<PAGE> 1
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, 1999
Commission file number 0-21630
--------------------
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 (14,983,545 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 20, 1999, was
$138,597,791. 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 20, 1999, there were outstanding 16,937,419 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 2000 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
<PAGE> 2
ACTION PERFORMANCE COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
ITEM 1. BUSINESS.................................................................................. 1
ITEM 2. PROPERTIES................................................................................ 33
ITEM 3. LEGAL PROCEEDINGS......................................................................... 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 34
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 35
ITEM 6. SELECTED FINANCIAL DATA................................................................... 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...... 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 46
ITEM 11. EXECUTIVE COMPENSATION.................................................................... 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................... 47
SIGNATURES .......................................................................................... 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................. F-1
</TABLE>
----------------------------
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 our "expectations," "anticipation," "intentions," "beliefs," or
"strategies" regarding the future. Forward-looking statements also include
statements regarding revenue, margins, expenses, and earnings analysis for
fiscal 2000 and thereafter; future products or product development; our product
and distribution channel development strategies, particularly as they relate to
the Internet; 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 us as of the filing date of this Report, and we
assume no obligation to update any such forward-looking statements. Our 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
<PAGE> 3
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are the worldwide leader in the design and sale of licensed
motorsports collectible and consumer products. Our products include die-cast
scaled replicas of motorsports vehicles, apparel (including t-shirts, hats, and
jackets), and souvenirs. We also operate "goracing.com," which provides
motorsports-related news and information, an online meeting place and community
for motorsports fans, and an extensive e-commerce marketplace for
motorsports-related die-cast collectibles, apparel, and souvenirs. We market our
products under an extensive portfolio of license arrangements with various
drivers, team owners, sponsors, sanctioning bodies, and others, including the
following:
- - NASCAR Winston Cup champions Dale Earnhardt, Jeff Gordon, Dale Jarrett,
and Rusty Wallace, as well as NASCAR drivers Bobby Labonte, Tony
Stewart, and Dale Earnhardt, Jr.;
- - NASCAR team owners Robert Yates Racing, Richard Childress Racing
Enterprises, Joe Gibbs Racing, and Dale Earnhardt, Inc.;
- - National Hot Rod Association, or NHRA, champions John Force and Kenny
Bernstein;
- - Formula One teams McLaren International Limited, Williams Grand Prix,
and Benetton Formula 1 Ltd.;
- - the National Association for Stock Car Auto Racing, or NASCAR,
Championship Auto Racing Teams, or CART, World of Outlaws, and World
Superbike; and
- - race track operators such as Speedway Motorsports, Inc., the organizers
of the Australian Grand Prix, and Silverstone Circuits Limited.
Third parties manufacture all of our motorsports collectibles and most of our
apparel and souvenirs, generally utilizing our designs, tools, and dies. We
screen print and embroider a portion of the licensed motorsports apparel that we
sell.
We market our products to approximately 11,500 specialty retailers
throughout the world, either directly or through our wholesale distributor
network; to motorsports enthusiasts directly through our Racing Collectibles
Club of America, or "Collectors' Club", which had approximately 167,000 members
as of September 30, 1999; through our e-commerce enabled Web sites located
within our goracing.com network; and through mobile trackside souvenir stores,
promotional programs for corporate sponsors, and fan clubs. We also distribute
certain of our products to mass-market retailers through our in-house sales
force and wholesale distributors. In addition, we have a license agreement with
Hasbro, Inc., a multi-billion dollar toy and game manufacturer, under which
Hasbro sells a line of motorsports-related products in the mass-merchandise
market.
Our products and other programs capitalize on the rapidly growing
popularity of motorsports. See Item 1, "Our Business Industry Overview." We
focus on developing long-term relationships with and we engage in comprehensive
efforts to license the most popular drivers, team owners, and other
personalities in each top racing category, their sponsors, car manufacturers,
various sanctioning bodies, and others in the motorsports industry. We
continually strive to strengthen our relationships with licensors and to develop
opportunities to market innovative licensed collectible and consumer products
that appeal to motorsports enthusiasts. We believe that our license agreements
with top race car drivers and other motorsports personalities, teams, and
sponsors significantly enhance the consumer appeal and marketability of our
products. We also believe that we will be able to leverage our relationships to
attract additional licensors in order to generate increased revenue for our
company as well as increased earnings for the licensors.
Historically, our business concentrated on designing and marketing
die-cast collectibles featuring NASCAR Winston Cup drivers and vehicles. Since
1995, we have aggressively expanded our lines of die-cast
<PAGE> 4
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, or USAC racing, World of Outlaws sprint car racing, and
motorcycle racing. In fiscal 1997, we began an aggressive program to expand our
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, of approximately $151.8
million.
<TABLE>
<CAPTION>
ACQUISITIONS(1) DATE BUSINESS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sports Image, Inc. November 1996 Markets and distributes licensed motorsports
apparel and souvenirs; trackside sales; Dale
Earnhardt fan club
Motorsport Traditions Limited Partnership January 1997 Markets and distributes licensed motorsports apparel and
and Creative Marketing and Promotions, souvenirs; trackside sales
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 product lines of August 1997 Manufactures and markets licensed "mini-helmets"
Simpson Products, Inc. and other motorsports collectibles and souvenirs
Assets related to sales of merchandise December 1997 Markets and distributes licensed motorsports
licensed by NASCAR driver Rusty Wallace apparel and souvenirs; trackside sales
Assets related to motorsports December 1997 Manufactures and markets "Revell" licensed die-cast
die-cast collectible product lines of collectibles; strategic alliance with Revell
Revell-Monogram, Inc. involving extensive product licensing and distribution
arrangements
Brookfield Collectors Guild, Inc. January 1998 Markets and distributes licensed motorsports
collectibles and ensembles
Chase Racewear, L.L.C. May 1998 Licenses motorsports apparel and clothing 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 Nutritional, L.L.C. September 1998 Develops and markets driver-endorsed nutritional
products, including vitamins, energy bars, and
energy drinks
Intellectual Properties Group, Inc. October 1998 Creates and develops promotional programs for
corporate sponsors of motorsports
Tech 2000 Worldwide, Inc. November 1998 Operates the "goracing.com" Internet web site;
designs, develops, implements, and maintains
motorsports-related and other Internet web sites,
including electronic commerce capabilities
Goodsports Holdings Pty Ltd. January 1999 Markets and distributes licensed Formula One
apparel and related products
Fantasy Sports Enterprises, Inc. October 1999 Develops and operates "fantasy" auto racing and
other sports-related games
</TABLE>
- -----------------
(1) The acquisitions listed consist of (a) the purchase of assets of Sports
Image, Inc.; (b) the purchase of assets of Motorsport Traditions
Limited Partnership and the stock of Creative Marketing and Promotions,
Inc. (together, "Motorsport Traditions"); (c) the purchase of stock of
Robert Yates Promotions, Inc., or RYP; (d) the purchase of assets of
Image Works, Inc.; (e) the purchase of motorsports collectibles-related
assets of Simpson Products, Inc., or Simpson; (f) the
2
<PAGE> 5
purchase of assets related to sales of merchandise licensed by Rusty
Wallace (the "Rusty Wallace acquisition"); (g) the purchase of assets
from Revell-Monogram, Inc.; (h) the purchase of assets from Brookfield
Collectors Guild, Inc.; (i) the acquisition of 80% of the membership
interests of Chase Racewear, L.L.C.; (j) the acquisition of an 80%
interest in Paul's Model Art, GmbH, MiniChamps, GmbH, Lang Miniaturen,
GmbH, and Spielwaren Danhausen, GmbH (collectively "MiniChamps"); (k)
the acquisition of 58% of the membership interests of Performance Plus
Nutritional, L.L.C.; (l) the purchase of stock of Intellectual
Properties Group, Inc., or IPG; (m) the purchase of stock of Tech 2000
Worldwide, Inc., which is now part of goracing.com, inc.; (n) the
purchase of stock of Goodsports Holdings Pty. Ltd.; and (o) the
purchase of assets of Fantasy Sports Enterprises, Inc.
We pursue a strategy designed to enhance our leadership position in the
motorsports collectible and consumer products industry. Key aspects of this
strategy include (a) continuing to enhance our existing products and introduce
new products and services that appeal to racing enthusiasts, (b) expanding and
strengthening our licensing arrangements, (c) developing promotional programs
for corporate sponsors, (d) strengthening and expanding our existing and
identifying new distribution channels, (e) developing the goracing.com network
as a leading online destination for motorsports fans, and (f) pursuing
strategic alliances and acquisitions.
Our company was incorporated in Arizona in 1992. Our principal
executive offices are located at 4707 East Baseline Road, Phoenix, Arizona
85040, and our telephone number is (602) 337-3700. All references to our
business operations in this Report include the operations of Action Performance
Companies, Inc. and our subsidiaries and operating divisions.
OUR 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;
- open wheel racing, controlled by CART and the Indy Racing
League, or IRL;
- dirt track racing, which includes the World of Outlaws and
USAC;
- sports car racing, which includes the United States Road
Racing Championship and the American Le Mans Series; and
- motorcycle racing, which includes the American Motorcycle
Association.
Internationally, the Federation Internationale de l'Automobile governs
the Formula One Grand Prix championship as well as Formula 3000, GT, World
Rally Championships, and other popular motorsports series. 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. The
Federation Internationale de Motocyclisme governs the World Championship Grand
Prix, Superbike World Championship, and other motorcycle racing events
throughout the world.
More than 17.1 million fans attended racing events in North America
during 1998, according to the Goodyear Racing Attendance Report, compared with
1998 attendance for the National Football League at 15.4 million fans and the
National Basketball Association at 20.4 million fans. Television reach is also
substantial. According to Nielson Media Research reports, NASCAR's televised
events alone attracted an aggregate of 287 million estimated viewers in 115
million households in 1998. Nielsen also reports household viewership of
NASCAR's televised Winston Cup events in the first six months of 1999 increased
15% from the first six months of 1998. CART reported that approximately 22.6
million U.S. households tuned in to the 20 CART races during 1999, a 5.8%
increase over the 21.4 million households that tuned in to the 19-race season in
1998. Motorsports coverage currently is provided by broadcast and cable
television networks, including NBC, ABC, CBS, ESPN, TBS, TNN, and Speedvision, a
motorsports cable network, in addition to regional sports networks. In November
1999, NASCAR entered into a six-year contract valued at more than $400 million
per year with NBC, Fox, and
3
<PAGE> 6
TBS for broadcast coverage of NASCAR Winston Cup races beginning in 2001.
Internationally, Formula One events are broadcast worldwide to approximately 130
countries.
Since 1996, new speedways have been opened in the Los Angeles,
Dallas/Ft. Worth, Las Vegas, and Chicago metropolitan areas. Additional
speedways have been announced for the New York, Kansas City, and Denver
metropolitan areas. These new speedways are bringing NASCAR, CART, and other
major motorsports events to new geographic markets with much larger population
bases than many of the traditional NASCAR venues located in the southeastern
United States. We believe that the expansion of major motorsports events into
these previously untapped markets will stimulate continued growth in the
motorsports industry, exposing the sport to new racing fans who will seek
products, services, and information related to their favorite drivers, teams,
and racing series.
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 motorsports-related activities as part
of their marketing strategies. The IEG Sponsorship Report indicates that
corporate sponsors were expected to spend an estimated $1.2 billion, or 24% of
all sports sponsorship dollars, on motorsports marketing programs in the United
States in 1999. The Wall Street Journal reported that Formula One attracts more
than $750 million per year from sponsors. The increasing popularity of
motorsports in the United States and abroad also has created significant demand
for a variety of race-related merchandise and souvenirs. For example, NASCAR
indicated that total NASCAR-related merchandise sales, which includes various
product categories in addition to the types of products we sell, increased from
approximately $80 million in 1990 to approximately $950 million in 1998. This
report estimated that total NASCAR-licensed product retail sales would increase
to approximately $1.1 billion in 1999. We believe that the worldwide market for
motorsports-related merchandise is substantially larger than NASCAR-licensed
product retail sales, and that there has been a lack of availability of
merchandise related to other popular racing series, such as Formula One and
CART.
GROWTH STRATEGY
We pursue a strategy designed to continue our 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 the
following:
Enhancing Existing and Introducing New Products
We continually seek to enhance our existing products and to introduce
new products designed to appeal to enthusiasts of every major racing series.
During the last several years, we have expanded our lines of die-cast
collectibles to include Formula One, NHRA drag racing, CART, NASCAR's "Busch"
and "Craftsman Truck" racing series, World of Outlaws, and other racing series.
We continually expand our 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. We also have expanded
our consumer product offerings to include licensed motorsports apparel,
souvenirs, and other consumer products. In addition, we participate in the
retail mass-merchandise market through a license agreement with Hasbro, under
which Hasbro manufactures and markets, with our assistance, a line of
motorsports products that do not compete with our core products.
We believe that our ongoing investment in tooling enables us to produce
die-cast products of higher quality and detail than those produced by our
competitors. We have invested more than $40.0 million in our proprietary
tooling, which contributes significantly to the quality of our products and is
critical to imparting the high level of detail and quality that collectors
demand. We intend to continue investing in our proprietary tooling in order to
upgrade and expand existing product lines and to add new products. We strive to
enhance the demand for and to increase the value of our collectible products by
offering limited numbers of each item.
4
<PAGE> 7
Expanding and Strengthening Licensing Arrangements
We focus on expanding and strengthening our relationships with existing
licensors as well as entering into licensing arrangements with additional
motorsports personalities in order to further solidify our position as the
leader in the motorsports marketplace. We believe that our licensing
arrangements with top race car drivers (including Dale Earnhardt, Jeff Gordon,
Rusty Wallace, Dale Jarrett, John Force, Tony Stewart, and Bobby Labonte), car
owners, manufacturers, sanctioning bodies, race track operators, and corporate
sponsors provide us with a competitive advantage. These licensing arrangements
enable us to manufacture and distribute distinctive collectibles and other
products to the growing market of motorsports enthusiasts.
Developing Corporate Promotional Programs
We provide complete marketing services to create corporate promotional
programs for large corporate sponsors. Promotional programs typically involve
special productions of our licensed die-cast replicas, apparel, souvenirs, or
other consumer products to increase brand awareness and name recognition of the
corporate sponsor. We successfully completed large-scale promotional programs
featuring Coca-Cola during the first quarter of fiscal 1999 and additional
large-scale programs featuring Pepsi-Cola and the "Star Wars: Episode 1 - The
Phantom Menace" motion picture, DC Comics and "Superman," Harley Davidson
motorcycles, and Home Depot in partnership with Habitat for Humanity during
calendar 1999. We plan to expand our efforts to develop promotional programs and
we continually engage in discussions to develop additional programs with major
corporate sponsors.
Strengthening and Expanding Our Existing and Identifying New Distribution
Channels
We plan to continue to strengthen and expand our existing distribution
channels and to identify new distribution channels. Beginning in fiscal 1997, we
significantly broadened and strengthened our distribution channels through
acquisitions and internal development. In addition to our wholesale distribution
network and direct sales to motorsports enthusiasts through our Collectors'
Club, our distribution channels now include
- mobile trackside souvenir stores,
- fan clubs,
- our e-commerce enabled Web sites on the goracing.com network,
- direct sales to corporate sponsors and race track operators,
- mass merchandising channels for our licensed motorsports
apparel and other products through large retailers, such as
Wal-Mart, K-Mart, and Target, and
- catalog merchandising programs targeted at corporate
motorsports sponsors.
As a result of the acquisition of MiniChamps in fiscal 1998, we now
utilize MiniChamps' international wholesale distribution network to sell our
products throughout the world. In addition, our license agreement with Hasbro
has provided us with a source of licensing revenue from the mass-merchandise
market without committing substantial resources to manufacturing and marketing
activities. We believe that targeting products to specific market niches,
distributing our products through the distribution channels of major corporate
sponsors of motorsports, distributing our products in international markets, and
our e-commerce initiatives will represent increasingly important distribution
channels in the future.
In October 1999, we announced a strategic reduction in the number of
our domestic wholesale distributors as part of our effort to strengthen our
distribution system. We reduced the number of domestic distributors as part of
our ongoing strategy to streamline our distribution network by retaining those
distributors with the most extensive dealer networks, the most strategic
geographic territories, the greatest ability to carry our complete product line,
and the proper controls to minimize sales of our products through unauthorized
channels.
We plan to continue to develop opportunities to streamline and enhance our
existing distribution channels, identify and develop or acquire new distribution
channels, and cross-market our products through all of our distribution channels
in the future.
5
<PAGE> 8
Develop the goracing.com Network as a Leading Online Destination for
Motorsports Fans
We intend to continue to develop goracing.com as a leading destination
on the Internet for motorsports fans around the world in order to maximize our
e-commerce opportunities. Our strategy to achieve this goal involves the
following elements:
- Take advantage of our relationships with drivers, team owners,
and sponsors by arranging to have them endorse and promote the
goracing.com network to increase fan awareness and increase
traffic on the goracing.com network;
- Continue to offer new products and expand goracing's
e-commerce offerings to include third-party suppliers'
products and services that appeal to our focused audience of
motorsports fans;
- Concentrate on internal development and explore opportunities
for strategic alliances and acquisitions in order to expand
goracing's motorsports-related content, take advantage of new
Internet technologies and capabilities, and add to goracing's
community features;
- Develop sponsorship and advertising programs with new and
existing sponsors of motorsports events;
- Expand the goracing.com network internationally to leverage
our experience in the U.S. motorsports industry. We intend to
expand our international online presence by developing
relationships with additional international drivers, teams,
sponsors, and racing series in order to offer additional
products and services that appeal to the international market;
expanding goracing's coverage of international racing news,
events, and information; and offering news, information, and
products that feature U.S. motorsports to the international
market.
Pursuing Strategic Alliances and Acquisitions
We seek to enter into strategic alliances and to acquire existing
businesses that we believe will enable us to introduce new products or expand
our product lines, to leverage or expand our licensing arrangements, or to
improve our distribution channels. In evaluating a potential strategic alliance
or a proposed acquisition candidate, we analyze the potential synergies that the
alliance or acquisition candidate can provide; the strength of the alliance
partner's or acquisition candidate's product lines, license rights, marketing
capabilities, manufacturing capacities, distribution channels, or management
team; and the potential opportunities presented by the alliance or acquisition.
PRODUCTS AND SERVICES
Die-Cast Scaled Replica Vehicles
We design and market scaled replicas of motorsports-related vehicles
that are constructed using die-cast bodies and chassis with free-spinning wheels
and tires. We design our die-cast replicas as high-quality collectible items and
not as toys We market our 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, several
divisions of General Motors Corp., and others. The die-cast collectibles that we
offer 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. We also produce die-cast
replicas of certain factory production cars. Our die-cast collectibles consist
primarily of the following:
6
<PAGE> 9
<TABLE>
<CAPTION>
-------------------------------- ---------------------------------------- ----------------------
SCALE PRODUCT APPROXIMATE SIZE
-------------------------------- ---------------------------------------- ----------------------
<S> <C> <C>
1:12 Racing Vehicles 15 inches
-------------------------------- ---------------------------------------- ----------------------
1:16 Pit Wagons 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 Production Cars 5 inches
-------------------------------- ---------------------------------------- ----------------------
1:64 Racing Vehicles 3 inches
-------------------------------- ---------------------------------------- ----------------------
1:64 Vehicle Transporters 13 inches
-------------------------------- ---------------------------------------- ----------------------
1:96 Vehicle Transporters 9 inches
-------------------------------- ---------------------------------------- ----------------------
1:8 Pedal Cars 10 inches
-------------------------------- ---------------------------------------- ----------------------
1:9 Racing Motorcycles 23 inches
-------------------------------- ---------------------------------------- ----------------------
</TABLE>
Our die-cast replicas typically range in price at retail from
approximately $10.00 to $99.00 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 $45.00. Certain of our more highly detailed die-cast collectibles
retail for as much as $400.00. We offer our die-cast collectibles primarily
through our wholesale distributor network to specialty retailers, through our
Collectors' Club, our e-commerce Web sites, and our mobile trackside stores, and
through corporate promotional programs. See Item 1, "Our Business - Sales and
Distribution."
We enhance the collectible value and appeal of our products through
various measures. These measures include (a) designing die-cast collectibles
that include features that are not offered by our competitors; (b) limiting the
quantities of each collectible item that we produce and sell; (c) specifying, on
certain products themselves and on the packaging material of certain other
die-cast collectibles, the quantity of that limited-edition item actually
produced; (d) offering certain items only through our Collectors' Club; and (e)
designing and developing new packaging concepts to improve the display of each
collectible item.
Motorsports Consumer Products
We market 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. We continually seek licenses with additional drivers and other
motorsports licensors, and we continually develop new motorsports consumer
products.
Our licensed motorsports apparel items utilize unique and creative
designs that are printed or applied to high-quality shirts, hats, jackets, and
other products. We design and sell our motorsports apparel products in sizes
ranging from infant to youth to men's and women's adult sizes.
We design our motorsports consumer products primarily for distribution
through retail outlets, mobile trackside stores, our e-commerce Web sites, and
promotional programs with corporate sponsors of racing teams and racing events.
See Item 1, "Our Business - Sales and Distribution."
7
<PAGE> 10
Other Motorsports Collectible and Specialty Items
In addition to our extensive line of collectible die-cast replicas of
racing vehicles, we design and market an increasing variety of other motorsports
collectible and specialty products. These products include the following:
- 1:43 and 1:18 scale plastic driver figurines;
- 1:12, 1:8, 1:4 and 1:3 scale miniature replica helmets with
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; and
- limited edition art prints featuring popular drivers and
racing themes.
The goracing.com Network
Our goracing.com network offers a broad range of news, information, and
features and serves as the online home to our e-commerce enabled Web sites,
various racing associations, driver fan clubs, race tracks, and other
motorsports-related Web sites. The goracing.com network consists of a variety of
motorsports-related Web sites that we develop, operate, and maintain.
Motorsports News and Information. goracing provides a timely,
comprehensive, and worldwide online source for news and information about the
world of motorsports. The goracing.com network is the official online home to
some of the most influential organizations in motorsports. We believe that
goracing's up-to-date news and other information encourage visitors to return
regularly to the network. goracing's field reporters cover races and events
throughout the motorsports community and produce original stories and event
coverage that are exclusive to the goracing.com network. goracing also obtains
news and information from editorial staffs of other Web sites in the
goracing.com network. goracing supplements its motorsports news with stories
from the news wire services.
The goracing Community. The goracing.com network offers an online
community where motorsports fans can
- interact in chat rooms with other motorsports fans that have
similar interests,
- participate in chats with motorsports celebrities,
- join their favorite drivers' fan clubs,
- track the value of and trade their collectibles,
- participate in online auctions, and
- play games and participate in online contests and promotions
related to motorsports.
We believe the traffic generated by these unique features and services will lead
to increased sales on the goracing.com network and makes the network an
attractive advertising medium for providers of motorsports and automotive
products and services.
Motorsports E-Commerce. We intend to capitalize on the unique
capabilities of the Internet to maximize the buying potential of our online
audience. In February 1999, we launched our e-commerce initiative on the
goracing.com network. Our Action Collectibles Store, Action Apparel Store, and
Racing Collectables Club of America Store sell selected lines of our licensed
die-cast scaled replicas of motorsports vehicles, apparel, and souvenirs online.
goracing's operating infrastructure and technology can track the usage
patterns for each visitor to our e-commerce Web sites, allowing us to target
promotions and cross-sell products to repeat visitors. This highly
8
<PAGE> 11
personalized approach to selling takes advantage of the Internet's unique
capabilities to structure the presentation of products and information around
the characteristics of a specific audience. We believe this use of technology
will provide a much more personalized shopping experience than more traditional
distribution channels, such as catalogs. Personalized selling also will allow us
to suggest products and potentially create sales that might not otherwise take
place.
Motorsports fans who visit goracing.com also can access SpeedMall, our
online shopping mall that is dedicated to motorsports and automotive products
and services. SpeedMall includes e-commerce enabled Web sites of other
motorsports and automotive-related entities that utilize the traffic generated
by the goracing network to sell their products and services online. Third-party
SpeedMall tenants pay us fees under a variety of arrangements, including fees
based on the amount of traffic the tenant receives on a per click-through basis
or a percentage of revenue that the tenant receives from sales generated by
traffic from SpeedMall.
Online Advertising and Sponsorships. Advertising on the goracing.com
network generated less than 1% of our revenue during the year ended September
30, 1999. We believe that selling sponsorships and advertisements on the
goracing.com network represents a significant opportunity for future revenue
growth. We plan to increase sales of various advertising and sponsorship
packages on the goracing.com network in the future.
Corporate Promotional Programs
We provide comprehensive marketing services designed to create
corporate promotional programs for large corporate sponsors that advertise in
motorsports, as well as companies that have not previously advertised 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. We provide design and creative services, graphic artists, and
the capacity to deliver a wide array of promotional products, such as die-cast
replicas, t-shirts, and hats. We also provide in-house marketing and
distribution support for our promotional programs, including in-bound order
processing, order fulfillment, sweepstakes processing, and redemption programs.
In fiscal 1997, we began developing and implementing extensive
corporate promotional programs that feature special, one-time themes or events
intended to provide our company, the corporate sponsor, and other licensors with
unique marketing opportunities. Our 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. Following the acquisition of IPG
in October 1998, we expanded our efforts to develop and implement large-scale
corporate programs. For example, during fiscal 1999 we
- 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;
- collaborated with Pepsi-Cola Company, Gordon-Everham
Motorsports, and Lucasfilm to create a promotion in which Jeff
Gordon drove a specifically painted "Star Wars: Episode 1 -
The Phantom Menace" Busch Series car;
- combined efforts with DC Comics, Jeff Gordon, John Force, Dale
Earnhardt, Jr., and six other popular drivers from four racing
series to produce a program in which each of the drivers drove
a specially painted "Superman" race car in a selected race;
- collaborated with the Fox television network and NASCAR to
create a promotion in which Jeff Gordon, Bobby Labonte, Terry
Labonte, and Kenny Wallace drove specially painted race cars
to introduce the "NASCAR Racers" Saturday morning children's
television program; and
- collaborated with Home Depot to develop a promotion in which
Tony Stewart drove a specially painted car in a program that
benefited Habitat for Humanity. We completed this program
during the first quarter of fiscal 2000.
For some programs, the corporate sponsors use our products either as
free or low-cost awards with the purchase of their own products or in
sweepstakes or other promotions. Die-cast replica vehicles that we develop
9
<PAGE> 12
and sell for these programs are not sold through our wholesale distribution
network or through our Collectors' Club.
Mass-Merchandise License
We have a license agreement with Hasbro that gives Hasbro the right to
produce motorsports-related products specifically designed for the
mass-merchandise market. Under this license, Hasbro markets a line of die-cast
replicas of racing vehicles, which was jointly developed by our 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 our
other products and do not compete directly with our 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.
We believe that the license agreement with Hasbro allows us to
capitalize on opportunities in the mass-merchandise market. The agreement
enables us to remain focused on our core business of designing and marketing
motorsports collectibles, apparel, and souvenir products while enabling us to
benefit from Hasbro's retail mass-merchandise marketing expertise and resources.
The agreement also provides a means of expanding our product offerings without
committing substantial resources to manufacturing and marketing activities or
subjecting us to the risks inherent in the mass-merchandise market.
Other Products and Services
Fan Clubs. We operate fan clubs for several popular race car drivers,
including "Club E," which is the Dale Earnhardt Fan Club; "Club E Jr.," which is
the Dale Earnhardt, Jr. fan club; the Dale Jarrett Fan Club; the Rusty Wallace
Fan Club; the Bobby Labonte Fan Club; and the John Force Fan Club. Our fan clubs
had a total of approximately 79,000 members as of December 20, 1999. 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. We provide to
fan club members unique product offerings and other benefits that we do not
offer through any other distribution channels.
Chase-branded Apparel. During fiscal 1998, we acquired an 80% interest
in Chase, a motorsports-related apparel and licensing company. Chase licenses
apparel and clothing accessories that bear "Chase" brand marks, including "Chase
Authentics," "Competitor's View," and a stylized "C." NASCAR drivers including
Dale Earnhardt, Jeff Gordon, Rusty Wallace, Dale Jarrett, Terry Labonte, Bobby
Labonte, and others, have agreed, subject to certain exceptions, to 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.
We sell certain of our Chase-branded apparel on a wholesale basis to NASCAR
Thunder stores, auto parts distributors, corporate sponsors of motorsports, and
specialty retail shops as well as to major discount stores, such as Wal-Mart,
K-Mart, and Target. During fiscal 1999, we extended our licensing arrangement
with a major apparel manufacturer under which the manufacturer holds the
exclusive right to use the "Chase Authentics" brand for all motorsports-related
apparel products distributed through major department stores, traditional
apparel stores, and sport and athletic specialty stores. The manufacturer pays
us a royalty based on its sales of Chase-branded products.
SALES AND DISTRIBUTION
We market our die-cast collectibles worldwide to approximately 11,500
specialty retailers through our wholesale distributor network; through our
Collectors' Club, our e-commerce Web sites, and mobile trackside stores; and
through corporate promotional programs. We market our motorsports consumer
products primarily 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; through direct
10
<PAGE> 13
trackside sales to race fans; through our e-commerce Web sites; and through
promotional programs with corporate sponsors.
Wholesale Distribution
Die-Cast Collectibles. We currently market our die-cast collectibles on
a wholesale basis through 18 distributors operating in the United States and 45
distributors operating in 45 countries throughout the world. The distributors
solicit orders for our 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, and a limited number of hobby shops. Our
employees attend trade shows in an effort to attract new retailers to our
network. We advertise our die-cast collectibles in newspapers and magazines
covering motorsports and the collectibles markets. We also take measures to
increase consumer awareness of our products through radio and television
advertising, including promotion of our 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. Our 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. We also utilize
our distributor network as well as an in-house sales force and independent
representatives to market our motorsports apparel, souvenirs, and other consumer
products on a wholesale basis to the same specialty retailers that sell our
die-cast collectibles.
In October 1999, we announced a strategic reduction in the number of
our domestic wholesale distributors as part of our effort to strengthen our
distribution system. We reduced the number of domestic distributors as part of
our ongoing strategy to streamline our distribution network by retaining those
distributors with the most extensive dealer networks, the most strategic
geographic territories, the greatest ability to carry our complete product line,
and the proper controls to minimize sales of our products through unauthorized
channels. We plan to continue to develop opportunities to streamline and enhance
our existing distribution channels, identify and develop or acquire new
distribution channels, and cross-market our products through all of our
distribution channels in the future.
Collectors' Club
We market certain of our die-cast collectibles exclusively through our
Collectors' Club. Members of the Collectors' Club pay a lifetime membership fee
that entitles them to receive a membership kit, a monthly magazine, catalogs,
and other special sales materials highlighting our collectibles and other
products. Membership in the Collectors' Club increased from approximately 22,000
members in September 1994 to approximately 167,000 members as of September 30,
1999. We advertise the Collectors' Club in publications that focus on
motorsports or the collectibles industry, through banner advertisements on the
Internet, and through limited radio and television advertisements. We strive to
increase collector interest in Collectors' Club products and to enhance the
value of these products as collectibles by
- offering many items exclusively through our Collectors' Club,
- offering a limited number of each collectible, and
- limiting the number of a particular item that each member may
purchase.
Until February 1999, members of our Collectors' Club purchased products
through our catalog by calling our customer service representatives. Beginning
with the February 1999 launch of our e-commerce initiative on goracing.com,
users also can join the Collectors' Club and view and purchase products online.
Each month, we send e-mail to online club members notifying them of new
product offerings. We attempt to notify all club members of new products either
by e-mail, catalog, or on the goracing.com network
11
<PAGE> 14
before accepting orders to ensure that all club members have an equal
opportunity to purchase collectible products. If items that we offer exclusively
to club members do not sell out, we may make them available to non-club members
after a period of time.
We also employ customer service representatives and an automated call
distribution telephone system to accept membership applications, take customer
orders, and handle customer inquiries. We utilize an advanced telephone and
computer system that combines telemarketing functions, computerized order
processing, and automated warehouse operations to process telephone orders from
and ship products to Collectors' Club members.
Trackside Sales
We currently operate 28 fully equipped mobile trackside stores to
capitalize on the large base of potential customers that attend
NASCAR-sanctioned races and other events throughout the United States. Some
or all of our mobile trackside stores travel to each NASCAR Winston Cup race (34
events in 1999) 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 authorized trackside opportunities for
racing enthusiasts to purchase motorsports products using the name and likeness
of the driver and racing team featured in each store.
Corporate Promotional Programs
We create promotional programs for large corporate sponsors of
motorsports. We continually pursue new opportunities to create promotional
programs and we are in discussions with major race car drivers and corporate
sponsors in our effort to develop such programs on a continuous basis. See Item
1, "Our Business - Products and Services - Corporate Promotional Programs."
Electronic Commerce Sales
In February 1999, we launched our e-commerce initiative consisting of
Web sites featuring our products, as well as SpeedMall, a state-of-the-art
virtual shopping mall linked to the traffic generated by goracing.com. See Item
1, "Our Business Products and Services - The goracing.com Network - Motorsports
E-Commerce."
DESIGN AND PRODUCTION
Die-cast Scaled Replica Vehicles
We design each die-cast collectible that we market. Many of our
die-cast collectibles include features such as opening hoods and trunks,
detailed engines, and working suspensions. We also devote a significant amount
of time and effort to the production of our die-cast collectibles to ensure that
the resulting products display a level of quality and detail that is superior to
competing products. For example, we produce most of our die-cast collectibles
with pad printing instead of stickers or decals.
Our 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, our artists and engineers use computer software to create
detailed scale renderings of the vehicles. After approval of the rendering by
the vehicle owner, driver, team sponsor, and other licensors whose approval may
be required, we supply computerized renderings to one of our manufacturers in
the People's Republic of China. The manufacturer produces a sample or model,
which we then inspect for quality and detail. After final approval, the
manufacturer produces the die-cast replicas, packages them, and ships the
finished products to us or, in certain instances, directly to our customers.
Our die-cast collectibles (other than products marketed by MiniChamps)
are primarily manufactured under an agreement with one third-party manufacturer
in China. The term of the agreement currently extends through December 31, 2001
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.
12
<PAGE> 15
We own a significant portion of the tooling that the third-party
manufacturer uses to produce die-cast collectibles for our company, and we have
partial control over the production of our die-cast collectibles under the
manufacturing agreement. We invested approximately $17.0 million in fiscal 1998
and $10.0 million in fiscal 1999 in tooling for our proprietary lines of
die-cast collectibles. We believe the breadth and quality of the tooling program
provides us with a competitive advantage in the motorsports collectible market.
We intend to make additional investments in tooling in order to support the
growth of our business.
We believe that our overseas manufacturer of die-cast collectibles is
dedicated to high quality and productivity as well as support for new product
development. Although we believe 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 our die-cast
products. See Item 1, "Special Considerations - We depend on third-party
manufacturers and shippers."
We obtain the die-cast collectibles marketed by MiniChamps and die-cast
collectibles sold under the "Brookfield" trademarks from three other
manufacturers in China. We currently do not have a formal, long-term arrangement
with any of these manufacturers.
Motorsports Consumer Products
We currently obtain substantially all of our licensed motorsports
apparel, souvenirs, and other consumer products on a purchase order basis from
approximately 200 third-party manufacturers and suppliers located primarily in
the United States. We also screen print and embroider a portion of the licensed
motorsports apparel that we sell. The apparel and souvenir suppliers present
product ideas and artistic designs to us. We then select those unique products
and artistic designs that we believe will appeal to motorsports enthusiasts and
distinguish our apparel and souvenir products from those of our competitors. We
engage in a bidding process for certain items, such as embroidered hats or
t-shirt blanks, in order to negotiate favorable prices and other terms. We also
purchase and resell certain finished items, such as tote bags and coolers, from
domestic and foreign companies that have licenses for those items with the
drivers and other licensors.
We work closely with the third-party apparel and souvenir manufacturers
in order to ensure that the products conform to design specifications and meet
or exceed our quality requirements. We believe that a number of alternative
manufacturers for each of these products is readily available in the event that
we are unable to obtain products from any particular manufacturer. We own the
tooling and dies used to manufacture certain of our motorsports consumer
products. As we develop new motorsports consumer products that require
specialized tooling, we intend to build or purchase the new tooling that will be
required to permit the third-party manufacturers to produce those items.
LICENSES
We focus on developing long-term relationships with and we engage in
comprehensive efforts to license the most popular drivers, team owners, and
other personalities in each top racing category, their sponsors, various
sanctioning bodies, and others in the motorsports industry. We continually
strive to strengthen our relationships with licensors and to develop
opportunities to market innovative collectible and consumer products that appeal
to motorsports enthusiasts. We believe that our license agreements with top race
car drivers and other licensors significantly enhance the consumer appeal and
marketability of our products. By aligning our company with top racing
personalities and providing them with a broad range of revenue opportunities, we
believe that we will be able to leverage those relationships to attract
additional licensors in order to generate increased revenue for our company as
well as increased earnings for the licensors.
Significant Driver License and Endorsement Agreements; Significant Team Owner
Licenses
We have 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 us 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 we exercise our right of first refusal, the driver will not personally
market and will not permit others to market, through the same channels of
13
<PAGE> 16
distribution used by our company, any products bearing his likeness that are the
same or similar to products marketed by our company. Each of the license
agreements requires us to pay the licensor royalties based on a percentage of
the wholesale price of licensed products that we sell. Certain of the license
agreements also provide for minimum guaranteed royalty payments each year during
the term of the agreement. These agreements, as well as many of our other
significant license agreements, give the licensors the right to terminate or
significantly shorten the term of the agreements if our business is sold or
transferred or if there is a significant change in our management team.
In October 1998, we entered into an amended personal service and
endorsement agreement with Jeff Gordon and an affiliate of Mr. Gordon. During
the term of the endorsement agreement, we have the right to use Mr. Gordon's
name, likeness, signature, and endorsement in connection with the advertisement,
promotion, and sale of the die-cast collectibles and other products approved by
Mr. Gordon and marketed by our company. The endorsement agreement expires on
December 31, 2005.
We also have license agreements with several of the most popular NASCAR
race car team owners, including Robert Yates Racing, Inc.; Richard Childress
Racing Enterprises, Inc.; Redline Sports Marketing, Inc. (the licensing entity
for the Joe Gibbs race team); and Dale Earnhardt, Inc. The team owner licenses
provide us 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 we exercise our 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 our 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 us
to pay the licensor royalties based on a percentage of the wholesale price of
licensed products that we sell. Certain of the license agreements also provide
for minimum guaranteed 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:
<TABLE>
<CAPTION>
LICENSOR DRIVER EXPIRATION DATE
-------- ------ ---------------
<S> <C> <C>
Dale Earnhardt and Dale Earnhardt November 7, 2011
Dale Earnhardt, Inc.
Jeff Gordon and Jeff Gordon December 31, 2005
JG Motorsports, Inc.
Rusty Wallace and Rusty Wallace December 31, 2004
Rusty Wallace, Inc.
John Force and John Force January 10, 2001
John Force Racing
Robert Yates Racing, Inc. Dale Jarrett December 31, 2012
Ricky Rudd
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. (Dale Earnhardt, Jr.
Ron Hornaday through 2005)
</TABLE>
14
<PAGE> 17
We have non-exclusive endorsement and marketing relationships with many of
the leading motorsports drivers, team owners, and crew chiefs, including the
following:
Dale Earnhardt Rusty Wallace
Jeff Gordon Bobby Labonte
Dario Franchitti Steve Kinser
Mark Martin Tony Stewart
Don Prudhomme Dale Earnhardt, Jr.
Joe Gibbs Racing Richard Childress Racing
Ray Evernham
Each of these personalities has agreed to endorse the goracing.com network
for motorsports and automotive-related products, services, and information.
These endorsements include publicly acknowledging goracing.com when appropriate,
making personal appearances and commercials on our behalf, granting interviews
and participating in online chats on our network, providing us with race-used
items for online auctions and promotions, and permitting us to use the
endorser's name, signature, and likeness for advertising, marketing, and
promotional purposes. Each of these drivers, team owners, and crew chiefs will
either add the endorser's Web site to the goracing.com network or grant us the
right to design, operate, host, and control the endorser's motorsports or
automotive-related Web sites.
