PROSPECTUS
2,100,000 SHARES
[ACTION LOGO]
COMMON STOCK
Of the 2,100,000 shares of Common Stock (the "Common Stock") offered hereby,
1,770,000 shares are being sold by Action Performance Companies, Inc. (the
"Company") and 330,000 shares are being sold by certain of the Company's
shareholders (the "Selling Shareholders"). See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "ACTN." On June 18, 1997, the last reported sale price for the Common
Stock was $26.00 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS," COMMENCING ON PAGE 6, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED
HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2) SELLING SHAREHOLDERS
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Per Share ....... $25.625 $1.47 $24.155 $24.155
Total (3) ....... $53,812,500 $3,087,000 $42,754,350 $7,971,150
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated to be $420,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $61,884,375, the Underwriting Discount will total
$3,550,050, the Proceeds to Company will total $50,363,175, and the Proceeds
to Selling Shareholders will total $7,971,150. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about June 24, 1997.
MONTGOMERY SECURITIES
ADVEST, INC.
INTERSTATE/JOHNSON LANE
CORPORATION
June 19, 1997
<PAGE>
[inside front cover]
Photographs of various race car drivers and racing vehicles under license to the
Company, with a photograph of a NASCAR racing event in the background.
LOGO
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[ inside front cover fold out ]
Photographs of various die-cast scaled replica vehicles offered by the Company
with descriptions of their various features.
LOGO
<PAGE>
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. As used
herein, the term "Company" refers to Action Performance Companies, Inc. and its
subsidiaries and operating divisions. 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, (ii) reflects the exercise of options to
acquire 15,600 shares of Common Stock by one of the Selling Shareholders and the
sale of such shares in this offering, and (iii) assumes no exercise of any other
currently outstanding or authorized options or the Underwriters' over-allotment
option.
THE COMPANY
The Company is the leader in the design and sale of licensed motorsports
collectible and consumer products in the United States. The Company's products
include die-cast scaled replicas of motorsports vehicles, apparel (including
t-shirts, hats, and jackets), and souvenirs. The Company markets its products
pursuant to license arrangements with popular race car drivers (including
exclusive license arrangements with seven-time Winston Cup champion Dale
Earnhardt, 1995 Winston Cup champion Jeff Gordon, and six-time National Hot Rod
Association ("NHRA") Funny Car champion John Force), car owners, car sponsors,
automobile manufacturers, and the National Association for Stock Car Auto Racing
("NASCAR"). The Company's motorsports collectibles and consumer products are
manufactured by third parties, generally utilizing the Company's designs, tools,
and dies.
The Company markets its products to approximately 5,000 specialty retailers
either directly or through its wholesale distributor network; to motorsports
enthusiasts directly through its Racing Collectables Club of America (the
"Collectors' Club"), which currently has approximately 90,000 members; and
through mobile trackside souvenir stores, promotional programs for corporate
sponsors, and fan clubs. 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's products and other programs capitalize on the rapidly growing
popularity of motorsports. USA Today reports that motorsports racing is the
fastest growing spectator sport in the United States with attendance at NASCAR
Winston Cup events more than doubling in the past decade from 75,643 per event
in 1985 to approximately 180,000 in 1996. Approximately 5.6 million fans
attended the 31 races of the Winston Cup series in 1996. USA Today also reports
that TV ratings are growing even faster than attendance, with more than 100
million people tuning in to NASCAR's televised events each year. According to
NASCAR, more than 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, United
States Auto Club ("USAC") racing, and "World of Outlaws" sprint car racing. The
Company recently expanded its product offerings by acquiring Sports Image, Inc.
("Sports Image") in November 1996 and Motorsport Traditions Limited Partnership
and Creative Marketing and Promotions, Inc. (together, "Motorsport Traditions")
in January 1997. As a result of these acquisitions, the Company now markets and
distributes licensed motorsports apparel and other souvenir items featuring the
likeness of Dale Earnhardt, Jeff Gordon, Darrell Waltrip, Bobby Labonte, and
other popular drivers. The Company also plans to expand its development of
promotional programs for corporate sponsors of motorsports, which feature the
Company's products and which are intended to increase the brand awareness of the
products and services of the corporate sponsors. The Company also has begun to
represent a number of popular race car drivers in a broad range of licensing and
other revenue-producing opportunities, including product licenses, corporate
sponsorships, endorsement contracts, and speaking engagements.
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The Company focuses on developing long-term relationships with the most
popular drivers, car owners, car sponsors, car manufacturers, and others in the
various top racing categories. The Company continually strives to strengthen its
relationships with licensors and to develop opportunities to market innovative
licensed collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with popular
NASCAR and other motorsports personalities and sponsors significantly enhance
the collectible value and marketability of its products. The Company believes
that it will be able to leverage its relationships to attract additional drivers
in order to generate increased revenue for the Company as well as increased
earnings for the drivers.
The Company pursues a strategy designed to enhance its leadership position in
the motorsports collectible and consumer products industry. Key aspects of this
strategy include (i) continuing to enhance its existing products and introduce
new products that appeal to racing enthusiasts, (ii) expanding and strengthening
its licensing arrangements, (iii) pursuing strategic acquisitions and alliances,
(iv) expanding existing and identifying new distribution channels, and (v)
developing promotional programs for corporate sponsors.
The Company was incorporated in Arizona in 1992. The Company's principal
executive offices are located at 2401 West First Street, Tempe, Arizona 85281,
and its telephone number is (602) 894-0100.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ................... 1,770,000 shares
Common Stock offered by the Selling Shareholders ..... 330,000 shares
Common Stock to be outstanding after this offering ... 15,523,835 shares(1)
Use of proceeds ....................................... To repay existing indebtedness and for general
corporate purposes, including working capital
and possible acquisitions.
Risk factors .......................................... Investors should carefully consider the factors
discussed under "Risk Factors."
Nasdaq National Market symbol ......................... ACTN
</TABLE>
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(1) Includes 15,600 shares to be issued upon exercise of outstanding stock
options and sold by one of the Selling Shareholders in this offering. See
"Principal and Selling Shareholders." Excludes (i) 1,095,620 shares of
Common Stock reserved for issuance upon exercise of other stock options
outstanding as of June 18, 1997, and (ii) 418,617 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. See "Management -- 1993
Stock Option Plan."
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
--------------------------------------------------------------- -------------------------------
1992 1993 1994 1995 1996 1996 1996 1997(2) 1997
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PRO FORMA(1) PRO FORMA(1)
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................... $12,669 $15,108 $16,869 $26,131 $44,216 $111,627 $17,772 $43,478 $54,948
Gross profit ................ 3,528 5,378 6,381 10,249 18,920 41,231 7,189 17,176 20,050
Income (loss) from
operations ................ 436 (1,174) 573 4,130 9,654 15,537 3,222 7,425 7,469
Net income (loss) ........... $ 301 $(1,171) $ 633 $ 2,770 $ 5,953 $ 7,431 $ 2,018 $ 4,005 $ 3,651
Net income (loss) per
common share,
assuming full
dilution(3) ................ $ 0.07 $(0.21) $ 0.08 $ 0.25 $ 0.46 $ 0.54 $ 0.16 $ 0.29 $ 0.26
Weighted average number
of common shares,
assuming full dilution(3) .. 4,247 5,662 9,640 11,570 13,069 13,816 12,948 13,799 14,061
MARCH 31, 1997
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AS
ACTUAL ADJUSTED(4)
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BALANCE SHEET DATA:
Working capital .................................................................................. $ 19,203 $ 61,576
Total assets ..................................................................................... 81,519 119,392
Total debt ....................................................................................... 26,805 22,305
Shareholders' equity ............................................................................. 43,960 86,334
</TABLE>
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(1) The pro forma statement of operations data for the year ended September 30,
1996 and for the six months ended March 31, 1997 present results for the
Company as if the acquisitions of Sports Image and Motorsport Traditions had
occurred as of October 1, 1995. The pro forma statement of operations data
does not reflect any cost savings associated with the reduction of overhead
or the elimination of duplicate functions or consolidation of facilities.
See "Unaudited Pro Forma Combined Financial Information" for a discussion of
pro forma statement of operations adjustments.
(2) Includes the results of operations of Sports Image beginning as of the date
of acquisition on November 7, 1996 and the results of operations of
Motorsport Traditions beginning as of the date of acquisition on January 8,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
(3) Adjusted to reflect the two-for-one stock split effected as a stock dividend
on May 28, 1996.
(4) As adjusted to give effect to the sale by the Company of 1,770,000 shares of
Common Stock at the public offering price of $25.625 per share and the
application of the net proceeds therefrom. Includes $39,000 to be received
by the Company upon exercise of 15,600 stock options by one of the Selling
Shareholders. See "Principal and Selling Shareholders."
The Company recently agreed to settle a lawsuit for $4.9 million, which will
be taken as a charge to earnings in the quarter ending June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
5
<PAGE>
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 shares of Common Stock 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 create and introduce products on a timely basis that take advantage of
those trends and that compete effectively on the basis of price and consumer
tastes and preferences; its ability to identify popular motorsports
personalities and to enter into and maintain mutually satisfactory licensing
arrangements with them; the racing success of the key motorsports personalities
with whom the Company has license arrangements; the Company's ability to design
and arrange for the timely production and delivery of its products; the market
acceptance of the Company's products; the level and timing of orders placed by
customers; seasonality; the popularity and life cycles of and customer
satisfaction with products designed and marketed by the Company; and competition
and competitive pressures on prices.
New motorsports collectible and consumer products frequently can be
successfully marketed for only a limited time. The Company's ability to increase
its sales and marketing efforts to stimulate customer demand and its ability to
monitor third-party manufacturing arrangements in order to maintain satisfactory
delivery schedules and product quality are important factors in its long-term
prospects. A slowdown in demand for the Company's products as a result of
ineffective marketing efforts, manufacturing difficulties, changing cultural and
demographic trends or consumer tastes and spending patterns, economic
conditions, or other broad-based factors could adversely affect the Company's
operating results.
DEPENDENCE ON LICENSE ARRANGEMENTS
The Company markets its products pursuant to licensing arrangements with race
car drivers, race car owners, race car sponsors, automobile manufacturers, and
NASCAR. These licensing arrangements vary in scope and duration and generally
authorize the sale of specified licensed products for short periods of time. In
some cases, the license agreements provide for the payment of minimum royalties
or other fixed amounts, so that the Company may have significant payment
obligations with respect to a particular agreement regardless of the level of
sales of products licensed under that agreement or the profitability of those
sales. The success of licensing arrangements depends on many factors, including
the reasonableness of license fees in relationship to revenue generated by sales
of licensed products, the continued popularity of licensors, and the absence of
their sickness, incapacity, or death. The termination, cancellation, or
inability to renew material licensing arrangements, or the inability to develop
and enter into new licensing arrangements, would have a material adverse effect
on the Company. See "Business -- Licenses."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company depends upon third parties to manufacture its motorsports
collectibles and 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
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 manufacturer of die-cast
products, which currently utilizes one facility in the Peoples' Republic of
China ("China") to produce all of the Company's die-cast products) or if its
current suppliers'
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<PAGE>
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's tools, dies, and molds are located at the facilities of its
third-party manufacturers, and, accordingly, significant damage to such
facilities (particularly the facility used by its die-cast product manufacturer
in China) could result in the loss of or damage to a material portion of its key
tools, dies, and molds in addition to production delays while new facilities
were being arranged and replacement tools, dies, and molds were being produced.
The Company does not maintain an inventory of sufficient size to provide
protection for any significant period against an interruption of supply,
particularly if it were required to utilize alternative sources of supply.
Although the Company does not itself purchase the raw materials used to
manufacture its products, it is potentially subject to variations in the prices
it pays its third-party manufacturers for products depending on what they pay
for the raw materials. In this regard, the Company understands that the price of
zinc, a principal raw material in its die-cast replicas, has increased
substantially over the last several years, although to date these price
increases have not been reflected in increases in the prices the Company pays
for its die-cast replicas.
INTEGRATION OF BUSINESS OPERATIONS
The Company has recently completed the acquisitions of Sports Image and
Motorsport Traditions. Following these acquisitions, the Company has
consolidated the operations of Sports Image and Motorsport Traditions, which
were based in the same city and marketed substantially identical types of
products through substantially identical channels of distribution. There can be
no assurance that the Company will be able to complete effectively the
integration of the operations of Sports Image and Motorsport Traditions with the
Company's operations, to manage effectively the combined operations of the
acquired businesses, to achieve the Company's operating and growth strategies
with respect to these businesses, to obtain increased revenue opportunities as a
result of the anticipated synergies created by expanded product offerings and
additional distribution channels, or to reduce the overall selling, general, and
administrative expenses associated with the acquired operations. 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.
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. For example, the Company recently was
named as a defendant in a lawsuit based upon actions alleged to have been taken
by Sports Image, Inc. and Creative Marketing and Promotions, Inc. prior to the
Company's acquisitions of those entities. The Company currently is unable to
quantify the amount of liability, if any, that it may incur as a result of the
lawsuit. See "Business -- Litigation and Environmental Matters."
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, 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.
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
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<PAGE>
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 enhance further its
operational, financial, and management systems; to expand its facilities 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 has entered into a lease for a new headquarters
facility in Phoenix, Arizona, and anticipates that it will enter into a lease
for a new facility in Charlotte, North Carolina, for its operations based in
that area. 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.
RAPID MARKET CHANGES
The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition, seasonality, and a constant need
to create and market new products. Demand for motorsports collectible and
consumer products depends upon 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 a material adverse effect on the
Company's business, financial condition, and operating results. See "Business --
Products and Services."
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."
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 motorsports die-cast replica 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's promotional programs
must compete for advertising dollars against other specialty advertising
programs and media, such
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as television, radio, newspapers, magazines, and billboards. The Company
currently competes principally on the basis of the current popularity of the
race car drivers and others with whom it has licenses and its ability to obtain
favorable licensing arrangements with other popular licensors; 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. See "Business -- Competition."
POTENTIAL REGULATION OF CORPORATE SPONSORSHIP
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 (the "FDA") published final regulations
that will substantially restrict tobacco industry sponsorship of sporting
events, including motorsports, beginning in 1998. In April 1997, a federal
district judge ruled that the FDA did not have the authority to regulate tobacco
marketing. That ruling, if upheld on appeal, would have the effect of
overturning the FDA regulations. It has been reported, however that certain
major manufacturers of tobacco products currently are involved in settlement
negotiations with attorneys general of a number of states that have filed
lawsuits against such tobacco product manufacturers. According to public
reports, those settlement negotiations involve discussions of potential
voluntary restrictions on advertising by the tobacco industry as one element of
a possible settlement. The FDA regulations, if ultimately approved, and any
other legislation, regulations, or other initiatives, including the pending
settlement negotiations, that limit or prohibit advertisements of tobacco and
alcohol products at sporting events, including racing events, could ultimately
affect the popularity of motorsports, which could have a material adverse effect
on the Company. The Company believes, however, that other major consumer
products companies would quickly replace tobacco and alcohol companies as
sponsors of motorsports in the event that advertisement of those products
declines.
SEASONAL FLUCTUATIONS IN SALES
Because the auto racing season is concentrated between the months of February
and November, the second and third calendar quarters of each year (the Company's
third and fourth fiscal quarters) generally are characterized by higher sales of
motorsports products. Seasonal fluctuations in quarterly sales may require the
Company to take temporary measures, including changes in its personnel levels,
borrowing amounts, and production and marketing activities, and could result in
unfavorable quarterly earnings comparisons. The Company believes, however, that
holiday sales of its products are increasing, which has the effect of reducing
seasonal fluctuations in its sales.
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 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 its 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.
All of the Company's purchases from its foreign manufacturers are denominated
in United States dollars. As a result, the foreign manufacturers bear any risks
associated with exchange rate fluctuations subsequent to the date the Company
places its orders with those manufacturers. Purchases of die-cast products from
the China-based manufacturer of those products 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.
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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 royalties from 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.
POSSIBLE NEED FOR ADDITIONAL CAPITAL TO SUPPORT GROWTH
The Company's business operations have grown considerably in recent years as
a result of an increase in the number of licensing arrangements with race car
drivers, car owners, sponsors, automobile manufacturers, and others; expansion
of the Company's product offerings, including additional lines of die-cast
replicas that have required substantial investments in new tooling; and
significant acquisitions of complementary businesses. The Company has financed
this growth through cash generated by operations, by debt and equity financings,
and by issuing additional shares of Common Stock for acquisitions. Continued
rapid growth, whether externally through additional acquisitions or internally
through new licensing arrangements or new product offerings, could require
substantial additional capital in excess of funds available to the Company
through its existing credit facility, cash generated by operations, and the net
proceeds of this offering. 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.
