RACING CHAMPIONS CORP, S-1/A, 1997-05-09

RACING CHAMPIONS CORP
S-1/A, 1997-05-09
MISC DURABLE GOODS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997.

REGISTRATION STATEMENT NO. 333-22493
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

PRE-EFFECTIVE AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

RACING CHAMPIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 5090 36-4088307
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

800 ROOSEVELT ROAD
BUILDING C, SUITE 320
GLEN ELLYN, ILLINOIS 60137
(630) 790-3507
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

ROBERT E. DODS
PRESIDENT
RACING CHAMPIONS CORPORATION
800 ROOSEVELT ROAD
BUILDING C, SUITE 320
GLEN ELLYN, ILLINOIS 60137
(630) 790-3507
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C>
MICHAEL T. PEPKE, ESQ. THOMAS J. MURPHY, ESQ.
JAMES M. BEDORE, ESQ. TIMOTHY R.M. BRYANT, ESQ.
REINHART, BOERNER, VAN DEUREN, MCDERMOTT, WILL & EMERY
NORRIS & RIESELBACH, S.C. 227 WEST MONROE STREET
1000 NORTH WATER STREET, SUITE
2100 CHICAGO, IL 60606-5096
MILWAUKEE, WI 53202 (312) 372-2000
(414) 298-1000
</TABLE>

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. [ ]
------------------------

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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 9, 1997

PROSPECTUS

5,000,000 SHARES

Racing Champions Logo

COMMON STOCK
------------------------

All of the 5,000,000 shares of Common Stock offered hereby are being sold
by Racing Champions Corporation. Certain of the net proceeds to the Company will
be used to redeem all of the Company's outstanding shares of preferred stock and
to repay indebtedness to the Company's current stockholders. See "Use of
Proceeds."

Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price for the
Common Stock will be between $12.00 and $14.00 per share. See "Underwriting" for
information relating to the determination of the initial public offering price.

The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "RACN."

PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION DISCUSSED
UNDER THE CAPTION "RISK FACTORS" AT PAGE 8.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
==================================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).............................. $ $ $
==================================================================================================================
</TABLE>

(1) The Company and certain stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses, estimated to be $750,000, payable by the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
357,142 additional shares of Common Stock and certain stockholders of the
Company have granted the Underwriters a 30-day option to purchase up to
392,858 additional shares of Common Stock on the same terms and conditions
as set forth above to cover over-allotments, if any. The Company will not
receive any proceeds from the sale of any additional shares by these
stockholders. See "Principal Stockholders." If the Underwriters exercise the
over-allotment option in full, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ , the
total Proceeds to Company will be $ and the total proceeds to these
stockholders will be $ . See "Underwriting."
------------------------

The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to their right to reject orders in whole or in
part. It is expected that delivery of the certificates representing shares of
Common Stock will be made on or about , 1997 through The
Depository Trust Company or at the offices of Robert W. Baird & Co.
Incorporated, Milwaukee, Wisconsin.

ROBERTW. BAIRD & CO.
INCORPORATED

WILLIAM BLAIR & COMPANY

J.C. BRADFORD & CO.

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3

[PICTURES OF PRODUCTS]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in the Prospectus. Unless indicated otherwise, the information
contained in this Prospectus (i) gives effect to the recapitalization
consummated on April 30, 1996 in which the Company was formed as a holding
company to acquire the RCI Group and the RCL Group (see "The Recapitalization"),
(ii) assumes that the Underwriters' over-allotment option is not exercised,
(iii) has been restated to give retroactive effect to a stock split of 7.885261
shares for each share of Common Stock and an amendment and restatement of the
Company's Certificate of Incorporation and By-Laws effected or to be effected
prior to consummation of the Offering, and (iv) gives effect to the conversion
of all of the outstanding shares of the Company's Nonvoting Common Stock, par
value $.01 per share, into an aggregate of 937,084 shares of Common Stock upon
the completion of the Offering. Unless indicated otherwise, references to the
"Company" or "Racing Champions" are to Racing Champions Corporation and its
subsidiaries, including the operations of the RCI Group and the RCL Group prior
to April 30, 1996.

THE COMPANY

Racing Champions is a leading producer and marketer of collectible scaled
die cast vehicle replicas(1). The Company is best known for its extensive line
of officially licensed, high quality collectible replicas of actual race cars
and related vehicles from the five most popular U.S. professional racing series,
including NASCAR. Since its inception in 1989, the Company has capitalized on
the growing popularity of motor sports by offering an expanding line of high
quality, affordable racing replicas targeted toward racing fans and adult
collectors. The Company believes that it had the largest domestic market share
in 1996 in the die cast racing replica category(1). Beginning in 1996, the
Company successfully expanded into non-racing collectibles by introducing the
Racing Champions Mint(TM) line of high quality die cast replicas of classic and
late-model vehicles. The Company is continuing this expansion in 1997 by
introducing an additional line of non-racing vehicle replicas and two new lines
of collectible pewter figures. From 1990, the Company's first full year of
operations, through 1996, the Company's net sales grew from approximately $5
million to $66 million. The Company intends to further its growth by (i)
continuing to capitalize on the growing popularity of motor sports to expand its
racing replica business, and (ii) leveraging its brand name, reputation with
collectors, and established distribution and manufacturing relationships by
developing new collectible products.

The Company's strategy is to develop affordable, collectible replicas
centered around themes for which significant enthusiast, hobbyist and collector
interest exists. In order to produce authentic products and create interest and
credibility with collectors and enthusiasts, the Company obtains official
licenses which allow for the reproduction of distinguishing characteristics,
trade names and trademarks. The Company enhances the collectibility of its
products by carefully managing product quantities and staggering product release
dates, continuously freshening its product offerings, producing special
editions, utilizing distinctive packaging and adding other special features. In
order to broaden the potential collector base for its products, the Company's
replicas are affordably priced, typically under $30 at retail. Although the
Company employs traditional collectible distribution channels such as collector
and hobby shops, the Company principally distributes its products through mass
merchants. The Company believes that its established shelf space at these mass
merchants enables it to (i) reach more customers with greater frequency given
the regular shopping patterns of its target market at mass merchants, and (ii)
sell a higher volume of products resulting in substantial economies of scale.
The resulting cost reductions make the Company's products more affordable to
consumers and more profitable for itself as well as retailers. In addition,
because of electronic links in place with its mass merchant customers, the
Company is better able to monitor retail inventories and point of sale
information and adjust production accordingly.

Racing Replicas. The racing replica category is well suited to the
Company's strategy because of (i) the popularity of major racing series such as
NASCAR, one of the fastest growing spectator sports in the United States, (ii)
the significant interest in collecting racing replicas among racing fans and
adult die cast collectors and (iii) the wide variety of frequently changing
vehicles to replicate. Racing Champions' largest product line is a comprehensive
collection of scaled stock cars, trucks and team transporters replicating most
of the
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vehicles competing in the current year's NASCAR Winston Cup Series, Busch Grand
National Series and Truck Series by Craftsman. The Company also produces
replicas from other popular racing series including National Hot Rod Association
drag racing ("NHRA"), Championship Auto Racing Teams ("CART") and Indy Racing
League ("IRL") Indy style racing, and World of Outlaws sprint car racing ("World
of Outlaws"), as well as Honda and Kawasaki racing motorcycles. Racing Champions
produced over 900 different styles of racing replicas in 1996. The Company's
racing replicas range in size from 1:144 scale to 1:9 scale and retail at prices
ranging from $1 to $30.

In order to produce its wide variety of racing replicas, the Company has
entered into over 450 different licensing agreements with racing teams, drivers
and sponsors, vehicle manufacturers and major racing series sanctioning bodies.
Because several aspects of a racing vehicle's outward appearance change
frequently due to changes in sponsors, vehicle styling, graphics and drivers,
many of the Company's replicas also change frequently, thereby enhancing their
collectibility. The Company further enhances collectibility by releasing
different monthly assortments of the various racing replicas, producing annual
and special editions and adding special features such as serial numbers, vehicle
display stands, die cast emblems and trading cards featuring the driver.
Established secondary markets exist for many of the Company's products and the
market values of the Company's products are regularly reported in a variety of
die cast collector magazines. In many cases, the value of a Racing Champions
product in the secondary markets exceeds the product's original retail price.

Non-racing Vehicle Replicas. In addition to racing replicas, the Company
has identified significant market opportunities for collectible non-racing die
cast vehicles. During 1996, the Company introduced Racing Champions Mint, a line
of high quality, collectible die cast vehicles replicating classic and
late-model cars and trucks from the 1930's to the present. The Racing Champions
Mint line features a series of limited production, serial numbered, highly
detailed replicas produced in color schemes matching those used on the actual
vehicle. This product line is sold through mass merchants at a retail price of
approximately $5 for each 1:64 scale vehicle and in its first year of production
generated sales for the Company of approximately $9.7 million. In early 1997,
the Company complemented the Racing Champions Mint series with the Racing
Champions Hot Rod Collection(TM), a new line of collectible die cast hot rod
replicas which is supported by licensing and marketing arrangements with
Petersen Publishing Company's Hot Rod Magazine.

Collectible Pewter Figures. The Company is targeting comic book and sports
enthusiasts and figure collectors with two new lines of collectible pewter
figures which it began shipping in 1997. The first line is a series of pewter
replicas of various comic book characters in action poses. Each figure is
mounted on a die cast stand in front of an encased miniature reproduction of a
comic book cover on which the character appeared ("Comic Book Champions"(TM)).
The Company has obtained licenses from Marvel Characters, Inc. and DC Comics (a
division of the Time Warner Entertainment Company L.P.), two of the leading
publishers of comic books in the United States, which will allow the Company to
replicate characters such as Superman(R), Batman(R) and Spiderman(R). The second
line consists of pewter replicas of popular athletes. Each athlete is mounted on
a die cast stand in front of an encased miniature reproduction of a Sports
Illustrated magazine cover on which the athlete appeared ("Sports
Champions"(TM)). In addition to a licensing arrangement with Sports Illustrated,
the Company is negotiating licenses from the major sports leagues (including the
National Football League, Major League Baseball, the National Hockey League and
the National Basketball Association) and popular athletes (including Muhammad
Ali, Frank Thomas, Ken Griffey, Jr., Joe Montana and Arnold Palmer). The Company
has received commitments from its major customers to purchase both the Comic
Book Champions and Sports Champions product lines.

Product Distribution and Supply. Approximately 76% of the Company's 1996
net sales were made through mass merchants, including K-Mart, Target, Toys 'R'
Us and Wal-Mart. Due to the success of its product offerings, the Company has
been able to increase shelf space for its products at each of its major
customers. The Company believes that its current shelf space and relationships
with its mass merchant customers provide it with a significant competitive
advantage in introducing new products and maintaining its leading share of the
racing replica market. The Company has maintained its profit margins while
selling through mass merchants by realizing economies of scale, diligently
controlling its costs and offering its mass market customers the opportunity to
earn an attractive mark-up on its products. Racing Champions also sells through
wholesalers who, in turn, distribute to hobby and collector shops (approximately
15% of 1996 net
4
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sales). The Company's remaining 9% of 1996 net sales were made through companies
which offered customized products for premium/promotional purposes.

