As filed with the Securities and Exchange Commission on May 22, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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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
of incorporation or organization) Identification Number)
4707 East Baseline Road, Phoenix, Arizona 85040
(602) 337-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
FRED W. WAGENHALS
Chairman of the Board, President, and Chief Executive Officer
4707 East Baseline Road
Phoenix, Arizona 85040
(602) 337-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Robert S. Kant, Esq.
Jere M. Friedman, Esq.
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.
One East Camelback Road
Phoenix, Arizona 85012
(602) 263-2606
---------------
Approximate date of commencement of Proposed Sale to the Public:
From time to time after the Registration Statement becomes effective.
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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, check the following box. [X]
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. [ ]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Securities Amount to be Aggregate Amount of
To be Registered Registered Price per Unit Registration Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4 3/4% Convertible Subordinated Notes due 2005 .. $ 100,000,000(1) 100% $ 29,500(2)
- ----------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share.......... (2) (2)
</TABLE>
================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) and Rule 457(i).
(2) Such indeterminate number of shares of Common Stock as shall be issuable
upon conversion of the Convertible Note being registered hereunder. No
additional consideration will be received for the Common Stock and
therefore no registration fee is required pursuant to Rule 457(i).
---------------
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 22, 1998
PROSPECTUS
$100,000,000
ACTION
Performance Companies, Inc.
4 3/4% Convertible Subordinated Notes Due 2005
and
Shares of Common Stock
Issuable Upon Conversion Thereof
This Prospectus relates to the proposed resale from time to time by
certain holders named herein (the "Selling Securityholders") of $100,000,000
principal amount of 4 3/4% Convertible Subordinated Notes Due 2005 (the
"Notes") of Action Performance Companies, Inc. (the "Company") and the shares
of the Company's common stock, par value $.01 per share (the "Common Stock"),
into which the Notes may be converted (the "Conversion Shares"). The Notes are
convertible into the Conversion Shares at any time at or before maturity,
unless previously redeemed, at a conversion price of $48.20 per share, subject
to adjustment upon the occurrence of certain events. The Common Stock is traded
on The Nasdaq National Market under the symbol "ACTN." On May 15, 1998, the
last reported sale price of the Common Stock was $30.31 per share.
Interest on the Notes is payable on April 1 and October 1 of each year,
commencing on October 1, 1998. The Notes do not provide for a sinking fund and
are not redeemable by the Company prior to April 1, 2001. The Notes are
redeemable thereafter at the option of the Company, in whole or in part, at the
redemption prices set forth in this Prospectus, together with accrued interest.
Upon a Repurchase Event (as defined herein), each holder ("Holder") of the
Notes shall have the right, at the Holder's option, to require the Company to
repurchase all or a portion of such Holder's Notes at a price equal to 100% of
the principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any. See "Description of Notes -- Certain Rights to Require
Repurchase of Notes."
The Notes are general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company. As of March 31, 1998, the Company had approximately
$41.0 million of outstanding Senior Indebtedness. The Indenture (as defined
herein) governing the Notes does not limit or prohibit the incurrence of
additional indebtedness, including Senior Indebtedness, by the Company or its
subsidiaries. See "Description of Notes -- Subordination."
Sales of the Notes and the Conversion Shares (collectively, the
"Securities") may be effected by or for the account of the Selling
Securityholders from time to time in transactions (which may include block
transactions in the case of the Conversion Shares) on any exchange or market on
which such Securities are listed or quoted, as applicable, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market price, or at negotiated prices.
The Selling Securityholders may effect such transactions by selling the
Securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders, or to broker-dealers who may purchase Securities
as principals and thereafter sell the Securities from time to time in
transactions (which may include block transactions in the case of the
Conversion Shares) on any exchange or market on which Securities are listed or
quoted, as applicable, in negotiated transactions, through a combination of
such methods of sale or otherwise. In effecting sales, broker-dealers engaged
by Selling Securityholders may arrange for other broker-dealers to participate.
Such broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Securities for whom such broker-dealers may act as agents or
to whom they may sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). See
"Selling Securityholders" and "Plan of Distribution."
None of the proceeds from the sale of the Securities by the Selling
Securityholders will be received by the Company. The Company has agreed to bear
all expenses (other than selling commissions) in connection with the
registration and sale of the Securities being offered by the Selling
Securityholders. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
The Notes have been designated for trading in the Private Offering,
Resales and Trading through Automated Linkages ("PORTAL") Market. Notes sold
pursuant to this Prospectus will not remain eligible for trading on the PORTAL
Market. For a description of certain income tax consequences to holders of the
Notes, see "Certain United States Federal Income Tax Consequences."
The Selling Securityholders and any broker-dealers or agents that
participate with the Selling Securityholders in the distribution of the
Securities may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by them and any profit on the
resale of the Securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES AND THE SHARES OF COMMON
STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, New York, New
York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 upon payment of the prescribed fees. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This
Web site can be accessed at http://www.sec.gov. Such reports, proxy statements
and other information concerning the Company also may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are hereby incorporated by reference herein: the
Company's Annual Report on Form 10-K for the year ended September 30, 1997, as
filed by the Company with the Commission on December 22, 1997 and as amended by
Form 10-K/A as filed by the Company with the Commission on May 21, 1998; (ii)
the Company's Quarterly Reports on Form 10-Q for the quarter ended December 31,
1997 as filed by the Company with the Commission on February 17, 1998 and as
amended by Form 10-Q/A as filed by the Company on May 22, 1998; (iii) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
as filed by the Company with the Commission on May 15, 1998; (iv) the Company's
current report on Form 8-K as filed by the Company with the Commission on March
10, 1998; and (v) the description of the Company's Common Stock contained in
the Registration Statement on Form 8-A/A as filed by the Company with the
Commission on June 14, 1995. 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, the information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents referred to above that have been
incorporated by reference herein (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Requests should be directed to Action
Performance Companies, Inc., 4707 East Baseline Road, Phoenix, Arizona 85040,
(telephone (602) 337-3700), Attention: Secretary.
2
<PAGE>
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.
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 and 1997 Winston Cup champion Jeff Gordon, 1989 Winston Cup
champion Rusty Wallace, and seven-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 most of the Company's
apparel and souvenirs are manufactured by third parties, generally utilizing
the Company's designs, tools, and dies. For the 12-month period ended March 31,
1998, the Company generated unaudited total net sales and EBITDA of
approximately $183.0 million and $31.5 million, respectively, and unaudited
total net sales and EBITDA, pro forma for all aquisitions completed during that
period, of approximately $210.9 million and $34.5 million, respectively.
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 Collectibles Club of
America (the "Collectors' Club"), which had approximately 123,000 members as of
March 31, 1998; and through mobile trackside souvenir stores, promotional
programs for corporate sponsors, and fan clubs. The Company also distributes
certain of its products to mass retailers through its in-house sales force and
wholesale distributors. In addition, the Company has a license agreement with
Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and game manufacturer,
covering the exclusive sale by Hasbro of a 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. According to USA Today, motorsports racing
is the fastest growing spectator sport in the United States. In 1997,
approximately 16.9 million people attended motorsports' premier events, an
increase of more than 9% compared with 1996 attendance. Approximately 6.1
million fans attended the 32 races of the Winston Cup series in 1997,
representing average attendance of approximately 190,000 per event, or
approximately 2.5 times the average attendance of 75,643 per Winston Cup event
in 1985. According to Nielson Media Research reports, more than 115 million
people tuned in to NASCAR's televised events in 1997. According to NASCAR, more
than 70 of the Fortune 500 companies utilize motorsports sponsorship or
advertising as part of their marketing strategies. Published reports indicate
that corporate sponsors will spend an estimated $1.1 billion on motorsports
marketing programs in 1998, with NASCAR teams and venues attracting an
estimated $476 million.
The Company focuses on developing long-term relationships with the most
popular drivers, car owners, car sponsors, car manufacturers, and others in the
various top racing categories. During fiscal 1997 and the first quarter of
fiscal 1998, the Company entered into long-term licensing arrangements with a
number of the most popular motorsports licensors, including drivers Dale
Earnhardt, Jeff Gordon, and Rusty Wallace and team owners Robert Yates Racing,
Inc., Richard Childress Racing, Inc., Joe Gibbs Racing, Inc., and Dale
Earnhardt, Inc. 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
3
<PAGE>
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.
Historically, the Company 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 "Craftsman Truck" racing series, United
States Auto Club ("USAC") racing, and "World of Outlaws" sprint car racing. In
fiscal 1997, the Company began expanding its product offerings and distribution
channels through a series of eight strategic acquisitions, representing an
aggregate base purchase price, including assumed liabilities but excluding
contingent payments, of approximately $95.0 million. The following table sets
forth certain information with respect to those acquisitions.
Recent Acquisitions
<TABLE>
<CAPTION>
Aquisitions(1) Date Business
- ------------------------------------------------- --------------- ----------------------------------------------------------
<S> <C> <C>
Sports Image, Inc. November 1996 Markets and distributes licensed motorsports apparel and
souvenirs; trackside sales; Dale Earnhardt fan club
Motorsport Traditions Limited Partnership and January 1997 Markets and distributes licensed motorsports apparel and
Creative Marketing and Promotions, Inc. souvenirs; trackside sales
Robert Yates Promotions, Inc. July 1997 Markets and distributes licensed motorsports apparel and
souvenirs; trackside sales
Image Works, Inc. July 1997 Manufactures and markets licensed motorsports apparel
through the mass-merchandise markets
Motorsports collectibles product lines of August 1997 Manufactures and markets licensed "mini-helmets" and
Simpson Products, Inc. other motorsports collectibles and souvenirs
Assets related to sales of merchandise licensed December 1997 Markets and distributes licensed motorsports apparel and
by NASCAR driver Rusty Wallace souvenirs; trackside sales
Assets related to motorsports December 1997 Manufactures and markets "Revell" licensed die-cast
die-cast collectible product lines of collectibles; strategic alliance with Revell involving
Revell-Monogram, Inc. extensive product licensing and distribution arrangements
Brookfield Collectors Guild, Inc. January 1998 Markets and distributes licensed motorsports collectibles
and ensembles
</TABLE>
- ------------
(1) The acquisitions listed consist of the purchase of assets of Sports Image,
Inc. ("Sports Image"); the purchase of assets of Motorsport Traditions
Limited Partnership and purchase of stock of Creative Marketing and
Promotions, Inc. (together, "Motorsport Traditions"); the purchase of
stock of Robert Yates Promotions, Inc. ("RYP"); the purchase of assets of
Image Works, Inc. ("Image Works"); the purchase of motorsports
collectibles-related assets of Simpson Products, Inc. ("Simpson"); the
purchase of assets related to sales of merchandise licensed by Rusty
Wallace ("Wallace") (the "Rusty Wallace Acquisition"); the purchase of
assets from Revell-Monogram, Inc. ("Revell") (the "Revell Acquisition");
and the purchase of assets from Brookfield Collectors Guild, Inc.
("Brookfield").
During fiscal 1997, the Company also expanded 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.
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 4707 East Baseline Road, Phoenix, Arizona
85040, and its telephone number is (602) 337-3700. The Company's Web site can
be accessed at www.action-performance.com.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Securities Offered ............. $100,000,000 principal amount of 4 3/4% Convertible Subordinated
Notes due 2005 (the "Notes") and the Conversion Shares. See
"Description of Notes" and "Plan of Distribution."
Interest Payment Dates ......... April 1 and October 1 of each year, commencing October 1, 1998.
Maturity Date .................. April 1, 2005.
Interest ....................... 4 3/4% per annum.
Conversion Rights .............. The Notes are convertible, at the option of the Holder, at any
time following the date of initial issuance thereof and prior to
maturity, unless previously redeemed, into shares of Common
Stock at a conversion price of $48.20 per share, subject to
adjustments upon the occurrence of certain events. See
"Description of Notes -- Conversion Rights."
Optional Redemption ............ The Notes are redeemable, in whole or in part, at the Company's
option, at any time on or after April 1, 2001, upon not less than
30 nor more than 60 days' notice, at the redemption prices set
forth in "Description of Notes -- Optional Redemption," in each
case together with accrued and unpaid interest and liquidated
damages, if any.
Repurchase Events .............. Upon the occurrence of any Repurchase Event (as defined
herein) occurring prior to the maturity of the Notes, each Holder
will have the right, at such Holder's option, to require the
Company to repurchase all or any part of such Holder's Notes at
100% of the principal amount thereof, subject to adjustments
upon the occurrence of certain events, together with accrued and
unpaid interest and liquidated damages, if any. See "Description
of Notes -- Certain Rights to Require Repurchase of Notes."
Subordination .................. The Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior
Indebtedness of the Company. At March 31, 1998, the Company
had approximately $41.0 million of outstanding Senior
Indebtedness. The Indenture governing the Notes does not limit
or prohibit the incurrence of additional indebtedness, including
Senior Indebtedness, by the Company or its subsidiaries.
Use of Proceeds ................ The Company will not receive any of the proceeds from sales of
the Notes or Conversion Shares by the Selling Securityholders.
Trading ........................ Prior to the resale thereof pursuant to this Prospectus, each of the
Notes was eligible for trading in the PORTAL Market. Notes
sold pursuant to this Prospectus are not expected to remain
eligible for trading in the PORTAL Market. The Conversion
Shares have been authorized for listing on the Nasdaq National
Market upon official notice of issuance. The Common Stock is
quoted on the Nasdaq National Market under the symbol
"ACTN."
Risk Factors ................... See "Risk Factors" for a discussion of factors to be considered
before purchasing any of the Securities offered hereby.
</TABLE>
5
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share amounts and ratios)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------------------------
Pro Forma
1993 1994 1995 1996 1997(1) 1997(2)
---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales .................... $15,108 $ 16,869 $ 26,131 $ 44,216 $ 130,380 $ 183,582
Gross profit ................. 5,378 6,381 10,249 18,920 49,385 68,642
Income (loss) from
operations(3) ............... (1,174) 573 4,130 9,654 18,135 18,565
Net income (loss)(3) ......... (1,171) 633 2,770 5,953 10,146 9,752
Net income (loss) per
common share, assuming
dilution(3)(4) .............. $ (0.21) $ 0.08 $ 0.26 $ 0.46 $ 0.69 $ 0.66
Weighted average number of
common shares, assuming
dilution(4) ................. 5,662 9,566 10,899 13,028 14,624 14,805
Other Financial Data:
EBITDA(5) .................... $ (726) $ 1,248 $ 5,036 $ 11,346 $ 22,612 $ 25,938
Ratio of earnings to fixed
charges(6) .................. N/A 2.2x 14.8x 44.7x 7.8x
<CAPTION>
Six Months Ended
March 31,
---------------------------------------
Pro Forma
1997 1998(1) 1998(2)
---- ------- -------
<S> <C> <C> <C>
Operating Data:
Net sales .................... $ 43,478 $ 96,073 $ 103,312
Gross profit ................. 17,176 35,218 39,488
Income (loss) from
operations(3) ............... 7,425 13,843 15,294
Net income (loss)(3) ......... 4,005 7,691 8,374
Net income (loss) per
common share, assuming
dilution(3)(4) .............. $ 0.29 $ 0.46 $ 0.50
Weighted average number of
common shares, assuming
dilution(4) ................. 13,786 16,591 16,618
Other Financial Data:
EBITDA(5) .................... $ 9,341 $ 18,207 $ 20,033
Ratio of earnings to fixed
charges(6) .................. 7.6x 7.8x
</TABLE>
March 31, 1998
------------------
Balance Sheet Data:
Cash and cash equivalents ............................... $97,405
Working capital ......................................... 110,058
Total assets ............................................ 276,473
Total long term debt .................................... 109,331
Shareholders' equity .................................... 112,868
- ------------
(1) Fiscal 1997 results include the results of operations of Sports Image,
Motorsport Traditions, RYP, Image Works, and Simpson, beginning as of
their respective dates of acquisition. Results for the six months ended
March 31, 1998 include the operating results obtained from the Rusty
Wallace Acquisition, the Revell Acquisition, and the acquisition of
Brookfield, beginning as of their respective dates of acquisition.
(2) Adjusted to give pro forma effect to the acquisitions of Sports Image,
Motorsport Traditions, RYP, Image Works, and Simpson, the Rusty Wallace
Acquisition, the Revell Acquisition, and the acquisition of Brookfield, as
if each had occurred as of October 1, 1996, but does not include any
assumed interest and other expenses or any assumed interest income related
to the proceeds from the sale of the Notes. See "Unaudited Pro Forma
Condensed Combined Financial Information."
(3) Amounts for fiscal 1997 include a one-time charge of approximately $5.4
million for costs and legal and other expenses related to the settlement
of a lawsuit. Excluding the one-time charge, fiscal 1997 income from
operations, net income, and net income per common share, assuming
dilution, would have been approximately $23,535, $13,386 and $0.92,
respectively, and fiscal 1997 pro forma income from operations, net
income, and net income per common share, assuming dilution, would have
been approximately $23,965, $12,992, and $0.88, respectively. Amounts for
the six months ended March 31, 1998 include a one-time charge of
approximately $950,000 for costs and legal and other expenses related to
the settlement of a lawsuit. Excluding the one-time charge, income from
operations, net income, and net income per common share, assuming
dilution, for the six months ended March 31, 1998 would have been
approximately $14,793, $8,261 and $0.50, respectively, and pro forma
income from operations, net income, and net income per common share,
assuming dilution, for the six months ended March 31, 1998 would have been
approximately $16,244, $8,944 and $0.54, respectively.
(4) Restated to reflect the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
(5) EBITDA represents income before interest, extraordinary items, depreciation
and amortization expense, and federal and state income taxes. EBITDA
generally is considered to provide information regarding a company's
ability to service and/or incur debt. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operations,
or other consolidated income or cash flow data prepared in accordance with
generally accepted accounting principles as a measure of a company's
profitability or liquidity.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental payments
on operating leases deemed representative of the interest factor. See "Use
of Proceeds" and "Capitalization." Earnings were inadequate to cover fixed
charges in fiscal 1993 ($1,240).