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 $3.0 million. The Company does not
maintain such insurance on any of its other officers. See "Management."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has increased dramatically
during the last three years. See "Price Range of Common Stock." The period was
marked by generally rising stock prices, extremely favorable industry
conditions, and substantially improved operating results by the Company. There
can be no assurance that these favorable conditions will continue. 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
10
<PAGE>
was recently named as a defendant in a class action lawsuit alleging that the
defendants engaged in certain price fixing and other anti-competitive activities
in violation of federal anti-trust laws. The Company also is a defendant in a
lawsuit alleging breach of contract, fraud, trademark infringement, and other
claims with respect to licenses for certain of its die-cast products. The
Company is actively defending these lawsuits. In the event a decision adverse to
the Company is rendered in any of these lawsuits, the resolution of such matter
could have a material adverse effect on the Company's business, financial
condition, and operation results. In addition, the Company recently agreed to a
$4.9 million settlement in a lawsuit alleging breach of contractual duties and
appropriation of certain business opportunities of a dissolved corporation and
further claiming that these alleged activities were part of a fraudulent
scheme.The Company's financial statements currently reflect no provision for any
of these lawsuits. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Litigation and
Environmental Matters."
RIGHTS TO ACQUIRE SHARES; POTENTIAL ISSUANCE OF ADDITIONAL SHARES
As of June 18, 1997, options to acquire a total of 1,111,220 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 the Company, in all likelihood, would be
able to obtain additional capital by offering shares of its Common Stock on
terms more favorable to the Company than those provided by the exercise of such
options.
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL DEPRESSIVE EFFECT ON STOCK PRICE
Sales of substantial amounts of Common Stock by shareholders of the Company
following this offering, or even the potential for such sales, may have a
depressive effect on the market price of the Common Stock. Of the 15,523,835
shares of Common Stock to be outstanding upon completion of this offering,
approximately 12,660,000 shares will be eligible for resale in the public market
without restriction or further registration unless held by an "affiliate" of the
Company, as that term is defined under the Securities Act of 1933, as amended
(the "Securities Act"). The approximately 2,864,000 remaining shares of Common
Stock 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 approximately 762,000 shares of such "restricted
securities" have been registered for resale pursuant to another registration
statement. Upon completion of this offering, an aggregate of approximately
2,101,000 shares held by certain officers and directors will be available for
sale under Rule 144. The Company's directors and executive officers (including
two of the Selling Shareholders) have entered into lock-up agreements that
restrict the sale of their shares of Common Stock during the 120-day period
after the date of this Prospectus without the prior written consent of
Montgomery Securities. The other Selling Shareholder has entered into a lock-up
agreement that restricts the sale of its remaining 450,000 shares of Common
Stock during the 90-day period after the date of this Prospectus without the
prior written consent of Montgomery Securities. In addition, the Company has
agreed that it will not issue, offer, sell, grant options to purchase, or
otherwise dispose of any equity securities or any other securities convertible
into or exchangeable for shares of Common Stock, other than upon exercise of
outstanding stock options, during the 120-day period after the date of this
Prospectus without the prior written consent of Montgomery Securities. See
"Description of Securities -- Shares Eligible for Future Sale" and
"Underwriting."
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."
11
<PAGE>
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, particularly
those 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 net proceeds to the Company from the sale of the 1,770,000 shares of
Common Stock offered by the Company hereby will be approximately $42.3 million
(approximately $49.9 million if the Underwriters' over-allotment option is
exercised in full) at the public offering price of $25.625 per share and after
deducting estimated underwriting discounts and offering expenses of
approximately $3.0 million (approximately $3.5 million if the Underwriters'
over-allotment option is exercised in full). The Company will not receive any of
the proceeds from the sale of shares of Common Stock by the Selling
Shareholders. See "Principal and Selling Shareholders."
The Company intends to use the net proceeds of this offering (i) to retire
outstanding indebtedness under the Company's existing line of credit facility of
approximately $4.5 million as of March 31, 1997 (drawn down in connection with
the acquisition of Motorsport Traditions and the refinancing of indebtedness
incurred in connection with the acquisition of Sports Image), which matures on
March 31, 1998 and bears interest, at the Company's option, at a rate equal to
either (a) the greater of (1) the bank's publicly announced prime rate or (2) a
weighted average Federal Funds rate plus 0.5%, or (b) LIBOR plus 1.9% per annum;
and (ii) for general corporate purposes, including possible acquisitions and for
additional working capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The amounts actually expended by the Company for general corporate
purposes will vary significantly depending upon a number of factors, including
future revenue growth and the amount of cash generated by the Company's
operations. As a result, the Company will retain broad discretion in the
allocation of a significant portion of the net proceeds from this offering. In
addition, the Company may make one or more acquisitions of complementary product
lines or businesses that it believes will broaden or enhance its current product
offerings or increase market share. Although it currently is engaged in
preliminary discussions regarding one or more potential business acquisitions,
the Company has no specific oral or written plans, agreements, or commitments
for any such acquisition, and there can be no assurance that the Company will be
able to consummate any such acquisition in the future. Pending the uses
described above, the net proceeds will be invested in interest-bearing,
investment-grade securities.
The Company recently agreed to pay $4.9 million to settle a pending lawsuit
against the Company, Fred W. Wagenhals, and other parties. See "Business --
Litigation and Environmental Matters." The Company intends to pay this
settlement amount out of working capital available to it on the date of payment,
which will include cash generated from operations, but could include a portion
of the proceeds of this offering.
DIVIDEND POLICY
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. Furthermore, the terms of the
Company's current credit facility impose limitations on the ability of the
Company to pay dividends without the consent of the Company's lender.
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as of
March 31, 1997, and as adjusted to reflect the sale of the 1,770,000 shares of
Common Stock offered hereby by the Company (at the offering price of $25.625 per
share) and the application of the estimated net proceeds therefrom, after
deducting estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL(1) AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt ........................................................ $ 4,500 $ --
======= ========
Long-term debt ......................................................... $22,305 $ 22,305
Shareholders' equity
Preferred stock, no par value, 5,000,000 shares authorized;
no shares outstanding ................................................ -- --
Common Stock, $0.01 par value, 25,000,000 shares authorized;
13,713,485 shares issued and outstanding, actual;
15,499,085 shares issued and outstanding, as adjusted................. 137 155(2)
Additional paid-in capital ............................................. 31,939 74,295(2)
Retained earnings ...................................................... 11,884 11,884
------- --------
Total shareholders' equity .......................................... 43,960 86,334
------- --------
Total capitalization ................................................... $66,265 $108,639
======= ========
</TABLE>
- ----------
(1) Excludes (i) 1,014,305 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding as of March 31, 1997, (ii) 134,000
shares reserved for issuance upon exercise of stock options granted
subsequent to March 31, 1997, and (iii) 417,450 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. See "Management -- 1993 Stock Option
Plan."
(2) Includes $39,000 to be received by the Company upon exercise of 15,600 stock
options by one of the Selling Shareholders. See "Principal and Selling
Shareholders."
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 sales 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
------ ------
1995:
First Quarter ......................... $ 3.69 $ 2.38
Second Quarter ........................ 4.63 3.19
Third Quarter ......................... 9.25 4.25
Fourth Quarter ........................ 9.81 6.13
1996:
First Quarter ......................... $11.63 $ 6.38
Second Quarter ........................ 20.50 10.75
Third Quarter ......................... 14.75 9.75
Fourth Quarter ........................ 19.50 12.50
1997:
First Quarter ......................... $24.25 $16.50
Second Quarter (through June 18, 1997) 29.00 18.00
As of June 18, 1997, there were 168 holders of record and approximately 5,000
beneficial owners of the Company's Common Stock. On June 18, 1997, the closing
sales price of the Company's Common Stock on the Nasdaq National Market was
$26.00 per share.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data presented below as of and for the five
years ended September 30, 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 six months ended March 31, 1996 and 1997 are derived from the Company's
unaudited financial statements. In the opinion of management, the historical
financial data for the six months ended March 31, 1996 and 1997 include all
adjustments, consisting solely of normal recurring adjustments, necessary for a
fair presentation for such periods. The historical results of operations for the
six months ended March 31, 1997 are not necessarily indicative of results to be
expected for the year ending September 30, 1997. The 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 included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Collectibles(1) ............... $10,681 $11,558 $12,802 $23,443 $40,904 $17,047 $23,522
Apparel and souvenirs(1) ..... -- -- 143 1,190 1,961 725 18,334
Promotional ................... -- -- -- -- 1,351 -- 1,355
Other(2)(3) ................... 1,988 3,550 3,924 1,498 -- -- 267
------- ------- ------- ------- ------- ------- -------
Net sales .................... 12,669 15,108 16,869 26,131 44,216 17,772 43,478
Cost of sales .................. 9,141 9,730 10,488 15,882 25,296 10,583 26,302
------- ------- ------- ------- ------- ------- -------
Gross profit ................... 3,528 5,378 6,381 10,249 18,920 7,189 17,176
Selling, general and
administrative expenses ....... 3,092 6,552 5,808 6,119 9,266 3,967 9,751
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations .. 436 (1,174) 573 4,130 9,654 3,222 7,425
Interest income (expense) and
other, net .................... (48) (66) (164) 24 216 141 (750)
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
for (benefit from) income taxes 388 (1,240) 409 4,154 9,870 3,363 6,675
Provision for (benefit from)
income taxes .................. 87 (69) (224) 1,384 3,917 1,345 2,670
------- ------- ------- ------- ------- ------- -------
Net income (loss) .............. $ 301 ($ 1,171) $ 633 $ 2,770 $ 5,953 $ 2,018 $ 4,005
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
share, assuming full
dilution(4) ................... $ 0.07 ($ 0.21) $ 0.08 $ 0.25 $ 0.46 $ 0.16 $ 0.29
======= ======= ======= ======= ======= ======= =======
Weighted average number of
common shares, assuming full
dilution(4) ................... 4,247 5,662 9,640 11,570 13,069 12,948 13,799
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital (deficit) ..... $ (285) $ 3,186 $ 5,699 $11,922 $18,094 $13,179 $19,203
Total assets ................... 3,174 8,565 11,656 23,351 31,649 25,875 81,519
Total debt ..................... 1,406 452 266 288 365 425 26,805
Shareholders' equity ........... 139 5,744 6,909 18,890 26,996 21,775 43,960
</TABLE>
- ----------
(1) Includes the results of operations of Sports Image beginning as of the date
of acquisition on November 7, 1996, and the results of operations of
Motorsport Traditions beginning as of the date of acquisition on January 8,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
(2) Includes the revenue of the Company's M-Car(TM) operations through the
discontinuation of those operations in September 1994 and the revenue of
the Company's mini vehicle operations through the discontinuation of those
operations in March 1995.
(3) Includes royalty and license fees beginning in fiscal 1997.
(4) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996.
15
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma combined statements of operations of the
Company for the fiscal year ended September 30, 1996 and the six months ended
March 31, 1997 give effect to the acquisitions of Sports Image and Motorsport
Traditions, assuming that those acquisitions were completed on October 1, 1995.
The unaudited pro forma combined statements of operations presented herein do
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 that date or to project the Company's results of operations for any
future period.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT 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>
Sales:
Collectibles ............................ $40,904 $ 8,990 $ 49,894 $ (6,900)(2) $ 42,994
Apparel and souvenirs ................... 1,961 69,650 71,611 (4,329)(2) 67,282
Promotional ............................. 1,351 -- 1,351 -- 1,351
Other ................................... -- -- -- -- --
------- ------- -------- --------- --------
Net sales .............................. 44,216 78,640 122,856 (11,229) 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 1,346 (3) 25,694
------- ------- -------- --------- --------
Income from operations ................... 9,654 7,229 16,883 (1,346) 15,537
Interest income (expense) and other, net 216 (1,031) (815) (2,311)(4) (3,126)
------- ------- -------- --------- --------
Income before provision for income taxes 9,870 6,198 16,068 (3,657) 12,411
Provision for income taxes ............... 3,917 -- 3,917 1,063 (5) 4,980
------- ------- -------- --------- --------
Net income ............................. $ 5,953 $ 6,198 $ 12,151 $ (4,720) $ 7,431
======= ======== ========= ========== ========
Net income per common share, assuming
full dilution ........................... $ 0.46 $ 0.54
======= ========
Weighted average number of common shares,
assuming full dilution .................. 13,069 13,816 (6)
</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. Does not reflect any cost savings
associated with the reduction of overhead or the elimination of duplicative
functions or consolidation of facilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
(4) Reflects additional interest expense associated with the financing of the
acquisitions of Sports Image and Motorsport Traditions. Does not reflect the
reduction of debt resulting from the use of proceeds related to this
offering. See "Use of Proceeds."
(5) Reflects the income tax provision based on applying the pro forma estimated
effective income tax rate of the combined companies.
(6) Reflects the issuance of 746,218 shares of Common Stock as a portion of the
consideration paid to the sellers. Does not reflect the issuance of
additional shares in this offering.
16
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTED
ACQUIRED PRO FORMA PRO FORMA
THE COMPANY COMPANIES(1) TOTAL COMBINED ADJUSTMENTS COMBINED
----------- ------------ -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales:
Collectibles ...................... $23,522 $ 1,726 $25,248 $ -- $25,248
Apparel and souvenirs ............. 18,334 10,794 29,128 (1,050)(2) 28,078
Promotional ....................... 1,355 -- 1,355 -- 1,355
Other ............................. 267 -- 267 -- 267
------- ------- ------- ------- -------
Net sales ....................... 43,478 12,520 55,998 (1,050) 54,948
Cost of sales ...................... 26,302 9,646 (3) 35,948 (1,050)(2) 34,898
------- ------- ------- ------- -------
Gross profit ....................... 17,176 2,874 20,050 -- 20,050
Selling, general and administrative
expenses .......................... 9,751 2,640 12,391 190 (4) 12,581
------- ------- ------- ------- -------
Income from operations ............. 7,425 234 7,659 (190) 7,469
Interest income (expense) and
other, net ........................ (750) (334) (1,084) (305)(5) (1,389)
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes ...................... 6,675 (100) 6,575 (495) 6,080
Provision for income taxes ......... 2,670 -- 2,670 (241)(6) 2,429
------- ------- ------- ------- ------
Net income (loss) .................. $ 4,005 $ (100) $ 3,905 $ (254) $ 3,651
======= ======= ======= ======= =======
Net income per common share,
assuming full dilution ............ $ 0.29 $ 0.26
======= =======
Weighted average number of
common shares, assuming full
dilution .......................... 13,799 14,061 (7)
</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 the acquisition date of January 8, 1997.
(2) Reflects the elimination of intercompany sales.
(3) Includes a write-down of inventory immediately prior to the acquisition of
Motorsport Traditions.
(4) 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 the acquisition date of January
8, 1997. Does not reflect any cost savings associated with the reduction of
overhead or the elimination of duplicative functions or consolidation of
facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(5) 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 the acquisition date of
January 8, 1997. Does not reflect the reduction of debt resulting from the
use of proceeds related to this offering. See "Use of Proceeds."
(6) Reflects the income tax provision based on applying the pro forma estimated
effective income tax rate of the combined companies.
(7) Reflects the issuance of 746,218 shares of Common Stock as of October 1,
1995 as a portion of the consideration paid to the sellers. Does not reflect
the issuance of additional shares in this offering.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs and markets licensed motorsports products, including
die-cast scaled replicas of motorsports vehicles, apparel, and souvenirs. The
Company also develops promotional programs for sponsors of motorsports that
feature the Company's die-cast replicas or other products and are intended to
increase brand awareness of the products or services of the corporate sponsors.
In addition, the Company represents popular race car drivers in a broad range of
licensing and other revenue-producing opportunities, including product licenses,
corporate sponsorships, endorsement contracts, and speaking engagements. The
Company's motorsports collectibles 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 licensed
motorsports consumer products. During fiscal 1994, the Company also conducted
the business of staging M-Car(TM) Grand Prix Races for charitable and other
organizations, in which participating sponsors purchased specialized
gas-powered, one-third scale racing vehicles from the Company. In September
1994, the Company sold the assets and liabilities related to its M-Car(TM)
operations and discontinued its M-Car(TM) Grand Prix Race operations. During
fiscal 1994 and the first two quarters of fiscal 1995, the Company designed and
marketed pedal, electric, and gas-powered mini vehicles, primarily as specialty
promotional items. The Company sold the assets related to its mini vehicle
operations in March 1995.
In November 1996, the Company acquired Sports Image and in January 1997 the
Company acquired Motorsport Traditions, both of which marketed and distributed
licensed motorsports apparel, die-cast collectibles, and other souvenir items.
Following these acquisitions, the Company took a number of actions intended to
integrate the operations of the acquired companies with the Company's existing
operations and to reduce overall selling, general, and administrative expenses
associated with the acquired entities. These actions included consolidating the
operations of Motorsport Traditions with Sports Image's existing operations and
facility in Charlotte, North Carolina; reducing the total number of employees in
Charlotte from 201 in January 1997 to 120 as of May 30, 1997; and integrating
the management information systems of the acquired companies. The Company
believes that these efforts will have a meaningful impact on the Company's
results of operations beginning in the third quarter of fiscal 1997. These
anticipated cost savings are not reflected in the pro forma financial statements
set forth under "Unaudited Pro Forma Combined Financial Information."
In addition to the anticipated cost savings described above, the Company
believes that the acquisitions of Sports Image and Motorsport Traditions provide
the potential for enhanced revenue opportunities as a result of the synergies
created by expanded product offerings and additional distribution channels. For
example, the Company intends to develop new lines of licensed motorsports
apparel and souvenirs for exclusive sales through its Collectors' Club. The
Company also believes that Sports Image and Motorsport Traditions will provide
opportunities for additional sales growth of the Company's die-cast products
through trackside sales, promotional programs, and fan clubs.
