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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended September 30, 2000
Commission file number 0-21630
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ACTION PERFORMANCE COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
ARIZONA 86-0704792
(State of Incorporation) (I.R.S. Employer Identification No.)
4707 E. Baseline Road
Phoenix, Arizona 85040
(602) 337-3700
(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) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark 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. [ ]
The aggregate market value of Common Stock held by nonaffiliates of the
registrant (14,949,611 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 20, 2000, was
$42,008,407. 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 to be an admission that such officers,
directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of December 20, 2000, there were outstanding 16,964,029 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 2001 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.
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ACTION PERFORMANCE COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
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ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 26
ITEM 3. LEGAL PROCEEDINGS.............................................. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 28
ITEM 6. SELECTED FINANCIAL DATA........................................ 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 38
ITEM 11. EXECUTIVE COMPENSATION......................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K............................................................ 38
SIGNATURES ............................................................. 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this report on Form 10-K that are not
purely historical are forward-looking statements within the meaning of
applicable securities laws. Forward-looking statements include statements
regarding our "expectations," "anticipation," "intentions," "beliefs," or
"strategies" regarding the future. Forward-looking statements also include
statements regarding revenue, margins, expenses, and earnings analysis for
fiscal 2001 and thereafter; our strategy to refocus on our core products and
licenses; our product and distribution channel development strategies; the
success of particular product or marketing programs; revenue generated as a
result of licensing arrangements; and liquidity and anticipated cash needs and
availability. All forward-looking statements included in this report are based
on information available to us as of the filing date of this report, and we
assume no obligation to update any such forward-looking statements. Our actual
results could differ materially from the forward-looking statements. Among the
factors that could cause actual results to differ materially are the factors
discussed in Item 1, "Special Considerations."
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are the worldwide leader in the design and sale of licensed
motorsports collectible and consumer products. Our products include die-cast
scaled replicas of motorsports vehicles, apparel (including t-shirts, hats, and
jackets), and souvenirs. We market our products through our U.S., German,
Australian, and United Kingdom subsidiaries under an extensive portfolio of
license arrangements with various drivers, team owners, sponsors, sanctioning
bodies, and others, including the following:
- NASCAR Winston Cup Points champions Dale Earnhardt, Jeff
Gordon, Dale Jarrett, Bobby Labonte, Bill Elliott, and Rusty
Wallace, as well as NASCAR drivers Ricky Rudd, Tony Stewart,
and Dale Earnhardt, Jr.;
- NASCAR team owners Robert Yates Racing, Richard Childress
Racing Enterprises, Joe Gibbs Racing, Evernham Motorsports,
MB2 Motorsports, and Dale Earnhardt, Inc.;
- National Hot Rod Association, or NHRA, champions John Force
and Kenny Bernstein;
- Formula One teams McLaren International Limited, Williams
Grand Prix, and Benetton Formula 1 Ltd.;
- the National Association for Stock Car Auto Racing, or NASCAR,
Indy Racing League, or IRL, and World of Outlaws; and
- race track operators such as Indianapolis Motorspeedway and
Silverstone Circuits Limited.
Third parties manufacture all of our motorsports collectibles and most of our
apparel and souvenirs, generally utilizing our designs, tools, and dies. We
screen print and embroider a portion of the licensed motorsports apparel that we
sell.
We market our products to
- approximately 10,000 specialty retailers throughout the world,
either directly or through our wholesale distributor network;
- to motorsports enthusiasts directly through our Racing
Collectibles Club of America, or Collectors' Club, which is
operated by QVC and which had approximately 171,000 members as
of September 30, 2000; and
- through trackside souvenir stores, promotional programs for
corporate sponsors, and direct response television.
We also distribute certain of our products to mass-market retailers through our
in-house sales force and wholesale distributors. We have a license agreement
with Hasbro, Inc., a multi-billion dollar toy and game manufacturer, under which
Hasbro sells a line of motorsports-related products in the mass-merchandise
market.
Our products and promotional programs capitalize on the popularity of
motorsports. We focus on developing long-term relationships with and we engage
in efforts to license the most popular drivers, team owners, and other
personalities in each top racing category, their sponsors, car manufacturers,
various sanctioning bodies, and others in the motorsports industry. We develop
opportunities to market licensed collectible and consumer products that appeal
to motorsports enthusiasts. We believe that our license agreements with top race
car drivers and other motorsports personalities, teams, and sponsors
significantly enhance the consumer appeal and marketability of our products.
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Historically, our business concentrated on designing and marketing
die-cast collectibles featuring NASCAR Winston Cup drivers and vehicles. Since
1995, we have aggressively expanded our lines of die-cast collectibles to
include replicas of motorsports vehicles from Formula One, NHRA drag racing,
NASCAR's "Busch" and "Craftsman Truck" racing series, CART racing, United States
Auto Club, or USAC racing, World of Outlaws sprint car racing, and motorcycle
racing. Through a series of acquisitions and licensing arrangements between
fiscal 1997 and fiscal 1999, we expanded our product offerings and distribution
channels. During that time period, the motorsports industry experienced a period
of rapid growth, evidenced by increased attendance at racing events, expanded
television coverage of racing events, and growth of speedways in major
metropolitan areas around the nation. Our annual net sales increased 93.2%
during fiscal 1998 and 36.0% during fiscal 1999. Growth in the motorsports
industry has slowed during fiscal 2000.
During fiscal 2000, our net sales decreased 25.6% from fiscal 1999 as a
result of industry conditions, reduced promotional activity and marketing
programs, delays in product deliveries, and reduced product offerings due to our
refocus on our core products. As a result of these conditions and non-recurring
charges arising from our continuing restructuring efforts related to achieving
cost reductions and other strategic corporate decisions, we incurred a net loss
of $58.1 million. Through management changes and analysis of our business and
financial condition, we are attempting to return our company to profitability
based on our strategic direction and execution of our operating plan. During
the next several fiscal quarters, we will focus on the core activities that have
historically produced strong sales and profits.
We continue to pursue a strategy designed to enhance our leadership
position in the motorsports collectible and consumer products industry. Key
aspects of this strategy include (a) focusing on our core licensed motorsports
products that appeal to racing enthusiasts, (b) focusing on products that we can
market under our key existing licensing arrangements, (c) developing promotional
programs for corporate sponsors, and (d) strengthening and developing our
existing distribution channels.
Our company was incorporated in Arizona in 1992. Our principal
executive offices are located at 4707 East Baseline Road, Phoenix, Arizona
85040, and our telephone number is (602) 337-3700. All references to our
business operations in this report include the operations of Action Performance
Companies, Inc. and our subsidiaries and operating divisions.
OUR BUSINESS
INDUSTRY OVERVIEW
Motorsports racing consists of several distinct segments, each with its
own organizing bodies and events. The largest segment in the United States, in
terms of attendance and media exposure, is stock car racing, which is dominated
by NASCAR. The other principal segments in the United States are
- drag racing, with NHRA the most prominent organizing body;
- open wheel racing, controlled by Championship Auto Racing
Teams, or CART, and the IRL;
- dirt track racing, which includes the World of Outlaws and
USAC;
- sports car racing, which includes the United States Road
Racing Championship and the American Le Mans Series; and
- motorcycle racing, which includes the American Motorcycle
Association.
Internationally, the Federation Internationale de l'Automobile governs
the Formula One Grand Prix championship as well as Formula 3000, GT, World Rally
Championships, and other popular motorsports series. Formula One racing uses
handcrafted, open-wheeled cars that look similar to Indy racers, but are the
most technologically advanced and expensive racing vehicles in the world. The
Federation Internationale de Motocyclisme governs the World Championship Grand
Prix, Superbike World Championship, and other motorcycle racing events
throughout the world.
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Millions of racing fans attend racing events in North America or tune
in to televised racing events each year. Motorsports television coverage
currently is provided by broadcast and cable television networks, including NBC,
ABC, CBS, ESPN, TBS, TNN, and Speedvision, a motorsports cable network, in
addition to regional sports networks. In November 1999, NASCAR entered into a
six-year contract valued at more than $400 million per year with NBC, Fox, and
TBS for broadcast coverage of NASCAR Winston Cup races beginning in 2001.
Internationally, Formula One events are broadcast worldwide to approximately 130
countries.
Since 1996, new speedways have been opened in the Los Angeles,
Dallas/Ft. Worth, Las Vegas, Kansas City, and Chicago metropolitan areas.
Additional speedways have been announced for the New York and Denver
metropolitan areas. These new speedways are bringing NASCAR, CART, and other
major motorsports events to new geographic markets with much larger population
bases than many of the traditional NASCAR venues located in the southeastern
United States.
STRATEGY
We pursue a strategy designed to continue our leadership position in
the motorsports collectible and consumer products industry and to provide top
race car drivers and other licensors with a broad range of revenue-producing
opportunities. Key aspects of this strategy include the
following:
Focusing on Core Licensed Motorsports Products
We intend to focus our sales efforts on products that historically have
been popular with motorsports enthusiasts. These products include the
traditional die-cast collectibles and licensed motorsports apparel. We
participate in the retail mass-merchandise market through a license agreement
with Hasbro, under which Hasbro manufactures and markets, with our assistance, a
line of motorsports products that do not compete with our core products.
Historically, we have invested substantial resources in tooling each
year. These investments enable us to produce die-cast products of high quality
and with great detail. Our strategy to refocus on our core products will allow
us to stabilize our annual investments in tooling.
Focusing on Existing Licensing Arrangements
We intend to focus on relationships with existing licensors in order to
further our position as the leader in the motorsports marketplace. We currently
have licensing arrangements with several of the top race car drivers (including
Dale Earnhardt, Jeff Gordon, Rusty Wallace, Dale Jarrett, John Force, Tony
Stewart, Bobby Labonte, and Al Unser, Jr.), car owners, manufacturers,
sanctioning bodies, race track operators, and corporate sponsors. These
licensing arrangements enable us to manufacture and distribute distinctive
collectibles and other products to motorsports enthusiasts. We believe that
these relationships provide us with a competitive advantage.
Developing Promotional Programs
We plan to continue to provide marketing services to create
promotional programs. Promotional programs typically involve special productions
of our licensed die-cast replicas, apparel, souvenirs, or other consumer
products. We have successfully completed large-scale promotional programs
featuring Coca-Cola, Pepsi-Cola, Harley Davidson motorcycles, Home Depot in
partnership with Habitat for Humanity, Major League Baseball, Universal Studios,
and United Parcel Service. We plan to expand our efforts to develop promotional
programs, including those with major corporate sponsors. Programs with corporate
sponsors are intended to increase brand awareness and name recognition of the
corporate sponsor.