6
<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 any of the Notes or Conversion Shares 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 and truck
manufacturers, NASCAR, and other entities. The 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 all of its
motorsports collectibles and most of its consumer products. Although the
Company owns most of the tools, dies, and molds utilized in the manufacturing
processes of its collectible products and owns the tooling and dies used to
manufacture certain of its consumer products, the Company has limited control
over the manufacturing processes themselves. As a result, any difficulties
encountered by the third-party manufacturers that result in product defects,
production delays, cost overruns, or the inability to fulfill orders on a
timely basis could have a material adverse effect on the Company.
The Company does not have long-term contracts with its third-party
manufacturers. Although the Company believes it would be able to secure other
third-party manufacturers to produce its products as a result of its ownership
of the molds and tools used in the manufacturing process, the Company's
operations would be adversely affected if it lost its relationship with any of
its current suppliers (including
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particularly its primary manufacturer of die-cast products, which currently
utilizes one facility in the People's Republic of China ("China") to produce
most of the Company's die-cast products) or if its current suppliers'
operations or sea or air transportation with its China-based die-cast
manufacturers 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 facilities used by its die-cast product
manufacturers 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 obtain alternative sources of
supply.
Although the Company does not itself purchase the raw materials used to
manufacture most of 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 price of zinc, a principal
raw material in its die-cast replicas, has increased substantially over the
last several years, which has resulted in increases in the prices the Company
pays for its die-cast replicas. Although to date the Company has been able to
increase the prices at which it sells its products in order to cover the
increased prices that it pays for such products, there can be no assurance that
the Company will be able to continue to pass along such price increases to its
customers in the future.
Integration of Business Operations
The Company has completed a number of acquisitions during and subsequent
to fiscal 1997. The Company has consolidated substantially all of the
operations of various of the acquired entities, several of which were based in
the same city and marketed substantially identical types of products through
substantially identical channels of distribution, into the Company's existing
operations in Phoenix, Arizona or the operations of Sports Image in Charlotte,
North Carolina. There can be no assurance that the Company will be able to
complete effectively the integration of the operations of the acquired
companies 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 the acquired companies 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, during 1997 the Company
was named as a defendant in a lawsuit based upon actions alleged to have been
taken by several of the newly acquired businesses 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 its acquired operations to effect what the Company believes will be
significant revenue opportunities and substantial cost savings, including
increased product offerings and a reduction in operating expenses as a result
of the elimination of duplicative sales, marketing, administrative, warehouse,
and distribution facilities, functions, and personnel. Significant
uncertainties, however, accompany any business combination, and there can be no
assurance that the Company will be able to achieve its anticipated revenue
increases or 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 revenue increases or cost savings could have a material adverse
effect on the Company's business, financial condition, and operating results.
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Management of Growth
Since 1993, the Company's business operations have undergone significant
changes and growth, including its emphasis on and the expansion of its
collectible product lines, acquisition of its motorsports consumer products
lines, expanded distribution channels, and significant investments in tooling
and licensing arrangements. The Company's ability to manage effectively any
significant future growth, however, will require it to integrate successfully
the operations of any acquired businesses 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. In 1997, the Company
relocated its corporate headquarters to a new 140,000 square foot facility in
Phoenix, Arizona and entered into a lease for a new 121,000 square foot
facility in Concord, 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 may increase orders for the
Company's products on short notice, which would place an excessive short-term
burden on the Company's resources. See "Business -- Growth Strategy."
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
accurately forecast required inventory levels or to respond to changes in
customer tastes and demands because of the amount of time and financial
resources that may be required to bring new products to market. The inability
to respond quickly to market changes could have a material adverse effect on
the Company's business, financial condition, and operating results. See
"Business -- Products and Services."
Dependence on New Products
The Company's operating results depend to a significant extent on its
ability to continue to develop and introduce new products on a timely basis
that compete effectively on the basis of price and that address customer
tastes, preferences, and requirements. The success of new product introductions
depends on various factors, including proper new product selection, successful
sales and marketing efforts, timely production and delivery of new products,
and consumer acceptance of new products. There can be no assurance that any new
products will receive or maintain substantial market acceptance. The failure of
the Company to design, develop, and introduce popular products on a timely
basis would adversely affect its future operating results. See "Business --
Products and Services."
Competition
The motorsports collectible and consumer products markets are extremely
competitive. The Company competes with major domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. The Company's motorsports die-cast collectibles compete
with die-cast and other motorsports collectibles and, to a certain extent,
die-cast replicas of motorsports vehicles that are sold through mass retail
channels. The Company's motorsports apparel and souvenirs compete with similar
9
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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 as television, radio,
newspapers, magazines, and billboards. The Company competes primarily on the
basis of the current popularity of the race car drivers and others with whom it
has licenses and its ability to obtain favorable licensing arrangements with
other popular licensors; the appeal of its products; and the cost, design, and
delivery schedules of its products. There can be no assurance that the Company
will continue to be able to compete successfully in the future. See "Business
- -- Competition."
Potential Regulation of Corporate Sponsorship
Tobacco and alcohol companies provide a significant amount of advertising
and promotional support of racing events, drivers, and car owners. In 1996, the
U.S. Food and Drug Administration (the "FDA") published final regulations that
would 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. In addition to the FDA regulations, however,
certain major manufacturers of tobacco products have reached a proposed
settlement with attorneys general of a number of states that have filed
lawsuits against such tobacco product manufacturers. The terms of those
settlements include potential voluntary restrictions on advertising by the
tobacco industry. The final terms of some or all of those settlements will be
subject to approval by the United States Congress and the President of the
United States. The FDA regulations, if ultimately approved, and any other
legislation, regulations, or other initiatives, including the pending
settlement negotiations, that limit or prohibit advertisements of tobacco and
alcohol products at sporting events, including racing events, could ultimately
affect the popularity of motorsports, which could have a material adverse
effect on the Company. The Company believes, however, that other major consumer
products companies would quickly replace tobacco and alcohol companies as
sponsors of motorsports in the event that advertisement of those products
declines.
Seasonal Fluctuations in Sales
Because the auto racing season is concentrated between the months of
February and November, the second and third calendar quarters of each year (the
Company's third and fourth fiscal quarters) generally are characterized by
higher sales of motorsports products. Seasonal fluctuations in quarterly sales
may require the Company to take temporary measures, including changes in its
personnel levels, borrowing amounts, and production and marketing activities,
and could result in unfavorable quarterly earnings comparisons. The Company
believes, however, that holiday sales of its products are increasing, which has
the effect of reducing seasonal fluctuations in its sales.
International Trade, Exchange, and Financing
The Company obtains its die-cast collectibles and other replicas under
manufacturing arrangements with third-party manufacturers 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 manufacturers 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
manufacturers, 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
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subsequent to the date the Company places its orders with those manufacturers.
Although the October 1997 financial crisis in Asia did not result in any
short-term changes in the prices that the Company pays for its die-cast
products, an extended period of financial pressure on overseas markets or a
devaluation of the Chinese currency that results in a financial setback to the
Company's overseas manufacturers could have an adverse impact on the Company's
operations. Purchases of die-cast products from the China-based manufacturers
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.
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
currently does not 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 currently does not 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 and cash generated by operations.
The timing and amount of any such capital requirements cannot be predicted at
this time. Although the Company has been able to obtain adequate financing on
acceptable terms in the past, there can be no assurance that such financing
will continue to be available on acceptable terms. If such financing is not
available on satisfactory terms, the Company may be unable to expand its
business at the rate desired and its operating results may be adversely
affected. Debt financing increases expenses and must be repaid regardless of
operating results. Equity financing could result in additional dilution to
existing shareholders.
Dependence on Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management, including Fred W. Wagenhals, the Company's
Chairman of the Board, President, and Chief Executive Officer. The loss of
services of one or more of its key employees, particularly Mr. Wagenhals, could
have a material adverse effect on the Company. The Company maintains key person
insurance on the life of Mr. Wagenhals in the amount of $3.0 million. The
Company does not maintain such insurance on any of its other officers.
Possible Volatility of Market Price of Common Stock and Notes
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
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<PAGE>
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. In addition, future trading prices of the Notes will
depend on the factors described above as well as on other factors, such as
prevailing interest rates, perceptions of the Company's credit worthiness, and
the market for similar securities. As a result, the market price of the Notes
may trade at a discount from their principal amount based on such factors.
Subordination
The Notes are general unsecured obligations, subordinated in right of
payment to all existing and future Senior Indebtedness of the Company. As a
result of such subordination, in the event of any insolvency, liquidation or
reorganization of the Company or upon acceleration of the Notes due to an Event
of Default (as defined in the Indenture), the assets of the Company will be
available to pay obligations on the Notes only after the administrative
expenses of any bankruptcy proceeding and all Senior Indebtedness, if any, has
been paid in full. As a result, there may not be sufficient assets remaining to
pay amounts due on the Notes and any other subordinated indebtedness of the
Company then outstanding. The Indenture does not prohibit or limit the
incurrence of additional indebtedness, including Senior Indebtedness, by the
Company. The incurrence of such indebtedness could adversely affect the
Company's ability to pay its obligations under the Notes. As of March 31, 1998,
the Company had outstanding approximately $41.0 million of Senior Indebtedness.
In addition, the Notes are not guaranteed by any subsidiary of the Company. As
a result, the Notes will effectively rank junior to all creditors of the
subsidiaries of the Company.
Absence of Public Market for the Notes
The Notes were issued in March 1998 in a private placement to a small
number of institutional buyers. The Notes issued in the initial private
placement have been designated for trading on the PORTAL Market. Notes sold
pursuant to this Prospectus will not remain eligible for trading on the PORTAL
Market. The Company does not intend to list the Notes on any national
securities exchange or on The Nasdaq Stock Market. There can be no assurance
that an active trading market for the Notes will develop or, if one does
develop, that it will be maintained. If an active trading market for the Notes
fails to develop or be sustained, the trading price of such Notes could be
adversely affected and holders of the Notes may experience difficulty in
reselling the Notes or may be unable to sell them at all. If a public trading
market develops for the Notes, future trading prices of the Notes will depend
upon many factors, including, among other things, prevailing interest rates and
the market price of the shares of the Company's Common Stock. The liquidity of,
and trading market for, the Notes also may be adversely affected by general
declines in the market for similar securities. Such a decline may adversely
affect such liquidity and trading markets independent of the financial
performance of, and prospects for, the Company. See "Plan of Distribution."
Limitation on Repurchase of Notes upon Repurchase Event
Upon the occurence of a Repurchase Event, each Holder of Notes may require
the Company to repurchase all or a portion of such Holder's Notes. If a
Repurchase Event were to occur, there can be no assurance that the Company
would have sufficient financial resources or would be able to arrange financing
to pay the repurchase price for all Notes tendered by Holders thereof. The
Company's ability to repurchase the Notes in such event may be limited by law,
the Indenture, and the terms of other agreements relating to borrowings that
constitute Senior Indebtedness, as such indebtedness or agreements may be
entered into, replaced, supplemented, or amended from time to time. The Company
may be required to refinance Senior Indebtedness in order to make any such
repurchase payments. If the
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Company is prohibited from repurchasing the Notes, such failure would
constitute an Event of Default under the Indenture, which may constitute a
further default under certain of the Company's existing agreements relating to
borrowings and the terms of other indebtedness that the Company may enter into
from time to time. In such circumstances, the subordination provisions in the
Indenture would prohibit payments to the Holders of the Notes. Furthermore, the
Company may not have the financial ability to repurchase the Notes in the event
that maturity of Senior Indebtedness is accelerated as a result of a default
under the applicable loan or similar agreement. See "Description of Notes --
Certain Rights to Require Repurchase of Notes."
Litigation
In March 1998, the Company settled one lawsuit and reached an agreement to
settle another lawsuit. The Company took a one-time charge of approximately
$950,000 in the second quarter of fiscal 1998 with respect to one of these
settlements. The final terms of the pending settlement are subject to the
execution of a definitive settlement agreement by the respective parties.
During 1997, the Company was 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 antitrust laws. The Company
is actively defending this lawsuit. In the event a decision adverse to the
Company is rendered in this lawsuit, 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 this lawsuit. See "Business -- Litigation."
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years in the date code field.
Computer systems and products that do not accept four-digit year entries will
need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. The Company recently commenced a
program to install new computer software programs that are intended to
integrate the Company's management information systems throughout its
organizational structure, as well as to comply with "Year 2000" requirements.
The Company anticipates that these software systems, which are designed to
improve the content, quality, and flow of information within the Company, will
be operational in the last quarter of calendar 1998. The Company believes that
its new software systems will comply with the Year 2000 requirements, and the
Company currently does not anticipate that it will experience any material
disruption to its operations as a result of the failure of any of its systems
to be Year 2000 compliant. There can be no assurance, however, that computer
systems operated by third parties, including customers, vendors, credit card
transaction processors, and financial institutions, with which the Company's
systems interface will continue to properly interface with the Company's
systems and will otherwise be compliant on a timely basis with Year 2000
requirements. The Company currently is developing a plan to evaluate the Year
2000 compliance status of third parties with which its computer systems
interface. Any failure of the Company's computer system or the systems of third
parties to timely achieve Year 2000 compliance could have a material adverse
effect on the Company's business, financial condition, and operating results.
Rights to Acquire Shares; Potential Issuance of Additional Shares
As of May 15, 1998, options to acquire a total of approximately 1,071,144
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.
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Shares Eligible for Future Sale; Potential Depressive Effect on Stock Price
Sales of substantial amounts of Common Stock by shareholders of the
Company, or even the potential for such sales, may have a depressive effect on
the market price of the Common Stock. Of the 16,194,905 shares of Common Stock
outstanding as of May 15, 1998, approximately 13,786,900 shares currently are
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. The approximately 2,408,000 remaining shares
of Common Stock outstanding are "restricted securities," as that term is
defined in Rule 144 under the Securities Act, and may be sold only in
compliance with Rule 144, pursuant to registration under the Securities Act, or
pursuant to an exemption therefrom. The Company has registered an aggregate of
approximately 498,800 shares of such "restricted securities" for resale
pursuant to an effective registration statement. Affiliates also are subject to
certain of the resale limitations of Rule 144 as promulgated under the
Securities Act. Generally, under Rule 144, each person who beneficially owns
restricted securities with respect to which at least one year has elapsed since
the later of the date the shares were acquired from the Company or an affiliate
of the Company may, every three months, sell in ordinary brokerage transactions
or to market makers an amount of shares equal to the greater of 1% of the
Company's then-outstanding Common Stock or the average weekly trading volume
for the four weeks prior to the proposed sale of such shares. An aggregate of
approximately 1,901,000 shares held by certain officers and directors currently
are available for sale under Rule 144. Sales of substantial amounts of Common
Stock by shareholders of the Company, or even the potential for such sales, are
likely to have a depressive effect on the market price of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Description of Capital Stock -- Shares Eligible for
Future Sale."
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and does
not currently anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply its earnings to the expansion and
development of its business.
Change in Control Provisions
The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles"), Amended and Restated Bylaws (the "Restated Bylaws"), and
Arizona law contain provisions that may have the effect of making more
difficult or delaying attempts by others to obtain control of the Company, even
when those attempts may be in the best interests of shareholders. The Restated
Articles also authorize the Board of Directors, without shareholder approval,
to issue one or more series of preferred stock, which could have voting,
liquidation, dividend, conversion, or other rights that adversely affect or
dilute the voting power of the holders of Common Stock. See "Description of
Capital Stock."
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Prospectus under the
headings "Business" and "Risk Factors" 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."
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USE OF PROCEEDS
The Company will not receive any of the proceeds from sales of the
Securities by the Selling Securityholders.
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. Instead, the Company
intends to apply its earnings to the expansion and development of its business.
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998.
March 31, 1998
------------------
(In thousands)
Long-term debt
Notes payable and other long-term debt(1) ................. $9,331
4 3/4% Convertible Subordinated Notes due 2005 ............ 100,000
--------
Total long-term debt ...................................... 109,331
Shareholders' equity
Preferred stock, no par value, 5,000,000 shares authorized;
no shares outstanding .................................... --
Common stock, $.01 par value, 25,000,000 shares authorized;
16,183,239 shares issued and outstanding(2) .............. 162
Additional paid-in capital ................................ 86,990
Retained earnings ......................................... 25,716
--------
Total shareholders' equity ................................ 112,868
--------
Total capitalization ......................................... $222,199
========
- ------------
(1) The amounts shown exclude an aggregate of $20.0 million in principal amount
of senior notes that mature in January 1999 and are classified as current
obligations at March 31, 1998.
