AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
ACTION PERFORMANCE COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Arizona 86-0704792
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2401 West First Street
Tempe, Arizona 85281
(602) 894-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------
FRED W. WAGENHALS
Chairman of the Board, President,
and Chief Executive Officer
2401 West First Street
Tempe, Arizona 85281
(602) 894-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to: Copies to:
Robert S. Kant, Esq. Edward S. Rosenthal, Esq.
Jere M. Friedman, Esq. Fried, Frank, Harris, Shriver & Jacobson
O'Connor, Cavanagh, Anderson, 350 South Grand Avenue
Killingsworth & Beshears, P.A. 32nd Floor
One East Camelback Road Los Angeles, California 90071
Phoenix, Arizona 85012 (213) 473-2001
(602) 263-2606
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practical after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
Title of Shares Proposed Maximum Amount of
to be Registered Aggregate Offering Registration
Price(1) Fee(2)
- --------------------------------------------------------------------------------
Common Stock, par value $0.01 per share..... $51,620,625 $ 15,642.62
================================================================================
(1) Includes 285,000 shares subject to the Underwriter's overallotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 20, 1997
PROSPECTUS
1,900,000 SHARES
[LOGO]
COMMON STOCK
Of the 1,900,000 shares of Common Stock (the "Common Stock") offered
hereby, 1,500,000 shares are being sold by Action Performance Companies, Inc.
(the "Company") and 400,000 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 May 19, 1997, the last reported sale price for the Common
Stock was $23.625 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.
<TABLE>
=====================================================================================================
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2) SELLING SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ................ $ $ $ $
Total (3) ................ $ $ $ $
=====================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated to be $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
285,000 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 $_______________, the Underwriting Discount will total
$_______________, the Proceeds to Company will total $______________, and
the Proceeds to Selling Shareholders will total $_______________. 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 , 1997.
----------------
MONTGOMERY SECURITIES
ADVEST, INC.
INTERSTATE/JOHNSON LANE
CORPORATION
, 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, and (ii) assumes no exercise of any
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 180,260 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.
3
<PAGE>
The Company focuses on developing long-term relationships with the most
popular drivers, car owners, car sponsors, car manufacturers, and others in
these 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 ................... 1,500,000 shares
Common Stock offered by the Selling Shareholders ..... 400,000 shares
Common Stock to be outstanding after this offering ... 15,213,485 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>
- ----------
(1) Excludes (i) 1,148,305 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding as of May 19, 1997, and (ii) 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."
4
<PAGE>
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
--------- ---------- --------- --------- --------- PRO FORMA(1)--------- --------- PRO FORMA(1)
----------- -----------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
--------------------
AS
ACTUAL ADJUSTED(4)
--------- -----------
BALANCE SHEET DATA:
Working capital ................................................................................... $19,203 $ 52,183
Total assets ....................................................................................... 81,519 109,999
Total debt ......................................................................................... 26,805 22,305
Shareholders' equity ............................................................................... 43,960 76,940
</TABLE>
- ----------
(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 Motorsports 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 1,500,000 shares
of Common Stock at an assumed public offering price of $23.625 per share
and the application of the net proceeds therefrom.
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 collectibles and
motorsports consumer products. Although the Company owns most of the tools,
dies, and molds utilized in the manufacturing processes of its collectible
products and owns the tooling and dies used to manufacture certain of its
motorsports consumer products, the Company has limited control over the
manufacturing processes themselves. As a result, any difficulties encountered by
the third-party manufacturers that result in product defects, production delays,
cost overruns, or the inability to fulfill orders on a timely basis could have a
material adverse effect on the Company.
The Company does not have long-term contracts with its third-party
manufacturers. Although the Company believes it would be able to secure other
third-party manufacturers to produce its products as a result of its ownership
of the molds and tools used in the manufacturing process, the Company's
operations would be adversely affected if it lost its relationship with any of
its current suppliers (including particularly its 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'
6
<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."
The Company anticipates using the opportunities created by the combination of
Sports Image and Motorsport Traditions to effect what the Company believes will
be substantial cost savings, including a reduction in operating expenses as a
result of the elimination of duplicative sales and marketing, administrative,
warehouse, and distribution facilities, functions, and personnel. Significant
uncertainties, however, accompany any business combination, and there can be no
assurance that the Company will be able to achieve its anticipated integration
of facilities, functions, and personnel in order to achieve operating
efficiencies or otherwise realize cost savings as a result of the recent
acquisitions or future acquisitions. The inability to achieve the anticipated
cost savings could have a material adverse effect on the Company's business,
financial condition, and operating results.
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
7
<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 an 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
8
<PAGE>
as television, radio, newspapers, magazines, and billboards. The Company
currently competes principally on the basis of the current popularity of the
race car drivers 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 an adverse effect on the
Company. The Company believes, however, that other major consumer products
companies would quickly replace tobacco and alcohol companies as sponsors of
motorsports in the event that 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.
9
<PAGE>
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 $3,000,000. 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 also is a
10
<PAGE>
defendant 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 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 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. 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."
RIGHTS TO ACQUIRE SHARES; POTENTIAL ISSUANCE OF ADDITIONAL SHARES
As of May 19, 1997, options to acquire a total of 1,148,305 shares were
outstanding under the Company's 1993 Stock Option Plan (the "1993 Plan"). During
the terms of such options, the holders thereof will have the opportunity to
profit from an increase in the market price of Common Stock with resulting
dilution in the interests of holders of Common Stock. The existence of such
stock options could adversely affect the terms on which the Company can obtain
additional financing, and the holders of such options can be expected to
exercise such options at a time when 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 15,213,485
shares of Common Stock to be outstanding upon completion of this offering,
approximately 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 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 shares of such "restricted securities" have
been registered for resale pursuant to another registration statement. An
aggregate of 2,365,456 shares held by certain officers and directors currently
are available for sale under Rule 144. The Company's directors and executive
officers have entered into lock-up agreements that restrict the sale of an
aggregate of shares of Common Stock during the 120-day period after
the date of this Prospectus without the prior written consent of Montgomery
Securities. The Selling Shareholders, other than directors and officers of the
Company, have entered into lock-up agreements that restrict the sale of their
remaining 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."
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
11
<PAGE>
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 1,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$33.0 million (approximately $39.3 million if the Underwriters' over-allotment
option is exercised in full), assuming a public offering price of $23.625 per
share and after deducting estimated underwriting discounts and offering expenses
of approximately $2.5 million (approximately $2.8 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.
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 1,500,000 shares of
Common Stock offered hereby by the Company (at the assumed offering price of
$23.625 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(1)
--------- --------------
(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;
shares issued and outstanding, as adjusted ............. 137 152
Additional paid-in capital ....................................... 31,939 64,904
Retained earnings ................................................ 11,884 11,884
------- -------
Total shareholders' equity .................................... 43,960 76,940
------- -------
Total capitalization ............................................... $66,265 $99,245
======= =======
</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."
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 May 19, 1997) .............. 29.00 18.00
As of May 19, 1997, there were 168 holders of record and approximately 5,000
beneficial owners of the Company's Common Stock. On May 19, 1997, the closing
sales price of the Company's Common Stock on the Nasdaq National Market was
$23.625 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 388 (1,240) 409 4,154 9,870 3,363 6,675
for (benefit from) income taxes
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 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 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) 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 Motorsports 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 19, 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 Motorsports 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
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<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 76,000 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.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1995
-------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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 11,086 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
</TABLE>
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."
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 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 180,260 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.
25
<PAGE>
During the last two years, the Company has expanded its lines of die-cast
collectibles to include drag racing, Super Truck racing, USAC racing, and "World
of Outlaws" sprint car racing. The Company 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 Motorsports 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 Motorsports
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 Motorsports 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.
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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 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
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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."
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
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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.
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 exceeded 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
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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.
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.
The chairman 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
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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.
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
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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.
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
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completely distinct from the Company's current products and do not compete
directly with the Company's limited-edition motorsports die-cast collectible
products.
The Hasbro License provides for a term ending on December 31, 2001. Hasbro
may extend the Hasbro License for an additional three-year term, provided that
total wholesale revenue of licensed products exceeds a specified amount during
the initial term
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
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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."
INSURANCE
The Company maintains a $2.0 million product liability insurance policy to
cover the sale of its die-cast and other products. The Company maintains an
additional $5.0 million in commercial umbrella liability coverage. The Company
also maintains a $7.0 million insurance policy to cover its molds and dies
located at its third-party manufacturer in China and a $12.0 million insurance
policy to cover lost revenue in the event of certain interruptions of business
with its overseas manufacturer of die-cast collectibles. The Company believes
its insurance coverage is adequate.
LITIGATION 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. Specifically, the complaint
alleges that (i) the Company and Mr. Wagenhals engaged in a series of fraudulent
activities against API with the intent of seizing control of the market for the
sale of mini vehicles and models replicating well-known race cars and other
novelty vehicles in the United States; (ii) Mr. Wagenhals breached his fiduciary
duties as president and a director of API by failing to advise API of business
opportunities coming to his attention that might be advantageous to API, by
failing to act faithfully in pursuit of API's business to the best of his
abilities, and by failing to provide full and candid information to API with
respect to any activities that might conflict with his duties on behalf of API;
34
<PAGE>
(iii) Mr. Wagenhals breached his employment agreement with API by spending
significant amounts of his time obtaining licenses and sales for and furthering
the business of another company; and (iv) the Company and Mr. Wagenhals breached
a manufacturer's representation agreement by failing to pursue major retail
accounts for API, by failing to present any new improvements and recommendations
to API respecting certain products, by failing to pay certain fees to API, and
by avoiding representing any other competitive companies or products during the
term of the agreement. In a motion to file an amended complaint, the plaintiff
also alleged that Mr. Wagenhals obstructed justice as a result of allegedly
perjured testimony in a deposition. API asserts that the Company and Mr.
Wagenhals are liable to API in an amount equal to the greater of three times
API's alleged lost profits or the total value of what API would be worth today
in the absence of the alleged acts or, alternatively, the present value of the
Company. 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 and Mr. Wagenhals are
vigorously defending the lawsuit and have raised various defenses to the claims
set forth in the complaint, including the passage of applicable statutes of
limitation, a general release dated as of September 1, 1992 executed by API in
favor of the Company and Mr. Wagenhals, the corporate incapability of API to
institute the suit, a lack of causation between the acts complained of and the
losses allegedly incurred by API, factual inaccuracies in the complaint, accord
and satisfaction, estoppel, waiver, and laches. 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 been a
material adverse effect on the Company.
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.
EMPLOYEES
As of May 19, 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.
35
<PAGE>
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.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---------------------- ----- ------------------------------------------------------
<S> <C> <C>
Fred W. Wagenhals ......... 55 Chairman of the Board, President, and Chief Executive
Officer
Tod J. Wagenhals .......... 33 Executive Vice President, Secretary, and Directo
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
</TABLE>
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 and 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
37
<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
38
<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 $1,572
Vice President, Chief Financial 1995 71,250 10,000 50,000 1,425
Officer, Treasurer, and Director 1994 45,000 -- 80,000 --
</TABLE>
- ------------
(1) Messrs. Wagenhals, Wagenhals, and Besing also received certain
perquisites, the value of which did not exceed 10% of their salary and
bonus during fiscal 1996.
(2) The exercise price of all stock options granted were equal to the fair
market value of the Company's Common Stock on the date of grant.
(3) Amounts shown for fiscal 1996 represent matching contributions made by the
Company to the Company's 401(k) Plan.
