<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission file number 0-21630
ACTION PERFORMANCE COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
ARIZONA 86-0704792
(State of Incorporation) (I.R.S. Employer Identification No.)
4707 E. Baseline Road
Phoenix, AZ 85040
(602) 337-3700
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 9, 2000 there were outstanding 16,428,356 shares of the
registrant's Common Stock, par value $.01 per share.
<PAGE> 2
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 33,848 $ 58,523
Accounts receivable, net of allowance for doubtful
accounts of $1,272 and $1,421, respectively ................................. 42,672 44,988
Inventories ..................................................................... 41,779 45,310
Prepaid royalties ............................................................... 9,364 7,271
Prepaid expenses and other assets ............................................... 505 2,953
--------- ---------
Total current assets ........................................................ 128,168 159,045
PROPERTY AND EQUIPMENT, net .......................................................... 58,419 56,162
GOODWILL AND OTHER INTANGIBLES, net .................................................. 113,575 111,634
OTHER ASSETS, net .................................................................... 9,105 8,906
--------- ---------
$ 309,267 $ 335,747
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 9,369 $ 20,127
Accrued royalties ............................................................... 7,538 13,519
Accrued expenses and other ...................................................... 11,611 14,889
Current portion of long-term debt ............................................... 1,439 2,713
--------- ---------
Total current liabilities ................................................... 29,957 51,248
LONG-TERM DEBT:
Convertible subordinated notes .................................................. 100,000 100,000
Other long-term debt ............................................................ 10,892 9,208
--------- ---------
Total long-term debt ........................................................ 110,892 109,208
MINORITY INTEREST .................................................................... 2,241 2,300
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding ............................................ -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
16,609,211 after deducting 328,228 shares held in treasury and
16,929,085 shares issued and
outstanding, respectively ................................................... 166 169
Additional paid-in capital ...................................................... 99,115 102,555
Accumulated other comprehensive (loss) .......................................... (1,956) (714)
Retained earnings ............................................................... 68,852 70,981
--------- ---------
Total shareholders' equity .................................................. 166,177 172,991
--------- ---------
$ 309,267 $ 335,747
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets
2
<PAGE> 3
ACTION PERFORMANCE COMPANIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Sales:
Collectibles ................................................................ $ 35,843 $ 45,867
Apparel and souvenirs ....................................................... 26,821 24,336
Other ....................................................................... 2,117 1,363
-------- --------
Net sales ............................................................... 64,781 71,566
Cost of sales .................................................................... 44,886 45,831
-------- --------
Gross profit ..................................................................... 19,895 25,735
Operating expenses:
Selling, general and administrative expenses ................................ 18,096 14,599
Other non-recurring charges ................................................. 2,251 --
Amortization of goodwill and other intangibles .............................. 1,896 1,458
-------- --------
Total operating expenses ................................................ 22,243 16,057
-------- --------
Income (loss) from operations .................................................... (2,348) 9,678
Other income (expense):
Minority interest in earnings ............................................... (210) (73)
Interest income and other, net .............................................. 778 695
Interest expense ............................................................ (1,739) (2,095)
-------- --------
Total other income (expense), net ....................................... (1,171) (1,473)
-------- --------
Income (loss) before provision (benefit) for income taxes ........................ (3,519) 8,205
Provision for (benefit from) income taxes ........................................ (1,390) 3,282
-------- --------
NET INCOME (LOSS) ................................................................ (2,129) 4,923
Other comprehensive income (loss) ........................................... (1,242) 32
-------- --------
Comprehensive income (loss) ................................................. $ (3,371) $ 4,955
======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic ....................................................................... $ (0.13) $ 0.30