Virtually all of the Company's products are manufactured by six
independently owned factories located in China. All but two of these factories
are exclusively dedicated to manufacturing the Company's products and all are
privately owned by independent Chinese entrepreneurs. The Company, through
Racing Champions Limited, its Hong Kong subsidiary, manages all key aspects of
its product manufacturing in China, including sourcing raw materials and
packaging, performing engineering and graphic art functions, executing
production schedules, providing on site quality control and safety testing and
delivering shipments for export from Hong Kong to the United States. The Company
believes its dedicated Chinese supplier base together with the local oversight
and coordination provided by its Hong Kong subsidiary provide it with certain
competitive advantages including a rapid product development capability as well
as a flexible, reliable and high quality supply source.

Formation. Racing Champions Corporation is a holding company which was
formed in April 1996 by an investor group led by Willis Stein & Partners, L.P.,
a private investment fund, for the purpose of acquiring both Racing Champions,
Inc., a privately held Illinois corporation formed in 1989 (together with an
affiliated company, the "RCI Group"), and Racing Champions Limited, a privately
held Hong Kong corporation formed simultaneously in 1989 (together with certain
affiliated companies, the "RCL Group"). See "The Recapitalization." The RCI
Group and the RCL Group, while under different ownership, effectively operated
as one entity with the RCI Group managing the licensing, product development and
sales operations, and the RCL Group managing the overseas manufacturing and
shipping operations. The RCI Group was owned equally by Robert E. Dods and Boyd
L. Meyer. The RCL Group was owned by Peter K.K. Chung. Messrs. Dods, Meyer and
Chung continue to serve as senior executives of the Company and collectively
will own approximately 30.3% of the outstanding Common Stock following the
Offering.

The Company's principal executive offices are located at 800 Roosevelt
Road, Building C, Suite 320, Glen Ellyn, Illinois 60137 and its telephone number
is (630) 790-3507. The Company maintains World Wide Web sites at
www.collectchamps.com and www.racingchamps.com.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........... 5,000,000 shares
Common Stock to be outstanding after the
Offering....................................
12,885,240 shares(2)
Use of Proceeds...............................
To repay subordinated debt owed to stockholders of
the Company and bank borrowings, and to redeem all of
the outstanding shares of the Company's Series A
Preferred Stock and Series B Preferred Stock. See
"Use of Proceeds."
Nasdaq National Market symbol.................
RACN
</TABLE>

- ---------------

(1) Information about the market for scaled die cast vehicle replicas and the
die cast racing replica category has been derived from information published
by the NPD Group, Inc., an independent research firm which compiles data for
its subscribers, together with the Company's internal research regarding the
market.

(2) Does not include 332,033 shares issuable upon exercise of options granted
pursuant to the Company's 1996 Key Employees Stock Option Plan. In addition,
it is anticipated that options to purchase up to 148,752 shares of Common
Stock will be granted at the initial public offering price on or before the
closing of the Offering under the Company's 1997 Stock Incentive Plan,
including options to purchase up to 78,852 shares of Common Stock that will
be accompanied by reload options. See "Management -- Executive
Compensation -- 1996 Key Employees Stock Option Plan and "--Stock Incentive
Plan."

5
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------------------
1993(1) 1994(1) 1995(1) 1996 PRO FORMA(2)(3) 1996 1997
-------- -------- -------- -------------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
NET SALES:
Company................... $ -- $ -- $ -- $ 49,385 $ -- $15,187
RCI Group................. 31,047 43,268 48,592 16,614 12,260 --
RCL Group................. 15,658 23,672 32,301 13,027 5,595 --
Intercompany and redundant
sales.................. (15,658) (23,672) (32,301) (13,027) (5,595) --
-------- ------- -------
$ 65,999 $12,260 $15,187
======== ======= =======
GROSS PROFIT:
Company................... $ -- $ -- $ -- $ 27,839 $ -- $ 8,694
RCI Group................. 14,151 18,056 23,036 7,210 5,248 --
RCL Group................. 4,147 5,770 6,216 2,483 1,741 --
-------- ------- -------
$ 37,532 $ 6,989 $ 8,694
======== ======= =======
OPERATING INCOME:
Company................... $ -- $ -- $ -- $ 10,864 $ -- $ 2,969
RCI Group................. 6,141 8,565 9,724 108 1,767 --
RCL Group................. 1,544 2,321 2,751 506 (37) --
-------- ------- -------
$ 11,478 $ 1,730 $ 2,969
======== ======= =======
NET INCOME(4):
Company................... $ -- $ -- $ -- $ 4,373 $ -- $ 1,225
RCI Group................. 5,722 8,224 9,392 72 511 --
RCL Group................. 1,216 2,339 2,790 299 (44) --
-------- ------- -------
$ 4,744 $ 467 $ 1,225
======== ======= =======
Net income per share...... $ 0.36 $ 0.03 $ 0.09
Weighted average shares
outstanding............ 13,214 13,214 13,214
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ (8,069) $ (269)
Total assets........................ 102,595 102,595
Total debt.......................... 81,035 30,107
Total stockholders' equity.......... 11,741 62,669
</TABLE>

- ---------------

(1) The 1993, 1994 and 1995 amounts represent certain historical financial data
of the RCI Group and RCL Group (converted from fiscal year end March 31 to
December 31).

(2) The pro forma financial data for the year ended December 31, 1996 gives
effect to the Recapitalization, the Offering and the application of the
estimated net proceeds from the Offering as if each had occurred on January
1, 1996. The pro forma financial data for the three months ended March 31,
1997 gives effect
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to the Offering and the application of the estimated net proceeds from the
Offering as if it had occurred on January 1, 1997.

(3) Pro forma statement of income data for the year ended December 31, 1996
include a nonrecurring incentive bonus expense of $2,389,000 incurred in
connection with the Recapitalization and a purchase accounting inventory
write-up adjustment of $1,367,000 as a result of the Recapitalization.
Excluding the effects of the nonrecurring incentive bonus expense and the
inventory write-up adjustment, the Company's pro forma gross profit,
operating income, net income and net income per share for the year ended
December 31, 1996 would have been:

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Net sales................................................... $65,999 100.0%
Gross profit................................................ 38,899 58.9
Operating income............................................ 15,234 23.1
Net income.................................................. 6,997 10.6
Net income per share........................................ $ 0.53
</TABLE>

(4) Net income for the years ended 1993, 1994 and 1995 includes a provision for
Hong Kong income taxes at an effective rate of 16.5% for certain entities,
no provision for other entities structured as tax-free British Virgin
Islands entities and no federal income tax provision for certain entities
structured as S corporations.

(5) The "As Adjusted" amounts give pro forma effect to (i) the issuance of
5,000,000 shares of Common Stock in the Offering at an assumed price of
$13.00 per share, net of estimated underwriting discounts and commissions of
$4,550,000 and estimated offering expenses of $750,000 and (ii) the
repayment of $50,928,000 of indebtedness and the redemption of $8,772,000 of
preferred stock.
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RISK FACTORS

Prospective investors should carefully consider the following risk factors,
in addition to the other information contained in this Prospectus, in evaluating
the Company and its business before purchasing shares of the Common Stock
offered hereby. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Future events and the Company's actual results
could differ materially from the results reflected in these forward-looking
statements.

CONSUMER ACCEPTANCE OF PRODUCTS

The markets for the Company's products are subject to rapidly changing
consumer preferences. The Company's historical growth has been based in part on
the growing interest in racing and motor sports and the evolution of the
preferences of racing enthusiasts and collectors toward the Company's products.
A decline in the popularity of racing and motor sports or a change in consumer
preferences could have a material adverse effect on the Company. The Company's
future growth will depend in large part upon its ability to continue to
conceive, design, source and market new products and upon continuing market
acceptance of its existing and future products. Significant delays in the
introduction of, or the failure to introduce, new products or additions to its
existing product lines or the failure of the Company's existing or future
products to maintain or receive substantial market acceptance could also have a
material adverse effect on the Company. In 1997, the Company introduced a
collection of pewter figures, its first significant non-vehicle product. There
can be no assurance that such products will achieve consumer acceptance. See
"Business -- Products."

COMPETITION

The Company operates in a highly competitive market. The Company competes
with several larger domestic and foreign companies, such as Mattel, Inc.
("Mattel") and Hasbro, Inc. ("Hasbro") which have recently entered the racing
replica market, and with other smaller producers of racing replicas. The smaller
producers of racing replicas, such as Action Performance Companies, Inc.,
generally distribute their products through direct marketing, collector clubs
and wholesalers who in turn distribute through hobby and collector shops. In
contrast, the Company distributes products primarily through national retailers
and mass merchants including K-Mart, Target, Toys 'R' Us and Wal-Mart. Mattel
and Hasbro also intend to distribute their racing replicas through national
retailers. The Company also competes with domestic and foreign producers of
scaled die cast toy vehicles. Many of the Company's competitors have greater
financial, technical, marketing and other resources than the Company. There can
be no assurance that the Company will continue to be able to compete
successfully in the future. See "Business -- Competition."

RELIANCE ON KEY SUPPLIERS

The Company depends upon six independently owned factories located in China
to manufacture its racing replicas and certain other products. As a result, any
difficulties encountered by the independent manufacturers which result in
product defects, production delays, cost overruns or the inability to fulfill
orders on a timely basis could have a material adverse effect on the Company.
Any significant accident, labor dispute or other disruption at one or more of
these factories also could adversely affect the Company's business. See
"Business -- Manufacturing" and "-- Risks of Foreign Manufacturing."

RISKS OF FOREIGN MANUFACTURING

The Company is subject to numerous risks inherent in foreign manufacturing,
including the following: fluctuations in currency exchange rates; economic and
political instability; restrictive actions by foreign governments; the laws and
policies of the United States affecting the importation of goods (including
duties, quotas and taxes); and trade and foreign tax laws.

Substantially all of the Company's products are subject to United States
duties and regulations pertaining to the importation of goods. Currently, the
Company's products are imported duty free. The United States may, from time to
time, impose new duties, tariffs, quotas or other charges or restrictions, or
adjust presently prevailing quotas, duties or tariff levies, which could
adversely affect the Company's business, financial condition or results of
operations or its ability to continue to import products at current or increased
levels.

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From time to time, the Company may also be involved in disputes with the United
States Customs Service regarding the amount of duty to be paid, the value of
merchandise to be reported or other customs regulations with respect to certain
of the Company's imports, which may result in the payment of additional duties
and/or penalties. The Company cannot predict what regulatory changes may occur
or the type or amount of any financial impact on the Company which those changes
may have in the future.

