AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996
REGISTRATION NO. 333-08175
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
PINNACLE BRANDS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2752 75-2406170
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Numbers) Identification No.)
organization)
</TABLE>
924 AVENUE J EAST
GRAND PRAIRIE, TEXAS 75050
(214) 601-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-------------------
JERRY M. MEYER
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PINNACLE BRANDS, INC.
924 AVENUE J EAST
GRAND PRAIRIE, TEXAS 75050
(214) 601-7000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
NANCY E. FUCHS ROHAN S. WEERASINGHE
JOEL I. GREENBERG SHEARMAN & STERLING
KAYE, SCHOLER, FIERMAN, 599 LEXINGTON AVENUE
HAYS & HANDLER, LLP NEW YORK, NEW YORK 10022
425 PARK AVENUE (212) 848-4000
NEW YORK, NEW YORK 10022
(212) 836-8000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 30, 1996
PROSPECTUS
4,000,000 SHARES
PINNACLE BRANDS, INC.
COMMON STOCK
-------------------
The 4,000,000 shares of Common Stock of Pinnacle Brands, Inc. (the
"Company") offered hereby are being offered by the Company. Prior to this
offering there has been no public market for any securities of the Company. It
is currently estimated that the initial offering price per share will be between
$14 and $16. For a discussion of the factors to be considered in determining the
initial public offering price, see "Underwriting."
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange ("NYSE") under the symbol "PNE".
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK
OFFERED HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE><CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) The Company and the Company's principal stockholder (the "Selling
Stockholder") have agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Selling Stockholder has granted the several Underwriters a 30-day option
to purchase up to 600,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public and Underwriting Discount, and the proceeds to the Selling
Stockholder will be $ , $ , and $ , respectively. See
"Underwriting." Approximately $33.0 million of the proceeds to be received
by the Company in this offering will be used to repay indebtedness held by
the Selling Stockholder. See "Use of Proceeds."
-------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on or
about , 1996.
-------------------
MERRILL LYNCH & CO. CS FIRST BOSTON
-------------------
The date of this Prospectus is , 1996.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ARTWORK DESCRIPTIONS
INSIDE FRONT COVER ARTWORK
Picture of a baseball player swinging a baseball bat with inset pictures of
the Company's trading card boxes and card packs.
FOLD OUT ARTWORK
Copy of Pinnacle advertisement showing a boy standing next to a bicycle
which has a football trading card in the spokes on one side of the page and the
back of one of the Company's card packs on the other side of the page. The
caption says "If it's one of your Pinnacles, ground him for life."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including the notes thereto) included elsewhere in this Prospectus. Unless the
context otherwise requires, as used in this Prospectus, the term "Pinnacle"
means Pinnacle Brands, Inc., and the term "Company" means Pinnacle and its
direct and indirect wholly-owned subsidiaries. "SCMA" means the Sports Card
Manufacturers Association, Inc., which is a trade organization comprising the
Company and its three principal competitors: Fleer/Skybox, Topps and Upper Deck.
As used in this Prospectus, references to SCMA data or net sales mean net sales,
defined as the aggregate wholesale gross sales of the four SCMA members less the
dollar value of product returns the four members actually received during the
reporting period. SCMA net sales are reported for baseball, football, hockey and
basketball trading cards. The Company believes that SCMA data represent
approximately 90% of wholesale net sales of the sports trading card industry.
THE COMPANY
The Company is one of the nation's leading designers, producers and
distributors of sports trading cards. The Company offers premium value products
under numerous brands and sub-brands--differentiated by product feature, price
point, sport and distribution channel--including such well-established brands as
Score, Select, Pinnacle, Donruss, Leaf, Action Packed, Racer's Choice and
Sportflix. Based on SCMA data, for 1995 the Company had an aggregate 37% market
share in the three major team sports categories in which it competes (consisting
of a 26% market share for the Company and an 11% market share related to
products sold under licenses acquired by the Company in May 1996). The Company
believes that it has the leading market share in each of those three team
sports--baseball, football and hockey. The Company is also a NASCAR licensee and
a leading producer of auto racing cards. In addition to its sports trading card
business, the Company sells collectible and similar picture products to consumer
and food product companies for their promotional purposes.
According to SCMA data, the 1995 sports trading card market was
approximately $560 million, which equates to approximately $900 million in
retail sales. Sales of sports trading cards are significantly influenced by the
popularity of the related sport. The Company and other producers of sports
trading cards operate pursuant to licenses with the owners' and players'
association in each relevant team sport or, in the case of auto racing, with
National Association for Stock Car Auto Racing, Inc.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10b-6,
10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
1
<PAGE>
("NASCAR") and the relevant drivers, team owners and sponsors. The major sports
organizations have generally limited the number of licensed sports trading card
competitors. Sports trading cards are sold to consumers through a variety of
distribution channels, including approximately 5,000 specialty hobby stores and
over 80,000 retail outlets such as mass merchandisers, convenience stores,
grocery and drug stores and toy stores. Sport trading cards are a highly
attractive category for retailers because of their relatively high profit
margins per square foot of shelf space.
The Company has positioned itself as a leader in the industry through an
emphasis on collectibility and continual product innovation, with a reputation
for high quality products and service. Each of the Company's sports trading card
brands has its own positioning in the marketplace and is designed to appeal to a
targeted group of consumers. Marketing studies commissioned by the Company
indicate that the Company's average collector is approximately 31 years old and
owns a collection valued at over $4,000. The Company produces different products
utilizing a variety of production technologies and distinctive features and
sells these products through multiple distribution channels at a wide range of
price points. The Company believes that it is an industry leader in innovative
card design and production technologies. The Company's sports trading card
products consistently have among the industry's highest aftermarket trading
values, based on aftermarket prices published in Beckett Monthly (the most
widely circulated sports trading card publication).
As a result of the business strategy implemented by the Company beginning
in 1993, the Company's net sales more than doubled from $62.5 million in 1993 to
$130.2 million in 1995, despite a decline in overall sports trading card
industry sales during that period. The Company's net sales have increased 19%
from $41.9 million for the first six months of 1995 to $49.9 million for the
comparable 1996 period. The Company's historical losses were $56.1 million,
$44.0 million and $2.5 million in 1993, 1994 and 1995, respectively. For the
first six months of 1995 and 1996, respectively, the Company had net losses of
$7.2 million and $9.6 million. The Company's historical losses include unusual
charges that the Company does not expect to be recurring, including charges
related to the write-off of amounts due from an acquired company in connection
with the acquisition thereof in 1993 and the write-off of goodwill in 1994.
Historical losses also include non-cash interest expense on indebtedness that
is being repaid or converted into Common Stock concurrently with the Offering.
Pro forma as adjusted for the Offering, net income (loss) for the year ended
December 31, 1995 and for the six month periods ended June 30, 1995 and June 30,
1996 was $8.2 million, $0 and ($1.5) million, respectively. See "-- Summary
Consolidated Financial Data" and the notes thereto and "Business--Seasonality."
Historically, the Company relied on multiple-product brokers to sell its
products. In 1996, however, the Company established an in-house, field sales
force to market its trading card products more effectively by providing a higher
level of customer service to retail and hobby dealers. The field sales force
educates the customer about the Company's products, helps to tailor the
customer's product selection, and shares product placement and merchandising
techniques with the customer, all with the goal of enhancing the customer's
sell-through of the Company's products.
The Company utilizes what it believes to be an aggressive, cost-effective
marketing strategy concentrating on public relations events and targeted
advertising to maximize brand awareness. To increase its visibility in the
sports market, the Company has entered into multi-year commitments to be the
exclusive title sponsor of the premiere fan events for hockey and baseball,
which include the Pinnacle NHL FANtasy held in conjunction with the National
Hockey League All-Star game and the Pinnacle All-Star FanFest held in
conjunction with the Major League Baseball All-Star game. The Company is also
the exclusive sports trading card sponsor of the NFL Quarterback Club's
Quarterback Challenge. These events serve both to increase fan interest in the
relevant sport and to provide an opportunity to introduce the Company's sports
trading cards to a large number of fans who may not be familiar with the
Company's products. In addition, these events provide significant brand
exposure, including national television and print media coverage, to a
sports-conscious target audience at a substantially lower cost than conventional
media advertising.
The Company continually seeks to improve its profitability and the quality
and predictability of its earnings and cash flows by managing the return of
unsold product and controlling costs. The Company believes that it has been an
industry leader in the effort to minimize returns, which has historically been a
concern for the industry. The Company has increased the percentage of its sales
to the hobby distribution channel, which traditionally does not have return
privileges, and has also negotiated with some major mass market retailers to
eliminate return privileges. As a result, since 1992 the Company has tripled the
percentage of its sales made on a non-returnable basis, to more than 50%. In
addition, the Company continually evaluates cost control opportunities. The
Company has successfully identified and reduced certain significant costs
through investments in design technology and identification of more
cost-efficient vendors and sources of raw materials. In addition, since 1993 the
Company has shifted its focus from being a manufacturer of sports trading cards
to being a flexible designer, marketer and distributor of collectible products.
The Company now outsources substantially all of its production processes other
than design and artwork.
2
<PAGE>
STRATEGY
The Company's strategy is to position its sports trading card products
principally as collectibles which are likely to have superior value in the
secondary market. This strategy has led the Company to increase its sales to
specialty retail outlets, consisting mainly of trading card hobby stores, the
retailer of choice for the serious collector/consumer. The Company believes that
success within this hobby channel, in turn, drives demand within the broader,
general retail channel. Since 1993, by consistently executing this strategy, the
Company has experienced a significant increase in net sales, as well as in the
proportion of its sales attributable to the key hobby channel. The Company's
strategy encompasses the following elements:
. Continual product innovation, both technological and artistic, to stimulate
collector interest;
. Managed production quantity and quality, making less than the market
demands, to promote collectibility; and
. Tailored product distribution, packaging and sales support, customized to
each individual channel of distribution to maximize sell-through.
In order to implement its strategy, the Company intends to: (i) continue to
enhance highly recognizable brands; (ii) further enhance hobby channel
distribution; (iii) selectively expand general retail distribution; (iv)
continually evaluate and reposition products to meet both customers' and
consumers' demands and preferences; (v) maximize profitability of recent
acquisitions; (vi) pursue opportunities in promotional and related markets; and
(vii) position the Company as a strong contender for additional licensing
opportunities. In addition, the Company will continue to seek strategic
acquisitions which would complement its existing business and/or take maximum
advantage of the Company's core competencies. These competencies include, among
other things, retail and specialty distribution, product development, licensing
and knowledge of collectibles markets. The Company believes that the continued
implementation of its strategy will enable it to maintain its leadership
position in the sports trading card market and achieve future growth.
RECENT ACQUISITION
In May 1996, the Company acquired from Donruss Trading Cards, Inc.
("Donruss/Leaf"), a subsidiary of Leaf, Inc., its baseball and hockey trading
card licenses, as well as certain inventory and intangibles, for an aggregate
purchase price of approximately $41.0 million (the "Donruss License
Acquisition"), which comprised a $32.5 million cash payment to Donruss/Leaf plus
the assumption of certain liabilities. In 1995, based on data reported to its
licensors, Donruss' gross shipments of products sold pursuant to the purchased
licenses (without deduction for returns) exceeded $50 million. The Company
believes that the Donruss License Acquisition significantly enhances the
Company's strategic position in the sports trading card industry. Management
believes that the Donruss products have distinctive features and brand
recognition that appeal to certain collectors/consumers and therefore intends to
maintain the distinctiveness of these products. The Company's strategy to
maximize net sales and profitability of the Donruss licensed products includes:
(i) leveraging the Company's existing infrastructure to maximize the
contribution of the Donruss products; (ii) repositioning Donruss products for
targeted market segments; (iii) marketing Donruss products using the Company's
more effective field sales force and aggressive marketing techniques; (iv)
extending Donruss brands into football trading cards; and (v) applying the
Company's return policies to sales of Donruss products.
Except as otherwise indicated, all information in this Prospectus (i) has
been adjusted to reflect a 103.96-for-1 stock split of the outstanding Common
Stock to be effected immediately prior to the consummation of this Offering,
(ii) gives effect to the conversion of certain subordinated indebtedness and all
outstanding shares of Redeemable Preferred Stock, par value $.01 per share
("Redeemable Preferred Stock"), into shares of Common Stock and (iii) assumes no
exercise of the Underwriters' over-allotment option.
Score, Select, Pinnacle, Donruss, Action Packed, Racer's Choice, Sportflix
and Optigraphics are among the Company's trademarks. Leaf is a trademark of
Leaf, Inc.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company(a)....... 4,000,000 shares
Common Stock to be outstanding after the
Offering(b).................................. 11,689,726 shares
Use of Proceeds.............................. Of the estimated net proceeds to the Company
of $55.0 million, approximately $22.0 million
will be used to reduce indebtedness under the
Credit Agreement (as defined herein) and
$33.0 million will be used to retire a
portion of the Subordinated Notes (as defined
herein). The Company will not receive any of
the proceeds from the sale of shares subject
to the over-allotment option.
Proposed New York Stock Exchange Symbol...... PNE
</TABLE>
- ------------
(a) Excludes shares subject to the over-allotment option which are being offered
by the Selling Stockholder.
(b) Excludes 1,386,652 shares of Common Stock subject to options granted under
the Company's 1992 Option Plan and 123,621 shares of Common Stock subject to
other options. Excludes 1,168,973 shares reserved for issuance under the
1996 Incentive Stock Option Plan and 33,837 shares reserved for issuance
under the 1996 Restricted Stock Plan.
-------------------
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE THREE MONTHS
MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ----------------------------------------- -----------------
1991(A) 1992 1993 1994 1995 1995 1996
------------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales(b).................... $35,511 $108,881 $ 62,501 $117,965 $130,183 $41,879 $49,905
Cost of sales................... 25,810 73,264 41,000 78,013 90,388 29,548 34,503
------------- -------- -------- -------- -------- ------- -------
Gross profit.................... 9,701 35,617 21,501 39,952 39,795 12,331 15,402
Selling, general and
administrative expenses........ 5,119 20,222 20,972 23,506 26,310 11,480 15,659
Unusual charges(c)(d)........... -- -- 41,435 47,366 -- -- --
------------- -------- -------- -------- -------- ------- -------
Operating income (loss)......... 4,582 15,395 (40,906) (30,920) 13,485 851 (257)
Interest expense--subordinated
notes payable.................. (777) (4,298) (7,198) (9,307) (11,526) (5,524) (6,034)
Interest expense--other......... (839) (5,792) (4,180) (4,509) (5,068) (2,581) (3,521)
Other income (expense), net..... (795) 252 72 730 657 42 195
------------- -------- -------- -------- -------- ------- -------
Income (loss) before income
taxes........................... 2,171 5,557 (52,212) (44,006) (2,452) (7,212) (9,617)
Income tax provision............ 1,074 2,431 -- -- -- -- --
------------- -------- -------- -------- -------- ------- -------
Net income (loss)(e)............ $ 1,097 $ 3,126 $(52,212) $(44,006) $ (2,452) $(7,212) $(9,617)
------------- -------- -------- -------- -------- ------- -------
------------- -------- -------- -------- -------- ------- -------
</TABLE>
PRO FORMA, AS ADJUSTED, STATEMENT OF OPERATIONS DATA(F):
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS
ENDED ENDED JUNE 30,
DECEMBER 31, -----------------
1995(G) 1995(H) 1996(I)
------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net sales...................................................................... $130,183 $41,879 $49,905
Cost of sales.................................................................. 90,388 29,548 34,503
------------ ------- -------
Gross profit................................................................... 39,795 12,331 15,402
Selling, general and administrative expenses................................... 24,325 10,930 15,509
------------ ------- -------
Operating income (loss)........................................................ 15,470 1,401 (107)
Interest expense............................................................... (2,888) (1,490) (2,431)
Other income (expense), net.................................................... 657 42 195
------------ ------- -------
Income (loss) before income taxes.............................................. 13,239 (47) (2,343)
Income tax provision (benefit)................................................. 5,031 (18) (890)
------------ ------- -------
Net income (loss).............................................................. $ 8,208 $ (29) $(1,453)
------------ ------- -------
------------ ------- -------
Net income (loss) per share(j)................................................. $ 0.63 $ -- $ (0.11)
Weighted average number of shares of common stock and equivalents(j)........... 13,091 13,091 13,091
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
PRO FORMA, AS
ACTUAL ADJUSTED(F)(K)
--------- -------------
<S> <C> <C>
(IN THOUSANDS)
Net working capital...................................................... $ 11,471 $ 11,471
Total assets............................................................. 129,296 147,396
Long-term debt, including current maturities............................. 197,666 74,318
Stockholders' equity (deficit)........................................... (102,492) 38,956
</TABLE>
(Notes on following page)
5
<PAGE>
NOTES TO SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<C> <S>
(a) The Company was formed by a group of investors to effect the September 28, 1991
acquisition of Optigraphics, Inc. Therefore, the 1991 period includes results of
operations for the three months ended December 31, 1991.
(b) Net sales for 1992 includes sales related to "collector's sets" that were discontinued
after 1992. The Company's reported SCMA net sales for these "collector's sets" for 1992
were $17.0 million. Unlike the data contained in the table above, which reports sales of
products shipped less a provision for estimated returns of such products, reported SCMA
net sales are based on sales of products shipped less the dollar value of returns
actually received during the period.
(c) Included in operating loss for 1993 is an unusual charge of $41.4 million resulting from
events that led to the MLM Acquisition related to (i) the write-off of a $30.2 million
pre-acquisition receivable from MLM and (ii) incremental sales returns, write-offs of
unsalable inventory and other operating expenses aggregating $11.2 million.
(d) Included in operating loss for 1994 are unusual charges of $47.4 million related to (i)
a $40.0 million writedown of goodwill and (ii) incremental sales returns and write-offs
of unsalable inventory related to the Major League Baseball and National Hockey League
work stoppages.
(e) For the year ended December 31, 1993, net income (loss) as reported herein is prior to
the effect of the adoption of a new accounting principle.
(f) Presented on a pro forma basis (as if the following transactions had occurred on the
first day of the period presented, and in the case of the Balance Sheet Data, as if such
transactions had occurred on June 30, 1996) to give effect to the conversion of a
portion of the Acadia subordinated notes and all of the Redeemable Preferred Stock; plus
options granted prior to the Offering to purchase Common Stock at $2.49 per share
and shares of Common Stock to be awarded under the Restricted Stock Plan (assuming
all such Common Stock was outstanding for all periods presented); and as adjusted
for the Offering assuming the issuance and sale of 4,000,000 shares of Common
Stock and application of the assumed net proceeds. Of the net proceeds from the
sale of shares of Common Stock offered by the Company in the Offering,
approximately $22.0 million will be used to repay senior bank indebtedness
and $33.0 million will be used to repay Acadia subordinated notes.
(g) Pro forma, as adjusted, results for the year ended December 31, 1995 give effect to (i)
decreased interest expense of $13.7 million (which consists of $2.0 million related to
senior bank borrowings, $11.5 million related to subordinated notes to Acadia, and $0.2
million related to amortization of deferred loan costs with respect to senior bank
borrowings), (ii) decreased selling, general and administrative expenses of $2.0 million
(which consists of $2.3 million of management and consulting fees that will no longer be
incurred offset by an increase of $0.3 million in compensation expense for new
employment agreements with members of senior management), and (iii) a tax provision of
$5.0 million.
(h) Pro forma, as adjusted, results for the six months ended June 30, 1995 give effect to
(i) decreased interest expense of $6.6 million (which consists of $1.0 million related
to senior bank borrowings, $5.5 million related to subordinated notes to Acadia, and
$0.1 million related to amortization of deferred loan costs with respect to senior bank
borrowings), (ii) decreased selling, general and administrative expenses of $0.6 million
(which consists of $0.8 million of management and consulting fees that will no longer be
incurred offset by an increase of $0.2 million in compensation expense for new
employment agreements with members of senior management), and (iii) a tax benefit of
$18,000.
(i) Pro forma, as adjusted, results for the six months ended June 30, 1996 give effect to
(i) decreased interest expense of $7.1 million (which consists of $1.0 million related
to senior bank borrowings, $6.0 million related to subordinated notes to Acadia, and
$0.1 million related to amortization of deferred loan costs with respect to senior bank
borrowings), (ii) decreased selling, general and administrative expenses of $0.2 million
(which consists of $0.3 million of management and consulting fees that will no longer be
incurred offset by an increase of $0.1 million in compensation expense for new
employment agreements with members of senior management), and (iii) a tax benefit of
$0.9 million.
(j) For purposes of pro forma, as adjusted, net income (loss) per share, weighted average
shares outstanding is 13,090,714, which is comprised of 2,156,026 shares currently
outstanding, 5,499,863 shares to be issued to give effect to the conversion of a portion
of the Acadia subordinated notes and all of the Redeemable Preferred Stock, 1,400,988
options (net of 122,237 options granted by Acadia from its existing holdings) granted
prior to the Offering to purchase Common Stock at $2.49 per share and 33,837 shares to
be awarded under the Restricted Stock Plan, and 4,000,000 million shares to be issued in
the Offering.
(k) Gives effect to the Offering and includes (i) a charge of $0.4 million (net of taxes of
$0.2 million) related to a write-off of a portion of deferred financing costs with
respect to the early payment of a portion of senior bank indebtedness, (ii) a non-cash
operating expense of $10.6 million (net of taxes of $6.5 million) in connection with the
grant of options to purchase Common Stock prior to the Offering at $2.49 per share
and shares of Common Stock to be awarded under the Restricted Stock Plan, and (iii)
a credit of $12.0 million related to the reversal of a portion of the deferred tax
asset valuation allowance. See "Management's Discussion and Analysis of Results of
Operation and Financial Condition--General." These nonrecurring charges are not
considered in the pro forma, as adjusted, statement of operations data.
</TABLE>
6
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the risk factors set forth
below, as well as other information set forth in this Prospectus, before
purchasing the shares of Common Stock offered hereby.
DEPENDENCE UPON NON-EXCLUSIVE LICENSE AGREEMENTS
The Company's ability to market its sports trading cards, from which the
Company derived approximately 89% of its gross sales in 1995, is dependent upon
its non-exclusive licenses from professional sports leagues, players
associations and other licensors. The Company currently has four baseball
licenses (two each with the professional sports league and the players'
association), three football licenses (one with the professional sports league
and two with the players' association), four hockey licenses (two each with the
professional sports league and the players' association), a license with NASCAR
and over 100 licenses with NASCAR drivers, owners and sponsors. The team sport
licenses typically have durations of two to five years. One of the Company's
professional sports league baseball licenses expired on December 31, 1994, one
of its professional sports league football licenses expired on March 31, 1995
and one of its professional sports league hockey licenses expired on June 30,
1996. The Company has entered into letters of intent with Major League Baseball
Properties and National Football League Properties with respect to the material
terms of replacement three-year licenses and is in the process of negotiating
definitive license agreements. The Company is also in the process of negotiating
a new license agreement with National Hockey League Enterprises. The Company
continues to operate under the terms of its expired licenses. The remainder of
the Company's material licenses expire between December 31, 1997 and June 30,
1999. Although each of these licenses is subject to termination for cause by the
respective licensors and to non-renewal at the expiration of its term, the
Company believes its relationships with its sports licensors to be strong, and
anticipates that it will be able to renew its sports trading card licenses on
acceptable terms. However, there can be no assurance that these licenses will
not be terminated for cause, that these licenses will be renewed upon their
expiration or that the terms of future sports trading card licenses will not be
materially less favorable to the Company than those currently in effect. The
loss of any baseball, football or hockey license could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business--License Agreements and Trademarks."
COMPETITION
The sports trading card industry is competitive. The Company competes with
three major competitors and numerous smaller competitors. The sports trading
card industry experienced significant growth between the early 1980s and 1991.
Between 1991 and 1993, however, a substantial industry contraction occurred
resulting in an increasingly competitive environment in the sports trading card
industry. Moreover, 1994 labor disputes in baseball and hockey caused even
further contraction and greater competition. If contractions in the sports
trading card market continue to occur, the resulting increased competition could
materially affect the Company's results of operations and financial condition.
In addition, the licensors retain the ability to grant additional sports trading
card licenses which, if granted, could increase competition in the sports
trading card industry. The Company also competes with sports memorabilia and
collectibles producers, as well as companies that market small toys, comic books
and other similar products. Certain of the Company's competitors are
significantly larger and have greater resources than the Company. See
"Business--Competition."
DEPENDENCE ON POPULARITY OF RELATED SPORTS
Sales of sports trading cards are influenced by the popularity of the sports
to which the cards relate. During 1994, Major League Baseball experienced a
strike and the National Hockey League experienced a work stoppage. These labor
disputes resulted in a loss of interest in these sports by many fans, which in
turn triggered a significant and immediate reduction in the Company's baseball
and hockey card sales as well as substantial product returns. Although the
National Hockey League resolved its dispute and commenced its season in January
1995, and Major League Baseball resumed operations in
7
<PAGE>
April 1995 (but without a written contract between the owners and the players
union), industry sales have been slow to rebound and remain well below
pre-strike levels. There can be no assurance that the industry's gross sales
will return to pre-strike levels. In addition, there can be no assurance that
similar labor disputes will not occur again or that the popularity of the sports
for which the Company holds sports trading card licenses will not decline for
other reasons. Further labor disputes or any such decline in popularity could
have a material adverse effect on the Company's results of operations and
financial condition. See "Business--Sports Trading Card Industry."
RETURNS
Historically, retailers' returns of unsold sports trading cards have been a
significant factor affecting profitability of companies in the sports trading
card industry. During each of the contractions in the sports trading card
industry since 1991, the industry experienced very high product returns
resulting in the need to increase financial provisions for returns as well as
write off excess inventory. For example, in 1994 the Company wrote off $2.3
million of unsalable inventory and took a charge of $5.1 million relating to
excess returns. Although less than 50% of the Company's sports trading card net
sales currently are subject to return privileges and the Company has implemented
business practices to reduce return occurrences, product returns that
significantly exceed the Company's estimates could have a material adverse
effect on the Company's results of operations and financial condition. In
addition, actions taken by the Company to eliminate or reduce a retailer's
return privileges may accelerate returns of products previously sold to that
retailer. See "Business--Returns."
HISTORY OF LOSSES; ACCUMULATED DEFICIT
The Company has incurred net losses since 1993. Although the Company does
not expect certain unusual charges incurred in prior periods to be recurring and
is significantly reducing its indebtedness in connection with this Offering
(which will reduce accordingly interest expense), there can be no assurance
that the Company will not continue to incur net losses in the future. As a
result of such losses, the Company's accumulated deficit was $108.0 million as
of June 30, 1996, which is a component of stockholders' equity. On a pro forma
basis, as of June 30, 1996 stockholders' equity was $39.0 million (after
giving effect to the Offering, based on the midpoint of the filing range, and
the recapitalization). See "Selected Financial and Operating Data" and the
Company's Consolidated Financial Statements.
GOODWILL AND OTHER INTANGIBLES
A majority of the Company's assets comprise goodwill and value associated
with its sport trading card licenses, trademarks and tradenames. Realization of
these intangible assets is dependent on the future successful operations of the
Company. There can be no assurance that the value of such intangible assets will
be realized.
LITIGATION
The Company is a defendant in a purported class action filed in August 1996
in Dallas in the United States District Court for the Northern District of
Texas. This action is directed against standard business practices in the sports
trading card industry, including the practice of randomly inserting chase cards
in packages of sports trading cards, and alleges that these practices constitute
illegal gambling activity in violation of state and federal law, including the
Racketeer Influenced and Corrupt Organizations Act. Inherently, the outcome
of litigation is uncertain. It is not possible at the early stage of this case
to predict the outcome with certainty. In the opinion of the Company, the action
lacks substantial merit and the Company intends to defend it vigorously. See
"Business--Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL
The operations of the Company currently depend, to a great extent, on the
abilities and continued services of its senior executives, particularly Jerry M.
Meyer, chairman of the board and chief executive officer of the Company. The
Company has entered into employment agreements with Mr. Meyer and other key
executives. There can be no assurance that the Company will be able to retain
the services of such executives. The extended loss of the services of Mr. Meyer
or the other key executives could have a
8
<PAGE>
material adverse effect on the Company's results of operations and financial
condition. See "Management--Employment Agreements."