======== ========
Diluted ..................................................................... $ (0.13) $ 0.29
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ....................................................................... 16,909 16,519
======== ========
Diluted ..................................................................... 16,909 16,878
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 4
ACTION PERFORMANCE COMPANIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ (2,129) $ 4,923
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................................... 6,186 5,139
Undistributed earnings to minority shareholders ................................. 210 73
Change in assets and liabilities, net of businesses acquired:
Accounts receivable ......................................................... 2,226 3,448
Inventories ................................................................. 3,367 2,173
Prepaid royalties ........................................................... (2,093) 553
Prepaid expenses and other assets ........................................... 1,977 (1,067)
Accounts payable ............................................................ (9,790) (4,735)
Accrued royalties ........................................................... (5,982) (153)
Accrued expenses and other .................................................. (4,466) 1,280
-------- --------
Net cash provided by (used in) operating activities .................... (10,494) 11,634
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................................. (7,671) (7,818)
Proceeds from sale of equipment ................................................. -- 155
Acquisition of businesses and other intangibles, less
cash acquired ............................................................... (3,121) 6
-------- --------
Net cash used in investing activities .................................. (10,792) (7,657)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock upon exercise
of stock options ............................................................... 89 1,547
Payments for purchases of treasury stock ........................................ (3,532) --
Borrowings under notes payable .................................................. -- 1,275
Payments on long-term debt ...................................................... (278) (1,413)
Collections on notes receivable ................................................. 145 --
-------- --------
Net cash provided by (used in) financing activities .................... (3,576) 1,409
-------- --------
Effect of exchange rate changes on cash and cash equivalents .................... 187 32
-------- --------
Net change in cash and cash equivalents ......................................... (24,675) 5,418
Cash and cash equivalents, beginning of quarter ................................. 58,523 60,867
-------- --------
Cash and cash equivalents, end of quarter ....................................... $ 33,848 $ 66,285
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
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ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) INTERIM FINANCIAL REPORTING
The accompanying unaudited consolidated financial statements for Action
Performance Companies, Inc. and subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented have been made. The results of operations
for the three-month period ended December 31, 1999 are not necessarily
indicative of the operating results that may be expected for the entire year
ending September 30, 2000. Certain prior period amounts have been reclassified
to conform to the December 31, 1999 presentation. These financial statements
should be read in conjunction with the Company's Form 10-K and Form 10-K/A for
the fiscal year ended September 30, 1999.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental cash flow disclosures and non-cash transactions for
the three-month periods ended December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosures:
Interest paid................................................ $ 93 $ 176
Income taxes paid............................................ 3,021 1,986
Non-cash transactions:
Debt and liabilities incurred or assumed in acquisitions..... 1,133 1,419
</TABLE>
(3) ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, which establishes accounting and reporting standards for a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The new statement requires all derivatives
to be recorded in the balance sheet as either an asset or liability measured at
its fair value. The Company believes the adoption of Statement No. 133 will not
have any material impact in the Company's financial position or results of
operations. Implementation of this standard has been delayed by the FASB for a
12-month period. The Company will adopt SFAS No. 133 as required during fiscal
2001.
(4) RECENT ACQUISITIONS
On October 15, 1999, the Company acquired substantially all of the
assets and assumed certain liabilities of Fantasy Sports Enterprises, Inc.
("Fantasy Sports") for approximately $3.1 million in cash. Fantasy Sports
operates Fantasy Cup Auto Racing through its Web site at www.fantasycup.com. In
connection with the acquisition, the Company recorded goodwill of approximately
$4.0 million, which will be amortized straight-line over 15 years. This
transaction was accounted for as a purchase.