Additional Product Licenses
In addition to the driver and team owner licenses described above, we
currently maintain approximately 300 licenses with various other drivers, car
owners, sponsors, and manufacturers. Other popular drivers under license with
our company include NASCAR Winston Cup driver Terry Labonte; NHRA drag racers
Kenny Bernstein, Cruz Pedregon, Larry Dixon, and Warren Johnson; and NHRA Pro
Stock motorcycle driver Matt Hines. We also have licenses with Formula One teams
McLaren International Ltd., Williams Grand Prix, and Benetton Formula Ltd., as
well as with other popular team owners, car sponsors, NASCAR, CART, World of
Outlaws, 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:
<TABLE>
<CAPTION>
- ------------------------ -------------------------------------- ----------------------------- ------------------------
LICENSES WITH LICENSES WITH LICENSES WITH
RACE CAR DRIVERS TEAM OWNERS MANUFACTURERS
- ------------------------ -------------------------------------- ----------------------------- ------------------------
<S> <C> <C> <C>
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 number and Right to reproduce the
photograph, likeness, and autograph. colors. cars or trucks.
- ------------------------ -------------------------------------- ----------------------------- ------------------------
RENEWAL: Individual agreements either renew Same. Same.
automatically, may be renewed or
extended upon written request by our
company, or expire at the end of the
specified term.
- ------------------------ -------------------------------------- ----------------------------- ------------------------
PAYMENTS TO LICENSORS: Either (i) a fixed dollar amount, Same. Same.
which may include a substantial
advance to the licensor; (ii) a fixed
amount per item that we sell pursuant
to the license; (iii) a percentage
of the net sales for a program or
a percentage of our wholesale price
per item that we sell pursuant to
the license; or (iv) a combination
of the above.
- ------------------------ -------------------------------------- ----------------------------- ------------------------
</TABLE>
15
<PAGE> 18
The license agreements with various sponsors generally provide for
terms of one to three years and permit us to reproduce the sponsors' decals and
logos as they appear on the cars or trucks. Although we directly or indirectly
pay license fees to the primary sponsors of most of the racing vehicles, the
license agreements with certain sponsors do not require us to pay the licensors
because of the advertising value provided to the licensor as a result of having
its decals and logos displayed on our products. We continually strive to renew
existing agreements or to enter into new license agreements with existing or new
drivers, team owners, car sponsors, and other licensors and to develop new
product programs pursuant to our license agreements in our effort to maintain
our leadership position in the motorsports licensed products industry.
Hasbro License Agreement
The license agreement between our company and Hasbro covers the sale by
Hasbro in the mass-merchandise market of specific motorsports-related products
for which we have or will secure exclusive or non-exclusive licenses from race
car drivers, team owners, manufacturers, and sponsors. The Hasbro license
provides us with a source of revenue from the mass-merchandise market without
committing substantial resources to manufacturing and marketing activities or
subjecting our company to the risks inherent in the mass-merchandise market.
Under the Hasbro license, we are 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 our 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's initial focus under the Hasbro license has been to develop,
with our 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. The mass-market die-cast products manufactured and marketed
under the Hasbro license are completely distinct from our current products and
do not compete directly with our limited-edition motorsports die-cast
collectible products.
During fiscal 1999, our company and Hasbro amended the license
agreement to provide Hasbro with a 90-day right of first refusal to utilize
licensing rights to new forms of motorsports that we acquire during the term of
the revised agreement. The amended license provides for a term ending on
December 31, 2006. Hasbro may extend the license for an additional three-year
term, provided that total wholesale revenue of licensed products exceeds a
specified amount during the initial term.
Other Significant License Arrangements
Revell License Agreement. We have a license agreement with
Revell-Monogram, Inc. that gives us 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. The license also gives us a
non-exclusive right 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.
NASCAR License Agreement. We have a licensing agreement with NASCAR
that gives us the non-exclusive right to use the "NASCAR" name and logo on all
of our NASCAR-related products and product packaging as well as on related
sales, marketing, and promotional materials. We pay NASCAR royalty payments
based on a percentage of the wholesale price of licensed products that we sell,
with minimum guaranteed royalty
16
<PAGE> 19
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. We have a license agreement with the licensing
affiliate of CART. Because CART provides the licensing rights of the sanctioning
body as well as all participating drivers, race teams, and tracks, the CART
license provides us with (a) exclusive (subject to certain pre-existing
licenses) licensing rights to the CART and "FedEx Championship Series" logos;
(b) exclusive (subject to certain pre-existing licenses) licensing rights to
five of the top race teams and their drivers; and (c) 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 us to develop and market
a line of CART-based die-cast collectible vehicles and 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. We pay the licensor royalty payments based on a
percentage of the wholesale price of licensed products that we sell, with
minimum royalty payments each year during the term of the agreement. The CART
license expires on December 31, 2003. We will have the right to renew the CART
license for an additional five-year term if we achieve certain minimum sales
requirements.
COMPETITION
The motorsports collectible and consumer product industry is extremely
competitive. We compete with major domestic and international companies, some of
which have greater market recognition and substantially greater financial,
technical, marketing, distribution, and other resources than we possess. Our
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. Our motorsports apparel and
souvenirs compete with similar products sold or licensed by drivers, team
owners, sponsors, and other licensors with which we currently do not have
licenses as well as with sports apparel licensors and manufacturers in general.
Emerging companies also may increase their participation in these markets. Our
promotional products compete for advertising dollars against other specialty
advertising programs and media, such as television, radio, newspapers,
magazines, and billboards. Our goracing.com network currently or potentially
competes with companies that concentrate on or include motorsports-related news
and information, community features, and products and services as part of their
online offerings.
We believe that our relationships and licenses with top race car
drivers, car owners, and other popular licensors represent a significant
advantage over our competitors in the motorsports collectible and consumer
products industry. We strive to expand and strengthen these relationships and to
develop opportunities to market innovative licensed collectible and consumer
products that appeal to motorsports enthusiasts. Our ability to compete
successfully depends on a number of factors both within and outside our control.
See Item 1, "Special Considerations - Markets for our products and services are
extremely competitive, and we cannot assure you that we will be able to compete
successfully in the future."
INTELLECTUAL PROPERTY
Our business depends upon valuable trademarks and other rights that we
license from third parties. See Item 1, "Our Business - Licenses." Our
performance and ability to compete also depend to a significant degree on the
value of our various tradenames and marks, as well as our proprietary technology
and other rights. We are seeking protection of our significant service marks and
trademarks in the United States, including various "Action" names and logos, as
well as the "goracing.com," "SpeedMall," and other names and logos. We may not
be able to secure protection for our service marks or trademarks that we have
not already registered. Our competitors or others may adopt product or service
names similar to any service marks or trademarks, which could impede our ability
to build brand identity and could lead to customer confusion. Our inability to
protect trade names and marks adequately could have a material adverse effect on
our business, operating results, and financial condition.
17
<PAGE> 20
Our Internet operations use proprietary software that we have
developed. Our proprietary software is protected by copyright laws. As part of
our confidentiality procedures, we generally enter into agreements with our
employees and consultants and limit access to and distribution of our software,
documentation, and other proprietary information. The steps we take may not
prevent misappropriation of our technology, and the agreements we enter into for
that purpose may not be enforceable. Third parties may independently develop
similar software or they could copy or otherwise obtain and use our software or
other proprietary information without our authorization. It may be difficult or
impossible for us to police unauthorized use of our technology. In addition, the
laws of other countries may afford us little or no effective protection of our
intellectual property outside the United States.
We may receive notices from third parties that claim our software or
other aspects of our Internet business infringe their rights. While we are not
currently subject to any such claim, any future claim, with or without merit,
could result in significant litigation costs and diversion of resources,
including the attention of our management, and could require us to enter into
royalty and licensing agreements. These royalty and licensing agreements, if
required, may not be available on terms acceptable to us or at all. In the
future, we also may need to file lawsuits to enforce our intellectual property
rights, to protect our trade secrets, or to determine the validity and scope of
the proprietary rights of others. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of our resources.
Our Internet operations also rely on a variety of technologies that we
license from third parties. These third-party technology licenses may not
continue to be available to us on commercially reasonable terms. Our loss or
inability to maintain or obtain upgrades to any of these technology licenses
could result in delays in completing our Internet software enhancements and
developments until we identify, license, develop, and integrate equivalent
technology. Any such delays could have an adverse effect on our Internet
business.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. As a result of the increasing popularity and use of the Internet and
other online services, however, it is possible that laws and regulations may be
adopted with respect to the Internet or other online services. These laws and
regulations could cover issues such as user privacy, pricing, content,
copyrights, distribution, sales and other taxes, and the characteristics and
quality of products and services. The growth and development of the market for
online commerce may prompt more stringent consumer protection laws, which may
impose additional burdens on companies that conduct business online. Because we
sell to consumers residing throughout the United States and in numerous foreign
countries and the goracing.com network is available over the Internet in every
state and numerous foreign countries, these jurisdictions may claim that we are
required to collect sales or other similar taxes on sales of products in those
jurisdictions. These jurisdictions also may claim that we are required to
qualify to do business as a foreign corporation in each such state and foreign
country. A successful assertion by one or more states or any foreign country
that we should collect sales or other taxes could adversely impact our business.
Our failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify. Any new legislation or regulation, the application of laws and
regulations of jurisdictions whose laws we believe do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and goracing's online services could have a material adverse effect on our
business.
INSURANCE
We maintain a $2.0 million product liability insurance policy to cover
the sale of our die-cast and other products. We maintain an additional $25.0
million commercial umbrella liability coverage. We also maintain a $6.0 million
insurance policy to cover our molds and dies located at our third-party
manufacturer in China and a $5.0 million insurance policy to cover lost revenue
in the event of certain interruptions of business with our overseas manufacturer
of die-cast collectibles. We believe that our insurance coverage is adequate.
18
<PAGE> 21
EMPLOYEES
As of December 20, 1999, we had 648 full-time employees and 9 part-time
employees. We have experienced no work stoppages and we are not a party to a
collective bargaining agreement. We believe that we maintain good relations with
our employees.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding each of
our executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Fred W. Wagenhals................................ 58 Chairman of the Board, President, and Chief
Executive Officer
Tod J. Wagenhals................................. 35 Executive Vice President, Secretary, and
Director
David A. Husband................................. 30 Executive Vice President - Finance and
Accounting and Chief Financial Officer
Melodee L. Volosin............................... 35 Executive Vice President - Sales and
Director
</TABLE>
Fred W. Wagenhals has served as our Chairman of the Board, President,
and Chief Executive Officer 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.
Tod J. Wagenhals has served as our Executive Vice President since July
1995, as a director since December 1993, and as Secretary since November 1993.
Mr. Wagenhals served as a Vice President of our company from September 1993 to
July 1995. Mr. Wagenhals served in various marketing capacities with our company
from May 1992 until September 1993. Mr. Wagenhals is the son of Fred W.
Wagenhals.
David A. Husband has served as our Executive Vice President - Finance
and Accounting and Chief Financial Officer since December 1999. Mr. Husband
served as Vice President - Finance and Accounting and Chief Accounting Officer
from May 1998 until December 1999. 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.
Melodee L. Volosin has served as our Executive Vice President - Sales
since December 1999 and as a director since January 1997. Ms. Volosin served as
our Vice President - Wholesale Division from September 1997 until December 1999.
Ms. Volosin served as the Director of our Wholesale Division from May 1992 to
September 1997. Ms. Volosin's duties include managing all of our Company's
wholesale distribution of die-cast collectibles and other products, including
advertising programs and budgeting.
19
<PAGE> 22
SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
Report, should be carefully considered in evaluating our company and our
business.
A VARIETY OF FACTORS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
A wide variety of factors could adversely impact our operating results.
These factors include the following:
- our 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 we have license
arrangements;
- our 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;
- our ability to design and arrange for the timely production
and delivery of our products;
- our ability to identify, develop, and implement special
merchandising and marketing programs on a timely basis;
- the level and timing of orders placed by customers;
- our ability to expand our distribution channels and Internet
business and to effectively manage the growth of our
operations;
- seasonality; and
- competition and competitive pressures on prices.
Many of the factors described above are beyond our control.
OUR BUSINESS DEPENDS ON OUR RELATIONSHIPS AND LICENSE ARRANGEMENTS WITH KEY
LICENSORS.
We market our products under licensing arrangements with race car
drivers, team owners, sponsors, automobile and truck manufacturers, NASCAR,
NHRA, CART, and other entities. The licensing arrangements vary in scope and
duration, but generally authorize us to sell specified licensed products for
short periods of time. Some license agreements require us 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 the licensors, and the continued
performance, public image, and health of the individual drivers. A driver's
popularity could be adversely affected if the driver fails to maintain a
successful racing career or engages in behavior that the general public
considers objectionable.
In addition, our ability to enforce our rights under licensing
agreements may be limited by the interpretation and enforcement of those
agreements. Some license agreements contain provisions that allow the licensor
to terminate the agreement upon the occurrence of certain events, including a
change in the driver's team owner or sponsor, a change of control of our
company, or a significant change in our management team. 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 our business.
20
<PAGE> 23
ANY DOWNTURN IN THE POPULARITY OF THE MOTORSPORTS INDUSTRY IN GENERAL, AND
NASCAR RACING IN PARTICULAR, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Motorsports competes for television viewership, attendance, merchandise
sales, and sponsorship funding with other sports, entertainment, and
recreational events. The competition in the sports, entertainment, and
recreation industries is intense. Any downturn in the popularity of the
motorsports industry, or its appeal to consumers, could reduce sales of
motorsports merchandise or corporation sponsorships, which would materially and
adversely affect our business.
Sales of die-cast replicas and other licensed merchandise related to
NASCAR racing represented approximately 86% of our revenue in fiscal 1999.
Although we have expanded our product lines to include vehicles from other
segments of motorsports, we expect that products related to NASCAR racing will
continue to account for a significant percentage of our revenue for the
foreseeable future. Any downturn in the popularity of NASCAR-sanctioned racing
could have a material and adverse effect on our business.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND SHIPPERS.
We depend upon third parties to manufacture all of our motorsports
collectibles and most of our consumer products. In particular, we rely on one
manufacturer, which operates a single facility in China, to produce most of our
die-cast products. Although we own most of the tools, dies, and molds used in
the manufacturing processes of our collectible products and own the tooling and
dies used to manufacture certain of our consumer products, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns, or the inability to fulfill orders on
a timely basis could have a material adverse effect on our business.
We do not have long-term contracts with our third-party manufacturers.
We obtain die-cast products from our primary manufacturer in China under an
agreement that has been in place since 1994 and that automatically renews for
successive one-year terms unless terminated by either party giving written
notice to the other at least 90 days prior to the end of the then-current term.
Because we own most of the tools and dies used in the manufacturing process, we
believe that we would be able to secure other third-party manufacturers to
produce our products. Our operations would be adversely affected, however, by of
the following:
- the loss of our relationship with certain of our current
suppliers, including particularly our primary manufacturer of
die-cast products;
- the disruption or termination of the operations of one or more
of our current suppliers; or
- the disruption or termination of sea or air transportation
with our China-based die-cast manufacturers, even for a
relatively short period of time.
For example, MiniChamps 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 our third-party manufacturers,
particularly the facilities used by our die-cast product manufacturers in China,
also could result in the loss of or damage to a material portion of our 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.
We do not maintain an inventory of sufficient size to provide protection for any
significant period against an interruption of supply, particularly if we are
required to obtain alternative sources of supply.
We do not directly purchase the raw materials used to manufacture most
of our products. We may, however, be subject to variations in the prices we pay
our third-party manufacturers for products if their raw materials, labor, and
other costs increase. Although to date we have been able to increase the prices
at which we
21
<PAGE> 24
sell our products in order to cover the increased prices that we pay for such
products, we may not be able to continue to pass along such price increases to
our customers in the future.
We also depend upon a number of third-party shippers, such as the U.S.
Postal Service, United Parcel Service, and Federal Express, to deliver goods to
us and our customers. Strikes or other service interruptions affecting our
shippers would have a material adverse effect on our ability to deliver
merchandise on a timely basis.
OUR FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD IMPAIR OUR BUSINESS.
Since 1993, our business operations have undergone significant changes
and growth, including the expansion of our collectible product lines, the
acquisition of our motorsports consumer products lines, the acquisition or
development of expanded distribution channels, and significant investments in
tooling and licensing arrangements. The failure to manage our growth on an
effective basis could have a material adverse effect on our business, financial
condition, and operating results. In order to manage effectively any significant
future growth, we must
- expand our facilities and equipment and further enhance our
operational, financial, and management systems;
- design, develop, produce, and receive products from
third-party manufacturers on a timely basis;
- develop and maintain our various distribution channels in
order to maximize product sales volumes and profit margins;
- effectively manage inventory levels;
- successfully hire, train, retain, and motivate additional
employees; and
- integrate successfully the operations of any acquired
businesses with our operations.
Our growth has placed, and our anticipated future growth in our
operations will continue to place, a significant strain on our management
systems and resources. We 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 our customers. Sales of our
collectible and consumer products are subject to changing consumer tastes, and
customers for our promotional items generally do not commit to firm orders for
more than a short time in advance. We may increase our expenditures in
anticipation of future orders that do not materialize, which would adversely
affect our profitability. Demand for popular products or services may result in
increased orders on short notice, which would place an excessive short-term
burden on our resources.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO RAPID MARKET CHANGES.
The markets for our products and services are subject to rapidly
changing customer tastes, a high level of competition, seasonality, and a
constant need to create and market new products and services. Demand for
motorsports collectible and consumer products depends upon a wide variety of
factors, including the following:
- the popularity of drivers, teams, and other licensors,
- the popularity of current product and service 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. We frequently are able to successfully market new products or services
for only a limited time.
22
<PAGE> 25
Our ability to increase our sales and marketing efforts to stimulate
customer demand and our ability to monitor third-party manufacturing
arrangements in order to maintain satisfactory delivery schedules and product
quality are important factors in our long-term prospects. Because of the amount
of time and financial resources that may be required to bring new products or
services to market, we may not always be able to accurately forecast required
inventory levels or to respond to changes in customer tastes and demands. We
could experience a material adverse effect on our business, financial condition,
and operating results if we are unable to respond quickly to market changes or a
slowdown in demand for our products or services.
WE MUST DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES TO SUCCEED.
Our operating results depend to a significant extent on our 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 and service selection,
- successful sales and marketing efforts,
- timely production and delivery of new products or services,
and
- consumer acceptance of new products and services.
New products or services may not receive or maintain substantial market
acceptance. Our failure to design, develop, and introduce popular products and
services on a timely basis would adversely affect our future operating results.
WE MAY EXPERIENCE SEASONAL FLUCTUATIONS IN SALES THAT COULD AFFECT OUR EARNINGS
AND THE TRADING PRICE OF OUR COMMON STOCK.
We may experience seasonality in our business, which could result in
unfavorable quarterly earnings comparisons and affect the trading price of our
common stock. Because the auto racing season is concentrated between the months
of February and November, the second and third calendar quarters of each
calendar year (our third and fourth fiscal quarters) generally are characterized
by higher sales of motorsports products. We also are increasing our efforts to
develop large corporate promotional programs. These programs typically result in
significant levels of revenue and income, which may increase quarter-to-quarter
variations in our operating results. As a result of these and other factors, we
may experience seasonality and quarterly fluctuations in our business, which
could result in unfavorable quarterly earnings comparisons and affect the
trading price of our common stock. Fluctuations in quarterly sales may require
us to take temporary measures, including changes in personnel levels, borrowing
amounts, and production and marketing activities. These factors and any seasonal
and cyclical patterns that emerge in Internet consumer purchasing could result
in unfavorable quarterly earnings comparisons. As a result, it is difficult to
predict our future revenue and operating results. Any shortfall in revenue or
fluctuations in operating results may have a material adverse effect on our
business and stock price. You should not rely on quarter-to-quarter comparisons
of our operating results as an indication of future performance.
WE FACE NUMEROUS RISKS RELATED TO OUR INTERNET BUSINESS.
We anticipate that our emphasis on expanding our Internet business will
impact our business operations in a number of ways, including the following:
- we will make significant expenditures to provide new and
enhanced motorsports-related content, community features, and
e-commerce product and service offerings;
- we will make significant investments to enhance our
technology, software, and basic infrastructure; and
23
<PAGE> 26
- we may incur substantial costs to form Internet-related
strategic alliances or to make Internet-related acquisitions
and to integrate them with our existing operations.
We face numerous risks and uncertainties associated with our Internet
operations. Some of these risks and uncertainties relate to our ability to
- develop brand awareness and brand loyalty of the
"goracing.com" name to attract a larger audience to the
goracing.com network;
- expand online product and service offerings, provide a
convenient, economical, and secure online shopping experience,
and increase customer acceptance of the online purchase of
motorsports, automotive, and related merchandise and services;
- offer up-to-date news, information, and other features related
to the world of motorsports that are attractive to the
goracing.com network's visitors;
- anticipate and adapt to the changing market for Internet
services and electronic commerce, particularly as those
changes relate to the markets that we target;
- continue to develop, upgrade, maintain, and enhance our
operational, administrative, and other systems and
infrastructure to accommodate the expanded service offerings
and increased consumer traffic that we anticipate will
develop and to avoid service interruptions and delays that
could cause users to stop visiting the goracing.com network;
and
- provide or contract for satisfactory customer service and
order fulfillment, which will be critical to ensure repeat
visits by users of the goracing.com network.
We may not be successful in addressing these risks and uncertainties. The
failure to do so would materially and adversely affect our business.
We also face a variety of risks and uncertainties related to the new
and rapidly evolving Internet market, including the following:
- our future success depends to a significant extent on the
continued growth in use of the Internet;
- our target users may not prefer to obtain their motorsports
news and information online or to make online purchases;
- we may use new technologies ineffectively or fail to adapt our
network, transaction-processing systems, and infrastructure to
meet customer requirements, competitive pressures, or emerging
industry standards;
- any well-publicized compromise of security or inadvertent
transmissions of computer viruses could deter use of the
Internet in general or use of the goracing.com network to
conduct commercial transactions, and could expose us to
litigation or to a material risk of loss;
- legal uncertainties exist regarding Internet user privacy,
pricing issues, the characteristics and quality of products
and services, access charges and connection fees, consumer
protection issues, cross-border commerce, and transmission of
certain types of information over the Internet;
- our e-commerce sales and operating results could be adversely
affected if one or more states or foreign countries
successfully assert that we should collect sales or other
taxes on the sale of our products via the Internet; and
- we may be subjected to claims for defamation, negligence,
copyright, or trademark infringement or claims based on other
theories relating to the information published on the
goracing.com network. We also could be subjected to claims
based upon the content that is accessible from the
goracing.com network through links to other Web sites.
24
<PAGE> 27
WE FACE A VARIETY OF RISKS ASSOCIATED WITH THE ACQUISITION AND INTEGRATION OF
NEW BUSINESS OPERATIONS.
We completed a number of acquisitions during fiscal 1997, fiscal 1998,
and fiscal 1999. We have consolidated substantially all of the operations of the
U.S.-based acquired entities into our operations in Phoenix, Arizona and the
Charlotte, North Carolina, vicinity. We continue to coordinate and integrate
certain of the administrative, information systems, sales and marketing, and
other operations of MiniChamps, goracing, and Fantasy Sports Enterprises with
our operations. We may wish to acquire complementary businesses, products,
services, or technologies in the future. We may not be able to identify suitable
acquisition candidates or make acquisitions on commercially acceptable terms. We
also cannot provide assurance that we will be able to
- complete effectively the integration of the operations of the
acquired companies with our operations,
- manage effectively the combined operations of the acquired
businesses,
- achieve our 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 acquired operations, or
- obtain, renew, or extend licensing agreements necessary to
successfully continue and expand the acquired operations.
The integration of the management, personnel operations, products, services,
technologies, and facilities of any businesses that we may acquire in the future
could involve unforeseen difficulties. These difficulties could disrupt our
ongoing business, distract our management and employees, and increase our
expenses, which could have a material adverse effect on our business, financial
condition, and operating results.
We conduct due diligence reviews of each acquired business and we
obtain representations and warranties regarding each acquired business.
Unforeseen liabilities and difficulties, however, can arise in connection with
the operation of acquired businesses. Contractual or other remedies may not be
sufficient to compensate us in the event unforeseen liabilities or other
difficulties arise. In addition, our ability to enforce our 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.
We strive 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. We may not be able to achieve revenue
increases; integrate 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 our business, financial condition, and
operating results.
As part of our acquisition strategy, we frequently engage in
discussions with various motorsports-related and other businesses regarding our
potential acquisition of those businesses. In connection with these discussions,
we 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.
25
<PAGE> 28
MARKETS FOR OUR PRODUCTS AND SERVICES ARE EXTREMELY COMPETITIVE, AND WE CANNOT
ASSURE YOU THAT WE WILL BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE.
The motorsports collectible and consumer products markets are extremely
competitive. We compete 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 we
possess. We cannot assure you that we will continue to be able to compete
successfully in the future.
Our 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. Our motorsports
apparel and souvenirs compete with similar products sold or licensed by drivers,
owners, sponsors, and other licensors with which we currently do 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. Our promotional programs must compete for advertising dollars against
other specialty advertising programs and media, such as television, radio,
newspapers, magazines, and billboards.
Our goracing.com network currently or potentially competes with
companies that include motorsports or automotive-related news and information,
community features, and products and services as part of their online offerings.
In addition, online retailers may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established, and
well-financed companies as use of the Internet and other online services
increases. Certain of our competitors may be able to devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies, and devote substantially more resources to Web site and
systems development than we can through goracing.com. The e-commerce market is
new, rapidly evolving, and intensely competitive, and we expect competition to
intensify 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 published final regulations that
would substantially restrict tobacco industry sponsorship of sporting events,
including motorsports. The legality of these regulations has been challenged in
court. The U.S. Supreme Court is reviewing these regulations on appeal, and we
expect the Court to issue its decision during 2000. 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 racing events could ultimately affect the popularity of motorsports,
which could have a material adverse effect on our business and operating
results.
In November 1998, certain major manufacturers of cigarettes and
smokeless tobacco products and the attorneys general of 46 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
terms of the settlement, among other things, limit sponsorship of racing events
by the participating manufacturers and substantially 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 limited sponsorships of racing events, drivers, or
teams. The participating manufacturers may not refer to any sponsored event,
driver, or team in their other advertisements of tobacco products. The terms of
the settlement limit or prohibit our 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. Domestic and
international tobacco advertisers heavily subsidize certain NASCAR, NHRA, CART,
Formula One, and other racing series and teams, and those series and teams may
be challenged to find similar sponsorships. The limitations on tobacco company
sponsorship imposed by the settlement and any further limitations imposed on
tobacco or alcohol sponsorship of racing events could ultimately affect the
popularity of motorsports, which could have a material adverse effect on our
business and operating results.
26
<PAGE> 29
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS, INTERNATIONAL TRADE,
EXCHANGE, AND FINANCING.
We obtain most of our products from overseas manufacturers,
particularly one third-party manufacturer of die-cast collectibles and other
replicas in China. During fiscal 1999, we derived approximately 44% of our
revenue from products that were manufactured by this third-party manufacturer.
Because most of our products are manufactured overseas, we face risks in
addition to the risks generally created by obtaining our products from third
parties. In addition, as a result of the acquisition of MiniChamps and
Goodsports, we now maintain business operations in Germany and Great Britain and
we market motorsports collectible products throughout the world. Our reliance on
third-party manufacturers to provide personnel and facilities in China, our
maintenance of personnel, equipment, and inventories abroad, our plans to expand
our product sales in international markets, and our plans to expand our Internet
operations to include additional Web sites serving international markets expose
us 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
- the possibility of
-- expropriation or nationalization of assets,
-- supply disruptions,
-- currency controls,
-- exchange rate fluctuations, and
-- 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 our ability to purchase
our products from foreign suppliers or the price at which we can obtain those
products. In November 1999, the United States and China signed an agreement that
will lift trade barriers between the two countries and that advances China's
efforts to join the World Trade Organization. Special interest groups have
raised objections to these efforts and we cannot be certain whether or to what
extent trade relations with China will continue to improve. Any developments
that adversely affect trade relations between the United States and China in the
future could impact our ability to obtain die-cast collectible products from our
manufacturers.
All of our purchases from our 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 we place orders with those manufacturers. An
extended period of financial pressure on overseas markets or a devaluation of
the Chinese currency that results in a financial setback to our overseas
manufacturers, however, could have an adverse impact on our operations.
Purchases of die-cast products from the China-based manufacturers generally
require us to provide an international letter of credit in an amount equal to
the purchase order. Although we currently have in place financing arrangements
in an amount that we consider adequate for anticipated purchase levels, the
inability to fund any letter of credit required by a supplier would have an
adverse impact on our operations.
Substantially all of our sales are denominated in either U.S. dollars,
Deutschmarks, or British pounds sterling. As a result, international customers
for our products bear any risks associated with exchange rate fluctuations
subsequent to the date the order is placed. We may, however, experience losses
as a result of exchange rate fluctuations between the dollar and the Deutschmark
or the pound. In the future, we may seek to
27
<PAGE> 30
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 our business,
financial condition, and operating results. In addition, revenue earned in
foreign countries may be subject to taxation by more than one jurisdiction,
which would adversely affect our earnings.
The "Euro" currency was introduced in certain Economic and Monetary
Union countries in January 1999. All EMU countries are expected to be operating
with the Euro as their single currency by 2002. We intend to monitor the impact,
if any, that introduction of the Euro currency will have on our internal systems
and the sale of our products and to take appropriate actions to address those
issues if required. We cannot predict the impact, if any, that introduction of
the Euro will have on our business, financial condition, or results of
operations.
Under the terms of our license agreement with Hasbro, Hasbro's royalty
payments to us 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, we bear 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. Royalties from overseas sales of
products by Hasbro do not represent a material percentage of our total revenue
and we do not expect that such royalties will represent a material percentage of
our total revenue in the future. As a result, we currently do not anticipate
that we 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.
WE MAY REQUIRE ADDITIONAL CAPITAL TO SUPPORT GROWTH.
Our 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, team owners, sponsors, automobile manufacturers,
and others,
- expansion of our product offerings, including additional lines
of die-cast replicas that have required substantial
investments in new tooling, and
- significant acquisitions of complementary businesses.
We have financed this growth through cash generated by operations, debt and
equity financings, and the issuance of our common stock in acquisitions.
Continued rapid growth, whether externally through additional acquisitions or
internally through new licensing arrangements, new product or service offerings,
or development and expansion of our Internet operations, could require
substantial additional capital in excess of cash resources, cash generated by
operations, and funds available to us through our existing credit facility. We
cannot predict the timing and amount of any such capital requirements at this
time. Although we have 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, we may be unable to expand our business at the rate desired,
which may adversely affect our operating results. Debt financing increases
expenses and must be repaid regardless of operating results. Equity financing
could result in additional dilution to existing shareholders.
WE DEPEND ON MANAGEMENT AND OTHER KEY PERSONNEL.
Our development and operations to date have been, and our proposed
operations will be, substantially dependent upon the efforts and abilities of
our 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 our key employees, particularly Mr. Wagenhals, could have a material
adverse effect on our company. We maintain key person insurance on the life of
Mr. Wagenhals in the amount of $3.0 million. We do not maintain such insurance
on any of our other officers.
28
<PAGE> 31
WE MUST BE ABLE TO ATTRACT AND RETAIN SKILLED EMPLOYEES.
Our success depends on our ability to continue to attract, retain, and
motivate skilled employees. We may be unable to retain our key employees or
attract, motivate, or retain other qualified employees in the future. Any
failure to attract and retain key employees will materially and adversely affect
our business.
WE HAVE SIGNIFICANT INDEBTEDNESS.
As of September 30, 1999, we had outstanding approximately $112.0
million of indebtedness. This indebtedness includes $100.0 million principal
amount of 4-3/4% Convertible Subordinated Notes due 2005 and approximately $12.0
million of other secured and unsecured indebtedness. In the future, we may face
risks related to servicing our debt obligations as interest or principal
payments become due. If we are unable to service our debt, we will be required
to restructure or refinance our debt or pursue alternative sources of financing,
which may include selling additional equity securities. We may not be able to
successfully implement alternative strategies on satisfactory terms in the event
that it becomes necessary to do so.
WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY, AND OTHERS COULD
INFRINGE ON OR MISAPPROPRIATE OUR RIGHTS.
We regard our trademarks, trade dress, copyrights, and other
intellectual properties as critical to our success. Our failure to adequately
protect our intellectual property could materially and adversely affect our
business, operating results, and financial position. Our intellectual property
rights primarily consist of (a) our trade names, logos, art, and (b) content of
our Web sites and the software technology that operates goracing's Web sites. We
have copyright protection for all original design and arrangement of the Web
sites on the goracing.com network, as well as any original material that we
produce to promote our products and services and the goracing.com network.
We have registered trademarks for certain of our "Action" names and
logos. We have applied for federal registration in the United States for various
other "Action" names and logos, as well as "goracing.com," "SpeedMall," and
other marks. The U.S. Patent and Trademark Office has suspended our
"goracing.com" application, pending review and disposition of other possibly
conflicting trademark applications and registrations for marks that include
variations of the word "goracing." The U.S. Patent and Trademark Office also has
informed us that another entity applied for federal registration of the name
"SpeedMall" prior to our application. We believe that we used the "goracing.com"
and "SpeedMall" marks prior in time to the other applications and registrations
cited against us. We also believe that our acquisition of a potentially
conflicting "goracing" trademark gives our "goracing.com" application priority
over the other possibly conflicting applications or registrations. As a result,
we do not believe that anyone else can obtain trademark protection for the
"goracing.com" mark in the United States for an online business similar to the
business that we operate. We may, however, find it necessary to engage in
litigation to prove our "senior user" status with respect to these marks in
order to obtain federal registration. We cannot assure you we will be successful
in obtaining a federal registration for the "goracing.com," "SpeedMall," or
other marks. Our ability to prevent others from using trademarks or names
similar to marks and names that we use may be adversely impacted if our marks
are regarded as descriptive or weak. Our inability to obtain trademark
protection for our marks and names could have a material adverse effect on our
business.
We may not be able to obtain effective trademark, service mark,
copyright, and trade secret protection in every country in which we make our
products and services available online. We may find it necessary to take legal
action in the future to enforce or protect our intellectual property rights or
to defend against claims of infringement. Policing unauthorized use of our
proprietary rights is difficult. Litigation can be very expensive and can
distract our management's time and attention, which could adversely affect our
business. In addition, we may not be able to obtain a favorable outcome in any
intellectual property litigation.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants. These agreements may be
ineffective in preventing misappropriation of technology and could be
29
<PAGE> 32
unenforceable. Misappropriation of our intellectual property or the litigation
costs associated with our intellectual property could have a material adverse
effect on us.
WE MAY BE UNABLE TO ACQUIRE OR MAINTAIN THE NECESSARY WEB DOMAIN NAMES.
We currently hold several Web domain names, including "goracing.com"
and "SpeedMall.com." Third parties currently own or could acquire similar domain
names that could create confusion and divert traffic to other Web sites, which
could adversely affect our Internet business. We may be unable to acquire or
maintain relevant domain names in all countries in which we conduct business. We
also may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon, or otherwise decrease the value of our proprietary
rights relating to goracing.
THE MARKET PRICE OF OUR COMMON STOCK AND NOTES MAY BE EXTREMELY VOLATILE.
The market price of our common stock has fluctuated 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 our company. These favorable conditions may not continue.
The trading price of our common stock in the past has been, and in the future
could be, subject to wide fluctuations in response to a number of factors,
including the following:
- quarterly variations in our operating results,
- actual or anticipated announcements of new products or
services by our company or our competitors,
- changes in analysts' estimates of our financial performance,
- general conditions in the markets in which we compete, and
- worldwide economic and financial conditions.
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 our common stock.
The trading price of our subordinated notes will depend on the factors
described above as well as on other factors, such as prevailing interest rates,
perceptions of our creditworthiness, the market price of our common stock into
which the subordinated notes are convertible, and the market for similar
securities. As a result, the market price of our subordinated notes may trade at
a discount from their principal amount based on such factors.
HOLDERS OF OUR SUBORDINATED NOTES AND HOLDERS OF OUR COMMON STOCK WILL BE
SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH THOSE NOTES.
Our subordinated notes are general unsecured obligations, subordinated
in right of payment to all of our existing and future senior indebtedness. As a
result of this subordination, in the event of any insolvency, liquidation or
reorganization of our company or upon acceleration of the subordinated notes due
to an event of default (as defined in the indenture governing the notes), the
assets of our 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, have been paid in full. As a result, there may not be
sufficient assets remaining to pay amounts due on the notes and any of our other
subordinated indebtedness then outstanding. The indenture does not prohibit or
limit the ability of our company and our subsidiaries to incur additional
indebtedness, including senior indebtedness. The incurrence of such indebtedness
could adversely affect our ability to pay our obligations under the notes. In
addition, the notes are not guaranteed by any of our subsidiaries. As a result,
the notes effectively rank junior to all creditors of our subsidiaries.
30
<PAGE> 33
Upon the occurrence of certain adverse events, each holder of
subordinated notes may require us to repurchase all or a portion of such
holder's notes. If such an event were to occur, we may not have sufficient
financial resources or may not be able to arrange financing to pay the
repurchase price for all subordinated notes tendered by holders thereof. Our
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. We may be
required to refinance senior indebtedness in order to make any such repurchase
payments. If we are prohibited from repurchasing the subordinated notes, such
failure would constitute an event of default under the indenture, which may
constitute a further default under certain of our existing agreements relating
to borrowings and the terms of other indebtedness that we may enter into from
time to time. In such circumstances, the subordination provisions in the
indenture would prohibit payments to the holders of the subordinated notes.
Furthermore, we may not have the financial ability to repurchase the
subordinated 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 subordinated notes under the circumstances
described above, or our inability to repurchase subordinated notes as required,
could have a material adverse affect on our financial condition and operating
results.
OUR BUSINESS COULD BE SEVERELY DISRUPTED IF OUR COMPUTER SYSTEMS OR THE COMPUTER
SYSTEMS OF OTHER PARTIES ON WHICH WE RELY FAIL BECAUSE THEY ARE NOT "YEAR 2000"
COMPLIANT.
We depend upon complex computer software and systems for all phases of
our operations. The failure of any of our software or systems to be Year 2000
compliant could disrupt the operation of our financial and management controls
and reporting systems, could prevent us from being able to process or fulfill
orders from our customers, and could disrupt our Internet operations.
In addition to the systems and software that we use directly, our
operations also depend on the performance of software and systems of our
third-party manufacturers, vendors, and service providers. These include
providers of financial, telecommunications, and parcel delivery services. We
cannot assure you that these third parties have, or will have, operating
software and systems that are Year 2000 compliant.
We have completed an analysis of our material operating software and
systems to assess and assure Year 2000 compliance. We also have been
communicating with our third-party manufacturers, vendors, and service providers
and others with whom we do business to coordinate Year 2000 readiness. The
responses we have received to date have indicated that steps currently are being
undertaken by our third-party manufacturers, vendors, and service providers to
address this concern. However, any failure of our computer software and systems
or the systems of third parties to achieve timely Year 2000 compliance could
have a material adverse effect on our business, operating results, and financial
position.
If widespread failures occur, we believe the worst case scenario would
include
- the failure of our operating system, on which we maintain our
inventory records, accounts payable, accounts receivable,
order fulfillment, and other information vital to the
operation of our business,
- the failure of the servers hosting the goracing.com network,
resulting in the inability of users to connect to the
goracing.com network or to purchase products from us,
- the failure of systems maintained by our critical suppliers
and shippers, which could disrupt our ability to obtain or
ship our products in a timely manner, and
- the failure of third-party credit card systems, resulting in
the inability of our customers to use their credit cards to
purchase products from us.
Any such worst case scenario, if not quickly remedied, would have a
material adverse effect on our business. We have developed contingency plans to
address the failure of our software or systems as a result of
31
<PAGE> 34
Year 2000 issues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."
