PROSPECTUS
1,056,516 Shares of Common Stock
ACTION PERFORMANCE COMPANIES, INC.
This Prospectus relates to 1,056,516 shares of common stock, par value
$.01 per share (the "Common Stock") of Action Performance Companies, Inc. (the
"Company") that may be sold from time to time by certain selling shareholders of
the Company (the "Selling Shareholders"). To the extent required by applicable
law or Securities and Exchange Commission regulations, this Prospectus shall be
delivered to purchasers upon resale of shares of Common Stock by the Selling
Shareholders. The Company will not receive any of the proceeds of sales by the
Selling Shareholders.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ACTN." On February 28, 1997, the last sale price of the Common
Stock as reported on Nasdaq was $21.50 per share.
The securities offered hereby involve a high degree of risk. See "Risk
Factors," which begins on page 7 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is March 12, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
New York Regional Office, Seven World Trade Center, New York, New York 10048,
and Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material may be obtained from the Public Reference Section of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of the prescribed fees. The Commission also maintains a Web
site that contains reports, proxy and information statements and other materials
that are filed through the Commission's Electronic Data Gathering, Analysis, and
Retrieval system. This Web site can be accessed at http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
following documents previously filed with the Commission pursuant to the
Exchange Act: (i) the Company's Annual Report on Form 10-KSB for the year ended
September 30, 1996, as filed by the Company on December 30, 1996; (ii) the
Company's Current Report on Form 8-K as filed by the Company on November 22,
1996 and as amended by Form 8-K/A as filed by the Company on January 13, 1997;
(iii) the Company's Current Report on Form 8-K as filed by the Company on
January 23, 1997 and as amended by Form 8-K/A as filed by the Company on
February 24, 1997; (iv) the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996, as filed by the Company on February 14, 1997;
and (v) the description of the Company's Common Stock contained in the
Registration Statement on Form 8-A/A as filed with the Commission on June 14,
1995. The Current Report on Form 8-K as filed by the Company on November 22,
1996 and as amended by Form 8-K/A as filed on January 13, 1997, which is
incorporated by reference herein, contains audited financial statements for
Sports Image, Inc. as of and for the year ended December 31, 1995 and for the
period from January 1, 1996 to November 7, 1996. The financial statements for
Sports Image, Inc. for the year ended December 31, 1994 have been omitted as a
result of the inability of the Company or Sports Image, Inc. to obtain financial
records from the owners of the predecessor of Sports Image, Inc. In addition,
the Company believes that the financial results of the predecessor of Sports
Image, Inc. for the year ended December 31, 1994 are not representative of the
current business operations of Sports Image, Inc. and would not provide
meaningful or relevant information to investors.
All reports and other documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Prospectus shall be deemed to be incorporated by reference herein
and to be a part hereof from the date of filing of such reports and documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein prior to the date hereof shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The information relating to the Company contained in this Prospectus
summarizes, is based upon, or refers to, information and financial statements
contained in one or more of the documents incorporated by reference herein;
accordingly, such information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above that have been incorporated by
reference herein (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates). Requests should be directed to Action Performance
Companies, Inc., 2401 West First Street, Tempe, Arizona 85281, (telephone (602)
894-0100), Attention: Secretary.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors, including those set forth in "Risk Factors" and elsewhere in
this Prospectus.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information and financial statements, including the notes thereto,
appearing elsewhere or incorporated by reference in this Prospectus. Unless
otherwise indicated, all information in this Prospectus (i) reflects a
two-for-one stock split effected as a stock dividend on May 28, 1996, and (ii)
assumes no exercise of any currently outstanding or authorized options.
The Company
The Company is a leader in the design and sale of motorsports
collectible and consumer products. The Company designs and markets collectible
die-cast and pewter miniature replicas of motorsports vehicles, designs and
markets licensed apparel, souvenirs, and other motorsports consumer items
(including t-shirts, hats, jackets, mugs, key chains, and drink bottles), and
licenses a line of motorsports-related products for sale in the mass-merchandise
market. The Company also develops marketing and product promotional programs for
corporate sponsors of motorsports which feature the Company's die-cast replicas
or other products as premium awards intended to increase brand awareness of the
products or services of the corporate sponsors, and represents popular race car
drivers in a broad range of licensing and other revenue-producing opportunities,
including product licenses, corporate sponsorships, endorsement contracts, and
speaking engagements. The Company markets its motorsports collectibles and
consumer items pursuant to license arrangements with popular race drivers, car
owners, car sponsors, and automobile manufacturers. The Company's motorsports
collectibles and consumer products are manufactured by third parties, generally
utilizing the Company's designs, tools, and dies.
The Company designs its products and other programs primarily to
capitalize on the growing interest in motorsports. The popularity of motorsports
with consumers has resulted in significant growth in the motorsports industry.
USA Today reports that motorsports racing is the fastest growing spectator sport
in the nation. According to The Wall Street Journal, approximately 5.3 million
fans attended the 31 races of the National Association for Stock Car Auto
Racing's ("Nascar") Winston Cup series in 1995. According to USA Today,
attendance at Winston Cup events has more than doubled in the past decade, from
75,643 per event in 1985 to 180,260 in 1996. USA Today reports that TV ratings
are growing even faster, with more than 100 million people tuning in to Nascar's
televised events each year. A.C. Nielsen reports that, with the exception of NFL
football, Nascar Winston Cup telecasts score higher ratings than any other
sporting event aired by cable. The Wall Street Journal reported that sales of
Nascar- licensed goods have grown ninefold during the 1990s to more than $500
million per year and are expected to reach $1.0 billion by 1998. According to
Nascar, 70 of the Fortune 500 companies utilize motorsports sponsorship or
advertising as part of their marketing strategies.
The Company focuses on developing long-term relationships with and
engages in comprehensive efforts to license the most popular drivers in each top
racing category as well as car owners, car sponsors, car manufacturers, and
others in these racing categories. The Company has license agreements with many
of the most popular drivers, including seven-time Winston Cup champion Dale
Earnhardt, 1995 Winston Cup champion Jeff Gordon, 1996 Winston Cup champion
Terry Labonte, and six-time NHRA Funny Car champion John Force. The Company
continually strives to strengthen its relationships with licensors and to
develop opportunities to market innovative collectible and licensed consumer
products that appeal to motorsports enthusiasts. The Company believes that its
license agreements with notable Nascar and other motorsports personalities and
sponsors significantly enhance the collectible value and marketability of its
products. The Company also believes that drivers and other motorsports licensors
increasingly recognize the Company's ability to design, develop, and produce a
broad range of high-quality licensed products and to market those products
through well-defined, organized, and established distribution channels designed
to maximize sales and profitability.
The Company continually seeks to develop or acquire exciting and
progressive new products and programs. Historically, the Company has designed
and marketed die-cast collectibles featuring Nascar drivers and vehicles. In
1995, the Company began expanding its lines of die-cast collectibles to include
other types of motorsports vehicles, including National Hot Rod Association
("NHRA") drag racing, Nascar's new "Super Truck" racing series, dirt car racing,
and sprint car racing. The Company acquired the business and substantially all
of the assets of Sports Image,
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Inc. ("Sports Image") in November 1996 and the business and substantially all of
the assets of Motorsport Traditions Limited Partnership and Creative Marketing
and Promotions, Inc. (together, "Motorsport Traditions") in January 1997. Sports
Image and Motorsport Traditions market and distribute licensed motorsports
apparel and other souvenir items, featuring the likeness of Dale Earnhardt, Jeff
Gordon, Terry Labonte, Darrell Waltrip, Bobby Labonte, and other popular drivers
through a network of wholesale distributors, trackside events, promotional
programs for corporate sponsors, and fan clubs. Sports Image had revenue of
approximately $32.5 million and $41.8 million during the year ended December 31,
1995 and the period from January 1, 1996 to November 7, 1996, respectively.
Motorsport Traditions had annual revenue of approximately $33.0 million from
sales of licensed apparel, souvenirs, and other motorsports consumer products
during 1996. The Company believes that Sports Image and Motorsport Traditions
represent an important new distribution channel for the Company's die-cast
collectibles, provide significant opportunities for developing and marketing
licensed apparel and souvenirs, and position the Company as the leading marketer
of licensed motorsports apparel and souvenirs.
In December 1996, the Company entered into a license agreement with
Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and game manufacturer,
covering the exclusive sale by Hasbro of a new line of motorsports-related
products in the mass-merchandise market. The Company believes that the license
agreement with Hasbro will enable it to remain focused on its core business of
designing and marketing motorsports collectibles, apparel, and souvenir products
while enabling the Company to benefit from Hasbro's retail mass merchandise
marketing expertise and resources as a means of expanding the Company's product
offerings without committing substantial resources to manufacturing and
marketing activities.
The Company pursues a strategy designed to enable it to enhance its
leadership position in the motorsports collectible and consumer products
industry. Key aspects of this strategy include (i) continuing to enhance its
existing products and introduce new products that appeal to racing enthusiasts,
(ii) expanding and strengthening its licensing arrangements, (iii) pursuing
strategic acquisitions and alliances, (iv) investing in proprietary tooling, and
(v) providing a one-stop source for revenue opportunities for racing
personalities.
The Company was incorporated in Arizona in 1992. As used herein, the
term "Company" refers to Action Performance Companies, Inc. and its subsidiaries
and operating divisions, including Sports Image and Motorsport Traditions. The
Company's principal executive offices are located at 2401 West First Street,
Tempe, Arizona 85281, and its telephone number is (602) 894-0100.
The Offering
<TABLE>
<S> <C>
Securities offered by the Selling Shareholders................. 1,056,516 shares of Common Stock
Common Stock currently outstanding............................. 13,703,485 shares(1)
Use of proceeds................................................ The Company will not receive any of the proceeds of
sales of Common Stock by the Selling Shareholders.
Risk factors................................................... Investors should carefully consider the factors
discussed under "Risk Factors."
Nasdaq National Market symbol.................................. ACTN
</TABLE>
(1) Excludes (i) 1,014,305 shares of Common Stock reserved for issuance
upon exercise of stock options outstanding as of December 31, 1996, and
(ii) 301,450 shares reserved for issuance upon the exercise of stock
options that may be granted in the future under the Company's 1993
Stock Option Plan. The Company is seeking shareholder approval to
increase the options that may be granted under the 1993 Stock Option
Plan from 2,000,000 to 2,750,000 shares. See "Management - 1993 Stock
Option Plan."
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Summary Consolidated Financial Data
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended September 30, December 31,
------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales................................... $16,869 $26,131 $44,216 $8,006 $15,175
Income before benefit from
(provision for) income taxes............. 409 4,154 9,870 1,463 2,614
Net income ................................. 633 2,770 5,953 878 1,568
Net income per share and
common share equivalent(1)............... $ 0.08 $ 0.25 $ 0.46 $0.07 $0.12
Weighted average number of common
shares and common share
equivalents outstanding(1)(2)............ 9,639,946 11,570,046 13,069,380 12,839,544 13,476,148
Balance Sheet Data (at end of period):
Working capital............................. $ 5,699 $11,922 $18,094 $12,199 $21,966
Total assets................................ 11,656 23,351 31,649 23,920 66,207
Notes payable and long-term debt(3)......... 61 288 365 461 24,899
Shareholders' equity(2)..................... 6,909 18,890 26,996 20,070 33,863
</TABLE>
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(1) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996.
(2) Excludes (i) 342,857 shares of Common Stock issued subsequent to
December 31, 1996 as a result of the acquisition of Motorsport
Traditions, (ii) 187,500 shares of Common Stock issued subsequent to
December 31, 1996 in one private placement, and (iii) an aggregate of
65,666 shares of Common Stock issued subsequent to December 31, 1996
upon exercise of stock options. See "Private Placements."
(3) Amounts shown as of December 31, 1996 include the $24.0 million
promissory note issued to the sellers of Sports Image. In January 1997,
the Company issued an aggregate of $20.0 million in principal amount of
senior notes and entered into a new $16.0 million credit facility. The
Company used the proceeds from the sale of the senior notes and a
portion of the new credit facility to repay the promissory note issued
to the sellers of Sports Image. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources."
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Summary Unaudited Pro Forma Combined Financial Information
(in thousands, except share and per share amounts)
The following summary unaudited pro forma combined financial
information of the Company for the fiscal year ended September 30, 1996 and the
three months ended December 31, 1996 give effect to the acquisitions of Sports
Image and Motorsport Traditions. The summary unaudited pro forma combined
statements of operations for the fiscal year ended September 30, 1996 and the
three months ended December 31, 1996 assume that the acquisitions of Sports
Image and Motorsport Traditions had been completed on October 1, 1995. The
summary unaudited pro forma combined balance sheet as of December 31, 1996 gives
effect to the acquisition of Motorsport Traditions as if it had occurred on
December 31, 1996. The summary unaudited pro forma combined financial
information presented herein does not purport to represent what the Company's
actual results of operations would have been had the acquisitions of Sports
Image and Motorsport Traditions occurred on those dates or to project the
Company's results of operations for any future period.
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30, 1996
Adjusted
The Acquired Total Pro Forma Pro Forma
Company Companies Combined Adjustments(1) Combined
------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales.............................. $44,216 $78,640 $122,856 $(11,229) $111,627
Income before provision for
(benefit from) income taxes........ 9,870 6,198 16,068 (3,574) 12,494
Net income............................. 5,953 6,198 12,151 (4,637) 7,514
Pro forma net income
per share.......................... $0.54
=====
Weighted average number of
common shares and common
share equivalents outstanding...... 13,815,598
==========
For the Three Months Ended December 31, 1996
Adjusted
The Acquired Total Pro Forma Pro Forma
Company Companies Combined Adjustments(1) Combined
------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales.............................. $15,175 $12,254 $27,429 $(1,050) $26,379
Income before provision for
(benefit from) income taxes........ 2,614 26 2,640 (459) 2,181
Net income............................. 1,569 26 1,595 (284) 1,311
Pro forma net income
per share.......................... $0.09
=====
Weighted average number of
common shares and common
share equivalents outstanding..... 13,989,995
==========
Balance Sheet Data (as of December 31, 1996):
Working capital........................ $21,966 $5,358 $27,324 $(6,765) $ 20,559
Total assets........................... 66,207 9,433 75,640 3,849 79,489
Notes payable and long-term debt,
net of current portion............... 24,899 11 24,910 850 25,760
Shareholders' equity................... 33,863 7,034 40,897 (2,302) 38,595
</TABLE>
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(1) For a detailed description of the pro forma adjustments, see "Unaudited
Pro Forma Combined Financial Information."
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RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered in evaluating the Company and its
business before purchasing any of the securities offered hereby.
Certain Factors That Could Adversely Affect Operating Results
The Company's operating results are affected by a wide variety of
factors that could adversely impact its net sales and operating results. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify trends in the motorsports collectibles and
consumer markets and to introduce products that take advantage of those trends;
its ability to identify popular motorsports personalities and to enter into and
maintain mutually satisfactory licensing arrangements with them; its ability to
design and arrange for the timely production and delivery of its products;
market acceptance of the Company's products; the level and timing of orders
placed by customers; seasonality; the popularity and life cycles of and customer
satisfaction with products designed and marketed by the Company; the timing of
expenditures in anticipation of orders; the cyclical nature of the markets
served by the Company; and competition and competitive pressures on prices.
The Company's ability to increase its sales and marketing efforts to
stimulate customer demand and its ability to monitor third-party manufacturing
arrangements in order to maintain satisfactory delivery schedules and product
quality are important factors in its long-term prospects. A slowdown in demand
for the Company's products as a result of ineffective marketing efforts,
manufacturing difficulties, changing consumer tastes and spending patterns,
economic conditions, or other broad-based factors could adversely affect the
Company's operating results.
Tobacco and alcohol companies provide a significant amount of
advertising and promotional support of racing events, drivers, and car owners.
In August 1996, the U.S. Food and Drug Administration published final
regulations that will substantially restrict tobacco industry sponsorship of
sporting events, including motorsports, beginning in 1998. These regulations and
any other legislation that limit or prohibit advertisements of tobacco and
alcohol products at sporting events, including racing events, could ultimately
affect the popularity of motorsports, which could have an adverse effect on the
Company. The Company believes, however, that other major consumer products
companies would quickly replace tobacco and alcohol companies as sponsors of
motorsports in the event that legislation prohibiting advertisements of those
products takes effect.
Dependence on License Arrangements
The Company markets its collectible products pursuant to licensing
arrangements with race car drivers, race car owners, race car sponsors, and
automobile manufacturers. These licensing arrangements generally are limited in
scope and duration and generally authorize the sale of specified licensed
products for short periods of time. The success of licensing arrangements
depends on many factors, including the reasonableness of license fees in
relationship to revenue generated by sales of licensed products, the continued
popularity of licensees, and the absence of their sickness, incapacity, or
death. The termination, cancellation, or inability to renew any of the Company's
existing licensing arrangements, or its inability to develop and enter into new
licensing arrangements, would have a material adverse effect on the Company. See
"Business - Licenses."
Integration of Business Operations
The Company has recently completed the acquisitions of Sports Image and
Motorsport Traditions. There can be no assurance that the Company will be able
to integrate effectively the operations of Sports Image and Motorsport
Traditions with the Company's operations on a timely basis, to manage
effectively the combined operations of the acquired businesses, or to achieve
the Company's operating and growth strategies with respect to these businesses.
The integration of the management, operations, and facilities of Sports Image,
Motorsport Traditions, and any other businesses the Company may acquire in the
future could involve unforeseen difficulties, which could have a material
adverse effect on the Company's business, financial condition, and operating
results.
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The Company has conducted due diligence reviews of each of the acquired
businesses and has received representations and warranties regarding each of the
acquired businesses. There can be no assurance, however, that unforeseen
liabilities will not arise in connection with the operation of the acquired
businesses or future acquired businesses or that any contractual or other
remedies available to the Company will be sufficient to compensate the Company
in the event unforeseen liabilities arise.
The Company anticipates using the opportunities created by the
combination of Sports Image and Motorsport Traditions to effect what the Company
believes will be substantial cost savings, including a reduction in operating
expenses as a result of the elimination of duplicative sales and marketing,
administrative, warehouse, and distribution facilities, functions, and
personnel. Significant uncertainties, however, accompany any business
combination, and there can be no assurance that the Company will be able to
achieve its anticipated integration of facilities, functions, and personnel in
order to achieve operating efficiencies or otherwise realize cost savings as a
result of the recent acquisitions or future acquisitions. The inability to
achieve the anticipated cost savings could have a material adverse effect on the
Company's business, financial condition, and operating results.
Outstanding Indebtedness and Possible Need For Additional Capital
In January 1997, the Company issued an aggregate of $20.0 million in
principal amount of senior notes and entered into a new $16.0 million credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." The Company believes
that its existing capital resources, credit facilities, and cash flow from
operations will be sufficient to satisfy the Company's capital requirements
during the next 12-month period, other than those related to any future
acquisitions. The Company, however, may be required to seek additional equity or
debt financing to finance future acquisitions or the development of new product
lines, to provide guarantees under license agreements, to obtain international
letters of credit in connection with purchase orders from its offshore
manufacturers, or to provide funds to take advantage of other business
opportunities. The timing and amount of any such capital requirements cannot be
predicted at this time. Although the Company has been able to obtain adequate
financing on acceptable terms in the past, there can be no assurance that such
financing will continue to be available on acceptable terms. If such financing
is not available on satisfactory terms, the Company may be unable to expand its
business at the rate desired and its operating results may be adversely
affected. Debt financing increases expenses and must be repaid regardless of
operating results. Equity financing could result in additional dilution to
existing shareholders.
