Document/Exhibit Description Pages Size
1: S-1 Reynard Motorsport, Inc. S-1 108 564K
2: EX-1.1 Underwriting Agreement 43 210K
3: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 40 126K
Liquidation or Succession
4: EX-3.1 Articles of Incorporation/Organization or By-Laws 4 20K
5: EX-3.2 Articles of Incorporation/Organization or By-Laws 26 116K
6: EX-5.1 Opinion re: Legality 1 9K
7: EX-10.1 Material Contract 20 85K
8: EX-10.2 Material Contract 8 41K
9: EX-10.3 Material Contract 13 63K
10: EX-10.4 Material Contract 4 21K
11: EX-10.5 Material Contract 14 64K
12: EX-10.6 Material Contract 18 66K
13: EX-10.7 Material Contract 17 70K
14: EX-23.1 Consent of Experts or Counsel 1 10K
15: EX-23.2 Consent of Experts or Counsel 1 7K
16: EX-24.1 Power of Attorney 1 9K
17: EX-27.1 Financial Data Schedule 1 11K
18: EX-27.2 Financial Data Schedule 1 11K
As filed with the Securities and Exchange Commission on October 29, 1998
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
------------
REYNARD MOTORSPORT, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 3711 52-2121044
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
8431 Georgetown Road, Suite 700
Indianapolis, Indiana 46268
(317) 824-5600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Alex Hawkridge
Chief Executive Officer
8431 Georgetown Road, Suite 700
Indianapolis, Indiana 46268
(317) 824-5600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------
Copies to:
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Jack A. Bjerke Bruce S. Mendelsohn
Amy M. Shepherd Paul A. Belvin
Kegler, Brown, Hill & Ritter Co., L.P.A. Akin, Gump, Strauss, Hauer & Feld, L.L.P.
65 East State Street 1333 New Hampshire Avenue, N.W.
18th Floor Washington, D.C. 20036
Columbus, OH 43215 (202) 887-4000
(614) 462-5400 Facsimile (202) 887-4288
Facsimile (614) 462-5419
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------
Title of each class of securities Proposed maximum aggregate Amount of registration fee
to be registered offering price (1)
--------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share:
Shares issued in public
Offering.......................... $57,500,000 $15,985
==============================================================================================================
(1) Estimated, pursuant to Rule 457(a) and (f), solely for the purpose of
calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. REYNARD MOTORSPORT, INC. MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND REYNARD
MOTORSPORT, INC. IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES TO ANYONE
WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED.
PROSPECTUS (Not Complete)
Issued October 29, 1998
___________ Shares
[Logo]
REYNARD MOTORSPORT, INC.
COMMON STOCK
_________
Reynard Motorsport, Inc. ("Reynard") is offering shares of common
stock. This is Reynard's initial public offering, and no public market currently
exists for Reynard's shares. Reynard anticipates that the initial public
offering price for its shares will be between $____ and $____ per share. After
the offering, the market price for Reynard's shares may be outside of this
range.
_________
Reynard will apply to list the common stock on the New York Stock
Exchange under the symbol "___."
_________
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE ____.
_________
PRICE $____ PER SHARE
_________
DISCOUNTS AND OFFERING
PUBLIC COMMISSIONS TO PROCEEDS TO
OFFERING PRICE UNDERWRITERS COMPANY
-------------- ------------ -------
PER SHARE $ $ $
TOTAL $ $ $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The Selling Stockholders have granted the underwriters the right to
purchase up to an additional ___ shares of common stock to cover any
over-allotments. The underwriters can exercise this right at any time within
thirty days after the offering. NationsBanc Montgomery Securities LLC expects to
deliver the shares of common stock to investors on _________, 1999.
_________
NationsBanc Montgomery Securities LLC
Wheat First Union
_____________, 1998 Josephthal & Co. Inc.
[PHOTOS]
References in this prospectus to racing cars that are designed,
engineered and manufactured by Reynard are to complete racing cars, excluding
tires, engines, transmissions and shock absorbers. Fiscal year references are to
the fiscal year ended September 30. Certain information in this prospectus has
been translated into U.S. dollar amounts from pound sterling amounts. Unless
otherwise indicated, the translations of pound sterling amounts into U.S. dollar
amounts have been made at (pound)_____ = $_____, which is the noon buying rate
in the City of New York for cable transfers in pounds sterling for customs
purposes by the Federal Reserve Bank of New York on _____________, 1998.
References in this prospectus to the "Company" or to "Reynard" mean
Reynard Motorsport, Inc. and its subsidiaries and affiliates and their
predecessors.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete. It may not contain all of the
information that you should consider before investing in the common stock. You
should read the entire prospectus carefully.
Unless otherwise stated, all of the information contained in this
prospectus assumes that the underwriters have not exercised their over-allotment
option to purchase up to _____ shares of common stock. The information in this
prospectus has been adjusted to reflect a ____-for-____ stock split of the
common stock effected on ____________, 1999.
REYNARD MOTORSPORT
Reynard is one of the world's leading designers and manufacturers of
production racing cars and other high performance specialty vehicles. Since the
Company's inception 25 years ago, our goal has been to dominate every race and
win each championship in every series we enter. Cars that we have designed and
produced have a long history of winning races and setting records in many of the
world's most competitive racing series. Our history of winning is reflected by
our operating performance, with sales growing at a compound annual growth rate
of 51.9% from 1994 to 1997. During 1998, our racing cars were used by some of
the world's best drivers, including Alex Zanardi, Jimmy Vasser, Greg Moore, Gil
DeFerran, Dario Franchitti, Mark Blundell, Adrian Fernandez and Bobby Rahal. A
majority of the current drivers in the Formula One World Championship ("Formula
One"), the most prestigious international racing series, have competed in one of
our racing cars during their career, including World Champions Jacques
Villeneuve, Michael Schumacher and Damon Hill.
We design, manufacture and sell racing cars for competition in (1) the
CART Series, the premier open-wheel motorsports series in North America, (2)
Formula Nippon, the Formula 3000 open-wheel racing series in Japan (the "Formula
Nippon Series"), and (3) the Barber Dodge Pro Series, an open-wheel one make
development series in the United States (the "Barber Dodge Series"). We also
design and engineer touring and sports racing cars in conjunction with
automobile manufacturers, such as Ford, Chrysler, Panoz Automotive Development
Company ("Panoz") and Dodge, for competition in international championships.
British American Racing ("BAR") will make its debut in Formula One in 1999. BAR
is a joint venture in which we are partners with British American Tobacco and
Mount Eagle, Inc.
We operate integrated design, production and testing facilities in
Oxfordshire, England, often referred to as the Motorsport Valley. We also
operate a North American headquarters and testing facility in Indianapolis,
Indiana. We employ over 230 people, of which over 85% are highly skilled and
well educated designers, engineers and other specialized technicians. Our
employees utilize the most advanced technology in the design and engineering of
racing cars, with a focus on maximizing aerodynamic efficiency, while continuing
to develop improved safety features.
OUR KEY COMPETITIVE STRENGTHS
HISTORY OF WINNING. Since the beginning of fiscal 1994, our racing cars
have won a total of 81 races, including six championships in the CART Series,
Formula 3000 competition and the Formula Nippon Series. Since winning our first
race in the CART Series with driver Michael Andretti in 1994, our racing cars
have achieved a total of 54 pole positions (fastest qualifying times) and 49
wins. We also have won the Constructor's Award for the CART Series each year
from 1995 through 1998. As a result of our winning track record, we supplied 22
of the 28 full-season entries in the 1998 CART Series. We have received orders
through October 20, 1998 to supply 37 racing cars for the 1999 CART Series and
orders for 13 racing cars for the 1999 Formula Nippon Series.
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LEADER IN THE DEVELOPMENT AND APPLICATION OF MOTORSPORTS TECHNOLOGY. We
employ a scientific, rather than the traditional trial and error approach, in
the design, engineering and manufacture of racing cars. We use simultaneous
engineering, which includes computer-aided engineering, design and manufacturing
systems. With these systems, we can develop and manufacture a racing car, from
initial design to final assembly, in a period of a few months. We analyze the
aerodynamic effects on a racing car in simulated race settings by (1) developing
and applying computational fluid dynamics ("CFD"), (2) applying finite element
analysis, and (3) testing at our wind tunnel facilities. We use the results of
these tests to engineer our racing cars. We believe that our participation at
the highest level of motorsports, such as the CART Series and Formula One,
enhances our ability to effectively develop and apply highly advanced technology
to the design, development and production of racing cars for junior formulae.
STRATEGIC RELATIONSHIP WITH BRITISH AMERICAN RACING IN FORMULA ONE. BAR
will field a two-car team in the 1999 Formula One World Championship. The 1997
Formula One World Champion driver, Jacques Villeneuve, will drive one of the
racing cars that will be designed and engineered by BAR. Dr. Reynard is the
Technical Director of BAR. Malcolm Oastler, who serves as our Technical
Director, is the Chief Designer of BAR. We believe that British American Tobacco
selected Reynard to be one of their joint venture partners in BAR as a result of
our reputation and expertise. British American Tobacco has entered into a
long-term sponsorship agreement to fund what we believe to be one of the most
significant sponsorship budgets in Formula One. As a result of the joint
venture, we have access to certain of BAR's technological know how (not in
written or machine readable form). We believe that this access to research and
development ideas will enhance our other motorsports projects by improving our
knowledge database and methodology.
HIGHLY EXPERIENCED MANAGEMENT AND OPERATING TEAM. We attribute much of
our success to our management team. Our senior management team is composed of
former racing car drivers, managers, race team members and motorsports
enthusiasts who are highly experienced and well known within the motorsports
sector. The members of our senior management team have an aggregate of over 75
years of service with the Company.
We also have developed a corporate culture that provides exceptional
training to young designers and engineers. By personally interviewing and
recruiting each applicant, Dr. Reynard and the other members of the senior
management team attempt to identify those skilled engineering students who they
believe will excel in our unique culture and environment. We believe that this
recruiting process and corporate culture has enabled us to attract, retain and
develop a team of highly skilled designers, engineers and technical staff. Upon
completion of the offering, officers and employees of the Company will
beneficially own approximately ___% of the outstanding common stock.
COMMITMENT TO CUSTOMER SERVICE. We believe that service is an integral
component of sales. We demonstrate our commitment to service by assigning a
liaison engineer to each Reynard racing car in the CART Series. We also have a
Reynard engineer present at each CART event to monitor the Reynard racing cars.
This allows us to respond quickly to customer questions and concerns and to
receive valuable information for the continued development of our racing cars
and equipment.
VERTICALLY INTEGRATED OPERATIONS. We have the ability to design,
engineer and manufacture the majority of the components of a racing car. Through
our vertically integrated operations, we are able to:
o maintain higher quality control standards in the production of all
components of the racing car;
o improve operating margins by lowering costs; and
o control the timing of production and delivery of our products.
4
With the pending acquisition of Gemini Transmissions Limited
("Gemini"), which manufactures gearbox and transmission systems, we will be able
to manufacture substantially all of the parts necessary to deliver a rolling
chassis to the customer.
OUR GROWTH STRATEGY
CAPITALIZE ON GROWTH OPPORTUNITIES WITHIN EXISTING RACE SERIES. We
intend to increase our presence in the race series in which we are currently
involved. We believe we will grow our business in existing series through:
o Capitalizing on the continued expansion of the CART Series and
other existing series. We believe we will continue to grow as
these series grow through (1) increases in popularity, (2)
expansion of the number of races and competitors, (3) increases in
development budgets, and (4) expansion internationally. With such
expansion, we can increase sales to existing customers who will
require additional high margin equipment, spare parts and
services. In addition, we intend to construct a composite
manufacturing and repair facility in Indianapolis, Indiana. This
facility will support parts sales and repair work that currently
is performed in-house by individual CART teams.
o Introduction of a newly designed racing car for the 1999 Formula
Nippon Series. We believe the new design will result in increased
sales of racing cars and spare parts in this series.
o Expansion of our presence in the touring and sports car racing
programs. Major automobile manufacturers increasingly view success
in these programs as an effective way to market their products and
increase their prestige. We are planning the production of a world
sports car to be designed and manufactured in conjunction with a
major automobile manufacturer. We are currently engaged in
discussions with two major international automobile manufacturers
regarding this project.
ENTER NEW RACE SERIES AND CONTRACTS WITH NEW CUSTOMERS. We intend to
selectively enter additional motorsports markets through the sale of racing cars
and equipment and through the sale of technological support. We continuously
evaluate existing opportunities to design and produce racing cars or provide
other support services for a number of race series including: (1) the Indy
Racing League ("IRL"), (2) Formula 3000, (3) Indy Lights, and (4) Toyota
Atlantic. In addition, we will provide certain contract manufacturing services
and show cars to BAR in its early stages, on a commercial basis, for the
upcoming Formula One racing season. Show cars are replicas of actual racing cars
that are used by sponsors to promote their association with motorsports.
INTRODUCE NEW HIGHER MARGIN SERVICES. We believe that a significant
portion of our future growth will be in the form of expanded sales of higher
margin services to our motorsports customers. These services include
computational fluid dynamics analysis, wind tunnel testing and seven post
suspension rig testing. Through the application of these services, our customers
are able to simulate and evaluate the effects of subtle changes in the
engineering and set up of individual cars moving at high speeds and can apply
the results of such tests to maximize their performance.
We have designed and built a state-of-the-art 50% scale model, moving
ground open jet wind tunnel in Indianapolis, Indiana. We sell time in the wind
tunnel to CART racing teams and others on a fee-per-usage basis. In 1999, we
will construct a seven post suspension rig testing facility in Indianapolis. We
will sell time on the suspension rig to CART racing teams and others on a
fee-per-usage basis.
LEVERAGE MOTORSPORTS TECHNOLOGY. We intend to selectively expand our
high margin non-motorsports operations by applying the technological and
engineering resources we have developed in the motorsports sector to
5
other industries. We believe that our highly skilled designers and engineers can
apply our advanced technology in all areas where wind resistance, weight, fuel
conservation and/or safety concerns are factors. For example, based on our
design and engineering capabilities, Virgin Airlines selected Reynard to design
and develop a light-weight, strong, fully-reclining business class aircraft
seat. The aircraft seat is currently in the production phase.
To further support efforts outside of motorsports, we plan to open a
computer-aided design office in Detroit, Michigan. This office will target
design and engineering projects within the automotive industry, and leverage the
relationships we have developed through motorsports with the major automobile
manufacturers such as Ford and Chrysler. Although our primary focus will remain
in the motorsports industry, we intend to capitalize on opportunities outside
the motorsports sector when they arise.
SELECTIVE ACQUISITIONS. We believe a number of opportunities exist to
make selective strategic acquisitions within the motorsports industry. We will
generally seek to acquire companies that:
o complement and expand our current operations
o have an experienced management team
o have an industry leading reputation
o have strong customer and supplier relationships
Our acquisition of Gemini meets these objectives by further integrating
our current operations and providing state-of-the-art equipment in a highly
specialized business. We believe that the relationships Gemini has developed
with Audi, BMW, Mercedes and Volkswagen, as well as many other industry
customers, will add strategic value to our future growth. We will continue to
evaluate methods to further enhance our vertical integration.
6
THE OFFERING
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COMMON STOCK OFFERED (a).................................. _______ shares
SHARES TO BE OUTSTANDING AFTER THE OFFERING (B)........... _______ shares
VOTING RIGHTS............................................. Holders of common stock will have one vote per
share.
DIVIDEND POLICY........................................... We do not plan to pay cash dividends in the near
term.
USE OF PROCEEDS........................................... We estimate that we will receive net proceeds from
the offering of approximately $_____ million.
From the proceeds, we expect to:
o Use approximately $12.4 million to
acquire Gemini;
o Use approximately $10.4 million to repay
a loan to Reynard from Dr. Reynard;
o Use $____ million to fund future growth and
for working capital purposes. These purposes
include purchasing additional computer equipment
and constructing new facilities.
RISK FACTORS.............................................. For a discussion of certain risks you should
consider before investing in the common stock, see
"Risk Factors."
PROPOSED NEW YORK STOCK EXCHANGE SYMBOL................... ________
(a) Excludes ____ shares issuable upon exercise of the over-allotment option
granted to the underwriters by the Selling Stockholders. The over-allotment
option is described in "Underwriting."
(b) Excludes ____ shares reserved for issuance under our stock option plans. See
"Management - Stock Option Plans."
REORGANIZATION
Reynard Motorsport, Inc., a Delaware company, was formed in September
1998 to become the parent company of Reynard Motorsport Limited, a U.K. company.
We expect that in early November 1998, all of the current shareholders of
Reynard Motorsport Limited and its U.K. operating subsidiaries will exchange
their current equity interests for shares of common stock of Reynard Motorsport,
Inc. (the "Reorganization"). Our primary operating subsidiaries were Reynard
Composites, Reynard Special Vehicle Projects, Reynard Racing Cars, Reynard
7
Racing Designs and Reynard North America, Inc. For purposes of this
prospectus, we have assumed that the Reorganization has occurred.
RECENT DEVELOPMENTS
On October 26, 1998, we entered into an agreement to acquire Princetown
Holdings Limited, the sole owner of Gemini, for an aggregate of $14.64 million,
including $12.4 million payable in cash and the assumption of certain finance
lease obligations (the "Gemini Acquisition"). Gemini manufactures and assembles
gearboxes, gearbox components, suspension components and machined items for
various automobile companies and motorsports teams. Gemini utilizes
state-of-the-art equipment with advanced precision capabilities that are not
generally available to its competitors in the U.K. This acquisition will further
integrate our current operations in the production of racing cars. We expect the
Gemini Acquisition will close concurrently with the completion of our initial
public offering. A portion of the proceeds from the offering will be used to pay
the purchase price for Gemini. See "Use of Proceeds" and "Business - Production"
for a discussion of the terms of the Gemini Acquisition and for a discussion of
Gemini's business.
8
SUMMARY COMBINED FINANCIAL DATA
The following summary combined financial data as of and for the years
ended September 30, 1993, 1994, 1995, 1996 and 1997 and the nine months ended
June 30, 1997 and 1998 are derived from the Company's Combined Financial
Statements. The unaudited pro forma financial information gives effect to (1)
the Gemini Acquisition, (2) the Reorganization, and (3) the offering, as if each
of these events had occurred on October 1, 1996 and 1997. The summary combined
financial data below should be read in conjunction with "Selected Combined
Financial Data," the Company's Combined Financial Statements and related notes
thereto, the Unaudited Pro Forma Condensed Consolidated Financial Information
and related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contained elsewhere in this prospectus.
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YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO
FORMA
1993 1994 1995 1996 1997 1997
(in thousands, except per share amounts)
REVENUES:
Products......................... $ 8,371 $ 12,079 $ 18,952 $ 22,406 $ 39,039 $ 42,196
Services......................... 1,254 2,147 2,701 6,493 10,803 10,803
Other revenue.................... -- -- -- -- -- 19
------- -------- -------- -------- -------- --------
Total Revenues.............. 9,625 14,226 21,653 28,899 49,842 53,018
------- -------- -------- -------- -------- --------
COST OF GOODS SOLD:
Products......................... 5,661 10,375 8,814 9,928 19,502 20,928
Services......................... 446 817 1,232 3,750 5,951 5,951
------- -------- -------- -------- -------- --------
Total cost of goods sold.... 6,107 11,192 10,046 13,678 25,453 26,879
------- -------- -------- -------- -------- --------
GROSS PROFIT 3,518 3,034 11,607 15,221 24,389 26,139
GENERAL AND ADMINISTRATIVE EXPENSES... 3,421 2,276 11,285 13,766 21,462 17,205
------- -------- -------- -------- -------- --------
INCOME FROM OPERATIONS 97 758 322 1,455 2,927 8,934
Share of loss in equity
investment...................... -- -- -- -- -- --
Minority interest in loss of
Subsidiary...................... -- -- -- -- -- --
Interest income.................. 31 10 165 166 171 171
Interest expense................. (64) (41) (20) -- -- (144)
------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 64 727 467 1,621 3,098 8,961
INCOME TAX EXPENSE 18 175 114 563 1,105 3,053
------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $ 46 $ 552 $ 353 $ 1,058 $ 1,993 $ 5,908
======= ======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE --
Basic and diluted $ .02 $ .19 $ .12 $ .36 $ .68 [ ]
======= ======== ======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 2,944 2,944 2,944 2,944 2,944
======= ======== ======== ======== ======== ========
OTHER DATA:
Gross margin...................... 36.6% 21.3% 53.6% 52.7% 48.9% 49.3%
Operating margin.................. 1.0% 5.3% 1.5% 5.0% 5.9% 16.9%
Depreciation and amortization..... $ 206 $ 251 $ 408 $ 535 $ 898 $ 2,394
Capital and tooling expenditures.. $ 473 $ 874 $ 650 $ 1,963 $ 3,494 $ 4,004
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HISTORICAL PRO
FORMA
1997 1998 1998
REVENUES:
Products.......................... $ 34,098 $ 40,881 $ 43,075
Services.......................... 8,349 9,882 9,882
Other revenue..................... -- -- 47
-------- -------- --------
Total Revenues............... 42,447 50,763 53,004
-------- -------- --------
COST OF GOODS SOLD:
Products.......................... 16,878 21,713 22,603
Services.......................... 3,344 3,944 3,944
-------- -------- --------
Total cost of goods sold..... 20,222 25,657 26,547
-------- -------- --------
GROSS PROFIT 22,225 25,106 26,457
GENERAL AND ADMINISTRATIVE EXPENSES.... 15,821 20,122 15,336
-------- -------- --------
INCOME FROM OPERATIONS 6,404 4,984 11,121
Share of loss in equity
investment....................... -- (5,310) (5,310)
Minority interest in loss of
Subsidiary....................... -- 106 106
Interest income................... 144 21 21
Interest expense.................. -- (670) (240)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 6,548 (869) 5,698
INCOME TAX EXPENSE 2,066 1,634 3,517
-------- -------- --------
NET INCOME (LOSS) $ 4,482 $ (2,503) $ 2,181
======== ======== ========
EARNINGS (LOSS) PER SHARE --
Basic and diluted $ 1.52 $ (.85)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 2.944 2.944
======== ======== ========
OTHER DATA:
Gross margin...................... 52.4% 49.5% 49.9%
Operating margin.................. 15.1% 9.8% 21.0%
Depreciation and amortization..... $ 687 $ 1,003 $ 2,130
Capital and tooling expenditures.. $ 1,067 $ 4,313 $ 4,453
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YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO
FORMA
1993 1994 1995 1996 1997 1997
(in thousands, except per share amounts)
Number of cars produced............. 53 38 36 38 67 67
Number of racing wins............... 19 11 15 16 16 16
BALANCE SHEET DATA:
Working capital (deficit)........... $ (347) $ (416) $ (625) $ (595) $ (4,793) $[ ]
Total assets 3,695 5,433 13,149 11,891 18,409 [ ]
Long-term debt (less current
portion).......................... -- -- -- -- -- [ ]
Total stockholders' equity
(deficit)......................... 521 930 1,285 2,296 741 [ ]
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HISTORICAL PRO
FORMA
1997 1998 1998
Number of cars produced............. 59 76 76
Number of racing wins............... 8 5 5
BALANCE SHEET DATA:
Working capital (deficit)........... $ (396) $ (7,955) $[ ]
Total assets........................ 13,653 26,972 [ ]
Long-term debt (less current
portion).......................... -- -- [ ]
Total stockholders' equity
(deficit)......................... 3,207 (1,151) [ ]
10
RISK FACTORS
You should carefully consider the following factors and other
information in this prospectus before deciding to invest in shares of common
stock.
CONTRACTION OF MOTORSPORTS INDUSTRY APPEAL
Substantially all of our current business relates to the auto racing
industry. Auto racing events compete for television viewership, attendance and
sponsorship funding with other racing events sanctioned by various racing bodies
and with other sports, entertainment and recreational events, such as soccer,
football, basketball and baseball. The competition in the sports and
entertainment industry in the United States and throughout the world is intense.
The motorsports industry generates significant recurring revenue from the
promotion, sponsorship and advertising of various companies and their products.
If racing teams in the series in which we compete are not able to secure
sponsorship, promotion and advertising revenues, then it could adversely affect
our financial and business results.
The revenue generated from such sponsorship, promotion and advertising
substantially depends upon the level of advertising expenditures by sponsors or
prospective sponsors. The level of advertising expenditures by sponsors depends
in part on (1) the financial condition of such companies, (2) the availability
and cost of alternative promotional outlets and (3) the sponsors' perception of
the benefits of using motorsports and the specific series, events or race teams
as an advertising medium. The advertising and promotional value to sponsors is
significantly impacted by television viewership of, and spectator attendance at,
motorsports events. If there is a contraction in the appeal of motorsports, in
terms of television viewership, attendance and overall popularity, then the
various race series would be adversely affected. If the various race series are
adversely affected, then our financial and business results could be adversely
affected.
The motorsports industry is affected by economic cycles and
entertainment industry conditions. Declines in general economic conditions or
uncertainties regarding future economic prospects have generally affected
consumer spending habits. A decline in consumer spending could have a material
adverse effect on the auto racing industry in general. This could lead to
decreased sales for us, which would adversely affect our financial and business
results.
SUBSTANTIAL COMPETITION
We design, develop and manufacture racing cars and technologically
advanced equipment. This industry is highly competitive, and requires continuous
attention to aerodynamic, technological and safety advances to remain
competitive. We compete primarily with other manufacturers of racing cars. A
purchaser of our racing cars is primarily concerned with performance results and
price. If we fail to continue development of our equipment, then our racing cars
may have less satisfactory performance results. This would directly impact
interest by and sales to particular race teams and series. In addition, if we
increase costs of equipment and spare parts, then we may lose purchasers of our
equipment. Such price increases may also make our products uncompetitive when
attempting to sell to competitors in the CART Series or to negotiate contracts
for a one make series such as the Barber Dodge Series.
MOTORSPORTS INDUSTRY SPONSORSHIPS - TOBACCO AND ALCOHOL
United States. A number of the significant sponsors of race teams in
the various motorsports events in which our racing cars compete are in the
tobacco and alcohol beverages industries. Advertising by the tobacco and
alcoholic beverage industries has been under greater threat of federal
governmental regulation than advertising by other sponsors of motorsports
events, series and teams.
11
In August 1996, the U.S. Food and Drug Administration (the "FDA")
issued regulations concerning advertising and sale of cigarettes and smokeless
tobacco to minors. These regulations, if adopted, would restrict tobacco
industry sponsorship of all sporting events, including motorsports. The FDA
regulations would prohibit the present practice of tobacco product brand name
sponsorship of, or identification with, motorsports events, entries and teams.
These regulations, however, have not become effective. In August 1998, the U.S.
Court of Appeals for the Fourth Circuit ruled that the FDA did not have the
jurisdiction to regulate tobacco products. Therefore, the FDA could not enforce
its regulations restricting tobacco advertising. At the present time, the FDA
has not appealed the Court of Appeals decision.
In addition, there was a recent federal legislative initiative to
restrict advertising by the tobacco industry. In June 1997, the major United
States companies engaged in the manufacture of cigarettes and smokeless tobacco
(collectively, the "tobacco industry") entered into a memorandum of
understanding with the attorneys general of six states. The memorandum provided
support for the adoption of federal legislation to settle the various regulatory
and litigation issues facing the tobacco industry. Such federal legislation
would have had an effect similar to the FDA regulations discussed above. The
proposed federal legislation, however, was not satisfactory to the tobacco
industry. The tobacco industry withdrew from the proposed settlement. At the
present time, there has been no new effort to enact federal legislation to
settle the litigation facing the tobacco industry or to restrict tobacco
advertising.
