SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended September 30, 1997
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.)
2401 West First Street
Tempe, Arizona 85281
(602) 894-0100
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) 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
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Issuer's revenues for its most recent fiscal year: $130,380,000.
The aggregate market value of Common Stock held by nonaffiliates of the
registrant (13,868,740 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 15, 1997, was
$458,535,216. For purposes of this computation, all officers, directors and 10%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors or
10% beneficial owners are, in fact, affiliates of the registrant.
As of December 15, 1997, there were outstanding 16,012,471 shares of
registrant's Common Stock, par value $.01 per share.
Documents incorporated by reference: Portions of the registrant's definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
ACTION PERFORMANCE COMPANIES, INC.
FORM 10-K/A
AMENDMENT No. 1 TO
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
PART II
ITEM 6. SELECTED FINANCIAL DATA.................................... 1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K ....................................... 11
SIGNATURES ........................................................... 14
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
i
ITEM 6. SELECTED 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 Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Report.
Fiscal Year Ended September 30,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share amounts)
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 full dilution(4) $ (0.21) $ 0.08 $ 0.25 $ 0.46 $ 0.69
========= ========= ========= ========= =========
Weighted average number of
common shares, assuming full
dilution(4) ..................... 5,662 9,640 11,570 13,069 14,671
Consolidated Balance Sheet Data
(at end of period):
Working capital .................... $ 3,186 $ 5,699 $ 11,922 $ 18,094 $ 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 26,996 103,168
- ---------------------
(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.
(5) Represents a one-time charge of approximately $5.4 million for
settlement costs and related legal and other expenses. See Item 3,
"Legal Proceedings."
2
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS,
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 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 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 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 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.
3
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 as well as goodwill amortization. The Company recorded goodwill of
approximately $47.7 million in connection with the fiscal 1997 acquisitions. The
goodwill is being amortized at the rate of $1.9 million per year over 25 years.
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.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total revenue represented by certain expense and revenue items.
Year Ended September 30,
-----------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Sales
Collectibles ................................. 76.5% 75.9% 89.7% 92.5% 49.6%
Apparel and souvenirs ........................ -- 0.8 4.6 4.4 46.2
Promotional .................................. -- -- -- 3.1 3.4
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%
===== ===== ===== ===== =====
4
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 API settlement and related legal
charges. This settlement represents 4.1% of net sales. See Item 3, "Legal
Proceedings."
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.
5
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, 1997 and 1996 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 herein. The Company believes that all necessary
adjustments have been made to present fairly the quarterly information when read
in conjunction with the Consolidated Financial Statements and Notes
6
thereto included elsewhere in this Report. The operating results for any quarter
are not necessarily indicative of the results for any future period.
(in thousands, except per share amounts)
Fiscal 1996
----------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales ........................... $ 8,006 $ 9,766 $12,283 $14,161
Gross profit ........................ 3,241 3,947 5,424 6,308
Income from operations .............. 1,370 1,852 2,938 3,494
Net income .......................... $ 878 $ 1,140 $ 1,777 $ 2,158
Net income per common share, assuming
full dilution .................... $ 0.07 $ 0.09 $ 0.14 $ 0.16
Weighted average number of common
shares, assuming full dilution ... 12,840 12,984 13,150 13,128
Fiscal 1997
-------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter(1) 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
full dilution .................... $ 0.12 $ 0.17 $ 0.08 $ 0.31
Weighted average number of common
shares, assuming full dilution ... 13,476 14,129 14,430 16,450
- ----------------------
(1) Includes a one-time charge of approximately $5.4 million for costs and
legal and other expenses related to the settlement of a lawsuit.
Excluding the one-time charge, income from operations, net income, and
net income per common share, assuming dilution, for the third quarter
of fiscal 1997 would have been approximately $7,749, $4,338, and $0.30,
respectively.
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.
7
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.
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 consists of a revolving line of credit (the "Line
of Credit") for up to $10.0 million through September 30, 1997 and up to $6.0
million from September 30, 1997 to March 31, 1998 and a $6.0 million letter of
credit/bankers' acceptances facility (the "Letter of Credit/BA Facility"). The
Line of Credit bears interest, at the Company's option, at a rate equal to
either (i) the greater of (a) the bank's publicly announced prime rate or (b) a
weighted average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line
of Credit is guaranteed by Sports Image and Motorsport Traditions. The Company
utilized $4.0 million of the Line of Credit to provide part of the cash portion
of the purchase price for Motorsport Traditions and an additional $4.0 million
of the Line of Credit to repay a portion of the $24.0 million promissory note
issued in connection with the acquisition of Sports Image. The Company utilized
a portion of the proceeds of the June 1997 public offering described below 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, as amended in April 1997, 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 prepay
8
the Senior Notes prior to maturity, but must offer to redeem the Senior Notes in
the event of a "Change of Control" of the Company, as defined in the Senior
Notes. The Senior Notes contain certain provisions that, among other things,
require the Company to comply with certain financial ratios and net worth
requirements and limit the ability of the Company and its subsidiaries to incur
additional indebtedness, to sell assets or engage in certain mergers or
consolidations. The Senior Notes are guaranteed by Sports Image and Motorsport
Traditions. The Company utilized the proceeds from the Senior Notes to repay the
remainder of the promissory note issued in connection with the acquisition of
Sports Image.
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 Item 1, "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 Item 3, "Legal
Proceedings." 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 way 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.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and
reports thereon, commencing at page F-1 of this report, which financial
statements, report, notes and data are incorporated herein by reference.
10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Statement Schedules
(1) Financial Statements are listed in the Index to Consolidated
Financial Statements on page F-1 of this Report.
(2) No Financial Statement Schedules are included because such
schedules are not applicable, are not required, or because
required information is included in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
Exhibit
Number Exhibit
- ------ -------
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)
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)
11
Exhibit
Number Exhibit
- ------ -------
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)
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.*
10.50 Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc.*
11.1 Computation of Primary Earnings Per Share*
11.2 Computation of Fully Diluted Earnings Per Share*
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule*
- ---------------------------
* Previously filed
(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.
