As filed with the Securities and Exchange Commission on February 10, 1998
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
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<S> <C> <C>
ARIZONA 5199 86-0704792
- ------------------------------- ---------------------------- ----------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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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)
---------------
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FRED W. WAGENHALS Copies to:
Chairman of the Board, President, Robert S. Kant, Esq.
and Chief Executive Officer Jere M. Friedman, Esq.
4707 East Baseline Road O'Connor, Cavanagh, Anderson,
Phoenix, Arizona 85040 Killingsworth & Beshears, P.A.
(602) 337-3700 One East Camelback Road
(Name, address, including zip code, and telephone number, Phoenix, Arizona 85012
including area code, of agent for service) (602) 263-2606
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Approximate date of Commencement of Proposed Sale to the Public: As
soon as practical after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [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. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=======================================================================================================
Proposed Maximum Amount of
Title of Shares Amount to be Aggregate Registration
to be Registered Registered Offering Price(1) Fee
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<S> <C> <C> <C>
Common Stock(2)......................... 64,164 Shares $2,241,729.70 $661.31
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Total.......................... 64,164 Shares $2,241,729.70 $661.31
=======================================================================================================
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
(2) Such shares are being registered for resale from time to time by certain
Selling Shareholders.
<PAGE>
Pursuant to Rule 429, this Registration Statement relates to (a) 11,142
outstanding shares of Common Stock (as adjusted to reflect the two-for-one stock
split effected as a stock dividend on May 28, 1996) that have been registered
for resale from time to time by certain Selling Shareholders included in the
Registrant's Registration Statement on Form S-3 and amendments thereto (No.
33-79942) as filed with the Commission on June 8, 1994 and declared effective on
September 20, 1994, for which a registration fee of $18.49 has been previously
paid; (b) 35,000 outstanding shares of Common Stock that have been registered
for resale from time to time as included in the Registrant's Registration
Statement on Form S-3 (No. 333-03865) as filed with the Commission on May 16,
1996 and declared effective on May 29, 1996, for which a registration fee of
$201.02 has been previously paid; and (c) 445,535 outstanding shares of Common
Stock that have been registered for resale from time to time as included in the
Registrant's Registration Statement on Form S-3 (No. 333-22943) as filed with
the Commission on March 7, 1997 and declared effective on March 12, 1997, for
which a registration fee of $2,885.88 has been previously paid.
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 FEBRUARY 10, 1998
PROSPECTUS
555,841 Shares of Common Stock
ACTION PERFORMANCE COMPANIES, INC.
This Prospectus relates to 555,841 shares of common stock, par value
$.01 per share (the "Common Stock") of Action Performance Companies, Inc. (the
"Company") that may be sold from time to time by certain selling shareholders of
the Company (the "Selling Shareholders"). To the extent required by applicable
law or Securities and Exchange Commission regulations, this Prospectus shall be
delivered to purchasers upon resale of shares of Common Stock by the Selling
Shareholders. The Company will not receive any of the proceeds of sales by the
Selling Shareholders.
The Company's Common Stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "ACTN." On February 6, 1998, the last sale price of
the Common Stock as reported on Nasdaq was $34.13 per share.
The securities offered hereby involve a high degree of risk. See "Risk
Factors," which begins on page 6 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
Company's Annual Report on Form 10-K for the year ended September 30, 1997, as
filed by the Company with the Commission pursuant to the Exchange Act on
December 22, 1997. All reports and other documents subsequently filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this Prospectus shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such reports and
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein prior to the date hereof shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The information relating to the Company contained in this Prospectus
summarizes, is based upon, or refers to, information and financial statements
contained in one or more of the documents incorporated by reference herein;
accordingly, such information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above that have been incorporated by
reference herein (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates). Requests should be directed to Action Performance
Companies, Inc., 4707 East Baseline Road, Phoenix, Arizona 85040, (telephone
(602) 337- 3700), Attention: Secretary.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors, including those set forth in "Risk Factors" and elsewhere in
this Prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information and financial statements, including the notes thereto,
appearing elsewhere or incorporated by reference in this Prospectus. 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, 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. 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 Racing Collectibles Club of America
(the "Collectors' Club"), which currently has approximately 107,000 members; and
through mobile trackside souvenir stores, promotional programs for corporate
sponsors, and fan clubs. In December 1996, the Company entered into a license
agreement with Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and game
manufacturer, covering the exclusive sale by Hasbro of a new line of
motorsports-related products in the mass-merchandise market.
The Company's products and other programs capitalize on the rapidly
growing popularity of motorsports. USA Today reports that motorsports racing is
the fastest growing spectator sport in the United States with attendance at
NASCAR Winston Cup events more than doubling in the past decade from 75,643 per
event in 1985 to approximately 180,000 in 1996. Approximately 5.6 million fans
attended the 31 races of the Winston Cup series in 1996. Published reports
estimate that attendance at NASCAR Winston Cup events in 1997 exceeded 6.0
million fans. USA Today also reports that TV ratings are growing even faster
than attendance, with more than 100 million people tuning in to NASCAR's
televised events each year. According to NASCAR, more than 70 of the Fortune 500
companies utilize motorsports sponsorship or advertising as part of their
marketing strategies.
Historically, the Company has designed and marketed die-cast
collectibles featuring NASCAR drivers and vehicles. In 1995, the Company began
expanding its lines of die-cast collectibles to include other types of
motorsports vehicles, including NHRA drag racing, NASCAR's "Craftsman Truck"
racing series, United States Auto Club ("USAC") racing, and "World of Outlaws"
sprint car racing. During fiscal 1997, the Company expanded its product
offerings by acquiring Sports Image, Inc. ("Sports Image"), Motorsport
Traditions Limited Partnership and Creative Marketing and Promotions, Inc.
(together, "Motorsport Traditions"), and Robert Yates Promotions, Inc. ("RYP"),
which market and distribute licensed motorsports products including apparel and
souvenirs; Image Works, Inc., which manufactures and markets licensed
motorsports apparel through the mass-merchandise markets ("Image Works"); and
the motorsports collectibles-related assets of Simpson Products, Inc.
("Simpson"). As a result of these acquisitions, the Company now markets and
distributes licensed motorsports apparel and other souvenir items featuring the
likeness of Dale Earnhardt, Jeff Gordon, Darrell Waltrip, Bobby Labonte, and
other popular drivers. 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.
3
<PAGE>
The Company has continued to take significant steps that are intended
to add new product lines and distribution channels to capitalize on the growing
demand for licensed motorsports products but will not compete with sales of the
Company's existing products. As part of these ongoing efforts, in October 1997
the Company entered into a ten-year license agreement with Richard Childress
Racing Enterprises, Inc. ("RCR") with respect to various rights used in
connection with Dale Earnhardt licensed products. In addition, in December 1997
the Company (i) acquired the assets and assumed certain liabilities related to
the motorsports die-cast collectible product lines of Revell-Monogram, Inc.
("Revell") and entered into a strategic alliance with Revell involving extensive
product licensing and distribution arrangements (the "Revell Acquisition"), and
(iii) acquired certain assets and assumed certain liabilities related to sales
of motorsports merchandise licensed by NASCAR Winston Cup driver Rusty Wallace
and entered into a seven-year license agreement for the name and likeness of Mr.
Wallace (the "Rusty Wallace Acquisition").
The Company focuses on developing long-term relationships with the most
popular drivers, car owners, car sponsors, car manufacturers, and others in the
various top racing categories. The Company continually strives to strengthen its
relationships with licensors and to develop opportunities to market innovative
licensed collectible and consumer products that appeal to motorsports
enthusiasts. The Company believes that its license agreements with popular
NASCAR and other motorsports personalities and sponsors significantly enhance
the collectible value and marketability of its products. The Company believes
that it will be able to leverage its relationships to attract additional drivers
in order to generate increased revenue for the Company as well as increased
earnings for the drivers.
The Company pursues a strategy designed to enhance its leadership
position in the motorsports collectible and consumer products industry. Key
aspects of this strategy include (i) continuing to enhance its existing products
and introduce new products that appeal to racing enthusiasts, (ii) expanding and
strengthening its licensing arrangements, (iii) pursuing strategic acquisitions
and alliances, (iv) expanding existing and identifying new distribution
channels, and (v) developing promotional programs for corporate sponsors.
The Company was incorporated in Arizona in 1992. The Company's
principal executive offices are located at 4707 East Baseline Road, Phoenix,
Arizona 85040, and its telephone number is (602) 337-3700. As used herein, the
term "Company" refers to Action Performance Companies, Inc. and its subsidiaries
and operating divisions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."
The Offering
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Securities offered by the Selling Shareholders... 555,841 shares of Common Stock
Common Stock currently outstanding............... 16,034,044 shares(1)
Use of proceeds.................................. The Company will not receive any of the proceeds of
sales of Common Stock by the Selling Shareholders.
Risk factors..................................... Investors should carefully consider the factors
discussed under "Risk Factors."
Nasdaq National Market symbol.................... ACTN
</TABLE>
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(1) Excludes (i) 1,143,028 shares of Common Stock reserved for issuance
upon exercise of stock options outstanding as of January 30, 1998, and
(ii) 266,360 shares reserved for issuance upon the exercise of stock
options that may be granted in the future under the Company's 1993
Stock Option Plan.
4
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Summary Consolidated Financial Data
(in thousands, except per share amounts)
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<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
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Operating Data:
Net sales(1) .......................... $ 15,108 $ 16,869 $ 26,131 $ 44,216 $130,380
Income (loss) before benefit from
(provision for) income taxes ....... (1,240) 409 4,154 9,870 16,910
Net income (loss)(2) .................. (1,171) 633 2,770 5,953 10,146
Net income (loss) per
common share equivalent,
assuming dilution (2) (3) .......... $ (0.21) $ 0.08 $ 0.26 $ 0.46 $ 0.69
Weighted average number of common
shares, assuming dilution (3) (4) .. 5,662 9,566 10,899 13,028 14,624
Balance Sheet Data (at end of period):
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 debt(5) ......................... 452 266 288 365 22,586
Shareholders' equity(4) ............... 5,744 6,909 18,890 26,996 103,169
</TABLE>
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(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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."
(2) Amounts for fiscal 1997 include a one-time charge of approximately $5.4
million for settlement costs and related legal and other expenses. See
"Business - Litigation."
(3) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996, and restated to reflect the adoption of
Statement of Financial Standards No. 128, "Earnings per Share."
(4) Excludes (i) an aggregate of 44,860 shares of Common Stock issued
subsequent to September 30, 1997 in connection with a license agreement
and for services (see "Private Placements"), and (ii) 37,121 shares of
Common Stock issued upon exercise of stock options subsequent to September
30, 1997.
(5) Amounts shown as of September 30, 1997, include an aggregate of $20.0
million in principal amount of senior notes issued in January 1997. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
5
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RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered in evaluating the Company and its
business before purchasing any of the securities offered hereby.
Certain Factors That Could Adversely Affect Operating Results
The Company's operating results are affected by a wide variety of
factors that could adversely impact its net sales and operating results. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify trends in the motorsports collectibles and
consumer markets and to create and introduce products on a timely basis that
take advantage of those trends and that compete effectively on the basis of
price and consumer tastes and preferences; its ability to identify popular
motorsports personalities and to enter into and maintain mutually satisfactory
licensing arrangements with them; the racing success of the key motorsports
personalities with whom the Company has license arrangements; the Company's
ability to design and arrange for the timely production and delivery of its
products, the market acceptance of the Company's products; the level and timing
of orders placed by customers; seasonality; the popularity and life cycles of
and customer satisfaction with products designed and marketed by the Company;
and competition and competitive pressures on prices.
New motorsports collectible and consumer products frequently can be
successfully marketed for only a limited time. The Company's ability to increase
its sales and marketing efforts to stimulate customer demand and its ability to
monitor third-party manufacturing arrangements in order to maintain satisfactory
delivery schedules and product quality are important factors in its long-term
prospects. A slowdown in demand for the Company's products as a result of
ineffective marketing efforts, manufacturing difficulties, changing cultural and
demographic trends or consumer tastes and spending patterns, economic
conditions, or other broad-based factors could adversely affect the Company's
operating results.
Dependence on License Arrangements
The Company markets its products pursuant to licensing arrangements
with race car drivers, race car owners, race car sponsors, automobile
manufacturers, and NASCAR. 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 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
6
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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 its products, it is potentially subject to variations in the prices
it pays its third-party manufacturers for products depending on what they pay
for the raw materials. In this regard, the Company understands that the price of
zinc, a principal raw material in its die-cast replicas, has increased
substantially over the last several years, although to date these price
increases have not been reflected in increases in the prices the Company pays
for its die-cast replicas.
Integration of Business Operations
The Company has completed a number of acquisitions during and
subsequent to fiscal 1997. The Company has substantially consolidated the
operations of the various 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.
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,
7
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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
August 1997, the Company relocated its corporate headquarters to a new 140,000
square foot facility in Phoenix, Arizona. The Company also recently 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 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
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
8
<PAGE>
schedules of its products. There can be no assurance that the Company will
continue to be able to compete successfully in the future. See "Business -
Competition."
Potential Regulation of Corporate Sponsorship
Tobacco and alcohol companies provide a significant amount of
advertising and promotional support of racing events, drivers, and car owners.
In August 1996, the U.S. Food and Drug Administration (the "FDA") published
final regulations that will substantially restrict tobacco industry sponsorship
of sporting events, including motorsports, beginning in 1998. In April 1997, a
federal district judge ruled that the FDA did not have the authority to regulate
tobacco marketing. That ruling, if upheld on appeal, would have the effect of
overturning the FDA regulations. 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 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.
9
<PAGE>
Under the terms of its license agreement with Hasbro, Hasbro's royalty
payments to the Company for sales by Hasbro in foreign countries are based on
the exchange rates in effect on the last day of the calendar quarter for which
such royalties are owed. As a result, the Company bears any risks that may be
associated with exchange rate fluctuations between the date on which Hasbro
records overseas sales of products subject to the license agreement and the last
day of the calendar quarter in which the sales are made. The Company does not
currently believe that royalties from overseas sales of products by Hasbro will
represent a material percentage of the Company's total revenue. As a result, the
Company does not currently anticipate that it will engage in hedging
transactions intended to offset potential adverse consequences of exchange rate
fluctuations with respect to royalty payments due from Hasbro for sales in
foreign countries.
Possible Need for Additional Capital to Support Growth
The Company's business operations have grown considerably in recent
years as a result of an increase in the number of licensing arrangements with
race car drivers, car owners, sponsors, automobile manufacturers, and others;
expansion of the Company's product offerings, including additional lines of
die-cast replicas that have required substantial investments in new tooling; and
significant acquisitions of complementary businesses. The Company has financed
this growth through cash generated by operations, by debt and equity financings,
and by issuing additional shares of Common Stock for acquisitions. Continued
rapid growth, whether externally through additional acquisitions or internally
through new licensing arrangements or new product offerings, could require
substantial additional capital in excess of funds available to the Company
through its existing credit facility, cash generated by operations, and the
proceeds of the public offering completed in July 1997. 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 Stock Price
The market price of the Company's Common Stock has increased
dramatically during the last three years. See "Price Range of Common Stock." The
period was marked by generally rising stock prices, extremely favorable industry
conditions, and substantially improved operating results by the Company. There
can be no assurance that these favorable conditions will continue. The trading
price of the Company's Common Stock in the future could be subject to wide
fluctuations in response to quarterly variations in operating results of the
Company, actual or anticipated announcements of new products by the Company or
its competitors, changes in analysts' estimates of the Company's financial
performance, general conditions in the markets in which the Company competes,
worldwide economic and financial conditions, and other events or factors. The
stock market also has experienced extreme price and volume fluctuations that
have particularly affected the market prices for many rapidly expanding
companies and that often have been unrelated to the operating performance of
such companies. These broad market fluctuations and other factors may adversely
affect the market price of the Company's Common Stock.
10
<PAGE>
Litigation
The Company is one of approximately 30 defendants in a lawsuit in which
the state of Arizona seeks recovery of certain clean-up costs under federal and
state environmental laws. 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 also is a defendant in a lawsuit alleging breach of contract,
fraud, trademark infringement, and other claims with respect to licenses for
certain of its die-cast products. The Company is actively defending these
lawsuits. In the event a decision adverse to the Company is rendered in any of
these lawsuits, the resolution of such matter could have a material adverse
effect on the Company's business, financial condition, and operation results.
The Company's financial statements currently reflect no provision for any of
these lawsuits. See "Business - Litigation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Rights to Acquire Shares; Potential Issuance of Additional Shares
As of January 30, 1998, options to acquire a total of 1,143,028 shares
were outstanding under the Company's 1993 Stock Option Plan (the "1993 Plan").
During the terms of such options, the holders thereof will have the opportunity
to profit from an increase in the market price of Common Stock, with resulting
dilution in the interests of holders of Common Stock. The existence of such
stock options could adversely affect the terms on which the Company can obtain
additional financing, and the holders of such options can be expected to
exercise such options at a time when the Company, in all likelihood, would be
able to obtain additional capital by offering shares of its Common Stock on
terms more favorable to the Company than those provided by the exercise of such
options.
Shares Eligible for Future Sale; Potential Depressive Effect on Stock Price
Sales of substantial amounts of Common Stock by shareholders of the
Company, or even the potential for such sales, may have a depressive effect on
the market price of the Common Stock. Of the 16,034,044 shares of Common Stock
outstanding, approximately 13,368,600 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
of 1933, as amended (the "Securities Act"). The approximately 2,665,600
remaining shares of Common Stock outstanding are "restricted securities," as
that term is defined in Rule 144 under the Securities Act, and may be sold only
in compliance with Rule 144, pursuant to registration under the Securities Act,
or pursuant to an exemption therefrom. An aggregate of 555,841 shares of such
"restricted securities" covered by this Prospectus are being registered for
resale pursuant to the registration statement of which this Prospectus forms a
part or have been registered for resale under another registration statement to
which this Prospectus relates. Affiliates also are subject to certain of the
resale limitations of Rule 144 as promulgated under the Securities Act.
Generally, under Rule 144, each person who beneficially owns restricted
securities with respect to which at least 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 2,101,000
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 Securities - Shares Eligible for Future Sale."
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not currently anticipate that it will pay dividends in the foreseeable
future. Instead, the Company intends to apply its earnings to the expansion and
development of its business.
11
<PAGE>
Change in Control Provisions
The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles"), Amended and Restated Bylaws, and Arizona law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when those attempts
may be in the best interests of shareholders. The Restated Articles also
authorize the Board of Directors, without shareholder approval, to issue one or
more series of preferred stock, which could have voting, liquidation, dividend,
conversion, or other rights that adversely affect or dilute the voting power of
the holders of Common Stock. See "Description of Securities."
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Prospectus under
the headings "Business," "Risk Factors," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning future,
proposed, and anticipated activities of the Company, certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the motorsports
industry in general, and other statements contained in this Prospectus regarding
matters that are not historical facts are forward-looking statements, as such
term is defined in the Securities Act. Forward-looking statements, by their very
nature, include risks and uncertainties, many of which are beyond the Company's
control. Accordingly, actual results may differ, perhaps materially, from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include those discussed elsewhere
under "Risk Factors."
12
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from sales of shares
of Common Stock by the Selling Shareholders.
DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, capital requirements,
financial condition, and other relevant factors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
September 30, 1997
------------------
<S> <C>
Long-Term Debt
Notes payable and other long-term debt(1)........................................... $ 22,586
========
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;
15,952,083 shares issued and outstanding(2)(3)................................... 160
Additional paid-in capital(3)....................................................... 84,984
Retained earnings................................................................... 18,025
--------
Total shareholders' equity(3)....................................................... $103,169
========
</TABLE>
- ----------------------
(1) The amounts shown include an aggregate of $20.0 million in principal
amount of senior notes issued in January 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
(2) Excludes (i) 1,035,210 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding as of September 30, 1997, and (ii)
394,451 shares reserved for issuance upon the exercise of stock options
that may be granted in the future under the Company's 1993 Stock Option
Plan.
(3) Excludes (i) an aggregate of 44,860 shares of Common Stock issued
subsequent to September 30, 1997 in connection with a license agreement
and for services (see "Private Placements"), and (ii) 37,121 shares issued
upon exercise of stock options subsequent to September 30, 1997.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National
Market under the symbol "ACTN" since April 27, 1993. The following table sets
forth the quarterly high and low closing sale prices of the Company's Common
Stock on the Nasdaq National Market for the calendar periods indicated, as
adjusted to reflect the two-for-one stock split effected as a stock dividend on
May 28, 1996:
High Low
---- ---
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
As of February 6, 1998, there were 215 holders of record and
approximately 5,750 beneficial owners of the Company's Common Stock. On February
6, 1998, the closing sales price of the Company's Common Stock on the Nasdaq
National Market was $34.13 per share.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data presented below as of and for
the five years ended September 30, 1997 are derived from the Company's
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. 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
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<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(1)(2) .................... 3,550 3,924 1,498 -- 1,019
--------- --------- --------- --------- ---------
Net sales(3) ................ 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(5)
Amortization of goodwill and other
intangibles .................... -- -- 4 4 1,286
--------- --------- --------- --------- ---------
Income (loss) from operations ..... (1,174) 573 4,130 9,654 18,135
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
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
========= ========= ========= ========= =========
Net income (loss) per common
share, assuming dilution (4) ... $ (0.21) $ 0.08 $ 0.26 $ 0.46 $ 0.69
========= ========= ========= ========= =========
Weighted average number of
common shares, assuming
dilution(4) .................... 5,662 9,566 10,899 13,028 14,624
Consolidated Balance Sheet Data
(at end of period):
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 debt ........................ 452 266 288 365 22,586
Shareholders' equity .............. 5,744 6,909 18,890 26,996 103,169
</TABLE>
- ---------------------
(1) 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.
(2) Includes royalty and license fees beginning in fiscal 1997.
(3) 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. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview."
(4) Adjusted to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996, and restated to reflect the adoption of
Statement of Financial Standards No. 128, "Earnings per Share."
(5) Represents a one-time charge of approximately $5.4 million for settlement
costs and related legal and other expenses. See "Business - Litigation."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company designs and markets licensed motorsports products,
including die-cast scaled replicas of motorsports vehicles, apparel, and
souvenirs. The Company also develops promotional programs for sponsors of
motorsports that feature the Company's die-cast replicas or other products and
are intended to increase brand awareness of the products or services of the
corporate sponsors. In addition, the Company represents popular race car drivers
in a broad range of licensing and other revenue-producing opportunities,
including product licenses, corporate sponsorships, endorsement contracts, and
speaking engagements. The Company's motorsports collectibles and 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 was incorporated in Arizona in May 1992 and began marketing
die-cast collectibles in July 1992. In August 1994, the Company acquired certain
assets and liabilities of Fan Fueler, Inc. and began marketing licensed
motorsports consumer products. During fiscal 1993 and 1994, the Company also
conducted the business of staging M-CarTM Grand Prix Races for charitable and
other organizations, in which participating sponsors purchased specialized
gas-powered, one-third scale racing vehicles from the Company. In September
1994, the Company sold the assets and liabilities related to its M-CarTM
operations and discontinued its M-CarTM Grand Prix Race operations. During
fiscal 1993 and 1994 and the first two quarters of fiscal 1995, the Company
designed and marketed pedal, electric, and gas-powered mini vehicles, primarily
as specialty promotional items. The Company sold the assets related to its mini
vehicle operations in March 1995.
In November 1996, the Company acquired Sports Image and in January 1997
the Company acquired Motorsport Traditions, both of which marketed and
distributed licensed motorsports apparel, die-cast collectibles and other
souvenir items. In July 1997, the Company acquired RYP, which had operations
similar to those of Sports Image and Motorsport Traditions, and Image Works,
which manufacturers and markets licensed motorsports apparel through the
mass-merchandising markets. The Company acquired certain assets and assumed
certain liabilities related to the mini-helmet collectible business of Simpson
in August 1997. Following these acquisitions, the Company took a number of
actions intended to integrate the operations of the acquired companies with the
Company's existing operations and to reduce overall selling, general, and
administrative expenses associated with the acquired entities. These actions
included consolidating the operations and warehouse facilities of Motorsport
Traditions and RYP with Sports Image's existing operations and facility in
Charlotte, North Carolina; consolidating the operations of Simpson into the
Company's headquarters in Phoenix, Arizona; eliminating duplicative personnel
functions; and integrating the management information systems of the acquired
companies. These efforts had a meaningful impact on the Company's results of
operations beginning in the second half of fiscal 1997.
In December 1997, the Company completed the Rusty Wallace Acquisition.
The purchase price for the acquired assets consisted of cash of approximately
$6.0 million. The Company and an affiliate of Rusty Wallace also entered into a
seven-year license agreement. See "Business - Licenses." In December 1997, the
Company also completed the Revell Acquisition. The purchase price for the
acquired assets consisted of cash of approximately $14.8 million. The Company
will pay Revell an additional $1.0 million per year for 10 years, beginning on
January 1, 1998, provided that certain conditions are met. The Company and
Revell also entered into a 10-year license agreement. See "Business - Licenses."
In addition to the cost savings described above, the Company believes
that the fiscal 1997 acquisitions provide the potential for enhanced revenue
opportunities as a result of the synergies created by expanded product offerings
and additional distribution channels. For example, in fiscal 1997 the Company
began developing new lines of licensed motorsports apparel and souvenirs for
exclusive sales through its Collectors' Club. The Company also believes that
these acquisitions will provide opportunities for additional sales growth of the
Company's die-cast products through trackside sales, promotional programs, and
fan clubs.
Prior to the fiscal 1997 acquisitions, the Company's revenue consisted
primarily of sales of die-cast collectibles, and the revenue of the acquired
businesses consisted primarily of sales of licensed motorsports apparel
16
<PAGE>
and souvenirs. Promotional revenue consists of sales of products developed for
corporate promotion programs. The Company's fiscal 1997 revenue includes royalty
income as a result of the license agreement with Hasbro.
The Company's cost of sales consists primarily of the cost of products
procured from third-party manufacturers, royalty payments to licensors, and
depreciation of tooling and dies. Significant factors affecting the Company's
cost of sales as a percentage of net sales include (i) the overall percentage of
net sales represented by sales of die-cast collectible products, which typically
carry higher gross margins than the Company's other products, (ii) the
percentage of sales of die-cast collectible products represented by sales
through the Collectors' Club, which typically carry higher gross margins than
sales of such products through wholesale distributors, and (iii) the effect of
amortizing the fixed cost components of cost of sales, primarily depreciation of
tooling and dies, over varying levels of net sales. The Company believes that
the increased sales of licensed apparel and souvenirs following the acquisitions
of Sports Image and Motorsport Traditions will result in lower overall gross
margins as a result of lower gross margins generally associated with these
acquired product lines. The Company believes, however, that the effect of these
lower gross margins will be mitigated at least to some extent by cost reductions
and other operational efficiencies associated with the combination of the
acquired entities and by the license agreement with Hasbro. The agreement with
Hasbro provides the Company with a source of license royalties without
significant related cost of sales. In addition, the license agreement provides
the Company with access to the mass-merchandise market without committing
capital for manufacturing and with limited marginal expenditures for
administrative and marketing activities.