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Strengthening Our Existing Distribution Channels
We plan to continue to strengthen our existing distribution channels.
In addition to our wholesale distribution network and direct sales to
motorsports enthusiasts through our Collectors' Club, our distribution channels
include
- trackside souvenir stores,
- direct response television through our agreement with QVC,
- direct sales to corporate sponsors and race track operators,
- mass merchandising channels for our licensed motorsports
apparel and other products through large retailers, such as
Wal-Mart and K-Mart, and
- catalog merchandising programs targeted at corporate
motorsports sponsors.
We believe that targeting products to specific market niches,
distributing our products through the distribution channels of major corporate
sponsors of motorsports, and expanding our distribution of products in
international markets will represent increasingly important distribution
channels in the future.
PRODUCTS AND SERVICES
Die-Cast Scaled Replica Vehicles
We design and market scaled replicas of motorsports-related vehicles
that are constructed using die-cast bodies and chassis with free-spinning wheels
and tires. We design our die-cast replicas as high-quality collectible items and
not as toys. We market our die-cast racing collectibles under approximately 300
active licenses with race car drivers, team owners, and sponsors as well as
under license agreements with NASCAR, IRL, Ford Motor Company, several divisions
of General Motors Corp., and others. The die-cast collectibles that we offer
relate to NASCAR Winston Cup, "Busch," and "Craftsman Truck" racing series;
Formula One; NHRA drag racing; GT and other sports car racing; USAC racing; and
"World of Outlaws" sprint car racing. We also produce die-cast replicas of
certain factory production cars. Our die-cast collectibles consist primarily of
the following:
SCALE PRODUCT APPROXIMATE SIZE
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1:12 Racing Vehicles 15 inches
1:16 Pit Wagons 7 inches
1:18 Racing Vehicles 11 inches
1:24 and 1:25 Racing Vehicles 8 inches
1:24 and 1:25 Dually Trucks with Trailers 26 inches
1:32 Racing Vehicles 6 inches
1:43 Racing Vehicles and Production Cars 5 inches
1:64 Racing Vehicles 3 inches
1:64 Vehicle Transporters 13 inches
1:96 Vehicle Transporters 9 inches
1:8 Pedal Cars 10 inches
1:9 Racing Motorcycles 23 inches
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Our die-cast replicas typically range in price at retail from
approximately $10.00 to $99.00 per item, depending on size, type of vehicle, and
level of detail. A 1:24th scale replica of an actual racing vehicle typically
retails for $45.00. Certain of our more highly detailed die-cast collectibles
retail for as much as $400.00. We offer our die-cast collectibles primarily
through our wholesale distributor network to specialty retailers, through our
Collectors' Club, direct response television through our relationship with QVC,
our trackside stores, and through corporate promotional programs.
We enhance the collectible value and appeal of our products through
various measures. These measures include (a) designing die-cast collectibles
that include features that are not offered by our competitors; (b) limiting the
quantities of each collectible item that we produce and sell; (c) specifying, on
certain products themselves and on the packaging material of certain other
die-cast collectibles, the quantity of that limited-edition item actually
produced; (d) offering certain items only through our Collectors' Club; and (e)
designing packaging concepts to improve the display of each collectible item.
Motorsports Consumer Products
We market various licensed motorsports apparel, souvenirs, and other
consumer products, including t-shirts, jackets, hats, coffee mugs, pins, key
chains, knives, coolers, and tote bags. Each of the motorsports consumer
products generally feature the name, likeness, and car number of a popular race
car driver.
Our licensed motorsports apparel items utilize creative designs that
are printed or applied to high-quality shirts, hats, jackets, and other
products. We design and sell our motorsports apparel products in sizes ranging
from infant to youth to men's and women's adult sizes.
We design our motorsports consumer products primarily for distribution
through retail outlets, trackside stores, direct response television through our
relationship with QVC, and promotional programs with corporate sponsors of
racing teams and racing events.
Promotional Programs
We provide marketing services designed to create promotional programs
for large corporate sponsors that advertise in motorsports, as well as companies
that have not previously advertised in motorsports. Many corporations sponsor
racing vehicles or events and advertise at motorsports events and in
motorsports-related media in order to increase awareness of their brands among
consumers and to encourage consumers to purchase their products. We provide
design and creative services, graphic artists, and the capacity to deliver a
wide array of promotional products, such as die-cast replicas, t-shirts, and
hats. We also provide in-house marketing and distribution support for our
promotional programs, including in-bound order processing, order fulfillment,
sweepstakes processing, and redemption programs.
We develop and implement extensive promotional programs that feature
special, one-time themes or events intended to provide our company, the
corporate sponsor, and other licensors with unique marketing opportunities. Our
company and the corporate sponsors market a broad variety of specially designed
die-cast
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vehicles and other collectibles, apparel, and souvenirs based on these programs.
Some examples of these programs are as follows:
- we developed a program for the Coca-Cola Company in which Dale
Earnhardt and Dale Earnhardt, Jr. competed against one another
for the first time at the Coca-Cola 500 in Japan;
- we collaborated with Home Depot to develop a promotion in
which Tony Stewart drove a specially painted car in a program
that benefited Habitat for Humanity;
- we combined efforts with artist Peter Max and General Motors
Service Parts Operations in a merchandising promotion
surrounding a special paint scheme designed by Peter Max for
Dale Earnhardt's car. The promotion was part of a nationwide
program to promote Goodwrench Service Plus Dealers;
- we developed the "Tribute to Freedom in the Millennium"
program with the United States Armed Services, Lowe's Motor
Speedway, and various teams and drivers to pay tribute to the
five branches of the United States Armed Services and assist
them in their recruiting efforts. As part of the promotion,
our products were sold in Military base exchange stores;
- we collaborated with United Media and Jeff Gordon to create a
promotion celebrating the PEANUTS 50th Anniversary in which
Jeff Gordon drove a specially painted PEANUTS car;
- we teamed up with Major League Baseball to implement
promotions in which Jeremy Mayfield drove a specially painted
Major League Baseball/World Series car and Bobby Labonte drove
a specially painted Major League Baseball All-Star Game car;
- we collaborated with Universal Studios and various teams and
drivers to create the "Monsters of the Speedway" program in
which select drivers in four different racing series drove
specially painted cars celebrating the world's most famous
horror film characters and Halloween; and
- we combined efforts with Universal Studios to promote the
motion picture release of "Dr. Seuss' How the Grinch Stole
Christmas" in which Terry Labonte and John Force drove
specially painted cars bearing images of "The Grinch" and
other film characters.
For some programs, the corporate sponsors use our products either as
free or low-cost awards with the purchase of their own products or in
sweepstakes, employee gifts, or other promotions. Die-cast replica vehicles that
we develop and sell for these programs are not sold through our wholesale
distribution network or through our Collectors' Club.
Mass-Merchandise License
We have a license agreement with Hasbro that gives Hasbro the right to
produce motorsports-related products specifically designed for the
mass-merchandise market. Under this license, Hasbro markets a line of die-cast
replicas of racing vehicles, which was jointly developed by our company and
Hasbro, under the "Winner's Circle" brand name. The mass-market die-cast
products manufactured and marketed by Hasbro are completely distinct from our
other products and do not compete directly with our limited-edition motorsports
die-cast collectible products. Under the agreement, Hasbro may market other
licensed motorsports products, including radio-controlled cars, slot car sets,
games (such as electronic and CD-ROM interactive games), plush toys, figurines,
play sets, walkie talkies, and other items similar to products that Hasbro
currently markets under the "Kenner," "Tonka," and "Milton Bradley" brand names.
Chase-branded Apparel
During fiscal 1998, we acquired an 80% interest in Chase Racewear,
L.L.C., a motorsports-related apparel and licensing company. Chase licenses
apparel and clothing accessories that bear "Chase" brand marks, including "Chase
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Authentics," "Competitor's View," and a stylized "C," which is generally
embroidered on the shirt cuff or pocket. NASCAR drivers including Dale
Earnhardt, Jeff Gordon, Rusty Wallace, Dale Jarrett, Terry Labonte, Bobby
Labonte, and others, have agreed, subject to certain exceptions, to ensure that
licensed apparel products bearing their names, likenesses, or signatures will
also bear "Chase" brand marks. These drivers also have agreed to endorse
Chase-branded apparel as the exclusive trackside apparel of top NASCAR drivers.
We sell certain of our Chase-branded apparel on a wholesale basis to NASCAR
Thunder stores, auto parts distributors, corporate sponsors of motorsports, and
specialty retail shops as well as to major discount stores, such as Wal-Mart,
K-Mart, and Target. Our license with VF Knitwear, a major apparel manufacturer,
grants VF Knitwear the exclusive right to use the "Chase Authentics" brand and
the stylized "C" mark for all motorsports-related apparel products distributed
through major department stores, traditional apparel stores, and sport and
athletic specialty stores. VF Knitwear pays us a royalty based on its sales of
Chase-branded products. This license agreement extends through 2008, and VF
Knitwear holds an option to extend the license for two successive five-year
terms. Under the agreement, VF Knitwear's rights will become non-exclusive under
certain conditions. VF Knitwear also holds the non-exclusive right to use the
"Competitors View" mark in all national and regional discount department stores.
SALES AND DISTRIBUTION
We market our die-cast collectibles worldwide to approximately 10,000
specialty retailers through our wholesale distributor network; through our
Collectors' Club; through direct response television through our relationship
with QVC; through trackside stores; and through corporate promotional programs.
We market our motorsports consumer products primarily through an in-house sales
force and independent representatives to approximately 10,000 specialty
retailers and to major discount and department stores, retail automotive product
outlets, and convenience stores; through direct trackside sales to race fans;
and through promotional programs with corporate sponsors.
Wholesale Distribution
Die-Cast Collectibles. We currently market our die-cast collectibles on
a wholesale basis through 18 distributors operating in the United States and 45
distributors operating in 45 countries throughout the world. The distributors
solicit orders for our die-cast products from approximately 5,000 specialty
retailers throughout the United States and approximately 5,000 specialty
retailers in other countries throughout the world. The retailers include stores
specializing in motorsports collectibles and apparel and stores specializing in
other sports collectible items, and a limited number of hobby shops. We
advertise our die-cast collectibles in newspapers and magazines covering
motorsports and the collectibles markets. We also take measures to increase
consumer awareness of our products through radio and television advertising,
including promotion of our collectibles on "home shopping" television programs
(such as QVC Network's "For Race Fans Only" program) and advertising during
popular television programs of interest to motorsports enthusiasts.