12
Exhibit
Number Exhibit
- ------ -------
(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).
13
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: May 21, 1998 /s/ Fred W. Wagenhals
-----------------------------------------
Fred W. Wagenhals, Chairman of the Board,
President, and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Fred W. Wagenhals Chairman of the Board, President, and Chief May 21, 1998
- --------------------------------- Executive Officer (Principal Executive Officer)
Fred W. Wagenhals
/s/ Tod W. Wagenhals Executive Vice President, Secretary, and Director May 21, 1998
- ---------------------------------
Tod J. Wagenhals
/s/ Christopher S. Besing Vice President, Chief Financial Officer, Treasurer, May 21, 1998
- --------------------------------- and Director (Principal Financial and
Christopher S. Besing Accounting Officer)
/s/ Melodee L. Volosin Vice President - Wholesale Division and Director May 21, 1998
- ---------------------------------
Melodee L. Volosin
/s/ John S. Bickford Vice President - Strategic Alliances and Director May 21, 1998
- ---------------------------------
John S. Bickford
Director May __, 1998
- ---------------------------------
Jack M. Lloyd
Director May __, 1998
- ---------------------------------
Robert H. Manschot
/s/ Edward J. Bauman Director May 21, 1998
- ---------------------------------
Edward J. Bauman
/s/ Donald G. Hawk, Jr. Director May 21, 1998
- ---------------------------------
Donald G. Hawk, Jr.
14
ACTION PERFORMANCE COMPANIES, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Public Accountants........................... F-2
Consolidated Balance Sheets as of September 30, 1997 and 1996...... F-3
Consolidated Statements of Operations for the Years
Ended September 30, 1997, 1996, and 1995.................... F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1997, 1996, and 1995.................... F-5
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997, 1996, and 1995.................... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Action Performance Companies, Inc.:
We have audited the accompanying consolidated balance sheets of ACTION
PERFORMANCE COMPANIES, INC. (an Arizona corporation) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Action Performance Companies,
Inc. and subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
November 18, 1997, except with respect
to matters discussed in Note 13 as to
which the date is December 10, 1997.
F-2
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(in thousands, except share data)
ASSETS 1997 1996
- ------ -------- --------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 29,318 $ 4,983
Accounts receivable, net of allowance for
doubtful accounts of $837 and $256,
respectively ...................................... 17,802 7,497
Inventories, net ................................... 17,855 5,834
Prepaid royalties .................................. 4,967 2,295
Prepaid expenses and other assets .................. 2,603 1,772
-------- --------
Total current assets ............................. 72,545 22,381
PROPERTY AND EQUIPMENT, net .......................... 20,017 8,188
GOODWILL AND OTHER INTANGIBLES, net .................. 46,409 56
NOTES RECEIVABLE AND OTHER ASSETS .................... 2,354 1,024
-------- --------
$141,325 $ 31,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 6,680 $ 2,188
Accrued royalties .................................. 5,098 1,180
Accrued expenses and other ......................... 3,792 920
-------- --------
Total current liabilities ........................ 15,570 4,288
LONG-TERM DEBT:
Notes payable ...................................... 20,602 --
Other long-term debt ............................... 1,984 365
-------- --------
Total long-term debt ............................. 22,586 365
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; 15,952,083 and 12,609,769 shares
issued and outstanding, respectively .............. 160 126
Additional paid-in capital ......................... 84,984 18,991
Retained earnings .................................. 18,025 7,879
-------- --------
Total shareholders' equity ....................... 103,169 26,996
-------- --------
$141,325 $ 31,649
======== ========
The accompanying notes are an integral part of these consolidated
balance sheets
F-3
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands, except per share data)
1997 1996 1995
-------- -------- --------
Sales:
Collectibles....................................... $ 63,846 $ 40,904 $ 23,443
Apparel and souvenirs .............................. 60,430 1,961 1,190
Promotional ........................................ 5,085 1,351 --
Other .............................................. 1,019 -- 1,498
-------- -------- --------
Net sales ........................................ 130,380 44,216 26,131
Cost of sales ........................................ 80,995 25,296 15,882
-------- -------- --------
Gross profit ......................................... 49,385 18,920 10,249
Operating expenses:
Selling, general and
administrative expenses .......................... 24,564 9,262 6,115
Settlement costs ................................... 5,400 -- --
Amortization of goodwill and
other intangibles ................................ 1,286 4 4
-------- -------- --------
Total operating expenses ......................... 31,250 9,266 6,119
-------- -------- --------
Income from operations ............................... 18,135 9,654 4,130
Other income (expense):
Interest income and other, net ..................... 796 296 208
Interest expense ................................... (2,021) (80) (184)
-------- -------- --------
Total other income (expense) ..................... (1,225) 216 24
-------- -------- --------
Income before provision for
income taxes ....................................... 16,910 9,870 4,154
Provision for income taxes ........................... 6,764 3,917 1,384
-------- -------- --------
NET INCOME........................................... $ 10,146 $ 5,953 $ 2,770
======== ======== ========
NET INCOME PER COMMON SHARE:
Primary ............................................ $ 0.69 $ 0.46 $ 0.27
======== ======== ========
Fully diluted ...................................... $ 0.69 $ 0.46 $ 0.25
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary ............................................ 14,624 13,028 10,116
======== ======== ========
Fully diluted ...................................... 14,671 13,069 11,570
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands, except share data)
Convertible
Common Stock Preferred Stock Common
------------------------- --------------------- Stock
Shares Amount Shares Amount Subscribed
---------- ---------- ---------- ------ ----------
BALANCE, September 30, 1994 .................... 7,873,846 $ 79 -- $-- $ 125
Common stock issued upon
conversion of debentures ..................... 1,485,676 15 -- -- --