RIGHTS TO ACQUIRE SHARES WILL RESULT IN DILUTION TO OTHER HOLDERS OF OUR COMMON
STOCK.
As of December 20, 1999, options to acquire a total of approximately
996,400 shares of our common stock were outstanding under our stock option
plans. We also offer our employees the opportunity to buy our common stock at a
discount under our employee stock purchase plan. Holders of our subordinated
notes have the right to convert their notes into an aggregate of 2,074,688
shares of common stock at a conversion price of $48.20 per share. Holders of
stock options, employees who participate in the purchase plan, and holders of
subordinated notes will have the opportunity to profit from an increase in the
market price of our common stock, with resulting dilution in the interests of
other holders of common stock. The existence of such stock options, notes, and
our purchase plan could adversely affect the terms on which we can obtain
additional financing, and the option holders, note holders, and purchase plan
participants can be expected to buy shares at a time when we, in all likelihood,
would be able to obtain additional capital by offering shares of common stock on
terms more favorable to us than those provided by such options, notes, and the
purchase plan.
SALES OF ADDITIONAL SHARES OF COMMON STOCK COULD HAVE A DEPRESSIVE EFFECT ON THE
MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of common stock by our shareholders, or
even the potential for such sales, may have a depressive effect on the market
price of our common stock. Of the 16,937,419 shares of common stock outstanding
as of December 20, 1999, 14,741,546 shares currently are eligible for resale in
the public market without restriction or further registration unless held by an
"affiliate" of our company, as that term is defined under applicable securities
laws. The 2,195,873 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 laws, or pursuant to an exemption therefrom. We have registered an
aggregate of approximately 472,300 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. Generally, under Rule
144, each person 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 us or an affiliate of our 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 our then-outstanding common stock or the average weekly
trading volume for the four weeks prior to the proposed sale of such shares.
Approximately 1,950,000 shares held by certain of our officers and directors
currently are available for sale under Rule 144.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF THE ACQUISITION
WOULD BE IN THE BEST INTERESTS OF SHAREHOLDERS.
Our Amended and Restated Articles of Incorporation, 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 our
company, even when those attempts may be in the best interests of our
shareholders. The Amended and Restated Articles of Incorporation also authorize
our 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.
OUR OPERATING RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS REPORT.
Some of the statements and information contained in this Report
concerning future, proposed, and anticipated activities of our company,
anticipated trends with respect to our revenue, operating results, capital
resources, and liquidity or with respect to the markets in which we compete 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 that term is defined in the securities laws. Forward-looking
statements, by their very nature, include risks and uncertainties, many of which
are beyond our control. Accordingly, actual results may differ, perhaps
materially, from those expressed in or implied by such forward-looking
statements. Factors that
32
<PAGE> 35
could cause actual results to differ materially include those discussed
elsewhere under this Item 1, "Special Considerations."
ITEM 2. PROPERTIES
We lease a newly constructed, approximately 140,000 square foot
building in Phoenix, Arizona. We use approximately 38,000 square feet of this
facility for our 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.
We lease a newly constructed, approximately 65,000 square foot building
in Tempe, Arizona for our goracing operations. The initial term of the lease
expires in October 2009, with two five-year renewal options.
We also lease a newly constructed, approximately 121,000 square foot
facility in the Charlotte, North Carolina, vicinity for our operations in that
area. We utilize approximately 42,000 square feet of the new facility for
offices and approximately 79,000 square feet for warehouse space and
distribution operations. The initial term of the lease expires in June 2018,
with four five-year renewal options.
We currently lease two facilities in Atlanta, Georgia, for our Image
Works operations. One facility consists of approximately 77,400 square feet, of
which we utilize 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 we utilize 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 2001.
We own a newly constructed, approximately 55,000 square foot facility
in Aachen, Germany, for our MiniChamps operations. We utilize approximately
39,000 square feet of this facility for our European warehouse and distribution
operations and approximately 16,000 square feet for office space.
We lease approximately 10,000 square feet of office space in the
London, England metropolitan area for our international licensing and apparel
distribution operations. The lease on this office expires in December 2009.
ITEM 3. LEGAL PROCEEDINGS
On March 4, 1997, two class action lawsuits were filed against our
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. We were named as a defendant based upon actions alleged to have been taken
by Sports Image and Creative Marketing & Promotions, Inc. prior to our
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 July 31,1997, we acquired all of the outstanding capital stock of
RYP, which is another defendant in the motorsports merchandise antitrust
litigation. Accordingly, we 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 excludes attorneys fees and certain other costs and expenses that
we may incur in defending or settling this matter.
The plaintiffs requested injunctive relief and monetary damages of
three times an unspecified amount of damages that the plaintiffs claim to have
actually suffered. In order to avoid further expense and the distraction of our
management that protracted litigation might create, on September 30, 1999, our
company and the plaintiffs
33
<PAGE> 36
entered into a memorandum of understanding with respect to the settlement of
this lawsuit. Final settlement of this matter will be subject to the negotiation
and execution of definitive settlement agreements, as well as approval by the
court. In connection with the memorandum of understanding, we recorded a
non-recurring pretax charge of $3.6 million during the fourth quarter of fiscal
1999 to reflect the financial terms of the proposed settlement, as well as legal
and other expenses related to the lawsuit and proposed settlement.
On November 30, 1999, a class action lawsuit was filed against our
company in the United States District Court for the District of Arizona, case
No. CIV'99 2106 PHXROS. Fred W. Wagenhals and Tod J. Wagenhals, directors and
officers of our company, and Christopher S. Besing, a former director and
officer of our company, also were named as defendants. The lawsuit alleges that
our company and the other defendants violated the Securities Exchange Act of
1934 by (a) making allegedly false statements about the state of our business
and the shipment of certain products to a customer, or (b) participating in a
fraudulent scheme that was intended to inflate the price of our common stock.
The alleged class of plaintiffs consists of all persons who purchased our
publicly traded securities between July 27, 1999 and November 4, 1999. The
plaintiffs are requesting an unspecified amount of monetary damages. We intend
to vigorously defend the claims asserted in the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
34
<PAGE> 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our 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 our common stock on the Nasdaq
National Market for the calendar periods indicated.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH LOW
<S> <C> <C>
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............................................ 37.63 18.63
1999:
First Quarter............................................. $48.00 $27.88
Second Quarter............................................ 42.00 26.88
Third Quarter............................................. 37.06 17.75
Fourth Quarter (through December 20, 1999)................ 23.69 9.25
</TABLE>
As of December 20, 1999, there were approximately 370 holders of record
of our common stock. On December 20, 1999, the closing sales price of our common
stock on the Nasdaq National Market was $9.25 per share.
35
<PAGE> 38
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for
the five years ended September 30, 1999 are derived from our 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 Consolidated Financial Statements
and the Notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1995 1996 1997(1) 1998(2) 1999(3)
------------ ---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Collectibles........................ $ 23,443 $ 40,904 $ 68,932 $ 142,026 $ 214,429
Apparel and souvenirs............... 1,190 1,961 60,430 106,712 119,922
Other(4)............................ 1,498 1,351 1,018 3,139 8,094
------------ ---------- ---------- --------- ----------
Net sales......................... 26,131 44,216 130,380 251,877 342,445
Cost of sales.......................... 15,882 25,296 80,995 157,079 210,768
------------ ---------- ---------- --------- ----------
Gross profit........................... 10,249 18,920 49,385 94,798 131,677
Selling, general and administrative
expenses............................ 6,115 9,262 24,564 45,344 68,036
Settlement costs (5)................... -- -- 5,400 950 3,600
Amortization of goodwill and other
intangibles......................... 4 4 1,286 4,392 6,818
------------ ---------- ---------- --------- ----------
6,119 9,266 31,250 50,686 78,454
------------ ---------- ---------- --------- ----------
Income from operations................. 4,130 9,654 18,135 44,112 53,223
Interest income (expense) and other,
net................................. 24 216 (1,225) (3,134) (6,328)
------------ ---------- ---------- --------- ----------
Income before provision for
income taxes........................ 4,154 9,870 16,910 40,978 46,895
Provision for income taxes............. 1,384 3,917 6,764 16,391 18,526
------------ ---------- ---------- --------- ----------
Net income............................. $ 2,770 $ 5,953 $ 10,146 $ 24,587 $ 28,369
============ ========== ========== ========= ==========
Net income per common
share, assuming dilution(6)......... $ 0.26 $ 0.46 $ 0.69 $ 1.48 $ 1.65
============ ========== ========== ========= ==========
Weighted average number of
common shares, assuming
dilution(6)......................... 10,899 13,028 14,624 16,647 19,179
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(7).. 14.8x 44.7x 8.2x 8.2x 7.7x
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital........................ $ 11,922 $ 18,094 $ 56,975 $ 86,939 $ 107,797
Total assets........................... 23,351 31,649 141,325 305,934 335,747
Total debt............................. 288 365 22,586 135,596 111,921
Shareholders' equity................... 18,890 26,996 103,168 136,432 172,991
</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."
(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
36
<PAGE> 39
of their respective dates of acquisition. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations Overview."
(3) Fiscal 1999 includes the results of operations of IPG, Tech 2000, and
Goodsports, beginning as of their respective dates of acquisition. See
Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview."
(4) Includes (a) the revenue of our mini vehicle operations through the
discontinuation of those operations in March 1995, and (b) royalty and
license fees beginning in fiscal 1997. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
(5) Represents (a) a one-time charge of approximately $5.4 million for
settlement costs and related legal and other expenses in fiscal 1997,
(b) a one-time charge of approximately $950,000 for settlement costs
and related legal and other expenses in fiscal 1998, and (c) a one-time
charge of approximately $3.6 million for settlement costs and related
legal and other expenses in fiscal 1999.
(6) 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."
(7) 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
We design and market licensed motorsports products, including die-cast
scaled replicas of motorsports vehicles, apparel, and souvenirs. We also operate
"goracing.com," which provides worldwide motorsports-related news and
information, an online meeting place and community for motorsports fans, and an
extensive e-commerce marketplace for motorsports-related die-cast collectibles,
apparel, and souvenirs. We also develop promotional programs for sponsors of
motorsports that feature our die-cast replicas or other products and that are
intended to increase brand awareness of the products or services of the
corporate sponsors. Third parties manufacture all of our motorsports
collectibles and most of our apparel and souvenirs, generally utilizing our
designs, tools, and dies. We screen print and embroider a portion of the
licensed motorsports apparel that we sell.
Our company was incorporated in Arizona in May 1992 and we began
marketing die-cast collectibles in July 1992. In August 1994, we acquired
certain assets and liabilities of Fan Fueler, Inc. and began marketing licensed
motorsports consumer products. During fiscal 1993 and 1994 and the first two
quarters of fiscal 1995, we designed and marketed pedal, electric, and
gas-powered mini vehicles, primarily as specialty promotional items. We sold the
assets related to our mini vehicle operations in March 1995.
In November 1996, we acquired Sports Image and in January 1997 we
acquired Motorsport Traditions, both of which marketed and distributed licensed
motorsports apparel, die-cast collectibles, and other souvenir items. In July
1997, we acquired RYP, which had operations similar to those of Sports Image and
Motorsport Traditions. In July 1997, we also acquired Image Works, which
manufactures and markets licensed motorsports apparel through the
mass-merchandising markets. We acquired certain assets and assumed certain
liabilities related to the mini-helmet collectible business of Simpson in August
1997. Following these acquisitions, we took a number of actions intended to
integrate the operations of the acquired companies with our existing operations
and to reduce overall selling, general, and administrative expenses associated
with the acquired entities. These efforts had a meaningful impact on our results
of operations beginning in the second half of fiscal 1997.
In December 1997, we completed an acquisition in which we acquired
assets related to sales of motorsports merchandise licensed by NASCAR driver
Rusty Wallace. In December 1997, we also acquired the assets related to certain
"Revell" trademarked die-cast products. Our company and Revell also entered into
a 10-year license agreement and a long-term strategic alliance involving
extensive marketing and distribution arrangements.
37
<PAGE> 40
In January 1998, we acquired the assets and assumed certain liabilities
of Brookfield, which distributes various motorsports collectibles and other
die-cast replicas. In May 1998, we acquired a majority interest in Chase, which
licenses apparel and clothing accessories that bear "Chase" branded marks. In
August 1998, we 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, we acquired a majority interest in Performance Plus, which
develops and markets driver-endorsed nutritional products, including vitamins,
energy bars, and energy drinks.
In October 1998, we acquired IPG, which expanded our resources and
ability to develop promotional programs for corporate sponsors of motorsports.
In November 1998, we acquired Tech 2000, which operates the goracing.com
network. In January 1999, we acquired Goodsports, which markets and distributes
licensed Formula One apparel and related products.
During fiscal 1999, we significantly expanded our emphasis on
developing the Internet as an important distribution channel for our products.
In February 1999, we launched our e-commerce Web sites dedicated to sales of our
products, as well as SpeedMall, which includes Web sites that sell motorsports
and automotive-related products offered by other companies. In October 1999, we
acquired Fantasy Sports Enterprises, which develops and operates "fantasy" auto
racing and other sports-related games via the Internet and by traditional means.
We believe that the acquisitions described above provide us with
enhanced revenue opportunities as a result of the synergies created by expanded
product offerings and additional distribution channels. For example, in fiscal
1997 we began developing new lines of licensed motorsports apparel and souvenirs
for exclusive sales through our Collectors' Club. These acquisitions also
provide opportunities for additional sales growth of our die-cast, apparel, and
other products through trackside sales, corporate promotional programs, our
e-commerce Web sites and fan clubs.
Prior to the fiscal 1997 and 1998 acquisitions, our revenue consisted
primarily of sales of die-cast collectibles. The revenue of the businesses
acquired during fiscal 1997 and 1998 consisted primarily of sales of either
die-cast or other collectibles or licensed motorsports apparel and souvenirs. As
a result of these acquisitions and our subsequent efforts to develop new product
lines and distribution channels, sales of collectible products represented
approximately 63% of net sales in fiscal 1999 and sales of apparel and souvenirs
represented approximately 35% of net sales in fiscal 1999.
In fiscal 1995 and 1996, other revenue consisted primarily of sales
from the mini-vehicle operations that we sold in fiscal 1995. Beginning in
fiscal 1997, other revenue consists of royalty income derived from apparel
licensing activities by Chase and our license agreement with Hasbro, as well as
revenue from Internet advertising and Web site development.
Our 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 our cost of sales as a
percentage of net sales include
- the overall percentage of net sales represented by sales of
die-cast collectible products, which typically carry higher
gross margins than our other products,
- 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,
- the effect of amortizing the fixed cost components of cost of
sales, primarily depreciation of tooling and dies, over
varying levels of net sales, and
- fluctuations in royalty rates associated with corporate
promotional programs.
Increased sales of licensed apparel and souvenirs following the fiscal
1997 acquisitions resulted in lower overall gross margins during fiscal 1997 and
1998 as a result of lower gross margins generally associated with the
38
<PAGE> 41
acquired product lines. Sales of collectible products as a percentage of net
sales increased in fiscal 1999 as a result of the successful completion of
several large - scale corporate promotional programs. As a result, gross margins
improved slightly in fiscal 1999 as compared with fiscal 1997 and 1998.
Selling, general, and administrative expenses include general corporate
expenses. We anticipate that our ongoing efforts to consolidate our operations
and reduce operating costs will enable us to lower selling, general, and
administrative expenses related to our core business operations. We anticipate
that expenses related to our Internet operations, however, will offset any
savings we achieve in other areas. We recorded goodwill and other intangibles of
approximately $50.0 million in connection with the fiscal 1997 acquisitions,
$61.8 million from the acquisitions completed in fiscal 1998, and approximately
$11.1 million from the acquisitions completed in fiscal 1999. We are amortizing
the goodwill and other intangibles over three to 25 years.
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,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales
Collectibles......................... 89.7% 92.5% 52.9% 56.4% 62.6%
Apparel and souvenirs................ 4.6 4.4 46.3 42.4 35.0
Other................................ 5.7 3.1 0.8 1.2 2.4
------ ------ ----- ------ ------
Net sales.......................... 100.0 100.0 100.0 100.0 100.0
Cost of sales........................... 60.8 57.2 62.1 62.4 61.5
------ ------ ----- ------ ------
Gross profit............................ 39.2 42.8 37.9 37.6 38.5
Selling, general and administrative
expenses............................. 23.4 21.0 18.8 18.0 19.9
Settlement costs(1)..................... --- --- 4.2 0.4 1.1
Amortization of goodwill and other
intangibles.......................... --- --- 1.0 1.7 2.0
------ ------ ----- ------ ------
Income from operations.................. 15.8 21.8 13.9 17.5 15.5
Interest income (expense) and other,
net.................................. 0.1 0.5 (0.9) (1.2) (1.2)
------ ------ ------ ------- -------
Minority interest in earnings........... --- --- --- 0.1 0.6
Income before provision for
income taxes......................... 15.9 22.3 13.0 16.3 14.3
Provision for income taxes.............. 5.3 8.8 5.2 6.5 5.4
------ ------ ----- ------ ------
Net income.............................. 10.6% 13.5% 7.8% 9.7% 8.3%
====== ====== ===== ====== ======
</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 1999 includes a one-time
charge of approximately $3.6 million for costs and other expenses related
to the settlement of a lawsuit. Excluding the one-time charge, fiscal 1999
income from operations, income before provision for income taxes, and net
income would have been 16.6%, 15.4%, and 8.9% of net sales, respectively.
39
<PAGE> 42
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1998
Net sales increased 36% to $342.4 million for the year ended September
30, 1999 from $251.9 million for the year ended September 30, 1998. We attribute
the improvement in sales during fiscal 1999 primarily to (1) our 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; (2) additional revenue from promotional programs for
die-cast, apparel, and souvenirs; (3) expanded sales through our retail
trackside operations and mass retail channels; (4) a full year's revenue from
our international operations; and (5) an increase in Collectors' Club
membership. The number of members in the Collectors' Club increased to
approximately 167,000 members at September 30, 1999 from approximately 148,000
members at September 30, 1998.
Gross profit increased to $131.7 million in fiscal 1999 from $94.8
million in fiscal 1998, representing 38.5% and 37.6% of net sales, respectively.
The increase in gross profit as a percentage of net sales resulted primarily
from (a) greater economies of scale as a result of the larger production runs
associated with the corporate promotional programs conducted during fiscal 1999,
which decreased costs of sales as a percentage of sales for those products; and
(b) an increase in sales, as a percentage of total sales, of die-cast products,
which typically provide higher gross margins than our other products.
Selling, general and administrative expenses increased to $68.0 million
in fiscal 1999 from $45.3 million in fiscal 1998, representing 19.9% and 18.0%
of net sales, respectively. The increase in such expenses as a percentage of
sales resulted primarily from (a) development and other operating costs related
to the launch of our Internet operations in fiscal 1999; (b) increased
depreciation expenses of approximately $6.3 million associated with capitalized
costs added in fiscal 1998, and (c) increased expenses for facilities and
personnel, particularly in our Charlotte operations.
Settlement costs of $3.6 million for the year ended September 30, 1999
resulted from a one-time charge for the settlement of a lawsuit and related
legal charges. This settlement represented 1.1% of net sales in fiscal 1999.
Amortization of goodwill and other intangibles increased to $6.8
million for the year ended September 30, 1999 from $4.4 million for the year
ended September 30, 1998. The increase in amortization of goodwill and other
intangibles is related to (1) an approximately $800,000 expense recorded in
connection with the acquisitions of Tech 2000 and Goodsports during fiscal 1999,
and (2) an additional $1.6 million of amortization of goodwill and other
intangibles associated with our fiscal 1998 acquisitions, which were expensed
over the entire year in fiscal 1999. We amortize the goodwill and other
intangible assets over periods of three to 25 years.
Interest income (expense) and other, net, changed to a net expense of
approximately $4.4 million in fiscal 1999 from approximately $2.9 million in
fiscal 1998. The change was primarily attributable to an increase in interest
expense of approximately $1.4 million related to the convertible subordinated
notes.
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. We
attribute the improvement in sales during fiscal 1998 primarily to (1) revenue
from our fiscal 1997 and 1998 acquisitions, (2) our 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 (3) an increase in membership in the 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.
40
<PAGE> 43
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. We 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. We are amortizing
the goodwill and other intangibles over periods of three to 25 years.
Interest income (expense) and other, net, changed to a net expense of
approximately $2.9 million for fiscal 1998 from a net expense of 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 subordinated notes in March 1998, offset by an
increase in interest income of approximately $1.8 million related to proceeds
from our common stock offering in June 1997 and the sale of the subordinated
notes in March 1998.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth the unaudited pro forma income statement
data of our company for the fiscal years ended September 30, 1998 and 1999,
giving effect to (a) the acquisitions of the Rusty Wallace acquisition, the
Revell acquisition, and the acquisitions of Brookfield, Chase, MiniChamps,
Performance Plus, IPG, Tech 2000, and Goodsports as if they had occurred on
October 1, 1997, using the purchase method of accounting for business
combinations, except for IPG, which was accounted for as a pooling of interests,
and (b) the conversion of the 4-3/4% Convertible Subordinated Notes due 2005,
which are convertible at the option of the holders into shares of common stock.
The conversion of the notes had an anti-dilutive effect on earnings per share
for fiscal year 1998 and therefore are not assumed converted during that period.
The unaudited pro forma income statement data presented below does not purport
to represent what our actual results of operations would have been had those
acquisitions occurred on October 1, 1997 or to project our results of operations
for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales....................................................... $ 292,753 $ 345,245
Net income(1)................................................... 24,043 27,871
Interest, net of tax, on convertible subordinated notes
payable....................................................... -- 3,216
---------- ----------
Net income attributable to diluted shares outstanding(1)........ 24,043 31,087
Net income per common share, assuming dilution(1)............... $ 1.44 $ 1.62
</TABLE>
- --------------------
(1) Pro forma amounts for fiscal 1998 include the one-time charge of
approximately $950,000, or $0.03 per share, for legal settlement costs
and related charges. Pro forma amounts for fiscal 1999 include the
one-time charge of approximately $3.6 million, or $0.11 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 pro forma results of operations for the years ended September 30, 1998 and
1999 reflect the amortization of goodwill and other intangibles arising from the
fiscal 1998 and fiscal 1999 acquisitions and include additional interest expense
associated with any financing of the acquisitions.
41
<PAGE> 44
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, 1998 and 1999. All quarterly information was obtained from unaudited
financial statements not otherwise contained in this Report. We believe 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.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1998
----------------------------------------------------------------
1ST QUARTER 2ND QUARTER(1) 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>
<TABLE>
<CAPTION>
FISCAL 1999
------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER (2)
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Net sales.............................. $ 71,566 $ 78,928 $ 101,524 $ 90,427
Gross profit........................... 25,735 29,995 40,836 35,111
Income from operations................. 9,678 12,393 20,957 10,195
Net income............................. $ 4,923 $ 6,504 $ 11,570 $ 5,372
Net income per common share,
assuming dilution................... $ 0.29 $ 0.38 $ 0.64 $ 0.31
Weighted average number of common
shares, assuming dilution........... 16,878 17,179 19,297 17,137
</TABLE>
- --------------------
(1) 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.
(2) Includes a one-time charge of approximately $3.6 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 fourth quarter
of fiscal 1999 would have been approximately $13,795, $7,532, and
$0.44, respectively. We had previously accounted for the Tech 2000
acquisition as a pooling of interests. We subsequently determined that
the transaction should be accounted for as a purchase. The effect of
reflecting the Tech 2000 acquisition as a purchase rather than a
pooling is immaterial to our quarterly and year-end operating results.
Our 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 1998
and 1999 acquisitions, we believe that quarter-to-quarter comparisons of our
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 (our
third and fourth fiscal quarters) generally are characterized by higher sales of
motorsports products. Our limited Internet operating history and the new and
rapidly evolving Internet markets make it difficult to predict the effects of
seasonality on our business in future periods.
42
<PAGE> 45
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position increased to $106.6 million at September
30, 1999 from $86.9 million at September 30, 1998. The increase of $19.7 million
is primarily attributable to increased inventories and accounts receivables and
decreased accounts payable through results of operations.
Capital expenditures for the year ended September 30, 1999 totaled
approximately $26.7 million, of which we utilized approximately $10.0 million
for our continued investment in tooling.
During the year ended September 30, 1999, we issued 332,922 shares of
common stock upon the exercise of stock options, resulting in total proceeds to
us of approximately $3.8 million.
On March 24, 1998, we sold $100.0 million of 4-3/4% Convertible
Subordinated Notes due 2005. The subordinated 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. The
notes mature on April 1, 2005. The notes are general unsecured obligations of
our company, subordinated in right of payment to all existing and future senior
indebtedness, as defined in the notes. The indenture governing the notes does
not limit or prohibit our company or our subsidiaries from incurring additional
debt, including senior indebtedness. We have the option to 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 subordinated notes will have the right to require us to repurchase all or
any part of such holders' notes at 100% of their principal amount, plus accrued
and unpaid interest.
On August 5, 1998, we entered into an amended and restated credit
agreement with First Union National Bank of North Carolina. 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 our 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, 2000 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. Our domestic
subsidiaries have guaranteed our obligations under the Credit Facility. The Line
of Credit contains provisions that require us to comply with certain financial
covenants and that limit our ability to incur additional debt or make certain
investments, to sell assets, to engage in certain mergers or consolidations, or
to pay dividends. We did not have any outstanding borrowings under the Line of
Credit as of September 30, 1999. We had outstanding purchase commitments of
approximately $6.0 million under the Letter of Credit/BA Facility as of
September 30, 1999.
On January 2, 1997, we issued an aggregate of $20.0 million principal
amount of senior notes to three insurance companies. The senior notes bore
interest at the rate of 8.05% per annum, and matured in January 1999. We used
available cash resources, including the proceeds from the convertible
subordinated notes, to repay the senior notes at maturity.
On October 27, 1998, we acquired all of the outstanding stock of IPG in
exchange of 35,000 shares of our restricted common stock. IPG creates and
develops promotional programs for corporate sponsors of motorsports.
On November 23, 1998, we acquired Tech 2000, a privately held Internet
company, through a merger of Tech 2000 and our wholly owned subsidiary goracing
Interactive Services, Inc. (formerly "Action Interactive, Inc."). Under the
terms of the merger agreement, we issued 137,922 shares of restricted common
stock in exchange for all of the issued and outstanding common stock of Tech
2000.
43
<PAGE> 46
On January 11, 1999, we acquired all of the outstanding stock of
Goodsports Holdings Pty. Ltd., an Australian-based marketer of Formula
One-related apparel and other merchandise. The consideration paid by our company
consisted of the assumption of certain liabilities and contingent payments of up
to $3.6 million to be paid over a four-year period based upon the attainment of
certain performance objectives.
We formed goracing.com, inc. on May 5, 1999. On July 1, 1999, we
contributed to goracing all of our interest in (a) the Collectors' Club, (b)
goracing Direct Sales, LLC, which provides Internet distribution services for
all of our product lines other than those sold through the Collectors' Club, and
(c) goracing Interactive Services, Inc. (formerly Tech 2000), which develops and
operates the Web sites that constitute the goracing.com network. We contributed
the operations of the Collectors' Club to goracing along with the other Internet
operations because of the increasing migration of club members to use of the
Internet to order our products and the importance of providing seamless order
fulfillment services to them. On July 6, 1999, goracing.com, inc. filed a
registration statement with the Securities and Exchange Commission for an
initial public offering of its Class A common stock. In December 1999, we
announced that we would indefinitely postpone the goracing public offering. We
will record non-recurring charges of up to $2.0 million in the first quarter of
fiscal 2000 for expenses incurred in connection with the proposed offering, as
well as various management restructuring charges that occurred during the first
quarter of fiscal 2000.
In August 1999, goracing entered into an agreement with a financial
institution under which goracing has available up to $7.0 million for the
purposes of acquiring capital equipment under operating leases. As of September
30, 1999, goracing had executed operating leases totaling approximately $3.7
million under this agreement. We have guaranteed goracing's obligations under
this agreement.
In December 1999, our Board of Directors approved a program in which we
may repurchase up to $40.0 million of our common stock in the open market or in
privately negotiated transactions. The initial term of the repurchase program
will be one year, subject to extension by the Board of Directors depending on
market conditions.
We are a defendant in various lawsuits, including a securities class
action lawsuit filed in November 1999. See Item 3, "Legal Proceedings." We have
agreed to settle one lawsuit and we recorded a non-recurring pretax charge of
$3.6 million in the fourth quarter of fiscal 1999 to reflect the financial terms
of the proposed settlement, as well as legal and other expenses related to the
lawsuit and proposed settlement. The final settlement will be subject to the
negotiation and execution of definitive settlement agreements, as well as court
approval. We have not made any provisions in our financial statements with
respect to the securities class action lawsuit we are defending. The imposition
of any additional damages in the lawsuit we have agreed to settle or the
imposition of damages in the securities class action lawsuit could have a
material adverse effect on our results of operations and financial position.
From time to time we also are subject to certain asserted and
unasserted claims encountered in the normal course of business. We believe that
the resolution of these matters will not have a material adverse effect on our
financial position or results of operations. We cannot provide assurance,
however, that damages that result in a material adverse effect on our financial
position or results of operation will not be imposed in these matters.
We believe that our current cash resources, our credit facility with
First Union, goracing's commitment for capital equipment lease financing, and
expected cash flow from operations will be sufficient to fund our capital needs
during the next 12 months at our current level of operations, apart from capital
needs resulting from additional acquisitions and the capital required to enable
goracing to fully execute its growth strategy. goracing will require additional
capital from our capital resources or from outside sources to be able to fully
execute its growth strategy. We may be required to obtain additional capital to
fund the planned growth of other aspects of our business 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 our 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 our business.
44
<PAGE> 47
YEAR 2000 COMPLIANCE
We are heavily dependent upon complex computer software and systems for
our operations. Many existing computer programs and systems use only two digits
to identify a year in the date field. These programs and systems were designed
and developed without considering the impact of the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at January 1, 2000.
State of Readiness
All of our material operating software and our information technology
systems and other systems, including telecommunications and warehouse systems,
were developed or are supported either by our internal staff or by third-party
vendors. During 1997, we engaged Computer Associates International, Inc. to
commence a program to install new information technology, or IT, and non-IT
systems including hardware and software programs that are intended to integrate
management information systems throughout our organizational structure, as well
as to comply with Year 2000 requirements. As of the date of this Report, the
installation is complete and operational with respect to those systems that we
believe were not Year 2000 compliant. We believe that our new software systems
will comply with the Year 2000 requirements, and we do not anticipate any
material disruption to our operations as a result of any failure of any of our
systems to function properly beyond December 31, 1999.
We are coordinating the delivery, receipt, and summary of results of
Year 2000 surveys sent for the purpose of determining Year 2000 readiness of our
significant vendors and suppliers. We have determined that there are 111
significant vendors and suppliers. Of the 111 surveys sent to significant
vendors and suppliers, 35 have provided written affirmation that they are Year
2000 compliant. Another 50 have indicated, through written response, that their
compliance programs are ongoing. These vendors and suppliers have indicated that
their compliance programs will be complete by the end of the fourth quarter of
1999. We continue to monitor the status of all our significant vendors and
suppliers to minimize the risk of any material adverse effect on our operations
that may result from Year 2000 failures of any of our significant vendors or
suppliers. We cannot assure you, however, that our vendors or service providers
have or will have operating software and systems that are Year 2000 compliant.
Risks
The failure of our software or systems to be Year 2000 compliant could
prevent us from being able to process or fulfill orders from our customers,
could cause users of our Web sites to consider alternative Web community and
content providers, or could disrupt our financial and management controls and
reporting systems. We believe the most reasonably likely worst-case scenario
resulting from a Year 2000 problem affecting our systems would be a short-term
inability to process orders, billings, payables, and payroll in a timely manner,
as we would have to resort to alternative manual procedures. However, in view of
our Year 2000 readiness efforts to date, we believe significant disruptions
within our systems are unlikely. Another worst-case scenario could arise because
our customers make a significant portion of purchases of merchandise from us
with credit cards. Our operations may be materially and adversely affected to
the extent our customers are unable to use their credit cards due to Year 2000
issues that are not rectified by the end of calendar year 1999.
Third parties in Asia manufacture a significant portion of our
products. Because the manufacturing processes utilized generally do not rely
upon date-related information, we currently believe that a failure on the part
of our overseas manufacturers to bring their processes and equipment into Year
2000 compliance does not represent a material risk to our ability to obtain
products on a timely basis. Our overseas manufacturers may be at risk with
respect to suppliers of necessary resources, particularly suppliers of power,
water, and telecommunications, if those suppliers are not Year 2000 compliant.
Extended disruptions in the operations of our overseas manufacturers' or
companies that ship our products would materially and adversely impact our
ability to obtain our products on a timely basis.
To date, we have not identified any significant exposure to Year 2000
problems outside of the information technology issues identified above. We have
developed contingency plans to address service interruptions and other failures
that may occur as a result of Year 2000 issues. These contingency plans include
45
<PAGE> 48
the development of manually operated alternative procedures, identification of
alternative vendors, development of emergency backup and recovery procedures for
lost data, and development of plans as a result of our assessment of customer
Year 2000 issues, as noted above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate risk associated
with our credit instruments and foreign currency exchange rate risk associated
with our foreign operations. We do not currently use and we have not
historically used derivative financial instruments to manage or reduce market
risk.
At September 30, 1999, we had $100 million outstanding under our
convertible subordinated notes at an interest rate of 4.75%, and approximately
$12.0 million of debt outstanding at various rates and terms, principally under
promissory notes and capital leases. Interest rates on these credit instruments
are fixed and comparable to current market rates.
The functional currency for our foreign operations is the Deutschmark
and British pound sterling. As such, changes in exchange rates between those
currencies and the U.S. dollar could adversely affect our future earnings. Given
the level of income we currently derive from our foreign operations, we consider
this exposure to be minimal. A 10% change in exchange rates would not have a
significant impact on our future earnings.
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 our
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 for
our 2000 Annual Meeting of Shareholders. The information required by this Item
relating to our executive officers is included in Item 1, "Our 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 our 2000 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 our 2000 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 our 2000 Annual Meeting of Shareholders.
46
<PAGE> 49
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
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1 First Amended and Restated Articles of Incorporation of Registrant(1)
3.2 Amended and Restated Bylaws of Registrant(1)
4.1 Form of Certificate of Common Stock(2)
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(3)
10.4.2 1993 Stock Option Plan, as amended and restated through January 16, 1997(4)
10.8 Form of Indemnification Agreement entered into with the Directors of the Registrant(2)
10.27 Manufacturing Agreement between the Company and Early Light International (Holdings) Ltd. dated December 5,
1994(5)
10.37 License Agreement dated as of November 7, 1996, among SII Acquisition, Inc., Dale Earnhardt, and Action
Performance Companies, Inc.(6)
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(7)
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(3)
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(8)
10.49 Standard Form Industrial Lease dated April 8, 1997, between Hewson/Breckner-Baseline, L.L.C. and Action Performance
Companies, Inc.(9)
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park Partners, LLC and Sports Image, Inc.(9)
10.52 1998 Non-qualified Stock Option Plan(3)
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.(3)
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.(3)
10.55 Common Stock Purchase Warrant dated October 7, 1998, issued to the National Association for Stock Car Auto Racing,
Inc.(10)
10.56 1999 Employee Stock Purchase Plan(11)
</TABLE>
47
<PAGE> 50
<TABLE>
<S> <C>
10.57 Standard Form Industrial Lease (Single Tenant) dated June 28, 1999, between H-B Tempe, L.L.C. and Action
Performance Companies, Inc.
10.58 Master Lease Agreement dated August 9, 1999 between General Electric Capital Corporation and goracing.com, inc.,
together with Schedule No. 01, Commitment Letter dated October 4, 1999, and Corporate Guaranty by Action
Performance Companies, Inc.
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(12)
27.1 Financial Data Schedule
</TABLE>
- --------------------
(1) 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.
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 and amendments thereto (Registration No.
33-57414-LA).
(3) 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.
(4) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 1997, as filed with the Securities and Exchange
Commission on May 15, 1997.
(5) 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.
(6) 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.
(7) 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.
(8) Incorporated by reference to the Registrant's Form 10-K for the
year ended September 30, 1998, as filed with the Securities and
Exchange Commission on December 29, 1998.
(9) 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.
(10) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended December 31, 1998, as filed with the Securities and
Exchange Commission on February 16, 1999.
(11) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-82879).
(12) Incorporated by reference to the Registrant's Registration
Statement on Form S-3 (Registration No. 333-53413).
48
<PAGE> 51
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, 1999 /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, 1999
- ------------------------------------ Executive Officer (Principal Executive Officer)
Fred W. Wagenhals
/s/ Tod J. Wagenhals Executive Vice President, and Director December 28, 1999
- ------------------------------------
Tod J. Wagenhals
/s/ David A. Husband Executive Vice President - Finance and December 28, 1999
- ------------------------------------ Accounting and Chief Financial Officer
David A. Husband (Principal Financial and Accounting Officer)
/s/ Melodee L. Volosin Executive Vice President - Sales and Director December 28, 1999
- ------------------------------------
Melodee L. Volosin
/s/ John S. Bickford Vice President - Strategic Alliances and Director December 28, 1999
- ------------------------------------
John S. Bickford
/s/ Jack M. Lloyd Director December 28, 1999
- ------------------------------------
Jack M. Lloyd
/s/ Robert H. Manschot Director December 28, 1999
- ------------------------------------
Robert H. Manschot
Director December __, 1999
- ------------------------------------
Edward J. Bauman
Managing Director of MiniChamps and Director December __, 1999
- ------------------------------------
Paul G. Lang
</TABLE>
49
<PAGE> 52
ACTION PERFORMANCE COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ................................................................. F-2
Consolidated Balance Sheets as of September 30, 1999 and 1998 ............................................ F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1999, 1998, and 1997 .............................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1999, 1998, and 1997 .............................................................. F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998, and 1997 .............................................................. F-6
Notes to Consolidated Financial Statements ............................................................... F-7
</TABLE>
F-1
<PAGE> 53
\ 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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
Phoenix, Arizona /s/ Arthur Andersen LLP
December 28, 1999.