(2) Excludes (i) 1,094,810 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding as of March 31, 1998, and (ii)
648,860 shares reserved for issuance upon the exercise of stock options
that may be granted in the future under the Company's stock option plans.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "ACTN" since April 27, 1993. The following table sets forth
the quarterly high and low 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 ............................ 29.00 18.00
Third Quarter ............................. 36.13 25.38
Fourth Quarter ............................ 38.00 23.00
1998:
First Quarter ............................. $ 38.88 $ 30.75
Second Quarter (through May 15, 1998) ..... 37.13 28.97
As of May 15, 1998, there were 215 holders of record and approximately
5,750 beneficial owners of the Company's Common Stock. On May 15, 1998, the
last reported sale price of the Company's Common Stock on the Nasdaq National
Market was $30.31 per share.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data presented below as of and for each
of the five years ended September 30, 1997 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 each of the six-month periods ended March 31, 1997 and 1998 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,
1997 and 1998 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, 1998 are not
necessarily indicative of results to be expected for the year ending September
30, 1998. 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 incorporated by reference herein.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------------------------------------
1993 1994 1995 1996 1997(1)
---- ---- ---- ---- -------
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales:
Collectibles ......................... $ 11,558 $12,802 $ 23,443 $ 40,904 $ 63,846
Apparel and souvenirs ................ -- 143 1,190 1,961 60,430
Promotional .......................... -- -- -- 1,351 5,085
Other(2) ............................. 3,550 3,924 1,498 -- 1,019
-------- ------- -------- -------- ---------
Net sales ........................... 15,108 16,869 26,131 44,216 130,380
Cost of sales ......................... 9,730 10,488 15,882 25,296 80,995
-------- ------- -------- -------- ---------
Gross profit .......................... 5,378 6,381 10,249 18,920 49,385
Selling, general and administrative
expenses ............................. 6,552 5,808 6,115 9,262 24,564
Settlement costs ...................... -- -- -- -- 5,400(3)
Amortization of goodwill and
other intangibles .................... -- -- 4 4 1,286
-------- ------- -------- -------- ---------
Total operating expenses ............ 6,552 5,808 6,119 9,266 31,250
Income (loss) from operations ......... (1,174) 573 4,130 9,654 18,135(3)
Interest income (expense)
and other, net ....................... (66) (164) 24 216 (1,225)
-------- ------- -------- -------- ---------
Income (loss) before provision for
(benefit from) income taxes .......... (1,240) 409 4,154 9,870 16,910(3)
Provision for (benefit from)
income taxes ......................... (69) (224) 1,384 3,917 6,764
-------- ------- -------- -------- ---------
Net income (loss) ..................... $ (1,171) $ 633 $ 2,770 $ 5,953 $ 10,146(3)
======== ======= ======== ======== =========
Net income (loss) per common
share, assuming dilution(4) .......... $ (0.21) $ 0.08 $ 0.26 $ 0.46 $ 0.69(3)
======== ======= ======== ======== =========
Weighted average number of
common shares,
assuming dilution(4) ................. 5,662 9,566 10,899 13,028 14,624
Other Financial Data:
EBITDA(5) ............................. $ (726) $ 1,248 $ 5,036 $ 11,346 $ 22,612
Ratio of earnings to fixed charges(6) N/A 2.2x 14.8x 44.7x 7.8x
Consolidated Balance Sheet Data
(at end of period):
Cash and cash equivalents ............. $ 1,719 $ 1,134 $ 6,760 $ 4,983 $ 29,318
Working capital ....................... 3,186 5,699 11,922 18,093 56,975
Total assets .......................... 8,565 11,656 23,351 31,649 141,325
Total long term debt .................. 452 266 288 365 22,586
Shareholders' equity .................. 5,744 6,909 18,890 26,996 103,169
<CAPTION>
Six Months Ended
March 31,
----------------------------
1997 1998(1)
---- -------
Statement of Operations Data:
<S> <C> <C>
Sales:
Collectibles ......................... $ 23,522 $ 46,217
Apparel and souvenirs ................ 18,334 45,625
Promotional .......................... 1,355 2,977
Other(2) ............................. 267 1,254
-------- ---------
Net sales ........................... 43,478 96,073
Cost of sales ......................... 26,302 60,855
-------- ---------
Gross profit .......................... 17,176 35,218
Selling, general and administrative
expenses ............................. 9,256 18,735
Settlement costs ...................... -- 950(3)
Amortization of goodwill and
other intangibles .................... 495 1,690
-------- ---------
Total operating expenses ............ 9,751 21,375
Income (loss) from operations ......... 7,425 13,843(3)
Interest income (expense)
and other, net ....................... (750) (1,024)
-------- ---------
Income (loss) before provision for
(benefit from) income taxes .......... 6,675 12,819(3)
Provision for (benefit from)
income taxes ......................... 2,670 5,128
-------- ---------
Net income (loss) ..................... $ 4,005 $ 7,691(3)
======== =========
Net income (loss) per common
share, assuming dilution(4) .......... $ 0.29 $ 0.46(3)
======== =========
Weighted average number of
common shares,
assuming dilution(4) ................. 13,786 16,591
Other Financial Data:
EBITDA(5) ............................. 9,341 18,207
Ratio of earnings to fixed charges(6) 7.6x 7.8x
Consolidated Balance Sheet Data
(at end of period):
Cash and cash equivalents ............. $ 29,318 $ 97,405
Working capital ....................... 56,975 110,058
Total assets .......................... 141,325 276,473
Total long term debt .................. 22,586 109,331
Shareholders' equity .................. 103,169 112,868
</TABLE>
17
<PAGE>
- ------------
(1) Fiscal 1997 results include the results of operations of Sports Image,
Motorsports Traditions, RYP, Image Works, and Simpson, beginning as of
their respective dates of acquisition. Results for the six months ended
March 31, 1998 include the operating results obtained from the Rusty
Wallace Acquisition and the Revell Acquisition, beginning as of their
respective dates of acquisition.
(2) Includes the revenue of the Company's M-CarTM 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. Includes royalty and license fees beginning in
fiscal 1997.
(3) The Company recognized a one-time charge of approximately $5.4 million in
fiscal 1997 for costs and legal and other expenses related to the
settlement of a lawsuit. Excluding the one-time charge, fiscal 1997 income
from operations, income before provision for income taxes, net income, and
net income per common share, assuming dilution, would have been
approximately $23,535, $22,310, $13,386, and $0.92, respectively. Amounts
for the six months ended March 31, 1998 include a one-time charge of
approximately $950,000 for costs and legal and other expenses related to
the settlement of a lawsuit. Excluding the one-time charge, income from
operations, income before provision for income taxes, net income, and net
income per common share, assuming dilution, for the six months ended March
31, 1998 would have been approximately $14,793, $13,769, $8,261, and
$0.50, respectively.
(4) Restated to reflect the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
(5) EBITDA represents income before interest, extraordinary items, depreciation
and amortization expense, and federal and state income taxes. EBITDA
generally is considered to provide information regarding a company's
ability to service and/or incur debt. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operations,
or other consolidated income or cash flow data prepared in accordance with
generally accepted accounting principles as a measure of a company's
profitability or liquidity.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental payments
on operating leases deemed representative of the interest factor. Earnings
were inadequate to cover fixed charges in fiscal 1993 ($1,240).
18
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction
The following unaudited pro forma condensed combined statements of
operations of the Company for the fiscal year ended September 30, 1997 and the
six months ended March 31, 1998 give effect to the acquisitions of Sports
Image, Motorsport Traditions, RYP, Image Works, and Simpson (the "Fiscal 1997
Acquisitions"), and the Rusty Wallace Acquisition, the Revell Acquisition, and
the acquisition of Brookfield (the "Fiscal 1998 Acquisitions"), assuming that
those acquisitions were completed on October 1, 1996. The unaudited pro forma
condensed combined statements of operations presented herein do not purport to
represent what the Company's actual results of operations would have been had
those acquisitions occurred on that date or to project the Company's results of
operations for any future period.
Unaudited Pro Forma Condensed Combined Statement of Operations
for the Fiscal Year Ended September 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Acquired Pro Forma Pro Forma
The Company Companies(1) Adjustments Combined
----------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Net sales ......................................... $130,380 $62,752 $ (9,550)(2) $ 183,582
Cost of sales ..................................... 80,995 42,800 (8,855)(2)(3) 114,940
-------- ------- ----------- ---------
Gross profit ................................... 49,385 19,952 (695) 68,642
Selling, general, and administrative expense ...... 25,850 17,344 1,483(3) 44,677
Settlement costs .................................. 5,400 0 0 5,400
-------- ------- ----------- ---------
Income from operations ............................ 18,135 2,608 (2,178) 18,565
Interest income (expense) and other, net .......... (1,225) 79 (1,166)(4) (2,312)
-------- ------- ----------- ---------
Income before provision for income taxes .......... 16,910 2,687 (3,344) 16,253
Provision for income taxes ........................ 6,764 0 (263)(5) 6,501
-------- ------- ----------- ---------
Net income ..................................... $ 10,146 $ 2,687 $ (3,081) $ 9,752
======== ======= =========== =========
Net income per common share, assuming dilution .... $ 0.69 $ 0.66(6)
======== =========
Weighted average number of common shares,
assuming dilution ................................ 14,624 14,805(6)
</TABLE>
- ------------
(1) Reflects (a) the historical operations of each of the Fiscal 1997
Acquisitions from October 1, 1996 through the respective dates of
acquisition, and (b) the historical operations of the Fiscal 1998
Acquisitions from October 1, 1996 through September 30, 1997.
(2) Reflects the elimination of intercompany sales.
(3) Reflects (a) the amortization of goodwill and other intangibles associated
with each of the Fiscal 1997 Acquisitions through the respective dates of
acquisition, and (b) the amortization of goodwill and other intangibles
associated with the Fiscal 1998 Acquisitions. Does not reflect any cost
savings associated with the reduction of overhead or the elimination of
duplicative functions or consolidation of facilities.
(4) Reflects additional interest expense associated with the financing of the
Fiscal 1997 Acquisitions and the Fiscal 1998 Acquisitions.
(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 791,939 shares of Common Stock as a portion of the
consideration paid to the sellers (including the maximum number of shares
issuable to the seller of Brookfield on or before December 31, 1998).
19
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
for the Six Months Ended March 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Acquired Pro Forma Pro Forma
The Company Companies(1) Adjustments Combined
----------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Net sales ......................................... $ 96,073 $10,439 $ (3,200)(2) $ 103,312
Cost of sales ..................................... 60,855 5,988 (3,019)(2)(3) 63,824
-------- ------- ----------- ---------
Gross profit ................................... 35,218 4,451 (181) 39,488
Selling, general, and administrative expense ...... 20,425 2,614 205(3) 23,244
Settlement costs .................................. 950 0 0 950
-------- ------- ----------- ---------
Income from operations ............................ 13,843 1,837 (386) 15,294
Interest income (expense) and other, net .......... (1,024) (90) (215)(4) (1,329)
-------- ------- ----------- ---------
Income before provision for income taxes .......... 12,819 1,747 (601) 13,965
Provision for income taxes ........................ 5,128 0 463(5) 5,591
-------- ------- ----------- ---------
Net income ..................................... $ 7,691 $ 1,747 $ (1,064) $ 8,374
======== ======= =========== =========
Net income per common share, assuming dilution .... $ 0.46 $ 0.50(6)
======== =========
Weighted average number of common shares,
assuming dilution ................................ 16,591 16,618(6)
</TABLE>
- ------------
(1) Reflects the historical operations of each of the Fiscal 1998 Acquisitions
from October 1, 1997 through the respective acquisition dates.
(2) Reflects the elimination of intercompany sales.
(3) Reflects the amortization of goodwill and other intangibles associated with
each of the Fiscal 1998 Acquisitions through the respective acquisition
dates. Does not reflect any cost savings associated with the reduction of
overhead or the elimination of duplicative functions or consolidation of
facilities.
(4) Reflects additional interest expense associated with the financing of the
Fiscal 1998 Acquisitions through the respective acquisition dates.
(5) Reflects the income tax provision based on applying the pro forma estimated
effective income tax rate of the combined companies.
(6) Reflects the assumed issuance of the maximum number of shares issuable to
the seller of Brookfield on or before December 31, 1998.
20
<PAGE>
BUSINESS
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 and 1997 Winston Cup champion Jeff Gordon, 1989 Winston Cup
champion Rusty Wallace, and seven-time NHRA Funny Car champion John Force), car
owners, car sponsors, automobile manufacturers, and NASCAR. The Company's
motorsports collectibles and most of the Company's apparel and souvenirs are
manufactured by third parties, generally utilizing the Company's designs,
tools, and dies. The Company screen prints and embroiders a portion of the
licensed motorsports apparel that it sells.
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 Collectors' Club, which currently
has approximately 123,000 members; and through mobile trackside souvenir
stores, promotional programs for corporate sponsors, and fan clubs. The Company
also distributes certain of its products to mass retailers through its in-house
sales force and wholesale distributors. In addition, the Company has 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. In 1997, approximately 16.9 million
people attended motorsports' premier events, an increase of more than 9%
compared with 1996 attendance. Approximately 6.1 million fans attended the 32
races in the NASCAR Winston Cup series in 1997, representing attendance of more
than 190,000 per event, approximately 2.5 times the average attendance of
75,643 per Winston Cup event in 1985. NHRA attendance also has grown
significantly in recent years, reaching total attendance of almost 2.2 million
in 1997. Motorsports events also have 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 to
launch Speedvision, a motorsports cable network. USA Today reports that TV
ratings are growing even faster than attendance. According to Nielson Media
Research reports, more than 115 million people tuned in to NASCAR's televised
events in 1997. The Company believes that the recent construction of new
superspeedways in Los Angeles, California; Dallas/Ft. Worth, Texas; Las Vegas,
Nevada; and other major cities will stimulate continued growth in the
motorsports industry through increased exposure to new racing enthusiasts and
markets.
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. Published reports indicate that corporate sponsors will spend an
estimated $1.1 billion on motorsports marketing programs in 1998, with NASCAR
teams and venues attracting an estimated $476 million.
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
21
<PAGE>
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.
Enhancing Existing and Introducing New Products
The Company continually seeks to enhance its existing products and to
introduce new products that appeal to auto racing enthusiasts, including
products for sale exclusively through its Collectors' Club. During the last two
years, the Company has expanded its lines of die-cast collectibles to include
NHRA drag racing and NASCAR's "Craftsman Truck" racing series. During fiscal
1997, the Company developed and introduced the higher priced "Elite" series of
die-cast collectibles, which feature detailed equipment such as spark plug
wires, braided hoses, and realistic suspension systems. The Revell Acquisition
provides the Company with additional lines of high-quality die-cast motorsports
collectibles that the Company intends to market under various well-recognized
"Revell" trademarks at price points that are different from those of the
Company's existing die-cast product lines. 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 manufactures and markets, with the Company's assistance, a line of
motorsports products that do not compete with the Company's core products. The
Company also may expand its product offerings by introducing new lines of
collectibles and other products designed to appeal to enthusiasts of different
types of motorsports circuits.
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 $20.6 million
in its proprietary tooling, 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.
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, Rusty Wallace, Dale Jarrett, and John Force), car owners,
manufacturers, and corporate sponsors provide the Company with a competitive
advantage. In connection with the Revell Acquisition, the Company entered into
a 10-year license agreement under which it has the right to market certain
die-cast products under the well-recognized "Revell" trademark. These licensing
arrangements enable the Company to manufacture and distribute distinctive
collectibles and other products to the growing market of motorsports
enthusiasts.
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. During fiscal 1997, the Company acquired Sports Image, Motorsport
Traditions, RYP, Image Works, and Simpson. In addition, during fiscal 1997, the
Company entered into strategic alliances with Hasbro, NASCAR, and several of
the most popular Winston Cup racing teams. In the first two quarters of fiscal
1998, the Company (i) acquired the assets related to the motorsports die-cast
collectible product lines of Revell and entered into a strategic alliance with
Revell involving extensive product licensing and distribution arrangements;
(ii)
22
<PAGE>
entered into an exclusive license arrangement with Richard Childress Racing
Enterprises, Inc. that gives the Company rights with respect to several of the
most popular racing teams; (iii) completed the Rusty Wallace Acquisition; (iv)
acquired Brookfield; and (v) made a $1.0 million equity investment in LBE
Technologies, Inc. ("LBET") and entered into a strategic alliance with LBET
that provides the Company with exclusive merchandising rights at each of LBET's
"NASCAR Silicon Motor Speedway" centers.
Expanding Existing and Identifying New Distribution Channels
The Company plans to continue to expand its existing distribution channels
and to identify new distribution channels. Prior to the Company's fiscal 1997
acquisitions, 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 fiscal 1997
acquisitions of Sports Image and Motorsport Traditions, which distributed
products directly to many of those 5,000 specialty retailers, also add
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. As a result of the Revell Acquisition, the Company markets certain of
the Company's die-cast collectibles to hobby shops where Revell's model kits
currently are sold. The acquisition of Image Works provided the Company with
immediate access to mass merchandising channels for its licensed motorsports
apparel and other products through large retailers, such as Wal-Mart, K-Mart,
and Target, as well as Image Works' catalog merchandising programs targeted at
corporate motorsports sponsors. 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, distributing its products in international markets,
and developing on-line ordering capabilities on its Internet website may
represent increasingly important new distribution channels in the future.
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, in fiscal 1997 the Company 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 also recently completed promotional programs for "NAPA" auto
parts and "Jurassic Park -- The Ride." In conjunction with Miller Brewing
Company and other corporate sponsors, the Company has developed and implemented
a promotional program in which Rusty Wallace and John Force will drive
specially painted "Elvis Presley" cars at selected races in 1998. The Company
and the corporate sponsors will market a broad variety of die-cast vehicles and
other collectibles, apparel, and souvenirs based on the "Elvis" program. The
Company plans to pursue additional 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-spinning 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, 1:43rd, 1:24th, and
1:18th scale replicas of actual racing vehicles, which are approximately three
inches, five inches, eight inches, and eleven inches long, respectively; (ii)
1:96th and 1:64th scale racing vehicle transporters; (iii) a 1:16th scale pit
wagon; and (iv) 1:24th
23
<PAGE>
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 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 "Craftsman
Truck" series in fiscal 1995 and introduced its line of Top Fuel Funny Car
replicas in fiscal 1996. In addition, during the second half of fiscal 1997 the
Company introduced the "Elite" series of die-cast replicas of NASCAR racing
vehicles, which feature highly detailed equipment such as spark plug wires,
braided hoses, and realistic suspension systems. The Company sells the Elite
series of collectibles exclusively through the Collectors' Club for
approximately $75.00 per replica vehicle.
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, souvenirs, and
other consumer products, including t-shirts, jackets, hats, miniature replica
helmets, coffee mugs, pins, and key chains. Each of the motorsports consumer
products generally features the name, likeness, and car number of a popular
race car driver. The Company intends to acquire licenses with additional
drivers and to develop new motorsports consumer products, including items
bearing the "NASCAR" name and logo in connection with the Company's license
agreement with NASCAR. The Company's licensed motorsports apparel items utilize
unique and creative designs that are printed or applied to high-quality shirts,
hats, jackets, and other products. The Company designs and sells its
motorsports apparel products in sizes ranging from infant to youth to men's and
women's adult sizes. The Company designs its motorsports consumer products
primarily for high-volume distribution through retail outlets, mobile trackside
stores, 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 line of motorsports-related
products specifically designed for the mass-merchandise market. See "Business
- -- Licenses." 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 may 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 enables 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
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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 seven-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
Collectors' Club, through mobile trackside stores, and through corporate
promotional programs. The Company markets its motorsports consumer products
primarily through direct trackside sales to race fans; through an in-house
sales force and independent representatives to approximately 5,000 specialty
retailers and to major discount and department stores, retail automotive
product outlets, and convenience stores; and through promotional programs with
corporate sponsors.
