $ 22,460 $ 9,305 $ 5,650
Basic EPS:
As Reported............................. $ 1.52 $ 0.72 $ 0.50
Pro Forma............................... $ 1.39 $ 0.66 $ 0.48
Diluted EPS:
As Reported............................. $ 1.48 $ 0.69 $ 0.46
Pro Forma............................... $ 1.35 $ 0.64 $ 0.43
</TABLE>
F-16
<PAGE> 64
(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.
Prior to March 1998, Fred W. Wagenhals, a shareholder, director, and officer of
the Company, owned a one-third interest in F.W. Investments, a partnership that
owned this facility. In March 1998, Mr. Wagenhals became the sole owner of this
facility. The Company paid F.W. Investments or Mr. Wagenhals rent of
approximately $175,000, $183,000, and $177,000 for the years ended September 30,
1998, 1997, and 1996 respectively. During fiscal 1998, the Company made a
refundable deposit of $900,000 to Mr. Wagenhals towards the purchase of the
facility. The Company is currently negotiating the final purchase agreement with
Mr. Wagenhals and intends to either sell or lease the facility to an
unaffiliated third party.
(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 Company expensed approximately $141,000, $41,000, and $26,000
under the plan for the years ended September 30, 1998, 1997, and 1996
respectively.
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, and certain reserves expensed currently for financial reporting
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, 1998 or 1997.
The provision for income taxes consists of the following for the years ended
September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Current:
Federal..................... $15,300 $ 5,828 $ 3,258
State....................... 2,181 822 753
------- ------- -------
17,481 6,650 4,011
Deferred income taxes........... (1,090) 114 (94)
------- ------- -------
Provision for income taxes...... $16,391 $ 6,764 $ 3,917
======= ======= =======
</TABLE>
F-17
<PAGE> 65
Reconciliation of the federal income tax rate to the Company's effective rate
for the years ended September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal rate..................35.00% 35.00% 34.00%
State taxes, net of federal benefit
and other............................. 5.00 5.00 5.69
------ ------ ------
40.00% 40.00% 39.69%
====== ====== =======
</TABLE>
The components of deferred taxes are as follows at September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Deferred tax assets (liabilities):
Accelerated tax depreciation........ $ (438) $ (391)
Accelerated tax amortization........ (675) (306)
Inventory cost capitalization....... 1,179 547
Valuation reserves and accruals..... 1,902 821
Deferred compensation............... 40 247
------ ------
Net deferred tax asset............ $2,008 $ 918
====== ======
</TABLE>
(9) LEGAL SETTLEMENTS
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 1997
financial statements include a charge of $5.4 million for the API Settlement and
related legal fees.
In March 1998, the Company agreed to settle a lawsuit with Petty Enterprises,
Inc. and an affiliate of Petty Enterprises, Inc. Under the financial terms of
the settlement, the Company will pay a total of approximately $700,000 to Petty
Enterprises, Inc. as payment in full for royalties and other fees in connection
with licenses for future sales of licensed products. The settlement is subject
to the execution of definitive settlement agreements. The accompanying 1998
financial statements include a charge of $950,000 incurred as a result of this
settlement and related charges.
In March 1998, the Company and other defendants settled an environmental lawsuit
with the State of Arizona. Under the agreement, the former shareholders of F.W.
& Associates, Inc., including Fred W. Wagenhals, the Company's Chairman of the
Board, President, and Chief Executive Officer, paid an aggregate of $800,000 to
the state and certain parties seeking indemnity from the Company. The Company
did not incur any costs in connection with this settlement.
(10) COMMITMENTS AND CONTINGENCIES
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 alleged to have
been taken by RYP and has agreed to be responsible for and to pay any costs,
fees, expenses, damages, payments, credits,
F-18
<PAGE> 66
rebates, and penalties, if any, arising out of this matter with respect to RYP.
The seller of RYP has agreed to be responsible for amounts, if any, in excess 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 court granted the
motion on March 20, 1998. On March 2, 1998, the plaintiffs filed, pursuant to a
court order, a second consolidated amended complaint intended to set forth
certain allegations with greater specificity. The Company intends to vigorously
defend the claims asserted in this lawsuit.
The Company leases certain equipment and office space under noncancellable
operating leases. Rent expense related to these lease agreements totaled
approximately $ 3.1 million, $935,000, and $437,000 for the fiscal years ended
September 30, 1998, 1997, and 1996 respectively.
Future lease payments under the noncancellable operating leases are
approximately as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
September 30,
<S> <C>
1999 $ 3,299
2000 2,933
2001 2,441
2002 2,115
2003 1,872
Thereafter 23,782
-------
Total $36,442
=======
</TABLE>
Certain of the Company's licensing agreements require the Company to make
minimum annual guaranteed royalty payments through the term of the agreements.
To date, the Company has recovered all such minimum annual guaranteed royalty
payments through normal product sales. There can be no assurance, however, that
the Company will generate sufficient product sales in the future to recover such
payments.
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) SUBSEQUENT EVENTS
On October 27, 1998, the Company acquired all of the outstanding stock of
Intellectual Properties Group, Inc. ("IPG") in exchange for 35,000 shares of the
Company's restricted common stock. IPG creates and develops promotional programs
for corporate sponsors of motorsports. The transaction will be accounted for as
a pooling-of-interests. Prior period financial statements will not be restated
because IPG's historical operating results and financial position are not
material in relation to the Company's operating results and financial position.
(12) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT
On November 23, 1998, the Company acquired Tech 2000 Worldwide, Inc. ("Tech
2000"), a privately held Massachusetts-based Internet company, through a merger
of Tech 2000 and Action Interactive, Inc., a wholly owned subsidiary of the
Company. Under the terms of the merger agreement, the Company issued 137,925
shares of its restricted common stock in exchange for all of the issued and
outstanding common stock of Tech 2000. The transaction will be accounted for as
a pooling-of-interests. Prior period financial statements will not be restated
because Tech 2000's historical operating results and financial position are not
material in relation to the Company's operating results and financial position.
F-19
<PAGE> 67
On November 30, 1998, the Company entered into an exclusive licensing agreement
with CART Licensed Products, L.P., the licensing arm of Championship Auto Racing
Teams, Inc. ("CART"). Under the terms of the licensing agreement, the Company
obtained the exclusive rights to the CART series and FedEx Championship Series
logos, as well as exclusive rights to five teams in the CART series, including
Newman/Haas Racing, PacWest Racing Group, Target/Chip Ganassi Racing, Team
Green, Inc., and Team Rahal, Inc. In addition, the Company also obtains the
non-exclusive rights for a minimum of 75% of the other teams and drivers that
participate in CART sanctioned race events. The rights granted under the
agreement allow the Company to create a line of collectible vehicles consistent
with the detail and quality featured in its existing die-cast collectibles and
allow the Company to market or sublicense a broad range of toy products such as
plastic and remote control vehicles, action figures, miniature helmets, board
games, plush toys, and puzzles. The initial term of the agreement is for five
years with a five-year renewal option.
F-20
<PAGE> 68
EXHIBIT INDEX
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)
4.2 Indenture dated as of March 24, 1998, between Action Performance
Companies, Inc. and First Union National Bank, as Trustee, including
forms of Notes(4)
10.4.2 1993 Stock Option Plan, as amended and restated through January 16,
1997(5)
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(6)
10.27 Manufacturing Agreement between the Company and Early Light
International (Holdings) Ltd. dated December 5, 1994(7)
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(8)
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.(8)
10.35 Security Agreement dated November 7, 1996, between Sports Image, Inc.
and SII Acquisition, Inc.(8)
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(8)
10.37 License Agreement dated as of November 7, 1996, among SII Acquisition,
Inc., Dale Earnhardt, and Action Performance Companies, Inc.(8)
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.(9)
10.40 Exchange Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(9)
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.(9)
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,
<PAGE> 69
and First Alexander Hamilton Life Insurance Company, together with form
of Note, form of Subsidiary Guaranty, and form of Subsidiary Joinder(9)
10.42A First Amendment dated as of March 18, 1998 to 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(4)
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(9)
10.43A Amendment and Consent to Credit Agreement dated March 18, 1998, by and
among Action Performance Companies, Inc., various subsidiary
guarantees, and First Union National Bank of North Carolina(4)
10.43B Amended and Restated Credit Agreement dated as of August 5, 1998, among
Action Performance Companies, Inc., certain subsidiaries and
affiliates, as guarantors, and First Union National Bank.
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.(9)
10.45 Registration Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(9)
10.46 Employment Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and Kenneth R. Barbee(9)
10.47 Consulting Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and John Bickford(9)
10.48 Common Stock Purchase Agreement dated January 16, 1997, between Hasbro,
Inc. and Action Performance Companies, Inc.(10)
10.49 Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies,
Inc.(11)
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc.(11)
10.51 Asset Purchase Agreement dated as of December 19, 1997, between Action
Performance Companies, Inc. and Revell-Monogram, Inc.(12)
10.52 1998 Non-qualified Stock Option Plan(4)
10.53 Purchase Agreement dated March 18, 1998 among Action Performance
Companies, Inc., NationsBanc Montgomery Securities LLC, CIBC
Oppenheimer Corp., EVEREN Securities, Inc. and Piper Jaffray Inc.(4)
10.54 Registration Rights Agreement dated march 24, 1998, by and among Action
Performance Companies, Inc., NationsBanc Montgomery Securities LLC,
CIBC Oppenheimer Corp., EVEREN Securities, Inc., and Piper Jaffray
Inc.(4)
11.1 Computation of Primary Earnings Per Share
11.2 Computation of Fully Diluted Earnings Per Share
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of Action Performance Companies, Inc.
23.1 Consent of Arthur Andersen LLP
25.1 Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1(13)
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, 1998, as filed with the Securities and Exchange
Commission on May 15, 1998.
<PAGE> 70
(5) 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.
(6) 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.
(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 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.
(9) 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.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-22943).
(11) Incorporated by reference to the Registrant's Form 10-K for the year
ended September 30, 1997, as filed with the Securities and Exchange
Commission on December 22, 1997.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-45991).
(13) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-53413).
<PAGE> 1
Exhibit 10.43B
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of August 5, 1998
among
ACTION PERFORMANCE COMPANIES, INC.
as Borrower,
Certain Subsidiaries and Affiliates,
as Guarantors,
AND
FIRST UNION NATIONAL BANK
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SECTION 1 DEFINITIONS ............................................................................................1
1.1 Definitions .........................................................................................1
1.2 Computation of Time Periods.........................................................................24
1.3 Accounting Terms ...................................................................................24
SECTION 2 CREDIT FACILITIES .....................................................................................24
2.1 Revolving Loans ....................................................................................24
2.2 Trade Letter of Credit Facility.....................................................................26
2.3 Bankers' Acceptances................................................................................28
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES.........................................................30
3.1 Default Rate .......................................................................................30
3.2 Extension and Conversion............................................................................30
3.3 Prepayments ........................................................................................31
3.4 Termination and Reduction of Commitments............................................................31
3.5 Fees ...............................................................................................31
3.6 Capital Adequacy ...................................................................................32
3.7 Inability To Determine Interest Rate................................................................33
3.8 Illegality .........................................................................................33
3.9 Requirements of Law.................................................................................33
3.10 Taxes .............................................................................................34
3.11 Indemnity .........................................................................................35
3.12 Payments, Computations, Etc........................................................................36
SECTION 4 GUARANTY ..............................................................................................37
4.1 The Guarantee ......................................................................................37
4.2 Obligations Unconditional...........................................................................37
4.3 Reinstatement ......................................................................................38
4.4 Certain Additional Waivers..........................................................................38
4.5 Remedies ...........................................................................................39
4.6 Rights of Contribution..............................................................................39
4.7 Continuing Guarantee................................................................................40
SECTION 5 CONDITIONS ............................................................................................40
5.1 Conditions to Closing...............................................................................40
5.2 Conditions to All Extensions of Credit..............................................................41
SECTION 6 REPRESENTATIONS AND WARRANTIES.........................................................................42
6.1 Financial Condition.................................................................................42
6.2 No Changes or Restricted Payments...................................................................42
6.3 Organization; Existence; Compliance with Law........................................................43
6.4 Power; Authorization; Enforceable Obligations.......................................................43
6.5 No Legal Bar .......................................................................................43
6.6 No Material Litigation..............................................................................44
6.7 No Default .........................................................................................44
6.8 Ownership of Property; Liens........................................................................44
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
6.9 Intellectual Property...............................................................................44
6.10 No Burdensome Restrictions.........................................................................44
6.11 Taxes .............................................................................................45
6.12 ERISA .............................................................................................45
6.13 Governmental Regulations, Etc. ....................................................................46
6.14 Subsidiaries ......................................................................................47
6.15 Purpose of Extensions of Credit....................................................................47
6.16 Environmental Matters..............................................................................47
SECTION 7 AFFIRMATIVE COVENANTS..................................................................................48
7.1 Financial Statements................................................................................48
7.2 Certificates; Other Information.....................................................................49
7.3 Notices ............................................................................................50
7.4 Payment of Obligations..............................................................................51
7.5 Conduct of Business and Maintenance of Existence....................................................51
7.6 Maintenance of Property; Insurance..................................................................52
7.7 Inspection of Property; Books and Records; Discussions..............................................52
7.8 Environmental Laws..................................................................................52
7.9 Financial Covenants.................................................................................53
7.10 Additional Guaranties..............................................................................53
7.11 Use of Proceeds ...................................................................................53
SECTION 8 NEGATIVE COVENANTS ....................................................................................54
8.1 Indebtedness .......................................................................................54
8.2 Liens ..............................................................................................55
8.3 Nature of Business..................................................................................55
8.4 Consolidation, Merger, Sale or Purchase of Assets, Capital Expenditures, etc. ......................55
8.5 Advances, Investments and Loans.....................................................................56
8.6 Transactions with Affiliates........................................................................56
8.7 Ownership of Equity Interests.......................................................................56
8.8 Fiscal Year ........................................................................................57
8.9 Prepayments of Indebtedness, etc. ..................................................................57
8.10 Restricted Payments................................................................................57
8.11 Sale Leasebacks ...................................................................................57
8.12 No Further Negative Pledges........................................................................57
SECTION 9 EVENTS OF DEFAULT .....................................................................................58
9.1 Events of Default...................................................................................58
9.2 Acceleration; Remedies..............................................................................60
SECTION 10 MISCELLANEOUS ........................................................................................61
10.1 Notices ...........................................................................................61
10.2 Right of Set-Off...................................................................................62
10.3 Benefit of Agreement...............................................................................62
10.4 No Waiver; Remedies Cumulative.....................................................................62
10.5 Payment of Expenses, etc. .........................................................................63
10.6 Amendments, Waivers and Consents...................................................................63
10.7 Counterparts ......................................................................................63
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
10.8 Headings ..........................................................................................64
10.9 Survival ..........................................................................................64
10.10 Governing Law; Submission to Jurisdiction; Venue..................................................64
10.11 Severability .....................................................................................64
10.12 Entirety .........................................................................................65
10.13 Binding Effect; Termination.......................................................................65
10.14 Conflict .........................................................................................65
</TABLE>
<PAGE> 5
SCHEDULES
Schedule 2.1(b) Form of Notice of Borrowing
Schedule 2.1(e) Form of Revolving Note
Schedule 2.2(b) Form of Notice of Request for Letter of Credit
Schedule 2.3(b) Form of Notice of Request for Banker's Acceptance
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 5.1(f) Secretary's Certificate
Schedule 6.6 Description of Legal Proceedings
Schedule 6.8 Liens
Schedule 6.14 Subsidiaries
Schedule 7.2(b) Form of Officer's Compliance Certificate
Schedule 7.11-1 Form of Joinder Agreement
Schedule 8.1 Indebtedness
Schedule 8.5 Existing Investments
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 5, 1998
(the "Credit Agreement"), is by and among ACTION PERFORMANCE COMPANIES, INC., an
Arizona corporation (the "Borrower"), the subsidiaries and affiliates identified
on the signature pages hereto and such other subsidiaries and affiliates as may
from time to time become Guarantors hereunder in accordance with the provisions
hereof (the "Guarantors") and FIRST UNION NATIONAL BANK (the "Bank").
W I T N E S S E T H
WHEREAS, a $16 million credit facility was established in favor of the
Borrower pursuant to the terms of a Credit Agreement dated as of January 2, 1997
(as amended and modified, the "Original Credit Agreement");
WHEREAS, the Borrower has requested that the credit facility be
increased and that multicurrency borrowings be made available thereunder; and
WHEREAS, the Bank has agreed to make the requested changes on the terms
and conditions set forth in this Credit Agreement which is given in amendment
to, restatement of and substitution for the Original Credit Agreement;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall
have the meanings specified below unless the context otherwise requires:
"Additional Credit Party" means each Person that becomes a
Guarantor after the Closing Date by execution of a Joinder Agreement.
"Affiliate" means, with respect to any Person, any other
Person (i) directly or indirectly controlling or controlled by or under
direct or indirect common control with such Person or (ii) directly or
indirectly owning or holding ten percent (10%) or more of the equity
interest in such Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative
to the foregoing.
1
<PAGE> 7
"Alternate Base Rate" means for any day, a rate per annum
equal to the greatest of (a) the Prime Rate in effect on such day and
(b) the Federal Funds Effective Rate in effect on such day plus 1/2 of
1%. For purposes hereof: "Prime Rate" shall mean, at any time, the rate
of interest per annum publicly announced from time to time by the Bank
at its principal office in Charlotte, North Carolina as its prime rate.
Each change in the Prime Rate shall be effective as of the opening of
business on the day such change in the Prime Rate occurs. The parties
hereto acknowledge that the rate announced publicly by the Bank as its
Prime Rate is an index or base rate and shall not necessarily be its
lowest or best rate charged to its customers or other banks; and
"Federal Funds Effective Rate" shall mean, for any day, the weighted
average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds
brokers, as published on the next succeeding Business Day by the
Federal Reserve Bank of New York, or, if such rate is not so published
on the next succeeding Business Day, the average of the quotations for
the day of such transactions received by the Bank from three federal
funds brokers of recognized standing selected by it. If for any reason
the Bank shall have determined (which determination shall be conclusive
in the absence of manifest error) that it is unable to ascertain the
Federal Funds Effective Rate, for any reason, including the inability
or failure of the Bank to obtain sufficient quotations in accordance
with the terms thereof, the Alternate Base Rate shall be determined
without regard to clause (b) of the first sentence of this definition,
as appropriate, until the circumstances giving rise to such inability
no longer exist. Any change in the Alternate Base Rate due to a change
in the Prime Rate or the Federal Funds Effective Rate shall be
effective on the opening of business on the date of such change.
"Alternate Base Rate Loan" means any Loan bearing interest at
a rate determined by reference to the Alternate Base Rate.
"Applicable Percentage" means for any day, the rate per annum
set forth below opposite the applicable Consolidated Senior Leverage
Ratio then in effect, it being understood that the Applicable
Percentage for (i) Alternate Base Rate Loans shall be the percentage
set forth under the column "Alternate Base Rate Margin", (ii) LIBOR
Rate Loans shall be the percentage set forth under the column "LIBOR
Rate Margin, Standby LOC Fee and BA Discount Rate", (iii) the Standby
LOC Fee shall be the percentage set forth under the column "LIBOR Rate
Margin, Standby LOC Fee and BA Discount Rate", (iv) the BA Discount
Rate shall be the percentage set forth under the column "LIBOR Rate
Margin, Standby LOC Fee and BA Discount Rate", and (v) the Commitment
Fee shall be the percentage set forth under the column "Commitment
Fee":
<TABLE>
<CAPTION>
Consolidated Alternate LIBOR Rate
Pricing Senior Leverage Base Rate Margin, Commitment
Level Ratio Margin Standby LOC Fee and BA Fee
Discount Rate
<S> <C> <C> <C> <C>
I < 0.75 0% .875% .25%
-
II > 0.75 but < 1.25 0% 1.00% .25%
-
III > 1.25 but < 1.75 .25% 1.25% .35%
-
IV > 1.75 .50% 1.50% .40%
</TABLE>
The Applicable Percentage shall be determined and adjusted quarterly on
the date (each a "Rate Determination Date") five (5) Business Days
after the date by which the annual
2
<PAGE> 8
and quarterly compliance certificates and related financial statements
and information are required in accordance with the provisions of
Sections 7.1(a) and (b) and Section 7.2(b), as appropriate; provided
that in the event an annual or quarterly compliance certificate and
related financial statements and information are not delivered timely
to the Bank by the date required by Sections 7.1(a) and (b) and Section
7.2(b), as appropriate, the Applicable Percentages shall be based on
Pricing Level IV until such time as an appropriate compliance
certificate and related financial statements and information are
delivered, whereupon the applicable Pricing Level shall be adjusted
based on the information contained in such compliance certificate and
related financial statements and information.
Each Applicable Percentage shall be effective from a Rate Determination
Date until the next such Rate Determination Date. The Bank shall
determine the appropriate Applicable Percentages in the pricing matrix
promptly upon receipt of the quarterly or annual compliance certificate
and related financial information and shall promptly notify the
Borrower and the Lenders of any change thereof. Such determinations by
the Bank shall be conclusive absent manifest error. Adjustments in the
Applicable Percentages shall be effective as to existing Extensions of
Credit as well as new Extensions of Credit made thereafter.
"Attributed Principal Amount" means, on any day, with respect
to any Securitization Transaction entered into by any member of the
Consolidated Group, the aggregate amount (with respect to any such
transaction, the "Invested Amount") paid to, or borrowed by, such
Person as of such date under such Securitization Transaction, minus the
aggregate amount received by the applicable Receivables Financier and
applied to the reduction of the Invested Amount under such
Securitization Transaction.
"Available Foreign Currency" means (i) British Pounds
Sterling, French Francs, Swiss Francs, Deutsche Marks, Japanese Yen,
Netherlands Guilders and Italian Lire and (ii) any other freely
available currency which is freely transferrable and freely convertible
into Dollars and in which dealings in deposits are carried on in the
London interbank market, which shall be requested by the Borrower and
approved by the Bank.
