<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 March 31, 2000
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 May 10, 2000, there were outstanding 16,353,356 shares of the registrant's
Common Stock, par value $.01 per share.
<PAGE> 2
PART I ITEM 1. FINANCIAL STATEMENTS
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 25,468 $ 58,523
Accounts receivable, net of allowance for
doubtful accounts of $1,109 and $1,421, respectively ................ 36,381 44,988
Inventories ........................................................... 43,335 45,310
Prepaid royalties ..................................................... 12,824 7,271
Prepaid expenses and other assets ..................................... 2,385 2,953
--------- ---------
Total current assets ............................................. 120,393 159,045
PROPERTY AND EQUIPMENT, net ........................................... 57,443 56,162
GOODWILL AND OTHER INTANGIBLES, net ..................................... 109,356 111,634
OTHER ASSETS, net ....................................................... 12,488 8,906
--------- ---------
$ 299,680 $ 335,747
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 14,535 $ 20,127
Accrued royalties ..................................................... 6,986 13,519
Accrued expenses and other ............................................ 7,151 14,889
Current portion of long-term debt ..................................... 1,565 2,713
--------- ---------
Total current liabilities .......................................... 30,237 51,248
--------- ---------
LONG-TERM DEBT:
Convertible subordinated notes ........................................ 100,000 100,000
Other long-term debt .................................................. 8,723 9,208
--------- ---------
Total long-term debt ............................................... 108,723 109,208
========= =========
MINORITY INTEREST ....................................................... 2,291 2,300
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued or outstanding .......................... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized; 16,353,356 and 16,929,085 shares issued and outstanding,
respectively ........................................................... 164 169
Additional paid-in capital.............................................. 102,713 102,555
Treasury Stock .......................................................... (6,514) --
Accumulated other comprehensive loss .................................... (2,648) (714)
Retained earnings ....................................................... 64,714 70,981
--------- ---------
Total shareholders' equity ........................................ 158,429 172,991
--------- ---------
$ 299,680 $ 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 MONTH AND SIX MONTH PERIODS ENDED MARCH 31, 2000
AND 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------- --------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales:
Collectibles .................................... $ 31,492 $ 46,439 $ 67,335 $ 92,306
Apparel and souvenirs ........................... 24,953 30,092 51,774 54,428
Other ........................................... 1,624 2,397 3,741 3,759
--------- --------- --------- ---------
Net sales .................................... 58,069 78,928 122,850 150,493
Cost of sales ...................................... 39,904 48,933 84,790 94,764
--------- --------- --------- ---------
Gross profit ....................................... 18,165 29,995 38,060 55,729
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses..... 22,351 16,101 40,447 30,701
Other non-recurring charges ..................... -- -- 2,251 --
Amortization of goodwill and other intangibles... 2,331 1,501 4,227 2,958
--------- --------- --------- ---------
Total operating expenses ..................... 24,682 17,602 46,925 33,659
--------- --------- --------- ---------
Income (loss) from operations ...................... (6,517) 12,393 (8,865) 22,070
--------- --------- --------- ---------
Other income (expense):
Minority interest in earnings ................... (341) (570) (551) (644)
Interest income and other, net .................. 582 649 1,361 1,345
Interest expense ................................ (1,427) (1,632) (3,167) (3,726)
--------- --------- --------- ---------
Total other expense, net ..................... (1,186) (1,553) (2,357) (3,025)
--------- --------- --------- ---------
Income (loss) before provision (benefit) for taxes.. (7,703) 10,840 (11,222) 19,045
Provision for (benefit from) income taxes .......... (3,565) 4,336 (4,955) 7,618
--------- --------- --------- ---------
NET INCOME (LOSS) .................................. (4,138) 6,504 (6,267) 11,427
Other comprehensive loss ........................... (692) (1,842) (1,934) (1,810)
Comprehensive income (loss) ........................ $ (4,830) $ 4,662 $ (8,201) $ 9,617
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic ........................................... $ (0.25) $ 0.39 $ (0.38) $ 0.69
========= ========= ========= =========
Diluted ......................................... $ (0.25) $ 0.38 $ (0.38) $ 0.67
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ........................................... 16,748 16,820 16,666 16,668
========= ========= ========= =========
Diluted ......................................... 16,748 17,179 16,666 17,025
========= ========= ========= =========
</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 SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ (6,267) $ 11,427
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization ............................................... 14,154 10,580
Gain on sale of property and equipment ...................................... (176) --
Undistributed earnings to minority shareholders ............................. 551 644
Change in assets and liabilities, net of businesses
acquired:
Accounts receivable ...................................................... 8,427 (178)
Inventories .............................................................. 1,753 1,875
Prepaid royalties ........................................................ (5,554) (4,015)
Prepaid expenses and other assets ........................................ (2,419) (1,342)
Accounts payable ......................................................... (5,282) 79
Accrued royalties ........................................................ (6,533) (188)
Accrued expenses and other ............................................... (8,410) 1,291
-------- --------
Net cash (used in) provided by operating ............................. (9,756) 20,173
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................................... (13,684) (13,560)
Proceeds from sale of equipment ............................................. 1,963 155
Acquisition of businesses and other intangibles, less cash acquired ......... (3,062) (3,046)
-------- --------
Net cash used in investing activities ................................ (14,783) (16,451)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock upon exercise of stock options ... 151 3,568
Payments for treasury stock ................................................. (6,514) --
Borrowings on line of credit ................................................ -- 1,275
Payments on line of credit .................................................. -- (1,275)
Payments on long-term debt .................................................. (1,981) (22,302)
Issuance of notes receivable ................................................ (1,057) --
Collections on notes receivable ............................................. 217 8
-------- --------
Net cash used in financing activities ................................ (9,184) (18,726)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ................ 668 (103)
-------- --------
Net change in cash and cash equivalents ..................................... (33,055) (15,107)
Cash and cash equivalents, beginning of period .............................. 58,523 60,867
-------- --------
Cash and cash equivalents, end of period .................................... $ 25,468 $ 45,760
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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 accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented have been made. The results
of operations for the six-month period ended March 31, 2000 are not necessarily
indicative of the operating results that may be expected for the entire year
ending September 30, 2000. Certain immaterial prior period amounts have been
reclassified to conform to the March 31, 2000 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
six-month periods ended March 31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Supplemental disclosures:
Interest paid............................. $1,091 1,562
Income taxes paid......................... 3,417 7,744
Non-cash transactions:
Debt and liabilities incurred or assumed
in acquisitions........................... 1,072 4,016
</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.
The SEC staff has issued Accounting Bulletin 101 which deals with revenue
recognition issues. The Company is required to implement Accounting Bulletin 101
during fiscal 2001. The Company is in the process of analyzing the financial
statement impact of this bulletin. The Company does not expect an adverse
financial statement impact upon implementation of the bulletin.
(4) RECENT TRANSACTIONS
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.
In March 2000, the Company signed a series of agreements, with a
third-party professional services firm in which, the third party professional
services firm will assume responsibility for all long-term lease obligations
related to goracing.com's infrastructure, including its physical facility and
all related computer equipment. goracing.com will retain usage of those portions
of the building necessary for it to continue its operations and will obtain
third-party hosting services for all of its Internet activities. As part of the
agreements the Company received proceeds of approximately $2.0 million and
recognized an immaterial gain from the disposition of property and equipment.
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 SIX MONTHS ENDED MARCH 31, 2000 (IN
THOUSANDS)
Collectibles ............................ $ 57,240 $ 10,095 $ 67,335
Apparel and souvenirs ................... 47,590 4,184 51,774
Other ................................... 3,741 -- 3,741
--------- --------- ---------
Total segment revenue ................. 108,571 14,279 122,850
Segment profit (loss) ................. (6,791) 177 (6,614)
Depreciation & amortization included
in segment profit (loss) ............ 13,665 489 14,154
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (IN
THOUSANDS)
Collectibles ............................ $ 77,272 $ 15,034 $ 92,306
Apparel and souvenirs ................... 53,071 1,357 54,428
Other ................................... 3,387 372 3,759
--------- --------- ---------
Total segment revenue ................. 133,730 16,763 150,493
Segment profit ........................ 19,413 2,657 22,070
Depreciation & amortization included
in segment profit ................... 10,162 418 10,580
</TABLE>
Reconciliation of segment profit (loss) to consolidated income (loss) before
taxes, is as follows: (in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
FOR THE SIX MONTHS ENDED MARCH 31,
Segment profits (loss) ................... $ (6,614) $ 22,070
Other non-recurring charges .............. (2,251) --
Total other income (expense), net ........ (2,357) (3,025)
-------- --------
Consolidated (loss) income before taxes .. $(11,222) $ 19,045
======== ========
</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
on-line 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.
