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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, 1999
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 (14,983,545 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 20, 1999, was
$138,597,791. 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, 1999, there were outstanding 16,937,419 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 2000 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, 1999
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................................................. 1
ITEM 2. PROPERTIES................................................................................ 33
ITEM 3. LEGAL PROCEEDINGS......................................................................... 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 34
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 35
ITEM 6. SELECTED FINANCIAL DATA................................................................... 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...... 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 46
ITEM 11. EXECUTIVE COMPENSATION.................................................................... 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................... 47
SIGNATURES .......................................................................................... 49
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 2000 and thereafter; future products or product development; our product
and distribution channel development strategies, particularly as they relate to
the Internet; potential acquisitions or strategic alliances; 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 also operate "goracing.com," which provides
motorsports-related news and information, an online meeting place and community
for motorsports fans, and an extensive e-commerce marketplace for
motorsports-related die-cast collectibles, apparel, and souvenirs. We market our
products under an extensive portfolio of license arrangements with various
drivers, team owners, sponsors, sanctioning bodies, and others, including the
following:
- - NASCAR Winston Cup champions Dale Earnhardt, Jeff Gordon, Dale Jarrett,
and Rusty Wallace, as well as NASCAR drivers Bobby Labonte, Tony
Stewart, and Dale Earnhardt, Jr.;
- - NASCAR team owners Robert Yates Racing, Richard Childress Racing
Enterprises, Joe Gibbs Racing, 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,
Championship Auto Racing Teams, or CART, World of Outlaws, and World
Superbike; and
- - race track operators such as Speedway Motorsports, Inc., the organizers
of the Australian Grand Prix, 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 11,500 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 had approximately 167,000 members
as of September 30, 1999; through our e-commerce enabled Web sites located
within our goracing.com network; and through mobile trackside souvenir stores,
promotional programs for corporate sponsors, and fan clubs. We also distribute
certain of our products to mass-market retailers through our in-house sales
force and wholesale distributors. In addition, we have a license agreement with
Hasbro, Inc., a multi-billion dollar toy and game manufacturer, under which
Hasbro sells a line of motorsports-related products in the mass-merchandise
market.
Our products and other programs capitalize on the rapidly growing
popularity of motorsports. See Item 1, "Our Business Industry Overview." 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, car manufacturers,
various sanctioning bodies, and others in the motorsports industry. We
continually strive to strengthen our relationships with licensors and to develop
opportunities to market innovative 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. We also believe that we will be able to leverage our relationships to
attract additional licensors in order to generate increased revenue for our
company as well as increased earnings for the licensors.
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
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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. In fiscal 1997, we began an aggressive program to expand our
product offerings and distribution channels through a series of strategic
acquisitions and licensing arrangements. The following table sets forth certain
information with respect to those acquisitions, which represent an aggregate
base purchase price, including assumed liabilities, of approximately $151.8
million.
ACQUISITIONS(1) DATE BUSINESS
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Sports Image, Inc. November 1996 Markets and distributes licensed motorsports
apparel and souvenirs; trackside sales; Dale
Earnhardt fan club
Motorsport Traditions Limited Partnership January 1997 Markets and distributes licensed motorsports apparel and
and Creative Marketing and Promotions, souvenirs; trackside sales
Inc.
Robert Yates Promotions, Inc. July 1997 Markets and distributes licensed motorsports
apparel and souvenirs; trackside sales
Image Works, Inc. July 1997 Manufactures and markets licensed motorsports
apparel through the mass-merchandise markets
Motorsports collectibles product lines of August 1997 Manufactures and markets licensed "mini-helmets"
Simpson Products, Inc. and other motorsports collectibles and souvenirs
Assets related to sales of merchandise December 1997 Markets and distributes licensed motorsports
licensed by NASCAR driver Rusty Wallace apparel and souvenirs; trackside sales
Assets related to motorsports December 1997 Manufactures and markets "Revell" licensed die-cast
die-cast collectible product lines of collectibles; strategic alliance with Revell
Revell-Monogram, Inc. involving extensive product licensing and distribution
arrangements
Brookfield Collectors Guild, Inc. January 1998 Markets and distributes licensed motorsports
collectibles and ensembles
Chase Racewear, L.L.C. May 1998 Licenses motorsports apparel and clothing accessories
Paul's Model Art/MiniChamps August 1998 Markets and distributes die-cast replicas of
Formula One and GT race cars as well as factory
production cars, driver figurines, and other
motorsports collectibles
Performance Plus Nutritional, L.L.C. September 1998 Develops and markets driver-endorsed nutritional
products, including vitamins, energy bars, and
energy drinks
Intellectual Properties Group, Inc. October 1998 Creates and develops promotional programs for
corporate sponsors of motorsports
Tech 2000 Worldwide, Inc. November 1998 Operates the "goracing.com" Internet web site;
designs, develops, implements, and maintains
motorsports-related and other Internet web sites,
including electronic commerce capabilities
Goodsports Holdings Pty Ltd. January 1999 Markets and distributes licensed Formula One
apparel and related products
Fantasy Sports Enterprises, Inc. October 1999 Develops and operates "fantasy" auto racing and
other sports-related games
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(1) The acquisitions listed consist of (a) the purchase of assets of Sports
Image, Inc.; (b) the purchase of assets of Motorsport Traditions
Limited Partnership and the stock of Creative Marketing and Promotions,
Inc. (together, "Motorsport Traditions"); (c) the purchase of stock of
Robert Yates Promotions, Inc., or RYP; (d) the purchase of assets of
Image Works, Inc.; (e) the purchase of motorsports collectibles-related
assets of Simpson Products, Inc., or Simpson; (f) the
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purchase of assets related to sales of merchandise licensed by Rusty
Wallace (the "Rusty Wallace acquisition"); (g) the purchase of assets
from Revell-Monogram, Inc.; (h) the purchase of assets from Brookfield
Collectors Guild, Inc.; (i) the acquisition of 80% of the membership
interests of Chase Racewear, L.L.C.; (j) the acquisition of an 80%
interest in Paul's Model Art, GmbH, MiniChamps, GmbH, Lang Miniaturen,
GmbH, and Spielwaren Danhausen, GmbH (collectively "MiniChamps"); (k)
the acquisition of 58% of the membership interests of Performance Plus
Nutritional, L.L.C.; (l) the purchase of stock of Intellectual
Properties Group, Inc., or IPG; (m) the purchase of stock of Tech 2000
Worldwide, Inc., which is now part of goracing.com, inc.; (n) the
purchase of stock of Goodsports Holdings Pty. Ltd.; and (o) the
purchase of assets of Fantasy Sports Enterprises, Inc.