F-2
<PAGE> 54
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 58,523 $ 60,867
Accounts receivable, net of allowance for doubtful accounts of $1,421
and $986, respectively ................................................... 44,988 36,314
Inventories ................................................................ 45,310 35,790
Prepaid royalties .......................................................... 7,271 5,745
Prepaid expenses and other assets .......................................... 2,953 4,961
--------- --------
Total current assets ..................................................... 159,045 143,677
PROPERTY AND EQUIPMENT, net ................................................... 56,162 46,053
GOODWILL AND OTHER INTANGIBLES, net ........................................... 111,634 106,146
OTHER ASSETS, net ............................................................. 8,906 10,058
--------- --------
$ 335,747 $305,934
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 20,127 $ 11,430
Accrued royalties .......................................................... 13,519 10,589
Accrued expenses and other ................................................. 14,889 10,973
Current portion of long-term debt .......................................... 2,713 23,746
--------- --------
Total current liabilities ................................................ 51,248 56,738
--------- --------
LONG-TERM DEBT:
Convertible subordinated notes ............................................. 100,000 100,000
Other long-term debt ....................................................... 9,208 11,850
--------- --------
Total long-term debt ..................................................... 109,208 111,850
--------- --------
MINORITY INTEREST ............................................................. 2,300 914
--------- --------
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; 16,929,085
and 16,423,238 shares issued and outstanding, respectively ............... 169 164
Additional paid-in capital ................................................. 102,555 91,974
Accumulated other comprehensive income (loss) .............................. (714) 1,682
Retained earnings .......................................................... 70,981 42,612
--------- --------
Total shareholders' equity ............................................... 172,991 136,432
--------- --------
$ 335,747 $305,934
========= ========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
<PAGE> 55
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales:
Collectibles ............................... $ 214,429 $ 142,026 $ 68,932
Apparel and souvenirs ...................... 119,922 106,712 60,430
Other ...................................... 8,094 3,139 1,018
--------- --------- ---------
Net sales ................................ 342,445 251,877 130,380
Cost of sales ................................. 210,768 157,079 80,995
--------- --------- ---------
Gross profit .................................. 131,677 94,798 49,385
--------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 68,036 45,344 24,564
Settlement costs ........................... 3,600 950 5,400
Amortization of goodwill and
other intangibles ........................ 6,818 4,392 1,286
--------- --------- ---------
Total operating expenses ................. 78,454 50,686 31,250
--------- --------- ---------
Income from operations ........................ 53,223 44,112 18,135
--------- --------- ---------
Other income (expense):
Minority interest in earnings .............. (1,930) (189) --
Interest income and other, net ............. 2,531 2,588 796
Interest expense ........................... (6,929) (5,533) (2,021)
--------- --------- ---------
Total other income (expense), net ........ (6,328) (3,134) (1,225)
--------- --------- ---------
Income before provision for income taxes ...... 46,895 40,978 16,910
Provision for income taxes .................... 18,526 16,391 6,764
--------- --------- ---------
NET INCOME 28,369 24,587 10,146
Other comprehensive income (loss).............. (2,396) 1,682 --
--------- --------- ---------
Comprehensive income (loss).................... $ 25,973 $ 26,269 $ 10,146
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic ...................................... $ 1.69 $ 1.52 $ 0.72
========= ========= =========
Diluted .................................... $ 1.65 $ 1.48 $ 0.69
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ...................................... 16,789 16,135 14,047
========= ========= =========
Diluted .................................... 19,179 16,647 14,624
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE> 56
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
---------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
---------- ------ -------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 ......... 12,609,769 $126 $ 18,991 $ 7,879 $ -- $ 26,996
Common stock issued in conjunction
with purchase of businesses ........ 765,542 8 10,041 -- -- 10,049
Common stock issued upon exercise
of options ........................ 296,092 3 1,708 -- -- 1,711
Common stock issued in
public offering ................... 2,085,000 21 49,822 -- -- 49,843
Tax benefit from stock options ...... -- -- 1,651 -- 1,651
Issuance of common stock in
private placements ................. 195,680 2 2,771 -- -- 2,773
Net income .......................... -- -- -- 10,146 -- 10,146
---------- ---- -------- ------- ------- ---------
BALANCE, SEPTEMBER 30, 1997 ......... 15,952,083 160 84,984 18,025 -- 103,169
Common stock issued upon exercise
of options ........................ 426,315 4 1,633 -- -- 1,637
Tax benefit from stock options ...... -- -- 4,100 -- -- 4,100
Issuance of common stock in
private placements ................ 44,840 -- 1,257 -- -- 1,257
Other comprehensive income,
translation adjustment ............ -- -- -- -- 1,682 1,682
Net income .......................... -- -- -- 24,587 -- 24,587
---------- ---- -------- ------- ------- ---------
BALANCE, SEPTEMBER 30, 1998 ......... 16,423,238 164 91,974 42,612 1,682 136,432
Common stock issued upon exercise
of options ........................ 332,922 3 3,835 -- -- 3,838
Tax benefit from stock options ...... -- -- 2,450 -- -- 2,450
Common stock issued in conjunction
with purchase of businesses ....... 172,925 2 4,296 -- -- 4,298
Other comprehensive (loss),
translation adjustment ............ -- -- -- -- (2,396) (2,396)
Net income .......................... -- -- -- 28,369 -- 28,369
---------- ---- -------- ------- ------- ---------
BALANCE, SEPTEMBER 30, 1999 ......... 16,929,085 $169 $102,555 $70,981 $ (714) $ 172,991
========== ==== ======== ======= ======= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE> 57
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 28,369 $ 24,587 $ 10,146
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ...................... 22,946 11,839 4,477
Undistributed earnings to minority
shareholders ..................................... 1,634 189 --
Change in assets and liabilities, net of
businesses acquired:
Accounts receivable .............................. (8,065) (12,937) (3,623)
Inventories ...................................... (9,067) (14,406) (5,009)
Prepaid royalties ................................ (3,725) (120) (2,672)
Prepaid expenses and other assets ................ (2,157) (1,233) (665)
Accounts payable ................................. 6,731 (373) (1,633)
Accrued royalties ................................ 2,931 4,106 2,395
Accrued expenses and other ....................... 8,323 6,004 917
-------- --------- --------
Net cash provided by operating activities ....... 47,920 17,656 4,333
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................ (26,693) (21,687) (11,192)
Proceeds from sale of equipment .................... 155 383 321
Acquisition of businesses less cash acquired
and other intangibles ............................. (4,738) (55,885) (11,082)
Collections (issuance) on notes receivable ......... 1,043 (15) --
-------- --------- --------
Net cash used in investing activities ............ (30,233) (77,204) (21,953)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit ....................... -- 9,600 4,879
Payments on line of credit ......................... -- (9,600) (10,279)
Net proceeds from issuance of
common stock ...................................... 3,838 1,637 54,327
Issuance of convertible subordinated notes, net of
offering expenses ................................. -- 96,500 --
Payments on long-term debt, net .................... (24,143) (7,096) (6,972)
-------- --------- --------
Net cash (used in) provided by financing activities (20,305) 91,041 41,955
-------- --------- --------
Effect of exchange rate changes on
cash and cash equivalents ........................ 274 56 --
-------- --------- --------
Net change in cash and cash equivalents ............ (2,344) 31,549 24,335
Cash and cash equivalents, beginning of year ....... 60,867 29,318 4,983
-------- --------- --------
Cash and cash equivalents, end of year ............. $ 58,523 $ 60,867 $ 29,318
======== ========= ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE> 58
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998, AND 1997
(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. 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.
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 through its Racing Collectables Club of
America; via electronic commerce through its "goracing.com" Web site; and
through mobile trackside souvenir stores, promotional programs for corporate
sponsors, and fan clubs.
(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 generally recognizes revenue upon shipment of product. 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.
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, 1999 and 1998 was approximately $65.0
million and $78.1 million, respectively, 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.
F-7
<PAGE> 59
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 diecast collectibles, apparel and other. Diecast
collectible inventory cost consist of purchased product and freight-in. Apparel
and other inventory costs consist of purchased product.
The Company depends upon third parties to manufacture all of its diecast
collectible and most of its apparel and other products. Most significantly, the
Company relies upon one manufacturer to produce approximately 68% of its
diecast collectible product. Any difficulty by this manufacturer to produce
and deliver diecast collectibles product could have an adverse effect on
the Company's results of operations.
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 thirty years.
Property and equipment consist of the following at September 30, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
Estimated
Useful
1999 1998 Life
--------- ---------- ---------
<S> <C> <C> <C>
Building and land .................................... $ 12,794 $ 6,207 30 years
Tooling and molds .................................... 40,293 30,217 1-5 years
Furniture, fixtures and equipment .................... 21,709 15,099 3-5 years
Autos and truck ...................................... 3,927 3,158 5 years
Leasehold improvements ............................... 4,534 2,984 10 years
---------- ---------
83,257 57,665
Less - accumulated depreciation ...................... (27,095) (11,612)
---------- ---------
$ 56,162 $ 46,053
========== =========
</TABLE>
Maintenance and repairs of approximately $738,000, $697,000, and $277,000 for
the years ended September 30, 1999, 1998, and 1997, respectively, were charged
to expense as incurred. The cost of renewals and betterments that materially
extend the useful lives of assets or increase their productivity are
capitalized.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations and is amortized using the straight-line method over
periods ranging from seven to twenty-five years. Other intangibles, which
consist of licenses and sponsorships, are amortized using the straight-line
method over their estimated useful lives, which range from three to 15 years.
Amortization expense of $6.8 million, $4.4 million, and $1.3 million is included
in the accompanying financial statements for the years ended September 30, 1999,
1998, and 1997, respectively. The following table sets forth the components of
goodwill and other intangibles as of September 30, 1999 and 1998, respectively
(in thousands).
<TABLE>
<CAPTION>
Amortization
Period (Years) 1999 1998
-------------- ---------- ---------
<S> <C> <C>
3-5 $ 3,882 $ 2,190
6-10 20,610 11,247
11-15 12,294 11,855
16-25 87,344 86,542
---------- ---------
124,130 111,834
Less accumulated amortization (12,496) (5,688)
---------- ---------
$ 111,634 $ 106,146
========== =========
</TABLE>
F-8
<PAGE> 60
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, 1999, 1998, and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Supplemental disclosures:
Interest paid ....................... $ 4,279 $ 4,690 $ 1,505
Income taxes paid ................... 12,052 10,600 5,396
Non-cash transactions:
Common stock issued in acquisitions . $ 4,298 $ -- $10,049
Debt and liabilities incurred or
assumed in acquisitions ........... 3,999 29,002 44,446
Acquisition of property and equipment
under notes payable and
capital leases .................... 1,078 2,961 1,515
Tax benefits on various common
stock options ..................... 2,450 4,100 1,651
Common stock issued in connection
with licensing and sponsorship
agreements ........................ -- 1,257 --
</TABLE>
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. The calculation of diluted net income per
common share for the years ended September 30, 1999, 1998, and 1997 are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Shares:
Weighted average number of common
shares outstanding ............................... 16,789 16,135 14,047
Additional shares assuming conversion of:
Stock options .................................... 315 512 577
Convertible subordinated notes payable ........... 2,075 -- --
------- ------- -------
Diluted weighted average shares
outstanding ...................................... 19,179 16,647 14,624
======= ======= =======
Net income ......................................... $28,369 $24,587 $10,146
Interest, net of tax, on convertible
subordinated notes payable...................... 3,216 -- --
------- ------- -------
Net income attributable to diluted
weighted average shares outstanding ............... $31,585 $24,587 $10,146
======= ======= =======
Diluted earnings per share ......................... $ 1.65 $ 1.48 $ 0.69
======= ======= =======
</TABLE>
F-9
<PAGE> 61
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income" issued by the Financial Accounting Standards Board ("FASB"). SFAS No.
130 specifies that components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes certain non-owner changes in equity
that are currently excluded from net income (i.e. foreign currency translation
adjustments). The adoption of SFAS No. 130 did not have a material effect on the
Company's financial position or results of operations. As of September 30, 1999,
the Company's accumulated other comprehensive income (loss) balance consisted of
cumulative foreign currency translation adjustments of approximately $(714,000).
In fiscal 1999, the Company adopted SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 superceded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS
No. 131 establishes a new method by which companies will report operating
segment information. This method is based on the manner in which management
organizes the segments within a company for making operating decisions and
assessing performance. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company's operations are reported on the basis of segments, as further
discussed in Note 9.
ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED
In June 1998, the FASB issued SFAS No. 133, which establishes accounting and
reporting standards for 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. Implementation of this standard has
been delayed by the FASB for a 12-month period. The Company will adopt SFAS No.
133 during fiscal 2001.
(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 $30.0 million, consisting of a $24.0 million 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 paid the $24.0 million
promissory note with the proceeds from the issuance of senior notes and a
portion of the borrowings under the Company's credit facility. The Company
recorded goodwill of approximately $26.9 million, amortized straight line over
25 years. Sports Image sells and distributes a variety of licensed motorsports
products through wholesale distributor networks, corporate sponsors, and mobile
trackside stores. 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 Company recorded goodwill
of approximately $7.2 million, amortized straight line over 25 years. Motorsport
Traditions sells and distributes licensed motorsports products through a network
of wholesale distributors and mobile trackside stores. 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. 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. The Company recorded goodwill of approximately $6.5
million, amortized straight line over 15 years. This transaction was accounted
for as a purchase. See Note 10.
F-10
<PAGE> 62
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. The Company recorded goodwill of approximately $7.1
million, amortized straight line over 25 years. Image Works designs and
manufactures screen printed and embroidered motorsports apparel items for
distribution through mass retailers and corporate accounts. 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. The contingent payments must be earned by August 2000. As
of September 30, 1999, the Company has not made any contingent payments. The
Company recorded goodwill of approximately $2.0 million, amortized straight line
over 25 years. This transaction was accounted for as a purchase.
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. The Company
recorded goodwill of approximately $5.2 million, amortized straight line over 15
years. 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 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.
The purchase price of $24.8 million, consisted 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. The Company recorded goodwill of approximately $10.0 million,
amortized straight line over 25 years. 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.
The purchase price adjustments have not been computed to date. The Company
recorded goodwill of approximately $1.9 million, amortized straight line over 25
years. 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.
F-11
<PAGE> 63
ACQUISITION OF CONTROLLING INTEREST IN CHASE RACEWEAR, LLC
On May 22, 1998, the Company acquired a majority 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. The Company recorded goodwill of approximately $9.9 million, amortized
straight line over 25 years. As of September 30, 1999, the Company has made no
payments related to this earnout. 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. The Company recorded goodwill of
approximately $19.4 million, amortized straight line over 25 years. 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. This transaction was accounted for as a purchase.
ACQUISITION OF INTELLECTUAL PROPERTIES GROUP, INC.
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 was accounted for as a
pooling of interests. Prior period financials were not restated due to IPG's
historical operating results and financial position not being material to the
Company's operating results and financial position.
ACQUISITION OF TECH 2000 WORLDWIDE, INC.
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 goracing Interactive Services, 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, valued at $31.00 per share in
exchange for all of the issued and outstanding common stock of Tech 2000. The
Company recorded goodwill of approximately $5.4 million, amortized straight line
over 7 years. This transaction was accounted for as a purchase.
ACQUISITION OF GOODSPORTS HOLDING PTY. LTD.
On January 11, 1999, the Company acquired all of the outstanding stock of
Goodsports Holdings, Pty. Ltd., an Australian-based marketer of Formula One
related apparel and other merchandise. The consideration paid by the Company
consisted of the assumption of certain liabilities and contingent payments of up
to $3.6 million to be paid over a four-year period based upon the attainment of
certain performance objectives. The Company recorded goodwill of approximately
$1.9 million, amortized straight line over 25 years. This transaction was
accounted for as a purchase.
F-12
<PAGE> 64
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA
The following unaudited pro forma combined statements of operations data for the
years ended September 30, 1999 and 1998 present the results of operations of the
Company as if (a) the acquisitions of the businesses acquired during fiscal 1999
and 1998 had occurred as of October 1, 1997, and (b) the 4-3/4% Convertible
Subordinated Notes due 2005 (the "Notes") had been converted at the option of
the holders into shares of Common Stock. The conversion of the Notes had an
anti-dilutive effect on earnings per share for fiscal 1998 and therefore are not
assumed converted during that period. Pro forma results are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999* 1998*
-------- --------
<S> <C> <C>
Revenue ................................................ $345,245 $292,753
Net income ............................................. 27,871 24,043
Interest, net of tax, on convertible subordinated
notes payable ...................................... 3,216 --
-------- --------
Net income attributable to diluted shares outstanding .. 31,087 24,043
Net income per common share, diluted ................... $ 1.62 $ 1.44
</TABLE>
*Includes charges for legal settlement costs of $3.6 million, or $0.11 per
share, in fiscal 1999, $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, 1999 and 1998 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Senior notes, interest at 8.05% payable semi-
annually, principal paid January 1999, secured
by the Company's subsidiaries ........................ $ -- $ 20,000
4-3/4% Convertible Subordinated Notes due 2005 ....... 100,000 100,000
Unsecured notes payable, interest ranging
from 4% to 8% ........................................ 7,250 7,458
Notes payable, interest ranging from 7.9% to 8.5%,
secured by property and equipment .................... 4,489 7,839
Obligations under capital leases of vehicles and
equipment, interest from 8.0% to 9.5%, payable monthly 182 299
--------- ---------
Total ................................................ 111,921 135,596
Less: current portion ............................... (2,713) (23,746)
--------- ---------
$ 109,208 $ 111,850
========= =========
</TABLE>
CONVERTIBLE SUBORDINATED NOTES
On March 24, 1998, the Company sold $100.0 million of 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.
F-13
<PAGE> 65
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,
1999 and 1998. The Company had outstanding purchase commitments of approximately
$6.0 million and $3.7 million under the Letter of Credit/BA Facility as of
September 30, 1999 and 1998, respectively. 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, 2000
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.
DEBT COVENANTS
The Company's 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>
2000 $ 2,713
2001 2,817
2002 1,458
2003 1,139
2004 995
Thereafter 102,799
---------
Total $ 111,921
=========
</TABLE>
(5) SHAREHOLDERS' EQUITY
ISSUANCE OF STOCK IN PRIVATE PLACEMENTS AND LICENSING AGREEMENTS
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.
F-14
<PAGE> 66
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.
A summary of the status of the Company's stock option plans at September 30,
1999, 1998, and 1997 and for the years then ended is presented in the table
below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ --------------------------- ---------------------------
Wtd Wtd Wtd
Number Avg Number Avg Number Avg
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
-------- -------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 930,811 $14.61 1,032,710 $ 6.58 1,110,053 $ 4.16
Granted ........... 419,500 28.50 503,500 27.92 220,250 17.76
Exercised ......... (332,924) 11.53 (425,990) 4.01 (296,092) 5.80
Canceled .......... (21,000) 26.64 (179,409) 30.63 (1,501) 9.43
-------- ------ ---------- ------- ---------- ---------
Outstanding at
end of year .... 996,387 21.23 930,811 14.61 1,032,710 6.58
Options exercisable
at end of year .. 460,668 14.88 563,058 9.79 714,950 3.09
Options available
for grant ....... 174,360 572,860 396,951
Weighted average
fair value of
options granted $13.93 $11.74 $ 7.33
</TABLE>
F-15
<PAGE> 67
Options outstanding and exercisable by price range as of September 30, 1999 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 - $11.06 248,148 1.9 $ 6.17 248,148 $ 6.17
$11.07 - $25.81 182,072 4.2 20.26 99,396 19.52
$25.82 - $29.50 402,167 6.7 26.28 70,324 26.58
$29.51 - $36.88 164,000 7.9 32.72 42,800 35.37
--------- ------ -------- --------- -------
$ 1.25 - $36.88 996,387 5.3 $ 21.23 460,668 $ 14.88
========= ====== ======== ========= =======
</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 5.75%; expected life of three years;
dividend rate of 0.0%; and expected volatility ranging between 54.72% and
66.67%. Using these assumptions, the fair value of the stock options granted,
net of cancellations, is $5,552,181, $3,553,957, and $1,614,623 for the years
ended September 30, 1999, 1998, and 1997, respectively. These amounts are
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>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Net Income:
As Reported ................................................... $28,369 $ 24,587 $ 10,146
Pro Forma ..................................................... $25,056 22,460 $ 9,305
Basic EPS:
As Reported ................................................... $ 1.69 $ 1.52 $ 0.72
Pro Forma ..................................................... $ 1.49 $ 1.39 $ 0.66
Diluted EPS:
As Reported ................................................... $ 1.65 $ 1.48 $ 0.69
Pro Forma ..................................................... $ 1.47 $ 1.35 $ 0.64
</TABLE>
(6) RELATED PARTY TRANSACTIONS
The Company owns 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 $120,000, $175,000,
and $183,000 for the years ended September 30, 1999, 1998, and 1997,
respectively. During fiscal 1998, the Company made a refundable deposit of
$900,000 to Mr. Wagenhals towards the purchase of the facility. During 1999 the
Company paid the remaining balance of $1.2 million as final payment and purchase
of the facility. The land and building are included in property and equipment of
the current year financial statements.
(7) PENSION PLAN AND OTHER 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 $206,000, $141,000, and
$41,000 under the plan for the years ended September 30, 1999, 1998, and 1997
respectively.
F-16
<PAGE> 68
In March 1999, the Company's stockholders approved, and the Company adopted, the
Action Performance Companies, Inc. 1999 Employee Stock Purchase Plan ("Purchase
Plan"). Under the Purchase Plan, the Company has reserved 1,800,000 shares of
the Company's common stock for sale to the employees. The Purchase Plan allows
eligible employees to purchase shares of common stock at the lesser of 85% of
the fair value of such shares at the beginning or end of each semi-annual
offering period. Purchases are limited to 15% of an employee's eligible
compensation, subject to a maximum limitation of $25,000 annually. The Purchase
Plan commenced on August 1, 1999. As of September 30, 1999, employee
withholdings totalled $24,106, with share purchases to be made in January 2000,
for the first semi-annual period.
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
been recorded for net operating losses generated by the Company's U.K.
subsidiary as of September 30, 1999. A valuation allowance has not been recorded
as of September 30, 1998.
The provision for income taxes consists of the following for the years ended
September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ------
<S> <C> <C> <C>
Current:
Federal ...................... $14,877 $ 15,300 $5,828
State ........................ 849 2,181 822
Foreign ...................... 2,641 -- --
------- -------- ------
18,367 17,481 6,650
Deferred income taxes ............ 159 (1,090) 114
------- -------- ------
Provision for income taxes ....... $18,526 $ 16,391 $6,764
======= ======== ======
</TABLE>
Reconciliation of the federal income tax rate to the Company's effective rate
for the years ended September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal rate .................. 35.00% 35.00% 35.00%
State taxes, net of federal benefit ..... 2.00 4.35 4.65
Foreign ................................. 2.00 -- --
Other non deductible expense ............ 0.50 0.65 0.35
----- ----- -----
39.50% 40.00% 40.00%
===== ===== =====
</TABLE>
The components of deferred taxes are as follows at September 30 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Inventory cost capitalization .............. $ 665 $ 1,179
Reserves and accruals ...................... 2,243 1,902
Deferred compensation ...................... 25 40
Foreign net operating losses ............... 493 --
Valuation allowance ........................ (493) --
------- -------
Net current deferred tax assets .............. 2,933 3,121
======= =======
Deferred tax liabilities:
Accelerated tax depreciation ............... (3,212) (438)
Accelerated tax amortization ............... (1,620) (675)
------- -------
Net long-term deferred tax liabilities ....... (4,832) (1,113)
------- -------
Net deferred tax asset/(liability) ........... $(1,899) $ 2,008
======= =======
</TABLE>
F-17
<PAGE> 69
(9) SEGMENT REPORTING
The Company has two reportable segments based on geographic points of
distribution: Domestic and Foreign. The Company's reportable segments are based
on operating divisions operating geographically within the continental United
States as "Domestic" and abroad as "Foreign." The Company evaluates performance
and allocates resources based on segment profits. The accounting policies of the
reportable segments are the same as those described in Note 2, "Summary of
Significant Accounting Policies." Segment profits are comprised of segment net
revenues less cost of goods sold and selling, general and administrative
expenses. Excluded from segment profits, however, are settlement costs, interest
income and interest expense. Financial information for the Company's reportable
segments is as follows:
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- ------- --------
<S> <C> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1999 (IN THOUSANDS)
Collectibles ..................................... $185,147 $29,282 $214,429
Apparel and souvenirs ............................ 113,606 6,316 119,922
Other ............................................ 7,669 425 8,094
-------- ------- --------
Total segment revenue .......................... 306,422 36,023 342,445
Segment profits ................................ 50,657 6,166 56,823
Depreciation & amortization included
in segment profits ........................... 19,243 3,703 22,946
FISCAL YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS)
Collectibles ..................................... $140,445 $ 1,581 $142,026
Apparel and souvenirs ............................ 106,712 -- 106,712
Other ............................................ 3,139 -- 3,139
-------- ------- --------
Total segment revenue .......................... 250,296 1,581 251,877
Segment profits ................................ 44,772 290 45,062
Depreciation & amortization included
in segment profits ........................... 11,688 151 11,839
FISCAL YEAR ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
Collectibles ..................................... $ 68,932 $ -- $ 68,932
Apparel and souvenirs ............................ 60,430 -- 60,430
Other ............................................ 1,018 -- 1,018
-------- ------- --------
Total segment revenue .......................... 130,380 -- 130,380
Segment profits ................................ 23,535 -- 23,535
Depreciation & amortization included
in segment profits ........................... 4,477 -- 4,477
</TABLE>
Reconciliation of segment profits to consolidated income before taxes, is as
follows: (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fiscal Year Ended September 30,
Segment profits.............................................. $ 56,823 $ 45,062 $ 23,535
Settlement costs............................................. 3,600 950 5,400
Interest income (expense), net .............................. (6,328) (3,134) (1,225)
-------- -------- --------
Consolidated income before taxes $ 46,895 $ 40,978 $ 16,910
======== ======== ========
</TABLE>
F-18
<PAGE> 70
(10) 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 paid 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 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.
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 Company was named a defendant based upon actions alleged to
have been taken by Sports Image, Inc. and Creative Marketing and Promotions,
Inc. prior to the Company's acquisitions of the assets and capital stock,
respectively, of those entities. 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 assumed the defense of this matter with respect to
claims based upon actions alleged to have been taken by RYP and agreed to be
responsible for and to pay any costs, fees, expenses, damages, payments,
credits, rebates, and penalties, if any, arising out of this matter with respect
to RYP. The seller of RYP agreed to be responsible for amounts, if any, in
excess of $400,000. The plaintiffs requested injunctive relief and monetary
damages of three times an unspecified amount of damages that the plaintiffs
claim to have actually suffered. In order to avoid further expense and the
distraction of Company management that protracted litigation might create, on
September 30, 1999, the Company and the plaintiffs entered into a memorandum of
understanding with respect to the settlement of this lawsuit. Final settlement
of this matter will be subject to the negotiation and execution of definitive
settlement agreements, as well as approval by the court. In connection with the
memorandum of understanding, the Company recorded a non-recurring pretax charge
of $3.6 million during the fourth quarter of fiscal 1999 to reflect the
financial terms of the proposed settlement, as well as legal and other expenses
related to the lawsuit and proposed settlement.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under noncancellable
operating leases. Rent expense related to these lease agreements totaled
approximately $4.8 million, $3.1 million, and $935,000 for the fiscal years
ended September 30, 1999, 1998, and 1997 respectively.
Future lease payments under noncancellable operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
2000 $ 6,182
2001 5,585
2002 4,909
2003 3,225
2004 2,908
Thereafter 25,610
----------
Total $ 48,419
==========
</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 such minimum annual guaranteed royalty
payments through normal product sales. Royalties paid in connection with these
licensing agreements, including guaranteed minimums, were approximately
$49,700,000, $28,400,000 and $13,100,000 for the fiscal years ended September
30, 1999, 1998, and 1997, respectively. The Company expects that future amounts
payable under these licensing agreements will be equal to or exceed the amount
paid in fiscal year ended September 30, 1999. 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.
F-19
<PAGE> 71
(12) SUBSEQUENT EVENTS
On October 15, 1999, the Company acquired Fantasy Sports Enterprises, Inc.
("Fantasy Sports") for approximately $3.5 million in cash. Fantasy Sports
operates Fantasy Cup Auto Racing through its Web site at www.fantasycup.com.
This transaction was accounted for as a purchase.
On November 30, 1999, a class action lawsuit was filed against the Company in
the United States District Court for the District of Arizona, case No. CIV'99
2106 PHXROS. Fred W. Wagenhals and Tod J. Wagenhals, directors and officers of
the Company, and Christopher S. Besing, a former director and officer of the
Company, also were named as defendants. The lawsuit alleges that the Company and
the other defendants violated the Securities Exchange Act of 1934 by (a) making
allegedly false statements about the state of the Company's business and the
shipment of certain products to a customer, or (b) participating in a fraudulent
scheme that was intended to inflate the price of the Company's common stock. The
alleged class of plaintiffs consists of all persons who purchased the Company's
publicly traded securities between July 27, 1999 and November 4, 1999. The
plaintiffs are requesting an unspecified amount of monetary damages. The Company
intends to vigorously defend the claims asserted in the lawsuit.
On December 17, 1999, the Company announced two strategic initiatives approved
by the Board of Directors. The first initiative included the indefinite
postponement of the proposed initial public offering of its Internet subsidiary,
goracing.com, inc., previously announced in July 1999. As a result, the Company
will record non-recurring charges of up to $2.0 million in the first quarter of
fiscal 2000 for expenses incurred in connection with the proposed offering and
various management restructuring charges that occurred during the first quarter
of fiscal 2000. The second initiative included the authorized repurchase of up
to $40.0 million of common stock in the open market or privately negotiated
transactions. The initial term of the repurchase program will be one year,
subject to extension depending on market conditions.
F-20
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 First Amended and Restated Articles of Incorporation of Registrant(1)
3.2 Amended and Restated Bylaws of Registrant(1)
4.1 Form of Certificate of Common Stock(2)
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(3)
10.4.2 1993 Stock Option Plan, as amended and restated through January 16, 1997(4)
10.8 Form of Indemnification Agreement entered into with the Directors of the Registrant(2)
10.27 Manufacturing Agreement between the Company and Early Light International (Holdings) Ltd. dated December 5,
1994(5)
10.37 License Agreement dated as of November 7, 1996, among SII Acquisition, Inc., Dale Earnhardt, and Action
Performance Companies, Inc.(6)
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(7)
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(3)
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(8)
10.49 Standard Form Industrial Lease dated April 8, 1997, between Hewson/Breckner-Baseline, L.L.C. and Action Performance
Companies, Inc.(9)
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park Partners, LLC and Sports Image, Inc.(9)
10.52 1998 Non-qualified Stock Option Plan(3)
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.(3)
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.(3)
10.55 Common Stock Purchase Warrant dated October 7, 1998, issued to the National Association for Stock Car Auto Racing,
Inc.(10)
10.56 1999 Employee Stock Purchase Plan(11)
</TABLE>
<PAGE> 73
<TABLE>
<S> <C>
10.57 Standard Form Industrial Lease (Single Tenant) dated June 28, 1999, between H-B Tempe, L.L.C. and Action
Performance Companies, Inc.
10.58 Master Lease Agreement dated August 9, 1999 between General Electric Capital Corporation and goracing.com, inc.,
together with Schedule No. 01, Commitment Letter dated October 4, 1999, and Corporate Guaranty by Action
Performance Companies, Inc.
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(12)
27.1 Financial Data Schedule
</TABLE>
- --------------------
(1) 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.
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 and amendments thereto (Registration No.
33-57414-LA).
(3) 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.
(4) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 1997, as filed with the Securities and Exchange
Commission on May 15, 1997.
(5) 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.
(6) 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.
(7) 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.
(8) Incorporated by reference to the Registrant's Form 10-K for the
year ended September 30, 1998, as filed with the Securities and
Exchange Commission on December 29, 1998.
(9) 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.
(10) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended December 31, 1998, as filed with the Securities and
Exchange Commission on February 16, 1999.
(11) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 333-82879).
(12) Incorporated by reference to the Registrant's Registration
Statement on Form S-3 (Registration No. 333-53413).
<PAGE> 1
Exhibit 10.57
STANDARD FORM
INDUSTRIAL LEASE
(SINGLE TENANT)
Landlord H-B TEMPE, L.L.C., an Arizona limited liability company
Tenant ACTION PERFORMANCE COMPANIES, INC., an Arizona corporation
Dated as of June 28, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Defined Terms ......................................................................................... 1
2. Leased Premises ....................................................................................... 2
(a) Property to be Leased ............................................................... 2
(b) Reserved Rights of Landlord ......................................................... 2
3. Completion of Premises ................................................................................ 2
(a) Plans ............................................................................... 2
(b) Scheduled Commencement Date; Delays Caused by Tenant ................................ 3
(c) Remedy .............................................................................. 3
(d) Changes ............................................................................. 3
(e) Ready for Occupancy ................................................................. 4
(f) Construction Representative ......................................................... 4
(g) Early Entry ......................................................................... 4
(h) Quality of Construction ............................................................. 4
(i) Tenant Improvement Allowance ........................................................ 4
4. Term .................................................................................................. 5
5. Rent .................................................................................................. 5
(a) Fixed Rent .......................................................................... 5
(b) Adjustments ......................................................................... 6
(c) Pro Rata Rent ....................................................................... 6
(d) Net Lease ........................................................................... 6
6. Security .............................................................................................. 6
(a) Security Deposit .................................................................... 6
(b) Lien and Security Interest .......................................................... 6
7. Use ................................................................................................... 6
(a) General ............................................................................. 6
(b) Compliance with Law ................................................................. 6
(c) Existing Title and Condition of Premises ............................................ 7
(d) Signs ............................................................................... 7
(e) Governmental Regulation ............................................................. 7
8. Maintenance and Repairs ............................................................................... 7
(a) Tenant's Maintenance ................................................................ 7
(b) Landlord's Obligations to Repair .................................................... 8
(c) Surrender ........................................................................... 8
9. Utilities ............................................................................................. 8
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
10. Alterations and Additions ............................................................................. 9
(a) Limitation .......................................................................... 9
(b) Liens ............................................................................... 9
(c) Removal ............................................................................. 9
11. Insurance.............................................................................................. 9
(a) General Liability ................................................................... 9
(b) Extended Coverage ................................................................... 9
(c) Policies ............................................................................ 10
(d) Waiver of Subrogation ............................................................... 10
(e) Tenant's Contents ................................................................... 10
(f) Workmen's Compensation .............................................................. 11
(g) Rental Income Insurance ............................................................. 11
12. Indemnity; Exemption of Landlord from Liability ....................................................... 11
(a) General ............................................................................. 11
(b) Tenant's Business ................................................................... 11
13. Damage or Destruction; Obligation to Rebuild .......................................................... 11
(a) Landlord's Obligation to Rebuild .................................................... 12
(b) Abatement of Rent ................................................................... 12
(c) Option to Terminate ................................................................. 12
(d) Uninsured Casualties ................................................................ 12
(e) Damage Near End of Term ............................................................. 12
(f) Tenant's Waiver ..................................................................... 13
14. Taxes and Assessments ................................................................................. 13
(a) Payment ............................................................................. 13
(b) Definition .......................................................................... 13
(c) Separate Assessment ................................................................. 13
(d) Personal Property ................................................................... 13
(e) Rent Tax ............................................................................ 13
(f) Declaration ......................................................................... 14
(g) Project Assessments ................................................................. 14
(h) Right to Contest .................................................................... 14
15. Condemnation .......................................................................................... 14
(a) Rent Reduction or Lease Termination ................................................. 14
(b) Award ............................................................................... 14
(c) Temporary Condemnation .............................................................. 15
16 Assignment and Subletting ............................................................................. 15
(a) Consent ............................................................................. 15
(b) Tenant's Continuing Liability ....................................................... 15
(c) Information ......................................................................... 15
(d) Excess Sublease Rental .............................................................. 16
(e) Release ............................................................................. 16
(f) Controlled Entity ................................................................... 16
(g) Attorneys' Fees ..................................................................... 16
17. Defaults; Remedies .................................................................................... 16
(a) Defaults ............................................................................ 16
(b) Remedies ............................................................................ 17
(c) Late Charges ........................................................................ 20
(d) Payment or Performance by Landlord .................................................. 20
18. Miscellaneous ......................................................................................... 20
</TABLE>
-ii-
<PAGE> 3
<TABLE>
<S> <C>
(a) Estoppel Certificates ............................................................... 20
(b) Landlord's Liability ................................................................ 21
(c) Construction ........................................................................ 21
(d) Interest on Past-Due Obligations .................................................... 21
(e) Time of Essence ..................................................................... 21
(f) Counterparts......................................................................... 21
(g) Incorporation of Prior Agreements; Amendments ....................................... 21
(h) Notices ............................................................................. 21
(i) Waivers ............................................................................. 22
(j) Recording ........................................................................... 22
(k) Holding Over ........................................................................ 22
(1) Covenants and Conditions ............................................................ 22
(m) Binding Effect ...................................................................... 22
(n) Subordination ....................................................................... 22
(o) Attorneys' Fee ...................................................................... 23
(p) Landlord's Access ................................................................... 23
(q) Auctions ............................................................................ 23
(r) Merger .............................................................................. 23
(s) Joint and Several Liability ......................................................... 23
(t) Individual Liability ................................................................ 23
(u) Attornment .......................................................................... 23
(v) Lenders Right to Cure ............................................................... 23
(w) Revisions to Lease................................................................... 24
(x) Administrative Charge ............................................................... 24
(y) Estimated Payments .................................................................. 24
19. Toxic Materials ....................................................................................... 24
(a) Definitions ......................................................................... 24
(b) Prohibition on Hazardous Materials .................................................. 25
(c) Exception to Prohibition ............................................................ 25
(d) Compliance with Environmental Laws .................................................. 25
(e) Environmental Notices ............................................................... 26
(f) Tenant's Environmental Indemnity .................................................... 26
(g) Remedial Work at Tenant's Expense ................................................... 26
(h) Landlord's Option ................................................................... 27
(i) Injunctive Relief ................................................................... 27
(j) Self-Help ........................................................................... 27
(k) Other Tenants and Owners ............................................................ 27
(1) Environmental Inspection ............................................................ 27
(m) Surrender of Premises - Environmental Considerations ................................ 28
(n) Landlord's Environmental Indemnity .................................................. 28
(o) Remedial Work at Landlord's Expense ................................................. 28
</TABLE>
Exhibit A The Site Plan for Premises
Exhibit B Legal Description of Property
Exhibit C Space Plan for Tenant Improvements
Exhibit D Certain Tenant Improvements to be Furnished by Landlord
Exhibit E Option to Extend Term
Exhibit F Tenant's Sign Plan
-iii-
<PAGE> 4
1. Defined Terms. Each reference in this Lease to any of the following
terms shall incorporate the data stated for that term. Other terms are as
defined in the Lease.
<TABLE>
<S> <C> <C>
(a) Landlord and Landlord's H-B TEMPE, L.L.C.
Address (subparagraph c/o Hewson Properties, Inc.
18(h)): 4636 East University Drive, Suite 265
Phoenix, AZ 85034
(b) Tenant and Tenant's ACTION PERFORMANCE COMPANIES, INC.,
Address for Notices an Arizona corporation
(subparagraph 18(h)): 4707 East Baseline Road
Phoenix, AZ 85034
Attn: Mr. Chris Bening
See subparagraph 18(h) for additional notices
(c) Street Address of Pre- 1480 South Hohokam Drive
mises (paragraph 2): Tempe, AZ 85281
(d) Leased Premises The real property described in Exhibit B attached
hereto and all improvements now or hereafter located
thereon, including an existing building (the
"Building") which contains approximately 65,018
square feet of rentable space, all as shown on the Site
Plan attached hereto as Exhibit A (the "Premises").
(e) Landlord's Construction Alan Gillespie
Representative (subpara-
graph 3(f)):
(f) Tenant's Construction
Representative (subpara-
graph 3(f)):
(g) Term (paragraph 4): One hundred twenty (120) months
(h) Scheduled Commencement 12:01 a.m. on November 1, 1999
Date (paragraph 4):
(i) Fixed Rent (subpara- Months 1-60 $78,563.00
graph 5(a)): Months 61-120 $94,817.00
(j) Rental Period (sub- Monthly
paragraph 5(a)):
(k) Security Deposit (sub- Waived
paragraph 6(a)):
(l) Permitted Uses (para- General office use, together with any other uses
graph 7): permitted by law upon the prior written consent of the
Landlord as provided in paragraph 7
(m) Liability Insurance $2,000,000
(subparagraph 11(a)):
(n) Project Hohokam Business Park
</TABLE>
<PAGE> 5
2. Leased Premises.
(a) Property to be Leased. Landlord hereby leases to Tenant, and
Tenant hereby leases from Landlord, subject to the terms and conditions
contained herein, (i) that certain real property located at the street address
set forth in paragraph 1 hereof and more particularly described in Exhibit B
attached hereto and incorporated herein by this reference (the "Property"); (ii)
the improvements located on the Property, including the Building (the "Existing
Improvements"); and (iii) those improvements to be constructed on the Property
in accordance with the provisions of paragraph 3 below and more particularly
described in Exhibits C and D attached hereto and incorporated herein by this
reference. The Existing Improvements and the Tenant Improvements are hereinafter
sometimes referred to collectively as the "Improvements", and the Property and
the Improvements are sometimes hereinafter collectively referred to as the
"Premises".
(b) Reserved Rights of Landlord. Notwithstanding the foregoing,
Landlord reserves the right from time to time, without unreasonable interference
with Tenant's use, to grant easements on, or dedicate portions of, the Premises
for public utilities without Tenant's consent, provided that no such grant or
dedication shall unreasonably interfere with Tenant's use of the Premises or
otherwise cause Tenant to incur cost or expense.