Selling, general, and administrative expenses include general corporate
expenses. The Company anticipates that it will continue to achieve a reduction
in selling, general, and administrative expenses as a percentage of sales as a
result of consolidation and the cost-reduction efforts described above. The
Company recorded goodwill and other intangibles of approximately $47.7 million
in connection with the fiscal 1997 acquisitions. The goodwill and other
intangibles are being amortized at the rate of approximately $1.9 million per
year over 15 to 25 years.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total revenue represented by certain expense and revenue items.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales
Collectibles ........................ 76.5% 75.9% 89.7% 92.5% 49.0%
Apparel and souvenirs ............... -- 0.8 4.6 4.4 46.3
Promotional ......................... -- -- -- 3.1 3.9
Other ............................... 23.5 23.3 5.7 -- 0.8
----- ----- ----- ----- -----
Net Sales ......................... 100.0 100.0 100.0 100.0 100.0
Cost of sales .......................... 64.4 62.2 60.8 57.2 62.1
----- ----- ----- ----- -----
Gross profit ........................... 35.6 37.8 39.2 42.8 37.9
Selling, general and administrative
expenses ............................ 43.4 34.4 23.4 21.0 18.9
Settlement costs ....................... -- -- -- -- 4.1
Amortization of goodwill and other
intangibles ......................... -- -- -- -- 1.0
----- ----- ----- ----- -----
Income (loss) from operations .......... (7.8) 3.4 15.8 21.8 13.9
Interest income (expense) and other, net (0.4) (1.0) 0.1 0.5 (0.9)
----- ----- ----- ----- -----
Income (loss) before provision for
(benefit from) income taxes ......... (8.2) 2.4 15.9 22.3 13.0
Provision for (benefit from) income
taxes .................................. (0.4) (1.4) 5.3 8.8 5.2
----- ----- ----- ----- -----
Net income (loss) ...................... (7.8)% 3.8% 10.6% 13.5% 7.8%
===== ===== ===== ===== =====
</TABLE>
17
<PAGE>
Fiscal Year Ended September 30, 1997 Compared with Fiscal Year Ended September
30, 1996
Net sales increased 195% to $130.4 million for the year ended September
30, 1997 from $44.2 million for the year ended September 30, 1996. The Company
attributes the improvement in sales during fiscal 1997 primarily to (i) revenue
from Sports Image and Motorsport Traditions, which were acquired by the Company
during the first and second quarters of fiscal 1997, respectively, (ii) the
Company's ability to capitalize on the continued strong growth in the base of
motorsports enthusiasts and to produce and sell increased quantities of
souvenirs, apparel, and die-cast collectible goods; and (iii) an increase in
Collectors' Club membership. The number of members in the Collectors' Club
increased to approximately 100,000 members from approximately 72,000 members at
September 30, 1997 and September 30, 1996, respectively.
Gross profit increased to $49.4 million in fiscal 1997 from $18.9
million in fiscal 1996, representing 37.9% and 42.8% of net sales, respectively.
The decrease in gross profit as a percentage of net sales resulted from
increased sales of apparel and souvenirs, which typically provide lower margins
than sales of the Company's collectible products.
Selling, general and administrative expenses increased to $24.6 million
in fiscal 1997 from $9.3 million in fiscal 1996, representing 18.9% and 21.0% of
net sales, respectively. The decrease in such expenses as a percentage of sales
resulted primarily from cost savings achieved with the integration and
consolidation of operations for the acquired entities of Sports Image and
Motorsport Traditions. The integration and consolidation included the relocation
of Motorsport Traditions into Sport Image's facility, the integration of
management information systems, and a reduction in excess labor.
Settlement costs of $5.4 million for the year ended September 30, 1997
resulted from a one-time charge for the settlement of a pending lawsuit and
related legal charges. This settlement represents 4.1% of net sales. See
"Business - Litigation."
Amortization of goodwill and other intangibles increased to $1.3
million for the year ended September 30, 1997 from $4,000 for the year ended
September 30, 1996. The increase in amortization of goodwill and other
intangibles is related to the acquisitions of Sports Image, Motorsport
Traditions, and other entities. The Company recorded goodwill and other
intangible assets of $47.7 million in connection with the fiscal 1997
acquisitions. The Company is amortizing the goodwill and other intangible assets
over a period of 15 to 25 years.
The change in interest income (expense) and other, net, was primarily
attributable to an increase in interest expense of approximately $2.0 million
related to debt incurred in connection with the acquisitions of Sports Image and
Motorsport Traditions.
Fiscal Year Ended September 30, 1996 Compared with Fiscal Year Ended September
30, 1995
Net sales increased 69.2% to $44.2 million for the year ended September
30, 1996 from $26.1 million for the year ended September 30, 1995. The $18.1
million increase in net sales resulted primarily from an increase of $17.5
million in collectible sales. The increase in collectible sales is primarily
attributable to (i) the continued expansion of the collectible market and the
Company's ability to produce and sell increased quantities of collectibles; (ii)
an increase in the number of members in the Collectors' Club (which increased to
approximately 72,000 members from approximately 40,000 members at September 30,
1996 and September 30, 1995, respectively); and (iii) sales from recently
introduced product lines.
Gross profit increased to $18.9 million in fiscal 1996 from $10.2
million in fiscal 1995, representing 42.8% and 39.2% of net sales, respectively.
The increase in gross profit as a percentage of net sales resulted primarily
from (i) the effect of higher sales volume on fixed cost components of cost of
sales, primarily depreciation charges related to the Company's tooling
equipment; and (ii) increased sales through the Collectors' Club, which
typically carry higher margins.
18
<PAGE>
Selling, general, and administrative expenses increased to $9.3 million
in fiscal 1996 from $6.1 million in fiscal 1995, representing 21.0% and 23.4% of
net sales, respectively. The increase in such expenses resulted from increased
expenditures for sales and marketing, particularly increased advertising
consistent with the Company's strategy to increase Collectors' Club memberships
and distributor sales.
Interest income (expense) and other, net, increased to approximately
$216,000 in fiscal 1996 from approximately $24,000 in fiscal 1995. This change
resulted primarily from the conversion of the 10% Convertible Subordinated
Debentures (the "Debentures") into shares of the Company's Common Stock during
fiscal 1995.
The provision for income taxes in fiscal 1996 resulted in an effective
tax rate of approximately 39.7% compared with an effective tax rate of
approximately 33.3% in fiscal 1995. The increase in the effective tax rate
occurred primarily as a result of the utilization of net operating loss
carryforwards in fiscal 1995.
Pro Forma Results of Operations
The following table sets forth the unaudited pro forma income statement
data of the Company for the years ended September 30, 1996 and 1997, giving
effect to the acquisitions of Sports Image, Motorsport Traditions, RYP, Image
Works, and Simpson as if they had occurred on October 1, 1995, using the
purchase method of accounting for business combinations. The unaudited pro forma
income statement data presented herein does not purport to represent what the
Company's actual results of operations would have been had those acquisitions
occurred on that date or to project the Company's results of operations for any
future period.
(in thousands, except per share data)
Year Ended Year Ended
September 30, September 30,
1996 1997
------------- -------------
(Unaudited) (Unaudited)
Net sales.......................... $ 137,930 $ 158,977
Net income(1)...................... 8,419 9,338
Net income per common share(1)..... $ 0.61 $ 0.63
- ----------------------
(1) Pro forma amounts for fiscal 1997 reflect the one-time charge of
approximately $5.4 million for legal settlement costs and related
expenses.
The pro forma results shown above do not account for efficiencies
gained upon the consolidation of operations, including the elimination of
duplicative functions and reduction of salaries expense and other related costs.
The difference in earnings per share on a pro forma basis for fiscal 1997 is
primarily attributable to lower gross margins as a result of the write-down of
inventory by Motorsport Traditions immediately prior to the date of acquisition.
The Company has implemented improvements to the management and control of
inventories of the acquired companies intended to reduce the need for seasonal
adjustments to inventory. The pro forma results of operations for the years
ended September 30, 1996 and 1997 reflect the amortization of goodwill and other
intangibles arising from the fiscal 1997 acquisitions and include additional
interest expense associated with the financing of the acquisitions of Sports
Image and Motorsport Traditions.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the period ended September 30,
1997. All quarterly information was obtained from unaudited financial statements
not otherwise contained or incorporated by reference herein. The Company
believes that all necessary adjustments have been made to present fairly the
quarterly information when read in conjunction with the Consolidated Financial
19
<PAGE>
Statements and Notes thereto incorporated by reference into this Prospectus. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Fiscal 1996
-----------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... $ 8,006 $ 9,766 $12,283 $14,161
Gross profit ........................ 3,241 3,947 5,424 6,308
Income from operations .............. 1,370 1,852 2,938 3,494
Net income .......................... $ 878 $ 1,140 $ 1,777 $ 2,158
Net income per common share, assuming
dilution ......................... $ 0.07 $ 0.09 $ 0.14 $ 0.16
Weighted average number of common
shares, assuming dilution ........ 12,840 12,913 13,147 13,118
Fiscal 1997
-----------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales ........................... $15,175 $28,302 $39,632 $47,270
Gross profit ........................ 6,395 10,781 14,684 17,525
Income from operations .............. 2,843 4,583 2,349 8,361
Net income .......................... $ 1,568 $ 2,437 $ 1,098 $ 5,043
Net income per common share, assuming
dilution ......................... $ 0.12 $ 0.17 $ 0.08 $ 0.31
Weighted average number of common
shares, assuming dilution ........ 13,455 14,129 14,430 16,450
</TABLE>
The Company's revenue and operating results may be subject to quarterly
and other fluctuations as a result of a variety of factors. As a result of the
fiscal 1997 acquisitions, the Company believes that quarter-to-quarter
comparisons of its past financial results may not necessarily be meaningful and
should not be relied upon as an indication of future performance.
Seasonality
Because the auto racing season is concentrated between the months of
February and November, the second and third calendar quarters of each year (the
Company's third and fourth fiscal quarters) generally are characterized by
higher sales of motorsports products. The Company believes, however, that
holiday sales of its products are increasing, which has the effect of reducing
seasonal fluctuations in its sales.
Liquidity and Capital Resources
The Company's working capital position increased to $57.0 million at
September 30, 1997 from $18.1 million at September 30, 1996. The increase of
$38.9 million is primarily attributable to the Company's 1997 public offering
described below, the working capital acquired from the Company's fiscal 1997
acquisitions (primarily the purchases of Sports Image and Motorsport
Traditions), and results from operations.
Capital expenditures for the year ended September 30, 1997 totaled
approximately $11.1 million, of which approximately $7.0 million was utilized
for the Company's continued investment in tooling.
20
<PAGE>
On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro at a price of $14.50 per share, with net proceeds to the
Company of approximately $2.6 million. The Company has agreed that, in the event
that Hasbro sells such shares at a price lower than $14.50 per share during the
one-year period ending on April 16, 1998, the Company will reimburse Hasbro for
the amount of such loss, plus interest. See "Principal and Selling
Shareholders."
On June 24, 1997, the Company sold 1,770,000 shares of Common Stock in
connection with an underwritten public offering. The Company sold an additional
315,000 shares of its common stock on July 17, 1997 pursuant to the exercise of
the underwriters' over-allotment option. The net proceeds to the Company from
this offering were approximately $49.8 million, after deducting estimated
offering expenses and underwriting discounts and commissions.
During the year ended September 30, 1997, the Company issued 296,092
shares of Common Stock upon the exercise of stock options, resulting in total
proceeds to the Company of approximately $1.7 million.
In November 1996, the Company purchased substantially all of the assets
and assumed certain liabilities of Sports Image. The purchase price was
approximately $30.0 million, consisting of a $24.0 million promissory note due
January 2, 1997 and 403,361 shares of the Company's Common Stock. On January 2,
1997, the Company repaid the promissory note with the proceeds from the issuance
of senior notes and a portion of the borrowings under the credit facility
described below. The terms of this acquisition were determined by arms-length
negotiations between representatives of Sports Image and representatives of the
Company. In fiscal 1996, the Company derived approximately 16% of its net sales
from Sports Image, a distributor of the Company's die-cast collectible products.
In January 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Motorsport Traditions Limited Partnership and
acquired all of the capital stock of Creative Marketing & Promotions, Inc. for
approximately $13.0 million, consisting of cash in the amount of $5.4 million, a
promissory note in the principal amount of $1.6 million, and an aggregate of
342,857 shares of the Company's Common Stock. The terms of the acquisitions were
determined by arms-length negotiations between representatives of the sellers
and representatives of the Company.
On January 2, 1997, the Company entered into a $16.0 million credit
facility (the "Credit Facility"), with First Union National Bank of North
Carolina. The Credit Facility, as amended in April 1997 and February 1998,
consists of a revolving line of credit (the "Line of Credit") for up to $10.0
million through March 31, 1998 and a $10.0 million letter of credit/bankers'
acceptances facility (the "Letter of Credit/BA Facility"). The Line of Credit
bears interest, at the Company's option, at a rate equal to either (i) the
greater of (a) the bank's publicly announced prime rate or (b) a weighted
average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line of
Credit is guaranteed by the Company's subsidiaries. The Company utilized $4.0
million of the Line of Credit to provide part of the cash portion of the
purchase price for Motorsport Traditions and an additional $4.0 million of the
Line of Credit to repay a portion of the $24.0 million promissory note issued in
connection with the acquisition of Sports Image. The Company utilized a portion
of the proceeds of the June 1997 public offering described above to repay its
outstanding indebtedness under the Line of Credit. The Company had no
outstanding borrowings under the Line of Credit as of September 30, 1997. The
Letter of Credit/BA Facility is available for issuances of letters of credit and
eligible bankers' acceptances in an aggregate amount up to $10.0 million to
enable the Company to finance purchases of products from its overseas vendors.
The Company had outstanding purchase commitments of approximately $3.5 million
under the Letter of Credit/BA Facility as of September 30, 1997. The Credit
Facility will mature on March 31, 1998. The Credit Facility contains certain
provisions that, among other things, require the Company to comply with certain
financial ratios and net worth requirements and limit the ability of the Company
and its subsidiaries to incur additional indebtedness, to sell assets, or to
engage in certain mergers or consolidations.
On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of senior notes to three insurance companies (the "Senior
Notes"). The Senior Notes bear interest at the rate of 8.05% per annum, provide
for semi-annual payments of accrued interest, and mature on January 2, 1999. The
Company may not
21
<PAGE>
prepay the Senior Notes prior to maturity, but must offer to redeem the Senior
Notes in the event of a "Change of Control" of the Company, as defined in the
Senior Notes. The Senior Notes contain certain provisions that, among other
things, require the Company to comply with certain financial ratios and net
worth requirements and limit the ability of the Company and its subsidiaries to
incur additional indebtedness, to sell assets or engage in certain mergers or
consolidations. The Senior Notes are guaranteed by the Company's subsidiaries.
The Company utilized the proceeds from the Senior Notes to repay the remainder
of the promissory note issued in connection with the acquisition of Sports
Image.
On July 22, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Image Works. The consideration paid by the
Company for the purchased assets consisted of (i) $4.25 million in cash plus
(ii) a three-year promissory note that provides for a minimum principal amount
of $750,000, with additional contingent payments of up to an aggregate of $1.4
million based upon the attainment of certain revenue objectives through
September 30, 2000. Image Works designs and manufactures screen printed and
embroidered motorsports apparel items for distribution through mass retailers
and corporate accounts. Image Works generated approximately $20.0 million in
revenue during calendar 1996. The terms of this acquisition were determined by
arms-length negotiations between representatives of Image Works and
representatives of the Company.
On July 31, 1997, the Company acquired all of the outstanding common
stock of RYP for cash of $5.7 million. RYP sells licensed motorsports products
through mobile trackside stores and generated approximately $5.0 million in
revenue during calendar 1996. In connection with the acquisition of RYP, the
Company entered into a 15-year license agreement with Robert Yates Racing, Inc.
See "Business -- Licenses." The terms of this acquisition were determined by
arms-length negotiations between representatives of RYP and representatives of
the Company.
On August 8, 1997, the Company acquired certain assets and assumed
certain liabilities related to the licensed mini-helmet collectible business of
Simpson. The consideration paid by the Company for the purchased assets
consisted of approximately $653,000 in cash, with additional contingent payments
of up to an aggregate of $1.5 million based upon the attainment of certain
revenue objectives. In connection with the purchase of the assets and assumption
of liabilities of Simpson, the Company also entered into a 25-year license
agreement with respect to certain rights used in connection with the purchased
assets. Pursuant to the license agreement, the Company paid the licensor an
initial license fee consisting of cash plus 19,324 shares of the Company's
Common Stock. The terms of this acquisition were determined by arms-length
negotiations between representatives of the seller and representatives of the
Company.
The Company is a defendant in various lawsuits. See "Business -
Litigation." The Company has made no provision in its financial statements with
respect to these matters. The imposition of damages in one or more of the cases
against the Company could have a material adverse effect on the Company's
results of operation and financial position.
The Company believes that its current cash resources, the Credit
Facility, and expected cash flow from operations will be sufficient to fund the
Company's capital needs during the next 12 months at its current level of
operations, apart from capital needs resulting from additional acquisitions.
However, the Company may be required to obtain additional capital to fund its
planned growth during the next 12 months and beyond. Potential sources of any
such capital may include the proceeds from the exercise of outstanding options,
bank financing, strategic alliances, and additional offerings of the Company's
equity or debt securities. There can be no assurance that such capital will be
available from these or other potential sources, and the lack of such capital
could have a material adverse effect on the Company's business.
22
<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, 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 107,000 members; and through mobile trackside souvenir stores,
promotional programs for corporate sponsors, and fan clubs. In December 1996,
the Company entered into a license agreement with Hasbro, a multi-billion dollar
toy and game manufacturer, covering the exclusive sale by Hasbro of a new line
of motorsports-related products in the mass-merchandise market.
Industry Overview
Motorsports racing in the United States consists of several distinct
segments, each with its own organizing bodies and events. The largest segment,
in terms of attendance and media exposure, is stock car racing, which is
dominated by NASCAR. The other principal segments are drag racing, with NHRA the
most important organizing body, and Indy car racing, controlled by the Indy
Racing League and Championship Auto Racing Teams.
According to USA Today, motorsports racing is the fastest growing
spectator sport in the United States. Approximately 15.4 million people attended
motorsports' premier events in 1996, almost three times the 1981 attendance.
Approximately 5.6 million fans attended the 31 races in the NASCAR Winston Cup
series in 1996, representing attendance of approximately 180,000 per event, more
than double the 75,643 attendance per Winston Cup event in 1985. Published
reports estimate that attendance at NASCAR Winston Cup events in 1997 exceeded
6.0 million fans. NHRA attendance also has grown significantly in recent years,
reaching total attendance of almost 1.9 million in 1996. 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 recently to launch Speedvision, a
motorsports cable network. USA Today reports that TV ratings are growing even
faster than attendance, with more than 100 million people tuning into NASCAR's
televised events in 1996. The Company believes that the recent construction of
new superspeedways in Los Angeles, California, 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.
Growth Strategy
The Company pursues a strategy designed to continue its leadership
position in the motorsports collectible and consumer products industry and to
provide top race car drivers and other licensors with a broad range of
revenue-producing opportunities throughout their careers. Key aspects of this
strategy include (i) continuing to enhance its existing products and introduce
new products that appeal to racing enthusiasts, (ii) expanding and strengthening
its licensing arrangements, (iii) pursuing strategic acquisitions and alliances,
(iv) expanding existing and identifying new distribution channels and (v)
developing promotional programs for corporate sponsors.
23
<PAGE>
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 will manufacture and market, with the Company's assistance, a line of
motorsports products that will not compete with the Company's core products.
The Company believes that its ongoing investment in tooling enables the
Company to produce die-cast products of higher quality and detail than those
produced by its competitors. The Company has invested more than $15.2 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, 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. Subsequent to September
30, 1997, 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) entered into an exclusive license arrangement with RCR that
gives the Company rights with respect to several of the most popular racing
teams; and (iii) completed the Rusty Wallace Acquisition.
24
<PAGE>
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
added complementary distribution channels, such as mobile trackside souvenir
stores and fan clubs, and provide the Company with the opportunity to
cross-market its die-cast, apparel, and souvenir products through all of its
distribution channels. As a result of the Revell Acquisition, the Company plans
to work with sales representatives for Revell's product lines of plastic model
kits to market 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 and K-mart, 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, and developing on-line ordering capabilities
on its Internet website may represent 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(R) cereal and offered two special-edition Dale
Earnhardt Wheaties(R) 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." The Company plans to pursue future promotional programs and
currently is in discussions to develop programs with major corporate sponsors.
Products and Services
Die-Cast Scaled Replica Vehicles
The Company designs and markets scaled replicas of motorsports-related
vehicles that are constructed using die-cast bodies and chassis with free
wheeling deluxe wheels and tires. The Company markets its die-cast racing
collectibles pursuant to approximately 300 active licenses with race car
drivers, owners, and sponsors as well as under license agreements with NASCAR,
Ford Motor Company, and several divisions of General Motors Corp. The die-cast
collectibles offered by the Company relate to stock car, NHRA drag racing,
"Super Truck" racing, USAC racing, and "World of Outlaws" sprint car racing. The
Company's die-cast collectibles consist of (i) 1:64th, 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 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."
25
<PAGE>
Historically, the Company has designed and marketed die-cast
collectibles featuring drivers and vehicles from the NASCAR Winston Cup series.
During fiscal 1995, the Company began the development of several new lines of
die-cast collectibles featuring replicas of vehicles from other popular
motorsports. The Company successfully introduced its line of Winston NHRA Top
Fuel Dragsters and a line of die-cast collectible replicas from the popular new
NASCAR "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.
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, license plate
brackets, mugs, pins, and key chains. Each of the motorsports consumer products
generally features the name, likeness, and car number of a popular race car
driver. The Company intends to acquire licenses with additional drivers and to
develop new motorsports consumer products, including items bearing the "NASCAR"
name and logo in connection with the Company's license agreement with NASCAR.
The Company's licensed motorsports apparel items utilize unique and creative
designs that are printed or applied to high-quality shirts, hats, jackets, and
other products. The Company designs and sells its motorsports apparel products
in sizes ranging from infant to youth to men's and women's adult sizes. The
Company designs its motorsports consumer products primarily for high-volume
distribution through retail outlets, 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 also will market other licensed motorsports products, including radio-
controlled cars, slot car sets, games (such as electronic and CD-ROM interactive
games), plush toys, figurines, play sets, walkie talkies, and other items
similar to products that Hasbro currently markets under the "Kenner," "Tonka,"
and "Milton Bradley" brand names.
The Company believes that the license agreement with Hasbro allows the
Company to capitalize on opportunities in the mass-merchandise market. The
agreement will enable the Company to remain focused on its core business of
designing and marketing motorsports collectibles, apparel, and souvenir products
while enabling the Company to benefit from Hasbro's retail mass-merchandise
marketing expertise and resources. The agreement also provides a means of
expanding the Company's product offerings without committing substantial
resources to manufacturing and marketing activities or subjecting it to the
risks inherent in the mass-merchandise market.
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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
The Company markets its die-cast collectibles on a wholesale basis
through approximately 40 distributors operating in the United States. The
distributors solicit orders for the Company's die-cast products from
approximately 5,000 specialty retailers throughout the United States. The
retailers include stores specializing in motorsports collectibles and apparel
and stores specializing in other sports collectible items. As a result of the
Revell Acquisition, the Company plans to work with sales representatives for
Revell's product lines of plastic model kits to market 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.
The Company 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. The Company's in-house
sales force and independent
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representatives also market certain motorsports consumer products on a wholesale
basis to major discount and department stores such as Wal-Mart and K-Mart, to
automotive retail stores, and to convenience stores.
Collectors' Club
The Company markets certain of its die-cast collectibles exclusively
through its Collectors' Club. Members of the Company's Collectors' Club pay a
lifetime membership fee that entitles them to receive membership premiums, a
quarterly magazine, catalogs, and other special sales materials highlighting the
Company's collectibles and other products. Membership in the Collectors' Club
increased from approximately 22,000 members in September 1994 to approximately
112,000 members as of January 30, 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 began
developing 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. During 1996 and 1997, the
Company increased its advertising on cable television during televised
motorsports events and related programming in order to enhance its exposure to
motorsports enthusiasts.
The Company employs customer service representatives and an automated
call distribution telephone system to take membership applications, take
customer orders, and handle customer inquiries. The Company utilizes an advanced
telephone and computer system that combines telemarketing functions,
computerized order processing, and automated warehouse operations to answer and
process telephone orders to its Collectors' Club more effectively and
efficiently and to accommodate the significant growth in club membership in
recent years. The system also enables the Company to track the effectiveness of
each advertisement and to target its marketing and advertising programs
accurately for enhanced impact.
Trackside Sales
Average attendance at NASCAR Winston Cup racing events grew to
approximately 180,000 fans per race during 1996. Following the Rusty Wallace
Acquisition, the Company owns and operates 25 fully equipped mobile trackside
stores to capitalize on this large base of potential customers. Some or all of
the Company's mobile trackside stores travel to each NASCAR Winston Cup race (34
events 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."
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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 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. See "Principal and Selling Shareholders." 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 anticipated 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.
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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.
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, seven-time NHRA Funny Car champion John Force,
Kenny Bernstein, Rusty Wallace, Dale Jarrett, Mark Martin, Bill Elliot, and
Bobby Labonte, significantly enhance the collectible value and marketability of
its products. By aligning itself with top racing personalities and providing a
broad range of revenue opportunities, the Company believes that it will be able
to leverage those relationships to attract additional drivers in order to
generate increased revenue for the Company as well as increased earnings for the
drivers.
Except for its licenses with Dale Earnhardt, 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
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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 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 expire on December 31,
2000, 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 Die-Cast License, 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, which
expires on December 31, 2000, the Company will have the right to use Mr.
Gordon's name, likeness, signature, and endorsement in connection with the
advertisement, promotion, and sale of the die-cast collectibles to be produced
under the Gordon Die-Cast License.
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, including Robert Yates
Racing, Inc. ("Yates"), Richard Childress Racing Enterprises, Inc.