Consumer Products. Our in-house sales force and independent
representatives market certain motorsports consumer products on a wholesale
basis to major discount and department stores, such as Wal-Mart and K-Mart, to
automotive retail stores, and to convenience stores. We also utilize our
distributor network as well as an in-house sales force and independent
representatives to market our motorsports apparel, souvenirs, and other consumer
products on a wholesale basis to the same specialty retailers that sell our
die-cast collectibles.
Collectors' Club
We market certain of our die-cast collectibles exclusively through our
Collectors' Club. Members of the Collectors' Club pay a lifetime membership fee
that entitles them to receive a membership kit, a monthly magazine, catalogs,
and other special sales materials highlighting our collectibles and other
products. Membership in the Collectors' Club increased from approximately 22,000
members in September 1994 to approximately 171,000 members as of September 30,
2000. We advertise the Collectors' Club in publications that focus on
motorsports or the collectibles industry and through limited radio and
television advertisements. We
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strive to increase collector interest in Collectors' Club products and to
enhance the value of these products as collectibles by:
- offering many items exclusively through our Collectors' Club,
- offering a limited number of each collectible, and
- limiting the number of a particular item that each member may
purchase.
During September 2000, we entered into a ten-year outsourcing and
exclusive supply agreement with QVC, Inc. under which QVC assumed
responsibilities for the day-to-day marketing and distribution operations of the
Collectors' Club over a phase-in period ending in January 2001. We will be QVC's
exclusive supplier for motorsports memorabilia offered by the Collector's Club,
and QVC will be the exclusive distributor for our Collectors' Club products,
including distribution over the Internet. Beginning in October 2000, QVC assumed
the day-to-day operations of the Collectors' Club, including the following:
- production of the Collectors' Club catalog;
- promotion of the Collectors' Club and its products;
- daily maintenance of the Collectors' Club database;
- operation of the call center;
- inventory warehousing; and
- order processing and fulfillment.
Under the agreement, we retain ultimate control over the
decision-making processes regarding pricing, production quantities, marketing,
and promotion of the products to be sold to Collectors' Club members. We produce
and consign our inventory with QVC, which sells and retains 20% to 40% of the
revenue generated based upon quantity of products shipped and whether products
are sold through direct response television. QVC retains all membership fees
paid and has the exclusive opportunity to sell club products over interactive
television and its web site after the initial sales window reserved for club
members has expired. For this purpose, we sell QVC agreed-upon production
surplus of Collectors' Club products for resale at wholesale prices.
Trackside Sales
We currently operate 26 fully equipped trackside stores to capitalize
on the large base of potential customers that attend NASCAR-sanctioned races and
other events throughout the United States. Some or all of our mobile trackside
stores travel to each NASCAR Winston Cup race (32 events in 2000) as well as to
other selected racing events. Each mobile trackside store is decorated with the
logos and color scheme of a particular racing team and driver and sells a
complete assortment of licensed motorsports apparel, souvenirs, and die-cast
collectibles dedicated to that team and driver. These mobile stores represent
the only authorized trackside opportunities for racing enthusiasts to purchase
motorsports products using the name and likeness of the driver and racing team
featured in each store.
Corporate Promotional Programs
We create promotional programs for large corporate sponsors of
motorsports. We continually pursue new opportunities to create promotional
programs, and we continually engage in discussions with major race car drivers
and corporate sponsors in our effort to develop additional programs. See Item 1,
"Our Business - Products and Services - Corporate Promotional Programs."
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Wind-down of Operations of goracing.com, our Internet subsidiary
We refocused goracing.com to deliver our merchandise to motorsports
fans, and no longer will offer motorsports-related content, services, or
features in the form of motorsports news and entertainment online. As part of
our new relationship with QVC, QVC will provide club members the opportunity to
purchase Collectors' Club product to club members over the Internet.
During fiscal 1999, we developed the goracing.com network to serve as a
comprehensive online destination for all motorsports fans. Our goracing.com
network offered a broad range of news, information, affinity programs and
features and consisted of a variety of motorsports-related web sites that we
developed and maintained, as well as web sites of third parties. As part of our
effort to refocus our goracing operations, during fiscal 2000 we reduced fixed
costs related to goracing.com infrastructure, including personnel, facilities,
and equipment. We subleased to a third party approximately 65,000 square feet of
leased space in Tempe, Arizona and all of our leased equipment related to our
goracing operations. In addition, during November 2000, we sold all of the
assets of our Fantasy Cup auto racing game business, which we acquired in
October 1999. The sale of these assets generated approximately $4.2 million in
cash.
DESIGN AND PRODUCTION
Die-cast Scaled Replica Vehicles
We design each die-cast collectible that we market. Many of our
die-cast collectibles include features such as opening hoods and trunks,
detailed engines, and working suspensions. We also devote a significant amount
of time and effort to the production of our die-cast collectibles to ensure that
the resulting products display a level of quality and detail that is superior to
competing products. For example, we produce most of our die-cast collectibles
with pad printing instead of stickers or decals.
Our design artists take numerous photographs of the actual racing cars,
trucks, and other vehicles to be produced as die-cast replicas. Working from
these photographs, our artists and engineers use computer software to create
detailed scale renderings of the vehicles. After approval of the rendering by
the vehicle owner, driver, team sponsor, and other licensors whose approval may
be required, we supply computerized renderings to one of our manufacturers in
China. The manufacturer produces a sample or model, which we then inspect for
quality and detail. After final approval, the manufacturer produces the die-cast
replicas, packages them, and ships the finished products to us or, in certain
instances, directly to our customers.
A substantial portion of our die-cast collectibles are manufactured
under an exclusive agreement with one third-party manufacturer in China. The
term of the agreement currently extends through October 31, 2006 and
automatically renews for five successive one-year terms unless terminated by
either party by giving written notice to the other party at least 90 days prior
to the end of the then-current term.
We own a significant portion of the tooling that the third-party
manufacturer uses to produce die-cast collectibles for our company, and we have
partial control over the production of our die-cast collectibles under the
manufacturing agreement. We invested approximately $10.0 million in fiscal 1999
and $10.7 million in fiscal 2000 in tooling for our proprietary lines of
die-cast collectibles. We believe the breadth and quality of the tooling program
provides us with a competitive advantage in the motorsports collectible market.
Although we have made substantial investments in tooling to date, we do not
intend to make substantial additional investments in tooling in the near future
as part of our effort to focus on our core products.
We believe that our primary overseas manufacturer of die-cast
collectibles is dedicated to high quality and productivity as well as support
for new product development. There are significant risks inherent in relying on
a single manufacturer for a substantial portion of our die-cast products. See
Item 1, "Special Considerations - We depend on third-party manufacturers and
shippers."
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We obtain the die-cast collectibles marketed by MiniChamps and die-cast
collectibles sold under the "Brookfield" trademarks from three other
manufacturers in China. We currently do not have a formal, long-term arrangement
with any of these manufacturers.
Motorsports Consumer Products
We currently obtain substantially all of our licensed motorsports
apparel, souvenirs, and other consumer products on a purchase order basis from
approximately 200 third-party manufacturers and suppliers located primarily in
the United States. We also screen print and embroider a portion of the licensed
motorsports apparel that we sell. The apparel and souvenir suppliers present
product ideas and artistic designs to us. We then select those products and
artistic designs that we believe will appeal to motorsports enthusiasts and
distinguish our apparel and souvenir products from those of our competitors. We
engage in a bidding process for certain items, such as embroidered hats or
t-shirt blanks, in order to negotiate favorable prices and other terms. We also
purchase and resell certain finished items, such as tote bags and coolers, from
domestic and foreign companies that have licenses for those items with the
drivers and other licensors.
We work closely with the third-party apparel and souvenir manufacturers
in order to ensure that the products conform to design specifications and meet
or exceed our quality requirements. We believe that a number of alternative
manufacturers for each of these products are readily available in the event that
we are unable to obtain products from any particular manufacturer. We own the
tooling and dies used to manufacture certain of our motorsports consumer
products. As we develop new motorsports consumer products that require
specialized tooling, we intend to build or purchase the new tooling that will be
required to permit the third-party manufacturers to produce those items.
LICENSES
We focus on developing long-term relationships with and we engage in
comprehensive efforts to license the most popular drivers, team owners, and
other personalities in each top racing category, their sponsors, various
sanctioning bodies, and others in the motorsports industry. We develop
opportunities to market innovative collectible and consumer products that appeal
to motorsports enthusiasts. We believe that our license agreements with top race
car drivers and other licensors significantly enhance the consumer appeal and
marketability of our products. By aligning our company with top racing
personalities and providing them with a broad range of revenue opportunities, we
believe that we will be able to leverage those relationships to attract
additional licensors in order to generate increased revenue for our company as
well as increased earnings for the licensors.
Significant Driver License and Endorsement Agreements; Significant Team Owner
Licenses
We have long-term license agreements with NASCAR Winston Cup Points
champions Dale Earnhardt, Jeff Gordon, Dale Jarrett, Bobby Labonte, Bill
Elliott, and Rusty Wallace and ten-time NHRA Funny Car champion John Force.
These licenses generally provide us with a right of first refusal to market
certain die-cast, apparel, and other products bearing the driver's name and
likeness. The license agreements also generally provide that, to the extent that
we exercise our right of first refusal, the driver will not personally market
and will not permit others to market, through the same channels of distribution
used by our company, any products bearing the driver's likeness that are the
same or similar to products marketed by our company. Each of the license
agreements requires us to pay the licensor royalties based on a percentage of
the wholesale or retail price of licensed products that we sell. Certain of the
license agreements also provide for minimum guaranteed royalty payments each
year during the term of the agreement. These agreements, as well as many of our
other significant license agreements, give the licensors the right to terminate
or significantly shorten the term of the agreements if our business is sold or
transferred or if there is a significant change in our management team.