The Company offers its employees medical and life insurance benefits. The
executive officers and other key employees of the Company, including directors
who also are employees of the Company, are eligible to receive stock options
under the Company's 1993 Stock Option Plan. See "Management -- 1993 Stock Option
Plan." The Company does not have a long-term incentive plan or a defined benefit
or actuarial plan and has never issued any stock appreciation rights.
39
<PAGE>
The following table provides information on stock options granted to the
Company's Named Officers during the fiscal year ended September 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL
SECURITIES RATE OF STOCK PRICE
UNDERLYING % OF TOTAL APPRECIATION FOR
OPTIONS OPTIONS EXERCISE OPTION TERM(2)
GRANTED GRANTED IN PRICE -------------------------
NAME (#)(1) FISCAL YEAR ($/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
40
<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 May 19, 1997, an aggregate of 1,184,245
shares of the Company's Common Stock has been issued upon exercise of Options
granted pursuant to the 1993 Plan, and there were outstanding Options to acquire
an additional 1,148,305 shares of the Company's Common Stock.
If any Option or SAR terminates or expires without having been exercised in
full, stock not issued under such Option or SAR will again be available for the
purposes of the 1993 Plan. If any change is made in the stock subject to the
1993 Plan, or subject to any Option or SAR granted under the 1993 Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
split-up, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the 1993 Plan provides that appropriate adjustments
will be made as to the maximum number of shares subject to the 1993 Plan and the
number of shares and exercise price per share of stock subject to outstanding
Options.
Options and Awards may be granted only to persons ("Eligible Persons") who at
the time of grant are either (i) key personnel, including officers and directors
of the Company or its subsidiaries, or (ii) consultants and independent
contractors who provide valuable services to the Company or to its subsidiaries.
Options that are 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.
41
<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."
42
<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
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<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 May 19, 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 5.0% 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
- ----------------------------------------- --------------- --------- -------------- -------- ---------
DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Fred W. Wagenhals ........................ 2,654,000 (3) 19.0%
Tod J. Wagenhals ......................... 171,456 (4) 1.2%
Christopher S. Besing .................... 50,000 (5) *
Joseph M. Mattes ......................... 45,000 (6) *
Melodee L. Volosin ....................... 27,500 (7) *
John S. Bickford ......................... 17,143 *
Jack M. Lloyd ............................ 18,000 (8) *
Robert H. Manschot ....................... 22,000 (9) *
All directors and executive officers as a
group (eight persons) ................... 3,005,099 21.0%
OTHER SELLING SHAREHOLDERS
- --------------------------
</TABLE>
- ---------------
Less than 1.0% 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 May 19, 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
May 19, 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
170,000 shares of Common Stock.
(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 18,000 shares of Common Stock.
(9) Represents 4,000 shares of Common Stock and vested options to acquire
18,000 shares of Common Stock.
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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 May 19, 1997, 13,713,485 shares of
Common Stock and no shares of Preferred Stock were issued and outstanding. An
additional 1,565,755 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
47
<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 15,213,485 shares of
Common Stock outstanding, of which 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. Of the remaining shares, shares of Common Stock
currently outstanding are "restricted securities," as that term is defined in
Rule 144, and may be sold only in compliance with Rule 144, pursuant to
registration under the Securities Act or pursuant to an exemption therefrom.
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 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 Selling Shareholders, other than directors
and officers of the Company, have entered into lock-up agreements that restrict
the sale of their remaining 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 152,134 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 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 outstanding restricted shares for resale pursuant to an
effective registration statement ( of which will be subject to the
lock-up agreements described
48
<PAGE>
above following the completion of this offering). 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.
As of May 19, 1997, options to purchase a total of 1,148,305 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 WARRANT AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.
49
<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 .............................................
Advest, Inc. ......................................................
Interstate/Johnson Lane Corporation ...............................
-----------
Total ........................................................... 1,900,000
===========
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 $ per
share and the Underwriters may allow, and such dealers may reallow, a concession
of not more than $ 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
285,000 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 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 Selling Shareholders, other than directors and
officers of the Company, have entered into similar lock-up agreements that
restrict the sale of their remaining 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.
52
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants ............................. F-2
Consolidated Balance Sheet as of September 30, 1996 .................. F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1995 and 1996 ................................... F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1995 and 1996 ................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1995 and 1996 ................................... F-6
Notes to Consolidated Financial Statements ........................... F-7
Consolidated Balance Sheet as of March 31, 1997 ...................... F-18
Consolidated Statements of Operations for the Six Months
Ended March 31, 1996 and 1997 ....................................... F-19
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 1996 and 1997 ....................................... F-20
Notes to Consolidated Financial Statements ........................... F-21
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,
---------------------------
ASSETS 1995 1996
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash .......................................................... $ 6,759,984 $ 4,983,382
Accounts receivable, net of allowance for doubtful accounts of
$142,746 and $256,324, respectively ......................... 4,057,124 7,496,988
Inventories ................................................... 2,691,035 5,833,812
Deferred income taxes ......................................... 910,126 1,031,619
Prepaid royalties ............................................. 1,109,647 2,295,505
Prepaid expenses and other assets ............................. 566,803 739,723
----------- -----------
Total current assets ........................................ 16,094,719 22,381,029
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation of $1,671,102 and $3,362,939, respectively ....... 5,768,215 8,188,441
NOTES RECEIVABLE, net of current portion ....................... 947,092 902,412
DEPOSITS AND OTHER ASSETS ...................................... 540,700 176,752
----------- -----------
$23,350,726 $31,648,634
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 1,623,219 $ 2,188,343
Accrued royalties and other accrued expenses ................... 1,232,022 1,577,567
Income taxes payable ........................................... 1,317,343 521,547
----------- -----------
Total current liabilities .................................... 4,172,584 4,287,457
CAPITAL LEASE OBLIGATIONS ...................................... 287,852 364,725
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized; ... 5 --
500 and 0 shares issued and outstanding, respectively
Common stock, $.01 par value, 25,000,000 shares authorized;
11,221,408 and 12,609,769 shares issued and outstanding,
respectively .................................................. 112,214 126,098
Additional paid-in capital ..................................... 16,852,308 18,991,296
Retained earnings .............................................. 1,925,763 7,879,058
----------- -----------
Total shareholders' equity ................................... 18,890,290 26,996,452
----------- -----------
$23,350,726 $31,648,634
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-3
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Sales:
Collectibles .............................. $ 12,802,295 $ 23,443,413 $ 40,903,590
Apparel and souvenirs ..................... 142,722 1,190,068 1,961,345
Promotional ............................... -- -- 1,351,000
Other ..................................... 3,924,110 1,497,734 --
------------ ------------ ------------
Net sales ................................ 16,869,127 26,131,215 44,215,935
Cost of sales .............................. 10,488,162 15,882,000 25,295,966
------------ ------------ ------------
Gross profit ............................... 6,380,965 10,249,215 18,919,969
Selling, general and administrative expenses 5,808,058 6,118,978 9,266,397
------------ ------------ ------------
Income from operations ..................... 572,907 4,130,237 9,653,572
Interest income (expense) and other, net ... (164,345) 24,112 216,919
------------ ------------ ------------
Income before provision for income taxes ... 408,562 4,154,349 9,870,491
Provision for (benefit from) income taxes .. (224,037) 1,384,500 3,917,196
------------ ------------ ------------
NET INCOME ................................. $ 632,599 $ 2,769,849 $ 5,953,295
============ ============ ============
NET INCOME PER COMMON SHARE:
Primary ................................... $ 0.08 $ 0.27 $ 0.46
============ ============ ============
Fully diluted ............................. $ 0.08 $ 0.25 $ 0.46
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary ................................... 8,079,930 10,115,582 13,027,746
============ ============ ============
Fully diluted ............................. 9,639,946 11,570,046 13,069,380
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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 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
========== ======== ==== ==== ========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income .................................................. $ 632,599 $ 2,769,849 $ 5,953,295
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................. 674,909 905,605 1,691,837
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)
Inventories ............................................ (14,978) (700,870) (3,142,777)
Deferred income taxes .................................. (224,037) 29,756 716,752
Prepaid royalties ...................................... (638,422) (471,225) (1,185,858)
Prepaid expense and other assets ....................... 161,556 (471,162) 204,929
Accounts payable ....................................... (498,593) 859,039 565,124
Income taxes payable ................................... -- 1,317,343 (795,796)
Accrued royalties and other accrued expenses ........... 31,067 137,756 292,862
----------- ----------- -----------
Net cash provided by operating activities .............. (1,459,846) 2,976,031 860,504
Cash Flows used in Investing Activities:
Acquisition of property and equipment ..................... (1,715,470) (3,024,359) (3,879,033)
Proceeds from the sale of property and equipment .......... 104,777 -- --
Proceeds from the sale of mini vehicle assets ............. -- 150,000 --
----------- ----------- -----------
Net cash used in investing activities .................. (1,610,693) (2,874,359) (3,879,033)
Cash Flows from Financing Activities:
Borrowings on line of credit .............................. -- 2,894,725 5,221,898
Payments on line of credit ................................ -- (2,894,725) (5,221,898)
Proceeds from issuance of common stock .................... 1,573,938 4,170,993 1,314,622
Issuance of Class A 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) --
Collections on notes receivable ........................... 214,994 69,012 31,979
Principal payments on capital lease obligations and
other ................................................... (90,802) (46,314) (104,674)
----------- ----------- -----------
Net cash provided by financing activities .............. 2,485,365 5,524,149 1,241,927
----------- ----------- -----------
Increase (Decrease) in Cash ............................... (585,174) 5,625,821 (1,776,602)
Cash, Beginning of Period ................................. 1,719,337 1,134,163 6,759,984
----------- ----------- -----------
Cash, End of Period ....................................... $ 1,134,163 $ 6,759,984 $ 4,983,382
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
(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:
1995 1996
------------ -----------
Raw materials ............. $ 383,106 $ 262,116
Finished goods ............ 2,307,929 5,571,696
------------ -----------
$2,691,035 $5,833,812
============ ===========
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to ten years.
F-7
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (Continued)
Property and equipment consist of the following at September 30, 1995 and
1996:
1995 1996
------------- -------------
Tooling and molds .................$ 5,540,418 $ 8,189,730
Furniture, fixtures and equipment 1,328,886 2,501,580
Autos and trucks .................. 244,279 342,142
Leasehold improvements ............ 325,734 517,928
------------- -------------
7,439,317 11,551,380
Less -- accumulated depreciation . (1,671,102) (3,362,939)
------------- -------------
$ 5,768,215 $ 8,188,441
============= =============
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,
--------------------------------------
1994 1995 1996
----------- ------------- ------------
<S> <C> <C> <C>
SHARES
Weighted average number of common shares outstanding 7,753,246 9,086,976 11,789,362
Additional shares assuming conversion of:
Stock options .................................... 247,366 600,866 573,618
Warrants ......................................... 153,658 598,562 39,733
Convertible debentures ........................... 1,485,676 783,642 --
Preferred stock .................................. -- 500,000 666,667
----------- ------------- ------------
Weighted average shares outstanding ................. 9,639,946 11,570,046 13,069,380
=========== ============= ============
Net income .......................................... $ 632,599 $ 2,769,849 $ 5,953,295
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
=========== ============= ============
Fully diluted earnings per share .................... $ 0.08 $ 0.25 $ 0.46
=========== ============= ============
</TABLE>
F-8
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (Continued)
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 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.