TRADING STATUS OF CHINA

China, where all of the Company's products are manufactured, is currently
afforded "Most Favored Nation" status and generally is not subject to United
States retaliatory duties. The "Most Favored Nation" status of China was last
renewed in June of 1996 and is reviewed on an annual basis. Various commercial
and legal practices widespread in China, including the handling of intellectual
properties, are under review by the United States government and, accordingly,
the duty treatment of goods imported from China is subject to political
uncertainties. To the extent China ceases to have "Most Favored Nation" status
or its exports become subject to political retaliation, the cost of importing
products from China could increase significantly. The Company could also be
subject to the imposition of retaliatory tariffs or other import restrictions
such as quotas as a result of a trade dispute between China and the United
States. These increased tariffs or other restrictions could be imposed whether
or not the trade dispute itself involves products of the type imported by the
Company. Such increased tariffs or other trade restrictions could also have a
material adverse effect on the Company.

RISKS RELATING TO HONG KONG

The Company conducts operations in Hong Kong through its Hong Kong
Subsidiary. On July 1, 1997, sovereignty over Hong Kong will be transferred from
the United Kingdom to China, and Hong Kong will become a Special Administrative
Region of China. At the present time, the Company is unable to predict the
effect, if any, that such change will have on the Company's or the Hong Kong
Subsidiary's business, financial condition or results of operations.

FOREIGN CURRENCY RISK

The Company's sales are denominated in U.S. dollars. The Company's
purchases of finished goods from the Chinese manufacturers are denominated in
Hong Kong dollars. Expenses for these manufacturers are often denominated in
Chinese Renminbi. The Company is subject to a variety of risks associated with
changes among the relative values of the U.S. dollar, the Hong Kong dollar and
Renminbi. Any material increase in the value of the Hong Kong dollar or Renminbi
relative to the U.S. dollar would increase the Company's expenses and therefore
could have a material adverse effect on the Company. Since 1983, the Hong Kong
government has maintained a policy of linking the U.S. dollar and the Hong Kong
dollar. There can be no assurance that this link will be continued, although the
Company is not aware of any intention of the Hong Kong government or China to
abandon the link. There has been significant volatility in the exchange rates of
Renminbi to U.S. dollars in recent years. Over the last five years, the Renminbi
has experienced significant devaluation against most major currencies. The
Company does not hedge foreign currency risk.

DEPENDENCE ON SIGNIFICANT CUSTOMERS; CONCENTRATION OF ACCOUNTS RECEIVABLE

The Company's success is, in part, dependent upon the continuing
willingness of leading retailers to purchase and provide shelf space for the
Company's products. For example, during 1996, approximately 17%, 15%, 6% and 16%
of the Company's net sales were made to K-Mart, Target, Toys 'R' Us and
Wal-Mart, respectively. The Company does not have long-term contracts with its
customers. An adverse change in the Company's relationship with or the financial
viability of one or more of these customers could have a material adverse effect
on the Company. In addition, certain of these retailers generally purchase large
quantities of the Company's products on credit, which may cause a concentration
of accounts receivable among some of the Company's largest customers. Any
inability or unwillingness to pay these accounts receivable when due by one or
more of the Company's largest customers could adversely affect the Company's
financial condition. Although the Company maintains credit insurance to reduce
the risk associated with the accounts receivable from 14 of its major customers,
the amount of this insurance generally does not cover the total amount of the
accounts receivable from any particular customer. See "Business -- Sales and
Distribution."

9
<PAGE> 11

DEPENDENCE ON LICENSING ARRANGEMENTS

The Company markets virtually all of its products under licenses from other
parties. For example, the Company markets its racing replicas pursuant to
licensing arrangements with race team owners, drivers, sponsors, agents, vehicle
manufacturers and major racing series sanctioning bodies. The Company markets
its collectible figures pursuant to licensing arrangements with popular sports
figures and creators of certain comic book characters. These licensing
arrangements are generally limited in scope and duration and generally authorize
the sale of specific licensed products on a nonexclusive basis for a limited
period of time. The termination, cancellation or inability to renew certain of
the Company's existing licensing arrangements, or the inability to develop and
enter into new licensing arrangements, could have a material adverse effect on
the Company.

As a result of increased competition among manufacturers for licenses, the
Company may, in the future, be required to pay licensors higher royalties and
higher minimum guaranteed payments in order to obtain or retain attractive
properties for development of existing and new product lines. This increased
competition could have an adverse effect on the profitability of these licenses.
In addition, exclusive or other licensing arrangements granted to competitors or
other parties could limit the Company's future ability to produce replicas of
certain characters, athletes, vehicles, drivers and sponsors, including replicas
of vehicles or entities currently being produced. For example, a competitor
currently has licenses with Dale Earnhardt and Jeff Gordon which restrict the
Company's ability to produce replicas of these drivers' racing vehicles.

The Company generally does not pursue exclusive licenses. However, the
Company has held the exclusive license to use the NASCAR trademark on die cast
racing replicas and related packaging since 1992. The Company has renewed its
license agreement with NASCAR on a nonexclusive basis for three years commencing
on January 1, 1998. The Company anticipates that certain of its competitors will
also license the NASCAR trademark on a nonexclusive basis for use on racing
replicas beginning in 1998. This could result in increased competition for the
Company's NASCAR racing replicas. See "Business -- Licenses."

RELIANCE ON KEY PERSONNEL

The Company relies heavily on its senior managers, including Robert E.
Dods, Boyd L. Meyer and Peter K.K. Chung (the "Founding Managers"). Although the
Company has entered into employment agreements with the Founding Managers that
extend through April 30, 1999, there can be no assurance that the Company will
be able to retain them or its other key employees in the future. The loss of the
services of any of the Founding Managers could have a material adverse effect on
the Company. The Company maintains a $2,000,000 key man life insurance policy on
each of the Founding Managers. See "Management."

SEASONAL PRODUCT DEVELOPMENT AND SALES

The Company generally must adjust the styles of its racing replicas each
year to accurately replicate the various vehicles competing in major racing
series. Generally in the fourth quarter, the Company commences this process of
product development for the coming year by obtaining information about new race
cars. From that point until the release date of the particular replica during
the racing season, the Company, along with its Hong Kong subsidiary and the
foreign manufacturers, must complete the production process, including the
design of prototypes for the new racing replicas, the production of new tooling,
if any, and the manufacture of the racing replicas, and deliver the racing
replicas to retailers. Any inability by the Company to deliver the new racing
replicas to retailers by the start of the racing season could have a material
adverse effect on the Company. The Company's sales of racing replicas are also
seasonal, with 63.3% of the Company's net sales and 79.0% of its net income on
average over the last three fiscal years occurring during the second and third
quarters. See "Business -- Manufacturing."

PRODUCT LIABILITY AND OTHER CLAIMS

The Company faces product liability risks relating to the use of the
Company's products. Although the Company has not experienced any material
product liability costs or claims, the Company carries a policy of product
liability insurance against such contingencies. The Company may also be subject
to other legal claims,

10
<PAGE> 12

such as unfair competition or trademark infringement. Any legal claims, if
brought, could materially adversely affect the business or financial condition
of the Company.

CONTROL BY PRINCIPAL STOCKHOLDERS

Upon the closing of the Offering, the existing management and stockholders
of the Company will collectively own approximately 61.2% of the outstanding
Common Stock (56.6% if the Underwriters' over-allotment option is exercised in
full). This share ownership would permit these stockholders, if they chose to
act together, to elect all of the Company's directors and to control other
actions requiring stockholder approval. See "Principal Stockholders."

ABSENCE OF PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

There has been no public market for the Common Stock prior to the Offering,
and there can be no assurance that an active public market will develop or, if
developed, will be sustained following the Offering. The stock market has in the
past experienced price and volume fluctuations that have at times been unrelated
to corporate operating performance. Such market volatility may adversely affect
the market price of the Common Stock. Other factors, such as fluctuations in
quarterly operating results, changes in trade policy between China and the
United States and evolving business prospects of the Company's customers and
competitors, also could cause the market price of the Common Stock to fluctuate
substantially.

IMMEDIATE AND SUBSTANTIAL DILUTION

Assuming an initial offering price of $13.00 per share, purchasers in the
Offering will experience dilution in the net tangible book value per share of
the Common Stock of $14.87. The existing stockholders will receive an increase
per share in pro forma net tangible book value per share of $8.76. Additional
dilution will occur upon the exercise of outstanding stock options. Existing
stockholders will have paid an average price per share of Common Stock of $0.13
and new stockholders will have paid 98.5% of the total consideration received
for shares of Common Stock but will own only 38.8% of the Common Stock. See
"Dilution."

DIVIDEND POLICY

The Company currently anticipates that, after completion of the Offering,
all of its earnings will be retained for development and expansion of the
Company's business and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."

GOVERNMENT REGULATION

The Company is subject to numerous federal and state health, safety, tax
and other regulations. No assurance can by given that current government
regulations or future regulatory changes will not adversely affect the Company.
In addition, certain of the Company's tax positions could be subject to
examination and challenge by the Internal Revenue Service.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect the market price of the Common Stock. Upon
completion of the Offering, the Company will have 12,885,240 shares of Common
Stock outstanding. Of these shares, 5,000,000 shares of Common Stock sold in the
Offering will be freely tradable in the market, except for shares purchased by
"affiliates" of the Company which will be subject to the resale limitations
(excluding the holding period requirement) of Rule 144 under the Securities Act
of 1933. Certain officers, directors and stockholders of the Company, who hold
in aggregate 7,885,240 shares of Common Stock, and the Company have agreed not
to sell any of their shares for a period of 180 days after the date of the
Prospectus without the prior written consent of Robert W. Baird & Co.
Incorporated. The Company believes that, following the expiration of such
180-day period, 7,885,240 of these shares will be eligible for immediate sale in
the public market, subject to Rule 144 resale limitations. Further, the exercise
of registration rights by certain of the Company's significant stockholders,
affiliates and executive officers would permit such persons to sell shares of
Common Stock upon registration

11
<PAGE> 13

without regard to the limitations of Rule 144. The Company has granted
registration rights covering a total of 7,885,240 shares of Common Stock. See
"Shares Eligible for Future Sale" and "Certain Transactions -- The
Recapitalization -- Registration Agreement."

HOLDING COMPANY STRUCTURE

Because the Company is a holding company that conducts its business
operations through its subsidiaries, the Company depends on its subsidiaries for
dividends and other cash distributions to pay the Company's expenses and to pay
dividends to holders of the Common Stock. The Company's credit agreement
("Credit Agreement") with the First National Bank of Boston, as agent, and
certain other lenders, specifies the conditions under which dividends, loans and
cash distributions may be made from the Company's subsidiaries to the Company so
that profits generated by such operating entities may not be available to the
Company while the loans under the Credit Agreement are outstanding.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and
By-Laws and of the Delaware General Corporation Law could discourage potential
acquisition proposals and delay or prevent a change of control of the Company.
Such provisions could diminish the opportunities for a stockholder to
participate in potential premiums associated with tender offers or other
acquisitions of the Company or its Common Stock. These provisions include
certain advance notice procedures for nominations of candidates for election as
directors and for stockholder proposals to be considered at stockholders'
meetings. In addition, section 203 of the Delaware General Corporation Law could
delay or prevent consummation of an acquisition transaction between the Company
and certain significant stockholders if the Board of Directors does not approve
such acquisition transaction in advance. See "Description of Capital
Stock -- Certain Statutory and Other Provisions."