We have personal service and endorsement agreements with popular race
car drivers. During the term of the endorsement agreements, we have the right to
use the driver's name, likeness, signature, and endorsement in connection with
the advertisement, promotion, and sale of the die-cast collectibles and other
products approved by
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the driver and marketed by our company. The following table sets forth certain
information with respect to the personal service and endorsement agreements
described above:
DRIVER EXPIRATION DATE
------ ---------------
Jeff Gordon and an affiliate December 31, 2005
Of Mr. Gordon
Ray Evernham December 31, 2005
Al Unser, Jr. December 31, 2002
We also have license agreements with several of the most popular NASCAR
race car team owners, including Robert Yates Racing, Inc.; Richard Childress
Racing Enterprises, Inc.; Redline Sports Marketing, Inc. (the licensing entity
for the Joe Gibbs race team); Evernham Motorsports, LLC; MB2 Motorsports, LLC;
and Dale Earnhardt, Inc. The team owner licenses provide us with either the
exclusive right or a right of first refusal to market certain products bearing
the likeness and number of each owner's Winston Cup cars and other racing
vehicles. To the extent that we exercise our right of first refusal, the team
owner licenses provide that the licensor will not permit others to market,
through the same distribution channels used by our company, any of the licensed
products. Certain of the team owner licenses also provide that the licensors
will not directly market any of the licensed products through such channels.
Each of the license agreements with the team owners requires us to pay the
licensor royalties based on a percentage of the wholesale or retail price of
licensed products that we sell. Certain of the license agreements also provide
for minimum guaranteed royalty payments to the licensors.
The following table sets forth certain information with respect to the
license agreements with the drivers and team owners described above:
LICENSOR DRIVER EXPIRATION DATE
-------- ------ ---------------
Dale Earnhardt and Dale Earnhardt November 7, 2011
Dale Earnhardt, Inc.
Jeff Gordon and Jeff Gordon December 31, 2005
JG Motorsports, Inc.
Rusty Wallace and Rusty Wallace December 31, 2004
Rusty Wallace, Inc.
John Force and John Force December 31, 2005
John Force Racing
Robert Yates Racing, Inc. Dale Jarrett December 31, 2012
Ricky Rudd
Richard Childress Racing Dale Earnhardt December 31, 2007
Enterprises, Inc. Mike Skinner
Redline Sports Marketing, Bobby Labonte December 31, 2002
Inc. (Joe Gibbs race team) Tony Stewart
Dale Earnhardt, Inc. Steve Park December 31, 2002
Dale Earnhardt, Jr. (Dale Earnhardt, Jr.
Michael Waltrip through 2005)
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LICENSOR DRIVER EXPIRATION DATE
-------- ------ ---------------
Evernham Motorsports, LLC Bill Elliott, Jr. December 31, 2005
MB2 Motorsports, LLC Ken Schrader December 31, 2001
Additional Product Licenses
In addition to the driver and team owner licenses described above, we
currently maintain approximately 150 licenses with various other drivers, car
owners, sponsors, and manufacturers. Other popular drivers under license with
our company include NASCAR Winston Cup driver Terry Labonte; Jerry Nadeau; Jeff
Burton and Mark Martin Historical Car Programs; IRL Driver Al Unser, Jr.; NHRA
drag racers Kenny Bernstein, Tony Pedregon, Larry Dixon, and Jerry Toliver; and
NHRA Pro Stock motorcycle driver Matt Hines. We also have licenses with Formula
One teams McLaren International Ltd., Williams Grand Prix, and Benetton Formula
Ltd., as well as with other popular team owners, car sponsors, NASCAR, CART,
World of Outlaws, Ford Motor Company, several divisions of General Motors Corp.,
DaimlerChrysler, and PACCAR, Inc. (the manufacturer of Kenworth and Peterbilt
trucks). These licenses generally provide for the following:
LICENSES WITH LICENSES WITH LICENSES WITH
RACE CAR DRIVERS TEAM OWNERS MANUFACTURERS
- -----------------------------------------------------------------------------------------------------------
TERM : One to three years. One to three years. Two or more years.
RIGHTS GRANTED: Use of the driver's name, Use of the car number and Right to reproduce the
photograph, likeness, and autograph. colors. body styles of cars or
trucks.
RENEWAL: Individual agreements either renew Same. Same.
automatically, may be renewed or
extended upon written request by our
company, or expire at the end of the
specified term.
PAYMENTS TO Either (i) a fixed dollar amount, Same. Same.
LICENSORS: which may include a substantial
advance to the licensor; (ii) a
fixed amount per item that we sell
pursuant to the license; (iii) a
percentage of the net sales for a
program or a percentage of our
wholesale price per item that we
sell pursuant to the license; or
(iv) a combination of the above.
The license agreements with various sponsors generally provide for
terms of one to three years and permit us to reproduce the sponsors' decals and
logos as they appear on the cars or trucks. Although we directly or indirectly
pay license fees to the primary sponsors of most of the racing vehicles, the
license agreements with certain sponsors do not require us to pay the licensors
because of the advertising value provided to the licensor as a result of having
its decals and logos displayed on our products. When appropriate, we strive to
renew existing agreements or to enter into new license agreements with existing
or new drivers, team owners, car sponsors, and other licensors and to develop
new product programs pursuant to our license agreements in our effort to
maintain our leadership position in the motorsports licensed products industry.
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Hasbro License Agreement
The license agreement between our company and Hasbro covers the sale by
Hasbro in the mass-merchandise market of specific motorsports-related products
for which we have or will secure exclusive or non-exclusive licenses from race
car drivers, team owners, manufacturers, and sponsors. The Hasbro license
provides us with a source of revenue from the mass-merchandise market without
committing substantial resources to manufacturing and marketing activities or
subjecting our company to the risks inherent in the mass-merchandise market.
Under the Hasbro license, we are responsible for acquiring and maintaining the
license rights with the licensors, and Hasbro is responsible for all costs and
other arrangements relating to tooling, manufacturing, transportation,
marketing, distribution, and sales of licensed products. Hasbro is responsible
for and pays or reimburses our company for all license fees and royalties,
including advances and guarantees, paid to licensors for licensed products. The
licensed products consist of (i) miniature toy die-cast replicas of motorsports
vehicles, and (ii) all other products that Hasbro may market as licensed
motorsports products, including, for example, radio-controlled cars, slot car
sets, games (including electronic and CD-ROM interactive games), puzzles, plush
toys, figurines, play sets, walkie talkies, and other products, for which Hasbro
pays a specified royalty.
Hasbro's focus under the Hasbro license has been to develop, with our
assistance, a line of motorsports die-cast products for the retail
mass-merchandise market. Hasbro funds all capital requirements for this product
line and manufactures, distributes, and markets the products under the "Winner's
Circle" brand name. The mass-market die-cast products manufactured and marketed
under the Hasbro license are distinct from our current products and do not
compete directly with our limited-edition motorsports die-cast collectible
products.
Other Significant License Arrangements
Revell License Agreement. We have a license agreement with
Revell-Monogram, Inc. that gives us the exclusive right to use the "Revell
Racing," "Revell Select," and "Revell Collection" trademarks in connection with
sales of NASCAR, NHRA, and certain other motorsports-related die-cast
collectibles in the United States and Canada. The license also gives us a
non-exclusive right to use the Revell trademarks described above in connection
with up to $5.0 million per year of sales of NASCAR, NHRA, and certain other
motorsports-related die-cast products outside the United States and Canada. The
term of the Revell license runs through December 31, 2007, at which time it will
automatically renew for successive one-year terms unless either party elects to
terminate by giving written notice at least 90 days prior to the end of the
initial term or any successive one-year term.
NASCAR License Agreement. We have a licensing agreement with NASCAR
that gives us the non-exclusive right to use the "NASCAR" name and logo on all
of our NASCAR-related products and product packaging as well as on related
sales, marketing, and promotional materials. We pay NASCAR royalty payments
based on a percentage of the wholesale or retail price of licensed products that
we sell, with minimum guaranteed royalty payments in each year through 2000. The
licensing arrangement expires on (i) October 7, 2003 with respect to licensed
products that bear both the NASCAR mark and the name, image, or likeness of a
NASCAR driver, team, or track, and (ii) on December 31, 2000 with respect to all
other licensed products. The license agreement with NASCAR will automatically
renew for two additional five-year terms unless it has been terminated in
accordance with its terms.
CART License Agreement. We have a license agreement with the licensing
affiliate of CART. Because CART provides the licensing rights of the sanctioning
body as well as all participating drivers, race teams, and tracks, the CART
license provides us with (a) exclusive (subject to certain pre-existing
licenses) licensing rights to the CART and "FedEx Championship Series" logos;
(b) exclusive (subject to certain pre-existing licenses) licensing rights to
five of the top race teams and their drivers; and (c) non-exclusive licensing
rights for a minimum of 75% of the other teams and drivers participating in
CART-sanctioned race events. The rights granted permit us to develop and market
a line of CART-based die-cast collectible vehicles and the exclusive rights to
market or sublicense a broad range of CART-based toy products, including plastic
and remote control vehicles, action figures, miniature helmets, board games,
plush toys, and puzzles. We pay the licensor royalty payments based on a
percentage of the wholesale or retail price of licensed products that we sell,
with minimum royalty payments each year during the term of the agreement. The
CART license expires on December 31, 2003.
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We will have the right to renew the CART license for an additional five-year
term if we achieve certain minimum sales requirements.
Indianapolis Motor Speedway License Agreement
We have a license agreement with the Indianapolis Motor Speedway
Corporation, the owner and operator of the Indianapolis Motor Speedway and the
host of the Indianapolis 500 and U.S. Grand Prix, that gives us the
non-exclusive right to use the IRL teams, drivers, and drivers' likeness on our
die-cast replicas and other motorsports products and apparel. The license
agreement extends through 2003. Under the agreement, we must pay IMS a royalty
based on a percentage of our net sales of licensed product, subject to
guaranteed minimum royalty payments by us.
COMPETITION
The motorsports collectible and consumer product industry is extremely
competitive. We compete with major domestic and international companies, some of
which have greater market recognition and substantially greater financial,
technical, marketing, distribution, and other resources than we possess. Our
motorsports die-cast collectibles compete with die-cast and other motorsports
collectibles and, to a certain extent, die-cast replicas of motorsports vehicles
that are sold through mass retail channels. Our motorsports apparel and
souvenirs compete with similar products sold or licensed by drivers, team
owners, sponsors, and other licensors with which we currently do not have
licenses as well as with sports apparel licensors and manufacturers in general.