("Childress"), Joe Gibbs Racing, Inc. ("Gibbs"), and Dale Earnhardt, Inc.
("DEI"). These licenses provide the Company with a right of first refusal to
market products bearing the likeness of Yates' "#28" and "#88" Winston Cup cars;
Childress' "#3" and "#31" Winston Cup and other racing vehicles; Gibbs' "#18"
Winston Cup car and a second car beginning in 1998; and DEI's "#14" Winston Cup
car and other racing vehicles. To the extent that the Company exercises its
right of first refusal, the license agreements also provide that the licensor
will not directly market and will not permit others to market, through the same
distribution channels used by the Company, any of the licensed products. The
license agreements with Yates, Childress, Gibbs, and DEI provide for terms of
15, 10, 5, and 3 years, respectively. 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
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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.
Hasbro License Agreement
The license agreement between the Company and Hasbro (the "Hasbro
License") covers the exclusive sale by Hasbro in the mass-merchandise market of
specific motorsports-related products for which the Company has or will secure
exclusive or non-exclusive licenses from race car drivers, owners,
manufacturers, and sponsors. The Company believes that the Hasbro License
provides the Company with a source of revenue from the mass-merchandise market
without committing substantial resources to manufacturing and marketing
activities or subjecting the Company to the risks inherent in the
mass-merchandise market. Under the Hasbro License, the Company is responsible
for acquiring and maintaining the license rights with the licensors, and Hasbro
is responsible for all costs and other arrangements relating to tooling,
manufacturing, transportation, marketing, distribution, and sales of licensed
products. Hasbro will be responsible for and will pay or reimburse the Company
for all license fees and royalties, including advances and guarantees, paid to
licensors for licensed products. The licensed products consist of (i) die-cast
replicas of motorsports vehicles and a 1:18th-scale plastic toy car, for which
Hasbro pays a specified royalty, and (ii) all other products that Hasbro may
market as licensed motorsports products, including, for example,
radio-controlled cars, slot car sets, games (including electronic and CD-ROM
interactive games), plush toys, figurines, play sets, walkie talkies, and other
products, for which Hasbro pays a specified royalty. Hasbro currently markets
similar products under the "Kenner," "Tonka," "Milton Bradley," and other brand
names. Hasbro will pay the Company guaranteed minimum annual royalty payments of
$500,000 to $1.0 million, depending on certain circumstances.
Hasbro's initial focus under the Hasbro License has been to develop,
with the Company's assistance, a line of motorsports die-cast products for the
retail mass-merchandise market. Hasbro will fund all capital requirements for
this product line and will manufacture, distribute, and market the products
under the "Winner's Circle" brand name. This product line has been recently
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 will be an official licensee of the "NASCAR 50th
Anniversary" program and intends to develop several
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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.
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 $2.0 million of such
products as of December 31, 1997.
Trademarks and Patent Rights
Although the Company's business historically has not depended on
trademark or patent protection, the Company recognizes the increasing value of
its various trade names and marks. The Company is taking steps designed to
protect, maintain, and increase the value of its trade names and marks. The
Company does, however, license valuable trademarks and other rights from third
parties. See "Business - Licenses."
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.
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Litigation
On May 17, 1993, the state of Arizona (the "State") instituted a
lawsuit against the Company and 29 other defendants in the United States
District Court for the District of Arizona. The State seeks recovery of certain
clean-up costs under federal and state environmental laws. Specifically, the
State seeks recovery of expenses that it has incurred to date for an
environmental investigation and clean-up of property formerly used as a site for
recycling hazardous wastes. The State alleges that the property has been
contaminated with hazardous substances. In addition, the State seeks a
declaratory judgment that the Company and the other defendants are jointly and
severally liable for all future costs incurred by the State for investigative
and remedial activities, and seeks a mandatory permanent injunction requiring
the Company to undertake appropriate assessment and remedial action at the
property. The State has not specified the amounts it seeks to collect from the
Company. The State alleges that F.W. Leisure Industries, Inc. and/or F.W. &
Associates, Inc. were predecessors of the Company that produced and arranged for
the transportation of hazardous substances to the property involved in the
lawsuit. The Company is defending this lawsuit on various bases including that
F.W. Leisure Industries, Inc. and/or F.W. & Associates, Inc. were not
predecessors of the Company and that neither the Company nor any predecessor of
the Company has ever produced or transported hazardous substances as alleged by
the State. The State has settled a portion of its claims with respect to a large
number of the other defendants to the lawsuit. The Company is not a party to
that settlement. On February 1, 1995, a number of the defendants that agreed to
the settlement with the State were granted leave to file, and subsequently did
file a cross-claim against the Company seeking indemnity from the Company based
on the same predecessor liability theory asserted by the State. The parties have
conducted discovery limited to the issue of any defendant's status as a
responsible party and regarding the Company's status as a successor corporation.
On March 25, 1997, the Court ruled that under federal environmental law the
Company would be treated as the successor to F.W. & Associates, Inc., and/or
F.W. Leisure Industries, Inc. The Company may appeal this ruling at the
appropriate time. Discovery is now ongoing with regard to the merits of the
underlying environmental claims and the amounts of those claims. The Company
currently estimates the potential loss to be approximately $800,000 in the event
that its defense proves unsuccessful. The Company has made no provision in its
finanical statements with respect to this matter.
A lawsuit, purportedly on behalf of Action Products, Inc. ("API"), a
dissolved Arizona corporation, was instituted on December 22, 1995 against the
Company, Fred W. Wagenhals, and others in the United States District Court for
the District of Arizona. The complaint requested damages, including punitive and
treble damages in an unspecified amount. The complaint alleged that the Company,
Mr. Wagenhals, and others breached contractual and other duties to API and
appropriated certain business opportunities of API and further claimed that
these activities were part of a fraudulent scheme. In July 1997, the Company,
Mr. Wagenhals, the other defendants, and the plaintiff settled the lawsuit for a
$4.9 millon payment by the Company to the plaintiff and the execution of mutual
releases. In connection with the proposed settlement, Mr. Wagenhals waived any
claims that he may have to the settlement proceeds as an approximately 20%
shareholder of API.
On March 4, 1997, two class action lawsuits were filed against the
Company and approximately 28 other defendants in the United States District
Court for the Northern District of Georgia. The lawsuits allege that the
defendants engaged in price fixing and other anti-competitive activities in
violation of federal anti-trust laws. The Company 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 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
34
<PAGE>
to claims based upon actions alleged to have been taken by RYP and has agreed to
be responsible for and to pay any costs, fees, expenses, damages, payments,
credits, rebates, and penalties arising out of this matter with respect to RYP,
up to an aggregate 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. The parties currently
are conducting class discovery. The Company intends to vigorously defend the
claims asserted in the amended and consolidated complaint.
On June 4, 1997, Petty Enterprises, Inc. Licensing Division filed a
lawsuit against the Company and Fred W. Wagenhals in the General Court of
Justice for Randolph County, North Carolina. The complaint alleges that the
Company engaged in activities that resulted in common law trademark
infringement, fraud, unfair competition, "palming off" unauthorized goods as
authorized products, marketing unlicensed products, misappropriation of business
opportunities, breach of contract, unjust enrichment, conversion, and violations
of the North Carolina Unfair and Deceptive Trade Practices Act and the Lanham
Act. In particular, the plaintiff alleges that the Company manufactured and sold
products in quantities greater than the amounts permitted under certain license
agreements, manufactured and sold certain products for which it did not have
licenses, misrepresented the number of licensed products actually manufactured
and sold, and underpaid royalties to the licensors. The complaint also alleges
that these acts constitute a pattern of improper activity. The complaint
requests an unspecified amount of actual damages plus treble and punitive
damages, as well as injunctive relief. On July 3, 1997, the Company and Mr.
Wagenhals were successful in removing the case to the United States District
Court for the Middle District of North Carolina. On July 11, 1997, each of the
Company and Mr. Wagenhals filed an answer denying the plaintiff's allegations
and each filed counterclaims against the plaintiff for breach of contract,
breach of a prior settlement agreement between the plaintiff and the Company,
violations of the North Carolina Unfair and Deceptive Trade Practices Act,
defamation and damage to reputation, and tortious interference with prospective
business relationships. On July 18, 1997, the Company and Mr. Wagenhals
collectively filed a third-party complaint against Brett Nelson, an affiliate of
the plaintiff, alleging violations of the North Carolina Unfair and Deceptive
Trade Practices Act, defamation and damage to reputation, and tortious
interference with actual and prospective business relationships. On August 8,
1997, Mr. Nelson filed an answer denying the allegations against him. After the
Court denied motions to dismiss by all parties, the plaintiff filed its amended
complaint and the Company and Mr. Wagenhals filed their respective amended
answer and counterclaims. The amended complaint and the amended answer and
counterclaims contain essentially the same allegations and defenses as the
original pleadings. The parties currently are conducting discovery, and a
court-ordered mediation currently is scheduled for February 16, 1998. The
Company and Mr. Wagenhals intend to vigorously pursue their counterclaims and
the third-party complaint and to vigorously defend this lawsuit.
Employees
As of January 30, 1998, the Company had 509 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.
35
<PAGE>
PROPERTIES
The Company leases a newly constructed, approximately 140,000 square
foot building in Phoenix, Arizona. The Company uses approximately 38,000 square
feet of this facility for its corporate headquarters and approximately 102,000
square feet for warehouse space and packaging operations. The initial term of
the lease expires in August 2007, with two five-year renewal options. The
Company currently is seeking to sublease its previous Tempe facility, but there
can be no assurance that it will be able to do so on favorable terms or at all.
See "Certain Transactions."
The Company leases a 25,000 square foot facility in Charlotte, North
Carolina. The Company uses approximately 5,000 square feet of the Charlotte
facility for offices and approximately 20,000 square feet for warehouse space
and packaging operations. The term of the lease for the Charlotte facility
expires in April 1998. The Company also leases approximately 10,000 square feet
of off-site storage space in Concord, North Carolina.
The Company has entered into a lease for a newly constructed,
approximately 121,000 square foot facility in Concord, North Carolina for its
operations in that area. The Company will utilize approximately 42,000 square
feet of the new facility for offices and approximately 79,000 square feet for
warehouse space and distribution operations. The initial term of the lease is 20
years, with four five-year renewal options. The Company anticipates that it will
occupy the new facility in April 1998.
The Company currently leases two facilities in Atlanta, Georgia, for
its Image Works operations. One facility consists of approximately 77,400 square
feet, of which the Company utilizes approximately 14,000 square feet for offices
and approximately 63,400 square feet for manufacturing and warehouse operations.
The lease on this facility expires in January 1999. The second facility consists
of approximately 21,900 square feet, of which the Company utilizes approximately
19,400 square feet for warehouse and distribution operations and approximately
2,500 square feet for offices. The lease on this facility expires in February
1999.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Fred W. Wagenhals.......... 56 Chairman of the Board, President, and
Chief Executive Officer
Tod J. Wagenhals........... 33 Executive Vice President, Secretary, and Director
Charles C. Blossom, Jr..... 47 Vice President, Chief Operating Officer, and Director
Christopher S. Besing...... 37 Vice President, Chief Financial Officer,
Treasurer, and Director
Melodee L. Volosin......... 33 Vice President - Wholesale Division and Director
John S. Bickford, Sr....... 51 Director
Jack M. Lloyd.............. 48 Director
Robert H. Manschot......... 54 Director
</TABLE>
Fred W. Wagenhals has served as Chairman of the Board, President, and
Chief Executive Officer of the Company since November 1993 and served as
Chairman of the Board and Chief Executive Officer from May 1992 until September
1993 and as President from July 1993 until September 1993. Mr. Wagenhals
co-founded Racing Champions, Inc. in April 1989 and served as a director of that
company until April 1993. From October 1990 until May 1992, Mr. Wagenhals served
as Chairman of the Board and Chief Executive Officer of Race Z, Inc. and Action
Performance Sales, Inc. ("APS"), which were engaged in sales of promotional
products and collectible items related to the racing industry.
Tod J. Wagenhals has served as Executive Vice President of the Company
since July 1995, as a director of the Company since December 1993, and as
Secretary of the Company since November 1993. Mr. Wagenhals served as a Vice
President of the Company from September 1993 to July 1995. Mr. Wagenhals served
in various marketing capacities with the Company from May 1992 until September
1993 and with APS from October 1991 until May 1992. Mr. Wagenhals was National
Accounts Manager of Action Products, Inc. from January 1989 to October 1991. Mr.
Wagenhals is the son of Fred W. Wagenhals.
Charles C. Blossom, Jr. has served as Vice President, Chief Operating
Officer, and as a director of the Company since November 1997. Mr. Blossom
served as Senior Vice President -- Sales and Marketing of the Company from July
1997 to November 1997. From January 1996 to July 1997, Mr. Blossom was engaged
in providing professional business consulting services. From October 1992 to
January 1996, Mr. Blossom served as President of Mac Tools, a $300 million
subsidiary of The Stanley Works, which manufactures and distributes tools and
equipment to the automotive aftermarket. Mr. Blossom served as Vice President --
Sales and Marketing of Mac Tools from May 1992 to October 1992 and as Vice
President -- Air Tool Operations from September 1989 to May 1992. From December
1983 to September 1989, Mr. Blossom owned and operated American Pneumatic
Technologies, Inc. before selling that business to Mac Tools.
Christopher S. Besing has served as a Vice President and the Chief
Financial Officer of the Company since joining the Company in January 1994, as a
director of the Company since May 1995, and as Treasurer of the Company since
February 1996. Prior to joining the Company, Mr. Besing held several financial
and accounting positions with Orbital Sciences Corporation ("OSC") from
September 1986 to December 1993, most recently as Director of Accounting and
Controller of OSC's Launch Systems Group in Chandler, Arizona. Prior to joining
37
<PAGE>
OSC, Mr. Besing was employed as an accountant with Arthur Andersen LLP from
January 1985 to August 1986. Mr. Besing is a Certified Public Accountant.
Melodee L. Volosin has served as the Company's Vice President -
Wholesale Division since September 1997 and has been a director of the Company
since January 1997. Ms. Volosin served as the Director of the Company's
Wholesale Division from May 1992 to September 1997. Ms. Volosin's duties include
managing all of the Company's wholesale distribution of die-cast collectibles
and other products, including advertising programs and budgeting. From 1983 to
May 1992, Ms. Volosin served in various marketing capacities with Action
Products, Inc. and its predecessors.
John S. Bickford, Sr. has served as the Company's Vice President -
Strategic Alliances since July 1997 and as a director of the Company since
January 1997. Mr. Bickford also served as a consultant to the Company from
January 1997 to June 1997. Mr. Bickford has served as President of Bickford
Motorsports, Inc., which provides consulting and special project coordination
services to race car drivers, car owners, and other businesses, from 1990 to the
present. Mr. Bickford also publishes Racing for Kids magazine. From 1976 to the
present, Mr. Bickford has served as President of MPD Racing Products, Inc.,
which manufactures race car parts for distribution through speed shops and
high-performance engine shops. Mr. Bickford served as Vice President and General
Manager of Jeff Gordon, Inc. from 1990 to 1995. Mr. Bickford currently serves as
a director of Equipoise Balancing, Inc., a privately held company.
Jack M. Lloyd has served as a director of the Company since July 1995.
Mr. Lloyd has served as the President and Chief Executive Officer of DenAmerica
Corp., a publicly held corporation that is the largest franchisee of Denny's
restaurants in the United States and owns and franchises Black-eyed Pea
restaurants, since March 1996 and as Chairman of the Board of DenAmerica Corp.
since July 1996. Mr. Lloyd served as the Chairman of the Board and Chief
Executive Officer of Denwest Restaurant Corp. ("Denwest"), the second largest
franchisee of Denny's restaurants in the United States, from 1987 until its
merger with DenAmerica Corp. in March 1996. Mr. Lloyd also served as President
of Denwest from 1987 until November 1994. Mr. Lloyd engaged in commercial and
residential real estate development and property management as president of
First Federated Investment Corporation during the early and mid-1980s. Mr. Lloyd
currently serves as a director of Star Buffet, Inc., a publicly held company,
and Masterview Window Company, a privately held company.
Robert H. Manschot has served as a director of the Company since July
1995. Mr. Manschot currently serves as Chairman and Chief Executive Officer of
Seceurop Security Services in the United Kingdom and engages in business
consulting services and venture capital activities as Chairman of RHEM
International Enterprises, Inc. Mr. Manschot served as President and Chief
Executive Officer of Rural/Metro Corporation ("Rural/Metro"), a publicly held
provider of ambulance and fire protection services, from October 1988 until
March 1995. Mr. Manschot joined Rural/Metro in October 1987 as Executive Vice
President, Chief Operating Officer and a member of its Board of Directors. Mr.
Manschot was with the Hay Group, an international consulting firm, from 1978
until October 1987, serving as Vice President and a partner from 1984, where he
led strategic consulting practices in Brussels, Asia, and the western United
States. Prior to joining the Hay Group, Mr. Manschot spent 10 years with several
leading international hotel chains in senior operating positions in Europe, the
Middle East, Africa, and the United States. Mr. Manschot currently serves as a
director of Samoth Capital Corporation and Premium Cigars International, both of
which are publicly traded companies, and as a director of LBE Technologies,
Inc., Thomas Pride Development, Inc., and Sports Southwest, Inc., all of which
are privately held companies.
Directors' Compensation
Employees of the Company do not receive compensation for serving as
members of the Company's Board of Directors. Independent directors receive
$2,500 for each meeting attended in person. All directors are reimbursed for
their expenses in attending meetings of the Board of Directors. Directors who
are employees of the Company are eligible to receive stock options pursuant to
the Company's 1993 Stock Option Plan. Pursuant to the
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<PAGE>
1993 Plan, each non-employee director of the Company receives an automatic grant
of options to acquire 10,000 shares of Common Stock on the date of his or her
election or appointment as a director. Non-employee directors also receive an
automatic grant of options to purchase 8,000 shares of Common Stock on the date
of the meeting of the Board of Directors held immediately after each subsequent
annual meeting of the shareholders of the Company. See "Management - 1993 Stock
Option Plan."
Executive Compensation
The following table sets forth certain information concerning the
compensation for the fiscal years ended September 30, 1995, 1996, and 1997
earned by the Company's Chief Executive Officer and by the Company's other
executive officers whose cash salary and bonus exceeded $100,000 during fiscal
1997 (the "Named Officers"). No other officer of the Company received
compensation of $100,000 or more during fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------------
Annual Compensation Securities All Other
------------------------ Underlying Compensation
Name and Principal Position Year Salary($)(1) Bonus($) Options(#)(2) ($)(3)
- --------------------------- ---- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fred W. Wagenhals 1997 $276,923 $ 50,000 16,000 $1,952
Chairman of the Board, President, 1996 250,000 75,000 -- 4,854
and Chief Executive Officer 1995 164,423 23,000 50,000 3,173
Tod J. Wagenhals 1997 $112,500 $ 21,000 15,000 $2,673
Executive Vice President, 1996 75,000 26,000 20,000 1,832
Secretary, and Director 1995 59,596 8,000 50,000 1,247
Christopher S. Besing 1997 $113,462 $ 21,000 15,000 $2,535
Vice President, Chief Financial 1996 75,000 26,000 20,000 1,572
Officer, Treasurer, and Director 1995 71,250 10,000 50,000 1,425
</TABLE>
- ------------------
(1) Messrs. Wagenhals, Wagenhals, and Besing also received certain
perquisites, the value of which did not exceed 10% of their salary and
bonus during fiscal 1996 and 1997.
(2) The exercise price of all stock options granted were equal to the fair
market value of the Company's Common Stock on the date of grant.
(3) Amounts shown for fiscal 1997 represent matching contributions made by
the Company to the Company's 401(k) Plan.
The Company offers its employees medical and life insurance benefits.
The executive officers and other key employees of the Company, including
directors who also are employees of the Company, are eligible to receive stock
options under the Company's stock option plan. See "Management - 1993 Stock
Option Plan." The Company does not have a long-term incentive plan or a defined
benefit or actuarial plan and has never issued any stock appreciation rights.
39
<PAGE>
The following table provides information on stock options granted to
the Company's Named Officers during the fiscal year ended September 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------------------ Annual Rates
Number of % of Total of Stock Price
Securities Options Appreciation
Underlying Granted to Exercise for Option Term(2)
Options Employees in Price Expiration ------------------
Name Granted (#)(1) Fiscal Year ($/Sh) Date 5% 10%
- ---- -------------- ----------- ------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals 16,000 7.8% $19.50 4/3/03 $106,080 $240,800
Tod J. Wagenhals 15,000 7.3% $19.50 4/3/03 $ 99,450 $225,750
Christopher S. Besing 15,000 7.3% $19.50 4/3/03 $ 99,450 $225,750
</TABLE>
- ------------------
(1) The options were granted at the fair value of the shares on the date of
grant and have a six-year term. One-third of the options vest and
become exercisable on each of the first, second, and third
anniversaries of the date of grant.
(2) Potential gains are net of the exercise price, but before taxes
associated with the exercise. Amounts represent hypothetical gains that
could be achieved for the respective options if exercised at the end of
the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of the Company's Common
Stock. Actual gains, if any, on stock option exercises will depend upon
the future market prices of the Company's Common Stock.
The following table provides information on options exercised in the
last fiscal year by the Company's Named Officers and the value of each such
officer's unexercised options at September 30, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the Money Options
Options at Fiscal Year-End (#) at Fiscal Year-End ($)(1)
Shares Acquired Value ------------------------------ -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Wagenhals......... 0 0 290,000 16,000 $7,833,750 $154,000
Tod J. Wagenhals.......... 30,600 $589,630 146,066 28,334 $3,847,346 $391,054
Christopher S. Besing..... 23,528 $676,430 33,138 28,334 $ 781,812 $391,054
</TABLE>
- ------------------
(1) Calculated based upon the closing price as reported on the Nasdaq
National Market on September 30, 1997 of $29.125 per share.
401(k) Profit Sharing Plan
In October 1994, the Company established a defined contribution plan
(the "401(k) Plan") that qualifies as a cash or deferred profit sharing plan
under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Under the 401(k) Plan, participating
employees may defer from 1% to 15% of their pre-tax compensation, subject to the
maximum allowed under the Internal Revenue Code. The Company will contribute
$0.50 for each dollar contributed by the employee, up to a maximum contribution
of 2% of the
40
<PAGE>
employee's defined compensation. In addition, the 401(k) Plan provides that the
Company may make an employer profit sharing contribution in such amounts as may
be determined by the Board of Directors.
1993 Stock Option Plan
The Company's 1993 Stock Option Plan, as amended (the "1993 Plan")
provides for the granting of options to acquire Common Stock of the Company
("Options"), the direct granting of Common Stock ("Stock Awards"), the granting
of stock appreciation rights ("SARs"), and the granting of other cash awards
("Cash Awards") (Stock Awards, SARs, and Cash Awards are collectively referred
to herein as "Awards"). The 1993 Plan is intended to comply with Rule 16b-3 as
promulgated under the Exchange Act with respect to persons subject to Section 16
of the Exchange Act. The Company believes that the 1993 Plan is important in
attracting and retaining executives and other key employees and constitutes a
significant part of the compensation program for key personnel, providing them
with an opportunity to acquire a proprietary interest in the Company and giving
them an additional incentive to use their best efforts for the long-term success
of the Company. The 1993 Plan will remain in effect until September 24, 2001.
A total of 2,750,000 shares of Common Stock may be issued under the
1993 Plan. As of January 30, 1998, an aggregate of 1,340,612 shares of the
Company's Common Stock has been issued upon exercise of Options granted pursuant
to the 1993 Plan, and there were outstanding Options to acquire an additional
1,143,028 shares of the Company's Common Stock. If any Option or SAR terminates
or expires without having been exercised in full, stock not issued under such
Option or SAR will again be available for the purposes of the 1993 Plan. If any
change is made in the stock subject to the 1993 Plan, or subject to any Option
or SAR granted under the 1993 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure, or otherwise), the
1993 Plan provides that appropriate adjustments will be made as to the maximum
number of shares subject to the 1993 Plan and the number of shares and exercise
price per share of stock subject to outstanding Options.
Options and Awards may be granted only to persons ("Eligible Persons")
who at the time of grant are either (i) key personnel, including officers and
directors of the Company or its subsidiaries, or (ii) consultants and
independent contractors who provide valuable services to the Company or to its
subsidiaries. Options that are incentive stock options may only be granted to
employees of the Company or its subsidiaries. To the extent that granted Options
are incentive stock options, the terms and conditions of those Options must be
consistent with the qualification requirements set forth in the Internal Revenue
Code. No employee of the Company may receive grants of Options or Awards
representing more than 50 percent of the shares of Common Stock issuable under
the 1993 Plan.
The exercise prices, expiration dates, maximum number of shares
purchasable, and the other provisions of the Options will be established at the
time of grant. The exercise prices of Options that are not incentive stock
options may not be less than 85% of the fair market value of the Common Stock at
the time of the grant, and the exercise prices of incentive stock options may
not be less than 100% (110% if the option is granted to a shareholder who at the
time the option is granted owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company) of the fair
market value of the Common Stock at the time of the grant. Options may be
granted for terms of up to ten years and become exercisable in whole or in one
or more installments at such time as may be determined upon a grant of the
Options. To exercise an Option, the optionholder will be required to deliver to
the Company full payment of the exercise price for the shares as to which the
option is being exercised. Generally, options can be exercised by delivery of
cash, bank cashier's check or shares of Common Stock of the Company.
Unless otherwise authorized by the Board of Directors in its sole
discretion, Options granted under the 1993 Plan are nontransferable other than
by will or by the laws of descent and distribution upon the death of the
optionholder and, during the lifetime of the optionholder, are exercisable only
by such optionholder. Unless the terms of the stock option agreement otherwise
provide, in the event of the death or termination of the employment
41
<PAGE>
or services of the participant (but never later than the expiration of the term
of the Option) Options may be exercised within a one-month period. If
termination is by reason of disability, however, Options may be exercised by the
optionholder or the optionholder's estate or successor by bequest or inheritance
during the period ending one year after the optionholder's retirement (but not
later than the expiration of the term of the option). Termination of employment
at any time for cause immediately terminates all Options held by the terminated
employee.