Competition
The motorsports collectible and consumer products markets are extremely
competitive. The Company competes with major domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. The Company believes that Racing Champions, Inc.,
Revell-Monogram, Inc., and The ERTL Company, Inc. constitute its principal
competitors in the die-cast collectible industry. The Company's motorsports
apparel and souvenirs compete with similar products sold or licensed by drivers,
owners, sponsors, and other licensors with which the Company currently does not
have licenses, as well as with sports apparel licensors and manufacturers in
general. Emerging companies also may increase their participation in these
motorsports markets.
The Company believes that its relationships with top race car drivers
and car owners represent a significant advantage over its competitors in the
motorsports collectible and consumer products industry. The Company strives to
expand and strengthen these relationships and to develop opportunities to market
innovative collectible and consumer licensed products that appeal to motorsports
enthusiasts. The ability of the Company to compete successfully depends on a
number of factors both within and outside its control, including the quality,
features, pricing, and diversity of its products; the quality of its customer
services; its ability to recognize industry trends and anticipate shifts in
consumer demands; its success in designing and marketing new products; the
availability of adequate sources of manufacturing capacity and the ability of
its third-party manufacturers to meet delivery schedules; its efficiency in
filling customer orders; the continued popularity of the motorsports
personalities with whom the Company has licensing arrangements; its ability to
renew existing licensing arrangements and enter into new licensing arrangements;
its ability to develop and
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maintain effective marketing programs that enable it to sell its products to
motorsports enthusiasts; product introductions by the Company's competitors; the
number, nature, and success of its competitors in a given market; and general
market and economic conditions. The Company's promotional programs must compete
for advertising dollars against other specialty advertising programs and media,
such as television, radio, newspapers, magazines, and billboards. The Company
currently competes principally on the basis of the current popularity of
motorsports; the appeal of its products; and the cost, design, and delivery
schedules of its products. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
Rapid Market Changes
The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition, seasonality, and a constant need
to create and market new products. Demand for motorsports collectible and
consumer products is influenced by the popularity of certain drivers and other
personalities, themes, cultural and demographic trends, marketing and
advertising expenditures, and general economic conditions. Because these factors
can change rapidly, customer demand also can shift quickly. New motorsports
collectible and consumer products frequently can be successfully marketed for
only a limited time. The Company may not always be able to respond to changes in
customer tastes and demands because of the amount of time and financial
resources that may be required to bring new products to market. The inability to
respond quickly to market changes could have an adverse effect on the Company's
business, financial condition, and operating results. See "Business - Products
and Services."
Fluctuations in Sales
The second and third calendar quarters of each year generally are
characterized by higher sales of motorsports products because of the
introduction of new race car models for the racing season beginning in February.
Sales of motorsports products are lowest in the fourth calendar quarter,
corresponding with the end of the racing season. Seasonal fluctuations in
quarterly sales may require the Company to take temporary measures, including
changes in its personnel levels, borrowing amounts, and production and marketing
activities, and could result in unfavorable quarterly earnings comparisons. The
Company believes, however, that holiday sales of its products are increasing,
which has the effect of reducing seasonal fluctuations in its sales.
Dependence on Third Parties for Manufacturing
The Company depends upon third parties to manufacture its die-cast and
pewter collectibles and motorsports consumer products. Although the Company owns
most of the tools, dies, and molds utilized in the manufacturing processes of
its collectible products and owns the tooling and dies used to manufacture
certain of its motorsports consumer products, the Company has limited control
over the manufacturing processes themselves. As a result, any difficulties
encountered by the third-party manufacturers that result in product defects,
production delays, cost overruns, or the inability to fulfill orders on a timely
basis could have a material adverse effect on the Company.
The Company does not have long-term contracts with its third-party
manufacturers. Although the Company believes it would be able to secure other
third-party manufacturers to produce its products as a result of its ownership
of the molds and tools used in the manufacturing process, the Company's
operations would be adversely affected if it lost its relationship with any of
its current suppliers (including particularly its China-based manufacturer of
die-cast products, which produced products constituting approximately 90% of the
Company's sales in fiscal 1996) or if its current suppliers' operations or sea
or air transportation with its China-based die-cast manufacturer were disrupted
or terminated even for a relatively short period of time. The Company does not
maintain an inventory of sufficient size to provide protection for any
significant period against an interruption of supply, particularly if it were
required to utilize alternative sources of supply.
As a result of its recent acquisitions of Sports Image and Motorsport
Traditions, the Company anticipates that a substantial portion of its revenue in
fiscal 1997 will be derived from sales of licensed apparel, souvenirs, and other
consumer products. Most of the manufacturers of these products are located in
the United States, and the Company
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believes that a number of alternative sources for each of these products is
readily available in the event that the Company is unable to obtain products
from any particular manufacturer.
International Trade, Exchange, and Financing
The Company obtains its die-cast collectibles and other replicas under
a manufacturing arrangement with a third-party manufacturer in the Peoples'
Republic of China ("China"). The Company believes that production of its
die-cast products overseas enables the Company to obtain these items on a cost
basis that enables the Company to market them profitably. The Company's reliance
on the third-party manufacturer to provide personnel and facilities in China,
and the Company's maintenance of equipment and inventories abroad, expose it to
certain economic and political risks, including the business and financial
condition of the third-party manufacturer, political and economic conditions
abroad, and the possibility of expropriation, supply disruption, currency
controls, and exchange fluctuations as well as changes in tax laws, tariffs, and
freight rates. Protectionist trade legislation in either the United States or
foreign countries, such as a change in the current tariff structures, export
compliance laws, or other trade policies, could adversely affect the Company's
ability to purchase its products from foreign suppliers or the price at which
the Company can obtain those products. The Company has not experienced any
significant interruptions in obtaining its die-cast products from the
third-party manufacturer to date.
All of the Company's purchases from its foreign manufacturer are
denominated in United States dollars. As a result, the foreign manufacturer
bears any risks associated with exchange rate fluctuations subsequent to the
date the Company places its orders with the manufacturer. Purchases of die-cast
products from the foreign manufacturer generally require the Company to provide
an international letter of credit in an amount equal to the purchase order.
Although the Company currently has in place financing arrangements in an amount
that it considers adequate for anticipated purchase levels, the inability to
fund any letter of credit required by a supplier would have an adverse impact on
the Company's operations.
Under the terms of its license agreement with Hasbro, Hasbro's royalty
payments to the Company for sales by Hasbro in foreign countries are based on
the exchange rates in effect on the last day of the calendar quarter for which
such royalties are owed. As a result, the Company bears any risks that may be
associated with exchange rate fluctuations between the date on which Hasbro
records overseas sales of products subject to the license agreement and the last
day of the calendar quarter in which the sales are made. The Company does not
currently believe that overseas sales of products by Hasbro will represent a
material percentage of the Company's total revenue. As a result, the Company
does not currently anticipate that it will engage in hedging transactions
intended to offset potential adverse consequences of exchange rate fluctuations
with respect to royalty payments due from Hasbro for sales in foreign countries.
Dependence on New Products
The Company's operating results depend to a significant extent on its
ability to continue to develop and introduce new products on a timely basis that
compete effectively on the basis of price and that address customer tastes,
preferences, and requirements. The success of new product introductions depends
on various factors, including proper new product selection, successful sales and
marketing efforts, timely production and delivery of new products, and consumer
acceptance of new products. There can be no assurance that any new products will
receive or maintain substantial market acceptance. The failure of the Company to
design, develop, and introduce popular products on a timely basis would
adversely affect its future operating results. See "Business - Products and
Services."
Management of Growth
Since 1993, the Company's business operations have undergone
significant changes and growth, including its emphasis on and the expansion of
its collectible product lines, acquisition of its motorsports consumer products
lines, and significant investments in tooling. The Company's ability to manage
effectively any significant future growth, however, will require it to integrate
successfully the operations of Sports Image and Motorsport Traditions with the
Company's operations and to further enhance its operational, financial, and
management systems; to expand its facilities
10
<PAGE>
and equipment; to receive products from third-party manufacturers on a timely
basis; and to successfully hire, train, retain, and motivate additional
employees. The failure of the Company to manage its growth on an effective basis
could have a material adverse effect on the Company's business, financial
condition, and operating results. The Company may be required to increase
staffing and other expenses as well as make expenditures on capital equipment
and manufacturing sources in order to meet the anticipated demand of its
customers. Sales of the Company's collectible and consumer products are subject
to changing consumer tastes, and customers for the Company's promotional items
generally do not commit to firm orders for more than a short time in advance.
The Company's profitability would be adversely affected if the Company increases
its expenditures in anticipation of future orders that do not materialize.
Certain customers also may increase orders for the Company's products on short
notice, which would place an excessive short-term burden on the Company's
resources.
Dependence on Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management, including Fred W. Wagenhals, the Company's
Chairman of the Board, President, and Chief Executive Officer. The loss of
services of one or more of its key employees, particularly Mr. Wagenhals, could
have a material adverse effect on the Company. The Company maintains key person
insurance on the life of Mr. Wagenhals in the amount of $3,000,000. The Company
does not maintain such insurance on any of its other officers. See "Management."
Control by Management
The directors and officers of the Company currently own approximately
17.5% of the Company's outstanding Common Stock. See "Principal and Selling
Shareholders."
Possible Volatility of Stock Price
The market price of the Company's Common Stock has fluctuated
significantly since its initial public offering in April 1993. See "Price Range
of Common Stock." The trading price of the Company's Common Stock in the future
could be subject to wide fluctuations in response to quarterly variations in
operating results of the Company, actual or anticipated announcements of new
products by the Company or its competitors, changes in analysts' estimates of
the Company's financial performance, general conditions in the markets in which
the Company competes, worldwide economic and financial conditions, and other
events or factors. The stock market also has experienced extreme price and
volume fluctuations that have particularly affected the market prices for many
rapidly expanding companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may adversely affect the market price of the Company's Common Stock.
Litigation
The Company is one of approximately 30 defendants in a lawsuit in which
the state of Arizona seeks recovery of certain clean-up costs under federal and
state environmental laws. The Company also is a defendant in a lawsuit alleging
breach of contractual duties and appropriation of certain business opportunities
of a dissolved corporation. The Company is actively defending these lawsuits. In
the event a decision adverse to the Company is rendered in either of these
lawsuits, the resolution of such matter could have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business - Litigation."
Rights to Acquire Shares; Potential Issuance of Additional Shares
As of February 28, 1997, options to acquire a total of 1,014,305 shares
were outstanding under the Company's 1993 Stock Option Plan (the "1993 Plan").
During the terms of such options, the holders thereof will have the opportunity
to profit from an increase in the market price of Common Stock with resulting
dilution in the interests of holders of Common Stock. The existence of such
stock options could adversely affect the terms on which the Company can obtain
additional financing, and the holders of such options can be expected to
exercise such options at a time when
11
<PAGE>
the Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such options.
Shares Eligible for Future Sale; Potential Depressive Effect on Stock Price
Of the 13,703,485 shares of Common Stock currently outstanding,
10,281,512 shares are eligible for resale in the public market without
restriction unless held by an "affiliate" of the Company, as that term is
defined under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 3,421,973 shares of Common Stock currently outstanding are "restricted
securities," as that term is defined in Rule 144 under the Securities Act, and
may be sold only in compliance with Rule 144, pursuant to registration under the
Securities Act, or pursuant to an exemption therefrom. An aggregate of 1,056,516
shares of such "restricted securities" covered by this Prospectus are being
registered for resale pursuant to the Registration Statement of which this
Prospectus forms a part or have been registered for resale under another
Registration Statement to which this Prospectus relates. Affiliates also are
subject to certain of the resale limitations of Rule 144 as promulgated under
the Securities Act. Generally, under Rule 144, each person who beneficially owns
restricted securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or an
affiliate of the Company may, every three months, sell in ordinary brokerage
transactions or to market makers an amount of shares equal to the greater of 1%
of the Company's then-outstanding Common Stock or the average weekly trading
volume for the four weeks prior to the proposed sale of such shares. Recent
changes to Rule 144, which go into effect in April 1997, will reduce the
two-year holding period to one year. An aggregate of 2,365,456 shares held by
certain officers and directors currently are available for sale under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the Company, or
even the potential for such sales, are likely to have a depressive effect on the
market price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. See "Description of
Securities - Shares Eligible for Future Sale."
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not currently anticipate that it will pay dividends in the foreseeable
future. Instead, the Company intends to apply its earnings to the expansion and
development of its business. See "Dividend Policy."
Change in Control Provisions
The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles"), Amended and Restated Bylaws (the "Restated Bylaws"), and
Arizona law contain provisions that may have the effect of making more difficult
or delaying attempts by others to obtain control of the Company, even when those
attempts may be in the best interests of shareholders. The Restated Articles
also authorize the Board of Directors, without shareholder approval, to issue
one or more series of Preferred Stock, which could have voting, liquidation,
dividend, conversion, or other rights that adversely affect or dilute the voting
power of the holders of Common Stock. See "Description of Securities."
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Prospectus under
the headings "Business," "Risk Factors," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," concerning future,
proposed, and anticipated activities of the Company, certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the motorsports
industry in general, and other statements contained in this Prospectus regarding
matters that are not historical facts are forward-looking statements, as such
term is defined in the Securities Act. Forward-looking statements, by their very
nature, include risks and uncertainties, many of which are beyond the Company's
control. Accordingly, actual results may differ, perhaps materially, from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include those discussed elsewhere
under "Risk Factors."
12
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds of sales of shares of
Common Stock by the Selling Shareholders.
DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, capital requirements,
financial condition, and other relevant factors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996.
<TABLE>
<CAPTION>
December 31, 1996
(unaudited)
<S> <C>
Long-Term Debt
Notes payable to banks and long-term debt(1)............................................ $24,898,711
===========
Shareholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized; no shares outstanding....... --
Common stock, $.01 par value, 25,000,000 shares authorized;
13,107,462 shares issued and outstanding(2)(3)....................................... 131,075
Additional paid-in capital(3)........................................................... 24,284,723
Retained earnings....................................................................... 9,447,191
-----------
Total shareholders' equity(3)........................................................... $33,862,989
===========
</TABLE>
- -----------------
(1) Amounts shown as of December 31, 1996 include the $24.0 million
promissory note issued to the sellers of Sports Image. In January 1997,
the Company issued an aggregate of $20.0 million in principal amount of
senior notes and entered into a new $16.0 million credit facility. The
Company used the proceeds from the sale of the senior notes and a
portion of the new credit facility to repay the promissory note issued
to the sellers of Sports Image. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources."
(2) Excludes (i) 1,014,305 shares of Common Stock reserved for issuance
upon exercise of stock options outstanding as of December 31, 1996, and
(ii) 301,450 shares reserved for issuance upon the exercise of stock
options that may be granted in the future under the Company's 1993
Stock Option Plan. The Company is seeking shareholder approval to
increase the options that may be granted under the 1993 Stock Option
Plan from 2,000,000 to 2,750,000 shares. See "Management - 1993 Stock
Option Plan."
(3) Excludes (i) 342,857 shares of Common Stock issued subsequent to
December 31, 1996 as a result of the acquisition of Motorsport
Traditions, (ii) 187,500 shares of Common Stock issued subsequent to
December 31, 1996 in one private placement, and (iii) an aggregate of
65,666 shares of Common Stock issued subsequent to December 31, 1996
upon exercise of stock options. See "Private Placements."
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National
Market under the symbol "ACTN" since April 27, 1993. The following table sets
forth the quarterly high and low closing sale prices of the Company's Common
Stock on the Nasdaq National Market for the calendar periods indicated, as
adjusted to reflect the two-for-one stock split effected as a stock dividend on
May 28, 1996:
High Low
---- ---
1993:
Second Quarter...................................... $3.50 $2.50
Third Quarter....................................... 3.25 2.25
Fourth Quarter...................................... 2.78 1.50
1994:
First Quarter....................................... $2.31 $1.63
Second Quarter...................................... 2.25 1.81
Third Quarter....................................... 2.25 1.84
Fourth Quarter...................................... 2.97 2.19
1995:
First Quarter....................................... $3.63 $2.44
Second Quarter...................................... 4.56 3.25
Third Quarter....................................... 9.19 4.25
Fourth Quarter...................................... 9.63 6.25
1996:
First Quarter....................................... $11.31 $6.44
Second Quarter...................................... 19.75 10.81
Third Quarter....................................... 14.34 10.63
Fourth Quarter ..................................... 18.75 13.63
1997:
First Quarter (through February 28, 1977)........... $24.25 $17.00
As of February 28, 1997, there were 162 holders of record and
approximately 5,000 beneficial owners of the Company's Common Stock. On February
28, 1997, the closing sales price of the Company's Common Stock on the Nasdaq
National Market was $21.50 per share.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data presented below as of and for
the three years ended September 31, 1996 are derived from the Company's
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected historical financial data as
of and for the three months ended December 31, 1995 and 1996 are derived from
the Company's unaudited financial statements as incorporated by reference
herein. The historical financial data for the three months ended December 31,
1995 and 1996, in the opinion of management, include all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair presentation for
such periods. The historical results of operations for the three months ended
December 31, 1996 are not necessarily indicative of results to be expected for
the year ended September 30, 1997. These selected financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and the notes thereto incorporated by reference herein.
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year Ended September 30, December 31,
------------------------------- ------------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Income:
Sales:
Collectible sales, net ................ $ 12,802 $ 23,443 $ 40,904 $ 7,697 $ 9,922
Apparel and souvenir sales, net(1) .... 143 1,190 1,961 309 5,253
Promotional sales, net(2) ............. 3,339 1,498 1,351 -- --
M-Car sales, net(3) ................... 585 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net sales ........................... 16,869 26,131 44,216 8,006 15,175
Cost and expenses:
Cost of sales ......................... 10,488 15,882 25,296 4,764 8,780
Selling, general and administrative ... 5,808 6,119 9,266 1,872 3,552
------------ ------------ ------------ ------------ ------------
Operating income ......................... 573 4,130 9,654 1,370 2,843
Interest income (expense) and other, net . (164) 24 216 93 (229)
------------ ------------ ------------ ------------ ------------
Income before benefit from (provision for)
income taxes .......................... 409 4,154 9,870 1,463 2,614
Benefit from (provision for) income taxes 224 (1,384) (3,917) (585) (1,046)
------------ ------------ ------------ ------------ ------------
Net income ............................... $ 633 $ 2,770 $ 5,953 $ 878 $ 1,568
============ ============ ============ ============ ============
Earnings per common share and
common share equivalent(4) ............ $ 0.08 $ 0.25 $ 0.46 $ 0.07 $ 0.12
============ ============ ============ ============ ============
Weighted average number of common
shares and common share equivalents
outstanding(4) ........................ 9,639,946 11,570,046 13,069,380 12,839,544 13,476,148
Consolidated Balance Sheet Data
(at end of period):
Working capital .......................... $ 5,699 $ 11,922 $ 18,094 $ 12,199 $ 21,966
Total assets ............................. 11,656 23,351 31,649 23,920 66,207
Notes payable and long-term debt ......... 61 288 365 461 24,899
Shareholders' equity ..................... 6,909 18,890 26,996 20,070 33,863
</TABLE>
- -----------------
(1) Includes the results of operations acquired from Fan Fueler, Inc.
beginning as of the effective date of the acquisition on August 12,
1994 and the results of operations of Sports Image, which the Company
acquired on November 7, 1996. See "Business - Development of the
Company."
(2) The Company sold the assets and liabilities related to its mini vehicle
operations and discontinued its mini vehicle operations in March 1995.
See "Business - Development of the Company."
(3) The Company sold the assets and liabilities related to its M-CarTM
operations and discontinued its M-CarTM operations in September 1994.
See "Business - Development of the Company."
(4) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996. Excludes (i) 342,857 shares of Common Stock
issued subsequent to December 31, 1996 as a result of the acquisition
of Motorsport Traditions, (ii) 187,500 shares of Common Stock issued
subsequent to December 31, 1996 in one private placement, and (iii) an
aggregate of 65,666 shares issued subsequent to December 31, 1996 upon
exercise of stock options. See "Private Placements."