Emerging companies also may increase their participation in these markets. Our
promotional products compete for advertising dollars against other specialty
advertising programs and media, such as television, radio, newspapers,
magazines, and billboards.
We believe that our relationships and licenses with top race car
drivers, car owners, and other popular licensors represent a significant
advantage over our competitors in the motorsports collectible and consumer
products industry. We strive to expand and strengthen these relationships and to
develop opportunities to market innovative licensed collectible and consumer
products that appeal to motorsports enthusiasts. Our ability to compete
successfully depends on a number of factors both within and outside our control.
INTELLECTUAL PROPERTY
Our business depends upon valuable trademarks and other rights that we
license from third parties. Our performance and ability to compete also depend
to a significant degree on the value of our various tradenames and marks, as
well as our proprietary technology and other rights. We are seeking protection
of our significant service marks and trademarks in the United States, including
various "Action" names and logos, "goracing.com," and other names and logos. We
may not be able to secure protection for our service marks or trademarks that we
have not already registered. Our competitors or others may adopt product or
service names similar to any service marks or trademarks, which could impede our
ability to build brand identity and could lead to customer confusion. Our
inability to protect trade names and marks adequately could have a material
adverse effect on our business, operating results, and financial condition.
We may receive notices from third parties that claim aspects of our
business infringe their rights. While we are not currently subject to any such
claim, any future claim, with or without merit, could result in significant
litigation costs and diversion of resources, including the attention of our
management, and could require us to enter into royalty and licensing agreements.
These royalty and licensing agreements, if required, may not be available on
terms acceptable to us or at all. In the future, we also may need to file
lawsuits to enforce our intellectual property rights, to protect our trade
secrets, or to determine the validity and scope of the proprietary rights of
others. Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of our resources.
INSURANCE
We maintain a $2.0 million product liability insurance policy to cover
the sale of our die-cast and other products. We maintain an additional $25.0
million commercial umbrella liability coverage. We also maintain a
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$6.0 million insurance policy to cover our molds and dies located at our
third-party manufacturer in China and a $5.0 million insurance policy to cover
lost revenue in the event of certain interruptions of business with our overseas
manufacturer of die-cast collectibles. We believe that our insurance coverage is
adequate.
EMPLOYEES
As of December 20, 2000, we had 519 full-time employees. This reflects
a reduction from 648 full-time employees as of December 20, 1999. The reductions
were made in connection with our efforts to reduce operating costs associated
with our business and our Internet operations. We have experienced no work
stoppages, and we are not a party to a collective bargaining agreement. We
believe that we maintain good relations with our employees.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding each of
our executive officers.
NAME AGE POSITION HELD
---- --- -------------
Fred W. Wagenhals........... 59 Chairman of the Board, President, and Chief
Executive Officer
R. David Martin............. 54 Chief Financial Officer and Director
Melodee L. Volosin.......... 36 Executive Vice President - Sales and
Director
John S. Bickford, Sr........ 54 Executive Vice President - Strategic
Alliances and Director
Fred W. Wagenhals has served as our Chairman of the Board, President,
and Chief Executive Officer since November 1993 and served as Chairman of the
Board and Chief Executive Officer from May 1992 until September 1993 and as
President from July 1993 until September 1993.
R. David Martin has served as our Chief Financial Officer since August
2000 and as a director since December 2000. Mr. Martin joined Deloitte & Touche
in June 1968 and served as a partner of that firm from August 1978 until May
2000. Mr. Martin is a Certified Public Accountant.
Melodee L. Volosin has served as our Executive Vice President - Sales
since December 1999 and as a director since January 1997. Ms. Volosin served as
our Vice President - Wholesale Division from September 1997 until December 1999.
Ms. Volosin served as the Director of our Wholesale Division from May 1992 to
September 1997. Ms. Volosin's duties include managing all of our wholesale
distribution of die-cast collectibles and other products, including advertising
programs and budgeting.
John S. Bickford, Sr. has served as our Vice President - Strategic
Alliances since July 1997 and as a director of our company since January 1997.
Mr. Bickford also served as a consultant to our company from January 1997 to
June 1997. From 1976 to the present, Mr. Bickford has served as President of
MPD Racing Products, Inc., which manufactures race car parts for distribution
through speed shops and high-performance engine shops. Mr. Bickford served as
President of Bickford Motorsports, Inc., which provided consulting and special
project coordination services to race car drivers, car owners, and other
businesses, from 1990 until 1997. Mr. Bickford also published Racing for Kids
magazine during 1996 to 1997. Mr. Bickford also served as General Manager of
Jeff Gordon, Inc. from 1990 to 1995. Mr. Bickford currently serves as a director
of Equipoise Balancing, Inc,. a privately held company.
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SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
report, should be carefully considered in evaluating our company and our
business.
A VARIETY OF FACTORS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
A wide variety of factors could adversely impact our operating results.
These factors include the following:
- our ability to identify popular motorsports personalities,
teams, and other licensors and to enter into and maintain
mutually satisfactory licensing arrangements with them;
- the racing success of the key motorsports personalities,
teams, and other licensors with whom we have license
arrangements;
- our ability to identify trends in the motorsports collectibles
and consumer markets and to create and introduce on a timely
basis products and services that take advantage of those
trends and that compete effectively on the basis of price and
consumer tastes and preferences;
- our ability to design and arrange for the timely production
and delivery of our products;
- our ability to identify, develop, and implement special
merchandising and marketing programs on a timely basis;
- the level and timing of orders placed by customers;
- our ability to expand our distribution channels and to
effectively manage the growth of our operations;
- seasonality; and
- competition and competitive pressures on prices.
Many of the factors described above are beyond our control.
OUR BUSINESS DEPENDS ON OUR RELATIONSHIPS AND LICENSE ARRANGEMENTS WITH KEY
LICENSORS.
We market our products under licensing arrangements with race car
drivers, team owners, sponsors, automobile and truck manufacturers, NASCAR,
NHRA, IRL, and other entities. The licensing arrangements vary in scope and
duration, but generally authorize us to sell specified licensed products for
short periods of time. Some license agreements require us to pay minimum
royalties or other fixed amounts regardless of the level of
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sales of products licensed under that agreement or the profitability of those
sales. The success of licensing arrangements depends on many factors, including
the following:
- the continued popularity of motorsports in general,
- the reasonableness of license fees in relationship to revenue
generated by sales of licensed products,
- the continued popularity of the licensors,
- the continued performance, public image, and health of the
individual drivers.
A driver's popularity could be adversely affected if the driver fails to
maintain a successful racing career or engages in behavior that the general
public considers objectionable.
In addition, our ability to enforce our rights under licensing
agreements may be limited by the interpretation and enforcement of those
agreements. Some license agreements contain provisions that allow the licensor
to terminate the agreement upon the occurrence of certain events, including a
change in the driver's team owner or sponsor, a change of control of our
company, or a significant change in our management team. The termination,
cancellation, or inability to renew or enforce material licensing arrangements,
or the inability to develop and enter into or enforce new licensing
arrangements, would have a material adverse effect on our business.
WE DEPEND ON THE POPULARITY OF THE MOTORSPORTS INDUSTRY IN GENERAL AND NASCAR
RACING IN PARTICULAR.
The growth rate of the motorsports industry and its appeal to consumers
has a significant effect on the sales of motorsports merchandise and corporation
sponsorship. Motorsports competes for television viewership, attendance,
merchandise sales, and sponsorship funding with other sports, entertainment, and
recreational events. The competition in the sports, entertainment, and
recreation industries is intense.
Sales of die-cast replicas and other licensed merchandise related to
NASCAR racing represented approximately 70.0% of our revenue in fiscal 2000.
Although we have expanded our product lines to include vehicles from other
segments of motorsports, we expect that products related to NASCAR racing will
continue to account for a significant percentage of our revenue for the
foreseeable future. As a result, the popularity of NASCAR-sanctioned racing is
important to the success of our business.
The motorsports industry experienced a slowing growth rate during our
2000 fiscal year. This recent decrease in growth of the motorsports industry has
had a material adverse effect on our business, and any continued growth decline
of the motorsports industry, and NASCAR racing in particular, would continue to
have a material adverse effect on our business.
OUR STRATEGY TO REFOCUS ON OUR CORE PRODUCTS MAY BE UNSUCCESSFUL.
In the past, a significant portion of our success resulted from our
ability to continue to develop and introduce on a timely basis new products and
services that compete effectively in terms of price and that address customer
tastes, preferences, and requirements. During fiscal 2000, we made the strategic
decision to refocus our efforts on our core products and licenses. We believe
that during the current downturn in the motorsports market, we have a better
opportunity to return to profitability if we focus on our core products and do
not make significant investments in new products or services. Our efforts may be
unsuccessful, and our assessment of the motorsports industry may be incorrect.
In the event that we are incorrect, we may lose opportunities to generate
revenue on new products and services related to motorsports.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND SHIPPERS.
We depend upon third parties to manufacture all of our motorsports
collectibles and most of our consumer products. In particular, we rely on one
manufacturer, which operates a single facility in China, to produce most of our
die-cast products. Although we own most of the tools, dies, and molds used in
the
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manufacturing processes of our collectible products and own the tooling and dies
used to manufacture certain of our consumer products, we have limited control
over the manufacturing processes themselves. As a result, any difficulties
encountered by the third-party manufacturers that result in product defects,
production delays, cost overruns, or the inability to fulfill orders on a timely
basis could have a material adverse effect on our business.
We obtain die-cast products from our primary manufacturer in China
under an agreement that extends through October 31, 2006, and that automatically
renews for successive one-year terms unless terminated by either party giving
written notice to the other at least 90 days prior to the end of the
then-current term. We do not have long-term contracts with any other of our
third-party manufacturers.
Because we own most of the tools and dies used in the manufacturing
process, we believe that we would be able to secure other third-party
manufacturers to produce our products in the event that either party terminates
that agreement. Our operations would be adversely affected, however, by of the
following:
- the loss of our relationship with certain of our current
suppliers, including particularly our primary manufacturer of
die-cast products;
- the disruption or termination of the operations of one or more
of our current suppliers; or
- the disruption or termination of sea or air transportation
with our China-based die-cast manufacturers, even for a
relatively short period of time.
For example, MiniChamps experienced significant delays in completing production
of certain 1998 product lines as a result of the transition of those products to
new manufacturers. Those delays resulted from the time required to move and
install the tools, dies, and molds at the new manufacturers' facilities as well
as the additional time required to train the new manufacturers' personnel and to
achieve satisfactory quality control levels.
