<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 6, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
goracing.com, inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 86-0956244
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4707 EAST BASELINE ROAD
PHOENIX, ARIZONA 85040
(602) 337-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHRISTOPHER S. BESING
CHIEF EXECUTIVE OFFICER
4707 EAST BASELINE ROAD
PHOENIX, ARIZONA 85040
(602) 337-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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<S> <C>
ROBERT S. KANT, ESQ. JAMES P. CLOUGH, ESQ.
JERE M. FRIEDMAN, ESQ. PATRICK J. DEVINE, ESQ.
SCOTT K. WEISS, ESQ. JAMES J. MASETTI, ESQ.
O'CONNOR, CAVANAGH, ANDERSON, PILLSBURY MADISON & SUTRO LLP
KILLINGSWORTH & BESHEARS, P.A. 2550 HANOVER STREET
ONE EAST CAMELBACK PALO ALTO, CALIFORNIA 94304-1115
PHOENIX, ARIZONA 85012-1656 (650) 233-4500
(602) 263-2400
</TABLE>
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered in 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,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A common stock, par value $.0001(2)............... $80,000,000 $22,240
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) Includes shares of Class A common stock subject to the Underwriters'
over-allotment option.
------------------------
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.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. GORACING.COM MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND GORACING.COM IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY JURISDICTION WHERE THE OFFER
OR SALE OF THESE SECURITIES IS NOT PERMITTED.
Prospectus (Not Complete)
Issued July 6, 1999
SHARES
[GORACING.COM LOGO]
goracing.com, inc.
CLASS A COMMON STOCK
------------------------
goracing.com, inc. is offering shares of its class A common
stock. This is our initial public offering, and no public market currently
exists for our shares. We estimate that the initial public offering price for
our shares will be between $ and $ .
------------------------
We will apply to have our class A common stock quoted on the Nasdaq
National Market under the symbol "GRCN."
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
<TABLE>
<CAPTION>
Per Share Total
---------------------- ----------------------
<S> <C> <C>
Public Offering Price............................. $ $
Discounts and Commissions to Underwriters......... $ $
Proceeds to goracing.com, inc. ................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
goracing.com, inc. has granted the underwriters the right to purchase up to
an additional shares of class A common stock to cover any
over-allotments. The underwriters can exercise this right at any time within
thirty days after the offering. Banc of America Securities LLC expects to
deliver the shares of class A common stock to investors on , 1999.
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY
U.S. BANCORP PIPER JAFFRAY
J.C. BRADFORD & CO.
------------------------
The date of this prospectus is , 1999
<PAGE> 3
[INSIDE FRONT COVER]
This page will contain a montage of pictures of various motorsports drivers,
vehicles, and fans, together with the "goracing.com" logo.
The inside cover folds out to display three representative samples of
"screen shots" from our network. The first depicts a representative sample
of motorsports news and information. The second depicts a representative sample
of the communtiy features on our network, such as a fantasy racing game.
The third depicts an e-commerce page where our visitors can purchase licensed
motorsports products.
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Combined Financial Data............................ 26
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 36
Management.................................................. 53
Transactions With Action Performance Companies, Inc. ....... 59
Certain Relationships and Transactions...................... 64
Principal Stockholders...................................... 65
Description of Capital Stock................................ 67
Shares Eligible for Future Sale............................. 72
Underwriting................................................ 74
Legal Matters............................................... 75
Experts..................................................... 75
Where You Can Find Additional Information................... 76
Index to Financial Statements............................... F-1
</TABLE>
------------------------
The "goracing.com" and "SpeedMall" names are our trademarks. This prospectus
also includes trade names and trademarks of Action Performance Companies, Inc.
and of other companies.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully. Unless otherwise indicated,
all information contained in this prospectus assumes that the underwriters will
not exercise their over-allotment option. This prospectus contains
forward-looking statements, which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this prospectus.
goracing.com, inc.
goracing.com, inc. is a leading online provider of worldwide
motorsports-related news and information, a global online meeting place and
community for motorsports fans, and a leading e-commerce marketplace for
motorsports-related die-cast collectibles, apparel, and souvenirs. In addition
to providing comprehensive motorsports information coverage, our network also
enables visitors to participate in chat groups, multimedia features,
entertainment offerings, online auctions, and other interactive activities
related to motorsports. Through SpeedMall, our virtual online shopping mall, our
visitors can shop for motorsports and automotive products and services,
including motorsports merchandise licensed by many of the leading race car
drivers, team owners, and motorsports sanctioning bodies. Our SpeedMall tenants
include our Racing Collectables Club of America, or Collectors' Club. We offer
on an exclusive basis limited edition lines of die-cast replicas of racing
vehicles and other licensed motorsports products to the more than 166,000
members of the Collectors' Club. Our network had approximately 15.7 million page
views and approximately 923,000 unique visitors during May 1999.
More than 17 million fans attended racing events in North America during
1998, with an additional aggregate 287 million estimated viewers tuning into
NASCAR events alone last year. Internationally, Formula One events are broadcast
worldwide to approximately 130 countries. Corporate sponsors are expected to
spend more than $1.2 billion, or 24% of all sports sponsorship dollars, on
motorsports marketing programs in the United States in 1999. We believe our
network provides merchants and advertisers targeted access to the substantial
and growing base of motorsports fans throughout the world.
During the fiscal year ended September 30, 1998, we generated $38.7 million
in revenue, up from $22.9 million in revenue during the prior fiscal year. For
the six months ended March 31, 1999, we generated $21.2 million in revenue, up
from $14.6 million in revenue during the same period of the prior year. From the
early February 1999 launch of SpeedMall through June 30, 1999, our company-owned
online stores received approximately 70,000 orders representing sales of
approximately $9.0 million, an average of $129 per order.
We have a unique relationship with our parent, Action Performance
Companies, Inc., a worldwide leader in the design and sale of licensed
motorsports merchandise. Through our parent, we have strategic relationships
with many of the most popular race car drivers, team owners, and crew chiefs who
have agreed to endorse our network. These personalities include Dale Earnhardt,
Jeff Gordon, Dario Franchitti, Don Prudhomme, Rusty Wallace, Bobby Labonte, Tony
Stewart, and more than 30 others, each of whom has agreed to grant interviews,
make personal appearances, participate in online chats, and provide items he
used in races for our online auctions and promotions. Our motorsports network
also hosts the Web sites of popular race car drivers and serves as the online
home to several influential racing associations.
We benefit from Action Performance's extensive portfolio of license
arrangements with popular race car drivers, many team owners and sponsors, and
various sanctioning bodies. We offer for sale online Action Performance's wide
variety of licensed motorsports merchandise. This licensed motorsports
merchandise features many of the leading racing series from around the world
including NASCAR, the Formula One World Championship, the National Hot Rod
Association, or NHRA, Championship Auto Racing Teams, or CART, and World
Superbike.
1
<PAGE> 6
Our goal is to be the leading destination on the Internet for motorsports
fans and automotive enthusiasts around the world. The key elements of our
strategy are as follows:
- capitalize on Action Performance's product offerings, licensing and
endorsement arrangements, and motorsports relationships,
- leverage our existing strategic relationships with drivers, team owners,
and sponsors and develop new strategic relationships with third-party
providers of motorsports content, community features, and products and
services,
- increase our online motorsports content, community, and commerce
offerings to drive traffic to our network and increase revenue,
- expand our offerings to include products, parts, accessories, and
services that appeal to automotive enthusiasts,
- develop sponsorship and other advertising programs that benefit from our
audience demographics,
- expand our network internationally, and
- increase worldwide brand recognition.
THE OFFERING
Class A common stock
offered shares
Common stock to be
outstanding
after this offering:
Class A common stock shares. This amount does not include
(1) up to an aggregate of shares
subject to over-allotment options granted by us to
the underwriters, or (2) any shares that may be
issued after the offering upon the exercise of
stock options, as discussed below.
Class B common stock shares. Action Performance owns all
of the class B common stock.
Relative rights of class A
common stock and class B
common stock The class A common stock and the class B common
stock have identical rights other than with respect
to voting, conversion, and transfer. The class A
common stock is entitled to one vote per share
while the class B common stock is entitled to ten
votes per share. In most cases, the class A common
stock and class B common stock vote together as one
class. The shares of class B common stock are
convertible at any time at the option of the holder
into shares of class A common stock on a
share-for-share basis. In addition, shares of class
B common stock will be automatically converted into
the same number of shares of class A common stock
if the shares are held by someone other than Action
Performance or one of its affiliates.
Use of Proceeds We intend to use the proceeds of this offering to
fund advertising and marketing programs; to add
online content, community features, and e-commerce
offerings on our network; to hire management and
other personnel; to enhance our technology,
software, and basic infrastructure; to facilitate
strategic relationships and acquisitions; to repay
$2,000,000 of intercompany payables to Action
Performance; and to provide funds for working
capital and general corporate purposes.
Listing We will apply to have our class A common stock
quoted on the Nasdaq National Market under the
symbol "GRCN."
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<PAGE> 7
OUR RELATIONSHIP WITH ACTION PERFORMANCE
We are a wholly owned subsidiary of Action Performance. Under various
contractual arrangements, Action Performance will make available its products to
us and will provide us with various management, administrative, and fulfillment
services. After this offering, Action Performance will continue to control our
company. As a result, our relationship with Action Performance will not always
be on an arm's-length basis.
OUR OFFICES
We are a Delaware corporation with executive offices located at 4707 E.
Baseline Road, Phoenix, Arizona 85040. Our telephone number is (602) 337-3700.
All references to "we," "our," "us," or "goracing.com" refer to goracing.com,
inc. and its predecessors, subsidiaries, and operating divisions. All references
to "Action Performance" refer to our parent company, Action Performance
Companies, Inc., and its predecessors, operating divisions, and subsidiaries
other than goracing.com, inc. and its subsidiaries and operating divisions. Our
Web site is located at http://www.goracing.com. Information contained on that
Web site and any of the Web sites in our network does not constitute a part of
this prospectus.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table sets forth our summary combined historical and summary
consolidated pro forma financial data. You should read this information in
conjunction with the Combined Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The historical financial
statements include allocations for administrative services, corporate overhead,
and other expenses incurred by Action Performance for resources it provides to
us. While we believe that these allocations are reasonable, they are not
necessarily indicative of, and it is not practical for us to estimate, the
amounts of expenses that would have resulted if we had operated as an
independent company.
The accompanying combined historical financial data includes
- the historical Internet operations of Action Interactive, Inc., a wholly
owned subsidiary of Action Performance, as restated for the acquisition
of Tech 2000 Worldwide, Inc., which was accounted for as a pooling of
interests,
- the operations of the Collectors' Club, an operating division of Action
Performance that became a wholly owned subsidiary of Action Performance
on June 1, 1998, and
- Action Direct Marketing, LLC, a wholly owned subsidiary of Action
Performance since December 31, 1998.
On July 1, 1999, Action Performance contributed to us all of its interest
in Action Interactive, Action Racing Collectables Club of America, and Action
Direct Marketing. We and Action Performance intend to enter into a number of
intercompany agreements governing the relationship between our companies. The
accompanying consolidated pro forma financial data is derived from our
historical financial statements and reflect
- the effect of the various intercompany agreements as if those agreements
were in place from the beginning of the periods presented,
- Action Performance's contribution to our company of its interest in
Action Interactive, Action Racing Collectables Club of America, and
Action Direct Marketing as if it had occurred as of March 31, 1999,
- the conversion of a portion of the intercompany payables to our capital,
and
- the recapitalization of our company.
The accompanying consolidated pro forma financial data is derived from our
historical financial statements and should be read in conjunction with the
audited and interim unaudited combined financial statements and notes thereto,
which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1996 1997 1998 1998(2) 1998 1999 1999(2)
------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue............................ $13,042 $22,948 $38,666 $38,666 $14,646 $21,199 $21,199
Gross profit....................... 7,158 12,708 20,118 12,563 7,313 11,341 6,809
Income (loss) before income
taxes............................ 1,417 4,127 6,537 (252) 1,397 2,318 (1,806)
Net income (loss).................. $ 667 $ 2,467 $ 3,737 $ (151) $ 807 $ 1,289 $(1,084)
Basic and diluted net income (loss)
per share(1)..................... $ 0.02 $ 0.07 $ 0.11 $ 0.00 $ 0.02 $ 0.04 $ (0.03)
Basic and diluted weighted average
shares outstanding(1)............ 35,000 35,000 35,000 35,000 35,000 35,000 35,000
</TABLE>
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<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------
COMBINED PRO FORMA PRO FORMA
ACTUAL CONSOLIDATED(2) AS ADJUSTED(3)
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(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 106 $ 106 $
Working capital (deficit)............................ (1,981) 4,175
Total assets......................................... 8,386 9,386
Long-term debt, net of current maturities............ -- --
Total equity (deficit)............................... (891) 6,265
</TABLE>
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(1) We did not exist as a separate company during the historical periods
presented. We computed earnings per share based on the shares outstanding
following our recapitalization on July 2, 1999, as if such shares were
outstanding from the beginning of the periods presented.
(2) Reflects (a) the consolidation of the contributed entities; (b) additional
assets contributed to us by Action Performance; (c) the conversion of a
portion of amounts due to Action Performance to our capital; and (d) the
effect of various intercompany agreements.
(3) Adjusted to give effect to the sale of shares of class A
common stock offered by this prospectus at the initial public offering
price, less the underwriting discounts and commissions and estimated
offering expenses, and the application of the estimated net proceeds
therefrom, which includes a $2,000,000 repayment of intercompany payables to
Action Performance.
5
<PAGE> 10
RISK FACTORS
An investment in our class A common stock involves a high degree of risk.
You should consider carefully the following risk factors, in addition to the
other information contained in this prospectus, before purchasing any of our
class A common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AS AN INTERNET COMPANY UPON WHICH YOU CAN
EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS.
We have a limited operating history on the Internet upon which you can
evaluate our existing business and our potential for future success. Our parent
incorporated our company in May 1999 and contributed the capital stock of our
operating subsidiaries to us on July 1, 1999. Although the Collectors' Club has
operated since 1991, we launched SpeedMall in February 1999. The historical
combined financial statements included in this prospectus include periods prior
to our launch of SpeedMall and the conduct of our current Internet business.
We face numerous risks and uncertainties as an early-stage company in the
new and rapidly evolving Internet market. Some of these risks and uncertainties
relate to our ability to
- develop brand awareness and brand loyalty to attract a larger audience to
our network of Web sites,
- increase customer acceptance of the online purchase of motorsports,
automotive, and related merchandise and services,
- develop an internal sales and marketing force to implement our
advertising and marketing strategies,
- develop and renew strategic relationships,
- offer up-to-date news, information, and other features that are
attractive to our visitors,
- anticipate and adapt to the changing market for Internet services and
electronic commerce,
- continue to upgrade and enhance our systems to accommodate expanded
service offerings and increased consumer traffic,
- provide or contract for satisfactory customer service and order
fulfillment, and
- integrate any acquired businesses, technologies, and services.
We may not be successful in addressing these risks and uncertainties. The
failure to do so would materially and adversely affect our business.
WE DO NOT OPERATE AS AN INDEPENDENT COMPANY, AND WE MAY FAIL TO DEVELOP OUR OWN
INFRASTRUCTURE.
We currently are a wholly owned subsidiary of Action Performance. We rely
on Action Performance to develop new products and to provide core business
services, computer hardware and software systems, technical and marketing
resources, and other administrative services. After this offering, we will
continue to obtain many of these services pursuant to intercompany agreements
between us and Action Performance, which have 25-year terms. Although we intend
to develop the operational, administrative, and other systems and infrastructure
necessary to support our business on an independent basis in the future, we may
not be successful in these efforts. Our business could be adversely affected if
we fail to develop our own infrastructure.
6
<PAGE> 11
THE FINANCIAL STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT REFLECT RESULTS
THAT WE WOULD HAVE ACHIEVED AS A STAND-ALONE COMPANY.
The historical financial statements contained in this prospectus include
allocations for administrative services, corporate overhead, and other expenses
that Action Performance incurred for services rendered to us or on our behalf.
While we believe that these allocations are reasonable, they do not necessarily
reflect the actual expenses that we would have incurred if we had operated as a
separate, stand-alone company during the periods presented. We also have relied
on Action Performance to finance our operations. Upon completion of this
offering, Action Performance will not be required to finance our operations and
we may not have access to the capital or financing resources available to our
parent. The financial information included in this prospectus does not reflect
the significant changes that will occur in our capital structure, sources of
financing, and operations as a result of this offering and any subsequent
separation from our parent. Therefore, investors should not rely on our cash
flows to date or our current financial position as indicative of the cash flows
or financial position that would have resulted if we had operated as an
independent company during the periods presented.
WE MAY INCUR SIGNIFICANT EXPENSES IN AN UNSUCCESSFUL ATTEMPT TO PROMOTE AND
MAINTAIN RECOGNITION OF THE GORACING.COM BRAND.
Our success depends on our ability to build the brand identity of
goracing.com and increase traffic to our network. We believe that the importance
of brand recognition will increase due to the growing number of Internet sites
and the relatively low barriers to entering this market. We believe that we will
incur significant marketing costs in our effort to create and maintain a strong
brand identity among motorsports fans and automotive enthusiasts. Other
companies currently use the "goracing" name. Our business could be adversely
affected if motorsports fans identify the "goracing" name with any company other
than ours. We must use the proceeds of this offering effectively to build our
brand identity, distinguish the goracing network, and successfully grow our
business. Our business, operating results, and financial condition could be
materially and adversely affected if we incur excessive expenses in an
unsuccessful attempt to promote and maintain recognition of the goracing.com
brand. See "Risk Factors -- We have limited protection of our intellectual
property and others could infringe on or misappropriate our rights," and "Risk
Factors -- We may be unable to acquire or maintain the necessary Web domain
names."
WE EXPECT TO INCUR LOSSES FROM OPERATIONS AND OUR FUTURE PROFITABILITY REMAINS
UNCERTAIN.
Our ability to generate significant revenue is uncertain. We have incurred
substantial costs to create, launch, and enhance the goracing network; to build
brand awareness; and to expand our Internet business. As of March 31, 1999, we
had an accumulated deficit of $894,000. We had a pro forma net loss of $151,000
for the year ended September 30, 1998 and a pro forma net loss of $1.1 million
for the six months ended March 31, 1999. We expect losses from operations and
negative cash flows for the foreseeable future because we plan to incur
significant expenses as we
- expand our sales and marketing efforts,
- develop our online community,
- hire additional management, sales, and other personnel,
- expand our online offerings,
- expand our infrastructure and customer support services, and
- seek to acquire complementary businesses and technologies.
Our expected losses may exceed our historical pro forma losses from
operations. If our revenue does not increase and if our spending levels are not
adjusted accordingly, we may not generate sufficient revenue to achieve
profitability in the future. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
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<PAGE> 12
WE MAY NOT BE COMPETITIVE IF WE FAIL TO ENHANCE OUR ONLINE OFFERINGS.
The failure to develop and introduce effectively new or enhanced online
features, functions, or services could have a material adverse effect on our
business. To remain competitive, we must continue to
- enhance our offerings of news, information, and features,
- expand our product and service offerings,
- enhance the ease of use, responsiveness, functionality, and features of
our network,
- attract and retain desirable tenants in SpeedMall, and
- continue to improve the consumer purchasing experience on our network of
Web sites.
These efforts may require us to develop or license increasingly complex
technologies. We may not be successful in developing or introducing new
features, functions, and services, and the features, functions, and services
that we develop may not result in increased traffic or revenue.
WE DEPEND ON SALES OF LICENSED PRODUCTS FOR A SIGNIFICANT PORTION OF OUR
REVENUE.
We expect to continue to generate a significant portion of our revenue from
the sale of Action Performance's products. Action Performance markets its
products under licensing arrangements with race car drivers, team owners,
sponsors, automobile and truck manufacturers, NASCAR, NHRA, CART, and other
entities. The licensing arrangements vary in scope and duration, but generally
authorize Action Performance to sell specified licensed products for short
periods of time. The success of licensing arrangements depends on many factors,
including the popularity, performance, image, and health of the individual
drivers. A driver's popularity could be adversely affected if the driver fails
to maintain a successful racing career or engages in behavior that the general
public considers objectionable.
In addition, Action Performance's ability to enforce its rights under
licensing agreements may be limited by the interpretation and enforcement of
those agreements. Some license agreements contain provisions that allow the
licensor to terminate the agreement upon the occurrence of events that are
outside of Action Performance's control, including a change in the driver's team
owner or sponsor. Our business would be materially and adversely affected if we
were unable to obtain licensed products from Action Performance or if Action
Performance becomes unable to develop, enter into, renew, or enforce material
licensing arrangements.
ANY DOWNTURN IN THE POPULARITY OF THE MOTORSPORTS INDUSTRY IN GENERAL, AND
NASCAR RACING IN PARTICULAR, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Substantially all of our current business relates to the motorsports
industry. Motorsports competes for television viewership, attendance,
merchandise sales, and sponsorship funding with other sports, entertainment, and
recreational events. The competition in the sports, entertainment, and
recreation industries is intense. Any downturn in the popularity of the
motorsports industry, or its appeal to consumers, could reduce sales of
motorsports merchandise or corporate sponsorships, which would materially and
adversely affect our business.
A significant percentage of our revenue consists of die-cast replicas and
other licensed merchandise related to NASCAR. Although Action Performance has
expanded its product lines to include vehicles from other segments of
motorsports, we expect that NASCAR-related products will continue to account for
a significant percentage of our revenue for the foreseeable future. Any downturn
in the popularity of NASCAR-sanctioned racing could have a material and adverse
effect on our business.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND VENDORS.
We do not manufacture any of the products that we sell. Action Performance
and various SpeedMall tenants depend upon third parties to manufacture their
products. Any difficulties encountered by the third-party manufacturers that
result in product defects, production delays, cost overruns, or the inability to
fulfill orders on a timely basis could have a material adverse effect on us.
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Our suppliers, including Action Performance, and many SpeedMall tenants
generally do not have long-term contracts with their third-party manufacturers.
In particular, Action Performance obtains most of its die-cast products from its
primary manufacturer in China under an agreement that has been in place since
1994 and that automatically renews for successive one-year terms unless
terminated by either party giving written notice to the other at least 90 days
prior to the end of the then-current term. We may not meet the demands and
expectations of our customers and our operations may be adversely affected by
any one or more of the following:
- the loss of these relationships,
- significant damage to the facilities of one or more of our suppliers or
their third-party manufacturers,
- the disruption or termination of one or more of the operations of our
suppliers or their third-party manufacturers, or
- the disruption or termination of transportation of products from one or
more of our suppliers or their manufacturers, even for a relatively short
period of time.
Neither we nor any of our suppliers maintain an inventory of sufficient
size to protect us against an interruption of supply for any significant period.
We also may be subject to variations in the prices that we or our suppliers pay
to third-party manufacturers for products if their raw materials, labor, and
other costs increase. We may not be able to pass along price increases to our
customers.
Action Performance engages one third-party manufacturer in China to
manufacture most of its die-cast collectible products. Action Performance's
reliance on a single manufacturer for a substantial portion of its products
increases those risks listed above.
We also depend upon a number of third-party shippers, such as the U.S.
Postal Service, United Parcel Service, and Federal Express, to deliver goods to
us and our customers. Strikes or other service interruptions affecting our
shippers would have a material adverse effect on our ability to deliver
merchandise on a timely basis.
WE DEPEND ON THIRD-PARTY MANUFACTURERS IN CHINA FOR MOST OF OUR PRODUCTS.
Action Performance obtains most of its products from overseas
manufacturers, particularly one third-party manufacturer of die-cast products in
China. As a result, we face risks in addition to the risks generally created by
obtaining our products from third parties. Our suppliers' reliance on those
third-party manufacturers to provide personnel and facilities in China and their
maintenance of personnel, equipment, and inventories abroad expose them to a
variety of economic and political risks commonly encountered in international
operations, international trade, currency exchange, and financing matters. In
particular, current tensions between the United States and China could adversely
affect trade relations with China and impact Action Performance's ability to
obtain die-cast collectible products from its manufacturers.
WE MAY NOT BE SUCCESSFUL IN ADDING NEW ONLINE OFFERINGS OR EXPANDING INTO NEW
MARKETS.
We may not be successful in our attempts to expand our motorsports-related
offerings of news and information, community features, and products and
services. We also may not be able to develop, acquire, or enter into strategic
alliances for Web sites designed to attract automotive enthusiasts and suppliers
of automotive-related products and services to our network. The success of our
business will depend to a great extent on our ability to develop markets for new
online offerings and an adequate online demand for the products and services
offered by us and the tenants in SpeedMall. Developing, launching, and promoting
new online offerings or expanding into new markets will require us to make
significant investments of financial, management, and operational resources.
These efforts also could strain our ability to support existing online offerings
and provide an enjoyable online experience to visitors to our network. Our
business could be materially and adversely affected if we fail to achieve these
goals.
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WE CURRENTLY LACK ADVERTISING SALES PERSONNEL.
Advertising on the goracing network has not generated substantial revenue
to date. We intend to develop a sales team to stimulate sales of advertising on
our network of Web sites. Establishing our sales team involves a number of
risks, including the following:
- we have not previously employed dedicated sales personnel,
- we may be unable to hire, retain, integrate, and motivate sales and sales
support personnel, and
- new sales personnel may require a substantial period of time to become
productive.
Failure to develop and maintain an effective sales force would have a material
adverse effect on our business.
FAILURE OF THE SPEEDMALL CONCEPT TO DEVELOP AS AN E-COMMERCE SOLUTION COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Visitors to SpeedMall may decide not to make online purchases in the future
if we do not provide a convenient, economical, and secure shopping experience or
do not offer the products and services that they seek. Our existing tenants may
not renew their leases in SpeedMall, and we may not be able to attract new
tenants if online sales are lower than anticipated. The failure of SpeedMall to
develop as a viable e-commerce solution could have a material adverse effect on
our business.
WE WILL FACE ADDITIONAL RISKS AS WE EXPAND INTO INTERNATIONAL MARKETS.
We plan to further expand our network to include additional Web sites
serving international markets. Expanding our overseas operations may cost more
than we expect. We also may be unsuccessful in expanding our presence in
international markets, and we might lose all or part of our investment in those
operations. As we expand into international operations, we will be increasingly
subject to various risks associated with international operations in addition to
the other business risks described in this prospectus. These risks include the
following:
- management of a multi-national organization,
- compliance with local laws and regulatory requirements, as well as
changes in those laws and requirements,
- restrictions on the repatriation of funds,
- employment and severance issues,
- overlap of tax issues,
- the business and financial condition of any overseas business partners,
- political and economic conditions abroad, and
- the possibility of
-- expropriation or nationalization of assets,
-- supply disruptions,
-- currency controls,
-- exchange rate fluctuations, or
-- changes in tax laws, tariffs, and freight rates.
Our inability to effectively manage these and other risks could have a material
adverse effect on our business.
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WE MUST RESPOND TO RAPID MARKET CHANGES.
The markets for products and services that the goracing network offers are
subject to rapidly changing customer tastes, a high level of competition,
seasonality, and a constant need to identify and market new products and
services. Demand for motorsports and automotive products and services depends
upon a wide variety of factors, including the following:
- the popularity of drivers, teams, and other licensors,
- the popularity of current product and service concepts or themes,
- cultural and demographic trends,
- marketing and advertising expenditures, and
- general economic conditions.
Because these factors can change rapidly, customer demand also can shift
quickly. New products or services frequently can be successfully marketed for
only a limited time.
Our ability to increase our sales and marketing efforts to stimulate
customer demand, secure popular high-quality products or services for sale, and
maintain satisfactory delivery schedules are important factors in our long-term
prospects. We could experience a material adverse effect on our business,
operating results, and financial condition if we are unable to respond quickly
to market changes or a slowdown in demand for the products we sell and services
we provide as a result of ineffective marketing efforts, manufacturing
difficulties, changing cultural and demographic trends, changing consumer tastes
and spending patterns, economic conditions, or other broad-based factors.
WE FACE RISKS FROM MANY COMPETITIVE FACTORS.
Markets for motorsports and automotive-related products and services are
extremely competitive. Many of our competitors have greater market recognition
and substantially greater financial, technical, marketing, distribution, and
other resources than we possess. In addition, online retailers may be acquired
by, receive investments from, or enter into other commercial relationships with
larger, well-established and well-financed companies as use of the Internet and
other online services increases. Certain of our competitors may be able to
secure merchandise from manufacturers exclusively or on more favorable terms,
devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing or inventory availability policies, and devote substantially
more resources to Web site and systems development than we can. Increased
competition may result in reduced operating margins, loss of market share, and a
diminished brand franchise. New technologies and the expansion of existing
technologies may increase the competitive pressures on us.
The e-commerce market is new, rapidly evolving, and intensely competitive,
and we expect competition to intensify in the future. Barriers to entry are
minimal and competitors may develop and offer similar services in the future. We
currently or potentially compete with several types of companies, including the
following:
- general integrated entertainment companies, such as Walt Disney Co. and
its ESPN affiliate, Time Warner, and TNN,
- Web sites targeted to sports enthusiasts generally, such as ESPN.com,
Sportsline.com, CNNSI.com, and Foxsports.com,
- NASCAR, which has a contract with Action Performance under which NASCAR
has a right to buy some of Action Performance's products for its
NASCAR.com e-commerce channel,
- other motorsports and automotive-related Web sites, such as
Speedvision.com, Jayski.com, Hemmings Motor News Online, and Ecklers.com,
- traditional forms of media that cover motorsports, such as magazines,
newspapers, radio, and television, and
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- online and offline retailers of motorsports merchandise, including
various distributors of Action Performance.
Our competitive position depends on a number of factors, both within and
outside our control, including the following:
- our ability to generate traffic on our network and to develop
successfully an online community that attracts motorsports fans and
automotive enthusiasts,
- the quality, features, pricing, and diversity of the products offered on
our network of Web sites,
- our ability to recognize industry trends, anticipate shifts in consumer
demands, and identify and market new products,
- our relationships with and the popularity of the race car drivers, teams,
and other licensors of the products we sell, and
- our ability to develop and maintain effective marketing programs that
enable us to sell products and services to motorsports fans and
automotive enthusiasts, and
- product and service offerings by our competitors.
We cannot assure you that we will be able to compete successfully in the future.
WE MAY REQUIRE ADDITIONAL CAPITAL TO SUPPORT GROWTH, AND ADDITIONAL FINANCING
MAY NOT BE AVAILABLE.
Continued rapid growth could require us to make substantial capital
investments in excess of resources provided by the proceeds of this offering,
cash generated by operations, and funds available to us through our parent
company. We cannot predict the timing and amount of any such capital
requirements at this time. Upon completion of this offering, we will not be able
to obtain funds available to Action Performance under its credit facility. We
currently do not have arrangements for a credit facility of our own. We may not
be able to obtain additional financing in sufficient amounts or on acceptable
terms when needed. As a result, we may not be able to expand our business at the
rate desired, which may adversely affect our operating results.
WE MAY BE UNABLE TO IDENTIFY OR SUCCESSFULLY INTEGRATE POTENTIAL ACQUISITIONS.
We may wish to acquire complementary businesses, products, services, or
technologies in the future. We may not be able to identify suitable acquisition
candidates or make acquisitions on commercially acceptable terms. We may have
difficulty integrating an acquired company's personnel, operations, products,
services, or technologies into our operations. These difficulties could disrupt
our ongoing business, distract our management and employees, increase our
expenses, and materially and adversely affect our business.
WE MUST EFFECTIVELY MANAGE OUR GROWTH.
Our failure to manage our growth effectively could have a material adverse
effect on our business, operating results, and financial condition. In order to
manage our growth, we must take various steps, including the following:
- arrange necessary capital to expand our facilities and equipment,
- obtain products and services from suppliers, including Action
Performance, on a timely basis, and
- successfully hire, train, retain, and motivate additional employees.
We will be required to increase staffing and other expenses as well as make
expenditures on capital equipment to attempt to meet the anticipated demand of
our customers. Sales of motorsports and automotive products are subject to
changing consumer tastes. We may increase our expenditures in anticipation of
future orders that do not materialize, which would adversely affect our
profitability. Demand for popular products or services may increase orders on
short notice, which would place an excessive short-term burden on our resources.
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WE DEPEND ON MANAGEMENT AND OTHER KEY PERSONNEL.
The development of our operations and those of Action Performance depend
upon the efforts and abilities of our respective senior managements, including
Fred W. Wagenhals and Christopher S. Besing. The loss of services of one or more
of our or Action Performance's key employees could have a material adverse
effect on our business.
Our success also depends on our ability to continue to attract, retain, and
motivate skilled employees. Competition for employees in the Internet industry
is intense. We may be unable to retain our key employees or attract, motivate,
or retain other qualified employees in the future. Any failure to attract and
retain key employees will materially and adversely affect our business.
SEASONAL FLUCTUATIONS IN SALES MAY AFFECT OUR EARNINGS AND THE TRADING PRICE OF
OUR CLASS A COMMON STOCK.
We may experience seasonality in our business, which could result in
unfavorable quarterly earnings comparisons and affect the trading price of our
class A common stock. Our limited Internet operating history and the new and
rapidly evolving Internet markets make it difficult to predict the effects of
seasonality on our business. Because the auto racing season is concentrated
between the months of February and November, the second and third calendar
quarters of each calendar year generally are characterized by higher sales of
motorsports products. Similarly, advertising sales in traditional media, such as
television and radio, generally are lower in the first calendar quarter of each
year. Seasonal fluctuations in quarterly sales may require us to take temporary
measures, including changes in personnel levels, borrowing amounts, and
marketing activities. These factors and any seasonal and cyclical patterns that
emerge in Internet consumer purchasing or in Internet advertising spending could
result in unfavorable quarterly earnings comparisons. As a result, it is
difficult to predict our future revenue. Any shortfall in revenue may have a
material adverse effect on our business and stock price. You should not rely on
quarter-to-quarter comparisons of our operating results as an indication of
future performance. It is possible that our operating results in some future
periods may fall below the expectations of analysts and investors. In that
event, the price of our class A common stock may decline.
WE MAY BE UNABLE TO SUPPORT INCREASED VOLUME ON OUR NETWORK.
Growth in the number of users accessing our network of Web sites may strain
or exceed the capacity of our computer systems and lead to impaired performance
or system failures. If this occurs, customer service and satisfaction may
suffer, which could lead to dissatisfied users, reduced traffic, and an adverse
impact on our business. Our current systems may be inadequate to accommodate
rapid traffic growth on our network. We plan to upgrade and add to our existing
technology and network infrastructure and to implement new systems so that our
network can perform better and handle increased traffic. Failure to implement
these systems effectively or within a reasonable period of time could have a
material adverse effect on our business, operating results, and financial
condition.
SERVICE FAILURES OR INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Any sustained or repeated failure or interruption in our computer systems
or equipment would reduce the appeal of our network of Web sites to customers,
advertisers, and SpeedMall tenants. Unanticipated problems affecting our systems
may cause interruptions in our services. Interruptions or failures could result
if we fail to maintain our computer systems and equipment in effective working
order or if our telecommunications providers fail to provide the capacity we
require. We also must protect our computer systems against damage from fire,
power loss, water, vandalism and other malicious acts, and similar unexpected
adverse events. In addition, our users depend on telecommunications providers,
Internet service providers, and network administrators for access to our Web
sites. Our systems and equipment could experience outages, delays, and other
difficulties as a result of system failures unrelated to our systems. Any
damage, interruption, or failure that interrupts or delays our operations could
cause users to stop using our services and have a material adverse effect on our
business.
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WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY, AND OTHERS COULD
INFRINGE ON OR MISAPPROPRIATE OUR RIGHTS.
We rely upon all facets of intellectual property and related law to protect
our intellectual property. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our services or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our proprietary rights is difficult. Our failure to adequately protect
our intellectual property could materially and adversely affect our business,
operating results, and financial position.
We currently are seeking federal registration of the trademarks
"goracing.com," "RCCA SelectNet," and "SpeedMall" in the United States. The U.S.
Patent and Trademark office has suspended our "goracing.com" application,
pending review of other possibly conflicting trademark
applications/registrations. We believe that our use of the "goracing.com" mark
was first in time with respect to the business in which we engage, and that our
acquisition of a potentially conflicting trademark gives our "goracing.com"
application priority over all such other possibly conflicting applications or
registrations. As a result, we do not believe that anyone else can obtain
trademark protection for the "goracing.com" mark in the United States for the
business in which we operate. However, we cannot assure you we will be
successful in obtaining a federal registration for the "goracing.com" mark. Our
ability to prevent others from using similar trademarks may be adversely
impacted if our "goracing.com" mark is regarded as a descriptive or weak
trademark. Our inability to obtain trademark protection for our "goracing.com"
mark could have a material adverse effect on our business.