Issuance of convertible preferred stock ........ -- -- 500 -- --
Common Stock issued under consulting agreement . 200,000 2 -- -- --
Common stock issued for common stock subscribed 100,000 1 -- -- (125)
Common stock issued upon exercise
of options ................................... 541,000 5 -- -- --
Tax benefit from stock options ................. -- -- -- -- --
Redemption of warrants ......................... -- -- -- -- --
Common stock issued upon exercise of warrants .. 1,020,886 10 -- -- --
Net income ..................................... -- -- -- -- --
---------- ---------- ---------- ---- -------
BALANCE, September 30, 1995 .................... 11,221,408 $ 112 500 $-- $--
---------- ---------- ---------- ---- -------
Common stock issued upon conversion
of convertible preferred stock ............... 1,000,000 10 (500) -- --
Common stock issued upon exercise
of options ................................... 239,247 2 -- -- --
Tax benefit from stock options ................. -- -- -- -- --
Common stock issued upon exercise of warrants .. 149,114 2 -- -- --
Net income ..................................... -- -- -- -- --
---------- ---------- ---------- ---- -------
BALANCE, September 30, 1996 .................... 12,609,769 $ 126 -- $-- $--
---------- ---------- ---------- ---- -------
Common stock issued in conjunction with
purchase of businesses ....................... 765,542 8 -- -- --
Common stock issued upon exercise
of options ................................... 296,092 3 -- -- --
Common stock issued in public offering ......... 2,085,000 21 -- -- --
Tax benefit from stock options ................. -- -- -- -- --
Issuance of common stock in private placements . 195,680 2 -- -- --
Net income ..................................... -- -- -- -- --
---------- ---------- ---------- ---- -------
BALANCE, September 30, 1997 .................... 15,952,083 $ 160 -- $-- $--
========== ========== ========== ==== =======
(Accumulated
Additional Deficit)
Paid-In Retained
Capital Earnings Total
---------- --------- ---------
BALANCE, September 30, 1994 .................... $ 7,549 $ (844) $ 6,909
Common stock issued upon
conversion of debentures ..................... 2,433 -- 2,448
Issuance of convertible preferred stock ........ 2,000 -- 2,000
Common Stock issued under consulting agreement . 248 -- 250
Common stock issued for common stock subscribed 124 -- --
Common stock issued upon exercise
of options ................................... 1,275 -- 1,280
Tax benefit from stock options ................. 716 -- 716
Redemption of warrants ......................... (404) -- (404)
Common stock issued upon exercise of warrants .. 2,911 -- 2,921
Net income ..................................... -- 2,770 2,770
--------- --------- ---------
BALANCE, September 30, 1995 .................... $ 16,852 $ 1,926 $ 18,890
--------- --------- ---------
Common stock issued upon conversion
of convertible preferred stock ............... (10) -- --
Common stock issued upon exercise
of options ................................... 801 -- 803
Tax benefit from stock options ................. 838 -- 838
Common stock issued upon exercise of warrants .. 510 -- 512
Net income ..................................... -- 5,953 5,953
--------- --------- ---------
BALANCE, September 30, 1996 .................... $ 18,991 $ 7,879 $ 26,996
--------- --------- ---------
Common stock issued in conjunction with
purchase of businesses ....................... 10,041 -- 10,049
Common stock issued upon exercise
of options ................................... 1,708 -- 1,711
Common stock issued in public offering ......... 49,822 -- 49,843
Tax benefit from stock options ................. 1,651 -- 1,651
Issuance of common stock in private placements . 2,771 -- 2,773
Net income ..................................... -- 10,146 10,146
--------- --------- ---------
BALANCE, September 30, 1997 .................... $ 84,984 $ 18,025 $ 103,169
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
-------- -------- --------
Cash Flows from Operating Activities:
Net income ................................... $ 10,146 $ 5,953 $ 2,770
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............. 4,477 1,692 906
Change in assets and liabilities, net of
businesses acquired:
Accounts receivable ...................... (3,623) (3,440) (1,400)
Inventories .............................. (5,009) (3,143) (701)
Prepaid royalties ........................ (2,672) (1,186) (471)
Prepaid expenses and other assets ........ (665) 922 (441)
Accounts payable ......................... (1,633) 565 859
Accrued royalties ........................ 2,395 320 (81)
Accrued expenses and other ............... 917 (823) 1,535
-------- -------- --------
Net cash provided by operating activities 4,333 860 2,976
Cash Flows from Investing Activities:
Purchase of property and equipment ......... (11,192) (3,879) (3,024)
Proceeds from sale of equipment ............ 321 -- 150
Acquisition of businesses, less
cash acquired ............................. (11,082) -- --
-------- -------- --------
Net cash used in investing activities .... (21,953) (3,879) (2,874)
Cash Flows from Financing Activities:
Borrowings on line of credit ............... 4,879 5,222 2,895
Payments on line of credit ................. (10,279) (5,222) (2,895)
Net proceeds from issuance of common stock,
stock options, and warrants ............... 54,327 1,315 3,767
Issuance of convertible preferred stock .... -- -- 2,000
Payments on long-term debt ................. (6,972) (105) (312)
Collections on notes receivable ............ -- 32 69
-------- -------- --------
Net cash provided by financing activities . 41,955 1,242 5,524
-------- -------- --------
Net change in cash and cash equivalents .... 24,335 (1,777) 5,626
Cash and cash equivalents,
beginning of year ......................... 4,983 6,760 1,134
-------- -------- --------
Cash and cash equivalents, end of year ..... $ 29,318 $ 4,983 $ 6,760
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996, and 1995
(1) THE COMPANY
Operations
Action Performance Companies, Inc. (the "Company") designs and markets licensed
motorsports products, including die-cast scaled replicas of motorsports
vehicles, apparel, and souvenirs. The Company also develops promotional programs
for sponsors of motorsports that feature the Company's die-cast replicas or
other products and are intended to increase brand awareness of the products or
services of the corporate sponsors. In addition, the Company represents popular
race car drivers in a broad range of licensing and other revenue-producing
opportunities, including product licenses, corporate sponsorships, endorsement
contracts, and speaking engagements. The Company's motorsports collectibles and
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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Certain reclassifications have been made in prior period financial statements to
conform to the current presentation.