Prior to the acquisitions of Sports Image and Motorsport Traditions, the
Company's revenue consisted primarily of sales of die-cast collectibles, and the
revenue of Sports Image and Motorsport Traditions consisted primarily of sales
of licensed motorsports apparel and souvenirs. Promotional revenue consists of
sales of products developed for corporate promotion programs. As a result of the
license agreement with Hasbro, the Company's revenue will include royalty income
beginning in fiscal 1997.
The Company's cost of sales consists primarily of the cost of products
procured from third-party manufacturers, royalty payments to licensors, and
depreciation of tooling and dies. Significant factors affecting the Company's
cost of sales as a percentage of net sales include (i) the overall percentage of
net sales represented by sales of die-cast collectible products, which typically
carry higher gross margins than the Company's other products, (ii) the
percentage of sales of die-cast collectible products represented by
18
<PAGE>
sales through the Collectors' Club, which typically carry higher gross margins
than sales of such products through wholesale distributors, and (iii) the effect
of amortizing the fixed cost components of cost of sales, primarily depreciation
of tooling and dies, over varying levels of net sales. The Company believes that
the increased sales of licensed apparel and souvenirs following the acquisitions
of Sports Image and Motorsport Traditions will result in lower overall gross
margins as a result of lower gross margins generally associated with these
acquired product lines. The Company believes, however, that the effect of these
lower gross margins will be mitigated at least to some extent by cost reductions
and other operational efficiencies associated with the combination of the
acquired entities and by the license agreement with Hasbro. The agreement with
Hasbro provides the Company with a source of license royalties without
significant related cost of sales. In addition, the license agreement provides
the Company with access to the mass-merchandise market without committing
capital for manufacturing and with limited marginal expenditures for
administrative and marketing activities.
Selling, general, and administrative expenses include general corporate
expenses as well as goodwill amortization. The Company recorded goodwill of
approximately $33.7 million in connection with the acquisition of Sports Image
and Motorsport Traditions. The goodwill is being amortized at the rate of $1.4
million per year over 25 years. As described above, the Company anticipates that
it will achieve a reduction in selling, general, and administrative expenses as
a percentage of sales as a result of the cost-reduction efforts taken following
the acquisitions of Sports Image and Motorsport Traditions.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by certain expense and revenue items.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Collectibles ............ 84.3% 76.5% 75.9% 89.7% 92.5% 95.9% 54.1%
Apparel and souvenirs ... -- -- 0.8 4.6 4.4 4.1 42.2
Promotional ............. -- -- -- -- 3.1 -- 3.1
Other ................... 15.7 23.5 23.3 5.7 -- -- 0.6
----- ----- ----- ----- ----- ----- -----
Net sales ............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales ............ 72.2 64.4 62.2 60.8 57.2 59.6 60.5
----- ----- ----- ----- ----- ----- -----
Gross profit ............. 27.8 35.6 37.8 39.2 42.8 40.4 39.5
Selling, general and
administrative expenses . 24.4 43.4 34.4 23.4 21.0 22.3 22.4
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations .............. 3.4 (7.8) 3.4 15.8 21.8 18.1 17.1
Interest income (expense)
and other, net .......... (0.3) (0.4) (1.0) 0.1 0.5 0.8 (1.7)
----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision for (benefit
from) income taxes ...... 3.1 (8.2) 2.4 15.9 22.3 18.9 15.4
Provision for (benefit
from) income taxes ...... 0.7 (0.4) (1.4) 5.3 8.8 7.5 6.2
----- ----- ----- ----- ----- ----- -----
Net income (loss) ........ 2.4% (7.8)% 3.8% 10.6% 13.5% 11.4% 9.2%
===== ====== ===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1997 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1996
Net sales increased 144.6% to $43.5 million for the six months ended March
31, 1997 from $17.8 million for the six months ended March 31, 1996. The Company
attributes the improvement in sales during the first six months of fiscal 1997
primarily to (i) revenue from Sports Image and Motorsport Traditions, which were
acquired by the Company during the first and second quarters of fiscal 1997,
respectively; (ii) the continued expansion of the die-cast collectible market
and the Company's ability to
19
<PAGE>
produce and sell increased quantities of collectibles; and (iii) an increase in
Collectors' Club membership. The number of members in the Collectors' Club
increased to approximately 86,000 members from approximately 56,000 members at
March 31, 1997 and March 31, 1996, respectively.
Gross profit increased to $17.2 million for the six months ended March 31,
1997 from $7.2 million for the six months ended March 31, 1996, representing
39.5% and 40.4% of net sales, respectively. The decrease in gross profit as a
percentage of net sales for the six-month period ended March 31, 1997 resulted
from increased sales of apparel and souvenirs, which typically provide lower
margins than sales of the Company's collectible products. The decrease was
partially offset by improved gross margins related to sales of the Company's
die-cast collectibles.
Selling, general and adminstrative expenses increased to $9.8 million for the
six-month period ended March 31, 1997 from $4.0 million for the six months ended
March 31, 1996, representing 22.4% and 22.3% of net sales, respectively. The
increase in such expenses resulted primarily from (i) the operating expenses of
Sports Image and Motorsport Traditions, which the Company acquired in the first
and second quarters of fiscal 1997, respectively, (ii) increased sales and
marketing expenditures, particularly increased advertising consistent with the
Company's strategy to increase Collectors' Club memberships and distributor
sales; and (iii) an increase of $493,000 in goodwill amortization associated
with the acquisitions of Sports Image and Motorsport Traditions.
The change in interest income (expense) and other, net, was primarily
attributable to an increase in interest expense of approximately $869,000
related to debt incurred in connection with the acquisitions of Sports Image and
Motorsport Traditions.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1995
Net sales increased 69.2% to $44.2 million for the year ended September 30,
1996 from $26.1 million for the year ended September 30, 1995. The $18.1 million
increase in net sales resulted primarily from an increase of $17.5 million in
collectible sales. The increase in collectible sales is primarily attributable
to (i) the continued expansion of the collectible market and the Company's
ability to produce and sell increased quantities of collectibles; (ii) an
increase in the number of members in the Collectors' Club (which increased to
approximately 73,000 members from approximately 40,000 members at September 30,
1996 and September 30, 1995, respectively), and (iii) sales from recently
introduced product lines.
Gross profit increased to $18.9 million in fiscal 1996 from $10.2 million in
fiscal 1995, representing 42.8% and 39.2% of net sales, respectively. The
increase in gross profit as a percentage of net 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) increased sales through the Collectors' Club, which typically carry higher
margins.
Selling, general, and administrative expenses increased to $9.3 million in
fiscal 1996 from $6.1 million in fiscal 1995, representing 21.0% and 23.4% of
net sales, respectively. The increase in such expenses resulted from increased
expenditures for sales and marketing, particularly increased advertising
consistent with the Company's strategy to increase Collectors' Club memberships
and distributor sales.
Interest income (expense) and other, net, increased to approximately $216,000
in fiscal 1996 from approximately $24,000 in fiscal 1995. This change resulted
primarily from the conversion of the 10% Convertible Subordinated Debentures
(the "Debentures") into shares of the Company's Common Stock during fiscal 1995.
The provision for income taxes in fiscal 1996 resulted in an effective tax
rate of approximately 39.7% compared with an effective tax rate of approximately
33.3% in fiscal 1995. The increase in the effective tax rate occurred primarily
as a result of the utilization of net operating loss carryforwards in fiscal
1995.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1994
Net sales increased 54.9% to $26.1 million for the year ended September 30,
1995 from $16.9 million for the year ended September 30, 1994. This $9.2 million
increase in net sales resulted from an increase of $10.6 million in collectible
sales and an increase of $1.0 million in apparel and souvenir sales, which was
20
<PAGE>
offset by a decrease of $2.4 million in other sales. The increase in collectible
sales resulted from (i) an increase in the number of members in the Collectors'
Club (which increased to approximately 40,000 members from approximately 22,000
members at September 30, 1995 and September 30, 1994, respectively); (ii)
increased sales as a result of the successful introduction of several new and
exclusive licensing programs and collectible product lines in fiscal 1995; and
(iii) the completion of the transition to the Company's current China-based
manufacturer, which began shipping sufficient quantities of die-cast
collectibles during the third quarter of fiscal 1995 to meet the increased
demand for the Company's products. The Company realized $1.2 million in apparel
and souvenir sales resulting from a full year of operations of Fan Fueler, Inc.,
which the Company acquired in August 1994. Other sales declined $2.4 million as
a result of the Company's sale and discontinuation of its M-Car(TM) and mini
vehicle operations in September 1994 and March 1995, respectively.
Gross profit increased to $10.2 million for the year ended September 30, 1995
from $6.4 million for the year ended September 30, 1994, representing 39.2% and
37.8% of net sales, respectively. The increase in gross profit 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 current China-based 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.
Selling, general and administrative expenses increased to $6.1 million for
the year ended September 30, 1995 from $5.8 million for the year ended September
30, 1994, representing 23.4% and 34.4% of net sales, respectively. The increase
in such expenses resulted from increased sales commissions and advertising,
consistent with the Company's strategy to increase Collectors' Club membership
and distributor sales. These increases were substantially offset by reductions
in staff, officer, and administrative salaries as a result of management changes
and reductions commenced in the second quarter of fiscal 1994. Additionally, the
Company reduced operating costs, beginning in the third quarter of fiscal 1994,
by consolidating the Company's operations from Florida, Georgia, and two
locations in Arizona to a single facility in Tempe, Arizona.
Interest income (expense) and other, net, increased to approximately $24,000
from approximately ($164,000) during the years ended September 30, 1995 and
September 30, 1994, respectively. This increase primarily reflects the reduction
in interest expense resulting from the conversion of the Debentures into shares
of the Company's Common Stock prior to May 31, 1995.
PRO FORMA RESULTS OF OPERATIONS
The Company had pro forma net income for the year ended September 30, 1996 of
$7.4 million, or $0.54 per share, compared with actual net income of $6.0
million, or $0.46 per share. See "Unaudited Pro Forma Combined Financial
Information." 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 had pro forma net income for the six months ended March 31, 1997
of $3.7 million, or $0.26 per share, compared with actual net income of $4.0
million, or $0.29 per share. The difference in earnings per share on a pro forma
basis for the six months ended March 31, 1997 is primarily attributable to lower
gross margins as a result of the write-down of inventory by Motorsport
Traditions immediately prior to the date of acquisition. The Company has
implemented improvements to the management and control of inventories of the
acquired companies intended to reduce the need for seasonal adjustments to
inventory.
The pro forma results of operations for the year ended September 30, 1996 and
the six months ended March 31, 1997 reflect the amortization of goodwill arising
from the acquisitions of Sports Image and Motorsport Traditions and include
additional interest expense associated with the financing of these acquisitions.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations for each of the 10 quarters in the period ended March 31, 1997. All
quarterly information was obtained from unaudited financial statements not
otherwise contained herein. The Company believes that all necessary adjustments
have been made to present fairly the quarterly information when read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The operating results for any quarter are
not necessarily indicative of the results of the full year or any future
quarter.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1995
-----------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales ........................ $4,106 $3,669 $ 8,490 $ 9,866
Gross profit ..................... 1,406 1,341 3,403 4,099
Income (loss) from operations ... 117 (77) 1,741 2,349
Net income ....................... $ 34 $ 122 $ 1,181 $ 1,433
Net income per common share,
assuming full dilution .......... $ 0.00 $ 0.01 $ 0.10 $ 0.11
Weighted average number of common
shares, assuming full dilution .. 8,434 9,036 11,729 12,505
FISCAL 1996
----------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Net sales ........................ $ 8,006 $ 9,766 $12,283 $14,161
Gross profit ..................... 3,241 3,947 5,424 6,308
Income from operations ........... 1,370 1,852 2,938 3,494
Net income ....................... $ 878 $ 1,140 $ 1,777 $ 2,158
Net income per common share,
assuming full dilution .......... $ 0.07 $ 0.09 $ 0.14 $ 0.16
Weighted average number of common
shares, assuming full dilution .. 12,840 12,984 13,150 13,128
FISCAL 1997
---------------------------
1ST QUARTER 2ND QUARTER
----------- -----------
Net sales .......................... $ 15,175 $ 28,302
Gross profit ....................... 6,395 10,781
Income from operations ............. 2,843 4,583
Net income ......................... $ 1,568 $ 2,437
Net income per common share,
assuming full dilution ............ $ 0.12 $ 0.17
Weighted average number of common
shares, assuming full dilution ... 13,476 14,129
The Company's revenue and operating results may be subject to quarterly and
other fluctuations as a result of a variety of factors. As a result of the
recent acquisitions of Sports Image and Motorsport Traditions, the Company
believes that quarter-to-quarter comparisons of its past financial results may
not necessarily be meaningful and should not be relied upon as an indication of
future performance.
SEASONALITY
Because the auto racing season is concentrated between the months of February
and November, the second and third calendar quarters of each year (the Company's
third and fourth fiscal quarters) generally are characterized by higher sales of
motorsports products. The Company believes, however, that holiday sales of its
products are increasing, which has the effect of reducing seasonal fluctuations
in its sales.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position increased to $19.2 million at March
31, 1997 from $18.1 million at September 30, 1996. The increase of $1.1 million
is primarily attributable to the Company's results of operations and working
capital acquired from the purchase of Sports Image and Motorsport Traditions by
the Company.
Capital expenditures for the six months ended March 31, 1997 totaled
approximately $3.6 million, of which approximately $3.0 million was utilized for
the Company's continued investment in tooling.
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, with net proceeds to the
Company of approximately $2.6 million. All of the 187,500 shares sold to Hasbro
have been registered for resale pursuant to another registration statement. 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 ending on April 16, 1998, the Company will
reimburse Hasbro for the amount of such loss, plus interest.
During the six months ended March 31, 1997, the Company issued 169,998 shares
of Common Stock upon the exercise of employee stock options, resulting in total
proceeds to the Company of approximately $747,000.
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image. The purchase price was
approximately $30.0 million, consisting of a $24.0 million promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock. 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. The terms of this acquisition were determined by arms-length
negotiations between representatives of Sports Image and representatives of the
Company. In fiscal 1996, the Company derived approximately 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
acquired all of the capital stock of Creative Marketing & Promotions, Inc. for
approximately $13.0 million, consisting of cash in the amount of $5.4 million, a
promissory note in the principal amount of $1.6 million, and an aggregate of
342,857 shares of the Company's Common Stock. The terms of the acquisitions were
determined by arms-length negotiations between representatives of the sellers
and representatives of the Company.
On January 2, 1997, the Company entered into a $16.0 million credit facility
(the "Credit Facility") with First Union National Bank of North Carolina. The
Credit Facility consists of a revolving line of credit (the "Line of Credit")
for up to $10.0 million through September 30, 1997 and up to $6.0 million from
September 30, 1997 to March 31, 1998 and a $6.0 million 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 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 $4.0 million of the Line of Credit to provide part of the cash portion
of the purchase price for Motorsport Traditions and an additional $4.0 million
of the Line of Credit to repay a portion of the $24.0 million promissory note
issued in connection with the acquisition of Sports Image. As of March 31, 1997,
the Company had outstanding borrowings of approximately $4.5 million under the
Line of Credit. The Company intends to utilize a portion of the proceeds of this
offering to repay its outstanding indebtedness under the Line of Credit. See
"Use of Proceeds." The Letter of Credit/BA Facility is available for issuances
of letters of credit and eligible bankers' acceptances in an aggregate amount up
to $6.0 million to enable the Company to finance purchases of products from its
overseas vendors. The Company had outstanding purchase commitments of
approximately $5.4 million under the Letter of Credit/BA Facility as of March
31, 1997. 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, to
sell assets, or to engage in certain mergers or consolidations.
On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of senior notes to three insurance companies (the "Senior
Notes"). The Senior Notes bear interest at the rate of
23
<PAGE>
8.05% per annum, provide for semi-annual payments of accrued interest, and
mature on January 2, 1999. The Company may not prepay the Senior Notes prior to
maturity, but must offer to redeem the Senior Notes in the event of a "Change of
Control" of the Company, as defined in the Senior Notes. The Senior Notes
contain certain provisions that, among other things, require the Company to
comply with certain financial ratios and net worth requirements and limit the
ability of the Company and its subsidiaries to incur additional indebtedness, to
sell assets or engage in certain mergers or consolidations. The Senior Notes are
guaranteed by 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 is a defendant in various lawsuits. See "Business -- Litigation
and Environmental Matters." The Company has made no provision in its financial
statements with respect to these matters. The imposition of damages in one or
more of the cases against the Company could have a material adverse effect on
the Company's results of operation, and financial position. The Company has
reached a tentative settlement with respect to one of these lawsuits under which
it has agreed to pay $4.9 million to the plaintiff. See "Business -- Litigation
and Environmental Matters." The settlement amount, together with legal fees
incurred in connection with defending and settling this lawsuit, will be taken
as a charge to earnings in the quarter ending June 30, 1997.