We may not be able to obtain effective trademark, service mark, copyright,
and trade secret protection in every country in which our products and services
are made available online. We may find it necessary to take legal action in the
future to enforce or protect our intellectual property rights or to defend
against claims of infringement. Litigation can be very expensive and can
distract management's time and attention, which could adversely affect our
business. In addition, we may not be able to obtain a favorable outcome in any
intellectual property litigation.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants. These agreements may be
ineffective in preventing misappropriation of technology and could be
unenforceable. Misappropriation of our intellectual property or the litigation
costs associated with our intellectual property could have a material adverse
effect on us.
WE MAY BE UNABLE TO ACQUIRE OR MAINTAIN THE NECESSARY WEB DOMAIN NAMES.
We currently hold several Web domain names, including "goracing.com" and
"SpeedMall.com." The acquisition of similar domain names by third parties could
create confusion that diverts traffic to other Web sites, which could adversely
affect our business. The regulation of domain names in the United States and in
foreign countries is subject to change in the near future. Internet regulatory
bodies may establish additional top-level domains, appoint new or additional
domain name registrars, or modify the requirements for holding domain names. As
a result, we may be unable to acquire or maintain relevant domain names in all
countries in which we conduct business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon, or
otherwise decrease the value of our proprietary rights.
REGULATION OF CORPORATE SPONSORSHIP MAY ADVERSELY AFFECT THE MOTORSPORTS
INDUSTRY.
Tobacco and alcohol companies provide a significant amount of advertising
and promotional support of racing events, drivers, and car owners. In 1996, the
U.S. Food and Drug Administration published regulations that would substantially
restrict tobacco industry sponsorship of sporting events, including motorsports.
The legality of these regulations has been challenged in court. The U.S. Supreme
Court will review these regulations on appeal, and we expect the Court to issue
its decision sometime during 2000. The FDA regulations, if ultimately approved,
and any other legislation, regulations, or other initiatives that limit or
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prohibit advertisements of tobacco or alcohol products at racing events could
adversely affect the popularity of motorsports, which could have a material
adverse effect on our business and operating results.
In November 1998, certain major manufacturers of cigarettes and smokeless
tobacco products and the attorneys general of 46 states agreed to settle certain
lawsuits filed by more than 40 of the settling states and potential claims that
could be brought by the remaining settling states. The terms of the settlement,
among other things, limit sponsorship of racing events by the participating
manufacturers and substantially eliminate outdoor advertising of tobacco
products and any marketing or distribution of tobacco brand name merchandise.
The settlement, however, permits the participating manufacturers to engage in
limited sponsorships of racing events, drivers, or teams. The participating
manufacturers may not refer to any sponsored event, driver, or team in its other
advertisements of tobacco products. The terms of the settlement will limit or
prohibit our ability to sell licensed motorsports collectible and consumer
products that include a tobacco brand name and our ability to sell online
advertising to tobacco companies. Domestic and international tobacco advertisers
heavily subsidize certain NASCAR, NHRA, CART, Formula One, and other racing
series and teams, and those series and teams may not find similar sponsorships.
The limitations on tobacco company sponsorship imposed by the settlement and any
further limitations imposed on tobacco or alcohol sponsorship of racing events
also could ultimately affect the popularity of motorsports, which could have a
material adverse effect on our business and operating results.
WE FACE RISKS ASSOCIATED WITH "YEAR 2000" COMPLIANCE.
We depend upon complex computer software and systems, including our
parent's computer systems, for all phases of our operations. The failure of any
of our software or systems or the software or systems of our parent to be Year
2000 compliant could disrupt the operation of our network, our financial and
management controls, and reporting systems, or could prevent us from being able
to process or fulfill orders from our customers.
In addition to the systems and software that we use directly, our
operations also depend on the performance of software and systems of our
third-party vendors and service providers. These include providers of financial,
telecommunications, and parcel delivery services. We cannot assure you that our
service providers have, or will have, operating software and systems that are
Year 2000 compliant.
We have begun conducting an analysis of our material operating software and
systems to assess and assure Year 2000 compliance. We also have been
communicating with our third-party vendors and service providers and others with
whom we do business to coordinate Year 2000 readiness. The responses we have
received to date have indicated that steps are currently being undertaken by our
third-party vendors and service providers to address this concern. However, any
failure of our computer software and systems, Action Performance's computer
software and systems, or the systems of third parties to achieve timely Year
2000 compliance could have a material adverse effect on our business, operating
results, and financial position. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
OUR NETWORK MAY BE ADVERSELY AFFECTED BY UNKNOWN SOFTWARE DEFECTS.
Our network depends on complex software, both internally developed and
licensed from third parties. Complex software often contains defects,
particularly when first introduced or when new versions are released. Although
we conduct extensive testing, we may not discover software defects that affect
our new or current services or enhancements until after they are deployed.
Although we have not experienced any material software defects to date, it is
possible that, despite testing by us, defects may occur in the software. These
defects could cause service interruptions, which could damage our reputation or
increase our service costs, cause us to lose revenue, delay market acceptance,
or divert our development resources, any of which could materially and adversely
affect our business.
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RISKS ASSOCIATED WITH OUR RELATIONSHIP WITH ACTION PERFORMANCE
WE DEPEND ON ACTION PERFORMANCE TO OBTAIN FAVORABLE LICENSE ARRANGEMENTS AND
DEVELOP NEW PRODUCTS.
We depend upon Action Performance to supply us with most of the licensed
motorsports merchandise that we sell and with licensing arrangements with
popular motorsports personalities. We believe that these arrangements are
important to the success of our business. Our earnings and growth prospects
could be adversely affected if Action Performance is unable or unwilling to
develop and maintain favorable licensing arrangements with popular motorsports
personalities, to introduce new and creative product offerings and marketing
opportunities on which we can capitalize, or to supply us with sufficient
quantities of products for sale. Our inability to obtain products and favorable
license arrangements from Action Performance could have a material adverse
effect on our business, operating results, and financial condition.
Our operating results depend to a significant extent on the ability of
Action Performance to develop and introduce on a timely basis new products and
services that compete effectively in terms of price and that address customer
tastes, preferences, and requirements.
WE DEPEND ON ACTION PERFORMANCE FOR SERVICES.
We depend upon Action Performance for various management, financial, tax,
human resource, and other functions that typically are performed by in-house
personnel of public companies. We have entered into long-term agreements that
require Action Performance to provide these services. Action Performance will
have the right to terminate or decline to renew these agreements in some
circumstances. We will need to renew or extend these agreements, engage other
entities to perform these services or provide us with products, or perform these
services ourselves if our agreements with Action Performance expire or are
terminated. The cost of obtaining other services from third parties or devoting
resources to provide them internally may exceed the cost under our agreements
with Action Performance.
ACTION PERFORMANCE WILL CONTROL OUR COMPANY AFTER THIS OFFERING.
Immediately after this offering, Action Performance will own all of our
outstanding class B common stock, representing approximately % of the
combined voting power of our outstanding common stock. As a result of this
ownership, Action Performance will be able to exercise a controlling influence
over our business and affairs and to determine unilaterally the outcome of any
matter submitted to a vote of our stockholders.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A CHANGE IN CONTROL OF ACTION
PERFORMANCE.
Action Performance is a public company. As long as Action Performance owns
shares representing a majority of our voting power, if another person or entity
gains control of Action Performance that person or entity would also be able to
control us. A new owner may change our operating strategy or may enter into new
markets that are different from those that appeal to motorsports fans or
automotive enthusiasts. Fred W. Wagenhals may cease to serve with Action
Performance following a change of control. Action Performance depends on Mr.
Wagenhals to develop and maintain relationships with many of the most popular
motorsports personalities. In addition, many of Action Performance's license
agreements contain a provision that gives the licensor the right to terminate
the agreement if Mr. Wagenhals no longer serves with Action Performance. The
loss of the services of Mr. Wagenhals might impair Action Performance's ability
to enter into license arrangements with motorsports personalities and
sanctioning bodies and might impair our ability to obtain favorable endorsement
arrangements with motorsports personalities. We believe these relationships are
important to our success. Any loss of these relationships would have a material
adverse effect on our business.
WE AND ACTION PERFORMANCE HAVE CONFLICTS OF INTEREST.
Because our business to a great extent depends on sales of Action
Performance's licensed motorsports merchandise and its ability to provide us
with valuable licensing arrangements, there exist numerous actual
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and potential conflicts of interest between us and Action Performance. We and
Action Performance to some extent will compete with each other when offering
products and services to potential customers. Our certificate of incorporation
contains provisions addressing potential conflicts of interest between us and
Action Performance and the allocation between us and Action Performance of
transactions that could otherwise constitute corporate opportunities of both
companies. These provisions provide that Action Performance need not make these
opportunities available to us.
Prior to the completion of this offering, we will enter into various
agreements with Action Performance. Among other things, these agreements will
govern the terms on which the parties will jointly market products and services
and provide products and services to each other. The agreements generally
contemplate that the parties will maintain their relationships in a manner
consistent with their past practice. However, neither these agreements nor any
future agreements between us and Action Performance will necessarily result from
arm's-length negotiations. Therefore, these agreements may be less favorable to
us than those we could obtain from unaffiliated third parties. Moreover, many of
the transactions between us and Action Performance are informal and do not lend
themselves to formulaic allocations of costs and benefits. Thus, there
inevitably will be some discretion left to the parties, which are subject to the
potentially conflicting interests described above. Action Performance is not
obligated to engage in any future business transactions with us or jointly
pursue opportunities, except for those expressly provided for in the
intercompany agreements.
SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR OFFICERS OF ACTION PERFORMANCE.
As long as Action Performance owns shares representing a majority of the
voting power of our stock, it will have the right to designate a majority of the
members of our board of directors. In addition, as long as Action Performance
owns shares representing at least 10% of the voting power of our stock, Action
Performance will have the right to designate at least one person to serve as a
member of our board of directors. We expect that some or all of the persons that
Action Performance designates to serve on our board of directors also will be
directors or officers of Action Performance. Persons designated by Action
Performance to serve on our board of directors will have obligations to us as
well as to Action Performance and therefore may have conflicts of interest when
matters arise that actually or potentially involve both companies. Our
certificate of incorporation includes provisions that are designed to help
resolve these conflicts of interest. These provisions do not, however, change
our directors' fiduciary duty of loyalty under Delaware law. Subject to
applicable Delaware law, by becoming a stockholder of our company you will be
deemed to have notice of and to have consented to the provisions in our
certificate of incorporation. We cannot assure you that these provisions will
resolve conflicts of interest between us and Action Performance in a manner that
you would consider to be fair to our company.
THE SAME INDIVIDUALS WILL MANAGE US AND ACTION PERFORMANCE
Following this offering, Fred W. Wagenhals, our Chairman of the Board, will
continue to serve as a director and officer of Action Performance and
Christopher S. Besing, our Chief Executive Officer, will continue to serve as a
director of Action Performance. Certain of our other officers and employees will
spend a substantial part of their professional time and efforts on behalf of
Action Performance. In many instances, their efforts for Action Performance will
relate to activities that are unrelated and, in some circumstances adverse, to
our interests. In addition, Messrs. Wagenhals, Besing, Lonnie P. Boutte, our
President, Roger J. Falcione, our Chief Technology Officer, and some of our
other employees will continue to hold shares and options to purchase shares of
Action Performance common stock or will continue to participate in Action
Performance's stock option plans. These circumstances may present these officers
and employees with incentives different from those of our stockholders and may
magnify the conflicts of interests described above.
In addition to Messrs. Wagenhals and Besing, our board of directors
includes two directors who are also directors or officers of Action Performance.
After this offering, a majority of our directors will be individuals who are
directors or officers of Action Performance. For as long as Action Performance
maintains voting control of our company, Action Performance will have the
ability to change the size or composition of our board of directors.
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WE FACE RISKS RELATING TO OUR INCLUSION WITHIN ACTION PERFORMANCE'S CONSOLIDATED
GROUP FOR INCOME TAX PURPOSES.
For as long as Action Performance continues to own at least 80% of the
voting rights and value of our capital stock, we will be included in Action
Performance's consolidated group for federal income tax purposes. Upon
completion of this offering, we will enter into a tax allocation agreement with
Action Performance. We will agree to pay to Action Performance the amount of
federal, state, and local income taxes that we would be required to pay to the
relevant taxing authorities if we were a separate taxpayer not included in
Action Performance's consolidated or combined returns. In addition, by virtue of
its controlling ownership of our company and the tax allocation agreement,
Action Performance will effectively control all of our tax decisions. Under the
tax allocation agreement, Action Performance will have sole authority to respond
to and conduct all tax proceedings, including tax audits relating to us, to file
all income tax returns on our behalf, and to determine the amount of our
liability to or entitlement to payment from Action Performance. Despite the tax
allocation agreement, federal law provides that each member of a consolidated
group is liable for the group's entire tax obligation. Thus, to the extent
Action Performance or other members of the group fail to make any federal income
tax payments required of them by law, we would be liable for the shortfall.
Similar principles apply for state income tax purposes in many states.
For as long as Action Performance continues to own at least 80% of the
voting rights and value of our capital stock, we will be liable for pension
funding, termination and excise taxes, and other pension-related matters in the
event that Action Performance fails to satisfy fully its legally required
pension obligations.
Our intercompany indemnification agreement with Action Performance provides
that Action Performance will indemnify us for some tax liabilities resulting
from our relationship with it, including the costs of defending against any
claims asserted against us. Action Performance may not be able to fulfill its
obligations under the intercompany indemnification agreement, in which case we
may be liable for those payments.
OUR AGREEMENTS WITH ACTION PERFORMANCE MAY REQUIRE US TO INDEMNIFY ACTION
PERFORMANCE FOLLOWING A DISTRIBUTION OF OUR SHARES.
Following this offering, Action Performance may distribute to its
shareholders all or a portion of the class B common stock that it owns. We will
indemnify Action Performance if it incurs any tax liability as a result of any
action on our behalf or failure to act that makes the distribution taxable to
Action Performance. We will indemnify Action Performance for any tax liability
incurred as the result of the failure of the distribution to qualify as a
tax-free transaction due to a takeover of our company or any other transaction
involving our capital stock, assets, or business regardless of whether such
transaction is within our control. If we become obligated to indemnify Action
Performance for any tax liabilities that it incurs, our business, operating
results, and financial condition, would be adversely affected.
RISKS RELATED TO THIS OFFERING
ACTION PERFORMANCE'S ABILITY TO DISTRIBUTE OR SELL SHARES OF OUR CLASS B COMMON
STOCK MAY HAVE AN ADVERSE IMPACT ON THE VALUE OF OUR CLASS A COMMON STOCK.
Following this offering Action Performance may distribute to its
shareholders all or a portion of our common stock that it owns. Action
Performance is under no obligation to distribute any of our stock and has the
sole discretion to determine the timing and the terms of any such distribution.
We cannot assure you as to whether, when, or if Action Performance will
distribute any shares of our common stock or as to the terms of any
distribution. We also cannot predict the effect that a distribution, or any
delay or inability to make a distribution, might have on the market price of our
class A common stock.
Action Performance also will have the right to require us to register its
shares of our common stock under the securities laws for sale in the public
market if it does not complete a distribution or other similar transaction.
Sales by Action Performance or others of substantial amounts of our common stock
in the public market following this offering, or the perception that sales might
occur, could have a material adverse effect on the market price of the class A
common stock.
18
<PAGE> 23
Sales of substantial amounts of common stock following this offering, or
even the potential for such sales, may have a depressive effect on the market
price of our class A common stock. Action Performance will have registration
rights that will enable it to sell its shares of our common stock in the public
market following this offering. In addition, Action Performance may sell or
distribute our common stock, which may adversely affect our stock price.
DIFFERENCES IN VOTING RIGHTS MAY LOWER THE MARKET VALUE OF CLASS A COMMON STOCK.
Shares of class A common stock are entitled to one vote per share while
shares of class B common stock are entitled to ten votes per share on all
matters to be voted on by stockholders. See "Description of Capital
Stock -- Common Stock." The difference in the voting rights of the class A
common stock and class B common stock could adversely affect the price of the
class A common stock to the extent that investors or any potential future
purchaser of our common stock assign value to the superior voting rights or
other rights of the class B common stock.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY BE VOLATILE.
The trading price of our class A common stock could be subject to wide
fluctuations in response to a number of factors, including the following:
- quarterly variations in our operating results or the operating results of
Action Performance,
- actual or anticipated announcements of new products or services by us,
Action Performance, or other business partners or competitors,
- announcements of technological innovations by us or our competitors,
- investor perception of our business prospects or the Internet industry in
general,
- changes in analysts' estimates of our financial performance,
- general conditions in the markets in which we compete, and
- worldwide economic and financial conditions.
The stock market also has experienced extreme price and volume fluctuations
that have affected the market prices for many rapidly expanding companies,
particularly Internet-related companies. These fluctuations often have been
unrelated to the operating performance of those companies. Broad market
fluctuations and other factors may adversely affect the market price of our
class A common stock. If the market price of our class A common stock
experiences significant market volatility, some stockholders may file a class
action lawsuit. We could incur substantial legal costs and our management's
attention could be diverted to defend this type of litigation, even if we are
ultimately successful in our defense. Declines in the market price of our common
stock also could adversely affect employee morale, our ability to attract and
retain qualified employees, and our access to additional capital. All of these
factors could materially and adversely affect our business, operating results,
and financial condition.
WE DO NOT ANTICIPATE THAT WE WILL PAY ANY DIVIDENDS.
For the foreseeable future, we intend to retain future earnings, if any, to
finance our business operations and do not anticipate paying any cash dividends
with respect to our common stock.
INVESTORS WILL SUFFER IMMEDIATE DILUTION.
The initial public offering price per share will exceed our net tangible
book value per share. Accordingly, investors purchasing shares in this offering
will incur immediate and substantial dilution of approximately $ in the
book value per share of the class A common stock from the assumed offering price
of $ per share. Any exercises of outstanding options to purchase class A
common stock will further dilute existing stockholders. See "Dilution."
19
<PAGE> 24
OUR BUSINESS COULD SUFFER IF WE DO NOT USE THE PROCEEDS OF THIS OFFERING IN A
MANNER BENEFICIAL TO US.
We intend to use the net proceeds from this offering for the following
purposes:
- to promote the goracing network and expand sales and marketing
activities,
- to add online content, community features, and e-commerce opportunities
on our network,
- to hire management and other personnel,
- to enhance our technology, software, and basic infrastructure,
- to enter into strategic relationships and acquisitions,
- to repay $2,000,000 of intercompany payables to Action Performance, and
- to provide working capital and funds for general corporate purposes.
We have not yet determined the actual expenditures and cannot estimate the
amounts we will use for each specified purpose. The actual amounts and timing of
these expenditures may vary significantly depending on a number of factors,
including the amount of cash generated by our operations and the market response
to the introduction of new product or service offerings. Depending on future
developments and circumstances, we may use some of the proceeds for uses other
than those described above. Our management will therefore have significant
flexibility in applying the net proceeds of this offering. If we do not use the
proceeds in a manner beneficial to us, our business could suffer and our stock
price could decline.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Our certificate of incorporation, bylaws, and Delaware law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control over us, even when those attempts may be in
the best interests of our stockholders. Our certificate of incorporation gives
the class B common stock super-voting rights, provides for a classified board of
directors, and authorizes the board of directors, without stockholder approval,
to issue one or more series of preferred stock that could have voting,
liquidation, dividend, conversion, or other rights that adversely affect or
dilute the voting power of the holders of our common stock. See "Description of
Capital Stock -- Anti-Takeover Effects of Provisions of Delaware Law."
Our intercompany agreements with Action Performance permit Action
Performance to terminate those agreements in the event of a change of control.
These provisions make it more difficult for others to obtain control over us.
RIGHTS TO ACQUIRE SHARES OF COMMON STOCK WILL RESULT IN DILUTION TO OTHER
HOLDERS OF COMMON STOCK.
As of , 1999, options to acquire a total of approximately
shares of class A common stock were outstanding under our 1999
Incentive Stock Plan. We also have issued options to acquire
shares of class A common stock to race car drivers, team owners, and other
motorsports participants in connection with various endorsement and other
arrangements. Holders of these options will have the opportunity to profit from
an increase in the market price of the class A common stock, with resulting
dilution in the interests of holders of all classes of common stock. The
existence of these stock options could adversely affect the terms on which we
can obtain additional financing, and the option holders can be expected to
exercise these options at a time when we, in all likelihood, would be able to
obtain additional capital by offering shares of our common stock on terms more
favorable to us than those provided by the exercise of these options.
RISKS RELATED TO THE INTERNET INDUSTRY
INCREASED USE OF THE INTERNET WILL BE CRITICAL TO OUR SUCCESS.
Our future success depends to a significant extent on the continued growth
in Internet use. Use of the Internet as a commercial marketplace is relatively
new and is rapidly evolving. Demand for and market acceptance of products and
services offered over the Internet remain uncertain. We cannot predict whether a
20
<PAGE> 25
large enough number of motorsports fans and automotive enthusiasts will shift
from traditional to online activities. For example, our target market may not
prefer to obtain their motorsports news and information online or make online
purchases. Many factors may inhibit Internet usage, including poor access,
unreliable performance, and security and privacy concerns. Our business would be
adversely affected if Internet usage does not continue to grow.
FAILURE OF THE INTERNET TO DEVELOP AS AN ADVERTISING MEDIUM MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We expect to generate a significant portion of our revenue in the future
from sponsorship and advertising on our network. The Internet advertising market
is new and rapidly evolving, and we cannot gauge its effectiveness as compared
with traditional advertising media. Most of our current or potential advertising
and e-commerce partners have limited experience using the Internet for
advertising purposes and have allocated only a limited portion of their
advertising budgets to Internet advertising. Advertisers and merchants may find
Internet advertising to be less effective than traditional advertising media for
promoting their products and services. Industry researchers continue to develop
standards to measure the effectiveness of Internet advertising or the
demographics of a company's user base. If such standards do not develop,
advertisers may not advertise on the Internet.
We currently are implementing additional systems designed to track and
analyze usage patterns of visitors to the goracing network. Our ability to
implement these systems may be affected by concerns about Internet privacy. If
we do not implement these systems successfully, we may not be able to accurately
evaluate usage patterns. Advertisers and e-commerce marketers may choose not to
advertise on goracing.com or may pay less for advertising on the goracing
network if they do not perceive our measurements to be reliable or if the market
for Internet advertising fails to develop or develops more slowly than expected.
Any of these factors could have a material adverse effect on us.
WE MAY NOT BE ABLE TO ADAPT TO RAPIDLY CHANGING TECHNOLOGIES OR WE MAY INCUR
SIGNIFICANT COSTS IN DOING SO.
The Internet is characterized by rapidly changing technologies, evolving
industry standards, frequent new service introductions, and changing customer
demands. As a result of the rapidly changing nature of the Internet environment,
we may be subject to risks, now and in the future, of which we are not currently
aware. To be successful, we must adapt to our rapidly evolving market by
continually enhancing our network of Web sites and introducing new products and
services to address our users' changing demands. We may use new technologies
ineffectively or we may fail to adapt our network, transaction-processing
systems, and infrastructure to meet customer requirements, competitive
pressures, or emerging industry standards. We could incur substantial costs if
we need to modify our services or infrastructure. Our business could be
materially and adversely affected if we incur significant costs to adapt, or
cannot adapt, to these changes.
FAILURE OF OUR ONLINE SECURITY MEASURES WOULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS.
Like any computer network, our network is vulnerable to computer viruses,
physical or electronic break-ins, and similar disruptions. We expect that these
problems will occur from time to time. Security breaches and inadvertent
transmissions of computer viruses could expose us to litigation or to a material
risk of loss, which could have a material adverse effect on our business.
We rely on technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as consumer credit card numbers. Unauthorized persons may be
able to compromise or breach the algorithms that we use to protect our
consumers, transaction data, or software, to misappropriate proprietary
information, or to cause interruptions in our operations. We may be required to
invest a significant amount of money and other resources to protect against
security breaches or to alleviate problems caused by any breaches that do occur.
Any well-publicized compromise of security could deter use of the Internet in
general or use of our network to conduct commercial transactions.
21
<PAGE> 26
LEGAL UNCERTAINTIES SURROUND THE DEVELOPMENT OF THE INTERNET.
There currently are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, federal, state, or foreign
governments may adopt laws and regulations in the future to address issues such
as
- user privacy,
- pricing issues,
- the characteristics and quality of products and services,
- access charges,
- consumer protection issues,
- cross-border commerce, and
- transmission of certain types of information over the Internet.
Regulation of these and other issues could increase the cost of transmitting
data over the Internet. Moreover, it may take years to determine the extent to
which existing laws relating to issues such as property ownership, libel, and
personal privacy apply to the Internet. Any new laws or regulations relating to
the Internet could adversely affect our business.
OUR SALES COULD DECREASE IF WE BECOME SUBJECT TO ADDITIONAL SALES OR OTHER
TAXES.
Our sales and operating results could be adversely affected if one or more
states or foreign countries successfully asserts that we should collect sales or
other taxes on the sale of our products. We currently do not collect sales or
other similar taxes for physical shipments of goods into states other than those
in which we operate. One or more local, state, or foreign jurisdictions may seek
to impose sales tax collection obligations on us. In addition, any new
operations in other states or countries outside those in which we operate could
subject us to sales taxes under current or future laws. If we become obligated
to collect sales taxes, we will need to update our system that processes
customers' orders to calculate the appropriate sales tax for each customer order
and to remit the collected sales taxes to the appropriate authorities. These
upgrades would increase our operating expenses. In addition, our customers may
be discouraged from purchasing products from us if they have to pay sales tax.
As a result, we may need to lower prices to retain these customers.
WE COULD BE SUBJECT TO LIABILITY FOR INFORMATION DISPLAYED ON OUR NETWORK OF WEB
SITES.
We may be subjected to claims for defamation, negligence, copyright, or
trademark infringement or claims based on other theories relating to the
information we publish on our network of Web sites. These types of claims have
been brought, sometimes successfully, against online services as well as other
print publications in the past. We also could be subjected to claims based upon
the content that is accessible from our network through links to other Web
sites. Our insurance may not adequately protect us against these types of
claims.
FORWARD-LOOKING STATEMENTS
Some of the statements and information contained in this prospectus
concerning our future, proposed, and anticipated activities, certain trends with
respect to our revenue, operating results, capital resources, and liquidity or
with respect to the markets in which we compete or the motorsports and
automotive industries in general, and other statements contained in this
prospectus regarding matters that are not historical facts are forward-looking
statements, as such term is defined in the securities laws. Forward-looking
statements, by their very nature, include risks and uncertainties, many of which
are beyond our control. Accordingly, actual results may differ, perhaps
materially, from those expressed in or implied by the forward-looking
statements. Factors that could cause actual results to differ materially include
those discussed elsewhere in the section entitled "Risk Factors."
22
<PAGE> 27
USE OF PROCEEDS
We intend to sell shares of class A common stock in this offering.
Assuming an initial offering price of $ per share, we estimate that we will
receive net proceeds of $ million ($ million if the underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. We
intend to use the net proceeds from this offering
- to promote the goracing network and expand sales and marketing
activities,
- to add online content, community features, and e-commerce opportunities
on our network,
- to hire management and other personnel,
- to enhance our technology, software, and basic infrastructure,
- for strategic relationships and acquisitions,
- to repay $2,000,000 of intercompany payables to Action Performance, and
- for working capital and general corporate purposes.
The amounts and purposes for which we allocate the net proceeds of this
offering may vary significantly depending upon a number of factors, including
future revenue and the amount of cash generated by our operations. As a result,
we will retain broad discretion in the allocation of the net proceeds from this
offering. Pending the uses described above, the net proceeds will be invested in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We currently plan to retain any earnings to finance the growth of our
business rather than to pay cash dividends. Payments of any cash dividends in
the future will depend on our financial condition, results of operations, and
capital requirements as well as other factors deemed relevant by our board of
directors.
23
<PAGE> 28
CAPITALIZATION
The following table sets forth as of March 31, 1999 (a) our actual combined
capitalization, (b) our pro forma consolidated capitalization, and (c) our pro
forma consolidated capitalization as adjusted to reflect the sale of the
shares of class A common stock in this offering (assuming an
offering price of $ per share) and the application of the estimated net
proceeds from this offering, after deducting estimated underwriting discounts
and offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Due to Action Performance Companies, Inc................ $8,156 $2,000 $
====== ====== ======
Long-term debt.......................................... $ -- $ -- $
Stockholders' equity (deficit)..........................
Serial preferred stock, $.0001 par value, 10,000,000
shares authorized, no shares issued or outstanding
actual and as adjusted............................. -- --
Class A common stock $.0001 par value, 100,000,000
shares authorized, no shares issued or outstanding
actual; shares issued and outstanding as
adjusted(2)........................................ -- --
Class B common stock $.0001 par value, 100,000,000
shares authorized, 35,000,000 shares issued and
outstanding pro forma; 35,000,000 shares issued and
outstanding as adjusted............................ -- 4
Capital accounts of contributed subsidiaries(1)(3).... 1 --
Additional paid-in capital............................ 2 7,155
Accumulated deficit................................... (894) (894)
------ ------ ------
Total stockholders' equity (deficit)............... (891) 6,265
------ ------ ------
Total capitalization.................................... $ (891) $6,265 $
====== ====== ======
</TABLE>
- ------------------------
(1) Pro forma consolidated capitalization reflects (a) the consolidation of the
contributed entities; (b) additional assets contributed to us by Action
Performance; and (c) the conversion of a portion of amounts due to Action
Performance to our capital.
(2) The number of shares of class A common stock excludes (a) an aggregate
of additional shares reserved for issuance under our 1999 Stock
Incentive Plan, of which we plan to grant to management at an
exercise price equal to the initial public offering price; and (b) an
aggregate of additional shares reserved for issuance pursuant to
stock option agreements with racing personalities and teams, of
which we plan to grant at an exercise price equal to the initial public
offering price. The pro forma consolidated as adjusted capitalization
assumes no exercise of the underwriters' over-allotment option. If the
underwriters exercise their over-allotment option in full, we will have
shares of class A common stock issued and outstanding, total
stockholders' equity of $ , and total capitalization of
$ .
(3) Capital accounts of contributed subsidiaries includes (a) Action
Interactive, Inc. common stock, $.01 par value, 4,000 shares authorized,
1,000 shares issued and outstanding; (b) Action Direct Marketing, LLC
membership interest; and (c) Action Racing Collectables Club of America,
Inc. common stock, $.01 par value, 4,000 shares authorized, 1,000 shares
issued and outstanding.
24
<PAGE> 29
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $6.3 million, or $0.18 per share of class B common stock. Pro
forma net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the shares of class B common stock
assumed to be outstanding as of March 31, 1999. Our pro forma net tangible book
value as of March 31, 1999, after giving effect to the issuance and sale of the
shares of class A common stock in this offering, and after
deducting underwriting discounts and commissions and estimated offering expenses
would have been $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to Action
Performance and an immediate dilution of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
--------
Pro forma net tangible book value per share before this
offering............................................... $0.18
-----
Increase in pro forma net tangible book value per share
attributable to new investors..........................
-----
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31, 1999,
the number of shares of class A common stock purchased in this offering; and the
aggregate cash consideration paid and average price per share paid by Action
Performance for class B common stock and by new investors purchasing shares of
class A common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Action Performance............. 35,000,000 % $7,155,000 % $0.20
New investors..................
---------- -------- ---------- --------
Total..................... % $ %
========== ======== ========== ========
</TABLE>
25
<PAGE> 30
SELECTED COMBINED FINANCIAL DATA
The selected combined balance sheet data set forth below as of September
30, 1997 and 1998 and the selected combined statements of operations data for
the years ended September 30, 1996, 1997, and 1998 have been derived from our
combined financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, and which appear elsewhere in this prospectus.
The selected balance sheet data as of March 31, 1999 and the selected statements
of operations data for the six months ended March 31, 1998 and 1999 have been
derived from our unaudited financial statements that, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, that management considers necessary for a fair presentation of the
information set forth below. The results of operations for the six months ended
March 31, 1999 are not necessarily indicative of the results for the full year.
The following data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
historical combined financial statements and notes thereto included elsewhere in
this prospectus.
The accompanying combined financial data includes the following:
- Action Interactive, Inc., a wholly owned subsidiary of Action
Performance, as restated for the acquisition of Tech 2000 Worldwide,
Inc., which was accounted for as a pooling of interests;
- the operations of the Collectors' Club, an operating division of Action
Performance that became a wholly owned subsidiary of Action Performance
on June 1, 1998; and
- Action Direct Marketing, L.L.C., a wholly owned subsidiary of Action
Performance since December 31, 1998.
On July 1, 1999, Action Performance contributed to us all of its interest
in Action Interactive, Action Racing Collectables Club of America, and Action
Direct Marketing.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue............................ $ 4,873 $ 9,409 $ 13,042 $22,948 $38,666 $14,646 $21,199
Cost of product sales.............. 2,349 4,368 5,884 10,240 18,548 7,333 9,858
------- ------- -------- ------- ------- ------- -------
Gross profit....................... 2,524 5,041 7,158 12,708 20,118 7,313 11,341
Selling, general, and
administrative expenses.......... 1,852 3,575 5,741 8,581 13,581 5,916 9,023
------- ------- -------- ------- ------- ------- -------
Income before income taxes......... 672 1,466 1,417 4,127 6,537 1,397 2,318
Provision for income taxes......... 269 586 750 1,660 2,800 590 1,029
------- ------- -------- ------- ------- ------- -------
Net income......................... $ 403 $ 880 $ 667 2,467 $ 3,737 $ 807 $ 1,289
======= ======= ======== ======= ======= ======= =======
Basic and diluted net income per
share(1)......................... $ 0.01 $ 0.03 $ 0.02 $ 0.07 $ 0.11 $ 0.02 $ 0.04
======= ======= ======== ======= ======= ======= =======
Basic and diluted weighted average
shares outstanding(1)............ 35,000 35,000 35,000 35,000 35,000 35,000 35,000
======= ======= ======== ======= ======= ======= =======
</TABLE>
26
<PAGE> 31
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------- MARCH 31,
1995 1996 1997 1998(2) 1999
------ ------ ----- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 5 $ 3 $ 17 $ 1 $ 106
Working capital (deficit)................................. (10) (16) (621) (1,637) (1,981)
Total assets.............................................. 18 275 318 9,829 8,386
Long-term debt, net of current maturities................. 5 617 -- -- --
Total equity (deficit).................................... (1) (451) (464) (917) (891)
</TABLE>
- ---------------
(1) We did not exist as a separate company during the historical periods
presented. We computed earnings per share based on the shares outstanding
following our recapitalization on July 2, 1999, as if such shares were
outstanding from the beginning of the periods presented.
(2) The increase in working capital (deficit), total assets, and total equity
(deficit) as of September 30, 1998 is due to (a) the formation of Action
Racing Collectables Club of America, Inc. on June 1, 1998 and the
simultaneous transfer of Collectors' Club assets and liabilities, including
inventory of $8.6 million, fixed assets of $676,000, and liabilities of $1.2
million to the Collectors' Club by Action Performance at historical cost;
and (b) the continued funding of our operations by Action Performance. For
financial reporting purposes, the Collectors' Club was treated as an
operating division of Action Performance prior to its formation as a
subsidiary of Action Performance through the creation of Action Racing
Collectables Club of America, Inc. As such, the financial position of the
Collectors' Club was not included in the September 30, 1997 historical
balance sheet, as the Collectors' Club did not have specific title to assets
nor was it specifically obligated for liabilities prior to its existence as
a subsidiary on June 1, 1998.
27
<PAGE> 32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma condensed consolidated statements of
operations for the fiscal year ended September 30, 1998 and the six months ended
March 31, 1999 give effect to the various intercompany agreements that we and
Action Performance intend to execute upon completion of this offering, assuming
that those intercompany agreements were in effect on October 1, 1997. The
unaudited pro forma condensed consolidated statements presented herein do not
purport to represent what our actual results of operations would have been had
those intercompany agreements been in effect on that date or to project our
results of operations for any future period.