BENEFITS TO CERTAIN STOCKHOLDERS AND EXECUTIVE OFFICERS

Out of the proceeds of the Offering, the Company plans to pay approximately
$27.7 million to members of the Investor Group and approximately $23.2 million
to management to repay indebtedness and redeem shares of preferred stock. See
"Use of Proceeds" and "Certain Transactions -- The Recapitalization."

THE RECAPITALIZATION

On April 30, 1996, an investor group led by Willis Stein & Partners, L.P.
("Willis Stein") consummated a recapitalization (the "Recapitalization") which
involved the following: (i) 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" and together with RCI, the "RCI Group"), (ii) the
acquisition by Banerjan Company Limited (subsequently renamed Racing Champions
Limited), a Hong Kong subsidiary of the Company (the "Hong Kong Subsidiary"), of
substantially all of the assets of Racing Champions Limited, Garnett Services,
Inc. and Hosten Investment Limited (collectively, the "RCL Group") and (iii) the
contribution by the Company of all of the outstanding stock of the Hong Kong
Subsidiary to RCI. Prior to the Recapitalization, the RCI Group was owned by
Robert E. Dods and Boyd L. Meyer and managed the Company's domestic operations,
and the RCL Group was owned by Peter K.K. Chung and managed the Company's
foreign operations. The members of the Investor Group did not have any interests
in or business relationships with the RCI Group, the RCL Group or any of their
respective affiliates prior to the Recapitalization. The amount of the purchase
price paid by the Company in each of these acquisitions was determined through
arms-length negotiations between members of the Investor Group, the Founding
Managers and their respective advisors. The management of the Company owns
approximately 45.6% of the Common Stock with each of the Founding Managers
owning 14.5% and other senior management owning 2.0% collectively. The remaining
54.4% is held by an investor group consisting of Willis Stein (37.8%), Baird
Capital Partners II Limited Partnership (8.0%), BCP II Affiliates Fund Limited
Partnership (2.4%), Nassau Capital Partners L.P. (6.2%) and NAS Partners I
L.L.C. (0.5%) (the "Investor Group"). Baird Capital Partners II Limited
Partnership and BCP II Affiliates Fund Limited Partnership are affiliates of
Robert W. Baird & Co. Incorporated, one of the co-managing

12
<PAGE> 14

Underwriters of the Offering. In addition, the Investor Group acquired an
aggregate of approximately $20.8 million principal amount of Series A Junior
Subordinated Promissory Notes ("Series A Junior Notes") and approximately $4.8
million of Series A Preferred Stock pursuant to the Recapitalization. The
Investor Group also received the right to elect four members of the Company's
Board of Directors and other rights pursuant to a stockholders agreement and a
registration rights agreement. For additional information regarding the terms of
the Recapitalization, see "Certain Transactions -- The Recapitalization."

Pursuant to the Recapitalization, the Company paid $58.3 million of cash
and securities for the RCI Group and paid $30.4 million of cash and securities
for the RCL Group. For a description of the terms of the Recapitalization, see
"Certain Transactions -- The Recapitalization." RCI paid bonuses aggregating
approximately $2.4 million to employees holding stock options surrendered in
connection with the Recapitalization, including $1.1 million to Curtis W.
Stoelting, $570,000 to each of John F. Olsen and M. Kevin Camp. Mr. Stoelting
had held options exercisable for 37.8 shares of RCI's common stock, or
approximately 3.6% of the shares outstanding, at an exercise price of $3,960 per
share, while each of Messrs. Olsen and Camp had held options exercisable for
18.69 shares of RCI's common stock, or approximately 1.8% of the shares
outstanding, at an exercise price of $3,960 per share. These options had been
granted in December 1994 under RCI's 1994 Stock Option Plan which was terminated
in connection with the Recapitalization.

The Recapitalization was financed with $40.0 million of bank borrowings and
the issuance to the three Founding Managers, other senior management and the
Investor Group of $8.0 million of Senior Subordinated Promissory Notes ("Senior
Notes"), approximately $38.2 million of Series A Junior Subordinated Promissory
Notes ("Series A Junior Notes"), approximately $1.2 million of Series B Junior
Subordinated Promissory Notes ("Series B Junior Notes"), approximately $6.7
million of the Company's Series A Preferred Stock, approximately $1.2 million of
the Company's Series B Preferred Stock, approximately $119,000 of the Company's
Nonvoting Common Stock (the "Nonvoting Common Stock"), and approximately
$881,000 of Common Stock. See "Certain Transactions -- The Recapitalization."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby are expected to be approximately $59.7 million
($64.0 million if the Underwriters' over-allotment option is exercised in full),
based upon an assumed initial public offering price of $13.00 per share, after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company will apply approximately $8.8
million of the net proceeds to repay indebtedness under the Credit Agreement,
consisting of indebtedness under Term Loan A which currently accrues interest at
a rate of 8.25% per year, $40.9 million to repay all of the Series A Junior
Notes which accrue interest at a rate of 12.00% per year, $1.2 million to repay
all of the Series B Junior Notes which accrue interest at a rate of 12.00% per
year and approximately $8.8 million to redeem all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock. For additional information
regarding the terms of the indebtedness and preferred stock proposed to be
repaid or redeemed with the proceeds of the Offering, see "Certain
Transactions -- The Recapitalization -- Certain Indebtedness," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Capital Stock -- Preferred Stock."

Pending the use for the foregoing purposes, the Company may invest the
proceeds in whole or in part in short-term, interest-bearing obligations. Any
funds received by the Company upon exercise of the Underwriters' over-allotment
option will be used to repay indebtedness under the Credit Agreement.

DIVIDEND POLICY

Following the Offering, the Company intends to retain any earnings for use
in the operation and expansion of its business and therefore does not anticipate
declaring any cash dividends in the foreseeable future. The payment of future
dividends, if any, will be made at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, operations,
capital requirements, the general financial condition of the Company, general
business conditions and other factors. In addition, the Credit Agreement
contains a provision limiting the Company's ability to pay dividends.

13
<PAGE> 15

DILUTION

The net tangible book value of the Common Stock as of March 31, 1997 was a
deficit of $83.8 million or $10.63 per share. Net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by 7,885,240 shares of Common Stock outstanding as of March
31, 1997. Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of Common Stock in the Offering
and the pro forma net tangible book value per share of Common Stock immediately
after completion of the Offering.

After giving effect to the sale of 5,000,000 shares of Common Stock in the
Offering at an assumed initial offering price of $13.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses, the pro forma net tangible book value as of March 31, 1997 would have
been a deficit of $24.1 million or $1.87 per share. This represents an immediate
increase in net tangible book value of $8.76 per share to the existing
stockholders and immediate dilution of net tangible book value of $14.87 per
share to purchasers of Common Stock in the Offering, as illustrated by the
following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Deficit in net tangible book value at March 31, 1997...... $(10.63)
Increase attributable to new investors.................... 8.76
-------
Pro forma deficit in net tangible book value after the
Offering.................................................. (1.87)
------
Net tangible book value dilution to new investors........... $14.87
======
</TABLE>

The following table sets forth, as of March 31, 1997, the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share of Common Stock paid by existing stockholders and new
stockholders purchasing shares of Common Stock in the Offering, at an assumed
initial public offering price of $13.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 7,885,240 61.2% $ 1,000,000 1.5% $ 0.13
New stockholders................ 5,000,000 38.8 65,000,000 98.5 13.00
---------- ----- ----------- -----
Total................. 12,885,240 100.0% $66,000,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing discussion and tables assume no exercise of any outstanding
stock options. As of the date of the Prospectus, options to purchase 332,033
shares of Common Stock are outstanding. To the extent any options with an
exercise price of less than the public offering price are exercised, there will
be further dilution to new stockholders. See "Management -- Executive
Compensation -- 1996 Key Employees Stock Option Plan."

14
<PAGE> 16

CAPITALIZATION

The following table sets forth (i) short-term debt and capitalization of
the Company as of March 31, 1997, and (ii) the adjusted short-term debt and
capitalization to give effect to the issuance by the Company of 5,000,000 shares
of Common Stock in the Offering (assuming an initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." The following table
should be read in conjunction with the Financial Statements and Notes thereto
appearing elsewhere in the Prospectus, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Selected Financial Data."

<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------
ACTUAL ADJUSTMENTS(1) AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SHORT-TERM DEBT:
Current maturities of long-term bank notes........... $ 7,800 $ (7,800) $ --
======== ======== ========
LONG-TERM DEBT:
Bank term notes, less current maturities............. $ 31,117 $ (1,010) $ 30,107
Junior subordinated debt due to stockholders......... 42,118 (42,118) --
-------- -------- --------
Total long-term debt......................... 73,235 (43,128) 30,107
-------- -------- --------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock:
100,000 shares authorized, 66,668 shares issued
and outstanding(2).............................. 773 (773) --
Series B Preferred Stock:
20,000 shares authorized, 11,952 shares issued and
outstanding(2).................................. 139 (139) --
Voting Common Stock:
20,000,000 shares authorized, 6,948,156 shares
issued and outstanding; 12,885,240 shares issued
and outstanding, as adjusted.................... 69 60 129
Nonvoting Common Stock:
1,000,000 shares authorized, 937,084 shares issued
and outstanding(2).............................. 9 (9) --
Additional paid-in capital........................... 8,783 51,789 60,572
Retained earnings.................................... 1,968 -- 1,968
-------- -------- --------
Total stockholders' equity........................ 11,741 50,928 62,669
-------- -------- --------
Total capitalization............................ $ 84,976 $ 7,800 $ 92,776
======== ======== ========
</TABLE>

- ---------------
(1) Adjustments give pro forma effect to (i) the conversion of each share of the
Company's Nonvoting Common Stock into one share of Common Stock upon the
completion of the Offering, (ii) the issuance of 5,000,000 shares of Common
Stock in the Offering at an estimated price of $13.00 per share, net of
estimated underwriting discounts and commissions of $4,550,000 and estimated
offering expenses of $750,000 and (iii) the repayment of $50,928,000 of
indebtedness and the redemption of $8,772,000 of Series A Preferred Stock
and Series B Preferred Stock.

(2) Following the Offering, all of the outstanding shares of Series A Preferred
Stock and Series B Preferred Stock will be redeemed, each share of Nonvoting
Common Stock will be converted into one share of Common Stock and the
Certificate of Incorporation of the Company will be amended to eliminate the
classes of Series A Preferred Stock, Series B Preferred Stock and Nonvoting
Common Stock.

