<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 September 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 X No
--- ---
On September 30, 1997, there were outstanding 13,242,382 shares of the
Registrant's $.01 par value common stock.
<PAGE> 2
RACING CHAMPIONS CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996........................................3
Consolidated Statements of Income for the Quarter
Ended September 30, 1997 and for the Nine Months
Ended September 30, 1997 and Pro Forma for the
Quarters Ended September 30, 1997 and 1996 and for
the Nine Months Ended September 30, 1997 and 1996............4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and Pro Forma for
the Nine Months Ended September 30, 1997.....................5
Notes to Unaudited Consolidated Financial Statements.........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................16
Item 2. Changes to Securities and Use of Proceeds...................16
Item 3. Defaults Upon Senior Securities.............................17
Item 4. Submission of Matters to a Vote of Security Holders.........18
Item 5. Other Information...........................................18
Item 6. Exhibits and Reports on Form 8-K............................18
Signatures..................................................19
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,189 $ 5,898
Accounts receivable, net 10,778 5,480
Inventory 2,018 1,264
Other current assets 1,126 1,599
Property and equipment, net 8,053 7,228
Excess purchase price over net assets acquired, 85,495 87,140
net
Other non-current assets 137 471
---------------------------------------
Total assets $ 112,796 $ 109,080
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 12,545 $ 9,426
Due to stockholders -- 945
Senior subordinated debt -- 8,020
Bank term loans 20,050 36,900
Junior subordinated debt -- 41,379
Deferred income taxes 2,583 997
---------------------------------------
Total liabilities 35,178 97,667
Preferred stock -- 657
Common stock 132 79
Additional paid in capital 69,668 8,782
Retained earnings 7,818 1,895
---------------------------------------
Total stockholders' equity 77,618 11,413
---------------------------------------
Total liabilities and stockholders'
equity $ 112,796 $ 109,080
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30,
--------------------------------------------------------
1997 ACTUAL 1997 PRO FORMA 1996 PRO FORMA
--------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales $ 22,487 $ 22,487 $ 23,034
Cost of sales 9,212 9,212 9,376
--------------------------------------------------------
Gross profit 13,275 13,275 13,658
Selling, general and administrative expenses 6,523 6,523 6,705
Amortization of intangible assets 554 554 560
--------------------------------------------------------
Operating income 6,198 6,198 6,393
Interest expense 319 307 722
Other expense 65 65 51
--------------------------------------------------------
Income before income taxes 5,814 5,826 5,620
Income tax expense 2,327 2,330 2,248
--------------------------------------------------------
Net income $ 3,487 $ 3,496 $ 3,372
========================================================
Net income per share $ .26 $ .26 $ .25
========================================================
Weighted average shares outstanding 13,571 13,571 13,571
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
1997 ACTUAL 1997 PRO FORMA 1996 PRO FORMA
--------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales $ 60,619 $ 60,619 $ 53,312
Cost of sales 25,057 25,057 21,843
--------------------------------------------------------
Gross profit 35,562 35,562 31,469
Selling, general and administrative expenses 18,256 18,256 16,880
Amortization of intangible assets 1,662 1,662 1,679
--------------------------------------------------------
Operating income 15,644 15,644 12,910
Interest expense 4,813 1,006 2,284
Other expense 153 153 41
--------------------------------------------------------
Income before income taxes 10,678 14,485 10,585
Income tax expense 4,277 5,794 4,234
--------------------------------------------------------
Net income $ 6,401 $ 8,691 $ 6,351
========================================================
Net income per share $.61 $.64 $.47
========================================================
Weighted average shares outstanding 10,451 13,571 13,571
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 ACTUAL 1997 PRO FORMA
---------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,401 $ 8,691
Depreciation and amortization 3,230 3,230
Deferred taxes and interest 2,402 1,026
Changes in operating assets and liabilities (2,486) (2,486)
---------------------------------------
Net cash provided by operating activities 9,547 10,461
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,393) (2,393)
Issuance of note receivable (50) (50)
---------------------------------------
Net cash used by investing activities (2,443) (2,443)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank term loans, net (16,850) (17,764)
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 (7,813) (8,727)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (709) (709)
Cash and cash equivalents, beginning of period 5,898 5,898
---------------------------------------
Cash and cash equivalents, end of period $ 5,189 $ 5,189
=======================================
Supplemental information:
Cash paid during the period for:
Interest $ 6,642 N/A
Taxes $ 36 N/A
Noncash activity:
</TABLE>
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 the consolidated financial statements.
5
<PAGE> 6
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 September 30, 1997 and the results of
operations for the three months and nine months ended September 30, 1997 and the
cash flows of the Company for the nine 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 month and nine month periods ended
September 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,
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$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 of
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 share, 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.
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.
7
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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>
SHARES OUTSTANDING AT SHARES OUTSTANDING AT
AUTHORIZED SHARES PAR VALUE SEPTEMBER 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 September 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 September 30, 1997 was $20,050,000, of
which $3,900,000 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.
8
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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 year presented.