The 1993 Plan includes an automatic program that provides for the
automatic grant of stock options ("Automatic Options") to non-employee
directors. Each non-employee director serving on the Board of Directors on the
date the amendments to the 1993 Plan providing for the automatic program were
approved by the Company's shareholders received Automatic Options to acquire
10,000 shares of Common Stock on that date, and each subsequently newly elected
non-employee member of the Board of Directors will receive Automatic Options to
acquire 10,000 shares of Common Stock on the date of his or her first
appointment or election to the Board of Directors. In addition, Automatic
Options to acquire 8,000 shares of Common Stock are automatically granted to
each non-employee director at the meeting of the Board of Directors held
immediately after each annual meeting of shareholders. All Automatic Options
vest and become exercisable immediately upon grant. A non-employee member of the
Board of Directors is not eligible to receive the 8,000-share Automatic Option
grant if that option grant date is within 30 days of such non-employee member
receiving the 10,000-share Automatic Option grant. The exercise price per share
of Common Stock subject to Automatic Options granted under the 1993 Plan will be
equal to 100% of the fair market value of the Company's Common Stock (as defined
in the 1993 Plan) on the date such options are granted. The Company believes
that the automatic grant of stock options to non-employee directors is necessary
to attract, retain, and motivate independent directors.
The Company also may grant Awards to Eligible Persons under the 1993
Plan. SARs entitle the recipient to receive a payment equal to the appreciation
in market value of a stated number of shares of Common Stock from the price
stated in the award agreement to the market value of the Common Stock on the
date the SAR is first exercised or surrendered. Stock Awards entitle the
recipient to directly receive Common Stock. Cash Awards entitle the recipient to
receive direct payments of cash depending on the market value or the
appreciation of the Common Stock or other securities of the Company.
Limitation of Directors' Liability; Indemnification of Directors, Officers,
Employees, and Agents
The Company's Restated Articles eliminate the personal liability of any
director of the Company to the Company or its shareholders for money damages for
any action taken or failure to take any action as a director of the Company, to
the fullest extent allowed by the Arizona Business Corporation Act (the
"Business Corporation Act"). Under the Business Corporation Act, directors of
the Company will be liable to the Company or its shareholders only for (a) the
amount of a financial benefit received by the director to which the director is
not entitled; (b) an intentional infliction of harm on the Company or its
shareholders; (c) certain unlawful distributions to shareholders; and (d) an
intentional violation of criminal law. The effect of these provisions in the
Restated Articles is to eliminate the rights of the Company and its shareholders
(through shareholders' derivative suits on behalf of the Company) to recover
money damages from a director for all actions or omissions as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (a) through (d) above. These
provisions do not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care.
The Company's Restated Articles require the Company to indemnify and
advance expenses to any person who incurs liability or expense by reason of such
person acting as a director of the Corporation, to the fullest extent allowed by
the Business Corporation Act. This indemnification is mandatory with respect to
directors in all circumstances in which indemnification is permitted by the
Business Corporation Act, subject to the requirements of the Business
Corporation Act. In addition, the Company may, in its sole discretion, indemnify
and advance expenses, to the fullest extent allowed by the Business Corporation
Act, to any person who incurs liability or expense by reason of such person
acting as an officer, employee or agent of the Company, except where
indemnification is
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<PAGE>
mandatory pursuant to the Business Corporation Act, in which case the Company is
required to indemnify to the fullest extent required by the Business Corporation
Act.
CERTAIN TRANSACTIONS
In December 1994, Fred W. Wagenhals advanced $300,000 to the Company in
order to enable the Company to make certain advance royalty payments related to
license agreements entered into by the Company for die-cast products to be
marketed by the Company beginning in the second quarter of fiscal 1995. The
Company issued a promissory note to Mr. Wagenhals for the advance, bearing
interest at 9% per annum, providing for monthly payment of accrued interest, and
calling for the payment of the principal no later than March 31, 1995. The
Company repaid the note in full on February 9, 1995. The Company's prepaid
expenses and other assets at September 30, 1995 included an advance of $50,000
to Mr. Wagenhals, which was repaid in fiscal 1996.
The Company currently leases a building in Tempe, Arizona, containing
approximately 46,000 square feet, which the Company utilized for its corporate,
administrative and sales offices, and warehouse facilities prior to September
1997. Fred W. Wagenhals currently owns a one-third interest in F.W. Investments,
a partnership that owns this facility. The Company paid F.W. Investments rent of
approximately $177,000, $177,000 and $183,000 during fiscal 1995, 1996, and
1997, respectively.
In November 1996, the Company issued to the seller of Sports Image and
persons affiliated with the seller an aggregate of 403,361 shares of Common
Stock as a portion of the consideration paid for the assets of Sports Image. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview." Joseph M. Mattes, who served as an officer and director
of the Company from December 1996 until June 1997, received 15,000 shares of
Common Stock as part of that transaction. An aggregate of 307,464 shares of
Common Stock issued in connection with the acquisition of Sports Image have been
registered for resale pursuant to another registration statement to which this
Prospectus relates. See "Principal and Selling Shareholders" and "Description of
Securities - Registration Rights."
PRIVATE PLACEMENTS
In January 1994, the Company completed a private placement of 83 units
and in March 1994, the Company completed a private placement of 125 units for
$20,000 per unit. Each unit consisted of $12,500 in principal amount of
Debentures and 5,400 shares of Common Stock. All of the Debentures were
subsequently converted into shares of the Company's Common Stock at a conversion
price of $1.75 per share. An aggregate of 11,142 shares of Common Stock that
were issued as part of the units or upon conversion of the Debentures have been
registered for resale pursuant to another Registration Statement to which this
Prospectus relates. See "Principal and Selling Shareholders."
In August 1994, the Company issued 100,000 shares of Common Stock to
F.M. Motorsports, Inc., formerly Fan Fueler, Inc., as consideration for the
assets and liabilities acquired from Fan Fueler, Inc. at that time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview." An aggregate of 35,000 shares of Common Stock held by
F.M. Motorsports, Inc. have been registered for resale pursuant to another
Registration Statement to which this Prospectus relates. See "Principal and
Selling Shareholders."
In November 1996, the Company issued an aggregate of 403,361 shares of
Common Stock to the sellers of Sports Image. See "Certain Transactions."
In January 1997, the Company issued to the sellers of Motorsport
Traditions an aggregate of 342,857 shares of Common Stock as a portion of the
consideration paid to acquire Motorsport Traditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview." An aggregate of 118,571 shares of Common Stock issued in connection
with the acquisition of Motorsport Traditions have been registered
43
<PAGE>
for resale pursuant to another registration statement to which this Prospectus
relates. See "Principal and Selling Shareholders" and "Description of Securities
- - Registration Rights."
On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro at a price of $14.50 per share. An aggregate of 57,500
shares sold to Hasbro have been registered for resale pursuant to the
registration statement to which this Prospectus relates. See "Principal and
Selling Shareholders" and "Description of Securities - Registration Rights." The
Company has agreed that, in the event that Hasbro sells such shares at a price
lower than $14.50 per share during the one-year period commencing on the later
of (i) April 16, 1997 or (ii) the effective date of the Registration Statement
of which this Prospectus forms a part, the Company will reimburse Hasbro for the
amount of such loss, plus interest.
On August 1, 1997, the Company issued 8,180 shares of Common Stock to
Dale Jarrett in connection with a personal services contract entered into by the
Company and Mr. Jarrett on that date. Pursuant to an agreement between the
Company and Mr. Jarrett, Mr. Jarrett may resell up to one-third of such shares
each year, beginning on August 1, 1998.
On August 8, 1997, the Company listed an aggregate of 19,324 shares of
Common Stock to E. J. Simpson as a portion of the license fee pursuant to a
license agreement entered into by the Company to Mr. Simpson on that date. All
of the 19,324 shares of Common Stock issued to Mr. Simpson are being registered
for resale pursuant to the registration statement of which this Prospectus forms
a part. See "Principal and Selling Shareholders."
On October 3, 1997, the Company issued an aggregate of 34,940 shares of
Common Stock to RCR as a portion of the license fee pursuant to a license
agreement entered into by the Company and RCR on that date. All of the 34,940
shares issued to RCR are being registered for resale pursuant to the
registration statement of which this Prospectus forms a part. See "Principal and
Selling Shareholders."
On February 3, 1998, the Company issued 9,486 shares of Common Stock to
Dale Earnhardt and Teresa Earnhardt and 414 shares of Common Stock to Donald G.
Hawk, Jr., for services rendered to the Company by Mr. and Mrs. Earnhardt and by
Mr. Hawk, respectively. See "Principal and Selling Shareholders."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the shares
of the Company's outstanding Common Stock beneficially owned as of February 6,
1998, by (i) each of the Company's directors and executive officers; (ii) all
directors and executive officers of the Company as a group; (iii) each person
who is known by the Company to own beneficially or exercise voting or
dispositive control over more than 5% of the Company's Common Stock; and (iv)
each of the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering(1)(2) Shares Being Offering(1)(2)(3)
Name and Address of ---------------------- Registered for ----------------------
Beneficial Owner Number Percent Sale(3) Number Percent
- ------------------------------------ ------------- ------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
- --------------------------------
Fred W. Wagenhals 2,394,933 (4) 14.7% 0 2,394,933 14.7%
Tod J. Wagenhals 152,522 (5) * 0 152,522 *
Charles C. Blossom, Jr. 50,000 (6) * 0 50,000 *
Christopher S. Besing 61,666 (7) * 0 61,666 *
Melodee L. Volosin 34,166 (8) * 0 34,166 *
John S. Bickford, Sr. 24,026 (9) * 15,693 8,333 *
Jack M. Lloyd 26,000 (10) * 0 26,000 *
Robert H. Manschot 31,310 (11) * 0 31,310 *
All directors and executive officers
as a group (eight persons) 2,774,623 16.6% 15,693 2,758,930 16.6%
Other Selling Shareholders
- --------------------------
Dale Earnhardt and Teresa Earnhardt,
JTWROS (12) 258,950 1.6% 258,950 0 *
Jeffrey M. Gordon (13) 101,428 * 101,428 0 *
Hasbro, Inc. (14) 57,500 * 57,500 0 *
F.M. Motorsports, Inc. (15) 35,000 * 35,000 0 *
Richard R. Childress (16) 30,000 * 30,000 0 *
Joseph M. Mattes (17) 25,000 * 15,000 10,000 *
E.J. Bill Simpson (18) 19,324 * 19,324 0 *
Dianne Leavitt 11,679 * 11,142 537 *
William N. Patterson 5,440 * 4,940 500 *
Donald G. Hawk, Jr.(19) 5,414 * 5,414 0 *
Brian Bell 290 * 290 0 *
John S. Bickford, Jr. 290 * 290 0 *
Tom Bickford 290 * 290 0 *
Patricia Henry 290 * 290 0 *
Kimberly Perry 290 * 290 0 *
</TABLE>
- -----------------------------------
*Less than 1% of outstanding shares of Common Stock.
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all Common Stock
beneficially owned by him, subject to applicable community property
law. Except as otherwise indicated, each of such persons may be
reached through the Company at 4707 East Baseline Road, Phoenix,
Arizona 85040.
(2) The numbers and percentages shown include the shares of Common Stock
actually owned as of February 6, 1998 and the shares of Common Stock
which the person or group had the right to acquire within 60 days of
such date. In calculating the percentage of ownership, all shares of
Common Stock which the identified person or group had the right to
acquire within 60 days of February 6, 1998 upon the exercise of
options are deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by such person or
group, but are not deemed to be outstanding for the purpose of
computing the percentage of the shares of Common Stock owned by any
other person.
(3) Each of the Selling Shareholders is assumed to be selling all of the
shares of Common Stock registered for sale and will own no shares of
Common Stock after the offering, except for 10,000, 537, and 500
shares of Common Stock to be beneficially owned by Joseph M. Mattes,
Dianne Leavitt, and William N. Patterson, respectively. The Company
has no assurance that the Selling Shareholders will sell any of the
securities being registered hereby.
(4) Represents 2,099,600 shares of Common Stock and vested options to
acquire 295,333 shares of Common Stock.
45
<PAGE>
(5) Represents 1,456 shares of Common Stock and vested options to acquire
151,066 shares of Common Stock.
(6) Represents vested options to acquire 50,000 shares of Common Stock.
(7) Represents 23,528 shares of Common Stock and vested options to acquire
38,138 shares of Common Stock.
(8) Represents vested options to acquire 34,166 shares of Common Stock.
(9) Represents (i) 15,643 shares of Common Stock and vested options to
acquire 8,333 shares of Common Stock held by Mr. Bickford; and (ii) 50
shares of Common Stock held by Mr. Bickford as custodian for Boston
Reid.
(10) Represents vested options to acquire 26,000 shares of Common Stock.
(11) Represents 5,310 shares of Common Stock and vested options to acquire
26,000 shares of Common Stock.
(12) The Company, Mr. Earnhardt, and certain of Mr. Earnhardt's affiliates
are parties to various license agreements. See "Business - License
Agreements."
(13) The Company, Mr. Gordon, and certain of Mr. Gordon's affiliates are
parties to various license agreements. See "Business - License
Agreements."
(14) The Company and Hasbro are parties to certain license agreements. See
"Business - License Agreements."
(15) F.M. Motorsports, Inc. is owned by Fred Miller, III, who may be deemed
to be the beneficial owner of the shares held by F.M. Motorsports,
Inc.
(16) The Company, Mr. Childress, and certain of Mr. Childress' affiliates
are parties to various license agreements. See "Business - License
Agreements."
(17) Represents 15,000 shares of Common Stock and vested options to acquire
10,000 shares of Common Stock. Mr. Mattes is a former officer and
director of the Company. See "Certain Transactions."
(18) The Company and Mr. Simpson are parties to a license agreement. See
"Managements Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
(19) An affiliate of Mr. Hawk provides consulting services to the Company.
DESCRIPTION OF SECURITIES
The Company's authorized capital consists of 25,000,000 shares of
Common Stock, $0.01 par value and 5,000,000 shares of serial preferred stock, no
par value (the "Serial Preferred Stock"). As of February 6, 1998, 16,034,044
shares of Common Stock and no shares of Preferred Stock were issued and
outstanding. An additional 1,409,388 shares of Common Stock may be issued upon
exercise of options outstanding or available for issuance under the Company's
1993 Stock Option Plan. All of the issued and outstanding shares of Common Stock
are fully paid and non-assessable.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each
share of Common Stock held of record on all matters submitted to a vote of the
shareholders, other than the election of directors in which shareholders are
entitled to cumulate their votes in accordance with Arizona law. Subject to the
preferences of any outstanding preferred stock, each share of Common Stock is
entitled to receive dividends as may be declared by the Company's Board of
Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment in full of all
creditors of the Company and the liquidation preferences of any outstanding
shares of preferred stock.
Serial Preferred Stock
The Serial Preferred Stock may be issued in such series and
denominations as deemed advisable by the Company's Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue Serial Preferred Stock with dividend, liquidation, conversion, voting,
or other rights that could adversely affect the voting power or other rights of
holders of the Common Stock. In the event of issuance, the Serial Preferred
Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying, or preventing a change in control of the Company. The
Company does not currently intend to issue any shares of Serial Preferred Stock.
46
<PAGE>
Senior Notes due January 2, 1999
On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of Senior Notes to three insurance companies. The Senior Notes
bear interest at the rate of 8.05% per annum, provide for semi-annual payments
of accrued interest, and mature on January 2, 1999. The Company may not prepay
the Senior Notes prior to maturity, but will be required to offer to redeem the
Senior Notes in the event of a "Change of Control" of the Company, as defined in
the Senior Notes. The Senior Notes contain certain provisions that, among other
things, require the Company to comply with certain financial ratios and net
worth requirements and limit the ability of the Company and its subsidiaries to
incur additional indebtedness, to sell assets, or to engage in certain mergers
on consolidations. The Senior Notes are guaranteed by the Company's
subsidiaries.
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. In addition to the
resale of shares of Common Stock by other Selling Shareholders, this Prospectus
relates to the resale of those shares covered by the registration statement
described above that have not previously been sold by the sellers of Sports
Image, the sellers of Motorsports Traditions, or Hasbro. See "Principal and
Selling Shareholders."
Arizona Corporate Takeover Act and Certain Charter Provisions
The Company is subject to the provisions of Arizona Revised Statutes
Sections 10-2701 et. seq. (the "Arizona Corporate Takeover Act"). The Arizona
Corporate Takeover Act and certain provisions of the Company's Restated Articles
and Restated Bylaws, as summarized in the following paragraphs, may have the
effect of discouraging, delaying, or preventing hostile takeovers (including
those that might result in a premium over the market price of the Company's
Common Stock), or discouraging, delaying, or preventing changes in control or
management of the Company.
Arizona Corporate Takeover Act
Article 1 of the Arizona Corporate Takeover Act is intended to restrict
"greenmail" attempts by prohibiting the Company from purchasing any shares of
its capital stock from any beneficial owner of more than 5% of the voting power
of the Company (a "5% Owner") at a per share price in excess of the average
market price during the 30 trading days prior to the purchase, unless (i) the 5%
Owner has beneficially owned the shares to be purchased for a period of at least
three years prior to the purchase; (ii) a majority of the Company's shareholders
(excluding the 5% Owner, its affiliates or associates, and any officer or
director of the Company) approves the purchase; or (iii) the Company makes the
offer available to all holders of shares of its capital stock.
Article 2 of the Arizona Corporate Takeover Act is intended to
discourage the direct or indirect acquisition by any person of beneficial
ownership of shares of the Company (other than an acquisition of shares from the
Company) that would, when added to other shares of the Company beneficially
owned by such person, immediately
47
<PAGE>
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.
Shares Eligible For Future Sale
As of February 6, 1998, the Company had 16,034,044 shares of Common
Stock outstanding, of which approximately 13,368,600 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 2,665,600 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
aggregate of 555,841 of such "restricted securities" covered by this Prospectus
are being registered for resale pursuant to the registration statement of which
this Prospectus forms a part or have been registered for resale under another
registration statement to which this
48
<PAGE>
Prospectus relates. Affiliates will be subject to certain of the resale
limitations of Rule 144 as promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of shares beneficially
owned by such person for at least one year in such amount that does not exceed
the greater of (i) one percent of the then-outstanding shares of Common Stock
(approximately 160,340 shares as of February 6, 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 Securities and
Exchange Commission. Sales under Rule 144 also are subject to certain other
requirements relating to the manner of sale, notice, and the availability of
current public information about the Company. However, a person who is not
deemed to have been an affiliate at any time within the three months immediately
prior to the date of sale, and who has beneficially owned his or her shares for
at least two years is entitled to sell those shares without regard to the
volume, manner of sale or notice requirements. An aggregate of approximately
2,101,000 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 January 30, 1998, options to purchase a total of 1,143,028 shares
of Common Stock were outstanding under the Company's 1993 Stock Option Plan. See
"Management - 1993 Stock Option Plan." The Company has filed registration
statements under the Securities Act to register for offer and sale the 2,750,000
shares of Common Stock reserved for issuance pursuant to the exercise of stock
options granted under the 1993 Plan. Shares issued upon the exercise of stock
options granted under the 1993 Plan generally will be eligible for sale in the
public market.
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.
PLAN OF DISTRIBUTION
The Company is registering hereby, or has registered under another
registration statement to which this Prospectus relates, a total of 555,841
shares of currently outstanding Common Stock, all of which shares may be sold
from time to time by the Selling Shareholders. Each Selling Shareholder may use
this Prospectus as updated from time to time to offer the shares of Common Stock
for sale in transactions in which the Selling Shareholder is or may be deemed to
be an underwriter within the meaning of the Securities Act. The Company will not
receive any proceeds from the sale of any shares of Common Stock by the Selling
Shareholders. The Company will not pay any compensation to any NASD member in
connection with this offering. Brokerage commissions, if any, attributable to
the sale of the shares of Common Stock offered hereby will be borne by the
holders thereof.
Each currently outstanding share of Common Stock being registered for
resale hereby may be sold by the holder thereof in transactions that are exempt
from registration under the Securities Act or as long as the Registration
Statement of which this Prospectus forms a part is effective under the
Securities Act, and as long as there is a qualification in effect under, or an
available exemption from, any applicable state securities law with respect to
the resale of such shares. The Selling Shareholders, in addition to selling
pursuant to the Registration Statement of which this Prospectus is a part, also
may sell under Rule 144 as promulgated under the Securities Act, if applicable.
See "Description of Securities - Shares Eligible for Future Sale."
49
<PAGE>
The Selling Shareholders also may pledge the shares of Common Stock
being registered for resale hereby to NASD broker/dealers (each a "Pledgee")
pursuant to the margin provisions of each Selling Shareholder's customer
agreements with such Pledgees. Upon default by a Selling Shareholder, the
Pledgee may offer and sell shares of Common Stock from time to time as described
above.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association, Phoenix, Arizona. Certain members of such
firm beneficially owned 12,000 shares of the Company's Common Stock as of the
date of this Prospectus.
EXPERTS
The consolidated financial statements incorporated by reference in this
Prospectus and elsewhere in the Registration Statement of which this Prospectus
forms a part have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act of 1933, with respect to the shares offered hereby. This
Prospectus does not contain all the information contained in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information regarding the Company and
the shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits that are a part thereof, which may be obtained
upon request to the Commission and the payment of the prescribed fee. Material
contained in the Registration Statement may be examined at the Commission's
Washington, D.C. office and copies may be obtained at the Commission's
Washington, D. C. office upon payment of prescribed fees. Statements contained
in this Prospectus are not necessarily complete, and in each case reference is
made to the copy of such contracts or documents filed as an exhibit to the
Registration Statement, each such statement being qualified by this reference.
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<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation not contained in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by or on behalf of the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any shares covered by this Prospectus
in any jurisdiction or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company or that the information contained
herein is correct as of any date subsequent to the date hereof.
------------------
Page
Available Information................................. 2
Incorporation of Certain Information
by Reference......................................... 2
Forward-Looking Statements.............................2
Prospectus Summary.................................... 3
Risk Factors.......................................... 6
Use of Proceeds.......................................13
Dividends.............................................13
Capitalization........................................13
Price Range of Common Stock...........................14
Selected Consolidated Financial Data..................15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................16
Business..............................................23
Properties............................................36
Management............................................37
Certain Transactions..................................43
Private Placements....................................43
Principal and Selling Shareholders....................45
Description of Securities.............................46
Plan of Distribution..................................49
Legal Opinions........................................50
Experts...............................................50
Additional Information................................50
================================================================================
555,841 Shares of
Common Stock
ACTION PERFORMANCE
COMPANIES, INC.
---------------
P R O S P E C T U S
---------------
, 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..................................... $ 661.31
Accountants' Fees and Expenses....................... 5,000.00
Legal Fees and Expenses.............................. 40,000.00
Printing and Engraving Expenses...................... 2,500.00
Miscellaneous Fees................................... 1,838.69
----------
Total.............................................. $50,000.00
==========
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.
R-1
<PAGE>
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 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.
R-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)
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(4)
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(5)
10.24.1 Commercial Credit Agreement dated March 6, 1995 between the Company and the Hong Kong
and Shanghai Banking Corporation Limited(6)
10.24.2 Optional Advance Time Note (Loans Against Imports) dated March 6, 1995 between the Company
and the Hong Kong and Shanghai Banking Corporation(6)
10.25 Bill of Sale and Asset Purchase Agreement between the Company, Fan Fueler, Inc., Peter
LaMonica, and Fred Miller, III dated August 12, 1994(7)
10.26 Bill of Sale and Asset Purchase Agreement between the Company, M-Car, Incorporated, and
Robert Scott Tremonti dated September 29, 1994(7)
10.27 Manufacturing Agreement between the Company and Early Light International (Holdings) Ltd.
dated December 5, 1994(7)
10.29 Asset Purchase Agreement dated March 31, 1995 between the Company and Motorsports
Promotion, Inc.(6)
10.30 Promissory Note dated March 31, 1995 between Motorsports Promotions, Inc., as borrower, and
the Company, as lender(6)
10.31 Security Agreement dated March 31, 1995 between Motorsports Promotions, Inc., as debtor, and
the Company, as secured party(6)
10.32 Credit Agreement by and between the Company and Wells Fargo HSBC Trade Bank, N.A.(8)
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(9)
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.(9)
10.35 Security Agreement dated November 7, 1996, between Sports Image, Inc. and SII Acquisition,
Inc.(9)
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(9)
10.37 License Agreement dated as of November 7, 1996, among SII Acquisition, Inc., Dale Earnhardt,
and Action Performance Companies, Inc.(9)
10.38 Employment Agreement dated as of November 7, 1996, between Action Performance Companies,
Inc. and Joe Mattes(9)
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.(10)
10.40 Exchange Agreement dated as of January 1, 1997, among Action Performance Companies, Inc.,
Kenneth R. Barbee, and Jeffery M. Gordon(10)
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.(10)
</TABLE>
R-3
<PAGE>
<TABLE>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
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(10)
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(10)
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.(10)
10.45 Registration Agreement dated as of January 1, 1997, among Action Performance Companies, Inc.,
Kenneth R. Barbee, and Jeffery M. Gordon(10)
10.46 Employment Agreement dated as of January 1, 1997, between Action Performance Companies,
Inc. and Kenneth R. Barbee(10)
10.47 Consulting Agreement dated as of January 1, 1997, between Action Performance Companies, Inc.
and John Bickford(10)
10.48 Common Stock Purchase Agreement dated January 16, 1997, between Hasbro, Inc. and Action
Performance Companies, Inc.(11)
10.49 Standard Form Industrial Lease dated April 8, 1997, between Hewson/Breckner-Baseline, L.L.C.
and Action Performance Companies, Inc.(12)
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park Partners, LLC and Sports
Image, Inc.(12)
10.51 Asset Purchase Agreement dated as of December 19, 1997, between Action Performance
Companies, Inc. and Revell-Monogram, Inc.
23.1 Consent of Arthur Andersen LLP
- -------------------
(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, 1997,
as filed with the Securities and Exchange Commission on May 15, 1997.
(5) 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.
(6) Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended March 31, 1995,
as filed with the Securities and Exchange Commission on May 15, 1995.
(7) Incorporated by reference to the Registrant's Form 10-KSB for
the year ended September 30, 1994, as filed with the
Securities and Exchange Commission on December 22, 1994.
(8) Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended June 30, 1996,
as filed with the Securities and Exchange Commission on August 14, 1996.
(9) 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.
(10) 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.
(11) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (Registration
No. 333-22943).
(12) 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.
</TABLE>
R-4
<PAGE>
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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
R-5
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
R-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 6th day of February, 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 Chief February 6, 1998
- -------------------------- Executive Officer (Principal Executive Officer)
Fred W. Wagenhals
/s/ Tod J. Wagenhals Executive Vice President, Secretary, and Director February 6, 1998
- --------------------------
Tod J. Wagenhals
/s/ Charles C. Blossom, Jr. Vice President, Chief Operating Officer, February 6, 1998
- -------------------------- and Director
Charles C. Blossom, Jr.