The Company believes that the proceeds of this offering, its current cash
resources, the Credit Facility, and expected cash flow from operations will be
sufficient to fund the Company's capital needs during the next 12 months at its
current level of operations, apart from capital needs resulting from additional
acquisitions. However, the Company may be required to obtain additional capital
to fund its planned growth during the next 12 months and beyond. Potential
sources of any such capital may include the proceeds from the exercise of
outstanding options, bank financing, strategic alliances, and additional
offerings of the Company's equity or debt securities. There can be no assurance
that such capital will be available from these or other potential sources, and
the lack of such capital could have a material adverse affect on the Company's
business.
24
<PAGE>
BUSINESS
OVERVIEW
The Company is the leader in the design and sale of licensed motorsports
collectible and consumer products in the United States. The Company's products
include die-cast scaled replicas of motorsports vehicles, apparel (including
t-shirts, hats, and jackets), and souvenirs. The Company markets its products
pursuant to license arrangements with popular race car drivers (including
exclusive license arrangements with seven-time Winston Cup champion Dale
Earnhardt, 1995 Winston Cup champion Jeff Gordon, and six-time NHRA Funny Car
champion John Force), car owners, car sponsors, automobile manufacturers, and
NASCAR. The Company's motorsports collectibles and consumer products are
manufactured by third parties, generally utilizing the Company's designs, tools,
and dies.
The Company markets its products to approximately 5,000 specialty retailers
directly or through its wholesale distributor network; directly to motorsports
enthusiasts through its Collectors' Club, which currently has approximately
90,000 members; and through mobile trackside souvenir stores, promotional
programs for corporate sponsors, and fan clubs. In December 1996, the Company
entered into a license agreement with 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.
INDUSTRY OVERVIEW
Motorsports racing in the United States consists of several distinct
segments, each with its own organizing bodies and events. The largest segment,
in terms of attendance and media exposure, is stock car racing, which is
dominated by NASCAR. The other principal segments are drag racing, with NHRA the
most important organizing body, and Indy car racing, controlled by the Indy
Racing League and Championship Auto Racing Teams.
According to USA Today, motorsports racing is the fastest growing spectator
sport in the United States. Approximately 15.4 million people attended
motorsports' premier events in 1996, almost three times the 1981 attendance.
Approximately 5.6 million fans attended the 31 races in the NASCAR Winston Cup
series in 1996, representing attendance of approximately 180,000 per event, more
than double the 75,643 attendance per Winston Cup event in 1985. NHRA attendance
also has grown significantly in recent years, reaching total attendance of
almost 1.9 million in 1996. Motorsports events have also achieved significant
success on television, with coverage of NASCAR and NHRA races provided by
broadcast and cable television networks, such as ABC, CBS, ESPN, TBS, and TNN,
in addition to regional sports networks. Several leading cable companies have
joined forces recently to launch Speedvision, a motorsports cable network. USA
Today reports that TV ratings are growing even faster than attendance, with more
than 100 million people tuning in to NASCAR's televised events in 1996.
The growing popularity of motorsports has been recognized by corporate
America. According to NASCAR, more than 70 of the Fortune 500 companies utilize
motorsports sponsorship or other activities as part of their marketing
strategies.
GROWTH STRATEGY
The Company pursues a strategy designed to continue its leadership position
in the motorsports collectible and consumer products industry and to provide top
race car drivers and other licensors with a broad range of revenue-producing
opportunities throughout their careers. Key aspects of this strategy include (i)
continuing to enhance its existing products and introduce new products that
appeal to racing enthusiasts, (ii) expanding and strengthening its licensing
arrangements, (iii) pursuing strategic acquisitions and alliances, (iv)
expanding existing and identifying new distribution channels and (v) developing
promotional programs for corporate sponsors.
o Enhancing Existing and Introducing New Products
The Company continually seeks to enhance its existing products and to
introduce new products that appeal to auto racing enthusiasts, including
products for sale exclusively through its Collectors' Club. During the last two
years, the Company has expanded its lines of die-cast collectibles to include
NHRA drag racing, Super Truck racing, USAC racing, and "World of Outlaws" sprint
car racing. The Company
25
<PAGE>
recently developed the higher priced "Elite" series of collectibles, which
feature detailed equipment such as spark plug wires, braided hoses, and
realistic suspension systems. The Company also has expanded its consumer product
offerings to include licensed motorsports apparel, souvenir, and other consumer
products. In addition, the Company has entered the retail mass-merchandise
market through a license agreement with Hasbro, under which Hasbro will
manufacture and market, with the Company's assistance, a line of motorsports
products that will not compete with the Company's core products.
The Company believes that its ongoing investment in tooling enables the
Company to produce die-cast products of higher quality and detail than those
produced by its competitors. The Company has invested more than $11.2 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. The Company strives to enhance the demand
for and to increase the value of its collectible products by offering limited
numbers of each item.
o Expanding and Strengthening Licensing Arrangements
The Company focuses on expanding and strengthening its relationships with
existing licensors as well as entering into licensing arrangements with
additional motorsports personalities in order to further solidify its position
as the leader in the motorsports marketplace. The Company believes that its
licensing arrangements with top race car drivers (including Dale Earnhardt, Jeff
Gordon, and John Force), car owners, manufacturers, and corporate sponsors
provide the Company with a competitive advantage. These licensing arrangements
enable the Company to manufacture and distribute distinctive collectibles and
other products to the growing market of motorsports enthusiasts.
o Pursuing Strategic Acquisitions or Alliances
The Company seeks to acquire existing businesses and enter into strategic
alliances that it believes will enable the Company to introduce new products or
expand its product lines, to leverage or expand its licensing arrangements, or
to improve its distribution channels. In evaluating a proposed acquisition
candidate, the Company considers a number of factors, including the quality of
its management, its historical operating results and future earnings potential,
the size and anticipated growth of the market it serves and its relative
position in that market, and competitive factors. Following each acquisition,
the Company takes steps to enhance the operating efficiencies of the acquired
business. Since August 1994, the Company has acquired Fan Fueler, Inc., Sports
Image, and Motorsport Traditions and has entered into strategic alliances with
Hasbro and NASCAR.
o Expanding Existing and Identifying New Distribution Channels
The Company plans to continue to expand its existing and identify new
distribution channels. Prior to the acquisitions of Sports Image and Motorsport
Traditions, the Company distributed its products primarily to approximately
5,000 specialty retailers through its wholesale distribution network and
directly to motorsports enthusiasts through its Collectors' Club. The Company
intends to continue to develop new programs designed to enhance sales through
the Collectors' Club and its wholesale distribution network. The recent
acquisitions of Sports Image and Motorsport Traditions, each of which
distributed products directly to many of those 5,000 specialty retailers, also
added complementary distribution channels, such as mobile trackside souvenir
stores and fan clubs, and provide the Company with the opportunity to
cross-market its die-cast, apparel, and souvenir products through all of its
distribution channels. In addition, the license agreement with Hasbro has
provided the Company with a source of licensing revenue from the
mass-merchandise market without committing substantial resources to
manufacturing and marketing activities. The Company believes that targeting
products to specific market niches identified by its database management
systems, distributing its products through the distribution channels of major
corporate sponsors of motorsports, and developing on-line ordering capabilities
on its Internet website may represent important new distribution channels in the
future.
o Developing Corporate Promotional Programs
The Company provides complete marketing services to create corporate
promotional programs for large corporate sponsors. Promotional programs
typically involve special productions of the Company's
26
<PAGE>
licensed die-cast replicas, apparel, souvenirs, or other consumer products as a
low-cost or free award to increase brand awareness and name recognition of the
corporate sponsor. For example, the Company recently completed a promotional
program that appeared on boxes of Wheaties cereal and offered two
special-edition Dale Earnhardt Wheaties die-cast replicas, a t-shirt, and a hat.
The Company plans to pursue future promotional programs and currently is in
discussions to develop programs with major corporate sponsors.
PRODUCTS AND SERVICES
Die-Cast Scaled Replica Vehicles
The Company designs and markets scaled replicas of motorsports-related
vehicles that are constructed using die-cast bodies and chassis with free
wheeling deluxe wheels and tires. The Company markets its die-cast racing
collectibles pursuant to approximately 300 active licenses with race car
drivers, owners, and sponsors as well as under license agreements with NASCAR,
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, USAC racing, and "World of Outlaws" sprint car racing. The
Company's die-cast collectibles consist of (i) 1:64th and 1:24th scale replicas
of actual racing vehicles, which are approximately three inches and eight inches
long, respectively; (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's die-cast replicas typically range in price at retail
from approximately $9.00 to $75.00 per item, depending on size, type of vehicle,
and level of detail. A 1:24th scale replica of an actual racing vehicle
typically retails for $35.00. The Company offers its die-cast collectibles
primarily through its wholesale distributor network to specialty retailers,
through its Collectors' Club, through mobile trackside stores, and through
corporate promotional programs. See "Business -- Sales and Distribution."
Historically, the Company has designed and marketed die-cast collectibles
featuring drivers and vehicles from the NASCAR Winston Cup series. During fiscal
1995, the Company began the development of several new lines of die-cast
collectibles featuring replicas of vehicles from other popular motorsports. The
Company successfully introduced its line of Winston NHRA Top Fuel Dragsters and
a line of die-cast collectible replicas from the popular new NASCAR "Super
Truck" series in fiscal 1995 and introduced its line of Top Fuel Funny Car
replicas in fiscal 1996. In addition, the Company recently developed an "Elite"
series of highly detailed die-cast replicas of NASCAR racing vehicles for
introduction during the second half of fiscal 1997. The Elite series of
collectibles is sold exclusively through the Collectors' Club for approximately
$75.00 and features detailed equipment, such as spark plug wires, braided hoses,
and realistic suspension systems.
The Company enhances the collectible value and appeal of its products through
various measures. These measures include (i) designing die-cast collectibles
that include features that are not offered by the Company's competitors; (ii)
limiting the quantities of each item that it produces and sells; (iii)
specifying on the packaging material of certain die-cast collectibles the
quantity of that limited-edition item actually produced; (iv) offering certain
items only through its Collectors' Club; and (v) designing and developing new
packaging concepts to improve the display of each collectible item.
Motorsports Consumer Products
The Company markets various licensed motorsports apparel, souvenir, and other
consumer products, including t-shirts, jackets, hats, 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
motorsports consumer products, including items bearing the "NASCAR" name and
logo in connection with the Company's license agreement with NASCAR. The
Company's licensed motorsports apparel items utilize unique and creative designs
that are printed or applied to high-quality shirts, hats, jackets, and other
products. The Company designs and sells its motorsports apparel products in
sizes ranging from infant to youth to men's and women's adult sizes. The Company
designs its motorsports consumer products primarily for high- volume
distribution through retail outlets, trackside sales, and promotional programs
with corporate sponsors of racing teams and racing events. See "Business --
Sales and Distribution."
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Mass-Merchandise License
The Company licenses Hasbro to produce a new line of motorsports-related
products specifically designed for the mass-merchandise market. Under this
license, Hasbro currently markets a line of die-cast replicas of racing
vehicles, which was jointly developed by the Company and Hasbro, under the
"Winner's Circle" brand name. The mass-market die-cast products manufactured and
marketed by Hasbro are completely distinct from the Company's current products
and do not compete directly with the Company's limited-edition motorsports
die-cast collectible products. 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 items similar to products that
Hasbro currently markets under the "Kenner," "Tonka," and "Milton Bradley" brand
names.
The Company believes that the license agreement with Hasbro allows the
Company to capitalize on opportunities in the mass-merchandise market. The
agreement will enable the Company 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. The agreement also provides a means of
expanding the Company's product offerings without committing substantial
resources to manufacturing and marketing activities or subjecting it to the
risks inherent in the mass-merchandise market.
Corporate Promotional Programs
The Company provides comprehensive marketing services designed to create
corporate promotional programs for large corporate sponsors that advertise in
motorsports. Many corporations sponsor racing vehicles or events and advertise
at motorsports events and in motorsports-related media in order to increase
awareness of their brands among consumers and to encourage consumers to purchase
their products. The Company provides design services, graphic artists, and the
capacity to deliver a wide array of promotional products, such as die-cast
replicas, t-shirts, and hats. The corporate sponsors use these products either
as free or low-cost awards with the purchase of their own products or in
sweepstakes or other promotions. The Company also provides in-house marketing
and distribution support for its promotional programs, including in-bound order
processing, order fulfillment, sweepstakes processing, and redemption programs.
Die-cast replica vehicles sold as promotional items are not sold through the
Company's wholesale distribution network or through its Collectors' Club.
Action Sports Management
The Company represents a number of top race car drivers in a broad range of
licensing and other revenue-producing opportunities, including product licenses,
corporate sponsorships, endorsement contracts, and speaking engagements. The
Company provides a number of services designed to enable drivers to maximize
revenue opportunities throughout their careers. Since the commencement of its
sports management business in fiscal 1996, the Company has entered into
exclusive agreements to represent 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. As a result of the Company's ability
to represent drivers effectively in obtaining favorable licensing arrangements
and other revenue opportunities, the Company believes that it is well-positioned
to attract and retain top race car drivers.
SALES AND DISTRIBUTION
The Company markets its die-cast collectibles to approximately 5,000
specialty retailers through its wholesale distributor network, through its
approximately 90,000-member Collectors' Club, through mobile trackside stores,
and through corporate promotional programs. The Company markets its motorsports
consumer products primarily through direct trackside sales to race fans; through
an in-house sales force and independent representatives to approximately 5,000
specialty retailers and to major discount and department stores, retail
automotive product outlets, and convenience stores; and through promotional
programs with corporate sponsors.
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Wholesale Distribution
The Company markets its die-cast collectibles on a wholesale basis through
approximately 40 distributors operating in the United States. The distributors
solicit orders for the Company's die-cast products from approximately 5,000
specialty retailers throughout the United States. The retailers include stores
specializing in motorsports collectibles and apparel and stores specializing in
other sports collectible items. Employees of the Company attend trade shows in
an effort to attract new distributors and retailers to its network. The Company
advertises its die-cast collectibles in newspapers and magazines covering
motorsports and the collectibles markets. These advertisements encourage
consumers to contact the nearest retailers to purchase the Company's die-cast
collectibles. The Company also takes measures to increase consumer awareness of
its products through radio and television advertising, including promotion of
its collectibles on "home shopping" television programs 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 the same
specialty retailers that sell its die-cast collectibles. 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 Wal-Mart and K-Mart, to automotive retail stores,
and to convenience stores.
Collectors' Club
The Company markets certain of its die-cast collectibles exclusively through
its Collectors' Club. Members of the Company's Collectors' Club pay a lifetime
membership fee that entitles them to receive membership premiums, a quarterly
magazine, catalogs, and other special sales materials highlighting the Company's
collectibles and other products. Membership in the Collectors' Club increased
from approximately 22,000 members in September 1994 to approximately 90,000
members in May 1997. The Company strives to increase collector interest in its
products and to enhance its products' value as collectibles by (i) offering
certain items exclusively through its Collectors' Club; (ii) producing a limited
number of each collectible; and (iii) limiting the number of a particular item
that each member may purchase. 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 during televised motorsports events and
related programming in order to enhance its exposure to motorsports enthusiasts.
The Company employs customer service representatives and an automated call
distribution telephone system to take membership applications, take customer
orders, and handle customer inquiries. The Company utilizes an advanced
telephone and computer system that combines telemarketing functions,
computerized order processing, and automated warehouse operations to answer and
process telephone orders to its Collectors' Club more effectively and
efficiently and to accommodate the significant growth in club membership in
recent years. The system also enables the Company to track the effectiveness of
each advertisement and to target its marketing and advertising programs
accurately for enhanced impact.
Trackside Sales
Average attendance at NASCAR Winston Cup racing events grew to approximately
180,000 fans per race during 1996. The Company owns and operates 22 fully
equipped mobile trackside stores to capitalize on this large base of potential
customers. Some or all of the Company's mobile trackside stores travel to each
NASCAR Winston Cup race (34 events scheduled in 1997) as well as to other
selected racing events. Each mobile trackside store is decorated with the logos
and color scheme of a particular racing team and driver and sells a complete
assortment of licensed motorsports apparel, souvenirs, and die-cast collectibles
dedicated to that team and driver. These mobile stores represent the only
trackside opportunities to purchase motorsports products using the name and
likeness of the driver and racing team featured in each store.
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Corporate Promotional Programs
The Company creates promotional programs for large corporate sponsors of
motorsports. The Company plans to pursue future promotional programs and
currently is in discussions with major race car drivers and corporate sponsors
in its effort to develop such programs. See "Business -- Products and Services
- -- Corporate Promotional Programs."