Revenue Recognition
The Company recognizes revenue upon shipment. Customer deposits received in
advance of delivery are deferred and recognized when the related product is
shipped.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. The carrying amounts of long-term debt and amounts outstanding
under the Company's line of credit approximate fair value based on current
market prices for similar debt instruments and bank lines of credit. Fair value
estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
F-7
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market, and consist of the following at September 30, 1997 and 1996 (in
thousands):
1997 1996
------- -------
Purchased components ................. $ 2,418 $ 262
Finished goods ....................... 15,437 5,572
------- -------
$17,855 $ 5,834
======= =======
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to ten years.
Property and equipment consist of the following at September 30, 1997 and 1996
(in thousands):
1997 1996
-------- --------
Tooling and molds ........................ $ 15,237 $ 8,190
Furniture, fixtures and equipment ........ 6,667 2,501
Autos and trucks ......................... 2,578 342
Leasehold improvements ................... 2,066 518
-------- --------
26,548 11,551
Less - accumulated depreciation .......... (6,531) (3,363)
-------- --------
$ 20,017 $ 8,188
======== ========
Property and equipment includes assets acquired under capital leases of
approximately $1.9 million and $300,000 at September 30, 1997 and 1996,
respectively.
Maintenance and repairs of approximately $277,000, $64,000 and $55,000 for the
years ended September 30, 1997, 1996 and 1995, respectively, were charged to
expense as incurred. The cost of renewals and betterments that materially extend
the useful lives of assets or increase their productivity are capitalized.
Goodwill and Other Intangibles
Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations and is amortized on the straight-line method over
twenty-five years. Other intangibles are amortized on the straight-line method
over their estimated useful lives, which ranges from fifteen to twenty-five
years. The Company continually evaluates whether later events and circumstances
have occurred, subsequent to acquisition, that indicate the remaining estimated
useful lives of intangible assets may warrant revision or that the remaining
balance may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from an asset to be held and used in
operations is less than the carrying value of the asset, an impairment loss must
be recognized in the amount of the difference between the carrying value and the
fair value. Amortization expense of $1.3 million, $4,000, and $4,000 is included
in selling, general and administrative expenses for the years ended September
30, 1997, 1996 and 1995, respectively. Accumulated amortization of goodwill and
other intangibles was approximately $1.3 million and $10,000 as of September 30,
1997 and 1996, respectively.
License Agreements
Royalties paid under various licensing agreements are recorded as expense at the
time the related sales are made.
F-8
Supplemental Cash Flow Information
The supplemental cash flow disclosures and non-cash transactions for the years
ended September 30, 1997, 1996, and 1995 are as follows (in thousands):
1997 1996 1995
------- ------- -------
Supplemental disclosures:
Interest paid ............................... $ 1,505 $ 79 $ 268
Income taxes paid ........................... 5,396 3,992 42
Non-cash transactions:
Common stock issued in acquisitions ......... $10,049 $ -- $ --
Debt and liabilities incurred or
assumed in acquisitions ................... 44,446 -- --
Acquisition of property and equipment
under capital leases ...................... 1,402 233 338
Tax benefits on various common
stock options ............................. 1,651 838 --
Conversion of debentures .................... -- -- 2,600
Common stock issued for common
stock subscribed .......................... -- -- 125
Sale of equipment for note receivable ....... 446 -- --
Net Income Per Common Share
Net income per common share is computed based on the weighted average number of
common shares and common share equivalents outstanding using the treasury stock
method, except when common share equivalents have an antidilutive effect. All
share amounts and per share data have been restated to reflect the two-for-one
stock split effected as a stock dividend on May 28, 1996. The calculation of
fully diluted net income per common share includes adjustments for interest
expense and equivalent shares related to the 10% Convertible Subordinated
Debentures, if dilutive. The calculation of fully diluted net income per common
share for the years ended September 30, 1997, 1996, and 1995 are as follows (in
thousands, except per share data):
1997 1996 1995
------- ------- -------
Shares:
Weighted average number of common
shares outstanding .......................... 14,047 11,789 9,087
Additional shares assuming conversion of:
Stock options ............................... 624 573 601
Warrants .................................... -- 40 598
Convertible debentures ...................... -- -- 784
Preferred stock ............................. -- 667 500
------- ------- -------
Weighted average shares outstanding ........... 14,671 13,069 11,570
======= ======= =======
Net income .................................... $10,146 $ 5,953 $ 2,770
Add:
Interest expense on convertible
debentures (assuming conversion) .......... -- -- 101
------- ------- -------
Net income attributable to fully diluted
weighted average shares outstanding ......... $10,146 $ 5,953 $ 2,871
======= ======= =======
Fully diluted earnings per share .............. $ 0.69 $ 0.46 $ 0.25
======= ======= =======
F-9
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," was issued by the Financial Accounting Standards Board in March 1995, and
adopted by the Company during the year ended September 30, 1997. The adoption of
SFAS No. 121 did not impact the Company's financial position or results of
operations.
Effective October 1, 1996, the Company adopted the disclosure option of SFAS No.
123, "Accounting for Stock-based Compensation." As permitted by SFAS No. 123,
the Company has not changed to the fair value method of accounting for
stock-based compensation and will continue to use Accounting Principles Board
Opinion No. 25 for measurement and recognition of stock-based transactions. SFAS
No. 123 requires companies that do not choose to account for stock-based
compensation as prescribed by the statement to disclose the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted. See Note
11.
Accounting Pronouncements Not Yet Required to be Adopted
In fiscal 1998, the Company will be required to adopt SFAS No. 128, "Earnings
per Share," issued by the Financial Accounting Standards Board. Upon adoption of
SFAS No. 128, the Company will present basic earnings per share and diluted
earnings per share. Basic earnings per share will be computed based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share will be computed based on the weighted average number of
shares outstanding during the period, increased by the effect of stock options,
warrants, and other dilutive securities using the treasury stock method. The
adoption of SFAS No. 128 is not expected to have a material effect on the
Company's financial statements.