We pursue a strategy designed to enhance our leadership position in the
motorsports collectible and consumer products industry. Key aspects of this
strategy include (a) continuing to enhance our existing products and introduce
new products and services that appeal to racing enthusiasts, (b) expanding and
strengthening our licensing arrangements, (c) developing promotional programs
for corporate sponsors, (d) strengthening and expanding our existing and
identifying new distribution channels, (e) developing the goracing.com network
as a leading online destination for motorsports fans, and (f) pursuing
strategic alliances and acquisitions.
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 CART and the Indy Racing
League, or 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.
More than 17.1 million fans attended racing events in North America
during 1998, according to the Goodyear Racing Attendance Report, compared with
1998 attendance for the National Football League at 15.4 million fans and the
National Basketball Association at 20.4 million fans. Television reach is also
substantial. According to Nielson Media Research reports, NASCAR's televised
events alone attracted an aggregate of 287 million estimated viewers in 115
million households in 1998. Nielsen also reports household viewership of
NASCAR's televised Winston Cup events in the first six months of 1999 increased
15% from the first six months of 1998. CART reported that approximately 22.6
million U.S. households tuned in to the 20 CART races during 1999, a 5.8%
increase over the 21.4 million households that tuned in to the 19-race season in
1998. Motorsports 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
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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, and Chicago metropolitan areas. Additional
speedways have been announced for the New York, Kansas City, 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. We believe that the expansion of major motorsports events into
these previously untapped markets will stimulate continued growth in the
motorsports industry, exposing the sport to new racing fans who will seek
products, services, and information related to their favorite drivers, teams,
and racing series.
Large corporate advertisers have recognized the growing popularity of
motorsports. According to NASCAR, more than 70 of the Fortune 500 companies
utilize motorsports sponsorship or other motorsports-related activities as part
of their marketing strategies. The IEG Sponsorship Report indicates that
corporate sponsors were expected to spend an estimated $1.2 billion, or 24% of
all sports sponsorship dollars, on motorsports marketing programs in the United
States in 1999. The Wall Street Journal reported that Formula One attracts more
than $750 million per year from sponsors. The increasing popularity of
motorsports in the United States and abroad also has created significant demand
for a variety of race-related merchandise and souvenirs. For example, NASCAR
indicated that total NASCAR-related merchandise sales, which includes various
product categories in addition to the types of products we sell, increased from
approximately $80 million in 1990 to approximately $950 million in 1998. This
report estimated that total NASCAR-licensed product retail sales would increase
to approximately $1.1 billion in 1999. We believe that the worldwide market for
motorsports-related merchandise is substantially larger than NASCAR-licensed
product retail sales, and that there has been a lack of availability of
merchandise related to other popular racing series, such as Formula One and
CART.
GROWTH 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 throughout their careers. Key aspects of this strategy include the
following:
Enhancing Existing and Introducing New Products
We continually seek to enhance our existing products and to introduce
new products designed to appeal to enthusiasts of every major racing series.
During the last several years, we have expanded our lines of die-cast
collectibles to include Formula One, NHRA drag racing, CART, NASCAR's "Busch"
and "Craftsman Truck" racing series, World of Outlaws, and other racing series.
We continually expand our product offerings by developing and introducing new
lines of collectible products, such as the higher-priced "Elite" series of
die-cast collectibles, which feature detailed equipment such as spark plug
wires, braided hoses, and realistic suspension systems. We also have expanded
our consumer product offerings to include licensed motorsports apparel,
souvenirs, and other consumer products. In addition, 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.
