Action Performance Reports Q3 Net Loss of $23.6 Million
2 August 2000
Q3 Sales Down: $76.1 million vs. $101.5 million in year-ago quarter. Company announces executive management changes. PHOENIX - Action Performance Companies, Inc. reported on Tuesday financial results for its third fiscal quarter ended June 30, 2000 and changes in its executive management team. Operating results for the quarter reflect both cash and non-cash restructuring and other special charges of approximately $29.2 million related to the previously announced decision to exit goracing.com, as well as certain inventory and other asset write-downs based on changes in market conditions and management's refocus on core business activities. Quarterly Results Action Performance Companies sales for the third quarter ended June 30, 2000 were $76.1 million, down 25% from $101.5 million recorded in the same quarter of the prior fiscal year. The company's adjusted pre-tax income, which excludes approximately $29.2 million in restructuring and other special charges and approximately $2.0 million in remaining operating losses for goracing.com, was $0.8 million for the most recent quarter. In the third fiscal quarter of the prior year, the company recorded pre-tax income of $19.3 million. The company's net loss for this year's third fiscal quarter was $23.6 million, or $1.44 per diluted share, compared to net income of $11.6 million, or $0.64 per diluted share for the third quarter of the prior year. Adjusted net income, excluding these charges and remaining goracing.com operating losses, was $0.6 million, or $0.04 per diluted share for the fiscal 2000 quarter. Fiscal 1999 third quarter results did not include any significant restructuring or other special charges. Commenting on the quarter, Fred Wagenhals, chairman, president and chief executive officer, said, ``We are disappointed by the quarter's results. In that regard, we are instituting measures to bring overhead more in line with current sales levels and are accelerating a number of marketing programs designed to drive sales growth. We anticipate that these measures will strengthen us during this temporary trough in the overall growth in the motorsport industry, which we believe will pick up next year when two new networks begin covering racing events and promotional activity increases.'' Mr. Wagenhals further noted, ``We anticipate a return to profitability in 2001 based in part on the savings in overhead we expect to achieve, our new contract with Evernham Motorsports for apparel, die-cast and souvenirs as Dodge enters NASCAR after many years of absence, and incremental sales related to the two new events in Kansas City and Chicago.'' Restructuring and Other Special Charges In its press release of May 24, 2000, the company announced plans to exit its Internet business, goracing.com. In the fiscal third quarter of 2000, the company recorded restructuring charges of approximately $15.9 million related to the write-off of goodwill, endorsements, sponsorships and employee severance and termination costs. Fiscal third quarter results also include approximately $2.0 million of goracing.com's operating losses. The company does not expect to record any significant goracing.com operating losses in the future. In addition to the goracing.com restructuring charge, Action Performance has recorded a special charge totaling approximately $13.3 million. This special charge is compOsed of a $2.6 million inventory write-down associated with a strategic decision to destroy certain die-cast products in an effort to preserve the after-market value of die-cast collectibles; a $2.6 million write-down for excess apparel inventories primarily based on anticipated sponsorship and livery changes that will render the merchandise obsolete; a $3.0 million provision for vendor discounts that the company will not receive due to lower than anticipated volumes; approximately $1.3 million related to the write-off of certain long-term contracts; a $1.0 million write-off of an equity investment in a motorsport company that filed for bankruptcy during the quarter; and $2.8 million in other asset impairments. In determining the amounts of these restructuring and other special charges, the company has made estimates based on currently available information. Future events or circumstances could impact these estimates and result in additional write-offs. Executive Management Changes Action Performance's Board and management outlined measures to address the company's operating performance and future growth. These actions include management changes, planned consolidation of operations and cost reductions, and the development of several marketing initiatives designed to increase revenues