CONTROL OF THE COMPANY
Upon completion of the Offering and the recapitalization, Acadia Partners,
L.P. and its affiliates (collectively, "Acadia") will own approximately 65% of
the outstanding Common Stock (or 57% on a fully diluted basis) or 60% if the
over-allotment option is exercised in full (or 53% on a fully diluted basis). As
a result, Acadia will effectively control the affairs of the Company and will
have the ability to determine the outcome of most corporate actions requiring
stockholder approval, including, among other things, the election of the board
of directors of the Company, the adoption of amendments to the Company's
certificate of incorporation and the approval of mergers and sales of all or
substantially all of the Company's assets. Approximately $33.0 million of the
proceeds of the Offering will be used to retire subordinated indebtedness
payable to Acadia. See "The Company--Acadia Partners, L.P." and "The
Company--Recapitalization."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 11,689,726 shares of the Company's Common
Stock will be outstanding. The Common Stock offered hereby will be freely
tradeable (other than by an "affiliate" of the Company as such term is defined
in the Securities Act of 1933, as amended (the "Securities Act")) without
restriction or registration under the Securities Act. All remaining shares may
be sold under Rule 144 under the Securities Act, subject to the volume
limitations and manner of sale and other restrictions of Rule 144. In addition,
Acadia and certain of the Company's other stockholders have the right to require
registration of their shares for public sale. However, the Company and its
directors, officers, affiliates and the current stockholders have, subject to
certain exceptions, agreed not to, directly or indirectly, sell, offer to sell,
grant any option for sale of, or otherwise dispose of, any capital stock of the
Company, or any security convertible or exchangeable into, or exercisable for,
such capital stock, or, in the case of the Company, file any registration
statement with respect to any of the foregoing, for a period of 180 days after
the date of this Prospectus, without the prior written consent of Merrill Lynch
& Co. ("Merrill Lynch"). Sales of substantial amounts of the Common Stock or the
perception that such sales may occur in the public market after the Offering
could adversely affect the market price of the Common Stock.
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained or that shares of Common Stock will be able to be resold at or above
the initial public offering price following the Offering. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the Representatives of the Underwriters and may not be
indicative of the trading prices of the Common Stock after the Offering. See
"Underwriting" for a description of certain factors to be considered in
determining the initial public offering price for the Common Stock. Trading
prices for the Common Stock following the Offering may be influenced by many
factors, including the depth of the market for the Common Stock, investor
perception of the Company, fluctuations in the Company's operating results and
changes in conditions or trends in the Company's industry, changes in any
securities analysts' estimates of the Company's future performance or that of
its competitors or general market conditions. In addition, future sales of
substantial amounts of Common Stock by existing stockholders could also
adversely affect the prevailing market price of the Common Stock. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
DILUTION
The initial public offering price will be substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offering will, therefore, incur immediate and substantial
dilution of $17.74 in the net tangible book value per share of Common Stock from
the midpoint of the initial public offering price range set forth on the cover
page of this Prospectus. See "Dilution."
9
<PAGE>
THE COMPANY
GENERAL
The Company is one of the nation's leading designers, producers and
distributors of sports trading cards. The Company offers premium value products
under numerous brands and sub-brands--differentiated by product feature, price
point, sport and distribution channel--including such well-established brands as
Score, Select, Pinnacle, Donruss, Leaf, Action Packed, Racer's Choice and
Sportflix. Based on SCMA data, for 1995 the Company had an aggregate 37% market
share in the three major team sports categories in which it competes (consisting
of a 26% market share for the Company and an 11% market share related to
products sold under licenses acquired by the Company in May 1996). The Company
believes that it has the leading market share in each of those three
sports--baseball, football and hockey. The Company is also a NASCAR licensee and
a leading producer of NASCAR auto racing cards. In addition to its sports
trading card business, the Company sells collectible and similar picture
products to consumer and food product companies for their promotional purposes.
The Company was incorporated in Texas in 1991 and was reincorporated in
Delaware the same year. The Company's principal executive offices are located at
924 Avenue J East, Grand Prairie, Texas 75050, and its telephone number is (214)
601-7000.
BACKGROUND
The Company was formed in September 1991 by a group of investors led by
Acadia Partners, L.P. to effect the acquisition of Optigraphics, Inc., a
manufacturer of baseball, football and hockey sports trading cards under the
Score brand name. At the time of the acquisition, all creative processes, sales
and marketing of the Company's products were managed under an exclusive,
perpetual contract with Major League Marketing, Inc. ("MLM"). The Company's
cutting, collating and packaging functions were performed under an exclusive
contract with Wrap-It-Corporation, an affiliate of the sellers. Finally, the
Company's distribution and customer service functions were performed by a Wm.
Wrigley Jr. Company subsidiary. Following the 1991 acquisition, MLM and
Wrap-It-Corporation continued to be responsible for the functions performed by
them prior to the acquisition and MLM assumed responsibility for the
distribution and customer service functions. The Company determined that the
division of functions among the various entities provided disparate objectives
and that coordination of such activities through consolidation of the MLM
operations was essential to the efficient design, sales, marketing and
distribution of its sports trading cards. Accordingly, in 1993 the Company
acquired MLM and gained control over the creative processes, sales, marketing
and distribution of its sports trading cards. In September 1994, the Company and
a printing company formed Performance Packaging, LLC, in which the Company holds
a 49% interest, to perform, at cost, the packaging functions previously provided
by Wrap-It Corporation. In addition, over time, the Company has outsourced all
of its production functions other than the design and artwork of its products.
As a result of these actions, the Company has been able to (i) complete
consolidation of the design, production, sales, marketing and distribution
functions for its sports trading card products under a single management team,
(ii) reduce operating expenses connected to such activities, (iii) formulate and
implement its marketing strategy and (iv) shift its focus from being a
manufacturer of sports trading cards to being a flexible designer, marketer and
distributor of collectible products. The Company believes that these actions,
together with the acquisitions described below have enabled it to gain an
increased share of the sports trading card market. See "Business--Strategy."
In April 1995, the Company acquired licenses and certain intangibles of LBC
Sports, Inc., a company which produced and distributed football and NASCAR auto
racing trading cards principally under the name Action Packed (the "Action
Packed License Acquisition"). Through this acquisition, the Company entered the
growing motor sports card market, increased its already strong presence in the
football trading card market and acquired innovative technologies.
In May 1996, the Company acquired the Donruss/Leaf baseball and hockey
trading card licenses together with certain trademarks and work-in-process
inventory needed to continue uninterrupted
10
<PAGE>
production of Donruss products under the Donruss and Leaf names. The Company
believes that the Donruss License Acquisition significantly enhances the
Company's competitive position in the trading card industry.
ACADIA PARTNERS, L.P.
Acadia Partners, L.P. is a $1.8 billion investment partnership established
in 1987 by a group of institutional investors, including commercial banks,
insurance companies and money managers, to invest in leveraged acquisitions as
well as selected public and private securities. Since its inception, Acadia
Partners, L.P. has sponsored or co-sponsored over 20 leveraged acquisitions with
a combined value in excess of $7 billion. These investments include American
Savings Bank, Bell & Howell Company, CapStar Hotel Company, Holophane
Corporation, Ivex Packaging Corporation, Multi-Local Media Corporation,
Musicland, National Reinsurance Corporation and Specialty Foods Corporation. Oak
Hill Partners, Inc. serves as Acadia's exclusive investment advisor.
RECAPITALIZATION
Immediately prior to the consummation of this Offering, the Company will
consummate a 103.96-for-1 stock split of the outstanding Common Stock. Except as
otherwise stated, all information in this Prospectus has been adjusted to
reflect this stock split. In addition, simultaneously with the closing of this
Offering (i) the Company will repay approximately $33.0 million of subordinated
indebtedness held by Acadia and (ii) the remaining subordinated indebtedness and
all of the 4,025 shares of Redeemable Preferred Stock held by Acadia will be
converted into 5,499,863 shares of Common Stock, based on an assumed initial
public offering price of $15, the midpoint of the initial public offering price
range. See "Use of Proceeds."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the four
million shares of Common Stock offered hereby, after deducting underwriting
discounts and estimated offering expenses payable by the Company, are estimated
to be approximately $55.0 million, based on an assumed initial public offering
price of $15 per share, the midpoint of the initial public offering price range.
Approximately $22.0 million of the estimated net proceeds of this Offering
will be used to pay principal and interest outstanding under the Credit
Agreement dated as of May 29, 1996 among Pinnacle Trading Card Company, as
Borrower, Pinnacle Brands, Inc. and GSAC Holdings, Inc., as Parent Guarantors,
the Subsidiary Guarantors, the lenders named therein, Merrill Lynch & Co., as
Arranger and Syndication Agent, and Wells Fargo Bank, N.A., as Administrative
and Collateral Agent (the "Credit Agreement"), an estimated $4.0 million of
which will be used to pay down the revolving credit facility portion of the
Credit Agreement. Amounts repaid under the revolving credit facility may be
reborrowed in the future subject to the terms of such facility. Merrill Lynch &
Co. is the managing underwriter for this Offering. See "Underwriting." The
proceeds of the Credit Agreement were used to refinance existing indebtedness of
the Company and to consummate the Donruss License Acquisition. See "The
Company--Background." The remainder of the estimated net proceeds of this
Offering, approximately $33.0 million, will be used to retire a portion of the
principal and interest outstanding under subordinated indebtedness of the
Company held by Acadia (the "Subordinated Notes").
Amounts outstanding under the Credit Agreement bear interest at various
floating rates. The effective rate was 8.5% per annum as of June 30, 1996. The
term loan portions of the Credit Agreement are payable in installments, with the
final installment due on May 28, 2001 with respect to $40.0 million of
indebtedness and on May 28, 2002 with respect to $48.0 million of indebtedness.
The final maturity date for the revolving credit facility portion of the Credit
Agreement is May 27, 2001, subject to a one-year extension under certain
circumstances. As of June 30, 1996, the Company had outstanding approximately
$88.0 million under the term loan facility of under the Credit Agreement and
approximately $7.5 million under the revolving loan facility thereunder. See
"Description of Indebtedness."
The Subordinated Notes bear interest at 12% per annum, which interest is
payable through the issuance of additional Subordinated Notes. All amounts
outstanding under the Subordinated Notes mature on December 31, 2001. As of June
30, 1996, approximately $101.3 million was outstanding under the Subordinated
Notes. See "Capitalization." Simultaneously with the closing of this Offering,
the subordinated indebtedness not repaid with the proceeds of the Offering will
be converted into 5,107,467 shares of Common Stock, at an assumed initial public
offering price of $15 per share, the midpoint of the initial public offering
price range. See "The Company--Recapitalization."
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock. The Company
presently intends to retain future earnings to finance its growth and
development and therefore does not anticipate the payment of any cash dividends
in the foreseeable future. In addition, the Credit Agreement restricts the
payment of cash dividends by the Company. See "Description of Indebtedness."
Payment of future dividends, if any, will depend upon future earnings and
capital requirements of the Company and other factors which the Company's Board
of Directors considers appropriate.
12
<PAGE>
DILUTION
The actual net tangible book value (deficit) of the Common Stock at June 30,
1996 was approximately $(173.5) million, or $(80.48) per share. Pro forma net
tangible book value (deficit) of the Common Stock reflecting the conversion of
the Subordinated Notes not repaid with the proceeds of this Offering and the
Redeemable Preferred Stock (the "Conversion"), was approximately $(105.2)
million, or $(13.74) per share. After giving effect to the sale of the 4,000,000
shares of Common Stock offered hereby by the Company at an assumed initial
public offering price of $15 per share, the midpoint of the initial public
offering price range, and the application of the net proceeds therefrom, and
after deducting the underwriting discount and estimated offering expenses
payable by the Company, the adjusted pro forma net tangible book value of the
Company at June 30, 1996, would have been $(32.1) million, or $(2.74) per share.
This represents an immediate increase in pro forma net tangible book value per
share of $11.00 to existing stockholders and an immediate dilution per share of
$17.74 to new investors purchasing Common Stock in the Offering.
The following table illustrates the per share dilution described above:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....... $15.00
Actual net tangible book value (deficit) per share at
June 30, 1996(a).................................... (80.48)
Increase per share attributable to the Conversion..... 66.74
-------
Pro forma net tangible book value (deficit) per share
at June 30, 1996.................................... (13.74)
Increase in net tangible book value per share
attributable to the Offering(b)(c).................. 11.00
-------
Adjusted pro forma net tangible book value per share
after the Offering(c)................................. (2.74)
------
Net tangible book value per share dilution to new
investors(c).......................................... $17.74
------
------
</TABLE>
----------------
<TABLE>
<C> <S>
(a) Includes $3.0 million, or $1.39 per share, of Common Stock and common stock
equivalents subject to a put right. See "Management--Employment Agreements."
(b) Includes effect of a $11.0 million non-cash operating expense (net of a tax benefit
of $6.7 million), or $0.94 per share, in connection with (i) options granted
prior to the Offering (including options granted by Acadia), (ii) shares awarded
under the Restricted Stock Plan and (iii) the write-off of deferred loan costs
in connection with the repayment of senior bank indebtedness; and the
effect of $12.0 million, or $1.03 per share, related to the estimated amount of the
reversal of a portion of the Company's deferred tax asset valuation allowance.
(c) Excludes 1,510,273 shares subject to issuance under the 1992 Stock Option Plan and
other arrangements. See "Management--1992 Stock Option Plan."
</TABLE>
The following table sets forth, after giving effect to the recapitalization
of the Company, the number of shares of Common Stock purchased from the Company
within the last five years, the total cash consideration paid for such shares
and the average consideration paid per share by existing stockholders of the
Company and by new investors. The following computations are based on an assumed
initial public offering price of $15 per share, the midpoint of the initial
public offering price range, before deduction of the underwriting discount and
estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- -----------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders........ 7,689,726 65.8% $ 72,239,000 54.6% $ 9.39
New investors(a).... 4,000,000 34.2 60,000,000 45.4 15.00
---------- ------- ------------ -------
Total(b)...... 11,689,726 100.0% $132,239,000 100.0%
---------- ------- ------------ -------
---------- ------- ------------ -------
</TABLE>
----------------
<TABLE>
<C> <S>
(a) If the over-allotment option is exercised in full, sales by the Selling Stockholder
will reduce the number of shares held by existing stockholders to 7,089,726, or
60.7%, and will increase the number of shares held by new investors to 4,600,000, or
39.3%, of the total number of shares of Common Stock outstanding after the Offering.
See "Principal and Selling Stockholders."
(b) Excludes shares of Common Stock purchased by existing stockholders who are not
officers, directors or affiliates of the Company.
</TABLE>
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company, on
an unaudited basis, as of June 30, 1996 and as adjusted to give effect to (i)
the issuance of 4,000,000 shares of Common Stock offered hereby and the
application of the estimated net proceeds to the Company therefrom ($22.0
million to repay secured bank borrowings and $33.0 million to repay subordinated
notes to Acadia) and (ii) the conversion of the outstanding Subordinated Notes
not repaid with the net proceeds of this Offering and all of the outstanding
Redeemable Preferred Stock to Common Stock. See "The Company--Recapitalization."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
<S> <C> <C>
PRO FORMA,
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Subordinated notes payable to Acadia............................ $ 101,348 $ --
Long-term debt--all other....................................... 96,318 74,318
--------- -----------
Total long-term debt........................................ 197,666 74,318
Common stock and common stock equivalents subject to put
agreement........................................................... 3,000 3,000
Stockholders' equity:
Preferred Stock; $.01 par value; $1,000 per share liquidation
preference; 2,000,000 shares authorized; 4,025 issued and
outstanding (0 pro forma, as adjusted).............................. -- --
Common Stock; $.01 par value; 80,000 shares authorized
(20,000,000 adjusted for Charter Amendment); 2,156,026 issued
and outstanding (11,689,726 pro forma, as adjusted)................. -- 117
Paid-in capital................................................. 5,498 145,829(a)
Accumulated deficit............................................. (107,990) (106,990)(a)(b)
--------- -----------
Total stockholders' equity (deficit)........................ (102,492) 38,956
--------- -----------
Total capitalization.................................... $ 98,174 $ 116,274
--------- -----------
--------- -----------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Adjusted for $17.1 million of compensation expense related to options granted prior to
the Offering to purchase 1,523,225 shares (of which 122,237 were granted by Acadia) of
Common Stock at an exercise price of $2.49 per share and for 33,837 shares of Common
Stock awarded under the Restricted Stock Plan.
(b) Adjusted for $6.7 million related to the tax effect of the $17.1 million compensation
charge and $0.6 million write-off of deferred loan costs and for $12.0 million related
to the estimated amount of the reversal of a portion of the Company's deferred tax
asset valuation allowance.
</TABLE>
14
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The historical selected financial data presented below as of and for the
years ended December 31, 1992, 1993, 1994 and 1995, and as of and for the three
months ended December 31, 1991 are derived from, and are qualified by reference
to, the financial statements that have been audited by Arthur Andersen LLP,
independent public accountants. The historical selected financial data presented
below for the six months ended June 30, 1995 and 1996 are derived from unaudited
interim financial statements of the Company and, in the opinion of management,
reflect a fair presentation of the Company's financial information. Results for
the six months ended June 30, 1996 are not necessarily indicative of the results
which may be expected for any other interim period or for the fiscal year ending
December 31, 1996. The data presented below should be read in conjunction with
the Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX MONTHS
MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ----------------------------------------- -------------------
1991(A) 1992 1993 1994 1995 1995 1996
------------- -------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales (b)....................... $35,511 $108,881 $ 62,501 $117,965 $130,183 $ 41,879 $49,905
Cost of sales....................... 25,810 73,264 41,000 78,013 90,388 29,548 34,503
------ -------- -------- -------- -------- --------- -------
Gross profit........................ 9,701 35,617 21,501 39,952 39,795 12,331 15,402
Selling, general and administrative
expenses............................ 5,119 20,222 20,972 23,506 26,310 11,480 15,659
Unusual charges (c)(d).............. -- -- 41,435 47,366 -- -- --
------ -------- -------- -------- -------- --------- -------
Operating income (loss)............. 4,582 15,395 (40,906) (30,920) 13,485 851 (257)
Interest expense--subordinated notes
payable............................. (777) (4,298) (7,198) (9,307) (11,526) (5,524) (6,034)
Interest expense--other............. (839) (5,792) (4,180) (4,509) (5,068) (2,581) (3,521)
Other income (expense), net......... (795) 252 72 730 657 42 195
------ -------- -------- -------- -------- --------- -------
Income (loss) before income taxes... 2,171 5,557 (52,212) (44,006) (2,452) (7,212) (9,617)
Income tax provision................ 1,074 2,431 -- -- -- -- --
------ -------- -------- -------- -------- --------- -------
Net income (loss) (e)............... $ 1,097 $ 3,126 $(52,212) $(44,006) $ (2,452) $ (7,212) $(9,617)
------ -------- -------- -------- -------- --------- -------
------ -------- -------- -------- -------- --------- -------
Pro forma, as adjusted, net income
(loss) (f)(g)(h)(i)................. $ 8,208 $ (29) $(1,453)
-------- --------- -------
-------- --------- -------
Pro forma, as adjusted, net income
(loss) per share (j)............... $ 0.63 $ -- $ (0.11)
Pro forma, as adjusted, weighted
average shares outstanding ........ 13,091 13,091 13,091
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED AS OF DECEMBER 31,
DECEMBER 31, ----------------------------------------- AS OF JUNE 30,
1991 1992 1993 1994 1995 1996
------------- -------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Net working capital (deficit)....... $(9,737) $ 3,651 $(18,173) $ 4,967 $ 7,350 $ 11,471
Total assets........................ 104,130 134,814 111,736 70,320 88,121 129,296
Long-term debt, including current
maturities.......................... 55,942 100,115 122,327 135,714 150,672 197,666
Stockholders' equity (deficit)...... 3,821 8,114 (46,417) (90,423) (92,875) (102,492)
</TABLE>
(Notes on following page)
15
<PAGE>
NOTES TO SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<C> <S>
(a) The Company was formed by a group of investors to effect the September 28, 1991
acquisition of Optigraphics, Inc. Therefore, the 1991 period includes results of
operations for the three months ended December 31, 1991.
(b) Net sales for 1992 includes sales related to "collector's sets" that were discontinued
after 1992. The Company's reported SCMA net sales for these "collector's sets" for 1992
were $17.0 million. Unlike the data contained in the table above, which reports sales of
products shipped less a provision for estimated returns of such products, reported SCMA
net sales are based on sales of products shipped less the dollar value of returns
actually received during the period.
(c) Included in operating loss for 1993 is an unusual charge of $41.4 million resulting from
events that led to the MLM Acquisition related to (i) the write-off of a $30.2 million
pre-acquisition receivable from MLM and (ii) incremental sales returns, write-offs of
unsalable inventory and other operating expenses aggregating $11.2 million.
(d) Included in operating loss for 1994 are unusual charges of $47.4 million related to (i)
a $40.0 million writedown of goodwill and (ii) incremental sales returns and write-offs
of unsalable inventory related to the Major League Baseball and National Hockey League
work stoppages.
(e) For the year ended December 31, 1993, net income (loss) as reported herein is prior to
the effect of the adoption of a new accounting principle.
(f) Presented on a pro forma basis (as if the following transactions had occurred on the
first day of the period presented, and in the case of the Balance Sheet Data, as if such
transactions had occurred on June 30, 1996) to give effect to the conversion of a
portion of the Acadia subordinated notes and all of the Redeemable Preferred Stock; plus
options granted prior to the Offering to purchase Common Stock at $2.49 per share and
shares of Common Stock to be awarded under the Restricted Stock Plan (assuming all such
Common Stock was outstanding for all periods presented); and as adjusted for the
Offering assuming the issuance and sale of 4,000,000 shares of Common Stock and
application of the assumed net proceeds. Of the net proceeds from the sale of shares of
Common Stock offered by the Company in the Offering, approximately $22.0 million will be
used to repay senior bank indebtedness and $33.0 million will be used to repay Acadia
subordinated notes.
(g) Pro forma, as adjusted, results for the year ended December 31, 1995 give effect to (i)
decreased interest expense of $13.7 million (which consists of $2.0 million related to
senior bank borrowings, $11.5 million related to subordinated notes to Acadia, and $0.2
million related to amortization of deferred loan costs with respect to senior bank
borrowings), (ii) decreased selling, general and administrative expenses of $2.0 million
(which consists of $2.3 million of management and consulting fees that will no longer be
incurred offset by an increase of $0.3 million in compensation expense for new
employment agreements with members of senior management), and (iii) a tax provision of
$5.0 million.
(h) Pro forma, as adjusted, results for the six months ended June 30, 1995 give effect to
(i) decreased interest expense of $6.6 million (which consists of $1.0 million related
to senior bank borrowings, $5.5 million related to subordinated notes to Acadia, and
$0.1 million related to amortization of deferred loan costs with respect to senior bank
borrowings), (ii) decreased selling, general and administrative expenses of $0.6 million
(which consists of $0.8 million of management and consulting fees that will no longer be
incurred offset by an increase of $0.2 million in compensation expense for new
employment agreements with members of senior management), and (iii) a tax benefit of
$18,000.
(i) Pro forma, as adjusted, results for the six months ended June 30, 1996 give effect to
(i) decreased interest expense of $7.1 million (which consists of $1.0 million related
to senior bank borrowings, $6.0 million related to subordinated notes to Acadia, and
$0.1 million related to amortization of deferred loan costs with respect to senior bank
borrowings), (ii) decreased selling, general and administrative expenses of $0.2 million
(which consists of $0.3 million of management and consulting fees that will no longer be
incurred offset by an increase of $0.1 million in compensation expense for new
employment agreements with members of senior management), and (iii) a tax benefit of
$0.9 million.
(j) For purposes of pro forma, as adjusted, net income (loss) per share, weighted average
shares outstanding is 13,090,714, which is comprised of 2,156,026 shares currently
outstanding, 5,499,863 shares to be issued to give effect to the conversion of a portion
of the Acadia subordinated notes and all of the Redeemable Preferred Stock, 1,400,988
options (net of 122,237 options granted by Acadia from its existing holdings) granted
prior to the Offering to purchase Common Stock at $2.49 per share and 33,837 shares to
be awarded under the Restricted Stock Plan, and 4,000,000 shares to be issued in the
Offering.
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1993, 1994 and 1995
and for the six month periods ended June 30, 1995 and 1996. This discussion
should be read in conjunction with the audited consolidated financial statements
of the Company and the related notes thereto and other financial information
included elsewhere in this Prospectus.
GENERAL
The Company's revenues are derived from the sale of sports trading cards and
similar picture products. Sports trading cards are sold principally to specialty
and mass market retailers for resale to individual consumers; other picture
products are sold generally to corporations who use the products for premium or
promotional purposes.
Sales are reported when the products are shipped. For those customers for
which return privileges exist, a provision for estimated returns of sports
trading cards (net of refundable royalties) is made in the period in which the
related sale is recorded. Because the actual amount of sports trading card
returns may differ from management's estimates, the Company's recorded liability
for estimated returns may be revised periodically to reflect actual return
experience.
Cost of sales includes both the costs to produce the products and also, in
the case of sports trading cards, royalties paid to the organizations which
represent the professional sports teams and players depicted on the Company's
sports trading cards. Costs to produce the products include materials, printing,
subcontract services, slitting, packaging and variable freight charges.
As noted elsewhere in this Prospectus, the level of sports trading card net
sales achieved by the Company is dependent, among other things, upon the
popularity of the sports for which the Company holds licenses. During 1994,
Major League Baseball canceled the last portion of its season as a consequence
of a disagreement between the league's owners and players' union. Also in 1994
the National Hockey League delayed, for approximately three months, the start of
its 1994-1995 season in order to resolve differences between the league's
players' union and team ownership. After considering the market contraction
caused by these work stoppages, as well as the 1991-1993 market correction
described elsewhere in this Prospectus, the Company determined that the carrying
value of goodwill, as reported in the Company's balance sheet, had been impaired
and recorded a $40.0 million write-down of goodwill in 1994 results of
operations. The Company also recorded other charges to 1994 results of
operations aggregating $7.4 million as a consequence of these work stoppages.
Upon consummation of the Offering, the Company will incur three significant
items of expense/income. These include a non-cash compensation expense of $10.6
million (net of taxes of $6.5 million) related to the grant, prior to the
Offering, of options to purchase 1,523,225 shares of Common Stock under the
Company's 1992 Option Plan and other arrangements (including 122,237 options
granted by Acadia) and also the grant of 33,837 shares of Common Stock to be
awarded under the Restricted Stock Plan. The compensation charge of $11.01 per
share represents 90% of the initial public offering price less the exercise
price of $2.49 per share. Furthermore, in connection with the early repayment
of a portion of the Company's debt outstanding under the Credit Agreement with
a portion of the proceeds of this Offering, the Company expects to record a
charge of approximately $0.4 million (net of taxes of $0.2 million) for the
write-off of a portion of unamortized deferred loan costs related to senior
bank indebtedness. In addition, the Company will recognize a previously
unrecorded benefit of $12.0 million for tax operating loss carryforwards as
the Company expects to utilize these carryforwards to offset income resulting
from the deleveraging of the Company.
17
<PAGE>
The Company expects to record a $1.0 million non-recurring charge in the
fourth quarter of 1996 related to relocation of the Company's corporate offices
from its current facilities in Grand Prairie, Texas to new offices in Dallas,
Texas.
MAJOR DEVELOPMENTS
Growth in Company Sales. The sports trading card market experienced a
correction between 1991 and 1993, followed in late 1994 and 1995 by the negative
effects of work stoppages in baseball and hockey. Notwithstanding this
contraction in overall market size, the Company's sports trading card sales and
its market share of SCMA net sales to the sports trading card market (i.e.,
baseball, football, basketball and hockey) have each increased each year since
1993. Management believes that the Company's sales growth and market share gains
during 1994 and 1995 are consequences of the Company's execution of its business
strategy. See "Business--Strategy."
In recent years the Company's sales and gross profits have, in large part,
improved because sales made on a non-returnable basis, principally to hobby
stores, have increased both in amount and as a percentage of total revenues.
MLM Merger and Other Asset Acquisitions. During 1993, the Company acquired
the operating assets and obligations of Major League Marketing, Inc. ("MLM") in
a stock transaction. Thereafter, the Company became solely responsible for all
creative, marketing, sales and distribution functions, all of which had
previously been conducted on the Company's behalf by MLM. In connection with the
MLM stock transaction, the Company wrote off as uncollectible a $30.2 million
receivable from MLM and recorded $11.2 million in provisions for excess product
return levels and unsalable inventory for a total charge to 1993 results of
operations of approximately $41.4 million.