In fiscal 1998, the Company will be required to adopt SFAS No. 130, "Reporting
Comprehensive Income," issued by the Financial Accounting Standards Board. SFAS
No. 130, establishes standards for reporting and display of comprehensive income
and its components in an entity's financial statements. The objective of SFAS
No. 130 is to give the effect of all changes in the equity of an enterprise that
result from transactions and other economic events of the period. Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS No. 130 does not address issues of recognition or measurement for
comprehensive income and its components. As a result, SFAS No. 130 will not have
an impact on the financial condition or results of operation of the Company upon
adoption.
(3) ACQUISITIONS AND DISPOSALS
Disposition of Mini Vehicle Assets
In March 1995, the Company sold certain of its assets related to its mini
vehicle product line to Motorsports Promotions, Inc. ("MPI"), an unrelated
company. The assets sold consisted primarily of accounts receivable, inventory,
tooling, and equipment. The purchase agreement provided for total consideration
of $1,324,712, consisting of $237,567 in cash, assumed liabilities of $52,891,
and a promissory note of $1,034,254, subject to certain adjustments. Effective
November 1995, the Company and MPI agreed to adjust the total consideration to
be paid by MPI to $1,051,646. The Company recorded a non-operating gain of
approximately $290,000 on this transaction in the second quarter of fiscal 1995.
As a result of the purchase price adjustment described above, the Company
reduced the gain such that no gain or loss was recorded on this transaction for
fiscal 1995. During 1997, the Company exchanged its promissory note for an
equity position in MPI. No gain or loss was recorded on the transaction.
Acquisition of Sports Image, Inc.
In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image, Inc.("Sports Image"). The purchase
price was approximately $30,000,000, consisting of a $24,000,000 promissory note
due January 2, 1997 and 403,361 shares of the Company's Common Stock valued at
$12.10 per share. On January 2, 1997, the Company repaid the $24,000,000
promissory note with the proceeds from the issuance of senior notes and a
portion of the borrowings under the Company's new credit facility. See Note 4.
Sports Image sells and distributes a variety of licensed motorsports products
through wholesale distributor networks, corporate sponsors, and mobile trackside
stores. In fiscal 1996, the Company derived 16% of its net
F-10
sales from Sports Image, a distributor of the Company's die-cast collectible
products. Sports Image had sales of approximately $41,800,000 of apparel,
die-cast replicas, souvenirs, and other motorsports consumer products during the
period from January 1, 1996 to November 7, 1996 (which includes sales of
die-cast collectibles purchased from the Company at an aggregate cost of
approximately $5,800,000). This transaction was accounted for as a purchase.
Acquisitions of Motorsport Traditions Limited Partnership and Creative Marketing
& Promotions, Inc.
On January 8, 1997, the Company acquired the business and substantially all of
the assets and assumed certain liabilities of Creative Marketing & Promotions,
Inc. and Motorsport Traditions Limited Partnership (collectively "Motorsport
Traditions") from 1995 Nascar Winston Cup Champion driver Jeff Gordon, Kenneth
R. Barbee, certain entities controlled by Mr. Barbee, and certain other persons.
The effective date of the acquisition of Motorsport Traditions was January 1,
1997. The purchase price paid by the Company for Motorsport Traditions consisted
of (i) cash in the amount of $5,400,000; (ii) a promissory note in the principal
amount of $1,600,000 issued by a wholly owned subsidiary of the Company; and
(iii) an aggregate of 342,857 shares of the Company's Common Stock valued at
$13.80 per share. The promissory note bears interest at 4% per annum, matures on
December 31, 1998, and has been guaranteed by the Company. Motorsport Traditions
sells and distributes licensed motorsports products through a network of
wholesale distributors and mobile trackside stores. Prior to the acquisitions,
Motorsport Traditions generated approximately $33,000,000 in annual revenue from
its design, manufacturing, and sales and distribution activities. This
transaction was accounted for as a purchase.
Acquisition of Robert Yates Promotions, Inc.
In July 1997, the Company acquired all of the outstanding common stock of Robert
Yates Promotions, Inc. ("RYP") for $5.7 million in cash. RYP sells licensed
motorsports products through trackside trailers, and generated approximately
$5.0 million in revenue during calendar year 1996. Concurrent with the
acquisition of RYP, the Company entered into a 15-year license agreement with
Robert Yates Racing, Inc. ("Yates Racing"). Pursuant to the license agreement,
the Company will pay royalties for the use of certain trademark rights
associated with Yates Racing Nascar Winston Cup teams. This transaction was
accounted for as a purchase. RYP is a defendant in certain litigation. The
purchase price is preliminary with respect to such litigation. See Note 10.
Acquisition of Image Works, Inc.
In July 1997, the Company acquired substantially all of the assets and assumed
certain liabilities of Image Works, Inc. ("Image Works"). The Company paid $4.25
million in cash and issued a three-year promissory note 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 $22.0 million in
revenue during calendar year 1996. This transaction was accounted for as a
purchase.
Acquisition of Simpson Products, Inc.
In August 1997, the Company acquired certain assets and assumed certain
liabilities related to the licensed mini-helmet collectible business of Simpson
Products, Inc. ("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. This transaction was accounted for as a purchase.
F-11
Unaudited Pro Forma Statements of Operations
The following unaudited pro forma combined statements of operations data for the
years ended September 30, 1997 and 1996 present the results of operations of the
Company as if the acquisitions of the businesses acquired during fiscal 1997 had
occurred as of October 1, 1995. Pro forma results are as follows (in thousands,
except per share data):
1997 1996
-------- --------
Revenues .............................. $158,977 $137,930
Net income ............................ 9,338 8,419
Net income per common share ........... $ 0.63* $ 0.61
* Includes a one time charge of $5.4 million, or $0.22 per share, for
legal settlement costs.