We believe that our ongoing investment in tooling enables us to produce
die-cast products of higher quality and detail than those produced by our
competitors. We have invested more than $40.0 million in our proprietary
tooling, which contributes significantly to the quality of our products and is
critical to imparting the high level of detail and quality that collectors
demand. We intend to continue investing in our proprietary tooling in order to
upgrade and expand existing product lines and to add new products. We strive to
enhance the demand for and to increase the value of our collectible products by
offering limited numbers of each item.
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Expanding and Strengthening Licensing Arrangements
We focus on expanding and strengthening our relationships with existing
licensors as well as entering into licensing arrangements with additional
motorsports personalities in order to further solidify our position as the
leader in the motorsports marketplace. We believe that our licensing
arrangements with top race car drivers (including Dale Earnhardt, Jeff Gordon,
Rusty Wallace, Dale Jarrett, John Force, Tony Stewart, and Bobby Labonte), car
owners, manufacturers, sanctioning bodies, race track operators, and corporate
sponsors provide us with a competitive advantage. These licensing arrangements
enable us to manufacture and distribute distinctive collectibles and other
products to the growing market of motorsports enthusiasts.
Developing Corporate Promotional Programs
We provide complete marketing services to create corporate promotional
programs for large corporate sponsors. Promotional programs typically involve
special productions of our licensed die-cast replicas, apparel, souvenirs, or
other consumer products to increase brand awareness and name recognition of the
corporate sponsor. We successfully completed large-scale promotional programs
featuring Coca-Cola during the first quarter of fiscal 1999 and additional
large-scale programs featuring Pepsi-Cola and the "Star Wars: Episode 1 - The
Phantom Menace" motion picture, DC Comics and "Superman," Harley Davidson
motorcycles, and Home Depot in partnership with Habitat for Humanity during
calendar 1999. We plan to expand our efforts to develop promotional programs and
we continually engage in discussions to develop additional programs with major
corporate sponsors.
Strengthening and Expanding Our Existing and Identifying New Distribution
Channels
We plan to continue to strengthen and expand our existing distribution
channels and to identify new distribution channels. Beginning in fiscal 1997, we
significantly broadened and strengthened our distribution channels through
acquisitions and internal development. In addition to our wholesale distribution
network and direct sales to motorsports enthusiasts through our Collectors'
Club, our distribution channels now include
- mobile trackside souvenir stores,
- fan clubs,
- our e-commerce enabled Web sites on the goracing.com network,
- 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, K-Mart, and Target, and
- catalog merchandising programs targeted at corporate
motorsports sponsors.
As a result of the acquisition of MiniChamps in fiscal 1998, we now
utilize MiniChamps' international wholesale distribution network to sell our
products throughout the world. In addition, our license agreement with Hasbro
has provided us with a source of licensing revenue from the mass-merchandise
market without committing substantial resources to manufacturing and marketing
activities. We believe that targeting products to specific market niches,
distributing our products through the distribution channels of major corporate
sponsors of motorsports, distributing our products in international markets, and
our e-commerce initiatives will represent increasingly important distribution
channels in the future.
In October 1999, we announced a strategic reduction in the number of
our domestic wholesale distributors as part of our effort to strengthen our
distribution system. We reduced the number of domestic distributors as part of
our ongoing strategy to streamline our distribution network by retaining those
distributors with the most extensive dealer networks, the most strategic
geographic territories, the greatest ability to carry our complete product line,
and the proper controls to minimize sales of our products through unauthorized
channels.
We plan to continue to develop opportunities to streamline and enhance our
existing distribution channels, identify and develop or acquire new distribution
channels, and cross-market our products through all of our distribution channels
in the future.
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Develop the goracing.com Network as a Leading Online Destination for
Motorsports Fans
We intend to continue to develop goracing.com as a leading destination
on the Internet for motorsports fans around the world in order to maximize our
e-commerce opportunities. Our strategy to achieve this goal involves the
following elements:
- Take advantage of our relationships with drivers, team owners,
and sponsors by arranging to have them endorse and promote the
goracing.com network to increase fan awareness and increase
traffic on the goracing.com network;
- Continue to offer new products and expand goracing's
e-commerce offerings to include third-party suppliers'
products and services that appeal to our focused audience of
motorsports fans;
- Concentrate on internal development and explore opportunities
for strategic alliances and acquisitions in order to expand
goracing's motorsports-related content, take advantage of new
Internet technologies and capabilities, and add to goracing's
community features;
- Develop sponsorship and advertising programs with new and
existing sponsors of motorsports events;
- Expand the goracing.com network internationally to leverage
our experience in the U.S. motorsports industry. We intend to
expand our international online presence by developing
relationships with additional international drivers, teams,
sponsors, and racing series in order to offer additional
products and services that appeal to the international market;
expanding goracing's coverage of international racing news,
events, and information; and offering news, information, and
products that feature U.S. motorsports to the international
market.
Pursuing Strategic Alliances and Acquisitions
We seek to enter into strategic alliances and to acquire existing
businesses that we believe will enable us to introduce new products or expand
our product lines, to leverage or expand our licensing arrangements, or to
improve our distribution channels. In evaluating a potential strategic alliance
or a proposed acquisition candidate, we analyze the potential synergies that the
alliance or acquisition candidate can provide; the strength of the alliance
partner's or acquisition candidate's product lines, license rights, marketing
capabilities, manufacturing capacities, distribution channels, or management
team; and the potential opportunities presented by the alliance or acquisition.
