<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-22635
Racing Champions Corporation
-----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4088307
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
-------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 630-790-3507
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X*
------- -------
*The Registrant became subject to the filing requirements of sections 13 or
15(d) of the Securities Exchange Act of 1934 on June 11, 1997.
On June 30, 1997, there were outstanding 13,242,382 shares of the Registrant's
$.01 par value common stock.
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RACING CHAMPIONS CORPORATION
FORM 10-Q
JUNE 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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Item 1. Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996.................................................... 4
Consolidated Statements of Income for the Three Months Ended
June 30, 1997 and for the Six Months Ended June 30, 1997 and Pro
Forma for the Three Months Ended June 30, 1997, the Three Months Ended
June 30, 1996, the Six Months Ended June 30, 1997 and the
Six Months Ended June 30, 1996........................................... 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and Pro Forma for the Six Months Ended June 30, 1997....... 6
Notes to Unaudited Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 15
Item 2. Changes to Securities..................................................... 15
Item 3. Defaults Upon Senior Securities........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................... 15
Item 5. Other Information......................................................... 17
</TABLE>
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures..................................................... 18
</TABLE>
3
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Item 1. Financial Statements.
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 5,143 $ 5,898
Accounts receivable, net 8,040 5,480
Inventory 2,065 1,264
Other current assets 716 1,599
Property and equipment, net 7,656 7,228
Excess purchase price over net assets acquired, net 86,043 87,140
Other non-current assets 87 471
------------------------------------
Total assets $109,750 $109,080
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 12,315 $9,426
Due to stockholders - 945
Senior subordinated debt - 8,020
Bank term loans 21,150 36,900
Junior subordinated debt - 41,379
Deferred income taxes 2,154 997
------------------------------------
Total liabilities 35,619 97,667
Preferred stock - 657
Common stock 132 79
Additional paid-in capital 69,668 8,782
Retained earnings 4,331 1,895
------------------------------------
Total stockholders' equity 74,131 11,413
------------------------------------
Total liabilities and stockholders' equity $109,750 $109,080
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-------------------------------------------
1997 ACTUAL 1997 PRO FORMA 1996 PRO FORMA
-------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales $22,945 $22,945 $18,018
Cost of sales 9,351 9,351 7,196
-------------------------------------------
Gross profit 13,594 13,594 10,822
Selling, general and administrative expenses 6,562 6,562 5,476
Amortization of intangible assets 554 554 559
-------------------------------------------
Operating income 6,478 6,478 4,787
Interest expense 2,114 392 764
Other expense 45 45 15
-------------------------------------------
Income before income taxes 4,319 6,041 4,008
Income tax expense 1,732 2,416 1,603
-------------------------------------------
Net income $2,587 $3,625 $2,405
===========================================
Net income per share $0.27 $0.27 $0.18
===========================================
Weighted average shares outstanding 9,524 13,571 13,571
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 ACTUAL 1997 PRO FORMA 1996 PRO FORMA
-------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales $38,132 $38,132 $30,278
Cost of sales 15,845 15,845 12,467
-------------------------------------------
Gross profit 22,287 22,287 17,811
Selling, general and administrative expenses 11,733 11,733 10,175
Amortization of intangible assets 1,108 1,108 1,119
-------------------------------------------
Operating income 9,446 9,446 6,517
Interest expense 4,494 784 1,562
Other expense (income) 88 88 (10)
-------------------------------------------
Income before income taxes 4,864 8,574 4,965
Income tax expense 1,950 3,430 1,986
-------------------------------------------
Net income $2,914 $5,144 $2,979
===========================================
Net income per share $0.33 $0.38 $0.22
===========================================
Weighted average shares outstanding 8,869 13,571 13,571
</TABLE>
See accompanying notes to consolidated financial statements.
5
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 ACTUAL 1997 PRO FORMA
-------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,914 $5,144
Depreciation and amortization 2,150 2,150
Deferred taxes and interest 1,973 597
Changes in operating assets and liabilities 390 390
--------------------------------
Net cash provided by operating activities 7,427 8,281
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,469) (1,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank term loans, net (15,750) (16,604)
Issuance of common stock 69,730 69,730
Redemption of preferred stock (8,996) (8,996)
Payments on shareholder debt (51,697) (51,697)
--------------------------------
Net cash provided (used) by financing activities (6,713) (7,567)
--------------------------------
Net increase (decrease) in cash and cash
equivalents (755) (755)
Cash and cash equivalents, beginning of period 5,898 5,898
--------------------------------
Cash and cash equivalents, end of period $5,143 $5,143
================================
Supplemental information
Cash paid during the period for:
Interest $6,311 N/A
Taxes 35 N/A
</TABLE>
Noncash activity:
In conjunction with the initial public offering of the Company's common stock,
937,084 shares of the Company's nonvoting common stock was converted into
937,084 shares of the Company's common stock.