(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, 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
F-9
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (Continued)
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 -- (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.
F-11
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (Continued)
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 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
Cash payments during the years ended September 30, 1994, 1995 and 1996
included interest of $112,758, $267,540 and $79,358, respectively, and income
taxes of $4,309, $41,901 and $3,991,740, 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).
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).
F-12
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (Continued)
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 approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the
F-13
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (Continued)
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: $ -- $1,050,311 $3,258,060
Federal .....................................
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:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
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 -- (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.
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 -- (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 EVENT
BUSINESS COMBINATIONS
In November 1996, the Company purchased substantially all of the assets and
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) EVENTS SUBSEQUENT TO DATE OF AUDITORS REPORT
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"), 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 generate 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.
F-16
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996 -- (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"). 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"). 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 MTL acquisition.
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.
F-17
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
1997
-----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash .......................................................... $ 2,978,623
Accounts receivable, net of allowance for doubtful
accounts of $895,140 ........................................ 11,965,253
Inventories ................................................... 13,810,128
Deferred income taxes ......................................... 1,031,619
Prepaid royalties ............................................. 3,886,237
Prepaid expenses and other assets ............................. 784,773
-----------
Total current assets ........................................ 34,456,633
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation of $4,783,858 .................................... 12,451,260
GOODWILL, net of accumulated amortization of $504,405 ........... 33,310,042
NOTES RECEIVABLE AND OTHER ASSETS ............................... 1,301,021
-----------
$81,518,956
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 6,489,336
Accrued royalties ............................................. 2,942,881
Line of credit ................................................ 4,500,000
Income taxes payable .......................................... 243,052
Accrued expenses and other .................................... 1,078,708
-----------
Total current liabilities ................................... 15,253,977
LONG TERM DEBT:
Notes payable ................................................. 21,398,183
Other long term debt .......................................... 906,516
-----------
Total long term debt ........................................ 22,304,699
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding ................ --
Common stock, $0.01 par value, 25,000,000 shares
authorized; 13,713,485 shares issued and outstanding ........ 137,135
Additional paid-in capital .................................... 31,938,922
Retained earnings ............................................. 11,884,223
-----------
Total shareholders' equity .................................. 43,960,280
-----------
$81,518,956
===========
The accompanying notes are an integral part of these consolidated balance
sheets
F-18
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31,
-----------------------------
1996 1997
------------- ---------------
(UNAUDITED)
-----------------------------
Sales:
Collectibles ................................. $ 17,046,904 $ 23,521,573
Apparel and souvenirs ........................ 725,328 18,333,520
Promotional .................................. -- 1,354,826
Other ........................................ -- 267,759
------------ ------------
Net sales .................................. 17,772,232 43,477,678
Cost of sales .................................. 10,583,762 26,301,654
------------ ------------
Gross profit ................................... 7,188,470 17,176,024
Selling, general and administrative expenses ... 3,966,700 9,750,462
------------ ------------
Income from operations ......................... 3,221,770 7,425,562
Interest income (expense) and other, net ....... 141,017 (750,287)
------------ ------------
Income before provision for income taxes ....... 3,362,787 6,675,275
Provision for income taxes ..................... 1,345,115 2,670,110
------------ ------------
NET INCOME ..................................... $ 2,017,672 $ 4,005,165
============ ============
NET INCOME PER COMMON SHARE:
Primary ...................................... $ 0.16 $ 0.29
============ ============
Fully diluted ................................ $ 0.16 $ 0.29
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary ...................................... 12,861,232 13,786,339
============ ============
Fully diluted ................................ 12,948,412 13,799,126
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
F-19
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED MARCH 31,
----------------------------------
1996 1997
----------------- ----------------
(UNAUDITED)
----------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income ................................................ $ 2,017,672 $ 4,005,165
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................... 714,760 1,915,805
Change in assets and liabilities:
Accounts receivable ................................... (1,213,978) 1,153,522
Inventories ........................................... (1,295,244) (2,794,169)
Prepaid royalties ..................................... (1,205,751) (1,590,732)
Prepaid expenses and other assets ..................... (363,550) (171,366)
Accounts payable ...................................... 321,928 (736,421)
Income taxes payable .................................. (872,228) (278,495)
Accrued royalties and other ........................... 4,868 981,956
----------- -----------
Net cash provided by (used in) operating activities . (1,891,523) 2,485,265
Cash Flows from Investing Activities:
Acquisition of property and equipment ................... (2,377,549) (3,635,416)
Proceeds from sale of equipment ......................... -- 110,781
Cash acquired in purchase of business ................... -- 1,140,363
----------- -----------
Net cash used in investing activities ................. (2,377,549) (2,384,272)
Cash Flows from Financing Activities:
Borrowings on line of credit ............................ 3,235,599 4,378,583
Payments on line of credit .............................. (3,235,599) (5,278,583)
Proceeds from issuance of common stock .................. 867,513 3,346,565
Payments on notes payable ............................... -- (4,419,984)
Principal payments on capital lease obligation and other (48,828) (132,333)
----------- -----------
Net cash provided by (used in) financing activities ... 818,685 (2,105,752)
----------- -----------
Decrease in Cash .......................................... (3,450,387) (2,004,759)
Cash, Beginning of Period ................................. 6,759,984 4,983,382
----------- -----------
Cash, End of Period ....................................... $ 3,309,597 $ 2,978,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-20
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(1) INTERIM FINANCIAL REPORTING
The accompanying unaudited Consolidated Financial Statements for Action
Performance Companies, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented have been made. The results
of operations for the six-month period ended March 31, 1997 are not necessarily
indicative of the operating results that may be expected for the entire year
ending September 30, 1997. Certain prior period amounts have been reclassified
to conform to the March 31, 1997 presentation. These financial statements should
be read in conjunction with the Company's Consolidated Financial Statements for
the fiscal year ended September 30, 1996 as set forth elsewhere in this
Prospectus.
(2) INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or
market, and consist of the following at March 31, 1997:
Raw materials .............. $ 1,902,282
Finished goods ............. 11,907,846
-------------
$13,810,128
=============
(3) 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.
Property and equipment consist of the following at March 31, 1997:
Tooling and molds ................$11,167,958
Furniture, fixtures and equipment 3,331,961
Autos and trucks ................. 1,908,301
Leasehold improvements ........... 826,898
-------------
17,235,118
Less -- accumulated depreciation 4,783,858
-------------
$12,451,260
=============
The cost of renewals and betterments that materially extend the useful lives
of assets or increase their productivity are capitalized.
(4) 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.
(5) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the six months ended March 31, 1996 and 1997 included
interest of $42,758 and $427,629, respectively, and income taxes of $2,270,000
and $2,981,000, respectively.
F-21
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 -- (Continued)
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. On January 8,
1997, the Company acquired the business and substantially all of the assets and
assumed specified liabilities of Motorsport Traditions Limited Partnership
("MTL") and acquired all of the capital stock of Creative Marketing &
Promotions, Inc. ("CMP" and, together with MTL, "Motorsport Traditions") for
approximately $13,000,000. The consideration paid for Motorsport Traditions
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.
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.
(6) INCOME TAXES
Income taxes for the six-month period ended March 31, 1997 were calculated by
applying the estimated effective tax rate for the fiscal year to the income
before taxes.
(7) BUSINESS COMBINATIONS
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image. The purchase price was
approximately $30,000,000, consisting of a $24,000,000 promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock. On January 2,
1997, the Company repaid the $24,000,000 promissory note with the proceeds from
the issuance of senior notes and a portion of the borrowings under the Company's
new credit facility. See Note 8. Sports Image sells and distributes a variety of
licensed motorsports products through wholesale distributor networks, corporate
sponsors, and mobile trackside stores. 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 was accounted for as a purchase.
On January 8, 1997, the Company acquired the business and substantially all
of the assets and assumed specified liabilities of Motorsport Traditions from
1995 NASCAR Winston Cup Champion driver Jeff Gordon, Kenneth R. Barbee, certain
entities controlled by Mr. Barbee, and certain other persons. The effective date
of the acquisition of Motorsport Traditions is January 1, 1997. The purchase
price paid by the Company for Motorsport Traditions 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. The terms of the acquisition, including the valuation
of the assets, liabilities, and capital stock acquired by the Company, were
determined by arms-length negotiations between representatives of the sellers
and representatives of the Company. Motorsport Traditions sells and distributes
licensed motorsports products through a network of wholesale distributors and
mobile trackside stores. Prior to
F-22
<PAGE>
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 -- (Continued)
the acquisitions, MTL and CMP together generated approximately $33,000,000 in
annual revenues from their design, manufacturing, and sales and distribution
activities. This transaction was accounted for as a purchase.
(8) FINANCING ACTIVITIES
Credit Facility 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.
SALE OF SENIOR NOTES
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.
(9) COMMITMENTS AND CONTINGENCIES
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-23
<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>
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.
TABLE OF CONTENTS
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 ................................................................ 37
Certain Transactions ...................................................... 43
Principal and Selling Shareholders ........................................ 45
Description of Securities ................................................. 46
Underwriting .............................................................. 50
Legal Opinions ............................................................ 51
Experts ................................................................... 51
Available Information ..................................................... 51
Additional Information .................................................... 51
Incorporation of Certain Information
by Reference ............................................................. 52
Index to Consolidated Financial Statements ................................ F-1
1,900,000 SHARES
[LOGO]
COMMON STOCK
------------------
PROSPECTUS
------------------
MONTGOMERY SECURITIES
ADVEST, INC.
INTERSTATE/JOHNSON LANE
CORPORATION
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses payable by the
Registrant in connection with the offering described in the Registration
Statement. All of the amounts shown are estimates except for the SEC, NASD, and
Nasdaq fees:
AMOUNT TO BE PAID
-----------------
SEC Registration Fee ........................................... $ 15,643
NASD Filing Fee ................................................ 5,682
Nasdaq National Market Additional Listing Fee .................. 17,500
Legal Fees and Expenses ........................................ 200,000
Accounting Fees and Expenses ................................... 100,000
Printing and Engraving Expenses ................................ 70,000
Blue Sky Fees and Expenses ..................................... 2,000
Transfer Agent's and Registrar's Fees .......................... 2,000
Miscellaneous Fees ............................................. 7,175
---------
Total ........................................................ $ 420,000
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Articles of Incorporation (the
"Restated Articles") require the Registrant 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 Arizona
Business Corporation Act (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 Registrant 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
Registrant, except where indemnification is mandatory pursuant to the Business
Corporation Act, in which case the Registrant is required to indemnify to the
fullest extent required by the Business Corporation Act. The effect of these
provisions is described below.
Required Indemnification
The Restated Articles and the Business Corporation Act require the Registrant
to indemnify all "Outside Directors," as defined below, and officers of the
Registrant who are not directors against "liability," as defined below. The
Restated Articles and the Business Corporation Act also require the Registrant
to indemnify against reasonable "expenses," as defined below, any director who
is the prevailing party in the defense of any proceeding to which the director
is a party because such person is or was a director of the Registrant. In
addition, the Business Corporation Act requires the Registrant to pay expenses
to Outside Directors in advance of a final disposition of the proceeding if (1)
the director furnishes to the Registrant a written affirmation (an
"Affirmation") of his or her good faith belief that (i) his or her conduct was
in good faith, (ii) he or she reasonably believed that the conduct was in the
best interests of the Registrant or at least not opposed to the Registrant's
best interests, and (iii) in the case of any criminal proceeding, he or she had
no reasonable cause to believe the conduct was unlawful (the "Standard of
Conduct"), and (2) the director provides the Registrant with a written
undertaking (an "Undertaking") to repay the advance if it ultimately is
determined that the director did not meet the Standard of Conduct. However, the
Business Corporation Act prohibits the Registrant from advancing expenses to an
Outside Director if a court determines before payment that the director failed
to meet the Standard of Conduct and a court does not otherwise authorize
indemnification.