These transactions included the acquisitions of (a) our licensed motorsports
apparel and souvenir business, including the "Chase" branded apparel line; (b)
our trackside sales operations; (c) a manufacturer and marketer of licensed
motorsports apparel through mass-merchandise markets; (d) the "Revell" branded
line of die-cast collectibles; (e) the leading European marketer and distributor
of licensed die-cast replicas of Formula One, GT, and production cars; and (f)
our "goracing.com" Internet web site and related Internet operations.
In connection with these and other transactions, we secured a number of
exclusive license agreements with race car drivers, team owners, and others,
including the following:
- NASCAR Winston Cup champions Dale Earnhardt, Jeff Gordon, Dale
Jarrett, and Rusty Wallace as well as other popular Nascar drivers;
- NASCAR team owners Robert Yates Racing, Richard Childress Racing
Enterprises, Joe Gibbs Racing, and Dale Earnhardt, Inc.;
- National Hot Rod Association champions John Force and Kenny
Bernstein;
- Formula One teams McLaren International Limited, Williams Grand
Prix, and Benneton Formula Ltd.; and
- Sanctioning bodies, including NASCAR, CART, World of Outlaws, and
World Superbike.
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.
7
<PAGE> 8
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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales:
Collectibles ......................................... 54.2% 58.9% 54.8% 61.3%
Apparel and souvenir ................................. 43.0 38.1 42.2 36.2
Other ................................................. 2.8 3.0 3.0 2.5
------ ------ ------ ------
Net sales .......................................... 100.0 100.0 100.0 100.0
Cost of sales ........................................ 68.7 62.0 69.0 63.0
------ ------ ------ ------
Gross profit ........................................ 31.3 38.0 31.0 37.0
Selling, general and administrative expenses ......... 38.5 20.4 32.9 20.4
Other non-recurring charges .......................... 0.0 0.0 1.8 0.0
Amortization of goodwill and other intangibles ....... 4.0 1.9 3.5 1.9
------ ------ ------ ------
Income (loss) from operations ....................... (11.2) 15.7 (7.2) 14.7
Minority interest in earnings ........................ (0.6) (0.7) (0.4) (0.4)
Interest income (expense) and other, net ............. (1.5) (1.3) (1.5) (1.6)
------ ------ ------ ------
Income (loss) before provision for income taxes ..... (13.3) 13.7 (9.1) 12.7
Provision for (benefit from) income taxes ............ 6.1 (5.5) 4.0 (5.1)
------ ------ ------ ------
Net income (loss) ................................... (7.2)% 8.2% (5.1)% 7.6%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
Net sales decreased 26.4% to $58.1 million for the three months ended
March 31, 2000 from $78.9 million for the three months ended March 31, 1999. The
decrease in sales during the second quarter of fiscal 2000 was primarily related
to management changes made in the first fiscal quarter, which significantly
delayed development and implementation of special promotional programs for
fiscal 2000. As a result, sales associated with special promotional programs
recorded in the second quarter of fiscal 2000 declined as compared with other
promotional sales recorded in the second quarter of fiscal 1999.
Gross profit decreased to $18.1 million in the second quarter of fiscal
2000 from $30.0 million in the second quarter of fiscal 1999, representing 31.3%
and 38.0% of net sales, respectively. The decrease in gross profit as a
percentage of net sales resulted partially from (a) the impact of fixed tooling
charges over a smaller base of sales, and (b) 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 from
54.2% of net sales in the three months ended March 31, 2000 from 58.9% for the
three-month period ended March 31, 1999, primarily as a result of decreased
special promotional sales, as described above.
Selling, general and administrative expenses increased to $22.4 million in
the three-month period ended March 31, 2000 from $16.1 million in the
three-month period ended March 31, 1999, representing 38.5% 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 sales base.