Significant damage to the facilities of our third-party manufacturers,
particularly the facilities used by our die-cast product manufacturers in China,
also could result in the loss of or damage to a material portion of our key
tools, dies, and molds in addition to production delays while new facilities
were being arranged and replacement tools, dies, and molds were being produced.
We do not maintain an inventory of sufficient size to provide protection for any
significant period against an interruption of supply, particularly if we are
required to obtain alternative sources of supply.
We do not directly purchase the raw materials used to manufacture most
of our products. We may, however, be subject to variations in the prices we pay
our third-party manufacturers for products if their raw materials, labor, and
other costs increase. Although to date we have been able to increase the prices
at which we sell our products in order to cover the increased prices that we pay
for such products, we may not be able to continue to pass along such price
increases to our customers in the future.
We also depend upon a number of third-party shippers, such as the U.S.
Postal Service, United Parcel Service, and Federal Express, to deliver goods to
us and our customers. Strikes or other service interruptions affecting our
shippers would have a material adverse effect on our ability to deliver
merchandise on a timely basis.
WE HAVE EXPERIENCED A DECLINE IN WORKING CAPITAL, A REDUCTION IN EQUITY, AND A
REDUCTION IN OUR RESOURCES, ALL OF WHICH MAY IMPEDE OUR ABILITY TO MAINTAIN OR
ATTRACT ADEQUATE CAPITAL TO SUPPORT OUR OPERATIONS.
Historically, we have financed our operations and our growth through
cash generated by operations, debt and equity financings, and the issuance of
our common stock in acquisitions. We may require additional capital in excess of
cash resources, cash generated by operations, and funds available to us through
our existing credit facility in order to sustain or expand our operations. We
cannot predict the timing or amount of any such capital requirements at this
time. Although we have been able to obtain adequate financing on acceptable
terms in the past when necessary, such financing may not continue to be
available on acceptable terms. As a result of our operations during fiscal 2000,
we have experienced a decline in working capital, a reduction in equity, and a
reduction in our human resources, all of which have placed a strain on our
business. Based on these factors, we do not believe that we have the same level
of access to capital as we have had in prior years. If such financing is not
available on satisfactory terms, we may be unable to operate our business as
desired, which may adversely affect our operating results. Debt financing
increases expenses and must be repaid regardless of operating results. Equity
financing could result in additional dilution to existing shareholders.
OUR GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR BUSINESS.
Sales of our collectible and consumer products are subject to changing
consumer tastes, and customers for our promotional items generally do not commit
to firm orders for more than a short time in advance. We may increase our
expenditures in anticipation of future orders that do not materialize, which
would adversely affect our profitability. Demand for popular products or
services may result in increased orders on short notice, which would place an
excessive short-term burden on our resources.
Between our 1993 and 1999 fiscal years, our business operations
underwent significant changes and growth, including the expansion of our
collectible product lines, the acquisition of our motorsports consumer product
lines, the acquisition or development of expanded distribution channels, and
significant investments in
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tooling and licensing arrangements. Our growth placed a significant strain on
our management systems and resources and contributed to operating losses when
industry growth slowed during fiscal 2000.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO RAPID MARKET CHANGES.
The markets for our products and services are subject to rapidly
changing customer tastes, a high level of competition, seasonality, and a
constant need to create and market new products and services, especially related
to our core licensors. Demand for motorsports collectible and consumer products
depends upon a wide variety of factors, including the following:
- the popularity of drivers, teams, and other licensors,
- the popularity of current product and service concepts or
themes,
- cultural and demographic trends,
- marketing and advertising expenditures, and
- general economic conditions.
Because these factors can change rapidly, customer demand also can shift
quickly. We frequently are able to successfully market new products or services
for only a limited time.
Our ability to increase our sales and marketing efforts to stimulate
customer demand and our ability to monitor third-party manufacturing
arrangements in order to maintain satisfactory delivery schedules and product
quality are important factors in our long-term prospects. Because of the amount
of time and financial resources that may be required to bring new products or
services to market, we may not always be able to accurately forecast required
inventory levels or to respond to changes in customer tastes and demands. We
could experience a material adverse effect on our business, financial condition,
and operating results if we are unable to respond quickly to market changes or a
slowdown in demand for our products or services.
WE FACE RISKS ASSOCIATED WITH OUR EXCLUSIVE RELATIONSHIP WITH QVC AND THE
OUTSOURCING OF OUR COLLECTORS' CLUB OPERATIONS.
We outsource the distribution of Collectors' Club products through QVC
under a ten-year exclusive agreement expiring in 2011. Historically, we operated
all aspects of the Collectors' Club, including production of the monthly
catalog, promotion of the Collectors' Club, inventory warehousing, and order
processing and fulfillment. Although we will remain responsible for acquisition
of licenses, product selection, development, and manufacturing, since October
2000 QVC has handled the day-to-day operation and marketing of the Collectors'
Club. Accordingly, we face risks associated with our agreement with QVC,
including the following:
- potential damage to the reputation of our Collectors' Club;
- reduced expertise in dealing with Club members and overall
levels of customer service;
- reduced sales generated from Club products; and
- risk of inventory obsolescence together with reduced control
over distribution of product.
QVC may be unsuccessful in its efforts to operate our Collectors' Club. Any
failure by QVC to operate our Collectors' Club successfully could result in
decreases in club membership or reputation, which could have a material adverse
effect on our business.
OUR REDUCTION OF OUR goracing.com INTERNET OPERATIONS MAY RESULT IN LITIGATION
OR FURTHER OBLIGATION TO OUR COMPANY.
During May 2000, we refocused goracing.com exclusively on delivering
our merchandise to motorsports fans, and no longer offer motorsports-related
content, services, or features. As part of our effort to refocus our
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goracing operations, we reduced fixed costs related to goracing.com
infrastructure, including personnel, facilities, and equipment. We face risks
associated with our rapid wind-down of our Internet operations, including the
following:
- reliance on our sublease with a third-party that assumed our
liabilities under goracing's leased office space and
equipment;
- elimination of goracing's contractual obligations; and
- potential litigation from third parties and former employees.
We may not be successful in our efforts to reduce our Internet operations, and
our efforts may result in litigation or further obligation to our company, all
of which would have a material adverse effect on our business.
WE MAY EXPERIENCE SEASONAL FLUCTUATIONS IN SALES THAT COULD AFFECT OUR EARNINGS
AND THE TRADING PRICE OF OUR COMMON STOCK.
We may experience seasonality in our business, which could result in
unfavorable quarterly earnings comparisons and affect the trading price of our
common stock. Because the auto racing season is concentrated between the months
of February and November, the second and third calendar quarters of each
calendar year (our third and fourth fiscal quarters) generally are characterized
by higher sales of motorsports products. We also are increasing our efforts to
develop large corporate promotional programs. These programs typically result in
significant levels of revenue and income, which may increase quarter-to-quarter
variations in our operating results. As a result of these and other factors, we
may experience seasonality and quarterly fluctuations in our business, which
could result in unfavorable quarterly earnings comparisons and affect the
trading price of our common stock. Fluctuations in quarterly sales may require
us to take temporary measures, including changes in personnel levels, borrowing
amounts, and production and marketing activities. These factors and any seasonal
and cyclical patterns that emerge in consumer purchasing could result in
unfavorable quarterly earnings comparisons. As a result, it is difficult to
predict our future revenue and operating results. Any shortfall in revenue or
fluctuations in operating results may have a material adverse effect on our
business and stock price. You should not rely on quarter-to-quarter comparisons
of our operating results as an indication of future performance.
WE FACE A VARIETY OF RISKS ASSOCIATED WITH THE ACQUISITION AND INTEGRATION OF
NEW BUSINESS OPERATIONS.
We completed a number of acquisitions during fiscal 1997, fiscal 1998,
and fiscal 1999. We have consolidated substantially all of the operations of the
U.S.-based acquired entities into our operations in Phoenix, Arizona and the
Charlotte, North Carolina vicinity. We continue to coordinate and integrate
certain of the administrative, information systems, sales and marketing, and
other operations of our acquired companies with our operations. Although our
short-term strategy does not anticipate any acquisitions, we may wish to acquire
complementary businesses, products, services, or technologies in the future. We
may not be able to identify suitable acquisition candidates, make acquisitions
on commercially acceptable terms, or have adequate capital to do so.
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The integration of the management, personnel operations, products, services,
technologies, and facilities of any businesses that we may acquire in the future
could involve unforeseen difficulties. These difficulties could disrupt our
ongoing business, distract our management and employees, and increase our
expenses, which could have a material adverse effect on our business, financial
condition, and operating results.
We conduct due diligence reviews of each acquired business, and we
obtain representations and warranties regarding each acquired business.
Unforeseen liabilities and difficulties, however, can arise in connection with
the operation of acquired businesses. Contractual or other remedies may not be
sufficient to compensate us in the event unforeseen liabilities or other
difficulties arise. In addition, our ability to enforce our rights or remedies
in connection with acquisitions of businesses outside the United States may be
limited by the interpretation and enforcement of those agreements under the laws
of countries other than the United States.
We strive to take advantage of the opportunities created by the
combination of acquired operations to achieve significant revenue opportunities
and substantial cost savings, including increased product offerings and
decreased operating expenses as a result of the elimination of duplicative
facilities and personnel associated with sales, marketing, administrative,
warehouse, and distribution functions. Significant uncertainties, however,
accompany any business combination. We may not be able to achieve revenue
increases; integrate facilities, functions, and personnel in order to achieve
operating efficiencies; or otherwise realize cost savings as a result of
acquisitions. The inability to achieve revenue increases or cost savings could
have a material adverse effect on our business, financial condition, and
operating results.
We frequently engage in discussions with various motorsports-related
and other businesses regarding our potential acquisition of those businesses. In
connection with these discussions, we and each potential acquisition candidate
exchange confidential operational and financial information, conduct due
diligence inquiries, and consider the structure, terms, and conditions of the
potential acquisition. In certain cases, the prospective acquisition candidate
agrees not to discuss a potential acquisition with any other party for a
specific period of time and agrees to take other actions designed to enhance the
possibility of the acquisition. Potential acquisition discussions frequently
take place over a longer period of time and often involve difficult business
integration and other issues, including in some cases retention of management
personnel and related matters. As a result of these and other factors, a number
of potential acquisitions that from time to time appear likely to occur may not
result in binding legal agreements and may not be consummated.