The pro forma statements are derived from our historical combined financial
statements. Therefore, the pro forma statements, including the notes thereto,
are qualified in their entirety by reference to and should be read in
conjunction with, our audited and interim unaudited combined financial
statements, including the notes thereto, which are included elsewhere in this
prospectus.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Net product sales...................................... $37,277 $ -- $37,277
Advertising and other.................................. 1,389 -- 1,389
------- ------- -------
Total revenue............................................ 38,666 -- 38,666
Cost of product sales.................................... 18,548 7,555(1) 26,103
------- ------- -------
Gross profit............................................. 20,118 (7,555) 12,563
Operating expenses....................................... 13,581 (766)(2) 12,815
------- ------- -------
Income (loss) before income taxes........................ 6,537 (6,789) (252)
Provision for (benefit from) income taxes................ 2,800 (2,901)(3) (101)
------- ------- -------
Net income (loss)........................................ $ 3,737 $(3,888) $ (151)
======= ======= =======
Basic and diluted net income (loss) per share(4)......... $ 0.11 $ 0.00
======= =======
Basic and diluted weighted average shares
outstanding(4)......................................... 35,000 35,000
======= =======
</TABLE>
- ---------------
(1) Reflects the effects of the intercompany distributor agreements under which
we will purchase products from Action Performance at its established
wholesale selling price plus a markup of 20% to 30% depending upon the type
of product sold and the third-party royalty obligation of Action Performance
for such products.
(2) Reflects the provisions of the intercompany services agreement as follows:
(a) elimination of certain corporate overhead allocations for goodwill
amortization, marketing, and indirect product design and development
costs. Those costs totaled $1,188,000 for the fiscal year ended
September 30, 1998; and
(b) a markup of 4% on the cost of services provided to us by Action
Performance totaling $422,000 for the fiscal year ended September 30,
1998.
(3) Reflects the recognition of income tax expense (benefit) in accordance with
the intercompany tax sharing agreement. Our effective income tax rate is
estimated to be approximately 40%.
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<PAGE> 33
(4) We did not exist as a separate company during the historical periods
presented. We computed earnings per share based on the shares outstanding
following our recapitalization on July 2, 1999, as if such shares were
outstanding from the beginning of the periods presented.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Net product sales...................................... $ 20,557 $ -- $ 20,557
Advertising and other.................................. 642 -- 642
-------- ------- --------
Total revenue............................................ 21,199 -- 21,199
Cost of product sales.................................... 9,858 4,532(1) 14,390
-------- ------- --------
Gross profit............................................. 11,341 (4,532) 6,809
Operating expenses....................................... 9,023 (408)(2) 8,615
-------- ------- --------
Income (loss) before income taxes........................ 2,318 (4,124) (1,806)
Provision for (benefit from) income taxes................ 1,029 (1,751)(3) (722)
-------- ------- --------
Net income (loss)........................................ $ 1,289 $(2,373) $ (1,084)
======== ======= ========
Basic and diluted net income (loss) per share(4)......... $ 0.04 $ (0.03)
======== ========
Basic and diluted weighted average shares
outstanding(4)......................................... 35,000 35,000
======== ========
</TABLE>
- ---------------
(1) Reflects the effects of the intercompany distributor agreements under which
we will purchase products from Action Performance at its established
wholesale selling price plus a markup of 20% to 30% depending upon the type
of product sold and the third-party royalty obligation of Action Performance
for such products.
(2) Reflects the effects of the intercompany services agreement as follows:
(a) elimination of certain corporate overhead allocations for goodwill
amortization, marketing, and indirect product design and development
costs. Those costs totaled $724,000 for the six-month period ended
March 31, 1999; and
(b) a markup of 4% on the cost of services provided to us by Action
Performance totaling $316,000 for the six-month period ended March 31,
1999.
(3) Reflects the recognition of income tax expense (benefit) in accordance with
the intercompany tax sharing agreement. Our effective income tax rate is
estimated to be approximately 40%.
(4) We did not exist as a separate company during the historical periods
presented. We computed earnings per share based on the shares outstanding
following our recapitalization on July 2, 1999, as if such shares were
outstanding from the beginning of the periods presented.
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<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements including the related notes, which appear elsewhere in this
prospectus. The following discussion contains forward-looking statements that
reflect our plans, estimates, and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below and
elsewhere in this prospectus, particularly in "Risk Factors."
OVERVIEW
We are a leading online provider of worldwide motorsports-related news and
information, a global meeting place and community for motorsports fans, and a
leading e-commerce marketplace for motorsports-related die-cast collectibles,
apparel, and souvenirs. We operate the Collectors' Club, which offers on an
exclusive basis limited edition lines of die-cast replicas of racing vehicles
and other licensed products to the more than 166,000 members as of June 30,
1999.
We were incorporated in the state of Delaware on May 5, 1999 as a wholly
owned subsidiary of Action Performance. Our combined results of operations
include the following:
- the Internet operations of Action Interactive, Inc., which Action
Performance formed in October 1998 for the purpose of merging with Tech
2000 Worldwide, Inc. Tech 2000 was a privately held Internet company that
provided motorsports and automotive-related content through its Web site
at www.goracing.com. The merger was consummated on November 23, 1998 and
was accounted for as a pooling-of-interests. Accordingly, the financial
statements of Action Interactive include the historical operating results
and financial position of Tech 2000;
- the operations of the Collector's Club, an operating division of Action
Performance that became a wholly owned subsidiary of Action Performance
on June 1, 1998; and
- the operations of Action Direct Marketing, LLC since its inception on
December 31, 1998.
We generate revenue from four primary sources:
- sales of licensed motorsports merchandise, including die-cast scaled
replicas of racing vehicles, apparel, and souvenirs through SpeedMall and
through our inbound telemarketing center,
- fees paid for advertising on our network,
- fees paid for third-party tenants in SpeedMall, and
- fees paid for Web development and hosting services.
Sales of licensed motorsports merchandise to our Collectors' Club members
accounted for a substantial majority of our revenue to date, and we anticipate
that such sales will continue to account for a majority of our revenue for the
foreseeable future. In May 1999, online Collectors' Club orders represented
approximately 50% of total Collectors' Club orders for products introduced to
club members in May. While we anticipate that sales of licensed motorsports
merchandise to our Collectors' Club members will continue to grow, we anticipate
that sales of licensed motorsports merchandise to non-club members will grow at
a faster rate in the future. We currently expect that fees paid for advertising
and participation in SpeedMall also will grow in relation to increased traffic
on our network.
We are subject to seasonal fluctuations in our product sales and results of
operations. Because the auto racing season is concentrated between the months of
February and November, our results of operations during the second and third
calendar quarters generally are characterized by higher sales of motorsports
products. Similarly, advertising sales in traditional media, such as television
and radio, generally are lower in the first calendar quarter of each year.
Seasonal fluctuations in quarterly sales may require us to take temporary
measures, including changes in personnel levels and marketing activities that
could result in unfavorable quarterly earnings comparisons.
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<PAGE> 35
The combined financial statements presented elsewhere in this prospectus
include expenses that Action Performance has allocated to us on a specific
identification basis, plus our allocated portion of the costs associated with
resources we share with Action Performance. Our parent has allocated such shared
resources primarily on a proportional cost method based on a number of factors,
including headcount, square footage, related revenue, and CPU usage. Our
selling, general, and administrative expenses consist of salaries and wages,
advertising, information technology, marketing expenses, art and graphics,
accounting, and other expenses allocated to us by Action Performance.
In addition, we purchased all of the products that we sold from or through
Action Performance or one of its subsidiaries or operating divisions at an
amount equal to Action Performance's costs plus the costs associated with such
purchases, including freight, handling, and tooling depreciation. We also bore
the expenses associated with third-party royalties related to the licensed
motorsports merchandise that we sold. Therefore, our combined financial
statements do not necessarily reflect the results of operations or the financial
position that would have existed had we operated as an independent company.
We and Action Performance plan to enter into a number of intercompany
agreements that will govern all transactions between us, including services that
Action Performance will provide to us and the pricing of merchandise that we
purchase from Action Performance. Had the intercompany agreements been in effect
during the historical periods, our results of operations would have been
materially different from those presented in our combined financial statements.
Additionally, we have relied on Action Performance to provide financing for our
operations. Therefore, our cash flows to date do not necessarily reflect the
cash flows that would have resulted had we operated as an independent company.
In view of the changes that will result upon completion of this offering,
we believe that an analysis of the historical operating results is not
necessarily meaningful. You should not rely on this information as an indication
of our future performance.
PRO FORMA RESULTS OF OPERATIONS
Historically, all transactions between us and Action Performance did not
consider a profit motive, which is more typical in arm's-length transactions.
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by pro forma revenue and expense, which reflects the
effects of various intercompany agreements we plan to enter into with Action
Performance.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Net product sales................................ 96.6% 94.4% 96.4% 94.4% 97.0%
Advertising and other............................ 3.4 5.6 3.6 5.6 3.0
----- ----- ----- ----- -----
Total revenue...................................... 100.0 100.0 100.0 100.0 100.0
Cost of product sales.............................. 67.6 66.1 67.5 66.1 67.9
----- ----- ----- ----- -----
Gross profit....................................... 32.4 33.9 32.5 33.9 32.1
Selling, general, and administrative expenses...... 40.6 31.9 33.1 38.0 40.6
----- ----- ----- ----- -----
Income (loss) before income taxes.................. (8.2) 2.0 (0.7) (4.1) (8.5)
Provision for (benefit from) income taxes.......... (3.3) 0.8 (0.3) (1.7) (3.4)
----- ----- ----- ----- -----
Net income (loss).................................. (4.9)% 1.2% (0.4)% (2.5)% (5.1)%
===== ===== ===== ===== =====
</TABLE>
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<PAGE> 36
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by certain line items included in our historical
combined statements of operations data.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Net product sales................................ 96.6% 94.4% 96.4% 94.4% 97.0%
Advertising and other............................ 3.4 5.6 3.6 5.6 3.0
----- ----- ----- ----- -----
Total revenue...................................... 100.0 100.0 100.0 100.0 100.0
Cost of product sales.............................. 45.1 44.6 48.0 50.1 46.5
----- ----- ----- ----- -----
Gross profit....................................... 54.9 55.4 52.0 49.9 53.5
Selling, general and administrative expenses....... 44.0 37.4 35.1 40.4 42.6
----- ----- ----- ----- -----
Income before income taxes......................... 10.9 18.0 16.9 9.5 10.9
Provision for income taxes......................... 5.8 7.2 7.2 4.0 4.9
----- ----- ----- ----- -----
Net income......................................... 5.1% 10.8% 9.7% 5.5% 6.1%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended March 31, 1999 Compared with Six Months Ended March 31, 1998
Revenue increased 45.2% to $21.2 million for the six months ended March 31,
1999 from $14.6 million for the comparable period of fiscal 1998. We attribute
the increase in revenue during the fiscal 1999 period to (a) an increase in
membership in the Collectors' Club to approximately 161,000 members at March 31,
1999 from approximately 123,000 members at March 31, 1998; (b) Action
Performance's ability to add popular motorsports personalities to its extensive
portfolio of licenses; (c) new product offerings by Action Performance under to
cross-promotional marketing programs; (d) an increase in sales of Action
Performance's "Elite" brand die-cast vehicles, which carry a higher retail
selling price than its other die-cast products; and (e) our ability to
capitalize on the continued strong growth in the base of motorsports fans and to
sell increased quantities of die-cast vehicles, apparel, and souvenirs.
Gross profit increased to $11.3 million in the first six months of fiscal
1999 from $7.3 million in the first six months of fiscal 1998, representing
53.5% and 49.9% of total revenue, respectively. The increase in gross profit as
a percentage of total revenue resulted primarily from a price increase effective
January 1999 and additional sales of Action Performance's "Elite" brand of
die-cast vehicles, which typically carry higher gross margins than sales of its
other products.
Selling, general, and administrative expenses increased to $9.0 million in
the six-month period ended March 31, 1999 from $5.9 million in the six-month
period ended March 31, 1998, representing 42.6% and 40.4% of total revenue,
respectively. The increase in such expenses as a percentage of total revenue
resulted primarily from (1) increased advertising of the goracing.com brand; (2)
design and development expenses associated with SpeedMall, the community center,
and a redesign of the content section of goracing.com; and (3) additional
investment in personnel and technology to manage e-commerce transactions and
increased traffic to our network.
Fiscal Year Ended September 30, 1998 Compared with Fiscal Year Ended September
30, 1997
Revenue increased 69.0% to $38.7 million for the fiscal year ended
September 30, 1998 from $22.9 million for the fiscal year ended September 30,
1997. We attribute the increase in revenue during fiscal year 1998 to (a) an
increase in membership in our Collectors' Club to approximately 148,000 members
at September 30, 1998 from approximately 100,000 members at September 30, 1997;
(b) Action Performance's ability to add popular motorsports personalities to its
extensive portfolio of licenses; (c) new product offerings by Action Performance
under cross-promotional marketing programs; (d) an increase in sales of Action
Performance's "Elite" brand die-cast vehicles, which carry a higher retail
selling price than its other die-cast products; and (e) our ability to
capitalize on the continued strong growth in the base of motorsports fans and to
produce and sell increased quantities of die-cast vehicles, apparel, and
souvenirs.
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<PAGE> 37
Gross profit increased to $20.1 million in fiscal 1998 from $12.7 million
in fiscal 1997, representing 52.0% and 55.4% of total revenue, respectively. The
decrease in gross profit as a percentage of total revenue resulted primarily
from an increase in the effective royalty rate associated with (1) licenses with
popular personalities in motorsports; (2) cross-promotional marketing programs;
and (3) NASCAR.
Selling, general, and administrative expenses increased to $13.6 million in
fiscal 1998 from $8.6 million in fiscal 1997, representing 35.1% and 37.4% of
total revenue, respectively. The decrease in such expenses as a percentage of
total revenue resulted primarily from an increase in revenue over a fixed base
of expenses, which was partially offset by an increase in expenses associated
with a new facility in Phoenix, Arizona, and an investment in personnel and
technology to handle continued expansion of our Collectors' Club.
Fiscal Year Ended September 30, 1997 Compared with Fiscal Year Ended September
30, 1996
Revenue increased 76.2% to $22.9 million for the fiscal year ended
September 30, 1997 from $13.0 million for the year ended September 30, 1996. We
attribute the increase in revenue during fiscal 1997 to (a) an increase in
membership in our Collectors' Club to approximately 100,000 members at September
30, 1997 from approximately 72,000 members at September 30, 1996; (b) Action
Performance's ability to add popular motorsports personalities to its extensive
portfolio of licenses; (c) new product offerings by Action Performance under
cross-promotional marketing programs; and (d) our ability to capitalize on the
continued strong growth in the base of motorsports fans and to sell increased
quantities of die-cast vehicles, apparel, and souvenirs.
Gross profit increased to $12.7 million in fiscal 1997 from $7.2 million in
fiscal 1996, representing 55.4% and 54.9% of total revenue, respectively. The
increase in gross profit as a percentage of total revenue resulted primarily
from an increase in total revenue over a fixed portion of cost of product sales,
primarily manufacturing setup charges and tooling depreciation.
Selling, general, and administrative expenses increased to $8.6 million in
fiscal 1997 from $5.7 million in fiscal 1996, representing 37.4% and 44.0% of
total revenue, respectively. The decrease in such expenses as a percentage of
total revenue resulted primarily from an increase in revenue over a fixed base
of expenses.
LIQUIDITY AND CAPITAL RESOURCES
On June 1, 1998, Action Performance established a separate legal entity for
the Collectors' Club at which time it contributed certain assets to the
Collectors' Club and established a corresponding liability payable to Action
Performance. Prior to June 1, 1998, the Collectors' Club operated as a division
of Action Performance. Therefore, the combined financial statements prior to
June 1, 1998 do not reflect the financial position of the Collectors' Club. As a
result, our combined working capital position and cash flows for certain
historical periods are not necessarily meaningful. You should not rely on this
information as an indication of future liquidity or sources and uses of cash.
Our working capital position as of March 31, 1999 was $(1,981) compared to
$(1,637) as of September 30, 1998. The reduction in working capital from
September 30, 1998 resulted primarily from the repayment of a $600,000 note
payable during the six-month period ended March 31, 1999.
We generated cash flows from operations of $706,000 during fiscal 1996,
$2.5 million during fiscal 1997, and $3.5 million during fiscal 1998. We also
generated cash flows from operations of $876,000 during the six-month period
ended March 31, 1998, and $3.0 million during the six-month period ended March
31, 1999. The primary factors that influence our cash flows from operations are
net income generated during the period and inventory management. A substantial
majority of our sales consist of cash or credit card transactions.
Our cash flows from investing activities consist of purchases of property
and equipment. We invested in property and equipment approximately $204,000 in
fiscal 1996, approximately $16,000 in fiscal 1997, and approximately $454,000
during the six-month period ended March 31, 1999. There were no cash flows from
investing activities during fiscal 1998.
For the six-month period ended March 31, 1998, cash flows used in financing
activities approximated $876,000. For the six-month period ended March 31, 1999,
cash flows used in financing activities approximated $2.4 million. For the
fiscal years ended September 30, 1996, 1997 and 1998, cash flows used in
33
<PAGE> 38
financing activities approximated $504,000, $2.5 million, and $3.5 million,
respectively. Cash flows from financing activities consist principally of
borrowings under note agreements with related parties and transfers of profits
to our parent company associated with our revenue generating activities.
Our future capital requirements will depend on a number of factors,
including (a) acceptance of the goracing network; (b) our ability to expand
product offerings and advertising fees; (c) the level of expenditures for sales
and marketing; (d) the level of expenditures to upgrade technology and
infrastructure; and (e) possible acquisitions of and formation of strategic
alliances with other businesses.
We cannot predict accurately the timing and amount of future capital
expenditures. However, we believe that the proceeds from this offering, together
with cash flows from operations, will be sufficient to fund our capital needs
for the next 12 months. Adequate capital may not be available from these or
other potential sources, and the lack of such capital could have a material
adverse effect on our business.
We currently participate under Action Performance's credit facility, which
prohibits dividends other than to Action Performance. Upon completion of this
offering, our participation under the credit facility will terminate.
YEAR 2000 COMPLIANCE
We are heavily dependent upon complex computer software and systems for our
operations, including, to a significant extent, our parent's computer systems.
Many existing computer programs and systems use only two digits to identify a
year in the date field. These programs and systems were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the January 1, 2000.
State of Readiness
All of our material operating software and our information technology
systems and other systems, including telecommunications and warehouse systems,
were developed or are supported by third-party vendors and Action Performance.
Some of our third-party vendors have provided written warranties and assurances
that the software will not be affected by the change in century. We are
currently in the process of obtaining assurances from our remaining third-party
vendors. We have been communicating with these third parties to coordinate Year
2000 readiness. The responses we have received to date have indicated that steps
are currently being taken to prepare for the year 2000.
In addition to the operating systems and software we use directly, our
operations are also dependent upon the performance of operating software and
systems used by our significant service providers, including our parent and
providers of financial, telecommunications and parcel delivery services. Action
Performance has engaged Computer Associates International Inc. to install and
implement a Year 2000 compliant enterprise, information, and business
application system. We expect this system will be fully operational by the
fourth calendar quarter of 1999. We have contacted many of our other significant
service providers and have obtained written assurances from some of them that
the relevant operating software and systems are Year 2000 compliant or will be
or by the end of the fourth calendar quarter of 1999. We are monitoring the
status of all our significant service providers' Year 2000 compliance efforts to
minimize the risk of any material adverse effect on our operations resulting
from compliance failures. However, we cannot assure you that our service
providers have, or will have operating software and systems that are Year 2000
compliant.
Risks
The failure of our software or systems to be Year 2000 compliant could
prevent us from being able to process or fulfill orders from our customers,
could cause users of our Web sites to consider alternative Web content and
community providers, or could disrupt our financial and management controls and
reporting systems. Any such worst-case scenario, if not quickly remedied, would
have a material adverse effect on us.
34
<PAGE> 39
Therefore, we are developing contingency plans with respect to such systems and
software. We expect our contingency plans to be completed by the end of the
third calendar quarter of 1999.
In addition, a significant portion of purchases of merchandise from us will
be made with credit cards, and our operations may be materially and adversely
affected to the extent our customers are unable to use their credit cards due to
Year 2000 issues that are not rectified by the end of calendar year 1999.
To date, we have not identified any significant exposure to Year 2000
problems outside of the information technology issues identified above.
35
<PAGE> 40
BUSINESS
OVERVIEW
We are a leading online provider of worldwide motorsports-related news and
information, a global online meeting place and community for motorsports fans,
and a leading e-commerce marketplace for motorsports-related die-cast
collectibles, apparel, and souvenirs. In addition to providing comprehensive
motorsports information coverage, our network also enables visitors to
participate in chat groups, multimedia features, entertainment offerings, online
auctions, and other interactive activities related to motorsports. Through
SpeedMall, our virtual online shopping mall, our visitors can shop for
motorsports and automotive products and services, including motorsports
merchandise licensed by many of the leading race car drivers, team owners, and
motorsports sanctioning bodies. Our SpeedMall tenants include our Collectors'
Club. We offer on an exclusive basis limited edition lines of die-cast replicas
of racing vehicles and other licensed motorsports products to the more than
166,000 members of the Collectors' Club. Our network had approximately 15.7
million page views and approximately 923,000 unique visitors during May 1999.
From the early February 1999 launch of SpeedMall through June 30, 1999, our
company-owned online stores received approximately 70,000 orders representing
$9.0 million, an average of $129 per order.
We have a unique relationship with our parent, Action Performance, a
worldwide leader in the design and sale of licensed motorsports merchandise.
Through Action Performance, we have strategic relationships with many of the
most popular race car drivers, team owners, and crew chiefs who have agreed to
endorse our network. These personalities include Dale Earnhardt, Jeff Gordon,
Dario Franchitti, Don Prudhomme, Rusty Wallace, Bobby Labonte, Tony Stewart, and
more than 30 others, each of whom has agreed to grant interviews, make personal
appearances, participate in online chats, and provide items he used in races for
our online auctions and promotions. Our motorsports network also hosts the Web
sites of popular race car drivers and serves as the online home to several
influential racing associations.
We benefit from Action Performance's extensive portfolio of license
arrangements with popular race car drivers, many team owners and sponsors, and
various sanctioning bodies. We offer for sale online Action Performance's wide
variety of licensed motorsports merchandise. This licensed motorsports
merchandise features many of the leading racing series from around the world,
including the National Association for Stock Car Racing, or NASCAR, the Formula
One World Championship, the National Hot Rod Association, or NHRA, Championship
Auto Racing Teams, or CART, and World Superbike.
INDUSTRY BACKGROUND
Worldwide Growth and Popularity of the Motorsports Industry
Motorsports racing consists of several distinct segments, each with its own
organizing bodies and events. The largest segment in the United States, in terms
of attendance and media exposure, is stock car racing, which is dominated by
NASCAR. The other principal segments in the United States are
- drag racing, with NHRA the most prominent body,
- open wheel racing, controlled by CART and the Indy Racing League, or IRL,
- dirt track racing, which includes the World of Outlaws,
- sports car racing, which includes the United States Road Racing
Championship and the American Le Mans Series, and
- motorcycle racing, which includes the American Motorcycle Association.
Internationally, the Federation Internationale de l'Automobile governs the
Formula One World Championship as well as the Formula 3000, GT, and World Rally
Championships and other popular motorsports series.
More than 17 million fans attended racing events in North America during
1998, according to the Goodyear Racing Attendance Report, compared with 1998
attendance for the National Football League at 15.4 million fans and the
National Basketball Association at 20.4 million fans. Television reach is also
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<PAGE> 41
substantial. According to Nielson Media Research reports, NASCAR's televised
events alone attracted an aggregate of 287 million estimated viewers in 115
million households in 1998. Nielsen also reports household viewership of
NASCAR's televised Winston Cup events in the first six months of 1999 increased
15% from the first six months of 1998. Motorsports coverage currently is
provided by broadcast and cable television networks, including NBC, ABC, CBS,
ESPN, TBS, TNN, and Speedvision, a motorsports cable network, in addition to
regional sports networks. Internationally, Formula One events are broadcast
worldwide to approximately 130 countries.
Since 1996, new speedways have been opened in the Los Angeles, Dallas/Ft.
Worth, and Las Vegas metropolitan areas. Additional speedways have been
announced for the New York, Chicago, Kansas City, and Denver metropolitan areas.
These new speedways are bringing NASCAR, CART, and other major motorsports
events to new geographic markets with much larger population bases than many of
the traditional NASCAR venues located in the southeastern United States. We
believe that the expansion of major motorsports events into these previously
untapped markets will stimulate continued growth in the motorsports industry,
exposing the sport to new racing fans who will seek information, products, and
services related to their favorite drivers, teams, and racing series.
The increasing popularity of motorsports in the United States and abroad
has created significant fan demand for a variety of race-related merchandise and
souvenirs. For example, NASCAR reports that total NASCAR-licensed product retail
sales, which includes various product categories in addition to the types of
products we sell, increased from approximately $80 million in 1990 to
approximately $950 million in 1998. This report estimates that total
NASCAR-licensed product retail sales will increase to approximately $1.1 billion
in 1999. We believe that the worldwide market for motorsports-related
merchandise is substantially larger than NASCAR-licensed product retail sales,
and that there has been a lack of availability of merchandise related to other
popular racing series, such as Formula One and CART.
Large corporate advertisers have recognized the growing popularity of
motorsports. The IEG Sponsorship Report indicates that corporate sponsors are
expected to spend an estimated $1.2 billion, or 24% of all sports sponsorship
dollars, on motorsports marketing programs in the United States in 1999.
The Growth of the Internet and Electronic Commerce
The Web is an increasingly significant global medium for information,
communications, and commerce. International Data Corporation, or IDC, estimates
there were 97 million domestic and international Web users at the end of 1998
and anticipates that there will be approximately 320 million Web users by the
end of 2002. IDC estimates that the percentage of Web users buying goods and
services on the Web will grow from approximately 28% in 1998 to 40% in 2002.
Forrester Research, Inc. estimates that advertising dollars spent on the
Internet will increase from approximately $1.5 billion in 1998 to $11 billion by
2002, a compound annual growth rate of 65%. The Internet contains features and
functions that are unavailable in traditional media. These advantages permit
online retailers and advertisers to target customers by capturing valuable data
about customer tastes, preferences, and shopping and buying patterns.
THE NEED FOR A MOTORSPORTS AND AUTOMOTIVE ONLINE NETWORK
We believe there is a need among motorsports fans and automotive
enthusiasts for a convenient, efficient, and centralized gathering place to
obtain and share news and information and to purchase motorsports and
automotive-related merchandise. We also believe that corporate advertisers and
merchants of motorsports and automotive-related products desire new ways to
maximize the impact of their sponsorship and advertising programs and the
opportunity to market their goods directly to a focused community of potential
customers.
Motorsports Fans. The ESPN CHILTON'S Sports Poll indicates that
approximately 87 million people in the United States have an interest in
motorsports and approximately 27 million people in the United States consider
themselves "avid" NASCAR fans. According to this poll, 57% of auto racing fans
have access to a personal computer, which is comparable to the national average.
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We believe that many motorsports fans are passionate about the sport and
demand timely, in-depth, and accurate news and information about the world of
motorsports that is more comprehensive than newspapers, magazines, television
coverage, or other sports-related Web sites typically deliver. We also believe
these fans desire licensed motorsports merchandise to further connect them with
the sport. Motorsports-related products and services, however, are often
difficult to buy due to the lack of reliable information about sought-after
items or the limited number of convenient retail sources with wide product
selection. Collectors who want to purchase, sell, or trade their collectibles
also may have difficulty locating other collectors or may not find collectors
with the particular items they seek.
Automotive Enthusiasts. Automotive enthusiasts include individuals
interested in classic cars and car restoration, aftermarket performance parts,
car shows and events, and vintage and historical car racing and restoration.
Automotive enthusiasts desire a central location to share information with
fellow enthusiasts and to obtain parts and accessories. For example, these
enthusiasts may want to obtain information about restoration tips, an automotive
trade show or event, advice about the best performance parts to install in their
vehicles, or the value of classic vehicles they would like to purchase. Without
a centralized source, these individuals must resort to the time-consuming task
of finding this information from highly fragmented sources, such as trade
catalogs, classified advertisements, or through word-of-mouth referrals from
fellow enthusiasts.
Corporate Advertisers and Merchants. Motorsports fans and automotive
enthusiasts represent attractive target audiences for corporate advertisers and
merchants. Performance Research reports that NASCAR fans are more brand-loyal
purchasers than other sports fans. These reports indicate that NASCAR fans will
purchase brands from companies that sponsor NASCAR drivers, teams, and events
approximately 72% of the time. In addition, 42% of polled NASCAR fans switched
from one brand to another because a company began a NASCAR sponsorship. In order
to take advantage of the brand loyalty of this audience, corporate advertisers
and merchants currently must promote their products or services at motorsports
events or on television broadcasts of these events. We believe corporate
advertisers and merchants want a more targeted way to reach these brand-loyal
motorsports fans.
THE GORACING.COM SOLUTION
Our solution is an integrated online information source, meeting place and
community, and shopping mall for motorsports fans and automotive enthusiasts.
This allows us to provide merchants and advertisers targeted access to the
growing base of motorsports fans and automotive enthusiasts. Our solution
involves the following key elements:
Content. We provide a timely, comprehensive, and integrated source for
worldwide motorsports race coverage, news, and information. Our relationships
with popular race car drivers, team owners and sponsors, race tracks, automobile
manufacturers, and sanctioning bodies enhance our original and unique content.
Community Features. We create community at goracing.com by uniting
- our offerings of proprietary news and information,
- the growing base of members of our Collectors' Club,
- the fan clubs of popular drivers and the Web sites of many of the most
influential organizations in motorsports located on our network, and
- the interactive features of our fan and celebrity chat rooms, bulletin
boards, online auctions, contests, entertainment features, and fantasy
racing.
We believe the community features of goracing.com attract visitors to our
network; increase the number, duration, and frequency of repeat visits; and
position the goracing network as the primary Internet destination for
motorsports fans.
Commerce. We believe the growing number of motorsports fans and automotive
enthusiasts interested in the news, information, and community features offered
by the goracing network provide an attractive target
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audience for merchants seeking to sell motorsports and automotive merchandise
and services as well as advertisers seeking to reach these consumers. Our
e-commerce offerings include a wide variety of licensed products from Action
Performance, as well as the products and services of other motorsports and
automotive-related SpeedMall tenants and our online sponsors and advertisers.
We believe the Internet provides a powerful communications tool that
enables motorsports fans and automotive enthusiasts to share information and
that allows for a convenient and efficient shopping experience. We believe our
solution provides an entertaining environment that encourages users to visit our
network more frequently and for longer periods of time, which in turn results in
additional e-commerce, advertising, and sponsorship activity on our network.
GROWTH STRATEGY
Our goal is to be the leading destination on the Internet for motorsports
fans and automotive enthusiasts around the world. We believe achieving this goal
will maximize our e-commerce, advertising, and sponsorship opportunities. Our
strategy to achieve this goal involves the following elements:
Capitalize on Our Unique Relationship With Action Performance
We intend to take advantage of our unique relationship with Action
Performance, a worldwide leader in the design and sale of licensed motorsports
collectibles, apparel, and souvenirs. We believe this relationship gives us a
competitive advantage as a result of our ability to offer online our parent's
popular products, many of which are exclusive to us. We also are able to take
advantage of the licensing arrangements, relationships, production sources,
marketing expertise, warehouse, order fulfillment, shipping, and other resources
of our parent.
Leverage Our Strategic Relationships
We intend to leverage our relationships with drivers, team owners, and
sponsors to increase traffic on our network. We have arrangements with some of
the most popular drivers and successful team owners to endorse and promote the
goracing network to increase fan awareness. We plan to further develop our
network through alliances with third-party providers of content and other
products and services.
Increase Our Online Motorsports Content, Community, and Commerce Offerings
We plan to enhance our network's features through internal development,
strategic alliances, and acquisitions to generate additional revenue from
product sales, tenant fees, sponsorships, and advertising. We plan to expand the
breadth and depth of our content, take advantage of new Internet technologies
and capabilities, and add to our community features. We will continue to offer
new products of Action Performance and plan to expand our e-commerce offerings
to include a growing number of third-party suppliers of products and services
that appeal to our focused audience of motorsports fans.
Expand Offerings to Automotive Enthusiast Market
We intend to expand our network features to attract additional automotive
enthusiasts to our network and suppliers of automotive parts, accessories, and
other products and services as tenants of SpeedMall and as advertisers on our
network. We plan to expand our content and online community to appeal to and
attract automotive enthusiasts. We also plan to explore strategic alliances and
acquisitions to expand offerings that appeal to the automotive enthusiast
market.
Develop Sponsorship and Advertising Programs That Benefit From Our Audience
Demographics
We intend to increase revenue by developing sponsorship and advertising
programs with new and existing sponsors of motorsports events. By providing
targeted access to the growing base of motorsports fans, we believe the goracing
network enables a broad range of advertisers and merchants to take advantage of
the brand loyalty of our visitors. We believe these sponsorship and advertising
programs are more effective
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than non-targeted banner advertising in supporting broad marketing objectives,
including brand promotion and awareness, product introductions, and the
integration of advertising with editorial content. We believe that these
sponsorship and advertising arrangements will have longer-term contracts and
higher dollar values than banner advertising arrangements as a result of their
targeted nature and the strong brand loyalty of our motorsports visitors.
Expand Internationally
We believe that the international market for motorsports news, information,
products, and services is significantly underserved. To expand our network
internationally, we intend to leverage our experience in the U.S. motorsports
industry. We believe that our right to offer online Action Performance's Formula
One and other international motorsports products gives us an advantage in the
international market, where we believe motorsports-related merchandise is scarce
and fan demand for products is high. We intend to expand our international
presence by
- taking advantage of growing international interest in U.S. motorsports by
providing our comprehensive domestic racing news, information, features,
and products to the international market,
- developing relationships with additional international drivers, teams,
sponsors, and racing series in order to offer additional products and
services that appeal to the international market,
- entering into additional international strategic alliances and
acquisitions and expanding our coverage of international racing news,
events, and information,
- developing innovative community features that appeal to motorsports fans
and automotive enthusiasts outside the United States, and
- creating regional Web sites for European, Asian, and Latin American
markets.
Increase Worldwide Brand Recognition
We intend to continue to build the goracing.com brand worldwide through
increased spending for traditional advertising media, which may include print,
radio, television, and event-based promotions. We also intend to advertise on
popular Web search engines and other third-party Web sites that attract our
target audience. In addition, we plan to develop strategic relationships with
traditional and Internet providers of news, information, and entertainment. We
believe these relationships will enable us to reach a wider audience, increase
awareness, and attract more visitors to our network.
THE GORACING NETWORK
We believe the world of motorsports recognizes the goracing network as a
leading provider of motorsports news and information on the Web. In May 1999,
the goracing network attracted approximately 923,000 unique visitors who
generated approximately 15.7 million page views. Our network offers a broad
range of news, information, and features and serves as the official online home
to SpeedMall, racing associations, driver fan clubs, race tracks, and other
motorsports related Web sites. Our network currently includes the following
motorsports and automotive-related Web sites:
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<PAGE> 45
THE GORACING NETWORK
<TABLE>
<CAPTION>
WEB SITE URL DESCRIPTION
- --------------------------------- --------------------------- ---------------------------------------
<S> <C> <C>
goracing goracing.com goracing.com is a comprehensive online
source for worldwide motorsports news
and information and is the gateway to
our network. We have created an online
community that positions this Web site
as the primary Internet destination of
motorsports fans and automotive
enthusiasts.
SpeedMall speedmall.com SpeedMall is our online shopping mall
and is the online home of our
Collectors' Club. Through SpeedMall, we
sell the products of Action Performance
and enable other motorsports and
automotive-related companies to utilize
the traffic generated by the goracing
network to sell their products and
services.
Racing Associations
National Hot Rod Association nhraonline.com Each of these Web sites serves as the
International Hot Rod ihra.com online home of the respective
Association goracing.com/outlaws sanctioning body or racing series,
World of Outlaws goracing.com/ardc providing comprehensive news,
American Racing Drivers Club havatamparacing.com information, and multimedia offerings.
Hav-A-Tampa Racing Series americanracetrucks.com Each site provides schedules, race
American Race Truck Series dragracing.com results, driver profiles, photos, and
Svensk Racing other information regarding the
particular association.
Fan Clubs
NASCAR speedmall.com/nascarfanclub Each of these Web sites serves as the
Dale Earnhardt earnhardtfan.com home for the respective racing
Dale Earnhardt, Jr. dalejr.com association's or driver's fan club.
Bobby Labonte bobbylabontefan.com Each site contains membership
Darrell Gwynn darrellgwynn.com information, news about the driver or
The Dodge Boys thedodgeboys.com series, autograph information,
Rusty Wallace rustywallace.com interactive materials, message forums,
Dario Franchitti franchitti.com games, and other features.