5
<PAGE> 6
(5) SEGMENT REPORTING
The Company has two reportable segments based on geographic points of
distribution: Domestic and Foreign. The Company's reportable segments are based
on operating divisions operating geographically within the continental United
States as "Domestic" and abroad as "Foreign." The Company evaluates performance
and allocates resources based on segment profits. Segment profits are comprised
of segment net revenues less cost of goods sold and selling, general and
administrative expenses. Excluded from segment profits, however, are
non-recurring costs, interest income, and interest expense. Financial
information for the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
Domestic Foreign Total
-------- -------- --------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS)
Collectibles .......................................................... $ 30,944 $ 4,899 $ 35,843
Apparel and souvenirs ................................................. 25,921 900 26,821
Other ................................................................. 2,117 -- 2,117
-------- -------- --------
Total segment revenue ................................................ 58,982 5,799 64,781
Segment profit (loss) ................................................ (317) 220 (97)
Depreciation & amortization included
in segment profit (loss) ........................................... 5,936 250 6,186
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 (IN THOUSANDS)
Collectibles .......................................................... $ 39,033 $ 6,834 $ 45,867
Apparel and souvenirs ................................................. 24,336 -- 24,336
Other ................................................................. 1,363 -- 1,363
-------- -------- --------
Total segment revenue ................................................ 64,732 6,834 71,566
Segment profit ....................................................... 8,971 707 9,678
Depreciation & amortization included
in segment profit .................................................. 4,925 214 5,139
</TABLE>
Reconciliation of segment profit (loss) to consolidated income (loss) before
taxes, is as follows: (in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
For the three months ended December 31,
Segment profits (loss) ................................................... $ (97) $ 9,678
Other non-recurring charges .............................................. (2,251) --
Total other income (expense), net ........................................ (1,171) (1,473)
------- -------
Consolidated (loss) income before taxes .................................. $(3,519) $ 8,205
======= =======
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits, including a securities
class action lawsuit filed in November 1999. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" and Part II, Item 1, "Legal Proceedings." The Company also is subject
to certain asserted and unasserted claims encountered in the normal course of
business. The Company believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We design and market licensed motorsports products, including die-cast
scaled replicas of motorsports vehicles, apparel, and souvenirs. We also operate
"goracing.com", which provides worldwide motorsports-related news and
information, an online meeting place and community for motorsports fans, and an
extensive e-commerce marketplace for motorsports-related die-cast collectibles,
apparel and souvenirs. We also develop promotional programs for sponsors of
motorsports that feature our die-cast replicas or other products and that are
intended to increase brand awareness of the products or services of the
corporate sponsors. Third parties manufacture all of our motorsports
collectibles and most of our apparel and souvenirs, generally utilizing our
designs, tools, and dies. We screen print and embroider a portion of the
licensed motorsports apparel that we sell.
We were incorporated in Arizona in May 1992 and began marketing
die-cast collectibles in July 1992. Since our incorporation, we completed a
number of acquisitions that expanded our product offerings and distribution
channels and secured a number of exclusive license agreements with race car
drivers and team owners. The following table sets forth the acquisitions
completed since October 1, 1996 and the nature of the businesses acquired.
<TABLE>
<CAPTION>
Acquisitions Date Business
- ------------------------------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Sports Image, Inc. Nov-96 Markets and distributes licensed
motorsports apparel and souvenirs;
trackside sales
Motorsport Traditions Limited Partnership Jan-97 Markets and distributes licensed apparel
motorsports and Creative Marketing and and souvenirs; trackside sales
Promotions, Inc.
Robert Yates Promotions, Inc. Jul-97 Markets and distributes licensed
motorsports apparel and souvenirs;
trackside sales
Image Works, Inc. Jul-97 Manufactures and markets licensed
motorsports apparel through
mass-merchandise markets
Motorsports collectibles product lines of Aug-97 Manufactures and markets licensed
Simpson Products, Inc. "mini-helmets" and other motorsports
collectibles and souvenirs
Assets related to sales of merchandise Dec-97 Markets and distributes licensed
licensed by NASCAR driver Rusty Wallace motorsports apparel and souvenirs;
trackside sales
Assets related to motorsports die-cast Dec-97 Manufactures and markets "Revell"
Collectibles product lines of licensed die-cast collectibles; strategic
Revell-Monogram, Inc. alliance with Revell involving extensive
product licensing and distribution
arrangements
Brookfield Collectors Guild, Inc. Jan-98 Markets and distributes licensed
motorsports collectibles and ensembles
Chase Racewear, L.L.C. May-98 Licensed motorsports apparel,
accessories, and toiletries
Paul's Model Art/MiniChamps Aug-98 Markets and distributes licensed die-cast
replicas of Formula One, GT, and
production cars
Performance Plus Sep-98 Develops and markets driver endorsed
nutritional products
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Acquisitions Date Business
- ------------------------------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Intellectual Properties Group, Inc. Oct-98 Creates and develops promotional programs
for corporate sponsors of motorsports
Tech 2000 Worldwide, Inc. Nov-98 Operates the "goracing.com" Internet web
site; designs, develops, implements, and
maintains motorsports-related and other
Internet web sites, including electronic
commerce capabilities
GoodSports Holdings Pty Ltd. Jan-99 Markets and distributes licensed
motorsports apparel and souvenirs related
to Formula One racing
Fantasy Sports Enterprises, Inc. Oct-99 Operates fantasy racing game
</TABLE>
We market our products to approximately 11,500 specialty retailers
throughout the world either directly or through our wholesale distributor
network; to motorsports enthusiasts directly through our Racing Collectables
Club of America, or "Collectors' Club;" via electronic commerce through our
"goracing.com" web site; and through mobile trackside souvenir stores,
promotional programs for corporate sponsors, and fan clubs. We also distribute
certain of our products to mass retailers through our in-house sales force and
wholesale distributors. In addition, we have a license agreement with Hasbro,
Inc., a multi-billion dollar toy and game manufacturer, covering the exclusive
sale by Hasbro of a line of motorsports-related products in the mass-merchandise
market.