See accompanying notes to consolidated financial statements.
6
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Racing Champions
Corporation ("the Company") and its wholly-owned subsidiaries, Racing
Champions, Inc. and Racing Champions Limited. All intercompany transactions
and balances have been eliminated.
The accompanying consolidated financial statements have been prepared by
management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of June 30, 1997 and the results of
operations for the three months and six months ended June 30, 1997 and cash
flows of the Company for the six month period then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and related notes included in the Company's prospectus dated June 11, 1997.
The results of operations for the three months and the six month periods ended
June 30, 1997 are not necessarily indicative of the operating results for the
full year.
NOTE 2 - RECAPITALIZATION
On April 30, 1996, an investor group consummated a recapitalization (the
"Recapitalization") which involved the following: (a) the Company's purchase
of all of the outstanding stock of Racing Champions, Inc. ("RCI") and
substantially all of the assets of Dods-Meyer, Ltd. ("DML") (collectively the
"RCI Group"); (b) the acquisition by Banerjan Company Limited (subsequently
renamed Racing Champions Limited) of substantially all of the assets of Racing
Champions Limited, Garnett Services, Inc. and Hosten Investment Limited
(collectively the "RCL Group"); and (c) the contribution by the Company of all
the outstanding stock of Racing Champions Limited to RCI.
The Recapitalization was financed with $40,000,000 of bank borrowings and the
issuance to management and the investor group of $8,020,000 of Senior
Subordinated Notes, $38,245,820 of Series A Junior Subordinated Notes,
$1,195,234 of Series B Junior Subordinated Notes, $6,666,790 of the Company's
Series A Preferred Stock, $1,195,233 of the Company's Series B Preferred Stock,
$118,840 of the Company's Nonvoting Common Stock and $881,160 of the Company's
Common Stock.
The acquisitions were accounted for using the purchase method of accounting.
The acquisitions involved the following: (i) the Company's purchase of all the
outstanding stock of RCI in exchange for the issuance by the Company of
three-day notes for $10,630,014, Senior Subordinated Notes of $1,327,808,
Series A Junior Subordinated Notes of $2,746,848 and Series B Junior
Subordinated Notes of $295,330, (ii) the Company's purchase of substantially
all of the assets DML for a cash payment of $1,728,107, and the issuance by the
Company of three-day notes for $28,304,102, Senior Subordinated Notes of
$4,025,525, Series A Junior Subordinated Notes of $8,369,985, Series B Junior
Subordinated Notes of $899,904, 2,422.06 shares of Series A Preferred Stock at
a price of $100 per share, 11,952.33 shares of Series B Preferred Stock at a
price of $100 per share, 1,354,908 shares of Common stock at a price of $0.13
per share and 937,084 shares of Nonvoting Common Stock at a price of $0.13 per
share, (iii) the Company's purchase of substantially all of the assets of
Racing Champions Limited for a cash payment of $1,500,000, (iv) the Company's
purchase of substantially all of the assets of Hosten Investment Limited for a
cash payment of $50,000, and (v) the Company's purchase of substantially all of
the assets of Garnett Services, Inc. for a cash payment of $17,976,667, and the
issuance by the Company of Senior Subordinated Notes of $2,666,667, Series A
Junior Subordinated Notes of $5,558,417, 13,163.26 shares of Series A Preferred
Stock at a price of $100 per shares, and 1,145,996 shares of Common Stock at a
price of $0.13 per share.
The excess purchase price over the book value of the net assets acquired was
$93,547,442. Of this excess $88,663,805 has been recorded as an intangible
asset and is being amortized on a straight-line basis over 40 years and
$4,883,637 was recorded as inventory and property and equipment.