Race Tracks
Old Bridge Township Each of these Web sites serves as the
Raceway Park etownraceway.com online home for the respective raceway.
Norwalk Raceway Park norwalkraceway.com Each site contains race track
Moroso Motorsports Park moroso.com calendars, race results, information
regarding hotel or camping
accommodations near the race track, and
other features, such as chat rooms and
multimedia offerings.
Performance Professor performanceprofessor.com This Web site educates automotive
enthusiasts regarding theoretical and
practical aspects of high-performance
components. A respected columnist with
over 30 years of experience in
automotive performance posts lectures
regarding topics such as engine cycle
analysis, basic air flow, and
performance parts.
</TABLE>
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We intend to increase the number of racing associations, fan clubs, race
tracks, and other Web site participants in the goracing network through our
unique relationship with Action Performance and our relationships with other
motorsports and automotive personalities and entities.
MOTORSPORTS NEWS AND INFORMATION
We provide a comprehensive online source for news and information about the
world of motorsports. The goracing network is the official online home to some
of the most influential organizations in motorsports. We believe that our
up-to-date news and other information encourage visitors to return regularly to
our network. Our unique coverage of motorsports events includes the following:
Race Coverage. Our field reporters cover races and events throughout the
motorsports community. These reporters produce original stories and
comprehensive event coverage that are exclusive to the goracing network. Our
reporters electronically transmit to us from remote locations the news, photos,
audio interviews, and video that we use to report motorsports news on a timely
basis. We also obtain news and information from editorial staffs of other Web
sites in the goracing network. These staff and other resources help us to
produce timely, comprehensive, and worldwide coverage of motorsports. We
supplement our motorsports news with stories from the news wire services. In
addition to our in-depth event coverage, we deliver comprehensive information
about dates, times, and locations of upcoming races. We plan to increase the
size of our reporting and editorial staff to enhance the news coverage and
unique content on our network.
Race of the Week. In addition to our comprehensive race coverage, we
highlight one racing event each week. Our reporters provide stories regarding
developments leading up to the race; conduct interviews with drivers, crew
chiefs, and other celebrities; obtain behind-the-scene insights from racing
personalities; and create other unique content regarding the featured race.
Daily Diary. We arrange for popular race car drivers and crew chiefs to
produce a daily diary of a race weekend. Our staff follows the driver or crew
chief during the race weekend and reports events as they occur. This diary
allows the viewer to see how the driver or crew chief practices during the week,
prepares for the race day, and spends time before, during, and after the race.
We believe this feature gives our users a unique perspective into the daily
lives of drivers or other motorsports personalities that is unavailable from
other sources.
Live Race Webcasts. We plan to Webcast races and other motorsports events
live on our network. In May 1999, we produced the first live Webcast of a World
of Outlaws event. We intend to Webcast additional races and events in the
future. We also intend to utilize state-of-the-art technology to enhance our
users' viewing experiences.
Driver Database and Track Locator. Through our driver database, users may
search for information regarding their favorite race car driver. The database
provides each driver's personal information, career statistics, race
performance, and fan club information. Through our track locator, users may
search our database to obtain information about specific race tracks, including
local weather conditions, contact information, and personalized directions to
the race track.
THE GORACING COMMUNITY
The Internet provides an opportunity for people with similar interests to
share information easily and quickly. Our network offers an online community
where motorsports fans and automotive enthusiasts can
- interact in chat rooms with others that have similar interests,
- participate in chats with their favorite motorsports celebrities,
- share information on topic-specific bulletin boards,
- track the value of and trade their collectibles,
- participate in online auctions,
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- play games related to motorsports, and
- find links to other Web sites for motorsports and automotive-related
products, services, and information.
We believe the traffic generated by these unique features and services will lead
to increased sales on our network and makes our network an attractive
advertising medium for providers of motorsports and automotive products and
services.
Chat Rooms. Our chat rooms enable visitors to communicate with other
motorsports fans and automotive enthusiasts who share similar interests. Chat
room visitors can discuss topics that include the issues of the week in racing,
participate in a weekly chat with editors covering the various racing circuits,
and chat with special guests who discuss timely issues in motorsports. We offer
the Collectors' Chat, which allows visitors to discuss the latest developments
in the market for motorsports collectibles. We sponsor celebrity chats that
allow visitors to ask questions directly of and receive answers directly from
motorsports celebrities. Since February 1999, we have hosted over 30 celebrity
chats with popular race car drivers, including Dale Earnhardt, Jeff Gordon,
Rusty Wallace, Dale Jarrett, and Dario Franchitti.
Bulletin Boards. In addition to chat rooms, we provide bulletin boards on
which users can share information about a variety of topics. We designate
particular discussion topics for the bulletin boards and enable users to create
new bulletin board topics. Users ask or answer questions by posting information
on various bulletin boards for others to read. The bulletin boards encourage
users to return to goracing.com frequently and for longer periods to view
responses to their questions or to comment about a particular subject.
Fan Clubs. We operate fan clubs for several popular race car drivers and
for NASCAR. These clubs include "Club E," which is the Dale Earnhardt fan club;
the Dale Jarrett Fan Club; the Rusty Wallace Fan Club; the Bobby Labonte Fan
Club; the John Force Fan Club; and the NASCAR Fan Club. These fan clubs had a
total of approximately 83,000 members as of June 30, 1999. We host the Web sites
of most of these fan clubs and lease space to those Web sites in SpeedMall.
Membership packages typically include a quarterly newsletter, personalized
membership card, and exclusive benefits and discounts that are provided only to
club members. Through our alliance with Action Performance, we provide to fan
club members unique product offerings and other benefits that are not available
through any other distribution channel.
Collectors' Database. Our Collectors' Database application provides a
method by which avid collectors can record information about their own
motorsports collections. The database generates a listing of a collector's
motorsports items in a user-friendly format that helps the user to determine the
market value of the collection and encourages the user to return to goracing.com
on a regular basis to update that information. The database also helps us track
information about individual collectors so that we can directly market special
promotions of motorsports collectibles to them.
Online Auctions. We provide our users with the ability to buy, sell, and
trade their collectibles through weekly auctions on our network. The auction
environment creates a convenient and attractive secondary marketplace in which
motorsports collectors can buy or sell their collectibles or gauge the value of
their collections. We believe that this service will create increased demand for
the collectible products that we sell. We have an arrangement under which
Beckett Auction organizes, conducts, and services the auctions and charges
sellers a posting fee and a commission on their product sales. We share with
Beckett Auction all revenue generated from posting fees and commissions. We plan
to expand our online auction services to offer popular items, such as
autographed memorabilia and items used in races, including drivers' gloves,
helmets and race car parts.
Personalized Services. We are developing personalized services that will
enable users to tailor their visits to our network by indicating their
geographic location, favorite drivers and racing events, and news they would
like to receive. Once we determine a user's interests, we can target news and
information, banner advertising, and product offerings to the individual to
maximize the utility of our network for that user. We believe that tailoring our
Web sites to the interests of our individual users encourages them to visit our
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network for longer periods of time, generates strong brand loyalty, and results
in higher revenue to us in the form of "click-through" revenue on banner
advertisements and increased product sales.
Promotions. We provide our visitors with a variety of contests and
promotions, including trivia contests, scavenger hunts, and "collection of the
week" contests. We award various prizes for these contests, such as cash awards
or tickets to racing events. We believe that these contests and promotions
generate a sense of community and, in turn, generate traffic to our network.
Other Community Activities. We provide other features and services to our
users that help to develop strong brand loyalty and generate additional traffic.
These features include the following:
- multimedia files displaying the latest photos, video clips, and audio
clips in motorsports,
- a fantasy racing game that enables participants to compete against each
other by assembling a fictional race team consisting of NASCAR drivers,
and
- the ability to send friends online greeting cards with
motorsports-related photos.
OUR COLLECTORS' CLUB AND MOTORSPORTS AND AUTOMOTIVE E-COMMERCE
We currently generate revenue primarily through the operation of our
Collectors' Club, which offers exclusive lines of licensed motorsports products
online as well as through a print catalog. We also generate revenue through
online sales of other licensed motorsports products and by operating SpeedMall.
Racing Collectables Club of America
We sell Action Performance's products through our Collectors' Club. We
offer on an exclusive basis limited edition lines of die-cast replicas of racing
vehicles and other licensed motorsports products. We also offer licensed
motorsports apparel and souvenirs through our Collectors' Club.
Members of our Collectors' Club pay a lifetime membership fee that entitles
them to receive a membership kit, a quarterly magazine, catalogs, and other
special sales materials highlighting Action Performance's collectibles and other
products. Membership in the Collectors' Club increased from approximately 22,000
members in September 1994 to approximately 166,000 members in June 1999, a
compound annual growth rate of approximately 53%. We advertise our Collectors'
Club in publications that focus on motorsports or the collectibles industry,
through banner advertisements on the Internet, and through limited radio and
television advertisements. We strive to increase collector interest in
Collectors' Club products and to enhance the value of these products as
collectibles by
- offering many items exclusively through our Collectors' Club,
- offering a limited number of each collectible, and
- limiting the number of a particular item that each member may purchase.
Until recently, members of our Collectors' Club purchased products through
our catalog by calling our customer service representatives. Since the February
1999 launch of SpeedMall, users can join the Collectors' Club and view and
purchase products online. In May 1999, online Collectors' Club orders
represented approximately 50% of total Collectors' Club orders for products
introduced to club members in May.
Each month, we send e-mail to our online club members notifying them of new
product offerings. We attempt to notify all of our club members of new products
either by e-mail, catalog, or on SpeedMall before we begin accepting orders to
assure all of our club members have an equal opportunity to purchase collectible
products. Items that we offer exclusively to our club members are made available
to non-club members after a period of time.
We also employ customer service representatives and an automated call
distribution telephone system to accept membership applications, take customer
orders, and handle customer inquiries. We utilize an advanced telephone and
computer system that combines telemarketing functions, computerized order
processing, and automated warehouse operations to process telephone orders to
our Collectors' Club.
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In order to enhance the user's online experience, increase customer
acceptance of the online shopping alternative, and lower the cost of customer
service, we plan to implement "click to call" technology on our online store.
This feature will allow users to interact with sales and customer service
representatives during their visits to our online store. This technology will
enable our sales and customer service representatives and users to view Web
pages at the same time from different locations and allow our representatives to
suggest purchasing opportunities by remotely delivering Web pages to users.
SpeedMall
Online Product Sales. Motorsports fans and automotive enthusiasts who
visit goracing.com can access SpeedMall, our online shopping mall that is
dedicated to motorsports and automotive products and services. Our Action
Collectibles Store, Action Apparel Store, Racing Collectables Club of America
Store, and SelectNet, serve as "anchor" tenants of SpeedMall. These stores sell
selected licensed motorsports collectible and consumer products, including
die-cast scaled replicas of motorsports vehicles, apparel, and souvenirs, that
we obtain from Action Performance. As of June 30, 1999, we had 36 tenants in
SpeedMall. These stores enable other motorsports and automotive-related entities
to utilize the traffic generated by the goracing network to sell their products
and services online. SpeedMall's diverse tenant base includes the following:
<TABLE>
<CAPTION>
TENANTS PRODUCT OR SERVICE OFFERINGS
- ------- ----------------------------
<S> <C>
Action Collectibles.............................. licensed die-cast collectibles
Action Apparel................................... motorsports apparel and accessories
Racing Collectables Club of America.............. licensed die-cast collectibles for
Collectors' Club members
Action SelectNet................................. licensed die-cast collectibles for
SelectNet members
Hasbro's "Winner's Circle" Brand Toys............ toy cars and trucks, games, and puzzles
Dura Lube........................................ automotive lubricants, products, paints,
and polishes
Carparts.com..................................... automotive parts and accessories
Beckett Auction.................................. online auction to buy, sell, or trade
collectibles
The Perfect Curve................................ hat apparel and accessories
Sun Time......................................... NASCAR licensed sports watches and golf
accessories
Buck Baker Racing School......................... race car driving school
NASCAR Silicon Motor Speedway.................... driving games and entertainment
Lynch Tours...................................... group race tours and travel
</TABLE>
Tenant Fees. Third-party SpeedMall tenants pay us fees under a variety of
arrangements, including fees based on the amount of traffic the tenant receives
on a per click-through basis, a percentage of revenue that the tenant receives
from sales generated by traffic from SpeedMall, or a flat monthly rate. We plan
to convert our traffic into additional revenue by broadening our base of tenants
and creating opportunities to collect increased tenant fees.
Target Marketing. We intend to capitalize on the unique capabilities of
the Internet to maximize the buying potential of our audience. Our operating
infrastructure and technology can track the usage patterns for each visitor to
SpeedMall, allowing us to target promotions and cross-sell products to repeat
SpeedMall visitors. This highly personalized approach to selling takes advantage
of the Internet's unique capabilities to structure the presentation of products
and information around the characteristics of a specific audience. We believe
this use of technology will provide a much more personalized shopping experience
than more traditional distribution channels, such as catalogs. Personalized
selling also will allow the merchandiser to suggest products and potentially
create sales that might not otherwise take place.
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OTHER REVENUE SOURCES
Online Advertising and Sponsorships
We believe that selling sponsorships and advertisements on our network
represents a significant opportunity for future revenue growth. As a result, we
intend to use a portion of the proceeds from this offering to hire our own sales
personnel to sell various advertising and sponsorship packages on our network.
To date, we have engaged a third-party advertising agency to sell advertising on
the goracing network. This agency currently provides us with our primary source
of advertising revenue and charges us commissions for advertisements that it
places. Advertisers may choose from three different methods to advertise on our
network.
Impression Advertising. We sell "generally available" advertising space on
all of the sites on our network. Advertisers pay us a fixed rate in exchange for
a guaranteed number of impressions on our Web sites. Although we guarantee a
fixed number of impressions under this model, we do not guarantee that the
advertisement will appear on any particular Web site on our network.
Reserved Internet Space. We sell "reserved" advertising space on each of
the sites on our network. Advertisers pay us a fixed rate in exchange for a
guaranteed number of impressions on a particular Web page. This advertising
method appeals to some advertisers because it enables them to target advertising
to users with a particular interest. Reserved Internet space advertising
generally bears higher rates than impression advertising.
Sponsorships. We enable advertisers to sponsor certain areas on the
goracing network. We are developing various sponsorship packages for advertisers
and plan to offer opportunities to sponsor celebrity chats, live Webcasts, and
special areas of SpeedMall. We believe these sponsorship packages are more
effective than traditional banner advertising in supporting broad marketing
objectives, including brand promotion, product introductions and awareness, and
the integration of advertising with editorial content. We plan to seek
sponsorship arrangements that have longer-term contracts and higher dollar
values than typical banner advertising arrangements. We believe these
sponsorship packages offer advertisers a unique opportunity to promote their
products to a focused group of users and represent an attractive method of
advertising.
We believe that a thorough understanding of the demographic profiles and
purchasing habits of our users is critical to effective and successful
advertising and merchandising. Our users must register for some of our features,
which gives us an opportunity to collect information relating to the demographic
makeup and purchasing and browsing behavior of our user base. We plan to share
this information with advertisers on our network. Collecting such demographic
consumer data permits us and our advertisers to target advertising and
promotional e-mail campaigns directly to specific customers.
Web Site Development
We provide Web site development and hosting services on a fee basis to
other entities in the motorsports and automotive industries. Our services
include the design of fully customized sites for current and potential long-term
SpeedMall tenants that desire larger sites or more advanced features.
STRATEGIC ALLIANCES AND RELATIONSHIPS
We pursue strategic alliances and relationships to increase our access to
online customers, build brand recognition, and expand our online presence. Our
principal strategic alliances and relationships include the following:
Action Performance
Upon completion of this offering, we will enter into a comprehensive
strategic alliance with Action Performance that covers licensing, sales, and
promotional arrangements for the Internet and other interactive electronic
media. Under this alliance, Action Performance will have a right of first
refusal to procure
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licensing arrangements with motorsports personalities for many of the products
that we sell online as well as for endorsements and promotion of the goracing
network. We will retain the right to procure licensing rights for our use if
Action Performance is unable to do so.
Our alliance with Action Performance also will designate us as Action
Performance's primary e-commerce distribution channel for sales of its products.
Except for (1) online sales by Action Performance's other wholesale
distributors, (2) sales of products to NASCAR including its NASCAR.com online
channel, (3) online sales of corporate promotional products by the corporate
sponsors, (4) online sales of licensed products by the licensors of those
products, and (5) online sales by manufacturers or suppliers that retain the
right to sell their products online, Action Performance will not directly or
indirectly sell its products through any electronic media other than
goracing.com. This arrangement will include comprehensive distribution and
supply agreements with Action Performance. We also will have the right of first
refusal to design, operate, host, and control Action Performance's Web sites,
other than its corporate Web site, and any new Internet or interactive
electronic opportunities that Action Performance develops or that third parties
bring to its attention. Action Performance also will use its best efforts to put
our "goracing.com" name or logo on its product packaging and to advertise and
promote our network. We believe that our strategic alliance with Action
Performance will provide us with access to unique motorsports and automotive
news, information, and e-commerce opportunities that will not be available from
any other online source.
Motorsports Personalities
Through Action Performance, we have strategic relationships with many of
the most popular motorsports drivers, team owners, and crew chiefs, including
the following:
<TABLE>
<S> <C>
Dale Earnhardt Rusty Wallace
Jeff Gordon Bobby Labonte
Dario Franchitti Steve Kinser
Don Prudhomme Tony Stewart
Joe Gibbs Racing Dale Earnhardt, Jr.
Ray Evernham Richard Childress Racing
</TABLE>
Each of these personalities has agreed to endorse the goracing network for
motorsports and automotive-related products, services, and information. These
endorsements include publicly acknowledging goracing.com when appropriate,
making personal appearances and commercials on our behalf, granting interviews
and participating in on-line chats on our network, providing us with race-used
items for online auctions and promotions, and permitting us to use the
endorser's name, signature, and likeness for advertising, marketing, and
promotional purposes. Through Action Performance, each of these drivers, team
owners, and crew chiefs will either add the endorser's Web site to the goracing
network or grant us the right to design, operate, host, and control the
endorser's motorsports or automotive-related Web sites. We granted options to
acquire our class A common stock in connection with these arrangements.
LICENSES
Our strategic alliance with Action Performance enables us to market
licensed motorsports products that Action Performance designs and sells. Action
Performance focuses on developing long-term relationships with and engages in
comprehensive efforts to license the most popular drivers, team owners, and
other personalities in each top racing category, their sponsors, various
sanctioning bodies, and others in the motorsports industry. Action Performance
continually strives to strengthen its relationships with licensors and to
develop opportunities to market innovative collectible and consumer products
that appeal to motorsports fans. We believe that Action Performance's license
agreements with top race car drivers and other licensors significantly enhance
the consumer appeal and marketability of the Action Performance-branded products
that we sell.
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<PAGE> 52
Action Performance maintains an extensive portfolio of license arrangements
with various drivers, team owners, sponsors, and sanctioning bodies, including
the following:
- NASCAR champions Dale Earnhardt, Jeff Gordon, and Rusty Wallace, as well
as NASCAR drivers Bobby Labonte, Dale Jarrett, Mark Martin, Tony Stewart,
and Dale Earnhardt, Jr.;
- NASCAR team owners Robert Yates Racing, Richard Childress Racing
Enterprises, Joe Gibbs Racing, and Dale Earnhardt, Inc.;
- NHRA champions John Force and Kenny Bernstein;
- Formula One teams McLaren International Ltd, Williams Grand Prix,
Benetton Formula Ltd, and Jordan Grand Prix Ltd; and
- NASCAR, CART, and the World of Outlaws.
These licenses are either exclusive or grant Action Performance a right of
first refusal to make products bearing the driver's name and likeness or the
likeness and number of each owner's racing vehicles. To the extent that Action
Performance exercises its right of first refusal, the licensor generally is
prohibited from personally marketing or permitting others to market, through the
distribution channels used by Action Performance, any of the licensed products.
Under these licenses, Action may make various die-cast collectibles, apparel,
and souvenir products bearing the licensors' name and likeness, car number and
colors, or logo, as applicable. In addition, Action Performance has licenses
with various car and truck manufacturers, which permit Action Performance to
reproduce the manufacturers' vehicles.
Action Performance also has a license agreement with Hasbro, Inc. that
covers the sale by Hasbro of motorsports-related products in the
mass-merchandise market. Action Performance secures and maintains for Hasbro
exclusive or non-exclusive licenses from race car drivers, owners,
manufacturers, and sponsors. The licensed products consist of die-cast replicas
of motorsports vehicles, 1:18th-scale plastic toy cars, radio-controlled cars,
slot car sets, games (including electronic and CD-ROM interactive games), plush
toys, figurines, play sets, and other products. Hasbro manufactures,
distributes, and markets these products under the "Winner's Circle" brand name.
The Hasbro Winner's Circle Toy Store is a tenant of SpeedMall.
PRODUCT SOURCING
We currently obtain most of the licensed motorsports products that we sell
from Action Performance. Upon completion of this offering, we will purchase
products from Action Performance under the terms of several intercompany
agreements. See "Transactions With Action Performance Companies, Inc. --
Intercompany Agreements." We believe that our arrangement to serve as the
primary online distribution channel for Action Performance's unique lines of
high-quality die-cast collectibles, apparel, and other products, many of which
are not available from any other source, provide us with a competitive advantage
in the e-commerce motorsports marketplace.
Action Performance designs each die-cast collectible that it markets and
devotes a significant amount of time and effort to the production of those
collectibles to assure that the resulting products display a level of quality
and detail that is superior to competing products. Action Performance engages
one third-party manufacturer in the People's Republic of China to manufacture
most of its die-cast collectible products. Action Performance owns a significant
portion of the tooling that the third-party manufacturer uses and has partial
control over the production of its die-cast collectibles. Action Performance
obtains its other die-cast collectibles from three other manufacturers in China.
Although Action Performance has advised us that it believes that there are
alternative manufacturing arrangements available if needed, there are
significant risks inherent in relying on a single manufacturer for a substantial
portion of its die-cast products.
Action Performance obtains substantially all of its licensed motorsports
apparel, souvenirs, and other consumer products on a purchase order basis from
third-party manufacturers and suppliers located primarily in the United States.
Action Performance screen prints and embroiders a portion of the licensed
motorsports apparel that it sells. Action Performance also purchases and resells
certain finished items, such as tote bags and coolers, from companies that have
licenses for those items. Action Performance works closely with third-
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party apparel and souvenir manufacturers to ensure that the products conform to
its design specifications and meet or exceed its quality requirements. Action
Performance has advised us that it believes that a number of alternative
manufacturers for each of these products are readily available in the event that
it is unable to obtain products from any particular manufacturer.
MARKETING AND PROMOTION
We have achieved our current level of success with a limited amount of
marketing and promotion of our brand. We plan to increase our brand recognition
through increased use of strategic alliances, personal endorsements, and
traditional and Internet advertising media.
Strategic Alliances. We plan to establish strategic alliances to obtain
content and community features for our network, provide marketing and
cross-promotional opportunities, increase worldwide brand recognition of the
goracing network, and build traffic on our network. We will carefully evaluate
each potential alliance and will analyze whether any fees associated with it are
cost effective in terms of the potential new customers, potential revenue, level
of exclusivity, and brand exposure.
Personal Endorsements. Through existing relationships with Action
Performance, popular race car drivers such as Dale Earnhardt, Jeff Gordon, Dario
Franchitti, Rusty Wallace, Don Prudhomme, and 33 other motorsports personalities
have agreed to endorse the goracing network as a leading Web site for
motorsports fans. We have agreed to grant options to purchase shares of class A
common stock at the initial public offering price for the endorsements of the
goracing network. We believe that our relationships with these drivers and other
notable motorsports participants helps position the goracing network as a
leading network for motorsports fans.
Traditional and Internet Advertising. We plan to utilize numerous
marketing techniques, including both traditional and online advertising, to
increase brand recognition and traffic. We intend to use a portion of the
proceeds of this offering to increase our marketing efforts. We have obtained a
limited amount of our advertising through barter arrangements in which we
provide space for motorsports and automotive-related companies in exchange for
advertising in other publications. Upon completion of this offering, we intend
to
- increase our cash payments for promotion of the goracing network in print
publications,
- utilize outdoor media, radio, and television promotions, and
- purchase preferred search terms and banner advertisements on various Web
search engines to promote our network when users perform searches
utilizing particular search terms.
INFRASTRUCTURE, OPERATIONS, AND TECHNOLOGY
A large array of high-availability, high-performance servers located at
Exodus Communications, Inc. in Waltham, Massachusetts hosts our network. Exodus
has an extensive data center with servers that run a sophisticated suite of
content management and deployment software, enterprise-class clustered
databases, and specialty Internet applications, such as chat rooms, message
boards, and streaming multimedia. We continually monitor our network of Web
sites for performance and availability.
We deliver the goracing network to the Internet via multiple redundant
high-bandwidth Internet connections through Exodus. High-speed connections to
network peering points and to other Internet backbone providers help to obtain
adequate download times even during peak use periods.
We consider security and reliability to be of paramount importance for a
successful network. Exodus provides 24-hour security personnel, gas-based fire
suppression systems, and fully redundant power with multiple backup generators.
When customers use credit cards to execute an online purchase, our systems
encrypt this sensitive information with Secure Sockets Layer, or SSL,
technology, which protects the data from being read while in transit. We protect
sensitive data with multiple "firewalls" and strict server- and
application-level security policies. SSL provides data encryption, server
authentication, message integrity, and client authentication for Internet
connections. All of our production data is copied to backup tapes each night and
stored at a third-party, off-site storage facility. We are in the process of
developing a comprehensive
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disaster recovery plan to respond to system failures. We keep all of our
production servers behind firewalls for security purposes and do not allow
outside access, at the operating systems level, except via special secure
channels. We follow strict password management and physical security measures.
Like other Internet sites, sites on our network from time to time have
experienced interruption and overload. Our business requires the uninterrupted
operation of our network of sites on the Internet and transaction processing
system. Our site operators attempt to maintain, to the greatest extent possible,
the reliability of these systems.
COMPETITION
Markets for motorsports and automotive-related products and services are
extremely competitive. Many of our competitors have greater market recognition
and substantially greater financial, technical, marketing, distribution, and
other resources than we possess. In addition, online retailers may be acquired
by, receive investments from, or enter into other commercial relationships with
larger, well-established, and well-financed companies as use of the Internet and
other online services increases. Certain of our competitors may be able to
secure merchandise from manufacturers exclusively or on more favorable terms,
devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing or inventory availability policies, and devote substantially
more resources to Web site and systems development than we can. Increased
competition may result in reduced operating margins, loss of market share, and a
diminished brand franchise. New technologies and the expansion of existing
technologies may increase the competitive pressures on us.
The e-commerce market is new, rapidly evolving, and intensely competitive;
and we expect competition to intensify in the future. Barriers to entry are
minimal and competitors may develop and offer similar services in the future. We
currently or potentially compete with several types of companies, including the
following:
- general integrated entertainment companies, such as the Walt Disney Co.
and its ESPN affiliate, Time Warner, and TNN,
- Web sites targeted to sports enthusiasts generally, such as ESPN.com,
Sportsline.com, CNNSI.com, and Foxsports.com,
- NASCAR, which has a contract with Action Performance under which NASCAR
has a right to buy some of Action Performance's products for its
NASCAR.com e-commerce channel,
- other motorsports and automotive-related Web sites, such as
Speedvision.com, Jayski.com, Hemmings Motor News Online, and Ecklers.com,
- traditional forms of media that cover motorsports, such as magazines,
newspapers, radio, and television, and
- online and offline retailers of motorsports merchandise, including
various distributors of Action Performance.
Our competitive position depends on a number of factors, both within and
outside our control, including the following:
- our ability to generate traffic on our network and to develop
successfully an online community that attracts motorsports fans and
automotive enthusiasts,
- the quality, features, pricing, and diversity of the products offered on
our network of Web sites,
- our ability to recognize industry trends, anticipate shifts in consumer
demands, and identify and market new products,
- our relationships with and the popularity of the race car drivers, teams,
and other licensors of the products we sell,
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- our ability to develop and maintain effective marketing programs that
enable us to sell products and services to motorsports fans and
automotive enthusiasts,
- product and service offerings by our competitors.
We cannot assure you that we will be able to compete successfully in the future.
We believe that Action Performance's relationships and licenses with top
race car drivers, car owners, sanctioning bodies, and other popular licensors
provide us with a significant advantage over competitors that may attempt to
develop a motorsports Web site or offer motorsports collectible and consumer
products online. Through Action Performance, we plan to expand and strengthen
these relationships and to develop opportunities to market innovative licensed
collectible and consumer products that appeal to motorsports fans and automotive
enthusiasts.
INTELLECTUAL PROPERTY
Our performance and ability to compete depend to a significant degree on
our proprietary technology and other rights. We rely on a combination of
trademark, copyright, and trade secret laws, confidentiality agreements with
employees and non-compete agreements executed by certain of our executive
officers; and technical measures to establish and protect our proprietary
rights.
We are seeking protection of the "goracing.com," "RCCA SelectNet," and
"SpeedMall" trademarks in the United States. We may not be able to secure
protection for our service marks or trademarks. Our competitors or others may
adopt product or service names similar to "goracing.com," or other of our
service marks or trademarks, which could impede our ability to build brand
identity and lead to customer confusion. Our inability to protect the name
"goracing.com" adequately could have a material adverse effect on our business,
operating results and financial condition.
Our proprietary software is protected by copyright laws. The source code
for our proprietary software also is protected under applicable trade secret
laws. As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limit access to and
distribution of our software, documentation, and other proprietary information.
The steps we take may not prevent misappropriation of our technology, and the
agreements we enter into for that purpose may not be enforceable. Despite our
precautions, third parties could copy or otherwise obtain and use our software
or other proprietary information without our authorization. These third parties
also may independently develop similar software. Policing unauthorized use of
our technology is difficult, particularly because the global nature of the
Internet makes it difficult for us to control the ultimate destination or
security of transmitted software or other data. The laws of other countries may
afford us little or no effective protection of our intellectual property.
We may receive notices from third parties that claim our software or other
aspects of our business infringe their rights. While we are not currently
subject to any such claim, any future claim, with or without merit, could result
in significant litigation costs and diversion of resources, including the
attention of management, and could require us to enter into royalty and
licensing agreements, all of which could have a material adverse effect on our
business, financial condition, and results of operations. These royalty and
licensing agreements, if required, may not be available on terms acceptable to
us or at all. In the future, we also may need to file lawsuits to enforce our
intellectual property rights, to protect our trade secrets, or to determine the
validity and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on our business, financial
condition, and results of operations.
We also rely on a variety of technologies that we license from third
parties, including our database and Internet server software, which perform key
functions. These third-party technology licenses may not continue to be
available to us on commercially reasonable terms. Our loss or inability to
maintain or obtain upgrades to any of these technology licenses could result in
delays in completing our proprietary software enhancements and new developments
until we identify, license, develop, and integrate equivalent technology. Any
such delays could have a material adverse effect on our business, financial
condition, and results of operations.
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GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. As a result of the increasing popularity and use of the Internet and
other online services, however, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services. These laws and regulations could cover issues such as user privacy,
pricing, content, copyrights, distribution, and the characteristics and quality
of products and services. The growth and development of the market for online
commerce may prompt more stringent consumer protection laws that may impose
additional burdens on companies that conduct business online. The adoption of
any additional laws or regulations may decrease the growth of the Internet or
other online services, which in turn could decrease the demand for the products
and services we offer, increase our cost of doing business, or otherwise have an
adverse effect on us. We are uncertain as to how existing laws that govern
issues such as property ownership, sales and other taxes, and personal privacy
will apply to the Internet and other online services. Any such developments may
take years to resolve.
Because our network is available over the Internet in multiple states and
foreign countries and we sell to numerous consumers residing in multiple states
and foreign countries, these jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each such state and foreign
country. Our failure to qualify as a foreign corporation in a jurisdiction where
we are required to do so could subject us to taxes and penalties for the failure
to qualify. Any such new legislation or regulation, the application of laws and
regulations of jurisdictions whose laws we believe do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services, could have a material adverse effect on our business.
EMPLOYEES
As of July 1, 1999, we had 103 full-time employees. We have experienced no
work stoppages and are not a party to a collective bargaining agreement. We
believe that we maintain good relations with our employees.
FACILITIES
Our corporate headquarters are located in Phoenix, Arizona. We share these
offices with Action Performance, which leases the property under a lease with an
initial term that expires in August 2007. The lease includes two five-year
renewal options. Following this offering, we expect to continue to use a portion
of this property pursuant to a space-sharing arrangement with Action
Performance. As we expand, we plan to lease that additional space on prevailing
terms.
We also lease approximately 6,000 square feet of office space in Canton,
Massachusetts under a lease expiring in March 2000. Our Web site developers use
this office space to develop the goracing network.
LEGAL PROCEEDINGS
We currently are not involved in any legal proceeding that we believe would
have a material adverse effect on our business, results of operations, or
financial position.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Fred W. Wagenhals............................ 57 Chairman of the Board
Christopher S. Besing........................ 38 Chief Executive Officer and Director
Lonnie P. Boutte............................. 48 President and Director
David A. Husband............................. 30 Acting Chief Accounting Officer and
Director
Roger J. Falcione............................ 49 Chief Technology Officer
Tod J. Wagenhals............................. 34 Director
</TABLE>
Fred W. Wagenhals has served as our Chairman of the Board since May 1999.
Mr. Wagenhals founded Action Performance in May 1992 and has served as its
Chairman of the Board, President, and Chief Executive Officer since November
1993.
Christopher S. Besing has served as our Chief Executive Officer and as a
director since May 1999. Mr. Besing has served as Vice President and Chief
Financial Officer of Action Performance since January 1994 and as a director of
Action Performance since May 1995. Mr. Besing will resign as an officer of
Action Performance upon completion of this offering, but will continue to serve
as a director of Action Performance. Prior to joining Action Performance, Mr.
Besing held several financial and accounting positions with Orbital Sciences
Corporation ("OSC") from September 1986 to December 1993, most recently as
Director of Accounting and Controller of OSC's Launch Systems Group in Chandler,
Arizona. Prior to joining OSC, Mr. Besing was employed as an accountant with
Arthur Andersen LLP from January 1985 to August 1986. Mr. Besing also serves as
a director of LBE Technologies, Inc., a privately held corporation that operates
"NASCAR Silicon Motor Speedway" entertainment centers that feature real-time
interactive racing simulators. Mr. Besing is a Certified Public Accountant.
Lonnie P. Boutte has served as our President since May 1999 and as a
director since July 2, 1999. Mr. Boutte served as the General Manager of our
Collectors' Club from June 1995 until February 1999, and has served as President
of our wholly owned subsidiary Action Interactive, Inc., since February 1999.
Prior to joining Action Performance, Mr. Boutte served as the Vice President of
Operations for SkyMall, Inc., a public in-flight shopping catalog company, from
February 1992 until June 1995.
David A. Husband has served as a director since July 2, 1999. Mr. Husband
also is serving as our Acting Chief Accounting Officer until we engage his
successor. Mr. Husband has served as Vice President -- Finance and Accounting
and as the Chief Accounting Officer of Action Performance since May 1998 and
will assume the role of Action Performance's Chief Financial Officer upon the
completion of this offering. Mr. Husband was employed as an accountant with
Arthur Andersen LLP from July 1992 to May 1998, where he was primarily engaged
in auditing publicly-held companies. Mr. Husband is a Certified Public
Accountant.
Roger J. Falcione has served as our Chief Technology Officer since November
1998. Mr. Falcione was the President, Chief Executive Officer, and a founder of
Tech 2000 Worldwide, Inc., a full-service Internet development company from
September 1995 until its acquisition by Action Performance in November 1998.
Prior to forming Tech 2000, Mr. Falcione served in a variety of positions during
an 18-year career at Bay State Gas Company, most recently as Manager of Network
Services.
Tod J. Wagenhals has served as a director since July 2, 1999. Mr. Wagenhals
has served as Executive Vice President of Action Performance since July 1995, as
a director of Action Performance since December 1993, and as Secretary of Action
Performance since November 1993. Mr. Wagenhals served as a Vice President of
Action Performance from September 1993 to July 1995. Mr. Wagenhals served in
various marketing capacities with Action Performance from May 1992 until
September 1993. Mr. Wagenhals was
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National Accounts Manager of Action Products, Inc. from January 1989 to October
1991. Mr. Wagenhals is the son of Fred W. Wagenhals.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our bylaws authorize the board of directors to appoint among its members
one or more committees consisting of one or more directors. Immediately
following this offering, our board of directors will establish an audit
committee and a compensation committee. The audit committee and the compensation
committee will each consist of at least two independent directors who are not
affiliated with us or Action Performance. The audit committee will review the
annual financial statements, any significant accounting issues, and the scope of
the audit with our independent auditors and will discuss with the auditors any
other audit-related matters that may arise. The compensation committee will
review and act on matters relating to compensation levels and benefit plans for
our key executives.