/s/ Christopher S. Besing Vice President, Chief Financial Officer, February 6, 1998
- -------------------------- Treasurer, and Director (Principal
Christopher S. Besing Financial and Accounting Officer)
/s/ Melodee L. Volosin Director of Wholesale Division and Director February 6, 1998
- --------------------------
Melodee L. Volosin
/s/ John S. Bickford, Sr. Director February 6, 1998
- --------------------------
John S. Bickford, Sr.
/s/ Jack M. Lloyd Director February 6, 1998
- --------------------------
Jack M. Lloyd
/s/ Robert H. Manschot Director February 6, 1998
- --------------------------
Robert H. Manschot
</TABLE>
R-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
February 6, 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 February 10, 1998 under the Securities Act of 1933, as amended, covering
an aggregate of 64,164 shares of the Company's common stock, par value $.01 per
share (the "Common Stock") that may be sold from time to time by certain of the
Company's shareholders (the "Selling Shareholders") (all such shares of Common
Stock collectively called the "Shares").
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 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.
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic, and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to such further limitations and qualifications set forth
below, it is our opinion that the Shares will be validly issued, fully paid, and
non-assessable when (a) the Registration Statement as then amended shall have
been declared effective by the Commission, and (b) the Shares have been sold by
the Selling Shareholders as described in the Registration Statement.
For purposes of our opinion, we have assumed (i) the payment
by the Selling Shareholders (or the prior holders thereof) of the full and
sufficient consideration due from them to the Company for such Shares, and (ii)
that the Shares have been duly issued, executed, and authenticated by the
Company. 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.
<PAGE>
Action Performance Companies, Inc.
February 6, 1998
Page 2
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 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.
ASSET PURCHASE AGREEMENT
DATED AS OF DECEMBER 19, 1997
BETWEEN
ACTION PERFORMANCE COMPANIES, INC.
AND
REVELL-MONOGRAM, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1
TRANSFER OF ASSETS.......................................................... 1
1.1 Purchase and Sale of Assets....................................... 1
1.2 Transferred Assets................................................ 1
(a) Accounts Receivable.......................................... 2
(b) Furniture, Fixtures, and Equipment........................... 2
(c) Inventory.................................................... 2
(d) Claims and Rights to the Transferred Assets.................. 2
(e) Business Contracts........................................... 2
(f) Intellectual Property........................................ 2
(g) Vendor and Customer Lists.................................... 3
(h) Licenses, Permits, and Approvals............................. 3
(i) Books and Records............................................ 3
(j) Leasehold Interests.......................................... 3
(k) Names........................................................ 3
(l) Phone Numbers................................................ 3
(m) Deposits and Prepaid Expenses................................ 3
1.3 Excluded Assets................................................... 3
(a) Rights Hereunder............................................. 4
(b) Cash......................................................... 4
(c) Corporate Documents.......................................... 4
(d) Employee Records............................................. 4
(e) Tax Records.................................................. 4
(f) Disposed of Assets........................................... 4
(g) Assets of the Other Business................................. 4
(h) Assets Related to Hallmark................................... 4
(i) Intellectual Property........................................ 4
SECTION 2
ASSUMPTION OF LIABILITIES................................................... 4
2.1 Liabilities Assumed............................................... 4
2.2 No Expansion of Third Party Rights................................ 5
2.3 Designated Subsidiary............................................. 5
SECTION 3
PURCHASE PRICE.............................................................. 5
3.1 Purchase Price.................................................... 5
3.2 Payment of Purchase Price......................................... 5
3.3 Additional Amount................................................. 5
3.4 Adjustment to Initial Payment..................................... 6
SECTION 4
REPRESENTATIONS AND WARRANTIES.............................................. 7
4.1 Representations and Warranties of Seller.......................... 7
(a) Due Incorporation, Good Standing, and Qualification.......... 7
i
<PAGE>
(b) Corporate Authority.......................................... 7
(c) No Subsidiaries.............................................. 7
(d) Financial Statements......................................... 7
(e) No Material Change........................................... 8
(f) Title to Properties.......................................... 8
(g) Condition of Assets and Properties........................... 8
(h) Litigation................................................... 8
(i) Rights and Licenses.......................................... 9
(j) No Violation................................................. 9
(k) Taxes........................................................ 9
(l) Accounts Receivable.......................................... 9
(m) Contracts.................................................... 9
(n) Compliance with Law and Other Regulations.................... 10
(o) Employee Benefit and Employment Matters...................... 10
(p) Insurance.................................................... 10
(q) Intellectual Property........................................ 10
(r) Inventories.................................................. 11
(s) Consents..................................................... 11
(t) Accuracy of Statements....................................... 11
4.2 Representations and Warranties of Buyer........................... 11
(a) Due Incorporation, Good Standing, and Qualification.......... 11
(b) Corporate Authority.......................................... 12
(c) Financial Statements......................................... 12
(d) No Material Change........................................... 12
(e) Litigation................................................... 13
(f) No Violation................................................. 13
(g) Taxes........................................................ 13
(h) Compliance with Law and Other Regulations.................... 13
(i) SEC Reports.................................................. 14
(j) Consents..................................................... 14
(k) Accuracy of Statements....................................... 14
4.3 Survival of Representations and Warranties........................ 14
SECTION 5
COVENANTS................................................................... 14
5.1 Covenants of Seller............................................... 14
(a) Truth of Representations and Warranties...................... 14
(b) Preservation of Business..................................... 14
(c) Ordinary Course.............................................. 15
(d) Books and Records............................................ 15
(e) Compensation................................................. 15
(f) Transfer of Rights Under Certain Excluded Business Contracts. 15
(g) Assistance to Buyer.......................................... 15
(h) Consents and Approvals....................................... 15
(i) Confidentiality.............................................. 16
(j) Insurance.................................................... 16
(k) Maintenance of Assets and Properties......................... 16
(l) Satisfaction of Obligations and Liabilities.................. 16
(m) Employees.................................................... 16
ii
<PAGE>
(n) Investments.................................................. 16
(o) Right of Inspection.......................................... 16
5.2 Covenants of Buyer................................................ 17
(a) Truth of Representations and Warranties...................... 17
(b) Consents and Approvals....................................... 17
(c) Assistance to Seller......................................... 17
5.3 No Solicitation................................................... 17
5.4 Efforts to Consummate Transaction; Further Assurances............. 17
5.5 Public Announcements.............................................. 18
5.6 Expenses.......................................................... 18
5.7 Post-Closing Assistance to Seller................................. 18
5.8 Post-Closing Assistance to Buyer.................................. 18
5.9 Seller's Right of First Refusal................................... 18
SECTION 6
CONDITIONS PRECEDENT TO OBLIGATIONS......................................... 18
6.1 Conditions Precedent to the Obligations of Buyer.................. 18
(a) Accuracy of Representations and Warranties................... 19
(b) Performance of Agreements.................................... 19
(c) Corporate Approval........................................... 19
(d) Opinion of Counsel for Seller................................ 19
(e) No Material Adverse Change................................... 20
(f) Litigation................................................... 20
(g) Certificate of Seller........................................ 20
(h) License Agreement............................................ 20
(i) Manufacturing Agreement...................................... 20
(j) Distribution Agreement....................................... 20
(k) Assignment of Business Contracts............................. 20
(l) Assistance to Buyer.......................................... 21
(m) Termination of HSR Act Waiting Periods....................... 21
(n) Consents and Approvals....................................... 21
(o) Delivery of Documents........................................ 21
(p) Proceedings Satisfactory to Counsel.......................... 21
6.2 Conditions Precedent to the Obligations of Seller................. 21
(a) Accuracy of Representations and Warranties................... 21
(b) Performance of Agreements.................................... 21
(c) Corporate Approval........................................... 21
(d) Opinion of Counsel for Buyer................................. 21
(e) Litigation................................................... 22
(f) Certificates of Buyer and Designated Subsidiary.............. 22
(g) License Agreement............................................ 23
(h) Manufacturing Agreement...................................... 23
(i) Distribution Agreement....................................... 23
(j) Assistance to Seller......................................... 23
(k) Termination of HSR Act Waiting Periods....................... 23
(l) Consents and Approvals....................................... 23
(m) Delivery of Documents........................................ 23
(n) Proceedings Satisfactory to Counsel.......................... 23
iii
<PAGE>
SECTION 7
THE CLOSING.................................................................. 23
7.1 Closing.............................................................. 23
7.2 Deliveries by Seller................................................. 23
(a) Instruments of Conveyance........................................ 23
(b) Certificate of Seller............................................ 24
(c) Certificate of Secretary......................................... 24
(d) Consents......................................................... 24
(e) Legal Opinion.................................................... 24
(f) Books and Records................................................ 24
(g) License Agreement................................................ 24
(h) Manufacturing Agreement.......................................... 24
(i) Distribution Agreement........................................... 24
7.3 Deliveries by Buyer or Designated Subsidiary......................... 24
(a) Assumption of Liabilities........................................ 24
(b) Initial Payment of Purchase Price................................ 24
(c) Buyer's Certificates............................................. 24
(d) Secretary's Certificate.......................................... 24
(e) Legal Opinion.................................................... 25
(f) Consents and Approvals........................................... 25
(g) License Agreement................................................ 25
(h) Manufacturing Agreement.......................................... 25
(i) Distribution Agreement........................................... 25
7.4 Further Assurances................................................... 25
SECTION 8
WAIVER, MODIFICATION, ABANDONMENT............................................ 25
8.1 Waivers.............................................................. 25
8.2 Modification......................................................... 25
8.3 Abandonment.......................................................... 26
8.4 Effect of Abandonment................................................ 26
SECTION 9
NON-COMPETITION, CONFIDENTIALITY,
AND NON-SOLICITATION......................................................... 27
9.1 Non-competition, Confidentiality, and Non-Solicitation by Seller..... 27
(a) Duration and Extent of Restriction............................... 27
(b) Confidentiality.................................................. 27
(c) Restrictions with Respect to Vendors and Customers............... 27
(d) Expiration of Non-Competition Period Under Certain Circumstances. 28
9.2 Non-competition, Confidentiality, and Non-Solicitation by Buyer...... 28
(a) Duration and Extent of Restriction............................... 28
(b) Confidentiality.................................................. 28
(c) Restrictions with Respect to Vendors and Customers............... 29
9.3 Remedies for Breach.................................................. 29
9.4 Restrictions Separable............................................... 29
iv
<PAGE>
SECTION 10
INDEMNIFICATION.............................................................. 29
10.1 Indemnification by Seller........................................ 29
(a) General..................................................... 29
(b) Bulk Sales Matters.......................................... 30
10.2 Indemnification by Buyer......................................... 30
10.3 Notice and Right to Defend Third-Party Claims.................... 30
10.4 Limitation on Rights to Indemnification.......................... 31
SECTION 11
GENERAL...................................................................... 31
11.1 Indemnity Against Finders........................................ 31
11.2 Controlling Law.................................................. 31
11.3 Notices.......................................................... 31
11.4 Binding Nature of Agreement; No Assignment....................... 32
11.5 Entire Agreement................................................. 33
11.6 Construction..................................................... 33
11.7 Attorneys' Fees.................................................. 33
11.8 Remedies Cumulative.............................................. 33
11.9 Computation of Time.............................................. 33
11.10 Authority........................................................ 33
11.11 Paragraph Headings............................................... 33
11.12 Gender........................................................... 33
11.13 Counterparts..................................................... 33
11.14 Subsidiaries..................................................... 33
v
<PAGE>
ASSET PURCHASE AGREEMENT
AGREEMENT dated as of December 19, 1997, between ACTION
PERFORMANCE COMPANIES, INC., an Arizona corporation ("Buyer") and
REVELL-MONOGRAM, INC., a Delaware corporation ("Seller").
Seller is engaged in the business (the "Business") of
developing, producing, marketing, and selling metal die-cast miniature replicas
of motorsports vehicles, haulers, and trains associated with motorsports
activities that are conducted primarily in the United States, specifically
limited to National Association for Stock Car Auto Racing ("NASCAR"), National
Hot Rod Association ("NHRA"), International Hot Rod Association ("IHRA"), "dirt
car," and "sprint car" racing (collectively, "U.S. Motorsports"). Seller owns or
has rights to all of the assets relating to or used by Seller in connection with
the Business. Buyer desires to acquire and assume from Seller, and Seller
desires to transfer to Buyer, the Transferred Assets and the Assumed Liabilities
(as such terms are defined respectively in Sections 1.2 and 2.1), all upon the
terms and conditions set forth in this Agreement.
Seller also engages in the development, production, marketing,
and sale of plastic models, plastic model kits, and plastic miniature replicas
of U.S. Motorsports vehicles and die-cast models, as well as plastic models,
plastic model kits, and other products that are not related to U.S. Motorsports
(the "Other Business"). Buyer is not acquiring any of the assets used or
intended for use in the Other Business, except as set forth in a Schedule
hereto.
In connection with the transfer of the Transferred Assets and
assumption of the Assumed Liabilities, Buyer and Seller also desire to enter
into a License Agreement, a Manufacturing Agreement, and a Distribution
Agreement, as respectively defined in Sections 6.1(h), 6.1(i), and 6.1(j) of
this Agreement.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants set forth herein, the parties agree as follows:
SECTION 1
TRANSFER OF ASSETS
1.1 Purchase and Sale of Assets. Based upon and subject to the
representations, warranties, covenants, agreements, and other terms and
conditions set forth in this Agreement, Seller shall sell, convey, transfer,
assign, and deliver on the Closing Date (as defined in Section 7.1), and Buyer
shall purchase, acquire, and accept or cause one of its subsidiaries
("Designated Subsidiary") to purchase, acquire, and accept, as provided herein,
all of the assets, properties, rights, and goodwill of Seller of every kind and
description, wherever located, used or intended for use in connection with the
Business, except for the "Excluded Assets" listed in Section 1.3.
1.2 Transferred Assets. The assets, properties, rights, and
goodwill to be sold, conveyed, transferred, assigned, and delivered by Seller on
the Closing Date pursuant to Section 1.1 are sometimes herein called the
"Transferred Assets" and shall include, without limitation, all of the assets
and properties shown on or reflected in the Balance Sheet relating to the
Business as at November 30, 1997 ("Seller's Base Balance Sheet") and all assets
and properties used in or intended for use in connection with the Business
acquired by Seller after the date of Seller's Base Balance Sheet and to the
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Closing Date except for those disposed of before the Closing Date as permitted
by this Agreement. Without limiting the foregoing, the Transferred Assets shall
include the following:
(a) Accounts Receivable. All accounts receivable and
notes and other receivables relating solely to the Business (the "Accounts
Receivable"), including, without limitation, those set forth on Schedule
"1.2(a)" hereto, which sets forth the amount of each receivable and the name and
mailing address of the obligor on each such receivable as of the date of
Seller's Base Balance Sheet, except for accounts receivable associated with
sales of "Revell Select" and "Revell Racing" inventory to mass-retail accounts
and hobby distributors.
(b) Furniture, Fixtures, and Equipment. All
furniture, fixtures, machinery, equipment, parts, tools, molds, and dyes used or
intended for use solely in connection with the Business (the "Equipment"),
including, without limitation, the Equipment set forth on Schedule "1.2(b)"
hereto.
(c) Inventory. All inventory, including, without
limitation, raw materials, supplies, work in process, finished goods, packaging,
and promotional materials used in or intended for use solely in connection with
the Business (the "Inventory" or "Inventories"), including, without limitation,
the Inventories set forth on Schedule "1.2(c)" hereto, excluding "Revell Racing"
and "Revell Select" inventory as described in the Manufacturing Agreement.
(d) Claims and Rights to the Transferred Assets. All
claims and rights (and benefits arising therefrom) relating to the Transferred
Assets against all persons and entities, including, without limitation, all
rights against suppliers under warranties covering any of the Equipment and
Inventory, in each case, to the same extent as the same are used or held for use
in connection with the Business.
(e) Business Contracts. All Leases (as defined in
Section 1.2(k)), license agreements, sales orders, sales contracts, sales
representative agreements, service agreements, supply agreements, franchise
agreements, technical service agreements, and other contracts and agreements to
which Seller is a party and that are in writing and used or held for use by
Seller solely in connection with the Business (the "Business Contracts"),
including, without limitation, each Business Contract set forth on Schedule
"1.2(e)(i)" hereto. Attached to Schedule "1.2(e)(i)" is the text of each
Business Contract that Seller reasonably believes will be in effect on the
Closing Date. Subject to Sections 5.1(f) and 5.8, below, Seller is not obligated
to transfer to Buyer any contract or agreement that relates in whole or in part
to the Other Business (the "Excluded Business Contracts"). The Excluded Business
Contracts that relate in part to the Business are identified in Schedule
"1.2(e)(ii)".
(f) Intellectual Property. Except for those
trademarks and trade names of Seller that are covered by and the subject of the
License Agreement, all intellectual property rights used or intended for use by
Seller solely in connection with the Business that are owned by or licensed to
Seller, including, without limitation, all patents and applications therefor,
know-how, unpatented inventions, trade secrets, packaging styles and methods,
business and marketing plans, ideas for products or production developed by or
on behalf of Seller for use solely in connection with the Business, copyrights
and applications therefor, trademarks and applications therefor, service marks
and applications therefor, trade names and applications therefor, and all names,
logos, and slogans used or intended for use by Seller solely in connection with
the Business (the "Intellectual Property"), including, without limitation, the
Intellectual Property set forth on Schedule "1.2(f)" hereto and including any
other Intellectual Property transferrable by Seller. Seller shall promptly
deliver to Buyer complete copies of all such business and marketing plans,
license agreements, copyrighted materials, trademarks, and trade
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names, and patents and all applications therefor used or intended for use solely
in connection with the Business.
(g) Vendor and Customer Lists. All vendor and
customer lists and vendor and customer records used or intended for use in
connection with the Business. Schedule "1.2(g)" hereto sets forth a list of all
previous (within the last two years from the date hereof) and existing vendors
and customers of Seller relating to the Business and their last known business
addresses.
(h) Licenses, Permits, and Approvals. All licenses,
permits, approvals, and authorizations of whatsoever kind and type, governmental
or private, issued, applied for, or pending, used or intended for use solely in
connection with the Business (the "Licenses and Permits"). The Licenses and
Permits are set forth on Schedule "1.2(h)" hereto. Attached to Schedule "1.2(h)"
are complete copies of all Licenses and Permits.
(i) Books and Records. Copies of all books and
records used or intended for use solely in connection with the Business,
including, without limitation, the vendor and customer lists, blueprints,
drawings, and other technical papers used or intended for use solely in
connection with the Business or the Transferred Assets, and all accounts
receivable, inventory, maintenance, and asset history records, but excluding all
employee and tax records whether or not used or intended for use in connection
with the Business (provided, however, that Seller shall provide to Buyer access
to such employee and tax records relating to the Business upon written request
following the Closing Date).
(j) Leasehold Interests. The leasehold interests
created by all leases of real property and personal property used or intended
for use solely in connection with the Business, under which Seller is a lessee,
including those leases that are capitalized leases and any maintenance contracts
and deposits in connection therewith (all such leasehold interest shall herein
be referred to as "Leasehold Interests" and the contracts evidencing the same
shall herein be referred to as the "Leases," and all such personal property that
Seller is leasing as lessee relating to the Business shall herein be referred to
as "Leased Personalty"), including, without limitation, the Leased Personalty
set forth on Schedule "1.2(k)" hereto and any other Leased Personalty
transferrable by Seller. Attached to Schedule "1.2(k)" are complete copies of
all the lease agreements listed on Schedule "1.2(k)".
(k) Names. Except for those names that will be
licensed to Buyer pursuant to the License Agreement, all right, title, and
interest in and to any and all names solely associated with the Business and the
Transferred Assets used at any time within the preceding 24 months, and any
derivations thereof (the "Names").
(l) Phone Numbers. All telephone and facsimile
numbers used solely in the conduct of the Business.
(m) Deposits and Prepaid Expenses. All deposits,
notes receivable, and prepaid expenses relating solely to the Business (the
"Deposits"), including, without limitation, the Deposits set forth on Schedule
"1.2(m)" hereto (including any deposits with respect to the Leases assumed by
Buyer pursuant to Section 2.1) as reduced in the ordinary course of business in
accordance with past historical practices.
1.3 Excluded Assets. Except as set forth in Section 1.2 of
this Agreement, the following assets, properties, and rights of Seller shall not
constitute Transferred Assets and therefore shall
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be excluded from the purchase and sale contemplated by this Agreement
(collectively, the "Excluded Assets"):
(a) Rights Hereunder. Seller's rights under this
Agreement, the License Agreement, the Manufacturing Agreement, the Distribution
Agreement, and any other agreement contemplated by this Agreement.
(b) Cash. Any cash, bank accounts, certificates of
deposit, or investment securities of Seller.
(c) Corporate Documents. Seller's corporate charter,
minute and stock record books, and corporate seal.
(d) Employee Records. To the extent such records
relate to the Business, all of Seller's records with respect to employees,
provided that access thereto shall be provided to Buyer upon written request.
(e) Tax Records. To the extent such books and records
relate to the Business, all of Seller's books and records with respect to taxes,
provided that access thereto shall be provided to Buyer upon written request.
(f) Disposed of Assets. Any assets and properties
disposed of since the date of Seller's Base Balance Sheet in the ordinary course
of business and as contemplated by this Agreement.
(g) Assets of the Other Business. Except as
explicitly set forth on a Schedule to this Agreement, any asset, property, or
other right related to the Other Business, subject to Seller's obligations to
assign or sublicense certain of its rights with respect to the Business under
certain of the Excluded Business Contracts pursuant to Sections 5.1(f) and 5.8
of this Agreement.
(h) Assets Related to Hallmark. Any asset, property
or right derived from Seller's sales, licenses or other dealings with Hallmark
Cards, Incorporated ("Hallmark") or Hallmark's distribution channels as
currently constituted (the "Hallmark Distribution Channels").
(i) Intellectual Property. Any name, trademark, or
other intellectual property that will be licensed to Buyer pursuant to the
License Agreement.
SECTION 2
ASSUMPTION OF LIABILITIES
2.1 Liabilities Assumed. Upon the sale and purchase of the
Transferred Assets as provided in this Agreement, Buyer or Designated Subsidiary
shall, except as provided in this Agreement, assume and shall thereafter pay or
discharge when due (a) all accounts payable of Seller or its affiliates to
vendors with respect to the Business as reflected on Seller's Base Balance Sheet
and as incurred by Seller with respect to the Business in the ordinary course of
the conduct of the Business after the date of Seller's Base Balance Sheet to the
Closing Date, to the extent such accounts payable exist on the Closing Date; (b)
all obligations and liabilities of Seller, including royalties payable under
license agreements, under the Leases and the Business Contracts transferred to
Buyer pursuant to Section 1.2; and (c) all other accrued liabilities of the
Business incurred in the normal course with respect to payroll expense for the
employees listed on Schedule 2.1 and accrued liabilities for sales tax
collections and any sales, value
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added, transfer, and other taxes (other than income taxes) associated with the
sale, transfer, or delivery of the Transferred Assets, or as listed on the Base
Balance Sheet. Such obligations and liabilities being assumed pursuant to this
Section 2.1 are sometimes referred to herein as "Assumed Liabilities."
2.2 No Expansion of Third Party Rights. The assumption by
Buyer or Designated Subsidiary of the Assumed Liabilities, and the transfer
thereof by Seller, shall in no way expand the rights and remedies of any third
party against Seller or Buyer or Designated Subsidiary as assignee of Seller as
compared to the rights and remedies that such third party would have had against
Seller or Buyer or Designated Subsidiary as assignee of Seller had Buyer or
Designated Subsidiary not assumed such liabilities. Without limiting the
generality of the preceding sentence, the assumption by Buyer or Designated
Subsidiary of such liabilities shall not create any third party beneficiary
rights.
2.3 Designated Subsidiary. Buyer and Seller contemplate that
Buyer may organize a newly formed, wholly owned subsidiary (referred to herein
as "Designated Subsidiary") to acquire the Transferred Assets and assume the
Assumed Liabilities. Accordingly, notwithstanding anything to the contrary in
Section 11.4, at the Closing (as defined in Section 7.1), Buyer may assign and
delegate to such Designated Subsidiary all its rights and obligations under this
Agreement and the other agreements contemplated by this Agreement (a "Permitted
Assignment"), it being agreed that any such Permitted Assignment shall not
release Buyer from any of its obligations under this Agreement or any other
agreement that Buyer would have entered into in connection with this Agreement
or the transactions contemplated hereby but for such Permitted Assignment.
Therefore, upon a Permitted Assignment, all obligations of Buyer hereunder and
under any such other agreement shall be joint and several obligations of Buyer
and such Designated Subsidiary, notwithstanding anything to the contrary in this
Agreement or any such other agreement.
SECTION 3
PURCHASE PRICE
3.1 Purchase Price. The purchase price for the Transferred
Assets to be acquired pursuant to Section 1.1 shall be, in addition to the
assumption of the Assumed Liabilities pursuant to Section 2.1, an amount equal
to $14,806,000.00 (subject to adjustment pursuant to Section 3.4), plus the
Additional Amount (as defined in Section 3.3).
3.2 Payment of Purchase Price. At the Closing, Buyer shall pay
to Seller, by cashier's check or wire transfer, the sum of $14,806,000.00 (the
"Initial Payment").
3.3 Additional Amount. In addition to the Initial Payment,
Buyer shall pay or cause to be paid to Seller an additional amount (the
"Additional Amount") calculated as follows:
(i) Buyer shall pay or cause to be paid to Seller
$1,000,000 (the "Base Additional Amount") on January 1 of each year beginning on
January 1, 1998 and ending on December 31, 2007, provided that, during the
12-month period immediately preceding each Base Additional Amount payment date,
Seller (A) has kept the "Revell" trademark duly and validly registered in the
United States, and (B) the License Agreement is still in effect.
(ii) For each of the five 12-month periods beginning
on January 1, 1998 and ending on December 31, 2002, Buyer shall pay or cause to
be paid to Seller, in addition to the Base Additional Amount, an Additional
Amount to be calculated based on 5.0% of the amount of Buyer's sales of "Revell"
trademarked die-cast products in excess of $20,000,000 in such 12-month period,
provided
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that the maximum Additional Amount payable by Buyer pursuant to this Section
3.3(ii) for any such 12- month period shall not exceed $500,000.
(iii) For each of the five 12-month periods beginning
on January 1, 2003 and ending on December 31, 2007, Buyer shall pay or cause to
be paid to Seller, in addition to the Base Additional Amount, an Additional
Amount to be calculated based on (A) 5.0% of the amount of Buyer's sales of
"Revell" trademarked die-cast products in excess of $20,000,000 but less than or
equal to $30,000,000 in such 12-month period, (B) 3.0% of the amount of Buyer's
sales of "Revell" trademarked die-cast products in excess of $30,000,000 but
less than or equal to $40,000,000 in such 12-month period, and (C) 2.0% of the
amount of Buyer's sales of "Revell" trademarked die-cast products in excess of
$40,000,000 in such 12-month period.