15
<PAGE> 17

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth selected financial data with respect to the
Company for each of the periods indicated. The selected financial data for the
year ended December 31, 1992 for the Predecessor - RCI Group and for the fiscal
years ended March 31, 1993 and 1994 for the Predecessor - RCL Group are derived
from unaudited combined financial statements, which are not included herein. The
unaudited selected financial data have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's consolidated financial position and results of operations
for the periods presented. The data for the years ended December 31, 1993, 1994
and 1995 and for the four months ended April 30, 1996 are derived from the
combined financial statements of the Predecessor - RCI Group, which have been
audited by Arthur Andersen LLP, independent public accountants. The data for the
fiscal years ended March 31, 1995 and 1996 and for the one month ended April 30,
1996 for the Predecessor - RCL Group are derived from combined financial
statements which have been audited by Ernst & Young, independent auditors. The
statement of income data for the eight months ended December 31, 1996 are
derived from the Company's consolidated financial statements which have been
audited by Arthur Andersen LLP, independent public accountants. The statement of
income and balance sheet data for and as of the three months ended March 31,
1997 have been derived from the unaudited consolidated financial statements of
the Company and, in the opinion of management, include all adjustments,
consisting only of normal and recurring adjustments, necessary to present fairly
the consolidated financial position and results of operations of the Company for
the three months then ended.

The pro forma financial data for the year ended December 31, 1996, which
give effect to the Recapitalization, the Offering and the application of the
estimated net proceeds from the Offering as if each had occurred on January 1,
1996, are presented for informational purposes only and are not necessarily
indicative of the results of the future operations of the Company or the actual
results that would have been achieved had the Recapitalization, the Offering and
the application of the estimated net proceeds from the Offering occurred on such
date. The pro forma financial data for the three months ended March 31, 1997,
which give effect to the Offering and the application of the estimated net
proceeds from the Offering as if it had occurred on January 1, 1997, are also
presented for informational purposes only and are not necessarily indicative of
the results of the future operations of the Company or the actual results that
would have been achieved had the Offering and the application of the estimated
net proceeds from the Offering occurred on such date. All of the data set forth
below are qualified by reference to, and should be read in conjunction with, the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.

(See page 17 for chart)

16
<PAGE> 18

<TABLE>
<CAPTION>
PREDECESSOR - RCI GROUP(1)(7) THE COMPANY PRO FORMA
--------------------------------------------------- --------------------------- ------------
FOUR MONTHS EIGHT MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED YEAR ENDED
------------------------------------- APRIL 30, DECEMBER 31, MARCH 31, DECEMBER 31,
1992 1993 1994 1995 1996(2) 1996(2) 1997 1996(2)
------- ------- ------- ------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $45,845 $31,047 $43,268 $48,592 $16,614 $49,385 $15,187 $65,999
Gross profit........ 16,170 14,151 18,056 23,036 7,210 28,019 8,694 37,532
Operating income.... 4,943 6,141 8,565 9,724 108 11,236 2,969 11,478
Net income(3)....... $ 5,458 $ 5,722 $ 8,224 $ 9,392 $ 72 $ 2,551 $ 328 $ 4,744
Net income available
to common
stockholders...... $ 1,895 $ 73 $ 4,744
Net income per
share............. $ 0.23 $ 0.01 $ 0.36
Weighted average
shares
outstanding(4).... 8,214 8,214 13,214

<CAPTION>
PRO FORMA
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997
-------- -----------
<S> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $12,260 $15,187
Gross profit........ 6,989 8,694
Operating income.... 1,730 2,969
Net income(3)....... $ 467 $ 1,225
Net income available
to common
stockholders...... $ 467 $ 1,225
Net income per
share............. $ 0.03 $ 0.09
Weighted average
shares
outstanding(4).... 13,214 13,214
</TABLE>

<TABLE>
<CAPTION>
PREDECESSOR - RCL GROUP(1)(7)
---------------------------------------------------
ONE MONTH
FISCAL YEARS ENDED MARCH 31, ENDED
------------------------------------- APRIL 30,
1993 1994 1995 1996 1996
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $28,067 $18,399 $22,331 $37,322 $ 3,852
Gross profit........ 6,105 4,801 5,288 7,085 752
Operating income.... 3,072 1,949 2,066 2,725 507
Net income(5)....... $ 2,693 $ 1,690 $ 2,079 $ 2,603 $ 488
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(6)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..... $ (8,069) $ (269)
Total assets........ 102,595 102,595
Total debt.......... 81,035 30,107
Total stockholders'
equity............ 11,741 62,669
</TABLE>

- ---------------
(1) On April 30, 1996 the Company acquired the RCI Group and the RCL Group in
the Recapitalization (see "The Recapitalization"). Accordingly, certain
information provided for the predecessor groups is not comparable to the
data of the Company due to the effects of certain purchase accounting
adjustments and the financing related to the Recapitalization. Also, the
data from the predecessor groups is derived from different fiscal year ends
and is not comparable. Prior to the Recapitalization, the RCL Group included
Bergen Services Inc. ("Bergen"), an entity that did not have any tangible
assets or conduct any operations. The Company did not acquire Bergen
pursuant to the Recapitalization.

(2) Data for the four months ended April 30, 1996 and pro forma statement of
income data for the year ended December 31, 1996 include a nonrecurring
incentive bonus expense of $2,389,000 incurred in connection with the
Recapitalization, and data for the eight months ended December 31, 1996 and
pro forma statement of income data for the year ended December 31, 1996
include a purchase accounting inventory write-up adjustment of $1,367,000 as
a result of the Recapitalization. Excluding the effects of the nonrecurring
incentive bonus expense and the inventory write-up adjustment, the Company's
pro forma gross profit, operating income, net income and net income per
share for the year ended December 31, 1996 would have been:

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------- ----------
<S> <C> <C>
Net sales................................................... $65,999 100.0%
Gross profit................................................ 38,899 58.9
Operating income............................................ 15,234 23.1
Net income.................................................. 6,997 10.6
Net income per share........................................ $ 0.53
</TABLE>

17
<PAGE> 19

(3) Net income of the RCI Group does not include a provision for federal income
taxes as a result of the S corporation status for certain entities in this
group during the periods from January 1, 1992 to April 30, 1996.

(4) Weighted average shares outstanding has been computed using the treasury
stock method which includes dilutive Common Stock equivalents as if
outstanding during the respective periods.

(5) Net income of the RCL Group includes a provision for Hong Kong income taxes
at an effective rate of 16.5% for certain entities and no provisions for
other entities which were structured as tax-free British Virgin Islands
entities.

(6) The "As Adjusted" amounts give pro forma effect to (i) the issuance of
5,000,000 shares of Common Stock in the Offering at an assumed price of
$13.00 per share, net of estimated underwriting discounts and commissions of
$4,550,000 and estimated offering expenses of $750,000 and (ii) the
repayment of $50,928,000 of indebtedness and the redemption of $8,772,000 of
Series A Preferred Stock and Series B Preferred Stock, including accrued
dividends.

(7) The following supplemental data represent for 1993, 1994 and 1995 certain
historical financial data of the RCI Group and the RCL Group (converted from
fiscal year end March 31 to December 31) for each year ended December 31.
The year ended December 31, 1996 is presented based upon the Pro Forma
Combined Statements of Income data (see "Pro Forma Combined Statements of
Income").

SUPPLEMENTAL FINANCIAL DATA

<TABLE>
<CAPTION>
PRO FORMA
-------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 PRO FORMA(2) 1996 1997
-------- -------- -------- ----------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
Company............... $ -- $ -- $ -- $ 49,385 $ -- $15,187
RCI Group............. 31,047 43,268 48,592 16,614 12,260 --
RCL Group............. 15,658 23,672 32,301 13,027 5,595 --
Intercompany and
redundant sales.... (15,658) (23,672) (32,301) (13,027) (5,595) --
-------- ------- -------
$ 65,999 $12,260 $15,187
======== ======= =======
GROSS PROFIT:
Company............... $ -- $ -- $ -- $ 27,839 $ -- $ 8,694
RCI Group............. 14,151 18,056 23,036 7,210 5,248 --
RCL Group............. 4,147 5,770 6,216 2,483 1,741 --
-------- ------- -------
$ 37,532 $ 6,989 $ 8,694
======== ======= =======
OPERATING INCOME:
Company............... $ -- $ -- $ -- $ 10,864 $ -- $ 2,969
RCI Group............. 6,141 8,565 9,724 108 1,767 --
RCL Group............. 1,544 2,321 2,751 506 (37) --
-------- ------- -------
$ 11,478 $ 1,730 $ 2,969
======== ======= =======
NET INCOME*:
Company............... $ -- $ -- $ -- $ 4,373 $ -- $ 1,225
RCI Group............. 5,722 8,224 9,392 72 511 --
RCL Group............. 1,216 2,339 2,790 299 (44) --
-------- ------- -------
$ 4,744 $ 467 $ 1,225
======== ======= =======
</TABLE>

- ---------------
* RCI Group net income does not include a provision for federal income taxes as
a result of the S corporation status. RCL Group net income includes a
provision for Hong Kong income taxes at an effective rate of 16.5% for certain
entities in the RCL Group and no provisions for other entities in the RCL
Group which were structured as tax-free British Virgin Islands entities.

18
<PAGE> 20

PRO FORMA STATEMENTS OF INCOME

The following unaudited Pro Forma Combined Statement of Income for the year
ended December 31, 1996 was prepared to illustrate the estimated effects of the
Recapitalization, the Offering and the application of the estimated net proceeds
of the Offering as if each had occurred on January 1, 1996. The unaudited Pro
Forma Consolidated Statement of Income for the three months ended March 31, 1997
was prepared to illustrate the estimated effects of the Offering and the
application of the estimated net proceeds of the Offering as if it had occurred
on January 1, 1997. The Pro Forma Statements of Income do not purport to
represent what the Company's results of operations would actually have been if
the Recapitalization, the Offering and the application of the estimated net
proceeds of the Offering had occurred on the dates indicated or to predict the
Company's results of operations for any future period. The following financial
information should be read in conjunction with "Capitalization," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Financial Statements and the related
Notes thereto included elsewhere in the Prospectus.

19
<PAGE> 21

PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------
RCI RCL PRO FORMA PRO FORMA OFFERING PRO FORMA
GROUP(1) GROUP(2) COMPANY(3) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
--------- --------- ----------- ------------ ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $16,614 $13,027 $49,385 $(13,027)(4) $65,999 $ -- $65,999
Cost of sales.................. 9,404 10,544 19,999 (13,027)(4) 27,100 -- 27,100
180(5)
Inventory adjustments(6)....... -- -- 1,367 -- 1,367 -- 1,367
------- ------- ------- -------- ------- ------ -------
Gross profit................... 7,210 2,483 28,019 (180) 37,532 -- 37,532
Selling, general &
administrative expense....... 4,713 1,977 15,244 18(5) 21,426 -- 21,426
(526)(7)
Nonrecurring bonus expense..... 2,389 -- -- -- 2,389 -- 2,389
Amortization of intangible
assets....................... -- -- 1,539 700(5) 2,239 -- 2,239
------- ------- ------- -------- ------- ------ -------
Operating income............... 108 506 11,236 (372) 11,478 -- 11,478
Interest expense (income)...... 20 49 6,738 2,862(8) 9,669 (6,198)(9) 3,471
Other expense (income)......... (23) (29) 153 -- 101 -- 101
------- ------- ------- -------- ------- ------ -------
Income before income taxes..... 111 486 4,345 (3,234) 1,708 6,198 7,906
Income tax expense............. 39 187 1,794 (1,335)(10) 685 2,477(10) 3,162
------- ------- ------- -------- ------- ------ -------
Net income..................... $ 72 $ 299 $ 2,551 $ (1,899) $ 1,023 $3,721 $ 4,744
======= ======= ======= ======== ======= ====== =======
Net income per share........... $ 0.12 $ 0.36
======= =======
Weighted average shares
outstanding.................. 8,214 5,000(11) 13,214
</TABLE>

- ---------------
(1) Data for the RCI Group is for the four months ended April 30, 1996.