DESIGN AND PRODUCTION
Die-Cast Scaled Replica Vehicles
The Company designs each die-cast collectible that it markets. The Company's
design artists take numerous photographs of the actual racing cars, trucks, and
other vehicles to be produced as die-cast replicas. Working from these
photographs, the Company's artists and engineers use computer software to create
detailed scale renderings of the vehicles. After approval of the rendering by
the vehicle owner, driver, or racing team sponsor, the Company supplies
computerized renderings to 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'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. The Company invested approximately $2.6 million and
$3.0 million in tooling for its proprietary line of die-cast collectibles in
fiscal 1996 and the first two quarters of fiscal 1997, respectively. The Company
believes the breadth and quality of the tooling program provides the Company
with a competitive advantage in the motorsports collectible market. The Company
intends to make additional investments in tooling in order to support the growth
of its business. The Company also devotes a significant amount of time and
effort to the production of its die-cast collectibles to ensure that the
resulting products display a level of quality and detail that is superior to
competing products, including opening hoods and trunks, detailed engines,
working suspensions, and pad printing instead of stickers or decals. The Company
believes that its overseas manufacturer of die-cast collectibles is dedicated to
high quality and productivity as well as support for new product development. An
affiliate of the Company's China-based die-cast manufacturer currently owns
500,000 shares of the Company's Common Stock. See "Principal and Selling
Shareholders." The Company believes that this ownership interest further aligns
the interests of the manufacturer with those of the Company.
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's graphic artists and
product designers seek to develop unique products and artistic designs that will
appeal to motorsports enthusiasts and distinguish the Company's apparel and
souvenir products from those of its competitors. The Company's artists and
designers also work closely with the third-party manufacturers in order to
ensure that the products conform to design specifications and meet or exceed
quality requirements. The Company believes that a number of alternative
manufacturers for each of these products is readily available in the event that
the Company is unable to obtain products from any particular manufacturer. The
Company owns the tooling and dies used to manufacture certain of its motorsports
consumer products. As the Company develops new motorsports consumer products
that require specialized tooling, the Company intends to build or purchase the
new tooling that will be required to permit the third-party manufacturers to
produce those items.
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LICENSES
Product Licenses
The Company focuses on developing long-term relationships with and engages in
comprehensive efforts to license the most popular drivers and car owners in each
top racing category, their sponsors, and others in the motorsports industry. The
Company currently has licenses with approximately 300 race car drivers, car
owners, and car sponsors as well as with NASCAR, Ford Motor Company, several
divisions of General Motors Corp., and PACCAR, Inc. (the manufacturer of
Kenworth and Peterbilt trucks). The Company continually strives to strengthen
its relationships with licensors and to develop opportunities to market
innovative collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with top race car
drivers, such as seven-time Winston Cup champion Dale Earnhardt, 1995 Winston
Cup champion Jeff Gordon, six-time NHRA Funny Car champion John Force, Kenny
Bernstein, Rusty Wallace, Dale Jarrett, Mark Martin, Bill Elliot, and Bobby
Labonte, significantly enhance the collectible value and marketability of its
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 earnings for the drivers.
Except for its licenses with Dale Earnhardt and Jeff Gordon, as described
below, 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 six months of fiscal 1997, the Company
incurred royalty expenses associated with its various licensing agreements of
approximately $5.8 million and $6.0 million, respectively. The Company
constantly strives to renew existing agreements or to enter into new license
agreements with existing or new drivers, car owners, and car sponsors and to
develop new product programs pursuant to its license agreements in its effort to
maintain its leadership position in the motorsports licensed products industry.
Dale Earnhardt License Agreement
In November 1996, 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 Mr. 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 Earnhardt License
also provides that Mr. Earnhardt will not personally market and will not permit
others to market, through the same channels of distribution used by the Company,
any products bearing his likeness that are the same as or similar to products
marketed by the Company under the Earnhardt License. The term of the Earnhardt
License extends to November 2011 and from year to year thereafter unless
terminated by either party.
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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.
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 the Gordon Die-Cast License, the Company
has the exclusive right to manufacture and market die-cast replicas of Mr.
Gordon's race car and related vehicles, subject to the right of a third party to
manufacture and market certain items on a limited basis through August 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 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.
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"). During the term of the Endorsement
Agreement, which expires on December 31, 2000, 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.
Hasbro License Agreement
The license agreement between the Company and Hasbro (the "Hasbro License")
covers the exclusive sale by Hasbro in the mass-merchandise market of specific
motorsports-related products for which the Company has or will secure exclusive
or non-exclusive licenses from race car drivers, owners, manufacturers, and
sponsors. The Company believes that the Hasbro License provides the Company with
a source of revenue from the mass-merchandise market without committing
substantial resources to manufacturing and marketing activities or subjecting
the Company to the risks inherent in the mass- merchandise market. Under the
Hasbro License, the Company is responsible for acquiring and maintaining the
license rights with the licensors, and Hasbro is responsible for all costs and
other arrangements relating to tooling, manufacturing, transportation,
marketing, distribution, and sales of licensed products. Hasbro 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. The licensed products consist of (i) die-cast replicas of motorsports
vehicles and a 1:18th-scale plastic toy car, for which Hasbro pays a specified
royalty, and (ii) all other products that Hasbro may market as licensed
motorsports products, including, for example, radio-controlled cars, slot car
sets, games (including electronic and CD-ROM interactive games), plush toys,
figurines, play sets, walkie talkies, and other products, for which Hasbro pays
a specified royalty. Hasbro currently markets similar products under the
"Kenner," "Tonka," "Milton Bradley," and other brand names. Hasbro will pay the
Company guaranteed minimum annual royalty payments of $500,000 to $1.0 million,
depending on certain circumstances.
Hasbro's initial focus under the Hasbro License has been to develop, with the
Company's assistance, a line of motorsports die-cast products for the retail
mass-merchandise market. Hasbro will fund all capital requirements for this
product line and will manufacture, distribute, and market the products under the
"Winner's Circle" brand name. This product line has been recently intoduced to
mass-market retailers. The mass-market die-cast products manufactured and
marketed under the Hasbro License are completely distinct from the Company's
current products and do not compete directly with the Company's limited-edition
motorsports die-cast collectible products.
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The Hasbro License provides for a term ending on December 31, 2001. Hasbro
may extend the Hasbro License for an additional three-year term, provided that
total wholesale revenue of licensed products exceeds a specified amount during
the initial term.
NASCAR License Agreement
In April 1997, the Company entered into a licensing agreement and marketing
alliance with NASCAR that gives the Company the non-exclusive right to use the
"NASCAR" name and logo on all of its products and product packaging as well as
on related sales, marketing, and promotional materials. The licensing
arrangement became effective immediately for all of the Company's products other
than die-cast products. Beginning on January 1, 1998, the Company also will have
the right to include the NASCAR name and logo on its die-cast products,
packaging, and related materials. Under the NASCAR license, the Company will be
an official licensee of the "NASCAR 50th Anniversary" program and intends to
develop several product lines in connection with that promotion. In addition,
the Company and NASCAR currently are working together to develop other
promotional programs targeted at many of NASCAR's corporate sponsors.
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 with which the Company currently does not
have licenses as well as with sports apparel licensors and manufacturers in
general. Emerging companies also may increase their participation in these
markets. The Company's promotional products compete for advertising dollars
against other specialty advertising programs and media, such as television,
radio, newspapers, magazines, and billboards.
The Company believes that its relationships and licenses with top race car
drivers, car owners, and other popular licensors represent a significant
advantage over its competitors in the motorsports collectible and consumer
products industry. The Company strives to expand and strengthen these
relationships and to develop opportunities to market innovative licensed
collectible and consumer products that appeal to motorsports enthusiasts. The
ability of the Company to compete successfully depends on a number of factors
both within and outside its control, including the quality, features, pricing,
and diversity of its products; the quality of its customer services; its ability
to recognize industry trends and anticipate shifts in consumer demands; its
success in designing and marketing new products; the availability of adequate
sources of manufacturing capacity and the ability of its third-party
manufacturers to meet delivery schedules; its efficiency in filling customer
orders; the continued popularity of the motorsports personalities with whom the
Company has licensing arrangements; its ability to renew existing licensing
arrangements and enter into new licensing arrangements; its ability to develop
and maintain effective marketing programs that enable it to sell its products to
motorsports enthusiasts; product introductions by the Company's competitors; the
number, nature, and success of its competitors in a given market; and general
market and economic conditions.
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 $7.1 million of such products as of
March 31, 1997.
TRADEMARKS AND PATENT RIGHTS
Although the Company's business historically has not depended on trademark or
patent protection, the Company recognizes the increasing value of its various
trade names and marks. The Company is taking steps designed to protect,
maintain, and increase the value of its trade names and marks. The Company does,
however, license valuable trademarks and other rights from third parties. See
"Business -- Licenses."
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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 $6.0 million insurance policy to cover its molds and dies
located at its third-party manufacturer in China and a $5.0 million insurance
policy to cover lost revenue in the event of certain interruptions of business
with its overseas manufacturer of die-cast collectibles. The Company believes
its insurance coverage is adequate.
LITIGATION AND ENVIRONMENTAL MATTERS
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. On March 25, 1997,
the Court ruled that under federal environmental law the Company would be
treated as the successor to F.W. & Associates, Inc., and/or F.W. Leisure
Industries, Inc. The Company may appeal this ruling at the appropriate time.
Discovery is now ongoing with regard to the merits of the underlying
environmental claims and the amount of those claims. 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. ("API"), a
dissolved Arizona corporation, was instituted on December 22, 1995 against the
Company, Fred W. Wagenhals, and others in the United States District Court for
the District of Arizona. The complaint requests damages, including punitive and
treble damages in an unspecified amount. The complaint alleges that the Company,
Mr. Wagenhals, and others breached contractual and other duties to API and
appropriated certain business opportunities of API and further claims that these
activities were part of a fraudulent scheme. In June 1997, the Company, Mr.
Wagenhals, the other defendants, and the plaintiff reached an agreement to
settle the lawsuit. The proposed settlement provides for a $4.9 million payment
by the Company to the plaintiff and the execution of mutual releases. In
connection with the proposed settlement, Mr. Wagenhals has waived any claims
that he may have to the settlement proceeds as an approximately 20% shareholder
of API. The settlement is subject to several conditions, including approval by
the Company's Board of Directors, the execution of final documentation, and
court approval.
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On March 4, 1997, two class action lawsuits were filed against the Company
and approximately 28 other defendants in the United States District Court for
the Northern District of Georgia. The lawsuits allege that the defendants
engaged in price fixing and other anti-competitive activities in violation of
federal anti-trust laws. The Company has been named as a defendant based upon
actions alleged to have been taken by Sports Image, Inc. and Creative Marketing
& Promotions, Inc. prior to the Company's acquisitions of those entities. The
plaintiffs have requested injunctive relief and monetary damages of three times
an unspecified amount of damages that the plaintiffs claim to have actually
suffered. A motion to consolidate these lawsuits into one action currently is
pending. The Company intends to vigorously defend these lawsuits.
On June 4, 1997, Petty Enterprises, Inc. Licensing Division filed a lawsuit
against the Company and Fred W. Wagenhals in the General Court of Justice for
Randolph County, North Carolina (Case No. 97 CVS 1070). The complaint alleges
that the Company engaged in activities that resulted in trademark infringement,
fraud, unfair competition, marketing unlicensed products, misappropriation of
business opportunities, breach of contract, unjust enrichment, conversion, and
violations of the North Carolina Unfair and Deceptive Trade Practices Act and
the Lanham Act. In particular, the plaintiff alleges that the Company
manufactured and sold products in quantities greater than the amounts permitted
under certain license agreements, manufactured and sold certain products for
which it did not have licenses, misrepresented the number of licensed products
actually manufactured and sold, and underpaid royalties to the licensors. The
complaint also alleges that these acts constitute a pattern of improper
activity. The complaint requests an unspecified amount of actual damages plus
treble and punitive damages, as well as injunctive relief. The Company intends
to vigorously defend this lawsuit.
EMPLOYEES
As of May 30, 1997, the Company employed 222 persons, of whom 220 were
employed full-time. 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.
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 that 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 has entered into a lease for a newly constructed, approximately
140,000 square foot building in Phoenix, Arizona. The initial term of the lease
is 10 years with a scheduled commencement date of August 15, 1997. The Company
has two options to extend the term for five years each. Upon completion of the
development of this facility by the Company, the Company plans to vacate its
existing Tempe, Arizona facility and move its executive offices, warehouse
space, and packaging operations to the new facility. The Company currently is
seeking to sublease the Tempe facility, but there can be no assurance that it
will be able to do so on favorable terms or at all.
The Company also leases a 25,000 square foot facility in Charlotte, North
Carolina. 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 also leases approximately 10,000 square feet
of off-site storage space in Concord, North Carolina. The Company anticipates
that it will enter into a lease for a new facility in Concord, North Carolina to
replace its current facilities in that area.
35
<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 ..... 33 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 served as Chairman of the Board, President, and Chief
Executive Officer of the Company since November 1993 and served as Chairman of
the Board and Chief Executive Officer from May 1992 until September 1993 and as
President from July 1993 until September 1993. Mr. Wagenhals co-founded Racing
Champions, Inc. in April 1989 and served as a director of that company until
April 1993. From October 1990 until May 1992, Mr. Wagenhals served as Chairman
of the Board and Chief Executive Officer of Race Z, Inc. and Action Performance
Sales, Inc. ("APS"), which were engaged in sales of promotional products and
collectible items related to the racing industry.
Tod J. Wagenhals has served as Executive Vice President of the Company since
July 1995, as a director of the Company since December 1993, and as Secretary of
the Company since November 1993. Mr. Wagenhals served as a Vice President of the
Company from September 1993 to July 1995. Mr. Wagenhals served in various
marketing capacities with the Company from May 1992 until September 1993 and
with APS from October 1991 until May 1992. Mr. Wagenhals was National Accounts
Manager of Action Products, Inc. from January 1989 to October 1991. Mr.
Wagenhals is the son of Fred W. Wagenhals.
Christopher S. Besing has served as a Vice President and the Chief Financial
Officer of the Company since joining the Company in January 1994, as a director
of the Company since May 1995, and as Treasurer of the Company since February
1996. Prior to joining the Company, Mr. Besing held several financial and
accounting positions with Orbital Sciences Corporation ("OSC") from September
1986 to December 1993, most recently as Director of Accounting and Controller of
OSC's Launch Systems Group in Chandler, Arizona. Prior to joining OSC, Mr.
Besing was employed as an accountant with Arthur Andersen & Co. from January
1985 to August 1986. Mr. Besing is a Certified Public Accountant.
Joseph M. Mattes has served as 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 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 served as 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 Action Products, Inc. and its predecessors.
John S. Bickford has served as 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
36
<PAGE>
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 of 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 served as 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 served as 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, as Chairman
of the Board of Securop U.K. Ltd., and as a director of LBE Technologies, Inc.,
Thomas Pride Development, Inc., and Arizona Sports, Inc., all of which are
privately held companies.
The Company's bylaws provide that the number of directors shall be fixed from
time to time by resolution of the Board of Directors. All directors are elected
at each annual meeting of the Company's shareholders and hold office until the
next annual meeting of shareholders or until their successors have been elected
and qualified, or until their earlier resignation or removal. The Board of
Directors elects the Company's officers, who hold office until their successors
have been elected and qualified or until their earlier resignation or removal.
Fred W. 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. See "Business -- Litigation and Environmental
Matters."
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
Common Stock on the date of his or her election
37
<PAGE>
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
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 $100,000 or more during fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
--------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) OPTIONS(#)(2) ($)(3)
- ----------------------------------- ---- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fred W. Wagenhals .................. 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 $1,572
Vice President, Chief Financial 1995 71,250 10,000 50,000 1,425
Officer, Treasurer, and Director 1994 45,000 -- 80,000 --
</TABLE>
- ----------
(1) Messrs. Wagenhals, Wagenhals, and Besing also received certain perquisites,
the value of which did not exceed 10% of their salary and bonus during
fiscal 1996.
(2) The exercise price of all stock options granted were equal to the fair
market value of the Company's Common Stock on the date of grant.
(3) Amounts shown for fiscal 1996 represent matching contributions made by the
Company to the Company's 401(k) Plan.
The Company offers its employees medical and life insurance benefits. The
executive officers and other key employees of the Company, including directors
who also are employees of the Company, are eligible to receive stock options
under the Company's 1993 Stock Option Plan. See "Management -- 1993 Stock Option
Plan." The Company does not have a long-term incentive plan or a defined benefit
or actuarial plan and has never issued any stock appreciation rights.
38
<PAGE>
The following table provides information on stock options granted to the
Company's Named Officers during the fiscal year ended September 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATE OF STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR OPTION TERM(2)
OPTIONS GRANTED IN PRICE -------------------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) EXPIRATION DATE 5% 10%
- ---------------------- -------------------------- --------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals ... -- -- -- -- -- --
Tod J. Wagenhals ..... 20,000 9.2% $10.63 9/4/02 $72,270 $163,957
Christopher S. Besing 20,000 9.2% $10.63 9/4/02 $72,270 $163,957
</TABLE>
- ----------
(1) The options were granted at the fair value of the shares on the date of
grant and have a six-year term. One-third of the options vest and become
exercisable on each of the first, second, and third anniversaries of the
date of grant.
(2) Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the future price of
the Company's Common Stock. Actual gains, if any, on stock option exercises
will depend upon the future market prices of the Company's Common Stock.
The following table provides information on options exercised in the last
fiscal year by the Company's Named Officers and the value of each such officer's
unexercised options at September 30, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END ($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals .... -0- -0- 290,000 -0- $3,125,250 -0-
Tod J. Wagenhals ...... -0- -0- 170,000 20,000 $1,784,380 $45,000
Christopher S. Besing . 40,000 $210,000 50,000 20,000 $ 431,250 $45,000
</TABLE>
- ----------
(1) Calculated based upon the closing price as reported on the Nasdaq National
Market on September 30, 1996 of $12.875 per share.