15
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Introduction
The following unaudited pro forma combined financial information of the
Company for the fiscal year ended September 30, 1996 and the three months ended
December 31, 1996 give effect to the acquisitions of Sports Image and Motorsport
Traditions. The unaudited pro forma combined balance sheet as of December 31,
1996 gives effect to the acquisition of Motorsport Traditions as if it had
occurred on December 31, 1996. The unaudited pro forma combined statements of
operations for each of the fiscal years ended September 30, 1996 and the three
months ended December 31, 1996 assume that the acquisitions of Sports Image and
Motorsport Traditions were completed on October 1, 1995. The unaudited pro forma
combined financial information presented herein does not purport to represent
what the Company's actual results of operations would have been had the
acquisitions of Sports Image and Motorsport Traditions occurred on those dates
or to project the Company's results of operations for any future period.
Unaudited Pro Forma Combined Balance Sheet
As of December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Adjusted
Acquired Total Pro Forma Pro Forma
The Company Companies(1) Combined Adjustments Combined
----------- ------------ -------- ----------- --------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets
Cash............................. $ 6,078 $ 63 $ 6,141 $(1,400) (2) $ 4,741
Accounts receivable............... 9,038 2,787 11,825 -- 11,825
Inventories....................... 8,757 4,754 13,511 -- 13,511
Deferred income taxes............. 1,032 -- 1,032 -- 1,032
Prepaid royalties................. 3,773 -- 3,773 -- 3,773
Prepaid expenses and other assets. 733 142 875 (64) (3) 811
-------- -------- -------- ------- -------
Total current assets.......... 29,411 7,746 37,157 (1,464) 35,693
Property, Plant, and Equipment........ 9,582 1,687 11,269 -- 11,269
Notes Receivable and Other Assets..... 1,017 -- 1,017 -- 1,017
Goodwill.............................. 26,197 -- 26,197 5,313 (2) 31,510
-------- -------- -------- ------- -------
Total assets.................. $ 66,207 $ 9,433 $ 75,640 $ 3,849 $79,489
========== ======== ======== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.................. $ 2,581 $ 1,746 $ 4,327 -- $ 4,327
Accrued royalties and other....... 2,872 471 3,343 615 (2) 3,958
Income taxes payable.............. 1,073 -- 1,073 -- 1,073
Current portion of notes payable.. 919 171 1,090 686 (2) 1,776
Line of credit.................... -- -- -- 4,000 (2) 4,000 (2)
-------- -------- -------- ------- -------
Total current liabilities..... 7,445 2,388 9,833 5,301 15,134
Long-Term Debt
Other long-term debt.............. 899 11 910 -- 910
Notes payable..................... 24,000 -- 24,000 850 (2) 24,850
-------- -------- -------- ------- -------
Total long-term debt.......... 24,899 11 24,910 850 25,760
Shareholders' Equity
Net equity of Motorsport Traditions -- 7,034 7,034 (7,034) (3) --
Common stock...................... 131 -- 131 4 (2) 135
Additional paid-in capital........ 24,285 -- 24,285 4,728 (2) 29,013
Retaining earnings................ 9,447 -- 9,447 -- 9,447
-------- -------- -------- ------- -------
Total shareholders' equity.... 33,863 7,034 40,897 (2,302) 38,595
-------- -------- -------- ------- -------
Total liabilities and
shareholders' equity........ $ 66,207 $ 9,433 $ 75,640 $ 3,849 $79,489
========== ======== ======== ======= =======
</TABLE>
- ----------------------
(1) Reflects the fair value of the assets of Motorsport Traditions acquired
and liabilities assumed from Motorsport Traditions based on the
historical balance sheet as of November 30, 1996.
(2) Reflects the fair value of the cash, the shares of Common Stock, and
the promissory note issued to the sellers of Motorsport Traditions, the
fair value of assets acquired and liabilities assumed from Motorsport
Traditions, and other acquisition-related costs.
(3) Reflects the elimination of intercompany balances.
16
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
for the Fiscal Year Ended September 30, 1996
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Adjusted
Acquired Total Pro Forma Pro Forma
The Company Companies(1) Combined Adjustments Combined
----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 44,216 $ 78,640 $ 122,856 $ (11,229) (2) $ 111,627
Cost of sales....................... 25,296 56,329 81,625 (11,229) (2) 70,396
--------- -------- ---------- -------- ---------
Gross profit.................... 18,920 22,311 41,231 -- 41,231
Selling, general, and
administrative expenses......... 9,266 15,082 24,348 1,263 (3) 25,611
--------- -------- ---------- ---------- ---------
Income from operations.............. 9,654 7,229 16,883 (1,263) 15,620
Other income (expense), net......... 216 (1,031) (815) (2,311) (4) (3,126)
--------- -------- ---------- ---------- ---------
Income before provision for
(benefit from) income taxes..... 9,870 6,198 16,068 (3,574) 12,494
Provision for (benefit from)
income taxes.................... 3,917 -- 3,917 1,063 (5) 4,980
--------- -------- ---------- ---------- ---------
Net income...................... $ 5,953 $ 6,198 $ 12,151 $ (4,637) $ 7,514
========= ======== ========== =========== =========
Pro forma earnings per common
share........................... $ 0.54
=========
Weighted average common and
common equivalent shares
outstanding..................... 13,815,598
==========
</TABLE>
- ----------------------
(1) Reflects the historical operations of Sports Image and Motorsport
Traditions.
(2) Reflects the elimination of intercompany sales.
(3) Reflects the amortization of goodwill associated with the acquisitions
of Sports Image and Motorsport Traditions.
(4) Reflects additional interest expense associated with the financing of
the acquisitions of Sports Image and Motorsport Traditions.
(5) Reflects the additional income tax provision based on applying the pro
forma estimated effective income tax rate of the Company to the
combined companies.
17
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
for the Three Months Ended December 31, 1996
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Adjusted
Acquired Total Pro Forma Pro Forma
The Company Companies(1) Combined Adjustments Combined
----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 15,175 $ 12,254 $ 27,429 $ (1,050) (2) $ 26,379
Cost of sales....................... 8,780 9,487 18,267 (1,050) (2) 17,217
--------- -------- -------- ------- --------
Gross profit.................... 6,395 2,767 9,162 -- 9,162
Selling, general, and
administrative expenses......... 3,552 2,410 5,962 163 (3) 6,125
--------- -------- -------- -------- --------
Income from operations.............. 2,843 357 3,200 (163) 3,037
Other income (expense), net......... (229) (331) (560) (296) (4) (856)
--------- -------- -------- --------- --------
Income before provision for
(benefit from) income taxes..... 2,614 26 2,640 (459) 2,181
Provision for (benefit from)
income taxes.................... 1,045 -- 1,045 (175) (5) 870
--------- -------- -------- -------- --------
Net income...................... $ 1,569 $ 26 $ 1,595 $ (284) $ 1,311
========= ======== ======== ========= ========
Pro forma earnings per common
share........................... $ 0.09
========
Weighted average common and
common equivalent shares
outstanding..................... 13,989,995
==========
</TABLE>
- --------------------
(1) Reflects the historical operations of Sports Image through the
acquisition date of November 7, 1996, and the historical operations of
Motorsport Traditions through December 31, 1996.
(2) Reflects the elimination of intercompany sales.
(3) Reflects the amortization of goodwill associated with the acquisition
of Sports Image through the acquisition date of November 7, 1996, and
the acquisition of Motorsport Traditions through December 31, 1996.
(4) Reflects additional interest expense associated with the financing of
the acquisition of Sports Image through the acquisition date of
November 7, 1996, and the acquisition of Motorsport Traditions through
December 31, 1996.
(5) Reflects the additional income tax provision based on applying the pro
forma estimated effective income tax rate of the Company to the
combined companies.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company designs and markets collectible die-cast and pewter
miniature replicas of motorsports vehicles and designs and markets licensed
apparel, souvenirs, and other motorsports consumer items, including t-shirts,
hats, jackets, mugs, key chains, and drink bottles. The Company also represents
popular race car drivers in a broad range of licensing and other
revenue-producing opportunities, including product licenses, corporate
sponsorships, endorsement contracts, and speaking engagements, and develops
marketing and product promotional programs for corporate sponsors of motorsports
that feature the Company's die-cast replicas or other products as premium awards
intended to increase brand awareness of the products or services of the
corporate sponsors. The Company's motorsports collectibles and consumer products
are manufactured by third parties, generally utilizing the Company's designs,
tools, and dies.
The Company was incorporated in Arizona in May 1992 and began marketing
die-cast collectibles in July 1992. In August 1994, the Company acquired certain
assets and liabilities of Fan Fueler, Inc. and began marketing product lines of
licensed motorsports consumer products. During fiscal 1994, the Company also
conducted the business of staging turn-key M-CarTM Grand Prix Races for
charitable and other organizations, in which participating sponsors purchased
specialized gas-powered, one-third scale racing vehicles from the Company. In
September 1994, the Company sold the assets and liabilities related to its
M-CarTM operations and discontinued its M-CarTM Grand Prix Race operations.
During fiscal 1994 and the first two quarters of fiscal 1995, the Company
designed and marketed pedal, electric, and gas-powered mini vehicles, primarily
as specialty promotional items. The Company sold the assets related to its mini
vehicle operations in March 1995. In November 1996, the Company acquired the
business of Sports Image and in January 1997, the Company acquired the business
of Motorsport Traditions, both of which market and distribute licensed
motorsports apparel and other souvenir items.
Results of Operations of the Company for the Three Months Ended December 31,
1995 and 1996
The Company had net income of $1,568,000, or $0.12 per share, for the
three months ended December 31, 1996 compared with net income of $878,000, or
$0.07 per share, for the three months ended December 31, 1995. The Company
attributes the improvement in net income during the first quarter of fiscal 1997
primarily to (i) additional revenue provided by Sports Image, which the Company
acquired in November 1996; (ii) growth in the motorsports collectible market and
the capture of additional market share, which enabled the Company to produce and
sell increased quantities of collectibles; and (iii) increased sales as a result
of growth in the Company's retail collectors' club, which provides higher gross
margins.
During the three months ended December 31, 1995 and 1996, sales were
$8,006,000 and $15,175,000, respectively. The $7,169,000, or 90%, increase in
sales resulted from an increase of $4,945,000 in apparel and souvenir sales and
a $2,224,000 increase in collectible sales. The increase in apparel and souvenir
sales is a result of the business activities of Sports Image, which the Company
acquired in November 1996. The increase in collectible sales is primarily
attributable to the continued growth in the motorsports collectible market and
the Company's ability to satisfy consumer demand for high-quality collectibles.
Cost of sales increased to $8,780,000 for the three months ended
December 31, 1996 compared with $4,765,000 for the three months ended December
31, 1995, representing 58% and 60% of net sales, respectively. The decrease in
cost of sales as a percentage of sales resulted primarily from (i) higher gross
margins associated with increased sales through the Company's retail collectors'
club and (ii) the effect of higher sales volume on fixed cost components of cost
of sales, primarily depreciation charges related to the Company's tooling
equipment. The decrease in cost of sales as a percentage of sales for the three
months ended December 31, 1996, was partially offset
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by the increase of apparel and souvenir sales, which provide lower margins than
sales of the Company's collectible products.
During the three months ended December 31, 1995 and 1996, selling,
general, and administrative expenses were $1,872,000 and $3,552,000,
respectively, representing 23% of net sales during each of the periods. The
increase in such expenses resulted from the operating expenses of Sports Image,
which the Company acquired in November 1996, and increased expenditures in sales
and marketing, particularly increased advertising consistent with the Company's
strategy to increase collectors' club memberships and distributor sales.
Interest expense increased to $301,000 for the three months ended
December 31, 1996 compared with $8,000 for the three months ended December 31,
1995. The increase in interest expense resulted from accrued interest on notes
payable issued for the acquisition of Sports Image in November 1996.
Results of Operations of the Company for the Years Ended September 30, 1995 and
1996
The Company had net income of $5,953,000, or $0.46 per share, for the
year ended September 30, 1996 compared with net income of $2,770,000, or $0.25
per share, for the year ended September 30, 1995. The Company attributes the
improvement in net income during fiscal 1996 primarily to (i) growth in the
motorsports collectible market and the capture of additional market share, which
enabled the Company to produce and sell increased quantities of collectibles;
(ii) increased sales as a result of growth in the Company's retail collector
club, which provides higher gross margins; and (iii) increased sales as a result
of the successful introduction of several new and exclusive licensing programs
for die-cast and pewter collectible product lines in fiscal 1996.
During the years ended September 30, 1995 and 1996, sales were
$26,131,000 and $44,216,000, respectively. The $18,085,000, or 69%, increase in
sales resulted from an increase of $17,461,000 in collectible sales, an increase
of $771,000 in motorsports consumer products sales, and a decrease of $147,000
in promotional sales.
The increase in collectible sales is primarily attributable to the
continued growth in the motorsports collectible market and the Company's ability
to satisfy consumer demand for high-quality collectibles. The Company continues
to realize sales increases from recently introduced product lines, which include
pewter replica vehicles and NHRA drag racing die-cast replicas. The decrease in
promotional sales is attributable to the sale of the Company's mini vehicle
operations in the second quarter of fiscal 1995, which was substantially offset
by sales of $1,351,000 from the Company's new promotional program featuring the
Company's die-cast replicas.
Cost of sales increased from $15,882,000 in fiscal 1995 to $25,296,000
in fiscal 1996, representing 61% and 57% of net sales during those years,
respectively. The decrease in cost of sales as a percentage of sales resulted
primarily from (i) the effect of higher sales volume on fixed cost components of
cost of sales, primarily depreciation charges related to the Company's tooling
equipment, and (ii) higher gross margins associated with increased sales through
the Company's retail collectors' club.
Selling, general, and administrative expenses increased from $6,119,000
in fiscal 1995 to $9,266,000 in fiscal 1996, representing 23% and 21% of net
sales during those years, respectively. The increase in such expenses resulted
from increased expenditures in sales and marketing, particularly increased
advertising consistent with the Company's strategy to increase collector club
memberships and distributor sales.
Interest and other income increased from approximately $24,000 in
fiscal 1995 to approximately $216,000 in fiscal 1996. The increase resulted
primarily from the decrease in interest expense from $184,000 in fiscal 1995 to
$79,000 in fiscal 1996. The decrease in interest expense resulted primarily from
the conversion of the 10% Convertible Subordinated Debentures (the "Debentures")
into shares of the Company's Common Stock during fiscal 1995.
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The provision for income taxes in fiscal 1995 resulted in an effective
tax rate of approximately 33.0% compared with an effective tax rate of
approximately 40.0% in fiscal 1996. The increase in the effective tax rate
occurred primarily as a result of the utilization of net operating loss
carryforwards in fiscal 1995.
Results of Operations of the Company for the Years Ended September 30, 1994 and
1995
The Company had net income of $2,770,000, or $0.25 per share, for the
year ended September 30, 1995 compared with net income of $633,000, or $.08 per
share, for the year ended September 30, 1994. The Company attributes the
improvement in net income during fiscal 1995 primarily to (i) increased sales as
a result of the successful introduction of several new and exclusive licensing
programs and die-cast and pewter collectible product lines in fiscal 1995; (ii)
the completion of the transition to the Company's new overseas manufacturer,
which began shipping sufficient quantities of high-quality die-cast collectibles
during the third quarter of fiscal 1995 to meet the increased demand for the
Company's products; and (iii) an aggressive program designed to restructure
management, reduce overhead and operating costs, and increase revenue that was
implemented beginning in fiscal 1994.
During the years ending September 30, 1994 and 1995, sales were
$16,869,000 and $26,131,000, respectively. The $9,262,000, or 55%, increase in
sales resulted from an increase of $10,641,000 in collectible sales, an increase
of $1,047,000 in motorsports consumer products sales, a decrease of $1,841,000
in promotional sales, and a decrease of $585,000 in M-CarTM sales.
The increase in collectible sales resulted from an increase in the
number of members in the Company's collector club from approximately 22,000 to
approximately 40,000 members at September 30, 1994 and 1995, respectively,
increased demand from the Company's wholesale distributors, and the
implementation of several new die-cast collectible sales programs. In fiscal
1995, the Company introduced a new collectible line of miniature replica
vehicles that are constructed of pewter. Sales of pewter miniature replica
vehicles totalled approximately $1,050,000 in fiscal 1995. The decrease in
promotional sales is attributable to the sale of the Company's mini vehicle
operations in the second quarter of fiscal 1995 and discontinuance of a large
promotional program in fiscal 1995 that contributed approximately $2,699,000 of
sales in fiscal 1994. The decrease in M-Car sales resulted from the September
1994 sale of the assets related to the Company's business of conducting M-Car
Grand Prix Races. The Company's motorsports consumer product line, acquired in
August 1994, contributed sales of approximately $1,190,000 during fiscal 1995.
During the years ended September 30, 1994 and 1995, cost of sales
increased from $10,488,000 to $15,882,000, representing 62% and 61%,
respectively, of net sales. The decrease in cost of sales as a percentage of
sales resulted from sales price increases combined with decreases in the unit
costs of certain die-cast collectibles as a result of the transition to the
Company's new third-party manufacturer and increased purchase volume. The
increased sales prices were consistent with the Company's marketing strategy,
implemented in fiscal 1994, to position the die-cast collectible line as a
limited production collectible.
During the years ended September 30, 1994 and 1995, selling, general
and administrative expenses increased from $5,808,000 to $6,119,000,
representing 34% and 23%, respectively, of net sales. The increase in such
expenses resulted from increased expenditures in sales and marketing,
particularly sales commissions and advertising, consistent with the Company's
strategy to increase collector club membership and distributor sales. These
increases were substantially offset by reductions in staff, officer, and
administrative salaries as a result of the management changes and reductions
commenced in the second quarter of fiscal 1994. Additionally, the Company
experienced a reduction in operating costs, beginning in the third quarter of
fiscal 1994, associated with the consolidation of the Company's operations from
Florida, Georgia, and two locations in Arizona to a single facility in Tempe,
Arizona.
Interest expense decreased from $215,000 to $184,000, respectively,
during the years ended September 30, 1994 and 1995. The decrease in interest
expense resulted primarily from the conversion of the Debentures into shares of
the Company's Common Stock prior to May 31, 1995.
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Pro Forma Results of Operations
The Company had pro forma net income for the year ended September 30,
1996 of $7,514,000, or $0.54 per share, compared with actual net income of
$5,953,000, or $0.46 per share. The pro forma results do not account for
efficiencies gained upon the consolidation of operations, including the
elimination of duplicative functions and reduction of salaries expense and other
related costs. The Company expects to achieve higher margins through the
combination of purchasing functions of the acquired companies, including the
ability to purchase larger volumes at a lower cost per unit.
The Company had pro forma net income for the three months ended
December 31, 1996 of $1,311,000, or $0.09 per share, compared with actual net
income of $1,569,000, or $0.12 per share. The difference in earnings per share
on a pro forma basis for the three months ended December 31, 1996 is primarily
attributable to lower gross margins as a result of the liquidation of inventory
following the end of the 1996 racing season. The Company expects to achieve
higher gross margins through the combination of purchasing functions of the
acquired companies, including the ability to purchase larger volumes at a lower
cost per unit. In addition, the Company intends to improve the management and
control of inventories at the acquired companies in order to increase gross
margins by reducing the need for seasonal adjustments to inventory.
The pro forma results of operations for the year ended September 30,
1996 and the three months ended December 31, 1996 reflect the amortization of
goodwill arising from the acquisitions of Sports Image and Motorsport Traditions
and includes additional interest expense associated with the financing of these
acquisitions.
Seasonality
Sales of collectibles and motorsports consumer products historically
have been lowest in the fourth calendar quarter, corresponding with the end of
the racing season. The Company believes, however, that holiday sales of its
products are increasing, which has the effect of reducing seasonal fluctuations
in its sales.