Europe. In December 1997, eleven of fifteen member states approved the
European Union Tobacco Advertising Directive (the "Directive"). The Directive
must be enacted by all member states by July 2001 (the "Execution Date"). The
Directive provides that, within three years from the date the Directive was
approved, all tobacco advertising and promotion will be prohibited, other than
in print media. Within four years of the Execution Date, tobacco advertising
will be prohibited in print media. Within five years of the Execution Date,
tobacco sponsorship will be prohibited at all events, unless such event is
"organized at world level" and nominated by member states. If such event has
been nominated, then it will be granted a three year extension. Formula One has
been granted such an extension. Within eight years of the date of the Directive,
but no later than October 1, 2006, tobacco sponsorship will be prohibited at all
events arranged at world level. During the interim period, tobacco sponsorship
can only continue in exceptional circumstances and for justified reasons if
there are reductions in levels of advertising expenditures and voluntary
restraints on visibility of advertising. The Tobacco Manufacturers' Association,
comprised of Gallaher, Imperial Tobacco, Rothmans, British American Tobacco
Company, Phillip Morris, R.J. Reynolds and Japan Tobacco, has applied to the
U.K. courts for leave to appeal the Directive to the European Court.
United Kingdom. Tobacco promotion (whether by advertising, sponsorship
or otherwise) is restricted in the U.K. through voluntary agreement. The tobacco
industry voluntarily agreed with the U.K. government to limit annual
expenditures on poster advertising and promotional activities. In addition,
health warnings must appear on all press and poster advertisements, and the
placement of those advertisements is restricted. Expenditures on sports
sponsorships is limited and events targeted at persons under the age of 18 may
not be sponsored by tobacco companies.
British American Tobacco ("BAT"), a sponsor for BAR, is involved in the
tobacco industry. BAT has entered into a long-term sponsorship agreement to fund
what the Company believes to be one of the most significant sponsorship budgets
in Formula One. Restriction on sponsorship by tobacco companies may lead to
cancellation of BAT's sponsorship of BAR. If BAT cancels its sponsorship
pursuant to the provisions of its agreement with BAR, then it could adversely
affect our financial and business results unless BAR can locate another sponsor.
Similarly, if the race teams in the various motorsports events in which we
compete lose sponsorship fees from tobacco sponsors without locating another
sponsor, then we could lose that team as a customer and our financial and
business results could be adversely affected.
12
DEPENDENCE ON KEY PERSONNEL
Our continued success will depend upon the availability and performance
of Dr. Adrian Reynard and the other members of our senior management team. In
our agreement with BAR, Dr. Reynard, Mr. Gorne, Vice President-Sales of the
Company and Mr. Oastler have committed a significant amount of their time to the
BAR Formula One racing effort. Mr. Oastler must devote substantially all of his
time over the next three years. Dr. Reynard and Mr. Gorne must each devote
approximately one half of their time for the next year and approximately one
quarter of their time for the subsequent two years. As a result, our future
results and the successful implementation of our growth strategy will
substantially depend upon the remaining members of our senior management team.
While we believe that our senior management team has significant depth, if we
lose key personnel or if we are unable to attract and retain key employees in
the future, then it could adversely affect our operations and business plans.
Although we have entered into employment agreements with key executive officers,
we cannot assure you that any of these individuals will continue in his present
capacity for a particular period of time. See "Management - Employment
Agreements."
ABILITY TO ATTRACT AND RETAIN PERSONNEL
Our future success depends upon maintaining our advanced technological
position in design, engineering and production of our racing cars. Therefore, we
are particularly dependent upon our ability to identify, attract, motivate and
retain qualified engineers and other professionals with the requisite
educational background and industry experience. We believe we have been
successful in our recruiting and retention efforts in the past. However, we may
not be able to attract and retain qualified engineers and other professionals in
the future. If we lose the services of a significant number of our engineers,
designers and specialized technicians, then our development efforts or business
relationships could be disrupted. Such a disruption could adversely affect our
financial and business results.
MANAGEMENT OF OUR GROWTH
During recent years, we have had substantial growth in revenues and
expansion of product lines and related businesses. However, our business is
subject to a number of risks, any one of which could have a material adverse
effect on our business, financial condition and results of operations. Our
future operating results will depend on a number of factors, including (1) the
continued level of performance of our equipment in the various race series, (2)
competitive price structure, (3) ability to attract and retain qualified
engineers, and (4) other factors beyond our control. A key element of our
business strategy is to continue the expansion of our product lines. We cannot
assure you that the expansion of our product lines and business ventures will be
successful or profitable.
We have and will continue to pursue selective acquisition opportunities
that complement our current operations. Acquisitions involve a number of risks
that could adversely affect our operating results. These risks include:
o the diversion of management's attention
o the assimilation of operations and personnel of the acquired
companies
o the amortization of acquired intangible assets
o the potential loss of key employees of the acquired companies
We may not be able to identify and consummate additional acquisitions on
satisfactory terms. In addition, we may not be able to obtain adequate financing
on acceptable terms to complete future acquisitions. Finally, if an acquisition
is completed, such business may not have a positive impact on our financial and
business results.
13
LIABILITY
Racing events can be dangerous to participants and spectators. During a
race at the Michigan Speedway in July 1998, a driver using a Reynard chassis was
involved in a racing incident that propelled a tire and suspension parts into
the grandstands. Three spectators were killed and six other persons reported
minor injuries. No claims have been made against the Company, and we do not
believe that we would be liable for this incident. We cannot assure you however,
that no claims will be made against us or, if claims are made, what the outcome
of any such claims will be.
We have not previously maintained any liability insurance. Any claims
and associated expenses related to prior racing incidents, including the
incident at Michigan Speedway, could adversely affect our financial and business
results.
Like other manufacturers of products, we face an inherent risk of
exposure to product liability claims in the event that the use of our equipment
results in injury. We may be subjected to various product liability claims. Such
claims may include allegations that (1) our equipment is inherently unsafe, (2)
we were negligent in the manufacture and/or design of a racing car, or (3)
similar claims. To date, we have not been sued or settled any threatened
litigation relating to injuries resulting from the use of our racing cars.
CHANGES IN RACING CAR SPECIFICATIONS BY RACE SERIES' SANCTIONING BODIES
Rule changes, including racing car specification modifications, are
commonplace in the motorsports industry. However, certain changes could
adversely affect our financial condition and results of operations. Such changes
would include (1) changes that significantly increase our cost for research and
development in design and engineering a new racing car, or (2) changes that
prohibit certain features of the current racing car we have developed.
We build our racing cars to comply with specifications set by each race
series' sanctioning body. Changes to racing cars and equipment specifications
could have a material adverse effect on our financial condition and results of
operations. For example, implementation of stability rules by the CART Series
that would prohibit changes to a racing car for a specified number of years
would result in a decrease in revenues to the Company. Similarly, cost
containment rule changes that are designed and implemented to reduce the costs
to race teams may impact our ability to pass cost increases on to our customers
and may limit our ability to sell additional products or services to the
customer.
INTERNATIONAL OPERATIONS
We currently have operations in various jurisdictions around the world.
In the future, we may expand our operations either within these jurisdictions or
into new jurisdictions. Accordingly, our business is subject to certain risks
inherent in international operations. These risks include:
o exposure to exchange rate fluctuations
o political and economic conditions
o unexpected changes in regulatory environments
o exposure to different legal standards
o difficulties in staffing and managing operations
o potentially adverse tax consequences
14
We have not experienced any material adverse effects with respect to our foreign
operations arising from such factors. However, problems associated with such
risks could arise in the future. Finally, managing operations in multiple
jurisdictions will place further strain on our ability to manage our overall
growth.
Our operating results also are subject to fluctuations in foreign
currency exchange rates. For example, costs for producing products sold to
customers participating in the CART Series are denominated in pounds sterling
and the products are sold in U.S. dollars. This mismatch will result in gains or
losses with respect to movements in foreign exchange rates and may be material.
To mitigate this effect, we engage in hedging transactions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations Foreign
Currency Fluctuations" for a description of these hedging activities and a
discussion of foreign exchange rates.
AVAILABILITY OF RAW MATERIALS
The principal raw materials that we use in the manufacturing process
for our racing cars are carbon fiber and Kevlar. An unexpected interruption of
supply could cause our results of operations to be adversely affected. We have
generally been able to raise our prices in response to significant increases in
the cost of raw materials. However, we may not be able to raise prices quickly
enough to offset the effects of such increased raw material costs completely.
BROAD DISCRETION REGARDING PROCEEDS OF THE OFFERING
We have allocated a substantial portion of the net proceeds of this
offering to fund future growth and for working capital and general corporate
purposes. Accordingly, management will have broad discretion in applying the
offering proceeds. Pending our use of such proceeds, the funds will be placed in
short-term, interest-bearing, investment grade investments. It is possible that
the return on such investments could be less than the return that would be
realized if we immediately used such funds in our business.
CONTROL OF THE COMPANY
Upon completion of the offering, Dr. Adrian Reynard will beneficially
own an aggregate of _____% of the outstanding shares of common stock. He will
continue to control the outcome of substantially all issues submitted to our
stockholders, including the election of directors. He also will be able to
effect a change of control, merger or combination without the approval of
minority stockholders. Such influence could adversely affect the market price of
the common stock or delay or prevent a change in control of the Company.
SEASONALITY AND FLUCTUATION OF QUARTERLY RESULTS
We derive a substantial portion of our total revenues from product
sales that are made primarily during the second and third quarters of our fiscal
year. We expense all research and development costs as they are incurred.
Similarly, a substantial amount of project costs are incurred during the first
and fourth quarters of our fiscal year. Historically, our revenues are higher in
the second and third quarters of the year due to the number of racing cars and
equipment delivered during such periods. We account for revenues at the time of
delivery of a racing car. Since we usually deliver racing cars on a Friday, the
timing of the delivery of racing cars, particularly for the CART Series, can
significantly affect our quarterly results of operations when compared to a
previous quarter due to the number of Fridays (and therefore the number of
racing cars delivered) in the particular quarter.
The timing of the initiation and conclusion of design and engineering
contracts with our customers also can significantly affect our quarterly results
of operations when compared to a previous quarter. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Seasonality and
Quarterly Results" for a discussion of our quarterly results.
15
ENVIRONMENTAL MATTERS
We believe that our operations are in substantial compliance with all
applicable environmental laws and regulations. Nonetheless, if damage to persons
or property or contamination of the environment is determined (1) to have been
caused or exacerbated by our conduct, or (2) to have been caused or exacerbated
by pollutants, substances, contaminants or wastes used, generated or disposed of
by us, or (3) which may be found on our property, then we may be held liable for
such damage and may be required to pay the cost of investigation and/or
remediation of such contamination or any related damage. The amount of such
liability could be material and may not be covered by insurance. Changes in the
provisions or application of environmental laws, regulations or requirements or
the discovery of unknown conditions, could also require us to make additional
material expenditures.
TAXATION ISSUES
In connection with the Reorganization, the Company was formed as a
Delaware corporation. We own shares of stock in foreign subsidiaries that are
organized under the laws of the U.K. To obtain approval for the Reorganization
from U.K. tax authorities, we have agreed to be treated as a dual resident and
will be taxed in the U.K. We believe that tax treaties between the U.S. and the
U.K. will allow our income to be taxed in the U.K., without also being taxed in
the U.S. However, the U.S. Internal Revenue Service could attempt to impose
taxes on us.
POTENTIAL DIFFICULTIES IN ENFORCEMENT OF CIVIL LIABILITIES
Most of our directors and executive officers and the experts named in
this prospectus are not residents of the United States. Substantially all of our
assets and the assets of our directors and executive officers are located
outside the United States. As a result, you may not be able to (1) effect
service of process within the United States upon such persons or (2) enforce
judgments of the U.S. courts predicated upon civil liability provisions of the
U.S. federal or state securities laws if you are attempting to enforce those
judgments in U.S. courts. In addition, it may be difficult for you to enforce
certain civil liabilities predicated upon U.S. federal or state securities laws
in England against the Company or our directors or executive officers.
DILUTION
You will experience immediate and substantial dilution of $_______ per
share in net tangible book value of the common stock from the initial public
offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of significant amounts of the common stock in the public market
after this offering, or the perception that such sales may occur, could cause
the market price of the common stock to drop. After the offering, _______ shares
of common stock (______ shares if the Underwriters' over-allotment option is
exercised in full) will be outstanding. The _____ shares offered hereby will be
freely transferable after the offering (______ shares if the Underwriters'
over-allotment option is exercised in full) unless purchased by affiliates of
Reynard, as defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). In addition, a total of _____ shares will be eligible
for sale, beginning 90 days after the date of this prospectus, subject to the
volume limitations of Rule 144 and the Underwriters' lock-up.
Our officers, directors and current stockholders have agreed not to
offer, sell, contract to sell or otherwise dispose of their shares
(approximately ____ shares) for a period of 180 days from the date of this
prospectus without the prior written consent of NationsBanc Montgomery
Securities LLC on behalf of the Underwriters. See "Shares Eligible for Future
Sale" and "Underwriting."
16
ABSENCE OF PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the offering, there has been no public market for the common
stock. We cannot assure you that an active trading market will develop and
continue after the offering. The initial offering price for the shares will be
determined by negotiations between us and representatives of the Underwriters.
The initial offering price may not be indicative of the market price of the
common stock after the offering. See "Underwriting" for the factors to be
considered in determining the initial public offering price.
The market price of the common stock after the offering could be less
than the initial public offering price. In addition, the stock market has, from
time to time, experienced extreme price and volume fluctuations. Such
fluctuations could adversely affect the market price of the common stock without
regard to our financial performance or prospects. The market price of the common
stock may fluctuate substantially in response to:
o variations in our results of operations
o our announcements or other developments that affect us
o changes by financial research analysts in their estimates of our
earnings
o our failure to achieve such estimates
o unfavorable publicity about the motorsports industry
o general economic trends and other external factors
See "Description of Capital Stock" and "Underwriting."
DIVIDEND POLICY
We anticipate that all of our earnings in the near term will be used
for the development and expansion of our business. Therefore, we do not plan to
pay cash dividends. Our future dividend policy will depend on our:
o earnings
o capital requirements
o financial condition
o bank facilities
o other factors considered relevant by the Board of Directors
We are a holding company and will not have our own operations. Therefore, we
will rely on dividends or other advances from our subsidiaries to fund any cash
dividends to holders of common stock.
ANTI-TAKEOVER PROVISIONS
The General Corporation Law of the State of Delaware contains certain
provisions which may delay or prevent an attempt by a third party to acquire
control of the Company. Our Certificate of Incorporation and By-laws contain
provisions that authorize the issuance of preferred stock, and establish advance
notice requirements for director nominations and actions to be taken at
stockholder meetings. These provisions could discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company, even if viewed favorably by stockholders.
In addition, the severance provisions included in employment agreements
with certain members of management could impede an attempted change of control
of the Company. We also have adopted a Stockholder Rights Plan which may have
the effect of impeding a hostile attempt to acquire control of the Company. See
17
"Description of Capital Stock - Delaware Law" and -- "Delaware Law and Certain
Charter and By-Law Provisions."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this prospectus are not
historical facts, but are forward-looking statements. Many of these
forward-looking statements are contained under the headings "Business," "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." These forward-looking statements concern:
o our future, proposed and anticipated activities
o certain trends with respect to our revenues
o operating results on a proforma basis
o capital resources and liquidity
o our competitive position
o the motorsports industry in general
o similar statements
These statements include some risks and uncertainties that are beyond our
control. Accordingly, actual results may differ, sometimes materially, from
those expressed in or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include those discussed under
"Risk Factors." The safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 do not apply to this offering or other initial public
offerings.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the ____ shares of
common stock offered hereby (after deducting underwriting discounts and
commissions and estimated offering expenses) are expected to be approximately
$____ million. This assumes an initial public offering price of $____ per share,
the mid-point of the price range on the cover page of this prospectus. The
Company intends to use:
o approximately $12.4 million to fund the Gemini Acquisition
o approximately $10.4 million to repay a loan to the Company from
Dr. Reynard (the "Loan")
o approximately $____ million of remaining net proceeds to fund
future growth and for working capital and general corporate
purposes
Anticipated expenditures for working capital purposes include an estimated $4.3
million to purchase additional computer equipment and approximately $15.9
million to construct new facilities.
The loan from Dr. Reynard is in the form of a facility letter, due and
payable on demand, with interest accruing at the National Westminster Bank's
base rate plus 2-1/2%. The Company received a letter from Dr. Reynard in which
he states that he does not expect to be paid or credited with interest on the
money lent to date. The Company currently has no agreements with respect to any
acquisitions other than the Gemini Acquisition, but it regularly engages in
discussions relating to potential acquisitions.
Pending application of the net proceeds of this offering, the Company
will invest the proceeds in short-term, interest-bearing, investment grade
securities. The Company will not receive any proceeds from the sale of shares of
common stock to be sold by the Selling Stockholders.
DIVIDEND POLICY
The Company intends to retain future earnings for the operation and
expansion of its business. The Company does not anticipate paying any cash
dividends in the near term. Any decision by the Board of Directors concerning
the payment of dividends on the common stock in the future will be dependent
upon the Company's (1) results of operations, (2) financial condition, (3) cash
requirements, (4) capital expenditure requirements and (5) other factors deemed
relevant by the Board of Directors.
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DILUTION
The Company's net tangible book value at __________, 1998 was
$___________ or $___________ per share. Net tangible book value per share
represents the Company's total tangible assets less its total liabilities,
divided by the number of shares of common stock outstanding. After giving effect
to the sale of the shares of common stock offered hereby (assuming an initial
price of $___________ per share, the midpoint of the price range on the cover
page of this prospectus, and after deducting underwriting discounts and
commissions and estimated offering expenses), the Company's pro forma net
tangible book value at ___________, 1998 would have been approximately
$_________ or $___________ per share. This represents an immediate increase in
net tangible book value per share of $_________ to existing stockholders and an
immediate dilution of $_________ per share to the investors purchasing shares of
common stock at the initial public offering price. Amounts have been transferred
into U.S. dollars, solely for your convenience, at a rate of (pound)___ =
$_________, the Noon Buying Rate on __________, 1998. The following table
illustrates the dilution and net tangible book value to new investors:
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Assumed price to public................................... $______________
Net tangible book value before offering.......... $____________
Increase attributable to new investors........... ____________
Pro forma net tangible book value after offering.......... ______________
Dilution to new investors................................. $______________
The following table provides the number of shares purchased from the
Company, the effective cash contributions made and the average price per share
paid by existing stockholders and by purchasers of the common stock in this
offering (assuming an initial offering price of $_____________ per share):
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SHARES PURCHASED TOTAL CONSIDERATION PAID
---------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
Existing Stockholders.......... % $ % $
New Investors.................. _____ _____ _____ _____
Total................... % $ %
===== ===== ===== =====
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CAPITALIZATION
The following table provides the total capitalization of the Company as
of June 30, 1998, and pro forma capitalization to reflect (1) the receipt and
application by the Company of the estimated net proceeds (based on an assumed
initial public offering price of $__________ per share) from the issuance by the
Company of the shares of common stock in the offering, after deducting
underwriting discounts and commissions and estimated expenses of the offering
payable by the Company and (2) the Gemini Acquisition. You should read this
table in conjunction with the unaudited pro forma consolidated financial
statements of the Company and the related notes included elsewhere in this
prospectus.
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AS OF JUNE 30, 1998
-------------------
ACTUAL PRO FORMA (1)
------ -------------
(DOLLARS IN THOUSANDS)
Long-term debt................................... $ $
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding
Common Stock, $___ par value:
____ authorized; ____ issued................
Additional paid in capital..................
Retained earnings...........................
Total stockholders' equity (2)
Total capitalization............................. $ $
====== ======
----------
(1) Does not include _____ shares reserved for issuance under the Company's
stock option plans. As of ____________, 1998, options for ____ shares have been
granted under these stock option plans with a weighted average exercise price
per share of $_________. See "Management - Stock Option Plans."
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SELECTED COMBINED FINANCIAL AND OPERATING DATA
The selected combined financial data in the table for the three years
in the period ended September 30, 1997 and the nine months ended June 30, 1998
are derived from the Company's Combined Financial Statements which have been
audited by Deloitte & Touche, independent auditors, and are included elsewhere
in this prospectus. The selected combined financial data in the table for the
two years in the period ended September 30, 1994 are derived from the Company's
audited financial statements. The selected combined financial data for the nine
months ended June 30, 1997 are derived from the Company's interim unaudited
combined financial statements included elsewhere in this prospectus and, in
management's opinion, contains all adjustments consisting of normal recurring
accruals, necessary to fairly present the results of its operations for the nine
month period ended June 30, 1997. The results of these interim periods are not
necessarily indicative of the results to be expected for the full year. The pro
forma financial information gives effect to (1) the Gemini Acquisition, (2) the
Reorganization, and (3) the offering and the application of the net proceeds
therefrom, as if each of the events had occurred on October 1, 1996. You should
read the following information in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Unaudited Pro
Forma Financial Information and related notes, and the Company's Combined
Financial Statements and notes contained elsewhere in this prospectus.
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YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL HISTORICAL
------------------------------------------------- -------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
REVENUES:
Products.......................... $8,371 $12,079 $18,952 $22,406 $39,039 $42,196 $34,098 $40,881 $43,075
Services.......................... 1,254 2,147 2,701 6,493 10,803 10,803 8,349 9,882 9,882
Other revenue..................... -- -- -- -- -- 19 -- -- 47
------ ------- ------- ------- ------- ------- ------- ------- -------
Total Revenues............... 9,625 14,226 21,653 28,899 49,842 53,018 42,447 50,763 53,004
------ ------- ------- ------- ------- ------- ------- ------- -------
COST OF GOODS SOLD:
Products.......................... 5,661 10,375 8,814 9,928 19,502 20,928 16,878 21,713 22,603
Services.......................... 446 817 1,232 3,750 5,951 5,951 3,344 3,944 3,944
------ ------- ------- ------- ------- ------- ------- ------- -------
Total cost of goods sold..... 6,107 11,192 10,046 13,678 25,453 26,879 20,222 25,657 26,547
------ ------- ------- ------- ------- ------- ------- ------- -------
GROSS PROFIT 3,518 3,034 11,607 15,221 24,389 26,139 22,225 25,106 26,457
GENERAL AND ADMINISTRATIVE EXPENSES.... 3,421 2,276 11,285 13,766 21,462 17,205 15,821 20,122 15,336
------ ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM OPERATIONS 97 758 322 1,455 2,927 8,934 6,404 4,984 11,121
Share of loss in equity investment -- -- -- -- -- -- -- (5,310) (5,310)
Minority interest in loss of
subsidiary........................ -- -- -- -- -- -- -- 106 106
Interest income................... 31 10 165 166 171 171 144 21 21
Interest expense.................. (64) (41) (20) -- -- (144) -- (670) (240)
------ ------- ------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 64 727 467 1,621 3,098 8,961 6,548 (869) 5,698
INCOME TAX EXPENSE 18 175 114 563 1,105 3,053 2,066 1,634 3,517
------ ------- ------- ------- ------- ------- ------- ------- -------
22
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YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL HISTORICAL
-------------------------------------------------- -------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
NET INCOME (LOSS) $ 46 $ 552 $ 353 $ 1,058 $ 1,993 $5,908 $ 4,482 $(2,503) $2,181
====== ====== ======= ======= ======= ====== ======= ======= ======
EARNINGS (LOSS) PER SHARE - BASIC AND
DILUTED $ .02 $ .19 $ .12 $ .36 $ $.68 [ ] $ 1.52 $ (.85) [ ]
====== ====== ======= ======= ======= ====== ======= ======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 2,944 2,944 2,944 2,944 2,944 2,944 2,944
====== ====== ======= ======= ======= ====== ====== ======= ======
OTHER DATA:
Gross margin...................... 36.6% 21.3% 53.6% 52.7% 48.9% 49.3% 52.4% 49.5% 49.9%
Operating margin.................. 1.0% 5.3% 1.5% 5.0% 5.9% 16.9% 15.1% 9.8% 21.0%
Depreciation and amortization..... $ 206 $ 251 $ 408 $ 535 $ 898 $2,394 $ 687 $ 1,003 $2,130
Capital and tooling expenditures.. $ 473 $ 874 $ 650 $ 1,963 $ 3,494 $4,004 $ 1,067 $ 4,313 $4,453
Number of cars produced........... 53 38 36 38 67 67 59 76 76
Number of racing wins............. 19 11 15 16 16 16 8 5 5
BALANCE SHEET DATA:
Working capital (deficit)......... $ (347) $ (416) $ (625) $ $(595) $(4,793) $[ ] $ (396) $(7,955) $[ ]
Total assets...................... 3,695 5,433 13,149 11,891 18,409 [ ] 13,653 26,972 [ ]
Long-term debt (less current
portion)........................ -- -- -- -- -- [ ] -- -- [ ]
Total stockholders' equity
(deficit)....................... 521 930 1,285 2,296 741 [ ] 3,207 (1,151) [ ]
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Combined Financial Statements and related notes thereto and "Selected Combined
Financial Data" included elsewhere in this Prospectus.
GENERAL
Reynard's sales have grown at a compounded annual growth rate of 51.9%
from 1994 to 1997. The Company typically enters into purchase agreements for the
sale of racing cars and design and engineering services as much as six months in
advance of delivery. As of October 20, 1998, the Company had entered into
purchase agreements for racing cars and services representing orders valued at
$44.80 million in 1999. The Company derives a substantial portion of its total
revenues in advance of and during the first half of the worldwide racing season
during the months of January through July. A racing season will typically run
from March through October, with a majority of the Company's racing car sales
occurring before the season starts (Reynard's second quarter) and parts and
service sales primarily occurring in Reynard's third quarter. New cars are
designed and developed at the conclusion of the racing season, which corresponds
with Reynard's fourth and first quarters, and the associated research and
development costs are expensed as they occur. Reynard generally only
manufactures racing cars once purchase orders have been received, which
primarily occurs in Reynard's first quarter. Service revenue, which is primarily
derived from design and engineering programs on touring and sports racing cars,
is generated on a contract by contract basis. The timing of the initiation and
closure of these contracts can lead to significant variances in quarterly
service revenue and the Company's operating results.
Since its inception, Reynard has progressed from manufacturing racing
cars for Formula Ford in the 1970's, Formula Three in the 1980's, and Formula
3000 in the early 1990's to CART in 1994, and it will enter Formula One in 1999.
The Company has continued to leverage its success and technical expertise gained
in each of these series and graduated into more advanced series in which revenue
and profit per car are greater. The more advanced race series require superior
research and development using state of the art technology and engineering
expertise with the most advanced work done within Formula One. Historically,
Reynard has exited some of the less advanced race series upon entering a more
advanced series. This decision has been driven by capacity constraints and the
higher cost structure needed to support production of cars for the more advanced
series. These higher costs are attributable primarily to research and
development and are technology related. As a result of the BAR joint venture,
Reynard will have access to certain of BAR's technological know how (not in
written or machine readable form). Reynard believes that this access to
research and development ideas will enhance its other motorsports projects by
improving its knowledge database and methodology.
Reynard's long running success in building racing cars, and its ability
to rapidly design and engineer new racing cars using advanced techniques in
aerodynamics and composite design, has made it a leader in providing racing car
engineering and design services to automobile manufacturers. Over the past two
years Chrysler, Ford and Panoz, amongst others, have selected Reynard to support
their motorsports efforts in selective projects. For example Reynard was awarded
the aerodynamic design work and production of composites for the Dodge Viper GT
racing cars. The engineering and design services provided for these projects
comprise a significant and increasing portion of the Company's revenue.