"BA Commitment" means the commitment of the Bank to create and
discount Bankers' Acceptances, and to honor payment obligations
relating thereto.
"BA Discount Reference Rate" shall mean, with respect to any
Bankers' Acceptance, the current quoted discount rate for bankers'
acceptances of the Bank on the date of creation of such Bankers'
Acceptance for bankers' acceptances in an amount substantially equal to
the face amount of such Bankers' Acceptance and having the same
maturity as such Bankers' Acceptance.
"BA Documents" shall mean, with respect to any Bankers
Acceptance such documents and agreements as the Bank reasonably may
require in connection with the creation of such Bankers' Acceptance.
3
<PAGE> 9
"BA Obligations" means, at any time, without duplication, the
sum of (i) the maximum aggregate amount which is, or at any time
thereafter may become, payable by the Bank under all Bankers'
Acceptances then outstanding, plus (ii) the aggregate BA Reimbursement
Obligations at such time.
"BA Reimbursement Obligation" means, at any time, with respect
to any Bankers' Acceptance, the obligation of the Borrower to reimburse
the Bank for the face amount of a matured Bankers' Acceptance.
"Bankers' Acceptance" means a draft drawn by the Borrower, on
and accepted and discounted by, the Bank in accordance with the
provisions of Section 2.3.
"Bankruptcy Code" means the Bankruptcy Code in Title 11 of the
United States Code, as amended, modified, succeeded or replaced from
time to time.
"Bankruptcy Event" means, with respect to any Person, the
occurrence of any of the following with respect to such Person: (i) a
court or governmental agency having jurisdiction in the premises shall
enter a decree or order for relief in respect of such Person in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of such Person or for any substantial part of its Property or
ordering the winding up or liquidation of its affairs; or (ii) there
shall be commenced against such Person an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or any case, proceeding or other action for the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of such Person or for any substantial part of its
Property or for the winding up or liquidation of its affairs, and such
involuntary case or other case, proceeding or other action shall remain
undismissed, undischarged or unbonded for a period of sixty (60)
consecutive days; or (iii) such Person shall commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in
an involuntary case under any such law, or consent to the appointment
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of such Person or for any
substantial part of its Property or make any general assignment for the
benefit of creditors; or (iv) such Person shall be unable to, or shall
admit in writing its inability to, pay its debts generally as they
become due.
"Borrower" means the Person identified as such in the heading
hereof, together with any permitted successors and assigns.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in Charlotte, North Carolina or
Phoenix, Arizona are authorized or required by law to close, except
that when used in connection with LIBOR Rate Loans, such day shall also
be a day on which dealings between banks are carried on in London,
England in deposits of Dollars or Available Foreign Currency, as
applicable.
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<PAGE> 10
"Capital Lease" means, as applied to any Person, any lease of
any Property (whether real, personal or mixed) by that Person as lessee
which, in accordance with GAAP, is or should be accounted for as a
capital lease on the balance sheet of that Person.
"Capital Lease Obligation" means the capital lease obligations
relating to a Capital Lease determined in accordance with GAAP.
"Cash Equivalents" means (a) securities issued or directly and
fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and
credit of the United States of America is pledged in support thereof)
having maturities of not more than twelve months from the date of
acquisition, (b) U.S. dollar denominated time deposits and certificates
of deposit of (i) the Bank, or (ii) any domestic commercial bank of
recognized standing (y) having capital and surplus in excess of
$500,000,000 and (z) whose short-term commercial paper rating from S&P
is at least A-1 or the equivalent thereof or from Moody's is at least
P-1 or the equivalent thereof (any the Bank being an "Approved Bank"),
in each case with maturities of not more than 270 days from the date of
acquisition, (c) commercial paper and variable or fixed rate notes
issued by any Approved Bank (or by the parent corporation thereof) and
maturing within six months of the date of acquisition, (d) repurchase
agreements entered into by a Person with the Bank or trust company
(including any of the Banks) or recognized securities dealer having
capital and surplus in excess of $500,000,000 for direct obligations
issued by or fully guaranteed by the United States of America in which
such Person shall have a perfected first priority security interest
(subject to no other Liens) and having, on the date of purchase
thereof, a fair market value of at least 100% of the amount of the
repurchase obligations, (e) obligations of any State of the United
States or any political subdivision thereof, the interest with respect
to which is exempt from federal income taxation under Section 103 of
the Code, having a long term rating of at least AA- or Aa-3 by S&P or
Moody's, respectively, and maturing within three years from the date of
acquisition thereof, (f) Investments in municipal auction preferred
stock (i) rated AAA (or the equivalent thereof) or better by S&P or Aaa
(or the equivalent thereof) or better by Moody's and (ii) with
dividends that reset at least once every 365 days and (g) Investments,
classified in accordance with GAAP as current assets, in money market
investment programs registered under the Investment Borrower Act of
1940, as amended, which are administered by reputable financial
institutions having capital of at least $100,000,000 and the portfolios
of which are limited to Investments of the character described in the
foregoing subdivisions (a), (b), (c), (e) and (f).
"Change of Control" shall be deemed to have occurred in the
event that:
(i) the Principal Shareholder shall cease to own,
directly or indirectly, at least 1,000,000 shares of Voting
Stock of the Borrower free and clear of Liens; or
(ii) the Principal Shareholder shall cease to be the
chief executive officer of the Borrower (a) for any reason
other than his death or legal disability, or (b) due to his
death or legal disability, and a successor satisfactory to the
Bank
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<PAGE> 11
does not assume his responsibilities and position within
thirty (30) days of such cessation.
"Closing Date" means the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor statute thereto, as interpreted by the rules and
regulations issued thereunder, in each case as in effect from time to
time. References to sections of the Code shall be construed also to
refer to any successor sections.
"Commitment" means the Revolving Commitment, the LOC
Commitment and the BA Commitment.
"Commitment Fee" shall have the meaning given such term in
Section 3.5(a).
"Commitment Period" means the period from and including the
Closing Date to but not including the earlier of (i) the Termination
Date, or (ii) the date on which the Revolving Commitment terminates in
accordance with the provisions of this Credit Agreement.
"Consolidated" means, when used with reference to Fixed
Charges or Funded Debt, the aggregate of Fixed Charges or Funded Debt,
as the case may be, of the Borrower and its Subsidiaries, after
eliminating all offsetting debts and credits between the Borrower and
its Subsidiaries and all other terms required to be eliminated in
accordance with GAAP. Calculations of Consolidated EBITDA, Consolidated
Revenues, Consolidated Fixed Charges and Consolidated Income Available
for Fixed Charges shall be made on a consolidating pro forma basis, as
if (i) any consolidation or merger with or into any Person by the
Borrower or any Subsidiary, any Transfer of all or substantially all of
the assets of the Borrower or any Subsidiary to any Person or any
Transfer of all or substantially all of the assets of any Person to the
Borrower or any Subsidiary that has occurred during the preceding four
Fiscal Quarters had occurred at the commencement of such period and
(ii) any Indebtedness incurred or assumed by the Borrower and its
Subsidiaries during the preceding four Fiscal Quarters (other than any
refinancing of Indebtedness to the extent that the principal amount of
such Indebtedness did not increase) had been in effect at the
commencement of such period.
"Consolidated EBITDA" means, with respect to any date of
determination, the sum of (a) Consolidated Net Income for the most
recently ended four Fiscal Quarters and (b) the amount of all Interest
Charges, depreciation, amortization, income taxes, deferred items and
other non-cash expenses of the Borrower and its Subsidiaries, but only
to the extent deducted in the determination of Consolidated Net Income
for the most recently ended four Fiscal Quarters;
"Consolidated Group" means the Borrower and its consolidated
subsidiaries, as determined in accordance with GAAP.
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<PAGE> 12
"Consolidated Income Available for Fixed Charges" means, with
respect to any period, Consolidated Net Income for such period plus all
amounts deducted in the computation thereof on account of (a) Fixed
Charges and (b) taxes imposed on or measured by income or excess
profits.
"Consolidated Net Income" means, with reference to any period,
the net income (or loss) of the Borrower and its Subsidiaries for such
period (taken as a cumulative whole), as determined in accordance with
GAAP, after eliminating all offsetting debits and credits between the
Borrower and its Subsidiaries and all other terms required to be
eliminated in the course of the preparation of consolidated financial
statements of the Borrower and its Subsidiaries in accordance with
GAAP; provided that there shall be excluded:
(a) subject to clause (i) of the definition of
"Consolidated" herein, the income (or loss) of any Person
accrued prior to the date it becomes a Subsidiary or is merged
into or consolidated with the Borrower or a Subsidiary, and
the income (or loss) of any Person, substantially all of the
assets of which have been acquired in any manner, realized by
such other Person prior to the date of acquisition;
(b) the income (or loss) of any Person (other than a
Subsidiary) in which the Borrower or any Subsidiary has an
ownership interest, except to the extent that any such income
has been actually received by the Borrower or such Subsidiary
in the form of cash dividends or similar cash distributions;
(c) the undistributed earnings of any Subsidiary to
the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time
permitted by the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Subsidiary;
(d) any restoration to income of any contingency
reserve, except to the extent that provision for such reserve
was made out of income accrued during such period;
(e) any aggregate net gain (but not any aggregate net
loss) during such period arising from the sale, conversion,
exchange or other disposition of capital assets (such term to
include, without limitation, (i) all non-current assets and,
without duplication, (ii) the following, whether or not
current: all fixed assets, whether tangible or intangible, all
inventory sold in conjunction with the disposition of fixed
assets, and all Securities);
(f) any gains resulting from any write-up of any
assets (but not any loss resulting from any writedown of any
assets);
(g) any net gain from the collection of the proceeds
of life insurance policies;
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<PAGE> 13
(h) any gain arising from the acquisition of any
Security, or the extinguishment, under GAAP, of any
Indebtedness, of the Borrower or any Subsidiary;
(i) any net income or gain (but not any net loss)
during such period from (i) any change in accounting
principles in accordance with GAAP, (ii) any prior period
adjustments resulting from any change in accounting principles
in accordance with GAAP, (iii) any extraordinary items, or
(iv) any discontinued operations or the disposition thereof;
(j) any deferred credit representing the excess of
equity in any Subsidiary at the date of acquisition over the
cost of the investment in such Subsidiary; and
(k) any portion of such net income that cannot be
freely converted into United States Dollars.
"Consolidated Net Worth" means, at any time, (a) Consolidated
Total Assets minus (b) the total liabilities of the Borrower and its
Subsidiaries which would be shown as liabilities on a consolidated
balance sheet of the Borrower and its Subsidiaries as of such time
prepared in accordance with GAAP.
"Consolidated Revenues" means the revenue of the Borrower and
its Subsidiaries for the applicable period, as determined in accordance
with GAAP, after eliminating all offsetting debits and credits between
the Borrower and its Subsidiaries and all other terms required to be
eliminated in the course of the preparation of consolidated financial
statements of the Borrower and its Subsidiaries in accordance with
GAAP.
"Consolidated Senior Leverage Ratio" means, as of the last day
of each fiscal quarter, the ratio of (i) Funded Debt of the Borrowers
and its Subsidiaries on such day determined on a consolidated basis to
(ii) Consolidated EBITDA for the period of four consecutive fiscal
quarters ending as of such day.
"Consolidated Total Assets" means, as of any date of
determination, the total assets of the Borrower and its Subsidiaries
which would be shown as assets on a consolidated balance sheet of the
Borrower and its Subsidiaries as of such time prepared in accordance
with GAAP, after eliminating all amounts properly attributable to
minority interests, if any, in the stock and surplus of Subsidiaries.
"Consolidated Total Tangible Assets" means Consolidated Total
Assets less and except goodwill and other intangible assets of the
Borrower and its Subsidiaries on a consolidated basis determined in
accordance with GAAP.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any material
agreement, instrument or undertaking to which such Person is a party or
by which it or any of its Property is bound.
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<PAGE> 14
"Credit Documents" means a collective reference to this Credit
Agreement, the Revolving Note, the LOC Documents, the BA Documents,
each Joinder Agreement and all other related agreements and documents
issued or delivered hereunder or thereunder or pursuant hereto or
thereto.
"Credit Party" means any of the Borrower and the Guarantors.
"Current Maturities of Funded Debt" means, at any time and
with respect to any item of Funded Debt, the portion of such Funded
Debt outstanding at such time which by the terms of such Funded Debt or
the terms of any instrument or agreement relating thereto is due on
demand or within one year from such time (whether by sinking fund,
other required prepayment or final payment at maturity) and is not
directly or indirectly renewable, extendible or refundable at the
option of the obligor under an agreement or firm commitment in effect
at such time to a date one year or more from such time.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Determination Date" means with respect to any Foreign
Currency Loan:
(a) in connection with the origination of any new
Loan advance, the Business Day which is the earliest of the
date such credit is extended, the date the rate is set or the
date the bid is accepted, as applicable;
(b) in connection with any extension or conversion or
continuation of an existing Loan, the last Business Day of
each month or the Business Day which is the earlier of the
date such advance is extended, converted or continued, or the
date the rate is set, as applicable, in connection with any
extension, conversion or continuation; or
(c) the date of any reduction of the Revolving
Committed Amount pursuant to the terms of Section 3.4; and
in addition to the foregoing, such additional dates not more frequently
than once a month as may be determined by the Bank. For purposes of
determining availability hereunder, the rate of exchange for Available
Foreign Currency shall be the spot rate for such Foreign Currency as
quoted by the Bank at or about 10:00 A.M. (Charlotte, North Carolina
time) on the day of determination.
"Dollar Amount" means (a) with respect to Obligations
denominated in Dollars, such amount and (b) with respect to Obligations
denominated in a Foreign Currency, (i) in the case of Loans, the Dollar
Equivalent of such amount on the applicable date contemplated in this
Credit Agreement and (ii) in the case of LOC Obligations, (A) if the
Borrower has entered into a Hedging Agreement with respect to such LOC
Obligations, the Dollar Equivalent of such amount on the applicable
date contemplated in this Credit Agreement or (B) if the Borrower has
not entered into a Hedging Agreement with
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<PAGE> 15
respect to such LOC Obligations, an amount equal to 120% of the Dollar
Equivalent of such amount on the applicable date contemplated in this
Credit Agreement.
"Dollar Equivalent" means, on any date, with respect to an
amount denominated in a Foreign Currency, the amount of Dollars into
which the Bank could, in accordance with its practice from time to time
in the interbank foreign exchange market, convert such amount of such
Foreign Currency at its spot rate of exchange (inclusive of all
reasonable related costs of conversion, if any, that are actually
incurred) at or about 10:00 A.M., Charlotte, North Carolina time, on
such date.
"Dollars" and "$" means dollars in lawful currency of the
United States of America.
"Domestic Credit Party" means any Credit Party which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Domestic Subsidiary" means any Subsidiary which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Eligible Bankers' Acceptance" means a Bankers' Acceptance
which meets the requirements of 12 U.S.C. Section 372(a).
"Environmental Laws" means any and all lawful and applicable
Federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions,
grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes.
"Equity Transaction" means, with respect to the Borrower or
any of its Subsidiaries, any issuance of shares of capital stock or
other equity interest, including stock and equity interests issued in
connection with acquisitions permitted hereunder, other than an
issuance (i) to the Borrower or a Subsidiary of the Borrower, or (ii)
in connection with the exercise by a present or former employee,
officer or director under a stock incentive plan, stock option plan or
other equity based compensation plan or arrangement.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute thereto, as interpreted by
the rules and regulations thereunder, all as the same may be in effect
from time to time. References to sections of ERISA shall be construed
also to refer to any successor sections.
"ERISA Affiliate" means an entity which is under common
control with any Credit Party within the meaning of Section 4001(a)(14)
of ERISA, or is a member of a group
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<PAGE> 16
which includes the Borrower and which is treated as a single employer
under Sections 414(b) or (c) of the Code.
"ERISA Event" means (i) with respect to any Plan, the
occurrence of a Reportable Event or the substantial cessation of
operations (within the meaning of Section 4062(e) of ERISA); (ii) the
withdrawal by the Borrower, any Subsidiary of the Borrower or any ERISA
Affiliate from a Multiple Employer Plan during a plan year in which it
was a substantial employer (as such term is defined in Section
4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan;
(iii) the distribution of a notice of intent to terminate or the actual
termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA;
(iv) the institution of proceedings to terminate or the actual
termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any
event or condition which could reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan; (vi) the complete or
partial withdrawal of the Borrower, any Subsidiary of the Borrower or
any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for
imposition of a lien under Section 302(f) of ERISA exist with respect
to any Plan; or (vii) the adoption of an amendment to any Plan
requiring the provision of security to such Plan pursuant to Section
307 of ERISA.
"Eurodollar Reserve Percentage" for any day, the percentage
(expressed as a decimal and rounded upwards, if necessary, to the next
higher 1/100th of 1%), which is in effect for such day as prescribed by
the Federal Reserve Board (or any successor) for determining the
maximum reserve requirement (including without limitation any basic,
supplemental or emergency reserves) in respect of Eurocurrency
liabilities, as defined in Regulation D of such Board as in effect from
time to time, or any similar category of liabilities for a member bank
of the Federal Reserve System in New York City.
"Event of Default" means such term as defined in Section 9.1.
"Extension of Credit" means the making of any Revolving Loan
(including the extension of, or conversion into, a LIBOR Rate Loan) or
the issuance or extension of any Letter of Credit or the creation and
discount of a Banker's Acceptance hereunder.
"Fees" means all fees payable pursuant to Section 3.5.
"First Union" means First Union National Bank and its
successors.
"Fiscal Quarter" means a fiscal quarter of the Borrower or any
of its Subsidiaries which shall be any quarterly period ending on March
31, June 30, September 30 or December 31 of any year.
"Fiscal Year" means, with respect to any Person, a fiscal year
of such Person.. The term "Fiscal Year, " when used without reference
to any Person, shall mean a Fiscal Year of the Borrower ending on
September 30, of any year.
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<PAGE> 17
"Fixed Charges" means, with respect to any date of
determination, the sum of (a) Interest Charges for the most recently
ended four Fiscal Quarters and (b) Lease Rentals for the most recently
ended four Fiscal Quarters.
"Fixed Charges Coverage Ratio" means, as of any date of
determination thereof, the ratio of (a) Consolidated Income Available
for Fixed Charges for the most recently ended four Fiscal Quarters to
(b) Consolidated Fixed Charges for such period.
"Foreign Credit Party" means a Credit Party which is not a
Domestic Credit Party.
"Foreign Currency" means Available Foreign Currency.
"Foreign Currency Equivalent" means, on any date, with respect
to an amount denominated in Dollars, the amount of any applicable
Available Foreign Currency into which the Bank could, in accordance
with its practice from time to time in the interbank foreign exchange
market, convert such amount of Dollars at its spot rate of exchange
(inclusive of all reasonable related costs of conversion, if any are
actually incurred) applicable to the relevant transaction at or about
10:00 A.M., Charlotte, North Carolina time, on such date.
"Foreign Currency Loan" means any Loan denominated in an
Available Foreign Currency.
"Foreign Subsidiary" means a Subsidiary which is not a
Domestic Subsidiary.
"Funded Debt" means, with respect to any Person, all
Indebtedness of such Person which by its terms or by the terms of any
instrument or agreement relating thereto matures, or which is otherwise
payable or unpaid, one year or more from, or is directly or indirectly
renewable or extendible at the option of the obligor in respect thereof
to a date one year or more (including, without limitation, an option of
such obligor under a revolving credit or similar agreement obligating
the lender or lenders to extend credit over a period of one year or
more) from, the date of the creation thereof; provided that Funded Debt
shall include, as at any date of determination, Current Maturities of
Funded Debt; provided further that Funded Debt shall not include any
Indebtedness which by its terms is expressly subordinated in right of
payment to the prior payment of the obligations under the Credit
Agreement and other Credit Documents on terms and conditions
satisfactory to the Bank, including, without limitation, the
Subordinated Notes.
"GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis and subject to the terms of
Section 1.3 hereof.
"Governmental Authority" means any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or
regulatory body.
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<PAGE> 18
"Guarantor" means each of those other Persons identified as a
"Guarantor" on the signature pages hereto, and each Additional Credit
Party which may hereafter execute a Joinder Agreement, together with
their successors and permitted assigns.
"Guaranteed Obligations" means, as to each Guarantor, without
duplication, (i) all obligations of the Borrower to the Bank, whenever
arising, under this Credit Agreement , the Revolving Note or the other
Credit Documents relating to the Obligations hereunder, and (ii) all
liabilities and obligations, whenever arising, owing from the Borrower
to the Bank, or any Affiliate of the Bank, arising under any Hedging
Agreement relating to Obligations hereunder.
"Guaranty Obligations" means, with respect to any Person,
without duplication, any obligations of such Person (other than
endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) guaranteeing or intended to
guarantee any Indebtedness of any other Person in any manner, whether
direct or indirect, and including without limitation any obligation,
whether or not contingent, (i) to purchase any such Indebtedness or any
Property constituting security therefor, (ii) to advance or provide
funds or other support for the payment or purchase of any such
Indebtedness or to maintain working capital, solvency or other balance
sheet condition of such other Person (including without limitation keep
well agreements, maintenance agreements, comfort letters or similar
agreements or arrangements) for the benefit of any holder of
Indebtedness of such other Person, (iii) to lease or purchase Property,
securities or services primarily for the purpose of assuring the holder
of such Indebtedness, or (iv) to otherwise assure or hold harmless the
holder of such Indebtedness against loss in respect thereof. The amount
of any Guaranty Obligation hereunder shall (subject to any limitations
set forth therein) be deemed to be an amount equal to the outstanding
principal amount (or maximum principal amount, if larger) of the
Indebtedness in respect of which such Guaranty Obligation is made.