(2) Data for the RCL Group is for the four months ended April 30, 1996.

(3) Data for the Company is for the eight months ended December 31, 1996.

(4) Eliminates intercompany sales and fees between the RCL Group and the RCI
Group during the period January 1, 1996 to April 30, 1996.

(5) Provides for the pro forma increase from January 1, 1996 through April 30,
1996 in depreciation expense based upon depreciating the purchase price
allocated to fixed assets of $3,517,000 over four years and in amortization
expense based upon amortizing the excess purchase price over net assets
acquired of $88,664,000 over 40 years. The pro forma depreciation expense
for the year ended December 31, 1996 is $1,636,000.

(6) Data for the RCI Group include a nonrecurring incentive bonus expense of
$2,389,000 in connection with the Recapitalization and data for the Company
include a purchase accounting inventory write-up adjustment of $1,367,000
as a result of the Recapitalization. Excluding the effects of the
nonrecurring incentive bonus expense and the inventory write-up adjustment,
the Company's pro forma gross profit, operating income, net income and net
income per share for the year ended December 31, 1996 would have been:

(7) Eliminates for the four months ended April 30, 1996 RCL Group non-business
expenses of $179,000 and depreciation expense of $347,000 related to assets
not acquired by the Company pursuant to the Recapitalization.

20
<PAGE> 22

(8) Represents the incremental interest expense from January 1, 1996 through
April 30, 1996, under borrowings incurred as part of the Recapitalization
including bank term loans of $40.0 million with a combined average rate of
8.38%, senior subordinated notes of $8.0 million with an interest rate of
8.25%, and $39.4 million of junior subordinated notes with an interest rate
of 12.00%.

(9) Reflects the effect on interest expense, net of income taxes at 40.0%, of
the receipt of the estimated Offering proceeds of $59.7 million. The
application of those proceeds reduces outstanding borrowings under term
loans by approximately $8.8 million with an interest rate of 8.38%, reduces
junior subordinated debt by approximately $41.1 million with an interest
rate of 12.00% and reflects the expected lower interest rate of 7.00% on
the remaining outstanding borrowings of approximately $30.0 million. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

(10) Increases the provision for income taxes to 40.0% for the income that was
taxed at lower rates or not subject to income taxes as a result of S
corporation or tax free British Virgin Islands status after giving effect
to the adjustments to depreciation, amortization and selling, general and
administrative expenses and the incremental interest expense, all as
discussed in Notes 5 and 8 above.

(11) Reflects the sale by the Company of 5,000,000 shares of Common Stock in the
Offering.

(12) The following unaudited Pro Forma Combined Statements of Income for each of
the quarters in the year ended December 31, 1996 is presented based upon
the Pro Forma Combined Statement of Income for the year ended December 31,
1996.

PRO FORMA COMBINED STATEMENT OF INCOME
FOR EACH OF THE QUARTERS IN THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
------------------------------------------------ DECEMBER 31,
MARCH 31 JUNE 30* SEPTEMBER 30 DECEMBER 31 1996
-------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $12,260 $18,018 $23,034 $12,687 $65,999
Cost of sales.............................. 5,271 7,196 9,376 5,257 27,100
Inventory adjustments...................... -- 1,367 -- -- 1,367
------- ------- ------- ------- -------
Gross profit............................... 6,989 9,455 13,658 7,430 37,532
Selling, general and administrative
expense.................................. 4,699 5,476 6,705 4,546 21,426
Nonrecurring bonus expense................. -- 2,389 -- -- 2,389
Amortization of intangible assets.......... 560 559 560 560 2,239
------- ------- ------- ------- -------
Operating income........................... 1,730 1,031 6,393 2,324 11,478
Interest expense (income).................. 977 792 900 802 3,471
Other expense (income)..................... (25) 15 51 60 101
------- ------- ------- ------- -------
Income before income taxes................. 778 224 5,442 1,462 7,906
Income tax expense......................... 311 90 2,176 585 3,162
------- ------- ------- ------- -------
Net income................................. $ 467 $ 134 $ 3,266 $ 877 $ 4,744
======= ======= ======= ======= =======
Net income per share....................... $ 0.03 $ 0.01 $ 0.25 $ 0.07 $ 0.36
======= ======= ======= ======= =======
Weighted average shares outstanding........ 13,214 13,214 13,214 13,214 13,214
</TABLE>

-------------------
* Excluding the effect of the nonrecurring incentive bonus and the inventory
write-up adjustment, the Company's pro forma gross profit, operating
income, net income and net income per share for the three months ended
June 30, 1996 would have been:

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Net sales................................. $18,018 100.0%
Gross profit.............................. 10,822 60.1
Operating income.......................... 4,787 26.6
Net income................................ 2,388 13.3
Net income per share...................... $ 0.18
</TABLE>

21
<PAGE> 23

PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................... $15,187 $ -- $15,187
Cost of sales............................................... 6,493 -- 6,493
------- ------- -------
Gross profit................................................ 8,694 -- 8,694
Selling, general & administrative expense................... 5,171 -- 5,171
Amortization of intangible assets........................... 554 -- 554
------- ------- -------
Operating income............................................ 2,969 -- 2,969
Interest expense (income)................................... 2,423 (1,495)(1) 928
------- ------- -------
Income before income taxes.................................. 546 1,495 2,041
Income tax expense.......................................... 218 598(1) 816
------- ------- -------
Net income.................................................. $ 328 $ 897 $ 1,225
======= ======= =======
Net income per share........................................ $0.09
======
Weighted average shares outstanding......................... 13,214
</TABLE>

- ---------------
(1) Reflects the effect on interest expense, net of income taxes at 40.0%, of
the receipt of the estimated Offering proceeds of $59.7 million. The
application of those proceeds reduces outstanding borrowings under term
loans by approximately $8.8 million with an interest rate of 8.38%, reduces
junior subordinated debt by approximately $42.1 million with an interest
rate of 12.00% and reflects the expected lower interest rate of 7.25% on the
remaining outstanding borrowings of approximately $28.1 million. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

22
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated Financial Statements and Notes thereto included elsewhere in the
Prospectus. The matters discussed in this section that are not historical or
current facts deal with potential future circumstances and developments. Such
forward-looking statements include, but are not limited to, the development and
market acceptance for new products, trends in the results of the Company's
operations and the Company's anticipated capital requirements and capital
resources. The Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed under the caption "Risk Factors" and elsewhere in the Prospectus.

OVERVIEW

Racing Champions is a leading producer and marketer of collectible scaled
die cast replicas. The Company is best known for its extensive line of
officially licensed collectible scaled replicas of actual race cars and related
vehicles from popular professional racing series, including NASCAR, NHRA, CART,
IRL and World of Outlaws. The majority of its products are sold through mass
merchants, such as K-Mart, Target, Toys 'R' Us and Wal-Mart. The Company has
maintained strong profit margins while selling through the mass merchant channel
by offering high quality, collectible products, managing product availability,
continuously updating its products, diligently controlling costs and realizing
economies of scale.

The Company's predecessors, the RCI Group and the RCL Group, each began
operations in 1989 with an initial product line of die cast vehicles, which
included racing car replicas. The RCI Group was owned by Robert E. Dods and Boyd
L. Meyer and operated the Company's domestic operations and the RCL Group was
owned by Peter K.K. Chung and operated the Company's foreign operations. In
1990, the Company shifted its focus to collectible stock car replicas and in
1991 obtained the license to use the NASCAR trademark and logo on its products
and packaging. The Company's initial racing replicas proved to be popular with
racing fans and adult collectors with net sales growing from $5.4 million in
1990 to $32.3 million in 1991. By 1992, many of the Company's retail customers
had overestimated short-term consumer demand for racing replicas and placed
significant orders for the Company's products as well as for competitive
products of varying quality and authenticity introduced by new entrants to the
racing replica market. While the Company's net sales grew dramatically to $45.8
million in 1992, significant excess inventories of racing replicas had built up
at many of the Company's major customers. As a result of these excess
inventories, the Company anticipated reduced sales in 1993 and, in response,
limited its production level. In order to preserve the collector base it had
already established and to further differentiate itself from lower quality new
market entrants, the Company took several steps to enhance the collectibility of
Racing Champions products in 1993. These steps included introducing annual
editions, limiting the number of units produced, staggering release dates,
adding serial numbers to certain production runs and generally improving
quality. Despite a net sales decline to $31.0 million in 1993, combined
operating income as a percentage of net sales increased.

Over the next three years, the Company experienced considerable growth in
its NASCAR product line and through its introduction of collectible racing
replicas from other major professional racing series. The Company believes that
the measures it undertook from 1993 through 1996 have significantly enhanced the
Racing Champions brand name, thereby increasing demand for the Company's
products. In turn, the Company's mass merchant customers have responded by
providing increased shelf space for the Company's product lines. The Company
believes that its significantly broader product lines, enhanced brand name
recognition among collectors and retailers and increased shelf space have
positioned it to compete favorably in its principal channel of distribution.

Beginning in 1996, the Company successfully expanded into non-racing
collectibles by introducing the Racing Champions Mint(TM) line of high quality
classic and late model die cast vehicle replicas. The Company is continuing this
expansion in 1997 by introducing the Racing Champions Hot Rod Collection(TM), a
new line of collectible die cast hot rod car replicas which is supported by
licensing and marketing arrangements with

23
<PAGE> 25

Petersen Publishing Company's Hot Rod Magazine. Also, beginning in 1997, the
Company is targeting comic book and sports enthusiasts and figure collectors
with two new lines of collectible pewter figures, to be marketed under the names
Comic Book Champions and Sports Champions, which are supported by licensing
agreements with Marvel Characters, Inc., DC Comics (a division of Time Warner
Entertainment Company L.P.) and Sports Illustrated.

On April 30, 1996, the Investor Group consummated the Recapitalization in
which a new holding company, Racing Champions Corporation, acquired the domestic
operations of the RCI Group and the foreign operations of the RCL Group. This
acquisition was accounted for using the purchase method. The acquisition costs
in excess of the fair value of net assets of the acquired businesses (goodwill)
is being amortized on a straight-line basis over a 40-year period and for income
tax purposes is deducted over a 15-year period. After the consummation of the
Recapitalization, management owned approximately 45.6% of the Common Stock,
while members of the Investor Group owned approximately 54.4%.