The Restated Articles and the Business Corporation Act also require the
Registrant to indemnify a director who is not an Outside Director against
liability, but only if the Registrant is authorized in the
R-1
<PAGE>
specific case after a determination has been made by either (a) a majority of
the members of the Board of Directors who are not at the time parties to the
proceeding, (b) special legal counsel, or (c) the shareholders of the Registrant
(excluding shares owned by or voted under the control of directors who are at
the time parties to the proceeding) that the director has met the Standard of
Conduct (a "Determination"). In addition, the Business Corporation Act prohibits
the Registrant from indemnifying a director who is not an Outside Director in
connection with a proceeding by or in the right of the Registrant in which the
director is adjudged liable to the Registrant, or in connection with a
proceeding in which the director was adjudged liable on the basis that the
director improperly received a personal benefit. As permitted by the Business
Corporation Act, the Restated Articles also require the Registrant to pay for or
reimburse the reasonable expenses of a director who is not an Outside Director
in advance of the final disposition of a proceeding if the director furnishes
the Registrant with an Affirmation and an Undertaking, and a Determination is
made that the facts then known to the persons making the Determination would not
preclude indemnification under the Business Corporation Act.
Optional Indemnification
Except for situations where the Registrant is required to indemnify its
officers who are not also directors against liability, as described above, the
Restated Articles and the Business Corporation Act permit the Registrant, in its
sole discretion, to indemnify against liability and advance expenses to any
officer, employee, or agent who is not a director to the same extent as to a
director. However, the Business Corporation Act prohibits the Registrant from
indemnifying such persons against liability unless a Determination is made that
indemnification is permissible because the person has met the Standard of
Conduct. The Business Corporation Act permits the Registrant to pay for or
reimburse expenses to an officer, employee, or agent who is not a director in
advance of a final disposition of the proceeding, but only if the person
furnishes to the Registrant an Affirmation and an Undertaking, and a
Determination is made that the facts then known to the persons making the
Determination would not otherwise preclude indemnification.
Court Ordered Indemnification
The Restated Articles and the Business Corporation Act permit a director or
officer of the Registrant to apply to a court for indemnification, in which case
the court may, subject to certain conditions, order the Registrant to indemnify
such person for part or all of the person's liability and expenses.
Definitions
The Business Corporation Act defines "Outside Director" to mean a director
who, when serving as a director, was not an officer, employee or holder of more
than 5% of the outstanding shares of any class of stock of the Registrant.
"Liability" under the Business Corporation Act means the obligation to pay a
judgment, settlement, penalty or fine, including an excise tax assessed with
respect to an employee benefit plan, or reasonable expenses incurred with
respect to a proceeding and includes obligations and expenses that have not yet
been paid by the indemnified person but that have been or may be incurred. The
Business Corporation Act defines "expenses" as attorney fees and all other costs
and expenses reasonably related to a proceeding.
ITEM 16. EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------
1.0 Form of Underwriting Agreement
3.1 First Amended and Restated Articles of Incorporation of
Registrant(1)
3.2 Amended and Restated Bylaws of Registrant(1)
4.1 Form of Certificate of Common Stock(2)
5.0 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears,
P.A.*
10.4.2 1993 Stock Option Plan, as amended and restated through January 17,
1997(3)
10.8 Form of Indemnification Agreement entered into with the Directors of
the Registrant(2)
R-2
<PAGE>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------
10.21 Lease between the Company and F.W. Investments dated January 1,
1994(4)
10.24.1 Commercial Credit Agreement dated March 6, 1995 between the Company
and the Hong Kong and Shanghai Banking Corporation Limited(5)
10.24.2 Optional Advance Time Note (Loans Against Imports) dated March 6,
1995 between the Company and the Hong Kong and Shanghai Banking
Corporation(5)
10.25 Bill of Sale and Asset Purchase Agreement between the Company, Fan
Fueler, Inc., Peter LaMonica, and Fred Miller, III dated August 12,
1994(6)
10.26 Bill of Sale and Asset Purchase Agreement between the Company,
M-Car, Incorporated, and Robert Scott Tremonti dated September 29,
1994(6)
10.27 Manufacturing Agreement between the Company and Early Light
International (Holdings) Ltd. dated December 5, 1994(6)
10.29 Asset Purchase Agreement dated March 31, 1995 between the Company
and Motorsports Promotion, Inc.(5)
10.30 Promissory Note dated March 31, 1995 between Motorsports Promotions,
Inc., as borrower, and the Company, as lender(5)
10.31 Security Agreement dated March 31, 1995 between Motorsports
Promotions, Inc., as debtor, and the Company, as secured party(5)
10.32 Credit Agreement by and between the Company and Wells Fargo HSBC
Trade Bank, N.A.(7)
10.33 Asset Purchase Agreement dated as of November 7, 1996, among Action
Performance Companies, Inc., SII Acquisition, Inc., Sports Image,
Inc., and R. Dale Earnhardt and Teresa H. Earnhardt(8)
10.34 Promissory Note dated November 7, 1996, in the principal amount of
$24,000,000 issued by SII Acquisition, Inc., as Maker, to Sports
Image, Inc., as Payee, together with Guarantee of Action Performance
Companies, Inc.(8)
10.35 Security Agreement dated November 7, 1996, between Sports Image,
Inc. and SII Acquisition, Inc.(8)
10.36 Registration Agreement dated as of November 7, 1996, among Action
Performance Companies, Inc., Sports Image, Inc., and R. Dale
Earnhardt and Teresa H. Earnhardt(8)
10.37 License Agreement dated as of November 7, 1996, among SII
Acquisition, Inc., Dale Earnhardt, and Action Performance Companies,
Inc.(8)
10.38 Employment Agreement dated as of November 7, 1996, between Action
Performance Companies, Inc. and Joe Mattes(8)
10.39 Asset Purchase Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., MTL Acquisition, Inc., Motorsport
Traditions Limited Partnership, Midland Leasing, Inc., and
Motorsports By Mail, Inc.(9)
10.40 Exchange Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(9)
10.41 Promissory Note dated January 1, 1997, in the principal amount of
$1,600,000 issued by MTL Acquisition, Inc., as Maker, to Motorsport
Traditions Limited Partnership, as Payee, together with Guarantee of
Action Performance Companies, Inc.(9)
10.42 Note Purchase Agreement dated as of January 2, 1997, among Action
Performance Companies, Inc., Jefferson-Pilot Life Insurance Company,
Alexander Hamilton Life Insurance Company of America, and First
Alexander Hamilton Life Insurance Company, together with form of
Note, form of Subsidiary Guaranty, and form of Subsidiary Joinder(9)
10.43 Credit Agreement dated as of January 2, 1997, among Action
Performance Companies, Inc., Sports Image, Inc., MTL Acquisition,
Inc., and First Union National Bank of North Carolina(9)
10.44 Registration Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Motorsport Traditions Limited
Partnership, Midland Leasing, Inc., and Motorsports By Mail, Inc.(9)
10.45 Registration Agreement dated as of January 1, 1997, among Action
Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
Gordon(9)
10.46 Employment Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and Kenneth R. Barbee(9)
10.47 Consulting Agreement dated as of January 1, 1997, between Action
Performance Companies, Inc. and John Bickford(9)
R-3
<PAGE>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------
10.48 Common Stock Purchase Agreement dated January 16, 1997, between
Hasbro, Inc. and Action Performance Companies, Inc.(10)
23.1 Consent of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
(included in its Opinion filed as Exhibit 5.0)
23.2 Consent of Arthur Andersen LLP
24.0 Powers of Attorney of Directors and Executive Officers (included on
the Signature Page of this Registration Statement)
- ---------------
* To be filed by amendment.
(1) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended March 31, 1996, as filed with the Securities and Exchange Commission
on May 2, 1996.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).
(3) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1997 as filed with the Securities and Exchange Commission
on March 15, 1997.
(4) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended March 31, 1994 filed with the Securities and Exchange Commission on
May 16, 1994.
(5) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended March 31, 1995, as filed with the Securities and Exchange Commission
on May 15, 1995.
(6) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended September 30, 1994, as filed with the Securities and Exchange
Commission on December 22, 1994.
(7) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 1996, as filed with the Securities and Exchange Commission
on August 14, 1996.
(8) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on November 22, 1996, as amended by Form
8-K/A filed on January 13, 1997.
(9) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on January 23, 1997, as amended by Form
8-K/A filed on February 24, 1997.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333- 22943) as filed with the Securities and
Exchange Commission on March 7, 1997 and declared effective on March 12,
1997.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post -effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
R-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
R-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tempe, Arizona, on the 19th day of May, 1997.
ACTION PERFORMANCE COMPANIES, INC.