Liquidity and Capital Resources
The Company's working capital position increased to $21,966,000 at
December 31, 1996 from $18,094,000 at September 30, 1996. The increase of
$3,872,000 is primarily attributable to the Company's results of operations and
working capital acquired from the purchase of Sports Image by the Company in
November 1996.
The Company's operations provided net cash of approximately $990,000
during the three months ended December 31, 1996. The major elements contributing
to net operating cash flow include earnings from operations and uses of cash
from (i) decrease in accounts payable related to the payments for inventories
received during the latter part of the fourth quarter of fiscal 1996, and (ii)
royalty advances paid on new and existing multi-year license agreements.
Investment in inventories has increased in response to continued growth
in sales through the Company's retail collectors' club and as a result of lower
than anticipated sales of the Corvette die-cast program introduced in the third
quarter of fiscal 1996. The Company has implemented several new plans to market
the Corvette product line, including the distribution of such products to
approximately 4,500 General Motors dealerships throughout the United States. The
Company also has reduced purchase commitments for future production of the
Corvette products until such time as it can determine the success of its current
marketing plans.
Capital expenditures for the fiscal year ended September 30, 1996
totalled approximately $3,879,000, of which approximately $2,649,000 was
utilized for the Company's continued investment in tooling. Capital expenditures
for the three months ended December 31, 1996 totalled approximately $1,022,000,
of which approximately $861,000 was utilized for the Company's continued
investment in tooling.
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During the three months ended December 31, 1996, the Company issued
94,332 shares of Common Stock upon the exercise of employee stock options,
resulting in total proceeds to the Company of approximately $418,000.
In May 1996, the Company entered into a new credit agreement with a
foreign bank. The credit agreement provided the Company's supplier of die-cast
collectible products with security for the Company's purchase orders, up to a
limit of $5.0 million, an increase of $1.5 million from the Company's previous
agreement. The agreement also provided for an import cash line of credit of $1.0
million, which enabled the Company to finance its imports for up to 90 days from
the date of shipment. As of December 31, 1996, there were no amounts outstanding
on the import cash line of credit. Total purchase commitments of approximately
$1,801,000 at December 31, 1996 were secured by the assets of the Company. In
January 1997, the Company entered into a new credit facility and issued senior
notes, as described below, to replace the previous credit agreement as well as
recent acquisition-related financing arrangements prior to their respective
expiration dates.
The Company is one of approximately 30 defendants in a lawsuit in which
the state of Arizona is seeking recovery of certain clean-up costs under federal
and state environmental laws. The Company is vigorously defending this lawsuit
on various bases, including that neither the Company nor any of its predecessors
has produced or arranged for the transportation of hazardous substances as
alleged by the state. The Company currently estimates the potential range of
loss to be between $400,000 and $800,000 in the event that its defense proves
unsuccessful. The Company has made no provision in its financial statements with
respect to this matter. See "Business - Litigation."
In December 1995, a lawsuit was instituted against the Company, the
Company's Chief Executive Officer, and others alleging that the Company, the
Company's Chief Executive Officer, and others breached contractual and other
duties and appropriated certain business opportunities of a dissolved Arizona
corporation. The Company is vigorously defending the lawsuit. The imposition of
damages in the case against the Company could have a material adverse effect on
the Company's earnings and liquidity. See "Business - Litigation."
In November 1996, the Company purchased substantially all of the assets
and assumed certain liabilities of Sports Image, Inc. The purchase price was
approximately $30,000,000, consisting of a $24,000,000 promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock. On January 2,
1997, the Company repaid the promissory note with the proceeds from the issuance
of senior notes and a portion of the borrowings under the credit facility
described below. Sports Image sells and distributes a variety of licensed
motorsports products through wholesale distributor networks, corporate sponsors,
and trackside events. The terms of this acquisition were determined by
arms-length negotiations between representatives of the sellers and
representatives of the Company. In fiscal 1996, the Company derived 16% of its
net sales from Sports Image, a distributor of the Company's die-cast collectible
products.
In January 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Motorsport Traditions Limited Partnership and
all of the capital stock of Creative Marketing & Promotions, Inc. (together,
"Motorsport Traditions") for approximately $13,000,000, consisting of cash in
the amount of $5,400,000, a promissory note in the principal amount of
$1,600,000, and an aggregate of 342,857 shares of the Company's Common Stock.
Motorsport Traditions sells and distributes licensed motorsports products
through a network of wholesale distributors, trackside events, and fan clubs.
The terms of the acquisitions were determined by arms-length negotiations
between representatives of the sellers and representatives of the Company. Prior
to the acquisition, Motorsport Traditions generated approximately $33,000,000 in
annual revenue from its design, manufacturing, and sales and distribution
activities.
On January 2, 1997, the Company entered into a $16,000,000 credit
facility with First Union National Bank of North Carolina (the "Credit
Facility"). The Credit Facility consists of a revolving line of credit for up to
$10,000,000 through September 30, 1997, and up to $6,000,000 from September 30,
1997 to March 31, 1998 (the "Line of Credit") and a $6,000,000 letter of
credit/bankers' acceptances facility (the "Letter of Credit/BA Facility"). The
Line of Credit bears interest, at the Company's option, at a rate equal to
either (i) the greater of (a) the bank's
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publicly announced prime rate or (b) a weighted average Federal Funds rate plus
0.5%, or (ii) LIBOR plus 1.9%. The Line of Credit is guaranteed by Sports Image
and Motorsport Traditions. The Company utilized $4,000,000 of the Line of Credit
to provide part of the cash portion of the purchase price for Motorsport
Traditions and an additional $4,000,000 of the Line of Credit to repay a portion
of the $24,000,000 promissory note issued in connection with the acquisition of
Sports Image. The Letter of Credit/BA Facility is available for issuances of
letters of credit and eligible bankers' acceptances in an aggregate amount up to
$6,000,000 to enable the Company to finance purchases of products from its
overseas vendors. The Credit Facility will mature on March 31, 1998. The Credit
Facility contains certain provisions that, among other things, require the
Company to comply with certain financial ratios and net worth requirements and
limit the ability of the Company and its subsidiaries to incur additional
indebtedness or to sell assets or engage in certain mergers or consolidations.
On January 2, 1997, the Company issued an aggregate of $20,000,000
principal amount of senior notes (the "Senior Notes") to three insurance
companies. The Senior Notes bear interest at the rate of 8.05% per annum,
provide for semi-annual payments of accrued interest, and will mature on January
2, 1999. The Company may not prepay the Senior Notes prior to maturity, but will
be required to offer to redeem the Senior Notes in the event of a "Change of
Control" of the Company, as defined in the Senior Notes. The Senior Notes
contain certain provisions that, among other things, require the Company to
comply with certain financial ratios and net worth requirements and limit the
ability of the Company and its subsidiaries to incur additional indebtedness or
to sell assets or engage in certain mergers on consolidations. The Senior Notes
are guaranteed by Sports Image and Motorsport Traditions. The Company utilized
the proceeds from the Senior Notes to repay the remainder of the promissory note
issued in connection with the acquisition of Sports Image.
The Company believes that its current cash resources, the Credit
Facility, and expected cash flow from operations will be sufficient to fund its
capital needs during the next 12 months at its current level of operations,
apart from capital needs resulting from any additional acquisitions. However,
the Company may be required to obtain additional capital to fund its planned
growth during the next 12 months and beyond, particularly to provide guarantees
under licensing arrangements or to obtain international letters of credit in
connection with purchase orders from its off-shore manufacturer of die-cast
collectibles. Potential sources of any such capital may include the proceeds
from the exercise of outstanding options, bank financing, strategic alliances,
and additional offerings of the Company's equity or debt securities. There can
be no assurance that such capital will be available from these or other
potential sources, and the lack of such capital could have a material adverse
affect on the Company's business.
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BUSINESS
Overview
The Company is a leader in the design and sale of motorsports
collectible and consumer products. The Company designs and markets collectible
die-cast and pewter miniature replicas of motorsports vehicles, designs and
markets licensed apparel, souvenirs, and other motorsports consumer items
(including t-shirts, hats, jackets, mugs, key chains, and drink bottles), and
licenses a line of motorsports-related products for sale in the mass merchandise
market. The Company also develops marketing and product promotional programs for
corporate sponsors of motorsports, which feature the Company's die-cast replicas
or other products as premium awards intended to increase brand awareness of the
products or services of the corporate sponsors, and represents popular race car
drivers in a broad range of licensing and other revenue-producing opportunities,
including product licenses, corporate sponsorships, endorsement contracts, and
speaking engagements. The Company markets its motorsports collectibles and
consumer items pursuant to license arrangements with popular race drivers, car
owners, car sponsors, and automobile manufacturers. The Company's motorsports
collectibles and consumer products are manufactured by third parties, generally
utilizing the Company's designs, tools, and dies.
The Company designs its products and other programs primarily to
capitalize on the growing interest in motorsports. The popularity of motorsports
with consumers has resulted in significant growth in the motorsports industry.
USA Today reports that motorsports racing is the fastest growing spectator sport
in the nation. According to The Wall Street Journal, approximately 5.3 million
fans attended the 31 races of the Nascar Winston Cup series in 1995. According
to USA Today, attendance at Winston Cup events has more than doubled in the past
decade, from 75,643 per event in 1985 to 180,260 in 1996. USA Today reports that
TV ratings are growing even faster, with more than 100 million people tuning in
to Nascar's televised events each year. A.C. Nielsen reports that, with the
exception of NFL football, Nascar Winston Cup telecasts score higher ratings
than any other sporting event aired by cable. USA Today indicates that recent
surveys report that 38% of Nascar fans are women; 65% own homes; 78% use credit
cards; and 53% are professionals, managers, or skilled workers. The Wall Street
Journal reported that sales of Nascar-licensed goods have grown ninefold during
the 1990s to more than $500 million per year and are expected to reach $1.0
billion by 1998. According to Nascar, 70 of the Fortune 500 companies utilize
motorsports sponsorship or advertising as part of their marketing strategies.
Historically, the Company has designed and marketed die-cast
collectibles featuring Nascar drivers and vehicles. In 1995, the Company began
expanding its lines of die-cast collectibles to include other types of
motorsports vehicles, including NHRA drag racing, Nascar's new "Super Truck"
racing series, dirt car racing, and sprint car racing. The Company focuses on
developing long-term relationships with and engages in comprehensive efforts to
license the most popular drivers in each top racing category as well as car
owners, car sponsors, car manufacturers, and others in these racing categories.
The Company has license agreements with many of the most popular drivers,
including seven-time Winston Cup champion Dale Earnhardt, 1995 Winston Cup
champion Jeff Gordon, and 1996 Winston Cup champion Terry Labonte, and six-time
NHCA Funny Car champion John Force. The Company continually strives to
strengthen its relationships with licensors and to develop opportunities to
market innovative collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with notable
Nascar and other motorsports personalities and sponsors significantly enhance
the collectible value and marketability of its products. The Company also
believes that drivers and other motorsports licensors increasingly recognize the
Company's ability to design, develop, and produce a broad range of high-quality
licensed products and to market those products through well-defined, organized,
and established distribution channels designed to maximize sales and
profitability.
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Strategy
The Company pursues a strategy designed to enable it to enhance its
leadership position in the motorsports collectible and consumer products
industry. Key aspects of this strategy include (i) continuing to enhance its
existing products and introduce new products that appeal to racing enthusiasts,
(ii) expanding and strengthening its licensing arrangements, (iii) pursuing
strategic acquisitions and alliances, (iv) investing in proprietary tooling, and
(v) providing a one-stop source for revenue opportunities for racing
personalities.
o Enhanced Products and New Product Offerings
The Company continually seeks to enhance its existing products and to
introduce new products that appeal to racing enthusiasts, including products for
sale exclusively through its collectors' club. The Company's ongoing investment
in proprietary tooling enables the Company to produce products with increasing
quality, expanded features, closer attention to detail, and more exacting
standards. The production of limited quantities of products available only from
the Company enhances the value of the Company's collectible products.
As a result of the Company's product development, licensing, and
acquisition programs, the Company also continually offers new products and
product lines. During the last two years, the Company has introduced a line of
limited edition, solid pewter race cars; expanded its lines of die cast
collectibles to include drag racing, Super Truck racing, dirt car racing, and
sprint car racing; expanded its consumer product offerings to include licensed
motorsports apparel, souvenir, and other consumer products; and entered the
retail mass-merchandise market through a license agreement with Hasbro. At the
same time, the Company has continued to expand its licensing rights across all
product lines.
o Expanding and Strengthening Licensing Arrangements
The Company continually strives to expand and strengthen its
relationships with existing licensors as well as to enter into licensing
arrangements with additional motorsports personalties in order to further
solidify its position as a leader in the motorsports marketplace. The Company
believes that its licensing arrangements with top race car drivers, car owners,
manufacturers, and corporate sponsors represent key assets that provide the
Company with a vital competitive advantage. These licensing arrangements enable
the Company to manufacture and distribute distinctive collectibles and other
products to the growing market of motorsports enthusiasts and to build market
share.
o Strategic Acquisitions or Alliances
The Company seeks to acquire existing businesses and enter into
strategic alliances when it believes the acquisition or alliance will enable the
Company to introduce new products or expand its product lines, to exploit or
expand its licensing arrangements, or to improve its distribution channels. In
evaluating a proposed acquisition candidate, the Company considers a number of
factors, including the quality of its management, its historical operating
results and future earnings potential, the size and anticipated growth of the
market it serves and its relative position in that market, and the competition
that exists in that market. When possible, the Company takes steps to enhance
the operating efficiencies of acquired businesses by eliminating duplicative
facilities, personnel, and functions; instituting management changes; improving
cost controls; and integrating systems for raw materials procurement, inventory
management, distribution efficiencies, and accounting procedures. Since August
1994, the Company has acquired Fan Fueler, Inc., Sports Image, and Motorsports
Traditions and entered into a strategic alliance with Hasbro. The Company plans
to consider additional acquisition and strategic alliance opportunities as they
arise.
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o Investing in Proprietary Tooling
The Company strives to produce high-quality collectible products that
represent more exact replicas than the Company's previous products or
collectibles sold by competitors. The Company believes that its ongoing
investment in tooling enables the Company to produce a higher-value product that
customers will prefer over competitive products. The Company has invested more
than $9.1 million in its proprietary tooling since April 1993, which contributes
significantly to the quality of the Company's products and is critical to
imparting the high level of detail and quality that collectors demand. The
Company intends to continue investing in its proprietary tooling in order to
upgrade and expand existing product lines and to add new products, such as the
highly detailed "Elite" series of collectibles scheduled for introduction in the
second half of fiscal 1997.
o Providing a One-Stop Source for Revenue Opportunities for Racing
Personalities
The Company strives to provide top race car drivers and other licensors
with a broad range of opportunities to maximize earnings throughout their
careers. Through its ability to represent racing personalities in a broad range
of licensing and other revenue-producing opportunities, combined with its
alliance with Hasbro and its recent acquisitions of Sports Image and Motorsport
Traditions, the Company is now positioned to generate sales through every major
venue of the motorsports industry, including trackside sales of apparel and
souvenirs, talent management, mass-marketed retail toys, and the Company's core
lines of collectible products. By aligning itself with top racing personalities
and providing a broad range of revenue opportunities, the Company believes that
it will be able to leverage those relationships to attract additional drivers in
order to generate increased revenue for the Company as well as increased license
fees for the drivers.
Products and Services
Die-Cast Miniature Replica Vehicles; Pewter Replica Vehicles
The Company designs and markets collectible miniature replicas of
motorsports-related vehicles that are constructed using die-cast bodies and
chassis with free wheeling deluxe wheels and tires. The Company markets its
die-cast racing collectibles pursuant to more than 300 active licenses with
stock car and other drivers, car owners, and car sponsors as well as under
license agreements with Ford Motor Company and several divisions of General
Motors Corp. The die-cast collectibles offered by the Company relate to stock
car, NHRA drag racing, "Super Truck" racing, dirt car racing, and sprint car
racing. The Company's die-cast collectibles consist of (i) 1:64th and 1:24th
scale replicas of actual racing vehicles; (ii) 1:96th and 1:64th scale racing
vehicle transporters; (iii) a 1:16th scale pit wagon; and (iv) 1:24th scale
dually trucks with trailers. The Company strives to enhance the demand for and
to increase the value of its collectible products by offering limited numbers of
each item. The Company offers its die-cast collectibles primarily through retail
dealers, through its collectors' club, and as promotional and specialty
advertising items. See "Business - Sales and Marketing."
Historically, the Company has designed and marketed die-cast
collectibles featuring drivers and vehicles from the Nascar Winston Cup series.
The Company continually seeks to expand its product lines and product offerings.
During fiscal 1995, the Company began development of several new lines of
die-cast collectibles that feature replicas of vehicles from other popular
motorsports. The Company successfully introduced its line of Winston NHRA Top
Fuel Dragster and Top Fuel Funny Car replicas in fiscal 1995, with sales of
approximately $6.0 million in fiscal 1996. The Company also successfully
introduced a line of die-cast collectible replicas from the popular new Nascar
"Super Truck" series in fiscal 1995, with sales of approximately $3.2 million in
fiscal 1996.
During 1995, the Company introduced a line of limited edition,
hand-crafted 1:43rd scale solid pewter replicas of race cars for sale through
its collectors' club. The Company's pewter replicas feature crisply detailed
wheels, chassis, and body elements, including the driver's name, car number, and
sponsors' logos and decals. The Company stamps a serial number on each of its
limited-edition pewter collectibles in order to enhance its value and packages
each pewter replica vehicle in a display case that includes literature featuring
the driver's photograph and details of the driver's racing accomplishments. The
Company currently is developing an "Elite" series of highly
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detailed die-cast replicas of Nascar racing vehicles for introduction during the
second half of fiscal 1997. The Elite series of collectibles will be targeted
toward higher-income customers and will feature detailed equipment, such as
spark plug wires, braided hoses, and realistic suspension systems.
The Company invested approximately $2.6 million and $861,000 in tooling
for its proprietary line of die- cast collectibles in fiscal 1996 and the first
quarter of fiscal 1997, respectively, which increased its total investment in
die-cast tooling to approximately $9.1 million at December 31, 1996. The Company
believes the breadth and quality of the tooling program provides the Company
with a competitive advantage in the motorsports collectible market. In addition,
the Company has taken various steps, and continually evaluates additional
measures, designed to enhance the collectible value and appeal of its products.
These measures include (i) designing die-cast collectibles that include features
that are not offered by the Company's competitors; (ii) limiting the quantities
of each item that it produces and sells; (iii) specifying on the packaging
material of each die-cast collectible the quantity of that limited-edition item
actually produced; (iv) offering certain items only through the Company's
collectors' club; and (v) designing and developing new packaging concepts to
improve the display of each collectible item.
Motorsports Consumer Products
The Company markets various licensed motorsports apparel, souvenir, and
other consumer products, including t-shirts, jackets, hats, die-cast replicas,
license plate brackets, mugs, pins, and key chains. Each of the motorsports
consumer products generally features the name, likeness, and car number of a
popular race car driver. The Company intends to acquire licenses with additional
drivers and to develop new items for its motorsports consumer products. The
Company designs its motorsports consumer products primarily for high-volume
distribution through retail outlets, trackside sales, and programs with
corporate sponsors of racing teams and racing events. See "Business - Sales and
Marketing." The Company sold approximately $2.0 million and $5.3 million of
motorsports consumer products during fiscal 1996 and the first quarter of fiscal
1997, respectively. The Company anticipates that its recent acquisitions of
Sports Image and Motorsport Traditions will result in substantial increases in
the sale of motorsports products. Sports Image, which the Company acquired in
November 1996, had sales of approximately $41.8 million of apparel, die-cast
replicas, souvenirs, and other motorsports consumer products during the period
from January 1, 1996 to November 7, 1996 (which includes sales of die-cast
collectibles purchased from the Company at an aggregate cost of approximately
$5.8 million). Motorsport Traditions had annual revenue of approximately $33.0
million from sales of apparel, souvenirs, and other motorsports consumer
products during 1996.