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NOTE 3 - COMMON STOCK OFFERING
On June 17, 1997 the Company sold 5,357,142 shares of its common stock in an
underwritten public offering ("the Offering"). The Offering price was $14 per
common share. The net proceeds to the Company from the sale of the stock were
approximately $69 million, after deduction of commissions and offering
expenses. Approximately $9 million of the net proceeds was used to redeem
preferred stock issued in the Recapitalization; $43 million was used to repay
shareholder notes issued in the Recapitalization; and $17 million was used to
repay bank borrowings incurred in connection with the Recapitalization.
NOTE 4 - COMMON AND PREFERRED STOCK
Authorized and issued shares and par values of the Company's common and
preferred stock are as follows:
<TABLE>
<CAPTION>
AUTHORIZED SHARES OUTSTANDING AT SHARES OUTSTANDING AT
SHARES PAR VALUE JUNE 30, 1997 DECEMBER 31, 1996
---------- --------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Series A Preferred Stock 100,000 $.01 0 66,668
Series B Preferred Stock 20,000 $.01 0 11,952
Voting Common Stock 20,000,000 $.01 13,242,382 6,948,156
Nonvoting Common Stock 1,000,000 $.01 0 937,084
</TABLE>
On June 17, 1997, the Company filed its Restated Certificate of Incorporation
to eliminate the Series A Preferred Stock, Series B Preferred Stock and
Nonvoting Common Stock.
NOTE 5 - DEBT
In conjunction with the Offering, the Company revised and amended its bank
agreement on June 17, 1997. The amended credit agreement provides for a
revolving loan and a five-year term loan. The revolving loan allows the
Company to borrow up to $5 million at any time prior to June 28, 2002, based
upon levels of the Company's accounts receivable, inventory and cash flows. At
June 30, 1997 there were no borrowings on the revolving loan. The term loan is
in the principal amount of $22 million, with final maturity at June 28, 2002.
The outstanding balance on the term loan at June 30, 1997 was $21,150,000, of
which $3,950,000 was current.
Borrowings under the credit agreement bear interest, at the Company's option,
at the bank's base rate plus a margin that varies between 0.00% and 0.75% or at
a reserve adjusted Eurodollar rate plus a margin that varies between 1.50% and
2.25%. All amounts outstanding under the credit agreement are secured by
substantially all of the assets of the Company.
NOTE 6 - NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares of
common stock and common equivalent shares outstanding using the treasury stock
method. The financial statements have been retroactively adjusted to reflect a
7.885261-for-one stock split issued on April 9, 1997.
NOTE 7 - PRO FORMA DATA
The pro forma consolidated statements of income and cash flows give effect to
the Offering as if it had occurred as of the beginning of the period presented.
8
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following is a discussion and analysis of the Company's financial
condition, results of operations, liquidity and capital resources. The
discussion and analysis should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included
elsewhere herein.
RESULTS OF OPERATIONS
PRO FORMA THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO PRO FORMA THREE MONTHS
ENDED JUNE 30, 1996
Net sales. Net sales increased $4.9 million, or 27.2%, to $22.9 million
for the three months ended June 30, 1997 from $18.0 million for the three
months ended June 30, 1996. The sales growth in 1997 was aided by a slight
increase in prices but was primarily due to 19.3% growth in the racing replica
category and 16.2% growth in the non-racing vehicle category with the remainder
of the growth attributable to the collectible pewter figures category, a new
introduction in 1997.
Gross profit. Gross profit increased $2.8 million, or 25.9%, to $13.6
million for the three months ended June 30, 1997 from $10.8 million for the
three months ended June 30, 1996. The gross profit margin (as a percentage of
net sales) decreased slightly to 59.3% in 1997 compared to 60.0% in 1996. This
decrease is the net result of a gross profit margin improvement of
approximately 1% offset by the increase in Hong Kong shipments (to 63.9% of net
sales in the second quarter of 1997 from 51.5% of net sales in the second
quarter of 1996) which have a lower gross profit margin than domestic
shipments. There were no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.1 million, or 20.0%, to $6.6 million for
the three months ended June 30, 1997 from $5.5 million for the three months
ended June 30, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 28.8% for the three months ended June 30,
1997 from 30.6% for the three months ended June 30, 1996. The decrease in
selling, general and administrative expenses as a percentage of net sales was a
result of spreading fixed selling and administrative expenses over higher sales
volume. Amortization expense of $554,000 and $559,000 for the three months
ended June 30,1997 and 1996, respectively related to intangible assets created
in connection with the 1996 Recapitalization.