By: /s/ FRED W. WAGENHALS
------------------------------------
Fred W. Wagenhals
Chairman of the Board, President, and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints jointly and severally, Fred W. Wagenhals and
Christopher S. Besing and each one of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including pre-effective and
post-effective amendments) to this Registration Statement, and to sign any
Registration Statement and amendments thereto for the same offering pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all which said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do, or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<S> <C> <C> <C>
/S/ FRED W. WAGENHALS Chairman of the Board, President, and May 19, 1997
- -------------------------- Chief Executive Officer (Principal
Fred W. Wagenhals Executive Officer)
/S/ TOD J. WAGENHALS Executive Vice President, Secretary, and May 19, 1997
- -------------------------- Director
Tod J. Wagenhals
/S/ CHRISTOPHER S. BESING Vice President, Chief Financial Officer, May 19, 1997
- -------------------------- Treasurer, and Director (Principal
Christopher S. Besing Financial and Accounting Officer)
/S/ JOSEPH M. MATTES Vice President and Director May 19, 1997
- --------------------------
Joseph M. Mattes
/S/ MELODEE L. VOLOSIN Director of Wholesale Division May 19, 1997
- -------------------------- and Director
Melodee L. Volosin
/S/ JOHN S. BICKFORD Director May 19, 1997
- --------------------------
John S. Bickford
/S/ JACK M. LLOYD Director May 19, 1997
- --------------------------
Jack M. Lloyd
/S/ ROBERT H. MANSCHOT Director May 19, 1997
- --------------------------
Robert H. Manschot
</TABLE>
R-6
[Draft of _____________, 1997]
_______________ Shares
ACTION PERFORMANCE COMPANIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
Dated [___]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. Representations and Warranties of the Company..................................6
A. Representations and Warranties of the Company..........................................6
Compliance with Registration Requirements.........................................6
Offering Materials Furnished to Underwriters......................................7
Distribution of Offering Material by the Company..................................7
The Underwriting Agreement........................................................7
Authorization of the Common Shares................................................7
No Applicable Registration or Other Similar Rights................................7
No Material Adverse Change........................................................8
Independent Accountants...........................................................8
Preparation of the Financial Statements...........................................8
Incorporation and Good Standing of the Company and its Subsidiaries...............8
Capitalization and Other Capital Stock Matters....................................9
Stock Exchange Listing............................................................9
Non-Contravention of Existing Instruments; No Further Authorizations or
Approvals Required................................................................9
No Material Actions or Proceedings................................................10
Intellectual Property Rights......................................................10
All Necessary Permits, Etc........................................................11
Title to Properties...............................................................11
Tax Law Compliance................................................................11
Company Not an "Investment Company"...............................................11
Insurance.........................................................................11
No Price Stabilization or Manipulation............................................12
Related Party Transactions........................................................12
No Unlawful Contributions or Other Payments.......................................12
Company's Accounting System.......................................................12
Exchange Act Compliance...........................................................12
Compliance with Environmental Laws................................................13
ERISA Compliance..................................................................13
B. Representations and Warranties of the Selling Shareholders.............................14
The Underwriting Agreement........................................................14
The Custody Agreement and Power of Attorney.......................................14
Title to Common Shares to be Sold; All Authorizations Obtained....................15
Delivery of the Common Shares to be Sold..........................................15
Non-Contravention; No Further Authorizations or Approvals Required................15
No Registration or Other Similar Rights...........................................15
No Further Consents, Etc..........................................................15
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Disclosure Made by Such Selling Shareholder in the Prospectus.....................16
No Price Stabilization or Manipulation............................................16
Confirmation of Company Representations and Warranties............................16
Section 2. Purchase, Sale and Delivery of the Common Shares...............................16
The Firm Common Shares............................................................16
The First Closing Date............................................................17
The Optional Common Shares; The Second Closing Date...............................17
Public Offering of the Common Shares..............................................18
Payment for the Common Shares.....................................................18
Delivery of the Common Shares.....................................................18
Delivery of Prospectus to the Underwriters........................................19
Section 3. Additional Covenants of the Company............................................19
A. Covenants of the Company...............................................................19
Underwriters' Review of Proposed Amendments and Supplements.......................19
Securities Act Compliance.........................................................19
Amendments and Supplements to the Prospectus and Other
Securities Act Matters............................................................20
Copies of Any Amendments and Supplements to the Prospectus........................20
Blue Sky Compliance...............................................................20
Use Of Proceeds...................................................................20
Transfer Agent....................................................................20
Earnings Statement................................................................21
Periodic Reporting Obligations....................................................21
Agreement Not to Offer or Sell Additional Securities..............................21
Future Reports to the Underwriters................................................21
Exchange Act Compliance...........................................................21
B. Covenants of the Selling Shareholders..................................................22
Agreement Not to Offer or Sell Additional Securities..............................22
Delivery of Forms W-8 and W-9....................................................22
Section 4. Payment of Expenses............................................................22
Section 5. Conditions of the Obligations of the Underwriters..............................23
Accountants' Comfort Letter.......................................................23
Compliance with Registration Requirements;
No Stop Order; No Objection from NASD.............................................24
No Material Adverse Change or Ratings Agency Change...............................24
Opinion of Counsel for the Company................................................24
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Opinion of Counsel for the Underwriters...........................................25
Officers' Certificate.............................................................25
Bring-Down Comfort Letter.........................................................25
Opinion of Counsel for the Selling Shareholders...................................25
Selling Shareholders' Certificate.................................................26
Selling Shareholders' Documents...................................................26
Lock-Up Agreement from Certain Shareholders of the Company Other Than
Selling Shareholders..............................................................26
Additional Documents..............................................................26
Section 6. Reimbursement of Underwriters' Expenses........................................27
Section 7. Effectiveness of this Agreement................................................27
Section 8. Indemnification................................................................27
Indemnification of the Underwriters...............................................27
Indemnification of the Company, its Directors and Officers........................29
Notifications and Other Indemnification Procedures................................29
Settlements.......................................................................30
Section 9. Contribution..................................................................31
Section 10. Default of One or More of the Several Underwriters............................32
Section 11. Termination of this Agreement.................................................33
Section 12. Representations and Indemnities to Survive Delivery...........................33
Section 13. Notices.......................................................................34
Section 14. Successors....................................................................34
Section 15. Partial Unenforceability......................................................35
Section 16. Governing Law Provisions......................................................35
Consent to Jurisdiction...........................................................35
Waiver of Immunity................................................................35
Section 17. Failure of One or More of the Selling Shareholders to Sell and Deliver
Common Shares.....................................................................36
Section 18. General Provisions............................................................36
</TABLE>
4
<PAGE>
UNDERWRITING AGREEMENT
[________, 1997]
MONTGOMERY SECURITIES
ADVEST, INCORPORATED
INTERSTATE/JOHNSON LANE CORPORATION
c/o MONTGOMERY SECURITIES
600 Montgomery
Street San Francisco, California 94111
Ladies and Gentlemen:
Introductory. Action Performance Companies, Inc., an Arizona
corporation (the "Company"), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of [___]
shares of its Common Stock, par value $.01 per share (the "Common Stock"); and
the shareholders of the Company named in Schedule B (collectively, the "Selling
Shareholders") severally propose to sell to the Underwriters an aggregate of
[___] shares of Common Stock. The [___] shares of Common Stock to be sold by the
Company and the [___] shares of Common Stock to be sold by the Selling
Shareholders are collectively called the "Firm Common Shares". In addition, the
Company has granted to the Underwriters an option to purchase up to an
additional [___] shares (the "Optional Common Shares") of Common Stock, as
provided in Section 2.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-3
(File No. 333-[___]), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements, exhibits
and schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including all
documents incorporated or deemed to be incorporated by reference therein and any
information deemed to be a part thereof at the time of effectiveness pursuant to
Rule 430A or Rule 434 under the Securities Act or the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder (collectively, the
"Exchange Act"), is called the "Registration Statement." Any registration
statement filed by the Company pursuant to Rule 462(b) under the Securities Act
is called the "Rule 462(b) Registration Statement," and from and after the date
and time of filing of the Rule 462(b) Registration Statement the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
Such prospectus, in the form first used by the Underwriters to confirm sales of
the Common Shares, is called the "Prospectus;" provided, however, if the Company
has, with the consent of Montgomery Securities, elected to rely upon Rule 434
under the Securities Act, the term "Prospectus" shall mean the Company's
prospectus subject to completion (each, a "preliminary prospectus") dated [___]
(such preliminary prospectus
5
<PAGE>
is called the "Rule 434 preliminary prospectus"), together with the applicable
term sheet (the "Term Sheet") prepared and filed by the Company with the
Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). All
references in this Agreement to financial statements and schedules and other
information which is "contained," "included" or "stated" in the Registration
Statement or the Prospectus (and all other references of like import) shall be
deemed to mean and include all such financial statements and schedules and other
information which is or is deemed to be incorporated by reference in the
Registration Statement or the Prospectus, as the case may be; and all references
in this Agreement to amendments or supplements to the Registration Statement or
the Prospectus shall be deemed to mean and include the filing of any document
under the Exchange Act which is or is deemed to be incorporated by reference in
the Registration Statement or the Prospectus, as the case may be.
The Company and each of the Selling Shareholders hereby
confirms their respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties of the Company.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company
has complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale
of the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times,
6
<PAGE>
did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties set forth in the two
immediately preceding sentences do not apply to statements in or omissions
from the Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment thereto, or the Prospectus, or any amendments
or supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing
by the Underwriters expressly for use therein. There are no contracts or
other documents required to be described in the Prospectus or to be filed
as exhibits to the Registration Statement which have not been described or
filed as required.
(b) Offering Materials Furnished to Underwriters. The Company
has delivered to the Underwriters three complete manually signed copies of
the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Underwriters have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material by the Company. The
Company has not distributed and will not distribute, prior to the later of
the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to
be purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any equity
or debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, other than the
Selling Shareholders with respect to the Common Shares included in the
Registration Statement, except for such rights as have been duly waived.
7
<PAGE>
(g) No Material Adverse Change. Except as otherwise disclosed
in the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects, whether
or not arising from transactions in the ordinary course of business, of the
Company and its subsidiaries, considered as one entity (any such change is
called a "Material Adverse Change"); (ii) the Company and its subsidiaries,
considered as one entity, have not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except
for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by
the Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, who have
expressed their opinion with respect to the financial statements (which
term as used in this Agreement includes the related notes thereto) filed
with the Commission as a part of the Registration Statement and included in
the Prospectus, are independent public or certified public accountants as
required by the Securities Act and the Exchange Act.
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the consolidated
financial position of the Company and its subsidiaries as of and at the
dates indicated and the results of their operations and cash flows for the
periods specified. Such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial
statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Consolidated Financial
Data," "Selected Consolidated Financial Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration
Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and, in the case of the
Company, to enter into and perform its obligations under this Agreement.
Each of the Company and each subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of
8
<PAGE>
property or the conduct of business, except for such jurisdictions where
the failure to so qualify or to be in good standing would not, individually
or in the aggregate, result in a Material Adverse Change. All of the issued
and outstanding capital stock of each subsidiary has been duly authorized
and validly issued, is fully paid and nonassessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim. The Company does
not own or control, directly or indirectly, any corporation, association or
other entity other than the subsidiaries listed in Exhibit 22 to the
[Company's Annual Report on Form 10 K for the fiscal year ended [_____],
19[__]].
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" (other than for
subsequent issuances, if any, pursuant to employee benefit plans described
in the Prospectus or upon exercise of outstanding options described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding shares of Common Stock (including the
shares of Common Stock owned by Selling Shareholders) have been duly
authorized and validly issued, are fully paid and nonassessable and have
been issued in compliance with federal and state securities laws. None of
the outstanding shares of Common Stock were issued in violation of any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of its subsidiaries other than those accurately
described in the Prospectus. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Stock (including the
Common Shares) is registered pursuant to Section 12(g) of the Exchange Act
and is listed on the Nasdaq National Market, and the Company has taken no
action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the
Common Stock from the Nasdaq National Market, nor has the Company received
any notification that the Commission or the National Association of
Securities Dealers, Inc. (the "NASD") is contemplating terminating such
registration or listing.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound
(including, without limitation, the Company's 8.05%
9
<PAGE>
Senior Notes due January 2, 1999 and Revolving Credit Facility with First
Union National Bank of North Carolina, as lender), or to which any of the
property or assets of the Company or any of its subsidiaries is subject
(each, an "Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change. The
Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the Prospectus
(i) have been duly authorized by all necessary corporate action and will
not result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary, (ii) will not conflict with or constitute a
breach of, or Default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, or require the consent of any other
part to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not, individually or in
the aggregate, result in a Material Adverse Change and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary.
No consent, approval, authorization or other order of, or registration or
filing with, any court or other governmental or regulatory authority or
agency, is required for the Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus, except such as have been obtained or made by the
Company and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the NASD. As used
herein, a "Debt Repayment Triggering Event" means any event or condition
which gives, or with the giving of notice or lapse of time would give, the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any of its subsidiaries.
(n) No Material Actions or Proceedings. Except as otherwise
disclosed in the Prospectus, there are no legal or governmental actions,
suits or proceedings pending or, to the best of the Company's knowledge,
threatened (i) against or affecting the Company or any of its subsidiaries,
(ii) which has as the subject thereof any officer or director of, or
property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any
such case (A) there is a reasonable possibility that such action, suit or
proceeding might be determined adversely to the Company or such subsidiary
and (B) any such action, suit or proceeding, if so determined adversely,
would reasonably be expected to result in a Material Adverse Change or
adversely affect the consummation of the transactions contemplated by this
Agreement. No material labor dispute with the employees of the Company or
any of its subsidiaries, or with the employees of any principal supplier of
the Company, exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) Intellectual Property Rights. Except as otherwise
disclosed in the Prospectus, the Company and its subsidiaries own or
possess sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to
10
<PAGE>
conduct their businesses as now conducted; and the expected expiration of
any of such Intellectual Property Rights would not result in a Material
Adverse Change. Neither the Company nor any of its subsidiaries has
received any notice of infringement or conflict with asserted Intellectual
Property Rights of others, which infringement or conflict, if the subject
of an unfavorable decision, would result in a Material Adverse Change.