Racing Champions' sales are recognized as products are shipped. The Company
does not sell its products on consignment and ordinarily accepts returns only
for defective merchandise. Returns have historically not been significant. In
certain instances, where retailers are unable to resell the quantity of products
which they have purchased from the Company, the Company may, in accordance with
industry practice, assist retailers in selling such excess inventory by offering
credits and other price concessions. These credits and other price concessions,
typically evaluated and issued annually, have not had a material effect on the
Company's historical financial statements. Mass merchant retailers purchase the
Company's product either in the United States with credit terms ranging from 30
to 120 days or directly in Hong Kong with payment made by irrevocable letter of
credit or wire transfer. By acquiring the products in Hong Kong, many of the
Company's retail customers are able to realize efficiencies with respect to cost
and logistics. Because the Company incurs significantly lower distribution and
administrative costs with respect to direct shipments to customers from Hong
Kong, a price discount of approximately 15% to 25% is granted. As a result, Hong
Kong shipments have lower gross profit margins than domestic shipments.
Therefore, the annual fluctuations in the mix of United States versus Hong Kong
shipments will affect year-to-year comparability of net sales and gross profit
margins. However, the Company believes that the operating income margin is
comparable for Hong Kong shipments due to the saved distribution and
administrative costs. For the years ended December 31, 1994, 1995 and 1996, Hong
Kong shipments constituted 28.7%, 44.9% and 52.8%, respectively, of net sales.

The Company's three largest expense categories are cost of sales, royalties
and sales commissions. Cost of sales consists primarily of purchases of finished
products from the Company's manufacturing suppliers. Royalties vary by product
category and are paid on a quarterly basis. Multiple royalties may be paid on a
product to various licensors. In 1996, aggregate royalties by product ranged
from approximately 3% to 19% of the Company's selling price, and averaged
approximately 15.7%. Sales commissions ranging from 3% to 5% of net sales are
paid quarterly to the Company's external sales representative organizations. In
1996, sales subject to commissions represented 61.0% of total net sales and
sales commissions were 3.0% of total net sales.

RESULTS OF OPERATIONS

The following tables set forth for the periods indicated certain items
reflected in the Statements of Income of the Company and its predecessors and
the percentage of net sales represented by these items.

24
<PAGE> 26

RACING CHAMPIONS CORPORATION

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS PRO FORMA THREE MONTHS ENDED
ENDED ENDED MARCH 31, -------------------------------------
DECEMBER 31, 1996 1997 MARCH 31, 1996 MARCH 31, 1997
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $49,385 100.0% $15,187 100.0% $12,260 100.0% $15,187 100.0%
Cost of sales................... 19,999 40.5 6,493 42.8 5,271 43.0 6,493 42.8
Inventory adjustment............ 1,367 2.8 -- -- -- -- -- --
------- ----- ------- ----- ------- ----- ------- -----
Gross profit.................. 28,019 56.7 8,694 57.2 6,989 57.0 8,694 57.2
Selling, general and
administrative expense........ 15,244 30.9 5,171 34.0 4,699 38.3 5,171 34.0
Amortization of intangible
assets........................ 1,539 3.1 554 3.6 560 4.6 554 3.6
------- ----- ------- ----- ------- ----- ------- -----
Operating income.............. 11,236 22.8 2,969 19.5 1,730 14.1 2,969 19.5
Interest expense (income)....... 6,738 13.6 2,380 15.7 977 8.0 885 5.8
Other expense................... 153 0.3 43 0.3 (25) (0.2) 43 0.3
------- ----- ------- ----- ------- ----- ------- -----
Income before income taxes.... 4,345 8.8 546 3.6 778 6.3 2,041 13.4
Income tax expense.............. 1,794 3.6 218 1.4 311 2.5 816 5.4
------- ----- ------- ----- ------- ----- ------- -----
Net income.................... $ 2,551 5.2% $ 328 2.2% $ 467 3.8% $ 1,225 8.1%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>

RCI GROUP

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOUR MONTHS ENDED
------------------------------------- -----------------
1994 1995 APRIL 30, 1996
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $43,268 100.0% $48,592 100.0% $16,614 100.0%
Cost of sales.............................. 25,212 58.3 25,556 52.6 9,404 56.6
------- ----- ------- ----- ------- -----
Gross profit............................. 18,056 41.7 23,036 47.4 7,210 43.4
Selling, general and administrative
expense.................................. 9,491 21.9 13,312 27.4 4,713 28.4
Nonrecurring bonus expense................. -- -- -- -- 2,389 14.4
------- ----- ------- ----- ------- -----
Operating income......................... 8,565 19.8 9,724 20.0 108 0.6
Interest expense........................... 211 0.5 133 0.3 20 0.1
Other expense (income)..................... (219) (0.5) 5 -- (23) (0.1)
------- ----- ------- ----- ------- -----
Income before income taxes............... 8,573 19.8 9,586 19.7 111 0.6
Income tax expense......................... 349 0.8 194 0.4 39 0.2
------- ----- ------- ----- ------- -----
Net income............................... $ 8,224 19.0% $ 9,392 19.3% $ 72 0.4%
======= ===== ======= ===== ======= =====
</TABLE>

RCL GROUP

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH ENDED
------------------------------------- -----------------
1995 1996 APRIL 30, 1996
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $22,331 100.0% $37,322 100.0% $ 3,852 100.0%
Cost of sales.............................. 17,043 76.3 30,237 81.0 3,100 80.5
------- ----- ------- ----- ------- -----
Gross profit............................. 5,288 23.7 7,085 19.0 752 19.5
Selling, general and administrative
expense.................................. 3,222 14.4 4,360 11.7 245 6.4
------- ----- ------- ----- ------- -----
Operating income......................... 2,066 9.3 2,725 7.3 507 13.1
Interest expense........................... 55 0.3 130 0.3 13 0.3
Other expense (income)..................... (113) (0.5) (179) (0.5) (28) (0.7)
------- ----- ------- ----- ------- -----
Income before income taxes............... 2,124 9.5 2,774 7.5 522 13.5
Income tax expense......................... 45 0.2 171 0.5 34 0.9
------- ----- ------- ----- ------- -----
Net income............................... $ 2,079 9.3% $ 2,603 7.0% $ 488 12.6%
======= ===== ======= ===== ======= =====
</TABLE>

25
<PAGE> 27

RACING CHAMPIONS CORPORATION

PRO FORMA THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO PRO FORMA THREE MONTHS
ENDED MARCH 31, 1996

Net sales. Net sales increased $2.9 million, or 23.9%, to $15.2 million for
the three months ended March 31, 1997 from $12.3 million for the three months
ended March 31, 1996. The sales growth in 1997 was aided by a slight increase in
prices but was primarily due to 16.5% growth in the racing replica category with
the remainder of the growth attributable to the initial shipments of new
products -- principally, the Racing Champions Hot Rod Collection of non-racing
vehicle replicas and Comic Book Champions collectible pewter figures. These new
products generated net sales of $1.1 million in the first quarter of 1997.

Gross profit. Gross profit increased $1.7 million, or 24.3%, to $8.7
million for the three months ended March 31, 1997 from $7.0 million for the
three months ended March 31, 1996. The gross profit margin (as a percentage of
net sales) remained relatively consistent at 57.2% in 1997 compared to 57.0% in
1996. There were no major changes in the components of cost of sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $472,000, or 10.0%, to $5.2 million for the
three months ended March 31, 1997 from $4.7 million for the three months ended
March 31, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 34.0% for the three months ended March 31,
1997 from 38.3% for the three months ended March 31, 1996. The decrease in
selling, general and administrative expenses as a percentage of net sales was a
result of spreading administrative expenses over higher sales volume.
Amortization expense of $554,000 and $560,000 for the three months ended March
31, 1997 and 1996, respectively, related to intangible assets created in
connection with the Recapitalization.

Operating income. Operating income increased $1.3 million, or 76.5%, to
$3.0 million for the first quarter of 1997 from $1.7 million for the first
quarter of 1996. As a percentage of net sales, operating income increased to
19.5% for the first three months of 1997 from 14.1% for the first three months
of 1996.

Interest expense. Interest expense of $885,000 and $977,000 for the three
months ended March 31, 1997 and March 31, 1996, respectively, related primarily
to bank term loans.

Income tax. Income tax expense for the three months ended March 31, 1997
and March 31, 1996 include provisions for federal, state and Hong Kong income
taxes at an effective rate of 40.0%.

THREE MONTHS ENDED MARCH 31, 1997

Net sales. Net sales were $15.2 million for the first quarter of 1997. This
quarter has historically been a lower volume quarter. Net sales for the RCI
Group and the RCL Group for the three months ended March 31, 1996 were $12.3
million. Net sales for the three months ended March 31, 1997 included racing
vehicle replicas and Racing Champions Mint non-racing vehicle replicas as well
as the initial shipments of the Racing Champions Hot Rod Collection and Comic
Book Champions collectible pewter figures.

Gross profit. Gross profit was $8.7 million for the first quarter of 1997.
The gross profit margin (as a percentage of net sales) was 57.2%. Net sales from
Hong Kong shipments, which generate lower gross profit due to price discounts,
were 62.5% of total net sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $5.2 million in the three months ended March 31,
1997. As a percentage of net sales, selling, general and administrative expenses
were 34.0%. Amortization expense of $554,000 or 3.6% of net sales in the first
quarter of 1997 relates to intangible assets created in connection with the
Recapitalization.

Operating income. Operating income for the first quarter of 1997 was $3.0
million or 19.5% of net sales. Excluding the amortization of intangible assets,
operating income was $3.5 million or 23.2% of net sales.

Interest expense. Interest expense was $2.4 million in the first quarter of
1997. Interest expense related primarily to bank term loans and subordinated
debt incurred in connection with the Recapitalization.

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<PAGE> 28

Income tax. Income tax expense for the three months ended March 31, 1997
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 40.0%.

EIGHT MONTHS ENDED DECEMBER 31, 1996

Net sales. Net sales were $49.4 million for the eight months ended December
31, 1996. Net sales for the RCI Group and the RCL Group for the eight months
ended December 31, 1995 were $39.4 million. Net sales for the eight months ended
December 31, 1996 included shipments of racing vehicle replicas and Racing
Champions Mint products.

Gross profit. Gross profit was $28.0 million for the eight months ended
December 31, 1996. The gross profit margin was 56.7%. Included as a reduction to
gross profit was a purchase accounting inventory write-up adjustment which
resulted in an additional $1.4 million of cost of sales. Excluding the impact on
the inventory write-up adjustment, gross profit for the eight months ended
December 31, 1996 was $29.4 million or 59.5% of net sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $15.2 million in the eight months ended December
31, 1996. As a percentage of net sales, selling, general and administrative
expenses were 30.9%. Amortization expense of $1.5 million or 3.1% of net sales
in the eight months ended December 31, 1996 relates to intangible assets created
in connection with the Recapitalization.

Operating income. Operating income for the eight months ended December 31,
1996 was $11.2 million or 22.8% net sales. Excluding the impact of the inventory
write-up adjustment and the amortization of intangible assets, operating income
was $14.1 million or 28.6% of net sales.