In conjunction with Reynard's entry into Formula One, the Company has
expanded its service technology to include CFD. The Company currently generates
service revenue by providing engineering staff and software analysis needed for
CFD design applications on a fee-per-usage basis. The Company believes that a
significant portion of its future growth will be in the form of expanded sales
of higher margin services to its motorsports customers, such as CFD software
analysis, wind tunnel testing and seven post suspension rig testing. Through the
application of these services, the Company's customers are able to simulate and
evaluate the effects of subtle
24
changes in the engineering and set up of individual cars moving at high speeds
and apply the results of such tests to maximize the performance of the racing
car. The Company has designed and built a state-of-the-art 50% scale model,
moving ground open jet wind tunnel in Indianapolis, Indiana, which is provided
on a fee-per-usage basis to CART racing teams and others. In 1999, the Company
will construct a seven post suspension rig testing facility in Indianapolis,
which will also be provided on a fee-per-usage basis to CART racing teams and
other potential customers.
BAR. In October 1997, Reynard entered into a joint venture agreement
with BAT and Mount Eagle, Inc. to form BAR. Reynard has agreed to commit its
management expertise and technology to BAR, and has invested $5.25 million, in
exchange for a 15% equity interest in BAR and an ongoing management fee for
directors' services. It is anticipated that Reynard will provide certain
contract manufacturing services to BAR in its early stages on a fee-for-service
basis. BAR will build and maintain its own independent design, engineering,
research and development and manufacturing staff and facilities adjacent to
Reynard's facilities in the Motorsport Valley of the UK. Reynard will account
for its ownership stake under the equity method of accounting due to the
Company's ability to exercise significant influence over the operating and
financial policies of BAR. A loss of $5.31 million was incurred during the
period ended June 30, 1998 as a result of losses incurred during the start up
phase of BAR. These losses were in line with the Company's expectations. The
Company expects to incur additional losses in the future relating to their
investment. Management currently has no plans to make additional equity
investments in BAR.
Reynard Aviation. In January 1998, Reynard entered into an arrangement
with Virgin Airlines whereby Reynard Aviation was created. Through this
arrangement, Reynard has capitalized on its expertise in composite material
usage, combined with its technical knowledge, to design and develop a
light-weight, strong and functional fully-reclining business class aircraft
seat. The project was primarily funded by Virgin Airlines, with Reynard
receiving a 20% equity interest in Reynard Aviation. Reynard will account for
its ownership interest in Reynard Aviation under the cost method of accounting
because Reynard does not have the ability to influence the operating or
financial decisions of Reynard Aviation.
Wind Tunnel Facility. Reynard North America, Inc. is the manager and
49% owner of the membership interests in a limited liability company known as
Auto Research Center, LLC ("ARC"). ARC owns and operates the wind tunnel
facility in Indianapolis, Indiana. Unaffiliated entities currently own 50% of
the membership interest and Bruce Ashmore, Vice President/Technical Director of
Reynard North America, Inc., owns 1% of the membership interest. ARC sells time
in the wind tunnel on a fee-per-usage basis. The operations of ARC are
consolidated in the Company's financial statements, with a minority interest
recorded with respect to the membership interests owned by unaffiliated
entities.
Set forth below are selected income and expense items and the
relationship of such income and expense items to total revenues for the years
ended September 30, 1995, 1996, and 1997 and the nine month periods ended June
30, 1997 and 1998.
25
· Enlarge/Download Table
YEAR ENDED SEPTEMBER 30
-----------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
REVENUES:
Products $ 18,952 87.5% $22,406 77.5% $ 39,039 78.3%
Services 2,701 12.5% 6,493 22.5% 10,803 21.7%
-------- ----- ------- ----- -------- -----
Total revenues 21,653 100.0% 28,899 100.0% 49,842 100.0%
-------- ----- ------- ----- -------- -----
COST OF GOODS SOLD:
Products 8,814 40.7% 9,928 34.4% 19,502 39.2%
Services 1,232 5.7% 3,750 12.9% 5,951 11.9%
-------- ----- ------- ----- -------- -----
Total cost of goods sold 10,046 46.4% 13,678 47.3% 25,453 51.1%
-------- ----- ------- ----- -------- -----
GROSS PROFIT 11,607 53.6% 15,221 52.7% 24,389 48.9%
-------- ----- ------- ----- -------- -----
GENERAL AND ADMINISTRATIVE
EXPENSES (1) 11,285 52.1% 13,766 47.7% 21,462 43.0%
-------- ----- ------- ----- -------- -----
INCOME FROM OPERATIONS 322 1.5% 1,455 5.0% 2,927 5.9%
Share of loss in equity investment -- -- --
Minority interest in loss of
subsidiaries -- -- --
Interest income 165 166 171
Interest expense (20) -- --
-------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES 467 -- 1,621 -- 3,098 --
Income tax expense 114 563 1,105
-------- ------- --------
NET INCOME (LOSS) $ 353 1.6% $ 1,058 3.7% $ 1,993 4.0%
======== ===== ======= ===== ======== =====
· Download Table
NINE MONTHS ENDED JUNE 30
-------------------------
1997 1998
---- ----
REVENUES:
Products $34,098 80.3% $ 40,881 80.5%
Services 8,349 19.7% 9,882 19.5%
------- ----- -------- -----
Total revenues 42,447 100.0% 50,763 100.0%
------- ----- -------- -----
COST OF GOODS SOLD:
Products 16,878 39.7% 21,713 42.8%
Services 3,344 7.9% 3,944 7.7%
------- ----- -------- -----
Total cost of goods sold 20,222 47.6% 25,657 50.5%
------- ----- -------- -----
GROSS PROFIT 22,225 52.4% 25,106 49.5%
------- ----- -------- -----
General and administrative
expenses (1) 15,821 37.3% 20,122 39.7%
------- ----- -------- -----
INCOME FROM OPERATIONS 6,404 15.1% 4,984 9.8%
Share of loss in equity investment -- (5,310)
Minority interest in loss of
subsidiaries -- 106
Interest income 144 21
Interest expense -- (670)
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 6,548 -- (869) --
Income tax expense 2,066 1,634
------- --------
NET INCOME (LOSS) $ 4,482 10.6% $ (2,503) (4.9)%
======= ===== ======== =====
(1) The results for years ended September 30, 1995, 1996 and 1997 and the nine
month periods ended June 30, 1997 and 1998 include remuneration of the Chairman
of the Company, who is the principal shareholder. This remuneration has a
significant effect on general and administration expenses and income before
taxes of the Company. Pursuant to a Services Agreement with Dr. Reynard,
compensation payable to Dr. Reynard for services he will provide to the Company
will total $1.5 million per year plus pension contributions.
REVENUES
The Company derives its revenues primarily from the sale of products
and provision of services.
Product Sales. Product sales consist of sales of (1) racing cars and
associated spare parts to CART, Formula Nippon and Barber Dodge racing teams;
and (2) racing cars produced in conjunction with projects for automobile
manufacturer's entries into touring, sports car and GT1 racing series. The sale
of new racing cars is in accordance with negotiated contractual commitments with
race teams, which are entered into on an average of six months ahead of supply
of the racing car. Advanced deposits are collected at the time of receiving the
order for racing cars, with the balance payable upon delivery of the racing car.
The sale of a new racing car will automatically generate an initial sale of
spare parts for basic vehicle servicing and maintenance, with an ongoing parts
revenue stream over the life of the racing car. The sale of update kits will be
dependent upon the longevity of the racing car, which vary from race series to
race series, combined with the investment of race teams to maintain a
competitive edge.
26
Service Sales. Revenues derived from services include: (1) engineering
and design work for touring car and sports car racing series; (2) specific
engineering and design projects for the CART Series; (3) fees for CFD analysis;
and (4) fees for use of Reynard's proprietary wind tunnels together with the
production of wind tunnel models.
COST OF GOODS SOLD
The Company classifies its cost of goods sold into cost of sales and
direct project expenses that are attributable to product and service revenues,
together with operating and non-operating overheads, as discussed below.
Cost of Sales (Product). The Company purchases raw materials to
fabricate components for racing cars and spare parts. Externally manufactured
parts may also be purchased where appropriate. This category also includes
personnel costs.
Cost of Sales (Services). This category includes costs, such as
personnel, wind tunnel, jigs, molds and tooling costs, specifically linked to
service projects.
General and Administrative Expenses. This category includes sales and
marketing, warranty, freight and property costs. It also includes purchases of
consumables, personnel costs, directors' remuneration, administrative expenses,
depreciation, foreign exchange gains/losses and other miscellaneous items.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Total revenues for the nine months to June 30, 1998 were $50.76
million, an increase of $8.32 million, or 19.6%, as compared to the nine months
ended June 30, 1997.
Product sales for the nine months ended June 30, 1998 were $40.88
million, an increase of $6.78 million, or 19.9%, as compared to the nine months
ended June 30, 1997. This increase was attributable to the higher volume of
racing cars and spare parts sold to CART teams and the supply of racing cars to
the 1998 Barber Dodge series, which commenced in the final quarter of 1997. This
was partially offset by the discontinuation of the Ford Mondeo Touring Car
program and various Chrysler programs, including the Stratus Touring Car.
Service sales for the nine months ended June 30, 1998 were $9.88
million, an increase of $1.53 million, or 18.4%, as compared to the nine months
ended June 30, 1997. This increase was primarily attributable to commencement of
the CFD program, development of the Strathcarron car and sales of wind tunnel
time and models. This was partially offset by reduced revenue from the Virgin
airline seat project and various Chrysler programs, including the Stratus
Touring Car.
Cost of sales (product) for the period ended June 30, 1998 were $21.71
million, an increase of $4.84 million, or 28.6%, as compared to the nine months
ended June 30, 1997. This increase was attributable to the development of the
Barber Dodge cars and the ongoing CART program. This was partially offset by
reductions in costs of the various Chrysler programs, including the Stratus
Touring Car.
Cost of sales (services) for the period ended June 30, 1998 were $3.94
million, an increase of $0.60 million, or 17.9%, as compared to the nine months
ended June 30, 1997. This increase was primarily attributable to increased costs
of the Panoz GT1 support program. This was partially offset by reduced costs for
the Ford Mondeo Touring Car development program and the cost of manufacturing
and testing of Virgin airline seats.
Gross profit was 49.5%, compared to 52.4% for the same period in the
prior year. This reduction was due to the wind down of various programs,
including the Ford Mondeo and Chrysler Stratus Touring Car programs discussed
above. This was partially offset by the increase in higher margin service
revenue.
General and administrative expenses, excluding payments to the
principal shareholder ($7.65 million), for the period ended June 30, 1998 were
$12.47 million, an increase of $3.97 million, or 46.7% as compared to nine
months ended June 30, 1997 (excluding payments to the principal shareholder of
$7.32 million). This increase was attributable to the expansion of the
administrative and information technology function to support the
27
Company's growth and increased depreciation following investment in plant and
equipment for the CFD program. General and administrative costs, excluding
payments to principal shareholders, for the nine months ended June 30, 1998
represent 24.6% of total sales, compared to 20.0% for the nine months ended June
30, 1997. This increase is the result of investment in the Company
infrastructure to support future growth. During the nine months ended June 30,
1998, the Company incurred expenses of $1.0 million for doubtful accounts. This
primarily related to closure expenses for the Ford Mondeo Touring Car and Panoz
GT1 programs.
The share of loss in equity investments for the nine months ended June
30, 1998 was $5.31 million. This represents the Company's 15% investment in BAR
which has been fully written off. This write off is a result of losses arising
during the start up phase of BAR. These losses are in line with the Company's
expectations.
The minority interest in losses of subsidiaries for the period ended
June 30, 1998 was $0.11 million. This represents the share of the loss incurred
by ARC which is attributable to unaffiliated members.
Interest income for the nine months ended June 30, 1998 was comparable
to the nine months ended June 30, 1997.
Interest expense for the nine months ended June 30, 1998 was $0.67
million, an increase of $0.67 million, or 100%, as compared to nine months ended
June 30, 1997. This charge represents the interest due on the loan from Dr.
Reynard. The Company has received a letter from Dr. Reynard in which he states
that he does not expect to be paid or credited with interest on money lent to
date.
Loss before income taxes for the nine months ended June 30, 1998 was
$0.87 million, a decrease of $7.42 million, as compared to the income achieved
during the nine months ended June 30, and 1997, as a result of the factors
described above, in particular the BAR investment.
Income tax expense for the period ended June 30, 1998 was $1.63
million, a decrease of $0.43 million as compared to the nine months ended June
30, 1997.
Net loss for the nine months ended June 30, 1998 was $2.50 million, a
decrease in net income of $6.99 million as compared to the nine months ended
June 30, 1997 as a result of factors described above.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Total revenues for 1997 were $49.84 million, an increase of $20.94
million, or 72.5 %, from 1996.
Product sales for 1997 were $39.04 million, an increase of $16.63
million, or 74.2%, from 1996. This increase was attributable to the higher
volume of racing cars and spare parts sold to CART teams and the commencement of
supply of Panoz GT1 cars and Ford Mondeo Touring Cars. In addition, product
sales included the initial supply of race cars to the Barber Dodge Series, which
commenced during the final quarter of 1997.
Service sales for 1997 were $10.80 million, an increase of $4.31
million, or 66.4%, from 1996. This increase was attributable to various Chrysler
projects, including the Stratus Touring Car, the Ford Mondeo Touring Car
program, for which preliminary work commenced during the third quarter of 1996,
and the development of the Virgin airline seat, which commenced in the second
quarter of 1997 and continued until the second quarter of 1998.
Cost of sales (product) for 1997 were $19.50 million, an increase of
$9.57 million, or 96.4%, from 1996. This aggregate increase was attributable to
the commencement of the Panoz GT1 project and the Ford Mondeo Touring Car
program and the increased aggregate cost of the CART program.
Cost of sales (service) for 1997 were $5.95 million, an increase of
$2.20 million, or 58.7%, from 1996. This increase was due to costs associated
with the Ford Mondeo Touring Car program and the Virgin airline seat
development, which commenced in the second quarter of 1997 and continued until
the second quarter of 1998.
Gross profit was 48.9%, compared to 52.7% for the prior year. This
reduction was due to the commencement of the new programs, including the
development of the Virgin airline seat and the Ford Mondeo Touring Car discussed
above.
28
General and administrative expenses, excluding payments to the
principal shareholder ($10.0 million), for 1997 were $11.47 million, an increase
of $2.41 million, or 26.6%, from 1996 (excluding payments to the principal
shareholder of $4.70 million). This increase was due to higher depreciation
charges following investment in plant and equipment to increase the Company's
engineering capability. This was partially offset by the reduction in
non-specific research and development expenditure. General and administrative
costs, excluding payments to principal shareholders, for 1997 represent 23.0% of
total sales, compared to 31.4% for 1996. This decrease is due to the Company
leveraging its personnel overhead during a period of significant sales growth.
Interest income and expense for 1997 were comparable to prior years.
Income before income taxes for 1997 was $3.10 million, an increase of
$1.48 million, or 91.1% from 1996, as a result of factors described above.
Income tax expense for 1997 was $1.11 million, an increase of $0.54
million from 1996.
Net income for 1997 was $1.99 million, an increase of $0.94 million
from 1996, as a result of the factors described above.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Total revenues for 1996 were $28.90 million, an increase of $7.24
million, or 33.5%, from 1995. This increase was due to higher product and
service sales described below.
Product sales for 1996 were $22.41 million, an increase of $3.45
million, or 18.2%, from 1995. This increase was attributable to the higher
volume of racing cars and spare parts sold to CART teams and the commencement of
the Chrysler Stratus Touring Car project. This was partially offset by the
completion of the Chrysler Patriot sports car during the final quarter of 1995.
Service sales for 1996 were $6.49 million, an increase of $3.79
million, or 140.4%, from 1995. This increase was primarily due to the provision
of development services to the Panoz GT1 project. In addition, the Company was
involved in a number of programs with major auto manufacturers, including the
Ford Indigo Concept Car and Chrysler Stratus Touring Car.
Cost of sales (product) for 1996 were $9.93 million, an increase of
$1.11 million, or 12.6%, from 1995. This increase reflects the increased sales
of racing cars to the CART series noted above, partially offset by cost
reductions in the Formula Nippon program.
Cost of sales (service) for 1996 were $3.75 million, an increase of
$2.52 million, or 204.4%, from 1995. This increase was attributable to costs
associated with the Ford Indigo concept car, the Panoz GT1 project and the
Chrysler Stratus development.
Gross profit was 52.7%, compared to 53.6% in the prior year. This
reduction was due to the start up of the various service projects, including the
Panoz GT1 project and the Ford Mondeo Touring Car program discussed above.
General and administrative expenses, excluding payments to the
principal shareholder ($4.70 million), for 1996 were $9.07 million, an increase
of $2.77 million or 44.0%, from 1995 (excluding payments to the principal
shareholder of $5.0 million). This increase was due to investment in further
development of engineering expertise, through recruitment and investment in
plant and equipment and the ongoing expansion of the Company's infrastructure.
General and administrative costs, excluding payments to principal shareholders,
for 1996 represent 31.4% of total sales, compared to 29.1% for 1995.
Interest income and expense for 1996 were comparable to prior years.
Income before income taxes for 1996 was $1.62 million, an increase of
$1.16 million, or 247.1%, from 1996, as a result of factors described above.
29
Income taxes for 1996 were $0.56 million, an increase of $0.45 million
from 1995.
Net Income for 1996 was $1.06 million, an increase of $0.71 million
from 1995, as a result of the factors described above.
SEASONALITY AND QUARTERLY RESULTS
The Company derives a substantial portion of its total revenues from
product sales that are made during the second and third quarters of the fiscal
year. Reynard expenses all research and development costs as they are incurred.
Similarly, a substantial amount of project costs are incurred during the first
and fourth quarters of the fiscal year. Historically, the Company's revenues are
higher in the second and third quarters of the year due to the number of racing
cars and equipment delivered during such period. Reynard accounts for revenues
at the time of delivery of a racing car, which usually occurs on a Friday. The
timing of the delivery of racing cars, particularly for the CART Series, can
significantly alter the Company's quarterly results of operations when compared
to a previous quarter due to the number of Fridays, and therefore the number of
racing cars delivered, in the particular quarter.
As a result, the Company's business has been, and is expected to
remain, seasonal based upon these external factors. The Company's quarterly
results are dependent on the timing of the following activities:
Period Activity
------ --------
Quarter ended December 31 Building chassis for sale
Quarter ended March 31 Selling chassis
Quarter ended June 30 Selling parts
Quarter ended September 30 Designing chassis for the following season
Service income is generated by individual contracts. The timing of the
initiation and closure of these contracts can lead to significant variances in
quarterly service revenue and the Company's operating results.
30
The following table presents selected quarterly financial information
of the Company for each of the four quarters of 1995, 1996 and 1997 and for the
first three quarters of 1998. This information has been prepared by the Company
on a basis consistent with the financial statements and related notes included
elsewhere in this Prospectus and include, in the opinion of management, all
adjustments necessary for a fair presentation of the results of such quarters.
The tables should be read in conjunction with "Selected Combined Financial
Data," the financial statements of the Company and the related notes thereto and
the other financial information included elsewhere in this Prospectus.
· Enlarge/Download Table
Quarters Ended
-----------------------------------------------------
December 31 March 31 June 30 September 30 TOTAL
(Dollars in thousands)
Total Revenues
1995 $ 6,053 $ 7,353 $ 5,693 $ 2,554 $21,653
1996 5,885 11,332 8,147 3,535 28,899
1997 8,239 20,615 13,593 7,395 49,842
1998 YTD(1) 11,119 20,957 18,687 TBA 50,763
Gross Profit
1995 $ 3,153 $ 3,935 $ 3,076 $ 1,443 $11,607
1996 3,539 5,106 4,677 1,899 15,221
1997 5,097 10,528 6,600 2,164 24,389
1998 YTD(1) 4,631 8,943 11,532 TBA 25,106
Operating Income (Loss)
1995 $ 412 $ 1,106 $ 473 $(1,669) $ 322
1996 277 1,694 1,559 (2,075) 1,455
1997 (78) 5,407 1,075 (3,477) 2,927
1998 YTD(1) (1,571)(3) 1,994 4,561 TBA 4,984
Income Before
Income Taxes
1995 $ 416 $ 1,111 $ 473 $(1,533) $ 467
1996 338 1,735 1,592 (2,044) 1,621
1997 (57) 5,462 1,143 (3,450) 3,098
1998 YTD(1) (6,070)(2) 1,484 3,717 TBA (869)
Net Income (Loss)
1995 $421 $ 1,027 $ 451 $(1,546) $ 353
1996 282 1,580 1,453 (2,257) 1,058
1997 139 3,622 721 (2,489) 1,993
1998 YTD(1) (5,549)(2) 817 2,229 TBA (2,503)
(1) Figures for 1998 are year to date as of June 30, 1998.
(2) Attributable to write down of BAR investment.
(3) Attributable to the discontinuation of the Ford Mondeo Touring Car Program.
31
Because of the Company's fluctuations in sales, historical quarterly
operating results do not reflect management's expectations of future quarterly
operating results. Management believes that future operating results will
fluctuate on a quarterly basis due to a variety of factors, including seasonal
cycles associated with the motorsports industry, the timing of orders for racing
cars and spare parts, the timing of service projects undertaken for third
parties and changes in the mix of products and services ordered by customers.
Management anticipates that the Company's sales will normally be lowest in its
first and fourth fiscal quarters, which end December 31 and September 30,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on cash flow from operations,
supplemented by loans from the principal shareholder, to finance working
capital, investments and capital expenditures.
For the nine months ended June 30, 1998 net cash provided by operating
activities was $5.01 million, as compared to $0.39 million for the nine months
ended June 30, 1997. This was largely comprised a net loss of $2.50 million
offset by non-cash charges for depreciation and amortization of $1.00 million
and the Company's share in losses incurred by related investments of $5.20
million, together with a net decrease in working capital of $1.68 million.
Accounts receivable at June 30, 1998 were $10.96 million net of allowance for
doubtful debts compared to $7.40 million at September 30, 1997. This increase
reflects the new business ventures undertaken by the Company during fiscal 1998.
These include the distribution of CART race cars and spare parts (previously
distributed by a third party) and the CFD program.
Net cash used in investing activities was $3.55 million for the nine
months ended June 30, 1998 as compared to $2.77 million provided for the nine
months ended June 30, 1997. This principally consisted of $4.27 million for the
investment in the equity of BAR and $4.31 million for the acquisition of
property and equipment. This was partially offset by an increase in the amount
owed to the principal shareholder of $5.03 million. Net cash provided by
financing activities during the period ended June 30, 1998 amounted to $0.97
million, largely due to the utilization of the bank line of credit.
Capital expenditures on property and equipment was $4.31 million for
the nine months ended June 30, 1998 as compared to $1.07 million for the nine
months ended June 30, 1997. The increase in capital expenditures relate to the
investment in computer hardware and software for the CFD program and investment
in the windtunnel facility in Indianapolis, operated through ARC.
At June 30, 1998, the Company had cash of $3.15 million offset by short
term debt of $10.48 million owed to the principal shareholder and $1.07 million
owed to National Westminster Bank. The Company believes that the existing cash,
the proceeds of the offering and cash flow from future operations will be
sufficient to fund its capital expenditures and other cash needs during fiscal
1999. In addition to the continuing operations, the Company plans to investigate
the potential acquisition opportunities in activities relating to its core
business. The Company has budgeted approximately $26.59 million of capital
expenditures for property and equipment during fiscal 1999.
The seasonality of revenue noted above causes working capital
requirements to fluctuate during the year. The nature of the supply of racing
cars is such that significant advance deposits are received at the time of
order. This can be up to six months prior to delivery of the car, and hence
reduces the need for short term borrowing. In addition, the Company has a loan
facility provided by Dr. Adrian Reynard. This facility is repayable on demand,
and is secured by way of fixed and floating charges over the Company's assets.
It bears interest at National Westminster Bank's base rate plus 2 1/2%. The
Company has received a letter from Dr. Reynard stating that he does not expect
to be paid or credited with interest on the money lent to date. A portion of the
proceeds from this offering will be used to repay the loan in its entirety. This
facility will not be available to the Company following the offering.
32
FOREIGN CURRENCY FLUCTUATIONS
The Company's earnings and liquidity are affected by fluctuations in
foreign currency exchange rates, principally the U.S. dollar rate, reflecting
the fact that most of the Company's revenues and cash receipts are denominated
in U.S. dollars while the large majority of its costs are in pounds sterling.
The Company reduces this dollar/sterling exchange risk where possible by
currency hedging. The Company monitors the dollar/sterling exchange rate on a
daily basis and maintains an ongoing currency hedging facility of approximately
$8.25 million with National Westminster Bank. It is the policy of the Company
not to enter into derivative financial instruments for speculative purposes. The
Company does enter into foreign currency forward exchange contracts to minimize
risk of loss from currency rate fluctuations on foreign currency commitments
entered into in the ordinary course of business. These commitments are generally
for terms of less than one year. The foreign currency forward exchange contracts
are executed with creditworthy banks and are denominated in currencies of major
industrial countries. The notional amount of outstanding foreign currency
forward exchange contracts aggregated $5.0 million at September 30, 1997. There
were no outstanding foreign currency forward exchange contracts at September 30,
1996 and June 30, 1998. The Company does not anticipate any material adverse
effect on its results of operations or financial position relating to these
foreign currency forward exchange contracts. The Company engages in currency
hedging activity whenever management believes that it is advantageous to do so.
The following table sets forth, for the periods indicated, certain
information concerning the exchange rate between pounds sterling and U.S.
dollars based on the Noon Buying Rate (expressed as U.S. dollars per pound
sterling). Such rates are provided solely for the convenience of the reader and
are not necessarily the exchange rates (if any) used by the Company in the
preparation of its consolidated financial statements included elsewhere in this
Prospectus. No representation is made that the pound sterling could have been,
or could be, converted into U.S. dollars at these rates or at any other rates.
· Enlarge/Download Table
SPOT RATE - U.S. DOLLARS PER POUND STERLING
--------------------------------------------------------------------
CALENDAR YEAR PERIOD-END RATE AVERAGE RATE (1) HIGH LOW
--------------------------------------------- --------------- ---------------- ------------ ------
1993...................................... 1.4775 1.5030 1.5875 1.4180
1994...................................... 1.5647 1.5326 1.6382 1.4620
1995...................................... 1.5496 1.5789 1.6400 1.5310
1996...................................... 1.7140 1.5624 1.7140 1.4929
1997...................................... 1.6451 1.6395 1.7115 1.5797
1998 (through June)....................... 1.6679 1.6500 1.6914 1.6128
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
On ____________, 1998, the Noon Buying Rate was (pound)___ =
$_________.
YEAR 2000 COMPLIANCE
GENERAL
The Company has been aware of potentially serious issues arising from
computer programs failing to recognize correctly, dates beyond 1999 for a number
of years. Since 1996, computer system upgrades have been implemented with
supplier compliance assurances. A 'Year 2000' compliance project is ongoing to
either ensure compliance, both internally and with regard to suppliers and
customers, or implement a contingency plan to avoid losses where guaranteed
compliance cannot be achieved.
In 1996 the Company commenced an organization wide implementation of an
integrated manufacturing and financial management computer system to improve
business information reporting. The new systems, which are expected to make the
Company's business systems substantially year 2000 compliant, are scheduled for
completion during 1999. The chosen manufacturing package 'Fourman' is Unix
based, with the Coda financial package and other administrative software, being
entirety Windows NT based by the end of the second quarter of 1999.
The computer aided design (CAD) applications used by the Company are
Unix based and the ongoing program of upgrading to achieve year 2000 compliance
will be completed by the end of 1998.
Information Technology (IT) development is viewed as critical to the
betterment of the organization and year 2000 has been viewed as one facet of
this development rather than an interruption to the overall IT development
program.
YEAR 2000 PROJECT
The Company engaged Ashton Court, a U.K. Department of Trade and
Industry approved external consultant, to assist in the management on all
aspects of a year 2000 compliance review project. The project can be divided
into three stages:
1. IT Systems - Infrastructure and applications software
2. External Agents - Third party suppliers and customers
3. Manufacturing - Process control and implementation
The phases common to all three stages are:
1. Preparing an inventory of year 2000 items
2. Assigning priorities to identified items
3. Identifying non-compliance items considered to be material
4. Repairing or replacing material items
5. Testing material items
6. Designing and implementing contingency and business continuation plans
With regard to IT systems, the Company has substantially completed the
replacement of material items and is on target to finalize this exercise by the
end of the second quarter of 1999. The IT replacement cost to date is
approximately $1.8 million. Management believes that the key business driver
with regard to IT is the CAD facility and that this area of the business is year
2000 compliant.