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Operating income. Operating income increased $1.7 million, or 35.4%, to
$6.5 million for the second quarter of 1997 from $4.8 million for the second
quarter of 1996. As a percentage of net sales, operating income increased to
28.4% for the second three months of 1997 from 26.7% for the second three
months of 1996.
Interest expense. Interest expense of $392,000 and $764,000 for the three
months ended June 30, 1997 and June 30, 1996, respectively related primarily to
bank term loans.
Income tax. Income tax expense for the three months ended June 30, 1997
and June 30, 1996 include provisions for federal, state and Hong Kong income
taxes at an effective rate of 40.0%.
PRO FORMA SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO PRO FORMA SIX MONTHS ENDED
JUNE 30, 1996
Net sales. Net sales increased $7.8 million, or 25.7%, to $38.1 million
for the six months ended June 30, 1997 from $30.3 million for the six months
ended June 30, 1996. The sales growth in 1997 was aided by a slight increase
in prices but was primarily due to 18.4% growth in the racing replica category
and 24.2% growth in the non-racing vehicle category with the remainder of the
growth attributable to the collectible pewter figures category, a new
introduction in 1997.
Gross profit. Gross profit increased $4.5 million, or 25.3%, to $22.3
million for the six months ended June 30, 1997 from $17.8 million for the six
months ended June 30, 1996. The gross profit margin (as a percentage of net
sales) decreased slightly to 58.5% in 1997 compared to 58.8% in 1996. This
decrease is the net result of a gross profit margin improvement of
approximately 1% offset by the increase in Hong Kong shipments (to 61.6% of net
sales in the first two quarters of 1997 from 51.7% of net sales in the first
two quarters of 1996) which have a lower gross profit margin than domestic
shipments. There were no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.5 million, or 14.7%, to $11.7 million for
the six months ended June 30, 1997 from $10.2 million for the six months ended
June 30, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 30.7% for the six months ended June 30,
1997 from 33.7% for the six months ended June 30, 1996. The decrease in
selling, general and administrative expenses as a percentage of net sales was a
result of spreading fixed selling and administrative expenses over higher sales
volume. Amortization expense of $1.1 million for the six months ended June 30,
1997 and 1996,
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respectively related to intangible assets created in connection
with the 1996 Recapitalization.
Operating income. Operating income increased $2.9 million, or 44.6%, to
$9.4 million for the first six months of 1997 from $6.5 million for the first
six months of 1996. As a percentage of net sales, operating income increased to
24.7% for the first six months of 1997 from 21.5% for the first six months of
1996.
Interest expense. Interest expense of $784,000 and $1.6 million for the
six months ended June 30, 1997 and June 30, 1996, respectively related
primarily to bank term loans.
Income tax. Income tax expense for the six months ended June 30, 1997 and
June 30, 1996 include provisions for federal, state and Hong Kong income taxes
at an effective rate of 40.0%.
THREE MONTHS ENDED JUNE 30, 1997
Net sales. Net sales were $22.9 million for the three months ended June
30, 1997. Net sales for the three months ended June 30, 1997 included three
product categories -- racing vehicle replicas, non-racing vehicles and
collectible pewter figures.
Gross profit. Gross profit was $13.6 million for the three months ended
June 30, 1997. The gross profit margin (as a percentage of net sales) was
59.3%. Net sales from Hong Kong shipments, which generate lower gross margins
due to price discounts, were 63.9% of net sales in the second quarter of 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $6.6 million for the three months ended June 30,
1997. As a percentage of net sales, selling, general and administrative
expenses were 28.8%. Amortization expense of $554,000 or 2.4% of net sales for
the three months ended June 30, 1997 related to intangible assets created in
connection with the 1996 Recapitalization.
Operating income. Operating income for the second quarter of 1997 was
$6.5 million or 28.4% of net sales. Excluding the amortization of intangible
assets, operating income was $7.0 million or 30.6% of net sales.
Interest expense. Interest expense of $2.1 million for the three months
ended June 30, 1997 related primarily to bank term loans and subordinated debt
incurred in connection with the Recapitalization.
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Income tax. Income tax expense for the three months ended June 30, 1997
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 40.0%.
SIX MONTHS ENDED JUNE 30, 1997
Net sales. Net sales were $38.1 million for the six months ended June 30,
1997. Net sales for the six months ended June 30, 1997 included three product
categories -- racing vehicle replicas, non-racing vehicles and collectible
pewter figures.