DIRECTOR COMPENSATION AND OTHER INFORMATION
Directors who are employees of our company or Action Performance do not
receive any additional compensation for serving as members of our board of
directors. Non-employee directors are eligible to participate in our 1999
Incentive Stock Plan. Our directors also will be eligible to receive other
grants of stock options or awards pursuant to the discretionary program of the
1999 Incentive Stock Plan. See "Executive Compensation -- 1999 Stock Incentive
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our board of directors has not had a compensation
committee. All compensation decisions relating to our executive officers have
been made by the compensation committee of the board of directors of Action
Performance, which compensated these individuals in their capacity as executive
officers of Action Performance. Once formed, the compensation committee of our
board of directors will make all compensation decisions regarding our executive
officers. None of our non-employee directors have any contractual or other
relationships with us or Action Performance except as directors.
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EXECUTIVE COMPENSATION
During 1996, 1997, and 1998, Messrs. Wagenhals, Besing, and Boutte were
compensated by Action Performance for services rendered to Action Performance,
participated in executive benefit plans sponsored by Action Performance, and did
not receive compensation from our company. During those periods, Mr. Falcione
received compensation as the President and Chief Executive Officer of Tech 2000.
During the periods presented, the compensation committee of the board of
directors of Action Performance determined the base salaries and bonuses of
Messrs. Wagenhals, Besing, and Boutte. After this offering, the compensation
committee of the board of directors of our company will determine the base
salaries and bonuses of our executive officers.
The following table sets forth certain information concerning the
compensation for the fiscal years ended September 30, 1996, 1997, and 1998
earned by our Chief Executive Officer and by our other executive officers whose
cash salary and bonus exceeded $100,000 during fiscal 1998 (the "Named
Officers"). All amounts listed represent compensation paid by Action Performance
or Tech 2000, as applicable, to the Named Officers for services rendered in all
capacities to those companies for the periods presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
AWARDS
-------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) OPTIONS(#)(2) ($)(3)
- --------------------------- ---- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fred W. Wagenhals...................... 1998 $459,676 $100,000 60,000(4) $3,200
Chairman of the Board 1997 276,923 50,000 16,000 1,952
1996 250,000 75,000 -- 4,854
Christopher S. Besing.................. 1998 $160,962 $ 40,000 40,000(5) $3,200
Chief Executive Officer and Director 1997 113,462 21,000 15,000 2,535
1996 75,000 26,000 20,000 1,572
Lonnie P. Boutte....................... 1998 $100,000 $ 10,000 10,000(6) $1,000
President and Director 1997 80,192 10,500 10,000 --
1996 70,000 4,000 2,000 --
Roger J. Falcione...................... 1998 $101,000 -- -- --
Chief Technology Officer 1997 101,000 -- -- --
1996 89,885 -- -- --
</TABLE>
- ---------------
(1) Messrs. Wagenhals and Besing also received certain perquisites, the value of
which did not exceed 10% of their salary and bonus during fiscal 1998.
(2) The securities listed represent options to purchase Action Performance
common stock.
(3) Amounts shown for fiscal 1998 represent matching contributions made by
Action Performance to its 401(k) Plan.
(4) Includes 30,000 options that were cancelled and reissued in June 1998.
(5) Includes 20,000 options that were cancelled and reissued in June 1998.
(6) Includes 5,000 options that were cancelled and reissued in June 1998.
We currently plan to pay annual base salaries of $250,000 to Mr. Besing,
$200,000 to Mr. Boutte, and $175,000 to Mr. Falcione. Our board of directors may
grant performance-based bonuses to our executive officers.
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Option Grants
The following table provides information on options to purchase Action
Performance common stock granted to our Named Officers during the fiscal year
ended September 30, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------------
NAME GRANTED(#)(1) FISCAL YEAR PRICE($/SH) DATE 5% 10%
---- ------------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals........ 30,000(3) 6.0% $30.75 1/29/04(3) -- --
30,000 6.0% $25.91 6/02/04 $264,316 $599,642
Christopher S. Besing.... 20,000(3) 4.0% $30.75 1/29/04(3) -- --
20,000 4.0% $25.91 6/02/04 $176,210 $399,761
Lonnie P. Boutte......... 5,000(3) 1.0% $30.75 1/29/04(3) -- --
5,000 1.0% $25.91 6/02/04 $ 44,053 $ 99,940
</TABLE>
- ---------------
(1) The options were granted at the fair value of the shares on the date of
grant and have six-year terms. One-third of the options vest and become
exercisable on each of the first, second, and third anniversaries of the
date of grant.
(2) Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the SEC and do not represent our estimate or
projection of the future price of Action Performance's common stock. Actual
gains, if any, on stock option exercises will depend upon the future market
prices of Action Performance's common stock.
(3) These options were cancelled and reissued in June 1998.
Option Exercises and Year-end Option Values
The following table provides information on options to purchase Action
Performance common stock that were exercised in the last fiscal year by our
Named Officers and the value of each such officer's unexercised options at
September 30, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE MONEY OPTIONS
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals............ 200,000 $4,375,000 95,333 40,667 $2,109,497 $116,823
Christopher S. Besing........ 26,472 $ 818,978 18,333 36,667 $ 255,828 $206,052
Lonnie P. Boutte............. -- -- 4,999 6,668 $ 28,063 $ 29,889
</TABLE>
- ---------------
(1) Calculated based upon the closing price of Action Performance common stock
as reported on the Nasdaq National Market on September 30, 1998 of $27.00
per share.
1999 STOCK INCENTIVE PLAN
On July 2, 1999, our board of directors adopted and our sole stockholder
approved the 1999 Incentive Stock Plan. The incentive plan provides for the
grant of incentive and nonqualified stock options to acquire class A common
stock, the direct grant of class A common stock, the grant of stock appreciation
rights, or
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SARs, and the grant of other cash awards to key personnel, directors,
consultants, independent contractors, and others providing valuable services to
us. We believe that the incentive plan represents an important factor in
attracting and retaining executive officers and other key employees, directors,
and consultants and constitutes a significant part of our compensation program.
The incentive plan provides these individuals with an opportunity to acquire a
proprietary interest in our company and thereby align their interests with the
interests of our other stockholders and to give them an additional incentive to
use their best efforts for our long-term success.
The maximum number of shares of our class A common stock that we may issue
under the incentive plan initially will be equal to 10% of our outstanding class
A common stock and class B common stock. As we issue additional shares of stock
in the future, the number of shares issuable under the incentive plan will
automatically increase by 10% of the additional shares outstanding, up to a
maximum of shares of class A common stock. The maximum number of
shares of stock with respect to which options or other awards may be granted to
any individual employee (including officers) during the term of the incentive
plan may not exceed 50% of the shares of class A common stock covered by the
incentive plan. We plan to grant stock options to purchase shares of
class A common stock at an exercise price equal to the initial per share
offering price to various persons, including directors, officers, and employees
of our company. Of these options, it is anticipated that options will be granted
to purchase shares to Mr. Wagenhals, to Mr. Besing,
to Mr. Boutte, and to Mr. Falcione.
The power to administer the incentive plan with respect to our executive
officers and directors and all persons who own 10% or more of our issued and
outstanding stock rests exclusively with the board of directors or a committee
consisting of two or more non-employee directors. The power to administer the
incentive plan with respect to other persons rests with the board of directors
or a committee of the board of directors.
The incentive plan will terminate in July 2009, and options may be granted
at any time during the life of the incentive plan. The plan administrator will
determine when options become exercisable, as well as the exercise prices of
options. If an option is intended to be an incentive stock option, the exercise
price may not be less than 100% (110% if the option is granted to a stockholder
who at the time of the grant of the option owns stock possessing more than 10%
of the total combined voting power of all classes of our stock) of the fair
market value of the class A common stock at the time of the grant. We may not
reprice any stock options granted to executive officers, directors, or 10%
stockholders under the incentive plan unless our stockholders approve the
repricing within 12 months.
The incentive plan also includes an automatic grant program that
automatically grants options to our non-employee directors. Under the automatic
grant program, each non-employee whose election to the board of directors is
proposed as of date of this prospectus will receive an option to acquire
shares of class A common stock on that date. Each subsequent
newly elected non-employee member of the board of directors will receive as an
initial grant an option to acquire shares of class A common stock
on the date of his or her first appointment or election to the board of
directors. In addition, an option to acquire shares of class A
common stock will be granted to each non-employee director at the meeting of the
board of directors held immediately after each annual meeting of stockholders. A
non-employee member of the board of directors will not be eligible to receive
this annual grant if the option grant date of such annual grant would be within
90 days of such non-employee member receiving his or her initial grant. Each
initial grant will vest and become exercisable in a series of three equal and
successive installments, with the first installment vested on the date of grant
(or the date of election to the board of directors, if later) and the next two
installments 12 months and 24 months after the date of grant. Each annual grant
will vest and become exercisable on the earlier of (a) the day prior to the date
of the next annual meeting of stockholders, or (b) 12 months after the date of
grant. Each automatic option will vest and become exercisable, however, only if
the optionholder has not ceased serving as a director as of such vesting date.
The exercise price per share of class A common stock subject to an initial
grant of automatic options on date of this prospectus will be equal to the
initial public offering price per share. The exercise price per share
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of class A common stock subject to other automatic options will be equal to 100%
of the fair market value of our class A common stock on the date, such option is
granted. Each automatic option will expire on the tenth anniversary of the date
of grant. In the event the non-employee director ceases to serve as a member of
the board of directors or dies while serving as a director, the optionholder or
the optionholder's estate or successor by bequest or inheritance may exercise
any automatic options that have vested by the time of cessation of service until
the earlier of (1) 90 days after the cessation of service, or (2) the expiration
of the term of the automatic option. We believe that the grant of automatic
options to non-employee directors is necessary to attract, retain, and motivate
independent directors.
The incentive plan is not intended to be the exclusive means by which we
may issue options or warrants to acquire our class A common stock, stock awards,
or any other type of award. To the extent permitted by applicable law and the
requirements of Nasdaq, we may issue additional options, warrants, or
stock-based awards other than pursuant to the incentive plan without stockholder
approval.
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TRANSACTIONS WITH ACTION PERFORMANCE COMPANIES, INC.
The following paragraphs provide a summary description of the material
agreements between Action Performance and us. These agreements relate to this
offering and define the mutual rights and obligations between Action Performance
and us after this offering. These descriptions summarize the material terms of
the agreements, but they are not complete. We will file the actual agreements
with the SEC as exhibits to the registration statement of which this prospectus
is a part. You should refer to those exhibits for the complete text of these
agreements.
HISTORICAL INTERCOMPANY RELATIONSHIPS
Prior to this offering, we have been a wholly owned subsidiary of Action
Performance. As our parent, Action Performance has provided a variety of
services to us, including
- administration services, such as accounting, human resources, and legal,
- order fulfillment, warehouse operations, and inventory management,
- information technology,
- creative, advertising, and public relations, and
- the services of a number of its executives and employees.
Our historical financial statements contained in this prospectus include
allocations for these services. Although we believe that the amounts allocated
are reasonable, those amounts do not necessarily reflect the actual expenses
that we would have incurred if we had operated as a separate, stand-alone
company during the periods presented.
We purchased all of our inventory from Action Performance during fiscal
1998 and the six months ended March 31, 1999. We also have relied on Action
Performance to provide us with financing for our cash flows. As a result, our
cash flows to date do not necessarily indicate the cash flows that we would have
experienced if we had operated as an independent company prior to this offering.
INTERCOMPANY AGREEMENTS
Upon completion of this offering, our relationship with Action Performance
will be governed by several intercompany agreements. In general, the terms of
these agreements will begin on the closing date of this offering and will
continue for 25 years. Any amendments to these agreements must be approved by a
majority of directors on our board who are not officers, directors, or 5%
stockholders of Action Performance. We may terminate any of the agreements by
mutual agreement and either party may terminate any of the agreements under
certain other circumstances. In addition, Action Performance generally may
terminate any or all of these agreements if there is a "change of control" of
our company. Under the intercompany agreements, a change of control will occur
if
- any person other than Action Performance or one of its affiliates
directly or indirectly acquires securities representing 50% or more of
our voting power, except that this provision will not apply to any public
or private offering of our common stock; or
- during the term of the agreements, the individuals who serve as members
of our board of directors as of the closing date of this offering cease
to constitute a majority of our board of directors, unless the election
or nomination for election of each new director was approved by unanimous
vote of the original directors and/or previously approved directors; or
- a tender offer or exchange offer is made and the effect of the offer is
the change in beneficial ownership of 50% or more of our stock; or
- we are merged, consolidated, or reorganized and as a result of the
transaction less than 50% of our equity securities are owned by our
former stockholders; or
- we transfer all or substantially all of our assets to a person that is
not one of our wholly owned subsidiaries.
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Sales or other transfers of our common stock by Action Performance or its
affiliates, including a distribution of our common stock by Action Performance
to its stockholders, will not be considered in determining whether a change of
control has occurred.
Master Intercompany Agreement
We will enter into a master intercompany agreement with Action Performance
that governs our relationship. The following paragraphs describe the significant
terms that will govern our relationship.
Product Sales. Generally, we will act as the primary online distributor of
Action Performance's lines of die-cast merchandise, apparel, and souvenirs.
Action Performance will not sell its products online. Action Performance,
however, may permit distributors of its products to sell those products online.
The licensors of products that Action Performance sells and corporate sponsors
of promotional products that Action Performance sells will be able to retain the
right to sell those products online. Action Performance buys some of its
licensed products from third-party suppliers and resells those products to us
and others. Those third-party suppliers may retain the right to sell those
products online. Action Performance, however, will use commercially reasonable
efforts to obtain those suppliers' agreements not to sell their products online.
Action Performance will be prohibited from (a) developing a collectors'
club or similar organization that competes with the Collectors' Club or (b)
selling our exclusive Collectors' Club products through any other distribution
channels. We will have the right to sell Action Performance's products through
catalog or direct mail channels. Action Performance will retain the right to
sell its products in catalogs, by direct mail, or otherwise, so long as it does
not conduct those activities online.
We will agree to maintain the high standards of operation, quality,
integrity, and goodwill associated with Action Performance's products and the
Collectors' Club. We and Action Performance will jointly own the Collectors'
Club membership database as it exists on the date of this prospectus. We will
own and have all rights to any additions to that database after completion of
this offering. If Action Performance terminates our intercompany agreements
because we discontinue the Collectors' Club or stop selling Action Performance's
products, or because a change of control of our company has occurred, Action
Performance will have the right to a one-time print-out of the information in
the database at the time of termination.
We will purchase products from Action Performance pursuant to our
intercompany agreements. We must offer and sell Action Performance's products
directly to retail consumers and we may not offer or sell these products to
other resellers. These restrictions will not prohibit sales to collectors who
may ultimately resell their collectibles.
We will agree to actively promote and sell the products of Action
Performance. Action Performance will agree to use commercially reasonable
efforts to maintain favorable license arrangements and the production and other
operations that may be reasonably necessary to produce and supply products to
us. If we desire to have new products or product lines made for us, Action
Performance will have a right of first refusal to make those products or product
lines. If Action Performance does not exercise its right of first refusal, we
will be permitted produce those products or product lines ourselves or have a
third party produce them for us.
Internet Services. Action Performance will grant us a right of first
refusal to control all of its current and future Internet sites and electronic
media-based interactive ventures and opportunities and any such opportunities
that it develops or that a third party brings to its attention in the future. We
will not, however, control Action Performance's corporate Web site. Action
Performance will be permitted to pursue online ventures and opportunities only
if we are unable or unwilling to pursue them.
Advertising. Action Performance will use its best efforts to include our
name or logo on its product packaging and to include our name or logo in its
advertisements. Except for its existing obligations to include the Nascar.com
logo on its product packaging, Action Performance will not advertise or promote
other online motorsports networks. We will provide banner advertising to Action
Performance in an amount not to exceed 5% of available unsold advertising
inventory on our network. Each party will provide the other with the right to
use the other party's tradenames and trademarks for advertising, endorsements,
and promotional purposes.
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Cooperation with Transactions. Under the master intercompany agreement, we
will cooperate with Action Performance to complete this offering and any
offerings of our securities prior to the time, if ever, that Action Performance
distributes our shares to its stockholders. If Action Performance decides to
distribute our class B common stock to its stockholders in the future, we will
cooperate with Action Performance to complete any transactions necessary to
distribute those shares. We will pay the expenses related to this offering and
any future offerings of our securities. Action Performance will pay any expenses
related to a tax-free distribution of our common stock.
Access to Information. Generally, we and Action Performance will provide
each other with access to information relating to the assets, business, and
operations of the requesting party. We and Action Performance will keep our
books and records for a period of time. Also, we and Action Performance will
cooperate with the other party with respect to any claims brought against the
other relating to the conduct of our business prior to completion of any
spin-off or similar transaction.
Covenants. For so long as Action Performance is required to consolidate
our results of operations and financial position, we will:
- provide Action Performance certain financial information regarding our
company and our subsidiaries,
- provide Action Performance copies of all quarterly and annual financial
information and other reports and documents we intend to file with the
SEC prior to such filings, as well as final copies upon filing,
- provide Action Performance with copies of our budgets and financial
projections, as well as the opportunity to meet with our management to
discuss such budgets and projections,
- consult with Action Performance regarding the timing and content of
earnings releases and cooperate fully and cause our accountants to
cooperate fully with Action Performance in connection with any of its
public filings,
- not change our auditors without Action Performance's prior written
consent, which will not be unreasonably withheld, and use our reasonable
best efforts to enable our auditors to complete their audit of our
financial statements such that they will date their opinion the same date
that they date their opinion on Action Performance's financial
statements,
- provide to Action Performance and its auditors all information required
for Action Performance to meet its schedule for the filing and
distribution of its financial statements,
- make our books and records available to Action Performance and its
auditors, so that they may conduct reasonable audits relating to our
financial statements,
- adhere to certain specified accounting standards,
- agree with Action Performance on any changes to our accounting policies,
and
- agree with Action Performance regarding our accounting estimates and
principles.
Maintenance Right. In order for our company to be included in Action
Performance's consolidated group for federal income tax purposes, Action
Performance must own 80% of the vote and value of our capital stock. For so long
as we are included in Action Performance's consolidated group for income tax
reporting purposes, at any time that we sell or otherwise issue additional
shares of our capital stock, Action Performance will have the right to maintain
its percentage of ownership by acquiring shares of our voting or non-voting
stock on the same terms that we sell or otherwise issue those securities to
third-parties. This will allow Action Performance to continue to include us in
its consolidated group for income tax reporting purposes.
Corporate Governance. For so long as Action Performance owns shares
representing 50% or more of the voting power of our company, Action Performance
will have the right to designate a majority of our board of directors. For so
long as Action Performance owns shares representing at least 10% but less than
50% of our voting power, Action Performance will have the right to designate a
proportionate number of
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directors to our board of directors. For so long as Action Performance owns
shares representing at least 10% of the voting power of our company, Action
Performance will have the right to designate at least one member to each
committee of our board of directors.
Indemnification and Release. We will give to Action Performance, and
Action Performance will give us, a full and complete release and discharge as of
the closing date of this offering of all liabilities, known or unknown, existing
or arising from all acts, events or conditions occurring or failing to occur or
alleged to have occurred or to have failed to occur between us and Action
Performance on or before the closing date of this offering, except as expressly
set forth in the master intercompany agreement.
Except as provided in the master intercompany agreement, we will indemnify,
defend and hold harmless Action Performance and its affiliates for, from, and
against all liabilities relating to, arising out of or resulting from (a) our
failure of or the failure of any other person to pay, perform or otherwise
promptly discharge any of our liabilities in accordance with their respective
terms; (b) any breach by us of any of the intercompany agreements; and (c) any
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, with respect to the
information contained in this prospectus or the registration statement of which
it forms a part or in connection with future offerings of our securities, except
for any liability that occurs in reliance on and in conformity with written
information provided by Action Performance expressly for use in connection with
those securities offerings.
Except as provided in the master intercompany agreement, Action Performance
will indemnify, defend, and hold us and each of our affiliates for, from, and
against all liabilities relating to, arising out of or resulting from (a) the
failure of Action Performance or any other person to pay, perform or otherwise
promptly discharge any liabilities of Action Performance other than our
liabilities; (b) any breach by Action Performance of the intercompany
agreements; and (c) any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
with respect to the information contained in this prospectus or the registration
statement of which it forms a part or in connection with future offerings of our
securities, but only to the extent that the liability occurs in reliance on and
in conformity with written information provided by Action Performance expressly
for use in connection with those securities offerings. Neither we nor Action
Performance will be obligated to indemnify the other for (1) any liability
assumed, transferred, assigned or allocated to the other under any of the
intercompany agreements; (2) any liability for the sale, lease, construction or
receipt of goods, property or services purchased, obtained or used in the
ordinary course of business between the parties prior to the closing date of
this offering; (3) any liability for unpaid amounts for products or services or
refunds owing on products or services due on a value-received basis for work
done by one party at the request or on behalf of the other; (4) any liability
that either party may have with respect to indemnification or contribution for
claims brought against the other party by third persons; or (5) generally, any
liability the release of which would result in the release of any person other
than a person released pursuant to the master intercompany agreement.
Talent Agreement
Action Performance has relationships with many of the popular race car
drivers, team owners and sponsors, and other motorsports personalities. Action
Performance has agreements with many of these personalities to provide
endorsements for the goracing network. We will enter into a talent agreement
with Action Performance that will provide us with the use of the services of
these personalities to endorse, promote, or advertise our network or motorsports
or automotive-related online opportunities on our network. If we wish to obtain
endorsements from or enter into online opportunities with new or additional
motorsports personalities in the future, we will notify Action Performance of
the identity of the person and the proposed terms of the agreement that we seek.
Action Performance will then have the responsibility to negotiate with the
motorsports personalities on our behalf, although our representatives will be
able to accompany Action Performance's representatives and participate in the
negotiations. Action Performance generally will enter into contracts for the
services of these personalities on our behalf. If Action Performance enters into
any new or additional agreements on our behalf for online endorsements by or
online opportunities with motorsports
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personalities, Action Performance will immediately assign its rights to us. We
may enter into contracts directly with the motorsports personalities that we
designate only if Action Performance is unable or unwilling to enter into an
agreement with these personalities, provided that any agreement that we enter
into directly must be on substantially the same terms that we requested Action
Performance to enter into on our behalf. We may pay these personalities cash,
options to purchase shares of our class A common stock, royalties, or other
consideration in exchange for their endorsements.
Intercompany Services Agreement
After this offering, Action Performance will continue to provide services
to us, including accounting, human resources, information technology, creative
and advertising, order fulfillment and warehouse operations, and public
relations. In exchange, we will pay Action Performance 104% of its direct and
indirect costs and expenses to provide these services. Under this agreement, we
will pay for all expenses incurred by Action Performance for our benefit for
upgrades or expansion to the computer systems, telephone systems, warehouse
space or equipment, and any other furniture or equipment.
Distributor Agreements; Processing and Fulfillment Agreement
We will have the exclusive right to purchase Collectors' Club products from
Action Performance. We also will act as the primary online retail distributor
for Action Performance's non-club die-cast, apparel, and other merchandise. We
generally will commit to purchase a percentage of all non-club die-cast items
produced by Action Performance. We may not commit to purchase, however, more
than 30% of these products during the first year following this offering or more
than 50% of all products during the second year following this offering. We will
have the right to decrease, but not increase this percentage commitment for
individual products.
Action Performance will fulfill all orders for products that we purchase
from it either through our intercompany services agreement or a processing and
fulfillment agreement. Action Performance will provide the labor and materials,
warehouse space, inventory receiving, storage, and handling, invoicing, credit
card processing, and returns receiving and processing. We will pay Action
Performance either (a) a fixed price per fulfilled order, plus costs for
materials and shipping, or (b) 104% of Action Performance's direct and indirect
costs and expenses to provide these services. We will provide customer services
for all of our product sales.
Registration Rights Agreement
We will enter into a registration rights agreement with Action Performance
prior to the closing of this offering that will cover the shares of our Class B
common stock owned by Action Performance. Under that agreement, at any time
beginning 180 days after the date of this prospectus, but not more than once in
any 12-month period, Action Performance may demand that we file a registration
statement under the securities laws covering all or a portion of our securities
held by Action Performance. The securities to be registered, however, either
must have a reasonably anticipated aggregate public offering price of at least
$5.0 million or represent all of the remaining registrable securities. In some
circumstances, we will have the right to delay the filing of a registration
statement or we can require the holders of registrable securities to suspend
sales of those securities.
Action Performance also will have registration rights that apply if we
propose to register any class A common stock or other securities under the
securities laws. In that case, Action Performance may require us to include all
or a portion of our securities that it owns in such registration. The managing
underwriter of the offering, however, will have the right to restrict the number
of registrable securities proposed to be included in the registration.
We will bear all registration expenses incurred in connection with the
first two demand registrations and all piggyback registrations. Action
Performance will pay all underwriting discounts, selling commissions, and stock
transfer taxes applicable to the sale of our securities owned by it. The
registration rights of Action Performance under the registration rights
agreement will terminate when Action Performance may sell all of
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its shares in a three-month period under Rule 144 under the securities laws, or
when all of the registrable securities have been sold under a registration
statement.
Tax Allocation Agreement
For so long as Action Performance continues to own at least 80% of the
voting rights and value of our capital stock, we will be included in Action
Performance's consolidated group for federal income tax purposes. We will enter
into a tax allocation agreement with Action Performance. Under that agreement,
we will pay to Action Performance the amount of federal, state, and local income
taxes that we would be required to pay to the relevant taxing authorities if we
were a separate taxpayer not included in Action Performance's consolidated or
combined returns. If we incur a net operating loss, Action Performance may use
it to reduce its tax liability. To the extent that it uses our tax benefit,
Action Performance will be required to establish a receivable for our benefit.
Action Performance will offset the amount of the receivable to the extent we owe
any amounts to Action Performance for income taxes in the future. When we are no
longer included in Action Performance's consolidated tax group, Action
Performance will be required to pay us cash for any amount remaining in the
receivable established for our benefit, less any amount that we are required to
pay our parent under the tax allocation agreement.
By virtue of its controlling ownership of our company and the tax
allocation agreement, Action Performance will effectively control all of our tax
decisions. Under the tax allocation agreement, Action Performance will have sole
authority to respond to and conduct all tax proceedings relating to us,
including tax audits, to file all income tax returns on our behalf, and to
determine the amount of our liability to or entitlement to payment from Action
Performance. Under the tax allocation agreement, we have agreed to indemnify
Action Performance, and Action Performance has agreed to indemnify us, for,
from, and against any tax or loss attributable to (a) failure of the
indemnifying party to make any payment required under the agreement, or (b)
negligence of the indemnifying party in supplying the other party with
inaccurate or incomplete information in connection with the preparation of a tax
return or an audit.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Action Performance acquired all of the outstanding stock of Tech 2000
Worldwide, Inc., currently an indirect wholly owned subsidiary of our company,
in November 1998. Prior to the acquisition, Tech 2000 operated the goracing.com
Web site. In connection with the acquisition, Action Performance issued 137,923
shares of its common stock to the former shareholders of Tech 2000, valued at
approximately $4.7 million. Roger J. Falcione, our Chief Technology Officer, was
a principal stockholder of Tech 2000.
We and Action Performance also plan to enter into a series of intercompany
agreements in connection with this offering, which are discussed above.
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PRINCIPAL STOCKHOLDERS
Action Performance beneficially owns all of the shares of our class B
common stock outstanding as of the date of this prospectus. Immediately after
this offering, Action Performance will continue to own all of our outstanding
class B common stock, which will represent approximately % of the combined
voting power of our outstanding common stock. If the underwriters exercise their
over-allotment option in full, Action Performance's ownership will represent
approximately % of the combined voting power of our outstanding common
stock.
The following table sets forth certain information regarding the shares of
our outstanding common stock and the common stock of Action Performance
beneficially owned as of June 30, 1999 by each of our directors and executive
officers, all directors and executive officers as a group, and each person who
is known by us to be the beneficial owner of more than 5% of the common stock of
Action Performance. Other than Action Performance, no other person beneficially
owns or exercises voting or dispositive control over more than 5% of our common
stock.
<TABLE>
<CAPTION>
SHARES OF GORACING.COM SHARES OF ACTION PERFORMANCE
COMMON STOCK BENEFICIALLY OWNED COMMON STOCK BENEFICIALLY OWNED
--------------------------------------------------- --------------------------------
NUMBER OF SHARES VOTING POWER(3) NUMBER OF SHARES
AND NATURE OF ------------------- AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE BEFORE AFTER BENEFICIAL PERCENTAGE
BENEFICIAL OWNER(1) OWNERSHIP(2) OWNED(2) OFFERING OFFERING OWNERSHIP OWNED(2)
- ------------------- ---------------- ---------- -------- -------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS
Fred W. Wagenhals........... 2,014,266(4) 11.8%
Christopher S. Besing....... 29,998(5) *
Lonnie P. Boutte............ 4,999(6) *
David A. Husband............ 6,666(7) *
Roger J. Falcione........... 86,107(8) *
Tod J. Wagenhals............ 40,321(9) *
All directors and executive
officers as a group (6
persons)(10).............. 2,305,812 13.4%
5% STOCKHOLDERS
Action Performance
Companies, Inc............ -- 100.0% 100.0% -- --
FMR Corp.................... -- -- -- 2,018,301(11) 11.9%
Pilgrim Baxter &
Associates................ -- -- -- 1,189,700(12) 7.0%
Rainier Investment
Management, Inc........... -- -- -- 1,087,350(13) 6.4%
AMVESCAP PLC................ -- -- -- 971,780(14) 5.7%
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all common stock beneficially
owned, subject to applicable community property law. Except as otherwise
indicated, each person may be reached at 4707 East Baseline Road, Phoenix,
Arizona 85040.
(2) The percentages shown are calculated based upon shares of class A
common stock and
shares of class B common stock of goracing.com outstanding on ,
1999, and 16,924,752 shares of common stock of Action Performance outstanding on
June 30, 1999. The numbers and percentages shown include the shares of
common stock actually owned as of June 30, 1999 and the shares of common
stock that the identified person or group had the right to acquire within
60 days of such date. In calculating the percentage of ownership, all
shares of common stock that the identified person or group had the right to
acquire within 60 days of June 30, 1999 upon the exercise of options are
deemed to be outstanding for the purpose of computing the percentage of the
shares of common stock owned by
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such person or group, but are not deemed to be outstanding for the purpose of
computing the percentage of the shares of common stock owned by any other
person.
(3) The percentages shown indicate the voting power of the common stock and
reflect that holders of class A common stock are entitled to one vote per
share while holders of class B common stock are entitled to ten votes per
share on all matters to be voted on by stockholders. See "Description of
Securities -- Common Stock."
(4) Represents 1,903,600 shares of Action Performance common stock and vested
options to acquire 110,666 shares of Action Performance Common Stock.
Includes 200,000 shares of Action Performance common stock held by Diecast
Investments Limited Partnership and 100,000 shares of Action Performance
common stock held by Pebble Ridge Investments Limited Partnership. Mr.
Wagenhals and Lisa K. Wagenhals are co-trustees of the Wagenhals Family
Trust U/A 8/7/98, which serves as the general partner of each such entity.
Accordingly, Mr. and Mrs. Wagenhals have shared voting power and shared
dispositive power over these 300,000 shares.
(5) Represents vested options to acquire 29,998 shares of Action Performance
common stock.
(6) Represents vested options to acquire 4,999 shares of Action Performance
common stock.
(7) Represents vested options to acquire 6,666 shares of Action Performance
common stock.
(8) Represents shares of Action Performance common stock including 11,724
shares held in escrow to secure Mr. Falcione's representations, warranties,
and covenants made in connection with Action Performance's acquisition of
Tech 2000.
(9) Represents 1,456 shares of Action Performance common stock and vested
options to acquire 38,865 shares of Action Performance common stock.
(10) All directors and executive officers as a group includes seven additional
executive officers and/or directors of Action Performance who are not
listed individually in the table. All of these directors and executive
officers may be reached at Action Performance at 4707 East Baseline Road,
Phoenix, Arizona 85040.
(11) Represents 2,018,301 shares of Action Performance common stock beneficially
owned by FMR Corp., Edward C. Johnson 3d, Chairman of FMR Corp., and
Abigail Johnson, Director of FMR Corp. FMR Corp., Mr. Johnson, and Ms.
Johnson have sole voting power with respect to 135,900 shares and sole
dispositive power with respect to 2,018,301 shares of common stock. All
shares of the common stock are held by various subsidiaries or entities
either wholly owned or controlled by FMR Corp., Mr. Johnson, or Ms. Johnson
that serve as investment advisers to various investment companies. The
address of FMR Corp., Mr. Johnson, and Ms. Johnson is 82 Devonshire Street,
Boston, Massachusetts 02109.
(12) Represents 1,189,700 shares of Acton Performance common stock beneficially
owned by Pilgrim Baxter & Associates, Ltd. ("Pilgrim"). Pilgrim has sole
voting power with respect to 1,189,700 shares and sole dispositive power
with respect to 1,013,400 shares of common stock. The address of Pilgrim is
825 Duportail Road, Wayne, Pennsylvania 19087.
(13) Represents 1,087,350 shares of Action Performance common stock beneficially
owned by Rainier Investment Management, Inc. ("Rainier"). Rainier has sole
voting power with respect to 969,500 shares and sole dispositive power with
respect to 1,087,350 shares of common stock. All shares of the common stock
are held by individual and institutional clients for which Rainier serves
as investment adviser. Rainier is the owner of record and disclaims
beneficial ownership of such shares. The address of Rainier is 601 Union
Street, Suite 2801, Seattle, Washington 98101.
(14) Represents 971,780 shares of Action Performance common stock beneficially
owned by AMVESCAP PLC. AMVESCAP PLC and six of its subsidiaries have shared
voting power and shared dispositive power with respect to 971,780 shares of
common stock. Such shares of common stock are held by the six subsidiaries
of AMVESCAP PLC on behalf of other persons who have the right to receive or
the power to direct the receipt of dividends from such shares or the
proceeds from the sale of such shares. The interest of any of such persons
does not exceed 5% of the outstanding shares of common stock. AMVESCAP PLC
and its subsidiaries may disclaim beneficial ownership of such shares. The
address of AMVESCAP PLC is 1315 Peachtree St. NE, Atlanta, Georgia 30309.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of shares of class A
common stock, par value $.0001 per share, shares of class B
common stock, par value $.0001 per share and shares of serial
preferred stock, par value $.0001 per share.
The following descriptions of our capital stock and selected provisions of
our Restated Certificate of Incorporation and Bylaws are summaries. Complete
copies of our Restated Certificate of Incorporation and Bylaws will be filed
with the Securities and Exchange Commission as exhibits to the registration
statement containing this prospectus.
COMMON STOCK
We are offering shares of class A common stock under this
prospectus. We reserved shares for issuance upon conversion of
class B common stock into class A common stock. Action Performance holds
shares of class B common stock, which represents all of the
outstanding shares of class B common stock.
Voting Rights. The holders of our class A and class B common stock
generally have identical voting rights. However, holders of our class A common
stock are entitled to one vote per share, while holders of our class B common
stock are entitled to ten votes per share on all matters to be voted on by
stockholders. Shares of class B common stock also have conversion rights, which
are described below.
Generally, all matters to be voted on by stockholders must be approved by a
majority of the votes entitled to be cast by all shares of class A and class B
common stock present in person or represented by proxy, voting together as a
single class. Holders of our preferred stock might in the future be granted the
right to vote alongside holders of our common stock. When electing directors,
those candidates receiving the most votes, even if not a majority of the votes
cast, will be elected directors. Holders of shares of class A common stock and
class B common stock are not entitled to cumulate their votes in the election of
directors.
Except as otherwise provided by law, and after honoring any voting rights
granted to holders of any outstanding preferred stock, amendments to our
Restated Certificate of Incorporation, including amendments to increase or
decrease the authorized shares of any class, must be approved by a majority of
the combined voting power of all of the class A and class B common stock, voting
together as a single class. However, amendments to our Restated Certificate of
Incorporation that would alter the powers, preferences or special rights of
either the class A or class B common stock so as to affect them adversely also
must be approved by a majority of the votes entitled to be cast by the holders
of the shares affected by the amendment, voting as a separate class. For
purposes of these provisions, any provision for the voluntary, mandatory, or
other conversion or exchange of the class B common stock into or for class A
common stock on a one-for-one basis will not be considered as adversely
affecting the rights of holders of the class A common stock.