(p) All Necessary Permits, Etc. The Company and each
subsidiary possess such valid and current certificates, authorizations or
permits issued by the appropriate state, federal or foreign regulatory
agencies or bodies necessary to conduct their respective businesses, and
neither the Company nor any subsidiary has received any notice of
proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its
subsidiaries has good and marketable title to all the properties and assets
reflected as owned in the financial statements referred to in Section 1 (A)
(i) above (or elsewhere in the Prospectus), in each case free and clear of
any security interests, mortgages, liens, encumbrances, equities, claims
and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use
made or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal
property held under lease by the Company or any subsidiary are held under
valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of
such real property, improvements, equipment or personal property by the
Company or such subsidiary.
(r) Tax Law Compliance. The Company and its consolidated
subsidiaries have filed all necessary federal, state and foreign income and
franchise tax returns or have properly requested extensions thereof and
have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against
any of them. The Company has made adequate charges, accruals and reserves
in the applicable financial statements referred to in Section 1 (A) (i)
above in respect of all federal, state and foreign income and franchise
taxes for all periods as to which the tax liability of the Company or any
of its consolidated subsidiaries has not been finally determined.
(s) Company Not an "Investment Company." The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(t) Insurance. Each of the Company and its subsidiaries are
insured
11
<PAGE>
by recognized, financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason
to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither of the Company nor
any subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has
not taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(v) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus
which have not been described as required.
(w) No Unlawful Contributions or Other Payments. Neither the
Company nor any of its subsidiaries nor, to the best of the Company's
knowledge, any employee or agent of the Company or any subsidiary, has made
any contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of the
character required to be disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a
system of accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(y) Exchange Act Compliance. The documents incorporated or
deemed to be incorporated by reference in the Prospectus, at the time they
were or hereafter are filed with the Commission, complied and will comply
in all material respects with the requirements of the Exchange Act, and,
when read together with the other information in the Prospectus, at the
time the Registration Statement and any amendments thereto become effective
and at the First Closing Date and the Second Closing Date, as the case may
be, will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
12
<PAGE>
the fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(z) Compliance with Environmental Laws. Except as otherwise
disclosed in the Prospectus or as would not, individually or in the
aggregate, result in a Material Adverse Change (i) neither the Company nor
any of its subsidiaries is in violation of any federal, state, local or
foreign law or regulation relating to pollution or protection of human
health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Materials of
Environment Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business of
the Company or its subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or
any of its subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges
that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its subsidiaries, now or
in the past (collectively, "Environmental Claims"), pending or, to the best
of the Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a
violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental Claim
the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law.
(aa) ERISA Compliance. The Company and its subsidiaries and
any "employee benefit plan" (as defined under the Employee Retirement
Income Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as
defined below) are in compliance in all material
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respects with ERISA. "ERISA Affiliate" means, with respect to the Company
or a subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as
amended, and the regulations and published interpretations thereunder (the
"Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to
occur with respect to any "employee benefit plan" established or maintained
by the Company, its subsidiaries or any of their ERISA Affiliates. No
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its
subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii)
Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or
failure to act, which would cause the loss of such qualification.
Any certificate signed by an officer of the Company and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
B. Representations and Warranties of the Selling Shareholders. In
addition to the representations, warranties and covenants set forth in Section
1(A), each Selling Shareholder represents, warrants and covenants to each
Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the
(i) Custody Agreement signed by such Selling Shareholder and [___], as
custodian (the "Custodian"), relating to the deposit of the Common Shares
to be sold by such Selling Shareholder (the "Custody Agreement") and (ii)
Power of Attorney appointing certain individuals named therein as such
Selling Shareholder's attorneys-in-fact (each, an "Attorney-in-Fact") to
the extent set forth therein relating to the transactions contemplated
hereby and by the Prospectus (the "Power of Attorney"), of such Selling
Shareholder has been duly authorized, executed and delivered by such
Selling Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof
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may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting the rights and remedies of
creditors or by general equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations
Obtained. Such Selling Shareholder has, and on the First Closing Date (as
defined below) will have, good and valid title to all of the Common Shares
which may be sold by such Selling Shareholder pursuant to this Agreement on
such date and the legal right and power, and all authorizations and
approvals required by law and under its charter or by-laws, partnership
agreement, trust agreement or other organizational documents to enter into
this Agreement and its Custody Agreement and Power of Attorney, to sell,
transfer and deliver all of the Common Shares which may be sold by such
Selling Shareholder pursuant to this Agreement and to comply with its other
obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the
Common Shares which are sold by such Selling Shareholder pursuant to this
Agreement will pass good and valid title to such Common Shares, free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
other claim.
(e) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by such Selling Shareholder of, and
the performance by such Selling Shareholder of its obligations under, this
Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the charter or
by-laws, partnership agreement, trust agreement or other organizational
documents of such Selling Shareholder or any other agreement or instrument
to which such Selling Shareholder is a party or by which it is bound or
under which it is entitled to any right or benefit, any provision of
applicable law or any judgment, order, decree or regulation applicable to
such Selling Shareholder of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over such
Selling Shareholder. No consent, approval, authorization or other order of,
or registration or filing with, any court or other governmental authority
or agency, is required for the consummation by such Selling Shareholder of
the transactions contemplated in this Agreement, except such as have been
obtained or made and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
(f) No Registration or Other Similar Rights. Such Selling
Shareholder does not have any registration or other similar rights to have
any equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale."
(g) No Further Consents, Etc. Except for the (i) exercise by
such Selling Shareholder of certain registration rights pursuant to the
Registration Rights
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Agreement dated as of [___] (which registration rights have been duly
exercised pursuant thereto), (ii) consent of such Selling Shareholder to
the respective number of Common Shares to be sold by all of the Selling
Shareholders pursuant to this Agreement and (iii) waiver by certain other
holders of Common Stock of certain registration rights [pursuant to such
Registration Rights Agreement], no consent, approval or waiver is required
under any instrument or agreement to which such Selling Shareholder is a
party or by which it is bound or under which it is entitled to any right or
benefit, in connection with the offering, sale or purchase by the
Underwriters of any of the Common Shares which may be sold by such Selling
Shareholder under this Agreement or the consummation by such Selling
Shareholder of any of the other transactions contemplated hereby.
(h) Disclosure Made by Such Selling Shareholder in the
Prospectus. All information furnished by or on behalf of such Selling
Shareholder in writing expressly for use in the Registration Statement and
Prospectus is, and on the First Closing Date will be, true, correct, and
complete in all material respects, and does not, and on the First Closing
Date and will not, contain any untrue statement of a material fact or omit
to state any material fact necessary to make such information not
misleading. Such Selling Shareholder confirms as accurate the number of
shares of Common Stock set forth opposite such Selling Shareholder's name
in the Prospectus under the caption "Principal and Selling Shareholders"
(both prior to and after giving effect to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling
Shareholder has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(j) Confirmation of Company Representations and Warranties.
Such Selling Shareholder has no reason to believe that the representations
and warranties of the Company contained in Section 1(A) hereof are not true
and correct, is familiar with the Registration Statement and the Prospectus
and has no knowledge of any material fact, condition or information not
disclosed in the Registration Statement or the Prospectus which has had or
may have a Material Adverse Effect and is not prompted to sell shares of
Common Stock by any information concerning the Company which is not set
forth in the Registration Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling
Shareholder and delivered to the Underwriters or to counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Shareholder
to each Underwriter as to the matters covered thereby.
Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. Upon the terms herein set forth, (i)
the Company agrees to issue and sell to the several Underwriters an aggregate of
[___] Firm
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Common Shares and (ii) the Selling Shareholders agree to sell to the several
Underwriters an aggregate of [___] Firm Common Shares, each Selling Shareholder
selling the number of Firm Common Shares set forth opposite such Selling
Shareholder's name on Schedule B. On the basis of the representations,
warranties and agreements herein contained, and upon the terms but subject to
the conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Shareholders the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company and the Selling Shareholders shall be $[___] per
share.
The First Closing Date. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall be
made at the offices of Montgomery Securities, 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed to by the Company
and the Underwriters) at 6:00 a.m. San Francisco time, on [___], or such other
time and date not later than 10:30 a.m. San Francisco time on [___] as the
Underwriters shall designate by notice to the Company (the time and date of such
closing are called the "First Closing Date"). The Company and the Selling
Shareholders hereby acknowledge that circumstances under which the Underwriters
may provide notice to postpone the First Closing Date as originally scheduled
include, but are in no way limited to, any determination by the Company, the
Selling Shareholders or the Underwriters to recirculate to the public copies of
an amended or supplemented Prospectus or a delay as contemplated by the
provisions of Section 10.
The Optional Common Shares; The Second Closing Date. In
addition, on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of [___] Optional Common Shares
from the Company at the purchase price per share to be paid by the Underwriters
for the Firm Common Shares. The option granted hereunder is for use by the
Underwriters solely in covering any over-allotments in connection with the sale
and distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the Underwriters
to the Company, which notice may be given at any time within 30 days from the
date of this Agreement. Such notice shall set forth (i) the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
(ii) the names and denominations in which the certificates for the Optional
Common Shares are to be registered and (iii) the time, date and place at which
such certificates will be delivered (which time and date may be simultaneous
with, but not earlier than, the First Closing Date; and in such case the term
"First Closing Date" shall refer to the time and date of delivery of
certificates for the Firm Common Shares and the Optional Common Shares). Such
time and date of delivery, if subsequent to the First Closing Date, is called
the "Second Closing Date" and shall be determined by the Underwriters and shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. If any Optional Common Shares are to be purchased,
each Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Underwriters may determine) that
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<PAGE>
bears the same proportion to the total number of Optional Common Shares to be
purchased as the number of Firm Common Shares set forth on Schedule A opposite
the name of such Underwriter bears to the total number of Firm Common Shares.
The Underwriters may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Underwriters hereby
advise the Company and the Selling Shareholders that the Underwriters intend to
offer for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Underwriters, in
their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares
to be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Common Shares to be
sold by the Selling Shareholders shall be made at the First Closing Date (and,
if applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Custodian.
Montgomery Securities, individually and not as the
representative of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by Montgomery Securities by the First Closing Date
or the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Each Selling Shareholder hereby agrees that (i) it will pay
all stock transfer taxes, stamp duties and other similar taxes, if any, payable
upon the sale or delivery of the Common Shares to be sold by such Selling
Shareholder to the several Underwriters, or otherwise in connection with the
performance of such Selling Shareholder's obligations hereunder and (ii) the
Custodian is authorized to deduct for such payment any such amounts from the
proceeds to such Selling Shareholder hereunder and to hold such amounts for the
account of such Selling Shareholder with the Custodian under the Custody
Agreement.