MARKETS FOR OUR PRODUCTS AND SERVICES ARE EXTREMELY COMPETITIVE, AND WE CANNOT
ASSURE YOU THAT WE WILL BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE.
The motorsports collectible and consumer products markets are extremely
competitive. We compete with major domestic and international companies. Some of
these competitors have greater market recognition and substantially greater
financial, technical, marketing, distribution, and other resources than we
possess. We cannot assure you that we will continue to be able to compete
successfully in the future.
Our motorsports die-cast collectibles compete with die-cast and other
motorsports collectibles and, to a certain extent, die-cast replicas of
motorsports vehicles that are sold through mass retail channels. Our motorsports
apparel and souvenirs compete with similar products sold or licensed by drivers,
owners, sponsors, and other licensors with which we currently do not have
licenses as well as with sports apparel licensors and manufacturers in general.
Emerging companies also may increase their participation in these motorsports
markets. Our promotional programs must compete for advertising dollars against
other specialty advertising programs and media, such as television, radio,
newspapers, magazines, and billboards.
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Certain of our competitors may be able to devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies, and devote substantially more resources to their business
than we do. The markets for motorsports collectible products are intensely
competitive, and we expect competition to intensify in the future.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS, INTERNATIONAL TRADE,
EXCHANGE, AND FINANCING.
We obtain most of our products from overseas manufacturers,
particularly one third-party manufacturer of die-cast collectibles and other
replicas in China. During fiscal 2000, we derived approximately 70% of our
revenue from products that were manufactured by this third-party manufacturer.
Because most of our products are manufactured overseas, we face risks in
addition to the risks generally created by obtaining our products from third
parties. We maintain business operations in Germany and Great Britain, and we
market motorsports collectible products throughout the world. Our reliance on
third-party manufacturers to provide personnel and facilities in China; our
maintenance of personnel, equipment, and inventories abroad; and our plans to
expand our product sales in international markets expose us to certain economic
and political risks. These risks include the following:
- management of a multi-national organization,
- compliance with local laws and regulatory requirements, as
well as changes in such laws and requirements,
- restrictions on the repatriation of funds,
- employment and severance issues,
- overlap of tax issues,
- the business and financial condition of the third-party
manufacturers,
- political and economic conditions abroad, and
- the possibility of
-- expropriation or nationalization of assets,
-- supply disruptions,
-- currency controls,
-- exchange rate fluctuations, and
-- changes in tax laws, tariffs, and freight rates.
Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws, or other trade policies, could adversely affect our ability to purchase
our products from foreign suppliers or the price at which we can obtain those
products. In November 1999, the United States and China signed an agreement that
will lift trade barriers between the two countries and that advances China's
efforts to join the World Trade Organization. Special interest groups have
raised objections to these efforts and we cannot be certain whether or to what
extent trade relations with China will continue to improve. Any developments
that adversely affect trade relations between the United States and China in the
future could impact our ability to obtain die-cast collectible products from our
manufacturers.
All of our purchases from our foreign manufacturers are denominated in
U.S. dollars or in Hong Kong dollars, which are pegged to the U.S. dollar. As a
result, the foreign manufacturers bear any risks associated with exchange rate
fluctuations subsequent to the date we place orders with those manufacturers. An
extended period of financial pressure on overseas markets or a devaluation of
the Chinese currency that results in a financial setback to our overseas
manufacturers, however, could have an adverse impact on our operations.
Purchases of die-cast products from the China-based manufacturers generally
require us to provide an international letter of credit in an amount equal to
the purchase order. Although we currently have in place financing arrangements
in an amount that we consider adequate for anticipated purchase levels, the
inability to fund any letter of credit required by a supplier would have an
adverse impact on our operations.
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Substantially all of our sales are denominated in either U.S. dollars,
Deutschmarks, or British pounds sterling. As a result, international customers
for our products bear any risks associated with exchange rate fluctuations
subsequent to the date the order is placed. We may, however, experience losses
as a result of exchange rate fluctuations between the dollar and the Deutschmark
or the pound. In the future, we may seek to limit such exposure by entering into
forward foreign exchange contracts or engaging in similar hedging strategies.
Any currency exchange strategy may be unsuccessful in avoiding exchange-related
losses, and the failure to manage currency risks effectively may have a material
adverse effect on our business, financial condition, and operating results. In
addition, revenue earned in foreign countries may be subject to taxation by more
than one jurisdiction, which would adversely affect our earnings.
The "Euro" currency was introduced in certain Economic and Monetary
Union countries in January 1999. All EMU countries are expected to be operating
with the Euro as their single currency by 2002. We intend to monitor the impact,
if any, that introduction of the Euro currency will have on our internal systems
and the sale of our products and to take appropriate actions to address those
issues if required. We cannot predict the impact, if any, that introduction of
the Euro will have on our business, financial condition, or results of
operations.
WE DEPEND ON MANAGEMENT AND OTHER KEY PERSONNEL.
Our development and operations to date have been, and our proposed
operations will be, substantially dependent upon the efforts and abilities of
our senior management, particularly Fred W. Wagenhals, our Chairman of the
Board, President, and Chief Executive Officer. The loss of services of one or
more of our key employees, particularly Mr. Wagenhals, could have a material
adverse effect on our company. We maintain key person insurance on the life of
Mr. Wagenhals in the amount of $3.0 million. We do not maintain such insurance
on any of our other officers.
WE MUST BE ABLE TO ATTRACT AND RETAIN SKILLED EMPLOYEES.
Our success depends on our ability to continue to attract, retain, and
motivate skilled employees. We may be unable to retain our key employees or
attract, motivate, or retain other qualified employees in the future. Any
failure to attract and retain key employees will materially and adversely affect
our business.
WE HAVE SIGNIFICANT INDEBTEDNESS.
As of September 30, 2000, we had outstanding approximately $109.8
million of indebtedness. This indebtedness includes $100.0 million principal
amount of 4-3/4% Convertible Subordinated Notes due 2005 and approximately $9.8
million of other secured and unsecured indebtedness. In the future, we may face
risks related to servicing our debt obligations as interest or principal
payments become due. If we are unable to service our debt, we will be required
to restructure or refinance our debt or pursue alternative sources of financing,
which may include selling additional equity securities. We may not be able to
successfully implement alternative strategies on satisfactory terms in the event
that it becomes necessary to do so.
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WE HAVE LIMITED PROTECTION OF OUR INTELLECTUAL PROPERTY, AND OTHERS COULD
INFRINGE ON OR MISAPPROPRIATE OUR RIGHTS.
We regard our trademarks, trade dress, copyrights, and other
intellectual properties as critical to our success. Our failure to adequately
protect our intellectual property could materially and adversely affect our
business, operating results, and financial position. Our intellectual property
rights primarily consist of our trade names, logos, and art. We have copyright
protection for all original material that we produce to promote our products and
services.
We have registered trademarks for certain of our "Action" names and
logos. We have applied for federal registration in the United States for various
other "Action" names and logos, as well as "goracing.com" and other marks. Our
ability to prevent others from using trademarks or names similar to marks and
names that we use may be adversely impacted if our marks are regarded as
descriptive or weak. Our inability to obtain trademark protection for our marks
and names could have a material adverse effect on our business.
We may not be able to obtain effective trademark, service mark,
copyright, and trade secret protection in every country in which we make our
products and services available. We may find it necessary to take legal action
in the future to enforce or protect our intellectual property rights or to
defend against claims of infringement. Policing unauthorized use of our
proprietary rights is difficult. Litigation can be very expensive and can
distract our management's time and attention, which could adversely affect our
business. In addition, we may not be able to obtain a favorable outcome in any
intellectual property litigation.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants. These agreements may be
ineffective in preventing misappropriation of technology and could be
unenforceable. Misappropriation of our intellectual property or the litigation
costs associated with our intellectual property could have a material adverse
effect on us.
THE MARKET PRICE OF OUR COMMON STOCK AND NOTES MAY BE EXTREMELY VOLATILE.
The market price of our common stock has fluctuated dramatically. The
trading price of our common stock in the past has been, and in the future could
be, subject to wide fluctuations in response to a number of factors, including
the following:
- quarterly variations in our operating results,
- actual or anticipated announcements of new products or
services by our company or our competitors,
- changes in analysts' estimates of our financial performance,
- general conditions in the markets in which we compete, and
- worldwide economic and financial conditions.
The stock market also has experienced extreme price and volume
fluctuations that have affected the market prices for many rapidly expanding
companies and that often have been unrelated to the operating performance of
such companies. These broad market fluctuations and other factors may adversely
affect the market price of our common stock.
The trading price of our subordinated notes will depend on the factors
described above as well as on other factors, such as prevailing interest rates,
perceptions of our creditworthiness, the market price of our common stock into
which the subordinated notes are convertible, and the market for similar
securities. As a result, the market price of our subordinated notes may trade at
a discount from their principal amount based on such factors.
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HOLDERS OF OUR SUBORDINATED NOTES AND HOLDERS OF OUR COMMON STOCK WILL BE
SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH THOSE NOTES.
Our subordinated notes are general unsecured obligations, subordinated
in right of payment to all of our existing and future senior indebtedness. As a
result of this subordination, in the event of any insolvency, liquidation or
reorganization of our company or upon acceleration of the subordinated notes due
to an event of default (as defined in the indenture governing the notes), the
assets of our company will be available to pay obligations on the notes only
after the administrative expenses of any bankruptcy proceeding and all senior
indebtedness, if any, have been paid in full. As a result, there may not be
sufficient assets remaining to pay amounts due on the notes and any of our other
subordinated indebtedness then outstanding. The indenture does not prohibit or
limit the ability of our company and our subsidiaries to incur additional
indebtedness, including senior indebtedness. The incurrence of such indebtedness
could adversely affect our ability to pay our obligations under the notes. In
addition, the notes are not guaranteed by any of our subsidiaries. As a result,
the notes effectively rank junior to all creditors of our subsidiaries.