3. Completion of Premises.
(a) Plans. Landlord and Tenant have approved the space plan attached
hereto as Exhibit C for the interior of the Building. Landlord's architect will
also prepare preliminary plans and outline specifications (the "Preliminary
Tenant Improvement Plans") for the construction of improvements (the "Tenant
Improvements") in and to the Building in accordance with the space plan, which
Tenant Improvements are described on Exhibit D attached hereto and by this
reference made a part hereof. Landlord and Tenant will expeditiously review the
Preliminary Tenant Improvement Plans prepared by Landlord's architect. Within
ten (10) days after delivery to Tenant of the Preliminary Tenant Improvement
Plans, as approved by Landlord, which approval shall not be unreasonably
withheld, Tenant shall set forth in writing, with particularity and precision,
any revisions which Tenant wishes to have made to the Preliminary Tenant
Improvement Plans, which revisions shall be subject to Landlord's approval,
which approval shall not be unreasonably withheld. Landlord's architect will
then make the appropriate revisions and submit the revised Preliminary Tenant
Improvement Plans to both Landlord and Tenant. If Tenant wishes to have any
additional revisions made to the revised Preliminary Tenant Improvement Plans,
Tenant shall set forth such revisions in writing, with precision and
particularity, and deliver the revisions to Landlord and Landlord's architect
within ten (10) days after delivery to Tenant of such revised Preliminary Tenant
Improvement Plans. Landlord's architect shall make the appropriate revisions and
the further revised plans shall be deemed the Preliminary Tenant Improvement
Plans for the following provisions and paragraphs of this Article 3 and
subparagraph 3(a).
Landlord shall thereafter cause to be prepared final plans and
specifications (the "Final Tenant Improvement Plans") substantially in
conformity with the Preliminary Tenant Improvement Plans and Exhibits C and D,
which need not include working detail drawings. The term "Tenant Improvement
Plans" shall hereinafter mean the Preliminary Tenant Improvement Plans and, when
prepared, the Final Tenant Improvement Plans. The Final Tenant Improvement Plans
shall be delivered to Tenant as soon as reasonably possible after preparation
thereof, subject to any period of delay encountered by Landlord in such
preparation as a result of requests by Tenant for changes in the Final Tenant
Improvement Plans after preparation thereof. Within ten (10) days after delivery
of the Final Tenant Improvement Plans, Tenant shall set forth in writing, with
particularity and precision, any corrections or changes necessary to bring the
Final Tenant Improvement Plans into substantial conformity with the Preliminary
Tenant Improvement Plans and Exhibits C and D, except that Tenant may not object
to any logical development or refinement of the Preliminary Tenant Improvement
Plans. Failure to deliver to Landlord written notice of any such corrections or
changes within said ten (10) day period shall constitute approval of the Final
Tenant Improvement Plans by Tenant. Following such approval of the Final Tenant
Improvement Plans, both parties shall endorse approval for filing purposes
thereon, in duplicate; thereafter changes may be made only in
2
<PAGE> 6
accordance with subparagraph (d) below; and Landlord shall employ Landlord's
contractor to construct the Tenant Improvements.
(b) Scheduled Commencement Date; Delays Caused by Tenant. Landlord,
at its sole expense, shall proceed diligently with construction and completion
of the Tenant Improvements substantially in accordance with the Tenant
Improvement Plans ("Landlord's Work"). Landlord shall complete the Tenant
Improvements and they shall be Ready for Occupancy (as defined below) by Tenant
not later than the Scheduled Commencement Date set forth in paragraph 1 above;
provided, however, that such Scheduled Commencement Date shall be extended for a
period of time equal to the period of any delay or delays encountered by
Landlord affecting construction because of fire, earthquake, inclement weather,
or other acts of God, acts of the public enemy, riot, insurrection, governmental
regulations of the sales of materials or supplies or the transportation thereof,
strikes or boycotts, shortages of material or labor, Tenant's early entry under
the provisions of subparagraph (g) below, changes in the Tenant Improvement
Plans pursuant to subparagraph (d) below, or any other cause beyond the control
of Landlord; and provided, further, the financial inability of Landlord to
perform Landlord's construction obligations shall not be deemed a cause beyond
the control of the Landlord.
(c) Remedy. If the Premises are not Ready for Occupancy on or before
the Scheduled Commencement Date as extended pursuant to subparagraph (b) above,
the sole remedy of Tenant shall be the option to terminate this Lease by the
delivery to Landlord of written notice within ten (10) days after the day three
(3) months following the Scheduled Commencement Date, as extended, if the
Premises are not Ready for Occupancy prior to the giving of such written notice.
Anything in the foregoing to the contrary notwithstanding, if periods of delay
attributable solely to events described in the second sentence of subparagraph
(b) above (exclusive of those described in subparagraphs (d) or (g) or otherwise
caused by Tenant or Tenant's agents, employees, contractors or licensees) cause
the Scheduled Commencement Date to be extended for periods totaling more than
six (6) months after the initial Scheduled Commencement Date, then Tenant, as
Tenant's sole remedy, shall also have the option to terminate this Lease by the
delivery to Landlord of written notice within ten (10) days after the Scheduled
Commencement Date has been extended for periods totaling six (6) months solely
as a result of events described in the second sentence of subparagraph (d) above
(exclusive of those described in subparagraphs (d) or (g) or otherwise caused by
Tenant or Tenant's agents, employees, contractors or licensees).
(d) Changes. Tenant shall have the right to request changes in the
Tenant Improvement Plans (including but not limited to changes intended to
reduce the anticipated costs of constructing the Tenant Improvements), which
request shall not be unreasonably denied; provided, however, (i) such right
shall not be exercised unreasonably, (ii) no such request shall effect any
structural change in the Building, (iii) Tenant shall pay any additional cost
incurred by Landlord required to implement such change, including without
limitation loss of rents calculated as provided in subparagraph 5(a) below for
any delay period, architectural fees, increase in construction costs and any
other charges payable hereunder caused by delay, with all said costs to be paid
immediately upon demand by Landlord (except that any payment for loss of rents
shall be payable at the time provided in subparagraph 5(a) below that such rents
would have been payable if such delay had not occurred), (iv) except as provided
in clause (v) below, such requests shall constitute an agreement on the part of
Tenant to accept any delay in completion caused by reviewing, processing and
implementing any such request and/or changes, and (v) changes in the Tenant
Improvement Plans will be authorized only by written agreement setting forth any
additional cost and expense and additional time required to complete the Tenant
Improvements as a result thereof. If Landlord believes that any such change may
cause a delay in completion of the Tenant Improvements, Landlord will notify
Tenant and such change shall be performed only if the parties agree in writing
to extend the date for completion of the Tenant Improvements by the number of
days of such anticipated delay and set forth the effect of such delay upon the
commencement of rent. If Landlord and Tenant do not enter into such an
agreement, Tenant may withdraw its request for a change and the Scheduled
Commencement Date shall not be extended except to the extent of any temporary
delay resulting from the cessation of those activities, if any, which (A) would
have been inconsistent with the requested change or (B) could not be engaged in
because the subject work would have been affected by the pending change
requested.
3
<PAGE> 7
(e) Ready for Occupancy. The Premises shall be deemed to be ready
for occupancy ("Ready for Occupancy") when the architect or engineer in charge
of the work of construction certifies: (i) that the work of construction has
been substantially completed in accordance with the Tenant Improvement Plans;
and (ii) the date of such completion. Landlord shall diligently complete, as
soon as reasonably possible, any items of work and adjustment not completed when
the Premises are Ready for Occupancy.
(f) Construction Representative. In connection with the original
construction of the Premises each party shall be bound by its Construction
Representative set forth in paragraph 1 above. A party may designate a
substitute Construction Representative by giving written notice to the other
party.
(g) Early Entry. With the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed, Tenant may, at any time
prior to the commencement of the Term, at its sole risk, enter upon and install
such trade fixtures and equipment in the Premises as it may elect; provided,
however, that (i) Tenant's early entry shall not interfere with Landlord's work
of construction or cause labor difficulties; (ii) Tenant shall execute an
indemnity agreement in favor of Landlord in form and substance reasonably
satisfactory to Landlord; and (iii) Tenant shall pay for and provide evidence of
insurance reasonably satisfactory to Landlord. Tenant shall not use the Premises
for the storage of inventory or otherwise commence the operation of business
prior to the commencement of the Term without the express prior written consent
of Landlord.
(h) Quality of Construction. All work shall be done in a good and
workmanlike manner and in compliance with all applicable laws and lawful
ordinances, bylaws, regulations and orders of governmental authority and of the
insurers of the Improvements. No part of the Building or the Improvements shall
encroach on adjacent properties and the construction thereof shall not violate
any recorded covenants, conditions or restrictions applicable to the Project or
the Premises. Landlord assumes no liability for special, consequential or
incidental damages of any kind. There are no representations, warranties or
guaranties, express or implied, including warranties of merchantability or use
of the Premises, except as are expressly set forth herein. Tenant hereby waives
the benefit of any rule that disclaimers of warranty shall be construed against
Landlord.
For one (1) year from the Commencement Date, Landlord, at its cost
and expense, will promptly correct: (i) any of the Landlord's Work found to be
defective or failing to conform to this Lease; (ii) any defects in the
construction, design, workmanship or materials used in the Premises or the
plumbing, electrical, heating, ventilation, air conditioning or building
equipment serving the Premises; and (iii) any defects in Landlord's Work or the
structural elements of the Premises required to be corrected by governmental
authorities. Landlord hereby assigns to Tenant, for the term of the Lease and to
the extent of Tenant's obligations hereunder, all warranties relating to the
equipment and facilities required to be maintained by Tenant, and Landlord, at
the request and expense of Tenant, will cooperate with Tenant to enforce same.
Landlord will execute such further instruments of assignment of such warranties
as may be reasonably requested by Tenant from time to time.
(i) Tenant Improvement Allowance. The cost of constructing the
Tenant Improvements (including but not limited to the costs for plans, permits
and fees as more particularly described in Exhibit D) shall be paid by Landlord;
provided, however, if the amount expended for constructing the Tenant
Improvements is or will be more than $1,537,500, Tenant hereby agrees to
reimburse Landlord for all costs incurred in connection with the Tenant
Improvements except for $1,537,500 which is the Landlord's allowance (the
"Allowance") and, except as otherwise provided herein, is Landlord's entire
monetary obligation for the Tenant Improvements; and provided, further, any
excess costs incurred as a result of the fault or neglect of Landlord or of
Landlord's contractors, employees or agents shall be borne entirely by Landlord
and Tenant shall be responsible for all costs incurred in connection with
Landlord's Work as a result of the fault or neglect of Tenant. Tenant shall pay
any costs which are Tenant's responsibility hereunder (the "Excess Costs") on a
pro rata basis with Landlord's payments for design and construction of the
Tenant Improvements, so that Landlord will always have paid a share of the total
costs then incurred which is equal to the percentage which the Allowance is of
the sum of the Allowance and Excess Costs, as then
4
<PAGE> 8
determined, and Tenant will always have paid a share of the total costs for the
Tenant Improvements then incurred which is equal to the percentage which the
Excess Costs, as then determined, is to the sum of the Allowance and the Excess
Costs, as then determined. Determination(s) of the amount of the Excess Costs
may be made from time to time prior to, during or after construction. Tenant
shall make such payments, including any adjustments necessary to maintain the
Tenant's appropriate share of the total costs as a result of subsequent
determinations, based upon requisitions setting forth in reasonable detail the
reason for such Excess Costs and the amount thereof, together with any other
information reasonably requested by Tenant, and the amounts owing by Tenant
shall be paid by Tenant to Landlord within ten (10) days after receipt of each
such requisition and other information. Except as otherwise provided herein,
Tenant shall have complete responsibility for the cost of the Tenant
Improvements and for the construction by Tenant of any other improvements and
alterations to the Premises in connection with Tenant's occupancy thereof,
Tenant agreeing to accept the same "AS IS", subject only to the construction by
Landlord of the Tenant Improvements and any other obligation of Landlord under
this Lease. Landlord shall promptly furnish to Tenant estimates of the
anticipated costs of the various elements of the Tenant Improvements as such
estimates are received by Landlord. If Tenant believes that the amount of any
estimate is excessive Tenant may request changes in the Tenant Improvement Plans
in accordance with subparagraph (d) above. On or before sixty (60) days after
completion of the Tenant Improvements, Landlord will provide a final
reconciliation of the Allowance, the Excess Costs and the total costs of the
Tenant Improvements and each party shall promptly thereafter make any payment to
the other party which is necessary to effect the correct allocation of the total
costs of the Tenant Improvements as provided in this subparagraph.
(j) Permits. Landlord shall be solely responsible for the procuring
of all building and other permits, licenses and approvals and certificates of
occupancy necessary for construction of the Tenant Improvements and for the
occupancy of the Premises as constructed in accordance with the Tenant
Improvement Plans. If Landlord determines that any activities or installations
by Tenant or Tenant's agents, employees, contractors or licensees have, will or
are likely to result in any delays or failures to obtain any such permits,
licenses or approvals, Landlord will promptly notify Tenant in writing and
Landlord will not be responsible for any delays caused by such activities or
installations.
4. Term. The Term of this Lease, which shall be for the period set
forth in paragraph 1 above (sometimes hereinafter referred to as the "Initial
Term"), shall commence on the first to occur of the following dates (the
"Commencement Date"):
(a) The Scheduled Commencement Date set forth in paragraph 1 above
(as it may be extended pursuant to the terms of paragraph 3 above); or
(b) The date upon which Tenant actually commences to do business in
the Premises.
Notwithstanding the foregoing, in the event that the Premises are not Ready for
Occupancy by the Scheduled Commencement Date, then such Scheduled Commencement
Date shall be extended until such time as the Premises are Ready for Occupancy,
but Tenant shall pay to Landlord amounts equal to the Fixed Rent which would
have been owing during the period of any delays in the Commencement Date caused
by Tenant or Tenant's agents, employees, contractors or licensees, including but
not limited to delays resulting from the exercise of Tenant's rights under
subparagraph 3(d) above. In addition, the Term of this Lease shall be subject to
extension as provided in Exhibit E attached hereto.
5. Rent.
(a) Fixed Rent. Tenant shall pay Landlord as fixed rent for the
Premises a sum equal to the Fixed Rent set forth in paragraph 1 on or before the
first day of each and every calendar month during the Term of this Lease, except
that Fixed Rent for the first full calendar month of the Term shall be payable
simultaneously with the execution of this Lease by Tenant.
5
<PAGE> 9
(b) Adjustments. INTENTIONALLY DELETED.
(c) Pro Rata Rent. Rent for any period during the Term which is for
less than one month shall be a pro rata portion of the Rental Period
installment. Rent shall be payable, without deduction or offset, in lawful money
of the United States to Landlord at the address stated herein or to such other
persons or at such other places as Landlord may designate in writing; provided,
however, if Tenant obtains a judgment against Landlord on the basis of a default
by Landlord in the performance of Landlord's obligations under this Lease,
Tenant may offset amounts owing under such judgment against amounts owing by
Tenant to Landlord under this Lease, but such offset rights may not be exercised
against any lender holding a lien on the Premises, either before or after an
acquisition of the Premises by such lender, or after any sale of the Premises at
a foreclosure or other sale of the Premises pursuant to exercise of the lender's
lien rights against the Property.
(d) Net Lease. This Lease is what is commonly called a "net lease",
it being understood that Landlord shall receive the Rent set forth in this
paragraph free and clear of any and all impositions, taxes, liens, charges or
expenses of any nature whatsoever in connection with its ownership and leasing
of the Premises except those expenses specifically designated in this Lease to
be borne by Landlord. In addition to the Rent provided in this paragraph, Tenant
shall pay all impositions, taxes, insurance premiums, operating charges, costs
and expenses which arise or may be contemplated under any provisions of this
Lease during the Term. All of such charges, costs and expenses shall constitute
additional rent, and upon the failure of Tenant to pay any of such costs,
charges or expenses, Landlord shall have the same rights and remedies as
otherwise provided in this Lease for the failure of Tenant to pay Rent. It is
the intention of the parties hereto that Tenant shall in no event be entitled to
any abatement of or reduction in Rent or additional rent payable hereunder,
except as expressly provided herein. Any present or future law to the contrary
shall not alter this agreement of the parties.
6. Security.
(a) Security Deposit. INTENTIONALLY DELETED.
(b) Lien and Security Interest. INTENTIONALLY DELETED.
7. Use.
(a) General. The Premises shall be used and occupied only for
the Permitted Uses set forth in paragraph 1 above and for no other purpose
without Landlord's prior written consent. Landlord, upon request for such
consent, shall not withhold such consent so long as Landlord is given such
information as Landlord may reasonably request concerning such other use and
such other use shall not increase materially the amount of, scope of or
potential liability to Landlord from Environmental Activities (as defined in
subparagraph 19(a) below) on the Premises.
(b) Compliance with Law. Tenant shall, at Tenant's sole cost
and expense, comply with all present and future laws, ordinances, orders,
declarations of covenants and restrictions, rules, regulations and requirements
of all federal, state and municipal governments, courts, departments,
commissions, boards and officers, and any national or local Board of Fire
Underwriters, or any other body exercising functions similar to those of any of
the foregoing, foreseen or unforeseen, ordinary as well as extraordinary, which
may be applicable to the Premises, and the sidewalk, curbs and vaults adjoining
the Premises or to the use or manner of use of the Premises, whether or not such
law, ordinance, order, rule, regulation or requirement shall necessitate
structural changes or improvements, or the removal of any encroachments or
projections, ornamental, structural or otherwise, onto or over the streets or
sidewalks adjacent to the Premises, or onto or over other property contiguous or
adjacent thereto. Tenant shall obtain any required certificates or permits with
respect to its particular use of the Premises, the Improvements and the Property
within thirty (30) days from the Commencement Date and shall deliver a copy
thereof to Landlord within such thirty (30) day period; provided, however,
Landlord shall obtain any certificate of occupancy required for the shell of the
Building and the general occupancy of any improvements
6
<PAGE> 10
to the Premises to be made by Landlord pursuant to paragraph 3 above. Tenant
shall not use or permit the use of the Premises in any manner that will tend to
create waste or a nuisance.
(c) Existing Title and Condition of Premises. Tenant hereby
accepts the Premises and this Lease subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, subject to all covenants, conditions and restrictions
affecting the Property, Project or Premises and subject to all liens, claims and
encumbrances currently existing against the Premises or any part thereof,
including all matters disclosed by any of the foregoing or by any exhibits
attached hereto; provided, however, such acceptance shall not negate any
obligations of Landlord with respect to the Premises under this Lease. Landlord,
in accordance with (and except as otherwise provided in) subparagraph 8(b)
below, shall be responsible for causing the roof and bearing walls of the
Premises to be in good condition and repair at the Commencement Date and shall
also cause the heating, ventilating and air conditioning system, the plumbing
system and the electrical system to be in good operating condition as of the
Commencement Date. All such systems shall be deemed in the condition required at
the Commencement Date unless Tenant gives Landlord written notice of any defects
in such systems on or before one hundred twenty (120) days after the
Commencement Date. Except for any representation or warranty which may be
specifically set forth in this Lease, Tenant acknowledges that neither Landlord
nor Landlord's agents have made any representations or warranties as to the
Premises, including without limitation, any representation or warranty as to
condition or fitness of the Building or the suitability of the Building for the
conduct of Tenant's business.
(d) Signs. Tenant shall not erect or install on any exterior
or interior window, any door, or any exterior wall signs, advertising media,
placards, trademarks, drapes, screens, tinting materials, shades, blinds or
similar items, without first securing Landlord's written permission, which
permission shall not be unreasonably withheld if the signs comply with the
following standards. All signs shall comply with all applicable governmental
requirements, shall conform to the design, motif and decor of the Project and
shall be in good taste, as determined in Landlord's reasonable discretion.
Landlord hereby approves the sign plan for the Premises attached hereto as
Exhibit F. Tenant shall properly maintain all approved signs. Upon expiration of
the Lease, Tenant promptly shall remove all signs placed in and around the
Premises by Tenant and shall repair any damage to the Premises caused by the
removal of such signs. Landlord may also require Tenant to erect an exterior
identifying sign in form and substance satisfactory to Landlord, which sign
shall also be subject to all of the other provisions of this subparagraph (d).
(e) Governmental Regulation. In addition to the general
obligation of Tenant to comply with laws and without limitation thereof,
Landlord shall not be liable to Tenant nor shall this Lease be affected if any
parking privileges appurtenant to or on the Premises or the Building are
impaired by reason of any moratorium, initiative, referendum, statute,
regulation, or other governmental decree or action which could in any manner
prevent or limit the parking rights of Tenant hereunder. Any governmental
charges or surcharges or other monetary obligations imposed relative to parking
rights with respect to the Premises or the Building shall be considered as
Property Taxes and shall be payable by Tenant under the provisions of paragraph
14 hereof.
8. Maintenance and Repairs.
(a) Tenant's Maintenance. Tenant shall, at Tenant's sole cost
and expense, keep and maintain the Premises, including, without limitation, the
roof and outside wall surfaces, the subfloors and floor coverings, any and all
alterations and additions made by Tenant pursuant to the provisions hereof, all
walks, driveways, parking and loading areas, lawns and landscaping, fences and
signs located in the areas which are adjacent to or included with the Premises,
in all respects in good repair and in a clean and safe condition. Tenant shall,
at Tenant's own expense, immediately replace all interior, exterior or other
glass in or about the Premises that may be broken during the Term with glass at
least equal to the specification and quality of the glass so replaced. If Tenant
fails to perform Tenant's obligations under this subparagraph, Landlord may at
its option enter upon the Premises after ten (10) days prior written notice to
Tenant and put the same in good order, condition and repair, and the cost
thereof together with interest thereon at the rate of fifteen percent (15%) per
7
<PAGE> 11
annum shall become due and payable as additional rental to Landlord together
with Tenant's next monthly Rent payment. Nothing herein shall imply any duty
upon the part of Landlord to do any such work and the performance thereof by
Landlord shall not constitute a waiver of Tenant's default in failing to perform
the same. Landlord may, during the progress of any such work in or on the
Premises, keep and store therein all necessary materials, tools, supplies and
equipment. Landlord shall not be liable for the inconvenience, annoyance,
disturbance, loss of business or other damage of Tenant by reason of making such
repairs or the performance of any such work, or on account of bringing
materials, tools, supplies or equipment into or through the Premises during the
course thereof, and the obligations of Tenant under this Lease shall not be
affected thereby.
(b) Landlord's Obligations to Repair. Landlord shall, at its
expense, after written notice from Tenant, repair in a prompt and diligent
manner any damage to structural portions of the roof and bearing walls of the
Premises; provided, however, that if such damage is caused by an act or omission
of Tenant or Tenant's agents, invitees, employees or contractors, then such
repairs shall, to the extent not covered by the insurance maintained by Tenant
under the provisions of this Lease, be at Tenant's expense, payable to Landlord
pursuant to this paragraph. There shall be no abatement of Rent during the
performance of such work. Landlord shall not be liable to Tenant for injury or
damage that may result from any defect in the construction or conditions of the
Premises and Tenant shall seek recovery for such injury or damage solely from
Tenant's insurance and/or any other persons or entities which may be liable to
Tenant; provided, however, Landlord shall comply with its warranty obligations
under paragraph 3 of this Lease. Tenant waives any right to make repairs at the
expense of Landlord under any law, statute or ordinance now or hereafter in
effect unless Tenant has given Landlord written notice of the need for such
repairs, such repairs are the obligation of Landlord under this Lease and
Landlord has failed to make the needed repairs within a reasonable period of
time after the receipt of such notice. Tenant expressly acknowledges that any
repairs to the walls of the Improvements relating to maturity or weathering of
construction materials, as contrasted to damage to the structural integrity of
the bearing walls, shall be the responsibility of the Tenant. If Landlord or
Tenant performs any repairs or replacement work pursuant to this subparagraph
(b) or other provisions of this Lease (except paragraph 3) which would be deemed
a capital expenditure to the Premises under generally accepted accounting
principles, then (i) the cost of the capital expenditure shall be amortized,
with interest at the rate of ten percent (10%) per annum, over the period of
their useful life; (ii) the cost, with interest, attributable on such amortized
basis to the remaining Term of the Lease, including, if applicable, the First
and Second Extended Terms, shall be payable by Tenant to Landlord; and (iii)
such amount shall be payable in equal monthly installments at the time each
payment of Fixed Rent is due under this Lease, including but not limited to
payments during the First or Second Extended Terms if Tenant exercises its
option(s) to extend the Term of this Lease under Exhibit E.
(c) Surrender. On the last day of the Term, or on any sooner
termination of this Lease, Tenant shall surrender the Premises to Landlord in
the same condition as when received, broom clean, ordinary wear and tear alone
excepted; provided, however, Tenant may leave certain alterations and
improvements on the Premises in accordance with subparagraphs 10(a) and 10(c)
below. Tenant shall repair any damage to the Premises occasioned by the removal
of Tenant's alterations and improvements (including, without limitation, its
trade fixtures, furnishings and equipment), which repair shall include, without
limitation, the patching and filling of holes and repair of structural damage.
9. Utilities. Tenant shall pay for water, gas, heat, light,
power, telephone and other utilities and services supplied to the Premises,
together with any taxes thereon. Landlord represents and warrants that each
utility now supplied to the Premises or to be supplied upon completion of the
Tenant Improvements will be separately metered. Landlord reserves the right to
grant easements on the Premises for public utilities, and to dedicate for public
utility purposes portions thereof, without Tenant's consent provided that no
such grant or dedication shall interfere with Tenant's use of the Premises or
otherwise cause Tenant to incur cost or expense. From time to time upon
Landlord's demand, Tenant shall execute, acknowledge and deliver to Landlord, in
accordance with Landlord's instructions, any and all documents or instruments
necessary to effect Tenant's covenants herein.
8
<PAGE> 12
10. Alterations and Additions.
(a) Limitation. Tenant shall not, without Landlord's prior
written consent, make any alterations, improvements, additions, or utility
installations (which term "utility installations" shall include ducting, power
panels, fluorescent fixtures, space heaters, conduits and wiring) in, on or
about the Premises, except for interior nonstructural alterations to the
Premises costing less than Fifty Thousand Dollars ($50,000) in the aggregate
over any one (1) year period. As a condition to giving such consent, Landlord
may require that Tenant agree to (i) remove any such alterations, improvements,
additions or utility installations at the expiration of the Term and restore the
Premises to their prior condition or, in the alternative, (ii) require that such
alterations, improvements, additions or utility installations shall become the
property of Landlord and shall be left by Tenant upon the expiration of the
Term; provided, however, Landlord may not require that Tenant remove any of the
foregoing items which are typically installed for office and/or warehouse use
such as normal partitions, offices and shelving, but items such as, without
limitation, foundations, hoists and refrigeration equipment shall not be deemed
items typically installed in an office or warehouse. As a further condition to
giving such consent, Landlord may require Tenant to provide Landlord, at
Tenant's sole cost and expense, lien and completion bonds or other adequate
security in an amount equal to one hundred five percent (105%) of the estimated
cost of such improvements to insure Landlord against any liability for
mechanics' and materialmen's liens and to insure completion of the work.
(b) Liens. Tenant shall keep the Premises, the Building and
the Property free from any liens arising out of any work performed or alleged to
have been performed for Tenant's account on the Premises or materials furnished
to the Premises for Tenant's account. Tenant shall give Landlord not less than
ten (10) days notice prior to the commencement of any work on the Premises, and
Landlord shall have the right to post notices of non-responsibility in or on
the Premises as provided by law.
(c) Removal. Unless Landlord requires their removal as set
forth in subparagraph (a) above or otherwise consents to such removal, all
alterations, improvements, additions and utility installations which may be made
on or to the Premises shall become the property of Landlord and remain upon and
be surrendered with the Premises at the expiration of the Term. Notwithstanding
the provisions of this subparagraph (c), Tenant's shelving, machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Tenant and may be removed by Tenant subject to the provisions of subparagraph
8(c) above.
11. Insurance.
(a) General Liability. Tenant at its sole cost and expense,
but for the mutual benefit of Landlord, Landlord's property manager (if any) and
Tenant as named insureds, shall maintain commercial general liability insurance
("Liability Insurance") on an "occurrence basis" against claims for "personal
injury," including without limitation, bodily injury, death or property damage,
occurring upon, in or about the Premises and on, in or about the adjoining
sidewalks, streets and passageways and for all other areas appurtenant thereto,
such insurance to afford immediate minimum protection, at the time of the
inception of this Lease, and at all times during the Term, to a limit of not
less than Two Million Dollars ($2,000,000) with respect to personal injury or
death to any one or more persons or to damage to property. Such insurance shall
also include coverage against liability for bodily injury or property damage
arising out of the use, by or on behalf of Tenant, or any other person or
organization, of any owned, non-owned, leased or hired automotive equipment in
the conduct of any and all operations called for under this Lease. The limits of
said insurance shall not, however, limit the liability of Tenant hereunder.
(b) Extended Coverage. Tenant, at its sole cost and expense,
shall keep the Improvements insured during the Term for the mutual benefit of
Landlord and Tenant as named insureds, against loss or damage by fire and
lightning and against loss or damage by other risks embraced by coverage, of the
type now known as the broad form of extended coverage, including but not limited
to fire, riot and civil commotion, vandalism and malicious mischief, special
extended
9
<PAGE> 13
perils (all risk) and sprinkler leakage, and against such other risks or hazards
as Landlord may from time to time reasonably designate, in amounts sufficient to
prevent Landlord or Tenant from becoming a co-insurer under the terms of the
applicable policies, but in any event in an amount not less than the full
replacement cost of the Improvements, without deduction for physical
depreciation, and with not more than Two Thousand Five Hundred Dollars ($2,500)
deductible from the loss payable for any casualty. The policies of insurance
carried in accordance with this paragraph shall contain a "Replacement Cost
Endorsement." Such full replacement cost shall be determined from time to time,
but not more frequently than once in any twelve (12) consecutive calendar months
(except in the event of substantial changes or alterations to the Improvements
undertaken by Tenant as permitted hereunder) upon the written request of
Landlord by an appraiser, architect or contractor who shall be mutually and
reasonably acceptable to Landlord and Tenant. A copy of any such determination
shall promptly be sent to Landlord, and subject to the approval of such
determination by Landlord, the insurance maintained in this paragraph shall be
adjusted to the new full replacement cost. Said insurance shall provide for
payment for loss thereunder to Landlord or, at Landlord's request, to the holder
of any mortgage or deed of trust on the Premises but the proceeds thereof shall
be applied as provided in paragraph 13 below.
(c) Policies. Insurance required hereunder shall be by
companies rated AX or better in "Best's Insurance Guide" licensed to do
business in the state in which the Premises are located and acceptable to
Landlord and the holder of any mortgage or deed of trust on the Premises or any
part or portion thereof. Tenant shall deliver to Landlord copies of policies of
such insurance or certificates evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Landlord. No such policy
shall be cancelable or subject to reduction of coverage or other modification
except after thirty (30) days written notice to Landlord. Tenant shall, within
ten (10) days of the expiration of such policies, furnished Landlord with
renewals or "binders" thereof, or Landlord may order such insurance and charge
the cost thereof to Tenant, which amount shall be payable by Tenant upon demand.
Each such policy or certificate therefor issued by the insurer shall to the
extent obtainable contain (i) a provision that no act or omission of Tenant
which would otherwise result in forfeiture or reduction of the insurance therein
provided shall affect or limit the obligation of the insurance company to pay
the amount of any loss sustained and (ii) an agreement by the insurer that such
policy shall not be canceled without at least thirty (30) days prior written
notice by registered mail to Landlord. Tenant shall not do or permit to be done
anything which shall invalidate the insurance policies referred to herein. If
Tenant shall fail to procure and maintain any insurance required to be
maintained by it by virtue of any provision of this paragraph, Landlord may, but
shall not be required to, procure and maintain the same, but at the expense of
Tenant.
(d) Waiver of Subrogation. Landlord and Tenant each hereby
waive any and all rights of recovery against the other, or against the partners,
officers, employees, agents and representatives of the other, for loss of or
damage to such waiving party or its property or the property of the other under
its control to the extent that such loss or damage is insured against under any
insurance policy in force at the time of such loss or damage. Tenant shall, upon
obtaining the policies of insurance required hereunder, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
(e) Tenant's Contents. Tenant shall assume the risk of damage
to any fixtures, goods, inventory, merchandise, equipment, furniture and
leasehold improvements which remain the property of Tenant or as to which Tenant
retains the right of removal from the Premises, and Landlord shall not be liable
for injury to Tenant's business or any loss of income therefrom relative to such
damage. Tenant shall maintain the following insurance coverage with respect to
such items during the Term:
(i) Against fire, extended coverage, and vandalism and
malicious mischief perils in an amount not less than ninety percent (90%)
of the full replacement cost thereof;
(ii) Broad form boiler and machinery insurance on a
blanket repair and replacement basis with limits per accident not less
than the replacement cost of all leasehold improvements and of all
boilers, pressure vessels, air conditioning equipment, miscellaneous
10
<PAGE> 14
electrical apparatus and all other insurable objects owned or operated by
the Tenant or by others (other than Landlord) on behalf of Tenant in the
Premises, or relating to or serving the Premises; and;
(iii) Business interruption insurance in such an amount
as will reimburse Tenant for direct or indirect loss of earnings
attributable to all such perils insured against in subparagraphs 11(e)(i)
and (ii) hereinabove.
(f) Workmen's Compensation. Tenant shall, at its own cost and
expense, keep and maintain in full force and effect during the Term, a policy or
policies of workmen's compensation insurance covering all Tenant's employees
working in the Premises, and shall furnish Landlord with certificates thereof.
(g) Rental Income Insurance. Tenant shall obtain and keep in
force during the term of this Lease a policy of rental income insurance in an
amount adequate to cover Fixed Rent and Adjustments for a period of twelve (12)
months, with loss payable to Landlord, which insurance shall also cover all real
estate taxes and insurance costs for which Tenant is obligated hereunder during
such twelve (12) month period.
12. Indemnity; Exemption of Landlord from Liability.
(a) General. In addition to any other obligations of Tenant
hereunder, including the obligations of Tenant to provide insurance, Tenant
shall indemnify and hold Landlord harmless for, from and against any and all
claims arising from Tenant's use of the Premises, or from the conduct of
Tenant's business or from any activity, work or things done, permitted or
suffered by Tenant in or about the Premises or elsewhere and shall further
indemnify and hold Landlord harmless for, from and against any and all claims
arising from any breach or default in the performance of any obligation on
Tenant's part to be performed under the terms of this Lease, or arising from any
negligence of Tenant, or any of Tenant's agents, contractors, or employees, and
for, from and against all costs, attorneys' fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Landlord by
reason of any such claim, Tenant upon notice from Landlord shall defend the same
at Tenant's expense by counsel satisfactory to Landlord; provided, however, the
foregoing indemnity shall not apply to claims made as a result of the active
negligence or intentional misconduct of Landlord. Tenant, as a material part of
the consideration to Landlord for Landlord's execution of this Lease, also
hereby assumes all risk of damage to property or injury to persons in, upon or
about the Premises arising from any cause whatsoever; hereby waives all claims
in respect thereof against Landlord; and agrees that all claims with respect
thereto shall be made solely against any insurance carried by Tenant and/or
against any other persons or entities which may be liable for such claims;
provided, however, the assumption, waiver and agreement set forth in this
sentence shall not negate or diminish the warranty obligations of Landlord set
forth in paragraph 3 of this Lease.
(b). Tenant's Business. In addition to any other obligation of
Tenant hereunder, including any obligation of Tenant to provide insurance,
Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's
business or any loss of income therefrom or for damage to the goods, wares,
merchandise or other property of Tenant, Tenant's employees, invitees,
customers, or any other person in or about the Premises, nor shall Landlord be
liable for injury to the person of Tenant or Tenant's employees, agents or
contractors, whether such damage or injury is caused by or results from fire,
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause whatsoever,
resulting from conditions arising upon the Premises, or from other sources or
places, and regardless of whether the cause of such damage or injury or the
means of repairing the same is inaccessible to Tenant. Instead, Tenant shall
seek recovery for any such injury, loss or damage solely from any insurance
carried by Tenant and/or from any other persons or entities which may be liable
to Tenant for such injury, loss or damage.
11
<PAGE> 15
13. Damage or Destruction; Obligation to Rebuild.
(a) Landlord's Obligation to Rebuild. If the Premises are
damaged or destroyed during the Term, Landlord shall, except as hereinafter
provided, diligently repair or rebuild them to substantially the condition in
which they existed immediately prior to such damage or destruction; provided
that any damage which is estimated in good faith by Landlord to be under Two
Thousand Five Hundred Dollars ($2,500.00) shall be repaired by Tenant, and
Landlord shall reimburse Tenant upon demand for expenses incurred in such repair
work to the extent of any proceeds received by Landlord from extended coverage
insurance maintained pursuant to paragraph 11 above.
(b) Abatement of Rent. Rent due and payable hereunder shall be
abated, but only to the extent of any proceeds received by Landlord from rental
income insurance maintained pursuant to paragraph 11 above, during the period
commencing with such damage or destruction and ending with the substantial
completion by Landlord of the work of repair or reconstruction which Landlord is
obligated or undertakes to do; provided, however, if such abatement period is
sixty (60) days or more, Tenant's obligation to pay Rent shall not commence
until the earlier of (i) occupancy of the damaged portion of the Premises by
Tenant, or (ii) thirty (30) days after Landlord gives Tenant written notice of
the approximate date that the work of repair or restoration will be
substantially complete.
(c) Option to Terminate. If the Improvements are damaged or
destroyed to the extent that the same cannot, with reasonable diligence, be
fully repaired or restored by Landlord within one hundred eighty (180) days
after the date of the damage or destruction, Tenant shall have the option to
terminate this Lease by written notice given to Landlord within thirty (30) days
after the date of the damage or destruction. If the Building, including the
Premises, can be fully repaired or restored within the one hundred eighty (180)
day period, or if it is determined that such repair or restoration cannot be
made within said period but Tenant does not elect to terminate within thirty
(30) days from the date of said damage or destruction, this Lease shall remain
in full force and effect and Landlord shall diligently repair and restore the
damage as soon as reasonably possible.
(d) Uninsured Casualties. Notwithstanding anything contained
herein to the contrary, in the event of damage to or destruction of all or any
portion of the Improvements which is not fully covered (except for deductible
amounts) by the insurance proceeds received by Landlord under the insurance
policies required to be maintained pursuant to paragraph 11 above, or in the
event that any portion of such insurance proceeds must be paid over to or are
retained by the holder of any mortgage or deed of trust on the Property or
Premises, Landlord may terminate this Lease by written notice to Tenant, given
within thirty (30) days after the date of notice to Landlord that said damage or
destruction is not so covered or that the proceeds are not available for repair
of the damage or destruction; provided, however, within a period of twenty (20)
days after receipt of Landlord's termination notice, Tenant may, by written
notice given to Landlord, make available to Landlord, for repair or restoration
but without any reimbursement by Landlord, the funds necessary to effect the
complete repair and restoration and, in such event, Landlord's notice of
termination shall be rescinded. If Landlord does not elect to terminate this
Lease or Tenant makes available the funds for repair or restoration as above
provided, the Lease shall remain in full force and effect and the Improvements
shall be repaired and rebuilt in accordance with the provisions for repair set
forth in subparagraph 13(a) above.
(e) Damage Near End of Term. If the Improvements are partially
destroyed or damaged during the last eighteen (18) months of the Term, as such
Term may have been extended pursuant to Exhibit E to this Lease, and the cost to
repair or restore the Premises shall be Three Hundred Fifty Thousand Dollars
($350,000) or greater, either Landlord or Tenant may, at its option, cancel and
terminate this Lease as of the date of occurrence of such damage by giving
written notice to the other party of such election to do so within thirty (30)
days after the date of occurrence of such damage; provided, however, if the
damage or destruction occurs during the thirteenth (13th) to eighteenth (18th)
month prior to the expiration of the Initial Term or First Extended Term (as
defined in Exhibit E) and Tenant then retains, but has not yet exercised, its
option to extend the Term for an additional five-year period pursuant to Exhibit
E, Tenant may elect, by written notice to Landlord
12
<PAGE> 16
given on or before the earlier of (i) the date which is sixty (60) days after
receipt of Landlord's notice of termination, or (ii) one (1) year prior to
expiration of the Initial Term or First Extended Term, as applicable, to
exercise its option to extend the Term for an additional five-year period as
provided in Exhibit E and, in such event, any notice of termination given by
Landlord shall be rescinded and this Lease shall continue in full force and
effect.