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, CART, 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:
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SCALE PRODUCT APPROXIMATE SIZE
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1:12 Racing Vehicles 15 inches
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1:16 Pit Wagons 7 inches
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1:18 Racing Vehicles 11 inches
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1:24 and 1:25 Racing Vehicles 8 inches
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1:24 and 1:25 Dually Trucks with Trailers 26 inches
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1:32 Racing Vehicles 6 inches
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1:43 Racing Vehicles and Production Cars 5 inches
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1:64 Racing Vehicles 3 inches
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1:64 Vehicle Transporters 13 inches
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1:96 Vehicle Transporters 9 inches
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1:8 Pedal Cars 10 inches
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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, our e-commerce Web sites, and our mobile trackside stores, and
through corporate promotional programs. See Item 1, "Our Business - Sales and
Distribution."
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 and developing new 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 features the name, likeness, and car number of a popular race
car driver. We continually seek licenses with additional drivers and other
motorsports licensors, and we continually develop new motorsports consumer
products.
Our licensed motorsports apparel items utilize unique and 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, mobile trackside stores, our e-commerce Web sites, and
promotional programs with corporate sponsors of racing teams and racing events.
See Item 1, "Our Business - Sales and Distribution."
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Other Motorsports Collectible and Specialty Items
In addition to our extensive line of collectible die-cast replicas of
racing vehicles, we design and market an increasing variety of other motorsports
collectible and specialty products. These products include the following:
- 1:43 and 1:18 scale plastic driver figurines;
- 1:12, 1:8, 1:4 and 1:3 scale miniature replica helmets with
padded interiors, flip-up visors, and plastic display cases;
- 1:24 scale replicas of racing vehicles made from 26% lead
crystal, which feature laser-engraved graphics and engine
details formed out of crystal; and
- limited edition art prints featuring popular drivers and
racing themes.
The goracing.com Network
Our goracing.com network offers a broad range of news, information, and
features and serves as the online home to our e-commerce enabled Web sites,
various racing associations, driver fan clubs, race tracks, and other
motorsports-related Web sites. The goracing.com network consists of a variety of
motorsports-related Web sites that we develop, operate, and maintain.
Motorsports News and Information. goracing provides a timely,
comprehensive, and worldwide online source for news and information about the
world of motorsports. The goracing.com network is the official online home to
some of the most influential organizations in motorsports. We believe that
goracing's up-to-date news and other information encourage visitors to return
regularly to the network. goracing's field reporters cover races and events
throughout the motorsports community and produce original stories and event
coverage that are exclusive to the goracing.com network. goracing also obtains
news and information from editorial staffs of other Web sites in the
goracing.com network. goracing supplements its motorsports news with stories
from the news wire services.
The goracing Community. The goracing.com network offers an online
community where motorsports fans can
- interact in chat rooms with other motorsports fans that have
similar interests,
- participate in chats with motorsports celebrities,
- join their favorite drivers' fan clubs,
- track the value of and trade their collectibles,
- participate in online auctions, and
- play games and participate in online contests and promotions
related to motorsports.
We believe the traffic generated by these unique features and services will lead
to increased sales on the goracing.com network and makes the network an
attractive advertising medium for providers of motorsports and automotive
products and services.
Motorsports E-Commerce. We intend to capitalize on the unique
capabilities of the Internet to maximize the buying potential of our online
audience. In February 1999, we launched our e-commerce initiative on the
goracing.com network. Our Action Collectibles Store, Action Apparel Store, and
Racing Collectables Club of America Store sell selected lines of our licensed
die-cast scaled replicas of motorsports vehicles, apparel, and souvenirs online.
goracing's operating infrastructure and technology can track the usage
patterns for each visitor to our e-commerce Web sites, allowing us to target
promotions and cross-sell products to repeat visitors. This highly
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personalized approach to selling takes advantage of the Internet's unique
capabilities to structure the presentation of products and information around
the characteristics of a specific audience. We believe this use of technology
will provide a much more personalized shopping experience than more traditional
distribution channels, such as catalogs. Personalized selling also will allow us
to suggest products and potentially create sales that might not otherwise take
place.
Motorsports fans who visit goracing.com also can access SpeedMall, our
online shopping mall that is dedicated to motorsports and automotive products
and services. SpeedMall includes e-commerce enabled Web sites of other
motorsports and automotive-related entities that utilize the traffic generated
by the goracing network to sell their products and services online. Third-party
SpeedMall tenants pay us fees under a variety of arrangements, including fees
based on the amount of traffic the tenant receives on a per click-through basis
or a percentage of revenue that the tenant receives from sales generated by
traffic from SpeedMall.
Online Advertising and Sponsorships. Advertising on the goracing.com
network generated less than 1% of our revenue during the year ended September
30, 1999. We believe that selling sponsorships and advertisements on the
goracing.com network represents a significant opportunity for future revenue
growth. We plan to increase sales of various advertising and sponsorship
packages on the goracing.com network in the future.
Corporate Promotional Programs
We provide comprehensive marketing services designed to create
corporate 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.