Upon the occurrence of certain adverse events, each holder of
subordinated notes may require us to repurchase all or a portion of such
holder's notes. If such an event were to occur, we may not have sufficient
financial resources or may not be able to arrange financing to pay the
repurchase price for all subordinated notes tendered by holders thereof. Our
ability to repurchase the notes in such event may be limited by law, the
indenture, and the terms of other agreements relating to borrowings that
constitute senior indebtedness, as such indebtedness or agreements may be
entered into, replaced, supplemented, or amended from time to time. We may be
required to refinance senior indebtedness in order to make any such repurchase
payments. If we are prohibited from repurchasing the subordinated notes, such
failure would constitute an event of default under the indenture, which may
constitute a further default under certain of our existing agreements relating
to borrowings and the terms of other indebtedness that we may enter into from
time to time. In such circumstances, the subordination provisions in the
indenture would prohibit payments to the holders of the subordinated notes.
Furthermore, we may not have the financial ability to repurchase the
subordinated notes in the event that maturity of senior indebtedness is
accelerated as a result of a default under the applicable loan or similar
agreement. The repurchase of subordinated notes under the circumstances
described above, or our inability to repurchase subordinated notes as required,
could have a material adverse affect on our financial condition and operating
results.
RIGHTS TO ACQUIRE SHARES WILL RESULT IN DILUTION TO OTHER HOLDERS OF OUR COMMON
STOCK.
As of December 20, 2000, options to acquire a total of approximately
1,280,000 shares of our common stock were outstanding under our stock option
plans. We also offer our employees the opportunity to buy our common stock at a
discount under our employee stock purchase plan. Holders of our subordinated
notes have the right to convert their notes into an aggregate of 2,074,688
shares of common stock at a conversion price of $48.20 per share. Holders of
stock options, employees who participate in the purchase plan, and holders of
subordinated notes will have the opportunity to profit from an increase in the
market price of our common stock, with resulting dilution in the interests of
other holders of common stock. The existence of such stock options, notes, and
our purchase plan could adversely affect the terms on which we can obtain
additional financing, and the option holders, note holders, and purchase plan
participants can be expected to buy shares at a time when we, in all likelihood,
would be able to obtain additional capital by offering shares of common stock on
terms more favorable to us than those provided by such options, notes, and the
purchase plan.
SALES OF ADDITIONAL SHARES OF COMMON STOCK COULD HAVE A DEPRESSIVE EFFECT ON THE
MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of common stock by our shareholders, or
even the potential for such sales, may have a depressive effect on the market
price of our common stock. Of the 16,964,029 shares of common stock outstanding
as of December 20, 2000, 14,824,039 shares currently are eligible for resale in
the public market without restriction or further registration unless held by an
"affiliate" of our company, as that term is defined under applicable securities
laws. The 2,139,990 remaining shares of common stock outstanding are "restricted
securities," as that term is defined in Rule 144 under the securities laws, and
may be sold only in
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compliance with Rule 144, pursuant to registration under the securities laws, or
pursuant to an exemption therefrom. We have registered an aggregate of
approximately 472,300 shares of such "restricted securities" for resale pursuant
to an effective registration statements. Affiliates also are subject to certain
of the resale limitations of Rule 144. Generally, under Rule 144, each person
who beneficially owns restricted securities with respect to which at least one
year has elapsed since the later of the date the shares were acquired from us or
an affiliate of our company may, every three months, sell in ordinary brokerage
transactions or to market makers an amount of shares equal to the greater of 1%
of our then-outstanding common stock or the average weekly trading volume for
the four weeks prior to the proposed sale of such shares. Approximately
1,962,000 shares held by certain of our officers and directors currently are
available for sale under Rule 144.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF THE ACQUISITION
WOULD BE IN THE BEST INTERESTS OF SHAREHOLDERS.
Our articles of incorporation, bylaws, and Arizona law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of our company, even when those attempts
may be in the best interests of our shareholders. Our articles of incorporation
also authorize our board of directors, without shareholder approval, to issue
one or more series of preferred stock, which could have voting, liquidation,
dividend, conversion, or other rights that adversely affect or dilute the voting
power of the holders of common stock. In addition, many of our license
agreements are subject to termination in the event of a change in control of our
company.
OUR OPERATING RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS REPORT.
Some of the statements and information contained in this report
concerning future, proposed, and anticipated activities of our company,
anticipated trends with respect to our revenue, operating results, capital
resources, and liquidity or with respect to the markets in which we compete or
the motorsports industry in general, and other statements contained in this
report regarding matters that are not historical facts are forward-looking
statements, as that term is defined in the securities laws. Forward-looking
statements, by their very nature, include risks and uncertainties, many of which
are beyond our control. Accordingly, actual results may differ, perhaps
materially, from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially include
those discussed elsewhere under this Item 1, "Special Considerations."
ITEM 2. PROPERTIES
We lease a newly constructed, approximately 140,000 square foot
building in Phoenix, Arizona. We have used approximately 38,000 square feet of
this facility for our corporate headquarters and approximately 102,000 square
feet for warehouse space and packaging operations. As a result of the changes in
our operations resulting from our agreement with QVC, which reduced the need for
warehouse space, packaging operations, and our call center, we are currently
attempting to sublease substantially all of our warehouse space and 50% of our
office space. The initial term of the lease expires in August 2007, with two
five-year renewal options.
We also lease a newly constructed, approximately 121,000 square foot
facility in the Charlotte, North Carolina, vicinity for our operations in that
area. We utilize approximately 42,000 square feet of the new facility for
offices and approximately 79,000 square feet for warehouse space and
distribution operations. The initial term of the lease expires in June 2018,
with four five-year renewal options.
We currently lease two facilities in Atlanta, Georgia, for our Image
Works operations. One facility consists of approximately 77,400 square feet, of
which we utilize approximately 14,000 square feet for offices and approximately
63,400 square feet for manufacturing and warehouse operations. The lease on this
facility expires in January 2001. The second facility consists of approximately
21,900 square feet, of which we utilize approximately 19,400 square feet for
warehouse and distribution operations and approximately 2,500 square feet for
offices. The lease on this facility expires in February 2001.
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We own a newly constructed, approximately 55,000 square foot facility
in Aachen, Germany, for our MiniChamps operations. We utilize approximately
39,000 square feet of this facility for our European warehouse and distribution
operations and approximately 16,000 square feet for office space.
We lease approximately 10,000 square feet of office space in the
London, England metropolitan area for our international licensing and apparel
distribution operations. The lease on this office expires in December 2009.
ITEM 3. LEGAL PROCEEDINGS
On March 4, 1997, two class action lawsuits were filed against our
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 antitrust laws. The alleged class of plaintiffs consists of
all purchasers of souvenirs or merchandise from licensed vendors at any NASCAR
Winston Cup race or supporting event during the period commencing January 1,
1991. We were named as a defendant based upon actions alleged to have been taken
by Sports Image, Robert Yates Promotions, Inc., and Creative Marketing &
Promotions, Inc. prior to our acquisitions of those entities. The actions were
subsequently consolidated by order of the court. The caption of the consolidated
action is "In re Motorsports Merchandise Antitrust Litigation" and the files are
maintained under Master File No. 1-97-CV-0569-CC. The plaintiffs requested
injunctive relief and monetary damages of three times an unspecified amount of
damages that the plaintiffs claim to have actually suffered. In order to avoid
further expense and the distraction of our management that protracted litigation
might create, on September 30, 1999, our company and the plaintiffs entered into
a memorandum of understanding with respect to the settlement of this lawsuit. In
connection with the settlement, we recorded a non-recurring pretax charge of
$3.6 million during the fourth quarter of fiscal 1999 to reflect the financial
terms of the settlement, as well as legal and other expenses related to the
lawsuit and settlement. During September 2000, the court approved a settlement
between the plaintiffs and our company. The principle financial terms of the
settlement require us to pay approximately $1.9 million in cash and
approximately $1.1 million in coupons in consideration of the dismissal and
release with prejudice of our company and our affiliates. We paid the cash
portion of the settlement during June 2000. Race fans may redeem the $1.1
million in coupons in connection with the purchase of products at our trackside
stores over the course of the 2001 and 2002 Winston Cup race seasons. In the
event the entire $1.1 million is not redeemed by the end of the 2002 season, 25%
of the balance will be paid in cash to a charity of the settling parties'
choice, which will satisfy our obligations in full.
On November 30, 1999, a class action lawsuit was filed against our
company in the United States District Court for the District of Arizona, case
No. CIV'99 2106 PHXROS. Fred W. Wagenhals our Chairman of the Board, President,
and Chief Executive Officer, and Tod J. Wagenhals and Christopher S. Besing,
former directors and officers of our company, also were named as defendants. The
lawsuit alleges that our company and the other defendants violated the
Securities Exchange Act of 1934 by (a) making allegedly false statements about
the state of our business and the shipment of certain products to a customer or
(b) participating in a fraudulent scheme that was intended to inflate the price
of our common stock. The alleged class of plaintiffs consists of all persons who
purchased our publicly traded securities between July 27, 1999 and December 16,
1999. The plaintiffs are requesting an unspecified amount of monetary damages.
We have filed a motion to dismiss this lawsuit, which is scheduled to be heard
by the court during April 2001. We intend to vigorously defend the claims
asserted in the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been quoted on the Nasdaq National Market under
the symbol "ACTN" since April 27, 1993. The following table sets forth the high
and low sales prices of our common stock on the Nasdaq National Market during
the calendar quarters indicated.
COMMON STOCK
------------
HIGH LOW
---- ---
1998:
First Quarter............................. $38.88 $30.75
Second Quarter............................ 37.13 25.91
Third Quarter............................. 37.25 23.13
Fourth Quarter............................ 37.63 18.63
1999:
First Quarter............................. $48.00 $27.88
Second Quarter............................ 42.00 26.88
Third Quarter............................. 37.06 17.75
Fourth Quarter............................ 23.69 9.25
2000:
First Quarter............................. $16.00 $ 7.75
Second Quarter............................ 13.75 5.81
Third Quarter............................. 10.94 2.86
Fourth Quarter (through December 20, 2000) 4.06 2.25
As of December 20, 2000, there were approximately 399 holders of record
of our common stock. On December 20, 2000, the closing sales price of our common
stock on the Nasdaq National Market was $2.81 per share.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for
the five years ended September 30, 2000 are derived from our 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 Consolidated Financial Statements
and the Notes thereto included elsewhere in this report.
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1996 1997(1) 1998(2) 1999(3) 2000(4)
---- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Sales:
Collectibles ....................... $ 40,904 $ 68,932 $ 142,026 $ 214,429 $ 149,032
Apparel and souvenirs .............