RECENT GRANTS OF STOCK OPTIONS
Subsequent to September 30, 1996, the Company granted options to acquire an
aggregate of 220,250 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 on November 6, 1996, and 15,000, 10,000,
15,000, 10,000, 16,000, and 15,000 shares of Common Stock at an exercise price
of $19.125 per share issued to Christopher S. Besing, John S. Bickford, Joseph
M. Mattes, Melodee L. Volosin, Fred W. Wagenhals, and Tod J. Wagenhals,
respectively, on April 3, 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
39
<PAGE>
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 $0.50 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 Securities Exchange Act of 1934, as amended (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
approved 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. The Company's shareholders approved those
amendments on April 3, 1997. As of June 18, 1997, an aggregate of 1,220,163
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 1,111,220 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 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% 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% (110% 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.
40
<PAGE>
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.
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 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."
41
<PAGE>
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.
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 8.0% 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
42
<PAGE>
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 that 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, $177,000
and $109,000, respectively, during fiscal 1994, 1995 and 1996 and the first six
months of fiscal 1997, respectively.
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.
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 have been registered for resale
pursuant to another registration statement. 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.
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<PAGE>
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 June 18, 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 NUMBER PERCENT
- ----------------------------------------- --------------- --------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Fred W. Wagenhals ........................ 2,654,000 (3) 18.9% 264,400 2,389,600 15.1%
Tod J. Wagenhals ......................... 156,456 (4) 1.1% 15,600 140,856 *
Christopher S. Besing .................... 50,000 (5) * 0 50,000 *
Joseph M. Mattes ......................... 45,000 (6) * 0 45,000 *
Melodee L. Volosin ....................... 27,500 (7) * 0 27,500 *
John S. Bickford ......................... 17,143 * 0 17,143 *
Jack M. Lloyd ............................ 26,000 (8) * 0 26,000 *
Robert H. Manschot ....................... 30,000 (9) * 0 30,000 *
All directors and executive officers as a
group (eight persons) ................... 3,006,099 21.0% 280,000 2,726,099 16.9%
OTHER SELLING SHAREHOLDER
- -------------------------
CMC Enterprises Ltd.(10) ................. 500,000 3.6% 50,000 450,000 2.9%
</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 June 18, 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
June 18, 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) Represents 2,364,000 shares of Common Stock and vested options to acquire
290,000 shares of Common Stock.
(4) Represents 1,456 shares of Common Stock and vested options to acquire
155,000 shares of Common Stock. Mr. Wagenhals is exercising options to
acquire 15,600 shares of Common Stock and is selling such shares in this
offering.
(5) Represents vested options to acquire 50,000 shares of Common Stock.
(6) Represents 15,000 shares of Common Stock and vested options to acquire
30,000 shares of Common Stock.
(7) Represents vested options to acquire 27,500 shares of Common Stock.
(8) Represents vested options to acquire 26,000 shares of Common Stock.
(9) Represents 4,000 shares of Common Stock and vested options to acquire 26,000
shares of Common Stock.
(10)The address of CMC Enterprises Ltd. ("CMC") is 23/F Block E-L, Superluck
Industrial Centre (Phase 2), 57 Sha Tsui Road, Tsuan Wan, Hong Kong. CMC is
an affiliate of Early Light International (Holdings) Ltd., which
manufactures the Company's die-cast collectibles in China.
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<PAGE>
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 June 18, 1997, 13,738,235 shares of
Common Stock and no shares of Preferred Stock were issued and outstanding. An
additional 1,529,837 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 currently issued and outstanding shares of Common Stock
are, and all of the shares of Common Stock to be issued in this offering will
be, 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 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, to sell assets, or to 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 the 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. In March 1997, the Company filed a
registration statement
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<PAGE>
and caused that registration statement to be declared effective in order 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 Corporate
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.
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.
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
46
<PAGE>
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
Upon completion of this offering, the Company will have 15,523,835 shares of
Common Stock outstanding, of which approximately 12,660,000 shares (including
all of the shares sold in this offering) will be freely tradeable in the public
market without restriction or further registration under the Securities Act
unless held by an "affiliate" of the Company, as that term is defined in Rule
144 under the Securities Act. The approximately 2,864,000 remaining shares of
Common Stock 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. Affiliates will be
subject to certain of the resale limitations of Rule 144 as promulgated under
the Securities Act.
The Company's directors and executive officers (including two of the Selling
Shareholders) have entered into lock-up agreements that restrict the sale of
their shares of Common Stock during the 120-day period after the date of this
Prospectus without the prior written consent of Montgomery Securities. The other
Selling Shareholder has entered into a lock-up agreement that restricts the sale
of its remaining 450,000 shares of Common Stock during the 90-day period after
the date of this Prospectus without the prior written consent of Montgomery
Securities. In addition, the Company has agreed that it will not issue, offer,
sell, grant options to purchase, or otherwise dispose of any equity securities
or any other securities convertible into or exchangeable for shares of Common
Stock, other than upon exercise of outstanding stock options, during the 120-day
period after the date of this Prospectus without the prior written consent of
Montgomery Securities. See "Underwriting."
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 one year in such amount that does not exceed
the greater of (i) one percent of the then-outstanding shares of Common Stock
(approximately 155,238 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 also are subject to
certain other requirements relating to the manner of sale, notice, and the
availability of current public information about the Company. However, a person
who is not deemed to have been an affiliate at any time within the three months
immediately prior to the date of sale, and who has beneficially owned his or her
shares for at least two years is entitled to sell them without regard to the
volume, manner of sale or notice requirements. Upon completion of this offering,
an aggregate of approximately 2,101,000 shares currently held by certain
officers and directors of the Company will be available for sale under Rule 144,
subject to the lock-up agreements described above. In addition, the Company has
registered approximately 762,000 outstanding restricted shares for resale
pursuant to an effective registration statement. Sales of substantial amounts of
Common Stock by shareholders of the Company under Rule 144 or otherwise, or even
the potential for such sales, may have a depressive effect on the market price
of the Common Stock.
47
<PAGE>
As of June 18, 1997, options to purchase a total of 1,111,220 shares of
Common Stock were outstanding under the Company's 1993 Stock Option Plan. See
"Management -- 1993 Stock Option Plan." The Company has filed registration
statements under the Securities Act to register for offer and sale the 2,750,000
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, subject to the lock-up agreements described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.
48
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions contained in the underwriting agreement by
and among the Company, the Selling Shareholders, and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company and the Selling
Shareholders the number of shares of Common Stock indicated below opposite their
respective names, at the public offering price less the underwriting discount
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters are committed to purchase all of
the shares of Common Stock if they purchase any.
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
Montgomery Securities ...................................... 1,050,000
Advest, Inc. ............................................... 525,000
Interstate/Johnson Lane Corporation ........................ 525,000
---------
Total .................................................... 2,100,000
=========
The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the shares of Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $0.84
per share and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 per share to certain other dealers. After the
offering, the public offering price and other selling terms may be changed by
the Underwriters. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
315,000 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with the offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriter may be required to make in respect thereof.
The Company's directors and executive officers (including two of the Selling
Shareholders) have agreed that, for a period of 120 days from the date of this
Prospectus, they will not directly or indirectly sell, offer, contract or grant
any option to sell, pledge, transfer, or otherwise dispose of any shares of
Common Stock, options, or warrants to acquire Common Stock or securities
convertible into or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of Montgomery Securities. The other Selling
Shareholder has entered into a similar lock-up agreement that restricts the sale
of its remaining 450,000 shares of Common Stock during the 90-day period after
the date of this Prospectus without the prior written consent of Montgomery
Securities. The Company has agreed that, for a period of 120 days after the date
of this Prospectus, it will not issue, offer, sell, grant options to purchase or
otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable for its Common Stock or other equity
security, other than pursuant to outstanding options disclosed in this
Prospectus, without the prior written consent of Montgomery Securities.
The Underwriters are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common
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<PAGE>
Stock in connection with the offering (i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus) the Underwriters
may reduce that short position by purchasing Common Stock in the open market.
The Underwriters may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriter will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
LEGAL OPINIONS
The validity of the 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 own 13,000 shares of the Company's Common Stock as of the date of
this Prospectus. Certain legal matters will be passed upon for the Underwriters
by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of September 30, 1995
and 1996 and for each of the three years in the period ended September 30, 1996
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of 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.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act, with respect to the shares of Common Stock 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
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<PAGE>
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.
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 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;
(ii) 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; and (iii) 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, including any
beneficial owner, 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.
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<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants ................................. F-2
Consolidated Balance Sheets as of September 30, 1995 and 1996, and
March 31, 1997 ......................................................... F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1994, 1995, and 1996, and the Six Months Ended
March 31, 1996 and 1997 ................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1994, 1995, and 1996, and the Six Months
Ended March 31, 1997 .................................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1994, 1995, and 1996, and the Six Months Ended
March 31, 1996 and 1997 .................................................. F-6
Notes to Consolidated Financial Statements ................................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Action Performance Companies, Inc.:
We have audited the accompanying consolidated balance sheets of ACTION
PERFORMANCE COMPANIES, INC. (an Arizona corporation) and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Action Performance Companies,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN, LLP
Phoenix, Arizona,
November 25, 1996, except with respect to matters discussed
in Note 13 as to which the date is December 27, 1996.
F-2
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- ------------
ASSETS 1995 1996 1997
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash ...................................................... $ 6,759,984 $ 4,983,382 $ 2,978,623
Accounts receivable, net of allowance for doubtful accounts
of $142,746, $256,324, and $895,140, respectively ........ 4,057,124 7,496,988 11,965,253
Inventories ............................................... 2,691,035 5,833,812 13,810,128
Deferred income taxes ..................................... 910,126 1,031,619 1,031,619
Prepaid royalties ......................................... 1,109,647 2,295,505 3,886,237
Prepaid expenses and other assets ......................... 566,803 739,723 784,773
----------- ----------- -----------
Total current assets .................................... 16,094,719 22,381,029 34,456,633
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation of $1,671,102, $3,362,939, and $4,783,858,
respectively .............................................. 5,768,215 8,188,441 12,451,260
GOODWILL, net of accumulated amortization of $0, $0,
and $504,405, respectively ................................ -- -- 33,310,042
NOTES RECEIVABLE, net of current portion ................... 947,092 902,412 934,542
DEPOSITS AND OTHER ASSETS .................................. 540,700 176,752 366,479
----------- ----------- -----------
$23,350,726 $31,648,634 $81,518,956
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................... $ 1,623,219 $ 2,188,343 $ 6,489,336
Accrued royalties and other accrued expenses .............. 1,232,022 1,577,567 4,021,589
Line of credit ............................................ -- -- 4,500,000
Income taxes payable ...................................... 1,317,343 521,547 243,052
----------- ----------- -----------
Total current liabilities ................................ 4,172,584 4,287,457 15,253,977
LONG TERM DEBT:
Notes payable ............................................. -- -- 21,398,183
Other long term debt ...................................... 287,852 364,725 906,516
----------- ----------- -----------
Total long term debt ..................................... 287,852 364,725 22,304,699
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized;
500, 0, and 0 shares issued and outstanding, respectively 5 -- --
Common stock, $.01 par value, 25,000,000 shares
authorized; 11,221,408, 12,609,769, and 13,713,485 shares
issued and outstanding, respectively ..................... 112,214 126,098 137,135
Additional paid-in capital ................................ 16,852,308 18,991,296 31,938,922
Retained earnings ......................................... 1,925,763 7,879,058 11,884,223
----------- ----------- -----------
Total shareholders' equity ............................... 18,890,290 26,996,452 43,960,280
----------- ----------- -----------
$23,350,726 $31,648,634 $81,518,956
=========== =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
F-3
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales:
Collectibles .......................... $ 12,802,295 $ 23,443,413 $ 40,903,590 $ 17,046,904 $ 23,521,573
Apparel and souvenirs ................. 142,722 1,190,068 1,961,345 725,328 18,333,520
Promotional ........................... -- -- 1,351,000 -- 1,354,826
Other ................................. 3,924,110 1,497,734 -- -- 267,759
------------ ------------ ------------ ------------ ------------
Net sales ............................ 16,869,127 26,131,215 44,215,935 17,772,232 43,477,678
Cost of sales .......................... 10,488,162 15,882,000 25,295,966 10,583,762 26,301,654
------------ ------------ ------------ ------------ ------------
Gross profit ........................... 6,380,965 10,249,215 18,919,969 7,188,470 17,176,024
Selling, general and
administrative expenses ............... 5,808,058 6,118,978 9,266,397 3,966,700 9,750,462
------------ ------------ ------------ ------------ ------------
Income from operations ................. 572,907 4,130,237 9,653,572 3,221,770 7,425,562
Interest income (expense)
and other, net ........................ (164,345) 24,112 216,919 141,017 (750,287)
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes .......................... 408,562 4,154,349 9,870,491 3,362,787 6,675,275
Provision for (benefit from)
income taxes .......................... (224,037) 1,384,500 3,917,196 1,345,115 2,670,110
------------ ------------ ------------ ------------ ------------
NET INCOME ............................. $ 632,599 $ 2,769,849 $ 5,953,295 $ 2,017,672 $ 4,005,165
============ ============ ============ ============ ============
NET INCOME PER
COMMON SHARE:
Primary ............................... $ 0.08 $ 0.27 $ 0.46 $ 0.16 $ 0.29
============ ============ ============ ============ ============
Fully diluted .......................... $ 0.08 $ 0.25 $ 0.46 $ 0.16 $ 0.29
============ ============ ============ ============ ============
WEIGHTED AVERAGE
SHARES
OUTSTANDING:
Primary ............................... 8,079,930 10,115,582 13,027,746 12,861,232 13,786,339
============ ============ ============ ============ ============
Fully diluted ......................... 9,639,946 11,570,046 13,069,380 12,948,412 13,799,126
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK (ACCUMULATED
------------------------ ----------------- COMMON ADDITIONAL DEFICIT)
SHARES SHARES STOCK PAID-IN RETAINED
ISSUED AMOUNT ISSUED AMOUNT SUBSCRIBED CAPITAL EARNINGS TOTAL
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1993 ..... 7,605,318 $ 76,053 -- $ -- $ 80,000 $ 7,064,496 $(1,476,685) $ 5,743,864
Common stock issued in settlement
with Alchem Corporation ......... 35,222 352 -- -- -- 96,511 -- 96,863
Common stock issued upon exercise
of employee options ............. 233,306 2,333 -- -- (80,000) 276,266 -- 198,599
Common stock issued in private
placement offering .............. 1,123,200 11,232 -- -- -- 1,364,107 -- 1,375,339
Purchase and retirement of common
stock ........................... (1,123,200) (11,232) -- -- -- (1,252,368) -- (1,263,600)
Common stock subscribed in
purchase of Fan Fueler, Inc. .... -- -- -- -- 125,000 -- -- 125,000
Net income ....................... -- -- -- -- -- -- 632,599 632,599
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
BALANCE, September 30, 1994 ..... 7,873,846 $ 78,738 -- $ -- $125,000 $ 7,549,012 $ (844,086) $ 6,908,664
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
Issuance of Class A Convertible
Preferred Stock ................. -- -- 500 5 -- 1,999,995 -- 2,000,000
Common stock issued upon
conversion of debentures ........ 1,485,676 14,858 -- -- -- 2,433,610 -- 2,448,468
Common stock issued under
consulting agreement ............ 200,000 2,000 -- -- -- 248,000 -- 250,000
Common stock issued for common
stock subscribed ................ 100,000 1,000 -- -- (125,000) 124,000 -- --
Common stock issued upon exercise
of employee options ............. 541,000 5,410 -- -- -- 1,274,915 -- 1,280,325
Tax benefit from employee
stock options ................... -- -- -- -- -- 715,844 -- 715,844
Redemption of warrants ........... -- -- -- -- -- (403,683) -- (403,683)
Common stock issued upon exercise
of warrants ..................... 1,020,886 10,208 -- -- -- 2,910,615 -- 2,920,823
Net income ....................... -- -- -- -- -- -- 2,769,849 2,769,849
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
BALANCE, September 30, 1995 ..... 11,221,408 $112,214 500 $ 5 $ -- $16,852,308 $ 1,925,763 $18,890,290
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
Common stock issued upon exercise
of warrants ..................... 149,114 1,491 -- -- -- 509,837 -- 511,328
Common stock issued upon exercise
of employee options ............. 239,247 2,393 -- -- -- 800,901 -- 803,294
Common stock issued upon
conversion of Class A
Convertible Preferred Stock .... 1,000,000 10,000 (500) (5) -- (9,995) -- --
Tax benefit from employee
stock options ................... -- -- -- -- -- 838,245 -- 838,245
Net income ....................... -- -- -- -- -- -- 5,953,295 5,953,295
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
BALANCE, September 30, 1996 ..... 12,609,769 $126,098 -- $ -- $ -- $18,991,296 $7,879,058 $26,996,452
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
Common stock issued upon exercise
of options ...................... 169,998 1,700 -- -- -- 745,035 -- 746,735
Common stock issued upon purchase
of businesses ................... 746,218 7,462 -- -- -- 9,604,636 -- 9,612,098
Issuance of common stock ......... 187,500 1,875 -- -- -- 2,597,955 -- 2,599,830
Net income ....................... -- -- -- -- -- -- 4,005,165 4,005,165
------------- ---------- -------- -------- ------------ ------------- -------------- ------------
BALANCE, March 31, 1997 .......... 13,713,485 $137,135 -- $ -- $ -- $31,938,922 $11,884,223 $43,960,280
============= ========== ======== ======== ============ ============= ============== ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED SEPTEMBER 30, MARCH 31,
--------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income .............................. $ 632,599 $ 2,769,849 $ 5,953,295 $ 2,017,672 $ 4,005,165
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization ......... 674,909 905,605 1,691,837 714,760 1,915,805
Loss on sale of property and
equipment ........................... 57,090 -- -- -- --
Change in assets and liabilities:
Accounts receivable ................. (1,641,037) (1,400,060) (3,439,864) (1,213,978) 1,153,522
Inventories ......................... (14,978) (700,870) (3,142,777) (1,295,244) (2,794,169)
Deferred income taxes ............... (224,037) 29,756 716,752 -- --
Prepaid royalties ................... (638,422) (471,225) (1,185,858) (1,205,751) (1,590,732)
Prepaid expense and other assets .... 161,556 (471,162) 204,929 (363,550) (171,366)
Accounts payable .................... (498,593) 859,039 565,124 321,928 (736,421)
Income taxes payable ................ -- 1,317,343 (795,796) (872,228) (278,495)
Accrued royalties and other
accrued expenses ................... 31,067 137,756 292,862 4,868 981,956
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating activities ........... (1,459,846) 2,976,031 860,504 (1,891,523) 2,485,265
Cash Flows used in Investing
Activities:
Acquisition of property and
equipment ........................... (1,715,470) (3,024,359) (3,879,033) (2,377,549) (3,635,416)
Proceeds from the sale of property
and equipment ....................... 104,777 -- -- -- 110,781
Proceeds from the sale of mini
vehicle assets ...................... -- 150,000 -- -- --
Cash acquired in purchase of business . -- -- -- -- 1,140,363
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (1,610,693) (2,874,359) (3,879,033) (2,377,549) (2,384,272)
Cash Flows from Financing Activities:
Borrowings on line of credit .......... -- 2,894,725 5,221,898 3,235,599 4,378,583
Payments on line of credit ............ -- (2,894,725) (5,221,898) (3,235,599) (5,278,583)
Proceeds from issuance of common
stock ............................... 1,573,938 4,170,993 1,314,622 867,513 3,346,565
Issuance of Class A Convertible
Preferred Stock ..................... -- 2,000,000 -- -- --
Proceeds from issuance of convertible
subordinated debentures ............. 2,600,000 -- -- -- --
Payments for repurchase and
retirement of common stock .......... (1,263,600) -- -- -- --
Proceeds from issuance of notes
payable ............................. 609,583 -- -- -- --
Payments for redemption of warrants ... -- (403,683) -- -- --
Payments on notes payable ............. (1,158,748) (265,859) -- -- (4,419,984)
Collections on notes receivable ....... 214,994 69,012 31,979 -- --
Principal payments on capital
lease obligations and other .......... (90,802) (46,314) (104,674) (48,828) (132,333)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities ........... 2,485,365 5,524,149 1,241,927 818,685 (2,105,752)
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Cash ........... (585,174) 5,625,821 (1,776,602) (3,450,387) (2,004,759)
Cash, Beginning of Period ............. 1,719,337 1,134,163 6,759,984 6,759,984 4,983,382
----------- ----------- ----------- ----------- -----------
Cash, End of Period ................... $ 1,134,163 $ 6,759,984 $ 4,983,382 $ 3,309,597 $ 2,978,623
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-6
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited)
(1) THE COMPANY
OPERATIONS
Action Performance Companies, Inc. (the "Company") designs and markets
licensed motorsports products, including die-cast scaled replicas of motorsports
vehicles, apparel, and souvenirs. The Company also develops promotional programs
for sponsors of motorsports that feature the Company's die-cast replicas or
other products and are intended to increase brand awareness of the products or
services of the corporate sponsors. In addition, the Company represents popular
race car drivers in a broad range of licensing and other revenue-producing
opportunities, including product licenses, corporate sponsorships, endorsement
contracts, and speaking engagements. The Company's motorsports collectibles and
consumer products are manufactured by third parties, generally utilizing the
Company's designs, tools, and dies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue upon shipment. Customer deposits received in
advance of delivery are deferred and recognized when the related product is
shipped.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect these estimates.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or
market, and consist of the following at September 30, 1995 and 1996, and March
31, 1997:
1995 1996 1997
---------- ---------- -----------
Raw materials ...... $ 383,106 $ 262,116 $ 1,902,282
Finished goods ...... 2,307,929 5,571,696 11,907,846
---------- ---------- -----------
$2,691,035 $5,833,812 $13,810,128
========== ========== ===========
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to ten years.