Dividends. Holders of class A common stock and class B common stock will
share equally on a per-share basis in any dividend declared by the board of
directors, after honoring any preferential rights of outstanding preferred
stock. We will pay any stock dividends as follows:
- we will pay dividend shares of class A common stock only to holders of
shares of class A common stock, and we will pay dividend shares of class
B common stock only to holders of class B common stock; and
- we will pay dividend shares in proportion to each outstanding share of
class A and class B common stock.
We may not subdivide or combine shares of either class A or class B common stock
without at the same time proportionally subdividing or combining shares of the
other class.
Conversion. Each share of class B common stock is convertible at the
option of the holder, into one share of class A common stock at any time prior
to a tax-free spin-off of our company by Action Performance. Shares of class B
common stock transferred prior to a tax-free distribution will automatically be
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converted into class A common stock on a one-to-one basis at the time of the
disposition upon their transfer to a person other than Action Performance or any
of Action Performance's affiliates or successors.
Shares of class B common stock distributed by Action Performance to its
stockholders in a transfer intended to be a tax-free distribution will not be
converted into shares of class A common stock upon the occurrence of a tax-free
distribution. Following a tax-free spin-off, shares of class B common stock will
no longer be convertible into shares of class A common stock. Following a
tax-free distribution, shares of class B common stock will generally be
transferable as class B common stock to the extent allowed under applicable
laws. We believe that Action Performance has no current plans with respect to a
tax-free distribution of goracing.com. All conversions will be effected on a
share-for-share basis.
Other Rights. In the event of any merger or consolidation of goracing.com
with or into another company in which shares of our common stock are converted
into or exchangeable for shares of stock, other securities or property,
including cash, of the other company, all holders of class A common stock and
class B common stock will be entitled to receive the same kind and amount of
interest in the other company.
On liquidation, dissolution, or winding-up of goracing.com, all holders of
class A common stock and class B common stock are entitled to share ratably in
any of our assets available for distribution to holders of shares of common
stock, after payment in full of the amounts required to be paid to holders of
our preferred stock, if any.
Upon the closing of this offering, all the outstanding shares of class A
common stock and class B common stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of of preferred stock in one or more
series. The board also is able to fix or alter the designations, preferences,
rights and any qualifications, limitations, or restrictions of the shares of
each series of preferred stock. There are no shares of preferred stock
outstanding. We have no present plans to issue any shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW
Upon completion of this offering, we will be subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, this statute
prohibits a publicly held Delaware corporation from engaging, under certain
circumstances, in a "business combination" with an "interested stockholder" (as
these terms are described below) for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless:
- the transaction in which such stockholder became an interested
stockholder is approved by the board of directors prior to the date the
interested stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers; or
- on or subsequent to such time the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.
"Business combinations" include mergers, asset sales, and other transactions
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with his, her, or its
affiliates and associates, owns, or within the prior three years did own, 15% or
more of the corporation's voting stock. The restrictions in this statute would
not apply to a "business combination" with Action Performance or any of its
subsidiaries, but they could prohibit or delay the accomplishment of mergers
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or other takeover or change-in-control attempts with respect to goracing.com and
could therefore discourage attempts to acquire goracing.com.
RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Our restated certificate of incorporation and bylaws may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in his or her best interest, including those attempts that might result in a
premium over the market price for the class A common stock. Our restated
certificate of incorporation and bylaws contain a number of other provisions
relating to corporate governance and to the rights of stockholders. These
provisions include (a) the authority of the board of directors to fill vacancies
on the board, and (b) the authority of the board of directors to issue preferred
stock in series with such voting rights, and (c) other powers as the board of
directors may determine.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors will be divided into three classes of directors
serving staggered, three-year terms. As a result, approximately one-third of the
members of our board of directors will be elected each year. When coupled with
the provision of our Restated Certificate of Incorporation authorizing the board
of directors to fill vacant directorships and increase the size of the board of
directors, these provisions may prevent stockholders from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the vacancies created by such removals with their own nominees.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our bylaws require that timely notice in writing be provided by
stockholders seeking to bring business before, or to nominate candidates for
election as directors at, the annual meeting of stockholders. To be timely, a
stockholder's notice must be delivered to or mailed and received at our
principal executive offices not less than 120 days nor more than 150 days prior
to the first anniversary of the date of our notice of annual meeting provided
with respect to the previous year's annual meeting of stockholders.
If no annual meeting of stockholders was held in the previous year or the
date of the annual meeting of stockholders has been changed to be more than 30
days earlier than or 70 days after that anniversary, notice will be timely if
received not more than 120 days prior to the meeting and not later than the
later of
- 90 days prior to the meeting, or
- the close of business on the tenth day following the date on which notice
of the date of the meeting is given to stockholders or made public,
whichever first occurs.
Our bylaws also specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from timely
bringing matters before, or from making nominations for directors at, an annual
meeting of stockholders.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breaches of directors' fiduciary duty of
care. Our Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of goracing.com's directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to goracing.com or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
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- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; and
- for any transaction from which the director derived an improper personal
benefit.
Our Bylaws generally provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by
law, our Restated Certificate of Incorporation, our Bylaws, or other
agreements; and
- we must advance expenses, as incurred, to our directors and executive
officers in defending any legal proceedings to the fullest extent
permitted by Delaware law.
Prior to the closing of this offering, we intend to obtain directors' and
officers' insurance providing indemnification for our directors, officers, and
certain employees. We believe that these indemnification provisions and
insurance are necessary to attract and retain qualified directors and executive
officers.
The limitation of liability and indemnification provisions in our Restated
Certificate of Incorporation and Bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty.
Such provisions may also reduce the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers in connection with
these indemnification provisions.
There is no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is sought. We are
unaware of any threatened litigation that may result in claims for
indemnification.
NO DUTY OF ACTION PERFORMANCE TO REFRAIN FROM COMPETING WITH US
Our Restated Certificate of Incorporation provides that, except as we
otherwise agreed with Action Performance:
- Action Performance will have no duty to refrain from engaging in the same
or similar or lines of business of goracing.com, thereby competing with
goracing.com;
- Action Performance, its officers, directors and employees will not be
liable to goracing.com or its stockholders for breach of any fiduciary
duty by reason of any activities of Action Performance in competition
with goracing.com;
- Action Performance will have no duty to communicate or offer corporate
opportunities to goracing.com and will not be liable for breach of any
fiduciary duty as a stockholder of goracing.com in connection with
corporate opportunities; and
- if a director or officer of goracing.com who is also a director or
officer of Action Performance learns of a potential transaction or matter
that may be a corporate opportunity for goracing.com or Action
Performance, that director or officer may offer the corporate opportunity
to goracing.com or Action Performance as such director or officer deems
appropriate under the circumstances.
Our intercompany agreements with Action Performance will control our respective
rights and obligations with respect to online opportunities and sales of
products that we purchase from Action Performance. See "Transactions with Action
Performance Companies, Inc."
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A director of officer will not be liable to goracing.com or its
stockholders for breach of any fiduciary duty or duty of loyalty for failure to
act in the best interests of goracing.com if:
- the director or officer first offers the corporate opportunity to Action
Performance; or
- Action Performance pursues the corporate opportunity for itself or does
not communicate information regarding the corporate opportunity to
goracing.com.
These provisions of our restated certificate of incorporation eliminate rights
that might have been available to stockholders under Delaware law had such
provisions not been included in our restated certificate of incorporation.
However, the enforceability of these provisions under Delaware law has not been
established.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common and preferred stock are
available for future issuance without stockholder approval. We may use these
additional shares for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions, and employee
benefit plans. The existence of these shares could discourage or make more
difficult an attempt to obtain control of us by means of a proxy contest, tender
offer, merger, or otherwise.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority in interest of the shares entitled to vote on any
matter is required to amend a corporation's certificate of incorporation or
bylaws, unless its certificate of incorporation or bylaws requires a greater
percentage. Following this offering, Action Performance, as the beneficial owner
of approximately % of the voting power of our outstanding common stock,
will, on its own, be able to cause us to amend our Certificate of Incorporation
and Bylaws.
LISTING
We have applied for listing of our class A common stock on the Nasdaq
National Market under the trading symbol "GRCN."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the class A common stock will be
American Stock Transfer & Trust, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. We
cannot predict the effect, if any, that sales of shares or the availability of
shares for sale will have on the market price of our common stock. Sales of
substantial amounts of our common stock in the public market, or the perception
that sales might occur, could adversely affect the market price of our common
stock. Sales of substantial amounts of common stock in the public market after
the restrictions on resale described below lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding
shares of class A common stock and shares of class
B common stock. All of the shares to be sold in this offering
will be freely tradable without restriction or further registration under the
securities laws unless held by one or more of our "affiliates," as that term is
defined under Rule 144 of the securities laws. Shares of class A common stock
purchased by our affiliates may be sold in the public market only if they are
registered for resale, if they are sold pursuant to Rule 144, or if they qualify
for an exemption from registration under the securities laws.
LOCK-UP AGREEMENTS
We, Action Performance, and our respective directors and officers have
agreed, subject to certain exceptions, not to sell or otherwise dispose of any
shares of class A common stock in the public market for a period of 180 days
after the date of this prospectus, without the prior written consent of Banc of
America Securities LLC. These restrictions also apply to shares of our class B
common stock held by Action Performance. The shares could be available for
resale immediately upon the expiration of the 180-day period, subject to the
limitations of Rule 144.
RULE 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our class A common
stock for at least one year would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
- 1% of the number of shares of class A common stock then outstanding,
which will equal approximately shares after the closing of
this offering, or
- the average weekly trading volume of the class A common stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice of Form 144 with respect to the sale.
Sales under Rule 144 also are subject to manner-of-sale provisions, notice
requirements, and the availability of current public information about our
company. Certain persons are entitled to sell such shares without regard to any
of the volume limitations or other requirements described above if:
- such person is not an affiliate or has not been an affiliate within three
months prior to sale, and
- such person has beneficially owned the shares proposed to be sold for at
least two years.
STOCK OPTIONS
We have reserved shares of class A common stock for issuance
under the 1999 Incentive Stock Plan. After this offering, we intend to register
these securities under the securities laws by filing a registration statement
with the SEC. After the effective date of such registration statement, shares
issued under the 1999 Incentive Stock Plan will be freely tradable without
restriction or further registration under the securities laws unless acquired by
one or more of our affiliates, who will be subject to the volume and other
limitations of Rule 144.
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REGISTRATION RIGHTS
Prior to the closing of this offering, we will enter into an agreement with
Action Performance providing Action Performance with specific registration
rights applicable to shares of our class B common stock held by it.
ADDITIONAL SHARES
We may issue additional shares of common stock to raise additional capital
or as part of any acquisition we may complete in the future. We may decide to
register such securities under the securities laws before we offer and issue
them. Registered shares generally will be freely tradable after their issuance
by persons not affiliated with us. However, sales of these shares during the
lock-up period would require the prior written consent of Banc of America
Securities LLC.
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UNDERWRITING
We are offering the shares of class A common stock described in this
prospectus through a number of underwriters. Banc of America Securities LLC,
William Blair & Company L.L.C., U.S. Bancorp Piper Jaffray Inc., and J.C.
Bradford & Co., are the representatives of the underwriters. We have entered
into an underwriting agreement with the representatives. Subject to the terms
and conditions of the underwriting agreement, we have agreed to sell to the
underwriters, and each of the underwriters has agreed to purchase, the number of
shares of class A common stock listed next to its name in the following table:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Banc of America Securities LLC..............................
William Blair & Company, L.L.C. ............................
U.S. Bancorp Piper Jaffray Inc..............................
J.C. Bradford & Co. ........................................
--------
Total..................................................
========
</TABLE>
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $ per share. The underwriters
also may allow, and any other dealers may reallow, a concession of not more than
$ per share to some other dealers. If all the shares are not sold at the
initial public offering price, the underwriters may change the offering price
and the other selling terms. The class A common stock is offered subject to a
number of conditions, including:
- receipt and acceptance of our class A common stock by the underwriters,
and
- the right to reject orders in whole or in part.
We have granted an option to the underwriters to buy up to
additional shares of class A common stock. These additional
shares would cover sales of shares by the underwriters which exceed the number
of shares specified in the table above. The underwriters have 30 days to
exercise this option. If the underwriters exercise this option, they will each
purchase additional shares approximately in proportion to the amounts specified
in the table above.
We, Action Performance, and our respective officers and directors have
entered into lock-up agreements with the underwriters. Under those agreements,
we and those holders of stock and options may not dispose of or hedge any common
stock or securities convertible into or exchangeable for shares of class A
common stock. These restrictions will be in effect for a period of 180 days
after the date of this prospectus. At any time and without notice, Banc of
America Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements.
We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make in respect of those liabilities.
In connection with this offering, the underwriters may purchase and sell
shares of class A common stock in the open market. These transactions may
include:
- short sales;
- stabilizing transactions, and
- purchase to cover positions created by short sales.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the class A common stock while this
offering is in progress.
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The underwriters also may impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the class A common stock, including:
- over-allotment,
- stabilization,
- syndicate covering transactions, and
- imposition of penalty bids.
As a result of these activities, the price of the class A common stock may
be higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
Prior to this offering, there has been no public market for our class A
common stock. The initial public offering price will be negotiated between us
and the underwriters. Among the factors to be considered in such negotiations
are:
- our history and prospects, and the history and prospectus of the industry
in which we compete,
- our past and present financial performance,
- an assessment of our management,
- the present state of our development,
- our prospects for future earnings,
- the prevailing market conditions of the applicable U.S. securities market
at the time of this offer,
- market valuations of publicly traded companies that we and the
representatives believe to be comparable to us, and
- other factors deemed relevant.
The underwriters have reserved up to 5% of the class A common stock offered
hereby for sale to certain of our employees, directors, and friends at the
initial public offering price set forth on the cover page of this prospectus.
Such persons must commit to purchase no later than the close of business on the
day following the date of this prospectus. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
these reserved shares.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
goracing.com, inc. by O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a
professional association, Phoenix, Arizona. Selected legal matters in connection
with this offering will be passed upon for the Underwriters by Pillsbury Madison
& Sutro LLP, Palo Alto, California.
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed a registration statement on Form S-1 with the Securities and
Exchange Commission relating to the class A common stock offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance we refer
you to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. For further information with respect to goracing.com, inc. and
the class A common stock offered by this prospectus, we refer you to the
registration statement, exhibits and schedules.
Anyone may inspect a copy of the registration statement without charge at
the public reference facilities maintained by the Securities Exchange and
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; the
Chicago Regional Office, Suite 1400, 500 West Madison Street, Citicorp Center,
Chicago, Illinois 60661; and the New York Regional Office, Suite 1300, 7 World
Trade Center, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed fees. The public may obtain information on
the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Registration Statement is also
available through the Securities and Exchange Commission's Web site at the
following address: http://www.sec.gov.
This prospectus includes statistical data regarding Internet usage and
growth of the motorsports industry that were obtained from industry
publications, including reports generated by International Data Corporation,
Forrester Research, Inc., IEG, NASCAR, and ESPN CHILTON. These industry
publications generally obtain information from sources believed to be reliable,
but do not guarantee the accuracy and completeness of their information. While
we believe these industry publications to be reliable, we have not independently
verified their data. We also have not sought the consent of any of these
organizations to refer to their reports in this prospectus.
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GORACING.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION TO FINANCIAL STATEMENTS........................ F-2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Unaudited Pro Forma Condensed Consolidated Balance
Sheet.................................................. F-5
Unaudited Pro Forma Condensed Consolidated Statements of
Operations............................................. F-6
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements................................... F-11
COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-12
Combined Balance Sheets................................... F-13
Combined Statements of Operations......................... F-14
Combined Statements of Equity............................. F-15
Combined Statements of Cash Flows......................... F-16
Notes to Combined Financial Statements.................... F-17
</TABLE>
F-1
<PAGE> 82
goracing.com, inc.
INTRODUCTION TO FINANCIAL STATEMENTS
goracing.com, inc., a Delaware corporation incorporated on May 5, 1999, is
a wholly-owned subsidiary of Action Performance Companies, Inc. (the "Parent").
The combined financial statements of goracing.com, inc., include the historical
operating results of Action Interactive, Inc., Action Direct Marketing, LLC,
Racing Collectables Club of America and Action Racing Collectables Club of
America, Inc., each of which was either a wholly-owned subsidiary or operating
division of the Parent. The entities and divisions described above, including
goracing.com, inc., are hereinafter collectively referred to as the "Company"
unless specifically referred to otherwise.
ACTION INTERACTIVE, INC.
Action Interactive, Inc. ("Action Interactive") was formed in October 1998,
for the purpose of merging with Tech 2000 Worldwide, Inc. ("Tech 2000"), a
privately-held Internet company that provides motorsports and automotive-related
content through its Web site at www.goracing.com. Under the terms of the merger
agreement, the Parent issued 137,923 shares of its common stock in exchange for
all of the issued and outstanding common stock of Tech 2000, and Tech 2000 was
merged into Action Interactive. The transaction was consummated on November 23,
1998 and was accounted for as a pooling-of-interests. Accordingly, the financial
statements of Action Interactive include the historical operating results and
financial position of Tech 2000.
ACTION RACING COLLECTABLES CLUB OF AMERICA, INC.
Action Racing Collectables Club of America, Inc. ("ARCCA") was formed on
June 1, 1998, as a wholly-owned subsidiary of the Parent that operates the
Racing Collectables Club of America (the "Club"). At that time, specific assets
and liabilities, including inventory of $8.6 million, fixed assets of $676,000
and liabilities of $1.2 million were transferred to ARCCA by the Parent at
historical cost basis. Prior to that date, the Club operated as a division of
the Parent. The Club markets die-cast scaled replica vehicles and other licensed
motorsports merchandise exclusively to its member base of approximately 166,000
members as of June 30, 1999. The Club also operates fan clubs for several
popular race car drivers and for the National Association for Stock Car Auto
Racing ("NASCAR"), with a combined member base of approximately 80,000 members
as of June 30, 1999. Club members are notified of new product offerings through
a monthly publication and through advertisements on the www.goracing.com Web
site. Historically, orders have been received via telephone by a live agent or
through an interactive voice response system. Beginning February 1999, with the
launch of the Company's e-commerce solution, SpeedMall at www.goracing.com, Club
members also began placing orders online through the Company's Web site. For
financial reporting purposes, the Club has been treated as an operating division
of the Parent prior to its formation as a subsidiary of the Parent through the
creation of ARCCA. As such, specific assets and liabilities of the Club are not
included in the September 30, 1997 historical balance sheet, as the Club did not
have specific title to assets nor was it specifically obligated for liabilities
prior to its existence as a subsidiary on June 1, 1998.
ACTION DIRECT MARKETING, LLC
Action Direct Marketing, LLC ("ADM"), was formed on December 31, 1998 to
serve as the Internet distribution arm for all of the Parent's operating
subsidiaries and divisions, other than ARCCA. ADM began operations in February
1999, when the Company commenced its e-commerce solution at www.goracing.com.
ADM's products consist of licensed motorsports merchandise, including die-cast
scaled replica vehicles, hats, t-shirts, jackets, souvenirs, and related
products. The accompanying combined interim financial statements include the
historical operations and financial position of ADM since its inception.
PRESENTATION OF COMBINED HISTORICAL FINANCIAL STATEMENTS
The accompanying combined historical financial statements include expenses,
which have been allocated to the Company by the Parent on a specific
identification basis, plus its allocated portion of the costs
F-2
<PAGE> 83
associated with resources it shares with the Parent. Allocations from the Parent
for such shared resources have been made primarily on a proportional cost method
based on a number of factors, including headcount, square footage, related
revenue, and CPU usage. In addition, all of the products sold by the Company
were purchased from or through the Parent or one of its subsidiaries or
operating divisions at an amount equal to the Parent's costs plus the costs
associated with such purchases, including freight, handling, and tooling
depreciation. The Company also bore the expenses associated with third-party
royalties related to the licensed motorsports merchandise that it sold.
Therefore, the combined historical financial statements of the Company do not
necessarily reflect the results of operations or the financial position that
would have existed had the Company been an independent company.
RECAPITALIZATION OF goracing.com, inc.
On July 2, 1999, the Company amended its certificate of incorporation such
that the authorized capital stock consists of 100 million shares of Class A
Common Stock, par value $.0001 per share, 100 million shares of Class B Common
Stock, par value $.0001 per share, and 10 million shares of Serial Preferred
Stock, par value $.0001 per share. In connection therewith, all of the
previously issued and outstanding capital stock of the Company was exchanged for
35 million shares of Class B Common Stock. There are currently no shares of
Serial Preferred Stock or Class A Common Stock issued or outstanding.
INITIAL PUBLIC OFFERING AND REORGANIZATION
The Company has filed a registration statement with the Securities and
Exchange Commission for the proposed initial public offering ("IPO") of its
Class A Common Stock. In connection therewith, the Parent contributed to the
Company, on July 1, 1999, all of its interest in Action Interactive, ARCCA, and
ADM, and converted $6.2 million of intercompany payables to capital of the
Company. In addition, the Company and the Parent intend to enter into a number
of intercompany agreements, as more fully described below, that more closely
reflect an arms-length relationship between the Company and the Parent.
MASTER INTERCOMPANY AGREEMENT AND DISTRIBUTOR AGREEMENTS
The Master Intercompany Agreement and Distributor Agreements establish
general guidelines by which the Company and the Parent will conduct business in
the future, including inventory pricing, exclusivity, non-competition, purchase
order requirements, rights of return, and other general provisions. Under the
terms of the agreements, the Company will purchase products from the Parent at
the Parent's established wholesale selling price plus a markup of 20% to 30%
depending upon the type of product sold and the third-party royalty obligation
of the Parent for such products. All royalties for products purchased by the
Company will be paid by the Parent. The agreements also establish the Company as
the exclusive internet distributor of the Parent, subject only to contractual
obligations of the Parent with respect to, or certain rights retained by,
certain distributors, third-party licensors, suppliers, and NASCAR.
INTERCOMPANY SERVICES AGREEMENT
Under the terms of the Intercompany Services Agreement, the Parent will
continue to provide substantially all of the services it currently provides to
the Company at 104% of its costs. These services include warehousing,
fulfillment, marketing, art and graphics, information technology, human
resources, accounting, and other administrative services. The costs for such
services will be determined based on a specific identification basis plus the
Company's allocated portion of the costs associated with resources it shares
with the Parent. Allocations from the Parent for such shared resources will be
made primarily on a proportional cost method based on a number of factors,
including headcount, square footage, related revenues, and CPU usage.
TAX ALLOCATION AGREEMENT
Following the IPO, the Company will be part of the Parent's combined group
for federal and state income tax reporting purposes. Until such time that the
Company no longer belongs to the Parent's taxpayer
F-3
<PAGE> 84
group, the Tax Allocation Agreement generally provides that the Company will pay
its proportionate share of the Parent's tax liability computed as if the Company
were filing a separate return. However, any tax benefits attributable to the
Company will be used by the Parent to the extent the Company is unable to use
such benefits at that time. The Parent will be required to establish a liability
in favor of the Company to the extent it uses the Company's tax benefits.
TALENT AGREEMENT
The Talent Agreement generally provides that the Parent will use its best
efforts in securing and maintaining, on behalf of the Company, agreements with
racing celebrities, teams, crew chiefs, and motorsports personalities or
organizations for endorsements as well as internet and other interactive
electronic ventures. All costs associated with such efforts, including licensing
fees, signing bonuses, appearance fees, and administrative services, will be
paid by the Company. The agreement prevents the Company from directly entering
into the endorsement agreements without using the Parent as its agent, except
that the Company can enter into an agreement with a particular individual or
organization if the Parent is unwilling or unable to do so.
PRO FORMA FINANCIAL STATEMENTS
Historically, all transactions between the Company and the Parent were
effectuated without taking into consideration a profit motive, which is more
typical in arms-length transactions. Had the agreements described above been in
effect during the historical periods presented in the financial statements, the
operating results would have been materially different from those presented. The
unaudited condensed consolidated pro forma financial statements (the "Pro Forma
Statements") reflect (i) the provisions of the various intercompany agreements
as if those agreements were in place from the earliest period presented; (ii)
the contribution by the Parent to the Company of its interest in Action
Interactive, ARCCA, and ADM as of March 31, 1999, (iii) the conversion of a
portion of the intercompany payables to capital of the Company and (iv) the
recapitalization of goracing.com as of March 31, 1999.
The Pro Forma Statements are derived from the historical financial
statements of the Company. Therefore, the Pro Forma Statements, including the
notes thereto, are qualified in their entirety by reference to and should be
read in conjunction with, the audited and unaudited interim combined financial
statements of goracing.com, including the notes thereto, which are included
elsewhere in this prospectus.
F-4
<PAGE> 85
goracing.com, inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 106 $ -- $ 106
Accounts receivable, net............................... 287 -- 287
Inventory.............................................. 6,902 -- 6,902
Prepaid expenses and other............................. 1 -- 1
------ -------- -------
Total current assets........................... 7,296 -- 7,296
PROPERTY AND EQUIPMENT, net.............................. 1,090 -- 1,090
OTHER ASSETS............................................. -- 1,000(a) 1,000
------ -------- -------
Total assets................................... $8,386 $ 1,000 $ 9,386
====== ======== =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable, deferred revenue and other........... $1,121 $ -- $ 1,121
Due to Action Performance Companies, Inc., net......... 8,156 (6,156)(b) 2,000
------ -------- -------
Total current liabilities...................... 9,277 (6,156) 3,121
------ -------- -------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Serial preferred stock $.0001 par value, 10,000,000
shares authorized, no shares issued or
outstanding......................................... -- --(c) --
Class A common stock, $.0001 par value, 100,000,000
shares authorized, no shares issued or
outstanding......................................... -- --(c) --
Class B common stock, $.0001 par value, 100,000,000
shares authorized, 35,000,000 shares issued and
outstanding......................................... -- 4(c) 4
Action Interactive, Inc. common stock, $.01 par value,
4,000 shares authorized, 1,000 issued and
outstanding......................................... -- --(c) --
Action Direct Marketing, LLC membership interest....... 1 (1)(c) --
Action Racing Collectables Club of America, Inc. common
stock, $.01 par value, 4,000 shares authorized,
1,000 issued and outstanding........................ -- --(c) --
Additional paid-in capital............................. 2 7,153(d) 7,155
Accumulated deficit.................................... (894) -- (894)
------ -------- -------
Total equity (deficit)......................... (891) 7,156 6,265
------ -------- -------
Total liabilities and equity................... $8,386 $ 1,000 $ 9,386
====== ======== =======
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated balance sheet.
F-5
<PAGE> 86
GORACING.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Net product sales.................................. $20,557 $ -- $20,557
Advertising and other.............................. 642 -- 642
------- ------- -------
Total revenue.............................. 21,199 -- 21,199
Cost of product sales................................ 9,858 4,532(e) 14,390
------- ------- -------
Gross profit............................... 11,341 (4,532) 6,809
Operating expenses................................... 9,023 (408)(f) 8,615
------- ------- -------
Income (loss) before income taxes.......... 2,318 (4,124) (1,806)
Provision for (benefit from) income taxes............ 1,029 (1,751)(g) (722)
------- ------- -------
Net income (loss).......................... $ 1,289 $(2,373) $(1,084)
======= ======= =======
Basic and diluted net income (loss) per share........ $ 0.04 $ (0.03)
======= =======
Basic and diluted weighted average shares
outstanding........................................ 35,000(h) 35,000(h)
======= =======
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
F-6
<PAGE> 87
GORACING.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Net product sales..................................... $13,819 $ -- $13,819
Advertising and other................................. 827 -- 827
------- ------- -------
Total revenue................................. 14,646 -- 14,646
Cost of product sales................................... 7,333 2,350(e) 9,683
------- ------- -------
Gross profit.................................. 7,313 (2,350) 4,963
Operating expenses...................................... 5,916 (347)(f) 5,569
------- ------- -------
Income (loss) before income taxes............. 1,397 (2,003) (606)
Provision for (benefit from) income taxes............... 590 (832)(g) (242)
------- ------- -------
Net income (loss)............................. $ 807 $(1,171) $ (364)
======= ======= =======
Basic and diluted net income (loss) per share........... $ 0.02 $ (0.01)
======= =======
Basic and diluted weighted average shares outstanding... 35,000(h) 35,000(h)
======= =======
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
F-7
<PAGE> 88
GORACING.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Net product sales...................................... $37,277 $ -- $37,277
Advertising and other.................................. 1,389 -- 1,389
------- -------- -------
Total revenue.................................. 38,666 -- 38,666
Cost of product sales.................................... 18,548 7,555(e) 26,103
------- -------- -------
Gross profit................................... 20,118 (7,555) 12,563
Operating expenses....................................... 13,581 (766)(f) 12,815
------- -------- -------
Income (loss) before income taxes.............. 6,537 (6,789) (252)
Provision for (benefit from) income taxes................ 2,800 (2,901)(g) (101)
------- -------- -------
Net income (loss).............................. $ 3,737 $ (3,888) $ (151)
======= ======== =======
Basic and diluted net income (loss) per share............ $ 0.11 $ 0.00
======= =======
Basic and diluted weighted average shares outstanding.... 35,000(h) 35,000(h)
======= =======
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
F-8
<PAGE> 89
GORACING.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Net product sales...................................... $21,659 $ -- $21,659
Advertising and other.................................. 1,289 -- 1,289
------- ------- -------
Total revenue.................................. 22,948 -- 22,948
Cost of product sales.................................... 10,240 4,921(e) 15,161
------- ------- -------
Gross profit................................... 12,708 (4,921) 7,787
Operating expenses....................................... 8,581 (1,253)(f) 7,328
------- ------- -------
Income before income taxes..................... 4,127 (3,668) 459
Provision for income taxes............................... 1,660 (1,476)(g) 184
------- ------- -------
Net income..................................... $ 2,467 $(2,192) $ 275
======= ======= =======
Basic and diluted net income per share................... $ 0.07 $ 0.01
======= =======
Basic and diluted weighted average shares outstanding.... 35,000(h) 35,000(h)
======= =======
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
F-9
<PAGE> 90
GORACING.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Net product sales.................................. $12,594 $ -- $12,594
Advertising and other.............................. 448 -- 448
------- ------- -------
Total revenue.............................. 13,042 -- 13,042
Cost of product sales................................ 5,884 2,932(e) 8,816
------- ------- -------
Gross profit............................... 7,158 (2,932) 4,226
Operating expenses................................... 5,741 (452)(f) 5,289
------- ------- -------
Income (loss) before income taxes.......... 1,417 (2,480) (1,063)
Provision for (benefit from) income taxes............ 750 (1,176)(g) (426)
------- ------- -------
Net income (loss).......................... $ 667 $(1,304) $ (637)
======= ======= =======
Basic and diluted net income (loss) per share........ $ 0.02 $ (0.02)
======= =======
Basic and diluted weighted average shares
outstanding........................................ 35,000(h) 35,000(h)
======= =======
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
F-10
<PAGE> 91
GORACING.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET
(a) Reflects the Parent's contribution of advanced payments in connection
with Internet Service and Sponsorship Agreements for celebrity talent.
(b) Reflects the Parent's contribution of certain intercompany payables and
receivables to equity of the Company.
(c) Reflects the recapitalization of goracing.com on July 2, 1999, such
that the authorized capital stock consists of 100 million shares of Class A
Common Stock, par value $.0001 per share, 100 million shares of Class
B Common Stock, par value $.0001 per share, and 10 million shares of Serial
Preferred Stock, par value $.0001 per share. In connection therewith, all of the
issued and outstanding capital stock was exchanged for 35 million shares of
Class B Common Stock. These pro forma adjustments also reflect the Parent's
contribution of all of its interest in Action Interactive, ARCCA, and ADM to the
Company and the consolidation of these entities into goracing.com.
(d) Reflects the net contribution to capital from the transactions
described above.
STATEMENTS OF OPERATIONS
(e) Reflects the provisions of the intercompany Distributor Agreements
whereby the Company will purchase products from the Parent at the Parent's
established wholesale selling price plus a markup of 20% to 30% depending upon
the type of product sold and the third-party royalty obligation of the Parent
for such products.
(f) Reflects the provisions of the intercompany Services Agreement as
follows:
(1) elimination of certain corporate overhead allocations for goodwill
amortization, marketing, and indirect product design and development costs.
Those costs totaled $621,000, $1,483,000, $1,188,000, $527,000, and
$724,000 for the fiscal years ended September 30, 1996, 1997, and 1998 and
for the six-month periods ended March 31, 1998 and 1999, respectively; and
(2) a markup of 4% on the cost of services provided to the Company by
the Parent. These amounts totaled $169,000, $231,000, $422,000, $180,000
and $316,000 for the fiscal years ended September 30, 1996, 1997, and 1998
and for the six-month periods ended March 31, 1998 and 1999, respectively.
(g) Reflects the recognition of income tax expense (benefit) in accordance
with the intercompany Tax Sharing Agreement. The Company's effective income tax
rate is estimated to be approximately 40%.
(h) goracing.com did not exist as a separate company during the historical
periods presented. Earnings per share has been computed based on the shares
outstanding following the recapitalization on July 2, 1999, as if such shares
were outstanding from the beginning of the periods presented.
F-11
<PAGE> 92
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To goracing.com, inc.:
We have audited the accompanying combined balance sheets of GORACING.COM,
INC. (a Delaware Corporation and a wholly owned subsidiary of Action Performance
Companies, Inc. incorporated in May 1999) and the companies and divisions
identified in Note 1 (collectively, the Company) as of September 30, 1998 and
1997, and the related combined statements of operations, equity and cash flows
for each of the three years in the period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
July 2, 1999.
F-12
<PAGE> 93
GORACING.COM, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1997 1998 1999
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 17 $ 1 $ 106
Accounts receivable, net of allowance for doubtful
accounts of $1, $76, and $75, respectively........... 143 153 287
Inventory............................................... -- 8,954 6,902
Prepaid expenses and other.............................. 1 1 1
---- ------ ------
Total current assets............................ 161 9,109 7,296
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$78, $374, and $418, respectively....................... 157 720 1,090
---- ------ ------
Total assets.................................... $318 $9,829 $8,386
==== ====== ======
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and deferred
revenue.............................................. $182 $1,448 $1,121
Notes payable........................................... 600 750 --
Due to Action Performance Companies, Inc................ -- 8,548 8,156
---- ------ ------
Total current liabilities....................... 782 10,746 9,277
---- ------ ------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Action Interactive, Inc. common stock, $.01 par value,
4,000 shares authorized, 1,000 issued and
outstanding.......................................... -- -- --
Action Direct Marketing, LLC membership interest........ -- -- 1
Action Racing Collectables Club of America, Inc. common
stock, $.01 par value, 4,000 shares authorized, 1,000
issued and outstanding............................... -- -- --
Additional paid-in capital.............................. 1 2 2
Accumulated deficit..................................... (465) (919) (894)
---- ------ ------
Total equity (deficit).......................... (464) (917) (891)
---- ------ ------
Total liabilities and equity.................... $318 $9,829 $8,386
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-13
<PAGE> 94
GORACING.COM, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Net product sales...................... $12,594 $21,659 $37,277 $13,819 $20,557
Advertising and other.................. 448 1,289 1,389 827 642
------- ------- ------- ------- -------
Total revenue.................. 13,042 22,948 38,666 14,646 21,199
Cost of product sales.................... 5,884 10,240 18,548 7,333 9,858
------- ------- ------- ------- -------
Gross profit................... 7,158 12,708 20,118 7,313 11,341
Selling, general and administrative
expenses............................... 5,741 8,581 13,581 5,916 9,023
------- ------- ------- ------- -------
Income before income taxes............... 1,417 4,127 6,537 1,397 2,318
Provision for income taxes............... 750 1,660 2,800 590 1,029
------- ------- ------- ------- -------
Net income..................... $ 667 $ 2,467 $ 3,737 $ 807 $ 1,289
======= ======= ======= ======= =======
Basic and diluted net income per share... $ 0.02 $ 0.07 $ 0.11 $ 0.02 $ 0.04
======= ======= ======= ======= =======
Basic and diluted weighted average shares
outstanding............................ 35,000 35,000 35,000 35,000 35,000
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-14
<PAGE> 95
GORACING.COM, INC.