Mass Merchandise Products
The Company licenses a new line of motorsports-related products
specifically designed for the mass- merchandise market under a license agreement
with Hasbro. The mass-market die-cast products manufactured and marketed by
Hasbro will be marketed under the "Winner's Circle" name, will be completely
distinct from the Company's current products, and will not compete directly with
the Company's limited-edition motorsports die-cast collectible products. The
licensed products include two new lines jointly developed by Hasbro and the
Company, consisting of die-cast replicas of motorsports vehicles and a
1/18th-scale plastic toy car. Under the agreement, Hasbro also will market other
licensed motorsports products, including radio-controlled cars, slot car sets,
games (such as electronic and CD-ROM interactive games), plush toys, figurines,
play sets, walkie talkies, and other products. Hasbro currently markets certain
of these products under the "Kenner," "Tonka," "Milton Bradley," and other brand
names.
The Company believes that the license agreement with Hasbro will enable
it to remain focused on its core business of designing and marketing motorsports
collectibles, apparel, and souvenir products while enabling the Company to
benefit from Hasbro's retail mass merchandise marketing expertise and resources
as a means of expanding the Company's product offerings without committing
substantial resources to manufacturing and marketing activities. The Company
also believes that the development of a line of motorsports-related toy products
through its strategic alliance with Hasbro also will result in the access to
future motorsports enthusiasts who will become customers for the Company's
motorsports collectibles and consumer products.
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Action Sports Management
The Company represents a number of top race car drivers in a broad
range of licensing and other revenue-producing opportunities, including product
licenses, corporate sponsorships, endorsement contracts, and speaking
engagements. The Company strives to provide services that will enable drivers to
maximize revenue opportunities throughout their careers. Since the commencement
of its sports management business in fiscal 1996, the Company has entered into
exclusive agreements to represent six-time Winston NHRA Funny Car champion John
Force and other popular drag racing drivers, including Darrell Alderman, Mike
Dunn, Scott Geoffrion, and Darrell Gwynn, in connection with their product
licensing, corporate sponsorship, and product endorsement contracts. The Company
believes that top racing drivers increasingly are regarding the Company to be a
"one-stop source" that can enable them to maximize earnings as a result of the
Company's ability to effectively represent them in obtaining favorable licensing
arrangements, corporate sponsorships, and product endorsements and the Company's
established wholesale and retail distribution channels and its alliance with
Hasbro. The Company intends to further develop its relationships with drivers
already under license as well as to attract additional drivers in order to
generate additional sales for the Company as well as license fees for the
drivers.
Promotional Programs
Major corporations sponsor racing vehicles or events and advertise at
motorsports events and in motorsports-related media in order to increase their
brand awareness and to encourage consumers to purchase their products. These
sponsors frequently use creative premium and promotional programs to increase
brand awareness and popularity with racing fans and other consumers. Many of
these corporations currently are outsourcing sales and marketing functions at an
increasing rate as they "downsize" their internal sales and marketing
departments. The Company plans to target a portion of this demand by providing
complete marketing services designed to create corporate premium and promotional
programs for large corporate sponsors that advertise in motorsports. The Company
provides design services, graphic artists, and the capacity to deliver a wide
array of promotional products, such as die-cast replicas, t-shirts, hats, or
bumper stickers, to create and produce promotional products. The corporate
sponsors use these products as a free premium award with the purchase of a
primary product, a low-cost premium that may be redeemed with a mail-in coupon
offer after purchasing the sponsor's consumer products, or in sweepstakes or
other promotions. The Company also provides in-house marketing and distribution
support for its promotional programs, including in-bound order processing, order
fulfillment, sweepstakes processing, and redemption programs. The Company
recorded sales of approximately $1.4 million as a result of one promotional
program in fiscal 1996 and intends to increase its efforts to develop
promotional programs in fiscal 1997.
Sales and Marketing
The Company markets its motorsports collectibles to approximately 5,000
retail dealers through a wholesale distributor network; directly to motorsports
enthusiasts through its 75,000-member collectors' club; and as promotional or
specialty advertising items. The Company markets its motorsports consumer
products primarily through direct trackside sales to race fans; through an
in-house sales force and independent representatives to approximately 5,000
specialty retail dealers and for mass distribution through major discount and
department stores, retail automotive product outlets, and convenience stores;
and through corporate promotional programs with major consumer products
companies.
Wholesale Distribution
The Company markets its collectibles on a wholesale basis through
approximately 50 distributors operating in the continental United States. The
distributors solicit orders for the Company's products from approximately 5,000
retail dealers throughout the United States. The retail dealers include hobby
shops, stores specializing in sports collectible items, and souvenir vendors
that attend various racing events. Employees of the Company attend several trade
shows each year in an effort to attract new retail dealers to its network. The
Company advertises its die-cast collectibles in newspapers and magazines
covering motorsports and the collectibles markets. These advertisements
encourage consumers to contact the nearest retail dealer to purchase the
Company's die-cast
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collectibles. The Company also takes measures to increase consumer awareness of
its products through radio and television advertising, including promotion of
its collectibles on "home shopping" television programs and advertising during
popular television programs of interest to motorsports enthusiasts.
The Company utilizes its in-house sales force, independent
representatives, and its die-cast collectible distribution network to market its
motorsports apparel, souvenirs, and other consumer products on a wholesale basis
to approximately 5,000 retail dealers specializing in motorsports merchandise
throughout the United States. The Company's in-house sales force and independent
representatives also market certain motorsports consumer products on a wholesale
basis to automobile sections in major discount and department stores such as
Walmart and K-Mart, to automotive retail stores, and to convenience stores. The
Company currently is developing new motorsports consumer products for
high-volume sales programs.
Collectors' Club
The Company markets its die-cast and pewter collectibles through its
Racing Collectibles Club of America, a motorsports collectible club that offers
the Company's motorsports collectibles exclusively to members. The Company
strives to increase collector interest in its products and to enhance its
products' value as collectibles by (i) offering certain items exclusively
through its collectors' club, and not through any other distribution network;
(ii) producing a limited number of each collectible; and (iii) limiting the
number of a particular item that each member may purchase. As a result of its
recent acquisitions of Sports Image and Motorsport Traditions, the Company
currently is developing a line of licensed motorsports apparel and souvenirs
that will be offered exclusively through its collectors' club. The Company
advertises its collectors' club in publications that focus on motorsports or the
collectibles industry and through limited radio and television advertisements.
During 1996, the Company increased its advertising on cable television in order
to enhance its exposure to the large number of enthusiasts watching televised
motorsports events and related programming. These efforts have enabled the
Company to increase membership in its collectors' club from approximately 15,000
members in August 1993 to approximately 75,000 members as of December 31, 1996.
Members of the Company's collectors' club pay a lifetime membership fee
that entitles them to receive membership premiums, a quarterly magazine,
catalogs, and other special sales materials highlighting the Company's
collectibles and other products. The Company employs customer service
representatives and an automated call distribution telephone system to take
membership applications, take customer orders, and handle customer inquiries. In
October 1995, the Company completed the installation of a $2.0 million telephone
and computer system that combines telemarketing functions, computerized order
processing, and automated warehouse operations in order to enable the Company to
more effectively and efficiently answer and process telephone orders to its
collectors' club. The Company installed its new telephone and computer system in
order to accommodate the significant growth in club membership and the
increasing volume of telephone orders that it has experienced as well as to
provide the infrastructure that may be required to handle an increased volume of
calls resulting from its accelerated advertising efforts and new collectible and
motorsports consumer product programs. The new systems also enable the Company
to track the effectiveness of each advertising venue and to accurately target
its marketing and advertising programs for enhanced impact.
Trackside Sales
According to USA Today, attendance at Nascar Winston Cup racing events
exceeded 180,000 fans per race during 1996. In connection with the recent
acquisitions of Sports Image and Motorsport Traditions, the Company acquired 22
fully equipped mobile trackside souvenir stores. These mobile trackside stores
travel from event to event throughout the racing season and sell a complete
assortment of licensed motorsports apparel and souvenirs. Sports Image and
Motorsport Traditions collectively recorded trackside sales of approximately
$18.8 million during the 1996 Nascar racing season.
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Promotional Programs
In addition to sales through wholesale distribution networks and
trackside sales, Sports Image and Motorsport Traditions develop corporate
promotional programs in which they design and sell specialty t-shirts, hats, and
other apparel or souvenirs to major corporate sponsors of motorsports teams and
events. The sponsors then use these products as promotional giveaways at
corporate hospitality tents at racing events and other promotions. Sports Image
recorded sales of approximately $1.1 million as a result of corporate
promotional programs during the period from January 1, 1996 to November 7, 1996.
Motorsport Traditions recorded sales of approximately $880,000 as a result of
corporate promotional programs for the 12 months ended November 30, 1996.
The Company also from time to time develops promotional programs with
major oil companies and other consumer products companies. These promotional
programs typically involve decalling, imprinting, or otherwise prominently
displaying the names, likenesses, and car numbers of popular drivers as well as
the customers' names, logos, or messages on the Company's die-cast replicas,
licensed apparel, souvenirs, or other consumer products as a low-cost or free
premium award specifically designed to increase brand awareness and name
recognition. Such programs include offering a free die-cast replica vehicle or
other product with the purchase of a primary product, a mail-in coupon offer for
a consumer to receive a die-cast replica vehicle or other product after
purchasing a company's consumer products, and sweepstakes promotions. Die-cast
replica vehicles sold as promotional items are not sold through the Company's
wholesale distribution network or through its collectors' club. The Company
recorded sales of approximately $1.4 million as a result of one promotional
program in fiscal 1996. The Company plans to pursue future promotional programs
and currently is in discussions with major stock car drivers and corporate
sponsors in its effort to develop such programs.
Manufacturing and Production
Die-cast and Pewter Collectibles
The Company's die-cast collectibles are manufactured under an exclusive
agreement with a third-party manufacturer in China. The term of the agreement
currently extends through December 31, 1997 and automatically renews for
successive one-year terms unless terminated by either party by giving written
notice to the other party at least 90 days prior to the end of the then-current
term. The Company owns a significant portion of the tooling that the third-party
manufacturer uses to produce die-cast collectibles for the Company and has
partial control over the production of its die-cast collectibles under the
manufacturing agreement. Since April 1993, the Company has invested
approximately $9.1 million for tooling used to produce its die-cast
collectibles. The Company intends to make additional investments in tooling in
order to support the growth of its business. The Company believes that its
overseas manufacturer of die-cast collectibles is dedicated to high quality and
productivity as well as support for new product development.
The Company designs each die-cast collectible that it markets. The
Company's design artists take numerous photographs of the actual racing cars,
trucks, and other vehicles to be produced as die-cast replicas. Working from
these photographs, the Company's artists and engineers use computer software to
create detailed scale renderings of the vehicles. After approval of the
rendering by the vehicle owner, driver, or racing team sponsor, the Company
supplies computerized renderings to its manufacturer in China. The manufacturer
produces a sample or model, which the Company then inspects for quality and
detail. After final approval, the manufacturer produces the die-cast replicas,
packages them, and ships the finished products to the Company or, in certain
instances, directly to the Company's customers.
The Company arranges for the manufacture of its pewter collectibles on
a purchase order basis with third-party manufacturers located in the United
States. The production of these pewter collectibles does not require the Company
to make an investment in tooling, as tooling costs are included as a portion of
the cost of each unit produced. The Company designs each of the pewter
collectibles that it markets in a process similar to the process required to
design its die-cast collectibles.
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Motorsports Consumer Products
The Company currently designs substantially all of its licensed
motorsports apparel, souvenirs, and other consumer products and arranges for the
manufacture of such products on a purchase order basis with third-party
manufacturers, located primarily in the United States. The Company owns the
tooling and dies used to manufacture certain of its motorsports consumer
products. As the Company develops new motorsports consumer products that require
specialized tooling, the Company intends to build or purchase the new tooling
that will be required to permit the third-party manufacturers to produce those
items.
Backlog
The Company accepts orders from members of its collectors' club in
advance of the arrival of certain collectible products from the manufacturers.
The Company had outstanding orders for approximately $1.8 million of such
products as of December 31, 1996.
Trademarks and Patent Rights
Although the Company's business historically has not depended on
trademark or patent protection, the Company recognizes the increasing value of
its various trade names and marks. The Company is taking steps designed to
protect, maintain, and increase the value of its trade names and marks.
Licenses
Product Licenses
The Company focuses on developing solid relationships with and engages
in comprehensive efforts to license the most popular drivers and car owners in
each top racing category, their sponsors, and others in the motorsports
industry. The Company currently has licenses with more than 300 race car
drivers, car owners, and car sponsors as well as with Ford Motor Company,
several divisions of General Motors Corp., and PACCAR, Inc. (the manufacturer of
Kenworth and Peterbilt trucks). The Company believes that its license agreements
with top Nascar and NHRA drivers, such as Dale Earnhardt, Jeff Gordon, John
Force, Kenny Bernstein, Terry Labonte, Rusty Wallace, Dale Jarrett, Mark Martin,
Bill Elliot, and Bobby Labonte, significantly enhance the collectible value and
marketability of its products.
The licenses with race car drivers generally provide for a term of one
year and permit the Company to use the driver's name, photograph or likeness,
and autograph; the licenses with race car owners generally provide for a term of
one year and permit the Company to use the car number and colors; the licenses
with manufacturers provide for terms of two or more years and permit the Company
to reproduce the cars or trucks themselves; and the license agreements with
various sponsors generally provide for terms of one to three years and permit
the Company to reproduce the sponsors' decals and logos as they appear on the
cars or trucks. Depending upon the particular agreement, the individual licenses
either renew automatically, may be renewed or extended upon written request by
the Company, or expire at the end of the specified term. The agreements with the
drivers, car owners, car and truck manufacturers, and car sponsors provide for
payments by the Company to the licensors of either (i) a fixed dollar amount,
which may include a substantial advance to the licensor; (ii) a fixed amount per
item sold by the Company pursuant to the license; (iii) a percentage of the net
sales for a program or a percentage of the Company's wholesale price per item
sold by the Company pursuant to the license; or (iv) a combination of the above.
License agreements with certain sponsors do not require payments by the Company
to the licensors because of the advertising value provided to the licensor as a
result of having its decals and logos displayed on the Company's products.
During fiscal 1996 and the first quarter of fiscal 1997, the Company
incurred royalty expenses associated with its various licensing agreements of
approximately $6.2 million and $2.2 million, respectively. The Company
constantly strives to renew existing agreements or to negotiate and enter into
new license agreements with existing
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or new drivers, car owners, and car sponsors and to develop new product programs
pursuant to its license agreements, in its effort to market lines of
collectibles and consumer products that its customers will find appealing.
Hasbro License Agreement
The license agreement between the Company and Hasbro (the "Hasbro
License") covers the exclusive sale by Hasbro in the mass-merchandise market of
specific motorsports-related products for which the Company has or will secure
exclusive or non-exclusive licenses from racing drivers, car owners,
manufacturers, or sponsors. Under the Hasbro License, the Company is responsible
for acquiring and maintaining the license rights with the licensors, and Hasbro
is responsible for all costs and other arrangements relating to tooling,
manufacturing, transportation, marketing, distribution, and sales of licensed
products. The licensed products will consist of (i) die-cast replicas of
motorsports vehicles and a 1/18th-scale plastic toy car, for which Hasbro will
pay a specified royalty, and (ii) all other products that Hasbro may market as
licensed motorsports products, including, for example, radio-controlled cars,
slot car sets, games (including electronic and CD-ROM interactive games), plush
toys, figurines, play sets, walkie talkies, and other products, for which Hasbro
will pay a specified royalty. Hasbro currently markets certain of these products
under the "Kenner," "Tonka," "Milton Bradley," and other brand names. Hasbro
will pay the Company guaranteed minimum annual royalty payments of (i) $500,000
for calendar year 1997, and (ii) for each calendar year thereafter, the greater
of (a) $500,000 or (b) 50% of the actual royalties earned in the prior year, up
to a maximum minimum annual guaranty of $1.0 million. Hasbro also will be
responsible for and will pay or reimburse the Company for all license fees and
royalties, including advances and guarantees, paid to licensors for licensed
products, up to a maximum of $3.2 million in 1997 and $4.5 million in each of
1998 and 1999.
Hasbro's initial focus under the Hasbro License will be to develop,
with the Company's guidance, a line of motorsports die-cast products under the
brand name "Winner's Circle" for the retail mass-merchandise market. Hasbro will
fund all capital requirements for this product line and will manufacture,
distribute, and market the products under the "Winner's Circle" brand name. The
Company and Hasbro intend to introduce this product line to the mass-market
retail industry in fiscal 1997. The mass-market die-cast products manufactured
and marketed by Hasbro will be completely distinct from the Company's current
products and will not compete directly with the Company's current
limited-edition motorsports die-cast collectible products.
The Hasbro License provides for a term ending on December 31, 2001.
Hasbro may extend the Hasbro License for an additional three-year term, provided
that total wholesale revenue of licensed products exceeds a specified amount
during the initial term.
Dale Earnhardt License Agreement
In connection with the acquisition of Sports Image, the Company entered
into a license agreement with Dale Earnhardt (the "Earnhardt License") under
which the Company has the right to market licensed motorsports products
utilizing the likeness of Dale Earnhardt. Under the Earnhardt License, Mr.
Earnhardt also granted the Company the right of first refusal to make, have
made, use, sell, or otherwise distribute any new licensable products that Mr.
Earnhardt becomes aware of and approves for marketing. The term of the Earnhardt
License is 15 years and from year to year thereafter unless terminated by either
party.
Jeff Gordon License and Endorsement Agreements
In connection with the acquisition of Motorsport Traditions, the
Company acquired the exclusive rights to manufacture and market various apparel
and souvenir products bearing the name, likeness, and signature of Jeff Gordon
and the likeness of his race car, under a license agreement with an affiliate of
Mr. Gordon (the "Gordon Apparel and Souvenir License"). The Gordon Apparel and
Souvenir License expires on December 31, 2000, subject to renewal by agreement
between the parties. The Gordon Apparel and Souvenir License requires the
Company to pay the licensor royalties based on a percentage of the wholesale
price of licensed products sold by the Company, with minimum royalty payments
each year during the term of the agreement.
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In connection with the acquisition of Motorsport Traditions, the
Company also entered into a license agreement (the "Gordon Die-Cast License")
with an affiliate of Jeff Gordon, pursuant to which the Company has the
exclusive right to manufacture and market die-cast replicas of Mr. Gordon's race
car and related vehicles. The Gordon Die-Cast License also provides the Company
the non-exclusive right to manufacture and market certain die- cast collectibles
currently licensed by a third party until that license expires in September
1997, at which time the Company will have the exclusive right to manufacture
those items. The Gordon Die-Cast License expires on December 31, 2000. The
Gordon Die-Cast License requires the Company the pay the licensor royalties
based on a percentage of the wholesale price of licensed products sold by the
Company, with minimum royalty payments each year during the term of the
agreement.
In connection with the Gordon Die-Cast License, the Company entered
into a personal service and endorsement agreement with Jeff Gordon and an
affiliate of Mr. Gordon (the "Endorsement Agreement"). The Endorsement Agreement
expires on December 31, 2000. During the term of the Endorsement Agreement, the
Company will have the right to use Mr. Gordon's name, likeness, signature, and
endorsement in connection with the advertisement, promotion, and sale of the
die-cast collectibles to be produced under the Gordon Die-Cast License. The
Endorsement Agreement requires Mr. Gordon to make two personal appearances and
to participate in photo shoots and the production of one television commercial
and two radio commercial production sessions per year during the term of the
Endorsement Agreement, to the extent that the Company requests him to do so.