In fiscal 1997, we began developing and implementing extensive
corporate 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 vehicles and other collectibles,
apparel, and souvenirs based on these programs. Following the acquisition of IPG
in October 1998, we expanded our efforts to develop and implement large-scale
corporate programs. For example, during fiscal 1999 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;
- collaborated with Pepsi-Cola Company, Gordon-Everham
Motorsports, and Lucasfilm to create a promotion in which Jeff
Gordon drove a specifically painted "Star Wars: Episode 1 -
The Phantom Menace" Busch Series car;
- combined efforts with DC Comics, Jeff Gordon, John Force, Dale
Earnhardt, Jr., and six other popular drivers from four racing
series to produce a program in which each of the drivers drove
a specially painted "Superman" race car in a selected race;
- collaborated with the Fox television network and NASCAR to
create a promotion in which Jeff Gordon, Bobby Labonte, Terry
Labonte, and Kenny Wallace drove specially painted race cars
to introduce the "NASCAR Racers" Saturday morning children's
television program; and
- 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 completed this program
during the first quarter of fiscal 2000.
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 or other promotions. Die-cast replica vehicles that we develop
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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.
We believe that the license agreement with Hasbro allows us to
capitalize on opportunities in the mass-merchandise market. The agreement
enables us to remain focused on our core business of designing and marketing
motorsports collectibles, apparel, and souvenir products while enabling us to
benefit from Hasbro's retail mass-merchandise marketing expertise and resources.
The agreement also provides a means of expanding our product offerings without
committing substantial resources to manufacturing and marketing activities or
subjecting us to the risks inherent in the mass-merchandise market.
Other Products and Services
Fan Clubs. We operate fan clubs for several popular race car drivers,
including "Club E," which is the Dale Earnhardt Fan Club; "Club E Jr.," which is
the Dale Earnhardt, Jr. fan club; the Dale Jarrett Fan Club; the Rusty Wallace
Fan Club; the Bobby Labonte Fan Club; and the John Force Fan Club. Our fan clubs
had a total of approximately 79,000 members as of December 20, 1999. Membership
packages typically include a quarterly newsletter, personalized membership card,
and exclusive benefits and discounts that are provided only to club members. Fan
club members also may purchase an exclusive membership kit that includes an
embroidered logo hat, lapel pin, and 1:64th scale die-cast car. We provide to
fan club members unique product offerings and other benefits that we do not
offer through any other distribution channels.
Chase-branded Apparel. During fiscal 1998, we acquired an 80% interest
in Chase, a motorsports-related apparel and licensing company. Chase licenses
apparel and clothing accessories that bear "Chase" brand marks, including "Chase
Authentics," "Competitor's View," and a stylized "C." 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. During fiscal 1999, we extended our licensing arrangement
with a major apparel manufacturer under which the manufacturer holds the
exclusive right to use the "Chase Authentics" brand for all motorsports-related
apparel products distributed through major department stores, traditional
apparel stores, and sport and athletic specialty stores. The manufacturer pays
us a royalty based on its sales of Chase-branded products.
SALES AND DISTRIBUTION
We market our die-cast collectibles worldwide to approximately 11,500
specialty retailers through our wholesale distributor network; through our
Collectors' Club, our e-commerce Web sites, and mobile 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 5,000 specialty retailers and to major discount
and department stores, retail automotive product outlets, and convenience
stores; through direct
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trackside sales to race fans; through our e-commerce Web sites; 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 6,500 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. Our
employees attend trade shows in an effort to attract new retailers to our
network. 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, K-Mart, and
Target, 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.
In October 1999, we announced a strategic reduction in the number of
our domestic wholesale distributors as part of our effort to strengthen our
distribution system. We reduced the number of domestic distributors as part of
our ongoing strategy to streamline our distribution network by retaining those
distributors with the most extensive dealer networks, the most strategic
geographic territories, the greatest ability to carry our complete product line,
and the proper controls to minimize sales of our products through unauthorized
channels. We plan to continue to develop opportunities to streamline and enhance
our existing distribution channels, identify and develop or acquire new
distribution channels, and cross-market our products through all of our
distribution channels in the future.
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 167,000 members as of September 30,
1999. We advertise the Collectors' Club in publications that focus on
motorsports or the collectibles industry, through banner advertisements on the
Internet, and through limited radio and television advertisements. We 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.
Until February 1999, members of our Collectors' Club purchased products
through our catalog by calling our customer service representatives. Beginning
with the February 1999 launch of our e-commerce initiative on goracing.com,
users also can join the Collectors' Club and view and purchase products online.
Each month, we send e-mail to online club members notifying them of new
product offerings. We attempt to notify all club members of new products either
by e-mail, catalog, or on the goracing.com network
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before accepting orders to ensure that all club members have an equal
opportunity to purchase collectible products. If items that we offer exclusively
to club members do not sell out, we may make them available to non-club members
after a period of time.
We also employ customer service representatives and an automated call
distribution telephone system to accept membership applications, take customer
orders, and handle customer inquiries. We utilize an advanced telephone and
computer system that combines telemarketing functions, computerized order
processing, and automated warehouse operations to process telephone orders from
and ship products to Collectors' Club members.