F-7
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
Property and equipment consist of the following at September 30, 1995 and
1996, and March 31, 1997:
1995 1996 1997
---- ---- ----
Tooling and molds ................. $ 5,540,418 $ 8,189,730 $11,167,958
Furniture, fixtures and equipment 1,328,886 2,501,580 3,331,961
Autos and trucks .................. 244,279 342,142 1,908,301
Leasehold improvements ............ 325,734 517,928 826,898
----------- ----------- -----------
7,439,317 11,551,380 17,235,118
Less -- accumulated depreciation . (1,671,102) (3,362,939) (4,783,858)
----------- ----------- -----------
$ 5,768,215 $ 8,188,441 $12,451,260
=========== =========== ===========
Maintenance and repairs of approximately $52,000, $55,000 and $64,000 for the
years ended September 30, 1994, 1995 and 1996, respectively, are charged to
expense as incurred. The cost of renewals and betterments that materially extend
the useful lives of assets or increase their productivity are capitalized.
LICENSE AGREEMENTS
Royalties paid under various licensing agreements are recorded as expense at
the time the related sales are made.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average number
of common shares and common share equivalents outstanding using the treasury
stock method, except when common share equivalents have an antidilutive effect.
All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996. The
calculation of fully diluted net income per common share includes adjustments
for interest expense and equivalent shares related to the 10% Convertible
Subordinated Debentures, if dilutive, as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SHARES
Weighted average number of common shares
outstanding .............................. 7,753,246 9,086,976 11,789,362 11,341,864 13,234,930
Additional shares assuming conversion of:
Stock options ............................ 247,366 600,866 573,618 557,504 564,196
Warrants ................................. 153,658 598,562 39,733 49,044 --
Convertible debentures ................... 1,485,676 783,642 -- -- --
Preferred stock .......................... -- 500,000 666,667 1,000,000 --
---------- ----------- ----------- ----------- -----------
Weighted average shares outstanding ...... 9,639,946 11,570,046 13,069,380 12,948,412 13,799,126
========== =========== =========== =========== ===========
Net income ................................ $ 632,599 $ 2,769,849 $ 5,953,295 $ 2,017,672 $ 4,005,165
Add:
Interest expense on convertible debentures
(assuming conversion) .................... 153,514 100,670 -- -- --
---------- ----------- ----------- ----------- -----------
Net income attributable to fully diluted
weighted average shares outstanding ..... $ 786,113 $ 2,870,519 $ 5,953,295 $ 2,017,672 $ 4,005,165
========== =========== =========== =========== ===========
Fully diluted earnings per share .......... $ 0.08 $ 0.25 $ 0.46 $ 0.16 $ 0.29
========== =========== =========== =========== ===========
</TABLE>
ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED
In fiscal 1997, the Company is required to adopt Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to
F-8
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
be Disposed Of," issued by the Financial Accounting Standards Board. SFAS No.
121 requires that long-lived assets be reviewed for impairment whenever events
or circumstances indicate that the carrying amount of the asset may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
without interest charges) from an asset to be held and used in operations is
less than the carrying value of the asset, an impairment loss must be recognized
in the amount of the difference between the carrying value and the fair value.
The Company does not believe that the adoption of SFAS No. 121 will have a
material effect on the Company's financial position or results of operations.
In fiscal 1997, the Company also is required to adopt SFAS No. 123,
"Accounting for Stock Based Compensation." As permitted by SFAS No. 123, the
Company will continue to account for transactions with its directors and
employees pursuant to Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 requires companies that do not
choose to account for the effects of stock based compensation in the financial
statements to disclose the pro forma effects on earnings and earnings per share
as if the fair value based method of accounting encouraged by SFAS No. 123 has
been applied. The Company has not yet calculated the impact of these pro forma
adjustments, since it is not required to do so.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited Consolidated Financial Statements as of March 31,
1997 and for the six months ended March 31, 1996 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for the periods presented have
been made. The results of operations for the six-month period ended March 31,
1997 are not necessarily indicative of the operating results that may be
expected for the entire year ending September 30, 1997.
(3) CREDIT AGREEMENT
In March 1995, the Company signed an international letter of credit agreement
with a foreign bank. The international letter of 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 $3.5 million. The agreement also
provided for an import cash line of credit of $1.0 million, which allowed the
Company to finance its imports for up to 90 days from the date of shipment. As
of September 30, 1995, there were no amounts outstanding on the import cash line
of credit and there were purchase commitments of approximately $1.9 million.
In May 1996, the Company entered into a new credit agreement with a foreign
bank. The credit agreement provides the Company's overseas 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 provides for an import cash line of credit of $1.0
million, which allows the Company to finance its imports for up to 90 days from
the date of shipment. As of September 30, 1996, there were no amounts
outstanding on the import cash line of credit. Total purchase commitments of
approximately $3,327,000 at September 30, 1996, are secured by the assets of the
Company. The credit facilities under the credit agreement will expire on January
31, 1997. See Note 13.
(4) SHAREHOLDERS' EQUITY
All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996.
10% CONVERTIBLE SUBORDINATED DEBENTURES
In January 1994, the Company completed a private placement of 83 units for
$20,000 each, each unit consisting of $12,500 in principal amount of 10%
Convertible Subordinated Debentures due December 31,
F-9
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
1996 and 5,400 shares of Common Stock. In March 1994, the Company completed a
private placement of 125 units for $20,000 each, each unit consisting of $12,500
in principal amount of 10% Convertible Subordinated Debentures due March 31,
1997 and 5,400 shares of Common Stock. The total proceeds from the private
placements aggregated $4,160,000. Of this amount, the Company utilized
$1,263,600 in March 1994 to purchase an aggregate of 1,123,200 shares of the
Company's Common Stock from two individuals at an average price of $1.13 per
share. All of the shares purchased by the Company were cancelled and new shares
were issued in connection with the private placements described above.
During the year ended September 30, 1995, the Company issued 1,485,676 shares
of Common Stock upon conversion of an aggregate of $2.6 million of principal
amount of 10% Convertible Subordinated Debentures (the "Debentures"), at a
conversion price of $1.75 per share, including 1,014,272 shares issued upon
conversion of an aggregate of $1,775,000 of principal amount of the Debentures
that were outstanding in April 1995 when the Company announced that it would
redeem all of the Debentures that remained outstanding on May 31, 1995, pursuant
to the terms of the Debentures.
CONVERTIBLE PREFERRED STOCK
In March 1995, the Company completed the sale of 500 shares of Class A
Convertible Preferred Stock (the "Preferred Stock") to an affiliate of its
principal manufacturer of die-cast collectibles, for a purchase price of $2.0
million. The sale was effected primarily as a long-term strategic transaction
intended to align the interests of the manufacturer with those of the Company.
The shares were converted into an aggregate of 1,000,000 shares of Common Stock
during May 1996.
REDEMPTION OF WARRANTS
On May 31, 1995, the Company redeemed an aggregate of 1,614,731 warrants to
purchase shares of its Common Stock. The redemption price was $0.25 per warrant,
or an aggregate payment of $403,683, pursuant to the terms of such warrants.
Prior to the redemption, each warrant entitled the holder to purchase two shares
of the Company's Common Stock at an exercise price of $3.75 per share. Certain
holders of such warrants exercised warrants to purchase an aggregate of 163,670
shares of Common Stock prior to the redemption, resulting in total proceeds to
the Company of approximately $613,000.
STOCK OPTIONS AND WARRANTS
Under the Company's 1993 Stock Option Plan (the "Plan"), the Board of
Directors may from time to time grant to key employees, consultants, and
independent contractors who provide valuable services to the Company (i)
incentive stock options and non-statutory stock options to purchase shares of
the Company's Common Stock, (ii) stock appreciation rights, (iii) shares of the
Company's Common Stock, or (iv) cash awards. The Plan also includes an automatic
program providing for automatic grants of stock options to non-employee
directors of the Company. The exercise price for all incentive stock options
granted under the Plan may not be less than the fair market value of the
Company's Common Stock on the date of the grant, except that the option price
may not be less than 110% of the fair market value of the Company's Common Stock
on the date of the grant in the case of incentive stock options granted to any
person possessing more than 10% of the combined voting power of the Company's
Common Stock or any parent or subsidiary corporation. In the case of
non-statutory stock options, the exercise price may not be less than 85% of the
fair market value of the Company's Common Stock on the date of the grant.
Options granted under the Plan generally have a six-year term. Options that were
granted prior to July 1995 are fully vested and exercisable. The option
agreements for options granted beginning in July 1995 generally provide that
one-third of the options vest and become exercisable on each of the first,
second, and third anniversaries of the date of grant. A total of 2,000,000
shares of Common Stock may be issued pursuant to the Plan. On September 4, 1996,
the Company's Board of Directors approved an amendment to increase the number of
shares authorized for issuance pursuant to the Plan from 2,000,000 to 2,500,000
shares, subject to shareholder approval by September 4, 1997. The Plan expires
in 2001.
F-10
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
The following summarizes the activity for the Plan at September 30, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
--------------------------- --------------------------
OPTION OPTION
NUMBER PRICE PER NUMBER PRICE PER
OF SHARES SHARE OF SHARES SHARE
----------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
year .............................. 1,252,000 $1.25 - $2.72 1,111,200 $1.25 - $ 5.25
Granted ............................ 400,200 $4.25 - $5.25 234,700 $6.50 - $10.63
Cancelled .......................... -- -- (1,600) $5.25 - $ 5.25
Exercised .......................... (541,000) $1.69 - $2.72 (239,247) $2.50 - $ 5.25
--------- ---------
Options outstanding at end of year 1,111,200 $1.25 - $5.25 1,105,053 $1.25 - $10.63
Options available for grant ....... 103,800 370,700
Options exerciseable at year end .. 1,051,000 867,274 $1.25 - $ 8.75
</TABLE>
During fiscal 1995 and 1996 the Company issued 541,000 and 239,247 shares of
Common Stock upon the exercise of employee stock options, resulting in total
proceeds to the Company of approximately $1,280,000 and $803,000, respectively.
In addition to the options outstanding at September 30, 1995, the Company had
warrants for the purchase of 149,114 shares of Common Stock at prices ranging
from $3.30 to $3.75. During fiscal 1995 and 1996, the Company issued 1,020,886
and 149,114 shares of Common Stock upon the exercise of warrants, with total
proceeds to the Company of approximately $2,291,000 and $511,000, respectively.
There were no warrants outstanding at September 30, 1996.
(5) ACQUISITIONS AND DISPOSALS
ACQUISITION OF FAN FUELER, INC.
In August 1994, the Company acquired certain assets and liabilities of Fan
Fueler Inc. ("Fan Fueler") and began marketing Fan Fueler's product lines of
licensed motorsports items that include drink bottles, key chains, and air
fresheners. The purchase price for Fan Fueler consisted of 100,000 shares of the
Company's Common Stock and the assumption of $396,603 in liabilities. The assets
of Fan Fueler acquired by the Company consisted of $15,590 of cash, $203,602 of
accounts receivable, $127,755 of inventory, $3,490 of deposits, and $105,279 of
property, plant and equipment. The liabilities of Fan Fueler assumed by the
Company consisted of $93,203 of accounts payable, $27,753 of accrued royalties,
commissions and interest, $121,752 of notes payable, and $153,895 of notes
payable to the affiliates of Fan Fueler. The notes payable assumed by the
Company were either non-interest bearing or bore interest at rates of 6% to 18%
and were repaid during fiscal 1995. The terms of the acquisition, including the
valuation of the assets and liabilities of Fan Fueler acquired by the Company,
were determined by negotiations between representatives of Fan Fueler and
representatives of the Company. No affiliation existed between Fan Fueler and
the Company at the time of the acquisition. This transaction was accounted for
as a purchase.
DISPOSITION OF MINI VEHICLE ASSETS
In January 1994, the Company sold to an unaffiliated third party
substantially all of its inventory and fixed assets, exclusive of proprietary
tooling and molds, related to the manufacture of its pedal, electric, and
gas-powered mini vehicles. The terms of the purchase agreement (i) required the
buyer to purchase certain equipment from the Company by issuing a note payable
to the Company in the amount of $46,200, payable in 18 monthly installments
beginning six months after the closing of the sale, and (ii) required the buyer
to purchase existing inventory from the Company by issuing a note payable to the
Company in the amount of $258,170, payable as the inventory was used in the
manufacture of the Company's mini vehicles. As of September 30, 1995, the buyer
had repaid the notes in full.