(f) Tenant's Waiver. With respect to any destruction which
Landlord is obligated to repair or may elect to repair under the terms of this
paragraph, Tenant hereby waives all right to terminate this Lease pursuant to
rights otherwise presently or hereafter accorded by the provisions of Arizona
Revised Statutes Section 33-343 or other applicable laws to tenants, except as
expressly otherwise provided herein.
14. Taxes and Assessments.
(a) Payment. Tenant shall pay all Property Taxes (as defined
below) applicable to the Premises during the Term. Each payment shall be made at
least ten (10) days prior to the delinquency date of such payment; provided,
however, that if (i) in connection with any financing obtained by Landlord on
the Premises or any portion thereof, Landlord is required to pay into an impound
account any sums due as Property Taxes, and (ii) Tenant has at any time
committed a default under paragraph 17 of this Lease by failing to pay when due
and prior to the expiration of any applicable cure period any monetary amounts
to be paid by Tenant under this Lease, then Tenant shall pay such sums to
Landlord in satisfaction of Tenant's obligations to pay such sums due as
Property Taxes as additional rent and without deduction or offset on or before
the first day of each and every month during which said sums are required to be
impounded. Tenant shall promptly furnish Landlord with evidence satisfactory to
Landlord that Property Taxes have been paid. If any Property Taxes due with
respect to the Premises shall cover any period of time prior to or after the
expiration of the Term, Tenant's share of such Property Taxes shall be equitably
prorated to cover only the period of time within the tax fiscal year during
which this Lease shall be in effect. If Tenant shall fail to pay any Property
Taxes, Landlord shall have the right, but not the obligation, to pay the same,
in which case Tenant shall repay such amount to Landlord with Tenant's next Rent
installment.
(b) Definition. As used herein, the term "Property Taxes"
shall include any form of general or special assessment, license fee, levy
penalty, or tax (other than inheritance or estate taxes) imposed by any
authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, lighting,
drainage or other improvement district, or any part or parts thereof, or against
any legal or equitable interest of Landlord in the Premises or any part thereof
or against Landlord's right to rent or other income therefrom (but exclusive of
taxes levied on or computed by reference to Landlord's net income as a whole),
or against Landlord's business of leasing the Premises, it being the intention
of the parties hereto that the Rent to be paid hereunder shall be paid to
Landlord absolutely net, without deduction of any nature whatsoever, foreseeable
or unforeseeable.
(c) Separate Assessment. Landlord warrants that the Premises
constitutes all of one or more tax parcels for the purposes of assessment of
real property taxes by the State of Arizona, and that no portion of the Premises
is jointly assessed with any other real property as a single tax parcel.
(d) Personal Property. tenant shall pay prior to delinquency
all taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property contained on the Premises or
elsewhere. Tenant shall cause such trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the
Premises.
(e) Rent Tax. Tenant shall pay to Landlord a sum equal to the
amount which Landlord is required to pay or collect by reason of any privilege
tax, sales tax, gross proceeds tax, rent tax, or like tax levied, assessed or
imposed by any governmental authority or subdivision thereof, upon or measured
by any Rent, Reimbursable Expense, or other charges or sums required to be paid
or improvements to be made by Tenant under this Lease. Such sum shall be paid
13
<PAGE> 17
simultaneously with the payment by Tenant to Landlord of the Fixed Rent or other
charge to which such tax is attributable or, in the case of a tax not
attributable to Fixed Rent or other charges, at such time as Landlord shall
demand payment thereof. Nothing contained in this Lease shall require Tenant to
pay any franchise, corporate, estate, inheritance, succession, or transfer tax
of Landlord or any tax upon the net income of Landlord.
(f) Declaration. INTENTIONALLY DELETED.
(g) Project Assessments. Tenant shall pay to Landlord or the
owner or manager of the Project, as Landlord may direct, prior to delinquency
any and all charges, assessments, fees or other costs of any type which are due
and payable by Landlord or other occupant of the Premises as a result of the
inclusion of the Premises in the Project, including but not limited to those
payable under any covenants, conditions, restrictions or declarations affecting
the Premises.
(h) Right to Contest. Either party, at its expense, will have
the right to contest the legality, validity or amount of any Property Taxes or
the assessments or valuations upon which same are based by appropriate
proceedings prosecuted in good faith. Such contest may be made in the name of
Landlord or Tenant, or both, and if requested by Tenant, Landlord will actively
at Tenant's expense participate in such contest. Landlord will be notified of
any such contest by Tenant and will cooperate with Tenant and, if required, join
Tenant in any such proceedings. No such contest, however, shall permit any tax
owing to become delinquent or subject the Premises to a lien for delinquent
taxes alleged to be due and owing.
15. Condemnation.
(a) Rent Reduction or Lease Termination. If the Premises or
any portion thereof is taken under the power of eminent domain, or sold under
the threat of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first occurs
(the "Condemnation Date") and the Rent shall be reduced (as of the Condemnation
Date) as provided below. If (i) more than ten percent (10%) of the floor area of
any building comprising the Improvements or more than twenty-five percent (25%)
of the land area of the Property which is not occupied by any such building is
taken by condemnation, and (ii) as a result of such taking by condemnation the
balance of the Premises remaining after such condemnation is not reasonably
suitable for the use to which the Premises were being put immediately prior to
the condemnation, Tenant may, at Tenant's option, to be exercised in writing
only within ten (10) days after Landlord shall have given Tenant written notice
of such taking (or in the absence of such notice, within ten (10) days of the
Condemnation Date) terminate this Lease as of the Condemnation Date. If Tenant
does not terminate this Lease in accordance with the foregoing, or in the event
that that portion of the Premises taken by condemnation is not sufficiently
large so as to give rise to the right to terminate this Lease as above provided,
this Lease shall remain in full force and effect as to the portion of the
Premises remaining, except that the Fixed Rent shall be reduced (as of the
Condemnation Date) in the proportion that the floor area of the Building taken
by condemnation bears to the total floor area of the Building.
(b) Award. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Landlord, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Tenant
shall be entitled to any award specifically attributed by the condemning
authority to loss or damage to Tenant's trade fixtures and removable personal
property or to Tenant's relocation costs. In the event that this Lease is not
terminated by reason of such condemnation, Landlord shall, to the extent of
severance damages received by Landlord in connection with such condemnation and
not paid to or retained by the holder of any mortgage or deed of trust on the
Property or the Premises, repair any damage to the Premises caused by such
condemnation except to the extent that Tenant has been reimbursed therefor by
the condemning authority (in which event such reimbursement to Tenant shall also
be applied to such repair). Tenant shall pay any amount in excess of such
severance damages required to complete such repair; provided, however, if the
severance damages are not
14
<PAGE> 18
sufficient to pay all of the repair costs and if any specific item of repair
work shall be expected to have a useful life which extends beyond the term of
this Lease (including the term of any options which Tenant may have the right to
exercise), then Tenant shall be obligated to pay with respect to the
identifiable cost of such item of repair only the portion of the total cost of
such item of repair which bears the same ratio to the total cost of such item of
repair as the remaining term of this Lease (as determined on the Condemnation
Date and including the term of any options which the Tenant may have the right
to exercise) bears to the reasonably anticipated useful life of such item of
repair.
(c) Temporary Condemnation. If the temporary use of the whole
or any part of the Premises shall be taken by condemnation, the Term shall not,
except as hereinafter specifically provided, be reduced or affected in any way,
and Tenant in such event shall continue to pay in full the Rent and other
charges herein reserved, without reduction or abatement, and, except to the
extent that Tenant is prevented from so doing by reason of any order of the
condemning authority, shall continue to perform and observe all of the other
covenants, conditions and agreements of this Lease to be performed or observed
by Tenant as though such taking had not occurred. In the event of any such
temporary condemnation Tenant shall, so long as it is otherwise in compliance
with the provisions of this Lease, be entitled to receive for itself any and all
awards or payments made for such use of that portion of the Premises so taken;
provided, however, that Tenant shall repair any and all damages to the Premises
(whether or not covered by any award to Tenant) caused by such temporary
condemnation. Anything in the foregoing to the contrary notwithstanding, if the
period of any temporary condemnation exceeds twelve (12) months and the
temporary condemnation materially interferes with Tenant's use of the Premises,
Tenant may, at any time thereafter prior to the termination of such temporary
condemnation, terminate this Lease by written notice to Landlord, with such
termination to have the same force and effect as if the Term of the Lease had
expired as of such date of termination.
16. Assignment and Subletting.
(a) Consent. Tenant shall not voluntarily or by operation of
law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or
any part of Tenant's interest in this Lease or in the Premises without
Landlord's prior written consent, which consent Landlord shall not unreasonably
withhold; provided, however, (a) Landlord may withhold its consent to such
assignment, transfer, mortgage, subletting or other transfer or encumbrance
pursuant to the preceding sentence for substantive reasons including, without
limitation, the financial condition of the proposed assignee or transferee; and
(b) Landlord shall be obligated to consent to any transfer or assignment which
is part of a merger transaction involving Tenant or which is to a person or
entity which controls Tenant, is controlled by Tenant or is controlled by the
same entity as Tenant. Any attempted assignment, transfer, mortgage, subletting
or encumbrance without such consent shall be void and shall constitute a breach
of this Lease. The consent of Landlord to any one assignment, transfer,
mortgage, subletting, or encumbrance shall not be deemed to be a consent to any
subsequent assignment, transfer, mortgage, subletting, or encumbrance.
(b) Tenant's Continuing Liability. Regardless of Landlord's
consent, no subletting or assignment shall alter the primary liability of Tenant
to pay the Rent or release Tenant of Tenant's obligation to perform all other
obligations to be performed by Tenant hereunder unless Landlord's written
consent shall so specifically provide, and Landlord under no circumstances shall
be obligated to release Tenant from any such liability. The acceptance of rent
by Landlord from any other person shall not be deemed to be a waiver by Landlord
of any provision hereof.
(c) Information. In connection with any proposed assignment or
sublease, Tenant shall submit to Landlord in writing:
(i) The name of the proposed assignee or sublessee;
(ii) Such information as to the financial responsibility
and standing of said assignee or sublessee as Landlord may
reasonably require; and
15
<PAGE> 19
(iii) All of the terms and conditions upon which the
proposed assignment or subletting is to be made.
(d) Excess Sublease Rental. If for any sublease or assignment,
Tenant receives rent or other consideration, either directly or indirectly (by
performance of Tenant's obligations or otherwise) and either initially or over
the Term of the sublease or assignment, in excess of the Fixed Rent, Adjustments
and additional rent called for hereunder, or in the case of the sublease or
assignment of a portion of the Premises, in excess of such Fixed Rent,
Adjustments and additional rent fairly allocable to such portion, after
appropriate adjustments to assure that all other payments called for hereunder
are appropriately taken into account, Tenant shall pay to Landlord, at the same
time as Fixed Rent is due hereunder, one-half (1/2) of the excess of each such
payment of rent or other consideration received by Tenant promptly after its
receipt; provided, however, such payment shall be required only with respect to
sums received by Tenant which are attributable to periods in an Extended Term
(as defined in Exhibit E) during which Tenant has assigned and/or sublet all or
substantially all of the Premises; and provided further, such payment shall not
be required in connection with a sublease or assignment which may be effected
under subparagraph 16(f) below without Landlord's consent.
(e) Release. Whenever Landlord conveys its interest in the
Premises, Landlord shall be automatically released from the further performance
of covenants on the part of Landlord herein contained, and from any and all
further liability, obligations, costs and expenses, demands, causes of action,
claims or judgments arising from or growing out of, or connected with this Lease
after the effective date of said release. The effective date of said release
shall be the date the assignee executes an assumption of such an assignment
whereby the assignee expressly agrees to assume all of Landlord's obligations,
duties, responsibilities and liabilities with respect to this Lease. If
requested, Tenant shall execute a form of release and such other documentation
as may be required to effect the provisions of this paragraph.
(f) Controlled Entity. Notwithstanding the provisions of this
paragraph 16, Tenant may assign or sublet the Premises, or any portion thereof,
without Landlord's consent, after written notice to Landlord, to any entity
which controls, is controlled by, or is under common ownership with Tenant, or
to any entity resulting from the merger or consolidation with Tenant, or to any
person or entity which acquires all the assets of Tenant as a going concern of
the business that is being conducted on the Premises or all of the outstanding
stock of Tenant, provided that said assignee assumes, in full, the obligations
of Tenant under this Lease. Any such assignment shall not, in any way, affect or
limit the liability of Tenant under the terms of this Lease even if after such
assignment or subletting the terms of this Lease are materially changed or
altered without the consent of Tenant, the consent of whom shall not be
necessary for such change or alteration.
(g) Attorneys' Fees. In the event that Landlord shall consent
to a sublease or assignment under subparagraph (a) above, Tenant shall pay
Landlord's reasonable attorneys' fees incurred in connection with the giving of
such consent and review of the information submitted by Tenant; provided,
however, the amount of such fees which Tenant shall be obligated to pay in
connection with any single consent shall not exceed Five Hundred Dollars ($500).
17. Defaults; Remedies.
(a) Defaults. The occurrence of any one or more of the
following events shall constitute a material default and material breach of this
Lease by Tenant:
(i) INTENTIONALLY DELETED.
(ii) The failure by Tenant to make any payment of Rent
or any other payment required to be made by Tenant hereunder,
as and when due, where such failure shall continue for a
period of five (5) working days after written notice thereof
from Landlord to Tenant;
16
<PAGE> 20
(iii) The failure by Tenant to observe or perform any of
the covenants, conditions or provisions of this Lease to be
observed or performed by Tenant, other than those described in
subparagraph (ii) above, where such failure shall continue for
a period of thirty (30) days after written notice thereof from
Landlord to Tenant; provided, however, that if the nature of
Tenant's default is such that it is capable of being cured but
more than thirty (30) days are reasonably required for its
cure, then Tenant shall not be deemed to be in default if
Tenant commences such cure within such thirty (30) day period
and thereafter diligently prosecutes such cure to completion;
or
(iv) The making by Tenant of any general assignment for
the benefit of creditors, the filing by or against Tenant of a
petition for order of relief in bankruptcy for the purpose of
bankruptcy liquidation or reorganization under any law
relating to bankruptcy whether now existing or hereafter
enacted (including, without limitation, any petition filed by
or against Tenant under any one or more of the following
Chapters of the Bankruptcy Reform Act of 1978, 11 U.S.C.
Sections 101-1330 ("Bankruptcy Code") as amended: Chapter 7 or
Chapter 9 or Chapter 11 or Chapter 12 or Chapter 13) except
that, in the case of a filing against Tenant of such a
petition, such filing shall not be a default if the petition
is dismissed or discharged on or before ninety (90) days after
the filing thereof; the appointment of a trustee or receiver
to take possession of all or substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within
ninety (90) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease,
where such seizure is not discharged within ninety (90) days.
Unless Landlord's express written consent thereto is first
obtained, in no event shall this Lease, or any interest herein
or hereunder or any estate created hereby, be assigned or
assignable by operation of law or by, in or under voluntary or
involuntary bankruptcy liquidation or reorganization
proceedings or otherwise and in no event shall this Lease or
any rights or privileges hereunder be an asset of Tenant under
any bankruptcy liquidation or reorganization proceedings. Any
purported assignment or transfer in violation of the
provisions of this subparagraph (iv) shall constitute a
material default and breach of this Lease by Tenant and in
connection with any such default and breach Landlord shall
have the rights and remedies described in subparagraph (b)
below, including, without limitation, the election to
terminate this Lease. As used in this subparagraph (iv) the
words "bankruptcy liquidation or reorganization proceedings"
shall include any proceedings under any law relating to
bankruptcy whether now existing or hereafter enacted
(including, without limitation, proceedings under any one or
more of the Bankruptcy Code as amended: Chapter 7 or Chapter 9
or Chapter 11 or Chapter 12 or Chapter 13).
(b) Remedies.
(i) In the event of any default and breach by Tenant of
any of its obligations under this Lease and notwithstanding
the vacation or abandonment of the Premises by Tenant, this
Lease shall continue in effect so long as Landlord does not
expressly terminate Tenant's right to possession in any of the
manners specified in this paragraph and Landlord may, at
Landlord's option and without limiting Landlord in the
exercise of any other rights or remedies which it may have by
reason of such default and breach, exercise all of its rights
and remedies hereunder, including, without limitation:
(A) the right to declare the Term ended and to
reenter the Premises and take possession thereof and
remove all persons therefrom, and Tenant shall have no
further claim in or to the Premises or under this Lease;
or
(B) the right without declaring this Lease ended
to reenter the Premises, take possession thereof, remove
all persons therefrom and occupy or lease the whole or
any part thereof for and on account of Tenant and upon
such terms and conditions and for such rent as Landlord
may deem proper and to collect such rent or any other
rent that may hereafter become payable and apply the
same as provided in subparagraph (ii) below; or
17
<PAGE> 21
(C) the right, even though Landlord may have relet
the Premises or brought an action to collect Rent and
other charges without terminating this Lease, to
thereafter elect to terminate this Lease and all of the
rights of Tenant in or to the Premises; or
(D) the right, without terminating this Lease, to
bring an action or actions to collect Rent and other
charges hereunder which are from time to time past due
and unpaid or to enforce any other provisions of this
Lease imposing obligations on Tenant, it being
understood that the bringing of any such action or
actions shall not terminate this Lease unless written
notice of termination is given;
provided, however;
(Y) if Tenant is in possession of the Premises,
Landlord shall not be entitled to recover possession of
the Premises by means of a lock-out or other self-help
remedy until there has been a determination by a court
of appropriate jurisdiction that Landlord is entitled to
possession or that Tenant is no longer entitled to
possession; and
(Z) Landlord shall not be entitled to exercise,
and hereby waives, any statutory landlord liens with
respect to Tenant's personal property, equipment and
fixtures.
(ii) Should Landlord relet the Premises under the
provisions of subparagraph (b)(i)(B) above, Landlord may
execute any lease either in its own name or in the name of
Tenant, but Tenant hereunder shall have no right or authority
whatever to collect any rent from the new tenant. The proceeds
of any such reletting shall first be applied to the payment of
the costs and expenses of reletting the Premises, including
without limitation, reasonable brokerage commissions and
alterations and repairs which Landlord, in its sole
discretion, deems reasonably necessary and advisable and to
the payment of reasonable attorneys' fees incurred by Landlord
in connection with the Tenant's default, the retaking of the
Premises and such reletting and, second, to the payment of any
indebtedness, other than Rent, due hereunder, including,
without limitation, storage charges owing from Tenant to
Landlord; provided, however, the amount of the proceeds which
may be applied to reimburse Landlord for the cost of repair
and restoration of the Premises in connection with a reletting
shall not exceed the costs necessary to restore the Premises
to the condition which would otherwise have been required at
the expiration of the Term of this Lease, but Tenant
acknowledges that Landlord will have no duty to make any other
improvements to the Premises in order to satisfy any
obligation Landlord may have under applicable law to use good
faith efforts to relet the Premises in order to mitigate
damages. When such costs and expenses of reletting have been
paid, and if there is no such indebtedness or such
indebtedness has been paid, Tenant shall be entitled to a
credit for the net amount of rental received from such
reletting each month during the unexpired balance of the Term,
and Tenant shall pay Landlord monthly on the first day of each
month as specified herein such sums as may be required to make
up the rentals provided for in this Lease. Nothing contained
herein shall be construed as obligating Landlord to relet the
whole or any part of the Premises.
(iii) Should Landlord elect to terminate this Lease
under the provisions of subparagraphs (b)(i)(A) or (C) above,
Landlord shall be entitled to recover immediately from Tenant
(in addition to any other amounts recoverable by Landlord as
provided by law), the following amounts:
(A) the worth at the time of award of the unpaid
rent which had been earned at the time of termination;
(B) the worth at the time of award of the amount
by which the unpaid rent which would have been earned
after termination until the time of award
18
<PAGE> 22
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided;
(C) the worth at the time of award of the amount by which the
unpaid rent for the balance of the Term after the time of award exceeds
the amount of such rental loss that Tenant proves could be reasonably
avoided; and
(D) any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things
would be likely to result therefrom.
For purposes of computing "the worth at the time of the award" of the
amount specified in subparagraph (b)(iii)(C) above, such amount shall be
discounted at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award. For purposes of computing "the worth at the time of the
award" under subparagraphs (b)(iii)(A) and (b)(iii)(B) above, an interest rate
of ten percent (10%) per annum shall be utilized.
(iv) If Landlord shall elect to reenter the Premises as provided
above, Landlord shall not be liable for damages by reason of any reentry so long
as Landlord has acted in a reasonable manner in effecting such reentry. Except
for claims based on negligent, malicious, reckless or willful and wanton acts of
Landlord, Tenant hereby waives all claims and demands against Landlord for
damages or loss arising out of or in connection with any reentering and taking
possession of the Premises and waives all claims for damages or loss arising out
of or in connection with any destruction of or damage to the Premises and any
loss of property belonging to Tenant or to any other person, firm or corporation
which may be in or upon the Premises at the time of such reentry.
(v) Landlord shall not be deemed to have terminated this Lease,
Tenant's right to possession of the Premises or the liability of Tenant to pay
Rent thereafter to accrue or its liability for damages under any of the
provisions hereof by any reentry hereunder or by any action in unlawful detainer
or otherwise to obtain possession of the Premises, unless Landlord shall notify
Tenant in writing that Landlord has so elected to terminate this Lease. Tenant
agrees that the service by Landlord of any notice pursuant to the unlawful
detainer statutes or comparable statutes of the state or locality in which the
Premises are located and the surrender of possession pursuant to such notice
shall not (unless Landlord elects to the contrary at the time of or at any time
subsequent to the service of such notice and such election shall be evidenced by
a written notice to Tenant) be deemed to be a termination of this Lease or of
Tenant's obligations hereunder. No reentry or reletting under this paragraph
shall be deemed to constitute a surrender or termination of this Lease, or of
any of the rights, options, elections, powers and remedies reserved by Landlord
hereunder, or a release of Tenant from any of its obligations hereunder, unless
Landlord shall specifically notify Tenant, in writing, to that effect. No such
reletting shall preclude Landlord from thereafter at any time terminating this
Lease as herein provided.
(vi) All fixtures, furnishings, goods, equipment, chattels or other
personal property of Tenant remaining on the Premises at the time that Landlord
takes possession thereof may at Landlord's election be stored at Tenant's
expense or sold or otherwise disposed of by Landlord in any manner permitted by
applicable law.
(vii) All rights, options, elections, powers and remedies of
Landlord under the provisions of this Lease are cumulative of each other and of
every other right, option, election, power or remedy which Landlord may
otherwise have at law or in equity and all or any of which Landlord is hereby
authorized to exercise. The exercise of one or more rights, options, elections,
powers or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies Landlord may have upon a breach and default
under this Lease and shall not be deemed to be a waiver of Landlord's rights or
remedies thereupon or to be a release of Tenant from Tenant's obligations
thereon unless such waiver or release is expressed in writing and signed by
Landlord.
19
<PAGE> 23
(viii) INTENTIONALLY DELETED.
(c) LATE CHARGES. Tenant hereby acknowledges that late payment
by Tenant to Landlord of rent and other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
such amount shall be due, Tenant shall pay to Landlord a late charge equal to
five percent (5%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted hereunder.
(d) PAYMENT OR PERFORMANCE BY LANDLORD. Landlord may, at
Landlord's option and without any obligation to do so, pay any sum or do any act
which Tenant has failed to pay or do at the time Tenant was obligated to make
such payment or perform such act and Landlord shall be entitled to recover from
Tenant, upon demand, all sums expended by Landlord in making such payment or
performing such act, together with interest thereon at the rate provided in
subparagraph 18(d) from the date of expenditure until repaid by Tenant;
provided, however, unless Landlord reasonably deems such payment or performance
by Landlord to be necessary prior to expiration of any applicable cure period
set forth in subparagraph (a) above in order to protect Landlord's interest,
Landlord shall not be entitled to recover such sums and interest from Tenant
unless Landlord waited until after expiration of any applicable cure period for
such non-payment or non-performance set forth in subparagraph (a) above. Any sum
and interest payable by Tenant under this subparagraph (d) shall be deemed
additional rent under this Lease.
18. MISCELLANEOUS.
(a) ESTOPPEL CERTIFICATES.
(i) Tenant shall at any time upon not less than ten
(10) days prior written notice from Landlord execute, acknowledge,
and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if modified,
stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to
which the Rent and other charges are paid in advance, if any, and
acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or specifying such
defaults if any are claimed. Any such statement may be conclusively
relied upon by any person to whom it shall be delivered by Landlord
including any prospective purchaser or encumbrancer of the Premises,
the Building, the Property, or any part thereof.
(ii) Tenant's failure to deliver such statement
within such time shall be conclusive upon Tenant that this Lease is
in full force and effect, without modification except as may be
represented by Landlord; that there are no uncured defaults in
Landlord's performance; and that not more than one month's Rent has
been paid in advance.
(iii) If Landlord desires to finance or refinance
the Premises, the Building, the Property, or any part thereof, Tenant
hereby agrees to deliver to any lender designated by Landlord such
financial statements of Tenant as may be reasonably required by such
lender. Such statements shall include the past three years financial
statements of Tenant. All such financial statements shall be received
by Landlord in confidence and shall be used only for the purposes
herein set forth.
(iv) Landlord shall at any time upon not less than
ten (10) days prior written notice from Tenant execute, acknowledge,
and deliver to Tenant a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if modified,
20
<PAGE> 24
stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to
which the Rent and other charges are paid in advance, if any, and
acknowledging that there are not, to Landlord's knowledge, any uncured
defaults on the part of Tenant hereunder, or specifying such defaults
if any are claimed. Any such statement may be conclusively relied upon
by any person to whom it shall be delivered by Tenant including any
prospective encumbrancer of Tenant's inventory or any part thereof.
Landlord's failure to deliver such statement within such time shall be
conclusive in favor of the prospective encumbrancer that this Lease is
in full force and effect, without modification except as may be
represented by Tenant; that there are no uncured defaults in Tenant's
performance; and that not more than one month's Rent has been paid in
advance.
(b) LANDLORD'S LIABILITY. The term "Landlord" as used herein
shall mean only the owner or owners at the time in question of the fee title to
the Premises and in the event of any transfer of such title, Landlord herein
named (and in case of any subsequent transfers, the then grantor) shall be
relieved from and after the date of such transfer of all liability as respects
Landlord's obligations thereafter to be performed, provided that any funds in
the hands of Landlord or the then grantor at the time of such transfer in which
Tenant has an interest shall be delivered to the grantee. The obligations
contained in this Lease to be performed by Landlord shall, subject as aforesaid,
be binding on Landlord's successors and assigns only during their respective
periods of ownership.
(c) CONSTRUCTION. Paragraph captions are solely for the
convenience of the parties and shall not be deemed to or be used to define,
construe, or limit the terms hereof. As used in this Lease, the masculine,
feminine and neuter genders shall be deemed to include the others, and the
singular number shall be deemed to include the plural, whenever the context so
requires. The invalidity of any provisions of this Lease as determined by a
court of competent jurisdiction shall in no way affect the validity of any other
provision hereof. This Lease shall be governed by the laws of the state in which
the Premises are located.
(d) INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly
herein provided, any amount due to Landlord or Tenant and not paid when due
shall bear interest at the lesser of (i) fifteen percent (15%) per annum or (ii)
the maximum rate permitted by law, from the date due until the date such amount
is paid. Payment of such interest shall be made when such amount is paid.
Payment of such interest shall not excuse or cure any default by Tenant under
this Lease.
(e) TIME OF ESSENCE. Time is of the essence of this Lease and
all of the covenants and obligations hereof.
(f) COUNTERPARTS. INTENTIONALLY DELETED.
(g) INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease
contains all agreements of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing only, which writing shall be
signed by the parties in interest at the time of the modification.
(h) NOTICES. Any notices, approvals, agreements, certificates,
other documents or communications between the parties hereto required or
permitted under this Lease shall be in writing. Any such communications shall
be deemed to have been duly given or served if delivered in hand or forty-eight
(48) hours after deposit in the United States mail, certified or registered,
postage and fees prepaid, return receipt requested, addressed to the parties at
the addresses set forth in paragraph 1 of this Lease. The address to which any
such communications shall be sent may be changed by either party hereto from
time to time by a notice mailed as aforesaid. A copy of each notice to Tenant
shall also be sent to:
Scott A. Rose, Esq.
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
21
<PAGE> 25
but copies of notices sent in accordance with this sentence are informational
and are not required in order for the notices given to Landlord or Tenant to be
effective.
(i) WAIVERS. No waiver by Landlord or Tenant of any provision
hereof shall be deemed a waiver of any other provision hereof or of any
subsequent breach by the other party of the same or any other provision.
Landlord's or Tenant's consent to or approval of any act shall not be deemed to
render unnecessary the obtaining of Landlord's or Tenant's consent to or
approval of any subsequent act by the other party. The acceptance of Rent
hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of
any provision hereof, other than the failure of Tenant to pay the particular
Rent so accepted, regardless of Landlord's knowledge of such preceding breach at
the time of acceptance of such Rent.
(j) RECORDING. Landlord and Tenant shall, upon the request of
either party, execute, acknowledge and deliver to the other a "short form"
memorandum of this Lease for recording purposes.
(k) HOLDING OVER. If Tenant remains in possession of the
Premises or any part thereof after the expiration of the Term or sooner
termination of this Lease with the express written consent of Landlord and
without executing a new lease, such occupancy shall be construed as a tenancy
from month-to-month at a rental equal to one hundred fifty percent (150%) of the
last monthly Rent plus all other charges payable hereunder, and upon all the
terms hereof insofar as the same are applicable to a month-to-month tenancy.
Nothing contained in this subparagraph shall be construed to grant Tenant the
right to holdover without the express written consent of Landlord.
(l) COVENANTS AND CONDITIONS. Each provision of this Lease
performable by Tenant shall be deemed both a covenant and a condition.
(m) BINDING EFFECT. Subject to any provisions hereof
restricting assignment or subletting by Tenant and subject to the provision of
subparagraph (b) above, this Lease shall bind the parties and their personal
representatives, successors and assigns.
(n) SUBORDINATION.
(i) This Lease, at Landlord's option, shall be subordinate
to any ground lease, mortgage, deed of trust, or any other
hypothecation for security now or hereafter placed upon the Premises,
the Building or the Property, or any part or parts thereof, and to any
and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof;
provided, however, such subordination shall not be binding on Tenant
unless the holder of the mortgage, deed of trust or other interest to
which this Lease is to be subordinate agrees that, so long as Tenant is
not in default hereunder:
(A) the holder will not disturb Tenant's possession
of the Premises;
(B) the holder agrees that, while it is in possession
of the Premises, it will perform Landlord's obligations under
this Lease which are attributable to the period of such
possession; and
(C) the holder will permit insurance proceeds to be
used for repair and restoration as provided in this Lease.
If any present or future mortgagee, trustee or ground lessor shall at
any time elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and written notice of such election
shall be given to Tenant, this Lease shall be deemed prior to such
mortgage, deed of trust, or ground lease, whether this Lease is dated
prior or subsequent to the date of said mortgage, deed of trust or
ground lease or the date of recording thereof.
22
<PAGE> 26
(ii) Tenant agrees to execute any documents required to
effectuate such subordination or to make this Lease prior to the lien
of any mortgage, deed of trust or ground lease, as the case may be, and
failing to do so within ten (10) days after written demand, does hereby
make, constitute and irrevocably appoint Landlord as Tenant's attorney
in fact and in Tenant's name, place and stead, to do so; provided,
however, such documents shall grant to Tenant the benefits and rights
described in clauses (A), (B) and (C) of subparagraph (n)(i) above.
(o) ATTORNEYS' FEE. If either party brings an action to
enforce the terms hereof or declare rights under this Lease, the prevailing
party in the final adjudication of any such action, on trial or appeal, shall be
entitled to its costs and expenses of suit, including, without limitation, its
actual attorneys' fees, to be paid by the losing party as fixed by the court. In
any situation in which a dispute is settled other than by action or proceeding,
Tenant shall pay all Landlord's costs and attorneys' fees relating thereto.
(p) LANDLORD'S ACCESS. Landlord and Landlord's agents shall
have the right to enter the Premises at reasonable times for the purpose of
inspecting the same, showing the same to prospective purchasers or lenders, and
making such alterations, repairs, improvements or additions to the Premises or
the improvements as Landlord may deem necessary or desirable; provided, however,
except in a situation reasonably deemed by Landlord to be an emergency, Landlord
shall give Tenant not less than twenty-four (24) hours prior written notice of
Landlord's planned entry. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" signs, all without rebate of rent or liability to Tenant.
(q) AUCTIONS. INTENTIONALLY DELETED.
(r) MERGER. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Landlord, terminate all or any existing subtenancies or may, at
the option of Landlord, operate as an assignment to Landlord of any or all of
such subtenancies. During any period while Tenant is in default under this
Lease, Landlord, in addition to any other rights and remedies it may have under
this Lease, shall have the right to collect directly from any subtenant all
rentals owing to Tenant under any subtenancy and to apply such rentals to any
amounts owing to Landlord by Tenant and the payment of such amounts by the
subtenant directly to Landlord shall not be a default under the subtenancy.
(s) JOINT AND SEVERAL LIABILITY. Each party signing this
Lease as Tenant shall be jointly and severally liable for the failure on the
part of Tenant to pay any sums due under the terms of this Lease or for the
breach by Tenant or any of the covenants or obligations of Tenant contained
herein.
(t) INDIVIDUAL LIABILITY. The obligations of Landlord under
this Lease do not constitute personal obligations of the individual partners,
directors, officers, or shareholders of Landlord, and Tenant shall look solely
to the real estate that is the subject of this Lease and to no other assets of
Landlord for satisfaction of any liability in respect of this Lease and will not
seek recourse against the individual partners, directors, officers or
shareholders of Landlord or any of their personal assets for such satisfaction.
(u) ATTORNMENT. Tenant shall, in the event any proceedings are
brought for the foreclosure of, or in the event of exercise of the power of sale
under any mortgage or deed of trust made by the Landlord, its successors or
assigns, encumbering the Premises, or any part thereof, or in the event of
termination of the ground lease, if any, and if so requested, attorn to the
purchaser upon such foreclosure or sale or upon any grant of a deed in lieu of
foreclosure, and shall recognize such purchaser as the Landlord under this
Lease, so long as such purchaser grants to Tenant the rights and benefits set
forth in clauses (A), (B) and (C) of subparagraph 18(n)(i) above.
(v) LENDERS RIGHT TO CURE. Tenant agrees to give the holder of
any mortgage or trust deed encumbering the Premises, by registered mail, a copy
of any notice of default or nonperformance served upon Landlord, provided that
prior to such notice, Tenant has been notified
23
<PAGE> 27
in writing (by way of Assignment of Rents and Leases or otherwise) of the
address of such mortgagee or trust deed holder. Tenant further agrees that
landlord shall not be in default under this Lease unless (i) tenant has given
a written notice to Landlord stating that Landlord has failed to perform
landlord's obligations under this lease and (ii) specifying with particularity
the obligations which Landlord has failed to perform, and Landlord thereafter
(A) fails to commence the cure of such default within thirty (30) days after
receipt of such notice or (B) fails to perform any of its obligations so
specified within a reasonable time after Landlord's receipt of such notice. If
Landlord shall fail to commence or cure such nonperformance in a timely manner
as above provided, then such mortgagee or trust deed holder shall have an
additional thirty (30) days within which to cure the default, or, if such
default cannot be cured within that time, then such additional time as may be
necessary if within such thirty (30) days such mortgagee or trust deed holder
has commenced and is diligently pursuing the remedies necessary to cure such
default (including but not limited to commencement of foreclosure proceedings,
if necessary to effect such cure), in which event this Lease shall not be
terminated by Tenant while such remedies are being so diligently pursued.
(w) REVISIONS TO LEASE. INTENTIONALLY DELETED.
(x) ADMINISTRATIVE CHARGE. In addition to Fixed Rent,
Adjustments and other charges hereunder, Tenant shall pay to Landlord an overall
administrative charge of five percent (5%) of any charge which is Tenant's
responsibility to pay, which Landlord pays on behalf of Tenant and for which
Landlord subsequently bills Tenant.
(y) ESTIMATED PAYMENTS. If Tenant has at any time during the
Term of this Lease committed a default under paragraph 17 of this Lease by
failing to pay when due and prior to the expiration of any applicable cure
period any monetary amount to be paid by Tenant under this Lease, Landlord may
require that Tenant thereafter during the remaining Term of this Lease pay to
Landlord, in monthly payments due at the time payments of Fixed Rent are due
hereunder, the estimated amounts of the annual premiums for all or a portion of
the insurance to be carried by Tenant and payments of Property Taxes to be made
by Tenant under this Lease; provided, however, if the Landlord requires such
estimated payments and Tenant, for a period of twenty-four (24) consecutive
months after the first time Landlord requires such estimated payments, does not
commit a default under paragraph 17 of this Lease by failing to pay when due and
prior to the expiration of any applicable cure period any monetary amount to be
paid by Tenant under this Lease (including but not limited to such estimated
payments), Tenant, except as otherwise provided in subparagraph 14(a), shall no
longer be required to make such estimated payments unless and until Tenant at
any time thereafter commits a default under paragraph 17 of this Lease by
failing to pay when due and prior to expiration of any applicable cure period
any monetary amount to be paid by Tenant under this Lease. The estimated
payments required by this subparagraph (y) shall be in addition to any impound
payments required by subparagraph 14(a), but Tenant may credit against payments
due under this subparagraph (y) any impound payments made by Tenant pursuant to
subparagraph 14(a) to the extent such impound payments apply to the same expense
item as an estimated payment under this subparagraph (y). The amount of each
estimated monthly payment shall be determined by dividing the Landlord's
estimate of the annual amount of the applicable payment, as determined in the
exercise of Landlord's reasonable discretion, by twelve (12). Landlord shall
then use the estimated payments to pay the amounts owing if Tenant is not in
default under this Lease; provided, however, Tenant shall remain fully obligated
to pay to Landlord or directly to the applicable entity, as Landlord may direct,
any deficiency between the amount owing for the applicable insurance premium or
Property Tax and the amount of the estimated payments held by Landlord for
application to such premium or Property Tax. The amount of estimated payments
paid and to be paid by Tenant shall be reconciled on an annual basis, with
appropriate deficiency payments and adjustments to be made or credits given in
the event that the estimated payments result in any underpayment or overpayment
to Landlord by Tenant when the amount of the actual charges for the applicable
premiums and/or Property Taxes are actually determined.
24
<PAGE> 28
19. TOXIC MATERIALS.
(a) DEFINITIONS.
(i) As used in this Lease, the term "Hazardous
Material[s]" means any oil, flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials including, without limitation, any substances that pose a
hazard to the Premises or to persons on or about the Premises and any
substances defined as or included in the definition of "hazardous
substance," "hazardous waste," "hazardous material," "toxic
substance," "extremely hazardous waste," "restricted hazardous waste"
or words of similar import, now or subsequently regulated in any way
under applicable federal, state or local laws or regulations,
including without limitation, petroleum-based products, paints,
solvents, lead, cyanide, DDT, printing inks, acids, pesticides,
ammonia compounds and other chemical products, asbestos, PCBs, urea
formaldehyde foam insulation, transformers or other equipment
containing dielectric fluid, levels of polychlorinated biphenyls, or
radon gas, and similar compounds, and including any different products
and materials which are subsequently found to have adverse effects on
the environment or the health and safety of persons.
(ii) As used herein, the term "Environmental Law[s]"
means any one or all of the following: the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund
Amendments and Reauthorization Act of 1986 (42 U.S.C. Sections 9601
seq.); the Resource Conservation and Recovery Act as amended (42 U.S.C.
Sections 6901 et seq.); the Safe Drinking Water Act as amended (42
U.S.C. Sections 300f et seq.); the Clean Water Act as amended (33
U.S.C. Sections 1251 et seq.); the Clean Air Act as amended (42 U.S.C.