Competition
The motorsports collectible and consumer product industry is extremely
competitive. The Company competes with major domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. The Company believes that Racing Champions, Inc.,
Revell-Monogram, Inc., and The ERTL Company, Inc. constitute its principal
competitors in the die-cast collectible industry. The Company's motorsports
apparel and souvenirs compete with similar products sold or licensed by drivers,
owners, sponsors, and other licensors that the Company currently does not have
licenses with, as well as sports apparel licensors and manufacturers in general.
Emerging companies also may increase their participation in these markets. The
Company's promotional products compete for advertising dollars against other
specialty advertising programs and media, such as television, radio, newspapers,
magazines, and billboards.
The Company competes principally on the basis of the current popularity
of motorsports and the cost, design, and delivery schedules of its products.
There is no assurance that the Company will continue to be able to compete
successfully in the future. See "Risk Factors - Competition."
Seasonality
Sales of die-cast motorsports collectibles and motorsports consumer
products historically have been lowest in the fourth calendar quarter,
corresponding with the end of the racing season. The Company believes, however,
that holiday sales of its products are increasing, which has the effect of
reducing seasonal fluctuations in its sales.
Nature of the Company's Markets
The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition, and a constant need to create and
market new products. Demand for motorsports products is influenced by the
popularity of certain drivers, themes, cultural and demographic trends in
society, marketing and advertising expenditures, and general economic
conditions. Because these factors can change rapidly, customer demand also can
shift quickly. New motorsports products frequently can be successfully marketed
for only a limited time. The Company may not always be able to respond to
changes in customer demand because of the amount of time and financial resources
that may be needed to bring new products to market. The inability to respond
quickly to market changes would have an adverse impact on the Company. See
"Business - Products and Services," "Business - Sales and Marketing," "Business
- - Competition," and "Business - Seasonality."
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Sources and Availability of Raw Materials
The Company currently obtains all of its die-cast and pewter
collectibles and motorsports consumer items pursuant to manufacturing
arrangements as discussed elsewhere in this Report. The Company believes that
all of the raw materials and other supplies that are necessary for the
manufacture and packaging of its products are readily available from multiple
sources.
Environmental Matters
The Company is one of approximately 30 defendants in a lawsuit in which
the state of Arizona seeks recovery of certain clean-up costs under federal and
state environmental laws. See "Business - Litigation." The imposition of damages
on the Company could have a material effect on the Company.
Insurance
The Company maintains a $2.0 million product liability insurance policy
to cover the sale of its die-cast and other products. The Company maintains an
additional $5.0 million in commercial umbrella liability coverage. The Company
also maintains a $7.0 million insurance policy to cover its molds and dies
located at its third-party manufacturer in China and a $12.0 million insurance
policy to cover lost revenue in the event of certain interruptions of business
with its overseas manufacturer of die-cast collectibles. The Company believes
its insurance coverage is adequate.
Litigation
On May 17, 1993, the state of Arizona (the "State") instituted a
lawsuit against the Company and 29 other defendants in the United States
District Court for the District of Arizona. The State seeks recovery of certain
clean-up costs under federal and state environmental laws. Specifically, the
State seeks recovery of expenses that it has incurred to date for an
environmental investigation and clean-up of property formerly used as a site for
recycling hazardous wastes. The State alleges that the property has been
contaminated with hazardous substances. In addition, the State seeks a
declaratory judgment that the Company and the other defendants are jointly and
severally liable for all future costs incurred by the State for investigative
and remedial activities, and seeks a mandatory permanent injunction requiring
the Company to undertake appropriate assessment and remedial action at the
property. The State has not specified the amounts it seeks to collect from the
Company. The State alleges that F.W. Leisure Industries, Inc. and/or F.W. &
Associates, Inc. were predecessors of the Company that produced and arranged for
the transportation of hazardous substances to the property involved in the
lawsuit. The Company is defending this lawsuit on various bases including that
F.W. Leisure Industries, Inc. and/or F.W. & Associates, Inc. were not
predecessors of the Company and that neither the Company nor any predecessor of
the Company has ever produced or transported hazardous substances as alleged by
the State. The State has settled a portion of its claims with respect to a large
number of the other defendants to the lawsuit. The Company is not a party to
that settlement. On February 1, 1995, a number of the defendants that agreed to
the settlement with the State were granted leave to file, and subsequently did
file a cross-claim against the Company seeking indemnity from the Company based
on the same predecessor liability theory asserted by the State. The parties have
conducted discovery limited to the issue of any defendant's status as a
responsible party and regarding the Company's status as a successor corporation.
The parties have filed cross-motions for summary judgment, which may resolve
part or all of the Company's involvement in the lawsuit. The court has scheduled
oral arguments on these motions for March 17, 1997. The Company currently
estimates the potential range of loss to be between $400,000 and $800,000 in the
event that its defense proves unsuccessful. The Company has made no provision in
its financial statements with respect to this matter.
A lawsuit, purportedly on behalf of Action Products, Inc., a dissolved
Arizona corporation, has been instituted against the Company, Fred W. Wagenhals,
and others in the United States District Court for the District of Arizona. The
complaint alleges that the Company, Mr. Wagenhals, and others breached
contractual and other duties to API and appropriated certain business
opportunities of API. The complaint requests damages, including
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punitive and treble damages, in an unspecified amount. The complaint was
effectively amended subsequent to filing. In June 1996, the court granted the
Company's motion to dismiss with respect to securities law claims, but denied
the Company's motion to dismiss with respect to certain federal RICO claims. The
Company is vigorously defending the lawsuit and all parties currently are
conducting discovery. In the event that a decision adverse to the Company is
rendered, and in the event that the Company has no insurance coverage with
respect to these claims, the resolution of such matter could have a material
adverse effect on the Company.
Employees
At February 28, 1997, the Company employed approximately 296 persons,
all of whom were employed full-time. Of the total number employed by the
Company, 26 were engaged in product development, 105 in sales and marketing, 4
in licensing activities, 116 in warehouse functions, and 45 in administrative
functions, including the Company's executive officers. The Company has
experienced no work stoppages and is not a party to a collective bargaining
agreement. The Company believes that it maintains good relations with its
employees.
Development of the Company
The Company was incorporated in Arizona in May 1992. In May 1992, the
Company began the manufacture and marketing of mini vehicles and began the
business of staging M-CarTM Grand Prix races for charitable organizations. In
July 1992, the Company began marketing a line of die-cast miniature replicas of
actual racing vehicles.
In July 1993, the Company acquired all of the outstanding common stock
of Racing Collectables, Inc. ("RCI"), which engaged in the wholesale marketing
of die-cast products, and Racing Collectables Club of America, Inc. ("RCCA"),
which operated a motorsports collectors' club. RCI and RCCA were unaffiliated
competitors of the Company prior to their acquisition by the Company.
In August 1994, the Company acquired certain assets and liabilities of
Fan Fueler, Inc. and began marketing product lines of licensed motorsports
consumer items that include drink bottles, key chains and air fresheners. No
affiliation existed between Fan Fueler, Inc. and the Company at the time of the
acquisition.
In September 1994, the Company sold to M-Car, Incorporated the assets
and liabilities related to its business of contracting with or licensing
selected sponsors to stage events known as M-CarTM Grand Prix Races. From
January 1994 until the date of the sale, the shareholder of M-Car, Incorporated,
conducted sales and marketing services related to the Company's M-Car operations
on a contractual basis with the Company. The contractual arrangement with the
shareholder of M-Car, Incorporated was terminated concurrently with the sale of
the Company's M-CarTM operations.
Effective March 31, 1995, the Company sold certain of its assets
related to its mini vehicle product line to an unaffiliated third party.
On November 7, 1996, the Company acquired the business and
substantially all of the assets and assumed certain of the liabilities of Sports
Image from seven-time Nascar Winston Cup Champion driver Dale Earnhardt and his
wife. Sports Image markets and distributes licensed motorsports apparel and
other souvenir items featuring the likeness of Dale Earnhardt and other popular
drivers through a network of wholesale distributors, trackside events,
promotional programs for corporate sponsors, and fan clubs. Sports Image had
revenue of approximately $32.5 million and $41.8 million during the year ended
December 31, 1995 and the period from January 1, 1996 to November 7, 1996,
respectively. The Company believes that Sports Image represents an important new
distribution channel for the Company's die-cast collectibles and provides
significant opportunities for developing and marketing licensed apparel and
souvenirs. The purchase price paid by the Company for the assets of the sellers
consisted of (i) a promissory note in the principal amount of $24.0 million, and
(ii) 403,361 shares of the Company's Common Stock. On January 2, 1997, the
Company repaid the $24.0 million promissory note with the proceeds from the
issuance of the Senior Notes and a portion of the borrowings under the Credit
Facility. See "Management's
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Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." The terms of the acquisition, including the
valuation of the assets and liabilities acquired by the Company, were determined
by arms-length negotiations between representatives of the sellers and
representatives of the Company. Except for certain license agreements between
the Company and Mr. Earnhardt, no affiliation existed between the Company and
the sellers at the time of the acquisition.
On January 8, 1997, the Company acquired the business and substantially
all of the assets and assumed specified liabilities of Motorsport Traditions
from 1995 Nascar Winston Cup Champion driver Jeff Gordon, Kenneth R. Barbee,
certain entities controlled by Mr. Barbee, and certain other persons. The
effective date of the acquisition of Motorsport Traditions is January 1, 1997.
Motorsport Traditions markets and distributes licensed motorsports apparel and
souvenir items featuring the likenesses of Jeff Gordon, Terry Labonte, Darrell
Waltrip, Bobby Labonte, and other popular Nascar drivers. Because of the
similarities of the businesses and operations of Motorsport Traditions and
Sports Image, the Company anticipates that the acquisition of Motorsport
Traditions will result in favorable synergies and will position the Company as a
leading marketer of licensed motorsports apparel and souvenirs. Motorsport
Traditions had 1996 revenue of approximately $33.0 million from sales of
licensed apparel, souvenirs, and other motorsports consumer products. The
purchase price paid by the Company for Motorsport Traditions consisted of (i)
cash in the amount of $5.4 million; (ii) a promissory note in the principal
amount of $1.6 million issued by a wholly owned subsidiary of the Company; and
(iii) an aggregate of 342,857 shares of the Company's Common Stock. The
promissory note bears interest at 4% per annum, matures on December 31, 1998,
and has been guaranteed by the Company. The terms of the acquisition, including
the valuation of the assets, liabilities, and capital stock acquired by the
Company, were determined by arms-length negotiations between representatives of
the sellers and representatives of the Company. Except for certain license
agreements between the Company and Mr. Gordon, no affiliation existed between
the Company and the sellers at the time of the acquisition.
In December 1996, the Company and Hasbro entered into a license
agreement covering the exclusive sale by Hasbro of a new line of
motorsports-related products in the mass-merchandise market. See "Business
- Licenses." The Company believes that the license agreement with Hasbro will
enable it to remain focused on its core business of designing and marketing
motorsports collectibles, apparel, and souvenir products, while enabling the
Company to benefit from Hasbro's retail mass merchandise marketing expertise and
resources as a means of expanding the Company's product offerings without
committing substantial resources to manufacturing and marketing activities.
PROPERTIES
The Company leases a facility in Tempe, Arizona, containing
approximately 46,000 square feet. The Company uses approximately 18,000 square
feet of the facility for offices and 28,000 square feet for warehouse space and
packaging operations. The term of the lease expires in December 2003. Fred W.
Wagenhals, Chairman of the Board, President, and Chief Executive Officer of the
Company, currently owns a one-third interest in F.W. Investments, a partnership
which owns this facility. The Company believes that the lease payments for this
facility are comparable to an amount it would pay to an unaffiliated party for
comparable space.
The Company leases a 25,000 square foot facility in Charlotte, North
Carolina, and a 41,000 square foot facility in Concord, North Carolina, for its
Sports Image and Motorsport Traditions operations. The Company uses
approximately 5,000 square feet of the Charlotte facility for offices and
approximately 20,000 square feet for warehouse space and packaging operations.
The term of the lease for the Charlotte facility expires in April 1998. The
Company utilizes approximately 7,000 square feet of the Concord facility for
offices and approximately 34,000 square feet for warehouse space and packaging
operations. The lease for the Concord facility is on a month-to-month basis.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company.
Name Age Position Held
---- --- -------------
Fred W. Wagenhals 55 Chairman of the Board, President, and
Chief Executive Officer
Tod J. Wagenhals 32 Executive Vice President, Secretary, and
Director
Christopher S. Besing 36 Vice President, Chief Financial Officer,
Treasurer, and Director
Joseph M. Mattes 38 Vice President and Director
Melodee L. Volosin 33 Director of Wholesale Division and Director
John S. Bickford 50 Director
Jack M. Lloyd 47 Director
Robert H. Manschot 53 Director
Fred W. Wagenhals has been Chairman of the Board, President, and Chief
Executive Officer of the Company since November 1993 and served as Chairman of
the Board and Chief Executive Officer from May 1992 until September 1993 and as
President from July 1993 until September 1993. Mr. Wagenhals co-founded Racing
Champions, Inc. in April 1989 and served as a director of that company until
April 1993. From October 1990 until May 1992, Mr. Wagenhals served as Chairman
of the Board and Chief Executive Officer of Race Z, Inc. and Action Performance
Sales, Inc. ("APS"), which were engaged in sales of promotional products and
collectible items related to the racing industry. Mr. Wagenhals served as
President of Action Products, Inc. ("API") from its inception in September 1986
until his resignation in October 1990 and as a director from September 1986
until his resignation in December 1992. API's principal creditor declared API in
default and installed a receiver to manage API's operations in November 1991.
The creditor took possession of all operating assets of API in May 1992 in
partial satisfaction of API's debt and thereafter sold such assets to the
Company.
Tod J. Wagenhals has been a Vice President and Secretary of the Company
since November 1993 and a director of the Company since December 1993. Mr.
Wagenhals served in various marketing capacities with the Company from May 1992
until September 1993 and with APS from October 1991 until May 1992. Mr.
Wagenhals was National Accounts Manager of API from January 1989 to October
1991. Mr. Wagenhals is the son of Fred W. Wagenhals.
Christopher S. Besing has been a Vice President and the Chief Financial
Officer of the Company since January 1994, a director of the Company since May
1995, and Treasurer of the Company since February 1996. Prior to joining the
Company, Mr. Besing held several financial 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, he was employed by Arthur Andersen and Co. from
January 1985 to August 1986. Mr. Besing is a Certified Public Accountant.
Joseph M. Mattes has been a Vice President and a director of the
Company since December 1996. Mr. Mattes also serves as President of the
Company's wholly owned subsidiary, Sports Image, Inc. Mr. Mattes served as
President of the predecessor of Sports Image from January 1995 until the
Company's acquisition of its business in November 1996. From 1985 through
December 1994, Mr. Mattes served at various times as Controller, Director
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<PAGE>
of Purchasing, Plant Manager, and Executive Vice President of Operations of
Carlisle Plastics, Inc., a $140 million per year injection molding company.
Melodee L. Volosin has been the Director of the Company's Wholesale
Division since May 1992 and has been a director of the Company since January
1997. Ms. Volosin's duties include managing all of the Company's wholesale
distribution of die-cast collectibles and other products, including advertising
programs and budgeting. From 1983 to May 1992, Ms. Volosin served in various
marketing capacities with API and its predecessors.
John S. Bickford has been a director of the Company since January 1997.
Mr. Bickford has served as President of Bickford Motorsports, Inc., which
provides consulting and special project coordination services to race car
drivers, car owners, and other businesses, from 1990 to the present. Mr.
Bickford also publishes Racing for Kids magazine. From 1976 to the present, Mr.
Bickford has served as President of MPD Racing Products, Inc., which
manufactures race car parts for distribution through speed shops and
high-performance engine shops. Mr. Bickford served as Vice President and General
Manager to Jeff Gordon, Inc., from 1990 to 1995. Mr. Bickford currently serves
as a director of Equipoise Balancing, Inc., a privately held company. Mr.
Bickford currently serves as a consultant to the Company. See "Management -
Employment and Consulting Agreements."
Jack M. Lloyd has been a director of the Company since July 1995. Mr.
Lloyd has served as the President and Chief Executive Officer of DenAmerica
Corp., a publicly held corporation that is the largest franchisee of Denny's
restaurants in the United States and owns and franchises Black-eyed Pea
restaurants, since March 1996 and as Chairman of the Board of DenAmerica Corp.
since July 1996. Mr. Lloyd served as the Chairman of the Board and Chief
Executive Officer of Denwest Restaurant Corp. ("Denwest"), the second largest
franchisee of Denny's restaurants in the United States, from 1987 until its
merger with DenAmerica Corp. in March 1996. Mr. Lloyd also served as President
of Denwest from 1987 until November 1994. Mr. Lloyd engaged in commercial and
residential real estate development and property management as president of
First Federated Investment Corporation during the early and mid-1980s. Mr. Lloyd
currently serves as a director of Masterview Window Company, a privately held
company.
Robert H. Manschot has been a director of the Company since July 1995.
Mr. Manschot currently serves as President and Chief Executive Officer of each
of NVD Group and Seceurop Group in the Netherlands and engages in business
consulting services and venture capital activities as Chairman of RHEM
International Enterprises, Inc. Mr. Manschot served as President and Chief
Executive Officer of Rural/Metro Corporation ("Rural/Metro"), a publicly held
provider of ambulance and fire protection services, from October 1988 until
March 1995. Mr. Manschot joined Rural/Metro in October 1987 as Executive Vice
President, Chief Operating Officer and a member of its Board of Directors. Mr.
Manschot was with the Hay Group, an international consulting firm, from 1978
until October 1987, serving as Vice President and a partner from 1984, where he
led strategic consulting practices in Brussels, Asia, and the western United
States. Prior to joining the Hay Group, Mr. Manschot spent 10 years with several
leading international hotel chains in senior operating positions in Europe, the
Middle East, Africa, and the United States. Mr. Manschot currently serves as a
director of Samoth Capital Corporation, a publicly traded company, and as
Chairman of the Board of Securop U.K. Ltd. and a director of LBE Technologies,
Inc., Thomas Pride Development, Inc., and Arizona Sports, Inc., which are
privately held companies.
Directors' Compensation
Employees of the Company do not receive compensation for serving as
members of the Company's Board of Directors. Independent directors receive
$2,500 for each meeting attended in person. All directors are reimbursed for
their expenses in attending meetings of the Board of Directors. Directors who
are employees of the Company are eligible to receive stock options pursuant to
the Company's 1993 Stock Option Plan. Pursuant to the 1993 Plan, each
non-employee director of the Company receives an automatic grant of options to
acquire 10,000 shares of the Common Stock on the date of his or her election or
appointment as a director. Non-employee directors also receive an automatic
grant of options to purchase 8,000 shares of Common Stock on the date of the
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<PAGE>
meeting of the Board of Directors held immediately after each subsequent annual
meeting of the shareholders of the Company. See "Management - 1993 Stock Option
Plan."
Executive Compensation
The following table sets forth certain information concerning the
compensation for the fiscal years ended September 30, 1994, 1995, and 1996
earned by the Company's Chief Executive Officer and by the Company's other
executive officers whose cash salary and bonus exceeded $100,000 during fiscal
1996 (the "Named Officers"). No other officer of the Company received
compensation of $100,000 or more during fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------
Securities All Other
Annual Compensation Underlying Compensation
-----------------------
Name and Principal Position Year Salary($)(1) Bonus($) Options(#)(2) ($)(3)
- --------------------------- ----- ------------ -------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Fred W. Wagenhals 1996 $250,000 $75,000 -- $4,854
Chairman of the Board, President, 1995 164,423 23,000 50,000 3,173
and Chief Executive Officer 1994 150,000 -- 40,000 --
Tod J. Wagenhals 1996 $ 75,000 $26,000 20,000 $1,832
Executive Vice President, 1995 59,596 8,000 50,000 1,247
Secretary, and Director 1994 43,345 -- 40,000 --
Christopher S. Besing 1996 $ 75,000 $26,000 20,000 $1,572
Vice President, Chief Financial 1995 71,250 10,000 50,000 1,425
Officer, Treasurer, and Director 1994 45,000 -- 80,000 --
</TABLE>
- ------------------
(1) Messrs. Wagenhals, Wagenhals, and Besing also received certain
perquisites, the value of which did not exceed 10% of their salary and
bonus during fiscal 1996.