Trackside Sales
We currently operate 28 fully equipped mobile 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 (34
events in 1999) 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 are in discussions with major race car drivers and corporate
sponsors in our effort to develop such programs on a continuous basis. See Item
1, "Our Business - Products and Services - Corporate Promotional Programs."
Electronic Commerce Sales
In February 1999, we launched our e-commerce initiative consisting of
Web sites featuring our products, as well as SpeedMall, a state-of-the-art
virtual shopping mall linked to the traffic generated by goracing.com. See Item
1, "Our Business Products and Services - The goracing.com Network - Motorsports
E-Commerce."
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
the People's Republic of 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.
Our die-cast collectibles (other than products marketed by MiniChamps)
are primarily manufactured under an agreement with one third-party manufacturer
in China. The term of the agreement currently extends through December 31, 2001
and automatically renews for successive one-year terms unless terminated by
either party by giving written notice to the other party at least 90 days prior
to the end of the then-current term.
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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 $17.0 million in fiscal 1998
and $10.0 million in fiscal 1999 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.
We intend to make additional investments in tooling in order to support the
growth of our business.
We believe that our overseas manufacturer of die-cast collectibles is
dedicated to high quality and productivity as well as support for new product
development. Although we believe that there are alternative manufacturing
arrangements available if needed, 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."
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 unique 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 is 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 continually
strive to strengthen our relationships with licensors and to 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 champions
Dale Earnhardt, Jeff Gordon, and Rusty Wallace and 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
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distribution used by our company, any products bearing his 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 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.
In October 1998, we entered into an amended personal service and
endorsement agreement with Jeff Gordon and an affiliate of Mr. Gordon. During
the term of the endorsement agreement, we have the right to use Mr. Gordon's
name, likeness, signature, and endorsement in connection with the advertisement,
promotion, and sale of the die-cast collectibles and other products approved by
Mr. Gordon and marketed by our company. The endorsement agreement expires on
December 31, 2005.
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); and Dale Earnhardt, Inc. The team owner licenses
provide us with either the exclusive right or a right of first refusal to market
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 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 January 10, 2001
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, 2000
Dale Earnhardt, Jr. (Dale Earnhardt, Jr.
Ron Hornaday through 2005)
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We have non-exclusive endorsement and marketing relationships with many of
the leading motorsports drivers, team owners, and crew chiefs, including the
following:
Dale Earnhardt Rusty Wallace
Jeff Gordon Bobby Labonte
Dario Franchitti Steve Kinser
Mark Martin Tony Stewart
Don Prudhomme Dale Earnhardt, Jr.
Joe Gibbs Racing Richard Childress Racing
Ray Evernham
Each of these personalities has agreed to endorse the goracing.com network
for motorsports and automotive-related products, services, and information.
These endorsements include publicly acknowledging goracing.com when appropriate,
making personal appearances and commercials on our behalf, granting interviews
and participating in online chats on our network, providing us with race-used
items for online auctions and promotions, and permitting us to use the
endorser's name, signature, and likeness for advertising, marketing, and
promotional purposes. Each of these drivers, team owners, and crew chiefs will
either add the endorser's Web site to the goracing.com network or grant us the
right to design, operate, host, and control the endorser's motorsports or
automotive-related Web sites.
Additional Product Licenses
In addition to the driver and team owner licenses described above, we
currently maintain approximately 300 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; NHRA drag racers
Kenny Bernstein, Cruz Pedregon, Larry Dixon, and Warren Johnson; 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., 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. 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 LICENSORS: Either (i) a fixed dollar amount, Same. Same.
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.
- ------------------------ -------------------------------------- ----------------------------- ------------------------
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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. We continually 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.
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) die-cast replicas of motorsports vehicles and a
1:18th-scale plastic toy car, for which Hasbro pays a specified royalty, and
(ii) all other products that Hasbro may market as licensed motorsports products,
including, for example, radio-controlled cars, slot car sets, games (including
electronic and CD-ROM interactive games), plush toys, figurines, play sets,
walkie talkies, and other products, for which Hasbro pays a specified royalty.
Hasbro's initial 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 completely distinct from our current products and
do not compete directly with our limited-edition motorsports die-cast
collectible products.
During fiscal 1999, our company and Hasbro amended the license
agreement to provide Hasbro with a 90-day right of first refusal to utilize
licensing rights to new forms of motorsports that we acquire during the term of
the revised agreement. The amended license provides for a term ending on
December 31, 2006. Hasbro may extend the license for an additional three-year
term, provided that total wholesale revenue of licensed products exceeds a
specified amount during the initial term.
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 price of licensed products that we sell,
with minimum guaranteed royalty
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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 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. We will have the right to renew the CART
license for an additional five-year term if we achieve certain minimum sales
requirements.
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. Our goracing.com network currently or potentially
competes with companies that concentrate on or include motorsports-related news
and information, community features, and products and services as part of their
online offerings.
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.
See Item 1, "Special Considerations - 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."
INTELLECTUAL PROPERTY
Our business depends upon valuable trademarks and other rights that we
license from third parties. See Item 1, "Our Business - Licenses." 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, as
well as the "goracing.com," "SpeedMall," 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.