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>
Three Months Ended
December 31,
-----------------------------
1999 1998
----- -----
% %
<S> <C> <C>
Sales:
Collectibles .................................................................. 55.3 64.1
Apparel and souvenir .......................................................... 41.4 34.0
Other ......................................................................... 3.3 1.9
----- -----
Net sales ................................................................. 100.0 100.0
Cost of sales ...................................................................... 69.3 64.0
----- -----
Gross profit ....................................................................... 30.7 36.0
Selling, general and administrative expenses ....................................... 31.4 20.4
Amortization of goodwill and other intangibles ..................................... 2.9 2.1
----- -----
Income (loss) from operations ...................................................... (3.6) 13.5
Minority interest in earnings ...................................................... (.1) (.1)
Interest income (expense) and other, net ........................................... (1.8) (1.9)
----- -----
Income (loss) before (provision) benefit for income taxes .......................... (5.5) 11.5
(Provision) benefit for income taxes ............................................... 2.2 (4.6)
----- -----
Net income (loss) .................................................................. (3.3) 6.9
===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1998
Net sales decreased 9.5% to $64.8 million for the three months ended
December 31, 1999 from $71.6 million for the three months ended December 31,
1998. We attribute the decrease in sales during the first quarter of fiscal 2000
primarily to differences in sales associated with corporate promotional programs
recorded in the first quarter of fiscal 1999 as compared with corporate
promotional sales recorded during the first quarter of fiscal 2000, partially
offset by increased sales of other collectible products. We also experienced
delayed orders in our Collectors' Club as a result of unforseen system
conversion problems in December 1999.
8
<PAGE> 9
Gross profit decreased to $19.9 million in the first quarter of fiscal
2000 from $25.7 million in the first quarter of fiscal 1999, representing 30.7%
and 36.0% of net sales, respectively. The decrease in gross profit as a
percentage of net sales resulted from decreased sales of die-cast collectibles
products, which typically provide higher margins than sales of our apparel and
souvenir products. Sales of die-cast collectibles decreased to 55.3% of net
sales in the three months ended December 31, 1999 from 64.1% for the three-month
period ended December 31, 1998, primarily as a result of non-comparative
revenues from certain promotional programs and delayed orders.
Selling, general and administrative expenses increased to $18.1 million
in the three-month period ended December 31, 1999 from $14.6 million in the
three-month period ended December 31, 1998, representing 31.4% and 20.4% of net
sales, respectively. The increase in such expenses as a percentage of sales
resulted primarily from additional operating and facilities costs, primarily
associated with our goracing.com facilities, over a smaller base of sales.
Other non-recurring charges were approximately $2.3 million in the
three-month period ended December 31, 1999. The non-recurring charges result
from expenses incurred in relation to the indefinite postponement of the initial
public offering of goracing.com, inc., as well as various management
restructuring charges that occurred during the first quarter of fiscal 2000.
Amortization of goodwill and other intangibles increased to $1.9
million for the three-month period ended December 31, 1999 from $1.5 million for
the three-month period ended December 31, 1998. The increase in amortization of
goodwill and other intangibles is related to (i) a full quarter of amortization
associated with the acquisition of our Internet company in November 1998, and
(ii) our acquisition of Fantasy Sports Enterprises, Inc. in October of the
current fiscal year.