Wholesale Distribution
Die-Cast Collectibles. The Company markets its die-cast collectibles on a
wholesale basis through approximately 30 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. As a result of the
Revell Acquisition, the Company markets certain of the Company's die-cast
collectibles to hobby shops where Revell's model kits currently are sold.
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.
Consumer Products. The Company's in-house sales force and independent
representatives market certain motorsports consumer products on a wholesale
basis to major discount and department stores, such as Wal-Mart, K-Mart, and
Target, to automotive retail stores, and to convenience stores. The
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Company also utilizes its distributor network as well as an in-house sales
force and independent representatives 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.
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
approximate 123,000 members as of March 31, 1998. 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.
Following the acquisitions of Sports Image and Motorsport Traditions, the
Company developed a line of licensed motorsports apparel and souvenirs to offer
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.
The Company employs customer service representatives and an automated call
distribution telephone system to take membership applications, take customer
orders, and handle customer inquiries. The Company utilizes an advanced
telephone and computer system that combines telemarketing functions,
computerized order processing, and automated warehouse operations to answer and
process telephone orders to its Collectors' Club more effectively and
efficiently and to accommodate the significant growth in club membership in
recent years. The system also enables the Company to track the effectiveness of
each advertisement and to target its marketing and advertising programs
accurately for enhanced impact.
Trackside Sales
Average attendance at NASCAR Winston Cup racing events grew to
approximately 190,000 fans per race during 1997. The Company currently operates
20 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 (32 events in 1997) as well as to other
selected racing events. Each mobile trackside store is decorated with the logos
and color scheme of a particular racing team and driver and sells a complete
assortment of licensed motorsports apparel, souvenirs, and die-cast
collectibles dedicated to that team and driver. These mobile stores represent
the only trackside opportunities for racing enthusiasts to purchase motorsports
products using the name and likeness of the driver and racing team featured in
each store. In connection with the Revell Acquisition, the Company acquired the
exclusive rights to market "Revell" plastic model kits at trackside stores at
all NASCAR, NHRA, and other major motorsports events throughout the United
States.
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 one of its manufacturers in China. The
manufacturer produces a sample or model, which the Company then inspects for
quality
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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 (other than products sold under the
"Revell" trademark) are manufactured under an exclusive agreement with a
third-party manufacturer in China. The term of the agreement currently extends
through December 31, 1998 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 $7.0 million in tooling for its
proprietary line of die-cast collectibles in fiscal 1996 and fiscal 1997,
respectively. The Company believes the breadth and quality of the tooling
program provides the Company with a competitive advantage in the motorsports
collectible market. The Company intends to make additional investments in
tooling in order to support the growth of its business. The Company also devotes
a significant amount of time and effort to the production of its die-cast
collectibles to ensure that the resulting products display a level of quality
and detail that is superior to competing products, including opening hoods and
trunks, detailed engines, working suspensions, and pad printing instead of
stickers or decals. The Company believes that its overseas manufacturer of
die-cast collectibles is dedicated to high quality and productivity as well as
support for new product development. An affiliate of the Company's China-based
die-cast manufacturer currently owns 450,000 shares of the Company's Common
Stock. The Company believes that this ownership interest further aligns the
interests of the manufacturer with those of the Company.
In connection with the Revell Acquisition, the Company acquired the
tooling and dies utilized to manufacture the Revell-trademarked lines of
die-cast products. These tools and dies are located at the facilities of two
additional third-party manufacturers in China, and the Company has made
arrangements with those manufacturers to continue producing the
Revell-trademarked die-cast products for the Company. The Company believes that
its new third-party manufacturers have demonstrated their ability to produce
high-quality die-cast products and are committed to maintaining their standards
of quality and productivity following the Revell Acquisition. The Company
intends to make additional investments in the tooling utilized in manufacturing
these new product lines in order to support the growth in sales of
Revell-trademarked products, to develop and introduce new lines of
Revell-trademarked products, and to ensure that those products are manufactured
to the Company's standards of quality. Although the Company believes that its
new manufacturing arrangements will provide the Company some protection against
the risks inherent in relying on a single manufacturer for its die-cast
products, the Company currently does not have a formal, long-term arrangement
with either of its new third-party manufacturers. See "Risk Factors --
Dependence on Third Parties for Manufacturing."
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 most of such products on a purchase order basis with
third-party manufacturers located primarily in the United States. As a result
of its recent acquisition of Image Works, the Company now screen prints and
embroiders a portion of the licensed motorsports apparel that it sells. The
Company's graphic artists and product designers seek to develop unique products
and artistic designs that will appeal to motorsports enthusiasts and
distinguish the Company's apparel and souvenir products from those of its
competitors. The Company's artists and designers also work closely with the
third-party manufacturers in order to ensure that the products conform to
design specifications and meet or exceed quality requirements. The Company
believes that a number of alternative manufacturers for each of these products
is readily available in the event that the Company is unable to obtain products
from any particular manufacturer. The Company owns the tooling and dies used to
manufacture certain of its motorsports consumer products. As the Company
develops new motorsports consumer products that require specialized tooling,
the Company intends to build or purchase the new tooling that will be required
to permit the third-party manufacturers to produce those items.
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Licenses
Product Licenses
The Company focuses on developing long-term relationships with and engages
in comprehensive efforts to license the most popular drivers and car owners in
each top racing category, their sponsors, and others in the motorsports
industry. The Company currently has licenses with approximately 300 race car
drivers, car owners, and car sponsors as well as with NASCAR, Ford Motor
Company, several divisions of General Motors Corp., and PACCAR, Inc. (the
manufacturer of Kenworth and Peterbilt trucks). The Company continually strives
to strengthen its relationships with licensors and to develop opportunities to
market innovative collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with top race car
drivers, such as seven-time Winston Cup champion Dale Earnhardt, 1995 and 1997
Winston Cup champion Jeff Gordon, 1989 Winston Cup champion Rusty Wallace,
seven-time NHRA Funny Car champion John Force, Kenny Bernstein, 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, Jeff Gordon, Rusty Wallace,
and certain race car team owners, 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. The Company
continually 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 connection with the acquisition of Sports Image, the Company entered
into a license agreement with Dale Earnhardt (the "Earnhardt License") under
which the Company has the right to market licensed motorsports products
utilizing the likeness of Mr. Earnhardt. Under the Earnhardt License, Mr.
Earnhardt also granted the Company the right of first refusal to make, have
made, use, sell, or otherwise distribute any new licensable products that Mr.
Earnhardt becomes aware of and approves for marketing. The Earnhardt License
also provides that Mr. Earnhardt will not personally market and will not permit
others to market, through the same channels of distribution used by the
Company, any products bearing his likeness that are the same as or similar to
products marketed by the Company under the Earnhardt License. The term of the
Earnhardt License extends to November 2011 and from year to year thereafter
unless terminated by either party.
Jeff Gordon License and Endorsement Agreements
In connection with the acquisition of Motorsport Traditions, the Company
entered into license agreements with an affiliate of Jeff Gordon under which
the Company acquired (i) the exclusive rights to
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manufacture and market various apparel and souvenir products bearing the name,
likeness, and signature of Mr. Gordon and the likeness of his race car and (ii)
the exclusive right to manufacture and market die-cast replicas of Mr. Gordon's
race car and related vehicles (the "Gordon Licenses"). The Gordon Licenses, as
amended, expire on December 31, 2005, subject to renewal by agreement between
the parties. The Gordon Licenses require 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 Licenses, the Company also 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, the Company has 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, apparel, and souvenirs
produced under the Gordon Licenses. The Endorsement Agreement, as amended,
expires on December 31, 2005.
Rusty Wallace License Agreement
In connection with the Rusty Wallace Acquisition, the Company entered into
a license agreement (the "Wallace License") with an affiliate of Rusty Wallace.
Pursuant to the Wallace License, the Company has the right to market certain
products bearing the name or likeness of Mr. Wallace and a right of first
refusal to make, have made, use, sell, or otherwise distribute any new
licensable products that bear the name or likeness of Mr. Wallace. The Wallace
License also provides that Mr. Wallace will not personally market and will not
permit others to market, through the same channels of distribution used by the
Company, any products bearing his likeness that are the same as or similar to
products marketed by the Company under the Wallace License. The Wallace 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 if certain minimum sales
requirements are met. The Wallace License expires on December 31, 2004, subject
to two five-year renewal options by agreement between the parties.
Significant Team Owner Licenses
During fiscal 1997, the Company entered into license agreements with
several of the most popular NASCAR race car team owners (the "Team Owner
Licenses"), including Robert Yates Racing, Inc., Richard Childress Racing
Enterprises, Inc., Joe Gibbs Racing, Inc., and Dale Earnhardt, Inc. Popular
drivers currently driving for these racing teams include Dale Jarrett, Bobby
Labonte, Kenny Irwin, Jr., Tony Stewart, Ron Hornaday, and Mike Skinner. The
Team Owner Licenses provide the Company with either the exclusive right or a
right of first refusal to market products bearing the likeness and number of
each owner's Winston Cup cars and certain other racing vehicles. To the extent
that the Company exercises its right of first refusal, the Team Owner Licenses
provide that the licensor will not permit others to market, through the same
distribution channels used by the Company, any of the licensed products.
Certain of the Team Owner Licenses also provide that the licensors will not
directly market any of the licensed products through such channels. The Team
Owner Licenses provide for terms ranging from 3 to 15 years. Each of the
license agreements with the team owners requires the Company to pay the
licensor royalties based on a percentage of the wholesale price of licensed
products sold by the Company. Certain of the license agreements also provide
for minimum royalty payments to the licensors.
Revell License Agreement
In connection with the Revell Acquisition, the Company entered into a
license agreement with Revell (the "Revell License") that gives the Company the
exclusive right to use the "Revell Racing," "Revell Select," and "Revell
Collection" trademarks in connection with sales of NASCAR, NHRA, and certain
other motorsports-related die-cast collectibles in the United States and
Canada. In addition, under the Revell License the Company has a non-exclusive
right to use the Revell trademarks described above in connection with up to
$5.0 million per year of sales of NASCAR, NHRA, and certain other
motorsports-related die-cast products outside the United States and Canada. The
term of the Revell License runs through December 31, 2007, at which time it
will automatically renew for successive one-year terms unless either party
elects to terminate by giving written notice at least 90 days prior to the end
of the initial term or any successive one-year term.
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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 is responsible for and pays or reimburses 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 pays 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 funds all capital requirements for this
product line and manufactures, distributes, and markets the products under the
"Winner's Circle" brand name. This product line has been recently introduced to
mass-market retailers. The mass-market die-cast products manufactured and
marketed under the Hasbro License are completely distinct from the Company's
current products and do not compete directly with the Company's limited-edition
motorsports die-cast collectible products.
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. Under the
NASCAR license, the Company is an official licensee of the "NASCAR 50th
Anniversary" program and has developed 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's motorsports die-cast collectibles compete
with die-cast and other motorsports collectibles and, to a certain extent,
die-cast replicas of motorsports vehicles that are sold through mass retail
channels. 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.
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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 $6.0 million of such products
as of March 31, 1998.
Trademarks and Patent Rights
Although the Company's business historically has not depended on trademark
or patent protection, the Company recognizes the increasing value of its
various trade names and marks. The Company is taking steps designed to protect,
maintain, and increase the value of its trade names and marks. The Company
does, however, license valuable trademarks and other rights from third parties.
See "Business -- Licenses."
Insurance
The Company maintains a $2.0 million product liability insurance policy to
cover the sale of its die-cast and other products. The Company maintains an
additional $5.0 million in commercial umbrella liability coverage. The Company
also maintains a $6.0 million insurance policy to cover its molds and dies
located at its primary third-party die-cast manufacturer in China and a $5.0
million insurance policy to cover lost revenue in the event of certain
interruptions of business with its primary overseas manufacturer of die-cast
collectibles. The Company believes its insurance coverage is adequate.
Litigation
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 alleged class of plaintiffs consists of all
purchasers of souvenirs or merchandise from licensed vendors at any NASCAR
Winston Cup race or supporting event during the period commencing January 1,
1991. The Company was named as a defendant based upon actions alleged to have
been taken by Sports Image, Inc., a North Carolina corporation ("Sports Image
N.C.") and Creative Marketing & Promotions, Inc. ("CMP") prior to the Company's
acquisitions of the assets and capital stock, respectively, of those entities.
The actions were subsequently consolidated by order of the court. The caption
of the consolidated action is "In re Motorsports Merchandise Antitrust
Litigation" and the files are maintained under Master File No. 1-97-CV-0569-CC.
On May 30, 1997, a consolidated amended complaint was filed, which deleted the
Company as a defendant with respect to claims based upon actions alleged to
have been taken by Sports Image N.C. and named the Company's wholly owned
subsidiary, Sports Image, Inc., an Arizona corporation ("Sports Image AZ"), as
a defendant with respect to those claims. The Company remains a defendant with
respect to claims based upon actions alleged to have been
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taken by CMP. On July 31, 1997, the Company acquired all of the outstanding
capital stock of RYP, which is another defendant in this matter. Accordingly,
the Company has assumed the defense of this matter with respect to claims based
upon actions alleged to have been taken by RYP and will be responsible for
costs, fees, expenses, damages, payments, credits, rebates, and penalties, if
any, arising out of this matter with respect to RYP. The seller of RYP has
agreed to be responsible for amounts, if any, in excess of $400,000 (the
"$400,000 Cap"). The $400,000 Cap excludes attorneys fees and certain other
costs and expenses that the Company may incur in defending or settling this
matter. 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. On August 1, 1997, answers were filed on behalf of the
Company and Sports Image AZ denying the allegations of the complaint. Pursuant
to an agreement between the plaintiffs and Sports Image AZ to toll the running
of the statute of limitations with respect to any claims against Sports Image
AZ, on November 17, 1997 the plaintiffs filed a motion to dismiss Sports Image
AZ from the case without prejudice. On March 20, 1998, the court granted that
motion and Sports Image AZ was dismissed from the case without prejudice. On
March 2, 1998, the plaintiffs filed, pursuant to an order of the court, a
second consolidated amended complaint intended to set forth certain of the
allegations with greater specificity. The parties currently are conducting
class discovery. The Company intends to vigorously defend the claims asserted
in this lawsuit.
On June 4, 1997, Petty Enterprises, Inc. Licensing Division filed a
lawsuit against the Company and Fred W. Wagenhals. The plaintiff alleged that
the Company engaged in trademark infringement and other improper activities
with respect to sales of products licensed by Petty Enterprises, Inc. The
Company and Mr. Wagenhals filed an answer denying the plaintiff's allegations;
the Company filed counterclaims against the plaintiff for various claims,
including breach of contract, defamation and damage to reputation, and tortious
interference with prospective business relationships; and Mr. Wagenhals filed
counterclaims against the plaintiff for defamation and damage to reputation. In
addition, the Company and Mr. Wagenhals collectively filed a third-party
complaint against Brett Nelson, an affiliate of the plaintiff, for various
claims, including defamation and damage to reputation. Petty Enterprises, Inc.
filed an answer denying the allegations in the counterclaims and Mr. Nelson
filed an answer denying the allegations against him. The court denied motions
to dismiss by all parties, and on March 6, 1998, the parties reached an
agreement to resolve their differences. Under the financial terms of the
agreement, the Company will pay a total of approximately $700,000 to Petty
Enterprises, Inc. as payment in full for royalties and other fees in connection
with licenses for future sales of certain products. The settlement, however, is
subject to the execution of definitive settlement agreements.
Employees
As of May 15, 1998, the Company had 572 full-time employees. 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.
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SELLING SECURITYHOLDERS
The Notes were originally issued by the Company in a private placement on
March 18, 1998, to NationsBanc Montgomery Securities LLC, CIBC Oppenheimer
Corp., EVEREN Securities, Inc., and Piper Jaffray Inc. (the "Initial
Purchasers") and were simultaneously offered and sold by the Initial
Purchasers, in transactions exempt from the registration requirements of the
Securities Act, (a) within the Untied States to persons that the Initial
Purchasers reasonably believed to be "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and to a limited number of
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act), and (b) outside the United States to certain
persons in reliance on Regulation S under the Securities Act. The Selling
Securityholders may from time to time offer and sell all or any portion of the
Notes and Conversion Shares pursuant to this Prospectus. The term "Selling
Securityholder" includes the Holders listed below and the beneficial owners of
the Notes or Conversion Shares and their respective transferees, pledgees,
donees, or other successors.
The following table sets forth the name of certain of the Selling
Securityholders and (i) the amount of Notes beneficially owned by each such
Selling Securityholder may be offered for the account of such Selling
Securityholder under this Prospectus and the number of Conversion Shares
beneficially owned by each such Selling Securityholder may be offered for the
account of such Selling Securityholder under this Prospectus.
<TABLE>
<CAPTION>
Principal Percentage of Number of
Amount of Total # Conversion Percentage of
Name of Notes That Outstanding Shares Shares That Common Stock
Selling Securityholder May Be Sold Notes Held May Be Sold(1) Outstanding(2)
- ---------------------- ----------- ----- ---- -------------- --------------
<S> <C> <C> <C> <C> <C>
</TABLE>
[Selling Securityholder information will be completed
via amendment to the Registration Statement prior to effectiveness]
- ------------
* Less than 1%
(1) Assumes conversion of the full amount of Notes held by such Selling
Securityholder into Common Stock at the initial conversion price of $48.20
per share. Except as otherwise indicated, also assumes that the Selling
Securityholder or any future transferees, pledgees, donees or successors
of or from such Selling Securityholder do not beneficially own any Common
Stock other than the Common Stock issuable upon conversion of the Notes.
The conversion price and the number of shares of Common Stock issuable
upon conversion of the Notes are subject to adjustment under certain
circumstances. Accordingly, the number of shares of Common Stock issuable
upon conversion of the Notes may increase or decrease from time to time.
Under the terms of the Indenture, the Company will pay cash in lieu of
issuing fractional shares upon conversion of the Notes. See "Description
of Notes -- Conversion Rights."