"Hedging Agreements" means any interest rate protection
agreement or foreign currency exchange agreement between the Borrower
and the Bank, or any Affiliate of the Bank.
"Indebtedness" of any Person means (i) all obligations of such
Person for borrowed money, (ii) all obligations of such Person
evidenced by bonds, debentures, notes or similar instruments, or upon
which interest payments are customarily made, (iii) all obligations of
such Person under conditional sale or other title retention agreements
relating to Property purchased by such Person (other than customary
reservations or retentions of title under agreements with suppliers
entered into in the ordinary course of business), (iv) all obligations
of such Person issued or assumed as the deferred purchase price of
Property or services purchased by such Person (other than trade debt
incurred in the ordinary course of business and due within six months
of the incurrence thereof) which would appear as liabilities on a
balance sheet of such Person, (v) all obligations of such Person under
take-or-pay or similar arrangements or under commodities agreements,
(vi) all Indebtedness of others secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on, or payable out of the proceeds of production
from, Property owned or acquired by such Person, whether or not the
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<PAGE> 19
obligations secured thereby have been assumed, provided that for
purposes hereof the amount of such Indebtedness shall be limited to the
greater of (A) the amount of such Indebtedness as to which there is
recourse to such Person and (B) the fair market value of the property
which is subject to the Lien, (vii) all Guaranty Obligations of such
Person, (viii) the principal portion of all obligations of such Person
under Capital Leases, (ix) all obligations of such Person in respect of
interest rate protection agreements, foreign currency exchange
agreements, commodity purchase or option agreements or other interest
or exchange rate or commodity price hedging agreements (including, but
not limited to, the Hedging Agreements), (x) the maximum amount of all
standby letters of credit issued or bankers' acceptances facilities
created for the account of such Person and, without duplication, all
drafts drawn thereunder (to the extent unreimbursed), (xi) all
preferred stock issued by such Person and required by the terms thereof
to be redeemed, or for which mandatory sinking fund payments are due,
by a fixed date, (xii) the outstanding Attributed Principal Amount
under any Securitization Financing and (xiii) the principal balance
outstanding under any synthetic lease, tax retention operating lease,
off-balance sheet loan or similar off-balance sheet financing product
to which such Person is a party, where such transaction is considered
borrowed money indebtedness for tax purposes but is classified as an
operating lease in accordance with GAAP. The Indebtedness of any Person
shall include the Indebtedness of any partnership or joint venture in
which such Person is a general partner or a joint venturer, but only to
the extent to which there is recourse to such Person for payment of
such Indebtedness.
"Interest Charges" means, with reference to any period, the
sum (without duplication) of the following (in each case, eliminating
all offsetting debits and credits between the Borrower and its
Subsidiaries and all other items required to be eliminated in the
course of the preparation of consolidated financial statements of the
Borrower and its Subsidiaries in accordance with GAAP): (a) all
interest in respect of Indebtedness of the Borrower and its
Subsidiaries (including imputed interest on Capital Lease Obligations)
deducted in determining Consolidated Net Income for such period,
together with all interest capitalized or deferred during such period
and not deducted in determining Consolidated Net Income for such
period, and (b) all debt discount and expense amortized or required to
be amortized in the determination of Consolidated Net Income for such
period.
"Interest Payment Date" (a) as to any Alternate Base Rate
Loan, the last day of each March, June, September and December to occur
while such Loan is outstanding, (b) as to any LIBOR Rate Loan having an
Interest Period of three months or less, the last day of such Interest
Period, and (c) as to any LIBOR Rate Loan having an Interest Period
longer than three months, each day which is three months after the
first day of such Interest Period and the last day of such Interest
Period.
"Interest Period" with respect to any LIBOR Rate Loan,
(i) initially, the period commencing on the borrowing
date or conversion date, as the case may be, with respect to
such LIBOR Rate Loan and ending one, two, three or six months
thereafter, as selected by the Borrower in the notice of
borrowing or notice of conversion given with respect thereto;
and
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<PAGE> 20
(ii) thereafter, each period commencing on the last day
of the immediately preceding Interest Period applicable to
such LIBOR Rate Loan and ending one, two, three or six months
thereafter, as selected by the Borrower by irrevocable notice
to the Bank not less than three Business Days prior to the
last day of the then current Interest Period with respect
thereto;
provided that the foregoing provisions are subject to the following:
(A) if any Interest Period pertaining to a LIBOR Rate
Loan would otherwise end on a day that is not a Business Day,
such Interest Period shall be extended to the next succeeding
Business Day unless the result of such extension would be to
carry such Interest Period into another calendar month in
which event such Interest Period shall end on the immediately
preceding Business Day;
(B) any Interest Period pertaining to a LIBOR Rate
Loan that begins on the last Business Day of a calendar month
(or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of the relevant calendar
month;
(C) if the Borrower shall fail to give notice as
provided above, the Borrower shall be deemed to have selected
an Alternate Base Rate Loan to replace the affected LIBOR Rate
Loan;
(D) any Interest Period in respect of any Loan that
would otherwise extend beyond the Termination Date shall end
on the Termination Date; and
(E) in the case of LIBOR Rate Loans which are
denominated in Dollars, no more than four (4) LIBOR Rate Loans
may be in effect at any time, and in the case of LIBOR Rate
Loans which are denominated in Available Foreign Currencies,
no more than four (4) LIBOR Rate Loans may be in effect at any
time. For purposes hereof, LIBOR Rate Loans with different
Interest Periods shall be considered as separate LIBOR Rate
Loans, even if they shall begin on the same date and have the
same duration, although borrowings, extensions and conversions
may, in accordance with the provisions hereof, be combined at
the end of existing Interest Periods to constitute a new LIBOR
Rate Loan with a single Interest Period.
"Invested Amount" shall have the meaning given such term in
the definition of Attributed Principal Amount.
"Investment", in any Person, means any loan or advance to such
Person, any purchase or other acquisition of any capital stock,
warrants, rights, options, obligations or other securities of, or
equity interest in, such Person, any capital contribution to such
Person or any other investment in such Person, including, without
limitation, any Guaranty Obligation incurred for the benefit of such
Person.
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"Joinder Agreement" means a Joinder Agreement substantially in
the form of Schedule 7.10 hereto, executed and delivered by an
Additional Credit Party in accordance with the provisions of Section
7.10.
"Lease Rentals" means, with reference to any period, the sum
of rental and other obligations required to be paid during such period
by the Borrower or any Subsidiary as lessee under all leases of real or
personal property (other than Capital Leases), excluding any amount
required to be paid by the lessee (whether or not therein designated as
rental or additional rental) on account of maintenance and repairs,
insurance, taxes, assessments, water rates and similar charges;
provided that, if at the date of determination, any such rental or
other obligations (or portion thereof) are contingent or not otherwise
definitely determinable by the terms of the related lease, the amount
of such obligations (or such portion thereof) (i) shall be assumed to
be equal to the amount of such obligations for the period of 12
consecutive calendar months immediately preceding the date of
determination or (ii) if the related lease was not in effect during
such preceding 12-month period, shall be the amount estimated by the
chief financial officer or controller of the Borrower on a reasonable
basis and in good faith.
"Letter of Credit" means any Standby Letter of Credit or Trade
Letter of Credit.
"Letter of Credit Fee" shall have the meaning given such term
in Section 3.5(b).
"LIBOR" means, for any LIBOR Rate Loan for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100th of 1%) appearing on Telerate Page 3750 (or any
successor or equivalent page) as the London interbank offered rate for
deposits in Dollars or applicable Available Foreign Currency, as
appropriate, at approximately 11:00 a.m. (London time) two Business
Days prior to (or, in the case of British Pounds Sterling, on) the
first day of such Interest Period for a term comparable to such
Interest Period; plus, in the case of British Pounds Sterling, the
applicable MLA Cost. If for any reason such rate is not available, the
term "LIBOR" shall mean, for any LIBOR Rate Loan for any Interest
Period therefor, (i) the rate per annum (rounded upwards, if necessary,
to the nearest 1/100th of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars or applicable
Available Foreign Currency, as appropriate, at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided that if
more than one rate is specified on Reuters Screen LIBO Page, the
applicable rate shall be the arithmetic mean of all such rates, or (ii)
if the no rate is available on the Reuters Screen, then the rate
determined by the Bank at which Dollars or applicable Available Foreign
Currency, as appropriate, is offered by leading banks at approximately
11:00 a.m. (London time) two Business days prior to the first day of
the applicable Interest Period; plus, in the case of British Pounds
Sterling, the applicable MLA Cost.
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"LIBOR Rate" means a rate per annum (rounded upwards, if
necessary, to the next higher 1/100th of 1%) determined by the Bank
pursuant to the following formula:
LIBOR Rate = LIBOR
----------------------------------------------
1.00 minus Eurodollar Reserve Percentage
"LIBOR Rate Loan" means Loans the rate of interest applicable
to which is based on the LIBOR Rate.
"Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, encumbrance, lien (statutory or
otherwise), preference, priority or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other
title retention agreement, any financing or similar statement or notice
filed under the Uniform Commercial Code as adopted and in effect in the
relevant jurisdiction or other similar recording or notice statute, and
any lease in the nature thereof).
"Loan" or "Loans" means the Revolving Loans.
"LOC/BA Committed Amount" means such term as defined in
Section 2.2.
"LOC Commitment" means the commitment of the Bank to issue,
and to honor payment obligations under, Letters of Credit hereunder.
"LOC Documents" means, with respect to any Letter of Credit,
such Letter of Credit, any amendments thereto, any documents delivered
in connection therewith, any application therefor, and any agreements,
instruments, guarantees or other documents (whether general in
application or applicable only to such Letter of Credit) governing or
providing for (i) the rights and obligations of the parties concerned
or at risk or (ii) any collateral security for such obligations.
"LOC Obligations" means, collectively, the Standby LOC
Obligations and the Trade LOC Obligations.
"Material Adverse Effect" means a material adverse effect on
(i) the condition (financial or otherwise), operations, business,
assets, liabilities or prospects of the Consolidated Group taken as a
whole, (ii) the ability of the Credit Parties taken as a whole to
perform any material obligation under the Credit Documents to which it
is a party or (iii) the rights and remedies of the Bank under the
Credit Documents.
"Materials of Environmental Concern" means any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Laws,
including, without limitation, asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"MLA Cost" means, with respect to any Foreign Currency Loan
denominated in British Pounds Sterling, the cost of compliance imputed
to the Bank with respect to the
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<PAGE> 23
Mandatory Liquid Assets requirements of the Bank of England, expressed
as a rate per annum. Determination of the MLA Cost by the Bank shall be
assumed correct and conclusive absent manifest error.
"Moody's" means Moody's Investors Service, Inc., or any
successor or assignee of the business of such Borrower in the business
of rating securities.
"Multiemployer Plan" means a Plan which is a multiemployer
plan as defined in Sections 3(37) or 4001(a)(3) of ERISA.
"Multiple Employer Plan" means a Plan which the Borrower, any
Subsidiary of the Borrower or any ERISA Affiliate and at least one
employer other than the Borrower, any Subsidiary of the Borrower or any
ERISA Affiliate are contributing sponsors.
"Non-Excluded Taxes" means such term as is defined in Section
3.10.
"Notice of Borrowing" means a written notice of borrowing in
substantially the form of Schedule 2.1(b), as required by Section
2.1(b).
"Notice of Extension/Conversion" means the written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Obligations" means, collectively, the Revolving Loans, the
LOC Obligations and the BA Obligations.
"Operating Lease" means, as applied to any Person, any lease
(including, without limitation, leases which may be terminated by the
lessee at any time) of any Property (whether real, personal or mixed)
which is not a Capital Lease other than any such lease in which that
Person is the lessor.
"Organizational Documents" means, as to any Person, the
certificate of incorporation and by-laws or other organizational or
governing documents of such Person.
"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any
successor thereof.
"Permitted Investments" means Investments which are either (i)
cash and Cash Equivalents; (ii) accounts receivable created, acquired
or made in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; (iii) Investments consisting
of stock, obligations, securities or other property received in
settlement of accounts receivable (created in the ordinary course of
business) from bankrupt obligors; (iv) Investments existing as of the
Closing Date and set forth in Schedule 8.5, (v) Guaranty Obligations
permitted by Section 8.1; (vi) acquisitions permitted by Section
8.4(d); (vii) transactions permitted by Section 8.6, (viii) loans to
employees, directors or officers in connection with the award of
convertible bonds or stock under a stock incentive plan, stock option
plan or other equity-based compensation plan or
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<PAGE> 24
arrangement in the aggregate not to exceed $1,000,000 (calculated on
the exercise price for any such shares) in the aggregate at any time
outstanding; (ix) other advances or loans to employees, directors,
officers or agents not to exceed $500,000 in the aggregate at any time
outstanding; (x) advances or loans to customers or suppliers that do
not exceed $2,000,000 in the aggregate at any one time outstanding,
(xi) Investments by members of the Consolidated Group and their
Subsidiaries and Affiliates existing on the Closing Date, (xii)
Investments by a Credit Party in and to a Domestic Credit Party, (xiii)
other loans, advances and investments of a nature not contemplated in
the foregoing subsections in an amount not to exceed in the aggregate
at any time outstanding an amount equal to the sum of $4,500,000 plus
an amount equal to the "unused" portion of Restricted Payments which
are permitted, but not made, in any fiscal year and (xiv) any other
Investments consented to in writing by the Bank.
"Permitted Liens" means:
(i) Liens in favor of the Bank;
(ii) Liens (other than Liens created or
imposed under ERISA) for taxes, assessments or governmental
charges or levies not yet due or Liens for taxes being
contested in good faith by appropriate proceedings for which
adequate reserves determined in accordance with GAAP have been
established (and as to which the Property subject to any such
Lien is not yet subject to foreclosure, sale or loss on
account thereof);
(iii) statutory Liens of landlords and Liens
of carriers, warehousemen, mechanics, materialmen and
suppliers and other Liens imposed by law or pursuant to
customary reservations or retentions of title arising in the
ordinary course of business, provided that such Liens secure
only amounts not yet due and payable or, if due and payable,
are unfiled and no other action has been taken to enforce the
same or are being contested in good faith by appropriate
proceedings for which adequate reserves determined in
accordance with GAAP have been established (and as to which
the Property subject to any such Lien is not yet subject to
foreclosure, sale or loss on account thereof);
(iv) Liens (other than Liens created or
imposed under ERISA) incurred or deposits made by the Borrower
and its Subsidiaries in the ordinary course of business in
connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the
performance of tenders, statutory obligations, bids, leases,
government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for
the payment of borrowed money);
(v) Liens in connection with attachments or
judgments (including judgment or appeal bonds) provided that
the judgments secured shall, within 30 days after the entry
thereof, have been discharged or execution thereof stayed
pending appeal, or shall have been discharged within 30 days
after the expiration of any such stay;
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<PAGE> 25
(vi) easements, rights-of-way, restrictions
(including zoning restrictions), minor defects or
irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use
of the encumbered Property for its intended purposes;
(vii) Liens securing purchase money and
sale/leaseback Indebtedness (including Capital Leases) to the
extent permitted under Section 8.1(d), provided that any such
Lien attaches only to the Property financed or leased and such
Lien attaches thereto concurrently with or within 90 days
after the acquisition thereof in connection with the purchase
money transactions and within 30 days after the closing of any
sale/leaseback transaction;
(viii) leases or subleases granted to others
not interfering in any material respect with the business of
any member of the Consolidated Group;
(ix) any interest of title of a lessor
under, and Liens arising from UCC financing statements (or
equivalent filings, registrations or agreements in foreign
jurisdictions) relating to, leases permitted by this Credit
Agreement;
(x) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods;
(xi) Liens deemed to exist in connection
with Investments in repurchase agreements permitted under
Section 8.5;
(xii) normal and customary rights of setoff
upon deposits of cash in favor of banks or other depository
institutions; and
(xiii) Liens existing as of the Closing Date
and set forth on Schedule 6.8; provided that no such Lien
shall at any time be extended to or cover any Property other
than the Property subject thereto on the Closing Date.
"Person" means any individual, partnership, joint venture,
firm, corporation, limited liability company, association, trust or
other enterprise (whether or not incorporated) or any Governmental
Authority.
"Plan" means any employee benefit plan (as defined in Section
3(3) of ERISA) which is covered by ERISA and with respect to which the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate is (or,
if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" within the meaning of Section 3(5)
of ERISA.
"Principal Shareholder" means Fred W. Wagenhals, the president
and chief executive officer of the Borrower.
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<PAGE> 26
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Receivables Financier" means, in connection with a
Securitization Transaction, the Person which provides financing for
such transaction whether by purchase, loan or otherwise in respect of
Receivables.
"Regulation T, U, or X" means Regulation T, U or X,
respectively, of the Board of Governors of the Federal Reserve System
as from time to time in effect and any successor to all or a portion
thereof.
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the environment (including the abandonment or
discarding of barrels, containers and other closed receptacles
containing any Materials of Environmental Concern).
"Reportable Event" means any of the events set forth in
Section 4043(c) of ERISA, other than those events as to which the
notice requirement has been waived by regulation.
"Requirement of Law" means, as to any Person, any law, treaty,
rule or regulation or determination of an arbitrator or a court or
other Governmental Authority, in each case applicable to or binding
upon such Person or any of its material property is subject.
"Responsible Officer" means the Chief Financial Officer and
the Controller.
"Restricted Payment" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class
of stock now or hereafter outstanding, except (A) a dividend payable
solely in shares of that class to the holders of that class and (B)
dividends and other distributions payable to a Credit Party, (ii) any
redemption, retirement, sinking fund or similar payment, purchase or
other acquisition for value, direct or indirect, of any shares of any
class of stock now or hereafter outstanding, and (iii) any payment made
to retire, or to obtain the surrender of, any outstanding warrants,
options or other rights to acquire shares of any class of stock now or
hereafter outstanding.
"Revolving Commitment" means the commitment of the Bank to
make Revolving Loans hereunder.
"Revolving Committed Amount" means such term as defined in
Section 2.1(a).
"Revolving Loans" shall have the meaning assigned to such term
in Section 2.1(a).
"Revolving Note" means the promissory note of the Borrower in
favor of the Bank evidencing the Revolving Loans in substantially the
form attached as Schedule 2.1(e), as such promissory note may be
amended, modified, supplemented, extended, renewed or replaced from
time to time.
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<PAGE> 27
"S&P" means Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc., or any successor or assignee of the business of such
division in the business of rating securities.
"Securitization Transaction" means any financing transaction
or series of financing transactions that have been or may be entered
into by a member of the Consolidated Group pursuant to which such
member of the Consolidated Group may sell, convey or otherwise transfer
to (i) a Subsidiary or affiliate, or (ii) any other Person, or may
grant a security interest in, any Receivables or interests therein
secured by merchandise or services financed thereby (whether such
Receivables are then existing or arising in the future) of such member
of the Consolidated Group, and any assets related thereto, including
without limitation, all security interests in merchandise or services
financed thereby, the proceeds of such Receivables, and other assets
which are customarily sold or in respect of which security interests
are customarily granted in connection with securitization transactions
involving such assets.
"Security" shall have the meaning set forth in Section 2(1) of
the Securities Act of 1933, as amended from time to time.
"Senior Note Agreement" means the Note Purchase Agreement
dated as of January 2, 1997 issued by the Borrower in connection with
the Senior Notes, as modified, supplemented, renewed and replaced from
time to time.
"Senior Notes" means those $20,000,000, 8.05% Senior Notes of
the Borrower due January 2, 1999, as amended, modified, supplemented,
renewed and replaced from time to time.
"Single Employer Plan" means any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple
Employer Plan.
"Standby Letter of Credit" means any standby or direct-pay
letter of credit or letter of credit which is not a Trade Letter of
Credit issued by the Bank for the account of the Borrower in accordance
with the terms of Section 2.1(a).
"Standby LOC Committed Amount" means such term as defined in
Section 2.1(a).
"Standby LOC Fee" means such term as defined in Section
3.5(b)(A).
"Standby LOC Obligations" means, at any time, the sum of (i)
the maximum Dollar Amount which is, or at any time thereafter may
become, available to be drawn under Standby Letters of Credit then
outstanding, assuming compliance with all requirements for drawings
referred to in such Standby Letters of Credit plus (ii) the aggregate
Dollar Amount of all drawings under Standby Letters of Credit honored
by the Bank and not theretofore reimbursed.
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<PAGE> 28
"Subordinated Notes" means, collectively, those $100,000,000
aggregate principal amount of 4.75% Convertible Subordinated Notes due
April 1, 2005 issued by the Borrower, as amended and modified.
"Subsidiary" means, as to any Person, (a) any corporation more
than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time, any class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by
such Person directly or indirectly through Subsidiaries, and (b) any
partnership, association, joint venture or other entity in which such
Person directly or indirectly through Subsidiaries has more than 50% of
the voting interests at any time. Unless otherwise identified,
"Subsidiary" or "Subsidiaries" shall mean Subsidiaries of the Borrower.
"Termination Date" means
(i) as to Revolving Loans and the Revolving
Commitment, April 1, 2001, or if extended with the written
consent of the Bank, such later date as to which the Bank may
agree; and
(ii) as to BA Obligations, LOC Obligations and the
Commitments relating thereto, April 1, 1999, or if extended
with the written consent of the Bank, such later date as to
which the Bank may agree.
"Trade Letter of Credit" means any commercial, trade or
documentary letter of credit issued by the Bank for the account of the
Borrower in accordance with the terms of Section 2.2.
"Trade LOC Obligations" means, at any time, the sum of (i) the
maximum Dollar Amount which is, or ant any time thereafter may become,
available to be drawn under Trade Letters of Credit then outstanding,
assuming compliance with all requirements for drawings referred to in
such Trade Letters of Credit plus (ii) the aggregate Dollar Amount of
all drawings under Trade Letters of Credit honored by the Bank and not
theretofore reimbursed.