The change in interest income (expense) and other, net, was primarily
attributable to a decrease in interest expense of approximately $350,000 related
to the retirement of $20 million of term loans in January 1999.
goracing.com INTERNET OPERATIONS
As discussed above, we recognized non-recurring charges
of approximately $2.3 million during the three months ended December 31, 1999.
These non-recurring charges included amounts related to the writeoff of
deferred offering costs and termination benefits for certain employees of
goracing.com. Our operating results for the three months ended December 31, 1999
were adversely impacted by the operating results of goracing.com. The
goracing.com Internet operations excluding the non-recurring charges generated
a net operating loss of approximately $3.1 million for the three months ended
December 31, 1999. For the three months ended December 31, 1998, goracing.com
generated an operating loss of approximately $100,000. The increase in the
loss from operations is a result of increased operating expenses of
goracing.com facilities, an increase in personnel, and other operating expenses.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth the unaudited pro forma income statement
data of our company for the three-month period ended December 31, 1998, giving
effect to the acquisitions of Tech 2000, Goodsports Holdings Pty, Ltd, and
Fantasy Sports as if they had occurred on October 1, 1998, using the purchase
method of accounting for business combinations. The unaudited pro forma income
statement data presented herein does not purport to represent what our actual
results of operations would have been had those acquisitions occurred on that
date or to project our results of operations for any future period.
<TABLE>
<CAPTION>
(in thousands, except per share data)
For the Three Months Ended
------------------------------------------
December 31, 1998
-----------------
<S> <C>
Net
sales............................................................. $ 72,234
Net income........................................................ 4,992
Net income per common share....................................... $ 0.30
</TABLE>
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 pro forma results of operations for the three-month period ended December
31, 1998 reflect the amortization of goodwill and other intangibles arising from
the acquisitions described above and include additional interest expense
associated with any financing related to the acquisitions.
SEASONALITY
Because the auto racing season is concentrated between the months of
February and November, the second and third calendar quarters of each year (our
third and fourth fiscal quarters) generally are characterized by higher sales of
motorsports products. Our limited Internet operating history and the new and
rapidly evolving Internet markets make it difficult to predict the effects of
seasonality on our business in future periods.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position decreased to $98.2 million at December 31,
1999 from $107.8 million at September 30, 1999. The decrease of $9.6 million is
primarily attributable to the cash flows from operations, principally the
reduction of operating payables and accruals, cash used to repurchase our common
stock, and our acquisition of Fantasy Sports.
Capital expenditures for the three-month period ended December 31, 1999
totaled approximately $7.7 million, of which we used approximately $3.7 million
for our continued investment in tooling.
During the three-month period ended December 31, 1999, we issued 8,334
shares of common stock upon the exercise of stock options.
On December 16, 1999, our Board of Directors authorized the repurchase
of up to $40.0 million of our common stock. The purchases are to be made from
time to time in privately negotiated transactions or the open market at
prevailing market prices. The initial term of the repurchase program will be one
year, subject to extension depending on market conditions. During the fiscal
quarter ended December 31, 1999, we repurchased 328,228 shares of common stock
at a cost of approximately $3.5 million. As of February 9, 2000 we have
repurchased an aggregate of 517,000 shares of common stock at a cost of
approximately $5.8 million.
On March 24, 1998, we sold $100.0 million of 4-3/4% convertible
subordinated notes. The notes are convertible, at the option of the holders,
into shares of common stock at the initial conversion price of $48.20 per share,
subject to adjustments in certain events. The notes are general unsecured
obligations of our company, subordinated in right of payment to all existing and
future senior indebtedness of our company, as defined in the notes. The
agreement governing the notes does not limit or prohibit the incurrence of
additional indebtedness, including senior indebtedness, by our company or our
subsidiaries. We, at our option, may redeem the notes in whole or in part at any
time on or after April 1, 2001, at redemption prices set forth in the agreement
governing the notes. Upon the occurrence of a "change in control" or a
"termination of trading," as defined in the agreement, the holders of the notes
will have the right to require our company to repurchase all or any part of such
holders' notes at 100% of their principal amount, plus accrued and unpaid
interest. The net proceeds to our company from this offering were approximately
$96.5 million, after deducting offering expenses and the initial purchasers'
discount of 3.0%. The offering expenses and initial purchasers discount are
included in other assets in the accompanying financial statements and are being
amortized into interest expense using the effective interest rate method.