(2) Calculated based upon shares of Common Stock outstanding as of ,
1998. The percentages shown include the shares of Common Stock actually
owned as of , 1998 and the shares of Common Stock that the identified
person had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of Common Stock that
the identified person had the right to acquire within 60 days of ,
1998 are deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by such person, 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.
The Selling Securityholders may, pursuant to this Prospectus, offer all or
some portion of the Notes and Common Stock they presently hold or, with respect
to Common Stock, have the right to acquire upon conversion of such Notes.
Although each of the Selling Securityholders is assumed to be selling all of
the Notes or Conversion Shares beneficially owned by such person, no estimate
can be given as to the amount
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<PAGE>
of the Notes and Common Stock that will be held by the Selling Securityholders
upon termination of any such sales. In addition, since the date on which they
provided the information regarding their Notes and Common Stock, the Selling
Securityholders identified above may have sold, transferred or otherwise
disposed of all or a portion of their Notes and Common Stock in transactions
exempt from the registration requirements of the Securities Act. See "Plan of
Distribution."
Only those Selling Securityholders who beneficially own the Notes and
Conversion Shares set forth opposite each such Selling Securityholder's name in
the foregoing table on the effective date of the Registration Statement may
sell such Notes and Common Stock pursuant to this Prospectus. The Company may
from time to time, in accordance with the Registration Rights Agreement (as
defined herein), include additional Selling Securityholders in supplements to
this Prospectus.
None of the Selling Securityholders listed above had any material
relationship with the Company other than as a result of ownership of the Notes,
within the three-year period ending on the date of this Prospectus.
DESCRIPTION OF NOTES
The Notes were issued under an indenture dated as of March 24, 1998 (the
"Indenture") between the Company and First Union National Bank, as trustee (the
"Trustee"). The following summaries of certain provisions of the Indenture do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Indenture and the
Registration Rights Agreement, as described below, including the definition
therein of certain terms. Wherever particular sections or defined terms of the
Indenture are referred to, such sections or defined terms are incorporated
herein by reference. Copies of the form of Indenture are available from the
Company or the Initial Purchasers upon request.
General
The Notes are general unsecured subordinated obligations of the Company,
are limited to $100,000,000 in aggregate principal amount, and will mature on
April 1, 2005 ("Maturity"). The Notes have an interest rate of 4 3/4% per
annum from the date of initial issuance pursuant to the Indenture or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semi-annually on April 1 and October 1 of each year, commencing
October 1, 1998, to the Person in whose name such Notes (or any predecessor
Notes) are registered (individually, a "Holder" and collectively, the
"Holders") at the close of business on the preceding March 15 or September 15,
as the case may be (whether or not a Business Day). Interest on the Notes will
be paid on the basis of a 360-day year consisting of twelve 30-day months.
Principal of, and premium, if any, interest, and liquidated damages, if
any, on the Notes are payable in same day funds, at the office of the Trustee
in Atlanta, Georgia, or at such other office or agency that the Company may
maintain pursuant to the Indenture. The Notes may be surrendered for transfer,
exchange, or conversion at the office of the Trustee in Atlanta, Georgia, or at
such other office or agency that the Company may maintain pursuant to the
Indenture. In addition, with respect to Notes held of record by Holders other
than DTC or its nominee, payment of interest may be made at the option of the
Company by check mailed to the address of the Holders entitled thereto as it
appears in the Note Register for the Notes on the Regular Record Date for such
interest.
The Notes were issued only in registered form, without coupons and in
denominations of $1,000 or any integral multiple thereof. No service charge
will be made for any transfer or exchange of the Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge and any other expenses (including the fees and expenses of the Trustee)
payable in connection therewith. The Company and the Note Registrar are not
required (i) to issue or register the transfer of or exchange of any Notes
during a period beginning at the opening of business 15 days before the day of
the mailing of a notice of redemption and ending at the close of business on
the day of such mailing, (ii) to register the transfer of or exchange of any
Note selected for redemption in whole or in part, except the
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<PAGE>
unredeemed portion of Notes being redeemed in part, or (iii) to register the
transfer or exchange of any Notes surrendered for conversion or for repurchase
upon the occurrence of a Repurchase Event.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of, and premium, if any, interest, and liquidated,
damages, if any, on any Note which remain unclaimed for two years after such
principal, premium, interest, or liquidated damages, if any, become due and
payable shall be repaid to the Company. Thereafter, the Holder of such Note
may, as an unsecured general creditor, look only to the Company for payment
thereof.
The Indenture does not contain any provisions that would afford protection
to Holders of the Notes against a sudden and dramatic decline in the credit
quality of the Company resulting from any takeover, recapitalization, or
similar restructuring, except as described under "Description of Notes --
Certain Rights to Require Repurchase of Notes."
Conversion Rights
The Notes are convertible, at the option of the Holder, into shares of
Common Stock prior to redemption or final maturity at the initial conversion
price of $48.20 per share. The right to convert Notes that have been called for
redemption will terminate at the close of business on the second business day
preceding the Redemption Date, unless the Company defaults on a redemption
payment. See "Description of Notes -- Optional Redemption."
The conversion price is subject to adjustments upon the occurrence of any
of the following events: (i) the subdivision, combination or reclassification
of outstanding shares of Common Stock; (ii) the payment of a dividend or
distribution on Common Stock exclusively in shares of Common Stock or the
payment of a dividend or distribution which includes shares of Common Stock on
any class of capital stock of the Company; (iii) the issuance of rights or
warrants to all holders of Common Stock entitling them to acquire shares of
Common Stock (or securities convertible into Common Stock) at a price per share
less than the Current Market Price; (iv) the distribution to all holders of
Common Stock of shares of capital stock (other than Common Stock), evidences of
indebtedness, cash or assets (including securities, but excluding dividends or
distributions in connection with the liquidation, dissolution, or winding up of
the Company or paid exclusively in cash and dividends, distributions, rights
and warrants referred to above); (v) the distribution to all holders of Common
Stock of rights or warrants to subscribe for the Company's securities (other
than those referred to in (iii) above); (vi) a distribution consisting
exclusively of cash (excluding any cash distributions referred to in (iv)
above) to all holders of Common Stock in an aggregate amount that, together
with (A) all other cash distributions (excluding any cash distributions
referred to in (iv) above) made within the 12 months preceding the date fixed
for determining the shareholders entitled to such distribution in respect of
which no adjustment has previously been made and (B) any cash and the fair
market value of other consideration payable in respect of any tender offer by
the Company or a subsidiary of the Company for Common Stock consummated within
the 12 months preceding such date of determination, exceeds the greater of (1)
10% of the product of the Current Market Price on such date of determination
times the number of shares of Common Stock outstanding on such date or (2) the
Company's retained earnings on the date fixed for determining the shareholders
entitled to such distribution; (vii) the consummation of a tender offer made by
the Company or any subsidiary of the Company for all or any portion of Common
Stock which involves an aggregate consideration that, together with (X) any
cash and the fair market value of other consideration payable in respect of any
tender offer by the Company or a subsidiary of the Company for Common Stock
consummated within the 12 months preceding the consummation of such tender
offer in respect of which no adjustment has been previously made and (Y) the
aggregate amount of all cash distributions (excluding any cash distributions
referred to in (iv) above) to all holders of the Common Stock within the 12
months preceding the consummation of such tender offer in respect of which no
adjustment has been previously made, exceeds the greater of (A) 10% of the
product of the Current Market Price immediately prior to the date of
consummation of such tender offer times the number of shares of Common Stock
outstanding at the date of consummation of such tender offer or (B) the
Company's retained earnings on the date of consummation of the tender offer;
and (viii) payment in respect of a tender offer or exchange offer by a person
other than the Company or any subsidiary of the Company in which, as of the
closing date of the
35
<PAGE>
offer, the Board of Directors is not recommending rejection of the offer. The
adjustment referred to in clause (viii) will only be made if the tender offer
or exchange is for an amount that increases the offeror's ownership of Common
Stock to more than 25% of the total shares of Common Stock outstanding, and if
the cash and value of any other consideration included in such payment per
share of Common Stock exceeds the Current Market Price per share of Common
Stock on the business day next succeeding the last date on which tenders or
exchanges may be made pursuant to such tender or exchange offer. The adjustment
referred to in clause (viii) will generally not be made, however, if, as of the
closing of the offer, the offering documents with respect to such offer
disclose a plan or an intention to cause the Company to engage in a
consolidation or merger of the Company or a sale of all or substantially all of
the Company's assets. No adjustment of the conversion price will be required to
be made until cumulative adjustments amount to at least one percent of the
conversion price, as last adjusted. Any adjustments that would not otherwise be
sufficient to require a change to be made pursuant to the immediately preceding
sentence shall be carried forward and taken into account in any subsequent
adjustment.
In addition to the foregoing adjustments, the Company is permitted to
reduce the conversion price as it considers to be advisable in order that any
event treated for federal income tax purposes as a dividend of stock or stock
rights will not be taxable to the holders of the Common Stock or, if that is
not possible, to diminish any income taxes that are otherwise payable because
of such event. See "Certain Federal Income Tax Considerations."
In the case of any consolidation or merger of the Company with any other
corporation (other than one in which no change is made in the Common Stock), or
any sale, or transfer of all or substantially all of the assets of the Company,
the Holder of any Note then outstanding will, with certain exceptions, have the
right thereafter to convert such Note only into the kind and amount of
securities, cash, and other property receivable upon such consolidation,
merger, sale, or transfer by a holder of the number of shares of Common Stock
into which such Note might have been converted immediately prior to such
consolidation, merger, sale, or transfer, and adjustments will be provided for
events subsequent thereto that are as nearly equivalent as practical to the
conversion price adjustments described in the Indenture.
In the case of any Note that has been converted into Common Stock after
any Record Date, but on or before the next Interest Payment Date, interest, the
stated due date of which is on such Interest Payment Date, shall be payable on
such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the Holder of such Note who is a Holder on such Record Date.
Any Note converted after any Record Date but before the next Interest Payment
Date (other than Notes called for redemption) must be accompanied by payment of
an amount equal to the interest payable on such Interest Payment Date on the
principal amount of Notes being surrendered for conversion; provided that no
such payment shall be required with respect to interest payable on Notes called
for redemption on April 1, 2001. No fractional shares of Common Stock will be
issued upon conversion but, in lieu thereof, an appropriate amount will be paid
in cash by the Company based on the market price of Common Stock (determined in
accordance with the Indenture) at the close of business on the day of
conversion. As a result of the foregoing provisions, Holders that surrender
Notes for conversion on a date that is not an Interest Payment Date will not
receive any interest for the period from the Interest Payment Date next
preceding the date of conversion to the date of conversion or for any later
period, except for Notes that are called for redemption on a Redemption Date
between a Record Date and the corresponding Interest Payment Date as provided
above. No other payment or adjustment for interest or dividends will be made
upon conversion.
Subordination
The payment of the principal of, and premium, if any, interest, and
liquidated damages, if any, on the Notes is, to the extent set forth in the
Indenture, subordinated in right of payment to the prior payment in full of all
Senior Indebtedness. If there is a payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, marshalling of assets, or any
bankruptcy, insolvency, or similar proceedings of the Company, the holders of
all Senior Indebtedness will be entitled to receive payment in full of all
amounts due or to become due thereon or provision for such payment in money or
money's worth before the Holders of the Notes will be entitled
36
<PAGE>
to receive any payment in respect of the principal of, or premium, if any,
interest, or liquidated damages, if any, on the Notes. In the event of the
acceleration of the Maturity of the Notes, the holders of all Senior
Indebtedness then-outstanding will first be entitled to receive payment in full
in cash of all amounts due thereon, or provision for such payment in money or
money's worth, before the Holders of the Notes will be entitled to receive any
payment for the principal of, or premium, if any, interest, or liquidated
damages, if any, on the Notes. The Company also may not make any payment
(whether by redemption, purchase, retirement, defeasance or otherwise) to the
Holders upon or in respect of the Notes if (i) a default in the payment of the
principal of, or premium, if any, or interest on any Designated Senior
Indebtedness (a "Payment Default") occurs or (ii) any other default occurs and
is continuing with respect to any Designated Senior Indebtedness that permits
holders of Designated Senior Indebtedness as to which that default relates to
accelerate its maturity (a "Nonpayment Default") and the Trustee receives
notice of that default (a "Payment Blockage Notice") from a person permitted to
give such notice under the Indenture. The payments on or in respect of the
Notes shall be resumed (i) in the case of a Payment Default respecting
Designated Senior Indebtedness, on the date on which that default is cured or
waived and (ii) in the case of a Nonpayment Default respecting Designated
Senior Indebtedness, the earliest of (a) the date on which that Nonpayment
Default is cured or waived, (b) the date the applicable Payment Blockage Notice
is retracted by written notice to the Trustee from a representative of the
holders of the Designated Senior Indebtedness that have given such Payment
Blockage Notice, or (c) 179 days after the date on which the applicable Payment
Blockage Notice is received by the Trustee if the maturity of such Designated
Senior Indebtedness has not been accelerated, unless any Payment Default has
occurred and is continuing or an Event of Default of the type referred to in
clause (g) of the first sentence under "Description of Notes -- Events of
Default" has occurred. No Nonpayment Default that existed or was continuing on
the date of any Payment Blockage Notice may be made the basis for giving a
second Payment Blockage Notice and only one such Payment Blockage Notice with
respect to a Nonpayment Default may be given in any 365-day period.
"Senior Indebtedness" is defined in the Indenture as the principal of and
premium, if any, and interest on (a) all indebtedness of the Company for money
borrowed under the Company's credit facilities and any predecessor or successor
credit facilities thereto, whether outstanding on the date of execution of the
Indenture or thereafter created, incurred or assumed; (b) any other
indebtedness of the Company for money borrowed, whether outstanding on the date
of execution of the Indenture or thereafter created, incurred or assumed,
except any such other indebtedness that by the terms of the instrument or
instruments by which such indebtedness was created or incurred expressly
provides that it (i) is junior in right of payment to the Notes or (ii) ranks
pari passu in right of payment with the Notes; and (c) any amendments,
renewals, extensions, modifications, refinancings, and refundings of any of the
foregoing. The term "indebtedness for money borrowed" when used with respect to
the Company is defined to mean (1) any obligation of or any obligation
guaranteed by, the Company for the repayment of borrowed money (including
without limitation fees, penalties, and other obligations in respect thereof),
whether or not evidenced by bonds, notes, or other written instruments, (2) any
deferred payment obligation of, or any such obligation guaranteed by, the
Company for the payment of the purchase price of property or assets evidenced
by a note or similar instrument, and (3) any obligation of, or any such
obligation guaranteed by, the Company for the payment of rent or other amounts
under a lease of property or assets which obligation is required to be
classified and accounted for under generally accepted accounting principles as
a capitalized lease on the balance sheet of the Company. For a description of
the Company's existing indebtedness, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." As used in the Indenture, "Designated Senior Indebtedness" means
principal, interest, premiums, fees, indemnification amounts, reimbursements,
damages, and other liabilities payable under the documentation governing any
indebtedness (a) under any debt facility with banks or other lenders that
provides for revolving credit loans, term loans, receivables financing
(including through the sale of receivables) or letters of credit to the Company
or any of its subsidiaries, and (b) any other Senior Indebtedness the principal
amount of which is $5.0 million or more and that has been designated by the
Company as "Designated Senior Indebtedness."
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<PAGE>
The Indenture does not limit or prohibit the incurrence of indebtedness,
including Senior Indebtedness, by the Company or its subsidiaries. As of
February 28, 1998, the Company had approximately $32.3 million in indebtedness
outstanding that constitutes Senior Indebtedness. The Company expects to incur
Senior Indebtedness from time to time in the future.
Optional Redemption
The Company may, at its option, redeem the Notes in whole or in part from
time to time, at any time on or after April 1, 2001, and prior to maturity upon
notice mailed not less than 30 nor more than 60 days prior to the Redemption
Date to each Holder of Notes to be redeemed at the Holder's address appearing
in the Note Register. Subject to the right of Holders of record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date, the Company may redeem the Notes at the
Redemption Prices (expressed as percentages of the principal amount) set forth
in the table below, plus accrued and unpaid interest and liquidated damages, if
any, up to, but excluding the Redemption Date. No sinking fund is provided for
the Notes.
If the Notes are redeemed during the period beginning April 1 in the year
indicated and ending on the succeeding March 31, the redemption prices shall
be:
Redemption
Year Price
---- -----
2001 ............................. 102.71%
2002 ............................. 102.04
2003 ............................. 101.36
2004 ............................. 100.68
2005 ............................. 100.00
Consolidation, Merger, and Sale of Assets
The Indenture provides that the Company will not consolidate with or merge
into any other Person or convey, transfer, or lease its properties and assets
substantially as an entirety to any Person, and the Company will not permit any
Person to consolidate with or merge into the Company unless (a) the Person
formed by such consolidation or into which the Company is merged or the Person
or corporation that acquires the properties and assets of the Company
substantially as an entirety is a corporation, partnership, or trust organized
and validly existing under the laws of the United States or any state thereof
or the District of Columbia and expressly assumes payment of the principal of
and premium, if any, and interest on the Notes and performance and observance
of each obligation of the Company under the Indenture; (b) after consummating
such consolidation, merger, transfer, or lease, no Default or Event of Default
will occur and be continuing; (c) such consolidation, merger, conveyance,
transfer, or lease does not adversely affect the validity or enforceability of
the Notes; and (d) the Company or Successor Person has delivered to the Trustee
an Officer's Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer, or lease complies with the
provisions of the Indenture.
Certain Rights to Require Repurchase of Notes
In the event of any Repurchase Event (as defined below) occurring after
the date of issuance of the Notes and on or prior to Maturity, each Holder of
Notes will have the right, at the Holder's option, to require the Company to
repurchase all or any part of the Holder's Notes on the date (the "Repurchase
Date") that is 30 days after the date the Company gives notice of the
Repurchase Event at a price (the "Repurchase Price") equal to 100% of the
principal amount thereof, together with accrued and unpaid interest and
liquidated damages, if any, to the Repurchase Date. On or prior to the
Repurchase Date, the Company shall deposit with the Trustee or a Paying Agent
an amount of money in same day funds sufficient to pay the Repurchase Price of
the Notes that are to be repurchased on or promptly following the Repurchase
Date.