The 1996 pro forma information also includes adjustments for the 1996
Recapitalization to exclude $2.3 million (net of income taxes) of nonrecurring
expenses.
9
<PAGE> 10
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 SEPTEMBER 30, 1997 COMPARED TO PRO
FORMA THREE MONTHS ENDED SEPTEMBER 30, 1996
Net sales. Net sales decreased $0.5 million, or 2.2%, to $22.5 million for
the three months ended September 30, 1997 from $23.0 million for the three
months ended September 30, 1996. The decrease in sales for the quarter was due
to the UPS strike in August and a temporary department-wide inventory reduction
directive for much of the third quarter at one of the Company's key customers.
Sales were positively impacted by a slight price increase in 1997.
Gross profit. Gross profit decreased $0.4 million , or 2.9%, to $13.3
million for the three months ended September 30, 1997 from $13.7 million for the
three months ended September 30, 1996. The gross profit margin (as a percentage
of net sales) decreased slightly to 59.1% in 1997 compared to 59.6% in 1996.
This decrease is a result of the decrease in net sales. There were no major
changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.2 million, or 3.0%, to $6.5 million for the
three months ended September 30, 1997 from $6.7 million for the three months
ended September 30, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased slightly to 28.9% for the three months ended
September 30, 1997 from 29.1% for the three months ended September 30, 1996.
This decrease is primarily due to lower royalty expense as a percentage of sales
because more 1997 sales were generated from non-racing products which carry
lower royalty rates. Amortization expense of $0.6 million for each of the three
month periods ended September 30, 1997 and 1996, related to intangible assets
created in conjunction with the 1996 Recapitalization.
Operating income. Operating income decreased $0.2 million, or 3.1%, to $6.2
million for the three months ended September 30, 1997 from $6.4 million for the
three months ended September 30, 1996. As a percentage of net sales, operating
<PAGE> 11
income decreased slightly to 27.6% for the three months ended September 30, 1997
from 27.8% for the three months ended September 30, 1996.
Interest expense. Interest expense of $0.3 million and $0.7 million for the
three months ended September 30, 1997 and September 30, 1996, respectively,
related primarily to bank term loans. The decrease in interest expense in
primarily due to lower outstanding bank term loans in 1997.
Income tax. Income tax expense for the three months ended September 30,
1997, and September 30, 1996 include provisions for federal, state and Hong Kong
income taxes at an effective rate of 40.0%.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, 1996
Net sales. Net sales increased $7.3 million, or 13.7%, to $60.6 million for
the nine months ended September 30, 1997 from $53.3 million for the nine months
ended September 30, 1996. The sales growth in 1997 was aided by a slight
increase in prices but was primarily attributable to $2.1 million growth in the
racing replica category and $1.7 million 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 $4.1 million, or 13.0%, to $35.6
million for the nine months ended September 30, 1997 from $31.5 million for the
nine months ended September 30, 1996. The gross profit margin (as a percentage
of net sales) decreased slightly to 58.7% in 1997 from 59.1% in 1996. This
decrease is the net result of a slight gross profit margin improvement offset by
the increase in Hong Kong shipments (to 57.7% of net sales in the first nine
months of 1997 from 50.9% of net sales in the first nine months 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 $1.4 million, or 8.3%, to $18.3 million for
the nine months ended September 30, 1997 from $16.9 million for the nine months
ended September 30, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 30.2% for the nine months ended September
30, 1997 from 31.7% for the nine months ended September 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 $1.7 million for each of the nine
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month periods ended September 30, 1997 and 1996, related to intangible assets
created in the 1996 Recapitalization.
Operating income. Operating income increased $2.7 million, or 20.9%, to
$15.6 million for the nine months ended September 30, 1997 from $12.9 million
for the nine months ended September 30, 1996. As a percentage of net sales,
operating income increased to 25.7% for the nine months ended September 30, 1997
from 24.2% for the nine months ended September 30, 1996.
Interest expense. Interest expense of $1.0 million and $2.3 million for the
nine months ended September 1997 and 1996, respectively, related primarily to
bank term loans.
Income tax. Income tax expense for the nine months ended September 30, 1997
and September 30, 1996 include provisions for federal, state and Hong Kong
income taxes at an effective rate of 40.0%.
THREE MONTHS ENDED SEPTEMBER 30, 1997
Net sales. Net sales were $22.5 million for the three months ended September
30, 1997. Net sales for the three months ended September 30, 1997 included three
product categories -- racing vehicle replicas, non-racing vehicles and
collectible pewter figures.
Gross profit. Gross profit was $13.3 million for the three months ended
September 30, 1997. The gross profit margin (as a percentage of net sales) was
59.1%. Net sales from Hong Kong shipments, which generate lower gross margins
due to price discounts, were 50.4% of net sales in the third quarter of 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $6.5 million for the three months ended September
30, 1997. As a percentage of net sales, selling, general and administrative
expenses were 28.9%. Amortization expense of $0.6 million, or 2.7% of net sales
for the three months ended September 30, 1997 related to intangible assets
created in connection with the 1996 Recapitalization.