On August 5, 1998, we entered into an amended and restated credit
agreement with First Union National Bank of North Carolina. The credit facility
consists of a revolving line of credit for up to $20.0 million, which includes
up to $5.0 million for standby letters of credit (the "Line of Credit"), and a
$30.0 million letter of credit/bankers' acceptance facility. We did not have any
outstanding borrowings under the Line of Credit as of December 31, 1999. We had
outstanding purchase commitments of approximately $5.8 million and $7.9 million
under the letter of credit/bankers' acceptance facility as of December 31, 1999
and 1998, respectively. The Line of Credit bears interest, at our option, at a
rate equal to (i) the Alternate Base Rate (as described below) plus an
applicable margin as defined in the credit agreement or (ii) LIBOR plus an
applicable margin as defined in the credit agreement. The "Alternate Base Rate"
under the Line of Credit is the greater of (a) the bank's publicly announced
prime rate or (b) the Federal Funds Effective Rate (as defined) plus 0.5%. The
Line of Credit matures on April 1, 2001 with respect to the revolving line of
credit portion of the Line of Credit, and on April 1, 2000 with respect to the
standby letter of credit portion of the Line of Credit and the letter of
credit/bankers' acceptance facility, subject to extensions by First Union.
In August 1999, goracing entered into an agreement with a financial
institution under which goracing has available up to $7.0 million for the
purposes of acquiring capital equipment under operating leases. As of December
31, 1999, goracing had executed operating leases totaling approximately $5.7
million under this agreement. We have guaranteed goracing's obligations under
this agreement.
Our credit facility agreements contain certain provisions that, among
other things, require our company to comply with certain financial ratios and
net worth requirements and will limit the ability of our company and our
subsidiaries to incur additional indebtedness, pay dividends, sell assets, or
engage in certain mergers or consolidations.
10
<PAGE> 11
We are a defendant in various lawsuits, including a securities class
action lawsuit filed in November 1999. See Part II, Item 1, "Legal Proceedings."
We have agreed to settle one lawsuit and we recorded a non-recurring pretax
charge of $3.6 million in the fourth quarter of fiscal 1999 to reflect the
financial terms of the proposed settlement, as well as legal and other expenses
related to the lawsuit and proposed settlement. The final settlement will be
subject to the negotiation and execution of definitive settlement agreements, as
well as court approval. We have not made any provisions in our financial
statements with respect to the securities class action lawsuit we are defending.
The imposition of any additional damages in the lawsuit we have agreed to settle
or the imposition of damages in the securities class action lawsuit could have a
material adverse effect on our results of operations and financial position. We
are also subject to certain asserted and unasserted claims encountered in the
normal course of business. We believe that the resolution of these matters will
not have a material adverse effect on our financial position or results of
operations; however, imposition of damages to that extent could still occur.
We believe that our current cash resources, our credit facility,
goracing's commitment for capital equipment lease financing, and expected cash
flow from operations will be sufficient to fund our capital needs during the
next 12 months at our current level of operations, apart from capital needs
resulting from additional acquisitions and the capital required to enable
goracing to fully execute its growth strategy. goracing will require additional
capital from our capital resources or from outside sources to be able to fully
execute its growth strategy. We may be required to obtain additional capital to
fund our 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 our
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 our business.
YEAR 2000 COMPLIANCE
We are heavily dependent upon complex computer software and systems for
our operations. Many existing computer programs and systems use only two digits
to identify a year in the date field. These programs and systems were designed
and developed without considering the impact of the recent change in the
century.
During 1997, we engaged Computer Associates International, Inc. to
commence a program to install new information technology, or IT, and non-IT
systems. These new systems include hardware and software programs that are
intended to integrate management information systems throughout our
organizational structure, as well as to comply with Year 2000 requirements.