(4) FINANCING ACTIVITIES
Long-term debt at September 30, 1997 and 1996 consists of the following (in
thousands):
1997 1996
-------- --------
Senior notes, interest at 8.05% payable semi-
annually, principal payable January 1999, secured
by assets of certain subsidiaries ....................... $ 20,000 $ --
Note payable to an individual, principal and interest
at 4% payable monthly through December 31, 1998,
unsecured ............................................... 988 --
Note payable to an individual, interest imputed at
8%, payable annually through November 2000,
unsecured ............................................... 644 --
Note payable to an individual, interest imputed at
8%, payable in equal installments through 2011,
unsecured ............................................... 565 --
Obligations under capital leases of vehicles and
equipment, interest from 8.0% to 9.5%, payable monthly .. 1,863 482
-------- --------
Total ................................................... 24,060 482
Less: current portion .................................. (1,474) (117)
-------- --------
$ 22,586 $ 365
======== ========
Credit Facility
On January 2, 1997, the Company entered into a $16.0 million credit facility
(the "Credit Facility") with First Union National Bank of North Carolina. The
Credit Facility consists of a revolving line of credit for up to $10.0 million
through September 30, 1997, and up to $6.0 million from September 30, 1997 to
March 31, 1998 (the "Line of Credit") and a $6.0 million letter of
credit/bankers' acceptances facility (the "Letter of Credit/BA Facility"). The
Line of Credit bears interest, at the Company's option, at a rate equal to
either (i) the greater of (a) the bank's publicly announced prime rate or (b) a
weighted average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line
of Credit is guaranteed by Sports Image and Motorsport Traditions. The Company
utilized $4.0 million of the Line of Credit to provide part of the cash portion
of the purchase price for Motorsport Traditions and an additional $4.0 million
of the Line of Credit to repay a portion of the $24.0 million promissory note
issued in connection with the acquisition of Sports Image. The Company utilized
a portion of the proceeds of the June 1997 public offering described in Note 5
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, as amended in April
F-12
1997, 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.
Debt Covenants
The Company's senior notes and Credit Facility agreements contain certain
provisions that, among other things, require the Company to comply with certain
financial ratios and net worth requirements and will limit the ability of the
Company and its subsidiaries to incur additional indebtedness or to sell assets
or engage in certain mergers or consolidations. In addition, the terms of the
Credit Facility limit the Company's ability to pay dividends without the consent
of the Company's lender. At September 30, 1997, the Company was in compliance
with all such covenants.
Future Maturities of Long-Term Debt
Aggregate future maturities of long-term debt are as follows (in thousands):
Year Ended
September 30,
-------------
1998 $ 1,474
1999 20,843
2000 666
2001 347
2002 310
Thereafter 420
-------
Total $24,060
=======
(5) SHAREHOLDERS' EQUITY
All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996.
10% Convertible Subordinated Debentures
During the year ended September 30, 1995, the Company issued 1,485,676 shares of
Common Stock upon conversion of an aggregate of $2.6 million of principal amount
of 10% Convertible Subordinated Debentures (the "Debentures"), at a conversion
price of $1.75 per share, including 1,014,272 shares issued upon conversion of
an aggregate of $1,775,000 of principal amount of the Debentures that were
outstanding in April 1995 when the Company announced that it would redeem all of
the Debentures that remained outstanding on May 31, 1995, pursuant to the terms
of the Debentures.
Convertible Preferred Stock
In March 1995, the Company completed the sale of 500 shares of Class A
Convertible Preferred Stock (the "Preferred Stock") to an affiliate of its
principal manufacturer of die-cast collectibles, for a purchase price of $2.0
million. The sale was effected primarily as a long-term strategic transaction
intended to align the interests of the manufacturer with those of the Company.
The shares were converted into an aggregate of 1,000,000 shares of Common Stock
during May 1996.
Redemption of Warrants
On May 31, 1995, the Company redeemed warrants to purchase an aggregate of
1,614,731 shares of its Common Stock. The redemption price was $.25 per warrant,
or an aggregate payment of $403,683, pursuant to the terms of such warrants.
Prior to the redemption, each warrant entitled the holder to purchase two shares
of the Company's Common Stock at an exercise price of $3.75 per share. Certain
holders of such warrants exercised warrants to purchase an aggregate of 163,670
shares of Common Stock prior to the redemption, resulting in total proceeds to
the Company of approximately $613,000.
F-13
Issuance of Stock in Private Placements
In January 1997, the Company sold 187,500 shares of Common Stock to Hasbro, Inc.
at a price of $14.50 per share, with net proceeds to the Company of
approximately $2.6 million. In August 1997, the Company issued (i) 8,180 shares
of Common Stock valued at $23.02 per share to Dale Jarrett in connection with a
three-year personal services contract, and (ii) 19,324 shares of Common Stock
valued at $22.59 to E.J. Simpson as a portion of the license fee pursuant to a
license agreement.
1997 Public Offering
On June 24, 1997, the Company sold 1,770,000 shares of its Common Stock in
connection with an underwritten public offering. On July 17, 1997, the Company
sold an additional 315,000 shares of its Common Stock 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.
Stock Options
Under the Company's 1993 Stock Option Plan (the "Plan"), the Board of Directors
may from time to time grant to key employees, consultants, and independent
contractors who provide valuable services to the Company (i) incentive stock
options and non-statutory stock options to purchase shares of the Company's
Common Stock, (ii) stock appreciation rights, (iii) shares of the Company's
Common Stock, or (iv) cash awards. The Plan also includes an automatic program
providing for automatic grants of stock options to non-employee directors of the
Company. The exercise price for all incentive stock options granted under the
Plan may not be less than the fair market value of the Company's Common Stock on
the date of the grant, except that the option price may not be less than 110% of
the fair market value of the Company's Common Stock on the date of the grant in
the case of incentive stock options granted to any person possessing more than
10% of the combined voting power of the Company's Common Stock or any parent or
subsidiary corporation. In the case of non-statutory stock options, the exercise
price may not be less than 85% of the fair market value of the Company's Common
Stock on the date of the grant. Options granted under the Plan generally have a
six-year term. Options that were granted prior to July 1995 are fully vested and
exercisable. The option agreements for options granted beginning in July 1995
generally provide that one-third of the options vest and become exercisable on
each of the first, second, and third anniversaries of the date of grant. A total
of 2,750,000 shares of Common Stock may be issued pursuant to the Plan. The Plan
expires in 2001.
(6) RELATED PARTY TRANSACTIONS
The Company currently leases a building in Tempe, Arizona, containing
approximately 46,000 square feet, which the Company utilized for its corporate,
administrative, sales offices, and warehouse facilities prior to September 1997.