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Our Internet operations use proprietary software that we have
developed. Our proprietary software is protected by copyright laws. As part of
our confidentiality procedures, we generally enter into agreements with our
employees and consultants and limit access to and distribution of our software,
documentation, and other proprietary information. The steps we take may not
prevent misappropriation of our technology, and the agreements we enter into for
that purpose may not be enforceable. Third parties may independently develop
similar software or they could copy or otherwise obtain and use our software or
other proprietary information without our authorization. It may be difficult or
impossible for us to police unauthorized use of our technology. In addition, the
laws of other countries may afford us little or no effective protection of our
intellectual property outside the United States.
We may receive notices from third parties that claim our software or
other aspects of our Internet 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.
Our Internet operations also rely on a variety of technologies that we
license from third parties. These third-party technology licenses may not
continue to be available to us on commercially reasonable terms. Our loss or
inability to maintain or obtain upgrades to any of these technology licenses
could result in delays in completing our Internet software enhancements and
developments until we identify, license, develop, and integrate equivalent
technology. Any such delays could have an adverse effect on our Internet
business.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. As a result of the increasing popularity and use of the Internet and
other online services, however, it is possible that laws and regulations may be
adopted with respect to the Internet or other online services. These laws and
regulations could cover issues such as user privacy, pricing, content,
copyrights, distribution, sales and other taxes, and the characteristics and
quality of products and services. The growth and development of the market for
online commerce may prompt more stringent consumer protection laws, which may
impose additional burdens on companies that conduct business online. Because we
sell to consumers residing throughout the United States and in numerous foreign
countries and the goracing.com network is available over the Internet in every
state and numerous foreign countries, these jurisdictions may claim that we are
required to collect sales or other similar taxes on sales of products in those
jurisdictions. These jurisdictions also may claim that we are required to
qualify to do business as a foreign corporation in each such state and foreign
country. A successful assertion by one or more states or any foreign country
that we should collect sales or other taxes could adversely impact our business.
Our failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify. Any new legislation or regulation, the application of laws and
regulations of jurisdictions whose laws we believe do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and goracing's online services could have a material adverse effect on our
business.
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 $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.
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EMPLOYEES
As of December 20, 1999, we had 648 full-time employees and 9 part-time
employees. 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................................ 58 Chairman of the Board, President, and Chief
Executive Officer
Tod J. Wagenhals................................. 35 Executive Vice President, Secretary, and
Director
David A. Husband................................. 30 Executive Vice President - Finance and
Accounting and Chief Financial Officer
Melodee L. Volosin............................... 35 Executive Vice President - Sales 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.
Tod J. Wagenhals has served as our Executive Vice President since July
1995, as a director since December 1993, and as Secretary since November 1993.
Mr. Wagenhals served as a Vice President of our company from September 1993 to
July 1995. Mr. Wagenhals served in various marketing capacities with our company
from May 1992 until September 1993. Mr. Wagenhals is the son of Fred W.
Wagenhals.
David A. Husband has served as our Executive Vice President - Finance
and Accounting and Chief Financial Officer since December 1999. Mr. Husband
served as Vice President - Finance and Accounting and Chief Accounting Officer
from May 1998 until December 1999. Mr. Husband was employed as an accountant
with Arthur Andersen LLP from July 1992 to May 1998, where he was primarily
engaged in auditing publicly held companies. Mr. Husband 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 Company's
wholesale distribution of die-cast collectibles and other products, including
advertising programs and budgeting.
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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 Internet
business 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, CART, 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 sales of products
licensed under that agreement or the profitability of those sales. The success
of licensing arrangements depends on many factors, including the reasonableness
of license fees in relationship to revenue generated by sales of licensed
products, the continued popularity of the licensors, and 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.
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ANY DOWNTURN IN THE POPULARITY OF THE MOTORSPORTS INDUSTRY IN GENERAL, AND
NASCAR RACING IN PARTICULAR, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
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. Any downturn in the popularity of the
motorsports industry, or its appeal to consumers, could reduce sales of
motorsports merchandise or corporation sponsorships, which would materially and
adversely affect our business.
Sales of die-cast replicas and other licensed merchandise related to
NASCAR racing represented approximately 86% of our revenue in fiscal 1999.
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. Any downturn in the popularity of NASCAR-sanctioned racing
could have a material and adverse effect on our business.
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 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 do not have long-term contracts with our third-party manufacturers.
We obtain die-cast products from our primary manufacturer in China under an
agreement that has been in place since 1994 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.
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. 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
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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.
OUR FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD IMPAIR OUR BUSINESS.
Since 1993, our business operations have undergone significant changes
and growth, including the expansion of our collectible product lines, the
acquisition of our motorsports consumer products lines, the acquisition or
development of expanded distribution channels, and significant investments in
tooling and licensing arrangements. The failure to manage our growth on an
effective basis could have a material adverse effect on our business, financial
condition, and operating results. In order to manage effectively any significant
future growth, we must
- expand our facilities and equipment and further enhance our
operational, financial, and management systems;
- design, develop, produce, and receive products from
third-party manufacturers on a timely basis;
- develop and maintain our various distribution channels in
order to maximize product sales volumes and profit margins;
- effectively manage inventory levels;
- successfully hire, train, retain, and motivate additional
employees; and
- integrate successfully the operations of any acquired
businesses with our operations.