The External Agents stage includes the process of identifying the
prioritizing critical suppliers and customers, and communicating with them about
their plans and progress in addressing the Year 2000 problem. Evaluations of the
most critical third parties have been initiated. These evaluations will be
followed by the development of contingency plans, which are scheduled for
completion in the first quarter of 1999. The process of evaluating is scheduled
for completion by mid-1999, with follow-up reviews scheduled through the
remainder of 1999.
Plans detailing the tasks and resources for the manufacturing review
are currently being prepared, with the completion of the review and testing
scheduled for the end of the first quarter of 1999. Any necessary replacement of
material items will be carried out during the second quarter of 1999. This stage
includes all hardware and software embodied in the manufacturing plant utilized
by the Company. The key equipment is programmed by the CAD stations and is
numerically controlled, rather than date controlled. The Company currently is
engaged in an evaluation and prioritization program to assess whether there will
be a material impact on its manufacturing ability or a requirement to develop a
contingency plan.
COSTS
Costs to date incurred purely for year 2000 compliance are
approximately $50,000, with compliance issues being taken into account and
resolved within the normal capital expenditure budget of the Company. However
personnel time has been diverted to project activities carried out to date. It
is not anticipated that there will be material costs in the replacement of
material items, or in the implementation of contingency plans. The cost of the
external consultants and internal personnel time to complete the review will be
approximately $150,000.
RISKS
Until the compliance review is substantially in process, the Company
cannot fully estimate the risks of its year 2000 issue. To date, the Company has
not identified any assets that present a material risk of not being year 2000
compliant or for which a suitable alternative cannot be implemented. However,
as the initiative proceeds into subsequent phases, it is possible that the
Company may identify assets that do present a risk of a year 2000-related
disruption. It is also possible that such a disruption could have a material
adverse effect on financial condition and results of operations. In addition, if
any third parties who provide goods or services that are critical to business
activities fail to appropriately address their year 2000 issues, there could be
a material adverse effect on the financial condition and results of operations
of the Company.
33
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" was issued by the Financial Accounting
Standards Board ("FASB"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. This statement requires that
all items that are required as components of comprehensive income be displayed
in a financial statement. The Company has not determined the impact on the
Company's combined financial statement disclosure. SFAS No. 130 is effective for
the Company's combined financial statements for the year ended September 30,
1999.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" was issued by the FASB. SFAS No. 131 establishes
standards for the way that public business enterprises report financial and
descriptive information about its reporting operating segments. The Company has
not determined the impact on the Company's combined financial statement
disclosure. SFAS No. 131 is effective for the Company's combined financial
statements for the year ending September 30, 1999.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued by the FASB. SFAS No. 133 establishes standards
for accounting for derivative instruments, including certain derivative
instruments embedded in other contracts by requiring that an entity recognize
those items as assets or liabilities in the balance sheet and measure them at
fair value. The Company has not determined the impact on the Company's combined
financial statements. SFAS No. 133 is effective for the Company's combined
financial statements for the year ending September 30, 2000.
FORWARD LOOKING STATEMENTS
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. In addition
to the factors discussed above, other factors that could cause actual results to
differ materially include the following:
o product offerings and pricing strategies by competitors;
o warranty expenses;
o foreign currency exchange rate fluctuations;
o environmental and product safety regulatory activity;
o effects of weather;
o uninsured product liability claims; and
o overall economic conditions, including inflation and consumer
confidence and spending.
34
MOTORSPORT INDUSTRY OVERVIEW
INDUSTRY OVERVIEW
Auto racing is the second most watched professional sport in the world
after soccer. In 1997, auto racing had an estimated aggregate television
audience of over 6 billion people. In addition, professional auto racing has
been the fastest growing professional sport in North America over the past five
years based on spectator attendance and television viewership.
Motorsport fans tend to be loyal to their favorite driver or teams.
These fans offer demographic profiles which attract significant corporate
sponsorship. Corporate sponsorships, which are estimated at over $1 billion in
North America alone include (1) event sponsorship, (2) racing team sponsorship
and (3) broadcast television sponsorship. British American Tobacco, Budweiser,
DuPont, Federal Express, Kellogg's, Marlboro, McDonald's, Miller Brewing,
Motorola, PPG Industries, Target Stores, Texaco/Havoline, Valvoline and Winston
each sponsor racing teams, series or events.
Auto racing consists of several distinct categories, each with its own
organizing body and racing events. Internationally, open-wheel racing is the
most recognized form of auto racing. Open-wheel racing utilizes an
aerodynamically designed chassis and technologically advanced equipment. The
most established international open-wheel racing series are Formula One and the
CART Series. The development series for Formula One include Formula Ford 1600,
Formula Ford 2000, various national Formula Three series, progressing to Formula
3000 and Formula Nippon. The development series for the CART Series include the
Barber Dodge Series, Toyota Atlantic and the Indy Lights Series. The IRL was
formed in 1995 as a rival U.S. open-wheel racing series. The IRL competes
directly with the CART Series, with an all oval race schedule including the
Indianapolis 500.
The largest auto racing category in the United States, in terms of
attendance and media exposure, is stock car racing. Stock car racing utilizes
equipment similar in appearance to standard passenger automobiles and races are
typically staged on oval courses. The most prominent organizing body in stock
car racing is NASCAR.
Drag racing typically involves short sprint races on a straight-line
drag strip. The National Hot Rod Association ("NHRA") is the most prominent
organizing body in drag racing.
Sports car racing, with various series throughout the world, includes
several different classifications. World sports cars are open-roof, specially
designed race cars. The cars eligible for racing in a GT Series are high
performance racing cars that must be based on limited production street cars.
ECONOMICS OF MOTORSPORTS
The primary participants in motorsports are spectators, corporate
sponsors, drivers and team members, team owners, suppliers, track owners and
sanctioning bodies. Track owners and sanctioning bodies derive their revenue
through spectator admissions, television broadcast rights fees and corporate
event sponsorship.
Team owners derive their revenue primarily through corporate
sponsorship, which varies with the team's appeal and racing success. Team owners
expenditures include (1) driver's salary, (2) engine, (3) racing car and spare
parts, and (4) team costs consisting of engineers, crew, office and travel
expenses. In a series such as CART, team budgets for a full racing season can
range from as low as $5 million to as high as $15 million per car. A typical
two-driver CART team purchases five cars, spare parts and services each year.
Formula One team budgets, which include the costs of individually produced
racing cars by each team, are significantly higher, in the range of five times
the budget of a CART team.
35
PARTICIPANTS
Motorsports events are generally heavily promoted, with a number of
supporting events surrounding the main race event. Examples of supporting events
include (1) qualifying trials, (2) secondary racing events, (3) driver autograph
sessions, (4) automobile and product expositions, (5) catered parties and (6)
other related events. The supporting events are designed to maximize the
spectator's entertainment experience.
Spectators. Motorsports is among the fastest growing spectator sports
in the United States. After soccer, it is the most watched sport world-wide.
Spectators either attend the motorsport event or view the event on television.
In 1997, auto racing had an estimated world-wide aggregate television audience
of over 6 billion people.
Corporate Sponsors. Drawn to motorsports by the large number of
spectators and television audiences and their attractive demographics, corporate
sponsors are active in all phases of the industry. Spectators are believed to be
loyal to motorsports and to its corporate sponsors. Estimated at over $1 billion
in North America alone, corporate sponsorships include (1) event sponsorship,
(2) racing team sponsorship, and (3) broadcast television sponsorship. In
addition to sponsoring the various race series, corporate sponsors support
drivers and teams by funding certain costs of their operations. They support
race promoters and track owners by sponsoring and promoting specific events. In
return, corporate sponsors receive advertising exposure on television and radio,
through newspapers, printed materials and advertising, promotional and
hospitality benefits at the track over the race weekend. Companies negotiate
sponsorship arrangements based on various factors, including a series' or
event's audience size or spectator demographics and the team's racing success.
Drivers and Team Members. The majority of drivers contract
independently with team owners, while select drivers own their own teams.
Principally, drivers receive income from contracts with team owners, sponsorship
fees and prize money. Successful drivers may also receive income from personal
endorsement fees and souvenir sales. The personality and success of the driver
can be an important marketing advantage for team owners because it can help
attract corporate sponsorships and generate sales for licensed merchandise. The
efforts of each driver are supported by a number of other team members, all of
whom are supervised by a crew chief.
Team Owners. In most instances, team owners underwrite the financial
risk of placing their teams in competition. They contract with drivers, acquire
racing cars and support equipment, employ pit crews and mechanics and syndicate
sponsorship of their teams. Team owners generally receive income primarily from
sponsorships and a percentage of the prize money.
Suppliers. In most race series, third-party companies supply racing
cars and equipment, engines and tires to the race teams. The equipment complies
with rules and specifications developed by that race series' sanctioning body.
Many suppliers are involved in the motorsports industry in order to enhance
brand recognition through advertising, as well as for research and development
for use in production road cars, tires and equipment.
Race Promoters. Race promoters include track owners, government
organizations and other groups and individuals. Race promoters pay a fee to have
an event sanctioned at their race venue and are responsible for the local
marketing and promotion of the event. Their revenue sources generally include
admissions, sponsorships, corporate hospitality (suites, chalets and tents for
race viewing and other amenities), advertising and concessions and souvenir
sales.
Sanctioning Bodies. Sanctioning bodies sanction events at various race
venues in exchange for fees from race promoters and track owners. Sanctioning
bodies are responsible for all aspects of race management necessary to "produce"
the race event. Sanctioning bodies are responsible for presenting racing cars,
drivers and teams and providing race officials to ensure fair competition, as
well as providing the race and series' purses and other prize payments.
36
RACING SERIES AND CLASSIFICATIONS
Motorsports is a highly segmented industry. Each classification of
racing constitutes a distinct product, with different rules and equipment
specifications. Racing series and classifications change regularly, but the
premier racing series currently can be denominated as follows:
o Formula One. The Federation Internationale de l'Automobile (the
"FIA") sanctions the Formula One World Championship. Formula One
events consist of open-wheel races on road courses in Europe,
South America, Canada, Australia and Japan. The Formula One World
Championship was founded in 1950. The 1998 Formula One calendar
includes 15 events in 13 different countries. The cars are
single-seater, open-wheel racing cars powered with a
non-turbocharged 3000 cubic centimeter capacity engine, capable of
speeds of around 200 miles per hour. The FIA rules require that
each team manufacture its own race car chassis. Formula One events
attract large, world-wide audiences. According to the FIA, the
1997 Formula One World Championship season attracted a total
spectator audience of over three million people and over 5.4
billion viewers in 202 countries.
o CART. The CART Series is the premier open-wheel motorsports series
in North America. CART racing cars ("Champ Cars") are
single-seater, open-wheel racing cars with a turbocharged
four-cycle overhead cam shaft eight-cylinder engine with allowed
maximum cubic inch displacement of 2,650 cubic centimeters. Champ
Cars are capable of speeds of up to 240 miles per hour. CART
events are staged on four different types of tracks -
superspeedways, ovals, temporary street courses and permanent road
courses. The 1998 CART Series calendar includes 19 events in five
different countries, with plans to stage 20 events in 1999. In
1997, CART races were televised in more than 185 countries with
aggregate television audiences in excess of one billion viewers.
Total attendance at CART races increased significantly from 1.8
million people in 1991 to 2.5 million people in 1997.
o NASCAR. Professional stock car racing developed in the
Southeastern United States in the 1930s, and the National
Association of Stock Car Auto Racing, Inc. ("NASCAR") has been
influential in the growth and development of the sport. NASCAR is
the most recognized sanctioning body of professional stock car
racing in North America, staging the Winston Cup and Busch Grand
National stock car race events. Stock cars are production-based
sedans that are closely regulated from an engine and chassis
specification standpoint. The 1998 Winston Cup and Busch Grand
National race series include 33 and 31 races, respectively, all of
which will be held in the United States, with two exhibition
events in Japan. NASCAR-sanctioned events, particularly Winston
Cup races, enjoy a large and growing base of spectator support.
Based on statistics developed by Goodyear Tire & Rubber Co.,
attendance at NASCAR's Winston Cup Series, Busch Grand National
Series and Craftsmen Truck Series grew 9.0%, 16.6% and 13.5%,
respectively, from 1996 to 1997. Moreover, according to Nielsen,
more than 175 million people watched NASCAR's televised events in
1997. Winston Cup, Busch Grand National and other major
NASCAR-sanctioned races also receive extensive national radio
coverage.
37
For each of the above racing series, there are established junior
formulae which develop drivers, engineers, suppliers, mechanics and other
personnel for the next level of competition. Although not a strict ladder
system, the conventional tiers are as follows:
Formula One
o Formula 3000. This formula was introduced in 1985 as a replacement
for Formula Two. It remains the secondary European racing formula,
acting as a final training ground and feeder series, in terms of
drivers, teams and engineers, for the Formula One World
Championship. The series is for single-seater open-wheel racing
cars with 3000 cubic centimeter engines generating horsepower of
approximately 450-500 bhp with top speeds of approximately 180
miles per hour. The Formula 3000 Championship has approximately
ten rounds, all in western Europe, of which four typically act as
support races to Formula One World Championship events. Television
coverage is limited to the Eurosport Satellite Channel. Since
1996, the Formula 3000 Championship has been conducted as a
one-make formula, with identically prepared chassis supplied by
one specified manufacturer.
o Formula Nippon. In Japan, the Formula Nippon Series has emerged,
taking the place of the previous Formula 3000 Series in Japan. The
series is for single-seater open-wheel racing cars with 3000 cubic
centimeter engines generating horsepower of approximately 550 bhp,
with top speeds of approximately 200 miles per hour. The 1998
Formula Nippon Series included 10 races throughout Japan, on
permanent road courses and temporary street circuits.
o Formula Three. The national Formula Three Series acts as a feeder
series to Formula 3000. Formula Three cars are smaller versions of
Formula 3000 cars, but with 2,000 cubic centimeter engines based
on standard production engines yielding around 200 horsepower and
a top speed of approximately 150 miles per hour. Formula Three
racing is organized largely on a national basis, with major series
in Britain, Germany and Italy, and other series in France, Japan,
South America, Mexico, Greece and India. There are also major
international Formula Three Series at Monaco, which support the
Formula One World Championship Monaco Grand Prix and the Macau
Grand Prix in the Far East. There are additional
sub-classifications that serve as feeder series to Formula Three,
including the Formula Ford 1600 Series and Formula Ford 2000
Series.
CART
o Indy Lights Championship. The Indy Lights Championship was formed
in 1986 as a one-make series with identical, sealed engines and a
single tire manufacturer. The series utilizes single-seat
open-wheel racing cars with engines generating horsepower of
approximately 450 bhp with top speeds of approximately 195 miles
per hour. The Indy Lights Championship is designated as the
"Official Development Series of the CART Series" and is sanctioned
by CART. In 1998, the Indy Lights Championship includes 14 races,
one of the which was run as a stand alone event.
o Toyota Atlantic Series. The Toyota Atlantic Series is a one-make
series with identical Toyota engines and a single tire
manufacturer. The series utilizes single-seater open-wheel racing
cars with 1600 cubic centimeter engines generating horsepower of
approximately 250 bhp with top speeds of approximately 165 miles
per hour. The races are staged on ovals, temporary street courses
and permanent road courses. In 1998, the Series will compete at 13
venues, 11 of which will be as support races for the CART Series.
38
o Barber Dodge Series. The Barber Dodge Series is a highly
competitive North American race series which utilizes 30
identically prepared single-seater racing cars, called Reynard
Dodges. Serving as a development series to the CART Series, the
Barber Dodge Series races on temporary street circuits and
permanent road courses, with many races run as a support race to a
CART event. Drivers and/or their sponsors lease a Reynard Dodge
for $10,000 per race, with a chance of earning $12,000 for a win.
Unlike other motorsports series, the Barber Dodge Series is
completely self-contained and owned and operated by Skip Barber
Racing.
In addition to the various racing series discussed above, the following
series and classifications have attracted a strong fan base and have established
an international following.
o Indy Racing League. In 1995, the IRL was formed as a rival United
States open-wheel racing series, competing directly with the CART
Series. The IRL's events are staged solely on oval courses. IRL
cars are single-seater open-wheel racing cars with 4000 cubic
centimeter normally aspirated engines generating horsepower of
approximately 700 bhp with top speeds of approximately 230 miles
per hour. The IRL's first season of racing commenced in 1996 and
consisted of five races, including the Indianapolis 500. The 1998
season consists of 11 races, including the Indianapolis 500.
o Super Touring. Super touring is a significant growth area in
international motor racing. The series is developed for touring
cars with a shell outwardly similar to a production model with a
rev-limited two liter engine from the same manufacturer. In many
instances, specialist racing firms produce the cars for major
motor manufacturers. The major series are in Britain, Germany,
Italy, France and Japan. Other series are run in Australia, South
Africa, Belgium and Spain. Manufacturers racing in this series
include Alfa Romeo, Audi, BMW, Ford, Honda, Mazda, Nissan,
Peugeot, Renault, Toyota, Vauxhall/Opel and Volvo.
Sub-classifications include oval touring, one-make touring, sports
prototype series and similar touring car race series.
o Sports Car Racing. Sports car racing is sanctioned in the United
States by the Sports Car Club of America, the United States Road
Racing Championship and Professional Sports Car Racing, which
sanction races held on road courses throughout the country,
including the Rolex 24 at Daytona, the premier sports car
endurance event held in the United States. Internationally, the
race at LeMans, France is the premier sports car endurance race.
Sports car racing includes several different classifications.
World sports cars are open-roof, specially designed racing cars.
Also included in sports car racing are GT cars. The cars eligible
for racing in a GT Series are high performance racing cars that
must be based on limited production street cars.
o Drag Racing. Drag racing typically involves short sprint races on
a quarter mile straight-line drag strip. The NHRA is the most
prominent organizing body in drag racing. The NHRA sanctions
numerous classifications of cars, the most prominent of which are
"top fuel dragsters" and "funny cars." Top fuel dragsters
frequently exceed 300 miles per hour. Horsepower is the most
important aspect of this form of racing. However, aerodynamics
have become increasingly important both from the standpoint of
eliminating aerodynamic drag and providing downforce to keep the
cars on the track with the maximum amount of traction.
o Truck Racing. NASCAR sanctions a series that races trucks based on
U.S. production mid-sized pick-up trucks. The Series events are
staged primarily on oval tracks throughout the United States. The
trucks' engines generate approximately 550 horsepower with top
speeds of approximately 190 miles per hour. The 1998 race season
includes 27 races.
39
THE MOTORSPORT VALLEY
British designed and assembled racing cars dominate motorsports
throughout the world. It has been estimated that over 75% of single-seater
racing cars used in 80 countries throughout the world were engineered, designed
and assembled in the U.K. Approximately 600 U.K. companies are currently
involved in the motorsports industry. This concentration of motorsports firms is
centered around the Thames Valley in Oxfordshire and has become known as the
"Motorsport Valley." The reasons for this concentration are numerous, but center
mainly upon the concentration of knowledge and expertise that has been developed
over the past 30 years and the ongoing British interest in the motorsports
industry. For Reynard, being a part of the Motorsport Valley provides it with
access to knowledge, expertise and a workforce that has been a significant
benefit to its expanding business.
THE RACING CAR
Following is a diagram of the 1998 Reynard Champ Car, with certain of
the components identified:
[DIAGRAM OF REYNARD RACE CAR WITH CERTAIN COMPONENTS OF THE CAR IDENTIFIED]
40
Reynard builds the CART Champ Car to comply with specifications set by
the sanctioning body. The 1998 Champ Car has a maximum allowable length of 196
inches (190 minimum), a maximum width of 78.5 inches (77-3/4 inch minimum) and a
maximum height of 32 inches, excluding the rollover hoop and rear wings. The
race cars must weigh a minimum of 1,550 pounds including coolant and lubricant.
The rear wing on the short oval and road course race car has a maximum allowable
height of 36 inches, but is limited to 32 inches on super speedways. The minimum
wheel base (distance between the front and back wheel center line) is 96 inches.
Ground effects are the result of designs which channel air under the
car to create a low-pressure area or partial vacuum between the racing car and
the race track. Under-car tunnels, combined with wings on the front and rear of
the racing car, create downforce, similar to lift on airplanes, only in reverse.
It is measured in pounds and can be used to balance the handling of the racing
car by adjusting the front and rear wings. Downforce may create loads up to
three times the weight of the racing car permitting the vehicle to corner at
greater speeds while drivers experience loads of over five Gs (a lateral load
equivalent to more than five times the pull of the earth's gravity) as a result
of the efficiency of ground and other aerodynamic effects.
Wings are critically important to the basic concepts and performance of
current Champ Cars. The wings and racing car underbody have a significant impact
on the handling and stability of the car. The wings work to improve cornering
capabilities, enhance traction and maintain a balanced vehicle. Wings used on
road courses or short ovals differ from those used on superspeedways.
Through tiny testing probes, teams can compare different shapes and
sizes in wind tunnel experiments to enhance the aerodynamic performance of the
car. Front and rear wings are frequently adjusted to achieve maximum performance
and handling of the racing car. Though the aerodynamics are fixed when the car
is on the track, packages are often adjusted by the crew based on the track
configuration, racing car speeds and wind speed measurements. On short ovals and
road courses, teams must work to obtain maximum downforce. At super speedways
and other especially fast circuits, downforce becomes less important, and drag
must be reduced to obtain maximum speed. In order to achieve the maximum
performance and handling of a racing car, many teams include a substantial
budget for research and development costs, including wind tunnel experiments, to
enhance the aerodynamic performance of the car.
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BUSINESS
GENERAL
Reynard Motorsport, Inc. is one of the world's leading designers and
manufacturers of production racing cars and other high performance specialty
vehicles. Cars designed and produced by Reynard have a long history of winning
races and setting records in many of the world's most competitive racing series.
During 1998, Reynard racing cars were used by some of the world's best drivers,
including Alex Zanardi, Jimmy Vasser, Greg Moore, Gil DeFerran, Dario
Franchitti, Mark Blundell, Adrian Fernandez and Bobby Rahal. A majority of the
current drivers in Formula One, the most prestigious international racing
series, have competed in a Reynard racing car during their career, including
World Champions Jacques Villeneuve, Michael Schumacher and Damon Hill.
The Company was founded 25 years ago by Dr. Adrian Reynard, a former
champion racing car driver who competed in vehicles of his own design. Since its
inception, the Company's goal has been to dominate every race and win each
championship in every series it enters. Reynard has graduated from Formula Ford
Championships in the mid-1980s to the CART Series, to become the reigning CART
Series champion, by applying the latest technology in the design and development
of safe and competitive products. Reynard's history of winning is reflected by
its operating performance, with sales growing at a compound annual growth rate
of 51.9% from 1994 to 1997. As of October 20, 1998, the Company had entered into
purchase agreements for racing cars and services representing orders valued at
$44.80 million in 1999.
Reynard Racing Cars. Reynard designs, manufactures and sells racing
cars for competition in (1) the CART Series, the premier open-wheel motorsports
series in North America; (2) the Formula Nippon Series, the Formula 3000
open-wheel racing series in Japan; and (3) the Barber Dodge Series, an
open-wheel one make development series in the United States. The Company also
designs and engineers touring and sports racing cars in conjunction with
automobile manufacturers, such as Ford, Chrysler, Panoz and Dodge, for
competition in international championships.
BAR will make its debut in Formula One in 1999. BAR is a joint venture
in which Reynard is a partner with British American Tobacco and Mount Eagle,
Inc. The 1997 Formula One World Champion driver, Jacques Villeneuve, will drive
one of the racing cars designed and engineered by BAR.
Reynard operates integrated design, production and testing facilities
in Oxfordshire, England, often referred to as the Motorsport Valley. The Company
also operates a North American headquarters and testing facility in
Indianapolis, Indiana. Reynard employs over 230 people, of which over 85% are
highly skilled and well educated designers, engineers and other specialized
technicians. The Company's employees utilize the most advanced technology in the
design and engineering of racing cars, with a focus on maximizing aerodynamic
efficiency, while continuing to develop improved safety features. Through the
use of computer-aided engineering, design and manufacturing technology, Reynard
meets stringent design criteria, streamlines production and reacts faster to
changing demands. The Company pioneered the use of carbon composites in the
manufacture of lighter, stronger and safer production racing cars. Reynard
emphasizes after-sales support, including on-site race day customer service, and
focuses on the needs of each individual customer. Such attention to customer
service and satisfaction, coupled with management's expertise and investment in
technology and equipment, has enabled Reynard to develop a track record of
winning within the competitive global motorsports market.
KEY COMPETITIVE STRENGTHS
History of Winning. Since the beginning of fiscal 1994, Reynard racing
cars have won a total of 81 races, including seven championships in the CART
Series, Formula 3000 competition and the Formula Nippon Series. Since winning
its first race in the CART Series with driver Michael Andretti in 1994, Reynard
racing cars have won
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a total of 54 pole positions (fastest qualifying times) and 49 wins. Reynard
also has won the Constructor's Award for the CART Series each year from 1995
through 1998. As a result of its winning track record, Reynard supplied 22 of
the 28 full-season entries in the 1998 CART Series. Reynard has received orders
through October 20, 1998 to supply 37 racing cars for the 1999 CART Series and
orders for 13 racing cars for the 1999 Formula Nippon Series.
Reynard's reputation for winning has allowed it to establish alliances
with major companies in the motorsports and automotive industries, including
Chrysler, Firestone, Ford, Goodyear, Honda, Mercedes and Toyota. Increasingly, a
number of international companies have sought the technological and engineering
resources of Reynard to provide more diverse commercial solutions.
Leader in the Development and Application of Motorsports Technology.
The Company employs a scientific, rather than the traditional trial and error
approach, in the design, engineering and manufacture of racing cars. The Company
uses simultaneous engineering, which includes computer-aided engineering, design
and manufacturing systems. With these systems, the Company can develop and
manufacture a racing car, from initial design to final assembly, in a period of
a few months. The Company analyzes the aerodynamic effects on a racing car in
simulated race settings by (1) development and application of computational
fluid dynamics, (2) application of finite element analysis and (3) testing at
its wind tunnel facilities. The Company uses the results of these tests to
engineer its racing cars. Management believes that its participation at the
highest level of motorsports, such as the CART Series and Formula One, enhance
the Company's ability to effectively develop and apply highly advanced
technology to the design, development and production of racing cars for junior
formulae.
Strategic Relationship with British American Racing in Formula One. BAR
will field a two-car team in the 1999 Formula One World Championship. The 1997
Formula One World Champion driver, Jacques Villeneuve, will drive one of the
racing cars that will be designed and engineered by BAR. Management believes
that British American Tobacco selected Reynard to be one of its joint venture
partners in BAR as a result of the Company's reputation and expertise. British
American Tobacco has entered into a long-term sponsorship agreement to fund what
management believes to be one of the most significant sponsorship budgets in
Formula One.
Reynard has agreed to commit its management expertise to BAR. Reynard
has invested $5.25 million, in exchange for a 15% equity interest in BAR and an
ongoing management fee. Reynard expects to provide certain contract
manufacturing services to BAR in its early stages on a fee-for-service basis.
BAR will build and maintain a separate staff and facilities adjacent to
Reynard's facilities in the Motorsport Valley. Although BAR operates
independently, BAR and the Reynard technical staff regularly hold joint meetings
to discuss and analyze research and development results of mutual interest.
As a result of the joint venture, Reynard has access to certain of
BAR's technological know how (not in written or machine readable form). The
Company believes that this access to research and development ideas will enhance
Reynard's other motorsports projects by improving our knowledge database and
methodology.