During the third quarter of 1995, the Company and the former MLM
stockholders reformed the original MLM acquisition in order to resolve a dispute
between the parties related to the treatment of $30.2 million of pre-acquisition
liabilities MLM owed to the Company. See Note 3 to the Consolidated Financial
Statements.
During the second quarter of 1995, the Company acquired certain licenses and
related intangible assets (the "Action Packed Licenses") for $3.0 million plus
certain contingent consideration through which the Company expanded its football
trading card product line and entered into the market for NASCAR motor sports
trading cards. During the second quarter of 1996, the Company acquired certain
licenses and related inventory and intangible assets (the "Donruss Licenses")
for $32.5 million in cash plus the assumption of approximately $8.5 million of
contractual and other liabilities through which the Company expanded its product
lines for baseball and hockey.
Refinancings. As a consequence of the 1994 baseball and hockey work
stoppages, in December 1994 and January 1995 the Company received an aggregate
of $8.0 million from Acadia, financed through the issuance of additional
subordinated debt to Acadia, to fund cash deficits triggered by the work
stoppages. In May 1995, Acadia extended the maturity of the Company's
subordinated debt obligations to Acadia, thereby enabling the Company to
refinance its secured bank obligations and to finance the purchase of the Action
Packed Licenses.
In the second quarter of 1996, the Company refinanced its secured bank
obligations, repaid $8.5 million of its outstanding subordinated debt to Acadia
and financed the purchase of the Donruss Licenses.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
the components of income and expense for the three years ended December 31,
1993, 1994 and 1995 and for the six month periods ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1995 1996 1995 1996
---- ---- ---- ----------- ---- ---- ---- ----
<CAPTION>
ACTUAL (PRO FORMA) ACTUAL (PRO FORMA)
------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. 100 % 100 % 100 % 100% 100 % 100 % 100 % 100 %
Cost of sales.......................... 67 % 66 % 69 % 69% 71 % 69 % 71 % 69 %
---- ---- ---- --- ---- ---- ---- ----
Gross profit........................... 33 % 34 % 31 % 31% 29 % 31 % 29 % 31 %
SG&A expenses.......................... 33 % 20 % 21 % 19% 27 % 31 % 26 % 31 %
Unusual charges........................ 66 % 40 % 0 % 0% 0 % 0 % 0 % 0 %
---- ---- ---- --- ---- ---- ---- ----
Operating income (loss)................ (66 %) (26 %) 10 % 12% 2 % 0 % 3 % 0 %
Interest expense, net.................. (18 %) (12 %) (13 %) (2%) (19 %) (19 %) (3 %) (5 %)
Other income, net...................... 0 % 1 % 1 % 1% 0 % 0 % 0 % 0 %
---- ---- ---- --- ---- ---- ---- ----
Income/(loss) before income taxes...... (84 %) (37 %) (2 %) 11% (17 %) (19 %) 0 % (5 %)
Income tax provision................... 0 % 0 % 0 % 4% 0 % 0 % 0 % (2 %)
---- ---- ---- --- ---- ---- ---- ----
Net income/(loss)(a)................... (84 %) (37 %) (2 %) 7% (17 %) (19 %) 0 % (3 %)
---- ---- ---- --- ---- ---- ---- ----
---- ---- ---- --- ---- ---- ---- ----
</TABLE>
----------------
(a) For the year ended December 31, 1993, net income/(loss) as reported
herein is prior to the effects of the adoption of a new accounting
principle. See Note 12 to the Consolidated Financial Statements.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
Net Sales. The Company's net sales for the six month periods ended June 30,
1996 and 1995 were $49.9 million and $41.9 million, respectively, reflecting an
increase of $8.0 million, or 19%. This increase resulted from increased
shipments of sports trading cards. This increase in sales was a direct
consequence of renewed consumer interest in baseball and hockey. Approximately
$5.9 million of this increase is attributable to product lines associated with
the Action Packed License Acquisition and the Donruss License Acquisition.
Cost of Sales. Cost of sales in the six month periods ended June 30, 1996
and 1995 was $34.5 million and $29.5 million, respectively. As a percentage of
net sales, cost of sales decreased to 69% in the 1996 period as compared with
71% in the 1995 period. This improvement resulted primarily from a lower
estimated provision for returns and a modest improvement in unit production
costs.
The provision for estimated returns of sports trading card products in the
1995 period was higher, relative to the 1996 period, because of management's
assessment that 1995 retail sales would suffer as a consequence of relatively
low consumer interest in sports trading card products in the aftermath of the
1994 work stoppages. The 1996 improvement in unit production costs, relative to
1995 levels, resulted from increased production volumes.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were $15.7 million and $11.5 million in the
1996 and 1995 periods, respectively. As a percentage of net revenues, SG&A
expenses were 31% in the 1996 period and 27% in the 1995 period. The $4.2
million increase in 1996 spending levels primarily reflects selling, marketing
and similar costs associated with new product lines offered pursuant to the
Action Packed and Donruss/Leaf Licenses
19
<PAGE>
and increased spending for sponsorships of certain sporting events. Also, the
1996 period SG&A includes significant costs relating to recruiting, relocation
and similar expenditures arising from expansion of the Company's field sales
force, although the economic benefit of that expansion, in the form of reduced
broker commissions, will not be realized until the latter part of 1996.
Operating income (loss). The Company experienced an operating loss of $0.3
million for the six month period ended June 30, 1996, compared with operating
income of $0.9 million for the six months ended June 30, 1995, principally as a
result of the higher levels of SG&A incurred in the 1996 period in order to
produce economic benefits in subsequent periods.
Interest expense. Interest expense for the six month period ended June 30,
1996 increased by $1.5 million, or 19%, over the same period in 1995 as the
result of a $0.9 million charge to write off deferred loan costs attributable to
the 1995 secured bank facilities (refinanced in May 1996), higher levels of
secured bank debt arising from the Action Packed License Acquisition and the
Donruss License Acquisition, and higher levels of subordinated debt owed to
Acadia.
Income tax provision. No provision for income taxes was made during the six
month periods ended June 30, 1996 and 1995, as the Company reported a net loss
before income taxes and was in a net operating loss carryforward position at the
end of each such period.
Pro forma results. Pro forma results for the six month period ended June 30,
1996 include the effects of (i) decreased interest expense of $7.1 million
(which consists of $1.0 million related to senior bank indebtedness, $6.0
million related to senior subordinated debt, and $0.1 million with respect to
amortization of deferred loan costs related to senior bank indebtedness), (ii)
decreased selling, general and administrative expenses of $0.2 million (which
consists of $0.3 million of management and consulting fees that will no longer
be incurred, offset by an increase in compensation expense of $0.1 million for
the new employment agreements with members of senior management), and (iii) a
tax benefit of $0.9 million. The comparable 1995 period pro forma results
include the effects of (i) decreased interest expense of $6.6 million (which
consists of $1.0 million related to senior bank indebtedness, $5.5 million
related senior subordinated debt, and $0.1 million related to amortization of
deferred loan costs with respect to senior bank indebtedness), (ii) decreased
selling, general and administrative expenses of $0.6 million (which consists of
$0.8 million of management and consulting fees that will no longer be incurred
offset by an increase in compensation expense of $0.2 million for the new
employment agreements with members of senior management), and (iii) a tax
benefit of $0.2 million. The six month pro forma results for the 1995 and 1996
periods assume that the conversion of certain subordinated debt (the
"Conversion") and the Offering had occurred on the first day of each period
presented.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
Net sales. The Company's net sales were $130.2 million in 1995 compared with
$118.0 million in 1994, a 10% increase. This increase in net sales was due to
increased shipments of sport trading cards which, in turn, resulted from sales
of football and NASCAR trading cards offered pursuant to the Action Packed
Licenses, and gains in net sales applicable to the Company's existing football,
baseball and hockey trading card products which resulted from continued
execution of the Company's business strategy.
Cost of sales. Costs of sales in 1995 totaled $90.4 million compared with
$78.0 million for 1994. The increase in cost of sales was principally
attributable to the growth in sales. In addition, during 1995 the Company
increased the provision for estimated returns of sports trading cards in
recognition of the potential that consumer demand for products would be soft
during the first half of 1995. As a consequence of this increase in 1995 return
provisions, 1995 costs of sales was 69% of net sales, whereas 1994 cost of sales
was 66% of net sales (excluding the $7.4 million in unusual charges described
below).
20
<PAGE>
Selling, general and administrative expenses. 1995 SG&A expenses were $26.3
million compared with $23.5 million in 1994, a $2.8 million increase. As a
percentage of net sales, SG&A expenses were 21% in 1995 and 20% in 1994. The
1995 increase relates principally to the Company's sponsorships of the Pinnacle
All-Star FanFest held in conjunction with Major League Baseball's 1995 All Star
Game and the 1995 NFL Quarterback Club's Quarterback Challenge, whereas no
similar sponsorships were undertaken by the Company during 1994. 1995 also
includes approximately seven months of increased operating expense incurred in
support of the new Action Packed motor sports and football product lines.
Unusual Charges. Results of operations for 1994 reflected a $7.4 million
charge, including a $5.1 million charge for excessively high return levels of
1994 product sales and a $2.3 million write-off of unsalable inventory, in each
case directly attributable to 1994's baseball and hockey work stoppages.
Results of operations for 1994 also included a $40.0 million non-cash
write-down of goodwill. Goodwill of $77.4 million was initially recorded in 1991
at the time the Company acquired Optigraphics, Inc. in a transaction
substantially financed through borrowings of long term debt. The goodwill
represented the excess of the purchase price over the valuation of the net
assets acquired in the Optigraphics acquisition. The purchase price was based on
management's expectations of future performance at the time of the Optigraphics
acquisition, considering historical experience and industry trends. These
expectations assumed moderate growth rates in revenue, planned operating and
product improvements to be implemented by new management, and sufficient cash
flow from operations to repay acquisition indebtedness.
The Company was acquired in September 1991, at the peak of the overextended
market for sports trading cards. That market experienced a correction between
1991 and 1993. In the second half of 1994, additional events occurred that led
management to reevaluate its expectations of future performance. In August, the
Major League Baseball players went on strike and one month later, Major League
Baseball canceled the remainder of its 1994 season, including the 1994 World
Series. Then, in October 1994, the National Hockey League delayed until January
1995 the start of league play in order to resolve economic differences between
team ownership and the players union. These events manifested themselves in a
significant decrease in sports trading card sales and a significant increase in
the rate of sports trading card returns. To fund the short-term cash flow
deficits triggered by these work stoppages the Company borrowed an additional $8
million in subordinated debt from Acadia. Concurrently, management of the
Company concluded that these sports' management/labor disputes would have a
material adverse effect on the future revenues of businesses (such as the
Company's) which were dependent upon the popularity of these sports. For
additional information regarding management's assessment and related
assumptions, see Note 5 to the Consolidated Financial Statements.
Operating income (loss). As a consequence of the above, 1995 operating
income was $13.5 million compared with an operating loss of $30.9 million in
1994 (including $47.4 million in unusual charges).
Interest expense. 1995 interest expense was $16.6 million compared with
$13.8 million in 1994, a $2.8 million increase. This increase arose due to
increased borrowings under the Company's subordinated debt instruments owing to
Acadia as well as moderately higher levels of borrowings under the Company's
secured bank facilities in the second half of 1995 arising from generally
increased operating activity and the Action Packed License Acquisition.
Income tax provision. As the Company incurred a loss before income taxes in
1995 and 1994 and was in a net operating loss carryforward position at the end
of each such period, no provision or benefit was made for income taxes.
Pro forma results. Pro forma results for the year ended December 31, 1995,
includes the effects of (i) decreased interest expense of $13.7 million (which
consists of $2.0 million related to secured bank indebtedness, $11.5 million
related to subordinated debt, and $0.2 million related to amortization of
21
<PAGE>
deferred loan costs with respect to secured bank indebtedness), (ii) decreased
selling, general administrative expenses of $2.0 million (which consists of $2.3
million of management and consulting fees that will no longer be incurred,
offset by an increase in compensation expenses of $0.3 million for the new
employment agreements with members of senior management), and (iii) a tax
provision of $4.3 million and assumes that the conversion of a portion of the
subordinated debt and all of the Redeemable Preferred Stock and the Offering had
both occurred on January 1, 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
Net sales. The Company's net sales were $118.0 million in 1994, a $55.5
million or 89% increase over the $62.5 million of net sales reported in 1993.
The 1994 increase reflects several significant events. First, 1994 sales derived
from the sale of sports trading cards increased $42.5 million over 1993 levels
as a direct consequence of management's focus on the sports trading card hobby
store market sector, plus the Company's introduction of new products, brands and
price points focused on the Company's principal target consumer group, the
sports trading card collector/consumer. Also, 1994 promotional sales increased
$13.0 million over 1993 sales as a result of focused marketing efforts which led
to significant sales to certain international consumer products companies.
Overall, 1994 sales reflected the benefits of a full year of Company managerial
control over product development, marketing and sales activities, whereas those
business functions were accomplished by MLM during the first seven months of
1993.
Cost of sales. 1994's cost of sales totaled $78.0 million (66% of net sales)
compared with 1993's cost of sales of $41.0 million (67% of net sales). The 1%
improvement in cost of sales for 1994 responds directly to the beneficial effect
of higher operating levels over fixed production costs, plus changes in product
mix which yielded increased profit margins on a per product basis.
Selling, general and administrative expenses. 1994 SG&A expenses totaled
$23.5 million compared with $21.0 million for 1993, a $2.5 million increase in
1994 over 1993. As a percentage of net sales, SG&A expenses were 20% in 1994 and
33% in 1993. This increase reflects a full year's responsibility for the sales
and marketing functions assumed from MLM in 1993, plus generally higher levels
of operating expenses required to support the 89% increase in net sales noted
above.
Unusual charges. As a result of the 1994 work stoppages discussed earlier,
the Company recorded an aggregate $7.4 million charge to 1994 results of
operations to provide for excessively high returns of 1994 products sales and to
write off unsalable sports trading card inventories. In addition, the Company
recorded a $40.0 million charge to write-down goodwill, as previously described.
1993 operating results included a charge of $41.4 million which arose as a
consequence of events which culminated in the MLM acquisition. At the date of
acquisition, MLM owed the Company approximately $30.2 million, which represented
MLM's share of expenses related to the two companies' operations during 1992 and
1993 that had been funded by the Company. Pursuant to the MLM Acquisition
agreement, the Company charged off this receivable as uncollectible.
Additionally, the Company provided $11.2 million in charges for expected
excessive levels of product returns and obsolete inventory, all arising from the
MLM transaction.
Operating loss. As a consequence of the above, the 1994 financial statements
reported a $30.9 million operating loss, compared to a $40.9 million operating
loss for 1993. Before considering unusual charges, 1994 operations yielded $16.4
million in operating income versus $0.5 million in operating income for 1993.
Interest expense. Interest expense aggregated $13.8 million in 1994,
compared to $11.4 million in 1993, a $2.4 million increase. This 21% increase in
interest expense is entirely attributable to higher levels of subordinated debt
to Acadia and secured bank debt outstanding in 1994 over 1993.
22
<PAGE>
Income tax provision. As the Company incurred a loss before income taxes in
1994 and 1993 and was in a net operating loss carryforward position at the end
of each such period, no provision or benefit was made for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow deficits from operating activities of $2.6 million, $2.6 million
and $9.0 million in 1995, 1994 and 1993, respectively, as set forth in the
Company's Consolidated Statements of Cash Flows for those years, are a direct
consequence of the Company's investment in working capital to support strong
revenue growth and also, for 1994 and 1993, the cash requirements arising from
special charges to operations during those two years. Although the Company has
generated $3.4 million of cash flow from operations for the six months ended
June 30, 1996, management believes that high revenue levels in the last half of
1996 dictate further cash resources will be needed during interim periods of the
year. Cash deficits were funded with borrowings under the Company's bank
facility and with borrowings from Acadia.
During the three years ended December 31, 1995, 1994 and 1993, the Company
invested $0.4 million, $1.5 million and $0.4 million, respectively, in purchases
of property and equipment. Through the first six months of 1996, the Company has
expended an additional $0.9 million for property and equipment, principally new
information systems hardware and software. The Company is currently committed to
spend approximately $3.0 million during the remainder of 1996 and 1997 for
information systems and capital expenditures to facilitate relocation of the
Company's corporate headquarters from Grand Prairie, Texas to Dallas, Texas.
Other cash expenditures arising from this relocation, which are likely to be
charged to expense in the fourth quarter of 1996, are expected to approximate
$1 million. Except for the information systems and relocation capital
expenditures, management does not currently expect the Company to make
significant annual capital expenditures because the Company relies upon third
party vendors, suppliers and subcontractors for virtually all of its sport
trading card production requirements.
In May 1996, the Company refinanced its secured bank obligations. The
proceeds from this refinancing were used to retire its prior bank obligations,
repay $8.5 million of subordinated notes payable to Acadia, and fund the Donruss
License Acquisition. The refinanced credit facilities include a $15.0 million
revolving credit commitment and $88.0 million term loan. Total availability
under the revolving credit commitment is limited to 80% of eligible accounts
receivable and 50% of eligible inventory, both as defined in the credit
agreement. Outstanding borrowings under the credit facilities bear interest at
optional rates based on the prime rate or LIBOR. A specified commitment fee is
payable on unused amounts under the revolving credit facility. All outstanding
borrowings under the revolving credit commitment are payable on May 27, 2001
(extendable to May 27, 2002 under certain conditions), and the term loans are
payable in 16 quarterly payments of $500,000 and then 4 quarterly payments of
$8.0 million through May 28, 2001, on $40.0 million of term loans and in 20
quarterly payments of $500,000 and then 4 quarterly payments of $9.5 million
through May 28, 2002, on the other $48.0 million of term loans, plus additional
annual payments, beginning in 1997, based upon 50% of any excess cash flows (as
defined) generated during each preceding calendar year. The credit agreement
contains covenants requiring the maintenance of certain minimum financial ratios
and limitations on dividend payments and the issuance of equity securities. The
credit facilities are collateralized by substantially all assets of the Company.
At June 30, 1996, the Company's outstanding senior bank indebtedness was
$95.5 million and the Company had undrawn availability under its revolving
credit facility of $7.5 million.
The Company will use approximately $22.0 million of the estimated net
proceeds from this Offering to repay its secured bank indebtedness. An
additional approximately $33.0 million in estimated net proceeds will be used to
repay subordinated debt owing to Acadia. The balance of the
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<PAGE>
subordinated debt will, immediately thereafter, be converted to shares of the
common equity of the Company. See "The Company-Recapitalization" and
"Description of Indebtedness" for further details.
As a result of the Conversion and this Offering, the Company will be
significantly deleveraged. Accordingly, the Company believes that it will begin
to generate taxable income, although there can be no assurance that the Company
will be able to do so. Although the Company's statements of operations may
reflect income before taxes and tax expense in future periods, the Company will
not be required to make income tax payments (except for any alternative minimum
taxes) until it has utilized its existing tax net operating loss carryforwards,
which were approximately $40.0 million at December 31, 1995. For financial
reporting purposes, the Company will recognize the benefit of its net operating
loss carryforwards following completion of the Offering.
The Company believes that cash from operations and borrowings under its
credit facility should provide sufficient funds to meet its currently
foreseeable debt repayment obligations and other cash needs. The Company may
seek additional debt, equity or equity-linked financing in connection with any
strategic acquisition, depending on its financial condition and market
conditions at the time of any such acquisition.
SEASONALITY
The timing of shipments of the Company's sports trading card products, and
related revenue recognition, is directly related to the playing seasons of the
various sports for which the Company holds licenses. Based on the Company's
current licenses, third and fourth quarter sales, gross profit and operating
income are generally higher than first and second quarter amounts. For example,
in 1995 the Company recognized 68% of its annual sales, 69% of its annual gross
profit and 91% of its annual operating income during the third and fourth
quarters.
In addition, within a sports season the Company continually evaluates when
to ship individual products based on a number of factors including but not
limited to consumers' demand for previously shipped products and competitors'
announced shipping dates. Accordingly, reported quarterly sports trading card
sales, gross profit and operating income may vary from historical quarterly
patterns. See "Business--Competition."
INFLATION
In general, printing costs are affected by inflation, and the effects of
such inflation may be experienced by the Company in future periods. However,
management believes that such effects have not been material during the past
three years.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued two standards which
will be applicable to the Company which the Company is required to adopt in
1996: "No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " and "No. 123, Accounting for Stock-Based
Compensation". The impairment standard is not expected to have a significant
impact on the Company. The Company has not yet determined which of the
acceptable approaches it will use under the stock compensation standard.
Adoption of certain approaches under the stock compensation standard could
result in non-cash charges which, if made, are not expected to be material. At a
minimum, the standard will require disclosures about the fair value of employee
stock options.
24
<PAGE>
BUSINESS
GENERAL
The Company is one of the nation's leading designers, producers and
distributors of sports trading cards. The Company offers premium value products
under numerous brands and sub-brands--differentiated by product feature, price
point, sport and distribution channel --including such well-established brands
as Score, Select, Pinnacle, Donruss, Leaf, Action Packed, Racer's Choice and
Sportflix. Based on SCMA data, for 1995 the Company had an aggregate 37% market
share in the three major team sports categories in which it competes (consisting
of a 26% market share for the Company and an 11% market share related to
products sold under licenses acquired by the Company in May 1996). The Company
believes that it has the leading market share in each of those three team
sports--baseball, football and hockey. The Company is also a NASCAR licensee and
a leading producer of auto racing cards. As a result of the business strategy
implemented by the Company beginning in 1993, the Company's net sales more than
doubled from $62.5 million in 1993 to $130.2 million in 1995, despite a decline
in overall sports trading card industry sales during that period. The Company's
net sales have increased 19% from $41.9 million for the first six months of 1995
to $49.9 million for the comparable 1996 period. In addition to its sports
trading card business, the Company sells collectible and similar picture
products to consumer and food product companies for their promotional purposes.
The Company has positioned itself as a leader in the industry through an
emphasis on collectibility and continual product innovation, with a reputation
for high quality products and service. Each of the Company's sports trading card
brands has its own positioning in the marketplace and is designed to appeal to a
targeted group of consumers. The Company produces different products utilizing a
variety of production technologies and distinctive features and sells these
products through multiple distribution channels at a wide range of price points.
The Company believes that it is an industry leader in innovative card design and
production technologies. The Company's sports trading card products consistently
have among the industry's highest aftermarket trading values, based on
information provided by Beckett Monthly (the most widely circulated sports
trading card publication).
Historically, the Company relied on multiple-product brokers to sell its
products. In 1996, however, the Company established an in-house, field sales
force to market its trading card products more effectively by providing a higher
level of customer service to retail and hobby dealers. The field sales force
educates the customer about the Company's products, helps to tailor the
customer's product selection, and shares product placement and merchandising
techniques with the customer, all with the goal of enhancing the customer's
sell-through of the Company's products.
The Company utilizes what it believes to be an aggressive, cost-effective
marketing strategy concentrating on public relations events and targeted
advertising to maximize brand awareness. To increase its visibility in the
sports market, the Company has entered into multi-year commitments to be the
exclusive title sponsor of the premiere fan events for hockey and baseball,
which include the Pinnacle NHL FANtasy held in conjunction with the National
Hockey League All-Star game, and the Pinnacle All-Star FanFest held in
conjunction with the Major League Baseball All-Star game. The Company is also
the exclusive sports trading card sponsor of the NFL Quarterback Club's
Quarterback Challenge. These events serve both to increase fan interest in the
relevant sport and to provide an opportunity to introduce the Company's sports
trading cards to a large number of fans who may not be familiar with the
Company's products. In addition, these events provide significant brand
exposure, including national television and print media coverage, to a
sports-conscious target audience at a substantially lower cost than conventional
media advertising.
The Company continually seeks to improve its profitability and the quality
and predictability of its earnings and cash flows by managing the return of
unsold product and controlling costs. The Company believes that it has been an
industry leader in the effort to minimize returns, which has historically been a
concern for the industry. The Company has increased the percentage of its sales
to the hobby
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distribution channel, which traditionally does not have return privileges, and
has also negotiated with some major mass market retailers to eliminate return
privileges. As a result, since 1992 the Company has tripled the percentage of
its sales made on a non-returnable basis, to more than 50%. In addition, the
Company continually evaluates cost control opportunities. The Company has
successfully identified and reduced certain significant costs through
investments in design technology and identification of more cost-efficient
vendors and sources of raw materials. In addition, since 1993 the Company has
shifted its focus from being a manufacturer of sports trading cards to being a
flexible designer, marketer and distributor of collectible products. The Company
now outsources substantially all of its production processes other than design
and artwork and does not believe that there are any significant risks involved
in outsourcing.
STRATEGY
The Company's strategy is to position its sports trading card products
principally as collectibles which are likely to have superior value in the
secondary market. This strategy has led the Company to increase its sales to
specialty retail outlets, consisting mainly of trading card hobby stores, the
retailer of choice for the serious collector/consumer. The Company believes that
success within this hobby channel, in turn, drives demand within the broader,
general retail channel. Since 1993, by consistently executing this strategy, the
Company has experienced a significant increase in net sales, as well as in the
proportion of its sales attributable to the key hobby channel. The Company's
strategy encompasses the following elements:
. Continual product innovation, both technological and artistic, to
stimulate collector interest;
. Managed production quantity and quality, making less than the market
demands, to promote collectibility; and
. Tailored product distribution, packaging and sales support, customized to
each individual channel of distribution to maximize sell-through.
In order to implement its strategy, the Company intends to: (i) continue to
enhance highly recognizable brands; (ii) further enhance hobby channel
distribution; (iii) selectively expand general retail distribution; (iv)
continually evaluate and reposition products to meet both customers' and
consumers' demands and preferences; (v) maximize profitability of recent
acquisitions; (vi) pursue opportunities in promotional and related markets;
(vii) position the Company as a strong contender for additional licensing
opportunities; and (viii) evaluate opportunities for strategic acquisitions. The
Company believes that the continued implementation of its strategy will enable
it to maintain its leadership position in the sports trading card market and
achieve future growth.
Continue to Enhance Highly Recognizable Brands. The Company intends to
continue to enhance its highly recognizable brands among both
collectors/consumers and retailers. The Company has positioned itself as a
leader in the industry through an emphasis on collectibility and continued
product innovation, with a reputation for high quality products and service. The
Company has also utilized numerous media tools to maximize brand awareness,
including the recent publication of Pinnacle magazine and advertising in trade
publications. In addition, the Company has multi-year commitments to be the
title sponsor of the premiere fan events for hockey and baseball, which include
the Pinnacle NHL FANtasy held in concert with the National Hockey League
All-Star game and the Pinnacle All-Star FanFest held in conjunction with the
Major League Baseball All-Star game. The Company is also the exclusive sports
trading card sponsor of the NFL Quarterback Club's Quarterback Challenge. The
Company intends to continue using these cost-effective marketing techniques to
reinforce its brand image. The Company also intends to strengthen the brand
image of its Donruss products, using marketing efforts separate and distinct
from those used to market Pinnacle products.
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Further Enhance Hobby Channel Distribution. Since 1993, the Company has
significantly increased its penetration of the hobby channel and currently
distributes its products to over 4,000 hobby stores. The Company plans to add as
many as 300 new hobby retailers to its distribution network in 1996 and will
continue to seek additional hobby stores that have the capabilities to
effectively market the Company's products. The Company is also focused on
expanding the range and volume of the Company's products offered by hobby
stores. The Company believes that its newsletters, magazines, field sales force,
hobby-specific merchandising programs and customer service department support
the Company's attainment of these goals by assisting hobby dealers with the
marketing and merchandising of sports trading cards.
Selectively Expand General Retail Distribution. The Company intends to (i)
recruit, as new customers, general retailers whose sales goals and merchandising
practices are consistent with the Company's marketing strategy and (ii)
selectively expand its sales to its existing general retail outlets by
emphasizing "program selling" of its broad product line and retailer partnership
programs (including the use of custom packaging and special price points). See
"--Marketing and Distribution." The Company's field sales force engages in
program selling in the general retail sector, whereby the sales person assigned
to each customer works with the customer to develop a program through which the
customer commits in advance to purchase the Company's products scheduled for
release during the following six months. To date, these efforts have
successfully increased penetration of the general retail channel while still
enabling the Company to manage product return exposure associated with the
general retail channel.