"Transfer" means the sale, lease, transfer, conveyance,
abandonment or other disposition, directly or indirectly, in a single
transaction or a series of transactions of all or any part of a
Person's assets.
"Voting Stock" means, with respect to any Person, capital
stock issued by such Person the holders of which are ordinarily, in the
absence of contingencies, entitled to vote for the election of
directors (or persons performing similar functions) of such Person,
even though the right so to vote has been suspended by the happening of
such a contingency.
"Wholly Owned Subsidiary" of any Person means any Subsidiary
100% of whose Voting Stock or other equity interests is at the time
owned by such Person directly or indirectly through other Wholly Owned
Subsidiaries.
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1.2 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the
word "from" means "from and including" and the words "to" and "until" each mean
"to but excluding."
1.3 Accounting Terms.
Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Bank hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis. All calculations made for the purposes of determining
compliance with this Credit Agreement shall (except as otherwise expressly
provided herein) be made by application of GAAP applied on a basis consistent
with the most recent annual or quarterly financial statements delivered pursuant
to Section 7.1 hereof (or, prior to the delivery of the first financial
statements pursuant to Section 7.1 hereof, consistent with the annual audited
financial statements referenced in Section 6.1(i)); provided, however, if (a)
the Borrower shall object to determining such compliance on such basis at the
time of delivery of such financial statements due to any change in GAAP or the
rules promulgated with respect thereto or (b) the Bank shall so object in
writing within 30 days after delivery of such financial statements, then such
calculations shall be made on a basis consistent with the most recent financial
statements delivered by the Borrower to the Bank as to which no such objection
shall have been made.
SECTION 2
CREDIT FACILITIES
2.1 Revolving Loans.
(a) Commitment.
During the Commitment Period, subject to the terms and conditions
hereof, the Bank agrees to make revolving loans in Dollars and in Available
Foreign Currencies, and to issue Standby Letters of Credit in Dollars and in
Available Foreign Currencies for the account of, the Borrower; provided that (i)
the aggregate principal Dollar Amount (determined as of the most recent
Determination Date) of Revolving Loans and Standby LOC Obligations shall not
exceed TWENTY MILLION DOLLARS ($20,000,000) (the "Revolving Committed Amount"),
and (ii) the aggregate principal Dollar Amount (determined as of the most recent
Determination Date) of Standby LOC Obligations shall not exceed FIVE MILLION
DOLLARS ($5,000,000) (the "Standby LOC Committed Amount"). Revolving Loans which
are denominated in Dollars may consist of Alternate Base Rate Loans or LIBOR
Rate Loans and Revolving Loans which are denominated in Available Foreign
Currencies shall consist solely of LIBOR Rate Loans, provided that no more than
four (4) separate LIBOR Rate Loans denominated in Available Foreign Currencies
may exist at any time, no more than six (6) LIBOR Rate Loans (including LIBOR
Rate Loans denominated in Available Foreign Currencies) may exist at any time.
Revolving Loans may be repaid and reborrowed in accordance with the provisions
hereof. Standby Letters of Credit issued hereunder (i) shall be of a duration
reasonably acceptable to the
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<PAGE> 30
Bank, but shall not in any event, extend beyond the Termination Date, (ii) may
be issued subject to any additional terms and provision provided in any
application or other document executed in connection therewith, and (iii) may be
issued subject to the Uniform Customs and Practice for Documentary Credits as
published by the International Chamber of Commerce. The obligation of the Bank
to make Extensions of Credit is subject to the condition that the
Representations and Warranties set forth herein are true and correct in all
material respects (except as to items stated as of a particular time).
(b) Notices.
Requests by the Borrower for Extensions of Credit hereunder, and for
extensions or conversions of Loans hereunder, shall be made by written notice
(or telephone notice promptly confirmed in writing) by 12:00 Noon Charlotte,
North Carolina time on (i) the Business Day prior to the requested borrowing,
extension or conversion in the case of Alternate Base Rate Loans, (ii) the third
Business Day prior to the requested borrowing, extension or conversion in the
case of LIBOR Rate Loans and (iii) the third Business Day prior to the requested
date of issuance of a Standby Letter of Credit. Each request shall be in a
minimum principal dollar amount of $1,000,000 (or approximate Dollar Equivalent)
in the case of LIBOR Rate Loans and $100,000 in the case of Alternate Base Rate
Loans and, in each case, integral multiples of $100,000 (or approximate Dollar
Equivalent) in excess thereof, and shall specify the date of the requested
borrowing, extension or conversion, the currency and aggregate amount to be
borrowed, extended or converted and if an extension of conversion, the Loan
which is being extended or converted, and whether the borrowing, extension or
conversion shall consist of LIBOR Rate Loans, Alternate Base Rate Loans or
combination thereof. If the Borrower shall fail to specify (A) the type of Loan
requested for a borrowing, the request shall be deemed a request for a Alternate
Base Rate Loan, (B) the duration of the applicable Interest Period in the case
of LIBOR Rate Loans, the request shall be deemed to be a request for an Interest
Period of one month. Unless extended in accordance with the provisions hereof,
LIBOR Rate Loans shall be converted to Alternate Base Rate Loans at the end of
the applicable Interest Period. A form of Notice of Borrowing is attached as
Schedule 2.1(b).
(c) Interest Rate.
(i) Revolving Loans. Subject to the provisions of Section 3.1,
the Revolving Loans hereunder shall bear interest at a per annum rate
equal to (i) in the case of LIBOR Rate Loans, the LIBOR Rate plus the
Applicable Percentage, and (ii) in the case of Alternate Base Rate
Loans, the Alternate Base Rate plus the Applicable Percentage, payable,
in each case, on each Interest Payment Date.
(ii) Letters of Credit. The unreimbursed portion of any
drawing under at Standby Letter of Credit shall bear interest payable
on demand, at a per annum rate equal to the Alternate Base Rate plus
two percent (2%) from the date of the drawing.
(d) Repayment.
(i) Repayment of Revolving Loans. The Revolving Loans shall be
due and payable on the Termination Date, together with accrued interest
and fees.
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(ii) Reimbursement of Standby Letters of Credit. The Bank will
notify the Borrower of any drawing under a Standby Letter of Credit
issued hereunder and the amount of any such drawing shall be due and
payable in full on the date of such drawing. Unless it shall receive
direction from the Borrower to the contrary, the Bank may, but shall
not be required to, make a Revolving Loan advance to reimburse the
amount an such drawing. The Borrower's reimbursement obligations
hereunder shall be absolute and unconditional under all circumstances
irrespective of any rights of setoff, counterclaim or defense to
payment the Borrower may claim or have against the Bank, the
beneficiary of the Letter of Credit drawn upon or any other Person,
including without limitation any defense based on any failure of the
Borrower or any other Credit Party to receive consideration or the
legality, validity, regularity or unenforceability of the Letter of
Credit.
(e) Revolving Note.
The Revolving Loans shall be evidenced by the Revolving Note.
2.2 Trade Letter of Credit Facility.
(a) Issuance. During the Commitment Period, subject to the terms and
conditions hereof and of the LOC Documents, if any, and such other terms and
conditions which the Bank may reasonably require, the Bank shall issue such
Trade Letters of Credit in Dollars and in Available Foreign Currencies as the
Borrower may request for its own account or for the account of another Credit
Party as provided herein, in a form acceptable to the Bank, for the purposes
hereinafter set forth; provided that the aggregate principal Dollar Amount
(determined as of the most recent Determination Date) of Trade LOC Obligations
plus BA Obligations shall not exceed THIRTY MILLION DOLLARS ($30,000,000) at any
time (the "LOC/BA Committed Amount). Trade Letters of Credit issued under this
Section 2.2 shall be trade or commercial letters of credit (as opposed to
standby letters of credit) and shall not have an original expiry date more than
six months from the date of issuance or extension, nor an expiry date, whether
as originally issued or by extension, extending beyond the Termination Date.
Each Trade Letter of Credit shall comply with the related LOC Documents The
issuance date of each Trade Letter of Credit shall be a Business Day.
(b) Notice and Reports. The request for the issuance of a Trade Letter
of Credit shall be submitted by the Borrower to the Bank at least three (3)
Business Days prior to the requested date of issuance (or such shorter period as
may be agreed by the Bank). A form of Notice of Request for Letter of Credit is
attached as Schedule 2.2(b).
(c) Reimbursement. In the event of any drawing under any Trade Letter
of Credit, the Bank will promptly notify the Borrower. The Borrower promises to
reimburse the Bank on the day of drawing under any Trade Letter of Credit
(either with the proceeds of a Revolving Loan obtained hereunder or otherwise)
in same day funds. If the Borrower shall fail to reimburse the Bank as provided
hereinabove, the unreimbursed amount of such drawing shall bear interest at a
per annum rate equal to the Alternate Base Rate plus two percent (2%). The
Borrower's reimbursement obligations hereunder shall be absolute and
unconditional under all circumstances
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irrespective of any rights of setoff, counterclaim or defense to payment the
Borrower may claim or have against the Bank, the beneficiary of the Letter of
Credit drawn upon or any other Person, including without limitation any defense
based on any failure of the Borrower or any other Credit Party to receive
consideration or the legality, validity, regularity or unenforceability of the
Letter of Credit.
(d) Designation of other Credit Parties as Account Parties.
Notwithstanding anything to the contrary set forth in this Credit Agreement,
including without limitation Section 2.2(a) hereof, a Trade Letter of Credit
issued hereunder may contain a statement to the effect that such Letter of
Credit is issued for the account of a Credit Party, provided that
notwithstanding such statement, the Borrower shall be the actual account party
for all purposes of this Credit Agreement for such Letter of Credit and such
statement shall not affect the Borrower's reimbursement obligations hereunder
with respect to such Letter of Credit.
(e) Renewal, Extension. The renewal or extension of any Trade Letter of
Credit shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.
(f) Uniform Customs and Practices. The Bank may have the Trade Letters
of Credit be subject to The Uniform Customs and Practice for Documentary
Credits, as published as of the date of issue by the International Chamber of
Commerce (the "UCP"), in which case the UCP may be incorporated therein and
deemed in all respects to be a part thereof.
(g) Indemnification; Nature of Bank's Duties.
(i) In addition to its other obligations under this Section
2.2, the Borrower hereby agrees to protect, indemnify, pay and save the
Bank harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees) that the Bank may incur or be subject to as
a consequence, direct or indirect, of (A) the issuance of any Letter of
Credit or (B) the failure of the Bank to honor a drawing under a Letter
of Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government or
governmental authority (all such acts or omissions, herein called
"Government Acts").
(ii) As between the Borrower and the Bank, the Borrower shall
assume all risks of the acts, omissions or misuse of any Letter of
Credit by the beneficiary thereof. The Bank shall not be responsible:
(A) for the form, validity, sufficiency, accuracy, genuineness or legal
effect of any document submitted by any party in connection with the
application for and issuance of any Letter of Credit, even if it should
in fact prove to be in any or all respects invalid, insufficient,
inaccurate, fraudulent or forged; (B) for the validity or sufficiency
of any instrument transferring or assigning or purporting to transfer
or assign any Letter of Credit or the rights or benefits thereunder or
proceeds thereof, in whole or in part, that may prove to be invalid or
ineffective for any reason; (C) for errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (D)
for any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under a
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Letter of Credit or of the proceeds thereof; and (E) for any
consequences arising from causes beyond the control of the Bank,
including, without limitation, any Government Acts. None of the above
shall affect, impair, or prevent the vesting of the Bank's rights or
powers hereunder.
(iii) In furtherance and extension and not in limitation of
the specific provisions hereinabove set forth, any action taken or
omitted by the Bank, under or in connection with any Letter of Credit
or the related certificates, if taken or omitted in good faith, shall
not put the Bank under any resulting liability to the Borrower or any
other Credit Party. It is the intention of the parties that this Credit
Agreement shall be construed and applied to protect and indemnify the
Bank against any and all risks involved in the issuance of the Letters
of Credit, all of which risks are hereby assumed by the Borrower (on
behalf of itself and each of the other Credit Parties), including,
without limitation, any and all Government Acts. The Bank shall not, in
any way, be liable for any failure by the Bank or anyone else to pay
any drawing under any Letter of Credit as a result of any Government
Acts or any other cause beyond the control of the Bank.
(iv) Nothing in this subsection (g) is intended to limit the
reimbursement obligations of the Borrower contained herein. The
obligations of the Borrower under this subsection (g) shall survive the
termination of this Credit Agreement. No act or omissions of any
current or prior beneficiary of a Letter of Credit shall in any way
affect or impair the rights of the Bank to enforce any right, power or
benefit under this Credit Agreement.
(v) Notwithstanding anything to the contrary contained in this
subsection (i), the Borrower shall have no obligation to indemnify the
Bank in respect of any liability incurred by the Bank (A) arising out
of the gross negligence or willful misconduct of the Bank, as
determined by a court of competent jurisdiction, or (B) caused by the
Bank's failure to pay under any Letter of Credit after presentation to
it of a request strictly complying with the terms and conditions of
such Letter of Credit, as determined by a court of competent
jurisdiction, unless such payment is prohibited by any law, regulation,
court order or decree.
(h) Conflict with LOC Documents. In the event of any conflict between
this Credit Agreement and any LOC Document (including any letter of credit
application), this Credit Agreement shall control.
2.3 Bankers' Acceptances.
(a) Bankers' Acceptance Commitment. During the Commitment Period,
subject to the terms and conditions hereof and of the BA Documents, if any,
executed in connection with the creation of each Bankers' Acceptance and such
other terms and conditions which the Bank may reasonably require, the Bank shall
create and discount such Bankers' Acceptances in Dollars as the Borrower may
request from time to time as provided herein, in a form acceptable to the Bank;
provided that the sum of LOC Obligations plus the BA Obligations shall not at
any time exceed the LOC/BA Committed Amount, and provided further that the
Borrower shall not be entitled to request any Bankers' Acceptance which, if
created, would result in more than ten (10) separate Bankers' Acceptances being
outstanding hereunder at any time. The maturity of any Bankers'
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Acceptances shall be the date 30, 60 or 90 days after the creation thereof, as
the Borrower may elect; provided that, no such maturity shall extend beyond the
date falling five (5) days before the Termination Date. Each Bankers' Acceptance
shall comply with the related BA Documents and shall be executed on behalf of
the Borrower and presented to the Bank pursuant to such procedures as are
provided for in such BA Documents or otherwise provided or required by the Bank.
The face amount of any Bankers' Acceptance shall be in a minimum amount of
$100,000 and integral multiples of $100,000 in excess thereof. The creation and
maturity date of each Bankers' Acceptance shall be a Business Day.
Notwithstanding the foregoing, the Bank shall not be obligated to create or
discount any Bankers' Acceptance (i) that is not an Eligible Bankers'
Acceptance, or (ii) if creation thereof would cause the BA Agent to exceed the
maximum amount of outstanding bankers' acceptances permitted by applicable law.
(b) Notice and Requests. Any request for the creation and discount of a
Bankers' Acceptance shall be submitted to the Bank by 9:30 A.M. (Charlotte,
North Carolina time) on the requested date of creation and discount by
completion of a Bankers' Acceptance Request in form acceptable to the Bank (a
"BA Request") and shall be accompanied by such documents as are specified
therein and in the related BA Documents.
(c) Discount of Bankers' Acceptances. Upon the creation by the Bank of
a Bankers' Acceptance, the Bank shall discount such Committed Bankers'
Acceptance by deducting from the face amount thereof a discount equal to the sum
of BA Discount Reference Rate plus the Applicable Percentage (the "Applicable BA
Discount Rate") applied against the face amount of the Bankers' Acceptance for
the term thereof, and the Bank shall make the net amount available in
immediately available funds to the Borrower. The Bank may retain or rediscount,
at its election, any Bankers' Acceptance and the amount received by the Bank
upon payment thereof at maturity or upon rediscounting shall be solely for the
account of the Bank.
(d) Reimbursement. The Bank shall give prompt notice to the Borrower in
each case of its honor of a mature Bankers' Acceptance. The Borrower shall
thereupon reimburse the Bank on the same day on which the Bank honors a matured
Bankers' Acceptance for the full amount of the related BA Reimbursement
Obligation in Dollars and in immediately available funds. If the Borrower shall
fail to reimburse the Bank as provided hereinabove, the related BA Reimbursement
Obligation shall bear interest at a per annum rate equal to the Alternate Base
Rate plus two percent (2%). The Borrower's reimbursement obligations hereunder
shall be absolute and unconditional under all circumstances irrespective of any
rights of set-off, counterclaim or defense to payment the Borrower may claim or
have against the Bank or any other Person.
(e) Eligibility Requirement. The Borrower agrees that, in the event
that any Bankers' Acceptance created (or to be created) shall not be an Eligible
Bankers' Acceptance, the Borrower shall, upon demand by the Bank, pay to the
Bank additional amounts sufficient to compensate the Bank for any increased
costs resulting therefrom (including without limitation costs resulting from any
reserve requirement, premium liability to the Federal Deposit Insurance
Corporation, or a higher discount rate). A detailed statement as to the amount
of such increased costs, prepared in good faith and submitted by the Bank to the
Borrower, shall be conclusive and binding for all purposes, absent manifest
error in computation.
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SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITIES
3.1 Default Rate.
Upon the occurrence, and during the continuance, of an Event
of Default, the principal of and, to the extent permitted by law, interest on
the Loans and any other amounts owing hereunder or under the other Credit
Documents shall bear interest, payable on demand, at a per annum rate 2% greater
than the rate which would otherwise be applicable (or if no rate is applicable,
whether in respect of interest, fees or other amounts, then 2% greater than the
Alternate Base Rate).
3.2 Extension and Conversion.
Subject to the terms of Section 5.2, the Borrower shall have
the option, on any Business Day, to extend existing Loans into a subsequent
permissible Interest Period or to convert Loans into Loans of another interest
rate type; provided, however, that (i) except as provided in Section 3.8, LIBOR
Rate Loans may be converted into Alternate Base Rate Loans only on the last day
of the Interest Period applicable thereto, (ii) LIBOR Rate Loans may be
extended, and Alternate Base Rate Loans may be converted into LIBOR Rate Loans,
only if no Default or Event of Default is in existence on the date of extension
or conversion, (iii) Loans extended as, or converted into, LIBOR Rate Loans
shall be subject to the terms of the definition of "Interest Period" set forth
in Section 1.1 and shall be in such minimum amounts as provided in Section
2.1(b), and (iv) any request for extension or conversion of a LIBOR Rate Loan
which shall fail to specify an Interest Period shall be deemed to be a request
for an Interest Period of one month. Each such extension or conversion shall be
effected by the Borrower by giving a Notice of Extension/Conversion (or
telephone notice promptly confirmed in writing) to the Bank prior to 11:00 A.M.
(Charlotte, North Carolina time) on the Business Day of, in the case of the
conversion of a LIBOR Rate Loan into a Alternate Base Rate Loan, and on the
third Business Day prior to, in the case of the extension of a LIBOR Rate Loan
as, or conversion of a Alternate Base Rate Loan into, a LIBOR Rate Loan, the
date of the proposed extension or conversion, specifying the date of the
proposed extension or conversion, the Loans to be so extended or converted, the
types of Loans into which such Loans are to be converted and, if appropriate,
the applicable Interest Periods with respect thereto. Each request for extension
or conversion shall be irrevocable and shall constitute a representation and
warranty by the Borrower of the matters specified in subsections (a) through (d)
of Section 5.2. In the event the Borrower fails to request extension or
conversion of any LIBOR Rate Loan in accordance with this Section, or any such
conversion or extension is not permitted or required by this Section, then (i)
in the case of LIBOR Rate Loans denominated in Dollars, such LIBOR Rate Loan
shall be continued as a LIBOR Rate Loan denominated in Dollars at the end of the
Interest Period applicable thereto for an Interest Period of one month, and (ii)
in the case of LIBOR Rate Loans in an Available Foreign Currency, such LIBOR
Rate Loan shall be automatically continued as a LIBOR Rate Loan in the same
Available Foreign Currency for an Interest Period of one month. The Bank shall
give the Bank notice as promptly as practicable of any such proposed extension
or conversion affecting any Loan.
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3.3 Prepayments.
(a) Voluntary Prepayments. Revolving Loans may be repaid in
whole or in part without premium or penalty; provided that (i) LIBOR Rate Loans
may be prepaid only upon three (3) Business Days' prior written notice to the
Bank and must be accompanied by payment of any amounts owing under Section 3.11,
and (ii) partial prepayments shall be minimum principal amounts of $1,000,000
(or approximate Dollar Equivalents), in the case of LIBOR Rate Loans, and
$100,000, in the case of Alternate Base Rate Loans, and in integral multiples of
$100,000 (or approximate Dollar Equivalents) in excess thereof.
(b) Mandatory Prepayments. If at any time, (A) the aggregate
principal Dollar Amount (determined as of the most recent Determination Date) of
Revolving Loans and Standby LOC Obligations shall exceed the Revolving Committed
Amount, (B) the aggregate principal Dollar Amount (determined as of the most
recent Determination Date) of Standby LOC Obligations shall exceed the Standby
LOC Committed Amount or (C) the aggregate principal Dollar Amount (determined as
of the most recent Determination Date) of Trade LOC Obligations plus BA
Obligations shall exceed the LOC/BA Committed Amount, the Borrower shall
immediately make payment on the Revolving Loans and/or to a cash collateral
account in respect of the LOC Obligations and/or BA Obligations, in an amount
sufficient to eliminate the deficiency.
(c) Application. Unless otherwise specified by the Borrower,
prepayments made hereunder shall be applied first to Alternate Base Rate Loans,
then to LIBOR Rate Loans in direct order of Interest Period maturities and then
to a cash collateral account to secure LOC Obligations and BA Obligations.
Amounts prepaid hereunder may be reborrowed in accordance with the provisions
hereof.