Gross profit. Gross profit was $22.3 million for the six months ended
June 30, 1997. The gross profit margin (as a percentage of net sales) was
58.5%. Net sales from Hong Kong shipments, which generate lower gross margins
due to price discounts, were 61.6% of net sales in the first half of 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $11.7 million for the six months ended June 30,
1997. As a percentage of net sales, selling, general and administrative
expenses were 30.7%. Amortization expense of $1.1 million or 2.9% of net sales
for the six months ended June 30, 1997 related to intangible assets created in
connection with the 1996 Recapitalization.
Operating income. Operating income for the first two quarters of 1997 was
$9.4 million or 24.7% of net sales. Excluding the amortization of intangible
assets, operating income was $10.5 million or 27.7% of net sales.
Interest expense. Interest expense of $4.5 million for the six months
ended June 30, 1997 related primarily to bank term loans and subordinated debt
incurred in connection with the Recapitalization.
Income tax. Income tax expense for the six months ended June 30, 1997
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $7.4 million during the six
months ended June 30, 1997. This was primarily due to earnings from operations
and increases in accounts payable and accrued expenses. Capital expenditures
for
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the six months ended June 30, 1997 were approximately $1.5 million, of
which approximately $1.3 million was for tooling.
On June 17, 1997, the Company revised and amended its credit agreement
with BankBoston, N.A. and certain other lenders. The revised and amended
credit agreement provides for a revolving loan, a five year term loan and the
issuance of letters of credit. The revolving loan allows the Company to borrow
up to $5 million at any time prior to June 28, 2002, based upon levels of the
Company's accounts receivable, inventory and cash flows and the amount of
letter of credit exposure. The Company has not borrowed under the revolving
loan as of June 30, 1997. The term loan in the principal amount of $22 million
is due on June 28, 2002. All borrowings under the credit agreement are secured
by substantially all of the assets of the Company.
The term loan and the revolving term loan bear interest, at the Company's
option, at BankBoston's base rate plus a margin that varies between 0.00% and
0.75% or at a reserve adjusted Eurodollar rate plus margin that varies between
1.50% and 2.25%. The applicable margin is based on the Company's financial
performance and is currently 0.00% for base rate loans and 1.50% for Eurodollar
loans. The credit agreement requires the Company to pay a commitment fee of
0.50% per annum on the average daily unused portion of the revolving loan.
BankBoston's Hong Kong branch has made available to the Company's Hong
Kong subsidiary a line of credit of up to $5 million. Amounts borrowed under
this line of credit bear interest at the bank's cost of funds plus 2% and are
cross-guaranteed by Racing Champions, Inc. and the Hong Kong subsidiary. At
June 30, 1997 the Hong Kong subsidiary had no outstanding borrowings under this
line of credit.
The Company's anticipated debt service obligations for remainder of 1997
for scheduled interest and principal payments are approximately $2.6 million.
Average annual debt service obligations through June 2002 are approximately $5
million.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the timing of
the racing season. Due to seasonal increases in demand for the
Company's racing replicas, working capital financing requirements are usually
highest during the third quarter and early in the fourth quarter. The Company
believes that its cash flow from operations, cash on hand and borrowings under
the credit agreement will be sufficient to meet its working capital and capital
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expenditure requirements and provide the Company with adequate liquidity to
meet anticipated operating needs for the foreseeable future. However, any
significant future product or property acquisitions (including up-front
licensing payments) may require additional debt or equity financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company did not hold any market risk sensitive instruments during the
period covered by this report.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 5, 1997, Petty Enterprises, Inc. filed a civil action in North
Carolina state court naming Racing Champions, Inc., a wholly-owned subsidiary
of the Company ("RCI"), as a defendant. The complaint relates to RCI's
production and sale of racing replicas bearing trademarks or trade names owned
by the plaintiff under a license agreement and makes a number of allegations
regarding unauthorized production, advertisement, use and sale by RCI of such
trademarks and trade names. The plaintiff seeks an unspecified amount of
compensatory and punitive damages and also seeks a court order that RCI cease
production, sale or promotion of products bearing the plaintiff's trademarks or
trade names and deliver all such products to the plaintiff for destruction.
RCI intends to vigorously defend the claims, although no assurances can be
given as to the outcome of this matter.
In the normal course of business the Company also may be involved in
various legal proceedings from time to time. The Company does not believe it
is currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The directors and stockholders of the Company, by unanimous written
consent dated April 8, 1997, adopted resolutions with respect to the following
matters:
1. Election of directors to serve until the Company's 1998 annual meeting
of stockholders.