(iv) Buyer shall have no obligation (A) to pay any
Base Additional Amount for any 12-month period beginning on or after January 1,
2008, or (B) to pay any Additional Amount to Seller based on sales of "Revell"
trademarked die-cast products made on or after January 1, 2008.
The amount, if any, of the Additional Amount for each year shall be calculated
by Buyer and paid to Seller within 90 days following such year. Each payment
shall be accompanied by a report to Seller, certified by an authorized officer
of Buyer to be accurate, setting forth the amount of sales of "Revell"
trademarked die-cast products in each calendar month of the relevant period. For
the purposes of this Agreement, a "sale" or "sales" shall be deemed to have
occurred upon the shipment by Buyer of any product bearing or accompanied by the
"Revell" name or otherwise licensed under the License Agreement and the amount
of Buyer's sales shall be the sales price to Buyer's immediate customers without
mark-up by third parties. Sales to affiliates of Buyer shall be made on an arm's
length basis. Buyer shall keep full, clear, and accurate books and records with
respect to all sales or other revenue with respect to the Transferred Assets
subject to this Agreement. The books and records shall be maintained in such a
manner that the Additional Amount shall be readily verifiable and shall be
available for inspection by representatives of Seller once per calendar year
upon reasonable prior notice and during normal business hours. Seller shall have
the right to cause the books and records of Buyer to be audited on Buyer's
premises upon reasonable prior notice and during normal business hours, by
Arthur Andersen, LLP or another independent accountant selected from a "big
four" accounting firm mutually agreed upon by Buyer and Seller, which shall
provide Seller with a statement summarizing the sales or other revenue with
respect to the Transferred Assets and the Additional Amount due for the audit
period. The information contained in Buyer's books and records shall remain
confidential. In no event shall Seller be entitled to examine and audit Buyer's
records more than once per calendar year except upon good cause shown. In the
event Seller's audit reveals an overpayment or deficiency in any Additional
Amount due under this Agreement, Seller or Buyer shall remit the overpayment or
deficiency, as the case may be, within 10 days together with interest at a rate
of 8% per annum accruing from the date such amount was paid. In the event such
audit shows an underpayment of an Additional Amount by Buyer of more than 5%,
the cost of the audit shall be paid by Buyer; otherwise, the cost of the audit
shall be paid by Seller. Should Seller fail to examine records for a period of
three years from the date of any report from which they were compiled, then that
report shall be deemed final and binding and Seller shall have no further right
to contest the report or payment of the Additional Amount called for therein.
Nothing in this Section 3.3 shall give Buyer the right to use the "Revell" name
or trademark. Such right must be pursuant to the License Agreement between
Seller and Buyer.
3.4 Adjustment to Initial Payment. Within 35 days after the
Closing, Seller shall prepare and deliver to Buyer a Closing Balance Sheet as of
the Closing Date which will reflect Seller's best estimate of the Transferred
Assets and the Assumed Liabilities, prepared in accordance with the
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principles reflected in, and on a basis consistent with, the Base Balance Sheet.
Buyer shall have access to relevant personnel, books, and records of Seller to
determine if it agrees with the Closing Balance Sheet, and will inform Seller,
in writing, within 15 days after receipt of the Closing Balance Sheet whether it
agrees with the Closing Balance Sheet and, if it does not, the specifics of any
disagreement. If the parties do not reach an agreement within 10 days after
Buyer notifies Seller of any disagreements with Seller's Closing Balance Sheet,
then Arthur Andersen LLP (the "Accountants") shall be engaged by both Seller and
Buyer to determine whether the proposed adjustments are appropriate. Seller and
Buyer shall provide to the Accountants all information and access to personnel
that the Accountants may require and shall divide equally and share equally the
costs, fees, and expenses of the Accountants. The Accountants' determination
shall be conclusive. Once the final determination of the net assets on the
Closing Balance Sheet is made, the Initial Payment shall be increased by the
amount of such net assets over, or will be decreased by the amount of such net
assets under, the amount of net assets as reflected in the Base Balance Sheet,
and there shall be payment to or repayment by the Seller, as the case may be, to
reflect such difference.
SECTION 4
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Seller. Except as
otherwise set forth in Seller's disclosure schedule (the "Seller Disclosure
Schedule") attached hereto and incorporated herein by reference, Seller
represents and warrants to Buyer and Designated Subsidiary as follows:
(a) Due Incorporation, Good Standing, and
Qualification. Seller is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation with all
requisite corporate power and authority to own, operate, and lease its assets
and properties and to carry on the Business as now being conducted. Seller is
not subject to any material disability in connection with the conduct of the
Business by reason of the failure to be duly qualified as a foreign corporation
for the transaction of business or to be in good standing under the laws of any
jurisdiction. Schedule "4.1(a)" hereto constitutes a list setting forth, as of
the date of this Agreement, each jurisdiction in which Seller is qualified to do
business with respect to the Business.
(b) Corporate Authority. Seller has the corporate
power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. The Board of Directors and shareholders of
Seller have duly authorized the execution, delivery, and performance of this
Agreement. No other corporate proceedings on the part of Seller are necessary to
authorize the execution and delivery by Seller of this Agreement or the
consummation by Seller of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by, and constitutes a legal, valid, and
binding agreement of, Seller, enforceable against Seller in accordance with its
terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium, or other similar laws now or hereafter
in effect relating to creditors' rights, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefore may be brought.
(c) No Subsidiaries. Seller does not have any other
affiliates or subsidiaries that own or have an interest in any of the
Transferred Assets or conduct any portion of the Business.
(d) Financial Statements. The Balance Sheets of the
Business as of December 31, 1996 and November 30, 1997, and the Statements of
Income and the Statements of Cash Flows of the Business for the periods ended
December 31, 1996 and November 30, 1997 have been
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prepared by Seller without audit. Within 35 days after the Closing Date, Seller
shall provide to Buyer a Balance Sheet of the Business as of the Closing Date
and the Statement of Income for the period from January 1, 1997 through the
Closing Date. All of the foregoing financial statements have been and will be
prepared in accordance with generally accepted accounting principles (but
without footnotes), which were applied on a consistent basis, are correct and
complete, and present fairly and accurately, in all material respects, the
consolidated financial position, results of operations, and changes in financial
position of the Business as of their respective dates and for the periods
indicated. Seller has no material liabilities or obligations relating to the
Business of a type that would be included in a balance sheet prepared in
accordance with generally accepted accounting principles, whether related to tax
or non-tax matters, accrued or contingent, due or not yet due, liquidated or
unliquidated, or otherwise, except as and to the extent disclosed or reflected
in Seller's Base Balance Sheet or incurred since the date of that balance sheet
in the ordinary course of business and as contemplated by this Agreement.
(e) No Material Change. Since the date of Seller's
Base Balance Sheet, there has not been and there is not threatened (i) any
material adverse change in the financial condition, business or operating
results of Seller with respect to the Business or the Transferred Assets, (ii)
any loss or damage (whether or not covered by insurance) to any of the
Transferred Assets that materially affects or impairs Seller's ability to
conduct the Business, or (iii) any mortgage or pledge of any of the Transferred
Assets, or any indebtedness incurred by or relating to Seller with respect to
the Business, other than indebtedness, not material in the aggregate, incurred
in the ordinary course of business. Seller makes no representation or warranty,
however, with respect to the manner in which any of Seller's current customers
may react to the news of the transactions that are the subject of this
Agreement.
(f) Title to Properties. Seller has good and
marketable title to all of the Transferred Assets, including those reflected in
Seller's Base Balance Sheet or acquired subsequent to the date of Seller's Base
Balance Sheet, except Transferred Assets disposed of subsequent to the date of
Seller's Base Balance Sheet in the ordinary course of the conduct of the
Business and as contemplated by this Agreement. The Transferred Assets are
subject to no mortgage, indenture, pledge, lien, claim, encumbrance, charge,
security interest or title retention, or other security arrangement, except for
liens for the payment of federal, state, and other taxes, the payment of which
is neither delinquent nor subject to penalties, and except for other liens and
encumbrances incidental to the conduct of the Business by Seller or the
ownership of the Transferred Assets, which were not incurred in connection with
the borrowing of money or the obtaining of advances and which do not in the
aggregate materially detract from the value of the Transferred Assets or
materially impair the use thereof in the operation of the Business, except in
each case as disclosed in Seller's Base Balance Sheet. All leases pursuant to
which Seller leases any substantial amount of the Transferred Assets are valid
and effective in accordance with their respective terms.
(g) Condition of Assets and Properties. The
buildings, equipment, machinery, fixtures, furniture, furnishings, office
equipment, and all other tangible personal assets and properties of Seller
constituting Transferred Assets do not require any repairs other than normal
maintenance and are in good operating condition and in a state of reasonable
maintenance and repair.
(h) Litigation. There are no actions, suits,
proceedings, or other litigation pending or, to the knowledge of Seller,
threatened against Seller at law or in equity, or before or by any federal,
state, municipal, or other governmental department, commission, board, bureau,
agency, or instrumentality that, if determined adversely to Seller, might
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the Transferred Assets or the operations, operating results,
or condition, financial or otherwise, of Seller with respect to the Business.
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(i) Rights and Licenses. Seller has all Licenses and
Permits necessary for the conduct of the Business as presently conducted by it
and the ownership and use of the Transferred Assets and the premises occupied by
it with respect to the Business. Schedule "1.2(h)" hereto contains a true,
correct, and complete list of all Licenses and Permits necessary for the conduct
of the Business.
(j) No Violation. Except as contemplated in Sections
5.1(f) and 5.8 of this Agreement, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby will not violate or
result in a breach by Seller of, or constitute a default under, or conflict
with, or cause any acceleration of any obligation with respect to, (i) any
provision or restriction of any charter, bylaw, loan, indenture, or mortgage of
Seller, or (ii) any provision or restriction of any lien, lease agreement,
contract, instrument, order, judgment, award, decree, ordinance, or regulation
or any other restriction of any kind or character to which any of the
Transferred Assets is subject or by which Seller is bound with respect to the
Business.
(k) Taxes. Seller has duly filed in correct form all
Tax Returns (as defined below) relating to the activities of Seller required or
due to be filed (with regard to applicable extensions) on or prior to the date
hereof. All such Tax Returns are accurate and complete in all material respects,
and Seller has paid or made provision for the payment of all Taxes (as defined
below) that have been incurred or are due or claimed to be due from Seller by
federal, state, or local taxing authorities for all periods ending on or before
the date hereof, other than Taxes or other charges that are not delinquent or
are being contested in good faith and have not been finally determined and have
been disclosed to Buyer. The amounts set up as reserves for Taxes on the books
of Seller are sufficient in the aggregate for the payment of all unpaid Taxes
(including any interest or penalties thereon), whether or not disputed, accrued,
or applicable. No claims for Taxes or assessments are being asserted or
threatened against Seller. For purposes of this Agreement, the term "Taxes"
shall mean all taxes, charges, fees, levies, or other assessments, including,
without limitation, income, gross receipts, excise, property, sales, transfer,
license, payroll, and franchise taxes, imposed by the United States, or any
state, local, or foreign government or subdivision or agency thereof; and such
term shall include any interest, penalties, or additions to tax attributable to
such assessments or to the failure to file any Tax Return; and the term "Tax
Return" shall mean any report, return, or other information required to be
supplied to a taxing authority or required by a taxing authority to be supplied
to any other person.
(l) Accounts Receivable. The accounts receivable of
Seller constituting Transferred Assets have been acquired in the ordinary course
of business, are valid and enforceable, and are fully collectible, subject to no
defenses, deductions, set-offs, or counterclaims, except to the extent of the
reserve reflected in Seller's Base Balance Sheet or in such other amount that is
not material in the aggregate. Each such account receivable is fully collectible
to the extent of the face value thereof (less the amount of the reserve for
doubtful accounts, if any, reflected on the books of Seller with respect to such
account), no later than 30 days after such account receivable is due, and no
account receivable is due more than 90 days after it was created. Any such
account receivable not collected in full (less any such reserve) within 30 days
after such account is due, or within 90 days after the Closing Date, whichever
is later, shall conclusively be deemed to be uncollectible. Notwithstanding the
foregoing, Buyer shall make no claim against Seller unless and until an
aggregate of at least $150,000 of accounts receivable are determined to be
non-collectible, in which case Seller shall be responsible for and shall
promptly reimburse Buyer for 50% of uncollectible accounts receivable in excess
of $150,000.
(m) Contracts. With respect to the Business, Seller
is not a party to any material contract, lease, agreement, mortgage, or other
arrangement other than the Business Contracts and the Excluded Business
Contracts. All material mortgages, leases, contracts, agreements, and other
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arrangements with respect to the Business to which Seller is a party are valid
and enforceable in accordance with their terms; Seller and all other parties to
each of the foregoing have performed all obligations required to be performed to
date; neither Seller nor any such other party is in default in any material
respect or in arrears under the terms of any of the foregoing; and no condition
exists or event has occurred that, with the giving of notice or lapse of time or
both, would constitute a default in any material respect under any of them.
(n) Compliance with Law and Other Regulations. Seller
is in compliance in all material respects with all requirements (including those
relating to environmental matters) of federal, state, or local law and all
requirements of all governmental bodies and agencies having jurisdiction over it
with respect to the conduct of the Business, the use of Transferred Assets, and
the use of all premises occupied by it with respect to the Business. There is no
environmental contamination, toxic waste or other discharge, spill, construction
component, structural element or condition, adversely affecting any of the
Transferred Assets, nor has Seller received any official notice or citation that
any of the Transferred Assets in any way contravene any federal, state, or local
law or regulation relating to environmental, health, or safety matters,
including without limitation any requirements of the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA") or any OSHA requirements.
Without limiting the foregoing, Seller has properly filed all reports, paid all
monies, and obtained all licenses, permits, certificates, and authorizations
needed or required for the conduct of the Business and the use of the
Transferred Assets and the premises occupied by it in connection with the
Business and is in compliance in all material respects with all conditions,
restrictions, and provisions of all of the foregoing. Seller has not received
any notice from any federal, state, or local authority or any insurance or
inspection body that any of the Transferred Assets or the business procedures or
practices related to the Business fails to comply with any applicable law,
ordinance, regulation, building, or zoning law or requirement of any public
authority or body.
(o) Employee Benefit and Employment Matters. Seller
is not a party to any collective bargaining agreement and, to the best of
Seller's knowledge, there is no material request for union representation
pending or threatened against Seller. Subject to a contingent six-month
severance liability as set forth on the Seller Disclosure Schedule, the
employment of each employee of Seller with respect to the Business is terminable
at will without cost to Buyer. Seller has complied with all other applicable
federal, state, and local laws relating to the employment of labor, including,
but not limited to, the provisions thereof relative to wages, hours, collective
bargaining, working conditions, and payment of taxes of any kind, with respect
to the Business, and Seller is not liable for any arrears of wages or any taxes
or penalties for failure to comply with any of the foregoing or has any
obligations for any vacation, sick leave, or other compensatory time, except as
reflected in the financial statements described in Section 4.1(d). All officers
and independent contractors of Seller with respect to the Business are paid
salaries or other compensation in accordance with the amounts set forth on
Schedule "4.1(o)" hereto, and Schedule "4.1(o)" hereto correctly and accurately
sets forth all salaries, expenses, and personal benefits paid to or accrued for
all directors, officers, and principal shareholders of Seller with respect to
the Business as of the date of this Agreement, all of which are reflected as
appropriate in Seller's Base Balance Sheet.
(p) Insurance. Seller maintains in full force and
effect insurance coverage on the Transferred Assets and its premises,
operations, and personnel relating to the Business in such amounts as Seller
deems appropriate.
(q) Intellectual Property. Seller owns or holds all
of the rights to use all packaging, logos, trademarks, trade names, trade
secrets, fictitious names, service marks, patents, and
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copyrights that are used in or necessary to the conduct of the Business. None of
the matters covered by the Intellectual Property, nor any of the products or
services sold or provided by Seller, nor any of the processes used or the
business practices followed by Seller, with respect to the Business, infringes
or has infringed upon any trademark, trade name, trade secret, fictitious name,
service mark, patent, or copyright owned by any person or entity (or any
application with respect thereto), or constitutes unfair competition. Except as
set forth on Schedule "4.1(q)" or elsewhere in this Agreement, Seller is not,
and following the Closing neither Buyer nor Designated Subsidiary will be,
obligated to pay any royalty or other payment with respect to any of the
Intellectual Property. To the knowledge of Seller, no person or entity is
producing, providing, selling, or using products or services that would
constitute an infringement of any of the Intellectual Property.
(r) Inventories. The Inventories are in good and
merchantable condition and are stated at not more than the lower of cost or
market, with adequate adjustments for obsolete, obsolescent, or otherwise not
readily marketable items. Since the date of Seller's Base Balance Sheet, there
have not been and there are not required to be any write-downs in the value of
the Inventories or write-offs with respect to such Inventories. The raw
materials, work in progress, and finished goods inventory of Seller constituting
Transferred Assets are all in good condition and are usable and currently are
being used in the present production and sales activities of Seller with respect
to the Business, and Seller does not have on hand or on order any raw materials,
work in progress, or finished goods inventory with respect to the Business in
excess of its normal requirements (based upon sales experience from the latest
12 months) for products that are included in its current line with respect to
the Business and for which Seller is now taking orders. Without limiting the
foregoing, (i) Seller does not have more than an eight-month supply of raw
materials, work in progress, or finished goods inventory with respect to the
Inventories, substantially all of which is saleable at prices currently quoted
by Seller but in no event at prices lower than the amounts reflected on the Base
Balance Sheet, and (ii) all work in progress and finished goods inventory to be
transferred to Buyer or Designated Subsidiary pursuant to this Agreement are in
accordance with customers' specifications and the sale thereof to customers will
not result in any liability of any kind to Buyer or Designated Subsidiary.
(s) Consents. Except as set forth in Schedule 4.1(s)
hereto, no consent, approval, license, permit, or authorization of any federal,
state, municipal, or other governmental department, commission, board, bureau,
agency, or instrumentality, or other person is required in connection with the
execution and delivery of this Agreement by Seller or the consummation by Seller
of the transactions contemplated hereby.
(t) Accuracy of Statements. Neither this Agreement
nor any statement, list, certificate, or other information furnished or to be
furnished by Seller to Buyer in connection with this Agreement or any of the
transactions contemplated hereby contains or will contain an untrue statement of
a material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein, in light of circumstances in which
they are made, not misleading.
4.2 Representations and Warranties of Buyer. Except as
otherwise set forth in Buyer's disclosure schedule (the "Buyer Disclosure
Schedule") heretofore delivered by Buyer to Seller and acknowledged as received
by Seller, and except as disclosed in Buyer's Annual Report on Form 10-K for the
year ended September 30, 1997 as heretofore filed by Buyer with the Securities
and Exchange Commission (the "SEC"), Buyer represents and warrants to Seller as
follows:
(a) Due Incorporation, Good Standing, and
Qualification. Each of Buyer and Designated Subsidiary is a corporation duly
organized, validly existing, and in good standing under
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the laws of its jurisdiction of incorporation with all requisite corporate power
and authority to own, operate, and lease its assets and properties and to carry
on its business as now being conducted. Neither Buyer nor Designated Subsidiary
is subject to any material disability by reason of the failure to be duly
qualified as a foreign corporation for the transaction of business or to be in
good standing under the laws of any jurisdiction.
(b) Corporate Authority. Buyer has and, if a
Permitted Assignment is effected, Designated Subsidiary will have, the corporate
power and authority to enter into this Agreement and carry out the transactions
contemplated hereby. The Board of Directors of Buyer has duly authorized the
execution, delivery, and performance of this Agreement and, if a Permitted
Assignment is effected, prior to such Permitted Assignment, the Board of
Directors of Designated Subsidiary will have authorized the performance of this
Agreement by virtue of its approval of the execution and delivery of documents
memorializing such Permitted Assignment. No other corporate proceedings on the
part of Buyer or any of its subsidiaries, including the approval of Buyer's
shareholders, are necessary to authorize the execution and delivery by Buyer of
this Agreement or the consummation by Buyer or Designated Subsidiary of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Buyer. This Agreement constitutes a legal, valid, and binding
agreement of Buyer, enforceable against Buyer in accordance with its terms, and
if a Permitted Assignment is effected, this Agreement will also constitute a
legal, valid, and binding agreement of Designated Subsidiary enforceable against
Designated Subsidiary in accordance with its terms, except that, in each case,
(i) such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium, or other similar laws now or hereafter in effect relating to
creditors' rights, and (ii) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefore may be
brought.
(c) Financial Statements. The Consolidated Balance
Sheets of Buyer and its subsidiaries as of September 30, 1996 and September 30,
1997 and the Consolidated Statements of Operations, the Consolidated Statements
of Shareholders' Equity, and the Consolidated Statements of Cash Flows of Buyer
and its subsidiaries for the three years ended September 30, 1997, and all
related schedules and notes to the foregoing, have been reported on by Arthur
Andersen, LLP, independent public accountants. All of the foregoing financial
statements have been prepared in accordance with generally accepted accounting
principles, which were applied on a consistent basis (except as described
therein), are correct and complete, and present fairly, in all material
respects, the financial position, results of operations, and changes of
financial position of Buyer and its subsidiaries as of their respective dates
and for the periods indicated. Neither Buyer nor any of its subsidiaries has any
material liabilities or obligations of a type that would be included in a
balance sheet prepared in accordance with generally accepted accounting
principles, whether related to tax or non-tax matters, accrued or contingent,
due or not yet due, liquidated or unliquidated or otherwise, except as and to
the extent disclosed or reflected in the Consolidated Balance Sheet of Buyer and
its subsidiaries as of September 30, 1997, or incurred since September 30, 1997,
in the ordinary course of business or as contemplated by this Agreement.
(d) No Material Change. Since September 30, 1997,
there has not been and there is not threatened (i) any material adverse change
in the business, assets, properties, financial condition, or operating results
of Buyer or its subsidiaries taken as a whole, (ii) any loss or damage (whether
or not covered by insurance) to any of the assets or properties of Buyer or its
subsidiaries, which materially affects or impairs their ability to conduct their
business, or (iii) any mortgage or pledge of any material amount of the assets
or properties of Buyer or any of its subsidiaries, or any indebtedness incurred
by Buyer or any of its subsidiaries, other than indebtedness, not material in
the aggregate, incurred in the ordinary course of business.
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(e) Litigation. There are no actions, suits,
proceedings, or other litigation pending or, to the knowledge of Buyer,
threatened against Buyer or Designated Subsidiary, at law or in equity, or
before or by any federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality that, (i) if determined
adversely to Buyer or Designated Subsidiary, might reasonably be expected to
have, individually or in the aggregate, a material adverse effect on the
business, assets, properties, or prospects or on the condition, financial or
otherwise, of Buyer and Designated Subsidiary taken as a whole, or (ii) question
the validity of this Agreement or seek to prohibit, enjoin, or challenge the
consummation of the transactions contemplated hereby.
(f) No Violation. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach by Buyer or Designated Subsidiary of, or
constitute a default under, or conflict with, or cause any acceleration of any
obligation with respect to, (i) any provision or restriction of any charter,
bylaw, loan, indenture, or mortgage of Buyer or Designated Subsidiary, or (ii)
any provision or restriction of any lien, lease agreement, contract, instrument,
order, judgment, award, decree, ordinance, or regulation or any other
restriction of any kind or character to which any assets or properties of Buyer
or Designated Subsidiary is subject or by which Buyer or Designated Subsidiary
is bound.
(g) Taxes. Buyer has duly filed in correct form all
Tax Returns relating to the activities of Buyer and its subsidiaries required or
due to be filed (with regard to applicable extensions) on or prior to the
Closing Date. All such Tax Returns are accurate and complete in all material
respects, and Buyer has paid or made provision for the payment of all Taxes that
have been incurred or are due or claimed to be due from it by federal, state, or
local taxing authorities for all periods ending on or before the Closing Date,
other than Taxes or other charges that are not delinquent or are being contested
in good faith and have not been finally determined and have been disclosed to
Seller. The amounts set up as reserves for Taxes on the books of Buyer and its
subsidiaries are sufficient in the aggregate for the payment of all unpaid Taxes
(including any interest or penalties thereon), whether or not disputed, accrued,
or applicable. No claims for taxes or assessments are being asserted or
threatened against Buyer or any of its subsidiaries.
(h) Compliance with Law and Other Regulations. Each
of Buyer and Designated Subsidiary is in compliance in all material respects
with all requirements (including those relating to environmental matters) of
federal, state, and local law and all requirements of all governmental bodies
and agencies having jurisdiction over it, the conduct of its business, the use
of its assets and properties, and all premises occupied by it. There is no
environmental contamination, toxic waste or other discharge, spill, construction
component, structural element or condition, adversely affecting any of the
properties of Buyer or Designated Subsidiary, nor has Buyer or Designated
Subsidiary received any official notice or citation that the properties of Buyer
or Designated Subsidiaries in any way contravene any federal, state, or local
law or regulation relating to environmental, health, or safety matters,
including without limitation any requirements of CERCLA nor any OSHA
requirements. Without limiting the foregoing, each of Buyer and Designated
Subsidiary has properly filed all reports, paid all monies, and obtained all
licenses, permits, certificates, and authorizations needed or required for the
conduct of its business and the use of its assets and properties and the
premises occupied by it in connection therewith and is in compliance in all
material respects with all conditions, restrictions, and provisions of all of
the foregoing. Neither Buyer nor Designated Subsidiary has received any notice
from any federal, state, or local authority or any insurance or inspection body
that any of its assets, properties, facilities, equipment, or business
procedures or practices fails to comply in any material respect with any
applicable law, ordinance, regulation, building, or zoning law or requirement of
any public authority or body.
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(i) SEC Reports. Buyer's Form 10-K Report for the
year ended September 30, 1997, and all subsequent reports and proxy statements
filed by Buyer thereafter with the SEC pursuant to Section 13(a) or 14(a) of the
Securities Exchange Act of 1934, do not contain a misstatement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading as of the time the document was
filed. No report, proxy statement, or other document has been required to be
filed by Buyer pursuant to Section 13(a) or 14(a) of the Securities Exchange Act
of 1934 that has not been filed. All such reports, registrations, and
statements, which are filed between the date hereof and the Closing Date, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they are made, not misleading.
(j) Consents. No consent, approval, license, permit,
or authorization of any federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality, or other
person is required.