Highly Experienced Management and Operating Team. The Company
attributes much of its success to its management team. It is composed of former
racing car drivers, managers, race team members and motorsports enthusiasts who
are highly experienced and well known within the motorsports sector. The
Company's senior management team has an aggregate of over 75 years of service
with the Company. Reynard has successfully manufactured racing cars for 25 years
by leveraging the expertise of its management team in design and engineering,
composites and production.
The Company also has developed a corporate culture that provides
exceptional training to young designers and engineers. By personally
interviewing and recruiting each applicant, Dr. Reynard and the other members of
the senior management team attempt to identify those skilled engineering
students who they believe will excel in the unique Reynard culture and
environment. Management believes that this recruiting process and corporate
culture
43
has enabled the Company to attract, retain and develop a team of highly skilled
designers, engineers and technical staff. Upon completion of the offering,
officers and employees of the Company will beneficially own approximately ___%
of the outstanding common stock.
Commitment to Customer Service. Reynard believes that service is an
integral component of sales. Reynard demonstrates its commitment to service by
assigning a liaison engineer to each Reynard racing car in the CART Series. By
dedicating an engineer to each team, the Company can respond quickly to customer
questions and concerns. Reynard also receives valuable information from these
engineers for the continued development of the racing cars and equipment.
Reynard engineers are present at each CART event to monitor the Reynard racing
cars. In addition to this individualized customer service provided by Reynard
engineers, its customers have access to Reynard's design systems and wind tunnel
results. The customers also have direct access to Reynard's design team through
the Company's computer-aided design system. Reynard uses the data obtained by
the engineers at each track and the results of wind tunnel testing and
engineering analysis to further refine the racing car design in response to
competition on the track and customer recommendations. Reynard sells update
packages, which may include newly designed wings or other components, to
customers periodically during the season to incorporate these refinements.
Vertically Integrated Operations. Reynard has the ability to design,
engineer and manufacture the majority of the components of a racing car. Through
its vertically integrated operations, the Company is able to (1) maintain higher
quality control standards in the production of all components of the racing car,
(2) improve operating margins by lowering costs, and (3) control the timing of
production and delivery of its products.
The Company (1) designs and engineers racing cars and component
equipment, (2) makes the patterns to be used in the production process, (3)
manufactures the individual components to specification and (4) assembles the
racing car. With the pending acquisition of Gemini, which manufactures gearbox
and transmission systems, the Company will be able to manufacture substantially
all of the parts necessary to deliver a rolling chassis to the customer.
GROWTH STRATEGY
Capitalize on Growth Opportunities within Existing Race Series. The
Company intends to increase its presence in the race series in which it is
currently involved. The Company believes it will grow its business in existing
series through:
o Capitalizing on the continued expansion of the CART Series and
other existing series. The Company believes it will continue to
grow as these series grow through (1) increases in popularity, (2)
expansion of the number of races and competitors, (3) increases in
development budgets, and (4) expansion internationally. With such
expansion, the Company can increase sales to existing customers
who will require additional high margin equipment, spare parts and
services. In addition, the Company intends to construct a
composite manufacturing and repair facility in Indianapolis,
Indiana. This facility will support parts sales and repair work
that currently is performed in-house by individual CART teams.
o Introduction of a newly designed racing car for the 1999 Formula
Nippon Series. The Company believes the new design will result in
increased sales of racing cars and spare parts in this series.
o Expansion of the Company's presence in the touring and sports car
racing programs. Major automobile manufacturers increasingly view
success in these programs as an effective way to market their
products and increase their prestige. The Company is planning the
production of a world sports
44
car to be designed and manufactured in conjunction with a major
automobile manufacturers. The Company is currently engaged in
discussions with two major international automobile manufacturers
regarding this project.
Enter New Race Series and Contracts with New Customers. Reynard intends
to selectively enter additional motorsports markets through the sale of racing
cars and equipment and through the sale of technological support. Reynard
continuously evaluates existing opportunities to design and produce racing cars
or provide support services for a number of race series including: (1) the IRL,
(2) Formula 3000, (3) Indy Lights, and (4) Toyota Atlantic. In addition, Reynard
will provide certain contract manufacturing services and show cars to BAR in
its early stages, on a commercial basis, for the upcoming Formula One racing
season.
Introduce New Higher Margin Services. Reynard believes that a
significant portion of its future growth will be in the form of expanded sales
of higher margin services to its motorsports customers. The services include CFD
analysis, wind tunnel testing and seven post suspension rig testing. Through the
application of these services, the Company's customers are able to simulate and
evaluate the effects of subtle changes in the engineering and set up of
individual cars moving at high speeds and can apply the results of such tests to
maximize their performance. Reynard has designed and built a state-of-the-art
50% scale model, moving ground open jet wind tunnel in Indianapolis, Indiana.
Reynard sells time in the wind tunnel to CART racing teams and others on a
fee-per-usage basis. In 1999, the Company will construct a seven post suspension
rig testing facility in Indianapolis. Reynard will sell time on the suspension
rig to CART racing teams and others on a fee-per-usage basis.
Leverage Motorsports Technology. Reynard intends to selectively expand
its non-motorsports operations by applying the technological and engineering
resources it has developed in the motorsports sector to other industries.
Reynard believes that its highly skilled designers and engineers can apply its
advanced technology in all areas where wind resistance, weight, fuel
conservation and/or safety concerns are factors. For example, based on Reynard's
design and engineering capabilities, Virgin Airlines selected Reynard to design
and develop a light-weight, strong, fully-reclining business class aircraft
seat. The aircraft seat is currently in the production phase. To further support
efforts outside of motorsports, Reynard plans to open a computer-aided design
office in Detroit, Michigan. This office will target design and engineering
projects within the automotive industry, and leverage the strong relationships
Reynard has developed over the years with the major automobile manufacturers.
Although Reynard's primary focus will remain in the motorsports industry,
management believes that a number of opportunities outside the motorsports
sector are available.
Selective Acquisitions. Management believes a number of opportunities
exist to make selective strategic acquisitions within the motorsports industry.
Reynard will generally seek to acquire companies that (1) complement and expand
the Company's current operations, (2) have an experienced management team, (3)
have an industry leading reputation and (4) have strong customer and supplier
relationships. Reynard's acquisition of Gemini meets these objectives by further
integrating the Company's current operations and providing state-of-the-art
equipment in a highly specialized business. Reynard believes that the
relationships Gemini has developed with Audi, BMW, Mercedes and Volkswagen, as
well as many other industry customers, will add strategic value to Reynard's
future growth. Management will continue to evaluate methods to further enhance
the Company's vertical integration.
COMPANY HISTORY
Reynard Motorsport was formed in 1973 when Adrian Reynard designed and
built his first Formula Ford car for competition. Since that time, Reynard has
progressed from manufacturing racing cars for Formula Ford in the 1970's,
Formula Three in the 1980's, Formula 3000 in the late 1980's and early 1990's,
CART in the mid-1990's and will enter Formula One in 1999. Reynard's cars have
dominated each of these series. Reynard has been able to continually leverage
its success and technical expertise as it graduated into more advanced series in
which
45
revenue and profit per car could be increased. Management believes Reynard has
grown to become a leading manufacturer of racing cars as a result of attracting
skilled and committed individuals, coupled with state of the art equipment and
technology.
As a result of its competitive designs and engineering, Reynard racing
cars have consistently won races and championships in every Formula in which
they have competed:
o Formula Ford Champions 1986, 1987, 1988, 1989
o Formula Three Champions 1986, 1987, 1988, 1989, 1990, 1991, 1992,
1993
o Formula 3000 Champions 1988, 1989, 1991, 1992, 1993, 1994, 1995
o US 500 winners 1996, 1997, 1998
o Indianapolis 500 winners 1995, 1996
o CART Series Champions 1995, 1996, 1997, 1998
o CART Series Constructor's Award 1995, 1996, 1997, 1998
Reynard is one of only a few racing car manufacturers which have
leveraged their knowledge and expertise to graduate from lower technology junior
formulae such as Formula Ford and Formula Three, to the more advanced higher
margin series, such as Formula 3000 and CART. Reynard has often exited the
junior series when graduating to higher series. In addition, , the Company has
expanded into international markets such as the United States, Europe, Canada,
South America and Asia by applying its technological expertise to specialized
projects within motorsports and select other industries. As a result, Reynard
won the Queen's Award for Export Achievement for the first time in 1990 and, in
1996, became the only company in the U.K. to win the award for a second time.
Reynard is well positioned to continue expanding in the series in which it
currently competes. The timeline below shows the Company's progression from its
inception in 1973:
· Enlarge/Download Table
Entrance into international
Markets USA, Canada,
Germany, South Africa
First Formula Ford | Production for Formula
produced | Vauxhall/Opel Lotus single Chrysler
| | make series with GM Toyota Atlantic Patriot
| | | | | | | | | |
------------------------------------------------------------------------------------------------------
1973 1975 1982 1984 1985 1987 1988 1989 1993 1994
| | | | |
| Development Entrance into Entrance into Entrance into the
First Formula Ford of carbon Formula Three Formula 3000 CART Series
2000 produced fiber technology
· Download Table
Ford Indigo Joint Venture with BAR
| to enter Formula One
Venture with Production of
Chrysler to produce Barber Dodge
Stratus Touring Cars single make cars
| | |
---------------------------------------------------
1995 1996 1997 1998
| |
Venture with Ford to Venture with
produce Mondeo Virgin Airlines to form
Touring Cars Reynard Aviation
Panoz GT cars Venture with
Strathcarron
PRODUCT DEVELOPMENT
Formula Ford. In 1973, Dr. Reynard designed and built his first Formula
Ford car. Formula Ford 1600s are simple, lightweight aerodynamic cars. They are
based on a stiff chassis with a 2-liter Ford engine which yields approximately
110 horsepower and a top speed of approximately 120 miles per hour. They are
built in accordance with a stringent set of regulations. Efficient use of
materials and components enhance performance and cost effectiveness. Dr. Reynard
designed the car for his own use in competition. In the process, Dr. Reynard
introduced
46
a number of new ideas to the otherwise conventional design, many of which later
became standard in Formula Ford 1600. The first time Dr. Reynard raced in the
new vehicle, it won.
Following its success in Formula Ford 1600, Reynard began developing a
Formula Ford 2000 car. By 1975, the Company had produced its first Formula Ford
2000 car. Formula Ford 2000 cars have a 2-liter engine yielding 130 horsepower
and a top speed of approximately 130 miles per hour. They use larger slick tires
and wings than Formula Ford 1600 cars. In 1983, Reynard's first Formula Ford
2000 car incorporated much of the design and engineering technology that Dr.
Reynard had learned while designing the Formula Ford 1600. The first time
Reynard's Formula Ford 2000 car raced, it won. Over the next ten years, Reynard
continued to achieve success in both the Formula Ford 1600 and Formula Ford 2000
series. From 1973 to 1988, the Company manufactured 277 Formula Ford 1600 cars
and 384 Formula Ford 2000 cars. At this time, the Company began to experiment
with carbon fiber in the production of its cars, a technology which, up until
that time, had only been used in Formula One.
Formula Three. By 1985, the Company began to develop a racing car for
competition in Formula Three. As in Formula Ford, the first time a Reynard car
competed in Formula Three, it won. Formula Three cars are smaller versions of
Formula 3000 cars, with 2,000 cubic centimeter engines based on standard
production engines yielding around 160 horsepower and a top speed of
approximately 150 miles per hour. The Company's success in Formula Three set
Reynard apart from many of its competitors in Formula Ford who had
unsuccessfully attempted to enter the higher formulae. Formula Three teams were
more demanding and had higher expectations than Formula Ford. Over the next ten
years, the Company produced approximately 360 Formula Three cars.
Formula Vauxhall Lotus. In 1987, General Motors decided to launch a
racing series known as Formula Vauxhall Lotus in Britain and Formula Opel-Lotus
in Europe. General Motors selected Reynard to manufacture the car. The Formula
Vauxhall-Lotus series was a one-make series using a 16-valve engine designed by
Cosworth Engineering, which was close in performance to the Formula Three engine
but at a much lower cost. Reynard was the exclusive chassis supplier to this
series between 1987 and 1992, producing a total of 204 cars for this series.
Formula 3000. The Company's entrance into Formula 3000 in 1988
represented a turning point for Reynard. The Formula 3000 design was
substantially different from the lower formulae in which Reynard had previously
competed. Formula 3000 is the secondary European racing formula, acting as a
final training ground and feeder series for Formula One. Formula 3000 is for
single-seater open-wheel race cars with 3000 cubic centimeter engines generating
horse power of approximately 450bhp with top speeds of approximately 180 miles
per hour. Reynard's Formula 3000 car won the first race in which it competed and
went on to win the Championship during its first year. For the next eight years,
Reynard continued to apply its technology to expand its presence in Formula
3000, manufacturing 220 cars during this time, while discontinuing its
production of Formula Ford 1600 and Formula Ford 2000 cars. Reynard stopped
producing Formula 3000 chassis in 1995, but continued operating successfully in
Japan, selling 10 cars and winning the Championship in 1997. Since 1996, Formula
3000 has been conducted as a one-make series.
Toyota Atlantic. In 1989, Reynard manufactured the first carbon
composite Toyota Atlantic car. The car debuted in New Zealand and won its first
race. The Toyota Atlantic series was a multiple chassis series with identical
Toyota engines and a single tire manufacturer. The Toyota Atlantic car was
closely related to the Formula Three car with slightly different aerodynamic
characteristics. Reynard continued to manufacture racing cars for this series
for two years, manufacturing 15 cars during this time.
Chrysler/Dodge. In 1993, Reynard entered into its initial design and
engineering consulting projects for large international automobile
manufacturers. For example, Chrysler selected Reynard to assist it in the design
and development of the Chrysler Patriot, an endurance racing sports car. The
Company designed and built the new car, from initial design to assembly, within
six months. Management believes no other motorsports manufacturer could have
achieved such results in that time frame. Although the Patriot never actually
raced, the alliance Reynard
47
developed with this major automobile manufacturer was a significant step in
Reynard's development. As a direct result of the Chrysler Patriot project,
Reynard was selected by Chrysler for two projects (1) making carbon fiber
composite bodies, consulting on chassis development and designing an
aerodynamics package to be used in the racing car version of the Dodge Viper and
(2) developing the Chrysler Stratus car for the American Touring Championship.
The Company provided technical support and supplied kits of parts for both cars.
Champ Car. After having successfully entered the U.S. market with a
Toyota Atlantic car, and following its success in Formula 3000, the Company
decided to participate in the CART Series. CART Champ Cars are single-seater,
open-wheel racing cars with a turbocharged four-cycle overhead cam shaft
eight-cylinder engine with allowed maximum displacement of 2,650 cubic
centimeters, capable of speeds of up to 240 miles per hour. Compared with
Formula 3000, the investment in Champ Cars was much greater, the technology was
higher and the customer base was more remote to the Company. Therefore, the
introduction of a Champ Car involved a higher degree of risk to the Company. In
addition, compared to many Formula series, a Champ Car is viewed as a design
compromise because it has to be raced on slower street circuits and road
circuits, as well as high-speed short and long oval tracks.
During 1993, Reynard began the design and marketing efforts for its
Champ Car. By the end of April 1994, Reynard had delivered 13 racing cars to its
CART customers, including Chip Ganassi Racing. Since the inception of the CART
program, Reynard has become very successful in this formula, with driver Michael
Andretti winning the first race in the series in Surfers Paradise, Australia in
the 1994 season. Reynard's successful debut in the CART Series led to a dominant
position during the 1995, 1996, 1997 and 1998 seasons. In each year, Reynard won
the Constructor's and Driver's Championships. In 1997, Reynard racing cars had a
total of 13 wins and 15 pole positions in the 17 race season. Mauricio Gugelmin
with PacWest Racing, driving a Reynard racing car, set the fastest lap ever run
on a closed circuit at the California Speedway in Fontana in 1996, lapping the
oval at 240.942 miles per hour. During 1998, the Reynard cars have won 17 races
and 17 pole positions in the 18 races and have clinched the 1998 Constructor's
Championship and Driver's Championships.
Since the Company introduced its first Champ Car in 1994, Reynard has
manufactured 148 cars, including 38 cars in fiscal 1997 and 42 cars in fiscal
1998. As of October 20, 1998, the Company has received orders for 37 racing cars
for the 1999 CART Series.
Panoz GT Cars. In January 1996, the Panoz Automotive Development
Company selected Reynard to design, develop and build six LeMans GT cars over
the course of two years. The resulting race car, known as the Panoz GTR 1,
shares the same front/mid-engine power train layout as the street-legal Panoz
AIV Roadster. It is powered by a Ford V-8 engine and is unique in every respect,
from initial concept to finished product. It is the only GT car with an external
design determined exclusively by aerodynamic considerations. The combined
expertise of Panoz and Reynard has resulted in one of the most advanced racing
cars on the international sports car racing circuit. Within 12 months of the
commencement of the project, the Panoz GTR 1 completed its proving tests and
competed for the first time at Sebring in the United States. The Panoz GTR 1 won
second place overall in the manufacturer's point standings in the 1997
Professional Sports Car Racing Series, as well as a second place in the 1997
driver's standing. During 1998, the Panoz GTR 1 won the manufacturer's and
driver's championships.
Barber Dodge. The Barber Dodge Pro Series is a highly competitive North
American racing series which utilizes 30 identically prepared single-seater
racing cars, called Reynard Dodges. Serving as a development series to the CART
Series, the Barber Dodge Series races on temporary street circuits and permanent
road courses. Many of the Barber Dodge races are run as a support race to a CART
event. Unlike other motorsports series, the Barber Dodge Series is completely
self-contained. The Series is owned and operated by Skip Barber Racing, which
has four transporters that haul everything, including the cars, parts and
equipment, to each race venue. Skip Barber Racing selected Reynard in 1997 to
design and build their cars as a result of the Company's reputation and service.
48
Formula Nippon. In Japan, the Formula Nippon Series has emerged, taking
the place of the previous Japan Formula 3000 Series. The series is for
single-seater open-wheel racing cars with 3000 cubic centimeter engines
generating horsepower of approximately 450 bhp, with top speeds of approximately
180 miles per hour. In 1998, Reynard racing cars captured first and second place
in the Championship. The 1998 Formula Nippon Series included 10 races, on
permanent road courses and temporary street circuits throughout Japan. A total
of 13 Formula Nippon cars have been ordered for the 1999 series.
Reynard Aviation. As a result of the Company's expertise in racing car
design and engineering and composite development, Virgin Airlines selected
Reynard to design and develop an aircraft seat. Through Reynard Aviation, a
venture between the Company and Virgin Airlines, Reynard has capitalized on its
technical knowledge to design and develop a light-weight, strong and functional
fully-reclining business class aircraft seat. The project was primarily funded
by Virgin Airlines, with Reynard receiving a 20% equity interest in Reynard
Aviation in exchange for its technical expertise. The seats are currently in
production. Reynard expects that Virgin Airlines will install the seats in its
aircraft during 1999.
Strathcarron. The Honorable Ian Macpherson (son of Lord Strathcarron, a
former racing car driver who is now the President of the Guild of Motoring
Writers) selected Reynard to design a basic, affordable sports car for street
use that would be the equivalent of a modern day Lotus Seven or a motorcycle on
four wheels. Reynard has designed an open, side by side, two seater without
doors which uses (1) aluminum and composite materials for safety while
maintaining lightweight performance, (2) a mid-engine layout including a compact
4-cylinder, 16 valve, 1200 cubic centimeter modern engine, and (3) a unique
Reynard-designed final drive unit. In 1998, Strathcarron Sports Cars plc
commissioned Reynard to engineer and manufacture three "proof of concept"
prototype chassis.
British American Racing. The British American Racing Team will field a
two-car team in the 1999 Formula One World Championship. The 1997 Formula One
World Champion driver, Jacques Villeneuve will drive one of the racing cars
designed and engineered by BAR. Management believes that BAT selected Reynard to
be one of its joint venture partners in BAR as a result of the Company's
reputation and expertise. BAT has entered into a long-term sponsorship agreement
to fund what management believes to be one of the most significant sponsorship
budgets in Formula One. Reynard has invested $5.25 million and agreed to commit
its management expertise and technology to BAR in exchange for a 15% equity
interest in BAR and an ongoing management fee for directors' services. Reynard
expects to provide certain contract manufacturing services to BAR in its early
stages on a fee-for-service basis. BAR will build and maintain its own
independent design, engineering, research and development and manufacturing
staff and facilities adjacent to Reynard's facilities in the Motorsport Valley.
From time to time, BAR and the Reynard technical staff hold joint meetings to
discuss and analyze research and development results of mutual interest. Reynard
may access the technological know-how (not in written or machine-readable form)
accumulated by personnel employed by Reynard. The Company believes that this
access to research and development ideas will enhance Reynard's other
motorsports projects by improving our knowledge database and methodology.
DESIGN AND DEVELOPMENT
Reynard designers use a vast vehicle dynamics database compiled from
actual results on the track and updated on an ongoing basis to translate past
performance into new racing car designs. Reynard's design engineers use a
variety of computer-aided design ("CAD") systems to design a competitive racing
car. A project's design team will utilize the CAD system to begin "drawing" the
various components of a racing car, with analysis of the vehicle dynamics
database and input from engineers and aerodynamicists. Each member of the design
team is responsible for specific components of the racing car. The CAD systems
available to the design team allow each designer to view the component design
from various angles. The system also allows the components to be assembled on
the computer screen. After each component has been drawn, the entire racing car
is assembled on the computer screen.
49
During the design phase, a wind tunnel model and/or prototype car is
built based on such design. Extensive engineering and testing is performed on
the racing car to refine the design prior to final production. Wind tunnel
models are built 40% or 50% to scale, depending upon the wind tunnel size, in
the same manner that actual race cars are manufactured and assembled.
Reynard has extensive experience in utilizing wind tunnel testing in
the development of its racing cars and equipment. Through the use of 50% scale
model, moving ground open jet wind tunnel testing at Reynard-operated facilities
in England and in Indianapolis, Indiana, Reynard designers, engineers and
aerodynamicists can test the car's design and set up under varying conditions.
These tests are used to improve the car's racing efficiency. In wind tunnel
testing, the aerodynamicist analyzes the impact of varying component designs,
such as different wings or nose cones, on the performance of racing cars. The
aerodynamicists may test wind tunnel sample component designs for each part
prior to finalizing the design. The designers then incorporate these findings
into the design of the racing car prior to manufacture and assembly.
Reynard is pioneering the use of computational fluid dynamics in the
design and development of racing cars. The development and application of CFD
technology and finite element analysis, in conjunction with testing performed at
proprietary-designed wind tunnel facilities, enables Reynard to analyze the
aerodynamic effects on a racing car in simulated race settings and provides the
Company with a competitive advantage in engineering its racing cars.
CFD is a computer-aided engineering system for mathematical modeling of
air flows. It allows the engineer to simulate wind tunnel tests on the computer
in advance of testing, thereby removing some of the guess work and expense from
the development process. Through its use of CFD, Reynard is able to analyze the
impact of changing component designs on the computer. This eliminates certain
possible component designs and brings fewer component designs into the wind
tunnel for testing. Through CFD, Reynard is also able to "optimize" component
design according to necessary parameters prior to building and testing parts.
Reynard currently utilizes the CFD data in conjunction with wind tunnel testing
as it further refines its CFD system and analysis processes.
In addition to the use of CFD, Reynard engineers perform extensive
finite element analysis in engineering its racing cars. Through finite element
analysis, engineers are able to mathematically calculate stress in structures,
such as the components of the racing cars, under simulated racing conditions.
Reynard continuously seeks ways in which to improve driver safety in
the design of its racing cars, as well as in the manufacturing techniques
developed to produce the racing cars. The design, engineering and development of
a Reynard racing car continues after cars have been manufactured and delivered
to customers. For example, aerodynamic refinements in the form of update kits
are developed and sold to customers to reflect the updates in car design made
during the year. The nature and frequency of update kits depend upon customer
demand and on-track competition throughout the race season.
PRODUCTION
Design and Engineering. Simultaneous engineering, which is the
concurrent participation of design, manufacturing, sales and purchasing, allows
the Company to develop and manufacture each racing car on an individual basis
from initial design to final assembly. This process is completed in a period of
two months. Through Reynard's vertically integrated operations, it is able to
(1) maintain higher quality control standards in the production of all
components of the racing car, (2) improve operating margins by lowering costs
and (3) control the timing of production and delivery of its products.
Reynard designs and engineers racing cars and component equipment,
makes the patterns to be used in the production process, manufactures the
individual components to specification and assembles the chassis. Quality and
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safety are of paramount importance in every aspect of production of the
composites and Reynard prides itself on the use of pioneering techniques in the
production of its racing cars.
Patterns. Once the design and engineering of the racing car has been
completed, patterns are made to design specification for production of the
racing car components. In May 1997, Reynard acquired the assets of a U.K.-based
partnership with extensive experience in the production of patterns. Patterns
are machined by computerized numerical control using CAD data direct from the
design office. For customers without CAD facilities, Reynard offers skilled
staff to complete the manufacturing process, from drawings to extremely high
precision finished patterns.
Manufacturing. Reynard has developed manufacturing techniques that it
believes enables it to produce one of the strongest and safest racing cars in
motor racing. The racing car components, which include the cockpit, sidepods,
wings and the underbody, are manufactured by hand using carbon composites.
Patterns are used to make molds for each chassis component. Precision computer
equipment is used to cut carbon fiber for each component. After Reynard
personnel conform the pieces of carbon fiber to the mold, each component is
placed into an autoclave at a specified pressure and temperature.
Reynard currently manufactures the majority of the suspension
components and other machined or fabricated parts necessary to deliver a rolling
chassis to the customer. With the acquisition of Gemini, Reynard will also
manufacture substantially all of the transmissions and gearbox components. The
technologically advanced equipment owned by Gemini will allow precision
production of components and parts to design specifications. The computer-aided
design and manufacturing features of the equipment allow for fast and efficient
prototyping. This, in turn, allows for small output manufacturing.
Assembly. Once all components have been produced, Reynard assembles a
rolling chassis for delivery to its customers. The cars are built by a team
split into three groups: (1) assembly, (2) sub-assembly and (3) gearbox
assembly. The sub-assembly and gearbox group has a separate kit of parts, which
are assembled into sections. These sub-assembled suspension components and
gearboxes are brought together into the main assembly area where the cars are
finished. This process ensures that the cars are assembled quickly and
accurately.
CUSTOMER SERVICES
Reynard assigns a liaison engineer to each Reynard-entry in the CART
Series in order to maintain its competitive advantage and demonstrate its
commitment to service. These engineers attend each CART event to monitor the
Reynard entries. The dedication of an engineer to each team allows Reynard to
respond quickly to customer questions and concerns. It also provides valuable
information to Reynard for further development of the chassis and equipment.
In addition to the hands-on assistance provided by Reynard engineers,
the customers from the CART Series have access to Reynard's design systems and
wind tunnel results, as well as direct access to Reynard's design team and
computer-aided design system. The continual communication between Reynard's
engineers and the race teams provide additional data for refinement of the
racing car design.
Reynard continues to enhance the performance and safety features of its
racing cars throughout the race season. Data obtained from the engineers at each
track, in conjunction with continued wind tunnel testing and engineering
analysis, allows Reynard to further refine the racing car design in response to
competition on the track. Update packages which may include newly designed wings
or other chassis components, are made available to Reynard's customers to
enhance performance of the racing car. Reynard believes that its commitment to
the continued development of its racing cars provides a significant competitive
advantage in the industry. In addition,
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Reynard continues to analyze data and evaluate designs to improve efficiency in
anticipation of the design and production of the next year's racing car.