and enhance the company's operating performance. David Husband, currently the company's chief financial officer, will play an increasing role in the company's day-to-day operations. The company plans to appoint Mr. Husband as Action Performance's chief operating officer. The company will recruit a new chief financial officer. In addition, John Bickford Sr., a vice president and current board member, will serve as the interim general manager of the company's U.S. apparel operations. As part of this move, Tod J. Wagenhals, currently executive vice president and a member of the board of directors, is withdrawing from the company to pursue other interests. ``Management and the Board are developing a plan to significantly restructure the company's operations with the objective of restoring Action Performance to profitable growth,'' Mr. Husband said. ``As part of this plan, we are taking a hard look at measures required to improve logistics and other process improvements in all of our operations. Overall, I believe there are a multitude of top line and cost-saving synergies that we can create through the further integration of the various acquisitions we have completed over the past several years.'' Nine Month Results Action Performance Companies revenues for the nine months ended June 30, 2000 were $198.9 million, down 21% from $252.0 million recorded in the same period of the prior fiscal year. Including the $31.5 million in restructuring and other special charges taken in the first and third quarters of fiscal 2000, the company's net loss was $29.8 million in this nine-month period, or $1.80 per diluted share. In the same period of the prior year, the company recorded net income of $23.0 million, or $1.33 per diluted share. Fiscal 1999 nine month results did not include any significant restructuring or other special charges. About Action Performance Action Performance Companies, Inc. is a leader in the design, marketing, promotion and distribution of licensed motorsports merchandise. Its products include a broad range of motorsports-related die-cast replica collectibles; apparel; souvenirs and other memorabilia. The company markets and distributes products through a variety of channels, including the Racing Collectibles Club of America (RCCA); trackside at racing events; mass retail department stores and a worldwide network of wholesale distributors and specialty dealers. ACTION PERFORMANCE COMPANIES, INC. Summary Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 Sales: Collectibles $ 42,445 $ 63,807 $ 109,781 $ 156,113 Apparel and souvenirs 31,970 35,434 83,744 89,863 Other 1,640 2,283 5,380 6,042 Net sales 76,055 101,524 198,905 252,018 Cost of sales (includes $10,676 of special charges)(a) 61,993 60,687 146,783 155,452 Gross profit 14,062 40,837 52,122 96,566 Gross profit percentage 18.5% 40.2% 26.2% 38.3% Operating expenses: (includes $17,458 of special charges)(a) Selling, general and administrative 26,711 18,277 67,159 48,977 Other non-recurring charges 5,806 -- 8,056 -- Amortization of goodwill and other intangibles 9,216 1,603 13,443 4,561 Total operating expenses 41,733 19,880 88,658 53,538 Income (loss) from operations (27,671) 20,957 (36,536) 43,028 Other income (expense): (includes $1,034 of special charges)(a) Minority interest in earnings (62) (613) (613) (1,257) Interest and other, net (2,647) (1,060) (4,453) (3,441) Total other expense, net (2,709) (1,673) (5,066) (4,698) Income (loss) before provision (benefit) for income taxes (30,380) 19,284 (41,602) 38,330 Provision for (benefit from) income taxes (6,809) 7,714 (11,765) 15,332 Net income (loss) $ (23,571) $ 11,570 $ (29,837) $ 22,998 Net income (loss) per common share: Basic ($1.44) $0.68 ($1.80) $1.37 Diluted ($1.44) $0.64 ($1.80) $1.33 Weighted average shares outstanding: Basic 16,358 16,895 16,563 16,743 Diluted 16,358 19,297 16,563 19,165 (a) Special charges refer to the 3 months ended 6/30/00, in thousands ACTION PERFORMANCE COMPANIES, INC. Summary Consolidated Balance Sheets (In thousands) June 30, September 30, 2000 1999 Current Assets: Cash $ 21,910 $ 58,523 Accounts receivable, net 43,066 44,988 Inventories 37,222 45,310 Prepaid royalties 12,770 7,271 Other assets 12,348 2,953 Total Current Assets 127,316 159,045 Property and equipment, net 56,257 56,162 Goodwill and other intangibles, net 100,561 111,634 Other assets 6,364 8,906 $290,498 $335,747 Current Liabilities: Accounts payable $ 20,667 $ 20,127 Accrued royalties 10,171 13,519 Accrued expenses and other 13,095 14,889 Current portion of long term-debt 1,442 2,713 Total Current Liabilities 45,375 51,248 Long-term debt 108,557 109,208 Minority interest in subsidiaries 2,017 2,300 Shareholders' Equity 134,549 172,991 $290,498 $335,747