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Notes when required as described in
the preceding paragraph, will result in an Event of Default under the Indenture
whether or not such repurchase is permitted by the subordination provisions of
the Indenture.
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<PAGE>
On or before the 15th day after the occurrence of a Repurchase Event, the
Company is obligated to mail to all Holders of Notes a notice of the occurrence
of such Repurchase Event and identifying the Repurchase Event, the Repurchase
Date, the date by which the repurchase right must be exercised, the Repurchase
Price, and the procedures that the Holders must follow to exercise the
repurchase right. To exercise the repurchase right, the Holder of a Note must
deliver to the Company (or an agent designated by the Company for such purpose)
and to the Trustee, on or before the close of business on the Repurchase Date,
written notice of the Holder's exercise of such right, together with the
certificates evidencing the Notes with respect to which the right is being
exercised, duly endorsed for transfer.
A "Repurchase Event" shall have occurred upon the occurrence of a Change
in Control (as defined below) or a Termination of Trading (as defined below). A
"Change in Control" shall occur when (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly owned subsidiary of the
Company in which all shares of Common Stock outstanding immediately prior to
the effectiveness thereof are changed into or exchanged for the same
consideration) or (B) pursuant to which the Common Stock would be converted
into cash, securities, or other property, in each case, other than a
consolidation or merger of the Company in which the holders of Common Stock
immediately prior to the consolidation or merger have, directly or indirectly,
at least a majority of the total voting power of all classes of capital stock
entitled to vote generally in the election of directors of the continuing or
surviving corporation immediately after such consolidation or merger in
substantially the same relative proportion as their ownership of Common Stock
immediately before such transaction; (iii) any person, or any persons acting
together that would constitute a "group" for purposes of Section 13(d) of the
Exchange Act, together with any affiliates thereof, shall beneficially own (as
defined in Rule 13d-3 under the Exchange Act) at least 50% of the total voting
power of all classes of capital stock of the Company entitled to vote generally
in the election of directors of the Company; (iv) at any time during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company was approved by a vote of 66 2/3%
of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office; or (v) the Company is
liquidated or dissolved or adopts a plan of liquidation or dissolution. A
"Termination of Trading" shall occur if the Common Stock (or other common stock
into which the Notes are then convertible) is neither listed for trading on a
United States national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
If a Repurchase Event were to occur, there can be no assurance that the
Company would have sufficient funds to repurchase the Notes tendered by the
Holders thereof. The Company's Senior Indebtedness may provide that a change in
control of the Company would constitute an event of default thereunder, in
which case any repurchase of the Notes, absent a waiver, could be blocked by
the subordination provisions of the Notes. In addition, even if such event of
default did not occur or was waived, the right to require the Company to
repurchase Notes as a result of the occurrence of a Repurchase Event could
create an event of default under Senior Indebtedness of the Company, as a
result of which any repurchase of the Notes, absent a waiver, could be blocked
by the subordination provisions of the Notes. See "Description of Notes --
Subordination." The Company's ability to pay cash to the Holders of Notes upon
a Repurchase Event may be limited by certain financial covenants contained in
the Company's Senior Indebtedness. Failure by the Company to repurchase the
Notes when required will result in an Event of Default with respect to the
Notes, whether or not such repurchase is permitted by the subordination
provisions thereof.
In the event a Repurchase Event occurs and the Holders exercise their
rights to require the Company to repurchase Notes, the Company intends to
comply with applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase.
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The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving the
Company that may adversely affect Holders. In addition, the foregoing
provisions may discourage open market purchases of the Common Stock or a
non-negotiated tender or exchange offer for such stock and, accordingly, may
limit a shareholder's ability to realize a premium over the market price of the
Common Stock in connection with any such transaction.
Events of Default
The following are Events of Default under the Indenture with respect to
the Notes: (a) default in the payment of the principal of, or the premium, if
any, on any Note when due (even if such payment is prohibited by the
subordination provisions of the Indenture); (b) default in the payment of any
interest and liquidated damages, if any, on any Note when due and payable,
which default continues for 30 days (even if such payment is prohibited by the
subordination provisions of the Indenture); (c) failure to provide timely
notice of a Repurchase Event as required by the Indenture; (d) default in the
payment of the Repurchase Price in respect of any Note on the Repurchase Date
therefor (even if such payment is prohibited by the subordination provisions of
the Indenture); (e) default in the performance, or breach, of any other
covenant or warranty of the Company in the Indenture which continues for 60
days after written notice as provided in the Indenture; (f) default under one
or more bonds, debentures, notes, or other evidences of indebtedness for money
borrowed by the Company or any subsidiary of the Company or under one or more
mortgages, indentures, or instruments under which there may be issued or by
which there may be secured or evidenced any indebtedness for money borrowed by
the Company or any subsidiary of the Company, whether such indebtedness now
exists or shall hereafter be created, which default individually or in the
aggregate shall constitute a failure to pay the principal of indebtedness in
excess of $10.0 million when due and payable after the expiration of any
applicable grace period with respect thereto or shall have resulted in
indebtedness in excess of $10.0 million becoming or being declared due and
payable prior to the date on which it would otherwise have become due and
payable, without such indebtedness having been discharged, or such acceleration
having been rescinded or annulled, within a period of 30 days after there shall
have been given to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of the Outstanding
Notes (as defined in the Indenture) a written notice specifying such default
and requiring the Company to cause such indebtedness to be discharged or to
cause such acceleration to be rescinded or annulled; and (g) certain events of
bankruptcy, insolvency, or reorganization of the Company or any subsidiary of
the Company.
If an Event of Default with respect to the Notes (other than as specified
in clause (g) in the immediately preceding paragraph) shall occur and be
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes may declare the principal of, and
premium, if any, on all such Notes to be due and payable immediately. If an
Event of Default shall occur as a result of an event of bankruptcy, insolvency,
or reorganization of the Company or any subsidiary of the Company, the
aggregate principal of, premium, if any, any accrued and unpaid interest and
liquidated damages, if any, on the Notes shall automatically become due and
payable. If the Company cures all Events of Default and has paid or deposited
with the Trustee a sum sufficient to pay all interest on, premium, if any, and
principal of Notes then due and certain other conditions are met, such
declaration may be canceled and past defaults may be waived by the Holders of a
majority in principal amount of Outstanding Notes. The Company is required to
furnish to the Trustee annually a statement as to the performance by the
Company of certain of its obligations under the Indenture and as to any default
in such performance. The Indenture provides that the Trustee may withhold
notice to the Holders of the Notes of any continuing default (except in the
payment of the principal of, or premium, if any, or interest on any Notes) if
the Trustee considers it in the interest of Holders of the Notes to do so.
Modification, Amendments, and Waivers
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of Outstanding Notes; provided, however, that no such
modification or amendment may without consent of the Holder of each Outstanding
Note affected thereby (i) change the Stated Maturity of the principal of, or
any installment of interest
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on, any Note; (ii) reduce the principal amount of, or the premium or rate of
interest on, any Note; (iii) change the place of payment where any Note or any
premium or interest thereof is payable; (iv) impair the right of a Holder to
institute suit for the enforcement of any payment on or with respect to any
Note; (v) change the currency in which the Notes are payable; (vi) adversely
affect the right to convert the Notes; (vii) adversely affect the right to
cause the Company to repurchase the Notes; (viii) modify the subordination
provisions in a manner adverse to the Holders of the Notes; or (ix) reduce the
above-stated percentage of aggregate principal amount of Outstanding Notes
necessary for waiver or compliance with certain provisions of the Indenture or
for waiver of certain defaults.
The Indenture may also be modified or amended without the consent of the
Holders (i) to cause the Indenture to be qualified under the Trust Indenture
Act of 1939, as amended; (ii) to evidence the succession of another Person to
the Company as otherwise permitted by the Indenture; (iii) to add to the
covenants of the Company for the benefit of the Holders of the Notes or to
surrender any power conferred upon the Company; (iv) to add additional Events
of Default; (v) to secure the Notes; (vi) to make provision with respect to the
conversion rights of Holders pursuant to the Indenture; (vii) to provide for
successor trustees; or (viii) to cure any ambiguity, to correct or supplement
any provision that may be defective or inconsistent with any other provision or
to make any other provisions with respect to matters or questions arising under
the Indenture, provided such action shall not adversely affect the interest of
Holders of Notes in any material respect and the Trustee may rely upon an
opinion of counsel to that effect.
The Holders of a majority in aggregate principal amount of Outstanding
Notes may waive compliance by the Company with certain restrictive provisions
of the Indenture. The Holders of a majority in aggregate principal amount of
Outstanding Notes may waive any past default or right under the Indenture,
except (i) a default in payment of principal, premium, or interest, (ii) the
right of a Holder to redeem or convert the Note, or (iii) with respect to any
covenant or provision of the Indenture that requires the consent of the Holder
of each Outstanding Note affected.
Satisfaction and Discharge
The Company may discharge its obligations under the Indenture, other than
its obligation to pay the principal of and interest on the Notes and certain
other obligations (including its obligation to deliver shares of Common Stock
upon conversion of the Notes), while Notes remain outstanding if all
Outstanding Notes (a) have been delivered to the Trustee for cancellation, or
(b) have become due and payable, or (c) will become due and payable at their
Stated Maturity within one year, or (d) are scheduled for redemption within one
year or are delivered to the Trustee for conversion in accordance with the
Indenture, and, in the case of (b), (c), or (d), the Company has irrevocably
deposited with the Trustee an amount sufficient to pay and discharge all
Outstanding Notes on the date of their scheduled maturity or the scheduled date
of redemption.
Payments of Principal and Interest
The Indenture requires that payments in respect of the Notes (including
principal, premium, if any, interest, and liquidated damages, if any) held of
record by DTC (including Notes evidenced by the Global Notes) be made in same
day funds. Payments in respect of the Notes held of record by Holders other
than DTC may, at the option of the Company, be made by check and mailed to such
Holders of record as shown on the register for the Notes.
Registration Rights; Liquidated Damages
Under the terms of a Registration Rights Agreement between the Company and
the Initial Purchasers, the Company is permitted to prohibit offers and sales
of Transfer Restricted Securities pursuant to the Registration Statement of
which this Prospectus forms a part under certain circumstances and subject to
certain conditions (any period during which offers and sales are prohibited
being referred to as a "Suspension Period"). "Transfer Restricted Securities"
means each Note and any underlying share of Common Stock until (i) the date on
which such Note or underlying share of Common Stock has been effectively
registered under the Securities Act and disposed of in accordance with the
Registration
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Statement, (ii) the date on which such Note or underlying share of Common Stock
is distributed to the public pursuant to Rule 144 under the Securities Act, or
(iii) the date on which such Note or share of Common Stock may be sold or
transferred pursuant to Rule 144(k) under the Securities Act (or any similar
provisions then in force).
The Company has agreed to cause the Registration Statement to be effective
for a period of two years from the effective date thereof or such shorter
period that will terminate when each of the Transfer Restricted Securities
covered by the Registration Statement ceases to be a Transfer Restricted
Security. Notwithstanding the foregoing, the Company shall not be obligated to
maintain the effectiveness of the Registration Statement if it has obtained an
opinion of counsel that the Transfer Restricted Securities may be freely
offered and sold in the public markets without the continued effectiveness of
the Registration Statement.
If the Registration Statement ceases to be effective (without being
succeeded immediately by an additional registration statement filed and
declared effective) or usable for the offer and sale of Transfer Restricted
Securities for a period of time (including any Suspension Period) that exceeds
60 days in the aggregate in any 12-month period (a "Registration Default"), the
Company will pay liquidated damages to each Holder of Transfer Restricted
Securities who has complied with such Holder's obligations under the
Registration Rights Agreement. The amount of liquidated damages payable during
any period during which a Registration Default shall have occurred and be
continuing is that amount which is equal to one-quarter of one percent (25
basis points) per $1,000 principal amount or $2.50 per 20.7469 shares of Common
Stock (subject to adjustment in the event of stock splits, stock
recombinations, stock dividends, and the like) constituting Transfer Restricted
Securities for each 90-day period until the Registration Statement again
becomes effective or usable, as the case may be, up to a maximum amount of
liquidated damages of one and one-quarter percent (125 basis points) per $1,000
principal amount of Notes or $12.50 per 20.7469 shares of Common Stock (subject
to adjustments in certain instances as set forth above) constituting Transfer
Restricted Securities. All accrued liquidated damages shall be paid by the
Company to Record Holders by wire transfer of immediately available funds or by
federal funds check on each Damages Payment Date (as defined in the
Registration Rights Agreement). Following the cure of all Registration
Defaults, liquidated damages will cease to accrue with respect to such
Registration Default.
The foregoing summary of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the Registration Rights
Agreement. Copies of the Registration Rights Agreement are available from the
Company or the Initial Purchasers upon request.
Governing Law
The Indenture and, except as may otherwise be required by mandatory
provisions of law, the Notes will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such state's
conflicts of laws principles.
The Trustee
First Union National Bank is both the Trustee under the Indenture for the
Notes and the lender under the Company's Credit Facility. The Indenture does
not preclude the Trustee from enforcing its rights as a creditor, including its
rights as a holder of Senior Indebtedness. In the event of a conflict of
interest arising between the Holders of the Notes and the holders of Senior
Indebtedness, First Union National Bank will resign as Trustee and a successor
trustee will be appointed.
In case an Event of Default shall occur and shall not be cured, the
Trustee is required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
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DESCRIPTION OF CAPITAL STOCK
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 15, 1998, 16,194,905 shares of
Common Stock and no shares of Preferred Stock were issued and outstanding.
Approximately 1,732,504 additional shares of Common Stock may be issued upon
exercise of options outstanding or available for issuance under the Company's
stock option plans. All of the issued and outstanding shares of Common Stock
are fully paid and non-assessable.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
of Common Stock held of record on all matters submitted to a vote of the
shareholders, other than the election of directors in which shareholders are
entitled to cumulate their votes in accordance with Arizona law. Subject to the
preferences of any outstanding preferred stock, each share of Common Stock is
entitled to receive dividends as may be declared by the Company's Board of
Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment in full of all
creditors of the Company and the liquidation preferences of any outstanding
shares of preferred stock.
Serial Preferred Stock
The Serial Preferred Stock may be issued in such series and denominations
as deemed advisable by the Company's Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Serial
Preferred Stock with dividend, liquidation, conversion, voting, or other rights
that could adversely affect the voting power or other rights of holders of the
Common Stock. In the event of issuance, the Serial Preferred Stock could be
utilized, under certain circumstances, as a method of discouraging, delaying,
or preventing a change in control of the Company. The Company does not
currently intend to issue any shares of Serial Preferred Stock.
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 required 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 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.
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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, reclassification 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 for a period of three
years after the date that the Interested Shareholder first acquired the shares
of Common Stock that qualify such person as an Interested Shareholder, unless
either the Business Combination or the Interested Shareholder's acquisition of
shares is approved by a committee of the Company's Board of Directors
(comprised of disinterested directors or other persons) prior to the date on
which the Interested Shareholder first acquired the shares that qualify such
person as an Interested Shareholder. In addition, Article 3 prohibits the
Company from engaging in any Business Combination with an Interested
Shareholder or any of the Interested Shareholder's affiliates after such
three-year period unless (i) the Business Combination or acquisition of shares
by the Interested Shareholder was approved by the Company's Board of Directors
prior to the date on which the Interested Shareholder acquired the shares that
qualified such person as an Interested Shareholder; (ii) the Business
Combination is approved by the Company's shareholders (excluding the Interested
Person or any of its affiliates) at a meeting called after such three-year
period; or (iii) the Business Combination satisfies each of certain statutory
requirements. Article 3 defines an "Interested Shareholder" as any person
(other than the Company and its subsidiaries) that either (a) beneficially owns
10% or more of the voting power of the outstanding shares of the Company, or
(b) is an affiliate or associate of the Company and who, at any time within the
three-year period preceding the transaction, was the beneficial owner of 10% or
more of the voting power of the outstanding shares of the Company.
Certain Charter Provisions
In addition to the provisions of the Arizona Corporate Takeover Act
described above, the Company's Restated Articles and Restated Bylaws contain a
number of provisions relating to corporate governance and the rights of
shareholders. These provisions include (a) the authority of the Board of
Directors to fill vacancies on the Board of Directors; (b) the authority of the
Board of Directors to issue preferred stock in series with such voting rights
and other powers as the Board of Directors may determine; (c) a provision that,
unless otherwise prohibited by law, special meetings of the shareholders may be
called only by the President of the Company, the Board of Directors, or by
holders of not fewer than 10% of all shares entitled to vote at the meeting;
and (d) a provision for cumulative voting in the election of directors,
pursuant to Arizona law.
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Shares Eligible For Future Sale
As of May 15, 1998, the Company had 16,194,905 shares of Common Stock
outstanding, of which approximately 13,786,900 shares are freely tradeable in
the public market without restriction under the Securities Act unless held by
an "affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act. The approximately 2,408,000 remaining 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.
The Company has registered an aggregate of approximately 498,800 of such
"restricted securities" for resale pursuant to an effective registration
statement. Affiliates will be subject to certain of the resale limitations of
Rule 144 as promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of shares
beneficially owned by such person for at least one year in such amount that
does not exceed the greater of (i) one percent of the then-outstanding shares
of Common Stock (approximately 161,949 shares as of May 15, 1998) 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 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 those shares without regard
to the volume, manner of sale or notice requirements. An aggregate of
approximately 1,901,000 shares currently held by certain officers and directors
of the Company currently are available for sale under Rule 144. Sales of
substantial amounts of Common Stock by shareholders of the Company under Rule
144 or otherwise, or even the potential for such sales, may have a depressive
effect on the market price of the Common Stock.