(k) Accuracy of Statements. Neither this Agreement
nor any statement, list, certificate, or other information furnished or to be
furnished by Buyer or Designated Subsidiary to Seller in connection with this
Agreement or any of the transactions contemplated hereby contains or will
contain an untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading.
4.3 Survival of Representations and Warranties. Each of the
representations and warranties contained in this Agreement shall survive the
consummation of the transactions contemplated by this Agreement irrespective of
any investigations or inquiries made by any party or any knowledge that any
party may possess, and each party shall be entitled to rely upon such
representations and warranties irrespective of any investigations, inquiries, or
knowledge.
SECTION 5
COVENANTS
5.1 Covenants of Seller. Seller agrees that, unless Buyer
otherwise agrees in writing and except as set forth in the Seller Disclosure
Schedule, at all times prior to the Closing Date:
(a) Truth of Representations and Warranties. Seller
shall not take or suffer or permit any action that would render untrue any of
the representations or warranties of Seller herein contained, and Seller shall
not omit to take any action, the omission of which would render untrue any such
representation or warranty.
(b) Preservation of Business. Seller shall use its
commercially reasonable best efforts to (i) preserve intact the present business
organization of Seller related to the Business, (ii) preserve the present
goodwill and advantageous relationships of Seller related to the Business with
all persons having business dealings with Seller, and (iii) preserve and
maintain in force all licenses, registrations, franchises, patents, trademarks,
copyrights, bonds, and other similar rights of Seller related to the Business.
Seller shall not enter into any employment agreements with any of its officers
or management personnel related to the Business and to be assumed by Buyer
hereunder that may not be canceled by Seller without penalty upon notice not
exceeding 30 days. The foregoing covenants shall not apply to (A) Richard
Nelson, who will remain an employee of Seller or (B) any change to the Business
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to which Buyer gives its prior written consent, which consent may be withheld in
Buyer's sole and absolute discretion.
(c) Ordinary Course. Seller shall operate the
Business only in the usual, regular, and ordinary course and manner. Without
limiting the foregoing, Seller shall not (i) acquire, transfer, sell, convey,
dispose of, encumber, pledge, or mortgage any Transferred Asset, except in the
ordinary course of the conduct of the Business and consistent with past practice
and as contemplated by this Agreement; (ii) incur any obligations (contingent or
otherwise) or modify any indebtedness that may create, increase or modify any
Assumed Liability in an amount greater than $100,000 without the prior written
consent of Buyer, which consent may be withheld in Buyer's sole and absolute
discretion; (iii) acquire directly or indirectly or redeem any shares of its
capital stock, acquire any stock or other equity interest in any corporation,
trust, or other entity, or create or acquire any subsidiary, except to the
extent that any such action will have no effect on the conduct of the Business,
the Transferred Assets, the Assumed Liabilities, or the performance of this
Agreement; (iv) merge or consolidate with any other corporation, trust, or
entity or change the character of the Business; (v) enter into, amend, modify,
terminate, extend, or otherwise change any lease, contract, agreement, or other
obligation with respect to a Transferred Asset or an Assumed Liability other
than contracts for the sale of products or services, and contracts for the
purchase of supplier or services, in the ordinary and usual course of the
conduct of the Business, which involve obligations aggregating $50,000 or more
or which extend beyond six months from the date of this Agreement; or (vi) enter
into any service agreement, maintenance agreement, contract, or other
arrangement relating to the operations of the Business, or maintenance of any
Transferred Assets other than in the ordinary course of the conduct of the
Business.
(d) Books and Records. Seller shall maintain its
books, accounts, and records related to the Business in the usual, regular, and
ordinary manner and on a basis consistent with prior years, and Seller shall
comply with all laws applicable to them with respect to the conduct of the
Business.
(e) Compensation. Seller shall not (i) provided that
such compensation is an Assumed Liability, increase the compensation payable
(including bonus compensation) to any officer or director or to other management
personnel related to the Business from the amount payable as of the date of
Seller's Base Balance Sheet, or (ii) provided that such profit sharing plan or
employee benefit arrangement is an Assumed Liability, introduce or change in any
material respect any pension or profit sharing plan or any other employee
benefit arrangement related to the Business.
(f) Transfer of Rights Under Certain Excluded
Business Contracts. Seller shall use its best efforts to assign or sublicense to
Buyer its rights related solely to the Business under those Excluded Business
Contracts listed on Schedule "1.2(e)(ii)" hereto, which schedule lists each
Excluded Business Contract that relates to both the Business and the Other
Business. Seller and Buyer shall allocate any guaranteed payments to third
parties with respect to the rights assigned or sublicensed to Buyer pursuant to
this Section "5.1(f)".
(g) Assistance to Buyer. Seller shall use its
commercially reasonable best efforts to assist Buyer to enter into manufacturing
agreements with Seller's current suppliers of die-cast products for the
Business.
(h) Consents and Approvals. Seller shall use its
commercially reasonable best efforts to obtain all necessary consents and
approvals of other persons and governmental authorities to the performance by
Seller of the transactions contemplated by this Agreement. Seller shall make or
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cause to be made all filings, applications, statements, and reports to all
federal and state government agencies or entities that are required to be made
prior to the Closing Date by or on behalf of Seller pursuant to any statute,
rule, or regulation in connection with the transactions contemplated by this
Agreement.
(i) Confidentiality. Except to the extent necessary
to enable Seller to maintain its ordinary course of business, Seller shall not
reveal, orally or in writing, to any person, other than Buyer and Designated
Subsidiary and their representatives, any of the business procedures or
practices followed by it in the conduct of the Business or any other information
of a confidential nature with respect to the Business.
(j) Insurance. Seller shall maintain in force through
the Closing Date all of the property, casualty, crime, directors and officers,
and other forms of insurance that it is presently carrying with respect to the
Transferred Assets or the Business and shall refrain from making any change in
any such insurance coverage.
(k) Maintenance of Assets and Properties. With
respect to the Business, Seller shall keep the premises occupied by it and all
of the equipment and other tangible assets and personal property of Seller
constituting a Transferred Asset in good operating condition and shall perform
all necessary repairs and maintenance. Seller shall not remove any personal
property constituting a Transferred Asset from any facility of Seller unless the
same are replaced with similar items of at least equal quality prior to the
Closing Date. Seller shall not permit any modifications or additions to and
shall not sell or permit to be sold or otherwise transferred or disposed of any
item or group of items constituting a Transferred Asset, except items sold in
the ordinary course of the conduct of the Business. Seller shall not convey any
interest in any of the Transferred Assets or subject any of the Transferred
Assets, or any portion thereof, to any additional liens, encumbrances, or
similar matters.
(l) Satisfaction of Obligations and Liabilities.
Seller shall (i) pay or cause to be paid all of its obligations and liabilities
related to the Business as they mature including those related to taxes, except
for those that are in good faith disputed with the written approval of Buyer,
(ii) maintain and perform in all material respects its obligations under all
agreements and contracts related to the Business to which it is bound in
accordance with their terms, and (iii) comply in all material respects with all
requirements of applicable federal, state, and local laws, regulations, and
rules related to the Business. Seller shall pay or cause to be paid in full, as
they mature and come due, all bills and invoices for labor, goods, materials,
services, and utilities of any kind relating to the Business, which were
contracted for by Seller or which were delivered to or performed on its
properties.
(m) Employees. Seller shall not hire any employees
with respect to the Business, except in the ordinary course of the conduct of
the Business and consistent with past practice.
(n) Investments. Seller shall not create or acquire
any subsidiary, invest in or acquire an equity interest in any entity, or
purchase any investment assets with respect to the Business.
(o) Right of Inspection. Seller shall make available
to Buyer and its representatives for inspection at all reasonable times all of
the assets, properties, facilities, and agreements relating to the Business
(including all documents of any description evidencing any right or obligation
of Seller) and the books, accounts, records, and financial statements of Seller
relating to the Business as Buyer shall reasonably request and allow Buyer and
its representatives the right to make whatever copies of such materials they
require, and Seller shall permit Buyer and its independent accountants to audit
or
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make such audit tests respecting the accounts of Seller relating to the Business
as Buyer or those accountants consider appropriate.
5.2 Covenants of Buyer. Buyer agrees that, unless Seller
otherwise agrees in writing and except as set forth in the Buyer Disclosure
Schedule or contemplated by this Agreement, at all times prior to the Closing
Date:
(a) Truth of Representations and Warranties. Buyer
and Designated Subsidiary shall not take or suffer or permit any action that
would render untrue any of the representations or warranties of Buyer herein
contained, and Buyer and Designated Subsidiary shall not omit to take any
action, the omission of which would render untrue any such representation or
warranty.
(b) Consents and Approvals. Buyer shall use its best
efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by Buyer and Designated Subsidiary
of the transactions contemplated by this Agreement. Buyer shall make or cause to
be made all filings, applications, statements, and reports to all federal and
state government agencies and entities that are required to be made prior to the
Closing Date by or on behalf of Buyer or Designated Subsidiary pursuant to any
statute, rule, or regulation in connection with the transactions contemplated by
this Agreement.
(c) Assistance to Seller. Prior to the Closing, Buyer
shall obtain for Seller license agreements with each of Dale Earnhardt, Inc. and
Jeff Gordon, Inc. for a term of one year or more with respect to plastic model
kits.
5.3 No Solicitation. Unless and until this Agreement shall
have been abandoned pursuant to Section 8, neither Seller nor any of its
officers, directors, affiliates, representatives, or agents shall:
(a) directly or indirectly, encourage, solicit, or
initiate discussions or negotiations with, any corporation, partnership, person,
or other entity or group (other than Buyer, its affiliates, employees,
representatives, and advisors) concerning any merger, sale of assets, sale of
shares of capital stock, tender offer, or similar transaction involving Seller
or any of its subsidiaries, except to the extent that such action will have no
effect on the conduct of the Business, the Transferred Assets, the Assumed
Liabilities or the performance of this Agreement; or
(b) disclose, directly or indirectly, any non-public
information to any corporation, partnership, person, or other entity or group
(other than to Buyer, its affiliates, employees, representatives, or agents)
concerning the Business, afford to any such party access to the books or records
of Seller relating to the Business, or otherwise assist or encourage any such
party in connection with any of the foregoing.
5.4 Efforts to Consummate Transaction; Further Assurances.
Subject to the terms and conditions of this Agreement, each of the parties
hereto agrees to use its best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including, without limitation, using its best efforts to obtain all
necessary, proper, or advisable permits, consents, authorizations, requests, and
approvals of third parties and governmental authorities. If at any time after
the Closing Date, any further action is necessary or desirable to carry out the
purposes of this Agreement (including providing any information in any way
related to the Transferred Assets), the proper officers
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and directors of each party to this Agreement shall take any such actions as the
other party may reasonably request.
5.5 Public Announcements. Buyer and Seller shall consult with
each other before issuing any press release or otherwise making any public
statements with respect to this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law on the advice of counsel or by any listing agreement with
any national securities exchange or The Nasdaq Stock Market, Inc.
5.6 Expenses. Except as may otherwise expressly be provided in
this Agreement, each party shall bear all those costs and expenses incurred by
it (including any fees and expenses of brokers, attorneys, or other
professionals engaged by such party) in connection with this Agreement and the
transactions contemplated hereby.
5.7 Post-Closing Assistance to Seller. Buyer hereby agrees
that as long as the License Agreement is in effect, for a period of 10 years
following the Closing Date, Buyer (i) shall use its best efforts to obtain for
Seller's Other Business licenses (exclusive, if possible) relating to U.S.
Motorsports and (ii) shall not obtain licenses for or on behalf of any other
person for use in a business that directly competes with Seller's Other
Business.
5.8 Post-Closing Assistance to Buyer. Following the Closing
Date, Seller shall use its best efforts to assign or sublicense to Buyer its
rights related solely to the Business under those Excluded Business Contracts
listed on Schedule "1.2(e)(ii)" that have not previously been assigned or
sublicensed to Buyer pursuant to Section 5.1(f). Seller and Buyer shall allocate
any guaranteed payments to third parties with respect to the rights assigned or
sublicensed to Buyer pursuant to this Section 5.8.
5.9 Seller's Right of First Refusal. In the event that Buyer's
current relationship with Hasbro, Inc. with respect to mass-retail sales of
Buyer's licensed products is terminated on or before December 31, 2004, and
Buyer desires to enter into a new agreement with a third party with respect to
mass-retail sales of Buyer's licensed products, Buyer hereby agrees that Seller
shall have the right of first refusal (the "Seller's Right of First Refusal") to
enter into a mass-retail distribution agreement with Buyer. If Seller desires to
exercise the Seller's Right of First Refusal, Seller shall exercise Seller's
Right of First Refusal by giving written notice of such exercise to Buyer within
30 days after receipt of notice from Buyer of the terms to be offered for a
mass-retail distribution agreement for such products to or by a third party.
Buyer agrees that it shall not enter into any mass-retail distribution
agreements with respect to its products until it has notified Seller and Seller
has had an opportunity to respond as set forth above. In the event that Seller
exercises the Seller's Right of First Refusal, the parties shall in good faith
negotiate the terms of mutually acceptable agreements with respect to Seller's
rights to distribute such products, provided that the terms of such agreement
are substantially the same as those offered by such third party to Buyer or by
Buyer to such third party. Notwithstanding the foregoing, however, nothing in
this Agreement shall preclude Buyer from pursuing mass-retail sales of its
products independent of any arrangement with third parties.
SECTION 6
CONDITIONS PRECEDENT TO OBLIGATIONS
6.1 Conditions Precedent to the Obligations of Buyer. The
obligations of Buyer to consummate the transactions contemplated by this
Agreement are, at the option of Buyer, subject to the satisfaction of the
following conditions on or before the Closing Date.
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(a) Accuracy of Representations and Warranties. The
representations and warranties of Seller herein contained shall have been true
and correct in all material respects when made and, in addition, shall be true
and correct in all material respects on the Closing Date with the same force and
effect as though made on and as of the Closing Date, except as affected by
transactions contemplated hereby.
(b) Performance of Agreements. Seller shall have in
all material respects performed all obligations and agreements and complied with
all covenants and conditions contained in this Agreement to be performed and
complied with by it on or prior to the Closing Date and shall have delivered all
documents, instruments, and materials required by Section 7.2.
(c) Corporate Approval. All necessary corporate
action on the part of the directors and shareholders of Seller approving this
Agreement and the transactions contemplated hereby shall have been duly and
validly taken.
(d) Opinion of Counsel for Seller. Buyer shall have
received an opinion of Dwight Arn, Esq., counsel for Seller, dated the Closing
Date, with customary assumptions, exceptions, and qualifications reasonably
acceptable to Buyer and its counsel, to the effect that:
(i) Seller is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority under the laws of such
jurisdiction to own, lease, and operate its properties, to carry on its business
as then being conducted, and to consummate the transactions contemplated hereby;
(ii) all necessary corporate proceedings of the
Board of Directors and the shareholders of Seller to approve and adopt this
Agreement and to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
and validly taken;
(iii) Seller has the corporate power and
authority to execute and deliver this Agreement, and this Agreement has been
duly authorized, executed, and delivered by Seller and constitutes the legal,
valid, and binding obligation of Seller, enforceable against Seller in
accordance with its terms;
(iv) such counsel knows of no actions, suits, or
proceedings pending or threatened against Seller or any of its subsidiaries at
law or in equity, or before or by any federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality
that would result in a breach of the representation and warranty set forth in
Section 4.1(h) of this Agreement; and
(v) except as listed in the Seller's Disclosure
Schedule with respect to consents not obtained, the consummation of the
transactions contemplated by this Agreement will not violate the charter or
bylaws (or similar constituent documents) of Seller or result in a breach of or
constitute a default by Seller under any provision of any indenture, mortgage,
lien, lease, agreement, contract, instrument, order, judgment, decree, award,
ordinance, regulation, or any other restriction of any kind or character known
to such counsel, to which Seller or any of its subsidiaries is a party or by
which any of them are bound.
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With respect to the opinions expressed pursuant to clauses
(iv) and (v) above, such opinion may be based upon a certificate or certificates
of an officer or officers of Seller and such other matters as such counsel deems
appropriate, and such counsel may rely on opinions of other counsel reasonably
satisfactory to Buyer, which opinion is delivered in connection with this
Agreement.
(e) No Material Adverse Change. Except with respect
to matters arising as a result of the transactions contemplated by this
Agreement, there shall have been no material adverse change in the business,
assets, properties, operating results, financial condition or prospects of
Seller with respect to the Business since the date of Seller's Base Balance
Sheet.
(f) Litigation. No action or proceeding by or before
any governmental agency shall have been instituted or threatened that seeks to
enjoin, restrain, or prohibit, or, if adversely decided, might reasonably be
expected to result in substantial damages in respect of, this Agreement or the
consummation of the transactions contemplated by this Agreement and would, in
the reasonable judgment of Buyer, make it inadvisable to consummate such
transactions, and no court order shall have been entered in any action or
proceeding instituted by any other party that enjoins, restrains, or prohibits
this Agreement or consummation of the transactions contemplated by this
Agreement.
(g) Certificate of Seller. Buyer and Designated
Subsidiary shall have received from Seller a certificate executed by the chief
executive officer and secretary of Seller, dated the date of the Closing Date,
certifying that all representations and warranties of Seller set forth in this
Agreement are true, complete, and correct in all material respects on and as of
the Closing Date as if made at that time, and that Seller has performed and
complied in all material respects with all agreements, covenants, and conditions
required by this Agreement to be performed or complied with by it at or before
the Closing Date.
(h) License Agreement. Seller and Buyer shall have
negotiated, executed, and delivered a license agreement (the "License
Agreement") in the form attached as Exhibit A hereto, pursuant to which Seller
shall license to Buyer the "Revell" trademarks for use in connection with the
Business.
(i) Manufacturing Agreement. Seller and Buyer shall
have negotiated, executed, and delivered a manufacturing agreement (the
"Manufacturing Agreement") in the form attached as Exhibit B hereto, pursuant to
which Buyer shall be the exclusive manufacturer of U.S. Motorsports die-cast
products for Seller's distribution under existing mass-merchandise license
agreements.
(j) Distribution Agreement. Seller and Buyer shall
have negotiated, executed, and delivered a distribution agreement (the
"Distribution Agreement") in the form attached as Exhibit C hereto, pursuant to
which Buyer shall be the exclusive distributor of "Revell" motorsport plastic
model kits at trackside sales venues and a non-exclusive distributor of "Revell"
motorsport plastic model kits through Buyer's network of wholesale distributors,
except as otherwise set forth therein.
(k) Assignment of Business Contracts. Subject to
Section 7.2(d), at the Closing Seller shall have assigned to Buyer or Designated
Subsidiary each of the Business Contracts, provided that Buyer shall have
obtained consents to such assignments to the extent that such consents are
required by any of the Business Contracts.
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(l) Assistance to Buyer. Seller shall have used its
best efforts to assist Buyer to enter into manufacturing agreements with
Seller's current suppliers of die-cast products for the Business.
(m) Termination of HSR Act Waiting Periods. Any and
all applicable waiting periods under the HSR Act with respect to the
transactions contemplated by this Agreement shall have expired or shall have
been terminated.
(n) Consents and Approvals. Seller shall have
obtained all necessary consents and approvals of other persons and governmental
authorities to the performance by Seller of the transactions contemplated by
this Agreement. Seller shall have made or caused to be made all filings,
applications, statements, and reports to all federal and state governmental
agencies and entities that are required to be made prior to the Closing by or on
behalf of Seller pursuant to any statute, rule, or regulation in connection with
the transactions contemplated by this Agreement.
(o) Delivery of Documents. All other documents
required to be delivered by Seller at or prior to the Closing Date shall be
delivered or shall be tendered by the Closing Date.
(p) Proceedings Satisfactory to Counsel. All
proceedings taken by Seller and all instruments executed and delivered by Seller
on or prior to the Closing Date in connection with the transactions contemplated
hereby shall be satisfactory in form and substance to counsel for Buyer.
6.2 Conditions Precedent to the Obligations of Seller. The
obligations of Seller to consummate the transactions contemplated by this
Agreement are, at the option of Seller, subject to the satisfaction of the
following conditions on or before the Closing Date:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Buyer herein contained shall have been true
and correct in all material respects when made and, in addition, shall be true
and correct in all material respects on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date, except as
affected by transactions contemplated hereby.
(b) Performance of Agreements. Buyer and, if a
Permitted Assignment is effected, Designated Subsidiary shall have in all
material respects performed all obligations and agreements and complied with all
covenants and conditions contained in this Agreement to be performed and
complied with by them on or prior to the Closing Date and shall have delivered
all consideration, documents, instruments, and other materials required by
Section 7.3 hereof.
(c) Corporate Approval. All necessary corporate
action on the part of the directors of Buyer and, if a Permitted Assignment is
effected, Designated Subsidiary approving this Agreement and approving the
transactions contemplated hereby shall have been taken.
(d) Opinion of Counsel for Buyer. Seller shall have
received an opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a
professional association, counsel for Buyer and Designated Subsidiary, dated the
Closing Date, with customary assumptions, exceptions, and qualifications
reasonably acceptable to Seller and its counsel, to the effect that:
(i) Each of Buyer and Designated Subsidiary (to
the extent applicable) is a corporation duly organized, validly existing, and in
good standing under the laws of the
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state of its incorporation and has the corporate power and authority under the
law of such state to own, lease, and operate its properties, to carry on its
business as then being conducted, and to consummate the transactions
contemplated hereby;
(ii) all necessary corporate proceedings of the
Board of Directors and shareholders of Buyer and Designated Subsidiary to
authorize the execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement have been duly and validly
taken;
(iii) Buyer has the corporate power and authority
to execute and deliver this Agreement, and this Agreement has been duly
authorized, executed, and delivered by it and constitutes the legal, valid, and
binding obligation of Buyer, enforceable against it in accordance with its
terms;
(iv) such counsel knows of no actions, suits, or
proceedings pending or threatened against Buyer or Designated Subsidiary at law
or in equity, or before or by any federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality
that would result in a breach of the representation and warranty set forth in
Section 4.2(e) of this Agreement; and
(v) the consummation of the transactions
contemplated by this Agreement will not violate the charter or bylaws of Buyer
or Designated Subsidiary or result in a breach of or constitute a default by
Buyer or Designated Subsidiary under any provision of any indenture, mortgage,
lien, lease, agreement, contract, instrument, order, judgment, decree, award,
ordinance, regulation, or any other restriction of any kind or character known
to such counsel, to which Buyer or Designated Subsidiary is a party or by which
either of them are bound.
With respect to the opinions expressed pursuant to
clauses (iv) and (v) of this subparagraph, such opinion may be based upon a
certificate or certificates of an officer or officers of Buyer or its
subsidiaries (including Designated Subsidiary) and such other matters as such
counsel deems appropriate, and such counsel may rely on opinions of other
counsel reasonably satisfactory to Seller, which opinion is delivered in
connection with this Agreement.
(e) Litigation. No action or proceeding by or before
any governmental agency shall have been instituted or threatened that seeks to
enjoin, restrain, or prohibit, or, if adversely decided, might reasonably be
expected to result in substantial damages in respect of, this Agreement or the
consummation of the transactions contemplated by this Agreement and would, in
the reasonable judgment of Seller, make it inadvisable to consummate such
transactions, and no court order shall have been entered in any action or
proceeding instituted by any other party that enjoins, restrains, or prohibits
this Agreement or consummation of the transactions contemplated by this
Agreement.
(f) Certificates of Buyer and Designated Subsidiary.
Seller shall have received from Buyer and Designated Subsidiary a certificate
executed by the chief executive officer and secretary of Buyer and Designated
Subsidiary, dated the date of the Closing Date, certifying that all
representations and warranties of Buyer set forth in this Agreement are true,
complete, and correct in all material respects on and as of the Closing Date as
if made at that time and that Buyer and Designated Subsidiary have performed and
complied in all material respects with all agreements, covenants, and conditions
required by this Agreement to be performed or complied with by Buyer and
Designated Subsidiary on or before the Closing Date.
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(g) License Agreement. Buyer and Seller shall have
negotiated, executed, and delivered the License Agreement.
(h) Manufacturing Agreement. Buyer and Seller shall
have negotiated, executed, and delivered the Manufacturing Agreement.
(i) Distribution Agreement. Buyer and Seller shall
have negotiated, executed, and delivered the Distribution Agreement.
(j) Assistance to Seller. Prior to the Closing, Buyer
shall have obtained for Seller license agreements with each of Dale Earnhardt,
Inc. and Jeff Gordon, Inc. for a term of one year or more with respect to
plastic model kits.
(k) Termination of HSR Act Waiting Periods. Any and
all applicable waiting periods under the HSR Act with respect to the
transactions contemplated by this Agreement shall have expired or shall have
been terminated.
(l) Consents and Approvals. Buyer or Designated
Subsidiary shall have obtained all necessary consents and approvals of other
persons and governmental authorities to the performance by Buyer or Designated
Subsidiary of the transactions contemplated by this Agreement. Buyer or
Designated Subsidiary shall have made or caused to be made all filings,
applications, statements, and reports to all federal and state governmental
agencies and entities that are required to be made prior to the Closing by or on
behalf of Buyer or Designated Subsidiary pursuant to any statute, rule, or
regulation in connection with the transactions contemplated by this Agreement.
(m) Delivery of Documents. All other documents
required to be delivered by Buyer and Designated Subsidiary shall be delivered
or shall be tendered by the Closing Date.
(n) Proceedings Satisfactory to Counsel. All
proceedings taken by Buyer and Designated Subsidiary and all instruments
executed and delivered by Buyer and Designated Subsidiary on or prior to the
Closing Date in connection with the transactions herein contemplated shall be
satisfactory in form and substance to counsel for Seller.
SECTION 7
THE CLOSING
7.1 Closing. Subject to Section 8.3, the closing (the
"Closing") of the transactions contemplated by this Agreement shall take place
at the offices of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.,
One East Camelback, Suite 1100, Phoenix, Arizona on or before December 31, 1997,
or at such other date, time, and place as may be agreed upon by Buyer and
Seller, which date is sometimes herein called the "Closing Date."
7.2 Deliveries by Seller. At the Closing or other acceptable
date as set forth in Sections 7.2(d) and 7.2(f), Seller shall execute (as
applicable) and deliver:
(a) Instruments of Conveyance. Such deeds, bills of
sale, instruments of assignment, and other instruments and documents as may be
necessary to convey, transfer, and assign to Buyer, or if a Permitted Assignment
is effected, Designated Subsidiary, title to the Transferred Assets.
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(b) Certificate of Seller. The certificate of the
chief executive officer and secretary of Seller required by Section 6.1(g).