Amortization of goodwill and other intangibles increased to $2.3 million
for the three-month period ended March 31, 2000 from $1.5 million for the
three-month period ended March 31, 1999. The increase in amortization of
goodwill and other intangibles is related to (a) a full quarter of amortization
associated with the acquisition of our Internet operations, and (b) amortization
resulting from 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 notes in January 1999, decreased
interest income due to lower cash balances, and the gain on the disposition of
property and equipment related to goracing.com.
8
<PAGE> 9
SIX MONTHS ENDED MARCH 31, 2000 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1999
Net sales decreased 18.4% to $122.9 million for the six months ended March
31, 2000 from $150.5 million for the six months ended March 31, 1999. We
attribute the decrease in sales primarily to management changes made in the
first quarter, which significantly delayed development and implementation of
special corporate promotional programs for fiscal 2000. As a result, sales
associated with special promotional programs recorded in the first six months of
fiscal 2000 declined as compared with other promotional sales recorded in the
first six months of fiscal 1999. We also experienced delayed orders in our
Collectors' Club during the first quarter of fiscal 2000 as a result of
unforeseen system conversion problems in December 1999.
Gross profit decreased to $38.1 million in the six months ended March 31,
2000 from $55.7 million in the six months ended March 31, 1999, representing
31.0% and 37.0% of net sales, respectively. The decrease in gross profit as a
percentage of net sales resulted from (a) the impact of fixed tooling charges
over a smaller base of sales, and (b) 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 54.8% of net
sales in the six months ended March 31, 2000 from 61.3% for the six-month period
ended March 31, 1999, primarily as a result of decreased special promotional
programs, as described above.
Selling, general and administrative expenses increased to $40.4 million in
the six-month period ended March 31, 2000 from $30.7 million in the six-month
period ended March 31, 1999, representing 32.9% 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 sales base.
During the six-month period ended March 31, 2000, we recorded other
non-recurring charges of $2.3 million, from expenses incurred in relation to the
cancellation 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 $4.2 million
for the six-month period ended March 31, 2000 from $3.0 million for the
six-month period ended March 31, 1999. The increase in amortization of goodwill
and other intangibles is related to (a) amortization associated with the
acquisition of our Internet company, and (b) amortization resulting from 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 notes in January 1999, decreased
interest income due to lower cash balances, and the gain on the disposition of
property and equipment related to goracing.com.
GORACING.COM INTERNET OPERATIONS
As discussed above, we recognized non-recurring charges of approximately
$2.3 million during the six months ended March 31, 2000. These non-recurring
charges included amounts related to the write-off of deferred offering costs and
termination benefits for certain employees of goracing.com. Our operating
results for the six months ended March 31, 2000 were adversely impacted by the
operating results of goracing.com. Excluding the non-recurring charges, the
goracing.com Internet operations generated a net operating loss of approximately
$7.4 million for the six-months ended March 31, 2000. For the six-months ended
March 31, 1999, goracing.com generated an operating loss of approximately
$727,000. 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.
As of March 28, 2000, we signed a series of agreements that we believe
will reduce the future operating expenses and cash flow requirements of our
internet subsidiary, goracing.com, inc. Under the terms of the agreements, a
third-party professional services firm will assume responsibility for all
long-term lease obligations related to goracing.com's infrastructure, including
its physical facility and all related computer equipment. goracing.com will
retain usage of those portions of the building necessary for it to continue its
operations and will obtain third-party hosting services for all of its Internet
activities. As part of the agreements, we received proceeds of approximately
$2.0 million and recognized an immaterial gain from the disposition of property
and equipment.
9
<PAGE> 10
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth the unaudited pro forma income statement
data of our company for the six-month period ended March 31, 1999, 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 SIX MONTHS ENDED
------------------------
MARCH 31, 1999
--------------
<S> <C>
Net sales.................................... $151,325
Net income................................... 11,484
Net income per common share.................. $0.69
</TABLE>
The pro forma results of operations for the six-month period ended March
31, 1999 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.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position decreased to $90.2 million at March 31, 2000
from $107.8 million at September 30, 1999. The decrease of $17.6 million is
primarily attributable to cash used in 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 six-month period ended March 31, 2000 totaled
approximately $13.7 million, of which we used approximately $5.9 million for our
continued investment in tooling. We used the balance for our ongoing investment
in other property and equipment.