(2) The exercise price of all stock options granted were equal to the fair
market value of the Company's Common Stock on the date of grant.
(3) Amounts shown for fiscal 1996 represent matching contributions made by
the Company to the Company's 401(k) Plan.
The Company offers its employees medical and life insurance benefits.
The executive officers and other key employees of the Company, including
directors who also are employees of the Company, are eligible to receive stock
options under the Company's stock option plan. See "Management - 1993 Stock
Option Plan." The Company does not have a long-term incentive plan or a defined
benefit or actuarial plan and has never issued any stock appreciation rights.
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<PAGE>
The following table provides information on stock options granted to
the Company's Named Officers during the fiscal year ended September 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Exercise
Options Granted in Price
Name Granted (#)(1) Fiscal Year ($/Sh) Expiration Date
- ---- -------------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Fred W. Wagenhals -- -- -- --
Chairman of the Board, President,
and Chief Executive Officer
Tod J. Wagenhals 20,000 8.5% $10.63 9/4/02
Executive Vice President,
Secretary, and Director
Christopher S. Besing 20,000 8.5% $10.63 9/4/02
Vice President, Chief Financial
Officer, and Director
</TABLE>
- ------------------
(1) The options were granted at the fair value of the shares on the date of
grant and have a six-year term. One- third of the options vest and
become exercisable on each of the first, second, and third
anniversaries of the date of grant.
The following table provides information on options exercised in the
last fiscal year by the Company's Named Officers and the value of each such
officer's unexercised options at September 30, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the Money Options
Shares Acquired Value Options at Fiscal Year-End (#) at Fiscal Year-End ($)(1)
------------------------------ -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- --------------- ------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals -0- -0- 290,000 -0- $3,125,250 -0-
Chairman of the Board,
President, and Chief
Executive Officer
Tod J. Wagenhals -0- -0- 170,000 20,000 $1,784,380 $45,000
Executive Vice President,
Secretary, and Director
Christopher S. Besing 40,000 $210,000 50,000 20,000 $ 431,250 $45,000
Vice President, Chief
Financial Officer,
and Director
</TABLE>
- ------------------
(1) Calculated based upon the closing price as reported on the Nasdaq
National Market on September 30, 1996 of $12.875 per share.
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<PAGE>
Recent Grants of Stock Options
Subsequent to September 30, 1996, the Company granted options to
acquire an aggregate of 86,250 shares of Common Stock. These options include
options to acquire 50,000 shares of Common Stock at an exercise price of $14.875
per share issued to Joseph M. Mattes, a Vice President and Director of the
Company, on November 8, 1996, and options to acquire 15,000 shares of Common
Stock at an exercise price of $17.50 per share issued to Kenneth R. Barbee, a
Vice President of Sports Image, on January 8, 1997. See "Management - Employment
and Consulting Agreements."
401(k) Profit Sharing Plan
In October 1994, the Company established a defined contribution plan
(the "401(k) Plan") that qualifies as a cash or deferred profit sharing plan
under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Under the 401(k) Plan, participating
employees may defer from 1% to 15% of their pre-tax compensation, subject to the
maximum allowed under the Internal Revenue Code. The Company will contribute
$.50 for each dollar contributed by the employee, up to a maximum contribution
of 2% of the employee's defined compensation. In addition, the 401(k) Plan
provides that the Company may make an employer profit sharing contribution in
such amounts as may be determined by the Board of Directors.
1993 Stock Option Plan
The Company's 1993 Stock Option Plan, as amended (the "1993 Plan")
provides for the granting of options to acquire Common Stock of the Company
("Options"), the direct granting of Common Stock ("Stock Awards"), the granting
of stock appreciation rights ("SARs"), and the granting of other cash awards
("Cash Awards") (Stock Awards, SARs, and Cash Awards are collectively referred
to herein as "Awards"). The 1993 Plan is intended to comply with Rule 16b-3 as
promulgated under the Exchange Act with respect to persons subject to Section 16
of the Exchange Act. The Company believes that the 1993 Plan is important in
attracting and retaining executives and other key employees and constitutes a
significant part of the compensation program for key personnel, providing them
with an opportunity to acquire a proprietary interest in the Company and giving
them an additional incentive to use their best efforts for the long-term success
of the Company. The 1993 Plan will remain in effect until September 24, 2001.
On September 4, 1996 and January 16, 1997, the Company's Board of
Directors adopted amendments to the 1993 Plan that, among other things,
increased the number of shares of Common Stock issuable pursuant to the 1993
Plan from 2,000,000 to 2,750,000 shares. Those amendments must be approved by
the Company's shareholders prior to September 4, 1997. In the event the
Company's shareholders do not approve the amendments prior to that date, Options
or Awards granted subsequent to September 4, 1996 will be cancelled. As of
February 28, 1997, an aggregate of 1,184,245 shares of the Company's Common
Stock has been issued upon exercise of Options granted pursuant to the 1993
Plan, and there were outstanding Options to acquire an additional 1,014,305
shares of the Company's Common Stock.
If any Option or SAR terminates or expires without having been
exercised in full, stock not issued under such Option or SAR will again be
available for the purposes of the 1993 Plan. If any change is made in the stock
subject to the 1993 Plan, or subject to any Option or SAR granted under the 1993
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, split-up, combination of shares, exchange of shares, change in
corporate structure, or otherwise), the 1993 Plan provides that appropriate
adjustments will be made as to the maximum number of shares subject to the 1993
Plan and the number of shares and exercise price per share of stock subject to
outstanding Options.
Options and Awards may be granted only to persons ("Eligible Persons")
who at the time of grant are either (i) key personnel, including officers and
directors of the Company or its subsidiaries, or (ii) consultants and
independent contractors who provide valuable services to the Company or to its
subsidiaries. Options that are
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<PAGE>
incentive stock options may only be granted to employees of the Company (or its
subsidiaries). To the extent that granted Options are incentive stock options,
the terms and conditions of those Options must be consistent with the
qualification requirements set forth in the Internal Revenue Code. No employee
of the Company may receive grants of Options or Awards representing more than 50
percent of the shares of Common Stock issuable under the 1993 Plan.
The exercise prices, expiration dates, maximum number of shares
purchasable, and the other provisions of the Options will be established at the
time of grant. The exercise prices of Options that are not incentive stock
options may not be less than 85 percent of the fair market value of the Common
Stock at the time of the grant, and the exercise prices of incentive stock
options may not be less than 100 percent (110 percent if the option is granted
to a shareholder who at the time the option is granted owns stock possessing
more than ten percent of the total combined voting power of all classes of stock
of the Company) of the fair market value of the Common Stock at the time of the
grant. Options may be granted for terms of up to ten years and become
exercisable in whole or in one or more installments at such time as may be
determined upon a grant of the Options. To exercise an Option, the optionholder
will be required to deliver to the Company full payment of the exercise price
for the shares as to which the option is being exercised. Generally, options can
be exercised by delivery of cash, bank cashier's check or shares of Common Stock
of the Company.
Unless otherwise authorized by the Board of Directors in its sole
discretion, Options granted under the 1993 Plan are nontransferable other than
by will or by the laws of descent and distribution upon the death of the
optionholder and, during the lifetime of the optionholder, are exercisable only
by such optionholder. Unless the terms of the stock option agreement otherwise
provide, in the event of the death or termination of the employment or services
of the participant (but never later than the expiration of the term of the
Option) Options may be exercised within a one-month period. If termination is by
reason of disability, however, Options may be exercised by the optionholder or
the optionholder's estate or successor by bequest or inheritance during the
period ending one year after the optionholder's retirement (but not later than
the expiration of the term of the option). Termination of employment at any time
for cause immediately terminates all Options held by the terminated employee.
The 1993 Plan includes an Automatic Program that provides for the
automatic grant of stock options ("Automatic Options") to non-employee
directors. Each non-employee director serving on the Board of Directors on the
date the amendments to the 1993 Plan providing for the Automatic Program were
approved by the Company's shareholders received Automatic Options to acquire
10,000 shares of Common Stock on that date, and each subsequently newly elected
non-employee member of the Board of Directors will receive Automatic Options to
acquire 10,000 shares of Common Stock on the date of his or her first
appointment or election to the Board of Directors. In addition, Automatic
Options to acquire 8,000 shares of Common Stock are automatically granted to
each non-employee director at the meeting of the Board of Directors held
immediately after each annual meeting of shareholders. All Automatic Options
vest and become exercisable immediately upon grant. A non-employee member of the
Board of Directors is not eligible to receive the 8,000-share Automatic Option
grant if that option grant date is within 30 days of such non-employee member
receiving the 10,000-share Automatic Option grant. The exercise price per share
of Common Stock subject to Automatic Options granted under the 1993 Plan will be
equal to 100% of the fair market value of the Company's Common Stock (as defined
in the 1993 Plan) on the date such options are granted. The Company believes
that the automatic grant of stock options to non-employee directors is necessary
to attract, retain and motivate independent directors.
The Company also may grant Awards to Eligible Persons under the 1993
Plan. SARs entitle the recipient to receive a payment equal to the appreciation
in market value of a stated number of shares of Common Stock from the price
stated in the award agreement to the market value of the Common Stock on the
date first exercised or surrendered. Stock Awards entitle the recipient to
directly receive Common Stock. Cash Awards entitle the recipient to receive
direct payments of cash depending on the market value or the appreciation of the
Common Stock or other securities of the Company.
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<PAGE>
Employment and Consulting Agreements
In connection with the acquisition of the assets of Sports Image, the
Company entered into a three-year employment agreement with Joseph M. Mattes,
who served as the President of Sports Image prior to the acquisition. Under the
terms of the employment agreement, Mr. Mattes serves as a Vice President of the
Company and as the President of its Sports Image subsidiary at a salary of
$225,000 per year. In addition, Mr. Mattes will be eligible to receive an annual
bonus of up to $67,500, as determined by the Company's Board of Directors based
upon factors that it deems relevant, including Mr. Mattes' performance. The
Company also granted to Mr. Mattes five-year options to acquire 50,000 shares of
the Company's Common Stock at an exercise price of $14.875 per share. Of the
options granted, options to acquire 30,000 shares vested at the date of grant,
options to acquire 10,000 shares will vest on November 8, 1997, and options to
acquire the remaining 10,000 shares will vest on November 8, 1998.
In connection with the acquisition of Motorsport Traditions, the
Company entered into a two-year employment agreement with Kenneth R. Barbee, who
served in various executive capacities with Motorsport Traditions prior to the
acquisition. Under the terms of the employment agreement, Mr. Barbee serves as a
Vice President of the Company's wholly owned subsidiary, Sports Image, at a
salary of $120,000 per year. In addition, Mr. Barbee will be eligible to receive
an annual bonus of up to $24,000, as determined by the Company's Board of
Directors based upon factors that it deems relevant, including Mr. Barbee's
performance. The Company also granted to Mr. Barbee six-year options to acquire
15,000 shares of the Company's Common Stock at an exercise price of $17.50 per
share. Of the options granted, options to acquire 7,500 shares vested at the
date of grant and options to acquire the remaining 7,500 shares will vest on the
first anniversary of the date of grant.
In connection with the acquisition of Motorsport Traditions, the
Company also entered into a four-year consulting agreement with John Bickford
pursuant to which Mr. Bickford provides consulting services with respect to
representing the Company in the motorsports community, creating new marketing
and promotional campaigns, and advising the Company with respect to the
motorsports industry. The Company pays Mr. Bickford an annual fee of $100,000
for services provided in connection with the consulting agreement. Mr. Bickford
became a director of the Company in January 1997. See "Management - Directors
and Executive Officers."
Limitation of Directors' Liability; Indemnification of Directors, Officers,
Employees, and Agents
The Company's Restated Articles eliminate the personal liability of any
director of the Company to the Company or its shareholders for money damages for
any action taken or failure to take any action as a director of the Company, to
the fullest extent allowed by the Arizona Business Corporation Act (the
"Business Corporation Act"). Under the Business Corporation Act, directors of
the Company will be liable to the Company or its shareholders only for (a) the
amount of a financial benefit received by the director to which the director is
not entitled; (b) an intentional infliction of harm on the Company or its
shareholders; (c) certain unlawful distributions to shareholders; and (d) an
intentional violation of criminal law. The effect of these provisions in the
Restated Articles is to eliminate the rights of the Company and its shareholders
(through shareholders' derivative suits on behalf of the Company) to recover
money damages from a director for all actions or omissions as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (a) through (d) above. These
provisions do not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care.
The Company's Restated Articles require the Company to indemnify and
advance expenses to any person who incurs liability or expense by reason of such
person acting as a director of the Corporation, to the fullest extent allowed by
the Business Corporation Act. This indemnification is mandatory with respect to
directors in all circumstances in which indemnification is permitted by the
Business Corporation Act, subject to the requirements of the Business
Corporation Act. In addition, the Company may, in its sole discretion, indemnify
and advance expenses, to the fullest extent allowed by the Business Corporation
Act, to any person who incurs liability or expense by reason of such person
acting as an officer, employee or agent of the Company, except where
indemnification is mandatory pursuant to the Business Corporation Act, in which
case the Company is required to indemnify to the fullest extent required by the
Business Corporation Act.
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CERTAIN TRANSACTIONS
In November 1993, Fred W. Wagenhals advanced the Company $473,000. This
advance was made to enable the Company to cover advance production costs on the
manufacture of certain die-cast promotional programs. The Company issued a
promissory note to Mr. Wagenhals in the amount of the advance, bearing interest
at 8% per annum. As of September 30, 1994, the promissory note was paid in full.
In November 1993, the Company entered into an agreement with Action
Performance Sales, Inc., Fred W. Wagenhals, and Edward M. Topham and Bruce S.
Gill, former officers and directors of the Company. The agreement was
subsequently modified in March 1994. Pursuant to the modified agreement, (i) Mr.
Wagenhals and his designees purchased 39,822 shares of the Company's Common
Stock from Mr. Gill for $46,390, or $1.16 per share; (ii) the Company purchased
and retired 560,178 shares of the Company's Common Stock from Mr. Gill for
$653,610, or $1.16 per share; (iii) Mr. Gill's employment agreement with the
Company, which provided for minimum compensation of $150,000 per year through
July 1996, was cancelled except for certain non-competition covenants; (iv) Mr.
Gill resigned as a director and officer of the Company and its subsidiaries; (v)
options to purchase 200,000 shares of the Company's Common Stock at $2.75 per
share held by Mr. Gill were cancelled; and (vi) the Company sold certain real
and personal property located in Florida to Mr. Gill for approximately $31,300
and the assumption by Mr. Gill of a mortgage with a principal amount of
approximately $23,344.
Pursuant to the same agreement, (a) Mr. Topham's employment agreement
with the Company, which provided for minimum compensation of $100,000 per year
through December 1995, was cancelled except for certain non-competition
covenants; (b) in January 1994 designees of Mr. Wagenhals purchased certain
bonus rights and options to acquire 160,000 shares of the Company's Common Stock
from Mr. Topham for $260,000; and (c) Mr. Topham agreed to assist the Company in
certain matters relating to his former responsibilities as the Company's Chief
Financial Officer for a period of not more than 60 days, for an amount equal to
$100,000.
In November 1993, the Company entered into an agreement with Fred W.
Wagenhals and V. Andrew Gill, a former officer and director of the Company. The
agreement was subsequently modified in March 1994. Pursuant to the modified
agreement, (1) Mr. Wagenhals and his designees purchased 36,978 shares of the
Company's Common Stock from Mr. Gill for $40,010, or $1.08 per share; (2) the
Company purchased and retired a total of 563,022 shares of the Company's Common
Stock from Mr. Gill for $559,990 and the cancellation of Mr. Gill's promissory
note in favor of the Company in the amount of $50,000, or $1.08 per share; (3)
Mr. Gill's employment agreement with the Company, which provided for minimum
compensation of $150,000 per year through July 1996, was cancelled except for
certain non-competition covenants; (4) Mr. Gill resigned as an officer of the
Company and its subsidiaries; and (5) options to acquire 200,000 shares of the
Company's Common Stock at $2.75 per share held by Mr. Gill were cancelled. Mr.
Gill resigned as a director of the Company on January 3, 1994.
In December 1994, Fred W. Wagenhals advanced $300,000 to the Company in
order to enable the Company to make certain advance royalty payments related to
license agreements entered into by the Company for die-cast products to be
marketed by the Company beginning in the second quarter of fiscal 1995. The
Company issued a promissory note to Mr. Wagenhals for the advance, bearing
interest, at 9% per annum, providing for monthly payment of accrued interest and
calling for the payment of the principal no later than March 31, 1995. The
Company repaid the note in full on February 9, 1995. The Company's prepaid
expenses and other assets at September 30, 1995 included an advance of $50,000
to Mr. Wagenhals, which was repaid in fiscal 1996.
The Company currently leases a building in Tempe, Arizona, containing
approximately 46,000 square feet, for its corporate, administrative and sales
offices and warehouse facilities. Fred W. Wagenhals currently owns a one-third
interest in F. W. Investments, a partnership which owns this facility. Prior to
February 1994, the Company occupied a separate leased facility in Tempe, Arizona
totalling approximately 47,000 square feet, which was utilized as offices and
for manufacturing. F.W. Investments also owns this building facility. The
Company paid F.W. Investments rent of approximately $171,000, $177,000 and
$177,000 respectively, during fiscal 1994, 1995 and 1996.
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In November 1996, the Company issued to the seller of Sports Image and
persons affiliated with the seller an aggregate of 403,361 shares of Common
Stock as a portion of the consideration paid for the assets of Sports Image. See
"Business - Development of the Company." Joseph M. Mattes, who became an officer
and director of the Company upon completion of the acquisition of Sports Image,
received 15,000 shares of Common Stock as part of that transaction. All of the
403,361 shares issued in connection with the acquisition of Sports Image are
being registered for resale pursuant to the Registration Statement of which this
Prospectus forms a part. See "Description of Securities - Registration Rights."
The Company entered into a three-year employment agreement with Mr. Mattes in
connection with the acquisition of Sports Image. See "Management - Employment
and Consulting Agreements."
In connection with the acquisition of Motorsport Traditions, the
Company entered into a consulting agreement with John S. Bickford. See
"Management - Employment and Consulting Agreements." Mr. Bickford became a
director of the Company in January 1997.
PRIVATE PLACEMENTS
In January 1994, the Company completed a private placement of 83 units
and in March 1994, the Company completed a private placement of 125 units for
$20,000 per unit. Each unit consisted of $12,500 in principal amount of 10%
Convertible Subordinated Debentures and 5,400 shares of Common Stock. All of the
Debentures were subsequently converted into shares of the Company's Common Stock
at a conversion price of $1.75 per share. An aggregate of 77,798 shares of
Common Stock that were issued as part of the units or upon conversion of the
Debentures have been registered for resale pursuant to another Registration
Statement to which this Prospectus relates.
In August 1994, the Company issued 100,000 shares of Common Stock to
F.M. Motorsports, Inc., formerly Fan Fueler, Inc., as consideration for the
assets and liabilities acquired from Fan Fueler, Inc. at that time. See
"Business - Development of the Company." The shares held by F.M. Motorsports,
Inc. have been registered for resale pursuant to another Registration Statement
to which this Prospectus relates.
In November 1996, the Company issued an aggregate of 403,361 shares of
Common Stock to the sellers of Sports Image. See "Certain Transactions."