Maximize Profitability of Recent Acquisitions. In May 1996, the Company
acquired from Donruss/Leaf its baseball and hockey trading card licenses as well
as certain inventory and intangibles for approximately $41.0 million. The
Company's strategy to maximize net sales and profitability of the Donruss
licensed products includes: (i) leveraging the Company's infrastructure to
maximize the contribution of the Donruss products; (ii) repositioning Donruss
products for targeted market segments; (iii) marketing Donruss products using
the Company's more effective field sales force and aggressive marketing
techniques; (iv) extending Donruss brands into football trading cards; and (v)
applying the Company's return policies to sales of Donruss products.
Continually Evaluate and Reposition Products to Meet Both Customers' and
Consumers Demands and Preferences. The Company continually evaluates customer
and consumer demand and preferences, and identifies opportunities to target
products to meet these preferences. The Company then repositions its products
through the addition of innovative trading card features, different price
points, brand concepts and sub-brands and modified product packaging, display
and similar features to support customers' merchandising practices. A recent
example is the Company's 1995 introduction of Pinnacle Zenith which is
distributed principally through the hobby market. This product, which like the
Company's Pinnacle product offers a full bleed design with an emphasis on action
photography, is enhanced to include an all-foil metallized printing technology,
heavy card stock and scarce insert sets. The 1995 premiere issue of the
Company's Pinnacle Zenith football trading card was named "The Sports Trading
Card of the Year" (among all sports and all brands) by Tuff Stuff magazine.
Pursue Opportunities in Promotional and Related Markets. The Company has
identified developing promotional products for commercial enterprises as a
market that it is qualified to service with its marketing expertise, creative
design capabilities and innovative production technologies, as well as its
existing relationships with licensors in major professional sports. For example,
the Company recently worked with McDonald's Corporation to create an innovative
and profitable hockey card promotion for all McDonald's Canadian restaurants.
The Company believes there is opportunity for future growth in this market.
Position the Company as a Strong Contender for Additional Licensing
Opportunities. The Company intends to evaluate and pursue other licensing
opportunities where appropriate. The Company believes that it is well-positioned
to develop any such licenses, if obtained, because of its
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competitive strengths. As the only member of the SCMA which does not currently
have a basketball license, the Company is seeking to position itself as the most
desirable candidate for such a license with the National Basketball Association.
Evaluate Opportunities for Strategic Acquisitions. The Company will continue
to seek strategic acquisitions which would complement its existing business
and/or take maximum advantage of the Company's core competencies. These
competencies include, among other things, retail and specialty distribution,
product development, licensing and knowledge of collectibles markets.
SPORTS TRADING CARD INDUSTRY
According to SCMA data, the 1995 sports trading card market was
approximately $560 million, which equates to approximately $900 million in
retail sales. Sales of sports trading cards are significantly influenced by the
popularity of the related sport. The Company and other producers of sports
trading cards operate pursuant to licenses with the owners' and players'
association in each relevant team sport or, in the case of auto racing, with
NASCAR and with the relevant drivers, team owners and sponsors. See "--License
Agreements and Trademarks." The major sports organizations have generally
limited the number of licensed sports trading card competitors. Sports trading
cards are sold to consumers through a variety of distribution channels,
including approximately 5,000 specialty hobby stores and over 80,000 retail
outlets such as mass merchandisers, convenience stores, grocery and drug stores
and toy stores. Sport trading cards are a highly attractive category for
retailers because of their relatively high profit margins per square foot of
shelf space.
Consumers. Studies commissioned by the Company to better understand its
ultimate consumer indicate that adult collectors account for over three-quarters
of the dollars spent annually on sports trading cards. The average collector is
approximately 31 years old and owns a collection valued at over $4,000. These
studies also indicate that key product attributes valued by this
collector/consumer base include scarcity, creative design and innovative
printing and technologies. The industry utilizes insert cards (known as "chase
cards") which incorporate these attributes and which are randomly inserted into
card packs to generate further demand for sports trading cards.
Collectors/consumers seek out these cards due to their relative scarcity and
higher aftermarket values. Collector interest in sports trading cards is
evidenced by the large circulation of the various trade magazines and the
significant attendance figures at the industry's various trade shows. Beckett
Monthly, which publishes secondary market values for sports trading cards and
related information, is the largest publisher of sports trading card price
guides covering baseball, football, basketball, hockey, motor sports and future
stars. The Beckett Monthly price guides have an aggregate total circulation of
1.2 million, which ranks them second in circulation to Sports Illustrated among
sports periodicals.
The inherent collectibility of sports trading cards is demonstrated by the
existence of an active, sophisticated secondary market for sports trading cards.
The secondary market infrastructure includes Sportsnet, a "members only"
electronic bulletin board for hobby dealers which functions as a clearing house
for advance sales of sports trading cards, plus a number of collector magazines
which publish aftermarket values. Beckett Monthly provides secondary market
values for virtually every baseball card produced since 1948.
History. The sports trading card industry experienced significant growth
between the early 1980s and 1991. The Company believes that this growth was
primarily fueled by the combined effects of new sports franchises, expanding
sports media coverage, growing levels of disposable income and an increased
number of trading card producers as a result of the granting of additional
licenses. Reported SCMA net sales of sports trading cards grew from less than
$250 million in 1988 to a peak of almost $1.1 billion in 1991. Product
innovation and competition increased significantly. Concurrently with this
trend, the trading card market experienced an influx of speculative investors
who acquired cards solely in expectation of a rapid and significant appreciation
in value. Industry publications with broad
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circulation, such as Beckett Monthly, were validating these speculators'
interest in the collectibility of sports trading cards by regularly publishing
updated secondary values for trading cards.
However, by 1991 the sports trading card market was overextended, with
supply levels outpacing demand. Retailers, however, continued to purchase large
quantities of trading cards from manufacturers but, not constrained by any time
limitation on sales returns, returned increasing quantities of accumulated
inventory to manufacturers. At the same time, the United States entered into a
recession. The speculative investors ceased viewing sports trading cards as an
attractive investment, and the sports trading card market contracted to its core
collector/consumer. According to SCMA data, 1992 net sales contracted slightly
to $982 million from 1991 and in 1993 net industry sales declined by 22% to
approximately $767 million.
Although SCMA net sales increased by 4% in the first half of 1994 compared
to the first half of 1993, during the second half of 1994 the industry was
negatively impacted by the Major League Baseball strike and the National Hockey
League work stoppage. These events led to a decline in SCMA net sales to
approximately $560 million in 1995. While the National Hockey League resolved
its dispute and commenced its season in January 1995, and Major League Baseball
resumed operations in April 1995 (without a written contract between the owners'
and the players' union), baseball and hockey sales remained well below
pre-strike levels throughout 1995.
Set forth below is SCMA data for the sports trading card industry and the
Company (excluding sales of Donruss products under licenses purchased by the
Company in May 1996) for the three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
COMPANY NET SALES
SCMA REPORTED DATA REPORTED TO SCMA
-------------------------- --------------------------------------------
% % SHARE OF SCMA
YEAR NET SALES CHANGE NET SALES CHANGE NET SALES
- ---- --------------- ------ --------------- ------ -------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS) (IN MILLIONS)
1993.. $ 766.7 (22%) $48.0 (51%)(a) 6%
1994.. 744.0 (3%) 79.3 65% 11%
1995.. 559.7 (25%) 102.5 29% 18%
</TABLE>
-----------------
(a) The Company's reported SCMA net sales for 1992 include $17.0 million
for "collector's sets", which were discontinued in 1993.
Consumer purchases of sports trading cards as reported by A.C. Nielsen
(which data excludes the hobby and certain other retail distribution channels)
for the period ended June 15, 1996 indicate that consumer purchases of baseball
trading cards have increased 18%, sales of football trading cards have increased
57%, sales of hockey trading cards have increased 18%, and sales of motor sports
trading cards have increased 70%, in each case over the comparable 1995 period.
SCMA data, which reflects aggregate wholesale gross sales (for both the hobby
and the general retail channels) less the dollar value of product returns
actually received during the reporting period, indicate a decline in sports
trading card sales in the sports in which the Company competes of 3% for the six
months ended June 30, 1996 as compared to the comparable period in 1995. The
Company believes that the increase in sales to consumers reflected in the A.C.
Nielsen data will ultimately be reflected as increased SCMA sales, as a result
of increases in shipments to meet increased demand and reductions in returns.
PRODUCTS
Sports Trading Cards. The Company is engaged in the design, production and
distribution of premium value sports trading cards featuring major league
baseball players, professional football and hockey players and NASCAR auto
racing drivers, team owners and/or sponsors. The Company markets numerous sports
trading card products under a variety of brand names including Score, Select,
Pinnacle, Donruss, Leaf, Action Packed, Sportflix and Racer's Choice. The
Company's sales are derived
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from a broad portfolio of products. The cards feature photographs of the
athletes and generally include summary statistics and biographical material. The
Company may issue several new series of baseball, football, hockey and NASCAR
trading cards each year. Each season's products contain new players, different
designs and photographs and updated statistics.
The Company has positioned itself as a leader in the industry through an
emphasis on collectibility and continued product innovation, with a reputation
for high quality products and service. Each of the Company's sports trading card
brands has its own positioning in the marketplace and is designed to appeal to
targeted groups of consumers. All of the Company's sports trading cards brands
are of high quality and most feature laminated paperboard and state-of-the-art
reproduction techniques. Certain brands contain cards which use wood, leather or
plastic or are produced using the Company's lenticular printing process, which
creates 3D or magic motion effects on the sports trading cards; other brands use
holograms. Certain brands also contain foil stamping; others are packaged with
other items such as coins. The Company produces different products utilizing a
variety of production technologies and distinctive features and sells those
products through multiple distribution channels at a wide range of price points.
The Company uses a variety of chase card sets differentiated by technology,
distribution channel and price point to provide the collector/consumer with
greater value. The Company continually changes and repositions its brands to
respond to its customers needs. As of June 30, 1996, the Company's principal
brands were as follows:
<TABLE>
<CAPTION>
SUGGESTED
BRAND RETAIL PRICE BRAND DESCRIPTION AND POSITIONING
--------------- ------------ ------------------------------------------------------------
<S> <C> <C>
Score $ .99 A classic border card for the traditional collector
Racer's Choice .99 A value priced classic border card for the racing enthusiast
Donruss 1.89 A traditional full bleed product with numbered random insert
cards
Select 1.99 A premium, full bleed hobby-only card for the serious
collector
Sportflix 1.99 A retail-only magic motion (lenticular) card targeted to
younger consumers
Pinnacle 2.49 A premium full bleed card with random insert cards designed
to maximize collector value
Leaf 2.99 A premium brand that uses unique materials (such as wood) in
its sequentially numbered random insert cards
Action Packed 2.99 An embossed card featuring unique materials (such as gold
leaf and diamond chips) and non-traditional photography
</TABLE>
To capitalize on the strength of these brands, the Company also issues
sub-brands--technologically advanced versions of regular cards produced in more
limited quantities--to reach niche markets. Examples of this include (i)
Pinnacle Zenith which, like Pinnacle, offers a full bleed design with an
emphasis on photography but also includes all-foil metallized printing
technology, heavier card stock and scarce insert sets (suggested retail price of
$3.99 per pack) and (ii) Select Certified, which, like Select, is a hobby-only
brand, but also includes a mirror-like finish protected by a removable plastic
film and a heavier card stock (suggested retail price of $4.99 per pack).
The Company uses a variety of chase card sets differentiated by technology,
distribution channel and price point to provide the collector/consumer with
greater value. The Company produces substantially fewer chase cards than regular
sports trading cards. Chase cards are differentiated by their innovative
technology, non-traditional photography and limited availability. Chase cards
may be die-cut and use holographic foil, or produced with DufexTM or GoldrushTM
technologies. See "--Technology." Examples of recent chase cards include (i) the
Christie Brinkley Collection, which contains photos taken by supermodel Christie
Brinkley, included in the Pinnacle Baseball II product, (ii) FanScanTM, an
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insert in Action Packed Credentials Racing, which allows collectors to access
live radio communications between popular NASCAR drivers and their pit crews
through a special toll-free telephone number printed on the back of each card
and (iii) Studs, an Action Packed embossed card which shows famous athletes
wearing their earrings--but in this case the diamond studs are real. The Company
believes that its innovative chase card designs, random insertion and limited
production reward the collector with high aftermarket trading values.
The dollar value of shipments of sports trading card products (excluding
sports trading cards sold by the Company to commercial customers for use as
promotional products) accounted for approximately 93%, 87% and 89% of the
Company's gross sales for the years ended December 31, 1993, 1994 and 1995,
respectively, and approximately 87% for the six months ended June 30, 1996.
Promotional Products. The Company also produces products for use by consumer
and food product companies in their promotional activities. The products include
sports trading cards and other products. The Company works with its customers to
develop promotional strategies and to produce products which employ the
Company's lenticular or other innovative technologies. For example, the Company
recently created a hockey card promotion for all McDonald's Corporation Canadian
restaurants, and has received contracts from other companies to perform similar
promotions in the United States.
The Company markets its promotional projects to several hundred customers,
who typically use these products in conjunction with one-time marketing events
or, occasionally, recurring promotional campaigns. While none of the promotional
projects conducted by the Company's commercial customers is individually
significant to the Company's revenues today, the Company believes that continued
development of products for the commercial consumer provides opportunity for
future revenue growth and creates further awareness of the Company's brands and
products.
Technology. The Company has been an innovator of trading card features
utilizing creative design
and advanced production technologies. The Company develops some technology
itself and also works with various vendors to develop technology and
applications for the Company's products. See "--Product Development and
Production." The Company currently employs the following innovative
technologies:
. DufexTM, which superimposes a player's image against a laminated foil
background with UV formulated transparent inks that allow the foil
reflections to shine through.
. Action Packed embossing, which gives the look and feel of raised
typography, and 24KT gold which includes actual gold leafing.
. GoldrushTM, a process where cards are printed in gold on silver metallized
foil.
. Sportflix, a process which allows two or more images to exist on the same
piece of printed stock because of special lenticular plastic lenses that
allow the eye to see only one image at a time. The image changes if the
card is tilted.
. LaserViewTM, a new holographic product which incorporates 3 to 4 seconds
of actual National Football LeagueTM game footage into full motion cards.
. Spectrotech, an etching technique which highlights foil with a texturizing
process that gives it tactile features which complement the mirror-like
look of the foil.
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<PAGE>
MARKETING AND DISTRIBUTION
The Company has commissioned studies of its customer base and the sports
trading card market. As a result of these studies, the Company shifted its focus
to the hobby channel and the serious collectors who purchase through that
channel, and began to develop innovative products that both attract the
collector/consumer's attention at the point of purchase and also maintain
superior value in the secondary market.
The Company's marketing strategy is based on the following premises: (i) the
collectibility of a product is determined by the market's perception of the
product's scarcity and its design features; (ii) success in the hobby channel
leads to increased demand in the broader general retail channel; (iii) strong
brand positioning is key to developing strong market position; and (iv) the
market demands continual product innovation.
To improve the collectibility of its cards, the Company manages both
production quality and quantity. While the number of the Company's brands or
sub-brands has increased, the Company has reduced the production volume per
product. This increase in products has reduced the Company's dependency on any
single product and reduced the Company's exposure to returns.
As an early demonstration of the Company's commitment to scarcity, the
Company was the first major industry player to eliminate the distribution of
"collector's sets." These sets made available, in a single purchase at the end
of the sports season, almost every card produced for the season. Although
elimination of such sets in 1993 and loss of revenues ($17.0 million in net
sales reported to SCMA in 1992) from their sales initially reduced the Company's
earnings, the Company believes that such action enhanced future sales because
sales of "collector's sets" reduced consumers' need to purchase cards throughout
the season in order to obtain an entire set. In addition, "collector's sets"
were typically priced lower than cards sold earlier in the season.
The Company meets at various times during the year with advisory boards of
hobby dealers, other retailers and consumers. These boards provide the Company
with insight into which of its products and product features are popular, and
keys to the success of its marketing techniques and sales practices within the
respective distribution channels. In addition, the Company solicits from the
advisory boards strategies that the Company, alone or together with its
customers, can employ to enhance sell-through of the Company's products.
Hobby and Retail Distribution. The Company's products are sold in hobby
stores, sports memorabilia shops, wholesale clubs, mass merchandisers,
convenience stores, variety stores, grocery and drug stores and toy stores. The
Company has aggressively pursued sales to the hobby sector, and over the last
three years has tripled its percentage of sales of sports trading cards made to
the hobby sector. The Company has focused on the hobby sector because it
believes that the effects of the market correction and work stoppages on this
sector of the market were less severe than on the general retail sector and that
demand in the hobby channel drives demand within the more general retail sector.
See "--Sports Trading Card Industry." In addition, the terms of sale to this
sector have made such sales more attractive to the Company. Unlike most general
retail and mass merchandise customers, hobby stores are required to pay in
advance for shipments and do not have the right to return unsold products. See
"--Returns." The Company distributes its products to over 4,000 hobby stores
nationwide.
While the Company has focused on developing the hobby market, the Company
has also taken a number of steps to further develop sales in the general retail
sector. For example, the Company is the only trading card competitor to provide
its customers with tools to manage sports trading card category profitability.
One such tool, "The Team Pinnacle Category Management System Newsletter," which
is distributed to approximately 500 key buyers and merchandise managers, has
been recognized by leading retail trade publications for its valuable insights.
In addition, the Company works with its
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<PAGE>
general retail customers to implement various trade marketing programs, such as
display merchandising and cooperative promotional advertising, to increase
sell-through of products at the retail outlets and to limit customers' product
purchases based on historical net sales, in each case with a view toward
maximizing future sales while minimizing returns. While the general retail
sector generally has had greater rights with respect to returns of the Company's
products than has the hobby sector, the Company has negotiated the elimination
of return privileges with some larger retailers and continues to pursue similar
arrangements with other retailers. See "--Returns."
Development of In-House Field Sales Force. Historically, the Company relied
on multiple-product brokers to sell its products. In 1996, however, the Company
established an in-house field sales force to market its trading card products
more effectively by providing a higher level of customer service to retail and
hobby dealers. This field sales force markets the Company's products to all of
its customers, including hobby dealers and certain large retailers, as well as
to certain distributors dedicated to particular mass merchandise retailers and,
to a lesser extent, independent distributors. In addition, the Company works
with "Authorized Pinnacle Distributors" to coordinate sales to the hobby channel
and to serve as a source of replenishment for shops in this channel.
Each customer is assigned an individual salesperson whose responsibility is
to educate the customer about the Company products, help to tailor the
retailers' product selection, and share product placement and merchandising
techniques with the customer, all with the goal of increasing the customer's
sell-through of the Company's products. The Company believes its field sales
force will gain important insights into the customer's needs, thereby enabling
the Company to be more responsive and to allocate its products on a basis that
takes into account the customer's past sales history and nature of its consumer
base. In addition, the Company has developed systems to integrate the Company's
scheduling, marketing and sales functions so as to facilitate maximum
information flow of research and sales data to and from the field sales force.
The Company's field sales force engages in program selling, particularly in the
general retail sector, in which it works with a customer to develop a program by
which the customer commits in advance to purchase the Company's products
scheduled for release during the following six months.
The Company's compensation structure for its field sales force is designed
to provide incentives to implement its marketing strategy. While the Company,
like others in the industry, had compensated its multiple-product brokers based
on gross sales with little regard to level of returns, a major component of the
Company's compensation of its field sales force is based on net sales, which
specifically takes into account sell-through and return of products.
Extension of Brand Awareness. To optimize the use of advertising and
promotional expenditures, the Company has chosen to focus its promotional
efforts on recognition of its brands rather than individual products. The
Company has done so through what it believes to be an aggressive, cost-effective
marketing strategy concentrating on public relations and targeted advertising to
maximize brand awareness. For example, the Company markets various brands
through advertising in card collectors' publications, and through the recently
published Pinnacle magazine which is currently being sold at magazine stands
throughout the United States.
To increase its visibility in the sports market, the Company has entered
into multi-year commitments to be the title sponsor of the premiere fan events
for hockey and baseball, which include the Pinnacle All-Star FANtasy, an
interactive fan event held in conjunction with the National Hockey League
All-Star Game, and the Pinnacle All-Star FanFest held in conjunction with the
Major League Baseball All-Star Game. The Company is also the exclusive sports
trading card sponsor of the NFL Quarterback Club's Quarterback Challenge. These
events serve both to increase fan interest in the relevant sport and also to
provide an opportunity to introduce the Company's sports trading cards to a
large number of fans who may not be familiar with the Company's products. In
addition, these events provide significant brand exposure, including national
television and print media coverage, to a sports-
33
<PAGE>
conscious target audience at a substantially lower cost than conventional media
advertising. The Company also obtains significant cost-effective exposure
through its production of products for use by corporate consumers in connection
with promotional activities.
RETURNS
Returns have historically been a concern for the sports trading card
industry. Traditionally, customers were allowed to return products in unlimited
amount and without regard to any time period. The Company has taken a number of
actions to limit product returns, thereby increasing its profitability and the
quality of its earnings and cash flows.
The Company has substantially increased the proportion of its sales to the
hobby channel, which does not have return privileges. The Company offers all
general retailers discounts on purchases of the Company's products in exchange
for the elimination of return privileges. Certain customers, principally large
retailers, have accepted these arrangements which save the retailer, as well as
the Company, the time and expense of collecting inventory for returns. The
Company continues to pursue similar arrangements with other significant
retailers. The increase in sales to the hobby channel coupled with the
elimination of return privileges of some retailers has significantly reduced the
risks associated with return levels. In addition, beginning in late 1993 the
Company implemented six initiatives geared toward limiting returns and their
associated costs within the remainder of the retail distribution channel. These
initiatives consist of (i) limiting returns to the period from four months to
twelve months after shipment, (ii) lowering administrative costs by limiting the
number of occasions on which returns may be accepted, (iii) not providing cash
reimbursements, but instead providing a credit that can be used against future
purchases, (iv) allocating its products to the Company's customers on the basis
of the customers' historical net sales, (v) sharing with customers innovative
packaging and merchandising techniques to increase sell-through of the Company's
products and (vi) structuring compensation policies to take into account return
of products. Actions taken by the Company to eliminate or limit a retailer's
return privileges may accelerate returns of products previously sold to that
retailer. As a result of these actions, since 1992 the Company has reduced its
exposure to returns and has tripled the percentage of its sales made on a
non-returnable basis, to more than 50%.
The Company did not assume any product return liability for sports trading
card products previously sold by Donruss/Leaf in connection with the Donruss
License Acquisition. Instead the Company is indemnified by Donruss/Leaf for any
such liability. The Company's return policies have been applied to all sales of
Donruss products made by the Company.
PRODUCT DEVELOPMENT AND PRODUCTION
The Company currently outsources substantially all of its production
processes, other than the design and artwork for its sports trading cards. It
works with a limited number of vendors selected on the basis of their ability to
produce consistent quality products at an efficient price. The Company evaluates
its vendors based on their product quality, their capacity to employ existing
technology developed by the Company or others, and also their willingness to
work with the Company to develop new technologies and/or applications. The
Company's vendors generally perform research and development as part of their
overall relationship with the Company without separate charge.
The elapsed time between initial product design and shipment is typically
six months. During the initial phase of the process, which generally takes
between three and four months, the Company focuses on photography, design,
artwork and technology. Photographs are generally taken by independent
photographers. The Company next converts the photographs into a digital data
base and does both high and low resolution cleanup of the photographs (i.e., to
enhance colors, eliminate blood, stains and shadows). The Company's in-house
staff of artists designs and coordinates the artwork for the sports trading
cards. The Company works with its vendors to produce sample runs to confirm that
the
34
<PAGE>
processes employed will produce consistent product quality. Prior to production,
the Company must obtain licensor approvals of virtually all aspects of the card
(i.e., design features and other elements of presentation). See "--License
Agreements and Trademarks."
Production begins after the product has been designed and has received
necessary licensor approval. The first shipment of product typically occurs six
to eight weeks after production commences. The printing processes, which include
printing, foil stamping and UV coating, are currently performed by third party
vendors. After printing, the trading cards are then packaged, which involves
cutting, collating and wrapping the cards. The finished cards are collated in a
manner designed to avoid duplication of the same card in packages and to
implement the Company's strategy of limiting availability of certain insert and
other cards. Most of the Company's packaging requirements are performed by
Performance Packaging LLC, in which the Company holds a 49% equity interest.
In order to ensure the quality of its sports trading cards, the Company
employs quality assurance personnel who meet with the Company's vendors
regularly and who sample test products at each stage of the production process,
in some cases several times a day. The Company is not dependent on any single
vendor in the production process and in many cases uses multiple vendors to
perform particular tasks.
LICENSE AGREEMENTS AND TRADEMARKS
The Company considers its trademarks, trade names and license agreements to
be of material importance to its business. The Company's principal trademarks
have been registered in the United States, as well as in certain of the foreign
countries where its products are sold. The Company owns the following principal
trademarks: Score, Select, Pinnacle, Donruss, Action Packed, Sportflix, Racer's
Choice and Optigraphics. In addition, the Company has the right to sell sports
trading card products under the name Leaf in the United States and Canada for a
period of five years.
The Company's ability to market its sports trading cards is based on rights
under non-exclusive license agreements with the baseball, hockey and football
players' associations, and with the organizations which represent the respective
leagues and their member teams, and, in the case of NASCAR auto racing, with
NASCAR and with the relevant drivers, owners and sponsors. Each of the players'
association agreements grants the Company the right to produce and sell sports
trading cards depicting virtually every member of such association. Licenses
with individual drivers, owners and sponsors are required to produce and sell
NASCAR auto racing trading cards.
The Company's agreements with the various players' associations enable the
Company to use a player's name, picture, facsimile signature and biographical
description. The Company's agreements with the organizations representing the
various leagues and their member teams enable the Company to use the logos and
trademarks of the various sports, the leagues and the member teams. These
licenses permit the Company to produce and sell trading cards in the United
States and Canada and, for specific licenses, other countries. All of these
licenses are non-exclusive and, accordingly, the various players' associations,
leagues and team representatives are free to grant similar licenses to other
companies. See "--Competition." Generally, these licenses are granted for a two-
to five-year period. Each of the Company's licenses is subject to termination
for cause by the respective licensors and to non-renewal at the expiration of
its term. Each such agreement provides for percentage royalties based on sales
with minimum guaranteed royalty payments. The Company believes that the
royalties received by the various players' associations under their license
agreements with the Company account for a significant portion of their revenues.
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<PAGE>
The Company holds the following material licenses for team sports:
<TABLE>
<CAPTION>
FIRST ISSUED EXPIRATION DATE
------------ ---------------
<S> <C> <C>
LICENSE
MAJOR LEAGUE BASEBALL
Pinnacle/Major League Baseball Players' Association 1987 12/31/97
Major League Baseball Properties 1987 12/31/94(a)
Donruss/Major League Baseball Players' Association 1981 12/31/97
Major League Baseball Properties 1981 12/31/98
NATIONAL FOOTBALL LEAGUE
Pinnacle/National Football League Players' Association 1988 2/28/99
National Football League Properties 1988 3/31/95(a)
Action Packed/National Football League Players' Association 1990 2/28/99
NATIONAL HOCKEY LEAGUE
Pinnacle/National Hockey League Players' Association 1989 6/30/98
National Hockey League Enterprises 1989 6/30/98
Donruss/National Hockey League Players' Association 1993 6/30/99
National Hockey League Enterprises 1993 6/30/96(b)
</TABLE>
----------------
(a) The Company is operating under a letter of intent with this licensor and
is currently negotiating a definitive three-year licensing agreement.
(b) The Company is in the process of negotiating a new license agreement
with this licensor.
In addition, the Company holds over 100 licenses with NASCAR and with the
NASCAR drivers, owners and sponsors (each, a "NASCAR License"). No single NASCAR
License is material to the Company's business.