Fred W. Wagenhals, a shareholder and officer of the Company, currently owns a
one-third interest in F.W. Investments, a partnership that owns this facility.
The Company paid F.W. Investments rent of approximately $183,000, $177,000, and
$177,000 for the years ended September 30, 1997, 1996, and 1995 respectively.
The Company is currently marketing the property for a sub-lease arrangement with
unaffiliated third parties.
(7) EMPLOYEE BENEFIT PLANS
In October 1994, the Company established a defined contribution plan that
qualifies as a cash or deferred profit sharing plan under Sections 401(a) and
401(k) of the Internal Revenue Code. The plan is available to substantially all
domestic employees. Under the plan, participating employees may defer from 1% to
15% of their pre-tax compensation. The Company contributes fifty cents for each
dollar contributed by the employee, with a maximum contribution of 2% of the
employee's defined compensation. In addition, the plan provides for an annual
employer profit sharing contribution in such amounts as the Board of Directors
may determine. The
F-14
Company expensed approximately $41,000 under the plan for the year ended
September 30, 1997 and $26,000 in each of the years ended September 30, 1996 and
1995.
The Company has no other programs that require payment by the Company of
post-employment benefits to current or retired employees.
(8) INCOME TAXES
The Company provides for income taxes under SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities and the tax rates in effect when these differences are expected
to reverse. The principal differences arise as a result of the use of
accelerated depreciation and amortization methods for federal income tax
reporting purposes, certain inventory costs required to be capitalized for tax
purposes, certain reserves expensed currently for financial reporting purposes,
and compensation not yet deductible for tax purposes.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. The
ultimate realization of this deferred tax asset depends on the Company's ability
to generate sufficient taxable income in the future. A valuation allowance has
not been recorded as of September 30, 1997.
Net operating loss carryovers for federal income tax purposes of approximately
$856,000 at September 30, 1994, were fully utilized in the year ended September
30, 1995.
The provision for income taxes consists of the following for the years ended
September 30 (in thousands):
1997 1996 1995
------- ------- -------
Current, net of operating loss carryover:
Federal ............................... $ 5,828 $ 3,258 $ 1,050
State ................................. 822 753 275
------- ------- -------
6,650 4,011 1,325
Deferred income taxes ..................... 114 (94) 13
Utilization of net operating loss
carryforward ............................ -- -- 340
Change in valuation allowance ............. -- -- (294)
------- ------- -------
Provision for income taxes ................ $ 6,764 $ 3,917 $ 1,384
======= ======= =======
Reconciliation of the federal income tax rate to the Company's effective rate
for the years ended September 30 are as follows:
1997 1996 1995
------ ------ ------
Statutory federal rate .................... 35.00% 34.00% 34.00%
State taxes, net of federal benefit ....... 4.65% 5.03% 5.53%
Non-deductible expense .................... .35% .66% 0.86%
Change in valuation reserve ............... -- -- (7.06%)
------ ------ ------
40.00% 39.69% 33.33%
====== ====== ======
F-15
The components of deferred taxes are as follows at September 30 (in thousands):
1997 1996
------- -------
Deferred tax assets (liabilities):
Accelerated tax depreciation ............. $ (391) $ (216)
Accelerated tax amortization ............. (306) --
Inventory cost capitalization ............ 547 156
Vacation accrual ......................... 27 13
Valuation reserves ....................... 794 197
Deferred compensation .................... 247 882
------- -------
Net deferred tax asset ................. $ 918 $ 1,032
======= =======
(9) LEGAL SETTLEMENT
In June 1997, the Company agreed to settle a breach of contract suit with Action
Products, Inc. for $4.9 million (the "API Settlement"). Pursuant to the API
Settlement, in July 1997 the Company made a payment of $4.9 million to the
plaintiff, and all parties executed mutual releases. The accompanying financial
statements include a charge of $5.4 million for the API Settlement and related
legal fees.
(10) COMMITMENTS AND CONTINGENCIES
On May 17, 1993, the State of Arizona (the "State") instituted a lawsuit against
the Company and 29 other defendants in the United States District Court for the
District of Arizona. The State seeks recovery of certain clean-up costs under
federal and state environmental laws. Specifically, the State seeks recovery of
expenses that it has incurred to date for an environmental investigation and
clean-up of property formerly used as a site for recycling hazardous wastes. The
State alleges that the property has been contaminated with hazardous substances.
In addition, the State seeks a declaratory judgment that the Company and the
other defendants are jointly and severally liable for all future costs incurred
by the State for investigative and remedial activities, and seeks a mandatory
permanent injunction requiring the Company to undertake appropriate assessment
and remedial action at the property. The State has not specified the amounts it
seeks to collect from the Company. The State alleges that F. W. Leisure
Industries, Inc. and/or F. W. & Associates, Inc. were predecessors of the
Company that produced and arranged for the transportation of hazardous
substances to the property involved in the lawsuit. The Company is defending
this lawsuit on various bases including that F. W. Leisure Industries, Inc.
and/or F. W. & Associates, Inc. were not predecessors of the Company and that
neither the Company nor any predecessor of the Company has ever produced or
transported hazardous substances as alleged by the State. The State has settled
a portion of its claims with respect to a large number of the other defendants
to the lawsuit. The Company is not a party to that settlement. On February 1,
1995, a number of the defendants that agreed to the settlement with the State
were granted leave to file, and subsequently did file, a cross-claim against the
Company seeking indemnity from the Company based on the same predecessor
liability theory asserted by the State. The parties have conducted discovery
limited to the issue of any defendant's status as a responsible party and
regarding the Company's status as a successor corporation. On March 25, 1997,
the Court ruled that under federal environmental law the Company would be
treated as the successor to F.W. & Associates, Inc., and/or F.W. Leisure
Industries, Inc. The Company may appeal this ruling at the appropriate time.
Discovery is now ongoing with regard to the merits of the underlying
environmental claims and the amount of those claims. Should the Company's
defense prove unsuccessful, the Company currently estimates the potential loss
to be approximately $800,000. No provision with respect to this matter has been
made in the financial statements.