Throughout the season, Reynard manufactures and sells spare parts to
customers on an as-needed basis. In order to avoid the cost of carrying obsolete
inventory, Reynard continuously monitors the spare parts needs of its customers
and manufactures chassis components in response to inventory needs throughout
the race season. Spare parts are sold to customers at the race track, as well as
through delivery from Reynard's distribution subsidiaries.
Reynard intends to expand sales of higher margin services, such as CFD
analysis, wind tunnel testing and seven post suspension rig testing. Through the
application of these services, Reynard's motorsports customers are able to
simulate and evaluate the effects of subtle changes in the engineering and set
up of individual cars moving at high speeds and apply the results of such tests
to maximize their performance.
Reynard, through Auto Research Center, LLC, has designed and built a
state-of-the-art 50% scale model, moving ground open jet wind tunnel in
Indianapolis, Indiana. Reynard sells time in the wind tunnel to racing teams
from the CART Series and others on a fee-per-usage basis. In 1999, Reynard will
construct a seven post suspension rig testing facility in Indianapolis. This
facility will be used to simulate the pitch and roll experienced by racing cars
under simulated racing conditions in order to refine suspension, springs and
shock absorbers on the racing car. Reynard intends to sell time on the seven
post suspension rig on a fee-per-usage basis to racing teams from the CART
Series and others.
RECRUITING AND TRAINING
During Reynard's 25-year history, Dr. Reynard and the other members of
the senior management team have developed a culture that provides exceptional
training to young designers and engineers. This culture encourages them to
assume responsibility for projects at a young age.
In 1988, Reynard developed a formal graduate recruitment program.
Pursuant to this program, skilled engineering students are given an opportunity
to intern with Reynard with the expectation of employment following graduation.
Each year, by personally interviewing and recruiting each of the over 300
applicants, Dr. Reynard and other members of the senior management team attempt
to identify skilled engineering students who they believe will flourish in the
culture and environment that is Reynard.
Reynard is committed to creating an environment that provides its
highly-skilled personnel with stimulating challenges which demand the very best
from each individual. Through the training process, the staff is exposed to the
latest engineering hardware and software, and each young designer and engineer
is encouraged to assume responsibility for projects. Management believes that
this recruiting process, coupled with the pervasiveness of the corporate
culture, has enabled Reynard to attract, retain and develop a team of
highly-skilled designers, engineers and technical staff.
COMPETITION
The industry for designing, developing and manufacturing racing cars
and technologically advanced equipment is highly competitive. Reynard competes
primarily with other manufacturers of racing cars, such as Swift and Lola, for
auto racing competitors. Continuous attention to aerodynamic, technological and
safety advances is required in order to remain competitive. Reynard believes
that on-track performance of the racing cars, industry reputation, service after
the sale, pricing and equipment availability are the principal factors that
distinguish competing motorsport manufacturers. It is its attention to those
factors listed above that has allowed Reynard to be the primary racing car
provider to competitors in the CART Series. In that series, Reynard provided
racing cars to
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22 of the 28 1998 full-season entrants. Reynard has received orders through
October 20, 1998 to supply 37 racing cars for the 1999 CART Series.
EMPLOYEES
As of August 31, 1998, Reynard employed approximately 230 full-time
employees. None of Reynard's employees are represented by a labor union.
Management believes that Reynard enjoys a good relationship with its employees.
LEGAL PROCEEDINGS
Reynard is a party to routine litigation incidental to its business.
Management does not believe that the resolution of any or all of such litigation
is likely to have a material adverse effect on Reynard's financial condition.
ENVIRONMENTAL MATTERS
Reynard believes that the facilities it operates are in material
compliance with applicable environmental statutes and regulations. Nevertheless,
if damage to persons or property or contamination of the environment is
determined to have been caused or exacerbated by the conduct of Reynard's
business or by pollutants, substances, contaminants or wastes used, generated or
disposed of by Reynard, or which may be found on Reynard's property, Reynard may
be held liable for such damage and may be required to pay the cost of
investigation and/or remediation of such contamination or any related damage.
The amount of such liability could be material and Reynard is self-insured.
Changes in regulations or requirements could also require material expenditures
by Reynard in order to become compliant.
TRADEMARKS AND PROPRIETARY INFORMATION
Dr. Adrian Reynard has filed a trademark application in the U.K. for
the Reynard brand name and logo. Dr. Reynard will grant a license to Reynard to
use the name and logo until the Company no longer conducts business operations,
at no cost to the Company except registration and related costs. Dr. Reynard
intends to file a trademark application with the U.S. Patent and Trademark
Office with respect to the Reynard brand name. U.S. registered trademarks have a
perpetual life, as long as they are renewed on a timely basis and used properly
as trademarks, subject to the rights of third parties to seek cancellation of
the marks.
Reynard does not seek patent protection on its products or processes
due to the continual development and refinement necessary to remain competitive.
Reynard does regard the products, technologies and databases that it has
developed as proprietary. The Company attempts to protect its trade secrets and
proprietary information through agreements and policies with employees and
consultants. Despite these efforts, there is no assurance that others will not
gain access to Reynard's trade secrets, or that Reynard can meaningfully protect
its technology and intellectual property. Although Reynard intends to protect
its rights vigorously, there is no assurance that such measures will be
successful.
PROPERTIES
Reynard's operations occupy leased property located in Bicester,
Oxfordshire, and Brackley, Northamptonshire, in the Motorsport Valley. The two
facilities in Bicester comprise over 3,000 square meters and those located in
Brackley occupy an area over 5,000 square meters. The lease for the Bicester
sites expire May 11, 2010. The leases for the Brackley sites expire on March 25,
1999, May 31, 2003 and May 11, 2010. Dr. Reynard is the lessor for one of the
Bicester sites, while the Reynard Racing Cars Directors Pension Fund is the
lessor for the remaining Bicester site and two of the Brackley sites. The total
rent per annum for all the sites is $897,482.
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ADDITIONAL INFORMATION
Reynard's principal executive offices are located at 8431 Georgetown
Road, Suite 700, Indianapolis, Indiana 46268. The telephone number is (317)
824-5600. Reynard was incorporated in Delaware on September 2, 1998.
Reynard has filed a Registration Statement on Form S-1 with the
Commission. This prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement.
Certain information is omitted and you should refer to the Registration
Statement and its exhibits. With respect to references made in this prospectus
to any contract or other document of Reynard, such references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement at the Commission's public reference
room in Washington, D.C., and at the Commission's regional offices in Chicago,
Illinois and New York, New York. Please call the Commission at 1-800-SEC-0330
for further information on the operation of the public reference rooms.
Reynard's Commission filings and the Registration Statement can also be reviewed
by accessing the Commission's Internet site at http://www.sec.gov.
Reynard files annual, quarterly and current reports, proxy statements
and other information with the Commission. You may read and copy any reports,
statements or other information on file at the Commission's public reference
room in Washington, D.C. You can request copies of those documents, upon payment
of a duplicating fee, by writing to the Commission.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning the executive
officers and directors of the Company.
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NAME AGE POSITION
---- --- --------
Adrian J. Reynard 47 Chairman of the Board and director of the Company
Alex S. Hawkridge 53 Chief Executive Officer and director of the Company
Richard J. Gorne 44 Vice President - Sales and director of the Company
Malcolm B. Oastler 39 Technical Director of Reynard Motorsport Limited
Paul R. Owens 57 Composites Director of Reynard Motorsport Limited
John C. Gower 42 Chief Financial Officer, Secretary, Treasurer and
director of the Company
Peter D. Morgan 44 Production Director of Reynard Motorsport Limited
Bruce G. Ashmore 39 Vice President/Technical Director - Reynard North America, Inc
Jeff S. Swartwout 45 Vice President/Operations Director - Reynard North America, Inc.
The Board of Directors are elected annually by the stockholders. The officers of
the Company serve at the pleasure of the Board of Directors.
DR. ADRIAN J. REYNARD was elected Chairman of the Board and a director in
September, 1998. He has served as president and chief executive officer of
Reynard Motorsport Limited and its predecessors since 1973. Dr. Reynard's career
in the motorsports industry began in 1973 as a driver who designed and built his
own racing cars. By concentrating on design, engineering and manufacturing,
instead of driving, Dr. Reynard has made the Company a successful manufacturer
of racing cars over the past 25 years.
ALEX S. HAWKRIDGE was elected Chief Executive Officer and a director of the
Company in September, 1998. From 1992 to 1998, Mr. Hawkridge provided
specialized advice to many major companies in British motorsports through his
company, Garland Management Ltd. From 1968 to 1992, Mr. Hawkridge served as
managing director of Toleman Group, a diversified manufacturing company with
over 1,200 employees and operations in the U.K., U.S., and Philippines. During
Mr. Hawkridge's tenure, Toleman Group owned and operated Toleman Motorsport,
which won the Formula Two European Championship in 1980 and the British Rally
Championship in the same year. Toleman Motorsport entered Formula One in 1981,
and sold the team to Benetton in 1985. Toleman Group also operated Cougar
Marine, the winner of 13 consecutive World Powerboat Championships.
RICHARD J. GORNE was elected Vice President - Sales and a director of the
Company in September, 1998. Mr. Gorne has served as a director of Reynard
Motorsport Limited and its predecessors for seventeen years. Mr. Gorne was a
successful racing car driver who competed against Dr. Reynard in the 1970's and
became both a friend and subsequently a partner in the Company. Mr. Gorne
focuses primarily on sales and customer service within the Company.
MALCOLM B. OASTLER has served as Technical Director of Reynard Motorsport
Limited since March 1994. He joined the Company in 1985 to design the Formula
Ford 1600 and 2000 chassis. In 1987, he built the Formula Ford car that won on
its debut. Prior to joining the Company, Mr. Oastler gained valuable experience
working in junior motor racing categories and competing as a driver in the
Formula Ford 2000 series.
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PAUL R. OWENS has served as managing director of Reynard Composites for 14
years. He joined Reynard in 1984 in order to develop the construction techniques
for the first ever carbon composite chassis for use in production based racing
cars. He helped start the Chevron Cars business in 1956 at age fifteen. He
remained with Chevron Cars until 1980 when he joined Maurer Racing Cars to
design and build Formula Two cars.
JOHN C. GOWER was elected Chief Financial Officer, Secretary, Treasurer and a
director of the Company in September, 1998. Mr. Gower has served as financial
controller for the Reynard companies since 1991. During this period of rapid
growth he was responsible for setting up new finance and accounting systems.
From 1985 to 1991, he served as financial controller for the Benetton Formula
One team. Mr. Gower is qualified as a Chartered Accountant.
PETER D. MORGAN was elected Production Director of Reynard Motorsport Limited in
September 1998. Mr. Morgan served as vice president of production for Reynard
Motorsport Limited since April 1994. Prior to that, he held the positions of
team manager and race engineer with Madgwick Motorsport in Formula 3000 for ten
years. Mr. Morgan began his racing career as a driver in the Formula Ford series
and was Esso National Champion in 1978.
BRUCE G. ASHMORE was elected Vice President/Technical Director of Reynard North
America, Inc. in December, 1997. Mr. Ashmore joined Reynard North America in
1994 as the technical director of the Company's North American operations. From
1988 to 1993, he worked as chief designer for Lola Cars Ltd., a chassis
manufacturer.
JEFF S. SWARTWOUT was elected Vice President/Operations Director of Reynard
North America, Inc. in March, 1998. Mr. Swartwout joined Reynard North America
in 1993. He began his career as a mechanic in the Formula Atlantic, Sports
Prototypes and Indy Car series. Mr. Swartwout's accomplishments on the racing
circuits as the lead mechanic include a victory at the 1986 Indianapolis 500 and
three National Championships.
Pursuant to the Company's agreement with BAR, Dr. Reynard and Messrs.
Gorne and Oastler have committed a significant amount of their time to the BAR
Formula One racing effort. Mr. Oastler must devote substantially all of his time
over the next three years. Dr. Reynard and Mr. Gorne must devote approximately
one half of their time for the next year and approximately one quarter of their
time for the subsequent two years.
COMMITTEES
Reynard's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the appointment of the
Company's independent auditors to the Board of Directors, reviews the
compensation of such auditors and reviews with such accountants the plans for
the result and scope of their auditing engagement. The Compensation Committee
reviews the performance and compensation of directors, executive officers and
key employees and makes recommendations to the Board of Directors with respect
thereto. It also administers the Company's Stock Option Plan. See "--Stock
Option Plans."
LIMITED LIABILITY AND INDEMNIFICATION OF DIRECTORS
Reynard's Certificate of Incorporation provides that the liability of
the directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. This limitation of liability does not apply in
the case of: (1) a breach of the director's duty of loyalty to Reynard or its
stockholders, (2) an act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law, (3) the unlawful payment
of dividends or unlawful stock purchases or redemptions, or (4) a transaction
from which a director derived an improper personal benefit.
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Reynard's By-laws indemnify its directors and officers to the fullest
extent possible under Delaware law, except as otherwise provided in the
Certificate of Incorporation. These indemnification provisions require Reynard
to indemnify directors and officers against certain liabilities and expenses to
which they may become subject by reason of their service to Reynard. The
provisions also set forth certain procedures, including the advancement of
expenses, that apply in the event of a claim for indemnification. Reynard
intends to obtain insurance to protect its officers and directors from
liability.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not Reynard employees will
receive options to purchase ______ shares of common stock when first elected and
options to purchase _____ shares of common stock upon each re-election. See
"--Stock Option Plans -- Director Option Plan." In addition, these independent
directors will be paid a per meeting fee of $_____ and $_____ for each
telephonic meeting. Reynard will reimburse all directors for their expenses
incurred in connection with their activities as directors. Directors who are
also Reynard employees receive no compensation for serving on the Board of
Directors.
EXECUTIVE COMPENSATION
Information regarding all forms of compensation paid or payable by
Reynard to the Chief Executive Officer and the four most highly compensated
executive officers whose annual salary and bonus exceeded $100,000 in fiscal
1997 is set forth below. The principal positions of the named executive officers
refer to titles held by such individual in the operating subsidiaries prior to
the Reorganization.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND FISCAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION COMPENSATION
------------------- ------ ------ ----- ------------ ------------
Adrian J. Reynard (1) 1997 $7,446,109 -- $87,573(2) $1,797,169(3)
Chief Executive Officer of the
Company, Chairman of Reynard
Motorsport Limited
Richard J. Gorne 1997 330,862 153,122 --(4) 3,758(3)
Managing Director, Reynard
Motorsport Limited
Malcolm B. Oastler 1997 245,069 153,122 --(4) --
Technical Director, Reynard
Motorsport Limited
Paul R. Owens 1997 82,753 153,122 --(4) 49,831(3)
Director, Reynard Composites
John W. Piper (5) 1997 139,730 -- --(4) 2,614(3)
Director, Reynard Special Vehicle
Projects
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--------------------
(1) Alex Hawkridge was elected Chief Executive Officer of Reynard in
October 1998. The Company anticipates entering into an employment agreement with
Mr. Hawkridge. In addition, Dr. Reynard has entered into an employment agreement
that provides for annual compensation of $1.5 million plus pension
contributions.
(2) Includes $76,216 and $4,174 for the use of a company-owned aircraft and
motorcycle, respectively; $1,961 for personal use of Reynard staff persons; and
$5,222 for automobile insurance paid by Reynard.
(3) Represents amounts paid by Reynard on behalf of the named parties into
a defined contribution pension fund.
(4) The aggregate amount of perquisite compensation to be reported herein
is less than the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for the named executive officer. No other annual compensation was
paid or payable to the named executive officers in the years indicated.
(5) Effective June 1, 1998, John W. Piper resigned from his position as
Director of Reynard Special Vehicle Projects Limited, a subsidiary of Reynard.
STOCK OPTION PLANS
In September 1998, Reynard's Board of Directors authorized, and
Reynard's stockholders approved, a stock incentive plan for executive and key
management employees of Reynard and its subsidiaries, including a limited number
of outside consultants and advisors, effective as of the completion of the
Offering (the "Stock Option Plans").
Under the Stock Option Plan, key employees, outside consultants and
advisors (the "Participants") of Reynard and its Subsidiaries (as defined in the
Stock Option Plan) may receive awards of stock options (both Nonqualified
Options and Incentive Options, as defined in the Stock Option Plan). Up to _____
shares of common stock (17% of the outstanding shares of common stock
immediately prior to the initial public offering) will be subject to the Stock
Option Plan. The purpose of the Stock Option Plan is to provide key employees
(including officers and directors who are also key employees) and key
non-employee consultants and advisors of the Company and its Subsidiaries
("employees") with an increased incentive to make significant and extraordinary
contributions to the long-term performance and growth of the Company and its
Subsidiaries. The Stock Option Plan will also join the interests of key
employees with the interests of the stockholders of the Company and facilitate
the attraction and retention of key employees of exceptional ability.
In connection with the Offering, Reynard intends to grant options to
purchase an aggregate of _______ shares of common stock to employees, of which
an aggregate of _____________________ will be granted to
______________________________, respectively, at the initial public offering
price.
Administration. The Compensation Committee of Reynard's Board of
Directors administers the Stock Option Plan. The Stock Option Plan may also be
administered by such other committee as may be specified by the Board of
Directors to perform the functions and duties of the Compensation Committee
under the Stock Option Plan. Subject to the provisions of the Stock Option Plan,
the Compensation Committee shall determine, from those eligible to be
Participants: (1) the persons to be granted stock options, (2) the amount of
stock options granted to each such person and (3) the terms and conditions of
any stock options. Subject to the provisions of the Stock Option Plan, the
Compensation Committee is authorized to: (1) interpret the Stock Option Plan,
(2) make, amend and rescind rules and regulations relating to the Stock Option
Plan and (3) make all other determinations necessary or advisable for the Stock
Options Plan's administration.
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Participants. The Participants in the Stock Option Plan are those key
employees, consultants and advisors of Reynard or any Subsidiary who in the
judgment of the Compensation Committee are or will become responsible for the
direction and financial success of Reynard or any Subsidiary. Key employees
include officers and directors who are also key employees of Reynard or any
Subsidiary.
Shares Subject to Plan. The maximum number of shares with respect to
which stock options may be granted under the Stock Option Plan is 150,000 shares
of common stock. Shares available for future grant under the Stock Option Plan
will be increased as of the first day of each new fiscal year during the term of
the Plan by the number of shares issuable upon exercise of options granted
thereunder in the previous fiscal year, net of returns. This increase may not
exceed 1,000,000 shares in any fiscal year. Shares covered by expired or
terminated stock options will again become available for grant under the Stock
Option Plan.
The number of shares subject to each outstanding stock option, the
option price with respect to outstanding stock options and the aggregate number
of shares remaining available under the Stock Option Plan will be subject to
such adjustment as the Compensation Committee, in its discretion, deems
appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations of or by Reynard.
Stock Options. Subject to the terms of the Stock Option Plan, the
Committee may grant to Participants either Incentive Options or Nonqualified
Options, or any combination thereof. Incentive Options meet the definition of an
incentive stock option under Section 422 of the Code and Nonqualified Options do
not meet such definition.
The exercise price for an Incentive Option may not be less than 100% of
the fair market value of the stock on the date of grant. But, the exercise price
for an Incentive Option granted to an employee who owns more than 10% of the
voting stock of Reynard or any Subsidiary may not be less than 110% of the fair
market value of the stock on the date of grant. The exercise price for a
Nonqualified Option may not be less than 100% of the fair market value of the
stock on the date of grant.
The exercise period for stock options will be determined by the
Compensation Committee, but no stock option may be exercisable after ten years
from the date of grant, subject to certain conditions and limitations.
Stock option are not transferable by a Participant other than by will
or by the laws of descent and distribution, and stock options are exercisable,
during the lifetime of the Participant, only by the Participant.
If the employment or consultancy of a Participant by Reynard or a
Subsidiary terminates, the committee may, in its discretion, permit the exercise
of stock options granted to such Participant (1) for a period not to exceed
three months following termination of employment with respect to Incentive
Options if termination is not due to death or permanent disability of the
Participant, (2) for a period not to exceed one year following termination of
employment with respect to Incentive Options if termination is due to the death
or permanent disability of the Participant, and (3) for a period not to extend
beyond the expiration date with respect to Nonqualified Options.
Termination, Duration And Amendments Of Plan. The Stock Option Plan may
be abandoned or terminated at any time by the Board of Directors. Unless sooner
terminated, the Stock Option Plan will terminate on the date ten years after its
adoption by the Board of Directors. The termination of the Stock Option Plan
will not affect the validity of any stock option outstanding on the date of
termination.
For the purpose of conforming to any changes in applicable law or
governmental regulation, or for any other lawful purpose, the Board of Directors
will have the right, with or without approval of the stockholders of the
Company, to amend or revise the terms of the Stock Option Plan at any time. No
such amendment or revision will increase the maximum number of shares in the
aggregate which are subject to the Stock Option Plan (other than anti-dilution
adjustments and annual automatic increases) without the approval or ratification
of the stockholders.
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No such amendment or revision will increase the maximum number of shares for
which any Participant may be granted stock options under the Stock Option Plan
(other than anti-dilution adjustments and annual automatic increases) without
the approval or ratification of the stockholders. No such amendment or revision
will change the class of persons eligible to be Participants under the Stock
Option Plan without the approval or ratification of the stockholders. Finally,
without the consent of the holder thereof, no such amendment or revision will
change the stock option price (other than anti-dilution adjustments) or alter or
impair any stock option which has been previously granted or awarded under the
Stock Option Plan.
Federal Income Tax Consequences. The rules governing the tax treatment
of stock options, stock appreciation rights, and shares acquired upon the
exercise of stock options are technical. Therefore, the description of federal
income tax consequences below is general in nature and is complete. Also,
statutory provisions and their interpretations change and their application may
vary in individual circumstances. Finally, the applicable state and local income
tax laws may not be the same as under the federal income tax laws and will
produce different consequences.
Incentive Options. Incentive Options granted pursuant to the Plan are
intended to qualify as "Incentive Options" within the meaning of Section 422 of
the Code. If the Participant does not dispose of the shares acquired pursuant to
exercise of an Incentive Option within one year after the transfer of shares to
such Participant and within two years from grant of the option, such Participant
will realize no taxable income as a result of the grant or exercise of such
option. In addition, any gain or loss that is subsequently realized may be
treated as long-term capital gain or loss, as the case may be. Under these
circumstances, the Company will not be entitled to a deduction for federal
income tax purposes with respect to either the issuance of the Incentive Options
or the transfer of shares upon their exercise. However, the exercise of an
Incentive Option is an item of tax preference and a Participant may have
alternative minimum tax liability.
If shares acquired upon exercise of Incentive Options are disposed of
prior to the expiration of the above time periods, the Participant will
recognize ordinary income in the year in which the disqualifying disposition
occurs. The amount of ordinary income will generally be the lesser of (1) the
excess of the market value of the shares on the date of exercise over the option
price, or (2) the gain recognized on such disposition. This amount will
ordinarily be deductible by the Company for federal income tax purposes in the
same year, as long as the amount constitutes reasonable compensation. The
excess, if any, of the amount realized on a disqualifying disposition over the
market value of the shares on the date of exercise will be treated as capital
gain.
Nonqualified Options. A Participant who acquires shares by exercise of
a Nonqualified Option generally realizes taxable ordinary income at the time of
exercise. The taxable ordinary income equals the difference between the exercise
price and the fair market value of the shares on the date of exercise. This
amount will usually be deductible by Reynard in the same year, as long as the
amount constitutes reasonable compensation. Subsequent appreciation or decline
in the value of the shares on the sale or other disposition of the shares will
generally be treated as capital gain or loss.
Withholding Payments. If, upon exercise of a Nonqualified Option or
upon a disqualifying disposition of shares acquired upon exercise of an
Incentive Option, Reynard or any Subsidiary must pay amounts for income tax
withholding, then in the Compensation Committee's sole discretion, either
Reynard will appropriately reduce the amount of stock or cash to be delivered or
paid to the Participant or the Participant must pay such amount to Reynard to
reimburse Reynard for such payment. The Compensation Committee may permit a
Participant to satisfy such withholding obligations by electing to reduce the
number of shares of common stock delivered or deliverable to the Participant
upon exercise of a stock option or by electing to tender an appropriate number
of shares of common stock back to Reynard after the exercise of a stock option
(with such restrictions as the Compensation Committee may adopt).
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Limitation on Compensation Deduction. Publicly-held corporations are
precluded from deducting compensation paid to certain of its executive officers
in excess of $1.0 million. The employees covered by the $1.0 million limitation
include the chief executive officer and those employees whose annual
compensation is required to be reported to the Securities and Exchange
Commission because the employee is one of the company's four highest compensated
employees for the taxable year (other than the chief executive officer). The
grant of stock options generally are included in an employee's compensation for
purposes of the $1.0 million limitation.
There is an exception to the $1.0 million deduction limitation for
compensation (including the grant of stock options paid pursuant to a qualified
performance-based compensation plan). Compensation attributable to stock options
is deemed to satisfy the qualified performance-based compensation exception if
(1) the grant is made by a compensation committee comprised of outside
directors; (2) the plan under which the option is granted states the maximum
number of shares with respect to which options may be granted during a specified
period to any employee and (3) under the terms of the option, the amount of
compensation the employee could receive is based solely on an increase in the
value of the stock after the date of the grant.
If the amount of compensation a covered employee will receive under the
grant is not based solely on an increase of the value of the stock after the
date of the grant (e.g., an option that is granted with an exercise price that
is less than the fair market value as of the date of the grant), none of the
compensation attributable to the grant is qualified performance-based
compensation unless the grant is made on account of the attainment of a
performance goal that has been previously established and approved by the
stockholders of Reynard.
The grant of stock options to a Participant under the Stock Option Plan
to purchase Reynard's stock at fair market value determined on the date of the
grant will, if granted at fair market value, be deemed to satisfy the
requirements of the performance-based compensation exception. Therefore, the
$1.0 million deduction limitation will not otherwise limit the deductibility of
the compensation paid to covered employees by the Company. But, the grant of a
stock option with an exercise price less than the fair market value of the stock
on the date of grant will be included in a covered employee's compensation in
determining the $1.0 million deductibility limit.
U.K. Tax Consequences. It is intended that stock options will be
granted to executives and key management employees of the Company who are
residents in the U.K. Options granted to U.K. residents under the Stock Option
Plan will be treated as unapproved for U.K. tax purposes. On the exercise of
such options, a U.K. Participant will be subject to U.K. income tax on the
difference between the exercise price and the fair market value of the shares on
the date of exercise. This amount will be subject to U.K. withholding tax. The
Committee is authorized to sell sufficient of the Participant's shares on the
exercise of a stock option to satisfy such withholding liabilities, if
necessary.
For options granted to U.K. residents after April 5, 1999 under the
Stock Option Plan, there is a liability to pay U.K. social security
contributions upon the exercise of such options based on the difference between
the exercise price and the fair market value of the shares on the date of
exercise.
U.K. Approved Stock Options. It is intended that a sub-plan of the
Stock Option Plan will be established which will be approved by the U.K. Inland
Revenue under the U.K. Taxes Act 1988. Approved stock options may be granted to
selected U.K. employees and full-time directors. The provisions of the sub-plan
will be similar to those of the Stock Option Plan except to the extent required
to obtain and maintain U.K. Inland Revenue approval.
In particular, approved options may only be granted to a U.K.
individual over shares worth up to (pound)30,000 at the date of grant. Provided
the approved options are exercised between the third and tenth anniversaries of
the date of grant and not within three years of a previous tax-free exercise of
an approved option by the same individual, no income tax will be payable upon
exercise. Furthermore, there will be no liability for social security
contributions on the exercise of an approved option.
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Accounting Treatment. Under current accounting rules, neither the grant
nor the exercise of an Incentive Option or a Nonqualified Option granted to
employees at an exercise price equal to the fair market value of the shares on
the date of grant requires any charge against earnings. The Company will follow
the provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. This publication provides for the
disclosure of the pro forma impact of the issuance of options to employees on
net income and earnings per share in the footnotes to the Company's financial
statements. Management currently believes that there will be no material impact
on earnings of the Company as a result of the adoption of SFAS 123.