In January 1997, the Company issued to the sellers of Motorsport
Traditions an aggregate of 342,857 shares of Common Stock as a portion of the
consideration paid to acquire Motorsport Traditions. See "Business Development
of the Company." All of the 342,857 shares issued in connection with the
acquisition of Motorsport Traditions are being registered for resale pursuant to
the Registration Statement of which this Prospectus forms a part. See
"Description of Securities - Registration Rights."
On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro at a price of $14.50 per share. Hasbro has agreed that it
will not sell or otherwise transfer any of such shares prior to April 16, 1997.
All of the 187,500 shares sold to Hasbro are being registered for resale
pursuant to the Registration Statement of which this Prospectus forms a part.
See "Description of Securities - Registration Rights." The Company has agreed
that, in the event that Hasbro sells such shares at a price lower than $14.50
per share during the one-year period commencing on the later of (i) April 16,
1997 or (ii) the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will reimburse Hasbro for the amount of
such loss, plus interest.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the shares
of the Company's outstanding Common Stock beneficially owned as of March 12,
1997 (i) by each of the Company's directors and executive officers; (ii) by all
directors and executive officers of the Company as a group; (iii) by each person
who is known by the Company to own beneficially or exercise voting or
dispositive control over more than 5% of the Company's Common Stock; and (iv) by
each of the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering(1)(2) Shares Being Offering(1)(2)
Name and Address of ------------------ Registered for --------------------
Beneficial Owner Number Percent Sale(3) Number Percent
- ---------------- --------- ------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
- --------------------------------
Fred W. Wagenhals 2,654,000 (4) 19.0% 0 2,654,000 19.0%
Tod J. Wagenhals 171,456 (5) 1.2% 0 171,456 1.2%
Christopher S. Besing 50,000 (6) * 0 50,000 *
Joseph M. Mattes 45,000 (7) * 15,000 30,000 *
Melodee L. Volosin 27,500 (8) * 0 27,500 *
John S. Bickford 17,143 * 17,143 0 *
Jack M. Lloyd 18,000 (9) * 0 18,000 *
Robert H. Manschot 22,000 (10) * 0 22,000 *
All directors and executive officers
as a group (eight persons) 3,005,099 21.0% 32,143 2,972,956 20.8%
Other Selling Shareholders
- --------------------------
Dale Earnhardt and Teresa Earnhardt,
JTWROS 377,536 2.8% 356,861 20,675 *
Hasbro, Inc. 187,500 1.4% 187,500 0 *
Jeffrey M. Gordon 171,428 1.3% 171,428 0 *
Kenneth R. Barbee 126,331(11) * 114,286 12,045 *
F.M. Motorsports, Inc. (12) 45,000 * 45,000 0 *
Philip C. Leavitt 56,960 * 55,620 1,340 *
Sonja R. Barbee 20,000 * 20,000 0 *
David M. Furr 86,100(13) * 15,000 71,100 *
Donald G. Hawk, Jr. 15,000 * 15,000 0 *
Dianne Leavitt 11,142 * 11,142 0 *
David Leavitt 11,036 * 11,036 0 *
Jack C. Nipper 10,000 * 10,000 0 *
Jeffrey C. Efird 10,000 * 10,000 0 *
Christopher L. Williams 1,500 * 1,500 0 *
</TABLE>
- --------------------------------
*Less than 1% of outstanding shares of Common Stock.
(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 by him, subject to applicable community property
law. Except as otherwise indicated, each of such persons may be reached
through the Company at 2401 West First Street, Tempe, Arizona 85251.
(2) The numbers and percentages shown include the shares of Common Stock
actually owned as of March 12, 1997 and the shares of Common Stock
which the 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 which the identified person or group had the right to
acquire within 60 days of March 12, 1997 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 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) Each of the Selling Shareholders is assumed to be selling all of the
shares of Common Stock registered for sale and will own no shares of
Common Stock after the offering, except for 30,000, 20,675, 12,045,
1,340, and 71,100 shares of Common Stock to be beneficially owned by
Joseph M. Mattes, Dale Earnhardt and Teresa Earnhardt, Kenneth R.
Barbee, Philip C. Leavitt, and David M. Furr, respectively. The Company
has no assurance that the Selling Shareholders will sell any of the
securities being registered hereby.
(4) Represents 2,364,000 shares of Common Stock and vested options to
acquire 290,000 shares of Common Stock.
(5) Represents 1,456 shares of Common Stock and vested options to acquire
170,000 shares of Common Stock.
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<PAGE>
(6) Represents vested options to acquire 50,000 shares of Common Stock.
(7) Represents 15,000 shares of Common Stock and vested options to acquire
30,000 shares of Common Stock.
(8) Represents vested options to acquire 27,500 shares of Common Stock.
(9) Represents vested options to acquire 18,000 shares of Common Stock.
(10) Represents 4,000 shares of Common Stock and vested options to acquire
18,000 shares of Common Stock.
(11) Represents 117,246 shares of Common Stock held and vested options to
acquire 7,500 shares of Common Stock held by Mr. Barbee; 985 shares of
Common Stock held jointly by Mr. Barbee and his spouse; and 600 shares
held in a custodial account for the benefit of Mr. Barbee's minor
grandson. Mr. Barbee serves as custodian of the account for the benefit
of his minor grandson, but disclaims beneficial ownership of the shares
held in such account. Mr. Barbee currently serves as a Vice President
of the Company's wholly owned subsidiary, Sports Image, Inc. See
"Management - Employment and Consulting Agreements."
(12) F.M. Motorsports, Inc. is owned by Fred Miller, III and Peter Thomas
Cassella, each of whom may be deemed to be the beneficial owner of the
shares held by F.M. Motorsports, Inc. Each of Messrs. Miller and
Cassella disclaims beneficial ownership of the shares held by F.M.
Motorsports, Inc., except to the extent of his respective ownership
interest in F.M. Motorsports, Inc. Mr. Cassella is a former officer and
director of the Company.
(13) Represents 35,000 shares of Common Stock and vested options to acquire
46,500 shares of Common Stock held by Mr. Furr; 4,000 shares held by
Mr. Furr's spouse; and 400 shares held in an IRA account by Mr. Furr's
spouse.
DESCRIPTION OF SECURITIES
The Company's authorized capital consists of 25,000,000 shares of
Common Stock, $0.01 par value and 5,000,000 shares of serial preferred stock, no
par value (the "Serial Preferred Stock"). As of February 28, 1997, 13,703,485
shares of Common Stock and no shares of Preferred Stock were issued and
outstanding. An additional 1,014,305 shares of Common Stock may be issued upon
exercise of options outstanding or available for issuance under the Company's
1993 Stock Option Plan. All of the issued and outstanding shares of Common Stock
are fully paid and non-assessable.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each
share of Common Stock held of record on all matters submitted to a vote of the
shareholders, other than the election of directors in which shareholders are
entitled to cumulate their votes in accordance with Arizona law. Subject to the
preferences of any outstanding preferred stock, each share of Common Stock is
entitled to receive dividends as may be declared by the Company's Board of
Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment in full of all
creditors of the Company and the liquidation preferences of any outstanding
shares of preferred stock.
Serial Preferred Stock
The Serial Preferred Stock may be issued in such series and
denominations as deemed advisable by the Company's Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue Serial Preferred Stock with dividend, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
holders of the Common Stock. In the event of issuance, the Serial Preferred
Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. The
Company does not currently intend to issue any shares of Serial Preferred Stock.
Senior Notes due January 2, 1999
On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of Senior Notes to three insurance companies. The Senior Notes
bear interest at the rate of 8.05% per annum, provide for semi-annual payments
of accrued interest, and will mature on January 2, 1999. The Company may not
prepay the Senior Notes prior to maturity, but will be required to offer to
redeem the Senior Notes in the event of a "Change of Control" of the Company, as
defined in the Senior Notes. The Senior Notes contain certain provisions that,
among other things, require the Company to comply with certain financial ratios
and net worth requirements and limit the
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<PAGE>
ability of the Company and its subsidiaries to incur additional indebtedness, to
sell assets, or engage in certain mergers on consolidations. The Senior Notes
are guaranteed by Sports Image and Motorsport Traditions.
Registration Rights
In connection with the acquisition of Sports Image, the Company entered
into a registration agreement with sellers of Sports Image. The registration
agreement grants the holders of the shares issued to the sellers of Sports Image
the right to one "demand" registration as well as "piggyback" registration
rights. In connection with the acquisition of Motorsport Traditions, the Company
entered into two registration agreements with the sellers of Motorsport
Traditions. These agreements require the Company to file a registration
statement covering the shares issued to the sellers of Motorsport Traditions and
to use its best efforts to cause the registration statement to become effective
as soon as practicable and to remain effective until December 31, 1999. In
addition, the registration agreements grant the holders of the shares issued to
the sellers of Motorsport Traditions "piggyback" registration rights. In
connection with the sale of shares of Common Stock to Hasbro, the Company agreed
to use its best efforts to file a registration statement covering such shares
and to cause the registration statement to become effective and to remain
effective until January 16, 2000. The Registration Statement of which this
Prospectus forms a part is intended to satisfy the Company's obligations to
register the shares covered by the registration agreements described above.
Arizona Corporate Takeover Act and Certain Charter Provisions
The Company is subject to the provisions of Arizona Revised Statutes
Sections 10-2701 et. seq. (the "Arizona Corporate Takeover Act"). The Arizona
Takeover Act and certain provisions of the Company's Restated Articles and
Restated Bylaws, as summarized in the following paragraphs, may have the effect
of discouraging, delaying, or preventing hostile takeovers (including those that
might result in a premium over the market price of the Company's Common Stock),
or discouraging, delaying, or preventing changes in control or management of the
Company.
Arizona Corporate Takeover Act
Article 1 of the Arizona Corporate Takeover Act is intended to restrict
"greenmail" attempts by prohibiting the Company from purchasing any shares of
its capital stock from any beneficial owner of more than 5% of the voting power
of the Company (a "5% Owner") at a per share price in excess of the average
market price during the 30 trading days prior to the purchase, unless (i) the 5%
Owner has beneficially owned the shares to be purchased for a period of at least
three years prior to the purchase; (ii) a majority of the Company's shareholders
(excluding the 5% Owner, its affiliates or associates, and any officer or
director of the Company) approves the purchase; or (iii) the Company makes the
offer available to all holders of shares of its capital stock on the same terms.
Article 2 of the Arizona Corporate Takeover Act is intended to
discourage the direct or indirect acquisition by any person of beneficial
ownership of shares of the Company (other than an acquisition of shares from the
Company) that would, when added to other shares of the Company beneficially
owned by such person, immediately after the acquisition entitle such person to
exercise or direct the exercise of (a) at least 20% but less than 33 1/3%, (b)
at least 33 1/3% but less than or equal to 50%, or (c) more than 50% of the
voting power of the Company's capital stock (a "Control Share Acquisition"). The
Arizona Corporate Takeover Act (1) gives the shareholders of the Company other
than any person that makes or proposes to make a Control Share Acquisition (the
"Acquiring Person") or the Company's directors and officers, the right to limit
the voting power of the shares acquired by the Acquiring Person that exceed the
threshold voting ranges described above, other than in the election of
directors, and (2) gives the Company the right to redeem such shares from the
Acquiring Person at a price equal to their fair market value under certain
circumstances.
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<PAGE>
Article 3 of the Arizona Corporate Takeover Act is intended to
discourage the Company from entering into certain mergers, consolidations, share
exchanges, sales or other dispositions of the Company's assets, liquidation or
dissolution of the Company, reclassifications of securities, stock dividends,
stock splits, or other distribution of shares, and certain other transactions
(each a "Business Combination") with any Interested Shareholder (as defined
below) or any of the Interested Shareholder's affiliates or for a period of
three years after the date that the Interested Shareholder first acquired the
shares of Common Stock that qualify such person as an Interested Shareholder,
unless either the Business Combination or the Interested Shareholder's
acquisition of shares is approved by a committee of the Company's Board of
Directors (comprised of disinterested directors or other persons) prior to the
date on which the Interested Shareholder first acquired the shares that qualify
such person as an Interested Shareholder. In addition, Article 3 prohibits the
Company from engaging in any Business Combination with an Interested Shareholder
or any of the Interested Shareholder's affiliates after such three-year period
unless (i) the Business Combination or acquisition of shares by the Interested
Shareholder was approved by the Company's Board of Directors prior to the date
on which the Interested Shareholder acquired the shares that qualified such
person as an Interested Shareholder; (ii) the Business Combination is approved
by the Company's shareholders (excluding the Interested Person or any of its
affiliates) at a meeting called after such three-year period; or (iii) the
Business Combination satisfies each of certain statutory requirements. Article 3
defines an "Interested Shareholder" as any person (other than the Company and
its subsidiaries) that either (a) beneficially owns 10% or more of the voting
power of the outstanding shares of the Company, or (b) is an affiliate or
associate of the Company and who, at any time within the three-year period
preceding the transaction, was the beneficial owner of 10% or more of the voting
power of the outstanding shares of the Company.
Certain Charter Provisions
In addition to the provisions of the Arizona Corporate Takeover Act
described above, the Company's Restated Articles and Restated Bylaws contain a
number of provisions relating to corporate governance and the rights of
shareholders. These provisions include (a) the authority of the Board of
Directors to fill vacancies on the Board of Directors; (b) the authority of the
Board of Directors to issue preferred stock in series with such voting rights
and other powers as the Board of Directors may determine; (c) a provision that,
unless otherwise prohibited by law, special meetings of the shareholders may be
called only by the President of the Company, the Board of Directors, or by
holders of not fewer than 10% of all shares entitled to vote at the meeting; and
(d) a provision for cumulative voting in the election of directors, pursuant to
Arizona law.
Shares Eligible For Future Sale
As of February 28, 1997, the Company had 13,703,485 shares of Common
Stock outstanding, of which approximately 10,281,512 shares are eligible for
resale in the public market without restriction unless held by an existing
"affiliate" of the Company, as that term is defined under the Securities Act.
The remaining 3,421,973 shares of Common Stock currently outstanding are
"restricted securities," as that term is defined in Rule 144, and may be sold
only in compliance with Rule 144, pursuant to registration under the Securities
Act or pursuant to an exemption therefrom. An aggregate of 1,056,516 shares of
"restricted securities" covered by this Prospectus are being registered for
resale pursuant to the Registration Statement of which this Prospectus forms a
part or have been registered for resale under another Registration Statement to
which this Prospectus relates. Affiliates will be subject to certain of the
resale limitations of Rule 144 as promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of shares beneficially
owned by such person for at least two years in such amount that does not exceed
the greater of (i) one percent of the then-outstanding shares of Common Stock
(approximately 13,700 shares as of February 28, 1997), or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 also are subject to certain
requirements as to the manner of sale, notice, and the availability of current
public information about the Company. However, a person who is not an affiliate
and has beneficially owned his or her
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<PAGE>
shares for at least three years is entitled to sell them without regard to the
volume, manner of sale or notice requirements. Recent changes to Rule 144, which
go into effect in April 1997, will reduce the two-year and three-year holding
periods described above to one year and two years, respectively. An aggregate of
2,365,456 shares held by certain officers and directors of the Company,
currently are available for sale under Rule 144. Sales of substantial amounts of
Common Stock by shareholders of the Company under Rule 144 or otherwise, or even
the potential for such sales, are likely to have a depressive effect on the
market price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities.
As of February 28, 1997, options to purchase a total of 1,014,305
shares of Common Stock were outstanding under the Company's 1993 Stock Option
Plan. An additional 301,450 shares currently are available for future option
grants under the 1993 Plan, subject to shareholder approval of recent amendments
to the 1993 Plan. See "Management - 1993 Stock Option Plan." The Company has
filed a registration statement under the Securities Act to register for offer
and sale the shares of Common Stock reserved for issuance pursuant to the
exercise of stock options granted under the 1993 Plan. Shares issued upon the
exercise of stock options granted under the 1993 Plan generally will be eligible
for sale in the public market.
Transfer Agent and Warrant Agent
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Company is registering hereby, or has registered under another
Registration Statement to which this Prospectus relates, a total of 1,056,516
shares of currently outstanding Common Stock, all of which shares may be sold
from time to time by the Selling Shareholders. The Company has granted
registration rights to certain of the Selling Shareholders, which the
Registration Statement of which this Prospectus forms a part is intended to
satisfy. Each Selling Shareholder may use this Prospectus as updated from time
to time to offer the shares of Common Stock for sale in transactions in which
the Selling Shareholder is or may be deemed to be an underwriter within the
meaning of the Securities Act. The Company will not receive any proceeds from
the sale of any shares of Common Stock by the Selling Shareholders. The Company
will not pay any compensation to an NASD member in connection with this
offering. Brokerage commissions, if any, attributable to the sale of the shares
of Common Stock offered hereby will be borne by the holders thereof.
Each currently outstanding share of Common Stock being registered for
resale hereby may be sold by the holder thereof in transactions that are exempt
from registration under the Securities Act or as long as the Registration
Statement of which this Prospectus forms a part is effective under the
Securities Act, and as long as there is a qualification in effect under, or an
available exemption from, any applicable state securities law with respect to
the resale of such shares. The Selling Shareholders, in addition to selling
pursuant to the Registration Statement of which this Prospectus is a part, also
may sell under Rule 144 as promulgated under the Securities Act, if applicable.
See "Description of Securities - Shares Eligible for Future Sale."
The Selling Shareholders also may pledge the shares of Common Stock
being registered for resale hereby to NASD broker/dealers (each a "Pledgee")
pursuant to the margin provisions of each Selling Shareholder's customer
agreements with such Pledgees. Upon default by a Selling Shareholder, the
Pledgee may offer and sell shares of Common Stock from time to time as described
above.
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<PAGE>
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association, Phoenix, Arizona. Certain members of such
firm beneficially owned 16,000 shares of the Company's Common Stock as of the
date of this Prospectus.
EXPERTS
The consolidated financial statements incorporated by reference in this
Prospectus and elsewhere in the Registration Statement of which this Prospectus
forms a part have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act of 1933, with respect to the shares offered hereby. This
Prospectus does not contain all the information contained in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information regarding the Company and
the shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits which are a part thereof, which may be
obtained upon request to the Commission and the payment of the prescribed fee.
Material contained in the Registration Statement may be examined at the
Commission's Washington, D.C. office and copies may be obtained at the
Commission's Washington, D. C. office upon payment of prescribed fees.
Statements contained in this Prospectus are not necessarily complete, and in
each case reference is made to the copy of such contracts or documents filed as
an exhibit to the Registration Statement, each such statement being qualified by
this reference.
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- --------------------------------------------------------------------------------
No person has been authorized to give any information or
to make any representation not contained in this
Prospectus, and, if given or made, such information or
representation must not be relied upon as having been
authorized by or on behalf of the Company. This
Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares covered by
this Prospectus in any jurisdiction or to any person to
whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create
any implication that there has been no change in the
affairs of the Company or that the information contained
herein is correct as of any date subsequent to the date
hereof.
--------------------------------
Page
Available Information................................. 2
Incorporation of Certain Information
by Reference......................................... 2
Forward-Looking Statements.............................2
Prospectus Summary.................................... 3
Risk Factors.......................................... 7
Use of Proceeds.......................................13
Dividends.............................................13
Capitalization........................................13
Price Range of Common Stock...........................14
Selected Consolidated Financial Data..................15
Unaudited Pro Forma Combined
Financial Information................................16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................19
Business..............................................25
Properties............................................37
Management............................................38
Certain Transactions..................................45
Private Placements....................................46
Principal and Selling Shareholders....................47
Description of Securities.............................48
Plan of Distribution..................................51
Legal Opinions........................................52
Experts...............................................52
Additional Information................................52
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<PAGE>
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1,056,516 Shares of
Common Stock
ACTION PERFORMANCE
COMPANIES, INC.
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P R O S P E C T U S
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March 12, 1997
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