Since their expiration, the Company has entered into letters of intent with
respect to the material terms of a new three-year license with each of Major
League Baseball Properties and National Football League Properties, and is in
the process of negotiating definitive license agreements. The Company is
currently negotiating a definitive license agreement with National Hockey League
Enterprises. The Company is continuing to operate under the terms of its expired
licenses and believes that it will be able to enter into new license agreements
in the near future. Since its formation, the Company has never failed to obtain
renewal of any of its team sports licenses and it anticipates that it will be
able to renew its sports trading card licenses on acceptable terms. However,
there can be no assurance that these licenses will not be terminated for cause,
that these licenses will be renewed upon their expiration or that the terms of
future sports trading card licenses will not be materially less favorable to the
Company than those currently in effect. The loss of any baseball, football or
hockey license could have a material adverse effect on the Company's results of
operations and financial condition.
The Company currently does not hold a license with the National Basketball
Association. Although the Company is seeking to obtain such a license, there can
be no assurance that such license will be granted.
Total royalty expense under the Company's sports trading card licenses for
1995 was $26.5 million. See Note 15 to the Consolidated Financial Statements for
a description of minimum guarantee payments required under the Company's
existing sports licenses.
In addition, the Company is party to an equipment sales and technical
assistance agreement with Toppan Printing (America), Inc. and Toppan Printing
Company, Ltd., pursuant to which the Company has the exclusive right to receive
technical assistance involved in producing lenticular products.
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<PAGE>
COMPETITION
The sports trading card industry is competitive and the Company competes
with several producers of sports trading card products. The principal brands
with which the Company's products compete include Fleer/Sky Box, Topps and Upper
Deck. The Company believes its products compete primarily based upon
collectibility and brand recognition, as well as product features and pricing,
customer service, quality and creativity.
The Company's brands and those of its key competitors account for a
substantial portion of total sports trading card sales. The remaining sales are
made by numerous additional companies that produce and distribute sports trading
cards only in regional or niche markets. Presently, there are four major
licensees for sports trading cards in baseball and hockey, a total of eight
licensees for football and three for basketball. The Company is currently
unaware of any pending new licensees. However, the licensors retain the right to
grant additional licenses.
In addition to the major sports trading card competitors named above, the
Company also competes with numerous smaller distributors of sports trading
cards, with sports memorabilia and collectibles producers and with companies
that market small toys, comic books and other similar products. Certain of the
Company's competitors are significantly larger and have greater resources than
the Company. See "Risk Factors--Competition."
SEASONALITY
The timing of shipments of the Company's sports trading card products, and
related revenue recognition, is directly related to the playing seasons of the
various sports for which the Company holds licenses. For example, shipments of
the Company's 1996 season baseball sports trading cards began in December 1995
and will conclude prior to the 1996 World Series in October. Similar but more
compressed shipping cycles exist for hockey, football and motorsports. Moreover,
within a sports season the Company continually evaluates when to ship individual
products based on a number of factors including consumers' demand for previously
shipped products and competitors' announced shipping dates. Accordingly,
reported quarterly sports trading card revenues may vary from historical
quarterly patterns. As a result, quarterly reported revenues and earnings are
not necessarily an accurate predictor of future financial results.
Given its current licenses, the Company expects that approximately 20% of
the Company's sales will occur in each of the first and second quarters and 30%
will occur in each of the third and fourth quarters. A substantial portion of
the Company's selling, general and administrative expenses do not vary based on
sales. As a result, substantially all of the Company's operating income has been
generated in the second half of the year. For example, in 1995 the Company
recognized 68% of its annual sales, 69% of its annual gross profit and 91% of
its operating income during its third and fourth fiscal quarters. The Company
expects that these seasonal variations will continue, although in differing
degrees from year to year.
EMPLOYEES
The Company employs approximately 200 people, of whom approximately one half
are involved in the production and creative process. The remaining employees of
the Company perform sales, administrative and management duties. None of the
Company's employees are covered by collective bargaining agreements. The Company
considers its employee relations to be good.
PROPERTIES
The Company currently leases its 50,000 square foot headquarters facility
and a 90,000 square foot warehouse and manufacturing facility, both located in
Grand Prairie, Texas. At the expiration of the
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<PAGE>
term of the headquarters' lease in October 1996, the Company intends to move its
corporate headquarters to an approximately 50,000 square foot facility located
in Dallas, Texas. The new lease will be for a seven-year term.
The Company also leases the office facilities located in Norwalk,
Connecticut and Charlotte, North Carolina. These leases are for approximately
4,500 and 1,000 square feet, respectively, and expire in April 1998 and August
1996, respectively.
The Company believes that its facilities are in good repair and adequate for
its needs for the foreseeable future.
ENVIRONMENT
The Company believes that it is in compliance in all material respects with
existing federal, state and local regulations relating to the protection of the
environment. Such environmental regulations have not had a material impact on
the Company's capital expenditures, earnings or competitive position.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business. In December 1995, Dream Team Collectibles, Inc., a St. Louis-based
manufacturer and retailer, filed suit against the Company in the U.S. District
Court for the Eastern District of Missouri, alleging trademark infringement and
unfair competition with respect to the Company's use of the "Dream Team" name
for a line of Score chase cards the Company has produced continuously since
1990. Dream Team Collectibles, Inc. is seeking royalties from the sale of those
products using the "Dream Team" name, as well as certain other relief. This
action is in the discovery phase. In the opinion of the Company, no such
litigation has had or is likely to have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
The Company is a defendant in a purported class action filed in August 1996
in Dallas in the United States District Court for the Northern District of
Texas. The action is directed against standard business practices in the sports
trading card industry, including the practice of randomly inserting chase cards
in packages of sports trading cards, and alleges that these practices constitute
illegal gambling activity in violation of state and federal law, including the
Racketeer Influenced and Corrupt Organizations Act ("RICO"). Each of the
Company's principal competitors has been separately sued in its home state for
employing the same or similar practices. The various sports organizations that
issue licenses to the Company are also alleged to be engaged in aspects of these
illegal gambling activities, but they are not named as defendants. Plaintiffs
seek certification of a class of persons who within the applicable statute of
limitations purchased packages of the Company's trading cards that might contain
randomly inserted chase cards and recovery of treble damages. No discovery has
been commenced nor have any motions been filed. Plaintiffs have not specified
the amount of damages sought, but generally allege that members of the purported
class have been damaged in the amount of their purchases of the Company's sports
trading cards during the four years preceding the commencement of the action.
Inherently, the outcome of litigation is uncertain. It is not possible at the
early stage of this case to predict the outcome with certainty. In the opinion
of the Company, the action lacks substantial merit and the Company intends to
defend it vigorously.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY MANAGEMENT PERSONNEL
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Jerry M. Meyer............................ 55 Chairman of the Board, Chief Executive
Officer and Director
Michael J. Cleary......................... 37 Executive Vice President, Chief Operating
Officer and Director
John S. Worth............................. 47 Chief Financial Officer, Senior Vice
President and Secretary
James Brochhausen......................... 37 Senior Vice President--Sales
Bradford E. Bernstein..................... 29 Director
Daniel L. Doctoroff....................... 38 Director
Douglas D. Wheat.......................... 45 Director
</TABLE>
Jerry M. Meyer has served as Chief Executive Officer of the Company and a
director of the Company since its formation in 1991, and has served as Chairman
of the Board since August 1996. Prior to that, he was a partner in Grauer &
Wheat Investments, a merchant banking firm associated with Acadia Partners, L.P.
that participated in the 1991 acquisition of Optigraphics, Inc. Prior to that,
Mr. Meyer held management positions with Coleman Company, Inc., Pullman, Inc.,
Garlock, Inc. and Colt Industries. Mr. Meyer is also a director of City National
Bank and Specialty Food Corporation; he also serves as President of Century
Capital, a real estate and financial holding company.
Michael J. Cleary has served as Executive Vice President and Chief Operating
Officer of the Company since October 1995, and has served in various management
positions with the Company since November 1991. Prior to that, he served as
Chief Financial Officer of Coleman Company's Water Sports Holding Company from
May 1990. Mr. Cleary has served as a director of the Company since December
1995.
John S. Worth has served as Chief Financial Officer, Senior Vice President,
and Secretary of the Company since 1994. Prior to that, he was a senior partner
in the Arthur Andersen Worldwide Organization from 1986 to 1994. During that
period, Mr. Worth served, in 1989, as Chief Financial Officer of Arthur
Andersen's newly formed International Accounting, Audit and Tax Business Unit
and, after relocation to the firm's Dallas office, as a Regional Director of
Arthur Andersen's Litigation, Bankruptcy and Corporate Finance Practice from
1990 to 1994.
James Brochhausen has served as Senior Vice President-Sales of the Company
since August 1996; from 1993 to June 1996 he served as Vice President Sales of
Pinnacle Trading Card Company. Prior to that he served as Vice President of
Sales for Major League Marketing, Inc. from 1992 to 1993, as North Central
Business Director at Nestle Food Company from 1991 to 1992, as Northeast
Confection Zone Manager from 1990 to 1991 and several other management positions
within Nestle since 1992.
Bradford E. Bernstein has served as a Vice President and an Associate of Oak
Hill Partners, Inc. (Acadia's investment advisor) since 1992. From 1991 until
1992, Mr. Bernstein worked at Patricof & Co. Ventures. Prior to that, from 1989
to 1991, he worked at Merrill Lynch & Co. Mr. Bernstein has served as a director
of the Company since December 1995. Mr. Bernstein serves as a director of
CapStar Hotel Company and Payroll Transfers, Inc.
Daniel L. Doctoroff has served as Managing Director of Oak Hill Partners,
Inc. and its predecessor since August 1987; Vice President and Director of
Acadia Partners MGP, Inc. since March 1992; Vice President of Keystone, Inc.
since March 1992; and a Managing Partner of Insurance Partners Advisors, L.P.
since February 1994. All of such entities are affiliates of Acadia Partners,
L.P. Mr Doctoroff has served as a director of the Company since 1995. Mr.
Doctoroff is also a director of Bell &
39
<PAGE>
Howell Holdings Company, CapStar Hotel Company, National Re Corporation, Payroll
Transfers, Inc., Transport Holdings, Inc., Kemper Corporation and Specialty
Foods Corporation.
Douglas D. Wheat has served as President of Haas Wheat & Partners,
Incorporated, a private investment firm, since January 1995. Prior to that, Mr.
Wheat was President of Haas Wheat & Partners from November 1992, Co-Chairman of
Grauer & Wheat, Inc., a private investment firm from April 1989 to October 1992
and Senior Vice President of Donaldson, Lufkin & Jenrette Securities Corporation
from January 1985 to March 1989. Mr. Wheat has served as a director of the
Company since 1991. Mr. Wheat is also a director of Specialty Foods Corporation
and Playtex Products, Inc.
BOARD OF DIRECTORS; COMMITTEES
The Board of Directors currently consists of five directors. Prior to the
consummation of the Offering, the Company intends to appoint three additional
directors, none of whom are officers or employees of the Company. All directors
are elected by the stockholders of the Company for a one-year term and hold
office until the next annual meeting of stockholders or until their successors
are elected and qualify.
The Board of Directors has established an Audit Committee comprising Messrs.
, and . The Audit Committee is responsible for recommending to
the Board of Directors the engagement of independent auditors of the Company and
reviewing with the independent auditors the scope and results of the audits, the
internal accounting controls of the Company, audit practices and the
professional services furnished by the independent auditors.
The Board of Directors has also established a Compensation Committee
comprising Messrs. , and . The Compensation Committee is
responsible for reviewing and approving all compensation arrangements for
officers of the Company and will be responsible for administering the 1992
Option Plan, the 1996 Option Plan and the Bonus Plan (each as defined below).
Prior to the Offering, the Company did not have a Compensation Committee.
DIRECTOR COMPENSATION
Any director who is not an employee of the Company will be paid an annual
fee of $12,000 per annum. In addition, each such director will be paid $750 for
attendance at each meeting of the Board and $500 for attendance at each meeting
of a committee of the Board of which such director is a member. Directors who
are employees of the Company will not receive any fees for their service on the
Board or a committee thereof. In addition, the Company will reimburse directors
for their out-of-pocket expenses in connection with their service on the Board.
On the date of the annual meeting of the Company's stockholders beginning
with the annual meeting held in 1997, each director who is not an employee of
the Company (a "Non-Employee Director") will be granted options to purchase
5,000 shares of Common Stock at the then current market price. All options
granted to directors will vest over three years. Any Non-Employee Director who
ceases to be a director will forfeit the right to receive any optioins not
previously vested or granted.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by or
paid to the Chief Executive Officer and the three most highly paid executive
officers other than the Chief Executive Officer, who served as executive
officers of the Company as of December 31, 1995 for services rendered in all
capacities to the Company during 1995.
40
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1995 ANNUAL COMPENSATION
----------------------------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Jerry M. Meyer............................. $430,106 $108,654(a) $127,422(b) $3,150(c)
Chairman of the Board and Chief Executive
Officer
Michael J. Cleary.......................... 250,288 104,808(a) -- 2,704(c)
Executive Vice President and Chief
Operating Officer(d)
John S. Worth.............................. 244,231 104,808(a) -- 2,906(c)
Chief Financial Officer, Senior Vice
President and Secretary(d)
James Brochhausen.......................... 175,000 78,365(a) -- 1,925(c)
Senior Vice President--Sales(d)
</TABLE>
- ------------
(a) Bonus represents amount paid in fiscal year for services rendered in the
prior fiscal year.
(b) Includes amounts paid for housing and auto allowances. Does not include
$1,300,000 paid to Mr. Meyer in 1996 in respect of a relocation loss.
(c) Represents matching contributions made by the Company on the officer's
behalf to the Company's 401(k) Plan.
(d) While this individual received perquisites or other personal benefits in the
year shown, in accordance with applicable regulations, the value of these
benefits is not indicated since they did not exceed in the aggregate the
lesser of $50,000 or 10% of the individual's salary and bonus of such year.
EMPLOYMENT AGREEMENTS
The Company has entered into a three-year Employment Agreement (the
"Agreement") with Jerry M. Meyer, its Chairman of the Board and Chief Executive
Officer, which will become effective upon consummation of the Offering. The
Agreement provides for an annual base salary of $600,000, which may be increased
by the Board in its sole discretion. Under the terms of the Agreement, Mr. Meyer
participates in the bonus plan described below under which he may receive awards
of up to 130% of his base salary (Mr. Meyer's annual bonus may not be less than
$100,000 (the "Minimum Bonus Amount")). If Mr. Meyer's employment is terminated
by the Company without cause or by Mr. Meyer for good reason, he will be
entitled to receive an amount equal to three times the sum of his then base
salary plus the Minimum Bonus Amount. However, if Mr. Meyer's employment is
terminated by the Company without cause or by Mr. Meyer for good reason
following a change of control of the Company, he will be entitled to receive a
lump sum amount equal to the discounted present value of payments over a
three-year period at an annual rate equal to the sum of (i) his base salary,
(ii) the greatest of (a) the Minimum Bonus Amount, (b) the incentive
compensation that would have been payable to him under the bonus plan for the
year in which his employment is terminated if the Company achieved 100% of its
targets and (c) the average of his incentive compensation paid to him under the
bonus plan for the immediately preceding two years, and (iii) the annual value
of other benefits received by him immediately prior to the termination date
(collectively, the "Change of Control Payment"). Mr. Meyer will also be entitled
to reimbursement (on an after-tax basis) for any excise tax attributable to
characterization of the Change of Control Payment and any income recognized as a
result of the acceleration of the exercisability of options under the 1996
Option Plan as an "excess parachute payment" under the Internal Revenue Code. In
addition, during the three year period following such termination, Mr. Meyer
will be entitled to use any automobile previously provided to him by the Company
and will have the option to purchase such automobile at the end of the three
year period. The Agreement also provides that Mr. Meyer may not compete with the
Company during the term of the Agreement and for one year thereafter and is
entitled to customary executive benefits, including health insurance,
participation in the Company's employee benefit plans, an automobile allowance
and directors' and officers' liability insurance. Acadia has granted Mr. Meyer
an option (the "Acadia Option") to purchase 93,564 shares of Common Stock at an
exercise price of $2.49 per share, on substantially the same terms as the
options granted under the Company's 1992 Option Plan. See "--
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<PAGE>
1992 Stock Option Plan." In addition, Mr. Meyer has the right (the "Put Right")
to require the Company to purchase, on or before November 30, 1998, all of the
shares of Common Stock and options to purchase shares of Common Stock owned by
Mr. Meyer or members of his immediate family at the time of consummation of the
Offering for a purchase price of $3.0 million, less any amounts previously
realized with respect to those shares and options. In the event the Company
fails to purchase Mr. Meyer's securities upon exercise of the Put Right, Acadia
Partners, L.P. is obligated to purchase, or cause the Company to purchase, those
securities at the same price.
The Company has entered into two-year Employment Agreements with each of
Michael Cleary, John Worth and James Brochhausen, which will become effective
upon consummation of the Offering. Mr. Cleary's annual base compensation will be
$300,000, Mr. Worth's will be $275,000 and Mr. Brochhausen's will be $225,000,
in each case subject to increase by the Board in its sole discretion. Each of
these individuals participates in the bonus plan described below and may receive
the bonus awards described below. The Employment Agreements contain other
provisions similar to Mr. Meyer's (other than the Acadia Option and the Put
Right and except that the measurement period for payments upon termination
without cause or for Good Reason is two years, not three, and there is no
Minimum Bonus Amount) and other provisions customary in executive employment
agreements.
BONUS PLAN
The Company has established a bonus plan in which its executive officers and
certain other employees may participate. Receipt of compensation under it will
be performance-based and will be weighted based on a combination of net income,
net cash flow, EBITDA (earnings before interest, taxes, depreciation and
amortization) and qualitative targets. Achievement of targets will be weighted
40% to the net income test, 15% to the net cash flow test, 25% to the EBITDA
test and 20% to the qualitative test. If the Company achieves 100% of these
targets, the participants in the bonus plan will receive a bonus ranging from
20% to 40% of his base compensation (depending on position), except that Mr.
Meyer's bonus will be 65% of base compensation, Mr. Cleary's bonus will be 55%
of base compensation, and Mr. Brochhausen's and Mr. Worth's bonuses will be 50%
of base compensation. If the Company meets 110% of its goals the foregoing
awards will be increased by 50% (i.e., if a participant was entitled to receive
40% of his base compensation, he would receive 60%). If the Company meets 120%
of its goals participants will be entitled to receive twice the base bonus
described above (i.e., 80% of base compensation, adjusted in the case of the
specified individuals).
1992 STOCK OPTION PLAN
In 1992, the Company's Board of Directors adopted, and the Company's
stockholders approved, the 1992 Stock Option Plan (as amended and restated in
August 1996, the "1992 Option Plan"). The 1992 Option Plan was designed to
provide employees with a more direct stake in the Company's future welfare and
an incentive to remain with the Company and to encourage qualified persons to
seek employment with the Company. Options to purchase 1,400,988 shares of Common
Stock at an exercise price of $2.49 per share will be granted prior to the
Offering under the 1992 Plan and will be fully vested. No additional options
will be granted under the 1992 Plan.
The 1992 Option Plan provides for grants of "incentive stock options"
("ISOs") meeting the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and "non-qualified stock options" ("NQSOs"). All
options granted under the 1992 Plan are NQSOs.
The 1992 Option Plan is administered by a stock option committee of the
Board of Directors (the "Committee") comprised of three members, each of whom
will be a "disinterested director" within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), at any time
when Section 16 of the Exchange Act is applicable to the Company. The 1992
Option Plan permits the Committee to determine which employees shall receive
options and the times when options are to be granted. The Committee will also
determine the purchase price of Common Stock covered by each option, the term of
each option and the number of shares of Common Stock to be covered by each
option. The Committee will also designate whether the options shall be ISOs or
NQSOs.
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<PAGE>
Options granted to employees under the 1992 Option Plan have a maximum term
of ten years from the date of grant. Options are not transferable except by will
or pursuant to the applicable laws of descent and distribution.
The Company has agreed to register under the Securities Act of 1933 the
shares of Common Stock issuable upon exercise of stock options granted under the
1992 Option Plan (and, in the case of Mr. Meyer, the Acadia Option). 25% (50% in
the case of Messrs. Meyer and Cleary) of the shares issuable under the stock
options granted to each holder will be registered six months after the
consummation of the Offering (if any of Messrs. Meyer, Cleary, Worth or
Brochhausen so request), with an additional 25% registered 18 months, 30 months
and (except in the case of Messrs. Meyer and Cleary) 42 months after the
consummation of the Offering. However, if an option holder's employment is
terminated by the Company without cause, that holder will have the right to
request that all or part of the shares of Common Stock issuable upon exercise of
the stock options granted to that employee will be registered. Option holders
also have certain "piggyback" registration rights.
In the event that an employee is terminated for any reason, the employee's
options will be exercisable until the expiration date of the option. Upon a Sale
of the Company (as defined in the 1992 Option Plan) the Committee may accelerate
the expiration date of such options.
The Board is permitted to suspend, terminate, modify or amend the 1992
Option Plan, provided that any amendment that would (i) increase the maximum
number of shares for which options may be granted, (ii) reduce the option price
below par value, (iii) extend the period during which options may be granted or
exercised or (iv) amend the requirements as to the class of employees eligible
to receive options shall be subject to stockholder approval.
1996 INCENTIVE STOCK OPTION PLAN
The Company's Board of Directors and stockholders have approved the 1996
Incentive Stock Option Plan (the "1996 Option Plan"). The description in this
Prospectus of the principal terms of the 1996 Option Plan is a summary, does not
purport to be complete, and is qualified in its entirety by the full text of the
1996 Option Plan, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Pursuant to the 1996 Option Plan, executive officers, key employees and
non-employee directors of the Company are eligible to receive awards of stock
options. Options granted under the 1996 Option Plan may be ISOs or NQSOs.
Under the 1996 Option Plan, the Company has reserved 1,168,973 shares of
Common Stock for issuance of awards under the 1996 Option Plan (subject to
antidilution and similar adjustments).
The 1996 Option Plan will be administered by the Compensation Committee (the
"Committee"). Subject to the provisions of the 1996 Option Plan, the Committee
will determine the type of award, when and to whom awards will be granted, the
number of shares covered by each award and the terms, provisions and kind of
consideration payable (if any), with respect to awards. The Committee may
interpret the 1996 Option Plan and may at any time adopt such rules and
regulations for the 1996 Option Plan as it deems advisable. The Committee may,
additionally, cancel or suspend awards.
In determining the persons to whom awards shall be granted and the number of
shares covered by each award the Committee shall take into account the duties of
the respective persons, their present and potential contribution to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the 1996 Option Plan.
An option may be granted on such terms and conditions as the Committee may
approve, and generally may be exercised for a period of up to 10 years from the
date of grant. Generally, both NQSOs and ISOs will be granted with an exercise
price equal to the "Fair Market Value" (as defined in the 1996 Option Plan) on
the date of grant. In the case of ISOs, certain limitations will apply with
respect to the aggregate value of option shares which can become exercisable for
the first time during any one calendar year, and certain additional limitations
will apply to ISOs granted to "Ten Percent Stockholders" (as defined in the 1996
Option Plan). The Committee may provide for the payment of the option price in
cash, by delivery of other Common Stock having a Fair Market Value equal to such
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<PAGE>
option price, by a combination thereof or by such other manner as the Committee
shall determine. Options granted under the 1996 Option Plan will become
exercisable at such times and under such conditions as the Committee shall
determine. Other than in the case of death or disability, options generally may
not be exericised more than three months after an employee terminates employment
with the Company. Each year that a Non-Employee Director is elected
or reelected to his position at the Company, an option to purchase 5,000 shares
of Common Stock will be granted with an exercise price equal to the fair market
value on the date of grant.
The Board may at any time and from time to time suspend, amend, modify or
terminate the 1996 Option Plan; provided, however, that, to the extent required
by Rule 16b-3 promulgated under the Exchange Act or any other law, regulation or
stock exchange rule, no such change shall be effective without the requisite
approval of the Company's stockholders. In addition, no such change may
adversely affect any award previously granted, except with the written consent
of the grantee.
No awards may be granted under the 1996 Option Plan after the tenth
anniversary of the approval of the 1996 Option Plan.
1996 RESTRICTED STOCK PLAN
The Company's Board of Directors and stockholders have approved the 1996
Restricted Stock Plan (the "Restricted Stock Plan"). The description in this
Prospectus of the principal terms of the Restricted Stock Plan is a summary,
does not purport to be complete, and is qualified in its entirety by the full
text of the Restricted Stock Plan, a copy of which has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The Company
has reserved 33,837 shares of Common Stock for issuance of awards under the
Restricted Stock Plan (subject to adjustment as provided therein).
The Restricted Stock Plan will be administered by the Compensation
Committee. The Compensation Committee may award shares of Restricted Stock to
participants in such amounts and subject to such terms and conditions as may be
determined by the Compensation Committee. Participants may be entitled to
voting, dividend and other voting rights prior to the vesting of shares.
401(K) PLAN
The Company has a 401(k) defined contribution plan under which employees may
contribute up to 15% of eligible gross wages subject to certain IRS limitations.
The Company, at its option, may match a portion of each eligible employee's
contribution. Contributions are made at the discretion of the Board of
Directors. Employer contributions vest 20% after the first year, 60% after the
second year and 100% after the third year. The Company incurred expenses of
$68,000 and $80,000 related to this plan for the years ended December 31, 1995
and 1994, respectively.
The Company does not provide any post-retirement or post-employment health
or welfare benefits to any of its employees, except as required by law.
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<PAGE>
CERTAIN TRANSACTIONS
SUBORDINATED NOTES AND REDEEMABLE PREFERRED STOCK
Since 1991, the Company has borrowed funds for its operation from Acadia
pursuant to the Subordinated Notes. On June 30, 1996, $101.3 million was
outstanding. The Subordinated Notes bear interest at a rate of 12% per annum,
payable through the issuance of additional Subordinated Notes, and mature on
December 31, 2001. A portion of the proceeds of this Offering will be used to
pay down principal and accrued interest on the Subordinated Notes. See "Use of
Proceeds." In addition, in 1993 Acadia was issued 4,025 shares of Redeemable
Preferred Stock in partial consideration for funding and consent to the
acquisition of MLM. The Subordinated Notes not repaid with the proceeds of this
Offering, together with the shares of Redeemable Preferred Stock owned by
Acadia, will be converted into shares of Common Stock. See "The
Company--Recapitalization."
CONSULTING AGREEMENTS
Pursuant to a Consulting Agreement dated as of October 1, 1991 between the
Company and Penobscot-MB Partners, a New York general partnership ("Penobscot")
(as amended on November 1, 1992 the "Penobscot Consulting Agreement"), the
Company paid fees to Penobscot equal to $250,000 per year in 1994, 1995 and 1996
for management services performed for the Company by Penobscot. Penobscot, a
Delaware limited partnership, is an affiliate of Acadia. The Penobscot
Consulting Agreement terminated on July 30, 1996 and the Company has no further
obligations thereunder.
Pursuant to a Consulting Agreement dated as of November 1, 1992 between the
Company and Haas, Wheat & Partners Incorporated, a Delaware corporation ("Haas
Wheat") (as amended on July 30, 1993, the "Haas Wheat Consulting Agreement"),
the Company paid fees to Haas Wheat equal to $250,000 per year in 1994, 1995 and
1996 for management services performed for the Company by Haas Wheat. Douglas D.
Wheat, a director of the Company, is a managing partner of Haas Wheat. The Haas
Wheat Consulting Agreement terminated on July 30, 1996 and the Company has no
further obligations thereunder.
MLM SETTLEMENT
On July 30, 1993, the Company acquired, in exchange for issuance of shares
of its Class B Common Stock and Senior Preferred Stock, all the issued and
outstanding capital stock of MLM (the "1993 MLM Acquisition"). Simultaneously
with the issuance of shares to the former MLM stockholders, 4,025 shares of
Redeemable Preferred Stock was issued to Acadia in partial consideration for
additional funding and consent to the 1993 MLM Acquisition. Assets acquired
(including cash of $68,000) and liabilities assumed were $13,164,000 and
$8,557,000, respectively, which resulted in an assigned value of $4,607,000 for
the Class B common stock and Senior Preferred Stock issued to the former MLM
stockholders. Pursuant to consulting agreements entered into in connection with
the 1993 MLM Acquisition, the Company paid the former MLM stockholders an
aggregate of $3.0 million.
After the 1993 MLM Acquisition was consummated, the Company and the former
MLM stockholders disagreed as to the proper interpretation of a provision in the
agreement to effect the 1993 MLM Acquisition (the "1993 Agreement") concerning
the treatment of certain pre-acquisition liabilities owed to MLM to the Company.