COMBINED STATEMENTS OF EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACTION RACING
COLLECTIBLES
ACTION INTERACTIVE, CLUB OF AMERICA,
INC. ADM INC. ADDITIONAL COMBINED
-------------------- MEMBERSHIP ------------------ PAID-IN ACCUMULATED COMBINED
SHARES PAR VALUE INTEREST SHARES PAR VALUE CAPITAL DEFICIT EQUITY
------- ---------- ---------- ------ --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1995.......... 1,000 $-- $-- -- $-- $ 1 $ (2) $ (1)
Net income (loss)............... -- -- -- -- -- 1,117 (450) 667
Transfer of operating division
profit to Parent.............. -- -- -- -- -- (1,117) -- (1,117)
----- -- --- ----- -- ------- ------- -------
Balance, September 30, 1996....... 1,000 -- -- -- -- 1 (452) (451)
Net income (loss)............... -- -- -- -- -- 2,480 (13) 2,467
Transfer of operating division
profit to Parent.............. -- -- -- -- -- (2,480) -- (2,480)
----- -- --- ----- -- ------- ------- -------
Balance, September 30, 1997....... 1,000 -- -- -- -- 1 (465) (464)
Formation of ARCCA on June 1,
1998.......................... -- -- -- 1,000 -- 1 -- 1
Net income...................... -- -- -- -- -- 880 2,857 3,737
Transfer of operating division
profit to Parent.............. -- -- -- -- -- (880) -- (880)
Transfer of subsidiary profit to
Parent........................ -- -- -- -- -- -- (3,311) (3,311)
----- -- --- ----- -- ------- ------- -------
Balance, September 30, 1998....... 1,000 -- -- 1,000 -- 2 (919) (917)
Formation of ADM on December 31,
1998 (unaudited).............. -- -- 1 -- -- -- -- 1
Net income (unaudited).......... -- -- -- -- -- -- 1,289 1,289
Transfer of subsidiary profit to
Parent (unaudited)............ -- -- -- -- -- -- (1,264) (1,264)
----- -- --- ----- -- ------- ------- -------
Balance, March 31, 1999
(unaudited)..................... 1,000 $-- $ 1 1,000 $-- $ 2 $ (894) $ (891)
===== == === ===== == ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-15
<PAGE> 96
GORACING.COM, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 667 $ 2,467 $ 3,737 $ 807 $ 1,289
Adjustments to reconcile net income to net
cash provided by operating
activities --
Depreciation and amortization............. 36 42 112 34 85
Change in assets and liabilities:
Accounts receivable, net............... (91) (53) (10) (91) (134)
Inventory.............................. -- -- (376) -- 2,052
Other assets........................... (1) -- -- -- --
Accounts payable, accrued expenses and
deferred revenue..................... 95 72 37 126 (327)
------- ------- ------- ----- -------
Net cash provided by operating
activities........................ 706 2,528 3,500 876 2,965
------- ------- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net... (204) (16) -- -- (454)
------- ------- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable... 613 -- 150 -- --
Payments on notes payable................. -- (18) -- -- (600)
Transfer of operating division profit to
Parent................................. (1,117) (2,480) (880) (876) --
Transfer of subsidiary profit to Parent... -- -- (3,311) -- (1,264)
Borrowings from (payments to) Parent,
net.................................... -- -- 525 -- (542)
------- ------- ------- ----- -------
Net cash used in financing
activities........................ (504) (2,498) (3,516) (876) (2,406)
------- ------- ------- ----- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..... (2) 14 (16) -- 105
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 5 3 17 17 1
------- ------- ------- ----- -------
CASH AND CASH EQUIVALENTS, end of period.... $ 3 $ 17 $ 1 $ 17 $ 106
======= ======= ======= ===== =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In June 1998, in conjunction with the formation of ARCCA (see Note 1),
assets and liabilities, including inventory of $8.6 million, fixed assets of
$676,000 and liabilities of $1.2 million were transferred to the Company by the
Parent.
The accompanying notes are an integral part of these combined financial
statements.
F-16
<PAGE> 97
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) THE BUSINESS:
goracing.com, inc., a Delaware corporation incorporated on May 5, 1999, is
a wholly-owned subsidiary of Action Performance Companies, Inc. (the "Parent").
The combined financial statements of goracing.com, inc., include the historical
operating results of Action Interactive, Inc., Action Direct Marketing, LLC,
Racing Collectables Club of America and Action Racing Collectables Club of
America, Inc., each of which was either a wholly-owned subsidiary or operating
division of the Parent. The entities described above, including goracing.com,
inc., are hereinafter collectively referred to as the "Company" unless
specifically referred to otherwise. The Company has utilized the Parent's
business relationships, infrastructure, and brand names and has relied on the
Parent to provide financing to fund its operations (see Notes 2 and 3). The
Company intends to file a registration statement with the Securities and
Exchange Commission for the proposed initial public offering ("IPO") of its
common stock. If the proposed IPO is not consummated, the Company will be
dependent on the continued financial support of the Parent.
Action Interactive, Inc.
Action Interactive, Inc. ("Action Interactive") was formed in October 1998,
for the purpose of merging with Tech 2000 Worldwide, Inc. ("Tech 2000"), a
privately-held Internet company that provides motorsports and automotive-related
content through its Web site at www.goracing.com. Under the terms of the merger
agreement, the Parent issued 137,923 shares of its common stock in exchange for
all of the issued and outstanding common stock of Tech 2000, and Tech 2000 was
merged into Action Interactive. The merger was consummated on November 23, 1998
and was accounted for as a pooling-of-interests. Accordingly, the financial
statements of Action Interactive include the historical operating results and
financial position of Tech 2000.
Action Racing Collectables Club of America, Inc.
Action Racing Collectables Club of America, Inc. ("ARCCA") was formed on
June 1, 1998, as a wholly-owned subsidiary of the Parent that operates the
Racing Collectables Club of America (the "Club"). At that time, specific assets
and liabilities, including inventory of $8.6 million, fixed assets of $676,000
and liabilities of $1.2 million were transferred to ARCCA by the Parent at
historical cost basis. Prior to that date, the Club operated as a division of
the Parent. The Club markets die-cast scaled replica vehicles and other licensed
motorsports merchandise exclusively to its member base of approximately 166,000
members as of June 30, 1999. The Club also operates fan clubs for several
popular race car drivers and for the National Association for Stock Car Auto
Racing ("NASCAR"), with a combined member base of approximately 80,000 members
as of June 30, 1999. Club members are notified of new product offerings through
a monthly publication and through advertisements on the www.goracing.com Web
site. Historically, orders have been received via telephone by a live agent or
through an interactive voice response system. Beginning February 1999, with the
launch of the Company's e-commerce solution at www.goracing.com, Club members
also began placing orders online through the Company's Web site. For financial
reporting purposes, the Club has been treated as an operating division of the
Parent prior to its formation as a subsidiary of the Parent through the creation
of ARCCA. Accordingly, specific assets and liabilities of the Club are not
included in the September 30, 1997 historical combined balance sheet, as the
Club did not have specific title to assets nor was it specifically obligated for
liabilities prior to its existence as a subsidiary on June 1, 1998.
Action Direct Marketing, LLC
Action Direct Marketing, LLC ("ADM"), was formed on December 31, 1998 to
serve as the Internet distribution arm for all of the Parent's operating
subsidiaries and divisions other than ARCCA. ADM began operations in February
1999, when the Company commenced its e-commerce solution at www.goracing.com.
F-17
<PAGE> 98
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADM's products consist of licensed motorsports merchandise, including die-cast
scaled replica vehicles, hats, t-shirts, jackets, souvenirs, and related
products.
Reorganization
In connection with the proposed IPO, the Parent contributed to the Company
on July 1, 1999, all of its interest in Action Interactive, ARCCA, and ADM, and
converted $6.2 million of intercompany indebtedness owed to the Parent to
capital of the Company.
Seasonality
The Company is subject to seasonal fluctuations in its product sales and
results of operations. Because the auto racing season is concentrated between
the months of February and November, the Company's results of operations during
the second and third calendar quarters generally are characterized by higher
sales of motorsports products. Seasonal fluctuations in quarterly sales may
require the Company to take temporary measures, including changes in its
personnel levels and marketing activities that could result in unfavorable
quarterly earnings comparisons.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements of the Company include the
historical operating results of Action Interactive (as restated for the
acquisition of Tech 2000, which was accounted for as a pooling-of-interests) and
the Club for all periods presented. The combined financial statements also
include the operations of ADM and ARCCA since their inception dates. The
operating results attributable to the Club have been recorded as Additional Paid
in Capital in the accompanying Combined Statements of Equity as these results
were derived from an operating division as opposed to a subsidiary of the
Company. The operating results attributable to Action Interactive, ADM and ARCCA
have been recorded as additions or reductions to Combined Accumulated Deficit in
the accompanying Combined Statements of Equity as these results were derived
from subsidiaries of the Company.
The combined financial statements include expenses, which have been
allocated to the Company by the Parent on a specific identification basis, plus
its allocated portion of the costs associated with resources it shares with the
Parent. Allocations from the Parent for such shared resources have been made
primarily on a proportional cost method based on a number of factors, including
headcount, square footage, related revenues, and CPU usage. Management believes
these allocations are reasonable.
The combined financial statements of the Company do not necessarily reflect
the results of operations or the financial position that would have existed had
the Company been an independent company.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less from the date of purchase to be cash equivalents. The
Company places its deposits with high-credit-quality financial institutions.
Inventory
Inventory consists entirely of finished goods and is stated at the lower of
cost (first-in, first-out method) or market.
F-18
<PAGE> 99
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment is stated at historical cost and is depreciated
using the straight-line method over three to five years, the estimated useful
lives of the assets.
Property and equipment consists of the following at September 30, (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- -----
<S> <C> <C>
Furniture, fixtures and equipment........................... $158 $ 948
Leasehold improvements...................................... 77 146
---- -----
235 1,094
Less -- accumulated depreciation............................ (78) (374)
---- -----
$157 $ 720
==== =====
</TABLE>
Stock-Based Compensation
The Company accounts for its stock-based employee compensation in
accordance with Accounting Principles Board Opinion ("APB") No. 25 "Accounting
for Stock Issued to Employees" and complies with the disclosure requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation." For non-employee stock-based compensation, the
Company applies the accounting requirements of SFAS No. 123. Accordingly, the
fair value of stock-based compensation is deferred and amortized as related
services are performed generally utilizing the straight-line method over the
term of the service agreement. See Note 7.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts in the financial statements and
footnotes thereto. The accompanying combined financial statements include
significant estimates of expenses associated with the costs of resources shared
with the Parent. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair value of financial instruments, which consist principally of cash
and cash equivalents and accounts receivable, approximate their carrying value.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of," the Company
periodically reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized if the sum of the expected
long-term undiscounted cash flows is less than the carrying value of the
long-lived assets being evaluated. There have been no impairment losses recorded
to date.
Due to Action Performance Companies, Inc.
Amounts due to the Parent represent expenses and capital expenditures of
the Company which have been funded by the Parent, net of cash collected by the
Parent from the revenue-generating activities of the Company. The amounts due to
the Parent also include assets and liabilities associated with income taxes paid
F-19
<PAGE> 100
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
or benefits used by the Parent, as well as deferred tax assets and liabilities
as if the Company was independent of the Parent. The net advances are unsecured,
non-interest bearing and due on demand.
Revenue Recognition
Sales of the Company's products are recognized at the time the products are
shipped to customers. Advertising revenue is recognized on a straight-line basis
over the period during which the advertising is provided. Sales of the Company's
advertising inventory by third parties under revenue sharing arrangements are
recorded at the amounts reported by the revenue sharing partners, less
agreed-upon commissions, when the advertising has been provided. When the
Company enters into sponsorship arrangements or licenses its content or other
intangible property rights to third parties for a specific project, rather than
for a period of time, licensing revenue is recognized when all significant
obligations have been met. Revenue generated from new membership fees is
recognized when all significant obligations have been met, which is generally
upon shipment of membership kits. Revenue generated from Web development and
related services are recognized ratably as the services are performed.
Advertising Costs
The Company expenses the cost of advertising as incurred.
Income Taxes
Historically, the Company's results have been included in the Parent's
combined federal and state income tax returns. The income tax provision in the
accompanying combined financial statements is calculated as if the Company was
independent of the Parent. Deferred tax assets and liabilities are recorded
based upon temporary differences between the financial statement carrying values
and the tax bases of the assets and liabilities. Additionally, deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The Company is reimbursed for any tax
benefits which the Parent receives on the Company's behalf and is liable to the
Parent for any tax liability incurred by the Company. The Parent pays all taxes
relative to the Company. Accordingly, income taxes receivable and payable and
deferred tax assets and liabilities have been included in the amounts due to the
Parent.
Earnings Per Share
The Company has computed earnings per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share". Although goracing.com did not
exist as a separate company during the periods presented in the historical
combined financial statements, earnings per share has been computed based on the
shares outstanding after the recapitalization discussed in Note 7, as if such
shares were outstanding for all periods. The Company has not had any stock
issuances or grants for nominal consideration.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in subsequent condensed financial statements of interim periods
issued to shareholders. This statement also requires that public companies
report certain information about their products and services, the geographic
areas in which they operate and their major customers. In management's opinion,
the adoption of the provisions of SFAS No. 131 will not have a significant
impact on the disclosures in the Company's financial statements.
F-20
<PAGE> 101
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. The adoption of
this new standard is not expected to have a material effect on the Company's
financial position or results of operations.
Interim Financial Reporting
The accompanying unaudited combined interim financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented have been made. The results of operations for the
six-month period ended March 31, 1999 are not necessarily indicative of the
operating results that may be expected for the entire year ending September 30,
1999.
(3) RELATED PARTY TRANSACTIONS:
Historically, substantially all of the products sold by the Company were
purchased from or through the Parent or one of its subsidiaries or operating
divisions at an amount equal to the Parent's costs plus the costs associated
with such purchases, including freight, handling, and tooling depreciation. The
Company also bore the expenses associated with third-party royalties related to
the licensed motorsports merchandise that it sold. For the years ended September
30, 1996, 1997, and 1998, such purchases and related costs (excluding third-
party royalties) totaled $3.9 million, $6.8 million, and $12.6 million,
respectively.
Additionally, the Company received, and was charged its proportionate share
of, various services from the Parent, including administrative, facilities,
warehousing, fulfillment, information technology, and other services. Such
charges totaled $3.3 million, $4.8 million, and $7.3 million for the fiscal
years ended September 30, 1996, 1997, and 1998, respectively. Management
believes all allocations for such charges are reasonable and have been made on a
consistent basis; however, they are not necessarily indicative of, nor is it
practical for management to estimate, the level of expenses which might have
been incurred had the Company operated independent from the Parent (see Note 2).
Pursuant to a note agreement dated August 1996, Tech 2000 borrowed
approximately $600,000 from a then current shareholder. The note is non-interest
bearing and was payable on April 1, 1998. The note was paid in full in
conjunction with the merger with Tech 2000 in November 1998. Prior to the
merger, in September 1998, Tech 2000 also borrowed $150,000 from Action
Performance Companies, Inc. This note was converted to an intercompany payable
to the Parent upon consummation of the merger.
(4) CREDIT FACILITY:
The Company is currently a participant and a guarantor under the Parent's
$20 million bank line of credit and $30 million letter of credit facility
(collectively the "Credit Facility"). Obligations under the Credit Facility are
subject to certain conditions including the maintenance of financial ratios and
covenants by the Parent. The Credit Facility also limits the payment of
dividends by the Parent. There were no outstanding borrowings under the Parent's
Credit Facility at September 30, 1997 and 1998. The Company's participation in
the Credit Facility will be terminated concurrent with the closing of the IPO
(see Note 7).
F-21
<PAGE> 102
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES:
The Company utilizes certain equipment and facilities under non-cancelable
operating leases of the Parent. As discussed in Note 3, the Company is charged
its proportionate share of expenses for facilities and equipment provided by the
Parent.
In the ordinary course of business, the Company may become a party to
pending or threatened lawsuits. In the opinion of management, upon consultation
with legal counsel, there are no currently pending or threatened lawsuits that
will have a material effect on the combined financial position or operations of
the Company.
(6) INCOME TAXES:
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $ 638 $1,411 $2,388
State................................................. 112 249 422
Deferred:
Federal............................................... -- -- (8)
State................................................. -- -- (2)
----- ------ ------
Total......................................... $ 750 $1,660 $2,800
===== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been established for the net deferred tax assets recorded for pre-acquisition
net operating losses incurred by Tech 2000. Significant components of the
Company's deferred tax assets and liabilities as of September 30 are as follows:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Deferred tax asset -- net operating losses.................. $ 190 $ 369
Other, net.................................................. (4) 13
Valuation allowance......................................... (186) (372)
----- -----
$ -- $ 10
===== =====
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax expense........................ 34% 34% 34%
State income tax expense, net of federal tax benefit........ 6 6 6
Change in valuation allowance and other..................... 13 -- 3
-- -- --
53% 40% 43%
== == ==
</TABLE>
F-22
<PAGE> 103
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) SUBSEQUENT EVENTS:
Lease commitments
In June 1999, the Parent entered into certain non-cancelable operating
lease agreements for the benefit of the Company. The expenses associated with
these and any future leases, will be allocated to the Company by the Parent at
104% of cost determined on a specific identification basis.
Recapitalization
On July 2, 1999, the Company amended its certificate of incorporation such
that the authorized capital stock of the Company consists of 100 million shares
of Class A Common Stock, par value $.0001 per share, 100 million shares of Class
B Common Stock, par value $.0001 per share, and 10 million shares of Serial
Preferred Stock, par value $.0001 per share. In connection therewith, all of the
previously issued and outstanding capital stock of the Company was exchanged for
35 million shares of Class B Common Stock. The Company's articles of
incorporation provide that the Company's Board of Directors may at any time in
the future establish rights and preferences under the Serial Preferred Stock.
Initial Public Offering
In the proposed IPO, the Company plans to issue shares of its Class A
Common Stock to the public while the Parent will retain ownership of all of the
issued and outstanding Class B Common Stock. Holders of Class A Common Stock
will have identical rights to the holder of the Class B Common Stock, except
with respect to voting, conversion, and transfer. The Class A Common Stock is
entitled to one vote per share while the Class B Common Stock is entitled to ten
votes per share on all matters submitted to a vote of the stockholders. The
shares of Class B Common Stock are convertible at any time at the option of the
holder into shares of Class A Common Stock on a share-for-share basis. In
addition, the shares of Class B Common Stock will be automatically converted
into a like number of shares of Class A Common Stock upon a transfer to any
person or entity other than the Parent or an affiliate of the Parent. If the
Parent distributes the Class B Common Stock to its stockholders, the shares will
no longer be convertible into Class A Common Stock and will retain their status
as Class B Common Stock.
Intercompany Agreements
In connection with the proposed IPO, the Company and the Parent will enter
into a number of intercompany agreements, as more fully described below, that
more closely reflect an arms-length relationship between the Company and the
Parent.
MASTER INTERCOMPANY AGREEMENT AND DISTRIBUTOR AGREEMENTS -- The Master
Intercompany Agreement and Distributor Agreements establish the general
guidelines by which the Company and the Parent will conduct business in the
future, including pricing, exclusivity, non-competition, purchase order
requirements, rights of return, and other general provisions. Under the
terms of the agreements, the Company will purchase products from the Parent
at the Parent's established wholesale selling price plus a markup of 20% to
30% depending upon the type of product sold and the third-party royalty
obligation of the Parent for such products. All royalties for products
purchased by the Company will be paid by the Parent. The agreements also
establish the Company as the exclusive internet distributor of the Parent,
subject only to contractual obligations of the Parent with respect to, or
certain rights retained by, certain distributors, third-party licensors,
suppliers, and NASCAR.
INTERCOMPANY SERVICES AGREEMENT -- Under the terms of the Intercompany
Services Agreement, the Parent will continue to provide substantially all
of the services it currently provides to the Company at 104% of its costs.
These services include warehousing, fulfillment, marketing, art and
graphics, information technology, human resources, accounting, and other
administrative services. The costs for such services will be determined
based on a specific identification basis plus the Company's allocated
portion of the costs associated with resources it shares with the Parent.
Allocations from the Parent for
F-23
<PAGE> 104
GORACING.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
such shared resources will be made primarily on a proportional cost method
based on a number of factors including, headcount, square footage, related
revenues, and CPU usage.
TAX ALLOCATION AGREEMENT -- Immediately following the proposed IPO,
the Company will be part of the Parent's combined group for federal and
state income tax reporting purposes. Until such time that the Company no
longer belongs to the Parent's taxpayer group, the Tax Allocation Agreement
generally provides that the Company will pay its proportionate share of the
Parent's tax liability computed as if the Company were filing a separate
return. However, any tax benefits attributable to the Company will be used
by the Parent to the extent the Company is unable to use such benefits at
that time. The Parent will be required to establish a liability in favor of
the Company to the extent it uses the Company's tax benefits.
TALENT AGREEMENT -- The Talent Agreement generally provides that the
Parent will use its best efforts in securing and maintaining, on behalf of
the Company, agreements with racing celebrities, teams, crew chiefs, and
motorsports personalities or organizations for endorsements as well as
internet and other interactive electronic ventures. All costs associated
with such efforts, including licensing fees, signing bonuses, appearance
fees, and administrative services will be paid by the Company. The
agreement prevents the Company from directly entering into the endorsement
agreements without using the Parent as its agent, except that the Company
can enter into an agreement with a particular individual or organization if
the Parent is unwilling or unable to do so.
Had the intercompany agreements described above been in effect from the
earliest period presented, the operating results would have been materially
different than those presented in the accompanying historical combined financial
statements.
Stock Option Compensation -- Employees and Directors
In conjunction with the proposed IPO, the Company has adopted the 1999
Stock Incentive Plan (the "Incentive Plan") for officers, employees, directors
and other persons providing services to the Company. The Incentive Plan provides
for the grant of stock options, including incentive stock options and
non-qualified stock options, stock appreciation rights and restricted stock.
Upon completion of the IPO, approximately 4,200,000 shares of Class A Common
Stock will be reserved for grant. Either the Board of Directors or the
Compensation Committee of the Board of Directors may determine the type of
award, when and to whom awards are granted, the number of shares and terms of
the awards and the exercise prices. No options have currently been granted under
the Incentive Plan. The Company intends to issue options to employees and
directors at the IPO date.
The Company applies APB No. 25 and related interpretations in accounting
for the Incentive Plan. Accordingly, no compensation expense will be recognized
for employee and director options granted under the plan. The estimated fair
market value of options granted will be estimated using the Black-Scholes
option-pricing model with weighted average assumptions appropriate for such
grants.
Stock Option Compensation -- Celebrity and Non-Employee Options
The Board of Directors has authorized the issuance of options to purchase
common stock in conjunction with the proposed IPO to racing celebrities, teams,
and crew chiefs as compensation and inducement to enter into Internet
endorsement and service agreements between these celebrities and the Parent. The
agreements generally provide for the endorsement of the Company's Web site at
www.goracing.com, sponsorship rights, and a certain number of personal
appearances and live chats on the Web site. No options have currently been
granted.
The estimated fair value of the options granted will be estimated using the
Black-Scholes option-pricing model with weighted average assumptions appropriate
for the options to be granted. The fair value of the options to be granted will
be recorded in the financial statements as deferred stock option compensation
and will be amortized using the straight-line method over the term of the
service agreements, generally five years.
F-24
<PAGE> 105
[INSIDE BACK COVER]
This page will contain pictures of various motorsports
personalities who have agreed to endorse the goracing network.
In addition, this page will contain logos of our strategic partners.
<PAGE> 106
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[GORACING.COM LOGO]
------------------------
Prospectus
, 1999
------------------------
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY
U.S. BANCORP PIPER JAFFRAY
J.C. BRADFORD & CO.
Until , 1999, all dealers that buy, sell or trade the common
stock may be required to deliver a prospectus, regardless of whether they are
participating in the offering. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in the Registration Statement. All such expenses are estimates except
for the SEC registration fee and NASD and Nasdaq National Market filing fees.
<TABLE>
<S> <C>
SEC registration fee........................................ $
NASD filing fee.............................................
Blue Sky fees and expenses..................................
Nasdaq National Market......................................
Transfer agent and registrar fees...........................
Accountants' fees and expenses..............................
Legal fees and expenses.....................................
Printing and engraving expenses.............................
Miscellaneous fees..........................................
----------
Total.................................................. $
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation and Bylaws of the Registrant
provide that the Registrant will indemnify and advance expenses, to the fullest
extent permitted by the Delaware General Corporation Law, to each person who is
or was a director or officer of the Registrant, or who serves or served any
other enterprise or organization at the request of the Registrant (and
"Indemnitee").
Under Delaware law, to the extent that an Indemnitee is successful on the
merits in defense of a suit or proceeding brought against him or her by reason
of the fact that he or she is or was a director, officer, or agent of the
Registrant, or serves or served any other enterprise or organization at the
request of the Registrant, the Registrant shall indemnify him or her against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with such action.
If unsuccessful in defense of a third-party civil suit or a criminal suit,
or if such a suit is settled, an Indemnitee may be indemnified under Delaware
law against both (i) expenses, including attorneys' fees, and (ii) judgments,
fines, and amounts paid in settlement if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Registrant, and, with respect to any criminal action, had no
reasonable cause to believe his or her conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Registrant, where the suit is settled, an Indemnitee may be indemnified under
Delaware law only against expenses (including attorneys' fees) actually and
reasonably incurred in the defense or settlement of the suit if he or she acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Registrant except that if the Indemnitee
is adjudged to be liable for negligence or misconduct in the performance of his
or her duty to the Registrant, he or she cannot be made whole even for expenses
unless a court determines that he or she is fully and reasonably entitled to
indemnification for such expenses.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit, or proceeding may be paid by the
Registrant in advance of the final disposition of the suit, action, or
proceeding upon receipt of an undertaking by or on behalf of the officer or
director to repay such amount if it is ultimately determined that he or she is
not entitled to be indemnified by the Registrant. The Registrant may also
advance expenses incurred by other employees and agents of the Registrant upon
such terms and conditions, if any, that the Board of Directors of the Registrant
deems appropriate.
II-1
<PAGE> 108
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has not sold any securities since its inception on October
, 1998 which were not registered under the Securities Act.
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<C> <S>
1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4.1 Specimen of Class A Common Stock Certificate*
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association
10.1(a) Master Intercompany Agreement between Action Performance
Companies, Inc. and goracing.com, inc. dated as of July
, 1999*
10.1(b) Talent Agreement between Action Performance Companies, Inc.
and goracing.com, inc. dated as of July , 1999*
10.1(c) Tax Allocation Agreement by and among Action Performance
Companies, Inc. and goracing.com, inc. dated as of July
, 1999*
10.1(d) Registration Rights Agreement between goracing.com, inc. and
Action Performance Companies, Inc. dated as of July ,
1999*
10.1(e) Intercompany Services Agreement between goracing.com, inc.
and Action Corporate Services, Inc. dated as of July ,
1999*
10.1(f) Distributor Agreement #1 between Racing Collectables Club of
America, Inc. and Action Sports Image, LLC dated as of
July , 1999*
10.1(g) Processing and Fulfillment Agreement between Action Racing
Collectables Club of America, Inc. and Action Sports
Image, LLC dated as of July , 1999*
10.1(h) Distributor Agreement #2 between Action Racing Collectables
Club of America, Inc. and Action Racing Collectables, Inc.
dated as of July , 1999*
10.2 1999 Incentive Stock Plan*
21 List of Subsidiaries
23.1 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association (included in Exhibit
5)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)
27.1 Financial Data Schedule for Fiscal Year Ended September 30,
1996
27.2 Financial Data Schedule for Fiscal Year Ended September 30,
1997
27.3 Financial Data Schedule for Six Months Ended March 31, 1998
27.4 Financial Data Schedule for Fiscal Year Ended September 30,
1998
27.5 Financial Data Schedule for Six Months Ended March 31, 1999
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules
The Registrant has not provided any financial statement schedules, because
the information called for is not required, or is shown either in the financial
statements or the notes thereto.
II-2
<PAGE> 109
ITEM 17. UNDERTAKINGS.
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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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.
The undersigned Registrant hereby undertakes:
(1) to provide to the underwriter at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser;
(2) that for purposes of determining any liability under the
Securities Act of 1933, 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 Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) that for purposes of determining any liability under the
Securities Act of 1933, 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.
II-3
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on July 2, 1999.
GORACING.COM, INC.
By: /s/ CHRISTOPHER S. BESING
------------------------------------
Christopher S. Besing
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints jointly and severally, Fred W. Wagenhals and
Christopher S. Besing, and each one of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including pre-effective and
post-effective amendments) to this registration statement, and to sign any
registration statement and amendments thereto for the same offering pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all which said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do, or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ FRED W. WAGENHALS Chairman of the Board July 2, 1999
- ---------------------------------------------
Fred W. Wagenhals
/s/ CHRISTOPHER S. BESING Chief Executive Officer and Director July 2, 1999
- --------------------------------------------- (Principal Executive Officer)
Christopher S. Besing
/s/ LONNIE P. BOUTTE President and Director July 2, 1999
- ---------------------------------------------
Lonnie P. Boutte
/s/ DAVID A. HUSBAND Acting Chief Accounting Officer and July 2, 1999
- --------------------------------------------- Director (Principal Financial and
David A. Husband Accounting Officer)
/s/ TOD J. WAGENHALS Director July 2, 1999
- ---------------------------------------------
Tod J. Wagenhals
</TABLE>
II-4
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<C> <S>
1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4.1 Specimen of Class A Common Stock Certificate*
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association
10.1(a) Master Intercompany Agreement between Action Performance
Companies, Inc. and goracing.com, inc. dated as of July
, 1999*
10.1(b) Talent Agreement between Action Performance Companies, Inc.
and goracing.com, inc. dated as of July , 1999*
10.1(c) Tax Allocation Agreement by and among Action Performance
Companies, Inc. and goracing.com, inc. dated as of July
, 1999*
10.1(d) Registration Rights Agreement between goracing.com, inc. and
Action Performance Companies, Inc. dated as of July ,
1999*
10.1(e) Intercompany Services Agreement between goracing.com, inc.
and Action Corporate Services, Inc. dated as of July ,
1999*
10.1(f) Distributor Agreement #1 between Racing Collectables Club of
America, Inc. and Action Sports Image, LLC dated as of
July , 1999*
10.1(g) Processing and Fulfillment Agreement between Action Racing
Collectables Club of America, Inc. and Action Sports
Image, LLC dated as of July , 1999*
10.1(h) Distributor Agreement #2 between Action Racing Collectables
Club of America, Inc. and Action Racing Collectables, Inc.
dated as of July , 1999*
10.2 1999 Incentive Stock Plan*
21 List of Subsidiaries
23.1 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association (included in Exhibit
5)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)
27.1 Financial Data Schedule for Fiscal Year Ended September 30,
1996
27.2 Financial Data Schedule for Fiscal Year Ended September 30,
1997
27.3 Financial Data Schedule for Six Months Ended March 31, 1998
27.4 Financial Data Schedule for Fiscal Year Ended September 30,
1998
27.5 Financial Data Schedule for Six Months Ended March 31, 1999
</TABLE>
- ---------------
* To be filed by amendment
<PAGE> 1
[Draft of July 1, 1999]
_______________ SHARES
GORACING.COM, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED [__________, 1999]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Representations and Warranties of the Company and the Principal Stockholder............................2
(a)Compliance with Registration Requirements.............................................................2
(b)Offering Materials Furnished to Underwriters..........................................................3
(c)Distribution of Offering Material By the Company......................................................3
(d)The Underwriting Agreement............................................................................3
(e)Authorization of the Common Shares....................................................................3
(f)No Applicable Registration or Other Similar Rights....................................................3
(g)No Material Adverse Change............................................................................3
(h)Independent Accountants...............................................................................4
(i)Preparation of the Financial Statements...............................................................4
(j)Incorporation and Good Standing of the Company and its Subsidiaries...................................4
(k)Capitalization and Other Capital Stock Matters........................................................4
(l)Stock Exchange Listing................................................................................5
(m)Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required............5
(n)No Material Actions or Proceedings....................................................................6
(o)Intellectual Property Rights..........................................................................6
(p)All Necessary Permits, etc............................................................................6
(q)Title to Properties...................................................................................6
(r)Tax Law Compliance....................................................................................7
(s)Company Not an "Investment Company."..................................................................7
(t)Insurance.............................................................................................7
(u)No Price Stabilization or Manipulation................................................................7
(v)Related Party Transactions............................................................................7
(w)No Unlawful Contributions or Other Payments...........................................................7
(x)Company's Accounting System...........................................................................7
(y)Compliance with Environmental Laws....................................................................8
(z)Periodic Review of Costs of Environmental Compliance..................................................8
(aa)ERISA Compliance.....................................................................................9
(bb)Year 2000............................................................................................9
Section 2. Purchase, Sale and Delivery of the Common Shares.......................................................9
The Firm Common Shares...................................................................................9
The First Closing Date..................................................................................10
The Optional Common Shares; the Second Closing Date.....................................................10
Public Offering of the Common Shares....................................................................10
Payment for the Common Shares...........................................................................11
Delivery of the Common Shares...........................................................................11
Delivery of Prospectus to the Underwriters..............................................................11
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
Section 3. Additional Covenants of the Company and the Principal Stockholder.....................................11
(a)Representatives'Review of Proposed Amendments and Supplements........................................11
(b)Securities Act Compliance............................................................................12
(c)Amendments and Supplements to the Prospectus and Other Securities Act Matters........................12
(d)Copies of any Amendments and Supplements to the Prospectus...........................................12
(e)Blue Sky Compliance..................................................................................12
(f)Use of Proceeds......................................................................................13
(g)Transfer Agent.......................................................................................13
(h)Earnings Statement...................................................................................13
(i)Periodic Reporting Obligations.......................................................................13
(j)Agreement Not To Offer or Sell Additional Securities.................................................13
(k)Future Reports to the Representatives................................................................14
Section 4. Payment of Expenses...................................................................................14
Section 5. Conditions of the Obligations of the Underwriters.....................................................15
(a)Accountants'Comfort Letter...........................................................................15
(b)Compliance with Registration Requirements; No Stop Order; No Objection from NASD.....................15
(c)No Material Adverse Change or Ratings Agency Change..................................................16
(d)Opinion of Counsel for the Company...................................................................16
(e)Opinion of Counsel for the Underwriters..............................................................16
(f)Officers'Certificate.................................................................................16
(g)Bring-down Comfort Letter............................................................................17
(h)Lock-Up Agreement from Certain Securityholders of the Company........................................17
(i)Additional Documents.................................................................................17
Section 6. Reimbursement of Underwriters'Expenses................................................................17
Section 7. Effectiveness of this Agreement.......................................................................18
Section 8. Indemnification.......................................................................................18
(a)Indemnification of the Underwriters..................................................................18
(b)Indemnification of the Company, its Directors and Officers and the Principal Stockholder.............19
(c)Notifications and Other Indemnification Procedures...................................................20
(d)Settlements..........................................................................................21
Section 9. Contribution..........................................................................................21
Section 10. Default of One or More of the Several Underwriters...................................................22
Section 11. Termination of this Agreement........................................................................23
Section 12. Representations and Indemnities to Survive Delivery..................................................24
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 13. Notices..............................................................................................24
Section 14. Successors...........................................................................................24
Section 15. Partial Unenforceability.............................................................................25
Section 16. Governing Law........................................................................................25
(a)Governing Law Provisions.............................................................................25
(b)Consent to Jurisdiction..............................................................................25
(c)Waiver of Immunity...................................................................................25
Section 17. General Provisions...................................................................................25
</TABLE>
-iii-
<PAGE> 5
Draft 7/1/99
UNDERWRITING AGREEMENT
__________, 1999
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY LLC
U.S. BANCORP PIPER JAFFRAY INC.
J. C. BRADFORD & CO.
As Representatives of the several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. goracing.com, inc., a Delaware corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Common
Shares") of its Class A Common Stock, par value $.001 per share (the "Common
Stock"). In addition, the Company has granted to the Underwriters an option to
purchase up to an additional [___] shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2. The Firm Common Shares and, if and to
the extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares." Banc of America Securities LLC, William Blair &
Company LLC, U.S. Bancorp Piper Jaffray Inc. and J. C. Bradford & Co. have
agreed to act as representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement." Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement," and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of Banc of America Securities LLC,
elected to rely upon Rule 434 under the Securities Act, the term "Prospectus"
-1-
<PAGE> 6
shall mean the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated __________, 1999 (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under Rules
434 and 424(b) under the Securities Act and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. All references
in this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company and Action Performance Companies, Inc. (the "Principal
Stockholder") hereby confirm their respective agreements with the Underwriters
as follows:
SECTION 1.REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
STOCKHOLDER.