3.4 Termination and Reduction of Commitments
(a) Voluntary Reductions. The Commitments hereunder may be
terminated or permanently reduced in whole or in part upon three (3) Business
Days' prior written notice to the Bank, provided that (i) after giving effect to
any such voluntary reduction the aggregate amount of Revolving Loans shall not
exceed the Revolving Committed Amount and the sum of LOC Obligations plus BA
Obligations shall not exceed the LOC Committed Amount, and (ii) partial
reductions shall be minimum principal amount of $1,000,000 (or approximate
Dollar Equivalents), and in integral multiples of $100,000 (or approximate
Dollar Equivalents) in excess thereof.
(b) Mandatory Reduction. The Commitments hereunder shall
terminate on the Termination Date.
3.5 Fees.
(a) Commitment Fee. In consideration of the Revolving
Commitments hereunder, the Borrower agrees to pay to the Bank a commitment fee
(the "Commitment Fee") at a per annum rate equal to the Applicable Percentage in
effect at the time on the average daily Unused Amount of the Revolving Committed
Amount for the applicable period. The
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Commitment Fee shall be payable quarterly in arrears on the 5th day following
the last day of each calendar quarter for the immediately preceding quarter (or
portion thereof) beginning with the first such date to occur after the Closing
Date. As used herein, the "Unused Amount" of the Revolving Committed Amount
shall be, on any day, the Revolving Committed Amount minus the aggregate Dollar
Amount (determined as of the most recent Determination Date) of Revolving Loans
and Standby LOC Obligations then outstanding.
(b) Letter of Credit Fees. The Borrower agrees to pay to the
Bank (collectively, the "Letter of Credit Fees"):
(A) with regard to Standby Letters of Credit (the
"Standby LOC Fee"), a per annum fee equal to the Applicable
Percentage on the average daily maximum amount available to be
drawn under Standby Letters of Credit from the date of
issuance to the date of expiration, payable quarterly in
arrears at the end of each calendar quarter thereafter;
(B) with regard to trade or commercial Letters of
Credit, such fronting and negotiation fees as may be mutually
agreed upon by the Bank and the Borrower from time to time;
and
(C) customary charges of the Bank with respect to the
issuance, amendment, transfer, administration, cancellation
and conversion of, and drawings under, such Letters of Credit
as may be mutually agreed upon by the Bank and the Borrowers
from time to time.
(c) Upfront Fee. The Borrower agrees to pay to the Bank on or
before the Closing Date an upfront fee of $50,000.
3.6 Capital Adequacy.
If the Bank has determined, after the date hereof, that the
adoption or the becoming effective of, or any change in, or any change by any
Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof in the interpretation or administration
of, any applicable law, rule or regulation regarding capital adequacy, or
compliance by the Bank with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on the Bank's capital or assets as a consequence of its commitments or
obligations hereunder to a level below that which the Bank could have achieved
but for such adoption, effectiveness, change or compliance (taking into
consideration the Bank's policies with respect to capital adequacy), then, upon
notice from the Bank to the Borrower, the Borrower shall be obligated to pay to
the Bank such additional amount or amounts as the Bank determines in good faith
will compensate the Bank for such reduction. Each determination by the Bank of
amounts owing under this Section shall, absent manifest error, be conclusive and
binding on the parties hereto.
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3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Bank shall have
determined (which determination shall be conclusive and binding upon the
Borrower) that, by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar Rate
for such Interest Period, the Bank shall give telecopy or telephonic notice
thereof to the Borrower as soon as practicable thereafter. If such notice is
given, in the case of Loans denominated in Dollars, any request for LIBOR Rate
Loans shall be made as Alternate Base Rate Loans instead, and, in the case of
Loans denominated in Foreign Currencies, any request for LIBOR Rate Loans shall
be made as Dollar denominated Alternated Base Rate Loans instead (unless the
Borrower shall otherwise request another currency or rate option available
hereunder). Until such notice has been withdrawn by the Bank, no further LIBOR
Rate Loans shall be made or continued in the affected currency.
3.8 Illegality.
Notwithstanding any other provision herein, if (i) the adoption of or any
change in any Requirement of Law or in the interpretation or application thereof
occurring after the Closing Date shall make it unlawful for the Bank to make or
maintain LIBOR Rate Loans as contemplated by this Credit Agreement, or (ii)
there shall have occurred any change in national or international financial,
political or economic conditions (including the imposition of or any change in
exchange controls) or currency exchange rates which would make it unlawful or
impossible for any Lender to make Loans denominated in any Available Foreign
Currency as contemplated by this Agreement, then until notice that the
conditions giving rise thereto have abated or otherwise been resolved,
(a) with respect to the affected currencies, the commitment of the
Bank hereunder to make LIBOR Rate Loans, continue Loans as LIBOR Rate
Loans or convert Loans into LIBOR Rate Loans, shall forthwith be
suspended; and
(b) with respect to the affected currencies, the Bank may require
outstanding LIBOR Rate Loans to be paid or converted into Alternate Base
Rate Loans in the case of Loans denominated in Dollars, or, in the case
other currencies, paid or converted into Loans in other Available
Currencies which are not affected hereunder.
If any such conversion or payment is made on a day which is not the last day of
the then current Interest Period with respect thereto, the Borrower will pay to
the Bank such amounts, if any, as may be required pursuant to Section 3.11.
3.9 Requirements of Law.
If, after the date hereof, the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof applicable to
the Bank, or compliance by the Bank with any request or directive (whether or
not having the force of law) from any central bank or other Governmental
Authority, in each case made subsequent to the Closing Date:
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(a) shall subject the Bank to any tax of any kind whatsoever
with respect to any Letter of Credit, any LIBOR Rate Loans made by it or
its obligation to make LIBOR Rate Loans, or change the basis of taxation
of payments to the Bank in respect thereof (except for (i) Non-Excluded
Taxes covered by Section 3.10 (including Non-Excluded Taxes imposed solely
by reason of any failure of the Bank to comply with its obligations under
Section 3.10) and (ii) changes in taxes measured by or imposed upon the
overall net income of the Bank or its applicable lending office, or any
branch or affiliate thereof, and all franchise taxes, branch taxes, taxes
on doing business or taxes on the overall capital or net worth of the Bank
or its applicable lending office, or any branch or affiliate thereof, in
each case imposed in lieu of net income taxes);
(b) shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar requirement against assets
held by, deposits or other liabilities in or for the account of, advances,
loans or other extensions of credit by, or any other acquisition of funds
by, any office of the Bank which is not otherwise included in the
determination of the Eurodollar Rate hereunder; or
(c) shall impose on the Bank any other condition (excluding
any tax of any kind whatsoever);
and the result of any of the foregoing is to increase the cost to the Bank, by
an amount which the Bank deems to be material, of making, converting into,
continuing or maintaining LIBOR Rate Loans or issuing or participating in
Letters of Credit or creating and discounting Bankers' Acceptances or to reduce
any amount receivable hereunder in respect thereof, then, in any such case, upon
notice to the Borrower from the Bank in accordance herewith, the Borrower shall
be obligated to promptly pay the Bank, upon its demand, any additional amounts
necessary to compensate the Bank for such increased cost or reduced amount
receivable, provided that, in any such case, the Borrower may elect to convert
the LIBOR Rate Loans made by the Bank hereunder to Alternate Base Rate Loans by
giving the Bank at least one Business Day's notice of such election, in which
case the Borrower shall promptly pay to the Bank, upon demand, without
duplication, such amounts, if any, as may be required pursuant to Section 3.11.
If the Bank becomes entitled to claim any additional amounts pursuant to this
subsection, it shall provide prompt notice thereof to the Borrower certifying
(x) that one of the events described in this Section has occurred and describing
in reasonable detail the nature of such event, (y) as to the increased cost or
reduced amount resulting from such event and (z) as to the additional amount
demanded by the Bank and a reasonably detailed explanation of the calculation
thereof. Such a certificate as to any additional amounts payable pursuant to
this Section submitted by the Bank to the Borrower shall be conclusive and
binding on the parties hereto in the absence of manifest error. This covenant
shall survive the termination of this Credit Agreement and the payment of the
Loans and all other amounts payable hereunder.
3.10 Taxes.
Except as provided below in this Section, all payments made by the
Borrower under this Credit Agreement and the Revolving Note shall be made free
and clear of, and without deduction or withholding for or on account of, any
present or future income, stamp or other taxes, levies, imposts, duties,
charges, fees, deductions or withholdings, now or hereafter imposed, levied,
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collected, withheld or assessed by any court, or governmental body, agency or
other official, excluding taxes measured by or imposed upon the overall net
income of the Bank or its applicable lending office, or any branch or Affiliate
thereof, and all franchise taxes, branch taxes, taxes on doing business or taxes
on the overall capital or net worth of the Bank or its applicable lending
office, or any branch or Affiliate thereof, in each case imposed in lieu of net
income taxes, imposed: (i) by the jurisdiction under the laws of which the Bank,
applicable lending office, branch or Affiliate is organized or is located, or in
which its principal executive office is located, or any nation within which such
jurisdiction is located or any political subdivision thereof; or (ii) by reason
of any connection between the jurisdiction imposing such tax and the Bank,
applicable lending office, branch or Affiliate other than a connection arising
solely from the Bank having executed, delivered or performed its obligations, or
received payment under or enforced, this Credit Agreement or the Revolving Note.
If any such non-excluded taxes, levies, imposts, duties, charges, fees,
deductions or withholdings ("Non-Excluded Taxes") are required to be withheld
from any amounts payable to the Bank hereunder or under the Revolving Note, (A)
the amounts so payable to the Bank shall be increased to the extent necessary to
yield to the Bank (after payment of all Non-Excluded Taxes) interest or any such
other amounts payable hereunder at the rates or in the amounts specified in this
Credit Agreement and the Revolving Note, and (B) as promptly as possible
thereafter the Borrower shall send to the Bank for its own account, a certified
copy of an original official receipt received by the Borrower showing payment
thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Bank the required receipts
or other required documentary evidence, the Borrower shall indemnify the Bank
for any incremental taxes, interest or penalties that may become payable by the
Bank as a result of any such failure. The agreements in this Section shall
survive the termination of this Credit Agreement and the payment of the Loans
and all other amounts payable hereunder.
3.11 Indemnity.
The Borrower promises to indemnify the Bank and to hold the Bank harmless
from any loss or expense which the Bank may sustain or incur (other than through
the Bank's gross negligence or willful misconduct) as a consequence of (a)
default by the Borrower in making a borrowing of, conversion into or
continuation of LIBOR Rate Loans after the Borrower has given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a LIBOR Rate Loan after
the Borrower has given a notice thereof in accordance with the provisions of
this Credit Agreement or (c) the making of a prepayment of LIBOR Rate Loans on a
day which is not the last day of an Interest Period with respect thereto. With
respect to LIBOR Rate Loans, such indemnification may include an amount equal to
the excess, if any, of (i) the amount of interest which would have accrued on
the amount so prepaid, or not so borrowed, converted or continued, for the
period from the date of such prepayment or of such failure to borrow, convert or
continue to the last day of the applicable Interest Period (or, in the case of a
failure to borrow, convert or continue, the Interest Period that would have
commenced on the date of such failure) in each case at the applicable rate of
interest for such LIBOR Rate Loans provided for herein over (ii) the amount of
interest (as reasonably determined by the Bank) which would have accrued to the
Bank on such amount by placing such amount on deposit for a comparable period
with leading banks in the interbank Eurodollar market. The covenants of the
Borrower set forth in this Section 3.11 shall survive the
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termination of this Credit Agreement and the payment of the Loans and all other
amounts payable hereunder.
3.12 Payments, Computations, Etc.
(a) Each payment on account of an amount due from the Borrower shall be
made in the currency in which such amount is denominated and in such funds as
are customary at the place and time of payment for the settlement of
international payments in such currency. Without limiting the terms of the
preceding sentence, accrued interest on any Loans denominated in a Foreign
Currency shall be payable in the same Foreign Currency as such Loan. Upon
request, the Bank will provide a statement to the Borrower showing the
computation used in calculating amounts denominated in foreign currencies
hereunder, which statement shall be assumed correct and conclusive absent
manifest error. The obligation of the Borrower to make each payment on account
of such amount in the currency in which such amount is denominated shall not be
discharged or satisfied by any tender, or any recovery pursuant to any judgment,
which is expressed in or converted into any other currency, except to the extent
such tender or recovery shall result in the actual receipt by the Bank of the
full amount in the appropriate currency payable hereunder. The Borrower agrees
that its obligation to make each payment on account of such amount in the
currency in which such amount is denominated shall be enforceable as an
additional or alternative claim for recovery in such currency of the amount (if
any) by which such actual receipt shall fall short of the full amount of such
currency payable hereunder, and shall not be affected by judgment being obtained
for such amount.
(b) Except as otherwise specifically provided herein, all payments
hereunder shall be made to the Bank in immediately available funds, without
offset, deduction, counterclaim or withholding of any kind, at the Bank's office
specified in Section 10.1 not later than 2:00 P.M. (Charlotte, North Carolina
time) on the date when due. Payments received after such time shall be deemed to
have been received on the next succeeding Business Day. The Bank may (but shall
not be obligated to) debit the amount of any such payment which is not made by
such time to any ordinary deposit account of the Borrower maintained with the
Bank (with notice to the Borrower). The Borrower shall, at the time it makes any
payment under this Credit Agreement, specify to the Bank the Loans, LOC
Obligations, BA Obligations, Fees, interest or other amounts payable by the
Borrower hereunder to which such payment is to be applied (and in the event that
it fails so to specify, or if such application would be inconsistent with the
terms hereof, the Bank shall apply such payment in such manner as the Bank may
determine to be appropriate in respect of obligations owing by the Borrower
hereunder). Whenever any payment hereunder shall be stated to be due on a day
which is not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day (subject to accrual of interest and Fees for the period
of such extension), except that in the case of LIBOR Rate Loans, if the
extension would cause the payment to be made in the next following calendar
month, then such payment shall instead be made on the next preceding Business
Day. Except as expressly provided otherwise herein, all computations of interest
and Fees shall be made on the basis of actual number of days elapsed over a year
of 360 days, except with respect to computation of interest on Alternate Base
Rate Loans which (unless the Alternate Base Rate is determined by reference to
the Federal Funds Rate) shall be calculated based on a year of 365 or 366 days,
as appropriate. Interest shall accrue from and include the date of borrowing,
but exclude the date of payment.
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SECTION 4
GUARANTY
4.1 The Guarantee.
Each of the Guarantors hereby jointly and severally guarantees to the
Bank, to each Affiliate of the Bank that enters into a Hedging Agreement and to
the Bank as hereinafter provided the prompt payment of the Guaranteed
Obligations in full when due (whether at stated maturity, as a mandatory
prepayment, by acceleration, a mandatory cash collateralization or otherwise)
strictly in accordance with the terms thereof. The Guarantors hereby further
agree that if any of the Guaranteed Obligations are not paid in full when due
(whether at stated maturity, as a mandatory prepayment, by acceleration, as
mandatory cash collateralization or otherwise), the Guarantors will, jointly and
severally, promptly pay the same, without any demand or notice whatsoever, and
that in the case of any extension of time of payment or renewal of any of the
Guaranteed Obligations, the same will be promptly paid in full when due (whether
at extended maturity, as a mandatory prepayment, by acceleration or otherwise)
in accordance with the terms of such extension or renewal.
Notwithstanding any provision to the contrary contained herein or in any
other of the Credit Documents or Hedging Agreements, to the extent the
obligations of a Guarantor shall be adjudicated to be invalid or unenforceable
for any reason (including, without limitation, because of any applicable state
or federal law relating to fraudulent conveyances or transfers) then the
obligations of each Guarantor hereunder shall be limited to the maximum amount
that is permissible under applicable law (whether federal or state and
including, without limitation, the Bankruptcy Code).
4.2 Obligations Unconditional.
The obligations of the Guarantors under Section 4.1 hereof are joint and
several, absolute and unconditional, irrespective of the value, genuineness,
validity, regularity or enforceability of any of the Credit Documents or Hedging
Agreements, or any other agreement or instrument referred to therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 4.2 that the obligations of the
Guarantors hereunder shall be absolute and unconditional under any and all
circumstances. Each Guarantor agrees that such Guarantor shall have no right of
subrogation, indemnity, reimbursement or contribution against the Borrower or
any other Guarantor of the Guaranteed Obligations for amounts paid under this
Guaranty until such time as the Bank (and any Affiliates of the Bank entering
into Hedging Agreements) has been paid in full, all Commitments under the Credit
Agreement have been terminated and no Person or Governmental Authority shall
have any right to request any return or reimbursement of funds from the Bank in
connection with monies received under the Credit Documents or Hedging
Agreements. Without limiting the generality of the foregoing, it is agreed that,
to the fullest extent permitted by law, the occurrence of any one or more of the
following shall not alter or impair the liability of any Guarantor hereunder
which shall remain absolute and unconditional as described above:
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(i) at any time or from time to time, without notice to any
Guarantor, the time for any performance of or compliance with any of the
Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of any of
the Credit Documents, any Hedging Agreement or any other agreement or
instrument referred to in the Credit Documents or Hedging Agreements shall
be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall be
accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under any of the
Credit Documents, any Hedging Agreement or any other agreement or
instrument referred to in the Credit Documents or Hedging Agreements shall
be waived or any other guarantee of any of the Guaranteed Obligations or
any security therefor shall be released or exchanged in whole or in part
or otherwise dealt with;
(iv) any Lien granted to, or in favor of, the Bank as security for
any of the Guaranteed Obligations shall fail to attach or be perfected; or
(v) any of the Guaranteed Obligations shall be determined to be void
or voidable (including, without limitation, for the benefit of any
creditor of any Guarantor) or shall be subordinated to the claims of any
Person (including, without limitation, any creditor of any Guarantor).
With respect to its obligations hereunder, each Guarantor hereby expressly
waives diligence, presentment, demand of payment, protest and all notices
whatsoever, and any requirement that the Bank exhaust any right, power or remedy
or proceed against any Person under any of the Credit Documents, any Hedging
Agreement or any other agreement or instrument referred to in the Credit
Documents or Hedging Agreements, or against any other Person under any other
guarantee of, or security for, any of the Guaranteed Obligations.
4.3 Reinstatement.
The obligations of the Guarantors under this Section 4 shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Guaranteed Obligations is rescinded
or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Bank on demand for all reasonable costs and expenses (including, without
limitation, fees and expenses of counsel) incurred by the Bank in connection
with such rescission or restoration, including any such costs and expenses
incurred in defending against any claim alleging that such payment constituted a
preference, fraudulent transfer or similar payment under the Bankruptcy Code,
insolvency or similar law.
4.4 Certain Additional Waivers.
Without limiting the generality of the provisions of this Section 4, each
Guarantor hereby specifically waives the benefits of N.C. Gen. Stat. Sections
26-7 through 26-9, inclusive. Each
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Guarantor further agrees that such Guarantor shall have no right of recourse to
security for the Guaranteed Obligations, except through the exercise of the
rights of subrogation pursuant to Section 4.2.
4.5 Remedies.
The Guarantors agree that, to the fullest extent permitted by law, as
between the Guarantors, on the one hand, and the Bank, on the other hand, the
Guaranteed Obligations may be declared to be forthwith due and payable as
provided in Section 9.2 hereof (and shall be deemed to have become automatically
due and payable in the circumstances provided in said Section 9.2) for purposes
of Section 4.1 hereof notwithstanding any stay, injunction or other prohibition
preventing such declaration (or preventing the Guaranteed Obligations from
becoming automatically due and payable) as against any other Person and that, in
the event of such declaration (or the Guaranteed Obligations being deemed to
have become automatically due and payable), the Guaranteed Obligations (whether
or not due and payable by any other Person) shall forthwith become due and
payable by the Guarantors for purposes of said Section 4.1.
4.6 Rights of Contribution.
The Guarantors hereby agree, as among themselves, that if any Guarantor
shall become an Excess Funding Guarantor (as defined below), each other
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor
an amount equal to such Guarantor's Pro Rata Share (as defined below and
determined, for this purpose, without reference to the properties, assets,
liabilities and debts of such Excess Funding Guarantor) of such Excess Payment
(as defined below). The payment obligation of any Guarantor to any Excess
Funding Guarantor under this Section 4.6 shall be subordinate and subject in
right of payment to the prior payment in full of the obligations of such
Guarantor under the other provisions of this Section 4, and such Excess Funding
Guarantor shall not exercise any right or remedy with respect to such excess
until payment and satisfaction in full of all of such obligations. For purposes
of this Section 4.6, (i) "Excess Funding Guarantor" shall mean, in respect of
any obligations arising under the other provisions of this Section 4 (hereafter,
the "Excess Funding Guarantied Obligations"), a Guarantor that has paid an
amount in excess of its Pro Rata Share of the Excess Funding Guarantied
Obligations; (ii) "Excess Payment" shall mean, in respect of any Excess Funding
Guarantied Obligations, the amount paid by an Excess Funding Guarantor in excess
of its Pro Rata Share of such Excess Funding Guarantied Obligations; and (iii)
"Pro Rata Share", for the purposes of this Section 4.6, shall mean, for any
Guarantor, the ratio (expressed as a percentage) of (a) the amount by which the
aggregate present fair saleable value of all of its assets and properties
exceeds the amount of all debts and liabilities of such Guarantor (including
contingent, subordinated, unmatured, and unliquidated liabilities, but excluding
the obligations of such Guarantor hereunder) to (b) the amount by which the
aggregate present fair saleable value of all assets and other properties of the
Borrower and all of the Guarantors exceeds the amount of all of the debts and
liabilities (including contingent, subordinated, unmatured, and unliquidated
liabilities, but excluding the obligations of the Borrower and the Guarantors
hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date
(if any Guarantor becomes a party hereto subsequent to the Closing Date, then
for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed
to have been a Guarantor as of the Closing Date and the information pertaining
to, and only pertaining to, such
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Guarantor as of the date such Guarantor became a Guarantor shall be deemed true
as of the Closing Date).