(c) Certificate of Secretary. The certificate of the
secretary of Seller certifying to the resolutions constituting all necessary
corporate action by the board of directors and by the shareholders of Seller to
authorize the consummation of the transactions provided for herein.
(d) Consents. Within 30 days after the Closing Date,
Seller shall deliver to Buyer the written consents to assignment of all parties
whose written consent is necessary to the continued effectiveness and validity,
after assignment as provided herein, of all contracts, agreements, indentures,
or leases to which Seller or its subsidiaries are parties, and written evidence
of other consents and approvals of the transactions contemplated hereby.
(e) Legal Opinion. The opinion of Dwight Arn, Esq.
required by Section 6.1(d).
(f) Books and Records. Within the later of (i) 10
days after the Closing Date or (ii) December 31, 1997, Seller shall deliver to
Buyer all of the books, records, and files of Seller and its subsidiaries,
relating to the Business excepting only Seller's corporate minute books, stock
books or records, and employee and tax records.
(g) License Agreement. The License Agreement required
by Section 6.1(h).
(h) Manufacturing Agreement. The Manufacturing
Agreement required by Section 6.1(i).
(i) Distribution Agreement. The Distribution
Agreement required by Section 6.1(j).
All assignments, consents, certificates, and other documents
delivered by Seller shall be in form reasonably satisfactory to counsel for
Buyer.
7.3 Deliveries by Buyer or Designated Subsidiary. At the
Closing, Buyer, or if a Permitted Assignment is effected, Designated Subsidiary,
shall execute and deliver to Seller:
(a) Assumption of Liabilities. One or more
assumptions or other instruments or documents as may be necessary for Buyer or
Designated Subsidiary (as applicable) to assume the Assumed Liabilities.
(b) Initial Payment of Purchase Price. Payment of the
Initial Payment of the purchase price provided for in Section 3.2 in immediately
available funds by cashier's check or wire transfer to the account or accounts
designated in advance by Seller.
(c) Buyer's Certificates. The certificate executed by
the chief executive officer and secretary of Buyer and Designated Subsidiary
required by Section 6.2(f).
(d) Secretary's Certificates. The certificate of the
secretary or an assistant secretary of Buyer and Designated Subsidiary
certifying to the resolutions constituting all necessary
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corporate action by the Board of Directors of Buyer and Designated Subsidiary to
authorize the consummation of the transactions provided for herein.
(e) Legal Opinion. The opinion of O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, a professional association, required by
Section 6.2(d).
(f) Consents and Approvals. Written evidence of all
consents and approvals of the transactions contemplated hereby.
(g) License Agreement. The License Agreement required
by Section 6.2(g).
(h) Manufacturing Agreement. The Manufacturing
Agreement required by Section 6.2(h).
(i) Distribution Agreement. The Distribution
Agreement required by Section 6.2(i).
All assumptions, certificates, and other documents delivered
by Buyer or Designated Subsidiary shall be in form reasonably satisfactory to
counsel for Seller.
7.4 Further Assurances. From time to time, on and after the
Closing Date, as and when requested by Buyer or its assigns, the proper officers
and directors of Seller shall, for and on behalf and in the name of Seller or
otherwise, execute and deliver all such deeds, bills of sale, assignments, and
other instruments and shall take or cause to be taken such further or other
actions as Buyer or its assigns may deem necessary or desirable in order to
confirm of record or otherwise to Buyer or Designated Subsidiary title to and
possession of all of the Transferred Assets and otherwise to carry out fully the
provisions and purposes of this Agreement. Without limiting the foregoing,
Seller shall make available the books and records retained by Seller pursuant to
Section 1.3 available to Buyer upon three days' prior notice and shall allow
Buyer to make extracts, copies, or summaries thereof. The parties shall
cooperate with each other and with their respective counsel and accountants in
connection with any steps to be taken as a part of their respective obligations
under this Agreement, including the preparation of financial statements. Seller
shall, at Buyer's cost, make all of its books and records available to Arthur
Andersen LLP and cooperate fully with Buyer and Arthur Andersen LLP, including
making any standard representations and signing any standard audit
representations letters to the extent the same are true in order to complete any
audit that may be required under applicable rules and regulations of the SEC, as
determined by Arthur Andersen LLP.
SECTION 8
WAIVER, MODIFICATION, ABANDONMENT
8.1 Waivers. The failure of Seller to comply with any of their
obligations, agreements, or conditions as set forth in this Agreement may be
waived expressly in writing by Buyer, by action of its Board of Directors. The
failure of Buyer or Designated Subsidiary to comply with any of their
obligations, agreements, or conditions as set forth in this Agreement may be
waived expressly in writing by Seller, by action of its Board of Directors,
without the vote of its shareholders.
8.2 Modification. This Agreement may be modified at any time
in any respect by the mutual consent of all of the parties, notwithstanding
prior approval by the shareholders of Seller. Any such modification may be
approved for any party by its Board of Directors, without further
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shareholder approval, except that amount of consideration to be paid for the
Transferred Assets may not be decreased (except as provided herein) without the
consent of the shareholders of Seller given by the same vote as is required
under applicable state law for approval of this Agreement.
8.3 Abandonment. The transactions contemplated by this
Agreement may be abandoned on or before the Closing Date, notwithstanding
approval of this Agreement by the shareholders of Seller:
(a) By the mutual agreement of the Boards of
Directors of Buyer and Seller, or
(b) By the Board of Directors of Buyer, if any of the
conditions provided in Section 6.1 shall not have been satisfied, complied with,
or performed in any material respect by the Closing Date, and Buyer shall not
have waived such failure of satisfaction, noncompliance, or nonperformance, or
(c) By the Board of Directors of Seller, if any of
the conditions provided in Section 6.2 shall not have been satisfied, complied
with, or performed in any material respect by the Closing Date, and Seller shall
not have waived such failure of satisfaction, noncompliance, or nonperformance,
or
(d) At the option of Buyer or Seller, if there shall
have been instituted and be pending or threatened any legal proceeding before
any court or governmental agency seeking to restrain or prohibit or to obtain
damages in respect of this Agreement or the consummation of the transactions
contemplated by this Agreement, or if any order restraining or prohibiting the
transactions contemplated by this Agreement shall have been issued by any court
or governmental agency and shall be in effect.
In the event of any abandonment pursuant to this Section 8.3
(other than pursuant to subparagraph (a) hereof), written notice setting forth
the reasons thereof shall forthwith be given by Seller if it is the abandoning
party, to Buyer, or by Buyer, if Buyer is the abandoning party, to Seller. This
Agreement shall terminate automatically if the Closing Date shall not have
occurred on or before December 31, 1997, or such later date as shall have been
agreed to by the parties hereto under Section 8.2.
8.4 Effect of Abandonment. Subject to the provisions of
Section 5.3, if the transactions contemplated by this Agreement are abandoned as
provided for in this Section, (a) this Agreement shall forthwith become wholly
void and of no effect without liability to any party to this Agreement or to the
directors, officers, representatives, and agents of any such party, (b) Buyer
and Seller shall each pay its own fees and expenses incident to the negotiation,
preparation, and execution of this Agreement and the obtaining of the necessary
approvals thereof, including fees and expenses of its counsel, accountants,
investment bankers, and other experts, and (c) Seller and Buyer (and their
representatives) shall return to the other all copies of books, records,
documents, or other papers given by Seller or Buyer (or their representatives)
to the other (or their representatives).
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SECTION 9
NON-COMPETITION, CONFIDENTIALITY,
AND NON-SOLICITATION
9.1 Non-competition, Confidentiality, and Non-Solicitation by
Seller. Buyer is unwilling to enter into and perform this Agreement unless
Seller enters into the non-competition, confidentiality, and non-solicitation
agreements contained in this Section 9.1. To induce Buyer to enter into this
Agreement and for the benefit of Buyer and Designated Subsidiary, Seller agrees
as follows:
(a) Duration and Extent of Restriction. Except for
(i) products directly or indirectly sold through the Hallmark Distribution
Channel, (ii) the sale of U.S. Motorsports die-cast items to third parties for
use as premiums or promotional items by those third parties, and (iii) sales
permitted under the Manufacturing Agreement, neither Seller nor any person or
entity directly or indirectly in control of or controlled by Seller shall, for a
period ending 10 years after the Closing Date (the "Non-Competition Period"),
within the United States or Canada (collectively, the "Relevant Territory"),
engage in a business the same as, similar to, or in general competition with the
Business as being conducted by Seller at or within 12 months prior to the
Closing Date provided that, for the purposes of this Section 9.1, the Other
Business shall not be considered the same as or similar to or in general
competition with the Business. The term "engage in" shall include, but shall not
be limited to, activities, whether direct or indirect, as proprietor, partner,
shareholder, principal, agent, employee, consultant or lender; provided,
however, that the ownership of not more than 5% in the aggregate by Seller of
the stock of a publicly held corporation shall not be included in such term.
(b) Confidentiality. Seller agrees that Seller and
each of its officers, directors, affiliates, representatives, or agents shall
maintain in strict secrecy and confidence all confidential, proprietary, or
other information relating to the Business. Furthermore, neither Seller nor any
of its officers, directors, affiliates, representatives, or agents shall, unless
first authorized in writing by Buyer, disclose to any person, firm or other
entity, or use for the benefit of Seller or any person, firm or other entity, at
any time during the Non-Competition Period, any confidential information
relating to the Business. For purposes of this Agreement, confidential
information will include, without limitation, any trade secrets, knowledge or
information with respect to processes, techniques, procedures or know-how unique
to the Business, or to which Seller has been given access in confidence by a
third party pursuant to any agreement with that third party; the names of any
customers or vendors; prices for materials, components or other supplies or
finished products; relations with employees, salaries, job classifications,
skill levels; or any other information of, about or concerning the Business,
including manner of operation, products, plans or any other data of any kind,
nature or description with respect to the Business. Seller understands and
agrees that all confidential information is a valuable and special asset and is
important, material and confidential and gravely affects the effective and
successful conduct of the Business, and that any breach of the terms of this
Section 9.1(b) is a material breach of this Agreement.
(c) Restrictions with Respect to Vendors and
Customers. In furtherance of, and without in any way limiting the restriction in
Sections 9.1(a) and 9.1(b), during the Non-Competition Period, neither Seller
nor any person or entity directly or indirectly in control of or controlled by
Seller shall, directly or indirectly, (i) request any past, present, or future
vendors or customers of the Business to curtail or cancel their business with
Buyer or any of its subsidiaries; (ii) except in connection with Seller's normal
conduct of the Other Business, disclose the identity of any past, present, or
future vendors or customers of Seller, Buyer, or any subsidiary of Buyer to any
other person, firm or corporation engaged in a business the same as, similar to,
or in general competition with the
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Business within the Relevant Territory; (iii) except in connection with Buyer's
normal conduct of the Other Business, solicit, canvas, or accept, or authorize
any other person to solicit, canvas, or accept, from any past, present, or
future vendors or customers of Seller, Buyer or any subsidiary of Buyer, any
business for any other person, firm, or corporation engaged in a business the
same as, similar to, or in general competition with the Business within the
Relevant Territory; (iv) induce or attempt to influence any employee,
independent contractor, or agent with respect to the Business of Seller, Buyer
or any subsidiary of Buyer to terminate his, her, or its employment or
engagement with Buyer. As used in this Section 9.1(c) "future customer" shall
mean a customer with whom business will have been transacted between the date
hereof and the end of the Non-Competition Period.
(d) Expiration of Non-Competition Period Under
Certain Circumstances. In the event that (i) the License Agreement is terminated
for breach by Buyer or, (ii) any payment due Seller pursuant to Section 3 of
this Agreement is not paid within 10 days of Buyer's receipt of written notice
from Seller that such payment is overdue and Buyer has not reasonably objected
to such notice in writing within such 10-day period, then the Non-Competition
Period shall automatically terminate upon the termination of the License
Agreement or expiration of such 10-day period.
9.2 Non-competition, Confidentiality, and Non-Solicitation by
Buyer. Seller is unwilling to enter into and perform this Agreement unless Buyer
enters into the non-competition, confidentiality, and non-solicitation
agreements contained in this Section 9.2. To induce Seller to enter into this
Agreement and for the benefit of Seller, Buyer agrees as follows:
(a) Duration and Extent of Restriction. Neither Buyer
nor any person or entity directly or indirectly in control of or controlled by
Buyer shall, during the Non-Competition Period and within the Relevant
Territory, engage in a business the same as, similar to, or in general
competition with Seller's Other Business as being conducted by Seller at or
within 12 months prior to the Closing Date. The term "engage in" shall include,
but shall not be limited to, activities, whether direct or indirect, as
proprietor, partner, shareholder, principal, agent, employee, consultant or
lender; provided, however, that the ownership of not more than 5% in the
aggregate by Buyer of the stock of a publicly held corporation shall not be
included in such term.
(b) Confidentiality. Buyer agrees that Buyer and each
of its officers, directors, affiliates, representatives, or agents shall
maintain in strict secrecy and confidence all confidential, proprietary or other
information relating to the Other Business. Furthermore, neither Buyer nor any
of its officers, directors, affiliates, representatives, or agents shall, unless
first authorized in writing by Seller, disclose to any person, firm or other
entity, or use for the benefit of Buyer or any person, firm or other entity, at
any time during the Non-Competition Period, any confidential information
relating to the Other Business. For purposes of this Agreement, confidential
information will include, without limitation, any trade secrets, knowledge or
information with respect to processes, techniques, procedures or know-how unique
to the Other Business, or to which Buyer has been given access in confidence by
a third party pursuant to any agreement with that third party; the names of any
customers or vendors; prices for materials, components or other supplies or
finished products; relations with employees, salaries, job classifications,
skill levels, or any other information of, about or concerning the Other
Business, including manner of operation, products, plans or any other data of
any kind, nature or description with respect to the Business. Buyer understands
and agrees that all confidential information is a valuable and special asset and
is important, material and confidential and gravely affects the effective and
successful conduct of the Other Business, and that any breach of the terms of
this Section 9.2(b) is a material breach of this Agreement.
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(c) Restrictions with Respect to Vendors and
Customers. In furtherance of, and without in any way limiting the restriction in
Sections 9.2(a) and 9.2(b), during the Non-Competition Period, neither Buyer nor
any person or entity directly or indirectly in control of or controlled by Buyer
shall, directly or indirectly, (i) request any past, present, or future vendors
or customers of the Other Business to curtail or cancel their business with
Seller or any of its subsidiaries; (ii) disclose the identity of any past,
present, or future vendors or customers of Buyer, Seller, or any subsidiary of
Seller to any other person, firm or corporation engaged in a business the same
as, similar to, or in general competition with the Other Business within the
Relevant Territory; (iii) solicit, canvas, or accept, or authorize any other
person to solicit, canvas, or accept, from any past, present, or future vendors
or customers of Buyer, Seller or any subsidiary of Seller, any business for any
other person, firm, or corporation engaged in a business the same as, similar
to, or in general competition with the Other Business within the Relevant
Territory; (iv) induce or attempt to influence any employee, independent
contractor, or agent with respect to the Other Business to terminate his, her,
or its employment or engagement. As used in this Section 9.2(c) "future
customer" shall mean a customer with whom business will have been transacted
between the date hereof and the end of the Non-Competition Period.
9.3 Remedies for Breach. Each of the parties acknowledges that
the restrictions contained in this Section 9, in view of the nature of the
business in which the parties are engaged, are reasonable and necessary to
protect the legitimate interests of the other party and its subsidiaries and
that any violation of these restrictions would result in irreparable injury to
the other party and its subsidiaries. Each of the parties agrees that, in the
event of a violation of any of such restrictions, the other party shall be
entitled to preliminary and permanent injunctive relief as well as an equitable
accounting of all earnings, profits, and other benefits arising from such
violation, which rights shall be cumulative and in addition to any other rights
or remedies to which the other party may be entitled. In the event of a
violation, the Non-Competition Period shall be extended by a period of time
equal to that period beginning when such violation commenced and ending when the
activities constituting such violation shall have been finally terminated in
good faith.
9.4 Restrictions Separable. If the scope of any provision of
this Section 9 is found by a Court to be too broad to permit enforcement to its
full extent, then such provision shall be enforced to the maximum extent
permitted by law. The parties agree that the scope of any provision of this
Agreement may be modified by a judge in any proceeding to enforce this
Agreement, so that such provision can be enforced to the maximum extent
permitted by law. Each and every restriction set forth in this Section 9 is
independent and severable from the others, and no such restriction shall be
rendered unenforceable by virtue of the fact that, for any reason, any other or
others of them may be unenforceable in whole or in part.
SECTION 10
INDEMNIFICATION
10.1 Indemnification by Seller.
(a) General. Seller covenants and agrees to defend,
indemnify, and hold Buyer and, if a Permitted Assignment is effected, Designated
Subsidiary harmless for, from, and against any and all damages, losses,
liabilities (absolute and contingent), fines, penalties, costs, and expenses
(including, without limitation, reasonable counsel fees and costs and expenses
incurred in the investigation, defense, or settlement of any claim covered by
this indemnity) with respect to or arising out of any demand, claim, inquiry,
investigation, proceeding, action or cause of action that Buyer and,
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if a Permitted Assignment is effected, Designated Subsidiary may suffer or incur
by reason of (i) the inaccuracy of any of the representations or warranties of
Seller contained in this Agreement, or any of the agreements, certificates,
documents, exhibits or schedules delivered in connection with this Agreement;
(ii) the failure to comply with, or the breach or the default by Seller of, any
of the covenants, warranties or agreements made by Seller contained in this
Agreement, or any of the agreements, certificates, documents, exhibits or
schedules delivered in connection with this Agreement; or (iii) any obligation
or liabilities of Seller other than those specifically assumed pursuant to
Section 2.1 hereof (the "Excluded Liabilities").
(b) Bulk Sales Matters. Seller covenants and agrees
to defend, indemnify and hold Buyer and, if a Permitted Assignment is effected,
Designated Subsidiary harmless for, from, and against any and all damages,
losses, liabilities (absolute and contingent), fines, penalties, costs, and
expenses (including, without limitation, reasonable counsel fees and costs and
expenses incurred in the investigation, defense, or settlement of any claim
covered by this indemnity) with respect to or arising out of any demand, claim,
inquiry, investigation, proceeding, action, or cause of action that Buyer and,
if a Permitted Assignment is effected, Designated Subsidiary may suffer or incur
by reason of any liability or obligation of Seller, of whatsoever nature and
type, with respect to or arising under any applicable Bulk Sales Act.
10.2 Indemnification by Buyer. Buyer and Designated Subsidiary
covenant and agree to defend, indemnify, and hold Seller harmless for, from, and
against any and all damages, losses, liabilities (absolute and contingent),
fines, penalties, costs, and expenses (including, without limitation, reasonable
counsel fees and costs and expenses incurred in the investigation, defense, or
settlement of any claim covered by this indemnity) with respect to or arising
out of any demand, claim, inquiry, investigation, proceeding, action, or cause
of action that Seller may suffer or incur by reason of (a) the inaccuracy of any
of the representations or warranties of Buyer or Designated Subsidiary contained
in this Agreement or any of the agreements, certificates, documents, exhibits,
or schedules delivered in connection with this Agreement; (b) the failure to
comply with, or the breach or the default by Buyer or Designated Subsidiary of,
any of the covenants, warranties, or agreements made by Buyer or Designated
Subsidiary in this Agreement or any of the agreements, certificates, documents,
exhibits, or schedules delivered in connection with this Agreement; or (c) any
Assumed Liability. Notwithstanding the above, however, Buyer and Designated
Subsidiary shall have no obligation to defend, indemnify, and hold Seller
harmless pursuant to this Section 10.2 hereof with respect to any liability that
is an Excluded Liability.
10.3 Notice and Right to Defend Third-Party Claims. Promptly
upon receipt of notice of any claim, demand, or assessment or the commencement
of any suit, action, or proceeding with respect to which indemnity may be sought
pursuant to this Agreement, the party seeking to be indemnified or held harmless
(the "Indemnitee") shall notify in writing, if possible, within sufficient time
to respond to such claim or answer or otherwise plead in such action (but in any
event within ten days), the party from whom indemnification is sought (the
"Indemnitor"). In case any claim, demand, or assessment shall be asserted, or
suit, action, or proceeding commenced against the Indemnitee, the Indemnitor
shall be entitled, at the Indemnitor's expense, to participate therein, and, to
the extent that it may wish, to assume the defense, conduct, or settlement
thereof, at its own expense, with counsel satisfactory to the Indemnitee, whose
consent to the selection of counsel shall not be unreasonably withheld or
delayed, provided that the Indemnitor confirms to the Indemnitee that it is a
claim to which its rights of indemnification apply. The Indemnitor shall have
the right to settle or compromise monetary claims without the consent of
Indemnitee; however, as to any other claim, the Indemnitor shall first obtain
the prior written consent from the Indemnitee, which consent shall be exercised
in the sole discretion of the Indemnitee. After notice from the Indemnitor to
the Indemnitee of Indemnitor's intent so to assume
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the defense, conduct, settlement, or compromise of such action, the Indemnitor
shall not be liable to the Indemnitee for any legal or other expenses
(including, without limitation, settlement costs) subsequently incurred by the
Indemnitee in connection with the defense, conduct, or settlement of such action
while the Indemnitor is diligently defending, conducting, settling, or
compromising such action. The Indemnitor shall keep the Indemnitee apprised of
the status of the suit, action, or proceeding and shall make Indemnitor's
counsel available to the Indemnitee, at the Indemnitor's expense, upon the
request of the Indemnitee. The Indemnitee shall cooperate with the Indemnitor in
connection with any such claim and shall make personnel, books and records and
other information relevant to the claim available to the Indemnitor to the
extent that such personnel, books and records and other information are in the
possession and/or control of the Indemnitee. If the Indemnitor decides not to
participate, the Indemnitee shall be entitled, at the Indemnitor's expense, to
defend, conduct, settle or compromise such matter with counsel satisfactory to
the Indemnitor, whose consent to the selection of counsel shall not be
unreasonably withheld or delayed.
10.4 Limitation on Rights to Indemnification. An Indemnitee
shall not be entitled to indemnification pursuant to this Section 10 until the
total amount of all damages actually paid or incurred by such Indemnitee for
which it shall be entitled to indemnification under this Section 10, but for
this provision, exceeds $250,000 in the aggregate (the "Basket Amount");
provided, however, that once such amount exceeds the Basket Amount, such
Indemnitee shall be entitled to indemnification for the total amount for which
indemnification may be owing in excess of the Basket Amount, and provided
further, that (i) the aggregate liability of any Indemnitor for all claims for
indemnification under this Section 10 shall not exceed $15,000,000. The
obligations of an Indemnitor to indemnify any Indemnitee under this Section 10
shall survive for a period ending 18 months after the Closing Date, except that
an Indemnitor's obligations shall continue as to any matter to which a claim
identified as a claim for indemnification pursuant to this Agreement is
submitted in writing to the Indemnitor prior to the date that is 18 months after
the Closing Date.
SECTION 11
GENERAL
11.1 Indemnity Against Finders. Each party hereto shall
indemnify and hold the other parties harmless against any claim for finders'
fees based on alleged retention of a finder by it.
11.2 Controlling Law. This Agreement, and all questions
relating to its validity, interpretation, performance, and enforcement, shall be
governed by and construed in accordance with the laws of Arizona,
notwithstanding any Arizona or other conflict-of-law provisions to the contrary.
11.3 Notices. All notices, requests, demands, and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
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If to Buyer:
Action Performance Companies, Inc.
4707 E. Baseline Road
Phoenix, Arizona 85040
Phone: (602) 894-0100
Fax: (602) 967-1403
Attention: President
with a copy given in the manner
prescribed above, to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Phone: (602) 263-2606
Fax: (602) 263-2900
Attention: Robert S. Kant, Esq.
If to Seller:
Revell-Monogram, Inc.
8601 Waukegan Road
Morton Grove, Illinois 65033
Phone: (847) 581-2625
Fax: (847) 966-6989
Attention: Ted Eischeid
with a copy given in the manner
prescribed above, to:
Hallmark Cards, Incorporated
2501 McGee
Kansas City, Missouri 64108
Phone: (816) 274-4057
Fax: (816) 274-7171
Attention: Dwight Arn, Esq.
Any party may alter the address to which communications or
copies are to be sent by giving notice to such other parties of change of
address in conformity with the provisions of this paragraph for the giving of
notice.
11.4 Binding Nature of Agreement; No Assignment. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided, however, that (except as
expressly provided in Section 2.3), no party may assign, delegate, or transfer
its rights or obligations under this Agreement other than as expressly provided
for herein without the prior written consent of the other parties hereto. Any
assignment, delegation, or transfer made in violation of this Section 11.4 shall
be null and void.
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11.5 Entire Agreement. This Agreement, together with all
Schedules and Exhibits attached hereto and made a part hereof, contains the
entire understanding among the parties hereto with respect to the subject matter
hereof and supersede all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
11.6 Construction. The parties hereto acknowledge that each
party was represented by legal counsel in connection with this Agreement and
that each of them and its counsel have reviewed and revised this Agreement, or
have had an opportunity to do so, and that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be employed in the interpretation of this Agreement or any amendments or any
exhibits hereto or thereto.
11.7 Attorneys' Fees. In the event of any claim, controversy
or dispute arising out of or relating to this Agreement, or the breach hereof,
the prevailing party (as determined by the court in which such claim,
controversy, or dispute is heard) shall be entitled to recover reasonable
attorneys' fees incurred in connection with the resolution of such matter.
11.8 Remedies Cumulative. The remedies of the parties hereto
under this Agreement are cumulative and shall not exclude any other remedies to
which any party may be lawfully entitled.
11.9 Computation of Time. Whenever the last day for the
exercise of any privilege or discharge of any duty hereunder shall fall upon
Saturday, Sunday or any public or legal holiday, whether under federal or
Arizona law, the party having such privilege or duty shall have until 5:00 p.m.
(Phoenix, Arizona time) on the next succeeding regular business day to exercise
such right or to discharge such duty.
11.10 Authority. Any individual signing below on behalf of a
corporation, partnership or other entity hereby personally represents that he or
she has full authority to bind the party or parties on whose behalf he or she is
signing.
11.11 Paragraph Headings. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
11.12 Gender. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
11.13 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
11.14 Subsidiaries. For purposes of this Agreement, all
references to a subsidiary or subsidiaries of Seller or Buyer shall mean any
corporation or partnership in which Seller or Buyer, as the case may be, owns a
majority interest or otherwise controls.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
ACTION PERFORMANCE COMPANIES, INC.
By:____________________________________________
Its:___________________________________________
REVELL-MONOGRAM, INC.
By:____________________________________________
Its:___________________________________________
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EXHIBIT 23.1
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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 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,
February 6, 1998