Delivery of the Common Shares. The Company and the Selling
Shareholders shall deliver, or cause to be delivered, to the Underwriters
certificates for the Firm Common Shares to be sold by them at the First Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered, to the Underwriters, certificates for
the Optional Common Shares the Underwriters have agreed to purchase from them at
the First Closing Date or the Second Closing Date, as the case may be, against
the irrevocable release of a wire transfer of immediately available funds for
the amount of the purchase price therefor. The certificates for the Common
Shares shall be in definitive form and registered in such names and
denominations as the Underwriters shall have requested at least two full
business days prior to the First Closing
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<PAGE>
Date (or the Second Closing Date, as the case may be) and shall be made
available for inspection on the business day preceding the First Closing Date
(or the Second Closing Date, as the case may be) at a location in New York City
as the Underwriters may designate. Time shall be of the essence, and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than
12:00 p.m. on the second business day following the date the Common Shares of
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Underwriters shall request.
Section 3. Additional Covenants of the Company.
A. Covenants of the Company. The Company further covenants and agrees
with each Underwriter as follows:
(a) Underwriters' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending on
the later of the First Closing Date or such date, as in the opinion of
counsel for the Underwriters, the Prospectus is no longer required by law
to be delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed under
Rule 462(b) under the Securities Act) or the Prospectus including any
amendment or supplement through incorporation by reference of any report
filed under the Exchange Act, the Company shall furnish to the Underwriters
for review a copy of each such proposed amendment or supplement, and the
Company shall not file any such proposed amendment or supplement to which
the Underwriters reasonably object.
(b) Securities Act Compliance. After the date of this
Agreement, the Company shall promptly advise the Underwriters in writing
(i) of the receipt of any comments of, or requests for additional or
supplemental information from, the Commission, (ii) of the time and date of
any filing of any post-effective amendment to the Registration Statement or
any amendment or supplement to any preliminary prospectus or the
Prospectus, (iii) of the time and date that any post-effective amendment to
the Registration Statement becomes effective and (iv) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which the it is listed for trading or included or designated for quotation,
or of the threatening or initiation of any proceedings for any of such
purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and
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<PAGE>
will use its reasonable efforts to confirm that any filings made by the
Company under such Rule 424(b) were received in a timely manner by the
Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered
to a purchaser, not misleading, or if in the opinion of the Underwriters or
counsel for the Underwriters it is otherwise necessary to amend or
supplement the Prospectus to comply with law, the Company agrees to
promptly prepare (subject to Section 3(A)(a) hereof), file with the
Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the statements
in the Prospectus as so amended or supplemented will not, in the light of
the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) Copies of any Amendments and Supplements to the
Prospectus. The Company agrees to furnish the Underwriters, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus and
any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the
Underwriters may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Underwriters and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the or state securities or blue sky laws or Canadian provincial securities
laws of those jurisdictions designated by the Underwriters, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Underwriters promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under
the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
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(h) Earnings Statement. As soon as practicable, the Company
will make generally available to its security holders and to the
Underwriters an earnings statement (which need not be audited) covering the
twelve-month period ending [___] that satisfies the provisions of Section
11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents
required to be filed under the Exchange Act. Additionally, the Company
shall file with the Commission all reports on Form SR as may be required
under Rule 463 under the Securities Act.
(j) Agreement Not to Offer or Sell Additional Securities.
During the period of [___] days following the date of the Prospectus, the
Company will not, without the prior written consent of Montgomery
Securities (which consent may be withheld at the sole discretion of
Montgomery Securities), directly or indirectly, sell, offer, contract or
grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act, or otherwise dispose of or transfer, or announce the offering of, or
file any registration statement under the Securities Act in respect of, any
shares of Common Stock, options or warrants to acquire shares of the Common
Stock or securities exchangeable or exercisable for or convertible into
shares of Common Stock (other than as contemplated by this Agreement with
respect to the Common Shares); provided, however, that the Company may
issue shares of its Common Stock or options to purchase its Common Stock,
or Common Stock upon exercise of options, pursuant to any stock option,
stock bonus or other stock plan or arrangement described in the Prospectus,
but only if the holders of such shares, options, or shares issued upon
exercise of such options, agree in writing not to sell, offer, dispose of
or otherwise transfer any such shares or options during such [___] day
period without the prior written consent of Montgomery Securities (which
consent may be withheld at the sole discretion of the Montgomery
Securities).
(k) Future Reports to the Underwriters. During the period of
five years hereafter the Company will furnish to the Underwriters at 600
Montgomery Street, San Francisco, CA 94111 Attention:[ ]: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close
of such fiscal year and statements of income, shareholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
(l) Exchange Act Compliance. During the Prospectus Delivery
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Period, the Company will file all documents required to be filed with the
Commission pursuant to Section 13, 14 or 15 of the Exchange Act in the
manner and within the time periods required by the Exchange Act.
B. Covenants of the Selling Shareholders. Each Selling Shareholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such
Selling Shareholder will not, without the prior written consent of
Montgomery Securities (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any
option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock, or
securities exchangeable or exercisable for or convertible into shares of
Common Stock currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date
hereof and continuing through the close of trading on the date [___] days
after the date of the Prospectus.
(b) Delivery of Forms W-8 and W-9. To deliver to the
Underwriters prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Shareholder is a non-United States person) or Form W-9 (if the Selling
Shareholder is a United States Person).
Montgomery Securities, on behalf of the several Underwriters,
may, in its sole discretion, waive in writing the performance by the Company or
any Selling Shareholder of any one or more of the foregoing covenants or extend
the time for their performance.
Section 4. Payment of Expenses. The Company and the Selling
Shareholders, jointly and severally, agree to pay in such proportions as they
may agree upon among themselves all costs, fees and expenses incurred in
connection with the performance of their obligations hereunder and in connection
with the transactions contemplated hereby, including without limitation (i) all
expenses incident to the issuance and delivery of the Common Shares (including
all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all
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fees and expenses of the Company's counsel, independent public or certified
pubic accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement (including financial statements, exhibits, schedules,
consents and certificates of experts), each preliminary prospectus and the
Prospectus, and all amendments and supplements thereto, and this Agreement, (vi)
all filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the state securities or blue sky laws or
the provincial securities laws of Canada, and, if requested by the Underwriters,
preparing and printing a "Blue Sky Survey" or memorandum, and any supplements
thereto, advising the Underwriters of such qualifications, registrations and
exemptions, (vii) the filing fees incident to, and the reasonable fees and
expenses of counsel for the Underwriters in connection with, the NASD's review
and approval of the Underwriters' participation in the offering and distribution
of the Common Shares, (viii) the fees and expenses associated with including the
Common Shares on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 14 of Part II of the Registration Statement. Except
as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
The Selling Shareholders further agree with each Underwriter
to pay (directly or by reimbursement) all fees and expenses incident to the
performance of their obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to (i) fees and
expenses of counsel and other advisors for such Selling Shareholders, (ii) fees
and expenses of the Custodian and (iii) expenses and taxes incident to the sale
and delivery of the Common Shares to be sold by such Selling Shareholders to the
Underwriters hereunder (which taxes, if any, may be deducted by the Custodian
under the provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Shareholders, on the other hand.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Shareholders set forth in Section 1 hereof as of the date hereof and
as of the First Closing Date as though then made and, with respect to the
Optional Common Shares, to the accuracy of the representations and warranties on
the part of the Company set forth in Section 1(A) hereof and as of the Second
Closing Date as though then made, to the timely performance by the Company and
the Selling Shareholders of their respective covenants and other obligations
hereunder, and to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Underwriters
shall have received from Arthur Andersen LLP, independent public or
certified public accountants for the Company, a letter dated the date
hereof addressed to the Underwriters, in form and substance satisfactory to
the Underwriters, containing statements and information of the type
ordinarily included in accountant's "comfort letters" to underwriters,
delivered according to Statement of Auditing Standards
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No. 72 (or any successor bulletin), with respect to the audited and
unaudited financial statements and certain financial information contained
in the Registration Statement and the Prospectus (and the Underwriters
shall have received an additional two conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order;
No Objection from NASD.For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with
the Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by Rule
424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective amendment
shall have become effective; or, if the Company elected to rely upon Rule
434 under the Securities Act and obtained the Underwriters' consent
thereto, the Company shall have filed a Term Sheet with the Commission in
the manner and within the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of
the Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect
and no proceedings for such purpose shall have been instituted or
threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For
the period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Underwriters there shall
not have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not indicate
the direction of the possible change, in the rating accorded any securities
of the Company or any of its subsidiaries by any "nationally recognized
statistical rating organization" as such term is defined for purposes of
Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First
Closing Date and the Second Closing Date, the Underwriters shall have
received the favorable opinion of O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, counsel for the Company, dated as of such Closing
Date, the form of which is attached as Exhibit A (and the Underwriters
shall have received an additional two conformed
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copies of such counsel's legal opinion for each of the several
Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the
First Closing Date and the Second Closing Date, the Underwriters shall have
received the favorable opinion of Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations), counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters
set forth in paragraphs (i), (vii) (with respect to subparagraph (i) only,
(viii), (ix), (x) (xi) and (xiv) (with respect to the captions "Description
of Securities" and "Underwriting" under subparagraph (i) only), (xii), and
the next-to-last paragraph of Exhibit A (and the Underwriters shall have
received an additional two conformed copies of such counsel's legal opinion
for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date
and the Second Closing Date, the Underwriters shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and
further to the effect that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not occurred any
Material Adverse Change;
(ii) the representations, warranties and covenants of
the Company set forth in Section 1(A) of this Agreement are true and
correct with the same force and effect as though expressly made on and as
of such Closing Date, and
(iii) the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(g) Bring-Down Comfort Letter. On each of the First Closing
Date and the Second Closing Date, the Underwriters shall have received from
Arthur Andersen LLP, independent public or certified public accountants for
the Company, a letter dated such date, in form and substance satisfactory
to the Underwriters, to the effect that they reaffirm the statements made
in the letter furnished by them pursuant to subsection (a) of this Section
5, except that the specified date referred to therein for the carrying out
of procedures shall be no more than three business days prior to the First
Closing Date or Second Closing Date, as the case may be (and the
Underwriters shall have received an additional two conformed copies of such
accountants' letter for each of the several Underwriters). .
(h) Opinion of Counsel for the Selling Shareholders. On the
First Closing Date, the Underwriters shall have received the favorable
opinion of [O'Connor, Cavanagh, Anderson, Killingsworth & Beshears],
counsel for the Selling Shareholders, dated as of such Closing Date, the
form of which is attached as
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Exhibit B (and the Underwriters shall have received an additional two
conformed copies of such counsel's legal opinion for each of the several
Underwriters).
(i) Selling Shareholders' Certificate. On the First Closing
Date, the Underwriters shall have received a written certificate executed
by the Attorney-in-Fact of each Selling Shareholder, dated as of the First
Closing Date, to the effect that:
(i) the representations, warranties and covenants of
such Selling Shareholder set forth in Section 1(B) of this Agreement are
true and correct with the same force and effect as though expressly made by
such Selling Shareholder on and as of the First Closing Date; and
(ii) such Selling Shareholder has complied with all
the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the First Closing Date.
(j) Selling Shareholders' Documents. On the date hereof, the
Company and the Selling Shareholders shall have furnished for review by the
Underwriters copies of the Powers of Attorney and Custody Agreements
executed by each of the Selling Shareholders and such further information,
certificates and documents as the Underwriters may reasonably request.