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
F-16
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 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 that 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 in the early stages of discovery.
The Company and Mr. Wagenhals intend to vigorously pursue their counterclaims
and the third-party complaint and to vigorously defend this lawsuit.
The Company leases certain equipment and office space under noncancellable
operating leases. Rent expense related to these lease agreements totaled
approximately $935,000, $437,000 and $352,000 for the fiscal years ended
September 30, 1997, 1996, and 1995 respectively.
F-17
Future lease payments under the noncancellable leases are approximately as
follows (in thousands):
Year Ending
September 30,
-------------
1998 $ 2,286
1999 1,813
2000 1,483
2001 1,124
2002 1,078
Thereafter 4,765
-------
Total $12,549
=======
The Company is subject to certain other asserted and unasserted claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
(11) STOCK OPTION PLAN
The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to the fair value of the Company's
Common Stock on the date of grant (See Note 5 for a general discussion of the
Company's Stock Option Plan). The Company adopted SFAS No. 123 for disclosure
purposes in fiscal 1997. For SFAS No. 123 purposes, the fair value of each
option grant has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rates
ranging between 5.29% and 6.34%; expected life of three years; dividend rate of
0.0%; and expected volatility of 51.88%. Using these assumptions, the fair value
of the stock options granted is $1,614,623 and $908,153 for the years ended
September 30, 1997 and 1996, respectively. These amounts would be amortized as
compensation expense over the vesting period of the options. Options generally
vest equally over three years. Had compensation costs been determined consistent
with SFAS No. 123, utilizing the assumptions detailed above, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
1997 1996
---------- ---------
Net Income:
As Reported ....................... $ 10,146 $ 5,953
Pro Forma ......................... $ 9,305 $ 5,650
Primary EPS:
As Reported ....................... $ 0.69 $ 0.46
Pro Forma ......................... $ 0.64 $ 0.43
Fully Diluted EPS:
As Reported ....................... $ 0.69 $ 0.46
Pro Forma ......................... $ 0.63 $ 0.43
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation cost may
not be representative of that expected in future years.
F-18
A summary of the status of the Company's stock option plan at September 30, 1997
and 1996 and for the years then ended is presented in the table below:
1997 1996 1995
------------------------- ------------------------ ------------------------
Wtd Wtd Wtd
Number Avg Number Avg Number Avg
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------------------------- ------------------------ ------------------------
Outstanding at
beginning of year 1,110,053 $ 4.16 1,111,200 $ 2.90 1,252,000 $ 2.07
Granted ........... 220,250 17.76 240,700 9.28 400,200 $ 4.78
Exercised ......... (296,092) 5.80 (239,247) 3.45 (541,000) $ 2.37
Canceled .......... (1,501) 9.43 (2,600) 5.25 --
--------- --------- --------- -------- --------- --------
Outstanding at
end of year ...... 1,032,710 6.58 1,110,053 4.16 1,111,200 $ 2.90
Options exercisable
at end of year ... 714,950 3.09 881,774 2.91 1,051,000 $ 2.79
Options available
for grant......... 396,951 365,700 103,800
Weighted average
fair value of
options granted... $ 7.33 $ 3.77
Options outstanding and exercisable by price range as of September 30, 1997 are
as follows:
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- --------------------------------- ----------------------
$ 1.25 - $ 5.25 655,010 2.17 $ 2.38 597,723 $ 2.16
$ 6.50 - $10.63 194,950 4.75 9.76 79,483 9.34
$14.88 - $19.50 182,750 5.42 18.25 37,744 15.33
--------- ---- ------ --------- -------
$ 1.25 - $19.50 1,032,710 3.23 $ 6.58 714,950 $ 3.09
========= ==== ====== ========= =======
(12) SUBSEQUENT EVENTS
On October 3, 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 connection
with this agreement, the Company paid RCR a license fee consisting of cash plus
34,940 shares of the Company's Common Stock. The license agreement also requires
the Company to pay to RCR certain minimum annual royalties during the term of
the agreement, plus royalties based on sales of licensed products in each year
during the term of the agreement.
In November 1997, the Company agreed in principle to purchase the assets and to
assume certain liabilities of the motorsport die-cast collectible business of
Revell Monogram, Inc. ("Revell") for approximately $15.0 million in cash. The
proposed transaction will include a ten-year license agreement that will enable
the Company to use certain "Revell" trademarks in connection with sales of
certain die-cast products, as well as other arrangements with respect to
licensing, manufacturing, and distributing various products by both the Company
and Revell. The agreement also includes a minimum contingent payment of $10.0
million over a ten-year period, based upon the attainment of certain future
financial objectives. The acquisition is subject to the completion of due
diligence and the preparation and execution of definitive agreements. Revell's
design and manufacturing activities for motorsport die-cast collectibles
generated approximately $16.2
F-19
million in revenue during calendar year 1996. This transaction will be accounted
for as a purchase.
(13) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT
On December 9, 1997, the Company acquired certain assets and assumed certain
liabilities related to sales of motorsports merchandise licensed by NASCAR
Winston Cup driver Rusty Wallace from an affiliate of Mr. Wallace. The purchase
price paid by the Company for the acquired assets consists of cash of $6.0
million, of which $2.5 million was paid at the closing and the remaining $3.5
million will be paid during fiscal 1998. In connection with the acquisition of
the assets and assumption of the liabilities, the Company entered into a
seven-year license agreement with another affiliate of Mr. Wallace for the name
and likeness of Mr. Wallace and acquired a five-year sublicense with a wholly
owned subsidiary of Penske Motorsports, Inc. The license agreement and
sublicense agreement both contain options that permit the Company to renew for
two five-year terms. The license agreement with the affiliate of Mr. Wallace
requires the Company to pay royalties on sales of licensed products, plus a
license fee if sales of licensed products exceed a specified amount each year
during the initial term of the license. The terms of the transaction were
determined by arms-length negotiations between the respective representatives of
the seller, the sublicensor and its parent, and the Company. This transaction
will be accounted for as a purchase.
F-20