Sections 7401 et seq.); the Toxic Substances Control Act as amended (15
U.S.C . Sections 136 et seq.); the Solid Waste Disposal Act as amended
(42 U.S.C. Sections 3251 et seq.); the Hazardous Materials
Transportation Act (49 U.S.C. Sections 1801 et seq.); the regulations
promulgated under any of the foregoing; and all other laws,
regulations, ordinances, standards, policies, and guidelines now in
effect or hereinafter enacted by any governmental entity (whether
local, state or federal) having jurisdiction or regulatory authority
over the Premises or the Project or over activities conducted therein
and which deal with the regulation or protection of human health,
industrial hygiene or the environment, including the soil, subsurface
soil, ambient air, groundwater, surface water, and land use.
(iii) As used herein, the term "Environmental
Activity[ies]" means any generation, manufacture, production, pumping,
bringing upon, use, storage, treatment, release, discharge, escaping,
emitting, leaching, disposal or transportation of Hazardous Materials.
(b) PROHIBITION ON HAZARDOUS MATERIALS. Except as specifically
provided in subparagraph (c) below, Tenant shall not cause or permit any
Environmental Activities in, on or about the Premises by Tenant or Tenant's
agents, employees, contractors, assignees, sublessees or invitees (hereinafter
cumulatively referred to as "Tenant's Agents") without the prior written consent
of Landlord. Landlord shall be entitled to take into account such factors or
facts as Landlord may reasonably determine to be relevant in determining whether
to consent to Tenant's proposed Environmental Activity and Landlord may attach
conditions to any such consent if such conditions are reasonably necessary to
protect Landlord's interests in avoiding potential liability upon Landlord or
damage to Landlord's property arising from any Environmental Activity by Tenant
or Tenant's Agents. In no event shall Landlord be required to consent to the
installation or use of any storage tanks on the Premises.
(c) EXCEPTION TO PROHIBITION. Notwithstanding the prohibition
set forth in subparagraph (b) above, but subject to Tenant's covenant to comply
with all Environmental Laws and with the other provisions of this paragraph 19,
Tenant may bring upon, keep and use in the Improvements (but not outside the
Improvements) general office supplies typically used in an office in the
ordinary course of business, such as copier toner, liquid paper, glue, ink and
janitorial
25
<PAGE> 29
supplies, so long as such supplies are used in the manner for which they were
designed and in such amounts as may be normal for the business operations
conducted by Tenant in the Premises.
(d) COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant shall keep and
maintain the Premises in compliance with, and shall not cause or permit the
Premises to be in violation of, any Environmental Laws. All Tenant's activities
at the Premises shall be in accordance with all Environmental Laws.
Additionally, Tenant shall obtain any and all necessary permits for Tenant's
activities at the Premises. Tenant's obligations and liabilities under this
paragraph 19 shall continue so long as Landlord bears any liability or
responsibility under the Environmental Laws for any, action that occurs on the
Premises during the term of this Lease.
(e) ENVIRONMENTAL NOTICES. Each party shall immediately notify
the other party of, and upon request from the other party shall provide such
other party with copies of, the following:
(i) Any correspondence, communication or notice, oral
or written, to or from any governmental entity regarding the
application of Environmental Laws to the Premises or Tenant's
operations on the Premises including, without limitation,
notices of violation, notices to comply and citations;
(ii) Any reports filed pursuant to any Environmental
Law or self-reporting requirements;
(iii) Any permits and permit applications; and
(iv) Any change in Tenant's operations on the
Premises that will change or has the potential to change
Tenant's or Landlord's obligations or liabilities under
Environmental Laws.
Tenant shall also notify the Landlord of the release of any Hazardous Material
in, on, under, about or above the Premises or the Project.
(f) TENANT'S ENVIRONMENTAL INDEMNITY. Tenant shall protect,
indemnify, defend (with counsel satisfactory to Landlord) and hold harmless
Landlord and its directors, officers, partners, employees, agents, lenders, and
ground lessees, if any, and their respective successors and assigns for, from
and against any and all losses, damages, claims, costs, expenses, penalties,
fines and liabilities of any kind (including, without limitation, the cost of
any investigation, remediation and cleanup, and attorneys' fees) which are
attributable to (i) any Environmental Activity on the Premises undertaken or
committed by Tenant or Tenant's Agents or caused by the negligence of such
persons during the Term of this Lease, (ii) any remedial or clean-up work
undertaken by or for Tenant in connection with Tenant's Environmental Activities
or Tenant's compliance with Environmental Laws, or (iii) the breach by Tenant of
any of its obligations and covenants set forth in this paragraph 19. Landlord
shall have the right but not the obligation to join and participate in, and
control, if it so elects, any legal proceedings initiated in connection with the
Environmental Activities of Tenant or Tenant's Agents. Landlord may also
negotiate, defend, approve and appeal any action taken or issued by any
applicable governmental authority with regard to contamination of the Premises
or Project by a Hazardous Material. Any costs or expenses incurred by Landlord
for which Tenant is responsible under this paragraph 19 or for which Tenant has
indemnified Landlord shall be reimbursed by Tenant on demand, as additional rent
and with interest thereon, as provided by subparagraph 17(d) of this Lease. This
indemnity shall survive the termination of this Lease.
(g) REMEDIAL WORK AT TENANT'S EXPENSE. If (i) any
Environmental Activity undertaken by Tenant or Tenant's Agents results in
contamination of the Premises or Project or any portion thereof, or the soil or
groundwater thereunder, or (ii) any investigation, site monitoring, containment,
cleanup, removal, restoration or other remedial work of any kind or nature
("Remedial Work") is necessary or appropriate due to or in connection with
Tenant's use or occupancy of the Premises, then, subject to Landlord's prior
written approval and any conditions imposed by
26
<PAGE> 30
Landlord, Tenant shall promptly perform all Remedial Work, at Tenant's sole
expense and without abatement of rent, as is necessary to return the affected
portion of the Premises and/or Project and the soil and groundwater to the
condition existing prior to the introduction of the contaminating Hazardous
Material and to otherwise comply with all applicable Environmental Laws.
Landlord's approval of such Remedial Work shall not be unreasonably withheld so
long as such actions will not cause a material adverse effect on the Premises or
the Project during or after expiration of the Lease Term. Landlord shall also
have the right to approve any and all contractors hired by Tenant to perform
such Remedial Work. All such Remedial Work shall be performed in compliance with
all applicable laws, ordinances and regulations and in such a manner as to
minimize any interference with the use and enjoyment of the Premises and
Project. All costs and expenses of such Remedial Work shall be paid by Tenant
including, without limitation, the charges of such contractor(s), and the
reasonable fees and costs of the attorneys and consultants for Landlord incurred
in connection with monitoring or review of such Remedial Work.
(h) LANDLORD'S OPTION. Landlord may elect, at Landlord's sole
discretion, to perform any Remedial Work. Landlord and Landlord's agents shall
have the right to enter the Premises at all reasonable times to inspect, monitor
and/or perform Remedial Work. All expenses incurred by Landlord in connection
with performing Remedial Work pursuant to subparagraph (g) above are payable by
Tenant, upon Landlord's demand, with interest thereon, as provided by
subparagraph 17(d).
(i) INJUNCTIVE RELIEF. Tenant's failure to abide by the terms
of this paragraph 19 shall be restrainable by injunction.
(j) SELF-HELP. Landlord shall have the right of "self-help"
or similar remedy in order to minimize any damages, expenses, penalties and
related fees or costs arising from or related to a violation of any
Environmental Law with respect to the Premises or the Project.
(k) OTHER TENANTS AND OWNERS. Other tenants or owners of
property in the Project may be using, handling or storing certain Hazardous
Materials in connection with such tenants' or owners' use of their premises or
property. The failure of another tenant or owner to comply with applicable laws
and procedures could result in a release of Hazardous Materials and
contamination to improvements within the Project or the soil and groundwater
thereunder. In the event of such a release, the tenant or owner responsible for
the release, and not Landlord, shall be responsible for any claim, damage or
expense incurred by Tenant by reason of such contamination and Tenant and
Landlord shall each exhaust all of their respective remedies against such other
tenant or owner with respect to any claim the Tenant or Landlord, as applicable,
may have against the other tenants or owners without any right to seek any
recovery against the other party to this Lease.
(l) ENVIRONMENTAL INSPECTION. Tenant shall, if reasonably
required by Landlord on account of the activities or suspected activities of
Tenant or Tenant's Agents, retain a recognized environmental consultant (the
"Consultant") acceptable to Landlord to conduct an investigation of the Premises
and of other portions of the Project deemed appropriate by Landlord
("Environmental Assessment") (i) for Hazardous Materials contamination in,
about or beneath the Premises or the Project as a result of such activities
and (ii) to assess all Environmental Activities of Tenant and Tenant's Agents on
the Premises or the Project for compliance with all applicable laws, ordinances
and regulations and for the use of procedures intended to reasonably reduce the
risk of a release of Hazardous Materials. The Environmental Assessment shall be
performed in a manner reasonably calculated to discover the presence of
Hazardous Materials contamination and shall be of a scope and intensity
reflective of the general standards of professional environmental consultants
who regularly provide environmental assessment services in connection with the
transfer or leasing of real property. Additionally, the Environmental Assessment
shall take into full consideration the past and present uses of the Premises and
Project and other factors unique to the Premises and Project. If Landlord
obtains the Environmental Assessment because of the activities of Tenant or
Tenant's Agents, as reasonably demonstrated by Landlord or indicated in the
Environmental Assessment, Tenant shall pay Landlord on demand the cost of the
Environmental Assessment, with interest thereon, as additional rent and in
accordance with subparagraph 17(d). If Landlord so requires, Tenant shall
comply, at its sole cost and expense, with all reasonable recommendations
contained
27
<PAGE> 31
in the Environmental Assessment with respect to Environmental Activities by
Tenant or Tenant's agents including any recommendation with respect to the
precautions which should be taken with respect to environmental activities on
the premises or the Project or any recommendations for additional testing and
studies to detect the presence of Hazardous Materials. Tenant covenants to
reasonably cooperate with the Consultant and to allow entry and reasonable
access to all portions of the Premises for the purpose of Consultant's
investigation.
(m) SURRENDER OF PREMISES - ENVIRONMENTAL CONSIDERATIONS.
Prior to or after the expiration or termination of the Lease Term, Landlord may
have an Environmental Assessment of the Premises performed in accordance with
subparagraph (l) above. Tenant shall perform, at its sole cost and expense, any
Remedial Work recommended by the Consultant which is necessary to remove,
mitigate or remediate any Hazardous Materials contamination of the Premises or
Project in connection with any Environmental Activities of Tenant or Tenant's
Agents; provided, however, if no such Remedial Work is recommended by the
Consultant as necessary for the above specified reasons, Landlord, and not
Tenant as provided in subparagraph (l) above, shall pay for the cost of the
Environmental Assessment. Prior to surrendering possession of the Premises,
Tenant shall also, unless otherwise directed by Landlord, remove any personal
property, equipment, fixture (except for any fixture installed by Landlord)
and/or storage device or vessel on or about the Premises and/or Project which is
contaminated by or contains Hazardous Materials as a result of the activities of
Tenant or Tenant's Agents and repair all damage to the Premises and the Project
caused by such removal.
(n) LANDLORD'S ENVIRONMENTAL INDEMNITY. Landlord shall
protect, indemnify, defend (with counsel satisfactory to Tenant) and hold
harmless Tenant and its directors, officers, partners, employees and agents,
for, from and against any and all losses, damages, claims, costs, expenses,
penalties, fines and liabilities of any kind (including, without limitation, the
cost of any investigation, remediation and cleanup, and attorneys' fees) which
are attributable to any Environmental Activity on the Premises undertaken or
committed by Landlord or Landlord's Agents (except for Environmental Activities
undertaken by or on behalf of Landlord in the exercise of Landlord's rights
under this paragraph 19) or caused by the negligence of such persons during the
Term of this Lease.
(o) REMEDIAL WORK AT LANDLORD'S EXPENSE. If (i) any
Environmental Activity undertaken by Landlord or Landlord's Agents results in
contamination of the Premises or any portion thereof, or the soil or groundwater
thereunder, or (ii) any Remedial Work is necessary or appropriate on the
Premises due to or in connection with Environmental Activities by Landlord or
Landlord's Agents, and if such contamination may have any material adverse
effect on Tenant's use and enjoyment of the Premises or impose any liability on
Tenant, then Landlord shall promptly perform all Remedial Work, at Landlord's
sole expense, as is necessary to return the affected portion of the Premises to
a condition which no longer has any material adverse effect on Tenant's use and
enjoyment thereof and no longer exposes potential liability on Tenant. All such
Remedial Work shall be performed in compliance with all applicable laws,
ordinances and regulations and in such a manner as to minimize any interference
with the use and enjoyment of the Premises. All costs and expenses of such
Remedial Work shall be paid by Landlord.
28
<PAGE> 32
IN WITNESS WHEREOF, the undersigned have executed this Lease as of the
date and year first above written.
LANDLORD
H-B TEMPE, L.L.C.,
an Arizona limited liability company
By: HEWSON PROPERTIES, INC.,
a California corporation,
its Manager
By: /s/ Robert Myers
Its: /s/ ROBERT MYERS, VP/CFO
TENANT
ACTION PERFORMANCE COMPANIES, INC.,
an Arizona corporation
By: /s/ Christopher S. Besing
Name: Christopher S. Besing
Title: CFO
29
<PAGE> 33
TENANT ACKNOWLEDGMENTS:
STATE OF ARIZONA )
) ss:
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this 28th day of
June, 1999, by Christopher S. Besing, the CFO of ACTION PERFORMANCE COMPANIES,
INC., an Arizona corporation, on behalf of the corporation.
/s/ Suzette M. Buron
NOTARY PUBLIC
[SEAL OF AZ]
My Commission Expires: "OFFICIAL SEAL"
4/10/200 Suzette M. Buron
Notary Public-Arizona
LANDLORD ACKNOWLEDGMENTS: Maricopa County
My Commission Expires 4/10/2000
STATE OF ARIZONA )y
) ss:
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this 28th day of June,
1999, by Robert Myers, the Vice President / CFO of HEWSON PROPERTIES, INC., a
California corporation and Manager of H-B TEMPE, L.L.C., an Arizona limited
liability company, on behalf of the limited liability company.
/s/ Deborah J. Fretwell
NOTARY PUBLIC
[SEAL OF AZ]
"OFFICIAL SEAL"
DEBORAH J. FRETWELL
Notary Public-State of Arizona
MARICOPA COUNTY
My Comm. Expires 11-04-02
My Commission Expires:
November 4, 2002
30
<PAGE> 1
Exhibit 10.58
MASTER LEASE AGREEMENT
dated as of AUGUST 9, 1999 ("AGREEMENT")
THIS AGREEMENT, is between GENERAL ELECTRIC CAPITAL CORPORATION (together
with its successors and assigns, if any, "LESSOR") and goracing.com, inc.
("LESSEE"). Lessor has an office at ONE LINCOLN CENTRE, 5400 LBJ FREEWAY SUITE
1280, L.B. 3, DALLAS, TX 75240. Lessee is a corporation organized and existing
under the laws of the State of Delaware. Lessee's mailing address and chief
place of business is 4707 E. BASELINE ROAD, PHOENIX, AZ 85040. This Agreement
contains the general terms that apply to the leasing of Equipment from Lessor to
Lessee. Additional terms that apply to the Equipment (term, rent, options, etc.)
shall be contained on a schedule ("SCHEDULE").
1. LEASING:
(a)Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor,
the equipment ("EQUIPMENT") described in any Schedule signed by both parties.
(b)Lessor shall purchase Equipment from the manufacturer or supplier
("SUPPLIER") and lease it to Lessee if on or before the Last Delivery Date
Lessor receives (i) a Schedule for the Equipment, (ii) evidence of insurance
which complies with the requirements of Section 9, and (iii) such other
documents as Lessor may reasonably request. Each of the documents required above
must be in form and substance satisfactory to Lessor. Lessor hereby appoints
Lessee its agent for inspection and acceptance of the Equipment from the
Supplier. Once the Schedule is signed, the Lessee may not cancel the Schedule.
2. TERM, RENT AND PAYMENT:
(a)The rent payable for the Equipment and Lessee's right to use the
Equipment shall begin on the earlier of (i) the date when the Lessee signs the
Schedule and accepts the Equipment or (ii) when Lessee has accepted the
Equipment under a Certificate of Acceptance ("LEASE COMMENCEMENT DATE"). The
term of this Agreement shall be the period specified in the applicable Schedule.
The word "term" shall include all basic and any renewal terms.
(b)Lessee shall pay rent to Lessor at its address stated above, except as
otherwise directed by Lessor. Rent payments shall be in the amount set forth in,
and due as stated in the applicable Schedule. If any Advance Rent (as stated in
the Schedule) is payable, it shall be due when the Lessee signs the Schedule.
Advance Rent shall be applied to the first rent payment and the balance, if any,
to the final rent payment(s) under such Schedule. In no event shall any Advance
Rent or any other rent payments be refunded to Lessee. If rent is not paid
within ten (10) days of its due date, Lessee agrees to pay a late charge of five
cents ($.05) per dollar on, and in addition to, the amount of such rent but not
exceeding the lawful maximum, if any.
3. RENT ADJUSTMENT:
(a)If, solely as a result of Congressional enactment of any law (including,
without limitation, any modification of, or amendment or addition to, the
Internal Revenue Code of 1986, as amended, ("CODE")), the maximum effective
corporate income tax rate (exclusive of any minimum tax rate) for calendar-year
taxpayers ("EFFECTIVE RATE") is higher than thirty-five percent (35%) for any
year during the lease term, then Lessor shall have the right to increase such
rent payments by requiring payment of a single additional sum. The additional
sum shall be equal to the product of (i) the Effective Rate (expressed as a
decimal) for such year less .35 (or, in the event that any adjustment has been
made hereunder for any previous year, the Effective Rate (expressed as a
decimal) used in calculating the next previous adjustment) times (ii) the
adjusted Termination Value (defined below), divided by (iii) the difference
between the new Effective Rate (expressed as a decimal) and one (1). The
adjusted Termination Value shall be the Termination Value (calculated as of the
first rent due in the year for which the adjustment is being made) minus the Tax
Benefits that would be allowable under Section 168 of the Code (as of the first
day of the year for which such adjustment is being made and all future years of
the lease term). The Termination Values and Tax Benefits are defined on the
Schedule. Lessee shall pay to Lessor the full amount of the additional rent
payment on the later of (i) receipt of notice or (ii) the first day of the year
for which such adjustment is being made.
(b)Lessee's obligations under this Section 3 shall survive any expiration or
termination of this Agreement.
4. TAXES: If permitted by law, Lessee shall report and pay promptly all taxes,
fees and assessments due, imposed, assessed or levied against any Equipment (or
purchase, ownership, delivery, leasing, possession, use or operation thereof),
this Agreement (or any rents or receipts hereunder), any Schedule, Lessor or
Lessee by any governmental entity or taxing authority during or related to the
term of this Agreement, including, without limitation, all license and
registration fees, and all sales, use, personal property, excise, gross
receipts, franchise, stamp or other taxes, imposts, duties and charges, together
with any penalties, fines or interest thereon (collectively "TAXES"). Lessee
shall have no liability for Taxes imposed by the United States of America or any
state or political subdivision thereof which are on or measured by the net
income of Lessor except as provided in Sections 3 and 14(c). Lessee shall
promptly reimburse Lessor (on an after tax basis) for any Taxes charged to or
<PAGE> 2
assessed against Lessor. Lessee shall show Lessor as the owner of the Equipment
on all tax reports or returns, and send Lessor a copy of each report or return
and evidence of Lessee's payment of Taxes upon request.
5. REPORTS:
(a)If any tax or other lien shall attach to any Equipment, Lessee will
notify Lessor in writing, within ten (10) days after Lessee becomes aware of the
tax or lien. The notice shall include the full particulars of the tax or lien
and the location of such Equipment on the date of the notice.
(b)Lessee will deliver to Lessor, Lessee's complete financial statements,
certified by a recognized firm of certified public accountants within ninety
(90) days of the close of each fiscal year of Lessee. Lessee will deliver to
Lessor copies of Lessee's quarterly financial report certified by the chief
financial officer of Lessee, within ninety (90) days of the close of each fiscal
quarter of Lessee. Lessee will deliver to Lessor all Forms 10-K and 10-Q, if
any, filed with the Securities and Exchange Commission within thirty (30) days
after the date on which they are filed.
(c)Lessor may inspect any Equipment during normal business hours after
giving Lessee reasonable prior notice.
(d)Lessee will keep the Equipment at the Equipment Location (specified in
the applicable Schedule) and will give Lessor prior written notice of any
relocation of Equipment. If Lessor asks, Lessee will promptly notify Lessor in
writing of the location of any Equipment.
(e)If any Equipment is lost or damaged (where the estimated repair costs
would exceed the greater of ten percent (10%) of the original Equipment cost or
ten thousand and 00/100 dollars ($10,000)), or is otherwise involved in an
accident causing personal injury or property damage, Lessee will promptly and
fully report the event to Lessor in writing.
(f)Lessee will furnish a certificate of an authorized officer of Lessee
stating that he has reviewed the activities of Lessee and that, to the best of
his knowledge, there exists no default or event which with notice or lapse of
time (or both) would become such a default within thirty (30) days after any
request by Lessor.
6. DELIVERY, USE AND OPERATION:
(a)All Equipment shall be shipped directly from the Supplier to Lessee.
(b)Lessee agrees that the Equipment will be used by Lessee solely in the
conduct of its business and in a manner complying with all applicable laws,
regulations and insurance policies and Lessee shall not discontinue use of the
Equipment.
(c)Lessee will not move any equipment from the location specified on the
Schedule, without the prior written consent of Lessor.
(d)Lessee will keep the Equipment free and clear of all liens and
encumbrances other than those which result from acts of Lessor.
(e)Lessor shall not disturb Lessee's quiet enjoyment of the Equipment during
the term of the Agreement unless a default has occurred and is continuing under
this Agreement.
7. MAINTENANCE:
(a)Lessee will, at its sole expense, maintain each unit of Equipment in good
operating order and repair, normal wear and tear excepted. The Lessee shall also
maintain the Equipment in accordance with manufacturer's recommendations. Lessee
shall make all alterations or modifications required to comply with any
applicable law, rule or regulation during the term of this Agreement. If Lessor
requests, Lessee shall affix plates, tags or other identifying labels showing
ownership thereof by Lessor. The tags or labels shall be placed in a prominent
position on each unit of Equipment.
(b)Lessee will not attach or install anything on any Equipment that will
impair the originally intended function or use of such Equipment without the
prior written consent of Lessor. All additions, parts, supplies, accessories,
and equipment ("ADDITIONS") furnished or attached to any Equipment that are not
readily removable shall become the property of Lessor. All Additions shall be
made only in compliance with applicable law. Lessee will not attach or install
any Equipment to or in any other personal or real property without the prior
written consent of Lessor.
<PAGE> 3
8. STIPULATED LOSS VALUE: If for any reason any unit of Equipment becomes worn
out, lost, stolen, destroyed, irreparably damaged or unusable ("CASUALTY
OCCURRENCES") Lessee shall promptly and fully notify Lessor in writing. Lessee
shall pay Lessor the sum of (i) the Stipulated Loss Value (see Schedule) of the
affected unit determined as of the rent payment date prior to the Casualty
Occurrence; and (ii) all rent and other amounts which are then due under this
Agreement on the Payment Date (defined below) for the affected unit. The Payment
Date shall be the next rent payment date after the Casualty Occurrence. Upon
Payment of all sums due hereunder, the term of this lease as to such unit shall
terminate.
9. INSURANCE:
(a)Lessee shall bear the entire risk of any loss, theft, damage to, or
destruction of, any unit of Equipment from any cause whatsoever from the time
the Equipment is shipped to Lessee.
(b)Lessee agrees, at its own expense, to keep all Equipment insured for such
amounts and against such hazards as Lessor may reasonably require. All such
policies shall be with companies, and on terms, reasonably satisfactory to
Lessor. The insurance shall include coverage for damage to or loss of the
Equipment, liability for personal injuries, death or property damage. Lessor
shall be named as additional insured with a loss payable clause in favor of
Lessor, as its interest may appear, irrespective of any breach of warranty or
other act or omission of Lessee. The insurance shall provide for liability
coverage in an amount equal to at least ONE MILLION U.S. DOLLARS ($1,000,000.00)
total liability per occurrence, unless otherwise stated in any Schedule. The
casualty/property damage coverage shall be in an amount equal to the higher of
the Stipulated Loss Value or the full replacement cost of the Equipment. No
insurance shall be subject to any co-insurance clause. The insurance policies
shall provide that the insurance may not be altered or canceled by the insurer
until after thirty (30) days written notice to Lessor. Lessee agrees to deliver
to Lessor evidence of insurance reasonably satisfactory to Lessor.
(c)Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make proof
of loss and claim for insurance, and to make adjustments with insurers and to
receive payment of and execute or endorse all documents, checks or drafts in
connection with insurance payments. Lessor shall not act as Lessee's
attorney-in-fact unless Lessee is in default. Lessee shall pay any reasonable
expenses of Lessor in adjusting or collecting insurance. Lessee will not make
adjustments with insurers except with respect to claims for damage to any unit
of Equipment where the repair costs are less than the lesser of ten percent
(10%) of the original Equipment cost or ten thousand and 00/100 dollars
($10,000). Lessor may, at its option, apply proceeds of insurance, in whole or
in part, to (i) repair or replace Equipment or any portion thereof, or (ii)
satisfy any obligation of Lessee to Lessor under this Agreement.
10. RETURN OF EQUIPMENT:
(a)At the expiration or termination of this Agreement or any Schedule,
Lessee shall perform any testing and repairs required to place the units of
Equipment in the same condition and appearance as when received by Lessee
(reasonable wear and tear excepted) and in good working order for the original
intended purpose of the Equipment. If required the units of Equipment shall be
deinstalled, disassembled and crated by an authorized manufacturer's
representative or such other service person as is reasonably satisfactory to
Lessor. Lessee shall remove installed markings that are not necessary for the
operation, maintenance or repair of the Equipment. All Equipment will be
cleaned, cosmetically acceptable, and in such condition as to be immediately
installed into use in a similar environment for which the Equipment was
originally intended to be used. All waste material and fluid must be removed
from the Equipment and disposed of in accordance with then current waste
disposal laws. Lessee shall return the units of Equipment to a location within
the continental United States as Lessor shall direct. Lessee shall obtain and
pay for a policy of transit insurance for the redelivery period in an amount
equal to the replacement value of the Equipment. The transit insurance must name
Lessor as the loss payee. The Lessee shall pay for all costs to comply with this
section (a).
(b)Until Lessee has fully complied with the requirements of Section 10(a)
above, Lessee's rent payment obligation and all other obligations under this
Agreement shall continue from month to month notwithstanding any expiration or
termination of the lease term. Lessor may terminate the Lessee's right to use
the Equipment upon ten (10) days notice to Lessee.
(c) Lessee shall provide to Lessor a detailed inventory of all components of
the Equipment including model and serial numbers. Lessee shall also provide an
up-to-date copy of all other documentation pertaining to the Equipment. All
service manuals, blue prints, process flow diagrams, operating manuals,
inventory and maintenance records shall be given to Lessor at least ninety (90)
days and not more than one hundred twenty (120) days prior to lease termination.
(d)Lessee shall make the Equipment available for on-site operational
inspections by potential purchasers at least one hundred twenty (120) days prior
to and continuing up to lease termination. Lessor shall provide Lessee with
reasonable notice prior to any inspection. Lessee shall provide personnel, power
and other requirements necessary to demonstrate electrical, hydraulic and
mechanical systems for each item of Equipment.
11. DEFAULT AND REMEDIES:
(a)Lessor may in writing declare this Agreement in default if: (i) Lessee
breaches its obligation to pay rent or any other sum when due and fails to cure
the breach within ten (10) days; (ii) Lessee breaches any of its insurance
obligations under Section 9; (iii) Lessee breaches any of its other obligations
and fails to cure that breach within thirty (30) days after written notice from
Lessor; (iv) any representation or warranty made by Lessee in connection with
this Agreement shall be false or misleading in any material respect; (v) Lessee
or any guarantor or other obligor for the Lessee's obligations hereunder
("GUARANTOR") becomes insolvent or ceases to
<PAGE> 4
do business as a going concern; (vi) any Equipment is illegally used; (vii) if
Lessee or any Guarantor is a natural person, any death or incompetency of Lessee
or such Guarantor; or (viii) a petition is filed by or against Lessee or any
Guarantor under any bankruptcy or insolvency laws and in the event of an
involuntary petition, the petition is not dismissed within forty-five (45) days
of the filing date. The default declaration shall apply to all Schedules unless
specifically excepted by Lessor.
(b)After a default, at the request of Lessor, Lessee shall comply with the
provisions of Section 10(a). Lessee hereby authorizes Lessor to peacefully enter
any premises where any Equipment may be and take possession of the Equipment.
Lessee shall immediately pay to Lessor without further demand as liquidated
damages for loss of a bargain and not as a penalty, the Stipulated Loss Value of
the Equipment (calculated as of the rent payment date prior to the declaration
of default), and all rents and other sums then due under this Agreement and all
Schedules. Lessor may terminate this Agreement as to any or all of the
Equipment. A termination shall occur only upon written notice by Lessor to
Lessee and only as to the units of Equipment specified in any such notice.
Lessor may, but shall not be required to, sell Equipment at private or public
sale, in bulk or in parcels, with or without notice, and without having the
Equipment present at the place of sale. Lessor may also, but shall not be
required to, lease, otherwise dispose of or keep idle all or part of the
Equipment. Lessor may use Lessee's premises for a reasonable period of time for
any or all of the purposes stated above without liability for rent, costs,
damages or otherwise. The proceeds of sale, lease or other disposition, if any,
shall be applied in the following order of priorities: (i) to pay all of
Lessor's costs, charges and expenses incurred in taking, removing, holding,
repairing and selling, leasing or otherwise disposing of Equipment; then, (ii)
to the extent not previously paid by Lessee, to pay Lessor all sums due from
Lessee under this Agreement; then (iii) to reimburse to Lessee any sums
previously paid by Lessee as liquidated damages; and (iv) any surplus shall be
retained by Lessor. Lessee shall immediately pay any deficiency in (i) and (ii)
above .
(c)The foregoing remedies are cumulative, and any or all thereof may be
exercised instead of or in addition to each other or any remedies at law, in
equity, or under statute. Lessee waives notice of sale or other disposition (and
the time and place thereof), and the manner and place of any advertising. Lessee
shall pay Lessor's actual attorney's fees incurred in connection with the
enforcement, assertion, defense or preservation of Lessor's rights and remedies
under this Agreement, or if prohibited by law, such lesser sum as may be
permitted. Waiver of any default shall not be a waiver of any other or
subsequent default.
(d)Any default under the terms of this or any other agreement between Lessor
and Lessee may be declared by Lessor a default under this and any such other
agreement.
12. ASSIGNMENT: LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, ENCUMBER OR SUBLET ANY
EQUIPMENT OR THE INTEREST OF LESSEE IN THE EQUIPMENT WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR. Lessor may, without the consent of Lessee, assign this
Agreement, any Schedule or the right to enter into a Schedule. Lessee agrees
that if Lessee receives written notice of an assignment from Lessor, Lessee will
pay all rent and all other amounts payable under any assigned Schedule to such
assignee or as instructed by Lessor. Lessee also agrees to confirm in writing
receipt of the notice of assignment as may be reasonably requested by assignee.
Lessee hereby waives and agrees not to assert against any such assignee any
defense, set-off, recoupment claim or counterclaim which Lessee has or may at
any time have against Lessor for any reason whatsoever.
13. NET LEASE: Lessee is unconditionally obligated to pay all rent and other
amounts due for the entire lease term no matter what happens, even if the
Equipment is damaged or destroyed, if it is defective or if Lessee no longer can
use it. Lessee is not entitled to reduce or set-off against rent or other
amounts due to Lessor or to anyone to whom Lessor assigns this Agreement or any
Schedule whether Lessee's claim arises out of this Agreement, any Schedule, any
statement by Lessor, Lessor's liability or any manufacturer's liability, strict
liability, negligence or otherwise.
14. INDEMNIFICATION:
(a)Lessee hereby agrees to indemnify Lessor, its agents, employees,
successors and assigns (on an after tax basis) from and against any and all
losses, damages, penalties, injuries, claims, actions and suits, including legal
expenses, of whatsoever kind and nature arising out of or relating to the
Equipment or this Agreement, except to the extent the losses, damages,
penalties, injuries, claims, actions, suits or expenses result from Lessor's
gross negligence or willful misconduct ("CLAIMS"). This indemnity shall include,
but is not limited to, Lessor's strict liability in tort and Claims, arising out
of (i) the selection, manufacture, purchase, acceptance or rejection of
Equipment, the ownership of Equipment during the term of this Agreement, and the
delivery, lease, possession, maintenance, uses, condition, return or operation
of Equipment (including, without limitation, latent and other defects, whether
or not discoverable by Lessor or Lessee and any claim for patent, trademark or
copyright infringement or environmental damage) or (ii) the condition of
Equipment sold or disposed of after use by Lessee, any sublessee or employees of
Lessee. Lessee shall, upon request, defend any actions based on, or arising out
of, any of the foregoing.
(b)Lessee hereby represents, warrants and covenants that (i) on the Lease
Commencement Date for any unit of Equipment, such unit will qualify for all of
the items of deduction and credit specified in Section C of the applicable
Schedule ("TAX BENEFITS") in the hands of Lessor, and (ii) at no time during the
term of this Agreement will Lessee take or omit to take, nor will it permit any
sublessee or assignee to take or omit to take, any action (whether or not such
act or omission is otherwise permitted by Lessor or by this Agreement), which
will result in the disqualification of any Equipment for, or recapture of, all
or any portion of such Tax Benefits.
(c)If as a result of a breach of any representation, warranty or covenant of
the Lessee contained in this Agreement or any Schedule (i) tax counsel of Lessor
shall determine that Lessor is not entitled to claim on its Federal income tax
return all or any portion of the Tax Benefits with respect to any Equipment, or
(ii) any Tax Benefit claimed on the Federal income tax return of Lessor is
disallowed or adjusted by the Internal Revenue Service, or (iii) any Tax Benefit
is recalculated or
<PAGE> 5
recaptured (any determination, disallowance, adjustment, recalculation or
recapture being a "LOSS"), then Lessee shall pay to Lessor, as an indemnity and
as additional rent, an amount that shall, in the reasonable opinion of Lessor,
cause Lessor's after-tax economic yields and cash flows to equal the Net
Economic Return that would have been realized by Lessor if such Loss had not
occurred. Such amount shall be payable upon demand accompanied by a statement
describing in reasonable detail such Loss and the computation of such amount.
The economic yields and cash flows shall be computed on the same assumptions,
including tax rates as were used by Lessor in originally evaluating the
transaction ("NET ECONOMIC RETURN"). If an adjustment has been made under
Section 3 then the Effective Rate used in the next preceding adjustment shall be
substituted.
(d)All references to Lessor in this Section 14 include Lessor and the
consolidated taxpayer group of which Lessor is a member. All of Lessor's rights,
privileges and indemnities contained in this Section 14 shall survive the
expiration or other termination of this Agreement. The rights, privileges and
indemnities contained herein are expressly made for the benefit of, and shall be
enforceable by Lessor, its successors and assigns.
15. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT
ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS
NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE
EQUIPMENT LEASED UNDER THIS AGREEMENT OR ANY COMPONENT THEREOF, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS,
QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE,
USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE.
All such risks, as between Lessor and Lessee, are to be borne by Lessee. Without
limiting the foregoing, Lessor shall have no responsibility or liability to
Lessee or any other person with respect to any of the following; (i) any
liability, loss or damage caused or alleged to be caused directly or indirectly
by any Equipment, any inadequacy thereof, any deficiency or defect (latent or
otherwise) of the Equipment, or any other circumstance in connection with the
Equipment; (ii) the use, operation or performance of any Equipment or any risks
relating to it; (iii) any interruption of service, loss of business or
anticipated profits or consequential damages; or (iv) the delivery, operation,
servicing, maintenance, repair, improvement or replacement of any Equipment. If,
and so long as, no default exists under this Agreement, Lessee shall be, and
hereby is, authorized during the term of this Agreement to assert and enforce
whatever claims and rights Lessor may have against any Supplier of the Equipment
at Lessee's sole cost and expense, in the name of and for the account of Lessor
and/or Lessee, as their interests may appear.
16. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee makes each of the following
representations and warranties to Lessor on the date hereof and on the date of
execution of each Schedule.
(a)Lessee has adequate power and capacity to enter into, and perform under,
this Agreement and all related documents (together, the "DOCUMENTS"). Lessee is
duly qualified to do business wherever necessary to carry on its present
business and operations, including the jurisdiction(s) where the Equipment is or
is to be located.
(b)The Documents have been duly authorized, executed and delivered by Lessee
and constitute valid, legal and binding agreements, enforceable in accordance
with their terms, except to the extent that the enforcement of remedies may be
limited under applicable bankruptcy and insolvency laws.
(c)No approval, consent or withholding of objections is required from any
governmental authority or entity with respect to the entry into or performance
by Lessee of the Documents except such as have already been obtained.
(d)The entry into and performance by Lessee of the Documents will not: (i)
violate any judgment, order, law or regulation applicable to Lessee or any
provision of Lessee's Certificate of Incorporation or bylaws; or (ii) result in
any breach of, constitute a default under or result in the creation of any lien,
charge, security interest or other encumbrance upon any Equipment pursuant to
any indenture, mortgage, deed of trust, bank loan or credit agreement or other
instrument (other than this Agreement) to which Lessee is a party.
(e)There are no suits or proceedings pending or threatened in court or
before any commission, board or other administrative agency against or affecting
Lessee, which if decided against Lessee will have a material adverse effect on
the ability of Lessee to fulfill its obligations under this Agreement.
(f)The Equipment accepted under any Certificate of Acceptance is and will
remain tangible personal property.
(g)Each financial statement delivered to Lessor has been prepared in
accordance with generally accepted accounting principles consistently applied.
Since the date of the most recent financial statement, there has been no
material adverse change.
(h)Lessee is and will be at all times validly existing and in good standing
under the laws of the State of its incorporation (specified in the first
sentence of this Agreement).
(i)The Equipment will at all times be used for commercial or business
purposes.
17. EARLY TERMINATION:
<PAGE> 6
(a)On or after the First Termination Date (specified in the applicable
Schedule), Lessee may, so long as no default exists hereunder, terminate this
Agreement as to all (but not less than all) of the Equipment on such Schedule as
of a rent payment date ("TERMINATION DATE"). Lessee must give Lessor at least
ninety (90) days prior written notice of the termination.
(b)Lessee shall, and Lessor may, solicit cash bids for the Equipment on an
AS IS, WHERE IS BASIS without recourse to or warranty from Lessor, express or
implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall (i) certify
to Lessor any bids received by Lessee and (ii) pay to Lessor (A) the Termination
Value (calculated as of the rent due on the Termination Date) for the Equipment,
and (B) all rent and other sums due and unpaid as of the Termination Date.
(c)If all amounts due hereunder have been paid on the Termination Date,
Lessor shall (i) sell the Equipment on an AS IS BASIS for cash to the highest
bidder and (ii) refund the proceeds of such sale (net of any related expenses)
to Lessee up to the amount of the Termination Value. If such sale is not
consummated, no termination shall occur and Lessor shall refund the Termination
Value (less any expenses incurred by Lessor) to Lessee.
(d)Notwithstanding the foregoing, Lessor may elect by written notice, at any
time prior to the Termination Date, not to sell the Equipment. In that event, on
the Termination Date Lessee shall (i) return the Equipment (in accordance with
Section 10) and (ii) pay to Lessor all amounts required under Section 17(b) less
the amount of the highest bid certified by Lessee to Lessor.
18. PURCHASE OPTION:
(a)Lessee may at lease expiration purchase all (but not less than all) of
the Equipment in any Schedule on an AS IS BASIS for cash equal to its then Fair
Market Value (plus all applicable sales taxes). Lessee must notify Lessor of its
intent to purchase the Equipment in writing at least one hundred eighty (180)
days in advance. If Lessee is in default or if the Lease has already been
terminated Lessee may not purchase the Equipment.