To resolve the parties' differing understandings as to the effects of the 1993
Agreement, in September 1995, all of the parties agreed to a settlement (the
"1995 MLM Settlement") through which the 1993 MLM Acquisition was reformed.
Under the 1995 MLM Settlement, the former MLM stockholders returned to Pinnacle
for cancellation all of the preferred and common shares of Pinnacle stock
originally issued to them as consideration in the 1993 MLM Acquisition and the
parties exchanged releases.
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REGISTRATION RIGHTS
Following this Offering, Acadia will be entitled to require the Company to
register all or part of Acadia's shares of Common Stock (the "Acadia Shares")
under the Securities Act in accordance with an agreement with the Company
providing for demand, shelf and piggyback registration rights. Certain
stockholders have been granted "piggyback" registration rights.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
to be sold pursuant to the Offering with respect to (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii) the
Selling Stockholder, (iii) each director of the Company, (iv) each of the
executive officers named in the Summary Compensation Table, and (v) all
directors and executive officers of the Company as a group. The table assumes
that the Underwriters' over-allotment option is not exercised and is based on an
assumed initial offering price of $15 per share, the midpoint of the initial
public offering price range, and gives effect to the recapitalization.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING OWNED AFTER OFFERING
NAME AND ADDRESSES --------------------- SHARES BEING ---------------------
OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Acadia Partners, L.P.
201 Main Street
Fort Worth, Texas 76102...... 7,128,960(a) 92.71% 7,128,960(a) 60.98%
Bradford E. Bernstein.......... -- * -- *
Daniel L. Doctoroff............ -- (b) * -- (b) *
Douglas D. Wheat............... 53,530(c) * 53,530(c) *
Jerry M. Meyer................. 713,239(d) 8.58 713,239(d) 5.79
Michael J. Cleary.............. 334,007(d) 4.16 334,007(d) 2.78
John S. Worth.................. 159,317(d) 2.03 159,317(d) 1.34
James Brochhausen.............. 159,317(d) 2.03 159,317(d) 1.34
All directors and executives as
a group (7 persons).......... 1,419,410 15.58 1,419,410 10.83
</TABLE>
--------------------
<TABLE>
<C> <S>
* Less than 1%.
(a) Includes 11,189 shares of Common Stock held by Acadia Electra Partners, L.P.
("Acadia Electra"). Acadia is the general partner of Acadia Electra. The general
partner of Acadia Partners, L.P. is Acadia FW Partners, L.P. ("Acadia FW"), the
managing general partner of which is Acadia MGP, Inc. ("Acadia MGP"), a corporation
controlled by J. Taylor Crandall. As such, Acadia FW, Acadia MGP and Mr. Crandall
may be deemed to beneficially own the shares of the Common Stock held by Acadia.
Excludes 220,525 shares of Common Stock held by Rosecliff-Score 1991 Partners, L.P.
("Rosecliff-Score") and 220,525 shares of Common Stock held by FWHY-Coinvestments IV
Partners, L.P. ("FWHY-IV") and the general partner of Rosecliff-Score is Steven B.
Gruber, who is also an officer and director of Acadia MGP. The general partner of
FWHY-IV is Bondo FTW, Inc. ("Bondo FTW"), a corporation controlled by David
Bonderman. Bondo FTW is the general partner of FW-HY Partners, L.P., one of two non-
managing general partners of Acadia FW. Acadia disclaims beneficial ownership of the
shares of Common Stock held by Rosecliff-Score FWHY-IV. The address of Acadia FW,
Acadia MGP, FWHY-IV, Acadia Electra and Mr. Crandall is 201 Main Street, Suite 3100,
Fort Worth, Texas 76102, The address of Bondo FTW, FW-HY Partners, L.P. and Mr.
Bonderman is 201 Main Street, Suite 2420, Fort Worth, Texas 76102. The address of
Rosecliff-Score and Mr. Gruber is 65 East 55th Street, New York, New York
10022-3219.
(b) Mr. Doctoroff is a director of Acadia MGP (see footnote (a) above). Mr. Doctoroff
disclaims beneficial ownership of the shares of Common Stock held by Acadia.
(c) Represents options held by Haas Wheat & Partners, Incorporated, of which Mr. Wheat
is President.
(d) Represents options to purchase shares of Common Stock at $2.49 per share.
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
At June 30, 1996, the outstanding capital stock of the Company consisted of
(i) 20,739.10589 shares of Class A Common Stock and (ii) 4,025 shares of
Redeemable Preferred Stock, par value $.01 per share, without giving effect to
the recapitalization. See "Capitalization." Simultaneously with the closing of
this Offering, all of the outstanding shares of Redeemable Preferred Stock will
be converted into shares of Common Stock. Upon completion of the Offering and
after giving effect to the recapitalization, the authorized capital stock will
consist of (i) 20,000,000 shares of Common Stock (of which 11,689,726 will be
outstanding) and (ii) 2,000,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock") (none of which will be outstanding). See "The
Company-- Recapitalization."
The following summary description relating to the capital stock does not
purport to be complete. Reference is made to the Certificate of Incorporation
that will be in effect upon the completion of the Offering which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part for a
detailed description of the provisions thereof summarized below.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may from
time to time be declared by the Board of Directors of the Company out of funds
legally available therefor. Holders of Common Stock are entitled to one vote per
share on all matters on which the holders of Common Stock are entitled to vote
and do not have any cumulative voting rights. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding Preferred Stock. The outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby when
issued will be, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of the Preferred Stock or any class or
series of preferred stock which the Company may issue in the future.
At present, there is no established trading market for the Common Stock. The
Common Stock has been approved for listing on the New York Stock Exchange,
subject to official notice of issuance, under the symbol "PNE".
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock. There is no Preferred Stock outstanding as of the date of this
Prospectus. The Board of Directors of the Company may, without further
stockholder action, issue the authorized and unissued shares of Preferred Stock
in any number of series and may establish as to each series the designation and
number of shares to be issued and the relative rights and preferences of the
shares of each series, including provisions regarding voting powers, redemption,
dividend rights, rights upon liquidation and conversion rights. The issuance of
Preferred Stock by the Board of Directors could adversely affect the rights of
holders of shares of Common Stock by, among other matters, establishing
preferential dividends, liquidation rights and voting power. Although the
Company has no present intention to do so, Preferred Stock could be issued to
discourage or defeat efforts to acquire control of the Company through the
acquisition of shares of Common Stock.
DELAWARE LAW, CHARTER AND BY-LAW PROVISIONS
Section 203 of the Delaware General Corporation Law (the "DGCL") prohibits
certain business combinations with certain stockholders for a period of three
years after they acquire 15% of the
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outstanding voting stock of a corporation. The Company has expressly elected not
to be governed by Section 203 of the DGCL.
The Certificate of Incorporation and By-Laws of the Company to be adopted
upon completion of the Offering will (i) prohibit the stockholders of the
Company from taking action by written consent in lieu of a meeting by less than
unanimous written consent and (ii) provide that special meetings of stockholders
may be called only by the Board of Directors. Such provisions could have the
effect of discouraging attempts by others to obtain control of the Company or
delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
CREDIT AGREEMENT
Set forth below is a summary description of the terms of the Credit
Agreement. The following summary does not purport to be complete and is
qualified in its entirety by reference to the Credit Agreement, including the
definitions of certain terms therein, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Whenever particular provisions of the Credit Agreement are referred to herein,
such provisions are incorporated herein by reference, and the statements are
qualified in their entirety by such reference.
A syndicate of banks and other financial institutions have provided Pinnacle
Trading Card Company, Pinnacle's principal operating subsidiary ("Pinnacle
Trading"), with loans under the Credit Agreement in an aggregate principal
amount not to exceed $103.0 million of which (i) $88.0 million is in the form of
term loans and (ii) up to $15.0 million (including a sub-limit of $3.0 million
for letters of credit), depending upon the available Borrowing Base (as defined
therein), will be available on a revolving credit basis for general corporate
purposes of Pinnacle Trading, including certain acquisitions (up to $10.0
million).
The loans consist of (a) senior secured term loan facilities consisting of
(i) a senior secured five-year term loan facility providing for term loans in
the amount of $40.0 million (the "Term Loan A") and (ii) a senior secured
six-year term loan facility providing for term loans in the amount of $48.0
million (the "Term Loan B" and together with the Term Loan A, the "Term Loans")
and (b) a senior secured five-year revolving credit facility (which may, subject
to certain terms and conditions, be extended to a six-year revolving credit
facility) providing for revolving loans and the issuance of letters of credit in
the aggregate principal amount of $15.0 million (the "Revolving Credit
Facility"). Subject to the terms of the Revolving Credit Facility, Pinnacle
Trading may, from time to time, borrow, repay and reborrow under such facility.
Amounts borrowed under the Revolving Credit Facility are not subject to
scheduled repayment prior to the Revolving Credit Commitment Termination Date
(as defined in the Credit Agreement); however, Pinnacle Trading is required to
reduce the outstanding payment balance of the Revolving Credit Facility to $4.0
million if Pinnacle Trading has not consummated any Related Business Acquisition
(as defined in the Credit Agreement) or to $4.0 million plus the aggregate
principal amount of revolving loans outstanding (but not to exceed $6.0 million)
the proceeds of which were used to fund such acquisition if Pinnacle Trading has
consummated any such acquisition for a consecutive 30-day period during the
150-day period beginning April 1, 1997 and during the second quarter of each
fiscal year beginning in 1998.
The Term Loans will have quarterly amortization payments commencing
September 30, 1996 and continuing over their respective terms. See Note 17 to
the Consolidated Financial Statements. Under the Credit Agreement, Pinnacle will
under certain circumstances be required to make mandatory
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<PAGE>
prepayments (including in connection with this Offering) and be subject to
corresponding commitment reductions and may make optional prepayments and
commitment reductions.
Obligations of Pinnacle under the Credit Agreement are jointly and severally
guaranteed by Pinnacle and its other subsidiaries. In addition, the Credit
Agreement is secured by (i) first priority security interests in virtually all
tangible and intangible assets of Pinnacle Trading, Pinnacle and its other
subsidiaries, and (ii) pledges of all capital stock of Pinnacle Trading and
Pinnacle's other subsidiaries, and all capital stock and all notes owned by
Pinnacle Trading, Pinnacle and its other subsidiaries.
Each of the Term Loans and advances under the Revolving Credit Facility bear
interest at specified margins over the applicable eurodollar rate or base rate.
The Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, incur guarantee obligations, repay other indebtedness
or amend other debt instruments, pay dividends, create liens on assets, enter
into leases, form or acquire subsidiaries, make investments, make acquisitions,
engage in mergers or consolidations, make capital expenditures, modify certain
documents or engage in certain transactions with subsidiaries and affiliates and
otherwise restrict corporate activities. In addition, the Credit Agreement
requires compliance with certain financial tests based on consolidated results
for Pinnacle and its subsidiaries.
Under the terms of the Credit Agreement, the Company was required to seek,
and has obtained, a waiver from the banks party thereto regarding the repayment
of certain subordinated indebtedness concurrently with this Offering. See "Use
of Proceeds."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding
11,689,726 shares of Common Stock. Of these shares, the 4,000,000 shares of
Common Stock sold in the Offering (or a maximum of 4,600,000 shares if the
over-allotment option is exercised in full) will be freely tradeable without
restriction under the Securities Act, unless purchased by "affiliates" of the
Company (as that term is defined in Rule 144). The remaining shares of Common
Stock outstanding upon completion of the Offering will be "restricted
securities" as that term is defined in Rule 144 ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 under the Securities
Act, which is summarized below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock that constitute restricted securities and have been outstanding and
not held by any "affiliate" of the Company for a period of two years may sell,
within any three-month period, a number of shares that does not exceed the
greater of one percent of the then outstanding shares of Common Stock or the
average weekly reported trading volume of the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is given,
provided certain requirements as to the manner of sale, notice of sale and the
availability of current public information are satisfied (which requirements as
to the availability of current public information are expected to be satisfied
commencing 90 days after the date of this Prospectus). Affiliates of the Company
must comply with the foregoing restrictions and requirements of Rule 144 as to
both restricted and non-restricted securities, except that the two-year holding
period requirement does not apply to shares of Common Stock that are not
"restricted securities" (such as shares acquired by affiliates in the Offering).
Under Rule 144(k), a person who is not deemed an "affiliate" of the Company at
any time during the three months preceding a sale by such person, and who has
beneficially owned shares of Common Stock that were not acquired from the
Company or an "affiliate" of the Company within the previous three years, would
be entitled to sell such shares without regard to volume limitation, manner of
sale provisions, notification requirements or the availability of current public
information concerning the Company. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer.
The Company, the directors, officers, affiliates and current stockholders of
the Company have entered into contractual "lock-up" agreements providing that
they will not offer, sell, contract to sell or otherwise dispose of the shares
of Common Stock, except for the shares offered hereby and subject to certain
exceptions in the case of the Company relating to employee stock options and the
recapitalization of the Company, or securities convertible into or exchangeable
or exercisable for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch. In addition,
certain individuals purchasing reserved shares may be required to agree not to
sell, offer or otherwise dispose of any shares of Common Stock for a period of
three months after the date of this Prospectus. Acadia and certain of the
Company's stockholders have the right to require registration of their shares
for public sale. See "Certain Transactions --Registration Rights." The remainder
of the shares held by existing stockholders will become eligible for sale at
various times thereafter, subject to the provisions of Rule 144.
Prior to the Offering, there has been no public market for the Common Stock.
No predictions can be made as to the effect, if any, that future sales of shares
of Common Stock, and options to acquire shares of Common Stock, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock in the public
market, or the perception that such sales may occur, could have a material
adverse effect on the market price of the Common Stock.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company and the Selling Stockholder have agreed to
sell to each of the Underwriters named below, and each of the Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated and CS First Boston
Corporation are acting as representatives (the "Representatives"), has severally
agreed to purchase, the respective number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
CS First Boston Corporation.....................................
---------
Total................................................ 4,000,000
---------
---------
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the shares of Common
Stock hereby if any of such shares are purchased. In the event of a default by
an Underwriter, the Purchase Agreement provides that, in certain circumstances,
such commitments of the non-defaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
The Representatives of the Underwriters have advised the Company and the
Selling Stockholder that they propose initially to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Selling Stockholder has granted the Underwriters an option, which may be
exercised within 30 days of the date of this Prospectus, to purchase up to an
additional 600,000 shares of Common Stock to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount. To the extent
that the Underwriters exercise the option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of such shares that the number of shares of Common Stock to be
purchased by it shown on the foregoing table bears to the total number of shares
initially offered hereby.
At the request of the Company, the Underwriters have reserved up to
approximately 3.5% of the shares of the Common Stock offered hereby for sale at
the public offering price to certain directors, officers and employees of the
Company, business affiliates and related persons who have expressed an interest
in purchasing shares. The number of shares available to the general public will
be reduced to the extent persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same terms as other shares offered by this Prospectus. Certain
individuals purchasing reserved shares may be required to agree not to sell,
offer or otherwise dispose of any shares of Common Stock for a period of three
months after the date of this Prospectus.
53
<PAGE>
The Selling Stockholder has agreed to indemnify the Underwriters for any
loss arising from the failure of any purchaser of reserved shares to complete
such purchase.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that the Underwriters do not
intend to make sales to discretionary accounts.
The Company, its officers and directors, and the Company's current
stockholders have agreed not to sell, contract to sell or otherwise transfer or
dispose of any shares of Common Stock of the Company for a period of 180 days
after the date of this Prospectus without the prior written consent of Merrill
Lynch. See "Shares Eligible for Future Sale."
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "PNE". To meet the requirements of
listing the Common Stock on the exchange, the Underwriters will undertake to
sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.
Prior to this Offering, there has been no market for the Common Stock of the
Company. Accordingly, the initial public offering price will be determined by
negotiation among the Company, Acadia Partners, L.P. and the Representatives.
Among the factors to be considered in determining the initial public offering
price are the Company's record of operations, the Company's current financial
condition, its future prospects, the present state of the Company's industry in
general, the experience of its management, the general condition of the equity
securities market and the demand for similar securities of companies considered
comparable to the Company and other relevant factors. The initial public
offering price set forth on the cover page of this Prospectus should not,
however, be considered an indication of the actual value of the Common Stock.
Such price is subject to change as a result of market conditions and other
factors. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
Merrill Lynch is one of the Company's lenders under the Credit Agreement and
will receive a portion of the proceeds of this Offering in connection therewith.
See "Use of Proceeds."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain legal
matters will be passed upon for the Company by Kaye, Scholer, Fierman, Hays &
Handler, LLP, New York, New York and for the Underwriters by Shearman &
Sterling, New York, New York.
EXPERTS
The consolidated financial statements and schedules included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon said firm as experts in giving said
reports.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement, which may be inspected,
without charge, at the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its New York
Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048
and its Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, upon
payment of prescribed fees.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent
accounting firm and quarterly reports containing unaudited consolidated
financial information for each of the first three fiscal quarters of each fiscal
year of the Company.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PINNACLE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996, and December
31, 1995............................................................................. F-2
For the Six Months Ended June 30, 1996 and 1995:
Unaudited Condensed Consolidated Statement of Operations......................... F-3
Unaudited Condensed Consolidated Statement of Cash Flows......................... F-4
Notes to Unaudited Condensed Consolidated Financial Statements..................... F-5
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................... F-7
Consolidated Balance Sheets as of December 31, 1995 and 1994....................... F-8
For the Years Ended December 31, 1995, 1994, and 1993:
Consolidated Statement of Operations............................................. F-9
Consolidated Statement of Stockholders' Investment............................... F-10
Consolidated Statement of Cash Flows............................................. F-11
Notes to Consolidated Financial Statements......................................... F-12
</TABLE>
F-1
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 222,000 $ 240,000
Accounts receivable, net.................................... 22,236,000 35,862,000
Inventories................................................. 16,893,000 10,503,000
Other current assets........................................ 7,815,000 1,312,000
------------- ------------
Total current assets.................................... 47,166,000 47,917,000
PROPERTY AND EQUIPMENT, net................................... 4,145,000 3,727,000
INTANGIBLE AND OTHER ASSETS, net.............................. 77,985,000 36,477,000
------------- ------------
$ 129,296,000 $ 88,121,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable............................................ $ 11,449,000 $ 12,224,000
Accrued liabilities......................................... 19,673,000 15,100,000
Current maturities of long-term debt........................ 4,573,000 13,243,000
------------- ------------
Total current liabilities............................... 35,695,000 40,567,000
------------- ------------
LONG-TERM DEBT, net of current maturities..................... 91,745,000 33,615,000
SUBORDINATED NOTES PAYABLE TO MAJORITY STOCKHOLDER............ 101,348,000 103,814,000
COMMITMENTS AND CONTINGENCIES
COMMON STOCK AND COMMON STOCK EQUIVALENTS SUBJECT TO PUT
AGREEMENT..................................................... 3,000,000 3,000,000
STOCKHOLDERS' INVESTMENT:
Senior preferred stock; $.01 par value; $100,000 per share
liquidation preference; 50 shares authorized; 0 shares
issued and outstanding.................................... -- --
Preferred stock; $.01 par value; $1,000 per share
liquidation preference; 4,025 shares authorized, issued
and outstanding............................................... 40 40
Class A common stock; $.01 par value; 80,000 shares
authorized; 20,739 shares issued and outstanding.............. 207 207
Class B common stock; $.01 par value; 30,000 shares
authorized; 0 shares issued and outstanding................... -- --
Paid-in capital............................................. 5,497,753 5,497,753
Accumulated deficit......................................... (107,990,000) (98,373,000)
------------- ------------
Total stockholders' investment.......................... (102,492,000) (92,875,000)
------------- ------------
$ 129,296,000 $ 88,121,000
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
<S> <C> <C>
1996 1995
----------- -----------
NET SALES........................................................ $49,905,000 $41,879,000
COST OF SALES.................................................... 34,503,000 29,548,000
----------- -----------
Gross profit............................................... 15,402,000 12,331,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..................... 15,659,000 11,480,000
----------- -----------
Operating income (loss).................................... (257,000) 851,000
NONOPERATING INCOME (EXPENSE):
Interest expense--subordinated notes payable................... (6,034,000) (5,524,000)
Interest expense--other........................................ (3,521,000) (2,581,000)
Other income, net.............................................. 195,000 42,000
----------- -----------
Nonoperating expense, net.................................. (9,360,000) (8,063,000)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................................ (9,617,000) (7,212,000)
INCOME TAX PROVISION............................................. -- --
----------- -----------
NET LOSS......................................................... $(9,617,000) $(7,212,000)
----------- -----------
----------- -----------
PRO FORMA NET LOSS .............................................. $(1,453,000) $ (29,000)
----------- -----------
----------- -----------
PRO FORMA NET LOSS PER SHARE..................................... $ (0.11) $ --
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
<S> <C> <C>
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $ (9,617,000) $ (7,212,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization.............................. 2,722,000 2,128,000
Interest added to long-term debt........................... 6,034,000 5,524,000
Change in assets and liabilities-
Accounts receivable, net................................. 13,627,000 4,368,000
Inventories.............................................. (6,390,000) (3,754,000)
Other current assets..................................... (6,505,000) (1,293,000)
Accounts payable......................................... (1,619,000) (4,552,000)
Accrued liabilities...................................... 5,418,000 338,000
Intangible and other assets.............................. (293,000) (1,312,000)
------------ ------------
Net cash provided by (used in) operating activities.... 3,377,000 (5,765,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (940,000) (241,000)
Purchases of sports trading card licenses and tradenames..... (40,950,000) (3,025,000)
------------ ------------
Net cash used in investing activities.................. (41,890,000) (3,266,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated notes payable to majority
stockholder.................................................... -- 2,000,000
Payments on subordinated notes payable to majority
stockholder.................................................... (8,500,000) --
Proceeds from long-term debt................................. 101,300,000 50,973,000
Payments on long-term debt................................... (54,305,000) (46,218,000)
------------ ------------
Net cash provided by financing activities.............. 38,495,000 6,755,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................... (18,000) (2,276,000)
CASH AND CASH EQUIVALENTS, beginning of period................. 240,000 2,847,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period....................... $ 222,000 $ 571,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying interim condensed consolidated financial statements of
Pinnacle Brands, Inc. and its subsidiaries (collectively, the Company or
Pinnacle) as of June 30, 1996, and for the six months ended June 30, 1996 and
1995, are unaudited. Certain information and footnote disclosures normally
prepared in accordance with generally accepted accounting principles have been
either condensed or omitted pursuant to the rules of the Securities and Exchange
Commission. Although the Company believes these interim statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows, interim period results are not necessarily indicative of the results of
operations for a full year. As such, these financial statements should be read
in conjunction with the consolidated financial statements and the related notes
thereto for the year ended December 31, 1995, included elsewhere in this
Prospectus.
2. LONG-TERM DEBT:
In May 1996, the Company refinanced substantially all of its long-term debt.
The proceeds from this refinancing were used to retire existing senior bank
obligations, repay $8.5 million of subordinated notes payable to Acadia, and to
acquire licenses and tradenames from Donruss Trading Cards, Inc. (see Note 3
below). The refinanced credit facilities include a $15.0 million revolving
credit commitment and $88.0 million of term loans. Total availability under the
revolving credit commitment is limited to 80% of eligible accounts receivable
and 50% of eligible inventory, both as defined in the credit agreement.
Outstanding borrowings under the credit facilities bear interest at optional
rates based on the prime rate or LIBOR. A commitment fee is payable on unused
amounts under the revolving credit facility. All outstanding borrowings under
the revolving credit commitment are payable on May 27, 2001 (extendable to May
27, 2002 under certain conditions), and the term loans are payable in 16
quarterly payments of $0.5 million and then 4 quarterly payments of $8.0 million
through May 28, 2001, on $40.0 million of term loans and in 20 quarterly
payments of $0.5 million and then 4 quarterly payments of $9.5 million through
May 28, 2002, on the other $48.0 million of term loans, plus additional annual
payments, beginning in 1997, based upon 50% of any excess cash flows (as
defined) generated during each preceding calendar year. The credit agreement
contains covenants requiring the maintenance of certain minimum financial ratios
and limitations on dividend payments and the issuance of equity securities. The
credit facilities are collateralized by substantially all assets of the Company.
In connection with the senior bank debt refinancing described above, during
May 1996, the maturity dates of all principal and interest payable under the
subordinated notes and the convertible subordinated notes were extended, by
agreement of the noteholders, to December 31, 2001.
3. ACQUISITION OF DONRUSS SPORTS TRADING CARD LICENSES AND TRADENAMES:
In May 1996, the Company acquired from Donruss Trading Cards, Inc. (Donruss)
the right to use the tradenames "Donruss" and "Leaf" and Donruss' licenses
through which it produces certain baseball and hockey trading card products.
There are no historical financial statements for Donruss included in the
Company's financial statements because (1) there is no continuity of the
seller's operations, (2) the Company's strategy for generating revenues from
the acquired licenses and tradenames will be different (i.e., the Company
positions the trading cards as collectibles and sells them through a dedicated
sales force to the Company's existing customer base under its existing customer
payment and sales terms), and (3) no physical facilities, distribution systems,
production techniques, customer base, or significant sales force were carried
over, and therefore this transaction did not constitute the acquisition of a
business as defined under the rules and regulations of the Securities and
Exchange Commission. Consideration given to Donruss included $32.5 million in
cash plus the assumption of various contracts with certain professional athletes
and other obligations. In connection with this transaction, the Company recorded
$41.0
F-5
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF DONRUSS SPORTS TRADING CARD LICENSES AND
TRADENAMES:--(CONTINUED)
million attributable to the licenses and tradenames which will be amortized over
35 years. The Company concurrently purchased certain prepaid expenses and
work-in-process inventory, and assumed certain related trade payables.
4. OPERATING LEASES:
At the expiration in October 1996 of the term of its current lease, the
Company intends to move its corporate headquarters to Dallas, Texas. The new
lease has a seven year term with annual lease payments of approximately $0.8
million which approximate the annual leasehold costs on the current corporate
headquarters lease.
5. SUBSEQUENT EVENTS:
Recapitalization and Initial Public Offering
The Company has filed a registration statement with the Securities and
Exchange Commission pursuant to an initial public offering (the Offering)
whereby 4,000,000 shares are to be sold at an assumed initial public offering
price of $15 per share, the midpoint of the initial public offering price range.
Immediately prior to the completion of the Offering, (1) the Company will change
its authorized capital to include 20,000,000 shares of Common Stock, (2) the
Company will declare a 103.96-for-1 stock split, (3) the majority stockholder
will convert all but $33.0 million of its subordinated notes payable and all
4,025 shares of its preferred stock into 5,499,863 shares of Common Stock, and
(4) the Company will grant options to purchase 1,400,988 shares of Common Stock
at $2.49 per share and will award 33,837 shares of Common Stock under a
newly-adopted restricted stock plan.
Pro Forma Information
Of the assumed net proceeds from the sale of shares of Common Stock offered
by the Company in the Offering, approximately $22.0 million will be used to
repay senior bank borrowings and $33.0 million will be used to repay
subordinated notes payable to majority stockholder. Pro forma net income per
common share is calculated using the weighted average number of shares of Common
Stock outstanding during the period (after giving effect to (i) the conversion
of subordinated notes payable and preferred stock referred to above, (ii)
assuming the issuance and sale of 4,000,000 shares of Common Stock and
application of the proceeds, as described, as if these transactions had occurred
on January 1, 1995, (iii) decreased selling, general and administrative expenses
related to management and consulting fees offset by increased salaries to senior
management under new employment agreements, and (iv) tax benefits on the
resulting pro forma net losses before taxes), plus options granted prior to the
Offering to purchase Common Stock at $2.49 per share and Common Stock to be
awarded under a newly-adopted restricted stock plan, assuming all such Common
Stock was outstanding for all periods presented. For purposes of this
computation, the weighted average number of shares of Common Stock outstanding
during each of the periods ended June 30, 1996 and 1995, is 13,090,714.