Our growth has placed, and our anticipated future growth in our
operations will continue to place, a significant strain on our management
systems and resources. We may be required to increase staffing and other
expenses as well as make expenditures on capital equipment and manufacturing
sources in order to meet the anticipated demand of our customers. 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.
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. 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.
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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 MUST DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES TO SUCCEED.
Our operating results depend to a significant extent on 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. The success of new product and service
introductions depends on various factors, including the following:
- proper new product and service selection,
- successful sales and marketing efforts,
- timely production and delivery of new products or services,
and
- consumer acceptance of new products and services.
New products or services may not receive or maintain substantial market
acceptance. Our failure to design, develop, and introduce popular products and
services on a timely basis would adversely affect our future operating results.
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 Internet 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 NUMEROUS RISKS RELATED TO OUR INTERNET BUSINESS.
We anticipate that our emphasis on expanding our Internet business will
impact our business operations in a number of ways, including the following:
- we will make significant expenditures to provide new and
enhanced motorsports-related content, community features, and
e-commerce product and service offerings;
- we will make significant investments to enhance our
technology, software, and basic infrastructure; and
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- we may incur substantial costs to form Internet-related
strategic alliances or to make Internet-related acquisitions
and to integrate them with our existing operations.
We face numerous risks and uncertainties associated with our Internet
operations. Some of these risks and uncertainties relate to our ability to
- develop brand awareness and brand loyalty of the
"goracing.com" name to attract a larger audience to the
goracing.com network;
- expand online product and service offerings, provide a
convenient, economical, and secure online shopping experience,
and increase customer acceptance of the online purchase of
motorsports, automotive, and related merchandise and services;
- offer up-to-date news, information, and other features related
to the world of motorsports that are attractive to the
goracing.com network's visitors;
- anticipate and adapt to the changing market for Internet
services and electronic commerce, particularly as those
changes relate to the markets that we target;
- continue to develop, upgrade, maintain, and enhance our
operational, administrative, and other systems and
infrastructure to accommodate the expanded service offerings
and increased consumer traffic that we anticipate will
develop and to avoid service interruptions and delays that
could cause users to stop visiting the goracing.com network;
and
- provide or contract for satisfactory customer service and
order fulfillment, which will be critical to ensure repeat
visits by users of the goracing.com network.
We may not be successful in addressing these risks and uncertainties. The
failure to do so would materially and adversely affect our business.
We also face a variety of risks and uncertainties related to the new
and rapidly evolving Internet market, including the following:
- our future success depends to a significant extent on the
continued growth in use of the Internet;
- our target users may not prefer to obtain their motorsports
news and information online or to make online purchases;
- we may use new technologies ineffectively or fail to adapt our
network, transaction-processing systems, and infrastructure to
meet customer requirements, competitive pressures, or emerging
industry standards;
- any well-publicized compromise of security or inadvertent
transmissions of computer viruses could deter use of the
Internet in general or use of the goracing.com network to
conduct commercial transactions, and could expose us to
litigation or to a material risk of loss;
- legal uncertainties exist regarding Internet user privacy,
pricing issues, the characteristics and quality of products
and services, access charges and connection fees, consumer
protection issues, cross-border commerce, and transmission of
certain types of information over the Internet;
- our e-commerce sales and operating results could be adversely
affected if one or more states or foreign countries
successfully assert that we should collect sales or other
taxes on the sale of our products via the Internet; and
- we may be subjected to claims for defamation, negligence,
copyright, or trademark infringement or claims based on other
theories relating to the information published on the
goracing.com network. We also could be subjected to claims
based upon the content that is accessible from the
goracing.com network through links to other Web sites.
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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 MiniChamps, goracing, and Fantasy Sports Enterprises with
our operations. We may wish to acquire complementary businesses, products,
services, or technologies in the future. We may not be able to identify suitable
acquisition candidates or make acquisitions on commercially acceptable terms. We
also cannot provide assurance that we will be able to
- complete effectively the integration of the operations of the
acquired companies with our operations,
- manage effectively the combined operations of the acquired
businesses,
- achieve our operating and growth strategies with respect to
these businesses,
- obtain increased revenue opportunities as a result of the
anticipated synergies created by expanded product offerings
and additional distribution channels,
- reduce the overall selling, general, and administrative
expenses associated with acquired operations, or
- obtain, renew, or extend licensing agreements necessary to
successfully continue and expand the acquired operations.
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.
As part of our acquisition strategy, 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.
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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.
Our goracing.com network currently or potentially competes with
companies that include motorsports or automotive-related news and information,
community features, and products and services as part of their online offerings.
In addition, online retailers may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established, and
well-financed companies as use of the Internet and other online services
increases. 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 Web site and
systems development than we can through goracing.com. The e-commerce market is
new, rapidly evolving, and intensely competitive, and we expect competition to
intensify in the future.
REGULATION OF CORPORATE SPONSORSHIP MAY ADVERSELY AFFECT THE MOTORSPORTS
INDUSTRY.
Tobacco and alcohol companies provide a significant amount of
advertising and promotional support of racing events, drivers, and car owners.
In 1996, the U.S. Food and Drug Administration published final regulations that
would substantially restrict tobacco industry sponsorship of s