2. Ratification of the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the year ending December 31, 1997.
3. Election of officers.
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4. Approval of the Company's Amended and Restated Certificate of
Incorporation.
5. Approval of a stock split of 7.885261 shares of Common Stock and
Nonvoting Common Stock for each outstanding share.
6. Approval of the Company's Amended and Restated By-Laws.
7. Approval of redemption of all outstanding shares of the Company's
Series A Preferred Stock and Series B Preferred Stock.
8. Approval of the Company's Stock Incentive Plan and the grant of
options to purchase an aggregate of 149,753 shares of Common Stock thereunder.
9. Approval of the Company's Employee Stock Purchase Plan.
10. Approval of Amendment No. 1 to the Racing Champions, Inc. 1996 Key
Employees Performance Compensation Plan.
11. Appointment of BankBoston, N.A. as the transfer agent and registrar
for the Company's Common Stock.
The directors and stockholders of the Company, by unanimous written
consent dated June 10, 1997, adopted resolutions with respect to the following
matters:
1. Approval of the Company's Amended and Restated Certificate of
Incorporation.
2. Approval of the Amended and Restated Credit Agreement among the
Company, Racing Champions, Inc. and BankBoston, N.A., as agent for the several
lenders.
3. Approval of a specimen stock certificate.
4. Approval of the issuance of 937,084 shares of Common Stock upon the
conversion of the Company's Nonvoting Common Stock.
16
<PAGE> 17
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
Incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-1 (Registration Statement
No. 333-22493) filed by the Company with the Securities and
Exchange Commission on April 11, 1997.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 13th day of August, 1997.
RACING CHAMPIONS CORPORATION
BY /s/ Robert E. Dods
-------------------------------------
Robert E. Dods, President
BY /s/ Curtis W. Stoelting
-------------------------------------
Curtis W. Stoelting, Vice President -
Finance and Operations and Secretary
18
<PAGE> 1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RACING CHAMPIONS CORPORATION
RACING CHAMPIONS CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
1. The Corporation was originally incorporated on April 24, 1996 as
Collectible Champions, Inc.
2. The Board of Directors of the Corporation and the stockholders of the
Corporation have approved the following Amended and Restated Certificate of
Incorporation of the Corporation in accordance with section 245 of the General
Corporation Law of the State of Delaware:
ARTICLE ONE
The name of the Corporation is Racing Champions Corporation.
ARTICLE TWO
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
19805. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
The total number of shares of stock which the Corporation has authority to
issue is 20,000,000 shares of Common Stock, par value $.01 per share.
ARTICLE FIVE
The Corporation is to have perpetual existence.
<PAGE> 2
ARTICLE SIX
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
alter or repeal the by-laws of the Corporation.
ARTICLE SEVEN
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws of the Corporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
by-laws of the Corporation. Election of directors need not be by written
ballot unless the by-laws of the Corporation so provide.
ARTICLE EIGHT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this certificate of incorporation in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE NINE
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE NINE shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE TEN
Each person who is or was or had agreed to become a director or officer of
the Corporation, or each such person who is or was serving or had agreed to
serve at the request of the Board of Directors or an officer of the Corporation
as an employee or agent of the Corporation or as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person), shall be indemnified by the Corporation to the full extent permitted
by the General
2
<PAGE> 3
Corporation Law of the State of Delaware or any other applicable laws
as now or hereafter in effect. Without limiting the generality or effect of
the foregoing, the Corporation may enter into one or more agreements with
any person which provide for indemnification greater or different than that
provided in this Article. No amendment to or repeal of this ARTICLE TEN shall
apply to or have any effect on the right to indemnity permitted or authorized
hereunder for or with respect to claims asserted before or after such amendment
or repeal arising from acts or omissions occurring in whole or in part before
the effective date of such amendment or repeal.
ARTICLE ELEVEN
The Corporation expressly elects to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Racing Champions Corporation has caused this
Certificate to be signed by Robert E. Dods, its President, and attested by
Curtis W. Stoelting, its Secretary, this 17th day of June, 1997.
RACING CHAMPIONS
CORPORATION
BY /s/ Robert E. Dods
-------------------------
Robert E. Dods, President
ATTEST:
BY /s/ Curtis W. Stoelting
------------------------------
Curtis W. Stoelting, Secretary
3
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