Recent Legal Proceedings
In August 1996, the Company was named in a lawsuit alleging that certain
standard business practices in the sports trading card industry, including the
practice of randomly inserting chase cards in packages of sports trading cards,
constitute illegal gambling activities in violation of, among other things, the
Racketeer Influenced and Corrupt Organizations Act (RICO). The Company's major
competitors have also been named in similar lawsuits. Inherently, the outcome of
litigation is uncertain. In the opinion of the Company, the action lacks
substantial merit and the Company intends to defend its vigorously.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pinnacle Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Brands, Inc. (formerly Grand Slam Acquisition Corp., a Delaware corporation) and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' investment, and cash flows for each of
the three years in the period ended December 31, 1995. 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 Pinnacle Brands, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 12, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," on January 1, 1993.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 7, 1996 (except with respect
to the matters discussed in Note 17,
as to which the date is August 30, 1996)
F-7
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 240,000 $ 2,847,000
Accounts receivable, net of allowance for uncollectible
accounts of $260,000 and $209,000, respectively............ 35,862,000 20,024,000
Inventories.................................................. 10,503,000 6,681,000
Other current assets......................................... 1,312,000 1,274,000
------------ ------------
Total current assets..................................... 47,917,000 30,826,000
------------ ------------
PROPERTY AND EQUIPMENT, net.................................... 3,727,000 5,131,000
INTANGIBLE AND OTHER ASSETS, net............................... 36,477,000 34,363,000
------------ ------------
$ 88,121,000 $ 70,320,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable............................................. $ 12,224,000 $ 8,613,000
Accrued liabilities.......................................... 15,100,000 13,416,000
Current maturities of long-term debt......................... 13,243,000 3,810,000
------------ ------------
Total current liabilities................................ 40,567,000 25,839,000
------------ ------------
LONG-TERM DEBT, net of current maturities...................... 33,615,000 41,616,000
SUBORDINATED NOTES PAYABLE TO MAJORITY STOCKHOLDER............. 103,814,000 90,288,000
COMMITMENTS AND CONTINGENCIES
COMMON STOCK AND COMMON STOCK EQUIVALENTS SUBJECT TO PUT
AGREEMENT...................................................... 3,000,000 3,000,000
STOCKHOLDERS' INVESTMENT:
Senior preferred stock; $.01 par value; $100,000 per share
liquidation preference; 50 shares authorized; 0 and 24
shares issued and outstanding, respectively................ -- 1
Preferred stock; $.01 par value; $1,000 per share liquidation
preference; 4,025 shares authorized, issued and outstanding.... 40 40
Class A common stock; $.01 par value; 80,000 shares
authorized; 20,739 and 18,505 shares issued and
outstanding, respectively...................................... 207 185
Class B common stock; $.01 par value; 30,000 shares
authorized; 0 and 14,118 shares issued and outstanding,
respectively................................................... -- 141
Paid-in capital.............................................. 5,497,753 5,497,633
Accumulated deficit.......................................... (98,373,000) (95,921,000)
------------ ------------
Total stockholders' investment........................... (92,875,000) (90,423,000)
------------ ------------
$ 88,121,000 $ 70,320,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-8
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES........................................ $130,183,000 $117,965,000 $ 62,501,000
COST OF SALES.................................... 90,388,000 78,013,000 41,000,000
------------ ------------ ------------
Gross profit............................... 39,795,000 39,952,000 21,501,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 26,310,000 23,506,000 20,972,000
UNUSUAL CHARGES:
Sports League work stoppages................... -- 7,366,000 --
Write-down of goodwill......................... -- 40,000,000 --
Related to MLM................................. -- -- 41,435,000
------------ ------------ ------------
Operating income (loss).................... 13,485,000 (30,920,000) (40,906,000)
NONOPERATING INCOME (EXPENSE):
Interest expense--subordinated notes payable... (11,526,000) (9,307,000) (7,198,000)
Interest expense--all other.................... (5,068,000) (4,509,000) (4,180,000)
Other income, net.............................. 657,000 730,000 72,000
------------ ------------ ------------
Nonoperating expense, net.................. (15,937,000) (13,086,000) (11,306,000)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
THE ADOPTION OF A NEW ACCOUNTING PRINCIPLE..... (2,452,000) (44,006,000) (52,212,000)
INCOME TAX PROVISION............................. -- -- --
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF THE ADOPTION OF
A NEW ACCOUNTING PRINCIPLE..................... (2,452,000) (44,006,000) (52,212,000)
CUMULATIVE EFFECT OF THE ADOPTION OF A NEW
ACCOUNTING PRINCIPLE............................. -- -- 3,926,000
------------ ------------ ------------
NET LOSS......................................... $ (2,452,000) $(44,006,000) $(56,138,000)
------------ ------------ ------------
------------ ------------ ------------
PRO FORMA NET INCOME PER SHARE................... $ 0.63
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
SENIOR
PREFERRED PREFERRED CLASS A CLASS B
STOCK STOCK COMMON STOCK COMMON STOCK
------------- ------------- ------------- -------------- RETAINED
NUMBER NUMBER NUMBER NUMBER EARNINGS TOTAL
OF PAR OF PAR OF PAR OF PAR PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL DEFICIT) INVESTMENT
------ ----- ------ ----- ------ ----- ------- ----- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992.................... -- $-- -- $-- 15,018 $ 150 -- $-- $ 3,890,850 $ 4,223,000 $ 8,114,000
Issuance of stock in
connection with the
1993 MLM
Acquisition............. 24 1 -- -- -- -- 14,118 141 4,606,858 -- 4,607,000
Issuance of preferred
stock to majority
stockholder at time
of the 1993 MLM
Acquisition............. -- -- 4,025 40 -- -- -- -- (40) -- --
Issuance of put rights
on common stock and
common stock
equivalents............. -- -- -- -- -- -- -- -- (3,000,000) -- (3,000,000)
Net loss............... -- -- -- -- -- -- -- -- -- (56,138,000) (56,138,000)
--
----- ------ ----- ------ ----- ------- ----- ----------- ------------ -------------
BALANCE, December 31,
1993.................... 24 1 4,025 40 15,018 150 14,118 141 5,497,668 (51,915,000) (46,417,000)
Issuance of stock in
connection with
conversion of
subordinated notes
payable and preferred
stock................... -- -- -- -- 3,487 35 -- -- (35) -- --
Net loss............... -- -- -- -- -- -- -- -- -- (44,006,000) (44,006,000)
--
----- ------ ----- ------ ----- ------- ----- ----------- ------------ -------------
BALANCE, December 31,
1994.................... 24 1 4,025 40 18,505 185 14,118 141 5,497,633 (95,921,000) (90,423,000)
Issuance of stock in
connection with
conversion of
subordinated notes
payable and preferred
stock................... -- -- -- -- 2,234 22 -- -- (22) -- --
Cancellation of stock
in connection with
the 1995 MLM
Settlement.............. (24) (1) -- -- -- -- (14,118) (141) 142 -- --
Net loss............... -- -- -- -- -- -- -- -- -- (2,452,000) (2,452,000)
--
----- ------ ----- ------ ----- ------- ----- ----------- ------------ -------------
BALANCE, December 31,
1995.................... -- $-- 4,025 $ 40 20,739 $ 207 -- $-- $ 5,497,753 $(98,373,000) $ (92,875,000)
--
--
----- ------ ----- ------ ----- ------- ----- ----------- ------------ -------------
----- ------ ----- ------ ----- ------- ----- ----------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (2,452,000) $(44,006,000) $(56,138,000)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................ 4,222,000 6,657,000 7,649,000
Write-down of goodwill....................... -- 40,000,000 --
Interest added to subordinated notes payable
to majority stockholder.................... 11,526,000 9,307,000 7,198,000
Cumulative effect of the adoption of a new
accounting principle............................. -- -- 3,926,000
Change in assets and liabilities, net of
acquired balances-
Accounts receivable, net................... (15,838,000) (2,186,000) 26,016,000
Inventories................................ (3,822,000) (2,534,000) 2,487,000
Other current assets....................... (38,000) 1,116,000 2,011,000
Accounts payable........................... 3,611,000 1,822,000 727,000
Accrued liabilities........................ 1,684,000 (12,619,000) (2,049,000)
Income taxes receivable.................... -- -- 703,000
Intangible and other assets................ (1,460,000) (179,000) (1,493,000)
------------ ------------ ------------
Net cash used in operating activities.... (2,567,000) (2,622,000) (8,963,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net....... (447,000) (1,509,000) (418,000)
Purchases of sports trading card licenses and
tradenames....................................... (3,025,000) -- --
Net cash balance of MLM at acquisition date.... -- -- 68,000
------------ ------------ ------------
Net cash used in investing activities.... (3,472,000) (1,509,000) (350,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated notes payable to
majority stockholder............................. 2,000,000 6,000,000 20,400,000
Proceeds from long-term debt................... 54,973,000 12,880,000 19,473,000
Payments on long-term debt..................... (53,541,000) (14,801,000) (29,025,000)
------------ ------------ ------------
Net cash provided by financing
activities....................................... 3,432,000 4,079,000 10,848,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS...................................... (2,607,000) (52,000) 1,535,000
CASH AND CASH EQUIVALENTS, beginning of year..... 2,847,000 2,899,000 1,364,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year........... $ 240,000 $ 2,847,000 $ 2,899,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for-
Interest..................................... $ 4,490,000 $ 3,924,000 $ 3,672,000
SUPPLEMENTAL NONCASH INVESTING ACTIVITIES:
Assets acquired under capital lease
arrangements..................................... $ -- $ 478,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
In 1991, an investor group, through newly formed Pinnacle Brands, Inc.
(Pinnacle) (formerly Grand Slam Acquisition Corp.), acquired all of the issued
and outstanding capital stock of Score Group, Inc. (Score). Two years later in
1993, Pinnacle acquired all of the issued and outstanding capital stock of Major
League Marketing, Inc. (MLM) (see Note 3), concurrently merged MLM into Score,
and changed Score's name to Pinnacle Trading Card Company (formerly Pinnacle
Brands, Inc.).
Pinnacle and its operating subsidiaries are primarily engaged (under license
agreements) in the printing, marketing, and distribution of sports trading
cards, three-dimensional specialty products, and other collectibles to hobby and
retail customers primarily in North America.
The consolidated financial statements include the operations of Pinnacle and
its majority-owned subsidiaries (collectively referred to as the Company). All
significant intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid investments having original maturities of
three months or less.
Accounts Receivable
In the normal course of business, the Company may extend unsecured credit to
certain classes of its customers. Because of the credit risk involved,
management has provided an allowance for doubtful accounts which reflects its
estimate of amounts which will eventually become uncollectible. Accounts
receivable from customers are stated net of allowances for doubtful accounts of
$260,000 and $209,000 as of December 31, 1995 and 1994, respectively.
Inventories
Inventories are stated at the lower of cost (principally weighted average
cost) or market. Inventory costs include material, labor, and manufacturing
overhead.
Property and Equipment
Property and equipment, including capitalized leases, are recorded at cost
and are depreciated over their estimated useful lives which range from five to
ten years for machinery and equipment, five to seven years for furniture and
office equipment, three years for vehicles, and over the life of the related
lease for leasehold improvements. Major additions and betterments are
capitalized and depreciated over the remaining estimated useful lives of the
related assets. Maintenance, repairs, and minor improvements are charged to
expense as incurred. Depreciation and amortization, which include amortization
F-12
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
of assets under capital leases, are computed using the straight-line method for
financial reporting purposes and accelerated methods for income tax reporting
purposes.
Intangible and Other Assets
Intangible and other assets consist primarily of goodwill, acquired licenses
and tradenames, organization costs, and deferred loan costs. Goodwill is being
amortized under the straight-line method over a period of 40 years. Acquired
licenses and tradenames are being amortized over periods ranging from 15 to 35
years. Organization costs and deferred loan costs are amortized over a period of
five years and the life of the related indebtedness, respectively.
Subsequent to its initial recording, the Company periodically evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated useful life of intangible assets may warrant revision or that the
remaining balance of the asset may not be recoverable. When factors indicate
that the recorded amount of the intangible asset should be evaluated for
possible impairment, the Company uses an estimate of the fair value of the
related asset (of the operating unit in the case of goodwill) in measuring
whether the asset is recoverable.
Net Sales
Revenue is recognized when the product is shipped. For those customers for
which return privileges exist, a provision for estimated returns of sports cards
(net of refundable royalties) is made in the period in which the related sale is
recorded. The actual amount of sports cards returns may differ from management's
estimates, however, and is dependent upon, among other things, consumer
perception of the products' desirability and scarcity, retailers' merchandising
practices, and owner-player relations in the respective professional sports
leagues. As such, the Company's recorded liability for estimated returns may be
revised periodically to reflect actual return experience. Sales of certain
sports card products and certain custom products require partial or full
deposits from customers.
Cost of Sales
Cost of sales includes materials, printing, production, slitting, packaging,
royalties, and freight. Royalties are paid primarily to organizations
representing the professional sports teams and players.
Income Taxes
Deferred income taxes are provided for temporary differences between the tax
basis of assets and liabilities and their financial reporting amounts. Deferred
taxes are recorded based upon enacted tax rates anticipated to be in effect when
these temporary differences are expected to reverse. Management provides a
valuation allowance when it is more likely than not that the deferred tax assets
will not be realized.
3. 1993 MLM ACQUISITION AND 1995 MLM SETTLEMENT:
On July 30, 1993, Pinnacle acquired all the issued and outstanding capital
stock of MLM (the 1993 MLM Acquisition) in a tax-free transaction. MLM had the
exclusive, contractual responsibility for all design, creative, marketing,
advertising, and sales/distribution activities for all of the Company's
F-13
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. 1993 MLM ACQUISITION AND 1995 MLM SETTLEMENT:--(CONTINUED)
sports trading card products. Simultaneously with the issuance of shares to the
former MLM stockholders, the Company's majority stockholder was issued 4,025
shares of preferred stock in partial consideration for additional funding and
consent to the 1993 MLM Acquisition. The acquisition was accounted for under the
purchase method of accounting. Assets acquired (including cash of $68,000) and
liabilities assumed were $13,164,000 and $8,557,000, respectively, which
resulted in an assigned value of $4,607,000 for the Class B common stock and
senior preferred stock issued to the former MLM stockholders. See additional
matters related to MLM in Note 5.
After the merger was consummated, the Company and the former MLM
shareholders disagreed as to the proper interpretation of a provision in the
1993 MLM Acquisition agreement (the 1993 Agreement) which regarded the treatment
and the tax attributes of certain pre-acquisition liabilities owed by MLM to the
Company. To resolve the parties' differing understandings as to the effects of
the 1993 Agreement, in September 1995, all of the parties agreed to a settlement
(the 1995 MLM Settlement) through which the 1993 MLM Acquisition was reformed.
Under the 1995 MLM Settlement, the former MLM shareholders returned to Pinnacle
for cancellation all of the preferred and common shares of Pinnacle stock
originally issued to them as consideration in the 1993 MLM Acquisition in
exchange for Pinnacle agreeing to amend its 1993 tax return in respect of the
treatment of the aforementioned pre-acquisition liabilities. For financial
reporting purposes, the 1995 MLM Settlement resulted in a credit to paid-in
capital and corresponding charges to Class B common stock and to senior
preferred stock to reflect the cancellation of those shares. The 1995 MLM
Settlement also resulted in a reduction of the deferred tax asset related to the
net operating loss carryforward and a corresponding reduction of the valuation
reserve (see Note 12).
4. ACQUISITION OF LICENSES AND TRADENAMES OF LBC:
During April 1995, the Company acquired from LBC Sports, Inc. and related
entities (LBC), the rights to use the trade name "Action Packed" and LBC's
licenses to produce certain motor sports and football trading card products.
Consideration given to LBC by the Company included cash and the assumption of
certain liabilities of LBC, plus performance payments, generally for a
three-year term, based on future net sales (as defined) of specified Action
Packed branded products and other criteria agreed to by the Company and LBC. In
connection with this transaction, the Company recorded $3,025,000 attributable
to the licenses and tradenames (see Note 8). Performance payments will be
expensed when they are earned. In accordance with the terms of the purchase
agreement, no performance payments were earned or payable for the period ending
December 31, 1995.
5. UNUSUAL CHARGES:
Related to Work Stoppages
During 1994, the Company incurred a substantial economic loss as a
consequence of the Major League Baseball strike and the National Hockey League
work stoppage. The 1994 financial statement
F-14
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. UNUSUAL CHARGES:--(CONTINUED)
impact of these events has been reflected as an unusual charge in the
accompanying consolidated statement of operations and is comprised of the
following:
Write-off of unsalable inventory............................... $2,300,000
Accrual for excess sales returns............................... 5,066,000
----------
$7,366,000
----------
----------
The National Hockey League resolved its dispute and commenced its season in
January 1995, and in April 1995, Major League Baseball resumed operations
(without a written contract between the owners and players union).
Related to Goodwill Write-down
In the fourth quarter of 1994, the Company recorded a $40,000,000 noncash
write-down of goodwill. Goodwill of $77.4 million was initially recorded in 1991
at the time the Company acquired Score (the Score Acquisition) in a transaction
substantially financed via borrowings of long-term debt. The goodwill
represented the excess of the purchase price over the valuation of the net
assets acquired in the Score Acquisition. The purchase price was based on
management's expectations of future performance at the time of the Score
Acquisition, considering historical experience and industry trends. These
expectations assumed moderate growth rates in revenue, planned operating and
product improvements to be implemented by new management, and sufficient cash
flow from operations to repay acquisition indebtedness.
Beginning in 1992, the sports trading cards industry began to contract
primarily as a result of prior industry overproduction which led to a reduced
perception of scarcity and collectibility. Further, in the second half of 1994,
two events occurred that led management to reevaluate its expectations of future
performance. In August, the Major League Baseball players went on strike and in
October, the National Hockey League players became involved in a work stoppage.
These events manifested themselves in a significant decrease in sports cards
sales and a significant increase in the rate of sports cards returns. Moreover,
management of the Company believed that these sports' management/labor disputes
would have a material adverse effect on future sports trading cards revenues.
As a result of the foregoing, in the fourth quarter of 1994, the Company
revised its projections of earnings before interest, taxes, depreciation and
amortization (EBITDA). The most critical assumptions used in these projections
were (i) decreases of baseball and hockey cards sales in 1995 of at least 20%
each and annual growth rates thereafter of 3-6%, (ii) no change in the Company's
market share, and (iii) annual expense inflation rate of 3%. Based on these
EBITDA projections, the Company utilized a fair value approach by discounting
(i) projected 1996--1999 EBITDA and (ii) a multiple of 1999 EBITDA, less
applicable Company long-term debt to unrelated parties. The EBITDA discount rate
and multiple used by the Company was based on transactions involving other
sports trading cards companies. In applying this methodology, the Company
concluded that the fair value of the Company indicated that the value of the
goodwill was approximately $30 million.
Consequently, and as a result of the foregoing, the Company recorded a
$40,000,000 write-down of goodwill in 1994 that has been classified as an
unusual charge in the accompanying consolidated statement of operations.
F-15
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. UNUSUAL CHARGES:--(CONTINUED)
Related to MLM
Prior to the 1993 MLM Acquisition, the Company had a receivable from MLM.
This receivable resulted from certain production costs billed to MLM for
reimbursement and from MLM's portion of certain operating costs such as sales
returns, bad debts, inventory write-offs, and unrecoverable minimum royalties.
Because of MLM's inability to pay, this receivable was written off immediately
prior to the acquisition. The Company also incurred its portion of certain of
these operating charges, all of which were in excess of normal operating levels
because of MLM operating decisions made prior to the acquisition. These charges
(which have been reflected as an unusual charge in the accompanying consolidated
statement of operations) are as follows:
<TABLE>
<S> <C>
Receivable due from MLM at July 30, 1993...................... $30,225,000
Incremental operating expenses absorbed by Pinnacle related to
MLM........................................................... 11,210,000
-----------
Unusual charges related to MLM.......................... $41,435,000
-----------
-----------
</TABLE>
6. INVENTORIES:
Inventories at December 31, 1995 and 1994, comprised the following:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Raw materials and supplies....................... $ 877,000 $1,762,000
Work-in-process.................................. 6,299,000 2,532,000
Finished goods................................... 3,327,000 2,387,000
----------- ----------
$10,503,000 $6,681,000
----------- ----------
----------- ----------
</TABLE>
7. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Vehicles, machinery, and equipment............... $ 5,352,000 $ 5,132,000
Furniture and office equipment................... 3,557,000 3,338,000
Leasehold improvements........................... 1,360,000 1,342,000
----------- -----------
10,269,000 9,812,000
Less- Accumulated depreciation................... (6,542,000) (4,681,000)
----------- -----------
$ 3,727,000 $ 5,131,000
----------- -----------
----------- -----------
</TABLE>
The Company recorded depreciation expense of $1,861,000, $1,777,000, and
$1,589,000 in 1995, 1994, and 1993, respectively.
F-16
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets at December 31, 1995 and 1994, consisted of the
following:
1995 1994
----------- -----------
Goodwill, net of accumulated amortization of
$46,571,000 and $45,702,000, respectively....... $30,808,000 $31,671,000
Acquired sports trading card licenses and
tradenames, net of accumulated amortization of
$134,000 in 1995................................ 2,891,000 --
Organization costs, net of accumulated
amortization of $3,695,000 and $2,715,000,
respectively.................................... 1,261,000 2,112,000
Deferred loan costs, net of accumulated
amortization of $199,000 and $2,236,000,
respectively.................................... 1,041,000 186,000
Deposits and other.............................. 476,000 394,000
----------- -----------
$36,477,000 $34,363,000
----------- -----------
----------- -----------
9. ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1995 and 1994, comprised the following:
1995 1994
----------- -----------
Accrued operating expenses and other............ $ 4,112,000 $ 3,728,000
Accrued sales returns........................... 5,026,000 7,153,000
Accrued royalties payable....................... 5,962,000 2,535,000
----------- -----------
$15,100,000 $13,416,000
----------- -----------
----------- -----------
F-17
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LONG-TERM DEBT:
Long-term debt (including accrued but unpaid interest where applicable) at
December 31, 1995 and 1994, comprised the following:
1995 1994
------------- ------------
SENIOR BANK OBLIGATIONS
Revolving bank loans, due December 31,
1998, with variable interest (9.14% at
December 31, 1995) payable quarterly......... $ 4,700,000 $ 16,500,000
Bank term loans, due December 31, 1998,
with scheduled principal and variable
interest (9% at December 31, 1995)
payable quarterly............................ 41,000,000 26,950,000
------------- ------------
Subtotal--Senior Bank Obligations...... 45,700,000 43,450,000
------------- ------------
SUBORDINATED NOTES PAYABLE TO MAJORITY
STOCKHOLDER
Subordinated notes payable, due December
31, 1999, plus interest (at 12%) added to
the principal semiannually each January
15 and July 15........................... 103,814,000 90,288,000
------------- ------------
OTHER
Other long-term debt....................... 906,000 1,498,000
Obligations under capital leases (see Note
11).......................................... 252,000 478,000
------------- ------------
Subtotal--Other........................ 1,158,000 1,976,000
------------- ------------
Total Long-Term Debt....................... 150,672,000 135,714,000
Less-
Subordinated notes payable to majority
stockholder.................................. (103,814,000) (90,288,000)
Current portion of all other long-term
debt......................................... (13,243,000) (3,810,000)
------------- ------------
Long-term debt, net of current
maturities................................... $ 33,615,000 $ 41,616,000
------------- ------------
------------- ------------
During May 1995, the Company's senior bank obligations were refinanced with
a group of lenders. As refinanced, these credit facilities include a $15.0
million revolving credit commitment and a $44.0 million term loan. Total
availability under the revolving credit commitment ($10.7 million at December
31, 1995) is limited to 80% of eligible accounts receivable and 50% of eligible
inventory, both as defined in the credit agreement. Outstanding borrowings under
the credit facilities bear interest, at the Company's option, at (1) the agent
bank's prime rate plus 2% or (2) LIBOR plus 3%. A commitment fee of 1/2 of 1% is
payable quarterly on unused amounts under the revolving credit facility. All
outstanding borrowings under the revolving credit commitment are payable on
December 31, 1998, and the term loan is payable in specified quarterly
installments through December 31, 1998, plus additional annual payments,
beginning in 1997, based upon 75% of any excess cash flows (as defined)
generated during each preceding calendar year. The credit agreement contains
covenants requiring the maintenance of certain minimum financial ratios and
limitations on dividend payments and the issuance of equity securities. The
credit facilities are collateralized by substantially all assets of the Company.
F-18
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LONG-TERM DEBT:--(CONTINUED)
In connection with the senior bank debt refinancing described above, during
May 1995, the maturity dates of all principal and interest payable under the
subordinated notes payable to majority stockholder were extended, by agreement
of the noteholder, to December 31, 1999.
Scheduled principal maturities of capital lease obligations and long-term
debt (including subordinated notes payable to majority stockholder and excluding
any payments arising from excess cash flows) are as follows:
YEAR ENDING
DECEMBER 31,
- ------------------------------------------------------------
[S] [C]
1996........................................................ $ 13,243,000
1997........................................................ 14,703,000
1998........................................................ 18,906,000
1999........................................................ 103,820,000
2000........................................................ --
Thereafter.................................................. --
------------
$150,672,000
------------
------------
11. LEASES:
Property and equipment includes assets under capital lease having
capitalized costs of $478,000, less accumulated depreciation of $226,000 and
$66,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995, future minimum payments under capital lease
obligations and noncancelable operating leases are as follows:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ---------------------------------------------------- -------- ----------
1996................................................ $245,000 $1,080,000
1997................................................ 61,000 200,000
1998................................................ -- 103,000
1999................................................ -- 65,000
2000................................................ -- 62,000
Thereafter.......................................... -- --
-------- ----------
Total minimum lease payments........................ 306,000 $1,510,000
----------
Less- Amounts representing interest................. 54,000
--------
Present value of future minimum lease payments...... $252,000
--------
--------
Rental expense for all operating leases for the years ended December 31,
1995, 1994, and 1993, was $1,311,000, $1,173,000, and $1,141,000, respectively.
12. INCOME TAXES:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a change from the deferred to the liability method of computing
deferred income taxes. The cumulative effect of adopting
F-19
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES:--(CONTINUED)
SFAS 109 at the beginning of 1993 was $3.9 million, which was principally a
result of providing a valuation reserve for deferred tax assets previously
recorded net-of-tax in connection with the Score Acquisition. Had the Company
elected to restate prior periods' financial statements, $3.2 million of the
cumulative effect would have been recorded as additional goodwill.
Due to the Company's losses incurred in 1995, 1994, and 1993, and due to
lack of any loss carryback opportunities, the Company had no taxes currently
payable or refundable during any of the periods presented. The effective income
tax rate differs from the statutory federal income tax rate for the following
reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
<S> <C> <C> <C>
1995 1994 1993
----- ----- -----
Statutory rate................................... (34.0)% (34.0)% (34.0)%
Nondeductible goodwill amortization.............. 12.0 32.4 1.3
Valuation allowance.............................. 22.6 1.6 32.8
Other............................................ (0.6) 0.0 (0.1)
----- ----- -----
Effective tax rate............................... 0.0% 0.0% 0.0%
----- ----- -----
----- ----- -----
</TABLE>
The following table summarizes the changes in the deferred income tax assets
and (liabilities):
<TABLE>
<CAPTION>
DEFERRED
DECEMBER 31, (PROVISION) DECEMBER 31,
1994 BENEFIT 1995
------------ ----------- ------------
<S> <C> <C> <C>
Excess tax depreciation and
amortization...................... $ (370,000) $ 91,000 $ (279,000)
Nondeductible accruals............ 2,001,000 (937,000) 1,064,000
Other items....................... 90,000 258,000 348,000
Operating loss carryforward....... 21,848,000 (8,143,000) 13,705,000
------------ ----------- ------------
23,569,000 (8,731,000) 14,838,000
Valuation allowance............... (23,569,000) 8,731,000 (14,838,000)
------------ ----------- ------------
Deferred income tax asset
(liability), net.................. $ -- $ -- $ --
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The Company's tax net operating loss carryforwards of approximately $40.0
million will begin to expire in 2007, if not utilized earlier. The 1995 decrease
in the net operating loss carryforward and valuation allowance is related to the
1995 MLM Settlement (see Note 3).
Management has concluded that, based on the Company's history of losses, it
is currently more likely than not that the Company will not realize its deferred
tax asset. Therefore, the Company has provided a 100% valuation allowance on its
deferred tax asset.
13. EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) defined contribution plan under which employees may
contribute up to 10% of eligible gross wages subject to certain IRS limitations.
The Company, at its option, may match a portion of each eligible employee's
contribution. Contributions are made at the discretion of the Board
F-20
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE BENEFIT PLANS:--(CONTINUED)
of Directors. The Company incurred expenses of $68,000, $80,000, and $85,000
related to this plan for the years ended December 31, 1995, 1994, and 1993,
respectively.