4.7 Continuing Guarantee.
The guarantee in this Section 4 is a continuing guarantee, and shall apply
to all Guaranteed Obligations whenever arising.
SECTION 5
CONDITIONS
5.1 Conditions to Closing.
This Credit Agreement shall become effective, and the initial Extensions
of Credit may be made, upon the satisfaction of the following conditions
precedent:
(a) Execution of Credit Agreement and Credit Documents. Receipt of
fully executed copies of this Credit Agreement and the Revolving Note.
(b) Financial Information. Receipt of financial information
regarding the Borrower and its Subsidiaries, as may be requested by, and in each
case in form and substance satisfactory to the Bank.
(c) Absence of Legal Proceedings. Except as disclosed in Schedule
6.6, the absence of any action, suit, investigation or proceeding pending in any
court or before any arbitrator or governmental instrumentality which if
adversely determined could reasonably be expected to have a Material Adverse
Effect on the Consolidated Group taken as a whole.
(d) Legal Opinions. Receipt of an opinion of counsel for the Credit
Parties relating to the Credit Documents and the transactions contemplated
herein, in form and substance satisfactory to the Bank.
(e) Corporate Documents. Receipt of the following (or their
equivalent) for each of the Credit Parties:
(i) Articles of Incorporation. Copies of the articles of
incorporation or charter documents certified to be true and complete as of
a recent date by the appropriate governmental authority of the state of
its incorporation.
(ii) Resolutions. Copies of resolutions of the Board of
Directors approving and adopting the respective Credit Documents, the
transactions contemplated therein and authorizing execution and delivery
thereof, certified by a secretary or assistant secretary as of the Closing
Date to be true and correct and in force and effect as of such date.
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(iii) Bylaws. Copies of the bylaws certified by a secretary or
assistant secretary as of the Closing Date to be true and correct and in
force and effect as of such date.
(iv) Good Standing. Copies, where applicable, of certificates
of good standing, existence or its equivalent certified as of a recent
date by the appropriate governmental authorities of the state of
incorporation and each other state in which the failure to so qualify and
be in good standing would have a Material Adverse Effect on the business
or operations in such state.
(v) Officer's Certificate. An officer's certificate for each
of the Credit Parties dated as of the Closing Date substantially in the
form of Schedule 5.1(f) with appropriate insertions and attachments.
(f) Fees. Receipt of all Fees, if any, owing to the Bank.
(g) Section 5.2 Conditions. The conditions specified in Section 5.2
shall be satisfied.
(h) Additional Matters. All other documents and legal matters in
connection with the transactions contemplated by this Credit Agreement shall be
reasonably satisfactory in form and substance to the Bank.
5.2 Conditions to All Extensions of Credit.
The obligation of the Bank to make any Extension of Credit hereunder
(including the initial Extension of Credit to be made hereunder) is subject to
the satisfaction of the following conditions precedent on the date of making
such Extension of Credit:
(a) Representations and Warranties. The representations and
warranties made by the Credit Parties herein or in any other Credit Documents or
which are contained in any certificate furnished at any time under or in
connection herewith shall be true and correct in all material respects on and as
of the date of such Extension of Credit as if made on and as of such date
(except for those which expressly relate to an earlier date).
(b) No Default or Event of Default. No Default or Event of Default
shall have occurred and be continuing on such date or after giving effect to the
Extension of Credit to be made on such date unless such Default or Event of
Default shall have been waived in accordance with this Credit Agreement.
(c) No Material Adverse Effect. No circumstances, events or
conditions shall have occurred since the date of the audited financial
statements referenced in Section 6.1 which would have a Material Adverse Effect.
(d) Additional Conditions to Revolving Loans. If a Revolving Loan is
made pursuant to Section 2.1, all conditions set forth therein shall have been
satisfied.
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(e) Additional Conditions to Letters of Credit. If such Extension of
Credit is made pursuant to Section 2.2, all conditions set forth therein shall
have been satisfied.
(f) Additional Conditions to Bankers' Acceptances. If such Extension
of Credit is made pursuant to Section 2.3, all conditions set forth therein
shall have been satisfied.
Each request for Extension of Credit (including extensions and
conversions) and each acceptance by the Borrower of an Extension of Credit
(including extensions and conversions) shall be deemed to constitute a
representation and warranty by the Borrower as of the date of such Extension of
Credit that the applicable conditions in subsections (a), (b) and (c), and in
(d), (e) or (f) of this Section have been satisfied.
SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Credit Agreement and to make
Extensions of Credit herein provided for, each of the members of the
Consolidated Group parties hereto hereby represents and warrants to the Bank
that:
6.1 Financial Condition.
Each of the financial statements described below (copies of which have
heretofore been provided to the Bank), have been prepared in accordance with
GAAP consistently applied throughout the periods covered thereby, are complete
and correct in all material respects and present fairly the financial condition
and results from operations of the entities and for the periods specified,
subject in the case of interim Borrower-prepared statements to normal year-end
adjustments:
(i) an audited consolidated balance sheet of the Borrower and its
consolidated subsidiaries dated as of September 30, 1997, together with
related statements income and cash flows certified by Arthur Andersen LLP,
certified public accountants; and
(ii) a Borrower-prepared consolidated balance sheet of the Borrower
and its consolidated subsidiaries dated as of March 31, 1998, together
with related consolidated statements of income and cash flows.
6.2 No Changes or Restricted Payments.
Since the date of the audited financial statements referenced in Section
6.1(i), (a) there has been no circumstance, development or event relating to or
affecting the members of the Consolidated Group which has had or would be
reasonably expected to have a Material Adverse Effect, and (b) except as
permitted herein, no Restricted Payments have been made by any members of the
Consolidated Group, other than those permitted hereunder.
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6.3 Organization; Existence; Compliance with Law.
Each of the members of the Consolidated Group (a) is a corporation duly
organized, validly existing in good standing under the laws of the jurisdiction
of its organization, (b) has the corporate or other necessary power and
authority, and the legal right to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (c) is duly qualified as a foreign entity and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not, in the aggregate, have a Material
Adverse Effect, and (d) is in compliance with all Organizational Documents and
Requirements of Law, except to the extent that the failure to comply therewith
would not, in the aggregate, be reasonably expected to have a Material Adverse
Effect.
6.4 Power; Authorization; Enforceable Obligations.
Each of the Credit Parties has the corporate or other necessary power and
authority, and the legal right, to make, deliver and perform the Credit
Documents to which it is a party and has taken all necessary corporate action to
authorize the execution, delivery and performance by it of the Credit Documents
to which it is a party. No consent or authorization of, filing with, notice to
or other act by or in respect of, any Governmental Authority or any other Person
is required in connection with the borrowings hereunder or with the execution,
delivery or performance of any Credit Documents by the Credit Parties (other
than those which have been obtained, such filings as are required by the
Securities and Exchange Commission and to fulfill other reporting requirements
with Governmental Authorities) or with the validity or enforceability of any
Credit Document against the Credit parties. Each Credit Document to which it is
a party constitutes a legal, valid and binding obligation of such Credit Parties
enforceable against such Credit Parties in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
6.5 No Legal Bar.
The execution, delivery and performance of the Credit Documents, the
borrowings hereunder and the use of the Extensions of Credit will not violate
any Requirement of Law or any Contractual Obligation of any member of the
Consolidated Group (except those as to which waivers or consents have been
obtained, and will not result in, or require, the creation or imposition of any
Lien on any of their respective properties or revenues pursuant to any
Requirement of Law or Contractual Obligation other than the Liens arising under
or contemplated in connection with the Credit Documents. No member of the
Consolidated Group is in default under or with respect to any of its Contractual
Obligations in any respect which would reasonably be expected to have a Material
Adverse Effect.
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6.6 No Material Litigation.
Except as disclosed on Schedule 6.6 (as updated from time to time with the
consent of the Bank), no claim, litigation, investigation or proceeding of or
before any arbitrator or Governmental Authority is pending or, to the best
knowledge of the Credit Parties, threatened by or against, any members of the
Consolidated Group or against any of their respective properties or revenues
which (a) relate to the Credit Documents or any of the transactions contemplated
hereby or thereby, (b) if adversely determined, would reasonably be expected to
have a Material Adverse Effect. Set forth on Schedule 6.6 (as updated from time
to time with the consent of the Bank) is a summary of all material claims,
litigation, investigations and proceedings pending or, to the best knowledge of
the Credit Parties, threatened by or against the members of the Consolidated
Group or against any of their respective properties or revenues, and none of
such actions, individually or in the aggregate, if adversely determined is
reasonably expected to have a Material Adverse Effect, except as disclosed on
Schedule 6.6 (as updated from time to time with the consent of the Bank).
6.7 No Default.
No Default or Event of Default has occurred and is continuing.
6.8 Ownership of Property; Liens.
Each of members of the Consolidated Group has good record and marketable
title in fee simple to, or a valid leasehold interest in, all its material real
property, and good title to, or a valid leasehold interest in, all its other
material property, and none of such property is subject to any Lien, except for
Permitted Liens.
6.9 Intellectual Property.
Each of the members of the Consolidated Group owns, or has the legal right
to use, all United States trademarks, tradenames, copyrights, technology,
know-how and processes, if any, necessary for each of them to conduct its
business as currently conducted (the "Intellectual Property") except for those
the failure to own or have such legal right to use would not be reasonably
expected to have a Material Adverse Effect. No claim has been asserted and is
pending by any Person challenging or questioning the use of any such
Intellectual Property or the validity or effectiveness of any such Intellectual
Property, nor does any Credit Party know of any such claim, and the use of such
Intellectual Property by the members of the Consolidated Group does not infringe
on the rights of any Person, except for such claims and infringements that in
the aggregate, would not be reasonably expected to have a Material Adverse
Effect.
6.10 No Burdensome Restrictions.
No Requirement of Law, Organizational Document or Contractual Obligation
of the members of the Consolidated Group would be reasonably expected to have a
Material Adverse Effect.
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6.11 Taxes.
Each of the members of the Consolidated Group has filed or caused to be
filed all United States federal income tax returns and all other material tax
returns which, to the best knowledge of the Credit Parties, are required to be
filed and has paid (a) all taxes shown to be due and payable on said returns or
(b) all taxes shown to be due and payable on any assessments of which it has
received notice made against it or any of its property and all other taxes, fees
or other charges imposed on it or any of its property by any Governmental
Authority (other than any (i) taxes, fees or other charges with respect to which
the failure to pay, in the aggregate, would not have a Material Adverse Effect
or (ii) taxes, fees or other charges the amount or validity of which are
currently being contested and with respect to which reserves in conformity with
GAAP have been provided on the books of such Person), and no tax Lien has been
filed, and, to the best knowledge of the Credit Parties, no claim is being
asserted, with respect to any such tax, fee or other charge.
6.12 ERISA
Except as would not reasonably be expected to have a Material Adverse
Effect:
(a) During the five-year period prior to the date on which this
representation is made or deemed made: (i) no ERISA Event has occurred, and, to
the best knowledge of the Credit Parties, no event or condition has occurred or
exists as a result of which any ERISA Event could reasonably be expected to
occur, with respect to any Plan; (ii) no "accumulated funding deficiency," as
such term is defined in Section 302 of ERISA and Section 412 of the Code,
whether or not waived, has occurred with respect to any Plan; (iii) each Plan
has been maintained, operated, and funded in compliance with its own terms and
in material compliance with the provisions of ERISA, the Code, and any other
applicable federal or state laws; and (iv) no lien in favor of the PBGC or a
Plan has arisen or is reasonably likely to arise on account of any Plan.
(b) The actuarial present value of all "benefit liabilities" (as defined
in Section 4001(a)(16) of ERISA), whether or not vested, under each Single
Employer Plan, as of the last annual valuation date prior to the date on which
this representation is made or deemed made (determined, in each case, in
accordance with Financial Accounting Standards Board Statement 87, utilizing the
actuarial assumptions used in such Plan's most recent actuarial valuation
report), did not exceed as of such valuation date the fair market value of the
assets of such Plan.
(c) No member of the Consolidated Group nor any ERISA Affiliate has
incurred, or, to the best knowledge of the Credit Parties, could be reasonably
expected to incur, any withdrawal liability under ERISA to any Multiemployer
Plan or Multiple Employer Plan. No member of the Consolidated Group nor any
ERISA Affiliate would become subject to any withdrawal liability under ERISA if
any member of the Consolidated Group or any ERISA Affiliate were to withdraw
completely from all Multiemployer Plans and Multiple Employer Plans as of the
valuation date most closely preceding the date on which this representation is
made or deemed made. No member of the Consolidated Group nor any ERISA Affiliate
has received any notification that any Multiemployer Plan is in reorganization
(within the meaning of Section 4241 of ERISA), is insolvent (within the meaning
of Section 4245 of ERISA), or has been terminated (within the
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meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best
knowledge of the Credit Parties, reasonably expected to be in reorganization,
insolvent, or terminated.
(d) No prohibited transaction (within the meaning of Section 406 of ERISA
or Section 4975 of the Code) or breach of fiduciary responsibility has occurred
with respect to a Plan which has subjected or may subject any member of the
Consolidated Group or any ERISA Affiliate to any liability under Sections 406,
409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any
agreement or other instrument pursuant to which any member of the Consolidated
Group or any ERISA Affiliate has agreed or is required to indemnify any person
against any such liability.
(e) No member of the Consolidated Group nor any ERISA Affiliates has any
material liability with respect to "expected post-retirement benefit
obligations" within the meaning of the Financial Accounting Standards Board
Statement 106. Each Plan which is a welfare plan (as defined in Section 3(1) of
ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply
has been administered in compliance in all material respects of such sections.
6.13 Governmental Regulations, Etc.
(a) No part of the proceeds of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any "margin stock"
within the meaning of Regulation G or Regulation U, or for the purpose of
purchasing or carrying or trading in any securities. If requested by the
Bank, the Borrower will furnish to the Bank a statement to the foregoing
effect in conformity with the requirements of FR Form U-1 referred to in
said Regulation U. No indebtedness being reduced or retired out of the
proceeds of the Loans was or will be incurred for the purpose of
purchasing or carrying any margin stock within the meaning of Regulation U
or any "margin security" within the meaning of Regulation T. "Margin
stock" within the meanings of Regulation U does not constitute more than
25% of the value of the consolidated assets of the Borrower and its
Subsidiaries. None of the transactions contemplated by this Credit
Agreement (including, without limitation, the direct or indirect use of
the proceeds of the Loans) will violate or result in a violation of the
Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, or regulations issued pursuant thereto, or Regulation G,
T, U or X.
(b) None of the members of the Consolidated Group is subject to
regulation under the Public Utility Holding Company Act of 1935, the
Federal Power Act or the Investment Borrower Act of 1940, each as amended.
In addition, none of the members of the Consolidated Group is (i) an
"investment company" registered or required to be registered under the
Investment Company Act of 1940, as amended, and is not controlled by such
a company, or (ii) a "holding company", or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company" or of a
"subsidiary" of a "holding company", within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(c) No director, executive officer or principal shareholder of any
member of the Consolidated Group is a director, executive officer or
principal shareholder of the Bank. For the purposes hereof the terms
"director", "executive officer" and "principal
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shareholder" (when used with reference to the Bank) have the respective
meanings assigned thereto in Regulation O issued by the Board of Governors
of the Federal Reserve System.
(d) Each of the members of the Consolidated Group has obtained all
material licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its respective Property and
to the conduct of its business.
(e) None of the members of the Consolidated Group is in violation of
any applicable statute, regulation or ordinance of the United States of
America, or of any state, city, town, municipality, county or any other
jurisdiction, or of any agency thereof (including without limitation,
environmental laws and regulations), which violation could reasonably be
expected to have a Material Adverse Effect.
(f) Each of the members of the Consolidated Group is current with
all material reports and documents, if any, required to be filed with any
state or federal securities commission or similar agency and is in full
compliance in all material respects with all applicable rules and
regulations of such commissions.
6.14 Subsidiaries.
Set forth on Schedule 6.14 are all the Subsidiaries of the Borrower at the
Closing Date, the jurisdiction of their incorporation and the direct or indirect
ownership interest of the Borrower therein.
6.15 Purpose of Extensions of Credit.
The Extensions of Credit will be used to finance permitted acquisitions
and to finance working capital and other corporate purposes. The Letters of
Credit shall be used only for or in connection with appeal bonds, reimbursement
obligations arising in connection with surety and reclamation bonds,
reinsurance, domestic or international trade transactions and obligations not
otherwise aforementioned relating to transactions entered into by the applicable
account party in the ordinary course of business.
6.16 Environmental Matters.
Except as disclosed on Schedule 6.6 and as would not reasonably be
expected to have a Material Adverse Effect:
(a) Each of the facilities and properties owned, leased or operated by the
members of the Consolidated Group (the "Properties") and all operations at the
Properties are in compliance with all applicable Environmental Laws, and there
is no violation of any Environmental Law with respect to the Properties or the
businesses operated by the members of the Consolidated Group (the "Businesses"),
and there are no conditions relating to the Businesses or Properties that could
give rise to liability under any applicable Environmental Laws.
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(b) None of the Properties contains, or has previously contained, any
Materials of Environmental Concern at, on or under the Properties in amounts or
concentrations that constitute or constituted a violation of, or could give rise
to liability under, Environmental Laws.
(c) None of the members of the Consolidated Group has received any written
or verbal notice of, or inquiry from any Governmental Authority regarding, any
violation, alleged violation, non-compliance, liability or potential liability
regarding environmental matters or compliance with Environmental Laws with
regard to any of the Properties or the Businesses, nor does any member of the
Consolidated Group have knowledge or reason to believe that any such notice will
be received or is being threatened.
(d) Materials of Environmental Concern have not been transported or
disposed of from the Properties, or generated, treated, stored or disposed of
at, on or under any of the Properties or any other location, in each case by or
on behalf any members of the Consolidated Group in violation of, or in a manner
that would be reasonably likely to give rise to liability under, any applicable
Environmental Law.
(e) No judicial proceeding or governmental or administrative action is
pending or, to the best knowledge of any Credit Party, threatened, under any
Environmental Law to which any member of the Consolidated Group is or will be
named as a party, nor are there any consent decrees or other decrees, consent
orders, administrative orders or other orders, or other administrative or
judicial requirements outstanding under any Environmental Law with respect to
any member of the Consolidated Group, the Properties or the Businesses.
(f) There has been no release or, threat of release of Materials of
Environmental Concern at or from the Properties, or arising from or related to
the operations (including, without limitation, disposal) of any member of the
Consolidated Group in connection with the Properties or otherwise in connection
with the Businesses, in violation of or in amounts or in a manner that could
give rise to liability under Environmental Laws.
SECTION 7
AFFIRMATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing Date,
and so long as this Credit Agreement is in effect and until the Commitments have
been terminated, no Obligations remain outstanding and all amounts owing
hereunder or in connection herewith have been paid in full, each of the members
of the Consolidated Group party hereto shall:
7.1 Financial Statements.
Furnish, or cause to be furnished, to the Bank:
(a) Audited Financial Statements. As soon as available, but in any
event within 90 days after the end of each fiscal year, an audited
consolidated balance sheet of the Borrower and its subsidiaries as of the
end of the fiscal year and the related consolidated statements of income,
retained earnings, shareholders' equity and cash flows for the
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year, audited by Arthur Andersen LLP, or other firm of independent
certified public accountants of nationally recognized standing reasonably
acceptable to the Bank, setting forth in each case in comparative form the
figures for the previous year, reported without a "going concern" or like
qualification or exception, or qualification indicating that the scope of
the audit was inadequate to permit such independent certified public
accountants to certify such financial statements without such
qualification.
(b) Borrower-Prepared Financial Statements. As soon as available,
but in any event
(i) within 45 days after the end of each of the first three
fiscal quarters, a Borrower-prepared consolidated balance sheet of
the Borrower and its subsidiaries as of the end of the quarter and
related Borrower-prepared consolidated statements of income and cash
flows for such quarterly period and for the fiscal year to date;
(ii) within 30 days prior to the end of each fiscal year, an
annual business plan and budget for the members of the Consolidated
Group, containing, among other things, pro forma financial
statements for the next fiscal year,
in each case setting forth in comparative form the consolidated figures
for the corresponding period or periods of the preceding fiscal year or
the portion of the fiscal year ending with such period, as applicable, in
each case subject to normal recurring year-end audit adjustments.
All such financial statements to be complete and correct in all material
respects (subject, in the case of interim statements, to normal recurring
year-end audit adjustments) and to be prepared in reasonable detail and ,in the
case of the annual and quarterly financial statements provided in accordance
with subsections (a) and (b) above, in accordance with GAAP applied consistently
throughout the periods reflected therein) and further accompanied by a
description of, and an estimation of the effect on the financial statements on
account of, a change in the application of accounting principles as provided in
Section 1.3.
7.2 Certificates; Other Information.
Furnish, or cause to be furnished, to the Bank:
(a) Accountant's Certificate and Reports. Concurrently with the
delivery of the financial statements referred to in subsection 7.1(a)
above, a certificate of the independent certified public accountants
reporting on such financial statements stating that in making the
examination necessary therefor no knowledge was obtained of any Default or
Event of Default, except as specified in such certificate.
(b) Officer's Certificate. Concurrently with the delivery of the
financial statements referred to in Sections 7.1(a) and 7.1(b) above, a
certificate of a Responsible Officer in such capacity and not individually
stating that, to the best of such Responsible Officer's knowledge and
belief, (i) the financial statements fairly present in all material
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respects the financial condition of the parties covered by such financial
statements, (ii) during such period the members of the Consolidated Group
have observed or performed in all material respects the covenants and
other agreements hereunder and under the other Credit Documents relating
to them, and satisfied in all material respects the conditions, contained
in this Credit Agreement to be observed, performed or satisfied by them,
(iii) such Responsible Officer has obtained no knowledge of any Default or
Event of Default except as specified in such certificate and (iv) such
certificate shall include the calculations required to indicate compliance
with Section 7.9. A form of Officer's Certificate is attached as Schedule
7.2(b).