Operating income. Operating income for the third quarter of 1997 was $6.2
million, or 27.6% of net sales. Excluding the amortization of intangible assets,
operating income was $6.8 million or 30.2% of net sales.
Interest expense. Interest expense of $0.3 million for the three months
ended September 30, 1997 related primarily to bank term loans incurred in
connection with the 1996 Recapitalization.
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Income tax. Income tax expense for the three months ended September 30, 1997
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 40.0%.
NINE MONTHS ENDED SEPTEMBER 30, 1997
Net sales. Net sales were $60.6 million for the nine months ended September
30, 1997. Net sales for the nine months ended September 30, 1997 included three
product categories -- racing vehicle replicas, non-racing vehicles and
collectible pewter figures.
Gross profit. Gross profit was $35.6 million for the nine months ended
September 30, 1997. The gross profit margin (as a percentage of net sales) was
58.7%. Net sales from Hong Kong shipments, which generate lower gross margins
due to price discounts, were 57.7% of net sales for the nine months ended
September 30, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $18.3 million for the nine months ended September
30, 1997. As a percentage of net sales, selling, general and administrative
expenses were 30.2%. Amortization expense of $1.7 million or 2.8% of net sales
for the nine months ended September 30, 1997 related to intangible assets
created in connection with the 1996 Recapitalization.
Operating income. Operating income for the first three quarters of 1997 was
$15.6 million or 25.7%. Excluding the amortization of intangible assets,
operating income was $17.3 million or 28.5% of net sales.
Interest expense. Interest expense of $4.8 million for the nine months ended
September 30, 1997 related primarily to bank term loans and subordinated debt
incurred in connection with the Recapitalization. Subordinated debt was repaid
with a portion of the proceeds from the initial public offering in June, 1997.
Income tax. Income tax expense for the nine months ended September 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 $9.5 million during the nine
months ended September 30, 1997. This was primarily due to earnings from
operations. Capital expenditures for the nine months ended September 30, 1997
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were approximately $2.4 million, of which approximately $2.1 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 had no outstanding borrowings under the revolving loan as
of September 30, 1997. The outstanding balance on the term loan at September 30,
1997 was $20,050,000, of which $3,900,000 was current. 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. As of
September 30, 1997, the Hong Kong subsidiary had not borrowed under this line of
credit.
The Company's anticipated debt service obligations for remainder of 1997 for
scheduled interest and principal payments are approximately $1.3 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 expenditure
requirements
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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 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 filed an answer
on June 30, 1997, denying all claims and asserting a counterclaim with respect
to approximately $80,000 of unpaid receivables. On July 12, 1997, the plaintiff
filed a reply denying RCI's counterclaim. 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 and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On June 17, 1997, the Company sold 5,357,142 shares of common
stock and certain selling stockholders sold 392,858 shares of common stock in an
underwritten public offering (the "Offering"), which constituted all of the
securities registered pursuant to the Company's Registration Statement on Form
S-1 (Registration No. 333-22493). The Securities and Exchange Commission
declared the Registration Statement effective on June 11, 1997. The managing
underwriters of the Offering were Robert W. Baird & Co.
Incorporated ("Baird"), William Blair & Company, L.L.C. and J.C. Bradford & Co.
16
<PAGE> 17
The selling stockholders sold 392,858 shares of common stock in the
offering for an aggregate offering price of $5,500,012 and received aggregate
net proceeds of $5,115,011.16.
The following table summarizes the offering expenses incurred by the
Company and the net proceeds received by the Company pursuant to the Offering:
Aggregate offering price of shares sold by the Company........ $ 74,999,988
Underwriting discounts and commissions........................ 5,249,999(1)
Finder's fees................................................. --
Expenses paid to or for underwriters.......................... --
Other expenses................................................ 949,253
Total expenses................................................ 6,199,252
Net offering proceeds to the Company.......................... 68,800,736
(1) Includes $1,124,550 paid to Baird. Certain entities related to Baird
held in the aggregate more than 10% of the outstanding shares of Common
Stock immediately prior to the Offering.
The following table summarizes the Company's use of the net proceeds of
the Offering:
Construction of plant, building and facilities................$ --
Purchase and installation of machinery and equipment.......... --
Purchase of real estate....................................... --
Acquisition of other businesses............................... --
Repayment of indebtedness..................................... 59,804,250(1)
Working capital............................................... --
Temporary investment.......................................... --
Other -- redemption of preferred stock........................ 8,996,486(2)
(1) Includes $40,264,354 paid to directors, officers, holders of 10% or more
of a class of the Company's equity securities or affiliates of the
Company.
(2) Includes $8,352,854 paid to directors, officers, holders of 10% or more
of a class of the Company's equity securities or affiliates of the
Company.
Item 3. Defaults Upon Senior Securities.
Not applicable.
17
<PAGE> 18
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company
during the third quarter of 1997.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.1
of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-22635)
filed by the Company with the Securities and Exchange
Commission on August 14, 1997).
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).
27 Financial Data Schedule
(b) Reports on Form 8-K: None in the third quarter of 1997.
<PAGE> 19
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 November, 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
19
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