The Company does not provide any postretirement or postemployment health or
welfare benefits to any of its employees.
14. STOCK OPTION PLAN:
During 1992, the stockholders approved a stock option plan (the "Plan") for
key employees covering 2,145 shares of Class A common stock. The Plan authorized
the issuance of both nonqualified and incentive stock options and is
administered by a committee of the Board of Directors (the "Committee"). Under
the terms of this Plan, the purchase price of shares subject to each
nonqualified stock option granted will not be less than the par value of the
common stock. The purchase price of shares subject to each incentive stock
option granted will not be less than 100% of their fair market value at the date
of grant. Unless extended by the Committee, options granted are exercisable for
a period not to exceed 10 years. As of December 31, 1995, there were 536 options
outstanding at an option price of $259 each, all of which were exercisable.
There were no options granted, exercised, canceled, or forfeited during 1995.
Further, the Board of Directors of the Company has reserved 7,558 shares of
Class A common stock for issuance to management. None of these shares has been
issued.
15. COMMITMENTS AND CONTINGENCIES:
Licensing Agreements
Sales of sports trading cards are permitted under licensing agreements with
owners' associations representing Major League Baseball, the National Football
League, the National Hockey League, and their related players' associations. The
agreements with these organizations typically require royalty payments based on
a percentage of net sports card sales (based on the regular wholesale price of
the sports cards) with guaranteed minimum annual payments that may vary by
license year. Historically, the Company has successfully renewed these license
agreements upon the expiration of the previous licenses; however, the impact on
net sales, operating income, and cash flows due to a loss of any of these
contracts would be significant. In addition to sports licensing agreements, the
Company has licensing agreements with certain manufacturers and individuals to
produce lenticular (three-dimensional) and other collectible products. The
Company pays royalty fees to these manufacturers based on net sales of these
products.
The Company's current licensing agreements (including renewal of licenses
which management believes will be executed during 1996 and one expired license
currently being negotiated for which the Company is currently operating under a
letter of intent) expire at various dates through June 30, 1998, requiring
future minimum payments aggregating $34,753,000 through 1998.
Related Parties
In addition to the financing described in Note 10, the Company also has
consulting agreements with certain stockholders and their affiliates under which
management services are provided to the Company. Total fees under these
agreements are $500,000 annually, payable through July 30, 1996.
F-21
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
The Company paid $2,000,000 and $1,000,000 in consulting payments to the
former MLM shareholders during 1995 and 1994, respectively. No further amounts
are owed to the former MLM shareholders.
Legal Matters
The Company and its subsidiaries are parties to various legal proceedings
arising in the ordinary course of business. Management believes, based upon the
advice of legal counsel responsible for the review of such matters, that there
is no proceeding, either threatened or pending, against the Company or its
subsidiaries that could result in a materially adverse effect on the business or
the financial condition of the Company.
16. STOCKHOLDERS' INVESTMENT:
During 1992, the Board of Directors authorized the issuance of 464 shares of
Class A common stock to the chief executive officer of the Company for a total
consideration of $120,300. As of December 31, 1995, these shares had not been
issued.
The Company's current authorized capital consists of an aggregate of 114,075
shares of stock, consisting of 80,000 shares designated as Class A common stock
(having 10 votes per share) (the Common Stock), 30,000 shares designated as
Class B common stock (having one vote per share), 4,025 shares designated as
redeemable preferred stock, and 50 shares designated as senior preferred stock.
In connection with the 1993 MLM Acquisition (see Note 3), the former MLM
stockholders received 14,118 shares of Class B common stock and 24 shares of
senior preferred stock in exchange for the issued and outstanding capital stock
of MLM. Simultaneously, 4,025 shares of redeemable preferred stock were issued
to the Company's majority stockholder in partial consideration for additional
funding and consent to the 1993 MLM Acquisition. In connection with the 1995 MLM
Settlement (see Note 3), in September 1995 all of the issued and outstanding
Class B common stock and senior preferred stock were returned to the Company and
canceled.
Dividends on the preferred shares accrue at the rate of $120 per year per
share (payable quarterly) and are cumulative. The preferred stock has a
liquidation preference of $1,000 per share together with all accrued but unpaid
dividends, and may be redeemed at any time, in whole or in part, by the Company
for the liquidation preference amount together with all accrued but unpaid
dividends. No dividends have been declared by the Company for the preferred
stock. Accumulated but undeclared and unpaid dividends on the preferred stock as
of December 31, 1995 and 1994, were $1,207,500 and $724,500, respectively.
Under an arrangement with the majority stockholder, the chief executive
officer of the Company has the right (the Put Right) to require the Company to
purchase on November 30, 1998, all shares of Common Stock and options owned by
such officer for a purchase price of $3,000,000, less any amounts previously
realized by such officer with respect to those shares and options. In the event
the Company fails to purchase these securities upon the exercise of the Put
Right, the majority stockholder is obligated to fulfill the commitment.
F-22
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS:
Refinancing of Long-Term Debt
In May 1996, the Company refinanced substantially all of its long-term debt.
The proceeds from this refinancing were used to refinance existing senior bank
obligations, repay $8.5 million of subordinated notes payable to majority
stockholder, and to acquire licenses and tradenames from Donruss Trading Cards,
Inc. (see below). The refinanced credit facilities include a $15.0 million
revolving credit commitment and $88.0 million of term loans. Total availability
under the revolving credit commitment is limited to 80% of eligible accounts
receivable and 50% of eligible inventory, both as defined in the credit
agreement. Outstanding borrowings under the credit facilities bear interest at
optional rates based on the prime rate or LIBOR. A commitment fee is payable on
unused amounts under the revolving credit facility. All outstanding borrowings
under the revolving credit commitment are payable on May 27, 2001 (extendable to
May 27, 2002 under certain conditions), and the term loans are payable in 16
quarterly payments of $0.5 million and then 4 quarterly payments of $8.0 million
through May 28, 2001, on $40 million of term loans and in 20 quarterly payments
of $0.5 million and then 4 quarterly payments of $9.5 million through May 28,
2002, on the other $48.0 million of term loans, plus additional annual payments,
beginning in 1997, based upon 50% of any excess cash flows (as defined)
generated during each preceding calendar year. The credit agreement contains
covenants requiring the maintenance of certain minimum financial ratios and
limitations on dividend payments and the issuance of equity securities. The
credit facilities are collateralized by substantially all assets of the Company.
In connection with the senior bank debt refinancing described above, during
May 1996, the maturity dates of all principal and interest payable under the
subordinated notes payable to majority stockholder were extended, by agreement
of the noteholder, to December 31, 2001.
Acquisition of Donruss Sports Trading Card Licenses and Tradenames
In May 1996, the Company acquired from Donruss Trading Cards, Inc. (Donruss)
the right to use the tradenames "Donruss" and "Leaf" and Donruss' licenses
through which it produces certain baseball and hockey trading card products.
Consideration given to Donruss included $32.5 million in cash plus the
assumption of various contracts with certain professional athletes and other
obligations. In connection with this transaction, the Company recorded $41.0
million attributable to the licenses and tradenames which will be amortized over
35 years. The Company concurrently purchased certain prepaid expenses and
work-in-process inventory, and assumed certain related trade payables.
Recent Legal Proceedings
In August 1996, the Company was named in a lawsuit alleging that certain
standard business practices in the sports trading card industry, including the
practice of randomly inserting chase cards in packages of sports trading cards,
constitute illegal gambling activities in violation of, among other things, the
Racketeer Influenced and Corrupt Organizations Act (RICO). The Company's major
competitors have also been named in similar lawsuits. Inherently, the outcome of
litigation is uncertain. In the opinion of the Company, the action lacks
substantial merit and the Company intends to defend it vigorously.
Recapitalization and Initial Public Offering
The Company has filed a registration statement with the Securities and
Exchange Commission pursuant to an initial public offering (the Offering)
whereby 4,000,000 million shares of Common Stock are to be sold at an estimated
per share amount of $15. Immediately prior to the completion of the Offering,
(1) the Company will change its authorized capital to include 20,000,000 shares
of Common
F-23
<PAGE>
PINNACLE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS:--(CONTINUED)
Stock, (2) the Company will declare a 103.96-for-1 stock split, (3) the majority
stockholder will convert all but $33.0 million of its subordinated notes payable
and all 4,025 shares of its preferred stock into 5,499,863 shares of Common
Stock, and (4) the Company will grant options to purchase 1,400,988 shares of
Common Stock at $2.49 per share and will award 33,837 shares of Common Stock
under a newly-adopted restricted stock plan.
18. UNAUDITED PRO FORMA PER SHARE INFORMATION:
Of the net proceeds from the sale of shares of Common Stock offered by the
Company in the Offering, approximately $22.0 million will be used to repay
senior bank borrowings and $33.0 million will be used to repay subordinated
notes payable to majority stockholder. Pro forma net income per common share is
calculated using the weighted average number of shares of Common Stock
outstanding during the period (after giving effect to (i) the conversion of
subordinated notes payable and preferred stock referred to in Note 17, (ii)
assuming the issuance and sale of 4,000,000 shares of Common Stock and
application of the proceeds, as described, as if these transactions had occurred
on January 1, 1995, (iii) decreased selling, general and administrative expenses
related to management and consulting fees offset by increased salaries to senior
management under new employment agreements, and (iv) a tax provision on the
resulting pro forma net income before taxes), plus options granted prior to the
Offering to purchase Common Stock at $2.49 per share and Common Stock to be
awarded under a newly-adopted restricted stock plan, assuming all such Common
Stock was outstanding for all periods presented. For purposes of this
computation, the weighted average number of shares of Common Stock outstanding
during the period ended December 31, 1995, is 13,090,714. Historical earnings
(loss) per share have not been presented since such amounts are not meaningful
in light of the conversion of subordinated notes payable and preferred stock.
F-24
<PAGE>
INSIDE BACK COVER ARTWORK:
Picture of Mickey Mantle with insets of one of the Company's Mickey Mantle
baseball trading cards and the Pinnacle logo.
<PAGE>
======================================== ====================================
- ---------------------------------------- ------------------------------------
NO DEALER, SALESPERSON OR OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS 4,000,000 SHARES
IN CONNECTION WITH THE OFFERING COVERED
BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDER OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER PINNACLE BRANDS, INC.
TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON
WHOM, IT IS PINNACLE BRANDS, INC.
UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT COMMON STOCK
THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY OR THE
SELLING STOCKHOLDER SINCE THE DATE
HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 1
Risk Factors.......................... 7
The Company........................... 10
Use of Proceeds....................... 12 ------------
Dividend Policy....................... 12 PROSPECTUS
Dilution.............................. 13 ------------
Capitalization........................ 14
Selected Financial and Operating
Data.................................. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 25
Management............................ 39
Certain Transactions.................. 45
Principal and Selling Stockholders.... 47
Description of Capital Stock.......... 48
Description of Indebtedness........... 50
Shares Eligible for Future Sale....... 52 MERRILL LYNCH & CO.
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54 CS FIRST BOSTON
Additional Information................ 55
Index to Financial Statements......... F-1
-------------------
UNTIL , 1996 (25 DAYS
FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTI-
CIPATING IN THIS DISTRIBUTION, MAY BE , 1996
REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------- ------------------------------------
======================================== ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee) fees and expenses (other than underwriting discounts
and commissions) in connection with the offering described in this registration
statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $23,793.10
National Association of Securities Dealers, Inc. filing fee............
The New York Stock Exchange filing fee.................................
Transfer Agent and Registrar fees......................................
Blue Sky filing and counsel fees and expenses..........................
Printing and engraving costs...........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Miscellaneous..........................................................
Total............................................................
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eleventh of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation"), as provided by Section
102(b)(7) of the Delaware General Corporation Law ("Delaware Law"), enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director to a corporation or
its stockholders for violations of the director's fiduciary duty, except (i) for
any breach of a director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the Delaware Law (providing for liability of directors for unlawful
payment of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Section 145 of the Delaware Law provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, if they had no
reasonable cause to believe their conduct was unlawful; provided, that no
indemnification may be made in respect of any claim, issue or matter as to which
they shall have been adjudged to be liable to the Company, unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, they are fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper. Any
such indemnification may be made by the Company only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Article Eleventh of the Company's Certificate of
Incorporation entitles officers and directors of the Company to indemnification
to the fullest extent permitted by Section 145 of the Delaware Law, as the same
may be supplemented from time to time.
Reference is also made to the Company's Certificate of Incorporation, filed
as Exhibit 3.1 hereto.
II-1
<PAGE>
Reference is also made to Section of the Underwriting Agreement contained
in Exhibit 1.1 hereto, which provides certain indemnification rights to the
directors and officers of the Company in connection with this Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 30, 1993, the Company issued an aggregate of 14,117.7 shares of its
Class B Common Stock and an aggregate of 23.64 shares of its Senior Preferred
Stock to Daniel C. Shedrick, Harris A. Cahn, Barry A. Halper, Bruno Tomasi and
Franco Harris (collectively, the "MLM Stockholders") in connection with its
acquisition of MLM Marketing, Inc. In September 1995, the acquisition of MLM
Marketing, Inc. was reformed and the MLM Stockholders returned to the Company
all of the shares of Class B Common Stock and Senior Preferred Stock issued to
them in the acquisition. In connection with the acquisition, Acadia received
4,025 shares of Redeemable Preferred Stock. On March 31, 1994 and May 31, 1995,
Acadia received 3,486.90652 and 2,234.48529 shares of Class A Common Stock.
During the past three years, $73.7 million of subordinated indebtedness was
issued to Acadia, of which $28.4 million was issued for cash, $28.0 million was
issued as pay-in-kind interest and $17.3 million was issued in exchange for
maturing subordinated indebtedness. The issuances described in this Item 15 were
deemed exempt from registration under the Securities Act of 1933, as amended
(the "Act"), in reliance upon Section 4(2) of the Act as transactions by an
issuer not involving any public offering. The securities issued in these private
transactions were subject to appropriate transfer restrictions. All recipients
had adequate access, through their relationships with the Company, to
information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- -------------- --------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Company and Merrill Lynch & Co. (1)
3.1 Form of Amended and Restated Certificate of Incorporation of the Company (1)
3.2 Amended and Restated By-Laws of the Company (1)
4.1 Form of Certificate for Common Stock (1)
4.2 Registration Rights Agreement dated as of , 1996 among the Company,
Acadia Partners, L.P. and Acadia Electra Partners, L.P. (1)
4.3 Registration Rights Agreement dated as of , 1996 between the Company
and Chase Manhattan Investment Holdings, Inc. (1)
4.4 Conversion Agreement dated as of , 1996 among the Company, Acadia
Partners, L.P. and Acadia Electra Partners, L.P. (1)
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP (1)
*10.1 Credit Agreement dated as of May 29, 1996 among Pinnacle Brands, Inc., Grand
Slam Acquisition Corp. and GSAC Holdings, Inc., as Parent Guarantors, the
Subsidiary Guarantors, the lenders named therein, Merrill Lynch & Co., as
Arranger and Syndication Agent, and Wells Fargo Bank, N.A., as Administrative
and Collateral Agent
10.2 Grand Slam Acquisition Corp. Amended and Restated 1992 Stock Option Plan (1)
*10.3 Lease Agreement between E. Ann Flavin and John P. Flavin and Optigraphics
Corporation
10.4 Amended and Restated Employment Agreement dated as of , 1996, between the
Company and Jerry M. Meyer (1)
10.5 Amended and Restated Employment Agreement dated as of , 1996 between the
Company and Michael J. Cleary (1)
10.6 Employment Agreement dated as of , 1996 between the Company and John S.
Worth (1)
10.7 Employment Agreement dated as of , 1996 between the Company and James
Brochhausen (1)
10.8 Pinnacle Brands Inc. 1996 Incentive Stock Option Plan (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- -------------- --------------------------------------------------------------------------------
<C> <S>
*10.9 Actuarial Consultants, Inc. Defined Contribution Prototype Plan and Trust
Agreement
*10.10 Asset Purchase Agreement dated as of April 16, 1996 by and among Donruss Trading
Cards, Inc., Leaf, Inc. and Pinnacle Brands, Inc.
*10.11 Trademark License Agreement dated as of May 28, 1996, by and between Leaf, Inc.
and Pinnacle Brands, Inc.
*10.12 License Agreement dated as of May 28, 1996 by and between Pinnacle Brands, Inc.
and Donruss Trading Cards, Inc.
*10.13 License Agreement dated as of May 28, 1996 by and between Pinnacle Brands, Inc.
and Donruss Trading Cards, Inc.
*10.14 Settlement Agreement dated September 15, 1995 among Grand Slam Acquisition
Corp., Pinnacle Brands, Inc., MLM Acquisition Corp., the MLM Stockholders and
Larry Lambrecht
*10.15 Settlement Agreement dated September 15, 1995 among Grand Slam Acquisition
Corp., Pinnacle Brands, Inc., MLM Acquisition Corp., the MLM Stockholders and
Larry Lambrecht
*10.16 Release dated September 15, 1995, by and among Grand Slam Acquisition Corp.,
Pinnacle Brands, Inc. and MLM Acquisition Corp.
*10.17 Release dated September 15, 1995, by and among Daniel C. Shedrick, Harris A.
Cohn, Barry A. Halper, Bruno Tomasi, Franco Harris, Larry Lambrecht, Grand
Slam Acquisition Corp., Pinnacle Brands, Inc., MLM Acquisition Corp. and the
other Releasees as listed therein.
*10.18 Release dated as of September 15, 1995, by and among Grand Slam Acquisition
Corp., Pinnacle Brands, Inc., MLM Acquisition Corp., Daniel C. Shedrick,
Harris A. Cohn, Barry A. Halper, Bruno Tomasi, Franco Harris, Larry Lambrecht
and the other Releasees as listed therein.
*10.19 Retail License Agreement dated September 21, 1993 between NHL Enterprises, Inc.
and Pinnacle Brands, Inc. (2)
*10.20 License Agreement dated June 3, 1996 between Donruss Trading Card Company and
the National Hockey League Players Association (2)
*10.21 License Agreement dated March 19, 1993 between Score Group, Inc. and the
National Hockey League Players Association (2)
*10.22 License Agreement dated December 31, 1994 between the Major League Baseball
Players Association and Donruss Trading Cards, Inc. (2)
*10.23 Major League Baseball Properties, Inc. License Agreement re: Donruss Trading
Cards, Inc., dated May 23, 1996 (2)
*10.24 License Agreement dated December 27, 1994 between the Major League Baseball
Players Association and Pinnacle Brands, Inc. (2)
*10.25 Agreement dated March 14, 1995 between Pinnacle Brands, Inc. and the National
Football League Players, Inc. (2)
*10.26 Letter of Intent dated June 29, 1995 between Pinnacle Brands, Inc. and NFL
Properties, Inc. (2)
*10.27 Letter of Intent dated May 15, 1995 between Pinnacle Brands, Inc. and Major
League Baseball Properties (2)
10.28 Pinnacle Brands, Inc. 1996 Restricted Stock Plan (1).
*21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit
5.1)(1)
24.1 Powers of Attorney (included on signature page)
*27.1 Financial Data Schedule
</TABLE>
- ------------
* Previously filed
(1) To be filed by amendment.
(2) Confidential treatment has been requested for portions of this exhibit.
II-3
<PAGE>
(b) Consolidated Financial Statements Schedules
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grand Prairie, State of Texas on August 30, 1996.
PINNACLE BRANDS, INC.
By: /s/ Jerry M. Meyer
..................................
Jerry M. Meyer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated. Each person
whose signature appears below hereby authorizes each of Jerry M. Meyer, Michael
J. Cleary and John S. Worth, as attorney-in-fact, to sign and file on his or her
behalf, individually and in each capacity stated below, any pre-effective or
post-effective amendment hereto or any registration statement relating to this
offering.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
* Chairman of the Board, Chief August 30,
..................................... Executive Officer and Director 1996
Jerry M. Meyer (principal executive officer)
* Executive Vice President, Chief August 30,
..................................... Operating Officer and Director 1996
Michael J. Cleary
* Chief Financial Officer, Senior Vice August 30,
..................................... President and Secretary (principal 1996
John S. Worth financial and accounting officer)
* Director August 30,
..................................... 1996
Bradford E. Bernstein
* Director August 30,
..................................... 1996
Daniel L. Doctoroff
* Director August 30,
..................................... 1996
Douglas D. Wheat
</TABLE>
By /s/ Jerry M. Meyer
............................
Jerry M. Meyer
individually and as
attorney-in-fact
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pinnacle Brands Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Pinnacle Brands Inc. (formerly Grand
Slam Acquisition Corp., a Delaware Corporation) and subsidiaries included in
this registration statement and have issued our report thereon dated March 7,
1996. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts, is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
March 7, 1996
Dallas, Texas
S-1
<PAGE>
PINNACLE BRANDS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------- DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO ------------ NET
BEGINNING COSTS AND OTHER PRODUCT INCREASE
OF PERIOD EXPENSES ACCOUNTS RETURNS (DECREASE)
----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Description
YEAR ENDED DECEMBER 31, 1995
Included in Accrued Liabilities:
Accrued Sales Returns....................... $ 7,153,000 $14,925,000 $ -- $(17,052,000) $(2,127,000)
----------- ----------- ---------- ------------ -----------
Total..................................... $ 7,153,000 $14,925,000 $ -- $(17,052,000) $(2,127,000)
----------- ----------- ---------- ------------ -----------
----------- ----------- ---------- ------------ -----------
YEAR ENDED DECEMBER 31, 1994
Included in Accrued Liabilities:
Accrued Sales Returns....................... $11,765,000 $17,037,000 $ -- $(21,649,000) $ 4,612,000
----------- ----------- ---------- ------------ -----------
Total..................................... $11,765,000 $17,037,000 $ -- $(21,649,000) $ 4,612,000
----------- ----------- ---------- ------------ -----------
----------- ----------- ---------- ------------ -----------
YEAR ENDED DECEMBER 31, 1993
Included in Accrued Liabilities:
Accrued Sales Returns....................... $ 3,276,000 $19,010,000 $ -- $(10,521,000) $ 8,489,000
----------- ----------- ---------- ------------ -----------
Total..................................... $ 3,276,000 $19,010,000 $ -- $(10,521,000) $ 8,489,000
----------- ----------- ---------- ------------ -----------
----------- ----------- ---------- ------------ -----------
<CAPTION>
BALANCE AT
END
OF PERIOD
-----------
<S> <C>
Description
YEAR ENDED DECEMBER 31, 1995
Included in Accrued Liabilities:
Accrued Sales Returns....................... $ 5,026,000
-----------
Total..................................... $ 5,026,000
-----------
-----------
YEAR ENDED DECEMBER 31, 1994
Included in Accrued Liabilities:
Accrued Sales Returns....................... $ 7,153,000
-----------
Total..................................... $ 7,153,000
-----------
-----------
YEAR ENDED DECEMBER 31, 1993
Included in Accrued Liabilities:
Accrued Sales Returns....................... $11,765,000
-----------
Total..................................... $11,765,000
-----------
-----------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- -------------- --------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Company and Merrill Lynch & Co. (1)
3.1 Form of Amended and Restated Certificate of Incorporation of the Company (1)
3.2 Amended and Restated By-Laws of the Company (1)
4.1 Form of Certificate for Common Stock (1)
4.2 Registration Rights Agreement dated as of , 1996 among the Company,
Acadia Partners, L.P. and Acadia Electra Partners, L.P. (1)
4.3 Registration Rights Agreement dated as of , 1996 between the Company
and Chase Manhattan Investment Holdings, Inc. (1)
4.4 Conversion Agreement dated as of , 1996 among the Company, Acadia
Partners, L.P. and Acadia Electra Partners, L.P. (1).
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP (1)
*10.1 Credit Agreement dated as of May 29, 1996 among Pinnacle Brands, Inc., Grand
Slam Acquisition Corp. and GSAC Holdings, Inc., as Parent Guarantors, the
Subsidiary Guarantors, the lenders named therein, Merrill Lynch & Co., as
Arranger and Syndication Agent, and Wells Fargo Bank, N.A., as Administrative
and Collateral Agent
10.2 Grand Slam Acquisition Corp. Amended and Restated 1992 Stock Option Plan (1)
*10.3 Lease Agreement between E. Ann Flavin and John P. Flavin and Optigraphics
Corporation
10.4 Amended and Restated Employment Agreement dated as of , 1996, between the
Company and Jerry M. Meyer (1)
10.5 Amended and Restated Employment Agreement dated as of , 1996 between the
Company and Michael J. Cleary (1)
10.6 Employment Agreement dated as of , 1996 between the Company and John S.
Worth (1)
10.7 Employment Agreement dated as of , 1996 between the Company and James
Brochhausen (1)
10.8 Pinnacle Brands Inc. 1996 Incentive Stock Option Plan (1)
*10.9 Actuarial Consultants, Inc. Defined Contribution Prototype Plan and Trust
Agreement
*10.10 Asset Purchase Agreement dated as of April 16, 1996 by and among Donruss Trading
Cards, Inc., Leaf, Inc. and Pinnacle Brands, Inc.
*10.11 Trademark License Agreement dated as of May 28, 1996, by and between Leaf, Inc.
and Pinnacle Brands, Inc.
*10.12 License Agreement dated as of May 28, 1996 by and between Pinnacle Brands, Inc.
and Donruss Trading Cards, Inc.
*10.13 License Agreement dated as of May 28, 1996 by and between Pinnacle Brands, Inc.
and Donruss Trading Cards, Inc.
*10.14 Settlement Agreement dated September 15, 1995 among Grand Slam Acquisition
Corp., Pinnacle Brands, Inc., MLM Acquisition Corp., the MLM Stockholders and
Larry Lambrecht
*10.15 Settlement Agreement dated September 15, 1995 among Grand Slam Acquisition
Corp., Pinnacle Brands, Inc., MLM Acquisition Corp., the MLM Stockholders and
Larry Lambrecht
*10.16 Release dated September 15, 1995, by and among Grand Slam Acquisition Corp.,
Pinnacle Brands, Inc. and MLM Acquisition Corp.
*10.17 Release dated September 15, 1995, by and among Daniel C. Shedrick, Harris A.
Cohn, Barry A. Halper, Bruno Tomasi, Franco Harris, Larry Lambrecht, Grand
Slam Acquisition Corp., Pinnacle Brands, Inc., MLM Acquisition Corp. and the
other Releasees as listed therein.
*10.18 Release dated as of September 15, 1995, by and among Grand Slam Acquisition
Corp., Pinnacle Brands, Inc., MLM Acquisition Corp., Daniel c. Shedrick,
Harris A. Cohn, Barry A. Halper, Bruno Tomasi, Franco Harris, Larry Lambrecht
and the other Releasees as listed therein.
*10.19 Retail License Agreement dated September 21, 1993 between NHL Enterprises, Inc.
and Pinnacle Brands, Inc. (2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- -------------- --------------------------------------------------------------------------------
<C> <S>
*10.20 License Agreement dated June 3, 1996 between Donruss Trading Card Company and
the National Hockey League Players Association (2)
*10.21 License Agreement dated March 19, 1993 between Score Group, Inc. and the
National Hockey League Players Association (2)
*10.22 License Agreement dated December 31, 1994 between the Major League Baseball
Players Association and Donruss Trading Cards, Inc. (2)
*10.23 Major League Baseball Properties, Inc. License Agreement re: Donruss Trading
Cards, Inc., dated May 23, 1996(2)
*10.24 License Agreement dated December 27, 1994 between the Major League Baseball
Players Association and Pinnacle Brands, Inc.(2)
*10.25 Agreement dated March 14, 1995 between Pinnacle Brands, Inc. and the National
Football League Players, Inc. (2)
*10.26 Letter of Intent dated June 29, 1995 between Pinnacle Brands, Inc. and NFL
Properties, Inc. (2)
*10.27 Letter of Intent dated May 15, 1995 between Pinnacle Brands, Inc. and Major
League Baseball Properties (2)
10.28 Pinnacle Brands, Inc. 1996 Restricted Stock Plan (1)
*21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit
5.1)(1)
24.1 Powers of Attorney (included on signature page)
*27.1 Financial Data Schedule
</TABLE>
- ------------
* Previously filed
(1) To be filed by amendment.
(2) Confidential treatment has been requested for portions of this exhibit.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 30, 1996