Effective March 31, 1995, the Company sold certain of its assets related to
its mini vehicle product line to Motorsports Promotions, Inc. ("MPI"), an
unrelated company. The assets sold consisted primarily
F-11
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
of accounts receivable, inventory, tooling, and equipment. The purchase
agreement provided for total consideration of $1,324,712, consisting of $237,567
in cash, assumed liabilities of $52,891, and a promissory note for $1,034,254,
subject to certain adjustments. Effective November 1995, the Company and MPI
agreed to adjust the total consideration to be paid by MPI to $1,051,646. The
Company recorded a non-operating gain of approximately $290,000 on this
transaction in the second quarter of fiscal 1995. As a result of the purchase
price adjustment described above, the Company reduced the gain such that no gain
or loss was recorded on this transaction for fiscal 1995.
SALE OF M-CAR ASSETS
On September 29, 1994, the Company sold the assets and liabilities related to
its business of conducting M-Car Grand Prix Races to M-Car, Incorporated, an
Arizona corporation. The total sale price for the M-Car operations was $125,000,
consisting of cash of $20,000 and a three-year promissory note in the principal
amount of $105,000, bearing interest at 9.75% per annum. The promissory note is
secured by the assets sold to M-Car, Incorporated and by the personal guaranty
of Robert Scott Tremonti, the shareholder of M-Car, Incorporated, and other
individuals related to Mr. Tremonti. The terms of the sale, including the
valuation of the assets and liabilities sold by the Company, were determined by
negotiations between representatives of the Company and representatives of
M-Car, Incorporated. Prior to the sale, Mr. Tremonti conducted sales and
marketing services related to the Company's M-Car operations on a contractual
basis with the Company. The contractual arrangement with Mr. Tremonti was
terminated concurrently with the sale of the Company's M-Car operations.
(6) SUPPLEMENTAL CASH FLOW INFORMATION
With respect to the acquisitions of Sports Image Inc., Motorsport Traditions
Limited Partnership and Creative Marketing & Promotions, Inc., discussed in
Notes 12, 13, and 14, non-cash financing, investing, and operating activities
for the six months ended March 31, 1997 include (i) a $9,612,098 increase to
common stock issued for the acquisitions; (ii) a $38,391,771 increase of debt
and liabilities incurred or assumed in the acquisitions; and (iii) a $13,114,948
increase of assets, net of cash acquired in the acquisitions.
Investing activities for the six-month period ended March 31, 1997 included
the sale of approximately $556,000 in equipment for cash proceeds of
approximately $111,000 and notes receivable of approximately $445,000.
Cash payments during the years ended September 30, 1994, 1995 and 1996 and
during the six months ended March 31, 1996 and 1997 included interest of
$112,758, $267,540, $79,358, $42,768, and $427,629, respectively, and income
taxes of $4,309, $41,901, $3,991,740, $2,270,000, and $2,981,000, respectively.
During the fiscal years ended 1995 and 1996, non-cash financing and investing
activities included assets acquired under capital lease agreements of
approximately $338,000 and $233,000, respectively.
Non-cash financing and operative activities for the year ended September 30,
1996, include an increase to deferred income taxes and additional paid-in
capital of approximately $838,000 related to tax benefits on various Common
Stock options.
Non-cash financing activities for the year ended September 30, 1996, include
the issuance of 1,000,000 shares of the Company's Common Stock upon the
conversion of all outstanding shares of Class A Convertible Preferred Stock.
During the year ended September 30, 1995, financing activities included the
conversion of an aggregate of $2,600,000 of principal amount of the Debentures
into 1,485,676 shares of the Company's Common Stock.
During the years ended September 30, 1994 and 1995, financing activities
included the issuance of $80,000 and $125,000, respectively, of Common Stock in
exchange for common stock subscribed.
In August 1994, non-cash investing activities included the purchase of assets
and assumption of liabilities of Fan Fueler in exchange for Common Stock
subscribed valued at $125,000 (Note 5).
F-12
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
In fiscal 1994, non-cash investing activities included the sale of certain
assets related to the Company's mini vehicle and M-Car operations in exchange
for notes receivable of $304,370 and $105,000, respectively (Note 5).
During the year ended September 30, 1994, financing activities included (i)
the receipt of a promissory note in exchange for certain assets sold to the
third-party manufacturer of the Company's mini vehicles, (ii) the issuance of
Common Stock in exchange for $96,863 of trade payables, and (iii) the issuance
of promissory notes in exchange for $84,757 of trade payables.
(7) RELATED PARTY TRANSACTIONS
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, a shareholder and officer
of the Company, currently owns a one-third interest in F.W. Investments, a
partnership that owns this facility. Prior to February 1994, the Company
occupied a separate leased facility in Tempe, Arizona, totaling 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 for the year ended September 30, 1994 and
$177,000 in each of the fiscal years ended September 30, 1995 and 1996.
In November 1993, Fred W. Wagenhals advanced the Company $473,000. The
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 for the advance, bearing interest at 8% per
annum. As of September 30, 1994, the promissory note was paid in full.
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.
(8) EMPLOYEE BENEFIT PLANS
In October 1994, the Company established a defined contribution plan that
qualifies as a cash or deferred profit sharing plan under Sections 401(a) and
401(k) of the Internal Revenue Code. The plan is available to substantially all
domestic employees. Under the plan, participating employees may defer from 1% to
15% of their pre-tax compensation. The Company contributes fifty cents for each
dollar contributed by the employee, with a maximum contribution of 2% of the
employee's defined compensation. In addition, the plan provides for an annual
employer profit sharing contribution in such amounts as the Board of Directors
may determine. The Company expensed approximately $26,000 and $27,000 under the
plan for the years ended September 30, 1995 and 1996, respectively.
The Company has no other programs that require payment by the Company of
post-employment benefits to current or retired employees.
(9) SIGNIFICANT CUSTOMER
In fiscal 1994, the Company derived approximately 16% of its net sales from a
promotional program with a major oil company.
(10) INCOME TAXES
The Company provides for income taxes under Statement of Financial Accounting
Standard No. 109 (SFAS No. 109), "Accounting for Income Taxes." SFAS No. 109
requires the use of an asset and liability
F-13
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
approach in accounting for income taxes. Deferred tax assets and liabilities are
recorded based on the differences between the financial statement and tax bases
of assets and liabilities and the tax rates in effect when these differences are
expected to reverse. The principal differences arise as a result of the use of
accelerated depreciation methods for federal income tax reporting purposes,
certain reserves expensed currently for financial reporting purposes, and
compensation not yet deductible for tax purposes.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. The
ultimate realization of this deferred tax asset depends on the Company's ability
to generate sufficient taxable income in the future. A valuation allowance has
not been recorded as of September 30, 1996.
Net operating loss carryovers for federal income tax purposes of
approximately $856,000 at September 30, 1994, were fully utilized in the year
ended September 30, 1995.
The provision for income taxes consists of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current, net of operating loss carryover:
Federal .......................................... $ -- $ 1,050,311 $ 3,258,060
State ............................................ 31,707 274,631 753,359
--------- ----------- -----------
$ 31,707 $ 1,324,942 $ 4,011,419
Deferred income taxes ............................... -- 13,206 (94,223)
Utilization of net operating loss carryforward ...... 212,468 339,985 --
Change in valuation allowance ....................... (468,212) (293,633) --
--------- ----------- -----------
Provision for (benefit from) income taxes ........... $(224,037) $ 1,384,500 $ 3,917,196
========= =========== ===========
</TABLE>
Reconciliation of the federal income tax rate to the Company's effective rate
for the years ended September 30 is as follows:
1994 1995 1996
----- ---- ----
Statutory federal rate ............................ 34.00% 34.00% 34.00%
State taxes, net of federal benefit ............... 7.00% 5.53% 5.03%
Non-deductible expense ............................ 2.26% 0.86% 0.66%
Benefit of net operating loss ..................... (35.50%) -- --
Benefit due to reduction in valuation allowance on
remaining net operating loss carryforwards ...... (62.60%) -- --
Change in valuation reserve ....................... -- (7.06%) --
-------- ----- -----
(54.84%) 33.33% 39.69%
======= ===== =====
The components of deferred taxes are as follows at September 30, 1995 and
1996:
1995 1996
---- ----
Deferred tax liabilities:
Accelerated tax depreciation ..... $(174,952) $ (215,909)
Deferred tax assets:
Inventory cost capitalization .... $ 136,294 $ 155,965
Vacation accrual ................. 26,288 13,048
Valuation reserves ............... 145,151 196,637
Deferred compensation ............ 777,345 881,878
--------- ----------
Net deferred tax asset ........ $ 910,126 $1,031,619
========= ==========
F-14
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
(11) COMMITMENTS AND CONTINGENCIES
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 had scheduled oral arguments on
these motions for September 30, 1996. That hearing date has been vacated and
will be rescheduled at a later date. Should the Company's defense prove
unsuccessful, the Company estimates the potential range of loss to be between
$400,000 and $800,000. No provision with respect to this matter has been made in
the financial statements.
A lawsuit, purportedly on behalf of Action Products, Inc. ("API"), a
dissolved Arizona corporation, has been instituted against the Company, the
Company's Chief Executive Officer, and others in the United States District
Court for the District of Arizona. The complaint alleges that the Company, the
Company's Chief Executive Officer, and others breached contractual and other
duties to API and appropriated certain business opportunities of API. The
complaint requests damages, including 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. See Note 14.
The Company leases certain equipment and office space under noncancellable
operating leases. Rent expense related to these lease agreements totaled
approximately $381,000, $352,000 and $437,000 for the fiscal years ended
September 30, 1994, 1995 and 1996, respectively.
F-15
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
Future lease payments under the noncancellable leases are approximately as
follows:
YEAR ENDING
SEPTEMBER 30,
---------------
1997 ................................... 412,000
1998 ................................... 386,000
1999 ................................... 320,000
2000 ................................... 309,000
2001 ................................... 206,000
Thereafter .............................. 486,000
-----------
Total ................................ $2,119,000
===========
The Company is subject to certain other asserted and unasserted claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
(12) SUBSEQUENT EVENTS
BUSINESS COMBINATIONS
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image, Inc. ("Sports Image") for
approximately $30,000,000, consisting of a $24,000,000 promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock valued at
$14.875 per share. Sports Image sells and distributes a variety of licensed
motorsports products through wholesale distributor networks, corporate sponsors,
and trackside events. Terms of this acquisition were determined by arms-length
negotiations between representatives of Sports Image 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. Sports
Image had sales of approximately $41,800,000 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
$5,800,000). This transaction will be accounted for as a purchase.
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") pursuant to
which the Company has the right to market licensed motorsports products
utilizing the likeness of Dale Earnhardt. Pursuant to 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.
(13) ADDITIONAL SUBSEQUENT EVENTS
BUSINESS COMBINATIONS
In December 1996, the Company reached an agreement in principle to acquire
substantially all of the assets and certain liabilities of Motorsport Traditions
Limited Partnership ("MTL") and all of the capital stock of Creative Marketing &
Promotions, Inc. ("CMP" and, together with MTL, "Motorsport Traditions"), for an
aggregate of approximately $13,000,000 consisting of cash, a promissory note,
and shares of the Company's Common Stock. The acquisition is subject to the
completion of due diligence and preparation and execution of definitive
agreements. MTL and CMP sell and distribute licensed motorsports products
through a network of wholesale distributors, and trackside events. MTL and CMP
together generated approximately $25,000,000 in annual revenues from their
design, manufacturing, and sales and distribution activities. This transaction
will be accounted for as a purchase. See Note 14, "Business Combinations".
F-16
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
FINANCING ARRANGEMENTS
The Company has received a letter of commitment from an insurance company for
$20,000,000 in debt financing in the form of senior unsecured notes. The senior
notes will bear interest at the rate of 8.05% per annum, provide for semi-annual
payments of accrued interest, and call for the payment of principal on January
2, 1999. The Company anticipates that the closing of the senior notes will be
January 2, 1997. The Company intends to utilize the proceeds from the senior
notes to repay a portion of the promissory note issued in connection with the
acquisition of Sports Image. The Company also has received a letter of
commitment from a bank for a $10,000,000 unsecured revolving line of credit. The
line of credit, which will mature on March 31, 1998, will bear an interest rate
equal to the LIBOR rate plus 1.90%. The Company anticipates that the closing of
the line of credit will be January 2, 1997. The Company intends to utilize
approximately $4,000,000 of the line of credit to complete the Sports Image
acquisition and an additional $4,000,000 to close the Motorsport Traditions
acquisition. See Note 14, "Financing Arrangements".
HASBRO LICENSE AGREEMENT
In December 1996, the Company and Hasbro, Inc. ("Hasbro") entered into a
license agreement (the "Hasbro License"). The Hasbro License covers the
exclusive sale by Hasbro in the mass-merchandise market of 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 will be responsible for acquiring and maintaining
the license rights with the licensors, and Hasbro will be 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 the
1:18th-scale plastic toy car developed by the Company, and (ii) all other
products that Hasbro may market as licensed motorsports products, including
radio controlled cars, slot car sets, games (including electronic and CD-ROM
interactive games), plush toys, figurines, play sets, walkie talkies, and other
products. 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 percent of the actual
royalties earned in the prior year, up to a maximum 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. 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.
(14) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
BUSINESS COMBINATIONS
On January 8, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of MTL and acquired all of the capital stock of CMP.
The purchase price paid by the Company consisted of (i) cash in the amount of
$5,400,000; (ii) a promissory note in the principal amount of $1,600,000 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.
This transaction will be accounted for as a purchase.
UNAUDITED PRO FORMA INCOME STATEMENT DATA
The following table sets forth the unaudited pro forma income statement data
of the Company for the six-month periods ended March 31, 1996 and 1997, giving
effect to the acquisitions of Sports Image and Motorsport Traditions as if they
had occurred on October 1, 1995, using the purchase method of
F-17
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996, AND MARCH 31, 1997 (Unaudited) - (Continued)
accounting for business combinations. The unaudited pro forma income statement
data presented herein does not purport to represent what the Company's actual
results of operations would have been had the acquisitions of Sports Image and
Motorsport Traditions occurred on that date or to project the Company's results
of operations for any future period.
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
---------------- ----------------
(UNAUDITED) (UNAUDITED)
Net Sales .................. $51,477,000 $54,948,000
Operating Income ........... 6,162,000 7,469,000
Net Income ................. 2,779,000 3,651,000
Net Income Per Common Share $ 0.20 $ 0.26
FINANCING ARRANGEMENTS
On January 2, 1997, the Company entered into a $16,000,000 credit facility
(the "Credit Facility") with First Union National Bank of North Carolina. 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 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, will require the Company to comply with certain
financial ratios and net worth requirements and will limit the ability of the
Company and its subsidiaries to incur additional indebtedness 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, will require the Company to
comply with certain financial ratios and net worth requirements and will limit
the ability of the Company and its subsidiaries to incur additional indebtedness
or to sell assets or engage in certain mergers or 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.
COMMITMENTS AND CONTINGENCIES
In June 1997, the Company reached an agreement to settle the lawsuit brought
on behalf of API against the Company, the Company's Chief Executive Officer, and
others. The proposed settlement provides for a $4.9 million payment by the
Company to the plaintiff and the execution of mutual releases. The settlement is
subject to approval by the Company's Board of Directors, the execution of final
documentation, and court approval.
The Company is subject to certain asserted and unasserted claims encountered
in the normal course of business. In the opinion of management, the resolution
of these matters will not have a material adverse effect on the Company's
financial position or result of operations. See "Business -- Litigation and
Environmental Matters" as set forth elsewhere in this Prospectus.
F-18
<PAGE>
[ inside back cover ]
Photographs of various licensed motorsports apparel and souvenir products
offered by the Company, with a photograph of a mobile trackside store in the
background.
LOGO LOGO LOGO LOGO LOGO LOGO
<PAGE>
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No dealer, representative, or any other person has been authorized to give
information or to make any representations in connection with this offering not
contained in this Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company,
the Selling Shareholders or by the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates, or an offer to, or
solicitation of, any person in any jurisdiction where such offer or solicitation
would be unlawful. 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 information contained
herein is correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
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PAGE
----
Prospectus Summary ............................. 3
Risk Factors ................................... 6
Use of Proceeds ................................ 13
Dividend Policy ................................ 13
Capitalization ................................. 14
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 .................................... 18
Business ....................................... 25
Management ..................................... 36
Certain Transactions ........................... 42
Principal and Selling Shareholders ............. 44
Description of Securities ...................... 45
Underwriting ................................... 49
Legal Opinions ................................. 50
Experts ........................................ 50
Available Information .......................... 50
Additional Information ......................... 50
Incorporation of Certain Information
by Reference .................................. 51
Index to Consolidated Financial Statements .... F-1
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2,100,000 SHARES
[ACTION LOGO]
COMMON STOCK
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PROSPECTUS
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MONTGOMERY SECURITIES
ADVEST, INC.
INTERSTATE/JOHNSON LANE
CORPORATION
June 19, 1997
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