Director Option Plan. The Director Option Plan permits the granting of
non-qualified stock options ("Director NQSOs") for up to 200,000 shares of
Common stock to Reynard's directors who are not employees of Reynard (an
"Independent Director"). Each person who is first elected or appointed to serve
as an Independent Director of Reynard is automatically granted an option to
purchase 15,000 shares of common stock. In addition, each individual who is
re-elected as an Independent Director is automatically granted an option to
purchase 5,000 shares of common stock each year on the date of the annual
meeting of stockholders. Each of the options automatically granted upon
election, appointment or re-election as an Independent Director (the "Fixed
Options") are exercisable at a price at least equal to the fair market value of
the common stock on the date of grant. In addition to the Fixed Options, each
Independent Director may elect to receive stock options in lieu of any
director's fees payable to such individuals.
All Directors NQSOs are immediately exercisable upon grant. The
exercise price for all such options may be paid in cash, shares of common stock
or other property. If an Independent Director dies or becomes ineligible to
participate in the Director Option Plan due to disability, his Director NQSOs
expire on the first anniversary of such event. If an Independent Director
retires with the consent of the Company, his Director NQSOs expire 90 days after
his retirement. In no event may a Director NQSO be exercised more than 10 years
from the date of grant.
EMPLOYMENT AGREEMENTS
Reynard has entered into employment agreements with certain of its key
officers and employees. Pursuant to the terms of the agreements, each employee,
other than Dr. Reynard, has agreed to be a full-time employee for a period of
four years. Dr. Reynard has agreed to be a full-time employee for a period of
three years. Each employee has also agreed not to compete with Reynard during
the term of the agreement and for a period of one year after termination. The
Company anticipates entering into an employment agreement with Mr. Hawkridge for
a period of three years with an agreement not to compete with Reynard during the
term of the agreement and for a period of one year after termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has established a Compensation Committee to
deliberate upon matters concerning executive compensation, the issuance of
options under the Stock Option Plan and other benefits payable to Reynard's
executive officers. The members of the Compensation Committee are Adrian J.
Reynard and Alex S. Hawkridge.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table contains information, as of September 30, 1998,
concerning the beneficial ownership of the common stock by (1) each director,
(2) each of the named officers, (3) all directors and executive officers as a
group and (4) each person or entity known by the Company to be the beneficial
owner of more than five percent of the outstanding shares of common stock. the
percentage of shares owned prior to the offering is calculated based upon
2,944,011.
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SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED SHARES BEING OWNED
PRIOR TO OFFERING OFFERED AFTER OFFERING
--------------------- ------------ -------------------
NAME OF BENEFICIAL OWNER (1) NUMBER PERCENT NUMBER PERCENT
------------------------ ------ ------- ------ -------
Adrian J. Reynard (2)(3) 2,291,819 77.8%
Richard J. Gorne (4) 13,990 0.5%
Paul R. Owens (5) -- --
Malcolm B. Oastler (6) -- --
Peter D. Morgan (7) -- --
Alex S. Hawkridge (8) 117,760 3.8%
Reynard Racing Cars Trustee
Limited (9)(10) 480,564 16.3%
John W. Piper (11) -- --
All directors and officers, as a group
(7 persons) 2,423,569 82.3%
(1) Unless otherwise noted, each beneficial owner has sole voting and
dispositive power with respect to the shares.
(2) Includes 10 shares held in the name of Gillian Reynard. Includes 192,227
shares held in the name of Spread Trustee Company Ltd. in which Dr. Reynard is
the sole beneficiary and 402,163 shares held in the name of Reynard Racing Cars
Directors Pension Fund in which Dr. Reynard is the sole beneficiary.
(3) The address for Dr. Reynard is 191 Godstow Road, Lower Wolvercote Village,
Oxfordshire, OX2 8PG.
(4) The address for Mr. Gorne is Willow Barn, Cuckoo Lane, Barnard Gate,
Oxfordshire, OX8 6XD.
(5) The address for Mr. Owens is Orchard Lea, Turweston, Brackley,
Northamptonshire, NN13 5JX.
(6) The address for Mr. Oastler is Westbrook, B. Hardwick, Bicester,
Oxfordshire, OX6 9SS.
(7) The address for Mr. Morgan is 4 The College Marsh Gibbon, Bicester,
Oxfordshire, OX6 0HW.
(8) Includes 117,760 shares issuable upon exercise of outstanding stock options,
exercisable within 90 days of September 30, 1998. The address for Mr. Hawkridge
is 25 Sandyfoot, Barkisland, Halifax, West Yorkshire, HX4 0JA.
(9) Includes 106,792 shares held in the name of Richard J. Gorne, 133,490 shares
held in the name of Malcolm B. Oastler, 106,792 shares held in the name of Paul
R. Owens, 53,396 shares held in the name of Peter D. Morgan and 53,396 shares
held in the name of John C. Gower. Reynard Racing Cars Trustee Limited, a
wholly-owned subsidiary of Reynard, owns 480,564 shares in trust for the
above-named directors. The shares vest five years from the date of issue to the
employee. At this time, no shares are vested. The first shares vest in 1999.
(10) The address for Reynard Racing Cars Trustee Limited is Reynard Centre,
Telford Road, Bicester, Oxfordshire, OX6 0UY.
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(11) The address for Mr. Piper is 3 Swinford Cottages, Eynsham,
Oxford, Oxfordshire OX8 1BY.
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CERTAIN TRANSACTIONS
As of September 30, 1998, the Company had borrowed an aggregate of
$9,802,987 from Dr. Adrian Reynard in the form of a facility letter, due and
payable on demand. The loan is secured by a pledge of all of the Company's
assets, and bears interest at the National Westminster Bank's base rate plus
2-1/2%. The Company has received a letter from Dr. Reynard in which he states
that he does not expect to be paid or credited with interest on the money lent
to date. The highest balance due to Dr. Reynard during the fiscal year was
$10,619,959, $5,519,961 and $(287,616) during 1998, 1997 and 1996. A portion of
the proceeds from this offering will be used to repay the loan in its entirety.
The real property from which the Company operates in the U.K. is owned
by Dr. Reynard and a pension fund of which he is the beneficiary. The Company
pays annual rent for the property in the aggregate amount of $897,482 per year.
In August , 1997, the Company loaned an aggregate of $899,000 to the
pension fund, of which Dr. Reynard is a beneficiary. The loan was partially
repaid in August, 1997, with the balance being repaid in October, 1997. The loan
was in the form of a facility letter, was due and payable on demand and bore
interest at the National Westminster Bank's base rate plus 2% per annum. The
loans were made for the purpose of purchasing property.
On September 25, 1998, the Company granted options to purchase 117,760
shares to Alex Hawkridge, the Company's chief executive officer, at an exercise
price of (pound)36.50 per share. The options are fully vested and may be
exercised by Mr. Hawkridge at any time after the date of the agreement.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Reynard consists of 50,000,000 shares
of common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share. On _____________, a total of ______ shares of
common stock were issued and outstanding and such shares were held by ____
stockholders. No shares of preferred stock were outstanding. Upon completion of
the Offering, there will be ____ shares of common stock (_____ shares if the
Underwriters' over-allotment option is exercised in full) and no shares of
preferred stock issued and outstanding.
The following summary description of Reynard's capital stock is not
complete. You should read Reynard's Certificate of Incorporation and By-laws.
Copies of the Company's Certification of Incorporation and By-laws have been
filed as exhibits to the Registration Statement of which this prospectus is a
part.
COMMON STOCK
All outstanding shares of common stock are, and the shares offered
hereby will be, duly authorized, validly issued, fully paid and nonassessable.
Subject to the prior rights of holders of any preferred stock then outstanding,
holders of common stock are entitled to receive dividends, when and if declared
by the Board of Directors, out of funds legally available therefore. Holders of
common stock will share ratably in the net assets of Reynard upon liquidation.
Reynard's payment of dividends, if any, rests with the Board of Directors and
will depend upon Reynard's results of operation, financial condition and capital
expenditure plans, as well as other factors considered relevant by the Board of
Directors. Holders of common stock do not have preemptive or other rights to
subscribe for additional shares. There are no redemption or sinking fund
provisions associated with the common stock.
Holders of common stock are entitled to one vote per share on all
matters requiring a vote of stockholders. Since the common stock does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of common stock voting for the election of
directors can elect all of the directors whose terms expire that year.
PREFERRED STOCK
Reynard's Certificate of Incorporation gives the Board of Directors the
power to designate the relative rights and preferences of the preferred stock,
when and if issued, without further action by the holders of the common stock.
The Board of Directors is authorized to issue up to 5,000,000 shares of
preferred stock in one or more series. The rights and preferences could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences. Any of these may be dilutive to the interests of
the holders of common stock. The issuance of preferred stock may have the effect
of delaying or preventing a change in control of Reynard and may have an adverse
effect on the rights of the holders of common stock.
The issuance of any series of preferred stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
future capital needs of Reynard, the then-existing market conditions and other
factors that, in the judgment of the Board of Directors, might warrant the
issuance of preferred stock. At the date of this prospectus, there are no plans,
agreements or understandings relative to the issuance of any shares of preferred
stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the General Corporation Law of the State of
Delaware and of the Company's Certificate of Incorporation and By-laws are
summarized in the following paragraphs. These provisions may be considered to
have an anti-takeover effect and may delay, deter or prevent a tender offer,
proxy contest or other
66
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including such an attempt as might result in payment of a premium
over the market price for shares held by stockholders.
Other Voting Requirements. The Certificate of Incorporation requires
the approval of 67% of Reynard's voting securities for an amendment of certain
provisions of the Certificate of Incorporation, unless 2/3 of the Board of
Directors first approve the matter. The Certificate of Incorporation also
requires either the approval of 67% of the Company's voting securities or a vote
of not less than a majority of the Board of Directors to amend the By-Laws.
Delaware Anti-Takeover Law. Since Reynard is a Delaware corporation, it
is subject to the provisions of the General Corporation Law of the State of
Delaware, including Section 203 thereof. Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (1) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (2) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203, or (3)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66-2/3% of the corporation's outstanding
voting stock, excluding shares owned by the interested stockholder. For these
purposes, the term "business combination" includes mergers, asset sales and
other similar transactions with an "interested stockholder." An "interested
stockholder" is a person who, together with affiliates and associates, owns (or,
within the prior three years, did own) 15% or more of the corporation's voting
stock. Although Section 203 permits a corporation to elect not to be governed by
its provisions, Reynard has not made this election.
Special Meetings of Stockholders; No Action Without Meeting. Reynard's
By-laws provide that special meetings of stockholders may be called only by the
Chairman, the President or the Board of Directors. Reynard's Certificate of
Incorporation and By-laws also provide that no action required to be taken or
that may be taken at any annual or special meeting of stockholders may be taken
without a meeting. Additionally, the power of stockholders to consent in
writing, without a meeting, to the taking of any action is specifically denied.
These provisions may make it more difficult for stockholders to take action
opposed by the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Reynard's By-laws provide that stockholders seeking to bring
business before an annual or special meeting of stockholders, or to nominate
candidates for election as directors at an annual or a special meeting of
stockholders, must provide timely, written notice thereof. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, Reynard's
principal executive office (1) with respect to business to be considered at the
annual meeting of the stockholders of Reynard, not less than 90 days prior to
the anniversary date of the immediately preceding annual meeting of Reynard's
stockholders, and (2) with respect to business to be considered at a special
meeting of Reynard's stockholders, not later than the close of business on the
10th day following the day on which notice of the date of the special meeting
was mailed to stockholders, or public disclosure of the date of the special
meeting was made, whichever occurs first. These provisions may preclude some
stockholders from making nominations for directors at an annual or special
meeting or from bringing other matters before the stockholders at a meeting.
RIGHTS AGREEMENT
Reynard and a rights agent have entered into a Rights Agreement. The
Rights Agreement provides for the distribution of a right to purchase one share
of common stock to the holder of each share of common stock. The holders of
rights do not have any voting rights and are not entitled to dividends. Prior to
the distribution date (the "Distribution Date"), the rights will be evidenced by
certificates representing the shares of common stock. The rights may be
transferred with, and only with, shares of common stock. The Distribution Date
will occur, if at all, upon the earlier of (a) the tenth business day following
a public announcement that a person (other than Reynard, Adrian J. Reynard or
certain related entities) has acquired or obtained the right to acquire,
beneficial ownership of
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15% or more of the outstanding shares of common stock, or (b) the tenth business
day (or such later date as determined by the Board of Directors) following the
commencement of or the first public announcement of intent of a tender offer or
exchange for 15% or more of the outstanding shares of common stock (other than
by Reynard or certain related entities). The rights are not exercisable until
the Distribution Date. The rights will expire at the close of business on
_____________, 2008, unless earlier redeemed by the Company.
After the Distribution Date, the rights may either "flip-in" or
"flip-over," allowing a stockholder to acquire the common stock or the voting
equity securities of the acquiring person, respectively, at a 50% discount. Once
any person (other than Reynard, Adrian J. Reynard or certain related entities)
becomes a 15% beneficial owner of the outstanding shares of common stock, the
rights (other than rights beneficially owned by the acquiring person which would
become null and void) automatically flip-in, unless the Board of Directors has
decided to exchange the rights for shares of common stock. If, after the
Distribution Date, the Company consolidates or merges with, or transfers a
majority of its assets to, any person, the rights will flip-over.
The rights may have certain anti-takeover effects. The rights are
designed to cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors. The rights
will not interfere with any merger or other business combination approved by the
Board because the rights may be redeemed by the Company at $.01 per right at any
time prior to 10 business days following a 15% acquisition. The Rights Agreement
may be amended, without limitation, prior to the distribution of the rights, by
the Board of Directors without the approval of the holders of the rights.
TRANSFER AGENT
The transfer agent and registrar of the common stock is ______________
____________________.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Reynard will have ______ shares of
common stock (___ shares if the Underwriters' over-allotment option is exercised
in full) outstanding. Of such outstanding shares, the ____ shares (___ shares if
the over-allotment option is exercised in full) sold in the offering will be
freely transferable after the offering and may be resold without further
registration under the Securities Act, unless purchased by affiliates of
Reynard, as defined in Rule 144 under the Securities Act. The remaining ___
shares outstanding are restricted shares and the holders will be entitled to
resell them only pursuant to a registration statement under the Securities Act
or an applicable exemption from registration thereunder, such as an exemption
provided by Rule 144. None of the current stockholders have any registration
rights with respect to the outstanding shares of common stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any
three-month period such number of shares as does not exceed the greater of one
percent of the then-outstanding shares or the average weekly trading volume
during the four calendar weeks prior to such resale. Rule 144 also permits,
under certain circumstances, the resale of shares without any quantity
limitation by a person who has satisfied a two-year holding period and who is
not, and has not been for the preceding three months, an affiliate of Reynard.
In addition, holding periods of successive non-affiliate owners are aggregated
for purposes of determining compliance with these one- and two-year holding
period requirements. The availability of shares for sale or actual sales under
Rule 144 may have an adverse effect on the market price of the common stock.
Sales under Rule 144 also could impair the Company's ability to market
additional equity securities.
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Upon completion of the offering, _________ shares of the restricted
shares will have been held for at least one year and may be resold pursuant to
Rule 144 three months after the date of this prospectus.
Reynard and all of its stockholders, executive officers and directors
have each agreed not to offer for sale, sell or otherwise dispose of any shares
of common stock or other securities convertible into or exchangeable for common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of NationsBanc Montgomery Securities LLC on behalf of the
Underwriters.
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement (the "Underwriting Agreement") by and between Reynard and the
Underwriters (collectively, the "Underwriters"), dated the date hereof, each
underwriter named below has severally agreed to purchase the number of shares of
common stock set forth below opposite the name of such Underwriter at the public
offering price less the underwriting discount set forth on the cover page of
this prospectus.
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NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
NationsBanc Montgomery Securities LLC..........................................
Wheat First Securities, Inc....................................................
Josephthal & Co. Inc...........................................................
--------
Total.................................................................
========
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of common stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom NationsBanc Montgomery Securities LLC, Wheat
First Union, a division of Wheat First Securities, Inc., and Josephthal & Co.
Inc. are acting as representatives (the "Representatives"), propose to offer the
shares of common stock directly to the public at the public offering price set
forth on the cover page of this prospectus. The Underwriters may allow selected
dealers a concession not in excess of $_________ per share under the public
offering price and the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $_________ per share to certain other dealers. After
the initial offering of the shares to the public, the public offering price and
other selling terms may be changed by the Representatives. The Representatives
have advised Reynard that the Underwriters do not intend to confirm sales of any
shares to any accounts over which they exercise discretionary authority.
The Selling Stockholder has granted an option to the Underwriters to
purchase up to ______ additional shares of common stock at the public offering
price set forth on the cover page of this prospectus, minus the underwriting
discounts and commissions. This option is exerciseable for 30 days from the date
of this prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with the offering of
the shares of common stock. To the extent such option is exercised, each
Underwriter will be
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obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
Reynard, its executive officers and directors and each of its existing
stockholders, who will hold an aggregate of ____ shares of common stock after
this offering, have agreed that until 180 days following the date of this
prospectus, they will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, on behalf of the Underwriters, sell, offer to sell,
solicit any offer to buy, contract to sell, grant any option to purchase, or
otherwise transfer or dispose of any shares, or any securities convertible into,
or exercisable or exchangeable for, shares of common stock, except that Reynard
may grant options under the Stock Option Plan and may issue shares of common
stock pursuant to the exercise of options granted under the Stock Option Plan.
In evaluating any request for a waiver of the 180-day lock-up period,
NationsBanc Montgomery Securities LLC will consider, in accordance with its
customary practice, all relevant facts and circumstances at the time of the
request, including, without limitation, the recent trading market for the common
stock, the size of the request and, with respect to a request by the Company to
issue additional equity securities, the purpose of such an issuance.
Prior to this offering, there has not been any public market for the
shares of common stock of the Company. Consequently, the initial public offering
price for the shares of common stock included in the offering will be determined
by negotiations between Reynard and the Representatives. Among the factors to be
considered in determining such price are the history of and prospects for
Reynard's business and the industry in which it competes, an assessment of
Reynard's management and the present state of Reynard's development, the past
and present revenues and earnings of Reynard, the prospects for growth of
Reynard's revenues and earnings, the current state of the economy in the U.S.
and the U.K. and the current level of economic activity in the industry in which
Reynard competes and in related or comparable industries, and currently
prevailing conditions in the securities markets, including current market
valuations of publicly traded companies that are comparable to Reynard.
The Representatives have advised Reynard that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the shares of
common stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Underwriters are not required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time. The
Representatives have advised Reynard that such transactions may be effected on
the NYSE or otherwise and, if commenced, may be discontinued at any time.
The Underwriting Agreement provides that Reynard will indemnify the
Underwriters against certain liabilities, including liabilities arising under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed
upon for Reynard by Kegler, Brown, Hill & Ritter Co., L.P.A., Columbus, Ohio.
Certain other legal matters governed by English law will be passed upon
70
for the Company by Davies Arnold Cooper. Legal matters in connection with this
offering will be passed upon for the Underwriters by Akin, Gump, Strauss, Hauer
& Feld, L.L.P., Washington, D.C.
EXPERTS
The combined financial statements of the Company as of September 30,
1996 and 1997 and June 30, 1998 and for each of the three years in the period
ended September 30, 1997 and the nine month period ended June 30, 1998, included
in this prospectus and the related financial statement schedule included
elsewhere in the registration statement, have been audited by Deloitte & Touche,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been included herein in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Princetown Holdings Limited as
of August 31, 1997 and May 31, 1998 and for the year ended August 31, 1997 and
the nine month period ended May 31, 1998, included in this prospectus, have been
audited by Deloitte & Touche, independent auditors, as stated in their report
appearing herein and have been included herein in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Reynard will furnish annual reports containing annual audited
consolidated financial statements audited by an independent accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
interim unaudited financial information to you. The financial information will
be prepared in accordance with U.S. GAAP.
71
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION,
COMBINED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS
· Enlarge/Download Table
REYNARD MOTORSPORT, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial Information..........................................................F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998..............................................F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended June 30, 1998................F-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended September 30, 1997..................F-5
Notes to Unaudited Pro Forma Consolidated Financial Information...........................................................F-6
REYNARD MOTORSPORT, INC.
Independent Auditors' Report..............................................................................................F-8
Combined Balance Sheets as of September 30, 1996 and 1997 and June 30, 1998...............................................F-9
Combined Statements of Operations for the Years Ended September 30,1995, 1996 and 1997 and for Nine Months
Ended June 30, 1997 (Unaudited) and June 30, 1998........................................................................F-10
Combined Statements of Stockholders' Equity (Deficit) for the Years Ended September 30, 1995, 1996 and
1997 and for the Nine Months Ended June 30, 1998.........................................................................F-11
Combined Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and 1997 and for the Nine
Months Ended June 30, 1997 (Unaudited) and June 30, 1998 ................................................................F-12
Notes to the Combined Financial Statements...............................................................................F-13
PRINCETOWN HOLDINGS LIMITED
Independent Auditors' Report.............................................................................................F-21
Consolidated Balance Sheets as of August 31, 1997 and May 31, 1998.......................................................F-22
Consolidated Statements of Operations for the Year Ended August 31, 1997 and for the Nine Months Ended May
31, 1997 (Unaudited) and May 31, 1998....................................................................................F-23
Consolidated Statements of Stockholder's Equity for the Year Ended August 31, 1997 and for the Nine Months
Ended May 31, 1998 ......................................................................................................F-24
Consolidated Statements of Cash Flows for the Year Ended August 31, 1997 and for the Nine Months Ended May
31, 1997 (Unaudited) and May 31, 1998 ...................................................................................F-25
Notes to Consolidated Financial Statements...............................................................................F-26
F-1
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of June 30, 1998
gives effect to (i) the Gemini Acquisition (See "Business - Growth Strategy")
and (ii) the Offering and application of the net proceeds from the Offering
(after deducting underwriting discounts and commissions and estimated expenses
of the Offering, but excluding the underwriters' over-allotment option), as if
each had occurred as of June 30, 1998. The following unaudited pro forma
condensed consolidated statements of operations for the nine months ended June
30, 1998 and for the year ended September 30, 1997 give effect to each of the
above transactions as if each had occurred as of October 1, 1996. The
information used in respect of Gemini represents the nine months ended May 31,
1998 and the year ended August 31, 1997. Pro forma adjustments are described in
the accompanying notes. The unaudited pro forma condensed consolidated financial
information should be read in conjunction with "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Combined and Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The unaudited pro forma
condensed consolidated statements of operations are not necessarily indicative
of the actual results of operations that would have been reported if the events
described above had occurred as of October 1, 1996, nor do such statements
propose to indicate the results of future operations of the Company.
Furthermore, the pro forma results do not give effect to cost savings or
incremental costs, if any, which may occur as a result of the integration and
consolidation of the Gemini Acquisition or the investment of cash balances
available from the Offering. In the opinion of management, all adjustments
necessary to present fairly such unaudited pro forma condensed consolidated
financial statements have been made.
F-2
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
· Enlarge/Download Table
PRO FORMA FOR ACQUISITION OF GEMINI
-----------------------------------
REYNARD GEMINI PRO FORMA PRO FORMA ADJUSTMENTS FOR
HISTORICAL HISTORICAL ADJUSTMENTS FOR GEMINI THE OFFERING PRO FORMA
---------- ---------- ----------- ---------- --------------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,152 $ -- $(11,779)(A) $(8,627) $(10,418)(B) $[ ]
Accounts receivable 10,960 555 -- 11,515 [ ] [ ]
Inventory 2,329 1,504 971(A) 4,804 [ ] [ ]
Prepaid expenses 615 23 -- 638 [ ] [ ]
Deferred income taxes 460 351 (291)(A) 520
------- ------ -------- ------- -------- ----
Total current assets 17,516 2,433 (11,099) 8,850 $(10,418) [ ]
PROPERTY AND EQUIPMENT - Net 9,001 3,554 7,171(A) 19,726 [ ] [ ]
INTANGIBLES -- -- 3,363(A) 3,363 [ ] [ ]
OTHER ASSETS 455 -- -- 455 [ ] [ ]
------- ------ -------- ------- -------- ----
TOTAL ASSETS $26,972 $5,987 $ (565) $32,394 $(10,418) $[ ]
======= ====== ======== ======= ======== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES
Bank lines of credit $ 1,072 $ 205 $ -- $ 1,277 $ [ ] $[ ]
Accounts payable 5,877 271 -- 6,148 [ ] $[ ]
Accrued liabilities 8,043 495 (460)(A) 8,078 [ ] [ ]
Notes payable to related party 10,479 3,611 (3,611)(A) 10,479 (10,418)(B) [ ]
Current portion of capital lease
obligations -- 614 -- 614 [ ] [ ]
Current portion of long-term debt -- 273 -- 273 [ ] [ ]
------- ------ -------- ------- -------- ----
Total current liabilities 25,471 5,469 (4,071) 26,869 (10,418) [ ]
CAPITAL LEASE OBLIGATIONS -- 670 670 [ ] [ ]
LONG TERM DEBT -- 281 660(A) 941 [ ] [ ]
DEFERRED INCOME TAXES 133 262 2,151(A) 2,546 [ ] [ ]
MINORITY INTEREST IN SUBSIDIARY 2,519 -- -- 2,519 [ ] [ ]
COMMITMENTS AND CONTINGENCIES
-- -- -- -- -- --
STOCKHOLDERS' EQUITY (DEFICIT) (1,151) (695) 695(A) (1,151) [ ] [ ]
------- ------ -------- ------- -------- ----
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $26,972 $5,987 $ (565) $32,394 $(10,418) $[ ]
======= ====== ======== ======= ======== ====
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
F-3
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
· Enlarge/Download Table
PRO FORMA FOR ACQUISITION OF GEMINI
-----------------------------------
REYNARD GEMINI PRO FORMA PRO FORMA ADJUSTMENTS FOR
HISTORICAL HISTORICAL ADJUSTMENTS FOR GEMINI THE OFFERING PRO FORMA
---------- ---------- ----------- ---------- --------------- ---------
REVENUES:
Products $40,881 $2,194 $ -- $43,075 $ -- $43,075
Services 9,882 -- -- 9,882 -- 9,882
Other -- 47 -- 47 -- 47
------- ------ ----- ------- ------- -------
Total revenues 50,763 2,241 -- 53,004 -- 53,004
COST OF GOODS SOLD:
Products 21,713 890 -- 22,603 -- 22,603
Services 3,944 -- -- 3,944 -- 3,944
------- ------ ----- ------- ------- -------
Total cost of goods sold 25,657 890 -- 26,547 -- 26,547
------- ------ ----- ------- ------- -------
GROSS PROFIT 25,106 1,351 -- 26,457 -- 26,457
GENERAL AND ADMINISTRATIVE
EXPENSES 20,122 965 126(C) 21,751 (6,415)(D) 15,336
538(C)
------- ------ ----- ------- ------- -------
INCOME FROM OPERATIONS 4,984 386 (664) 4,706 6,415 11,121
OTHER INCOME (EXPENSE)
Share of loss of equity
investment (5,310) -- -- (5,310) -- (5,310)
Minority interest in loss of -- -- --
subsidiary 106 106 106
Interest income 21 -- -- 21 -- 21
Interest expense (670) (240) -- (910) 670(E) (240)
------- ------ ----- ------- ------- -------
INCOME (LOSS) BEFORE TAXES ON
INCOME (869) 146 (664) (1,387) 7,085 5,698
INCOME TAX EXPENSE 1,634 55 (161)(F) 1,528 1,989(F) 3,517
------- ------ ----- ------- ------- -------
NET INCOME (LOSS) $(2,503) $ 91 $(503) $(2,915) $ 5,096 $ 2,181
======= ====== ===== ======= ======= =======
EARNINGS (LOSS) PER SHARE -
BASIC AND DILUTED (G) $ (.85) $ [ ]
=======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC AND
DILUTED 2,944
=======
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
F-4
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
· Enlarge/Download Table
PRO FORMA FOR ACQUISITION OF GEMINI
-----------------------------------
REYNARD GEMINI PRO FORMA PRO FORMA ADJUSTMENTS FOR
HISTORICAL HISTORICAL ADJUSTMENTS FOR GEMINI THE OFFERING PRO FORMA
---------- ---------- ----------- ---------- --------------- ---------
REVENUES:
Products $39,039 $3,157 $ -- $42,196 $ -- $42,196
Services 10,803 -- -- 10,803 -- 10,803
Other -- 19 -- 19 -- 19
------- ------ ----- ------- ------- -------
Total revenues 49,842 3,176 -- 53,018 -- 53,018
COST OF GOODS SOLD:
Products 19,502 1,426 -- 20,928 -- 20,928
Services 5,951 -- -- 5,951 -- 5,951
------- ------ ----- ------- ------- -------
Total cost of goods sold 25,453 1,426 -- 26,879 -- 26,879
------- ------ ----- ------- ------- -------
GROSS PROFIT 24,389 1,750 -- 26,139 -- 26,139
GENERAL AND ADMINISTRATIVE
EXPENSES 21,462 1,399 717(C) 23,746 (6,541)(D) 17,205
------- ------ ----- ------- ------- -------
INCOME FROM OPERATIONS 2,927 351 (885) 2,393 6,541 8,934
OTHER INCOME (EXPENSE)
Interest income 171 -- -- 171 -- 171
Interest expense -- (144) -- (144) -- (144)
------- ------ ----- ------- ------- -------
INCOME BEFORE TAXES ON INCOME 3,098 207 (885) 2,420 6,541 8,961
INCOME TAX EXPENSE 1,105 70 (215)(F) 960 2,093(F) 3,053
------- ------ ----- ------- ------- -------
NET INCOME $ 1,993 $ 137 $(670) $ 1,460 $ 4,448 $ 5,908
======= ====== ===== ======= ======= =======
EARNINGS PER SHARE - Basic and
diluted (g) $ .68 $ [ ]
======= =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC AND
DILUTED 2,944
======= =======
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
F-5
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
BALANCE SHEET - In October 1998, the Company entered into an agreement to
acquire all of the outstanding shares of stock of Princetown Holdings Limited,
the sole owner of Gemini Transmissions Limited (together, "Gemini") for
approximately $12.4 million. Gemini manufactures and assembles gearboxes,
gearbox components, suspension components and other fabricated items for various
automobile companies and motorsport teams, and is an industry leader in the
design, manufacture and assembly of fuel-efficient gearboxes. The excess of the
purchases price over the net book value of the net assets acquired of Gemini has
been allocated to the tangible and intangible assets based on the Company's
estimate of the fair market value of the net assets acquired. The allocation of
the purchase price paid for Gemini is as follows:
· Enlarge/Download Table
(DOLLARS IN THOUSANDS)
Fair market value of net assets acquired $ 9,076
Allocation of purchase price in excess of acquired assets - Goodwill 3,363
-------
Total Purchase Price $12,439
=======
The accompanying unaudited pro forma condensed consolidated balance sheet as of
June 30, 1998 has been prepared as if the Offering, the Gemini Acquisition and
the Reorganization had been consummated as of June 30, 1998 and includes:
(A) a pro forma adjustment to:
o record the write-up to fair market value of assets acquired
of $8,142,000 ($7,171,000 in relation to plant and
machinery; $971,000 in respect of inventory) and goodwill
($3,363,000) related to the Gemini acquisition;
o present the Gemini acquisition for $11,779,000 in cash and
$660,000 in deferred consideration payable on December 31,
2000;
o reflect the deferred tax liability arising in respect of the
fair value adjustments in respect of plant and machinery and
inventory referred to above;
o reflect the repayment of notes and rent due from Gemini to
certain related parties totalling $3,611,000 and $460,000,
respectively.