(k) Lock-Up Agreement from Certain Shareholders of the Company
Other Than Selling Shareholders. On the date hereof, the Company shall have
furnished to the Underwriters an agreement in the form of Exhibit C hereto
from [___], and such agreement shall be in full force and effect on each of
the First Closing Date and the Second Closing Date.
(l) Additional Documents. On or before each of the First
Closing Date and the Second Closing Date, the Underwriters and counsel for
the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them
to pass upon the issuance and sale of the Common Shares as contemplated
herein, or in order to evidence the accuracy of any of the representations
and warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Underwriters by notice to the Company and the Selling Shareholders at any time
on or prior to the First Closing Date and, with respect to the Optional Common
Shares, by the Underwriters by notice to the Company at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
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Section 6. Reimbursement of Underwriters' Expenses. If this Agreement
is terminated by the Underwriters pursuant to Section 5, Section 7, Section 10
or Section 11 or Section 17, or if the sale to the Underwriters of the Common
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company or the Selling Shareholders to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Underwriters (or such Underwriters as have terminated
this Agreement with respect to themselves), severally, upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by the
Underwriters in connection with the proposed purchase and the offering and sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, facsimile and telephone
charges.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of
(i) the execution of this Agreement by the parties hereto and (ii) notification
by the Commission to the Company and the Underwriters of the effectiveness of
the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated
by any party by notice to each of the other parties hereto, and any such
termination shall be without liability on the part of (a) the Company or the
Selling Shareholders to any Underwriter, except that the Company and the Selling
Shareholders shall be obligated to reimburse the expenses of the Underwriters
pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company or
the Selling Shareholders, or (c) of any party hereto to any other party except
that the provisions of Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
Section 8. Indemnification.
(a) Indemnification of the Underwriters. Each of the Company
and each of the Selling Shareholders, jointly and severally, agrees to
indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act and the Exchange Act against any
loss, claim, damage, liability or expense, as incurred, to which such
Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule
434 under the
27
<PAGE>
Securities Act, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
or (iii) in whole or in part upon any inaccuracy in the representations
and warranties of the Company or the Selling Shareholders contained
herein; or (iv) in whole or in part upon any failure of the Company or
the Selling Shareholders to perform their respective obligations
hereunder or under law; or (v) any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Stock or the offering
contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based
upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that a
court of competent jurisdiction shall have determined by a final
judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to
be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling
person for any and all expenses (including the fees and disbursements
of counsel chosen by Montgomery Securities) as such expenses are
reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action;
provided, however, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent,
but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information
furnished to the Company and the Selling Shareholders by the
Underwriters expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any
preliminary prospectus, the foregoing indemnity agreement shall not
inure to the benefit of any Underwriter from whom the person asserting
any loss, claim, damage, liability or expense purchased Common Shares,
or any person controlling such Underwriter, if copies of the Prospectus
were timely delivered to the Underwriter pursuant to Section 2 and a
copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if
the Prospectus (as so amended or supplemented) would have cured the
defect giving rise to such loss, claim, damage, liability or expense.
The indemnity agreement set forth in this Section 8(a) shall be in
addition to any liabilities that the Company and the Selling
Shareholders may otherwise have.
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<PAGE>
(b) Indemnification of the Company, its Directors and
Officers. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of
its officers who signed the Registration Statement, the Selling
Shareholders and each person, if any, who controls the Company or any
Selling Shareholder within the meaning of the Securities Act or the
Exchange Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer, Selling
Shareholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or
alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or arises out of or is based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement,
any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written
information furnished to the Company and the Selling Shareholders by
the Underwriters expressly for use therein; and to reimburse the
Company, or any such director, officer, Selling Shareholder or
controlling person for any legal and other expense reasonably incurred
by the Company, or any such director, officer, Selling Shareholder or
controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage,
liability, expense or action. Each of the Company and each of the
Selling Shareholders hereby acknowledges that the only information that
the Underwriters have furnished to the Company and the Selling
Shareholders expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the last two
paragraphs on the inside front cover page of the Prospectus concerning
stabilization and passive market making by the Underwriters and (B) in
the table in the first paragraph and as the second and [___] paragraphs
under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity
agreement set forth in this Section 8(b) shall be in addition to any
liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures.
Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying
party under this Section 8, notify the indemnifying party in writing of
the commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party for contribution or otherwise than under
the
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<PAGE>
indemnity agreement contained in this Section 8 or to the extent it is
not prejudiced as a proximate result of such failure. In case any such
action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party,
the indemnifying party will be entitled to participate in, and, to the
extent that it shall elect, jointly with all other indemnifying parties
similarly notified, by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however,
if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of
the indemnifying party and the indemnified party in conducting the
defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in
the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such
indemnified party of such indemnifying party's election so to assume
the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate
counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel (together
with local counsel), approved by the indemnifying party (Montgomery
Securities in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in each of
which cases the fees and expenses of counsel shall be at the expense of
the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified
party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
Section 8(c) hereof, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid request
and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of
such settlement. No indemnifying party
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<PAGE>
shall, without the prior written consent of the indemnified party,
effect any settlement, compromise or consent to the entry of judgment
in any pending or threatened action, suit or proceeding in respect of
which any indemnified party is or could have been a party and indemnity
was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any
reason held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholders, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Shareholders, on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholders, on the one hand, and the Underwriters,
on the other hand, in connection with the offering of the Common Shares pursuant
to this Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company and the Selling
Shareholders, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or the
Selling Shareholders, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 8(c), any
legal or other fees or expenses reasonably
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<PAGE>
incurred by such party in connection with investigating or defending any action
or claim. The provisions set forth in Section 8(c) with respect to notice of
commencement of any action shall apply if a claim for contribution is to be made
under this Section 9; provided, however, that no additional notice shall be
required with respect to any action for which notice has been given under
Section 8(c) for purposes of indemnification.
The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in this
Section 9.
Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several, and not joint, in proportion
to their respective underwriting commitments as set forth opposite their names
in Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
Section 10. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Underwriters, to purchase the Common Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date. If, on the First Closing Date or the Second Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Common Shares and the aggregate number of Common Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Common Shares
to be purchased on such date, and arrangements satisfactory to the Underwriters
and the Company for the purchase of such Common Shares are not made within 48
hours after such default, this Agreement shall
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<PAGE>
terminate without liability of any party to any other party except that the
provisions of Section 4, Section 6, Section 8 and Section 9 shall at all times
be effective and shall survive such termination. In any such case either the
Underwriters or the Company shall have the right to postpone the First Closing
Date or the Second Closing Date, as the case may be, but in no event for longer
than seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 10. Any action taken under this Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
Section 11. Termination of this Agreement. Prior to the First Closing
Date this Agreement maybe terminated by the Underwriters by notice given to the
Company and the Selling Shareholders if at any time (i) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally on
either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii) a
general banking moratorium shall have been declared by any of federal, New York,
Arizona or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Underwriters is material and adverse and
makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Underwriters there shall have occurred
any Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Underwriters may interfere materially with the conduct of
the business and operations of the Company regardless of whether or not such
loss shall have been insured. Any termination pursuant to this Section 11 shall
be without liability on the part of (a) the Company or the Selling Shareholders
to any Underwriter, except that the Company and the Selling Shareholders shall
be obligated to reimburse the expenses of the Underwriters pursuant to Sections
4 and 6 hereof, (b) any Underwriter to the Company or the Selling Shareholders,
or (c) of any party hereto to any other party except that the provisions of
Section 8 and Section 9 shall at all times be effective and shall survive such
termination.
Section 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect,
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<PAGE>
regardless of any investigation made by or on behalf of any Underwriter or the
Company or any of its or their partners, officers or directors or any
controlling person, or the Selling Shareholders, as the case may be, and will
survive delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
Section 13. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Underwriters:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Action Performance Companies, Inc.
2401 West First Street
Tempe, Arizona 85281
Facsimile: (602) 967-1403
Attention: [___]
If to the Selling Shareholders:
[Custodian]
[Address]
Facsimile: [___]
Attention: [___]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 14. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and
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controlling persons referred to in Section 8 and Section 9, and in each case
their respective successors, and personal representatives, and no other person
will have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the Common Shares as such from any of the Underwriters
merely by reason of such purchase.
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. (a) Governing Law Provisions. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or
proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby ("Related Proceedings") may be
instituted in the federal courts of the United States of America
located in the City and County of San Francisco or the courts of the
State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party
irrevocably submits to the exclusive jurisdiction (except for
proceedings instituted in regard to the enforcement of a judgment of
any such court (a "Related Judgment"), as to which such jurisdiction is
non-exclusive) of such courts in any such suit, action or proceeding.
Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process
for any suit, action or other proceeding brought in any such court. The
parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the
Specified Courts and irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such suit, action or
other proceeding brought in any such court has been brought in an
inconvenient forum. Each party not located in the United States
irrevocably appoints CT Corporation System, which currently maintains a
San Francisco office at 49 Stevenson Street, San Francisco, California
94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the
City and County of San Francisco.
(c) Waiver of Immunity. With respect to any Related
Proceeding, each party irrevocably waives, to the fullest extent
permitted by applicable law, all immunity (whether on the basis of
sovereignty or otherwise) from jurisdiction,
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<PAGE>
service of process, attachment (both before and after judgment) and
execution to which it might otherwise be entitled in the Specified
Courts, and with respect to any Related Judgment, each party waives any
such immunity in the Specified Courts or any other court of competent
jurisdiction, and will not raise or claim or cause to be pleaded any
such immunity at or in respect of any such Related Proceeding or
Related Judgment, including, without limitation, any immunity pursuant
to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
Section 17. Failure of One or More of the Selling Shareholders to Sell
and Deliver Common Shares. If one or more of the Selling Shareholders shall fail
to sell and deliver to the Underwriters the Common Shares to be sold and
delivered by such Selling Shareholders at the First Closing Date pursuant to
this Agreement, then the Underwriters shall have the right to, at their option,
by written notice to the Company and the Selling Shareholders, either (i)
terminate this Agreement without any liability on the part of any Underwriter
or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company or the
Selling Shareholders, (ii) purchase the shares which the Company and other
Selling Shareholders have agreed to sell and deliver in accordance with the
terms hereof, or (iii) postpone the First Closing Date, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
Section 18. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a
sophisticated business person who was adequately represented by counsel during
negotiations regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
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If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to the Company [and the Custodian] the
enclosed copies hereof, whereupon this instrument, along with all counterparts
hereof, shall become a binding agreement in accordance with its terms.
Very truly yours,
ACTION PERFORMANCE COMPANIES, INC.
By:___________________________________
Fred W. Wagenhals, Chairman of the
Board, President, and Chief Executive
Officer
SELLING SHAREHOLDERS
By:___________________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Underwriters in San Francisco, California as of the date first
above written.
MONTGOMERY SECURITIES
ADVEST, INCORPORATED
INTERSTATE/JOHNSON LANE CORPORATION
By MONTGOMERY SECURITIES
By:____________________________
Richard A. Smith
Authorized Signatory
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SCHEDULE A
Number of
Firm Common
Underwriters Shares
to be Purchased
Montgomery Securities ............................. [___]
Advest, Incorporated [___]
Interstate/Johnson Lane Corporation [___]
[___]
Total..........................................
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SCHEDULE B
Number of
Selling Shareholder Firm Common Shares
to be Sold
Selling Shareholder #1
[address]
Attention: [___] .......................... [___]
Selling Shareholder #2
[address] [___]
Attention: [___] ..........................
Total: [___]
39
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of this Registration
Statement.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
May 20, 1997.