During the six-month period ended March 31, 2000, we issued 16,271 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 six-month period
ended March 31, 2000, we repurchased 592,000 shares of common stock at a cost of
approximately $6.5 million.
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 March 31, 2000. We had
outstanding purchase commitments of approximately $6.9 million and $4.5 million
under the letter of credit/bankers' acceptance facility as of March 31, 2000 and
1999, 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 Credit Facility
matures on April 1, 2001, subject to extensions by First Union.
10
<PAGE> 11
As of March 28, 2000, we had executed operating leases totaling
approximately $7.2 million for the purpose of acquiring equipment for
goracing.com. On March 28, 2000, we signed a series of agreements whereby a
third-party assumed responsibility for all long-term lease obligations related
to goracing.com's infrastructure, including its physical facility and all
related computer equipment. We remain the guarantor under the terms of the
original 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.
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, 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.
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.
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 March 31, 2000, we had $100 million outstanding under our convertible
subordinated notes at an interest rate of 4.75%, and approximately $8.7 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, or below, 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.
11
<PAGE> 12
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. After the first complaint
was filed, five other substantially similar complaints were filed
against our company and the other defendants alleging nearly
identical allegations and causes of action. The court has
consolidated all of the cases and has appointed a lead plaintiff
group and lead counsel. The plaintiffs have announced that the
purported class period will be extended through and including
December 16, 1999. We anticipate that the lead plaintiff group will
file an amended complaint before the end of May 2000. No trial date
or other schedule has been set. 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
The Company's 2000 Annual Meeting of Shareholders was held on March
30, 2000. The following nominees were elected to the Company's Board
of Directors to serve until their successors are elected or have
qualified, or until their earlier resignation or removal:
<TABLE>
<CAPTION>
Nominee Votes in Favor Opposed
------- -------------- -------
<S> <C> <C>
Fred W. Wagenhals 14,787,711 457,963
Tod J. Wagenhals 14,784,055 461,619
Melodee L. Volosin 14,788,676 456,998
John S. Bickford, Sr. 14,788,505 457,169
Paul G. Lang 14,436,652 809,022
John M. Lloyd 14,898,405 347,269
Robert H. Manschot 14,898,405 347,269
Edward Bauman 14,898,505 347,169
Herbert M. Baum 14,898,776 346,898
</TABLE>
The following items were voted upon by the Company's shareholders:
(a) Proposal to approve the Company's 2000 Stock Option Plan.
<TABLE>
<CAPTION>
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
<S> <C> <C> <C>
6,798,447 1,350,677 169,325 6,927,225
</TABLE>
(b) Proposal to ratify the appointment of Arthur Andersen LLP
as the independent auditors of the Company for the fiscal year ending
September 30, 2000.
<TABLE>
<CAPTION>
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
<S> <C> <C> <C>
15,143,594 60,940 41,140 -0-
</TABLE>
12
<PAGE> 13
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 May 11, 2000
Fred W. Wagenhals Chief Executive Officer
(Principal Executive Officer)
/s/ David A. Husband Executive Vice President-Finance and May 11, 2000
David A. Husband Accounting and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
- -------
<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 March 31, 2000, 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 25,468
<SECURITIES> 0
<RECEIVABLES> 37,490
<ALLOWANCES> 1,109
<INVENTORY> 43,335
<CURRENT-ASSETS> 120,393
<PP&E> 93,675
<DEPRECIATION> 36,232
<TOTAL-ASSETS> 299,680
<CURRENT-LIABILITIES> 30,237
<BONDS> 108,723
0
0
<COMMON> 164
<OTHER-SE> 102,713
<TOTAL-LIABILITY-AND-EQUITY> 299,680
<SALES> 122,850
<TOTAL-REVENUES> 122,850
<CGS> 84,790
<TOTAL-COSTS> 84,790
<OTHER-EXPENSES> 46,925
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,167
<INCOME-PRETAX> (11,222)
<INCOME-TAX> (4,955)
<INCOME-CONTINUING> (6,267)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,267)
<EPS-BASIC> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