(b)"Fair Market Value" shall mean the price that a willing buyer (who is
neither a lessee in possession nor a used equipment dealer) would pay for the
Equipment in an arm's-length transaction to a willing seller under no compulsion
to sell. In determining the Fair Market Value the Equipment shall be assumed to
be in the condition in which it is required to be maintained and returned under
this Agreement. If the Equipment is installed it shall be valued on an installed
basis. The costs of removal from current location shall not be a deduction from
the value of the Equipment. If Lessor and Lessee are unable to agree on the Fair
Market Value at least one hundred thirty-five (135) days before lease
expiration, Lessor shall appoint an independent appraiser (reasonably acceptable
to Lessee) to determine Fair Market Value. The independent appraiser's
determination shall be final, binding and conclusive. Lessee shall bear all
costs associated with any such appraisal.
(c)Lessee shall be deemed to have waived this option unless it provides
Lessor with written notice of its irrevocable election to exercise the same
within fifteen (15) days after Fair Market Value is told to Lessee.
19. MISCELLANEOUS:
(a)LESSEE AND LESSOR UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF
THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR RELATING TO THE
SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE
RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. THE SCOPE OF
THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY
BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT,
ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
(b)The Equipment shall remain Lessor's property unless Lessee purchases the
Equipment from Lessor and until such time Lessee shall only have the right to
use the Equipment as a lessee. Any cancellation or termination by Lessor of this
Agreement, any Schedule, supplement or amendment hereto, or the lease of any
Equipment hereunder shall not release Lessee from any then outstanding
obligations to Lessor hereunder. All Equipment shall at all times remain
personal property of Lessor even though it may be attached to real property. The
Equipment shall not become part of any other property by reason of any
installation in, or attachment to, other real or personal property .
(c)Time is of the essence of this Agreement. Lessor's failure at any time to
require strict performance by Lessee of any of the provisions hereof shall not
waive or diminish Lessor's right at any other time to demand strict compliance
with this Agreement. Lessee agrees, upon Lessor's request, to execute any
instrument necessary or expedient for filing, recording or perfecting the
interest of Lessor. All notices required to be given hereunder shall be deemed
adequately given if sent by registered or certified mail to the addressee at its
address stated herein, or at such other place as such addressee may have
specified in writing. This Agreement and any Schedule and Annexes thereto
constitute the entire agreement of the parties with respect to the subject
matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF
ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED
BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO.
<PAGE> 7
(d)If Lessee does not comply with any provision of this Agreement, Lessor
shall have the right, but shall not be obligated, to effect such compliance, in
whole or in part. All reasonable amounts spent and obligations incurred or
assumed by Lessor in effecting such compliance shall constitute additional rent
due to Lessor. Lessee shall pay the additional rent within five days after the
date Lessor sends notice to Lessee requesting payment. Lessor's effecting such
compliance shall not be a waiver of Lessee's default.
(e)Any rent or other amount not paid to Lessor when due shall bear interest,
from the due date until paid, at the lesser of eighteen percent (18%) per annum
or the maximum rate allowed by law. Any provisions in this Agreement and any
Schedule that are in conflict with any statute, law or applicable rule shall be
deemed omitted, modified or altered to conform thereto.
(f)Lessee hereby irrevocably authorizes Lessor to adjust the Capitalized
Lessor's Cost up or down by no more than ten percent (10%) within each Schedule
to account for equipment change orders, equipment returns, invoicing errors, and
similar matters. Lessee acknowledges and agrees that the rent shall be adjusted
as a result of the change in the Capitalized Lessor's Cost. Lessor shall send
Lessee a written notice stating the final Capitalized Lessor's Cost, if it has
changed.
(g)THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF
LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT.
(h)Any cancellation or termination by Lessor, pursuant to the provisions of
this Agreement, any Schedule, supplement or amendment hereto, of the lease of
any Equipment hereunder, shall not release Lessee from any then outstanding
obligations to Lessor hereunder.
(i)To the extent that any Schedule would constitute chattel paper, as such
term is defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction, no security interest therein may be created through the transfer
or possession of this Agreement in and of itself without the transfer or
possession of the original of a Schedule executed pursuant to this Agreement and
incorporating this Agreement by reference; and no security interest in this
Agreement and a Schedule may be created by the transfer or possession of any
counterpart of the Schedule other than the original thereof, which shall be
identified as the document marked "Original" and all other counterparts shall be
marked "Duplicate".
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
<TABLE>
<CAPTION>
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL CORPORATION GORACING.COM, INC.
<S> <C>
By: /s/ Arthur G. Abello By: /s/ Christopher S. Besing
----------------------------- -----------------------------
Name: Arthur G. Abello Name: Christopher S. Besing
----------------------------- -----------------------
Title: Senior Risk Analyst Title: C.E.O
----------------------------- -----------------------
</TABLE>
<PAGE> 8
COMPUTER EQUIPMENT SCHEDULE
SCHEDULE NO. 01
DATED THIS ____________________
TO MASTER LEASE AGREEMENT
DATED AS OF AUGUST 9, 1999
<TABLE>
LESSOR & MAILING ADDRESS: LESSEE & MAILING ADDRESS:
- ------------------------- -------------------------
<S> <C>
GENERAL ELECTRIC CAPITAL CORPORATION GORACING.COM, INC.
ONE LINCOLN CENTRE, 5400 LBJ FREEWAY SUITE 1280, L.B. 3 4707 E. BASELINE ROAD
DALLAS, TX 75240 PHOENIX, AZ 85040
</TABLE>
This Schedule is executed pursuant to, and incorporates by reference the terms
and conditions of, and capitalized terms not defined herein shall have the
meanings assigned to them in, the Master Lease Agreement identified above
("AGREEMENT" said Agreement and this Schedule being collectively referred to as
"LEASE"). This Schedule, incorporating by reference the Agreement, constitutes a
separate instrument of lease.
A. EQUIPMENT: Subject to the terms and conditions of the Lease, Lessor
agrees to Lease to Lessee the Equipment described below (the
"EQUIPMENT").
<TABLE>
<CAPTION>
NUMBER CAPITALIZED
OF UNITS LESSOR'S COST MANUFACTURER SERIAL NUMBER MODEL AND TYPE OF EQUIPMENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3,250,730.07 Numerous Personal Computers, monitors,
printers, software and the
various equipment needed for
installation and running of the
systems.
</TABLE>
SEE COLLATERAL SCHEDULE A ATTACHED HERETO FOR THE VARIOUS
EQUIPMENT, SERIAL NUMBERS AND COSTS.
Equipment immediately listed above is located at: 4707 E. Baseline Road,
Phoenix, Maricopa County, AZ 85040
<TABLE>
<CAPTION>
B. FINANCIAL TERMS
<S> <C>
1. Advance Rent (if any): NOT APPLICABLE 5. Basic Term Commencement Date:
2. Capitalized Lessor's Cost: $ 3,250,730.07 6. Lessee Federal Tax ID No.: 860956244
3. Basic Term (No. of Months): 36 Months. 7. Last Delivery Date: OCTOBER 1, 1999
4. Basic Term Lease Rate Factor: 2.843469% 8. Daily Lease Rate Factor: N/A
</TABLE>
9. First Termination Date: THIRTY-SIX (36) months after the Basic Term
Commencement Date.
10. Interim Rent: For the period from and including the Lease Commencement
Date to but not including the Basic Term Commencement Date ("Interim
Period"), Lessee shall pay as rent ("Interim Rent") for each unit of
Equipment, the product of the Daily Lease Rate Factor times the
Capitalized Lessor's Cost of such unit times the number of days in the
Interim Period. Interim Rent shall be due on NOT APPLICABLE.
11. Basic Term Rent. Commencing on OCTOBER 1, 1999 and on the same day of
each month thereafter (each, a "Rent Payment Date") during the Basic
Term, Lessee shall pay as rent ("Basic Term Rent") the product of the
Basic Term Lease Rate Factor times the Capitalized Lessor's Cost of all
Equipment on this Schedule.
C. TAX BENEFITS Depreciation Deductions:
1. Depreciation method is the 200 % declining balance method, switching
to straight line method for the 1st taxable year for which using the straight
line method with respect to the adjusted basis as of the beginning of such year
will yield a larger allowance.
2. Recovery Period: FIVE (5) YEARS.
3. Basis: 100 % of the Capitalized Lessor's Cost.
D. PROPERTY TAX
APPLICABLE TO EQUIPMENT LOCATED IN 4707 E. BASELINE ROAD, PHOENIX, MARICOPA
COUNTY, AZ: Lessee agrees that it will not list any of such Equipment for
property tax purposes or report any property tax assessed against such Equipment
until otherwise directed in writing by Lessor. Upon receipt of any property tax
bill pertaining to such Equipment from the appropriate taxing authority, Lessor
will pay such tax and will invoice Lessee for the expense. Upon receipt of such
invoice, Lessee will promptly reimburse Lessor for such expense.
Lessor may notify Lessee (and Lessee agrees to follow such notification)
regarding any changes in property tax reporting and payment responsibilities.
1
<PAGE> 9
E. ARTICLE 2A NOTICE
IN ACCORDANCE WITH THE REQUIREMENTS OF ARTICLE 2A OF THE UNIFORM
COMMERCIAL CODE AS ADOPTED IN THE APPLICABLE STATE, LESSOR HEREBY MAKES
THE FOLLOWING DISCLOSURES TO LESSEE PRIOR TO EXECUTION OF THE LEASE, (A)
THE PERSON(S) SUPPLYING THE EQUIPMENT IS ADVANCED SYSTEMS GROUP, KENT DATA
COMM, ORACLE, ACCRUE SOFTWARE, INC. (THE "SUPPLIER(S)"), (B) LESSEE IS
ENTITLED TO THE PROMISES AND WARRANTIES, INCLUDING THOSE OF ANY THIRD
PARTY, PROVIDED TO THE LESSOR BY SUPPLIER(S), WHICH IS SUPPLYING THE
EQUIPMENT IN CONNECTION WITH OR AS PART OF THE CONTRACT BY WHICH LESSOR
ACQUIRED THE EQUIPMENT AND (C) WITH RESPECT TO SUCH EQUIPMENT, LESSEE MAY
COMMUNICATE WITH SUPPLIER(S) AND RECEIVE AN ACCURATE AND COMPLETE
STATEMENT OF SUCH PROMISES AND WARRANTIES, INCLUDING ANY DISCLAIMERS AND
LIMITATIONS OF THEM OR OF REMEDIES. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, LESSEE HEREBY WAIVES ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON A
LESSEE IN ARTICLE 2A AND ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE
OR OTHERWISE WHICH MAY LIMIT OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES
UNDER THE DEFAULT AND REMEDIES SECTION OF THE AGREEMENT.
F. STIPULATED LOSS AND TERMINATION VALUE TABLE*
<TABLE>
<CAPTION>
Termination Stipulated Termination Stipulated
Value Loss Value Value Loss Value
Rental Percentage Percentage Rental Percentage Percentage
------ ---------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
1 103.656 107.834 19 61.007 68.541
2 101.452 105.816 20 58.481 66.202
3 99.219 103.769 21 55.942 63.849
4 96.955 101.692 22 53.389 61.482
5 94.675 99.598 23 50.818 59.098
6 92.378 97.488 24 48.233 56.699
7 90.065 95.361 25 45.634 54.287
8 87.735 93.218 26 43.017 51.856
9 85.389 91.059 27 40.386 49.412
10 83.027 88.883 28 37.741 46.953
11 80.648 86.690 29 35.077 44.476
12 78.251 84.480 30 32.395 41.980
13 75.839 82.254 31 29.697 39.469
14 73.409 80.011 32 26.983 36.941
15 70.962 77.750 33 24.252 34.396
16 68.499 75.473 34 21.505 31.836
17 66.018 73.179 35 18.739 29.256
18 63.519 70.867 36 15.956 26.661
</TABLE>
*The Stipulated Loss Value or Termination Value for any unit of Equipment
shall be the Capitalized Lessor's Cost of such unit multiplied by the
appropriate percentage derived from the above table. In the event that the
Lease is for any reason extended, then the last percentage figure shown
above shall control throughout any such extended term.
G. MODIFICATIONS AND ADDITIONS FOR THIS SCHEDULE ONLY
For purposes of this Schedule only, the Agreement is amended as follows:
1. EQUIPMENT SPECIFIC PROVISIONS
The MAINTENANCE Section of the Lease is amended by adding the
following as the third sentence in subsection (a):
Lessee agrees that upon return of the Equipment, it will comply with
all original manufacturer's performance specifications for new Equipment
without expense to Lessor. Lessee shall, if requested by Lessor, obtain a
certificate or service report from the manufacturer attesting to such
condition.
Each reference contained in this Agreement to:
(a) "Adverse Environmental Condition" shall refer to (i) the
existence or the continuation of the existence, of an Environmental
Emission (including, without limitation, a sudden or non-sudden accidental
or non-accidental Environmental Emission), of, or exposure to, any
substance, chemical, material, pollutant, Contaminant, odor or audible
noise or other release or emission in, into or onto the environment
(including, without limitation, the air, ground, water or any surface) at,
in, by, from or related to any Equipment, (ii) the environmental aspect of
the transportation, storage, treatment or disposal of materials in
connection with the operation of any Equipment or (iii) the violation, or
alleged violation of any statutes, ordinances, orders, rules regulations,
permits or licenses of, by or from any governmental authority, agency or
court relating to environmental matters connected with any Equipment.
(b) "Affiliate" shall refer, with respect to any given Person, to any
Person that directly or indirectly through one or more intermediaries,
controls, or
2
<PAGE> 10
is controlled by, or is under common control with, such Person.
(c) "Contaminant" shall refer to those substances which are regulated
by or form the basis of liability under any Environmental Law, including,
without limitation, asbestos, polychlorinated biphenyls ("PCBs"), and
radioactive substances, or other material or substance which has in the
past or could in the future constitute a health, safety or environmental
hazard to any Person, property or natural resources.
(d) "Environmental Claim" shall refer to any accusation, allegation,
notice of violation, claim, demand, abatement or other order on direction
(conditional or otherwise) by any governmental authority or any Person for
personal injury (including sickness, disease or death), tangible or
intangible property damage, damage to the environment or other adverse
effects on the environment, or for fines, penalties or restrictions,
resulting from or based upon any Adverse Environmental Condition.
(e) "Environmental Emission" shall refer to any actual or threatened
release, spill, emission, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, leaching or migration into the indoor or outdoor
environment, or into or out of any of the Equipment, including, without
limitation, the movement of any Contaminant or other substance through or
in the air, soil, surface water, groundwater or property.
(f) "Environmental Law" shall mean any federal, foreign, state or
local law, rule or regulation pertaining to the protection of the
environment, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") (42
U.S.C. Section 9601 et seq.), the Hazardous Material Transportation Act
(49 U.S.C. Section 1801 et seq .), the Federal Water Pollution Control Act
(33 U.S.C. Section 1251 et seq .), the Resource Conservation and Recovery
Act (42 U.S.C. Section 6901 et seq .), the Clean Air Act (42 U.S.C.
Section 7401 et seq .), the Toxic Substances Control Act (15 U.S.C.
Section 2601 et seq .), the Federal Insecticide, Fungicide, and
Rodenticide Act (7 U.S.C. Section 1361 et seq .), and the Occupational
Safety and Health Act (19 U.S.C. Section 651 et seq .), as these laws have
been amended or supplemented, and any analogous foreign, federal, state or
local statutes, and the regulations promulgated pursuant thereto.
(g) "Environmental Loss" shall mean any loss, cost, damage,
liability, deficiency, fine, penalty or expense (including, without
limitation, reasonable attorneys' fees, engineering and other professional
or expert fees), investigation, removal, cleanup and remedial costs
(voluntarily or involuntarily incurred) and damages to, loss of the use of
or decrease in value of the Equipment arising out of or related to any
Adverse Environmental Condition.
(h) "Person" shall include any individual, partnership, corporation,
trust, unincorporated organization, government or department or agency
thereof and any other entity.
Lessee shall fully and promptly pay, perform, discharge, defend,
indemnify and hold harmless Lessor and its Affiliates, successors and
assigns, directors, officers, employees and agents from and against any
Environmental Claim or Environmental Loss.
The provisions of this Schedule shall survive any expiration or
termination of the Lease and shall be enforceable by lessor, its
successors and assigns.
RETURN CONDITIONS: In addition to the provisions provided for in the
RETURN OF EQUIPMENT Section of the Lease, and provided that the Lessee has
not elected its option to purchase the Equipment, Lessee shall, at its
expense:
(a) Upon the request of Lessor, Lessee shall no later than ninety
(90) days prior to the expiration or other termination of the Lease
provide:
(i) a detailed inventory of the Equipment (including the model
and serial number of each major component thereof), including, without
limitation, all internal circuit boards, module boards, and software
features;
(ii) a complete and current set of all manuals, equipment
configuration, setup and operation diagrams, maintenance records and other
data that may be reasonably requested by Lessor concerning the
configuration and operation of the Equipment; and
(iii) a certification of the manufacturer or of a maintenance
provider acceptable to Lessor that the Equipment (1) has been tested and
is operating in accordance with manufacturers specifications (together
with a report detailing the condition of the Equipment), the results of
such test(s) and inspection(s) and all repairs that were performed as a
result of such test(s) and inspection(s) and (2) that the Equipment
qualifies for the manufacturers used equipment maintenance program.
(b) Upon the request of Lessor, Lessee shall, no later than sixty
(60) days prior to the expiration or other termination of the Lease, make
the Equipment available for on-site operational inspection by persons
designated by the Lessor who shall be duly qualified to inspect the
Equipment in its operational environment.
(c) All Equipment shall be cleaned and treated with respect to rust,
corrosion and appearance in accordance with manufacturers recommendations
and consistent with the best practices of dealers in used equipment
similar to the Equipment; shall have no Lessee installed markings or
labels which are not necessary for the operation, maintenance or repair of
the Equipment; and shall be in compliance with all applicable governmental
laws, rules and regulations.
(d) The Equipment shall be deinstalled and packed by or under the
supervision of the manufacturer or such other person acceptable to Lessor
in accordance with manufacturers recommendations. Without limitation, all
internal fluids will either be drained and disposed of or filled and
secured in accordance with manufacturers recommendations and applicable
governmental laws, rules and regulations.
(e) Provide for transportation of the Equipment in a manner
consistent with the manufacturer's recommendations and practices to any
locations within the continental United States as Lessor shall direct; and
shall have the Equipment unloaded at such locations.
2. LEASE TERM OPTIONS
EARLY LEASE TERM OPTIONS
The Lease is hereby amended by adding the following to the end
thereof:
3
<PAGE> 11
CANCELLATION OPTION:
(a) So long as no default exists hereunder and expressly
provided that all of the terms and conditions of this Provision are
fulfilled, Lessee may cancel the Agreement as to all (but not less than
all) of the Equipment on this Schedule as of any one of the Cancellation
Dates set forth below (each, a "Cancellation Date") upon at least 90 days
prior written notice (the "Notice Date") to Lessor (which notice shall be
irrevocable and shall be sent to the attention of Lessor's Asset
Management Organization, 44 Old Ridgebury Road, Danbury, CT 06810-5105).
Such notice shall state the Cancellation Date which shall apply. If all of
the terms and conditions of this Provision are not fulfilled, this Lease
shall continue in full force and effect and Lessee shall continue to be
liable for all obligations thereunder, including, without limitation, the
obligation to continue paying rent.
(b) Prior to the Cancellation Date, Lessee shall
(i) pay to Lessor, as additional rent, (A) the
Cancellation Value (set forth below for the applicable Cancellation Date)
for the Equipment, plus (B) all rent and all other sums due and unpaid as
of the Cancellation Date (including, but not limited to, any Rent payment
due and payable on the Cancellation Date and any sales taxes and property
taxes); and
(ii) return the Equipment in full compliance with the
RETURN OF EQUIPMENT Section of the Lease, such compliance being
independently verified by an independent appraiser selected by Lessor
(reasonably acceptable to Lessee) to determine that the Equipment is in
such compliance, which determination shall be final, binding and
conclusive. Lessee shall bear all costs associated with such appraiser's
determination and such costs, if any, to cause the Equipment to be in full
compliance with the RETURN OF EQUIPMENT Section of the Lease on or prior
to such Cancellation Date.
(c) The Cancellation Dates and the applicable Cancellation
Values are as set forth below:
October 1, 2001 1,350,028.20
(d) Lessee shall, from the applicable Notice Date through the
Cancellation Date,
(i) continue to comply with all of the terms and
conditions of the Lease, including, but not limited to, Lessee's
obligation to pay rent, and
(ii) make the Equipment available to Lessor in such a
manner as to allow Lessor to market and demonstrate the Equipment to
potential purchasers or lessees from such premises at no cost to Lessor;
provided, however, that, subject to Lessor's right to market and
demonstrate the Equipment to potential purchasers or lessees from time to
time, Lessee may still use the Equipment until the Cancellation Date.
(e) Lessee shall, from the applicable Cancellation Date through
the earlier of the date the Equipment is sold by Lessor to a third party
or 30 days following the Cancellation Date, comply with the following
terms and conditions:
(i) Continue to provide insurance for the Equipment, at
Lessee's own expense, in compliance with the terms found in the INSURANCE
Section of the Lease, and
(ii) Make the Equipment available to Lessor and/or allow
Lessor to store the Equipment at Lessee's premises, in such a manner as to
allow Lessor to market and demonstrate the Equipment to potential
purchasers or lessees from such premises at no cost to Lessor.
(f) The proceeds of any sale or re-lease of the Equipment after
Lessee has exercised its Cancellation Option shall be for the sole benefit
of Lessor and Lessee shall have no interest in or any claim upon any of
such proceeds.
H. PAYMENT AUTHORIZATION
You are hereby irrevocably authorized and directed to deliver and apply
the proceeds due under this Schedule as follows:
<TABLE>
<CAPTION>
COMPANY NAME ADDRESS AMOUNT
------------ ------- ------
<S> <C> <C>
Advanced Systems Group, Inc. 12405 North Grant Street $ 1,831,694.00
Thornton, CO 80241
Kent Datacomm P.O. Box 201523 $ 525,931.07
Houston, TX 77216-1523
Oracle Wire Transfer Information: $ 570,326.00
Wells Fargo Bank
Chicago, IL
ABA# 121000248
Account # 4522-020841
Accrue Software, Inc. 48634 Milmont Drive $ 322,779.00
Freemont, CA 94538
</TABLE>
This authorization and direction is given pursuant to the same authority
authorizing the above-mentioned financing.
4
<PAGE> 12
Except as expressly modified hereby, all terms and provisions of the
Agreement shall remain in full force and effect. This Schedule is not binding or
effective with respect to the Agreement or Equipment until executed on behalf of
Lessor and Lessee by authorized representatives of Lessor and Lessee,
respectively.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be
executed by their duly authorized representatives as of the date first above
written.
<TABLE>
<CAPTION>
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL CORPORATION goracing.com, inc.
<S> <C>
By: /s/ Arthur G. Abello By: /s/ Christopher S. Besing
----------------------------- -----------------------------
Name: Arthur G. Abello Name: Christopher S. Besing
----------------------------- -----------------------
Title: Senior Risk Analyst Title: C.E.O
----------------------------- -----------------------
</TABLE>
5
<PAGE> 13
[GENERAL ELECTRIC LETTERHEAD]
October 4, 1999
goracing.com, inc.
4707 E Baseline Road
Phoenix AZ 85040
Attn: Mr. Dean Jargo
Dear Mr. Jargo:
General Electric Capital Corporation ("GE Capital") is pleased to offer
the following commitment to goracing.com, inc. for the financing of certain
computer equipment ("Equipmen") - similar to the equipment leased pursuant to
Schedule No. 1 to Master Lease Agreement dated August 8, 1999 ("Lease") The
following is a summary of the principal terms and conditions of this commitment:
SUMMARY OF PRINCIPAL TERMS AND CONDITIONS.
<TABLE>
<S> <C> <C>
- Transaction: Single Investor Guideline Lease.
- Lessee: goracing.com, inc.
- Guarantor: Action Performance Companies, Inc.
- Lessor: GE Capital or one of its wholly-owned
subsidiaries or Assignees.
- Equipment Location: Tempe, AZ
- Equipment Cost: Approximately
US$7,000,000.00. To
date GE Capital has
leased approximately
$3,250,000.00 which
leaves an available
amount under this
commitment of
$3,750,000.00.
- Depreciation Deductions: (1)Method: 200% declining
balance method over
the Recovery Period,
switching to straight
line method for the
first taxable year for
which using the
straight line method
with respect to the
adjusted basis as of
the beginning of such
year will yield a
larger allowance.
(2) Recovery Period: _ years.
(3) Basis: 100% of Equipment Cost.
- Delivery Assumptions: The Equipment is anticipated to be delivered on or before 12-31-99. The
Last Delivery Date is 12-31-99.
- Basic Term: Thirty-Six (36) months
</TABLE>
6
<PAGE> 14
<TABLE>
<S> <C> <C>
- Basic Term Rent: Equal to the Equipment Cost multiplied by the Basic Term Rental Factor.
Paid monthly in advance.
- Basic Term Rental Factor: To be mutually agreed upon by Lessee and Lessor
- Cancellation Option: Similar to the Cancellation Option in Schedule No. 1
- Lease Expiration
Purchase Option: Fair Market Value. Lessee would be
able to purchase all
(but not less than
all) of the Equipment
at its then Fair
Market Value at lease
expiration.
- Commitment Valid Until: 12-31-99.
</TABLE>
GE Capital's commitment to enter into the Lease shall be subject to the
following additional conditions: (i) execution by you and all other parties
involved in the transaction of all documentation required by GE Capital and in
form and substance satisfactory to GE Capital in its sole discretion; (ii) the
satisfaction of all conditions precedent set forth in the documentation, and,
(iii) no material adverse change in the financial or operating condition of
Lessee and Guarantor. The willingness of GE Capital to enter into further
schedules to the Lease is expressly conditioned upon GE Capital's determination
that all of the foregoing conditions ("Foregoing Conditions") have been
satisfied as required herein and in the Lease, which determination shall be in
GE Capital's and its counsel's sole discretion. In the event that GE Capital
determines that any of the Foregoing Conditions have not been satisfied, GE
Capital shall have no obligation whatsoever to enter into further schedules to
the Lease with you and shall have no liability whatsoever to you under this
letter or the Lease. In such case, this letter shall be of no further force and
effect.
It is understood that if, as a result of further investigation and
analysis by GE Capital and its counsel, information which GE Capital is not now
aware of may be revealed and/or certain other impediments to closing may come to
its attention, GE Capital may require that the transaction be restructured or
otherwise modified. As the potential Lessor, GE Capital shall be the sole judge
of what is an impediment and whether the impediment is so serious as to preclude
closing.
Thank you for your interest in GE Capital. If there are any questions,
please do not hesitate to call.
Very truly yours,
General Electric Capital Corporation
By: /s/ D. L. DeBroux
----------------------------------
Name: D. L. DeBroux
Title: Senior Risk Manager
<PAGE> 15
CORPORATE GUARANTY
Date: 08/09 99
---------------, 19---
General Electric Capital Corporation
One Lincoln Centre, 5400 LBJ Freeway Suite 1280, L.B. 3
Dallas, TX 75240
To induce you to enter into, purchase or otherwise acquire, now or at any
time hereafter, any promissory notes, security agreements, chattel mortgages,
pledge agreements, conditional sale contracts, lease agreements, and/or any
other documents or instruments evidencing, or relating to, any lease, loan,
extension of credit or other financial accommodation (collectively "ACCOUNT
DOCUMENTS" and each an "ACCOUNT DOCUMENT") to goracing.com, inc., a CORPORATION
organized and existing under the laws of the State of DELAWARE ("CUSTOMER"),
but without in any way binding you to do so, the undersigned, for good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, does hereby guarantee to you, your successors and assigns, the
due regular and punctual payment of any sum or sums of money which the Customer
may owe to you now or at any time hereafter, whether evidenced by an Account
Document, on open account or otherwise, and whether it represents principal,
interest, rent, late charges, indemnities, an original balance, an accelerated
balance, liquidated damages, a balance reduced by partial payment, a deficiency
after sale or other disposition of any leased equipment, collateral or
security, or any other type of sum of any kind whatsoever that the Customer may
owe to you now or at any time hereafter, and does hereby further guarantee to
you, your successors and assigns, the due, regular and punctual performance of
any other duty or obligation of any kind or character whatsoever that the
Customer may owe to you now or at any time hereafter (all such payment and
performance obligations being collectively referred to as "OBLIGATIONS").
Undersigned does hereby further guarantee to pay upon demand all losses, costs,
attorneys' fees and expenses which may be suffered by you by reason of
Customer's default or default of the undersigned.
This Guaranty is a guaranty of prompt payment and performance (and not
merely a guaranty of collection). Nothing herein shall require you to first
seek or exhaust any remedy against the Customer, its successors and assigns, or
any other person obligated with respect to the Obligations, or to first
foreclose, exhaust or otherwise proceed against any leased equipment,
collateral or security which may be given in connection with the Obligations.
It is agreed that you may, upon any breach or default of the Customer, or at
any time thereafter, make demand upon the undersigned and receive payment and
performance of the Obligations, with or without notice or demand for payment or
performance by the Customer, its successors or assigns, or any other person.
Suit may be brought and maintained against the undersigned, at your election,
without joinder of the Customer or any other person as parties thereto. The
obligations of each signatory to this Guaranty shall be joint and several.
The undersigned agrees that its obligations under this Guaranty shall be
primary, absolute, continuing and unconditional, irrespective of and unaffected
by any of the following actions or circumstances (regardless of any notice to
or consent of the undersigned): (a) the genuineness, validity, regularity and
enforceability of the Account Documents or any other document; (b) any
extension, renewal, amendment, change, waiver or other modification of the
Account Documents or any other document; (c) the absence of, or delay in, any
action to enforce the Account Documents, this Guaranty or any other document;
(d) your failure or delay in obtaining any other guaranty of the Obligations
(including, without limitation, your failure to obtain the signature of any
other guarantor hereunder); (e) the release of, extension of time for payment
or performance by, or any other indulgence granted to the Customer or any other
person with respect to the Obligations by operation of law or otherwise; (f)
the existence, value, condition, loss, subordination or release (with or
without substitution) of, or failure to have title to or perfect and maintain a
security interest in, or the time, place and manner of any sale or other
disposition of any leased equipment, collateral or security given in connection
with the Obligations, or any other impairment (whether intentional or
negligent, by operation of law or otherwise) of the rights of the undersigned;
(g) the Customer's voluntary or involuntary bankruptcy, assignment for the
benefit of creditors, reorganization, or similar proceedings affecting the
Customer or any of its assets; or (h) any other action or circumstances which
might otherwise constitute a legal or equitable discharge or defense of a
surety or guarantor.
This Guaranty, the Account Documents and the Obligations may be assigned
by you, without the consent of the Undersigned. The Undersigned agrees that if
it receives written notice of an assignment from you, the Undersigned will pay
all amounts due hereunder to such assignee or as instructed by you. The
Undersigned also agrees to confirm in writing receipt of the notice of
assignment as may be reasonably requested by assignee. The Undersigned hereby
waives and agrees not to assert against any such assignee any of the defenses
set forth in the immediate preceding paragraph.
This Guaranty may be terminated upon delivery to you (at your address
shown above) of a written termination notice from the undersigned. However, as
to all Obligations (whether matured, unmatured, absolute, contingent or
otherwise) incurred by the Customer prior to your receipt of such written
termination notice (and regardless of any subsequent amendment, extension or
other modification which may be made with respect to such Obligations), this
Guaranty shall nevertheless continue and remain undischarged until all such
Obligations are indefeasibly paid and performed in full.
The undersigned agrees that this Guaranty shall remain in full force and
effect or be reinstated (as the case may be) if at any time payment or
performance of any of the Obligations (or any part thereof) is rescinded,
reduced or must otherwise be restored or returned by you, all as though such
payment or performance had not
<PAGE> 16
been made. If, by reason of any bankruptcy,
insolvency or similar laws effecting the rights of creditors, you shall be
prohibited from exercising any of your rights or remedies against the Customer
or any other person or against any property, then, as between you and the
undersigned, such prohibition shall be of no force and effect, and you shall
have the right to make demand upon, and receive payment from, the undersigned
of all amounts and other sums that would be due to you upon a default with
respect to the Obligations.
Notice of acceptance of this Guaranty and of any default by the Customer
or any other person is hereby waived. Presentment, protest demand, and notice
of protest, demand and dishonor of any of the Obligations, and the exercise of
possessory, collection or other remedies for the Obligations, are hereby
waived. The undersigned warrants that it has adequate means to obtain from the
Customer on a continuing basis financial data and other information regarding
the Customer and is not relying upon you to provide any such data or other
information. Without limiting the foregoing, notice of adverse change in the
Customer's financial condition or of any other fact which might materially
increase the risk of the undersigned is also waived. All settlements,
compromises, accounts stated and agreed balances made in good faith between the
Customer, its successors or assigns, and you shall be binding upon and shall
not affect the liability of the undersigned.
Payment of all amounts now or hereafter owed to the undersigned by the
Customer or any other obligor for any of the Obligations is hereby subordinated
in right of payment to the indefeasible payment in full to you of all
Obligations and is hereby assigned to you as a security therefor. The
undersigned hereby irrevocably and unconditionally waives and relinquishes all
statutory, contractual, common law, equitable and all other claims against the
Customer, any other obligor for any of the Obligations, any collateral
therefor, or any other assets of the Customer or any such other obligor, for
subrogation, reimbursement, exoneration, contribution, indemnification, setoff
or other recourse in respect of sums paid or payable to you by the undersigned
hereunder, and the undersigned hereby further irrevocably and unconditionally
waives and relinquishes any and all other benefits which it might otherwise
directly or indirectly receive or be entitled to receive by reason of any
amounts paid by, or collected or due from, it, the Customer or any other
obligor for any of the Obligations, or realized from any of their respective
assets.
THE UNDERSIGNED HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR
INDIRECTLY, THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, ANY OF THE
RELATED DOCUMENTS, ANY DEALINGS BETWEEN US RELATING TO THE SUBJECT MATTER
HEREOF OR THEREOF, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN
US. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION,
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY, THE
OBLIGATIONS GUARANTEED HEREBY, OR ANY RELATED DOCUMENTS. IN THE EVENT OF
LITIGATION, THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
As used in this Guaranty, the word "person" shall include any individual,
corporation, partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, or any government or any political
subdivision thereof.
This Guaranty is intended by the parties as a final expression of the
guaranty of the undersigned and is also intended as a complete and exclusive
statement of the terms thereof. No course of dealing, course of performance or
trade usage, nor any paid evidence of any kind, shall be used to supplement or
modify any of the terms hereof. Nor are there any conditions to the full
effectiveness of this Guaranty. This Guaranty and each of its provisions may
only be waived, modified, varied, released, terminated or surrendered, in whole
or in part, by a duly authorized written instrument signed by you. No failure
by you to exercise your rights hereunder shall give rise to any estoppel
against you, or excuse the undersigned from performing hereunder. Your waiver
of any right to demand performance hereunder shall not be a waiver of any
subsequent or other right to demand performance hereunder.
This Guaranty shall bind the undersigned's successors and assigns and the
benefits thereof shall extend to and include your successors and assigns. In
the event of default hereunder, you may at any time inspect undersigned's
records, or at your option, undersigned shall furnish you with a current
independent audit report.
If any provisions of this Guaranty are in conflict with any applicable
statute, rule or law, then such provisions shall be deemed null and void to the
extent that they may conflict therewith, but without invalidating any other
provisions hereof.
Each signatory on behalf of a corporate guarantor warrants that he had
authority to sign on behalf of such corporation and by so signing, to bind said
guarantor corporation hereunder.
IN WITNESS WHEREOF, this Guaranty is executed the day and year above
written.
ACTION PERFORMANCE COMPANIES, INC.
By: /s/ Fred W. Wagenhals
______________________________
(Signature)
Title: Fred W. Wagenhals
______________________________
(Officer's Title)
<PAGE> 17
ATTEST: J. Roberts
___________________________________
Secretary/Assistant Secretary
<PAGE> 1
EXHIBIT 12.1
ACTION PERFORMANCE COMPANIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(000 OMITTED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1995 1996 1997 1998 1999
------ -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income before income taxes..................... $4,154 $ 9,870 $ 16,910 $ 40,978 $ 46,895
Fixed charges:
Actual interest expense................... 184 80 1,871 5,228 6,831
Interest portion of leases................ 117 146 312 138 105
Amortization of debt issuance costs....... 0 0 150 305 98
------ -------- --------- --------- ---------
Total fixed charges..................... 301 226 2,333 5,671 7,034
------ -------- --------- --------- ---------
Net income as adjusted......................... $4,455 $10,096 $19,243 $ 46,649 $ 53,929
------ -------- --------- --------- ---------
Ratio of earnings to fixed charges............. 14.8x 44.7x 8.2x 8.2x 7.7x
====== ======== ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
ACTION PERFORMANCE COMPANIES, INC.
(AS OF DECEMBER 20, 1999)
<TABLE>
<CAPTION>
STATE OR COUNTRY
OF INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
- ------------------ ----------------
<S> <C>
Action Corporate Services, Inc. Arizona
Action Performance Holdings GmbH Germany
Action Performance International, Ltd. United Kingdom
Action Racing Collectables, Inc. Arizona
Action Sports Image, L.L.C. Arizona
APC Europe GmbH Germany
APC Minichamps GmbH(1) Germany
AW Acquisition Corp. Arizona
Chase Racewear L.L.C. North Carolina
Creative Marketing & Promotions, Inc. North Carolina
Danhausen GmbH Germany
Goodsports Holdings Pty. Ltd. Australia
Goodsports International, Ltd.(2) United Kingdom
Goodsports International Pty. Ltd.(3) Australia
Goodsports Sportswear Pty. Ltd.(3) Australia
goracing.com, inc. Delaware
goracing Direct Sales, L.L.C.(4) Arizona
goracing Interactive Services, Inc.(4) Arizona
Grand Prix, Inc. Ltd.(5) United Kingdom
Lang Miniaturen GmbH & Co. KG. Germany
Minichamps GmbH & Co. KG. Germany
Paul's Model Art GmbH & Co. KG. Germany
Performance Plus Nutritional, L.L.C. Delaware
RYP, Inc. North Carolina
Racing Collectables Club of America, Inc.(6) Arizona
The Fan Club Company, L.L.C.(4) Arizona
</TABLE>
- -------------------
(1) wholly owned subsidiary of Action Performance Holdings GmbH
(2) wholly owned subsidiary of Action Performance International, Ltd.
(3) wholly owned subsidiary of Goodsports Holdings Pty. Ltd.
(4) wholly owned subsidiary of Racing Collectables Club of America, Inc.
(5) wholly owned subsidiary of Goodsports International, Ltd.
(6) wholly owned subsidiary of goracing.com, inc.
<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, 333-01874,
333-03865, 333-22943, 333-28717, 333-45991, 333-53413, 333-60321, 333-73201, and
333-82879.
/s/ Arthur Andersen LLP
Phoenix, Arizona
December 28, 1999
<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, 1999, 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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 58,523
<SECURITIES> 0
<RECEIVABLES> 46,409
<ALLOWANCES> 1,421
<INVENTORY> 45,310
<CURRENT-ASSETS> 159,045
<PP&E> 83,257
<DEPRECIATION> 27,095
<TOTAL-ASSETS> 335,747
<CURRENT-LIABILITIES> 51,248
<BONDS> 109,208
0
0
<COMMON> 169
<OTHER-SE> 102,555
<TOTAL-LIABILITY-AND-EQUITY> 335,747
<SALES> 342,445
<TOTAL-REVENUES> 342,445
<CGS> 210,768
<TOTAL-COSTS> 210,768
<OTHER-EXPENSES> 78,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,929
<INCOME-PRETAX> 46,895
<INCOME-TAX> 18,526
<INCOME-CONTINUING> 28,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,369
<EPS-BASIC> 1.69
<EPS-DILUTED> 1.65
</TABLE>