(c) Public Information. Within thirty days after the same are sent,
copies of all reports (other than those otherwise provided pursuant to
subsection 7.1) and other financial information which any member of the
Consolidated Group sends to its public stockholders, and within thirty
days after the same are filed, copies of all financial statements and
non-confidential reports which any member of the Consolidated Group may
make to, or file with, the Securities and Exchange Commission or any
successor or analogous Governmental Authority.
(d) Other Information. Promptly, such additional financial and other
information as the Bank may from time to time reasonably request.
7.3 Notices.
Give notice to the Bank of:
(a) Defaults. Immediately (and in any event within two (2) Business
Days) after a Responsible Officer of a Credit Party knows or has reason to
know thereof, the occurrence of any Default or Event of Default.
(b) Contractual Obligations. Promptly, the initiation of any default
or event of default under any Contractual Obligation of any member of the
Consolidated Group which would reasonably be expected to have a Material
Adverse Effect.
(c) Legal Proceedings. Promptly, any litigation, or any
investigation or proceeding (including without limitation, any
environmental proceeding) known to any member of the Consolidated Group
(other than those disclosed in Schedule 6.6), or any material development
in respect thereof (including those matters disclosed on Schedule 6.6),
affecting any member of the Consolidated Group which, if adversely
determined, would reasonably be expected to have a Material Adverse
Effect.
(d) ERISA. Promptly, after any Responsible Officer of the Borrower
knows or has reason to know of (i) any event or condition, including, but
not limited to, any Reportable Event, that constitutes, or might
reasonably lead to, an ERISA Event; (ii) with respect to any Multiemployer
Plan, the receipt of notice as prescribed in ERISA or otherwise of any
withdrawal liability assessed against any of their ERISA Affiliates, or of
a determination that any Multiemployer Plan is in reorganization or
insolvent (both within the meaning of Title IV of ERISA); (iii) the
failure to make full payment on or
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before the due date (including extensions) thereof of all amounts which
the members of the Consolidated Group or any ERISA Affiliate are required
to contribute to each Plan pursuant to its terms and as required to meet
the minimum funding standard set forth in ERISA and the Code with respect;
or (iv) any change in the funding status of any Plan that reasonably could
be expected to have a Material Adverse Effect; together with a description
of any such event or condition or a copy of any such notice and a
statement by the chief financial officer of the Borrower briefly setting
forth the details regarding such event, condition, or notice, and the
action, if any, which has been or is being taken or is proposed to be
taken by the Credit Parties with respect thereto. Promptly upon request,
the members of the Consolidated Group shall furnish the Bank with such
additional information concerning any Plan as may be reasonably requested,
including, but not limited to, copies of each annual report/return (Form
5500 series), as well as all schedules and attachments thereto required to
be filed with the Department of Labor and/or the Internal Revenue Service
pursuant to ERISA and the Code, respectively, for each "plan year" (within
the meaning of Section 3(39) of ERISA).
(e) Other. Promptly, any other development or event which a
Responsible Officer determines could reasonably be expected to have a
Material Adverse Effect.
Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the relevant Credit Parties propose to take with respect
thereto.
7.4 Payment of Obligations.
Pay, discharge or otherwise satisfy at or before maturity or before they
become delinquent, as the case may be, in accordance with prudent business
practice (subject, where applicable, to specified grace periods) all material
obligations of each member of the Consolidated Group of whatever nature and any
additional costs that are imposed as a result of any failure to so pay,
discharge or otherwise satisfy such obligations, except (i) when the amount or
validity of such obligations and costs is currently being contested in good
faith by appropriate proceedings and reserves, if applicable, in conformity with
GAAP with respect thereto have been provided on the books of the Consolidated
Group, as the case may be, and (ii) to the extent that the failure to so pay,
discharge or otherwise satisfy such obligations would not have a Material
Adverse Effect.
7.5 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as now conducted
by it on the date hereof and similar or related businesses with respect to
motorsports products except to the extent that failure to comply therewith would
not, in the aggregate, have a Material Adverse Effect; preserve, renew and keep
in full force and effect its corporate existence and take all reasonable action
to maintain all rights, privileges, licenses and franchises necessary or
desirable in the normal conduct of its business; and comply with all Contractual
Obligations and Requirements of Law applicable to it except to the extent that
failure to comply with such Contractual Obligations and Requirements of Law
would not, in the aggregate, have a Material Adverse Effect.
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7.6 Maintenance of Property; Insurance.
Keep all material Property useful and necessary in its business in
reasonably good working order and condition (ordinary wear and tear excepted);
maintain with financially sound and reputable insurance companies casualty,
liability and such other insurance (which may include plans of self-insurance)
with such coverage and deductibles, and in such amounts as may be consistent
with prudent business practice and in any event consistent with normal industry
practice (except to any greater extent as may be required by the terms of any of
the other Credit Documents); and furnish to the Bank, upon written request, full
information as to the insurance carried.
7.7 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and correct
entries in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its businesses and activities; and
permit, during regular business hours and upon reasonable notice, the Bank to
visit and inspect any of its properties and examine and make abstracts
(including photocopies) from any of its books and records (other than materials
protected by the attorney-client privilege and materials which the Credit
Parties may not disclose without violation of a confidentiality obligation
binding upon them) at any reasonable time, and to discuss the business,
operations, properties and financial and other condition of the members of the
Consolidated Group with officers and employees of the members of the
Consolidated Group and with their independent certified public accountants. The
cost of the inspection referred to in the preceding sentence shall be for the
account of the Bank unless an Event of Default has occurred and is continuing,
in which case the cost of such inspection shall be for the account of the Credit
Parties.
7.8 Environmental Laws.
(a) Comply in all material respects with, and take reasonable actions to
ensure compliance in all material respects by all tenants and subtenants,
if any, with, all applicable Environmental Laws and obtain and comply in
all material respects with and maintain, and take reasonable actions to
ensure that all tenants and subtenants obtain and comply in all material
respects with and maintain, any and all licenses, approvals,
notifications, registrations or permits required by applicable
Environmental Laws except to the extent that failure to do so would not
reasonably be expected to have a Material Adverse Effect;
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all
lawful orders and directives of all Governmental Authorities regarding
Environmental Laws except to the extent that the same are being contested
in good faith by appropriate proceedings and the failure to do or the
pendency of such proceedings would not reasonably be expected to have a
Material Adverse Effect; and
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(c) Defend, indemnify and hold harmless the Bank, and its employees,
agents, officers and directors, from and against any and all claims,
demands, penalties, fines, liabilities, settlements, damages, costs and
expenses of whatever kind or nature known or unknown, contingent or
otherwise, arising out of, or in any way relating to the violation of,
noncompliance with or liability under, any Environmental Law applicable to
the operations of the members of the Consolidated Group or the Properties,
or any orders, requirements or demands of Governmental Authorities related
thereto, including, without limitation, reasonable attorney's and
consultant's fees, investigation and laboratory fees, response costs,
court costs and litigation expenses, except to the extent that any of the
foregoing arise out of the gross negligence or willful misconduct of the
party seeking indemnification therefor. The agreements in this paragraph
shall survive repayment of the Loans and all other amounts payable
hereunder, and termination of the Commitments.
7.9 Financial Covenants.
(a) Consolidated Senior Leverage Ratio. The Borrower will not permit, at
any time, the Consolidated Senior Leverage Ratio to be greater than 2.0 to 1.0.
(b) Fixed Charges Coverage Ratio. The Borrower will not permit, at any
time, the Fixed Charges Coverage Ratio to be less than 5.0 to 1.0.
(c) Consolidated Net Worth. The Borrower will not permit, at any time
Consolidated Net Worth to be less than the sum of (i) $95 million plus (ii) as
of the end of each fiscal quarter to occur after September 30, 1997, an amount
equal to fifty percent (50%) of Consolidated Net Income (but not less than zero)
for the fiscal quarter then ended, such increases to be cumulative plus (iii) an
amount equal to one hundred percent (100%) of the net proceeds from Equity
Transactions occurring after September 30, 1997.
7.10 Additional Guaranties.
(a) Domestic Subsidiaries. At any time any Person becomes a Domestic
Subsidiary, the Borrower will promptly notify the Bank thereof and cause
such Domestic Subsidiary to become a Guarantor hereunder by (i) execution
of a Joinder Agreement, and (ii) delivery of supporting resolutions,
incumbency certificates, corporation formation and organizational
documentation and opinions of counsel as the Bank may reasonably request.
(b) Foreign Subsidiaries. At any time any Person becomes a Foreign
Subsidiary, the Borrower will promptly notify the Bank thereof and cause
delivery of supporting resolutions, incumbency certificates, corporation
formation and organizational documentation and opinions of counsel as the
Bank may reasonably request.
7.11 Use of Proceeds.
Extensions of Credit will be used solely for the purposes provided in
Section 6.15.
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SECTION 8
NEGATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing Date,
and so long as this Credit Agreement is in effect and until the Commitments have
been terminated, no Obligations remain outstanding and all amounts owing
hereunder or in connection herewith, have been paid in full, no member of the
Consolidated Group shall:
8.1 Indebtedness.
Contract, create, incur, assume or permit to exist any Indebtedness,
except:
(a) Indebtedness arising or existing under this Credit Agreement and
the other Credit Documents;
(b) Indebtedness evidenced by the Senior Notes in an aggregate
principal amount not to exceed $20,000,000;
(c) Indebtedness set forth in Schedule 8.1, and renewals,
refinancings and extensions thereof on terms and conditions no less
favorable than for such existing Indebtedness;
(d) Capital Lease Obligations and Indebtedness incurred, in each
case, to provide all or a portion of the purchase price or costs of
construction of an asset or, in the case of a sale/leaseback transaction
as described in Section 8.11, to finance the value of such asset owned by
a member of the Consolidated Group, provided that (i) such Indebtedness
when incurred shall not exceed the purchase price or cost of construction
of such asset or, in the case of a sale/leaseback transaction, the fair
market value of such asset, (ii) no such Indebtedness shall be refinanced
for a principal amount in excess of the principal balance outstanding
thereon at the time of such refinancing, and (iii) the total amount of all
such Indebtedness shall not exceed an amount equal to fifteen percent
(15%) of Consolidated Net Worth as of the end of the most recent fiscal
quarter;
(e) Indebtedness and obligations owing under interest rate
protection agreements relating to the Obligations hereunder and under
interest rate, commodities and foreign currency exchange protection
agreements entered into in the ordinary course of business to manage
existing or anticipated risks and not for speculative purposes;
(f) unsecured intercompany Indebtedness owing by a member of the
Consolidated Group to another member of the Consolidated Group (subject,
however, to the limitations of Section 8.5 in the case of the member of
the Consolidated Group extending the intercompany loan, advance or
credit);
(g) other unsecured Funded Debt of the Borrower in the aggregate at
any time outstanding of up to an amount equal to an amount equal to
fifteen percent (15%) of Consolidated Net Worth as of the end of the most
recent fiscal quarter;
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(h) Guaranty Obligations of Indebtedness permitted under this
Section 8.1;
(i) the Subordinated Notes; and
(j) other subordinated debt issued on terms and conditions
reasonably acceptable to the Bank in an amount equal to fifteen percent
(15%) of Consolidated Net Worth as of the end of the most recent fiscal
quarter.
8.2 Liens.
Contract, create, incur, assume or permit to exist any Lien with respect
to any of their respective property or assets of any kind (whether real or
personal, tangible or intangible), whether now owned or hereafter acquired,
except for Permitted Liens.
8.3 Nature of Business.
Alter the character of their business in any material respect from that
conducted as of the Closing Date and similar or related businesses with respect
thereto.
8.4 Consolidation, Merger, Sale or Purchase of Assets, Capital
Expenditures, etc.
(a) Dissolve, liquidate or wind up their affairs, except (i) in connection
with a disposition of assets permitted by the terms of subsection (c) hereof and
(ii) for the dissolution and liquidation of a wholly-owned Subsidiary of a
Credit Party where the parent Credit Party receives the assets of such
Subsidiary;
(b) Enter into any transaction of merger or consolidation; provided,
however, that, so long as no Default or Event of Default would be directly or
indirectly caused as a result thereof,
(i) a member of the Consolidated Group (other than the Borrower) may
merge or consolidate with another member of the Consolidated Group,
provided that (A) if the Borrower is a party thereto, it shall be the
surviving corporation, (B) if a Credit Party shall be a party thereto, it
shall be the surviving corporation, and (C) the surviving corporation
shall be a Domestic Credit Party or shall become a Domestic Credit Party
pursuant to the terms of Section 7.10 concurrently with consummation of
the merger or consolidation;
(ii) a member of the Consolidated Group (other than the Borrower)
may merge or consolidate with any Person that is not a Subsidiary,
provided that the applicable conditions set forth in the foregoing
subsection (i) of this Section 8.4(b), in Section 7.10 regarding joinder
of certain Subsidiaries as Credit Parties, and in Section 8.4(d) regarding
acquisitions, are complied with in connection with any such acquisition by
merger.
(c) Sell, lease, transfer or otherwise dispose of any Property (including
without limitation pursuant to any sale/leaseback transaction) other than (i)
the sale of inventory in the ordinary course of business for fair consideration,
(ii) the sale or disposition of machinery and
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equipment no longer used or useful in the conduct of such Person's business, and
(iii) other sales of assets, provided that (A) after giving effect to such sale
or other disposition, the aggregate book value of assets sold or otherwise
disposed of pursuant to this clause (iii), or the revenues therefrom, in any
given fiscal year does not exceed an amount equal to the lesser of 15% of
Consolidated Net Worth as of the end of the immediately preceding fiscal quarter
or 15% of Consolidated Revenues for the immediately preceding four Fiscal
Quarters, and (B) after giving effect to such sale or other disposition, no
Default or Event of Default would exist hereunder.
(d) Except
(i) as otherwise permitted by Section 8.4(b)(i), and
(ii) for Investments in entities in which less than 50% is (or, as a
result of the transaction, will be) owned by a Credit Party where such
Investments are permitted by subclause (xiii) of the definition of
"Permitted Investments",
purchase, lease or otherwise acquire (in a single transaction or a series of
related transactions) all or any substantial part of the Property of any other
Person without the prior written consent of the Bank, unless the Borrower shall
certify that no Default or Event of Default shall then exist and demonstrate
that no Default or Event of Default shall exist after giving effect thereto on a
pro forma basis by giving effect to the transaction as if it had occurred as of
the first day of the four fiscal quarter period ending as of the most recent
fiscal quarter preceding the date of such transaction.
(e) Take or permit any action, or fail to take any action, the effect of
which would be to cause a Domestic Credit Party to lose its status as such,
other than as expressly permitted in this Section.
8.5 Advances, Investments and Loans.
Lend money or extend credit or make advances to any Person, or purchase or
acquire any stock, obligations or securities of, or any other interest in, or
make any capital contribution to, or otherwise make an Investment in, any Person
except for Permitted Investments.
8.6 Transactions with Affiliates.
Enter into or permit to exist any transaction or series of transactions,
whether or not in the ordinary course of business, with any officer, director,
shareholder or Affiliate other than (i) transactions permitted by Section 8.1,
Section 8.4(b), Section 8.5 or Section 8.10, (ii) customary fees and expenses
paid to directors and (iii) where such transactions are on terms and conditions
substantially as favorable as would be obtainable in a comparable arm's-length
transaction with a Person other than an officer, director, shareholder or
Affiliate.
8.7 Ownership of Equity Interests.
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Issue, sell, transfer, pledge or otherwise dispose of any partnership
interests, shares of capital stock or other equity or ownership interests
("Equity Interests") in any member of the Consolidated Group other than the
Borrower, except (i) issuance, sale or transfer of Equity Interests to a Credit
Party by a Subsidiary of such Credit Party, (ii) in connection with a
transaction permitted by Section 8.4, and (iii) as needed to qualify directors
under applicable law.
8.8 Fiscal Year.
Change its Fiscal Year.
8.9 Prepayments of Indebtedness, etc.
(a) After the issuance thereof, amend or modify (or permit the amendment
or modification of), the terms of any other Funded Debt in a manner adverse to
the interests of the Bank (including specifically shortening any maturity or
average life to maturity or requiring any payment sooner than previously
scheduled or increasing the interest rate or fees applicable thereto);
(b) Make any prepayment, redemption, defeasance or acquisition for value
of (including without limitation, by way of depositing money or securities with
the trustee with respect thereto before due for the purpose of paying when due),
or refund, refinance or exchange of any Funded Debt (other than intercompany
Indebtedness permitted hereunder) other than regularly scheduled payments of
principal and interest on such Funded Debt, except to the extent permitted by
Section 8.10.
8.10 Restricted Payments.
Make or permit Restricted Payments in the aggregate for any Fiscal Year in
excess of an amount equal to 35% of Consolidated Net Income (if positive) for
the immediately preceding Fiscal Year, without the prior written consent of the
Bank.
8.11 Sale Leasebacks.
Except as permitted pursuant to Section 8.1(c) and (d) hereof, directly or
indirectly, become or remain liable as lessee or as guarantor or other surety
with respect to any lease, whether an Operating Lease or a Capital Lease, of any
Property (whether real or personal or mixed), whether now owned or hereafter
acquired, (i) which such Person has sold or transferred or is to sell or
transfer to any other Person other than a Credit Party or (ii) which such Person
intends to use for substantially the same purpose as any other Property which
has been sold or is to be sold or transferred by such Person to any other Person
in connection with such lease.
8.12 No Further Negative Pledges.
Except with respect to the Senior Note Agreement relating to (i) the
Senior Notes, (ii) Indebtedness incurred pursuant to Section 8.1(g), and (iii)
prohibitions against other encumbrances on specific Property encumbered to
secure payment of particular Indebtedness
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(which Indebtedness relates solely to such specific Property, and improvements
and accretions thereto, and is otherwise permitted hereby), no member of the
Consolidated Group will enter into, assume or become subject to any agreement
prohibiting or otherwise restricting the creation or assumption of any Lien upon
its properties or assets, whether now owned or hereafter acquired, or requiring
the grant of any security for such obligation if security is given for some
other obligation.
SECTION 9
EVENTS OF DEFAULT
9.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. Any Credit Party shall
(i) default in the payment when due of any principal of any of the
Loans or of any reimbursement obligations relating to Letters of Credit or
Bankers' Acceptances, or
(ii) default, and such defaults shall continue for five (5) or more
Business Days, in the payment when due of any interest on the Loans or on
any reimbursement obligations, or of any Fees or other amounts owing
hereunder, under any of the other Credit Documents or in connection
herewith or therewith; or
(b) Representations. Any representation, warranty or statement made or
deemed to be made herein, in any of the other Credit Documents, or in any
statement or certificate delivered or required to be delivered pursuant hereto
or thereto shall prove untrue in any material respect on the date as of which it
was deemed to have been made; or
(c) Covenants.
(i) Default in the due performance or observance of any term,
covenant or agreement contained in Section 7.3(a), 7.9, 7.10 or 8.1
through 8.12 (except in the case of negative covenants contained in
Sections 8.1 through 8.12, those Defaults which may occur or arise other
than on account of or by affirmative or intentional act of the Borrower or
event or condition which the Borrower shall with knowledge permit to
exist, all of which shall be subject to the provisions of clause (ii)
hereof), inclusive, or
(ii) Default in the due performance or observance by it of any term,
covenant or agreement (other than those referred to in subsections (a),
(b) or (c)(i) of this Section 9.1) contained in this Credit Agreement and
such default shall continue unremedied for a period of at least 30 days
after the earlier of a responsible officer of a Credit Party becoming
aware of such default or notice thereof by the Bank or, if such
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default cannot reasonably be remedied within such 30 day period, an
additional period not to exceed 30 days, provided that remedy is commenced
within the original 30 day period and is diligently and continuously
pursued; or
(d) Other Credit Documents. (i) Any Credit Party shall default in the due
performance or observance of any material term, covenant or agreement in any of
the other Credit Documents (subject to applicable grace or cure periods, if
any), or (ii) except as to the Credit Party which is dissolved, released or
merged or consolidated out of existence as the result of or in connection with a
dissolution, merger or disposition permitted by Section 8.4(a), Section 8.4(b)
or Section 8.4(c), any Credit Document shall fail to be in full force and effect
or to give the Bank any material part of the Liens, rights, powers and
privileges purported to be created thereby; or
(e) Guaranties. Except as to the Credit Party which is dissolved, released
or merged or consolidated out of existence as the result of or in connection
with a dissolution, merger or disposition permitted by Section 8.4(a), Section
8.4(b) or Section 8.4(c), the guaranty given by any Guarantor hereunder or any
material provision thereof shall cease to be in full force and effect, or any
Guarantor hereunder or any Person acting by or on behalf of such Guarantor shall
deny or disaffirm such Guarantor's obligations under such guaranty, or any
Guarantor shall default in payment under such guaranty; or
(f) Bankruptcy, etc. A Bankruptcy Event shall occur with respect to any
member of the Consolidated Group; or
(g) Defaults under Other Agreements. With respect to any Indebtedness
(other than Indebtedness outstanding under this Credit Agreement) in excess of
$1,000,000 in the aggregate for the Consolidated Group taken as a whole, without
duplication, (A) (1) any member of the Consolidated Group shall default in any
payment (beyond the applicable grace period with respect thereto, if any) with
respect to any such Indebtedness, or (2) the occurrence and continuance of a
default in the observance or performance relating to such Indebtedness or
contained in any instrument or agreement evidencing, securing or relating
thereto, or any other event or condition shall occur or condition exist, the
effect of which default or other event or condition is to cause, or permit, the
holder or holders of such Indebtedness (or trustee or agent on behalf of such
holders) to cause any such Indebtedness to become due prior to its stated
maturity; or (B) any such Indebtedness shall be declared due and payable, or
required to be prepaid other than by a regularly scheduled required prepayment,
prior to the stated maturity thereof; or
(h) Judgments. Any member of the Consolidated Group shall fail within 30
days of the date due and payable to pay, bond or otherwise discharge any
judgment, settlement or order for the payment of money which judgment,
settlement or order, when aggregated with all other such judgments, settlements
or orders due and unpaid at such time, exceeds $2,000,000, and which is not
stayed on appeal (or for which no motion for stay is pending) or is not
otherwise being executed; or
(i) ERISA. Any of the following events or conditions, if such event or
condition could reasonably be expected to have a Material Adverse Effect: (1)
any "accumulated funding deficiency," as such term is defined in Section 302 of
ERISA and Section 412 of the Code,
59
<PAGE> 65
whether or not waived, shall exist with respect to any Plan, or any lien shall
arise on the assets of a member of the Consolidated Group or any ERISA Affiliate
in favor of the PBGC or a Plan; (2) an ERISA Event shall occur with respect to a
Single Employer Plan, which is, in the reasonable opinion of the Bank, likely to
result in the termination of such Plan for purposes of Title IV of ERISA; (3) an
ERISA Event shall occur with respect to a Multiemployer Plan or Multiple
Employer Plan, which is, in the reasonable opinion of the Bank, likely to result
in (i) the termination of such Plan for purposes of Title IV of ERISA, or (ii) a
member of the Consolidated Group or any ERISA Affiliate incurring any liability
in connection with a withdrawal from, reorganization of (within the meaning of
Section 4241 of ERISA), or insolvency of (within the meaning of Section 4245 of
ERISA) such Plan; or (4) any prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary
responsibility shall occur which may subject a member of the Consolidated Group
or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or
502(l) of ERISA or Section 4975 of the Code, or under any agreement or other
instrument pursuant to which a member of the Consolidated Group or any ERISA
Affiliate has agreed or is required to indemnify any person against any such
liability; or
(j) Ownership. There shall occur a Change of Control; or
(k) Senior Notes. The occurrence of an Event of Default under the Senior
Notes.