During fiscal 1999, we completed the new system installation with respect to
those systems that we believe were not Year 2000 compliant. As of the date of
this Report, we have not experienced any material disruption to our operations
as a result of any failure of any of our systems to function properly as of
January 1, 2000. We also have not experienced any Year 2000 failures related to
any of our significant vendors or suppliers, including our third party
manufacturers in Asia.
Year 2000 compliance has many elements and potential consequences, some
of which may not be foreseeable or may be realized in future periods. In
addition, unforeseen circumstances may arise, and we may not in the future
identify equipment or systems that are not Year 2000 compliant.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements
regarding our business strategies, our business, and the industry in which we
operate. These forward-looking statements are based primarily on our
expectations and are subject to a number of risks and uncertainties, some of
which are beyond our control. Actual results could differ materially from the
forward-looking statements as a result of numerous factors, including those set
forth in our Form 10-K and Form 10-K/A for the year ended September 30, 1999, as
filed with the Securities and Exchange Commission.
11
<PAGE> 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate risk associated
with our credit instruments and foreign currency exchange rate risk associated
with our foreign operations. We do not currently use and we have not
historically used derivative financial instruments to manage or reduce market
risk.
At December 31, 1999, we had $100 million outstanding under our
convertible subordinated notes at an interest rate of 4.75%, and approximately
$10.9 million of debt outstanding at various rates and terms, principally under
promissory notes and capital leases. Interest rates on these credit instruments
are fixed and comparable to current market rates.
The functional currency for our foreign operations is the Deutschmark
and British pound sterling. As such, changes in exchange rates between those
currencies and the U.S. dollar could adversely affect our future earnings. Given
the level of income we currently derive from our foreign operations, we consider
this exposure to be minimal. A 10% change in exchange rates would not have a
significant impact on our future earnings.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 30, 1999, a class action lawsuit was filed against
our company in the United States District Court for the
District of Arizona, case No. CIV'99 2106 PHXROS. Fred W.
Wagenhals and Tod J. Wagenhals, directors and officers of our
company, and Christopher S. Besing, a former director and
officer of our company, also were named as defendants. The
lawsuit alleges that our company and the other defendants
violated the Securities Exchange Act of 1934 by (a) making
allegedly false statements about the state of our business and
shipment of certain products to a customer, or (b)
participating in a fraudulent scheme that was intended to
inflate the price of our common stock. The alleged class of
plaintiffs consists of all persons who purchased our publicly
traded securities between July 27, 1999 and November 4, 1999.
The plaintiffs are requesting an unspecified amount of
monetary damages. We intend to vigorously defend this lawsuit.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SECURITIES
Not applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACTION PERFORMANCE COMPANIES, INC.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Fred W. Wagenhals Chairman of the Board, President, and February 11, 2000
- ------------------------------------ Chief Executive Officer
Fred W. Wagenhals (Principal Executive Officer)
/s/ David A. Husband Executive Vice President-Finance and February 11, 2000
- ------------------------------------ Accounting and Chief Financial Officer
David A. Husband (Principal Financial and Accounting Officer)
</TABLE>
14
<PAGE> 15
Exhibit Index
<TABLE>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF THE SECURITIES
ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE
SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY
OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER
FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 33,848
<SECURITIES> 0
<RECEIVABLES> 43,944
<ALLOWANCES> 1,272
<INVENTORY> 41,779
<CURRENT-ASSETS> 128,168
<PP&E> 90,340
<DEPRECIATION> 31,921
<TOTAL-ASSETS> 309,267
<CURRENT-LIABILITIES> 29,957
<BONDS> 110,892
0
0
<COMMON> 166
<OTHER-SE> 99,115
<TOTAL-LIABILITY-AND-EQUITY> 309,267
<SALES> 64,781
<TOTAL-REVENUES> 64,781
<CGS> 44,886
<TOTAL-COSTS> 44,886
<OTHER-EXPENSES> 22,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,739
<INCOME-PRETAX> (3,519)
<INCOME-TAX> (1,390)
<INCOME-CONTINUING> (2,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,129)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