(B) a pro forma adjustment to present the application of the net
proceeds ($[ ]) of the Offering, assuming Offering expenses of $[ ]
together with repayment of certain related party amounts totalling
$10,418,000.
STATEMENT OF OPERATIONS - The accompanying unaudited pro forma condensed
consolidated statement of operations for the nine months ended June 30, 1998 and
for the year ended September 30, 1997 presents the results as though the
Offering, the Gemini Acquisition and the Reorganization had been consummated on
October 1, 1996. The accompanying unaudited pro forma condensed consolidated
statement of operations for the nine months ended June 30, 1998 has been
prepared by combining the historical results for the Company for the nine months
ended June 30, 1998 and for Gemini for the nine months ended May 31, 1998. The
accompanying unaudited pro forma condensed consolidated statement of operations
for the year ended September 30, 1997 has been prepared by combining the
historical results for the Company for the year ended September 30, 1997 and for
Gemini for the year ended August 31, 1997. The accompanying unaudited pro forma
condensed consolidated statements of operations include the following
adjustments:
(C) pro forma adjustments for the nine months ended June 30, 1998 and
the year ended September 30, 1997 have been made to increase
depreciation and amortization for goodwill by $126,000 and
$168,000, respectively, related to the Gemini Acquisition as if the
Gemini Acquisition had occurred as of October 1, 1996. Goodwill is
amortized over 20 years. The Company intends to evaluate
periodically the recoverability of goodwill based upon future
profitability and undiscounted operating cash flows of the Gemini
Acquisition. Pro forma adjustments have also been made for the nine
months ended June 30, 1998 and the year ended September 30, 1997 to
increase depreciation and amortization by $538,000 and $717,000,
respectively, for the fair value adjustment to plant and machinery
described in (A) above.
(D) pro forma adjustments for the periods presented have been made to
reduce compensation made to Dr. Adrian Reynard. Effective October
1, 1998, the Company entered into an agreement with Dr. Reynard
whereby his total compensation is fixed at $1.5 million per annum.
Total compensation will comprise of a basic salary ($1,000,000),
and bonus ($500,000). Accordingly the amount paid to Dr.
F-6
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Reynard for the nine months ended June, 30 1998 and the year ended
September, 30 1997 has been reduced to $1,125,000 and $1,500,000
respectively (together with related employment taxes) to reflect
compensation based on the agreed $1.5 million per annum. Such
Agreement expires on September 30, 2001.
(E) pro forma adjustment for the nine months ended June 30, 1998 has
been made to eliminate interest expense incurred on the related
party note payable referred to in (B) above which is to be repaid
as part of the proceeds of the Offering.
(F) pro forma adjustments for the periods presented have been tax
effected based upon the statutory rate then expected to be in
effect.
(G) pro forma earnings per share is computed by dividing pro forma net
income by the weighted average common shares outstanding and the
shares offered hereby. Pro forma common shares outstanding for the
nine months ended June 30, 1998 were [ ] ([ ] for the year ended
September, 30 1997).
F-7
THE ACCOMPANYING COMBINED FINANCIAL STATEMENTS REFLECT CHANGES FOR THE
REORGANIZATION (EXCLUDING THE EFFECTS OF THE PROPOSED STOCK SPLIT) WHICH IS TO
BE EFFECTED PRIOR TO THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT. THE
FOLLOWING OPINION IS IN THE FORM WHICH WILL BE SIGNED BY DELOITTE & TOUCHE UPON
CONSUMMATION OF THE ABOVE EVENT, WHICH IS DESCRIBED IN NOTE 11 OF NOTES TO
COMBINED FINANCIAL STATEMENTS AND ASSUMING THAT FROM SEPTEMBER 14, 1998 TO THE
DATE OF SUCH EVENT, NO OTHER EVENTS HAVE OCCURRED WHICH WOULD AFFECT THE
ACCOMPANYING COMBINED FINANCIAL STATEMENTS AND NOTES THERETO.
DELOITTE & TOUCHE
LONDON, ENGLAND
OCTOBER 27, 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Reynard Motorsport, Inc. and Related Companies
We have audited the combined balance sheets of Reynard Motorsport, Inc. and
related companies (the "Companies") as of September 30, 1996 and 1997 and June
30, 1998, and the related combined statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
September 30, 1997 and the nine month period ended June 30, 1998. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
materials respects, the financial position of the Companies at September 30,
1996 and 1997 and June 30, 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1997
and the nine month period ended June 30, 1998, in conformity with accounting
principles generally accepted in the United States of America.
London, England
September 14, 1998
(_______, 1998 as to Note 11)
F-8
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
· Enlarge/Download Table
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,597 $ 727 $ 3,152
Accounts receivables (net of allowance for doubtful accounts of
$174,000, $110,000 and $1,002,000 in 1996, 1997 and 1998
respectively) 2,482 7,397 10,960
Inventory (net of allowance for obsolescence of $1,078,000,
$2,012,000 and $2,502,000 in 1996, 1997 and 1998,
respectively) 2,397 4,316 2,329
Prepaid expenses 174 179 615
Deferred income taxes 216 96 460
------- ------- -------
Total current assets 8,866 12,715 17,516
PROPERTY AND EQUIPMENT - Net 3,025 5,694 9,001
OTHER ASSETS -- -- 455
------- ------- -------
TOTAL ASSETS $11,891 $18,409 $26,972
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank line of credit $ -- $ 35 $ 1,072
Notes payable to related party 250 5,246 10,479
Accounts payable 2,663 5,225 5,877
Accrued liabilities:
Deposits on cars 3,732 3,012 731
Taxes 687 528 2,421
Other 2,129 3,462 4,891
------- ------- -------
Total current liabilities 9,461 17,508 25,471
DEFERRED INCOME TAXES 134 160 133
MINORITY INTEREST IN SUBSIDIARY -- -- 2,519
COMMITMENTS AND CONTINGENCIES (Note 7) -- -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock: $0.1 par value; 10,000,000 shares authorized;
2,944,009 issued and outstanding. $1 par value; 2,100
shares authorized; 502 $1 shares issued and outstanding at
September 30, 1996 and 1997 and June 30, 1998, respectively 422 422 422
Additional paid-in capital 6 6 676
Foreign currency translation adjustment 3 97 104
Retained earnings (accumulated deficit) 1,865 216 (2,353)
------- ------- -------
Total stockholders' equity (deficit) 2,296 741 (1,151)
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $11,891 $18,409 $26,972
======= ======= =======
The accompanying notes are an integral part of the combined statements.
F-9
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
· Enlarge/Download Table
NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED JUNE NINE MONTHS
SEPTEMBER SEPTEMBER SEPTEMBER 30, 1997 ENDED JUNE
30, 1995 30, 1996 30, 1997 (UNAUDITED) 30, 1998
-------- -------- -------- ----------- -----------
REVENUES:
Products $18,952 $22,406 $39,039 $34,098 $40,881
Services 2,701 6,493 10,803 8,349 9,882
------- ------- ------- ------- -------
Total revenues 21,653 28,899 49,842 42,447 50,763
------- ------- ------- ------- -------
COST OF GOODS SOLD:
Products 8,814 9,928 19,502 16,878 21,713
Services 1,232 3,750 5,951 3,344 3,944
------- ------- ------- ------- -------
Total cost of goods sold 10,046 13,678 25,453 20,222 25,657
------- ------- ------- ------- -------
GROSS PROFIT 11,607 15,221 24,389 22,225 25,106
GENERAL AND ADMINISTRATIVE
EXPENSES 11,285 13,766 21,462 15,821 20,122
------- ------- ------- ------- -------
INCOME FROM OPERATIONS 322 1,455 2,927 6,404 4,984
Share of loss in equity investment -- -- -- -- (5,310)
Minority interest in loss of -- -- -- -- 106
subsidiary
Interest income 165 166 171 144 21
Interest expense (20) -- -- -- (670)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 467 1,621 3,098 6,548 (869)
INCOME TAX EXPENSE 114 563 1,105 2,066 1,634
------- ------- ------- ------- -------
NET INCOME (LOSS) $ 353 $ 1,058 $ 1,993 $ 4,482 $(2,503)
======= ======= ======= ======= =======
EARNINGS (LOSS) PER SHARE - Basic and
Diluted $ .12 $ .36 $ .68 $ 1.52 $ (.85)
======= ======= ======= ======= =======
WEIGHTED SHARES OUTSTANDING - BASIC AND
DILUTED 2,944 2,944 2,944 2,944 2,944
======= ======= ======= ======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-10
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
· Enlarge/Download Table
FOREIGN RETAINED
COMMON STOCK ADDITIONAL CURRENCY EARNINGS STOCKHOLDERS'
----------------- PAID-IN TRANSLATION (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) (DEFICIT)
------ ------ ------- ---------- -------- ---------
BALANCES, OCTOBER 1, 1994 2,944 $422 $ 6 $ -- $ 502 $ 930
Net income -- -- -- -- 353 353
Foreign currency translation
adjustment -- -- -- 2 -- 2
----- ---- ---- ---- ------- -------
BALANCES, SEPTEMBER 30, 1995 2,944 422 6 2 855 1,285
Net income -- -- -- -- 1,058 1,058
Foreign currency translation
adjustment -- -- -- 1 -- 1
Common stock dividend -- -- -- -- (48) (48)
----- ---- ---- ---- ------- -------
BALANCES, SEPTEMBER 30, 1996 2,944 422 6 3 1,865 2,296
Net income -- -- -- - 1,993 1,993
Foreign currency translation
adjustment -- -- -- 94 -- 94
Common stock dividend -- -- -- -- (3,642) (3,642)
----- ---- ---- ---- ------- -------
BALANCES, SEPTEMBER 30, 1997 2,944 422 6 97 216 741
Net loss -- -- -- -- (2,503) (2,503)
Foreign currency translation
adjustment -- -- -- 7 -- 7
Common stock dividend -- -- -- -- (66) (66)
Capital contribution (waiver of
interest expense by stockholder) -- -- 670 -- -- 670
----- ---- ---- ---- ------- -------
BALANCES, JUNE 30, 1998 2,944 $422 $676 $104 $(2,353) $(1,151)
===== ==== ==== ==== ======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-11
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
· Enlarge/Download Table
NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED JUNE NINE MONTHS
SEPTEMBER SEPTEMBER SEPTEMBER 30, 1997 ENDED JUNE
30, 1995 30, 1996 30, 1997 (UNAUDITED) 30, 1998
-------- -------- -------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 353 $ 1,058 $ 1,993 $ 4,482 $(2,503)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 408 535 898 687 1,003
Capital contribution - waiver of
interest expense -- -- -- -- 670
Foreign currency translation adjustment (4) (54) 152 217 1
Deferred income taxes (52) 19 146 86 (391)
Loss from sale of property and equipment 2 260 -- -- 202
Minority interest in loss of subsidiary -- -- -- -- (106)
Share of loss in equity investment -- -- -- -- 5,310
Changes in assets and liabilities that
(used) provided cash:
Accounts receivables (1,336) 337 (4,965) (5,978) (3,939)
Prepaid expenses (93) 62 1 (867) (427)
Inventory 228 (360) (1,854) 1,208 2,099
Accounts payable 300 504 2,493 (35) 596
Accrued liabilities 5,468 (1,238) 327 589 2,492
------- ------- ------- ------- -------
Net cash provided by
(used in) operating
activities 5,274 1,123 (809) 389 5,007
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (650) (1,963) (3,494) (1,067) (4,313)
Proceeds from sale of property and
equipment 2 -- 6 1 --
Equity investments -- -- -- -- (4,273)
Notes payable to related party (506) 247 5,034 3,836 5,033
------- ------- ------- ------- -------
Net cash (used in) provided by
investing activities (1,154) (1,716) 1,546 2,770 (3,553)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends -- (48) (3,642) (3,647) (66)
Net proceeds from bank line of credit -- -- 35 151 1,037
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities -- (48) (3,607) (3,496) 971
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,120 (641) (2,870) (337) 2,425
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 118 4,238 3,597 3,597 727
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,238 $ 3,597 $ 727 $ 3,260 $ 3,152
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 45 $ 304 $ 1,439 $ 1,439 $ 252
======= ======= ======= ======= =======
Interest $ 145 $ 166 $ 171 $ 144 $ 21
======= ======= ======= ======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-12
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Reynard Engineering Group Limited (a United Kingdom ("UK") Corporation) was
formed in 1994 to act as a holding company for its wholly-owned subsidiaries
(the "Company"). At June 30, 1998 the Company had wholly-owned subsidiaries as
follows: Reynard Racing Cars Limited, Reynard Manufacturing Limited, Rumfleet
Limited and subsidiaries, Reynard Formula One Limited and Advantage CFD Limited
and Reynard Composites Limited. The Company designs, manufactures and sells
production racing cars, as well as providing various engineering and management
services.
Reynard Racing Designs Limited (a UK Corporation) was formed in 1994 to hold the
property rights and certain plant, property and equipment of Reynard Engineering
Group Limited and its subsidiaries.
Reynard Special Vehicle Projects Limited (a UK Corporation) was formed in 1996
to design and manufacture vehicle components which do not bear the Reynard name.
Each of these companies is majority owned by Dr Adrian Reynard, his family and
trusts beneficially owned by Dr Reynard. Other shareholders include an employee
share ownership trust ("ESOT"), which holds shares for the benefit of employees
including the other directors of Reynard Engineering Group Limited.
Since all entities described above have been, and are, related through common
control, the preceding balance sheets as of September 30, 1996 and 1997 and June
30, 1998 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the years ended September 30, 1995, 1996 and 1997
and the nine month periods ended June 30, 1997 (unaudited) and 1998 have been
presented on a combined basis. All significant inter-company balances and
transactions have been eliminated in combination.
In addition, the combined financial statements include the financial statements
of Auto Research Center LLC, ("ARC") a 50% owned subsidiary.
NATURE OF OPERATIONS
The Company designs and manufactures production racing cars and other high
performance speciality vehicles. Cars are sold for competition in the CART Fed
Ex Championship Series, the Barber Dodge Pro Series and Formula Nippon Series.
Substantially all of the Company's revenues are derived from the sale of racing
car chassis and related spare parts ("products") and the provision of services
such as wind-tunnel testing and computer-aided design ("services") in the UK and
United States.
INVENTORY. Inventory consists of finished goods, spare parts, work-in-process
and raw materials which are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives
which range from 4 to 25 years. Leasehold improvements are amortized over the
life of the related leases.
F-13
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
REVENUE RECOGNITION. Revenue derived from the sale of products are recognized at
the time of shipment. Revenue derived from the providing of services are
recognized as earned. Deposits received in advance are deferred until the
shipment of products occur.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include investments with
original maturities of three months or less at the date of original acquisition.
INVESTMENTS. The Company has a 20% ownership in Reynard Aviation, a joint
venture with Virgin Airlines which was formed in January 1998. This investment
is accounted for under the cost method by the Company as they do not have the
ability to exercise significant influence over the operating and financial
policies of Reynard Aviation.
The Company has a 15% ownership in British America Racing ("BAR"), a joint
venture with British American Tobacco, through its subsidiary BAT (Westminster
House) Ltd. and Mount Eagle, Inc. which was formed in November 1997. This
investment is accounted for under the equity method by the Company as they have
the ability to exercise significant influence over the operating and financial
policies of BAR. The Company has guaranteed (on a joint and several basis) debt
obligations available to BAR of approximately $13,342,000 at June 30, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosures about the fair value of financial instruments whether or
not such instruments are recognized on the balance sheet. Due to the short-term
nature of the Company's financial instruments, other than debt, fair values are
not materially different from their carrying values. Based on the borrowing
rates available to the Company, the carrying value of debt approximated fair
value prevailing market prices and rates as of September 30, 1996 and 1997 and
June 30, 1998.
It is the policy of the Company not to enter into derivative financial
instruments for speculative purposes. The Company does enter into foreign
currency forward exchange contracts to minimize risk of loss from currency rate
fluctuations on foreign currency commitments entered into in the ordinary course
of business. These commitments are generally for terms of less than one year.
The foreign currency forward exchange contracts are executed with creditworthy
banks and are denominated in currencies of major industrial countries. The
notional amount of outstanding foreign currency forward exchange contracts
aggregated $5 million at September 30, 1997. There were no outstanding foreign
currency forward exchange contracts at September 30, 1996 and June 30, 1998. The
Company does not anticipate any material adverse effect on its results of
operations or financial position relating to these foreign currency forward
exchange contracts.
FOREIGN CURRENCY TRANSLATION. Gains and losses arising from the settlement of
foreign currency transactions are charged to the related period's combined
statement of operations. The Company's functional currency is UK pounds
sterling. The combined financial statements of the Company are translated into
United States dollars as of the balance sheet date. All revenue and expense
accounts are translated at a weighted - average of exchange rates in effect
during the period. Translation adjustments are recorded as a separate component
of stockholders' equity (deficit).
RESEARCH AND DEVELOPMENT. Research and development costs relating to present and
future products are expensed as incurred. During the years ended September 30,
1995, 1996 and 1997, and the nine month period ended June 30, 1998 the Company
incurred research and development costs of approximately $584,000, $1,793,000,
$595,000 and $1,519,000 respectively.
EARNINGS (LOSS) PER SHARE. Earnings (loss) per share - basic and diluted are
based on the weighted average number of common shares outstanding during the
periods presented.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
F-14
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
liabilities and disclosure of contingent assets and liabilities at September 30,
1996 and 1997 and June 30, 1998 and the reported amounts of revenues and
expenses during the periods presented. The actual outcome of the estimates could
differ from the estimates made in the preparation of the financial statements.
INTERIM INFORMATION (UNAUDITED). The accompanying unaudited interim combined
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" was
issued by the Financial Accounting Standards Board ("FASB"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. This Statement requires that all items that are required as
components of comprehensive income be displayed in a financial statement. The
Company has not determined the impact on the Company's combined financial
statement disclosure. SFAS No. 130 is effective for the Company's combined
financial statements for the year ending September 30, 1999.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued by the FASB. SFAS No. 131 establishes standards
for the way that public business enterprises report financial and descriptive
information about its reporting operating segments. The Company has not
determined the impact on the Company's combined financial statement disclosure.
SFAS No. 131 is effective for the Company's combined financial statements for
the year ending September 30, 1999.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued by the FASB. SFAS No. 133 establishes standards for
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts by requiring that an entity recognize those items as
assets or liabilities in the balance sheet and measure them at fair value. The
Company has not determined the impact on the Company's combined financial
statements. SFAS No. 133 is effective for the Company's combined financial
statements for the year ending September 30, 2000.
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
· Download Table
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
Trade receivables - gross $2,215 $6,415 $11,261
Allowance for trade receivables (174) (110) (1,002)
------ ------ -------
Trade receivables - net 2,041 6,305 10,259
Value Added Taxes 437 729 --
Income taxes -- 333 343
Other 4 30 358
------ ------ -------
$2,482 $7,397 $10,960
====== ====== =======
F-15
]
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
3. INVENTORY
Inventory consists of the following (in thousands):
· Download Table
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
Raw material and supplies $ 593 $ 742 $ 1,283
Work-in-process 1,166 957 554
Finished products and service parts 1,716 4,629 2,994
------- ------- -------
Total $ 3,475 $ 6,328 $ 4,831
Less allowance for obsolete inventory (1,078) (2,012) (2,502)
------- ------- -------
$ 2,397 $ 4,316 $ 2,329
======= ======= =======
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
· Download Table
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
Equipment $ 3,158 $ 4,270 $ 6,932
Vehicles 488 594 732
Furniture and fixtures 1,222 1,513 3,940
Leasehold improvements 166 222 268
Land 304 2,348 1,451
------- ------- -------
Total 5,338 8,947 13,323
Less accumulated depreciation (2,313) (3,253) (4,322)
------- ------- -------
$ 3,025 $ 5,694 $ 9,001
======= ======= =======
5. BANK LINE OF CREDIT
The Company has an unsecured bank line of credit with National Westminster Bank
PLC. Interest is charged at the bank's base rate plus 2% on the first $1,650,000
and the bank's base rate plus 6% thereafter (effective rate of 9.0% and 9.5% at
September 30, 1997 and June 30, 1998, respectively) and is due on demand. At
September 30, 1996, there were no amounts outstanding on the line of credit.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of the following (in thousands):
· Enlarge/Download Table
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
Wages and salaries $ 862 $1,292 $2,258
Payroll taxes 820 828 493
Project costs -- 566 --
Value Added Taxes -- 212
Accrual for final payment of investment in BAR -- -- 1,502
Other 447 776 426
------ ------ ------
$2,129 $3,462 $4,891
====== ====== ======
F-16
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
The Company has entered into various non-cancellable operating leases with the
Company's majority stockholder for office space and equipment which expire
through 2003. Total rent expense for the years ended September 30, 1995, 1996
and 1997 was approximately $269,000, $229,000 and $229,000, respectively, and
approximately $366,000 for the nine months ended June 30, 1998.
Approximate future minimum lease payments under non-cancellable operating leases
are as follows:
(IN THOUSANDS)
Year ending September 30:
1999 $ 897
2000 897
2001 897
2002 897
2003 897
------
Total $4,485
======
At June 30, 1998, the Company has committed to capital expenditures of
approximately $1,800,000 for the construction of facilities and purchase of
certain equipment.
The Company is a party to routine litigation incidental to its business.
Management does not believe that the resolution of any or all of such litigation
is likely to have a material adverse effect on the Company's combined financial
condition.
8. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
During the year ended September 30, 1996, the Company had three customers which
accounted for approximately 78% of the Company's revenues. The aggregate trade
receivable balances at September 30, 1996 in respect of these customers was
approximately $937,000. During the year ended September 30, 1997, the Company
had three customers which accounted for approximately 80% of the Company's
revenues. The aggregate trade receivable balances at September 30, 1997 in
respect of these customers was approximately $3,931,000. During the period ended
June 30, 1998, the Company had one customer which accounted for approximately
16% of the Company's revenues. The aggregate trade receivables balance at June
30, 1998 in respect of this customer was approximately $4,523,000.
Revenues by geographic area are as follows (in thousands):
· Enlarge/Download Table
Years Ended September 30,
--------------------------------------------------- Nine Months Ended
1995 1996 1997 June 30, 1998
---- ---- ---- -----------------
UK $ 1,258 $ 1,408 $14,497 $14,453
United States 17,315 24,724 32,517 35,889
Other 3,080 2,767 2,828 421
------- ------- ------- -------
$21,653 $28,899 $49,842 $50,763
======= ======= ======= =======
9. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation
F-17
REYNARD MOTORSPORT, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
Realization of the Company's deferred tax assets is dependent on generating
sufficient taxable income. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.
The tax effects of temporary differences giving rise to deferred tax assets
(liabilities) are as follows (thousands):
· Download Table
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
Deferred tax assets (liabilities):
Depreciation $(134) $(160) $(133)
Development costs 210 91 98
Inventory 6 5 264
Other -- -- 98
----- ----- -----
Total 82 (64) 327
Current portion 216 96 460
----- ----- -----
Non current portion $(134) $(160) $(133)
===== ===== =====
The provision for income taxes consists of the following (thousands):
· Download Table
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
---- ---- ----
Current $544 $ 959 $2,025
Deferred (benefit) 19 146 (391)
---- ------ ------
Total $563 $1,105 $1,634
==== ====== ======
The reconciliation of income tax expense computed at the UK statutory tax rate
to the Companies' effective income tax rate is as follows (thousands):
· Download Table
YEAR ENDED YEAR ENDED NINE MONTHS
SEPTEMBER SEPTEMBER ENDED JUNE
30, 1996 30, 1997 30, 1998
-------- -------- --------
Tax at UK statutory rate $530 $1,044 $ (94)
Meals and entertainment 13 16 15
Professional fees 12 19 18
Depreciation 8 26 49
Non deductible losses in equity investment -- -- 1,646
---- ------ ------
Total $563 $1,105 $1,634
==== ====== ======
F-18