9.2 Acceleration; Remedies.
Upon the occurrence of an Event of Default, and at any time thereafter,
the Bank may, by written notice to the Borrower and the other Credit Parties
take any of the following actions:
(i) Termination of Commitments. Declare the Commitments terminated
whereupon the Commitments shall be immediately terminated.
(ii) Acceleration. Declare the unpaid principal of and any accrued
interest in respect of all Loans, any reimbursement obligations relating
to Letters of Credit and Bankers' Acceptances and any and all other
indebtedness or obligations of any and every kind owing by the Credit
Parties to the Bank hereunder to be due whereupon the same shall be
immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by each of the Credit
Parties.
(iii) Cash Collateral. Direct the Borrower to pay (and the Borrower agrees
that upon receipt of such notice, or upon the occurrence of an Event of
Default under Section 9.1(f), it will immediately pay) to the Bank
additional cash, to be held by the Bank in a cash collateral account as
additional security for the LOC Obligations and BA Obligations in an
amount equal to the maximum aggregate amount which may be drawn under all
Letters of Credits and Bankers' Acceptances then outstanding.
(iv) Enforcement of Rights. Enforce any and all rights and interests
created and existing under the Credit Documents and all rights of set-off.
60
<PAGE> 66
Notwithstanding the foregoing, if an Event of Default specified in Section
9.1(f) shall occur, then the Commitments shall automatically terminate and all
Loans, all reimbursement obligations relating to Letters of Credit and Bankers'
Acceptances, all accrued interest in respect thereof, all accrued and unpaid
Fees and other indebtedness or obligations owing to the Bank hereunder
automatically shall immediately become due and payable without presentment,
demand, protest or the giving of any notice or other action by the Bank, all of
which are hereby waived by the Credit Parties.
SECTION 10
MISCELLANEOUS
10.1 Notices.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (i) when
delivered, (ii) when transmitted via telecopy (or other facsimile device) to the
number set out below, (iii) the Business Day following the day on which the same
has been delivered prepaid to a reputable national overnight air courier
service, or (iv) the third Business Day following the day on which the same is
sent by certified or registered mail, postage prepaid, in each case to the
respective parties at the address, in the case of the Borrower, Guarantors and
the Bank, set forth below or at such other address as such party may specify by
written notice to the other parties hereto:
if to the Borrower or the Guarantors:
ACTION PERFORMANCE COMPANIES, INC.
4707 East Baseline Road
Phoenix, Arizona 85040
Attn: David Husband
Telephone: (602) 337-3636
Telecopy: (602) 337-3780
with a copy to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Attn: Robert S. Kant
Telephone: (602) 263-2606
Telecopy: (602) 263-2900
if to the Bank:
First Union National Bank
201 South College Street, Suite 1300
61
<PAGE> 67
Charlotte, North Carolina 28288-0656
Attn: Portfolio Management
Telephone: (704) 383-4369
Telecopy: (704) 374-4820
with a copy to:
First Union National Bank
301 S. Tryon Street, N.C. Corporate Banking
Charlotte, North Carolina 28288-0145
Attn: Tracey Gillespie
Vice President
Telephone: (704) 383-7645
Telecopy: (704) 374-4000
10.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable law or
otherwise, and not by way of limitation of any such rights, upon the occurrence
of an Event of Default, the Bank is authorized at any time and from time to
time, without presentment, demand, protest or other notice of any kind (all of
which rights being hereby expressly waived), to set-off and to appropriate and
apply any and all deposits (general or special) and any other indebtedness at
any time held or owing by the Bank (including, without limitation branches,
agencies or Affiliates of the Bank wherever located) to or for the credit or the
account of any Credit Party against obligations and liabilities of such Person
to the Bank hereunder, under the Revolving Note, the other Credit Documents or
otherwise, irrespective of whether the Bank shall have made any demand hereunder
and although such obligations, liabilities or claims, or any of them, may be
contingent or unmatured, and any such set-off shall be deemed to have been made
immediately upon the occurrence of an Event of Default even though such charge
is made or entered on the books of the Bank subsequent thereto.
10.3 Benefit of Agreement.
This Credit Agreement shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto; provided that none of the Credit Parties may assign or transfer any of
its interests without prior written consent of the Bank.
10.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Bank in exercising any right, power
or privilege hereunder or under any other Credit Document and no course of
dealing between the Bank and any of the Credit Parties shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights and remedies provided herein are cumulative
and not exclusive of any rights or remedies which the Bank would otherwise have.
No notice to or demand on any Credit Party in any case shall entitle the
Borrower or any other Credit Party to any other or further notice
62
<PAGE> 68
or demand in similar or other circumstances or constitute a waiver of the rights
of the Bank to any other or further action in any circumstances without notice
or demand, except as expressly provided otherwise herein or in other Credit
Documents.
10.5 Payment of Expenses, etc.
The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and
expenses (A) of the Bank in connection with the negotiation, preparation,
execution and delivery and administration of this Credit Agreement and the other
Credit Documents and the documents and instruments referred to therein
(including, without limitation, the reasonable fees and expenses of Moore & Van
Allen, PLLC, special counsel to the Bank) and any amendment, waiver or consent
relating hereto and thereto including, but not limited to, any such amendments,
waivers or consents resulting from or related to any work-out, renegotiation or
restructure relating to the performance by the Credit Parties under this Credit
Agreement and (B) of the Bank in connection with enforcement of the Credit
Documents and the documents and instruments referred to therein (including,
without limitation, in connection with any such enforcement, the reasonable fees
and disbursements of counsel for the Bank); (ii) pay and hold the Bank harmless
from and against any and all present and future stamp and other similar taxes
with respect to the foregoing matters and save the Bank harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to the Bank) to pay such taxes;
and (iii) indemnify the Bank, its officers, directors, employees,
representatives and agents from and hold each of them harmless against any and
all losses, liabilities, claims, damages or expenses incurred by any of them as
a result of, or arising out of, or in any way related to, or by reason of (A)
any investigation, litigation or other proceeding (whether or not the Bank is a
party thereto) related to the entering into and/or performance of any Credit
Document or the use of proceeds of any Loans (including other extensions of
credit) hereunder or the consummation of any other transactions contemplated in
any Credit Document, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding or (B) the presence or Release of any Materials
of Environmental Concern at, under or from any Property owned, operated or
leased by the Borrower or any of its Subsidiaries, or the failure by the
Borrower or any of its Subsidiaries to comply with any Environmental Law (but
excluding, in the case of either of clause (A) or (B) above, any such losses,
liabilities, claims, damages or expenses to the extent incurred by reason of
gross negligence or willful misconduct on the part of the Person to be
indemnified).
10.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any of the
terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing entered into by, or approved in writing by, the Bank and the Credit
Parties directly affected thereby.
10.7 Counterparts.
This Credit Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall constitute one and the
63
<PAGE> 69
same instrument. It shall not be necessary in making proof of this Credit
Agreement to produce or account for more than one such counterpart.
10.8 Headings.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
10.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 2.2(i), 3.9, 3.11 or 10.5 shall survive the execution and delivery of
this Credit Agreement, the making of the Loans, the issuance of the Letters of
Credit, the repayment of the Loans, LOC Obligations and other obligations under
the Credit Documents and the termination of the Commitments hereunder, and all
representations and warranties made by the Credit Parties herein shall survive
delivery of the Revolving Note and the making of the Loans hereunder.
10.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA. Any legal action or proceeding with respect to this Credit Agreement
or any other Credit Document may be brought in the courts of the State of North
Carolina in Mecklenburg County, or of the United States for the Western District
of North Carolina, and, by execution and delivery of this Credit Agreement, each
of the Credit Parties hereby irrevocably accepts for itself and in respect of
its property, generally and unconditionally, the nonexclusive jurisdiction of
such courts. Nothing herein shall affect the right of the Bank to commence legal
proceedings or to otherwise proceed against any Credit Party in any other
jurisdiction.
(b) Each of the Credit Parties hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Credit Agreement or any other Credit Document brought in the courts referred to
in subsection (a) hereof and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
(c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE BANK, THE BORROWER AND THE
CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT
AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
10.11 Severability.
64
<PAGE> 70
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
10.12 Entirety.
This Credit Agreement together with the other Credit Documents represent
the entire agreement of the parties hereto and thereto, and supersede all prior
agreements and understandings, oral or written, if any, including any commitment
letters or correspondence relating to the Credit Documents or the transactions
contemplated herein and therein.
10.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at such time on or after
the Closing Date when it shall have been executed by the Borrower, the
Guarantors and the Bank, and thereafter this Credit Agreement shall be binding
upon and inure to the benefit of the Borrower, the Guarantors and the Bank and
their respective successors and assigns.
(b) The term of this Credit Agreement shall be until no Loans or other
Obligations or any other amounts payable hereunder or under any of the other
Credit Documents shall remain outstanding and until all of the Commitments
hereunder shall have expired or been terminated.
10.14 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit Document, on
the other hand, this Credit Agreement shall control.
[Signature Page to Follow]
65
<PAGE> 71
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Credit Agreement to be duly executed and delivered as of the date first
above written.
BORROWER: ACTION PERFORMANCE COMPANIES, INC.,
an Arizona corporation
By:_____________________________________
Name:
Title:
GUARANTORS: SPORTS IMAGE, INC.,
an Arizona corporation
By:_____________________________________
Name:
Title:
MTL ACQUISITION, INC.,
an Arizona corporation
By:_____________________________________
Name:
Title:
CREATIVE MARKETING & PROMOTIONS, INC.,
a North Carolina corporation
By:_____________________________________
Name:
Title:
RYP, INC.,
a North Carolina corporation
By:_____________________________________
Name:
Title:
ACTION PERFORMANCE COMPANIES, INC.
CREDIT AGREEMENT
<PAGE> 72
IW ACQUISITION CORP.,
an Arizona corporation
By:_____________________________________
Name:
Title:
AW ACQUISITION CORP.,
an Arizona corporation
By:_____________________________________
Name:
Title:
BANK: FIRST UNION NATIONAL BANK
By:_____________________________________
Name:
Title:
ACTION PERFORMANCE COMPANIES, INC.
CREDIT AGREEMENT
<PAGE> 73
Schedule 2.1(e)
FORM OF REVOLVING NOTE
$20,000,000 August 5, 1998
FOR VALUE RECEIVED, the undersigned Borrower, hereby promises to pay to
the order of FIRST UNION NATIONAL BANK, and its successors and assigns, on or
before the Termination Date to the office of the Bank in immediately available
funds as provided in the Credit Agreement, the principal amount of the Bank's
Revolving Committed Amount or, if less, the aggregate unpaid principal amount of
all Revolving Loans made by the Bank to the undersigned Borrower, together with
interest thereon at the rates and as provided in the Credit Agreement.
This Note is the Revolving Note referred to in the Amended and Restated
Credit Agreement dated as of August 5, 1998 (as amended and modified, the
"Credit Agreement") among Action Performance Companies, Inc., an Arizona
corporation, the Guarantors identified therein and First Union National Bank.
Terms used but not otherwise defined herein shall have the meanings provided in
the Credit Agreement.
The holder may endorse and attach a schedule to reflect borrowings
evidenced by this Note and all payments and prepayments thereon; provided that
any failure to endorse such information shall not affect the obligation of the
undersigned Borrower to pay amounts evidenced hereby.
Upon the occurrence of an Event of Default, all amounts evidenced by this
Note may, or shall, become immediately due and payable as provided in the Credit
Agreement without presentment, demand, protest or notice of any kind, all of
which are waived by the undersigned Borrower. In the event payment of amounts
evidenced by this Note is not made at any stated or accelerated maturity, the
undersigned Borrower agrees to pay, in addition to principal and interest, all
costs of collection, including reasonable attorneys' fees.
This Note and the Loans and amounts evidenced hereby may be transferred
only as provided in the Credit Agreement.
This Note shall be governed by, and construed and interpreted in
accordance with, the law of the State of North Carolina.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Note to be
duly executed as of the date first above written.
ACTION PERFORMANCE COMPANIES, INC.,
an Arizona corporation
By_________________________________
Name:
Title:
<PAGE> 74
Schedule 7.11-1
Form of Joinder Agreement
THIS JOINDER AGREEMENT (the "Agreement"), dated as of _____________, 19__,
is by and between the parties identified on the signature page as Applicant
Guarantors, a ___________________ (the "Applicant Guarantor"), and FIRST UNION
NATIONAL BANK, under that certain Amended and Restated Credit Agreement dated as
of August 5, 1998 (as amended and modified, the "Credit Agreement") by and among
ACTION PERFORMANCE COMPANIES, INC., an Arizona corporation, the Guarantors
identified therein and First Union National Bank of North Carolina, as Bank. All
of the defined terms in the Credit Agreement are incorporated herein by
reference.
The Applicant Guarantors have indicated their desire to become a Guarantor
or is required by the terms of Section 7.10 of the Credit Agreement to become, a
Guarantor under the Credit Agreement.
Accordingly, each of the Applicant Guarantors hereby agrees as follows
with the Bank:
1. Each of the Applicant Guarantors hereby acknowledges, agrees and
confirms that, by its execution of this Agreement, the Applicant Guarantor will
be deemed to be a party to the Credit Agreement and a "Guarantor" for all
purposes of the Credit Agreement and the other Credit Documents, and shall have
all of the obligations of a Guarantor thereunder as if it had executed the
Credit Agreement and the other Credit Documents. Each of the Applicant
Guarantors agrees to be bound by, all of the terms, provisions and conditions
contained in the Credit Documents, including without limitation (i) all of the
affirmative and negative covenants set forth in Sections 7 and 8 of the Credit
Agreement and (ii) all of the undertakings and waivers set forth in Section 4 of
the Credit Agreement. Without limiting the generality of the foregoing terms of
this paragraph 1, each of the Applicant Guarantors hereby (A) jointly and
severally together with the other Guarantors, guarantees to the Bank as provided
in Section 4 of the Credit Agreement, the prompt payment and performance of the
Guaranteed Obligations in full when due (whether at stated maturity, as a
mandatory prepayment, by acceleration, as a mandatory cash collateralization or
otherwise) strictly in accordance with the terms thereof. and (B) agrees that if
any of the Guaranteed Obligations are not paid or performed in full when due
(whether at stated maturity, as a mandatory prepayment, by acceleration, as a
mandatory cash collateralization or otherwise), the Applicant Guarantor will,
jointly and severally together with the other Guarantors, promptly pay and
perform the same, without any demand or notice whatsoever, and that in the case
of any extension of time of payment or renewal of any of the Guaranteed
Obligations, the same will be promptly paid in full when due (whether at
extended maturity, as a mandatory prepayment, by acceleration, as a mandatory
cash collateralization or otherwise) in accordance with the terms of such
extension or renewal.
2. Each of the Applicant Guarantors acknowledges and confirms that it has
received a copy of the Credit Agreement and the Schedules and Exhibits thereto.
The information on the Schedules to the Credit Agreement are amended to provide
the information, if any, shown on the attached Schedule A.
<PAGE> 75
3. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute one contract.
4. This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of North Carolina.
IN WITNESS WHEREOF, the Applicant Guarantors have caused this Joinder
Agreement to be duly executed by its authorized officers, and the Bank has
caused the same to be accepted by its authorized officer, as of the day and year
first above written.
APPLICANT GUARANTORS
By:__________________________________
Name:
Title:
Address for Notices:
Attn: _______________________
Telephone:
Telecopy:
Acknowledged and accepted:
FIRST UNION NATIONAL BANK
By:______________________________________
Name:
Title:
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF BASIC EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Shares:
Weighted average number of common
shares outstanding.................. 16,135 14,047 11,789
Net income............................ $ 24,587 $ 10,146 $ 5,953
======== ======== =======
Basic earnings per share.............. $ 1.52 $ 0.72 $ 0.50
======== ======== =======
</TABLE>
All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996.
<PAGE> 1
EXHIBIT 11.2
COMPUTATION OF DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shares:
Weighted average number of common
shares outstanding................... 16,135 14,047 11,789
Additional shares assuming
conversion of:
Stock options....................... 512 577 539
Warrants............................ - - 33
Preferred stock..................... - - 667
-------- -------- --------
Weighted average shares outstanding 16,647 14,624 13,028
Net income............................. $ 24,587 $ 10,146 $ 5,953
======== ======== ========
Diluted earnings per share............. $ 1.48 $ 0.69 $ 0.46
======== ======== ========
</TABLE>
All share amounts and per share data have been restated to reflect
the two-for-one stock split effected as a stock dividend on May 28, 1996.
<PAGE> 1
EXHIBIT 12.1
ACTION PERFORMANCE COMPANIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(000 OMITTED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income before income taxes..................... $ 409 $ 4,154 $ 9,870 $ 16,910 $ 41,167
Fixed charges:
Actual interest expense................... 215 184 80 2,021 5,228
Interest portion of operating leases...... 127 117 146 312 967
Amortization of debt issuance costs....... 0 0 0 150 305
----- ------- -------- -------- --------
Total fixed charges..................... 342 301 226 2,483 6,500
----- ------- -------- -------- --------
Net income as adjusted......................... $ 751 $ 4,455 $10,096 $19,393 $47,677
----- ------- -------- -------- --------
Ratio of earnings to fixed charges............. 2.2x 14.8x 44.7x 7.8x 7.3x
===== ======= ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
ACTION PERFORMANCE COMPANIES, INC.
(AS OF DECEMBER 15, 1998)
STATE OR COUNTRY
OF INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
------------------ ---------------
Action Corporate Services, Inc. Arizona
Action Interactive, Inc. Arizona
Action Performance Holding GmbH Germany
Action Racing Collectables Club of America, Inc. Arizona
Action Racing Collectables, Inc. Arizona
Action Sports Image, LLC Arizona
APC Europe GmbH Germany
AW Acquisition Corp. Arizona
Chase Racewear L.L.C. North Carolina
Creative Marketing & Promotions, Inc. North Carolina
Danhausen GmbH Germany
Intellectual Properties Group, Inc. Illinois
Lang Miniaturen GmbH & Co KG. Germany
Minichamps GmbH & Co KG. Germany
MTL Acquisition, Inc. Arizona
Paul's Model Art GmbH & Co KG. Germany
Performance Plus Nutritional, L.L.C. Delaware
RYP, Inc. North Carolina
<PAGE> 1
EXHIBIT 23.1
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. 33-66980, 33-86230, 333-03865, 333-01874,
333-22943, 333-28717, 333-45991, 333-53413, and 333-60321.
/s/ Arthur Andersen LLP
Phoenix, Arizona
December 1, 1998
<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, 1998, and
is qualified in its entirety by reference to such financial statements. This
exhibit shall not be deemed filed for purposes of Section 11 of the Securities
Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of such Sections, nor shall it be deemed a part of any
other filing which incorporates this report by reference, unless such other
filing expressly incorporates this Exhibit by reference.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 60,867
<SECURITIES> 0
<RECEIVABLES> 37,300
<ALLOWANCES> 986
<INVENTORY> 35,790
<CURRENT-ASSETS> 143,677
<PP&E> 57,665
<DEPRECIATION> 11,612
<TOTAL-ASSETS> 305,934
<CURRENT-LIABILITIES> 56,738
<BONDS> 111,850
0
0
<COMMON> 164
<OTHER-SE> 91,974
<TOTAL-LIABILITY-AND-EQUITY> 305,934
<SALES> 251,877
<TOTAL-REVENUES> 251,877
<CGS> 157,079
<TOTAL-COSTS> 157,079
<OTHER-EXPENSES> 50,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,533
<INCOME-PRETAX> 41,167
<INCOME-TAX> 16,391
<INCOME-CONTINUING> 24,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,587
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.48
</TABLE>