As of May 15, 1998, options to purchase a total of approximately 1,071,144
shares of Common Stock were outstanding under the Company's 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.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer and Trust Company, New York, New York.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain United States federal income
tax considerations relevent to Holders of the Notes and the Common Stock
issuable upon conversion thereof as of the date hereof. This discussion is
based on existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated thereunder, judicial decisions
now in effect, and administrative rulings, all of which are subject to change
or alternative construction, possibly with retroactive effect. This summary
does not discuss other federal taxes (such as federal estate and gift taxes)
that may be important to Holders of the Notes or any state, local, or foreign
tax considerations, nor does it purport to address all federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules in light of their specific circumstances, such as life
insurance companies, tax-exempt organizations, dealers in securities or
currency, banks or other financial institutions, investors whose functional
currency is not the United States dollar, or investors that hold the Notes as
part of a hedge, straddle, or conversion transaction. In addition, this summary
deals only with Notes and Common Stock into which the Notes are convertible
that are held as "capital assets" within the meaning of Section 1221 of the
Code and that are purchased by investors upon initial issuance at the initial
offering price. The Company will not seek a ruling from the Internal Revenue
Service (the "IRS") with regard to the United States federal income tax
treatment relating to an investment in the Notes or the Common Stock into which
the Notes are convertible and, therefore, there can be no assurance that the
IRS will agree with the conclusions set forth below.
For purposes of this summary, the term "U.S. Holder" means a beneficial
owner of a Note or Common Stock that is (i) a citizen or resident of the United
States, (ii) except to the extent otherwise provided in Treasury regulations, a
partnership, a corporation, or other entity created or organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, and (iv) a trust if (a) a United States court is able
to exercise primary supervision over the trust's administration and (b) one or
more United States fiduciaries have the authority to control all of the trust's
substantial decisions. The term "Non-U.S. Holder" shall mean the beneficial
owner of a Note or Common Stock other than a U.S. Holder.
PERSONS CONSIDERING THE PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF UNITED STATES FEDERAL TAX LAWS, AS WELL
AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR
PARTICIPATION IN THE OFFERING, OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING CONVERSION OF THE NOTES, AND THE EFFECT THAT THEIR PARTICULAR
SITUATIONS MAY HAVE ON SUCH TAX CONSIDERATIONS. THIS SUMMARY DOES NOT PURPORT
TO ADDRESS ALL ASPECTS OF FEDERAL, STATE, LOCAL, OR FOREIGN TAXATION THAT MAY
BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE THE NOTES.
Taxation of U.S. Holders
Adjustments to Conversion Price. The Indenture provides that the
conversion price will be adjusted upon the occurrence of certain circumstances.
Section 305 of the Code treats as a distribution taxable as a dividend (to the
extent of the Company's current or accumulated earnings and profits) certain
actual or constructive distributions of stock with respect to stock and
convertible securities. Applicable Treasury regulations treat holders of
convertible debentures as having received such a constructive distribution
where the conversion price is adjusted to reflect certain distributions with
respect to the stock into which such debentures are convertible. Thus, under
certain circumstances, an adjustment in the conversion price of the Notes may
be taxable to the U.S. Holders as a dividend distribution. In such a case, U.S.
Holders may recognize income as a result of an event pursuant to which they
receive no cash or property that could be used to pay the related income tax.
Generally, a Holder's tax basis in a Note will be increased by the amount of
any such constructive dividend. Holders of the Notes are advised to consult
their tax advisors with respect to potential taxable constructive dividend
distributions upon such conversion price modifications.
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Payments of Interest. The payment of stated interest on the Notes will be
taxable to a U.S. Holder as ordinary interest income at the time it accrues or
is received in accordance with the Holder's usual method of accounting for
federal income tax purposes.
Conversion of a Note into Common Stock. In general, a U.S. Holder will not
recognize gain or loss on conversion of a Note solely into Common Stock of the
Company pursuant to the terms of the Notes, except with respect to cash
received in lieu of a fractional share. The holding period of the Common Stock
received by the U.S. Holder upon conversion of a Note generally will include
the period during which the Note was held prior to the conversion. The U.S.
Holder's aggregate tax basis in the Common Stock received upon conversion of a
Note generally will equal the U.S. Holder's aggregate tax basis in the Note
converted, reduced by the portion allocable to cash received in lieu of a
fractional share. A U.S. Holder generally will recognize capital gain or loss
in connection with any cash received in lieu of a fractional share in an amount
equal to the difference between the amount of cash received and the U.S.
Holder's tax basis in the fractional share. U.S. Holders should consult their
own tax advisors regarding the tax consequences of converting the Notes into
Common Stock, in particular in the case of the conversion of a Note into Common
Stock after a Regular Record Date for the payment of interest but prior to the
next succeeding Interest Payment Date.
Disposition of Notes or Common Stock. A U.S. Holder of a Note or the
Common Stock into which it was converted generally will recognize capital gain
or loss upon the sale, exchange, retirement, or other disposition of the Note
or Common Stock. The amount of capital gain or loss to be recovered will be
measured by the difference between (i) the amount realized (except to the
extent the amount is attributable to accrued interest income, which will
generally be taxable as ordinary income) and (ii) the U.S. Holder's tax basis
in the Note or the Common Stock. The gain or loss on such disposition will be
taken into account in determining the amount of the U.S. Holder's net capital
gain, which is taxed at a rate of 20% if the Note or Common Stock has been held
for more than 18 months at the time of such disposition or at a rate of 28% if
the Note or Common Stock has been held for more than one year but not more than
18 months at the time of such disposition.
Market Discount. The resale of Notes may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
Note generally will be equal to the amount, if any, by which the stated
redemption price at maturity of the Note immediately after its acquisition
exceeds the holder's tax basis in the Note. Subject to a de minimis exception,
these provisions generally require a holder of a Note acquired at a market
discount to treat as ordinary income any gain recognized on the disposition of
such Note to the extent of the "accrued market discount" on such Note at the
time of disposition. In general, market discount on a Note will be treated as
accruing on a straight-line basis over the term of such Note, or, at the
election of the holder, under a constant yield method. A holder of a Note
acquired at a market discount may be required to defer the deduction of a
portion of the interest on any indebtedness incurred or maintained to purchase
or carry the Note until the Note is disposed of in a taxable transaction,
unless the holder elects to include accrued market discount in income
currently.
Distributions with Respect to Common Stock. In general, distributions made
by the Company with respect to Common Stock will constitute dividends for
federal income tax purposes and will be taxable to a holder as ordinary income
to the extent of the Company's undistributed current or accumulated earnings
and profits (as determined for federal income tax purposes). Distributions in
excess of the Company's current or accumulated earnings and profits will be
treated first as a nontaxable return of capital reducing the U.S. Holder's tax
basis in the Common Stock, thus increasing the amount of any gain (or reducing
the amount of any loss) which might be realized by such holder upon the sale,
exchange, or redemption of such Common Stock. Any such distributions in excess
of the U.S. Holder's tax basis in the Common Stock will be treated as capital
gain to the U.S. Holder (provided the Common Stock is held as a capital asset),
and will be either long-term (more than 18 months), mid-term (more than 12
months but not more than 18 months), or short-term (not more than 12 months)
capital gain depending upon the Holder's federal income tax holding period for
the Common Stock.
Subject to certain limitations, to the extent that distributions made by
the Company are treated as dividends, a U.S. Holder of Common Stock that is
taxed as a domestic corporation and that meets the applicable holding period
and taxable income requirements of the Code may be entitled to a deduction
47
<PAGE>
under Section 243 of the Code equal in amount to 70% of the dividends paid out
of such earnings and profits (the "Dividends Received Deduction"). With respect
to Common Stock considered to be "portfolio stock" as defined in Section 246A
of the Code, the Dividends Received Deduction will be reduced to the extent
that the Common Stock constitutes "debt financed portfolio stock." In addition,
under certain circumstances, the receipt of a dividend on the Common Stock
determined to be an "extraordinary dividend" may cause the Holder's tax basis
in the Common Stock to be reduced by the untaxed portion of the dividend and
could result in gain recognition pursuant to Section 1059 of the Code.
Taxation of Non-U.S. Holders
Payments of Interest. The payment of stated interest on a Note by the
Company or any Paying Agent to a Non-U.S. Holder will qualify for the
"portfolio interest exemption" and, therefore, will not be subject to United
States federal income tax or withholding tax, provided that such interest
income is not taxable as "effectively connected" with a United States trade or
business of the Non-U.S. Holder and provided that the Non-U.S. Holder (i) does
not actually or constructively own 10% or more of the combined voting power of
all classes of stock of the Company entitled to vote, (ii) is not a controlled
foreign corporation related to the Company actually or constructively through
stock ownership, (iii) is not a bank receiving interest on a loan entered into
in the ordinary course of business, and (iv) either (a) provides a Form W-8 (or
suitable substitute form) signed under penalties of perjury that includes its
name and address and certifies as to its non-United States status in compliance
with applicable law and regulations, or (b) deposits the Note with a securities
clearing organization, bank, or financial institution that holds customers'
securities in the ordinary course of its trade or business and which holds the
Note and provides a statement to the Company or its agent under penalties of
perjury in which it certifies that such a Form W-8 (or a suitable substitute)
has been received by it from the Non-U.S. Holder or qualifying intermediary and
furnishes the Company or its agent with a copy thereof. For purposes of
determining whether a Non-U.S. Holder constructively owns more than 10% of the
Company's combined voting power, the Non-U.S. Holder will be treated as owning
the number of shares of Common Stock that it would acquire if it converted all
of its Notes.
Recently finalized Treasury regulations (the "Regulations") provide
alternative methods for satisfying the certification requirement described in
clause (iv) above. These Regulations also generally will require, in the case
of Notes held by a foreign partnership, that (a) the certification described in
clause (iv) above be provided by the partners rather than by the foreign
partnership, and (b) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule will apply in
the case of tiered partnerships. These Regulations generally will be effective
January 1, 1999. Non-U.S. Holders of the Notes are advised to consult their tax
advisors with respect to their qualification for the portfolio interest
exemption and the steps necessary to comply with such exemption.
Except to the extent otherwise provided under an applicable tax treaty, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder
with respect to interest on a Note if such interest income is effectively
connected with a United States trade or business of the Non-U.S. Holder.
Effectively connected interest received by a corporate Non-U.S. Holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate (or, if applicable, a lower treaty rate). A Non-U.S. Holder
may be required to satisfy certain certification requirements in order to claim
a reduction of or exemption from withholding under the foregoing rules.
Non-U.S. Holders should consult applicable income tax treaties, which may
provide different rules.
Interest income of a Non-U.S. Holder that is not effectively connected
with a United States trade or business and that does not qualify for the
portfolio interest exemption described above generally will be subject to a
withholding tax at a 30% rate (or, if applicable, a lower treaty rate).
Conversion of a Note into Common Stock. In general, no United States
federal income tax or withholding tax will be imposed upon the conversion of a
Note into Common Stock by a Non-U.S. Holder except with respect to the receipt
of cash in lieu of fractional shares by Non-U.S. Holders upon conversion of a
Note, where any one of the four exceptions described below under "Certain
Federal Income Tax Considerations -- Taxation of Non-U.S. Holders --
Disposition of Notes or Common Stock" is applicable. In addition, under certain
circumstances, the extent to which the fair market value of the Common
48
<PAGE>
Stock received upon conversion is attributable to accrued interest will be
treated as ordinary interest income taxable as described above under "Certain
Federal Income Tax Considerations -- Taxation of Non-U.S. Holders -- Payments
of Interest."
Disposition of Notes or Common Stock. A Non-U.S. Holder of a Note or the
Common Stock into which it was converted generally will not be subject to
United States federal income tax or withholding tax on any gain realized on the
sale, exchange, retirement, or other disposition of the Note or Common Stock
(including the receipt of cash in lieu of fractional shares upon conversion of
the Note to Common Stock), unless (i) the gain is effectively connected with a
United States trade or business of the Non-U.S. Holder, (ii) in the case of a
Non-U.S. Holder who is an individual, such holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition, and either such holder has a "tax home" in the United
States or the disposition is attributable to an office or other fixed place of
business maintained by such holder in the United States, (iii) the Non-U.S.
Holder is subject to tax pursuant to the provisions of the Code applicable to
certain United States expatriates, or (iv) the Company is a United States real
property holding corporation. The Company does not believe that it is, or is
likely to become, a United States real property holding corporation.
Distributions with Respect to Common Stock. To the extent distributions
made by the Company are treated as dividends (as described above under "Certain
Federal Income Tax Considerations -- Taxation of U.S. Holders -- Distributions
with Respect to Common Stock"), a Non-U.S. Holder will be subject to United
States federal withholding tax at a 30% rate (or lower rate provided under an
applicable income tax treaty) on dividends paid (or deemed paid, as described
above under "Certain Federal Income Tax Considerations -- Taxation of U.S.
Holders -- Adjustments to Conversion Price") on Common Stock, unless the
dividends are taxable as effectively connected with the conduct of a trade or
business in the United States and the Non-U.S. Holder delivers IRS Form 4224 to
the payer. Except to the extent otherwise provided under an applicable tax
treaty, a Non-U.S. Holder generally will be taxed in the same manner as a U.S.
Holder on dividends paid (or deemed paid) that are effectively connected with
the conduct of a trade or business in the United States by the Non-U.S. Holder.
If such Non-U.S. Holder is a foreign corporation, it also may be subject to a
United States branch profits tax on such effectively connected income at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under current Treasury regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payer has knowledge to the contrary) for purposes of the withholding rules
discussed below and, under the current interpretation of Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. Under the
Regulations effective January 1, 1999, however, a Non-U.S. Holder of Common
Stock who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification requirements. In addition, under
these Regulations, in the case of Common Stock held by a foreign partnership,
the certification requirement generally would be applied to the partners of the
partnership and the partnership would be required to provide certain
information, including a United States taxpayer identification number. These
Regulations also will provide look-through rules for tiered partnerships.
Backup Withholding and Information Reporting
U.S. Holders. Under current United States federal income tax law, U.S.
Holders of Notes or Common Stock will be subject to information reporting and,
under certain circumstances, may be subject to "backup withholding" at the rate
of 31% in respect to payments of principal, interest, and dividends made to,
and the proceeds of disposition of Notes or Common Stock by, certain
noncorporate U.S. Holders. Generally, the backup withholding rules will apply
only if the U.S. Holder (i) fails to furnish its taxpayer identification number
("TIN") to the payor, (ii) furnishes such payor with an incorrect TIN, (iii) is
notified by the IRS that it has failed to report properly interest, dividends,
or other "reportable payments" as defined by the Code, or (iv) under certain
circumstances, fails to provide such payor or the U.S. Holder's securities
broker with a certified statement, signed under penalty of perjury, that the
TIN provided is its correct number and that the U.S. Holder is not subject to
backup withholding. Backup withholding will not apply with respect to payments
made to certain U.S. Holders of the Notes, including payments to certain exempt
recipients (such as corporations and exempt organizations). The amount of
49
<PAGE>
backup withholding from a payment to a Holder will be allowed as a credit
against the Holder's federal income tax liability and may entitle such Holder
to a refund, provided the required information is furnished to the IRS.
Non-U.S. Holders. The Company must report annually to the IRS and to each
Non-U.S. Holder any interest or dividend that is subject to withholding or that
is exempt from U.S. withholding tax pursuant to a tax treaty or the exceptions
described above.
Backup withholding at a rate of 31% and information reporting generally
may apply to payments of principal and interest if the payee fails to certify
under penalties of perjury that it is not a U.S. person, provided the payor
does not have actual knowledge that the holder is a United States person.
Dividends paid to Non-U.S. Holders that are subject to the 30% withholding tax
described above or that are subject to treaty reduction generally will be
exempt from United States backup withholding tax.
Payment of the proceeds of the sale or other disposition of Notes or
Common Stock to or through a United States office of a United States or foreign
broker will be subject to information reporting and possible backup withholding
at a rate of 31% unless the owner certifies its non-United States status under
penalties of perjury or otherwise establishes an exemption, provided the broker
does not have actual knowledge that the holder is a U.S. Person or that the
conditions of any other exemption are not, in fact, satisfied. Payment of the
proceeds on the sale of Notes or Common Stock to or through a foreign office of
a foreign broker that is not a "U.S. related person" generally will not be
subject to information reporting or backup withholding tax. For this purpose, a
"U.S. related person" is (i) a "controlled foreign corporation" for United
States federal income tax purposes or (ii) a foreign person 50% or more of
whose gross income from all sources for a specified period is derived from
activities that are effectively connected with the conduct of a United States
trade or business. In the case of the payment of proceeds from the disposition
of Notes to or through a foreign office of a broker that is either a United
States person or a related person, information reporting is required on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Holder and the broker has no actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules from a payment to
a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's United States federal income tax, provided that the required
information is furnished to the IRS.
The backup withholding and information reporting rules would also be
changed by the Regulations. These Regulations will provide that proceeds from
the disposition of Common Stock after December 31, 1998 will be exempt from
backup withholding and information reporting only if the Non-U.S. Holder
complies with certain certification requirements or otherwise establishes an
exemption.
Holders of Notes should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
THE FOREGOING SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL
INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, PROSPECTIVE HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE NOTES AND THE COMMON STOCK INTO
WHICH THE NOTES ARE CONVERTIBLE, INCLUDING THE APPLICABILITY AND EFFECT OF
STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Pursuant to the Registration Rights Agreement, the Company has filed a
Registration Statement, of which this Prospectus forms a part, with the
Commission covering the resale of the Securities. The Company has agreed to use
all reasonable efforts to keep the Registration Statement effective until two
years from the date of this Prospectus (or such earlier date when the holders
of the Securities are able to sell all such Securities immediately without
restriction pursuant to Rule 144(k) under the Securities Act
50
<PAGE>
of 1933 or any successor rule thereto or otherwise). Under certain
circumstances set forth in the Registration Rights Agreement, the Company will
be permitted to suspend the use of this Prospectus in connection with sales of
Securities by Selling Securityholders during certain periods of time. The
specific provisions relating to the registration rights described above are
contained in the Registration Rights Agreement, and the foregoing summary is
qualified in its entirety by reference to the provisions of such agreement.