Each of the Company and the Principal Stockholder hereby represents,
warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation
S-T under the Securities Act), was identical to the copy thereof delivered
to the Underwriters for use in connection with the offer and sale of the
Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times, did not and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by the
Representatives expressly for use therein. There are no
-2-
<PAGE> 7
contracts or other documents required to be described in the Prospectus or to be
filed as exhibits to the Registration Statement which have not been described or
filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives a complete manually signed copy of the
Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with
the offering and sale of the Common Shares other than a preliminary
prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company and the Principal Stockholder, enforceable in accordance
with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors
or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or,
to the knowledge of the Company and the Principal Stockholder, any
development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
business, operations or prospects, whether or not arising from transactions
in the ordinary course of business, of the Company and its subsidiaries,
considered as one entity (any such change is called a "Material Adverse
Change"); (ii) the Company and its subsidiaries, considered as one entity,
have not incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business;
and (iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company or, except for dividends paid to the Company or
other subsidiaries, any of
-3-
<PAGE> 8
its subsidiaries on any class of capital stock or repurchase or redemption
by the Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, which has expressed
its opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) [and supporting
schedules] filed with the Commission as a part of the Registration
Statement and included in the Prospectus, are independent public or
certified public accountants as required by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial
position of the Company and its subsidiaries as of and at the dates
indicated and the results of their operations and cash flows for the
periods specified. [The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.]
Such financial statements [and supporting schedules] have been prepared in
conformity with generally accepted accounting principles as applied in the
United States applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto.
No other financial statements or supporting schedules are required to be
included in the Registration Statement. The financial data set forth in the
Prospectus under the captions "Prospectus Summary -- Summary Financial
Data," "Selected Combined Financial Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration
Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and, in the case of the
Company, to enter into and perform its obligations under this Agreement.
Each of the Company and each subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in the State of
Arizona and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the State of
Arizona) where the failure to so qualify or to be in good standing would
not, individually or in the aggregate, result in a Material Adverse Change.
All of the issued and outstanding capital stock of each subsidiary has been
duly authorized and validly issued, is fully paid and nonassessable and is
owned by the Company, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance or claim. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than the subsidiaries listed in Exhibit
21 to the Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding
-4-
<PAGE> 9
options described in the Prospectus). The Common Stock (including the
Common Shares) conforms in all material respects to the description thereof
contained in the Prospectus. All of the issued and outstanding shares of
Common Stock (including the shares of Class B Common Stock owned by the
Principal Stockholder) have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding shares of Common
Stock were issued in violation of any preemptive rights, rights of first
refusal or other similar rights to subscribe for or purchase securities of
the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable
for, any capital stock of the Company or any of its subsidiaries other than
those accurately described in the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or bylaws or is in default (or,
with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound,
or to which any of the property or assets of the Company or any of its
subsidiaries is subject (each, an "Existing Instrument"), except for such
Defaults as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company's and the Principal Stockholder's
execution, delivery and performance of this Agreement and consummation of
the transactions contemplated hereby and by the Prospectus (i) have been
duly authorized by all necessary corporate action and will not result in
any violation of the provisions of the charter or bylaws of the Company or
any subsidiary, (ii) will not conflict with or constitute a breach of, or
Default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company, the Principal
Stockholder or any of its subsidiaries pursuant to, or require the consent
of any other party to, any Existing Instrument, except for such conflicts,
breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and
(iii) will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company or
any subsidiary. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental or regulatory
authority or agency, is required for the Company's execution, delivery and
performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus, except such as have been
obtained or made by the Company and are in full force and effect under the
Securities Act, applicable state securities or blue sky laws and from the
National Association of Securities Dealers, Inc. (the "NASD").
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(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's or the Principal Stockholder's knowledge, threatened (i) against
the Company or any of its subsidiaries, (ii) which has as the subject
thereof any officer or director of, or property owned or leased by, the
Company or any of its subsidiaries or (iii) relating to environmental or
discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined
adversely to the Company or such subsidiary and (B) any such action, suit
or proceeding, if so determined adversely, would reasonably be expected to
result in a Material Adverse Change or adversely affect the consummation of
the transactions contemplated by this Agreement. No material labor dispute
with the employees of the Company or any of its subsidiaries, or, to the
knowledge of the Company or the Principal Stockholder, with the employees
of any principal supplier of the Company, exists or, to the best of the
Company's or the Principal Stockholder's knowledge, is threatened or
imminent.
(o) Intellectual Property Rights. Except as otherwise disclosed in the
Prospectus, the Company and its subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Neither the Company
nor any of its subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct their respective businesses, and neither the
Company nor any subsidiary has received any notice of proceedings relating
to the revocation or modification of, or non-compliance with, any such
certificate, authorization or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, could result in
a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as
owned in the financial statements referred to in Section 1(i) above, in
each case free and clear of any security interests, mortgages, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such
property by the Company or such subsidiary. The real property,
improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with
such exceptions as are not material and do not materially interfere with
the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or such subsidiary.
(r) Tax Law Compliance. The Company and its consolidated subsidiaries
have filed all necessary federal, state and foreign income and franchise
tax returns and have
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paid all taxes required to be paid by any of them and, if due and payable,
any related or similar assessment, fine or penalty levied against any of
them. The Company has made adequate charges, accruals and reserves in the
applicable financial statements referred to in Section 1(i) above in
respect of all federal, state and foreign income and franchise taxes for
all periods as to which the tax liability of the Company or any of its
consolidated subsidiaries has not been finally determined.
(s) Company Not an "Investment Company." The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after
receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(t) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason
to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither of the Company nor
any subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(v) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any
other person required to be described in the Prospectus which have not been
described as required.
(w) No Unlawful Contributions or Other Payments. Neither the Company
nor the Principal Stockholder nor any of their respective subsidiaries nor,
to the best of the Company's and the Principal Stockholder's knowledge, any
employee or agent of the Company or the Principal Stockholder or any
subsidiary, has made any contribution or other payment to any official of,
or candidate for, any federal, state or foreign office in violation of any
law or of the character required to be disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in
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conformity with generally accepted accounting principles as applied in the
United States and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environment Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its
subsidiaries under applicable Environmental Laws, or noncompliance with the
terms and conditions thereof, nor has the Company or any of its
subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company or any of its subsidiaries has received written notice,
and no written notice by any person or entity alleging potential liability
for investigatory costs, cleanup costs, governmental responses costs,
natural resources damages, property damages, personal injuries, attorneys'
fees or penalties arising out of, based on or resulting from the presence,
or release into the environment, of any Material of Environmental Concern
at any location owned, leased or operated by the Company or any of its
subsidiaries, now or in the past (collectively, "Environmental Claims"),
pending or, to the best of the Company's knowledge, threatened against the
Company or any of its subsidiaries or any person or entity whose liability
for any Environmental Claim the Company or any of its subsidiaries has
retained or assumed either contractually or by operation of law; and (iii)
to the best of the Company's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence
or disposal of any Material of Environmental Concern, that reasonably could
result in a violation of any Environmental Law or form the basis of a
potential Environmental Claim against the Company or any of its
subsidiaries or against any person or entity whose liability for any
Environmental Claim the Company or any of its subsidiaries has retained or
assumed either contractually or by operation of law.
(z) Periodic Review of Costs of Environmental Compliance. In the
ordinary course of its business, the Company conducts a periodic review of
the effect of Environmental Laws on the business, operations and properties
of the Company and its subsidiaries, in the course of which it identifies
and evaluates associated costs and liabilities
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<PAGE> 13
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties). On the basis of such review and the amount of its established
reserves, the Company has reasonably concluded that such associated costs
and liabilities would not, individually or in the aggregate, result in a
Material Adverse Change.
(aa) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in section 414(b),(c),(m) or
(o) of the Internal Revenue Code of 1986, as amended, and the regulations
and published interpretations thereunder (the "Code") of which the Company
or such subsidiary is a member. No "reportable event" (as defined under
ERISA) has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would
have any "amount of unfunded benefit liabilities" (as defined under ERISA).
Neither the Company, its subsidiaries nor any of their ERISA Affiliates has
incurred or reasonably expects to incur any liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "employee
benefit plan" or (ii) section 412, 4971, 4975 or 4980B of the Code. Each
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates that is intended to be
qualified under section 401(a) of the Code is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss
of such qualification.
(bb) Year 2000. All disclosure regarding year 2000 compliance that is
required to be described under the 1933 Act and 1933 Regulations (including
disclosures required by Staff Legal Bulletin No. 5) has been included in
the Prospectus. The Company will not incur significant operating expenses
or costs to ensure that its information systems will be year 2000
complaint, other than as disclosed in the Prospectus.
Any certificate signed by an officer of each of the Company and the
Principal Stockholder and delivered to the Representatives or to counsel for the
Underwriters shall be deemed to be a representation and warranty by the Company
and the Principal Stockholder to each Underwriter as to the matters set forth
therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase
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<PAGE> 14
from the Company the respective number of Firm Common Shares set forth opposite
their names on Schedule A. The purchase price per Firm Common Share to be paid
by the several Underwriters to the Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Banc of America Securities LLC, 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed to by the Company
and the Representative) at 6:00 a.m. San Francisco time, on X , 1999 or such
other time and date not later than 10:30 a.m. San Francisco time, on X+10 , 1999
as the Representatives shall designate by notice to the Company (the time and
date of such closing are called the "First Closing Date"). The Company hereby
acknowledges that circumstances under which the Representatives may provide
notice to postpone the First Closing Date as originally scheduled include, but
are in no way limited to, any determination by the Company or the
Representatives to recirculate to the public copies of an amended or
supplemented Prospectus or a delay as contemplated by the provisions of Section
10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Optional Common Shares from the Company
at the purchase price per share to be paid by the Underwriters for the Firm
Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and
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<PAGE> 15
the Registration Statement has been declared effective as the Representatives,
in their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be made
at the First Closing Date (and, if applicable, at the Second Closing Date) by
wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
own account and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Common
Shares and any Optional Common Shares the Underwriters have agreed to purchase.
Banc of America Securities LLC, individually and not as a Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to be
delivered, to the Representatives for the accounts of the several Underwriters
certificates for the Firm Common Shares at the First Closing Date, against the
irrevocable release of a wire transfer of immediately available funds for the
amount of the purchase price therefor. The Company shall also deliver, or cause
to be delivered, to the Representatives for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase at the First Closing Date or the Second Closing Date, as the
case may be, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The certificates
for the Common Shares shall be in definitive form and registered in such names
and denominations as the Representatives shall have requested at least two full
business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on
the second business day following the date the Common Shares are first released
by the Underwriters for sale to the public, the Company shall deliver or cause
to be delivered, copies of the Prospectus in such quantities and at such places
as the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY AND THE PRINCIPAL
STOCKHOLDER.
The Company and the Principal Stockholder further covenant and agree with
each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or
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<PAGE> 16
dealer (the "Prospectus Delivery Period"), prior to amending or
supplementing the Registration Statement (including any registration
statement filed under Rule 462(b) under the Securities Act) or the
Prospectus, the Company shall furnish to the Representatives for review a
copy of each such proposed amendment or supplement, and the Company shall
not file any such proposed amendment or supplement to which the
Representatives reasonably objects.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which it is listed for trading or included or designated for quotation, or
of the threatening or initiation of any proceedings for any of such
purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(a) hereof), file with the Commission and furnish at
its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may reasonably
request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or
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<PAGE> 17
Canadian provincial Securities laws of those jurisdictions designated by
the Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to take any action that
would subject it to general service of process in any such jurisdiction
where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the
Representatives promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares for
offering, sale or trading in any jurisdiction or any initiation or threat
of any proceeding for any such purpose, and in the event of the issuance of
any order suspending such qualification, registration or exemption, the
Company shall use its best efforts to obtain the withdrawal thereof at the
earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it substantially in the manner described
under the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending [insert the date of the end of the Company's first quarter
ending after one year following the "effective date of the Registration
Statement" (as defined in Rule 158(c) under the Securities Act).] that
satisfies the provisions of section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall report the use of
proceeds from the issuance of the Common Shares as may be required under
Rule 463 under the Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Company and
the Principal Stockholder will not, without the prior written consent of
Banc of America Securities LLC (which consent may be withheld at the sole
discretion of Banc of America Securities LLC), directly or indirectly,
sell, offer, contract or grant any option to sell, pledge, transfer or
establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or
announce the offering of, or file any registration statement under the
Securities Act in respect of, any shares of Common Stock, options or
warrants to acquire shares of the Common Stock or securities exchangeable
or exercisable for or convertible into shares of Common Stock (other than
as contemplated by this Agreement with respect to the Common Shares);
provided, however, that the Company may issue shares of its Common Stock or
options to purchase its Common Stock, or Common Stock upon exercise of
options, pursuant to any stock option, stock bonus or other stock plan or
arrangement described in the
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<PAGE> 18
Prospectus, but only if the holders of such shares, options, or shares
issued upon exercise of such options, agree in writing not to sell, offer,
dispose of or otherwise transfer any such shares or options during such 180
day period without the prior written consent of Banc of America Securities
LLC (which consent may be withheld at the sole discretion of the Banc of
America Securities LLC).
(k) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111, Attention: Murray C. Huneke:
(i) as soon as practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the Company as
of the close of such fiscal year and statements of income, stockholders'
equity and cash flows for the year then ended and the opinion thereon of
the Company's independent public or certified public accountants; (ii) as
soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q,
Current Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
Banc of America Securities LLC, on behalf of the several Underwriters, may,
in its sole discretion, waive in writing the performance by the Company of any
one or more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Principal Stockholder
agree to pay all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limitation (a) all expenses
incident to the issuance and delivery of the Common Shares (including all
printing and engraving costs), (b) all fees and expenses of the registrar and
transfer agent of the Common Stock, (c) all necessary issue, transfer and other
stamp taxes in connection with the issuance and sale of the Common Shares to the
Underwriters, (d) all fees and expenses of the Company's counsel, independent
public or certified public accountants and other advisors, (e) all costs and
expenses incurred in connection with the preparation, printing, filing, shipping
and distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (f) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the state securities or blue sky
laws or the provincial securities laws of Canada, and, if requested by the
Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (g) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (h) the fees and expenses
associated with including the Common Stock on the Nasdaq National Market, and
(i) all other fees, costs and expenses referred to in Item 13 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8
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<PAGE> 19
and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Principal Stockholder set forth in Section 1 hereof as of the date hereof
and as of the First Closing Date as though then made and, with respect to the
Optional Common Shares, as of the Second Closing Date as though then made, to
the timely performance by the Company and the Principal Stockholder of their
respective covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Arthur Andersen LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall
have received an additional [___] conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed
a post-effective amendment to the Registration Statement containing
the information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
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(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Representatives there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any securities of the
Principal Stockholder or any of its subsidiaries by any "nationally
recognized statistical rating organization" as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received
the favorable opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., counsel for the Company, dated as of such Closing Date, the
form of which is attached as Exhibit A (and the Representatives shall have
received an additional [___] conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Pillsbury Madison & Sutro LLP, counsel
for the Underwriters, dated as of such Closing Date, with respect to the
matters set forth in paragraphs (i), (vii) (with respect to subparagraph
(A) only, (viii), (ix), (x), (xi), (xii) and (xiii) (with respect to the
captions "Description of Capital Stock" and "Underwriting" under
subparagraph (A) only), and the next-to-last paragraph of Exhibit A (and
the Representatives shall have received an additional [___] conformed
copies of such counsel's legal opinion for each of the several
Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Principal Stockholder and the Chief
Financial Officer or Chief Accounting Officer of the Company and the
Principal Stockholder, dated as of such Closing Date, to the effect set
forth in subsections (b)(ii) and (c)(ii) of this Section 5, and further to
the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material
Adverse Change;
(ii) the representations, warranties and covenants of the Company
and the Principal Stockholder set forth in Section 1 of this Agreement
are true and correct with the same force and effect as though
expressly made on and as of such Closing Date; and
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(iii) the Company and the Principal Stockholder have complied
with all the agreements hereunder and satisfied all the conditions on
their respective parts to be performed or satisfied hereunder at or
prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from Arthur
Andersen LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance satisfactory to
the Representatives, to the effect that they reaffirm the statements made
in the letter furnished by them pursuant to subsection (a) of this Section
5, except that the specified date referred to therein for the carrying out
of procedures shall be no more than three business days prior to the First
Closing Date or Second Closing Date, as the case may be (and the
Representatives shall have received an additional [___] conformed copies of
such accountants' letter for each of the several Underwriters).
(h) Lock-Up Agreement from Certain Securityholders of the Company . On
the date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit B hereto from each director, officer and
each beneficial owner of Common Stock (as defined and determined according
to Rule 13d-3 under the Exchange Act, except that a one hundred eighty day
period shall be used rather than the sixty day period set forth therein),
and such agreement shall be in full force and effect on each of the First
Closing Date and the Second Closing Date.
(i) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Principal Stockholder at any
time on or prior to the First Closing Date and, with respect to the Optional
Common Shares, at any time prior to the Second Closing Date, which termination
shall be without liability on the part of any party to any other party, except
that Section 4, Section 6, Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company and the Principal Stockholder jointly and
severally agree to reimburse the Representatives and the other Underwriters (or
such Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the
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Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not become
effective until the later of (a) the execution of this Agreement by the parties
hereto and (b) notification by the Commission to the Company and the
Representatives of the effectiveness of the Registration Statement under the
Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company or the Principal
Stockholder to any Underwriter, except that the Company and the Principal
Stockholder shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter
to the Company or the Principal Stockholder, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company and the Principal
Stockholder, jointly and severally, agree to indemnify and hold harmless
each Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below)
arises out of or is based (i) upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, or
any amendment thereto, including any information deemed to be a part
thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading;
or (ii) upon any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company or the Principal Stockholder
contained herein; or (iv) in whole or in part upon any failure of the
Company or the Principal Stockholder to perform their respective
obligations hereunder or under law; or (v) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Stock or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered
by clause (i) or (ii) above, provided that the Company and the Principal
Stockholder shall not be liable under this clause (v) to the extent that a
court of competent
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<PAGE> 23
jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its bad faith or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by Banc of America
Securities LLC) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability
or expense to the extent, but only to the extent, arising out of or based
upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the
person asserting any loss, claim, damage, liability or expense purchased
Common Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to
any liabilities that the Company and the Principal Stockholder may
otherwise have.
(b) Indemnification of the Company, its Directors and Officers and the
Principal Stockholder. Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, each of its directors, each of
its officers who signed the Registration Statement, the Principal
Stockholder and each person, if any, who controls the Company within the
meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, the
Principal Stockholder, or any such director, officer or controlling person
may become subject, under the Securities Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of such Underwriter), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon
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<PAGE> 24
and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company,
the Principal Stockholder, or any such director, officer or controlling
person for any legal and other expense reasonably incurred by the Company,
the Principal Stockholder, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or action. The
Company and the Principal Stockholder hereby acknowledge that the only
information that the Underwriters have furnished to the Company and the
Principal Stockholder expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) as the last [two] paragraphs on
the inside front cover page of the Prospectus concerning stabilization by
the Underwriters and (B) in the table in the first paragraph and as the
second paragraph [second and [discretionary accounts] paragraphs] under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm that
such statements are correct. The indemnity agreement set forth in this
Section 8(b) shall be in addition to any liabilities that each Underwriter
may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel (together with local
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counsel), approved by the indemnifying party (Banc of America Securities
LLC in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the
fees and expenses of counsel shall be at the expense of the indemnifying
party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement, compromise or consent to
the entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have been
a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8
is for any reason held to be unavailable to or otherwise insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (a) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Principal Stockholder, on the
one hand, and the Underwriters, on the other hand, from the offering of the
Common Shares pursuant to this Agreement or (b) if the allocation provided by
clause (a) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (a)
above but also the relative fault of the Company and the Principal Stockholder,
on the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Principal Stockholder, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the Common
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Common Shares
pursuant to this Agreement (before deducting expenses) received by the Company,
and the total underwriting discount received by the Underwriters, in each case
as set forth on the front cover page of the Prospectus (or, if Rule 434
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under the Securities Act is used, the corresponding location on the Term Sheet)
bear to the aggregate initial public offering price of the Common Shares as set
forth on such cover. The relative fault of the Company and the Principal
Stockholder, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or the
Principal Stockholder, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company, the Principal Stockholder and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Common Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common
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<PAGE> 27
Shares set forth opposite their respective names on Schedule A bears to the
aggregate number of Firm Common Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as may be specified by
the Representatives with the consent of the non-defaulting Underwriters, to
purchase the Common Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase on such date. If, on the First Closing
Date or the Second Closing Date, as the case may be, any one or more of the
Underwriters shall fail or refuse to purchase Common Shares and the aggregate
number of Common Shares with respect to which such default occurs exceeds 10% of
the aggregate number of Common Shares to be purchased on such date, and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Common Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, Section 6, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11.TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company and the Principal Stockholder if at any time (a) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq National Market, or trading in securities generally
on either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (b) a
general banking moratorium shall have been declared by any of federal, New York
or California authorities; (c) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or calamity,
or any change in the United States or international financial markets, or any
substantial change or development involving a prospective substantial change in
United States' or international political, financial or economic conditions, as
in the judgment of the Representatives is material and adverse and makes it
impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus or to enforce contracts for the sale of securities;
(d) in the judgment of the Representatives there shall have occurred any
Material Adverse Change; or (e) the Company or the Principal Stockholder shall
have sustained a loss by strike, fire, flood, earthquake, accident or other
calamity of such character as in the judgment of the Representatives may
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (i) the Company or the Principal Stockholder to any Underwriter, except that
the Company and the Principal Stockholder shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 4 and
6 hereof, (ii) any Underwriter to the Company, or (iii) of
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any party hereto to any other party except that the provisions of Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
SECTION 12.REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Principal Stockholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Principal Stockholder,
as the case may be, and will survive delivery of and payment for the Common
Shares sold hereunder and any termination of this Agreement.
SECTION 13.NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representative:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 913-5558
Attention: Richard A. Smith
with a copy to:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 913-5553
Attention: Jeffrey R. Lapic, Esq.
If to the Company or the Principal Stockholder:
goracing.com, inc.
4707 East Baseline Road
Phoenix, Arizona 85040
Facsimile: (602) 337-3825
Attention: Christopher S. Besing
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14.SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors and no other person will
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have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 15.PARTIAL UNENFORCEABILITY
The invalidity or unenforceability of any Section, paragraph or provision
of this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW.
(a) Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the
federal courts of the United States of America located in the City and
County of San Francisco or the courts of the State of California in each
case located in the City and County of San Francisco (collectively, the
"Specified Courts"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to
which such jurisdiction is non-exclusive) of such courts in any such suit,
action or proceeding. Service of any process, summons, notice or document
by mail to such party's address set forth above shall be effective service
of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to
the laying of venue of any suit, action or other proceeding in the
Specified Courts and irrevocably and unconditionally waive and agree not to
plead or claim in any such court that any such suit, action or other
proceeding brought in any such court has been brought in an inconvenient
forum.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable
law, all immunity (whether on the basis of sovereignty or otherwise) from
jurisdiction, service of process, attachment (both before and after
judgment) and execution to which it might otherwise be entitled in the
Specified Courts, and with respect to any Related Judgment, each party
waives any such immunity in the Specified Courts or any other court of
competent jurisdiction, and will not raise or claim or cause to be pleaded
any such immunity at or in respect of any such Related Proceeding or
Related Judgment, including, without limitation, any immunity pursuant to
the United States Foreign Sovereign Immunities Act of 1976, as amended.
SECTION 17.GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral
-25-
<PAGE> 30
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement may not be amended or
modified unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom
the condition is meant to benefit. The Table of Contents and the Section
headings herein are for the convenience of the parties only and shall not affect
the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated business
person who was adequately represented by counsel during negotiations regarding
the provisions hereof, including, without limitation, the indemnification
provisions of Section 8 and the contribution provisions of Section 9, and is
fully informed regarding said provisions. Each of the parties hereto further
acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the
risks in light of the ability of the parties to investigate the Company, its
affairs and its business in order to assure that adequate disclosure has been
made in the Registration Statement, any preliminary prospectus and the
Prospectus (and any amendments and supplements thereto), as required by the
Securities Act and the Exchange Act.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
GORACING.COM, INC.
By
-------------------------------------
Title
---------------------------------
ACTION PERFORMANCE COMPANIES, INC.
By
-------------------------------------
Title
---------------------------------
-26-
<PAGE> 31
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in San Francisco, California as of the date first above
written.
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY LLC
U.S. BANCORP PIPER JAFFRAY INC.
J. C. BRADFORD & CO.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By BANC OF AMERICA SECURITIES LLC
By
------------------------------------
-27-
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Underwriters to be Purchased
- ------------------------------------------------------------ ------------------
<S> <C>
Banc of America Securities LLC.............................. [___]
William Blair & Company LLC................................. [___]
U.S. Bancorp Piper Jaffray Inc.............................. [___]
J. C. Bradford & Co......................................... [___]
Total....................................................... [___]
</TABLE>
SA-1
<PAGE> 33
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time
this Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section 5(d)
of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of Arizona and in
each other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except for such jurisdictions (other than the State of Arizona) where the
failure to so qualify or to be in good standing would not, individually or
in the aggregate, result in a Material Adverse Change.
(iv) Each significant subsidiary of the Company (as defined in Rule
405 under the Securities Act) has been either duly incorporated and is
validly existing as a corporation or duly organized and is validly existing
as a limited liability company, as applicable, in good standing under the
laws of the jurisdiction of its incorporation or organization, has
corporate or organizational power and authority, as applicable, to own,
lease and operate its properties and to conduct its business as described
in the Prospectus and, to the best knowledge of such counsel, is duly
qualified as a foreign corporation or foreign limited liability company to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(v) All of the issued and outstanding capital stock of each such
significant subsidiary of the Company has been duly authorized and validly
issued, is fully paid and nonassessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security interest
or pledge or, to the best knowledge of such counsel, any pending or
threatened claim.
(vi) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform in all material respects to
the descriptions thereof set forth in the Prospectus. All of the
outstanding shares of Common Stock (including
A-1
<PAGE> 34
the shares of Class B Common Stock owned by Principal Stockholder) have
been duly authorized and validly issued, are fully paid and nonassessable
and, to the best of such counsel's knowledge, have been issued in
compliance with the registration and qualification requirements, or an
exemption therefrom, of federal and state securities laws. The form of
certificate used to evidence the Common Stock is in due and proper form and
complies with all applicable requirements of the charter and bylaws of the
Company and the General Corporation Law of the State of Delaware. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly
presents in all material respects the information required to be shown with
respect to such plans, arrangements, options and rights.
(vii) Except as described in the Prospectus, no stockholder of the
Company or any other person has any preemptive right, right of first
refusal or other similar right to subscribe for or purchase securities of
the Company arising (A) by operation of the charter or bylaws of the
Company or the General Corporation Law of the State of Delaware or (B) to
the best knowledge of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by, and, assuming New York and Arizona law are the same, is a
valid and binding agreement of, the Company and the Principal Stockholder,
enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.
(x) [Each of] The Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such counsel,
no stop order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been
issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or threatened by the Commission. Any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and within
the time period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and
supporting schedules included therein or in exhibits to or excluded from
the Registration Statement and financial and statistical matters contained
in the
A-2
<PAGE> 35
Registration Statement, as to which no opinion need be rendered) comply as
to form in all material respects with the applicable requirements of the
Securities Act.
(xii) The Common Shares have been approved for quotation on the Nasdaq
National Market.
(xiii) The statements (A) in the Prospectus under the captions "Risk
Factors -- "We face risks associated with our intellectual property,"
"Description of Capital Stock," ["Management's Discussion and Analysis and
Results of Operations -- Liquidity,"] "Business -- Licenses," "Business --
Intellectual Property," "Certain Relationships and Transactions," "Shares
Eligible for Future Sale," and "Transactions with Action Performance
Companies, Inc." and (B) in Item 14 and Item 15 of the Registration
Statement, insofar as such statements constitute matters of law, summaries
of legal matters, the Company's charter or bylaw provisions, documents or
legal proceedings, or legal conclusions, has been reviewed by such counsel
and fairly present and summarize, in all material respects, the matters
referred to therein.
(xiv) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened against
the Company which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xv) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits
thereto; and the descriptions thereof and references thereto are correct in
all material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's and the Principal Stockholder's
execution, delivery and performance of the Underwriting Agreement and
consummation of the transactions contemplated thereby and by the
Prospectus, except as required under the Securities Act, applicable state
securities or blue sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting Agreement by the
Company and the Principal Stockholder and the performance by the Company
and the Principal Stockholder of their respective obligations thereunder
(other than performance by the Company and the Principal Stockholder of
their respective indemnification obligations under the Underwriting
Agreement, as to which no opinion need be rendered) (A) have been duly
authorized by all necessary corporate action on the part of the Company and
the Principal Stockholder; (B) will not result in any violation of the
provisions of the charter or bylaws of the Company or the Principal
Stockholder or any subsidiary; (C) to the best knowledge of such counsel,
will not constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to any
material Existing Instrument; or (D) to the best knowledge of such counsel,
will not result
A-3
<PAGE> 36
in any violation of any law, administrative regulation or administrative or
court decree applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xix) Except as disclosed in the Prospectus to the best knowledge of
such counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by the
Underwriting Agreement, except for such rights as have been duly waived.
(xx) To the best knowledge of such counsel, neither the Company nor
any subsidiary is in violation of its charter or bylaws or operating
agreements, as applicable, or any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary
or is in Default in the performance or observance of any obligation,
agreement, covenant or condition contained in any material Existing
Instrument, except in each such case for such violations or Defaults as
would not, individually or in the aggregate, result in a Material Adverse
Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the Law of the State of Arizona or the
federal law of the United States, to the extent they deem proper and specified
in such opinion, upon the opinion (which shall be dated the First Closing Date
or the Second Closing Date, as the case may be, shall be satisfactory in form
and substance to the Underwriters, shall expressly state that the Underwriters
may rely on such opinion as if it were addressed to them and shall be furnished
to the Representative) of other
A-4
<PAGE> 37
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; provided, however, that such
counsel shall further state that they believe that they and the Underwriters are
justified in relying upon such opinion of other counsel, and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible officers
of the Company and public officials.
A-5
<PAGE> 38
EXHIBIT B
June __, 1999
Banc of America Securities LLC
William Blair & Company LLC
U.S. Bancorp Piper Jaffray Inc.
J. C. Bradford & Co.
As Representatives of the Several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Re: goracing.com, inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Class A Common Stock of the Company ("Common Stock") or securities convertible
into or exchangeable or exercisable for Common Stock. The Company proposes to
carry out a public offering of Common Stock (the "Offering") for which you will
act as the Representatives of the underwriters. The undersigned recognizes that
the Offering will be of benefit to the undersigned and will benefit the Company
by, among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Banc of America
Securities LLC (which consent may be withheld in its sole discretion), directly
or indirectly, sell, offer, contract or grant any option to sell (including
without limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 180 days after the date of the Prospectus. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
B-1
<PAGE> 39
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Printed Name of Holder
By
-------------------------------------------
Signature
------------------------------------
- ---------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
B-2
<PAGE> 1
EXHIBIT 5
[LAW OFFICES OF O'CONNOR CAVANAGH letterhead]
July ____, 1999
goracing.com, inc.
4707 East Baseline Road
Phoenix, Arizona 85040
RE: REGISTRATION STATEMENT ON FORM S-1
goracing.com, inc.
Ladies and Gentlemen:
As legal counsel to goracing.com, inc., a Delaware corporation
(the "Company"), we have assisted in the preparation of the Company's
Registration Statement on Form S-1 (the "Registration Statement"), to be filed
with the Securities and Exchange Commission in connection with the registration
under the Securities Act of 1933, as amended, of shares of common stock of the
Company covered by the Registration Statement (the "Shares"). The facts, as we
understand them, are set forth in the Registration Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The Certificate of Incorporation of the Company, as
amended to date;
B. The Bylaws of the Company;
C. The Registration Statement; and
D. The resolutions of the Board of Directors of the
Company relating to the approval of the filing of the
Registration Statement and the transactions in
connection therewith.
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, (b) the
Underwriting Agreement shall have
<PAGE> 2
goracing.com, inc.
July ____, 1999
been duly executed and delivered, and (c) the Shares have been duly issued,
authenticated, paid for, sold, and delivered, by the Company as described in the
Registration Statement and in accordance with the provisions of the Underwriting
Agreement, the Shares will be validly issued, fully paid, and nonassessable.
Please be advised that we are members of the State Bar of
Arizona, and our opinion is limited to the legality of matters under federal
securities laws and the General Corporation Laws of the State of Delaware.
Further, our opinion is based solely upon existing laws, rules, and regulations
and we undertake no obligation to advise you of any changes that may be brought
to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in
the Registration Statement and in any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933 for this same offering, the
inclusion of this opinion as an exhibit to the Registration Statement and the
incorporation by reference into any such additional registration statement, and
to the filing of this opinion with any other appropriate governmental agency.
Very truly yours,
/s/ O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Company State of Incorporation
- --------------- ----------------------
Action Direct Marketing, L.L.C. Arizona
Action Racing Collectables Club of America, Inc. Arizona
Action Interactive, Inc. Arizona
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 2, 1999, and to all references to our firm included in or made
a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
July 2, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
COMBINED FINANCIAL STATEMENTS OF GORACING.COM, INC. FOR THE YEAR ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF
SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES
EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS,
NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS
REGISTRATION STATEMENT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY
INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 12,594
<TOTAL-REVENUES> 13,042
<CGS> 5,884
<TOTAL-COSTS> 5,884
<OTHER-EXPENSES> 5,741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,417
<INCOME-TAX> 750
<INCOME-CONTINUING> 667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 667
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
COMBINED FINANCIAL STATEMENTS OF GORACING.COM, INC. FOR THE YEAR ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF
SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES
EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS,
NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS
REGISTRATION STATEMENT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY
INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 143
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 161
<PP&E> 157
<DEPRECIATION> 78
<TOTAL-ASSETS> 318
<CURRENT-LIABILITIES> 782
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1
<TOTAL-LIABILITY-AND-EQUITY> 318
<SALES> 21,659
<TOTAL-REVENUES> 22,948
<CGS> 10,240
<TOTAL-COSTS> 10,240
<OTHER-EXPENSES> 8,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,127
<INCOME-TAX> 1,660
<INCOME-CONTINUING> 2,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,467
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED COMBINED FINANCIAL STATEMENTS OF GORACING.COM, INC. FOR THE SIX
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE
PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE
SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH
SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES
THIS REGISTRATION STATEMENT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY
INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 13,819
<TOTAL-REVENUES> 14,646
<CGS> 7,333
<TOTAL-COSTS> 7,333
<OTHER-EXPENSES> 5,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,397
<INCOME-TAX> 590
<INCOME-CONTINUING> 807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 807
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE AUDITED COMBINED FINANCIAL STATEMENTS OF GORACING.COM, INC. FOR THE YEAR
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF
SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES
EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS,
NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS
REGISTRATION STATEMENT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY
INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 153
<ALLOWANCES> 76
<INVENTORY> 8,954
<CURRENT-ASSETS> 9,109
<PP&E> 720
<DEPRECIATION> 374
<TOTAL-ASSETS> 9,829
<CURRENT-LIABILITIES> 10,746
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2
<TOTAL-LIABILITY-AND-EQUITY> 9,829
<SALES> 37,277
<TOTAL-REVENUES> 38,666
<CGS> 18,548
<TOTAL-COSTS> 18,548
<OTHER-EXPENSES> 13,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,537
<INCOME-TAX> 2,800
<INCOME-CONTINUING> 3,737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,737
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED COMBINED FINANCIAL STATEMENTS OF GORACING.COM, INC. FOR THE SIX
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE
PURPOSE OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE
SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH
SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES
THIS REGISTRATION STATEMENT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY
INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 287
<ALLOWANCES> 75
<INVENTORY> 6,902
<CURRENT-ASSETS> 7,296
<PP&E> 1,090
<DEPRECIATION> 418
<TOTAL-ASSETS> 8,386
<CURRENT-LIABILITIES> 9,277
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3
<TOTAL-LIABILITY-AND-EQUITY> 8,386
<SALES> 20,557
<TOTAL-REVENUES> 21,199
<CGS> 9,858
<TOTAL-COSTS> 9,858
<OTHER-EXPENSES> 9,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,318
<INCOME-TAX> 1,029
<INCOME-CONTINUING> 1,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,289
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