Sales of the Securities may be effected by or for the account of the
Selling Securityholders from time to time in transactions (which may include
block transactions in the case of the Conversion Shares) on any exchange or
market on which such Securities are listed or quoted, as applicable, in
negotiated transactions, through a combination of such methods of sale, or
otherwise, at fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to prevailing market price, or at
negotiated prices. The Selling Securityholders may effect such transactions by
selling the Notes or the Conversion Shares directly to purchasers, through
broker-dealers acting as agents for the Selling Securityholders, or to
broker-dealers who may purchase Securities as principals and thereafter sell
the Notes or Conversion Shares from time to time in transactions (which may
include block transactions in the case of the Conversion Shares) on any
exchange or market on which Securities are listed or quoted, as applicable, in
negotiated transactions, through a combination of such methods of sale or
otherwise. In effecting sales, broker-dealers engaged by Selling
Securityholders may arrange for other broker-dealers to participate. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Notes or Conversion Shares for whom such broker-dealers may
act as agents or to whom they may sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).
In addition, any Notes or Conversion Shares covered by this Prospectus
which qualify for sale pursuant to Rule 144 or Rule 144A under the Securities
Act may be sold under Rule 144 or Rule 144A rather than pursuant to this
Prospectus. There is no assurance that any Selling Securityholder will sell any
Notes or Conversion Shares described herein, and any Selling Securityholder may
transfer, devise or gift the Notes or Conversion Shares by other means not
described herein.
The Selling Securityholders and any broker-dealers, agents or underwriters
that participate with the Selling Securityholders in the distribution Notes or
Conversion Shares may be deemed to be "underwriters" within the meaning of the
Securities Act. Any commissions paid or any discounts or concessions allowed to
any such persons, and any profits received on the resale of the Notes or
Conversion Shares offered hereby and purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
At the time a particular offering of the Notes and/or the Conversion
Shares is made and to the extent required, the aggregate principal amount of
Notes and number of Conversion Shares being offered, the name or names of the
Selling Securityholders and the terms of the offering, including the name or
names of any underwriters, broker-dealers or agents, any discounts, concessions
or commissions and other terms constituting compensation from the Selling
Securityholders, and any discounts, concessions or commissions allowed or
reallowed or paid to broker-dealers, will be set forth in an accompanying
Prospectus Supplement.
Pursuant to the Registration Rights Agreement, the Company has agreed to
bear all expenses (other than selling commissions) in connection with the
registration and sale of the Securities being offered by the Selling
Securityholders. Such expenses are estimated to be approximately $110,000. The
Company has agreed to indemnify the Selling Securityholders against certain
liabilities, including liabilities under the Securities Act.
To comply with the securities laws of certain jurisdictions, if
applicable, the Notes and Conversion Shares offered hereby will be offered or
sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states the Securities may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualifications requirement is available and
is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Notes or the Conversion Shares may be limited
in its ability to engage in market activities with
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<PAGE>
respect to the Notes or the Conversion Shares. In addition and without limiting
the foregoing, each Selling Securityholder will be subject to applicable
provision of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of any of the Notes and
Conversion Shares by the Selling Securityholders. The foregoing may affect the
marketability of the Notes and the Conversion Shares.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a
professional association, Phoenix, Arizona. Certain members of such firm
beneficially owned 14,000 shares of the Company's Common Stock as of the date of
this Prospectus.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1996 and 1997 and for each of the three years in the period ended September 30,
1997 incorporated by reference in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
summaries of the material provisions thereof, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit or
incorporated by reference to the Registration Statement of which this
Prospectus forms a part, each such statement being qualified in all respects by
such reference. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement,
including the exhibits that are a part thereof, which may be obtained upon
request to the Commission and the payment of the prescribed fee. Copies of the
Registration Statement may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
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<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this offering,
other than those made in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, to anyone or by anyone in any
jurisdiction where, or to any person to whom, it would be unlawful to make such
an offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that information contained herein is correct as of any time subsequent to its
date.
--------------------------------------------
TABLE OF CONTENTS
--------------------------------------------
Page
----
Summary .................................................................. 3
Risk Factors ............................................................. 7
Use of Proceeds .......................................................... 15
Dividend Policy .......................................................... 15
Capitalization ........................................................... 15
Price Range of Common Stock .............................................. 16
Selected Consolidated Financial Data ..................................... 17
Unaudited Pro Forma Condensed Combined
Financial Information ................................................. 19
Business ................................................................. 21
Selling Securityholders .................................................. 33
Description of Notes ..................................................... 34
Description of Capital Stock ............................................. 43
Certain Federal Income Tax Considerations ................................ 46
Plan of Distribution ..................................................... 50
Legal Matters ............................................................ 52
Experts .................................................................. 52
Additional Information ................................................... 52
================================================================================
$100,000,000
ACTION
Performance Companies, Inc.
4 3/4% Convertible
Subordinated Notes
Due 2005
and
Shares of Common Stock
Issuable Upon Conversion
Thereof
-----------------------------------------------------
PROSPECTUS
-----------------------------------------------------
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the 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 registration fees:
Amount to be Paid
-----------------
Registration Fee ......................... $ 29,500.00
Nasdaq Listing Fee ....................... 17,500.00
Accountants' Fees and Expenses ........... 10,000.00
Legal Fees and Expenses .................. 40,000.00
Printing and Engraving Expenses .......... 10,000.00
Miscellaneous Fees ....................... 3,000.00
------------
Total ................................. $ 110,000.00
============
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 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
II-1
<PAGE>
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, 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.
II-2
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ---------- ------------------------------------------------------------------------------------------
<S> <C>
1.0 Form of Underwriting Agreement(1)
3.1 First Amended and Restated Articles of Incorporation of Registrant(2)
3.2 Amended and Restated Bylaws of Registrant(2)
4.1 Form of Certificate of Common Stock(3)
4.2 Indenture dated as of March 24, 1998, between Action Performance Companies, Inc., and
First Union National Bank, as Trustee, including forms of Notes(4)
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.
10.4.2 1993 Stock Option Plan, as amended and restated through January 16, 1997(5)
10.8 Form of Indemnification Agreement entered into with the Directors of the Registrant(3)
10.21 Lease between the Company and F.W. Investments dated January 1, 1994(6)
10.27 Manufacturing Agreement between the Company and Early Light International (Holdings)
Ltd. dated December 5, 1994(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)
10.42A First Amendment dated as of March 18, 1998 to 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(4)
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)
10.43A Amendment and Consent to Credit Agreement dated March 18, 1998, by and among
Action Performance Companies, Inc., various subsidiary guarantees, and First Union
National Bank of North Carolina(4)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ---------- ---------------------------------------------------------------------------------------
<S> <C>
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)
10.48 Common Stock Purchase Agreement dated January 16, 1997, between Hasbro, Inc. and
Action Performance Companies, Inc.(10)
10.49 Standard Form Industrial Lease dated April 8, 1997, between Hewson/Breckner-Baseline,
L.L.C. and Action Performance Companies, Inc.(11)
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park Partners, LLC and
Sports Image, Inc.(11)
10.51 Asset Purchase Agreement dated as of December 19, 1997, between Action Performance
Companies, Inc. and Revell-Monogram, Inc.(12)
10.52 1998 Non-qualified Stock Option Plan
10.53 Purchase Agreement dated March 18, 1998 among Action Performance Companies, Inc.,
NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp., EVEREN
Securities, Inc., and Piper Jaffray Inc.(4)
10.54 Registration Rights Agreement dated March 24, 1998, by and among Action Performance
Companies, Inc., NationsBanc Montgomery Securities LLC, CIBC Oppenheimer Corp.,
EVEREN Securities, Inc., and Piper Jaffray Inc.(4)
12.1 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP
23.2 Consent of O'Connor, Cavanagh, Anderson, Killingsworth, & Beshears, P.A. (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility of Trustee under the Trust Indenture Act of 1939 on Form T-1
</TABLE>
- ------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 and Amendment No. 1 thereto (Registration No. 333-27485).
(2) 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.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1998, as filed with the Securities and Exchange Commission
on May , 1998.
(5) 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 May 15, 1997.
(6) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended March 31, 1994, as filed with the Securities and Exchange Commission
on May 16, 1994.
(7) Incorporated by refernce 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, 1998.
(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).
II-4
<PAGE>
(11) Incorporated by reference to the Registrant's Form 10-K for the year ended
September 30, 1997, as filed with the Securities and Exchange Commission
on December 22, 1997.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Registration No. 333-45991).
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement, provided, however, that clauses (1)(i) and
(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference into the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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.
II-5
<PAGE>
(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.
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.
II-6
<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 Phoenix, Arizona, on the 21st day of May, 1998.
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>
/s/ Fred W. Wagenhals Chairman of the Board, President, and May 21, 1998
- --------------------------- Chief Executive Officer (Principal
Fred W. Wagenhals Executive Officer)
/s/ Tod J. Wagenhals Executive Vice President, Secretary, and May 21, 1998
- --------------------------- Director
Tod J. Wagenhals
/s/ Christopher S. Besing Vice President, Chief Financial Officer, May 21, 1998
- --------------------------- Teasurer, and Director (Principal
Christopher S. Besing Financial and Accounting Officer)
/s/ Melodee L. Volosin Vice President Wholesale Division and May 21, 1998
- --------------------------- Director
Melodee L. Volosin
/s/ John S. Bickford, Sr. Director May 21, 1998
- ---------------------------
John S. Bickford, Sr.
/s/ Jack M. Lloyd Director May 21, 1998
- ---------------------------
Jack M. Lloyd
/s/ Robert H. Manschot Director May 21, 1998
- ---------------------------
Robert H. Manschot
/s/ Edward J. Bauman Director May 21, 1998
- ---------------------------
Edward J. Bauman
- --------------------------- Director , 1998
Donald G. Hawk, Jr.
</TABLE>
II-7
EXHIBIT 5.1
-----------
The Law Offices of
O'CONNOR, CAVANAGH, ANDERSON, KILLINGSWORTH & BESHEARS
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Telephone: (602) 263-2400
Fax: (602) 263-2900
May 21, 1998
Action Performance Companies, Inc.
2401 West First Street
Tempe, Arizona 85281
Re: Registration Statement on Form S-3
Action Performance Companies, Inc.
Gentlemen:
We have acted as legal counsel to Action Performance
Companies, Inc. (the "Company"), in connection with the preparation of the
Company's Registration Statement on Form S-3 (the "Registration Statement"), to
be filed with the Securities and Exchange Commission (the "Commission") on or
about May 22, 1998 under the Securities Act of 1933, as amended, covering the
resale of an aggregate of $100,000,000 principal amount of the Company's 4 3/4%
Convertible Subordinated Notes due 2005 (the "Notes") and shares of the
Company's common stock, par value $.01 per share (the "Common Stock") issuable
upon conversion of the Notes (the "Shares"), all of which may be sold from time
to time by the holders of such Notes and/or Shares (the "Selling
Securityholders"). The Notes were issued pursuant to an indenture dated March
24, 1998, between the Company and First Union National Bank, as trustee (the
"Indenture").
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, of the Registration Statement, the Indenture, and such
other corporate records of the Company, agreements and other instruments, and
certificates of public officials and officers of the Company as we have deemed
necessary as a basis for the opinions hereinafter expressed. As to various
questions of fact material to such opinions, we have, where relevant facts were
not independently established, relied upon statements of officers of the
Company. For purposes of the opinion set forth below, we have assumed (i) that
the documents and signatures examined by us are genuine and authentic, (ii) the
persons executing the documents examined by us have the legal capacity to
execute such documents, (iii) the payment by the Selling Securityholders (or the
prior holders thereof) of the full and sufficient consideration due from them to
the Company for the Notes, (iv) that the Indenture has been duly authorized,
executed, and delivered by the Trustee, and (v) that the Notes have been duly
issued, executed, and authenticated by the Trustee. For purposes of our opinion,
we also have assumed that the Company has paid all taxes, penalties and interest
which are due and owing to the State of Arizona.
Based on and subject to the foregoing, we are of the opinion
that:
<PAGE>
Action Performance Companies, Inc.
May 21, 1998
Page Two
1. The execution and delivery of the Indenture has been duly authorized by the
Company and the Indenture constitutes a valid and binding agreement of the
Company enforceable against the Company in accordance with its terms,
except that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, or other similar laws now or hereafter relating
to or affecting the rights of creditors or by general equitable principles.
2. The Notes have been duly authorized and constitute valid and binding
obligations of the Company and are enforceable against the Company in
accordance with their terms, except that enforcement thereof may be subject
to bankruptcy, insolvency, reorganization, moratorium, or other similar
laws now or hereafter relating to or affecting the rights of creditors or
by general equitable principles.
3. The Shares have been duly authorized and, when certificates therefor have
been duly authenticated, issued, and delivered in accordance with the terms
of the Indenture, will be validly issued, fully paid, and non-assessable.
For purposes of this opinion, we have assumed that the laws of
the state of New York are the same as the laws of the state of Arizona.
Accordingly, we express no opinion as to the applicability or effect of any
laws, orders or judgments of any state or other jurisdiction other than federal
securities laws and the substantive laws of the State of Arizona. Further, our
opinion is based solely upon existing laws, rules and regulations, and we
undertake no obligation to advise you of any changes that may be brought to our
attention after the date hereof.
We hereby expressly consent to any reference to our firm under
the heading "Legal Matters" in the Registration Statement, the inclusion of this
opinion as an exhibit to the Registration Statement, and to the filing of this
opinion with any other appropriate governmental agency.
Very truly yours,
/s/ O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
RSK:rr
P00e3u00.doc
Exhibit 12.1
ACTION PERFORMANCE COMPANIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(000 omitted)
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year Ended September 30, March 31,
------------------------------------------------------------ ------------------------
1993 1994 1995 1996 1997 1997 1998
------------ --------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes ..... ($ 1,240) $ 409 $ 4,154 $ 9,870 $ 16,910 $ 6,675 $ 12,819
Fixed charges:
Actual Interest Expense .............. 165 215 184 80 2,021 876 1,413
Interest Portion of Operating Leases . 107 127 117 146 312 95 405
Amortization of Debt Issuance Costs .. 0 0 0 0 150 40 75
------- ------ ------- -------- -------- ------- --------
Total Fixed Charges ................ 272 342 301 226 2,483 1,011 1,893
------- ------ ------- -------- -------- ------- --------
Net Income as Adjusted ................ ($ 968) $ 751 $ 4,455 $ 10,096 $ 19,393 $ 7,686 $ 14,712
------- ------ ------- -------- -------- ------- --------
Ratio ................................. N/A 2.2x 14.8x 44.7x 7.8x 7.6x 7.8x
======= ====== ======= ======== ======== ======= ========
Amount Inadequate to Cover Fixed
Charges .............................. ($ 1,240)
=======
</TABLE>
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated November 18, 1997,
included in Action Performance Companies, Inc.'s Form 10-K/A for the year ended
September 30, 1997, and to all references to our firm included in this
registration statement.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
May 13, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM T-1
________________
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED,
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305 (b) (2)___
________________
FIRST UNION NATIONAL BANK
(Exact name of Trustee as specified in its charter)
<TABLE>
<S> <C> <C>
Two First Union Center
CHARLOTTE, NORTH CAROLINA 28288 58-1079889
(Address of principal executive office) (Zip Code) (I.R.S. Employer Identification No.)
</TABLE>
Teresa L. Davis
First Union National Bank
1100 First Union Plaza
999 Peachtree Street N.E.
Atlanta, Georgia 30309
(404) 827-7346
(Name, Address and Telephone Number of Agent for Service)
______________________________
ACTION PERFORMANCE COMPANIES, INC.
(Exact name of obligor as specified in its charter)
ARIZONA
(State or other jurisdiction of incorporation or organization)
86-0704792
(IRS employer identification no.)
4707 E. Baseline Road
Phoenix, Arizona 85040
(602) 337-3700
(Name, address, including zip code, and telephone number, including area code,
of principal executive offices)
Christopher S. Besing
Vice President and Chief Financial Officer
Action Performance Companies, Inc.
4707 E. Baseline Road
Phoenix, Arizona 85040
(602) 337-3703
______________________________
4 3/4% Convertible Subordinated Notes due 2005
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information.
(a) The following are the names and addresses of each examining or
supervising authority to which the Trustee is subject:
The Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Atlanta, Georgia.
Federal Deposit Insurance Corporation, Washington, D.C.
Securities and Exchange Commission, Division of Market Regulation,
Washington, D.C.
(b) The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with obligor.
The obligor is not an affiliate of the Trustee.
16. List of Exhibits.
(1) Articles of Association of the Trustee as now in effect. (See
Exhibit 1 of the Form T-1 filed in connection with
Registration Statement No. 333-31863, which is incorporated
herein by reference)
(2) Certificate of Authority of the Trustee to commence business.
(See Exhibit 2 of the Form T-1 filed in connection with
Registration Statement No. 333-31863, which is incorporated
herein by reference)
(3) Authorization of the Trustee to exercise corporate trust
powers. Incorporated in Exhibit (4).
(4) By-Laws of the Trustee, as amended, to date. (See Exhibit 4 of
the Form T-1 filed in connection with Registration Statement
No.333-31863, which is incorporated herein by reference)
(5) Not applicable.
(6) Consent by the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939. Included on Page 4 of this Form T-1
Statement.
(7) Most recent report of condition of the Trustee. (See Exhibit 7
of the Form T-1 filed in connection with Registration
Statement No. 333-31863, which is incorporated herein by
reference)
(8) Not applicable.
(9) Not applicable.
- 2 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, FIRST UNION NATIONAL BANK, a national banking association
organized and existing under the laws of the United States of America, has duly
caused this statement of eligibility and qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Atlanta, and State of Georgia on the 12th day of May, 1998.
FIRST UNION NATIONAL BANK
(Trustee)
BY: /s/ Teresa L. Davis
---------------------------------
Teresa L. Davis, Vice President
- 3 -
<PAGE>
EXHIBIT T-1 (6)
CONSENT OF TRUSTEE
Under section 321(b) of the Trust Indenture Act of 1939 and in
connection with the proposed issuance of Notes of ACTION PERFORMANCE COMPANIES,
INC., First Union National Bank, as the Trustee herein named, hereby consents
that reports of examinations of said Trustee by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon requests therefor.
FIRST UNION NATIONAL BANK
BY: /s/ Emily E. Katt
---------------------------------
Emily E. Katt, Vice President
Dated:
May 12, 1998
- 4 -