Interest expense. Interest expense was $6.7 million in the eight months
ended December 31, 1996. Interest expense related primarily to bank term loans
and subordinated debt incurred in connection with the Recapitalization.

Income tax. Income tax expense for the eight months ended December 31, 1996
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 41.3%.

RCI GROUP

FOUR MONTHS ENDED APRIL 30, 1996

Net sales. Net sales were $16.6 million for the four months ended April 30,
1996. This period includes the first quarter of the year which has historically
been a lower volume quarter. Net sales for the RCI Group and the RCL Group for
the four months ended April 30, 1995 were $9.2 million. Net sales for the four
months ended April 30, 1996 included racing vehicle replicas and the initial
shipments of Racing Champions Mint products.

Gross profit. Gross profit was $7.2 million for the four months ended April
30, 1996. The gross profit margin was 43.4%.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.7 million in the four months ended April 30,
1996. As a percentage of net sales, selling, general and administrative expenses
were 28.4%. Non-recurring bonus expense of $2.4 million or 14.4% of net sales in
the four months ended April 30, 1996 related to a one time payment of incentive
compensation in connection with the Recapitalization.

Operating income. Operating income for the four months ended April 30, 1996
was $108,000 or 0.6% of net sales. Excluding the impact of the non-recurring
bonus expense, operating income was $2.5 million or 15.0% of net sales.

Interest expense. Interest expense was $20,000 in the four months ended
April 30, 1996. Interest expense related primarily to short-term working capital
bank loans.

27
<PAGE> 29

Income tax. Income tax expense for the four months ended April 30, 1996
includes only a provision for state replacement taxes as the entities in the RCI
Group were S corporations and therefore not subject to federal income taxes.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net sales. Net sales increased $5.3 million, or 12.2%, to $48.6 million for
1995 from $43.3 million for 1994. The sales growth for 1995 was attributable to
(i) strong growth in the NASCAR racing replica category ($6.5 million), as the
Company expanded its NASCAR stock car product offerings and introduced NASCAR
racing trucks, and (ii) increases from other racing replica product lines ($1.7
million) including the introduction in late 1995 of NHRA top fuel dragster
replicas. These increases were partially offset by a decrease in a line of
vintage automobile and airplane die cast coin banks ($2.9 million) produced by
another company and resold to wholesalers by the Company. The sales increase in
1995 was accomplished despite the negative impact on first quarter sales due to
delays by the vehicle manufacturers in finalizing stock car designs that in turn
delayed the Company's ability to complete tooling on new models.

Gross profit. Gross profit increased $4.9 million, or 27.1%, to $23.0
million for 1995 from $18.1 million for 1994. The gross margin increased to
47.4% in 1995 from 41.7% in 1994. The increase in gross margin was due to a 2.5%
price increase in 1995 coupled with stable product costs and a benefit of 1.7%
from decorating and design efficiencies. In addition, gross profit benefited by
approximately 1.5% as a percent of net sales when the Company's products were
classified as import duty free beginning January 1, 1995, a reduction from 7.0%
of product cost in 1994.

Selling, general and administrative expense. Selling, general and
administrative expenses increased $3.8 million, or 40.0%, to $13.3 million for
1995 from $9.5 million for 1994. As a percentage of net sales, selling, general
and administrative expenses increased to 27.4% in 1995 from 21.9% in 1994. The
increase in selling, general and administrative expenses was a result of higher
royalty expenses which increased 4.8% (as a percentage of net sales) due to
increased rates on new product categories and specialty promotional programs.
The remainder of the increase was attributable to commissions expense which
increased as a result of a higher percentage of total sales being made to
customers assisted by outside sales representatives.

Operating income. Operating income increased $1.2 million, or 14.1%, to
$9.7 million for 1995 from $8.5 million for 1994. As a percentage of net sales,
operating income increased to 20.0% for 1995 from 19.8% for 1994.

Income tax. Income tax expense for 1995 and 1994 includes provisions for
state replacement taxes for the RCI Group as these entities were S corporations
and therefore not subject to federal income taxes.

RCL GROUP

ONE MONTH ENDED APRIL 30, 1996

Net sales. Net sales were $3.9 million for the one month ended April 30,
1996. Net sales consisted of related party sales to the RCI Group of $1.3
million. The remaining net sales (non-RCI Group sales) are redundant with the
net sales from Hong Kong shipments recorded by the RCI Group for April of 1996.

Gross profit. Gross profit was $752,000 for the one month ended April 30,
1996. The gross profit margin was 19.5%.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $245,000 in the one month ended April 30, 1996. As
a percentage of net sales, selling, general and administrative expenses was
6.4%.

Operating income. Operating income for the one month ended April 30, 1996
was $507,000 or 13.1% of net sales.

Interest expense. Interest expense was $13,000 in the one month ended April
30, 1996. Interest expense related primarily to short-term working capital bank
loans.

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<PAGE> 30

Income tax. Income tax expense for the one month ended April 30, 1995
includes a provision for Hong Kong income taxes on certain entities in the RCL
Group while certain entities were tax free British Virgin Islands entities.

YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995

Net sales. Net sales increased $15.0 million, or 67.3%, to $37.3 million
for 1996 from $22.3 million for 1995. The sales growth for 1996 was attributable
to growth in NASCAR racing replica sales. Net sales consisted of related party
sales to the RCI Group of $11.3 million and $10.3 million in 1996 and 1995,
respectively. The remaining net sales (non-RCI Group sales) are redundant with
the net sales from Hong Kong shipments recorded by the RCI Group.

Gross profit. Gross profit increased $1.8 million, or 34.0%, to $7.1
million for 1996 from $5.3 million for 1995. The gross profit margin decreased
to 19.0% in 1996 from 23.7% in 1995. The decrease was due to an increase from
53.8% of 1995 net sales to 69.7% of 1996 net sales in non-RCI Group sales which
generate lower gross profit margins than sales to the RCI Group.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.2 million, or 35.5%, to $4.4 million for
1996 from $3.2 million for 1995. As a percentage of net sales, selling general
and administrative expenses decreased to 11.7% in 1996 from 14.4% in 1995. The
decrease in selling, general and administrative expenses as a percentage of net
sales was a result of an increase in the percentage of net sales represented by
non-RCI Group sales, which has the effect of spreading administrative expenses
over higher sales volumes.

Operating income. Operating income increased $659,000 or 31.9%, to $2.7
million in 1996 from $2.1 million for 1995. As a percentage of net sales,
operating income decreased to 7.3% for 1996 from 9.3% for 1995.

Interest expense. Interest expense increased to $130,000 for 1996 from
$55,000 for 1995. The increase was due to the bank working capital loans and
capital lease obligations.

Income tax. Income tax expense for 1996 and 1995 includes provisions for
Hong Kong income taxes on certain RCL Group entities while certain entities were
tax free British Virgin Islands entities.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the Recapitalization, the Company and RCI entered into
the Credit Agreement with the First National Bank of Boston ("Bank of Boston"),
as agent, and certain other lenders. The Credit Agreement provides for a
Revolving Loan, Term Loan A, Term Loan B, a Deferred Term Loan and the issuance
of letters of credit. The Revolving Loan allows the Company to borrow up to $5.0
million at any time prior to April 30, 2001, based upon the 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
the date of the Prospectus. Term Loan A in the principal amount of $30.0 million
is due on April 30, 2001 and Term Loan B in the principal amount of $10.0
million is due on April 30, 2002. The proceeds of Term Loan A and Term Loan B
were used to finance the Recapitalization. The Credit Agreement also provided
the Company with the ability to borrow up to $8.0 million under a Deferred Term
Loan at any time between March 31, 1997 and April 30, 1997, to refinance the
$8.0 million Senior Notes. The Company repaid the Senior Notes on March 31, 1997
using proceeds from the Deferred Term Loan. The Deferred Term Loan matures on
April 30, 2001. All borrowings under the Credit Agreement are secured by
substantially all of the assets of the Company.

Term Loan A, the Revolving Loan and the Deferred Term Loan bear interest,
at the Company's option, at Bank of Boston's base rate plus a margin that varies
between 0.50% and 1.25% or at a reserve adjusted Eurodollar rate plus a margin
that varies between 2.00% and 3.25%. The applicable margin is based on the
Company's financial performance, and for Term Loan A, the Revolving Loan and the
Deferred Term Loan, the margin is currently 1.25% for base rate loans and 2.75%
for Eurodollar loans. Term Loan B bears interest at a reserve adjusted
Eurodollar rate plus 3.25%. The Credit Agreement requires the Company to pay a

29
<PAGE> 31

commitment fee of one-half of one percent per annum on the average daily unused
portion of the Revolving Loan and the Deferred Term Loan.

At the completion of the Offering, the Company intends to replace the
Credit Agreement with a revised agreement permitting the Company to use the
proceeds of the Offering to repay certain indebtedness and redeem the Series A
Preferred Stock and Series B Preferred Stock and providing the Company with term
and revolving loan availability of approximately $40.0 million at lower interest
rates than currently provided by the Credit Agreement. These lower rates are
expected to range from a reserve Eurodollar rate plus 1.50% to 2.00%.

Bank of Boston's Hong Kong branch has made available to the Hong Kong
Subsidiary a line of credit of up to $5.0 million. Amounts borrowed under this
line of credit bear interest at the bank's cost of funds plus 2% and are
cross-guaranteed by RCI and the Hong Kong Subsidiary. As of January 31, 1997,
the Hong Kong Subsidiary had not borrowed under this line of credit.

The Company's anticipated debt service obligations in 1997 for scheduled
interest and principal payments are approximately $10.8 million for amounts
outstanding under the Credit Agreement and approximately $10.6 million for
indebtedness incurred pursuant to the Recapitalization. Assuming that the
Company does not incur additional indebtedness and after giving effect to the
Offering and the application of the net proceeds from the Offering as described
in "Use of Proceeds," the Company anticipates that its annual debt service
obligations will be $7.8 million through December 31, 1999.

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. Capital expenditures for the
eight month period ended December 31, 1996 were $2.3 million ($3.3 million for
the full year combined). The Company expects that capital expenditures during
1997, principally for molds and tooling, will be approximately $5.0 million.
During 1996, the Company borrowed $40.0 million in connection with the
Recapitalization and repaid $3.1 million of principal related to the bank term
loans. 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 and provide the Company with
adequate liquidity to meet its 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25") "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
The Company has elected to continue to measure compensation cost under APB No.
25. If the APB No. 25 method is continued, pro forma disclosures are required as
if SFAS No. 123 accounting provisions were followed.

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<PAGE> 32

BUSINESS

GENERAL

Racing Champions is a leading producer and marketer of collectible scaled
die cast vehicle replicas. The Company is best known for its extensive line of
officially licensed, high quality collectible replicas of actual race cars and
related vehicles from the five most popular U.S. professional racing series,
including NASCAR. Since its inception in 1989, the Company has capitalized on
the growing popularity of motor sports by offering an expanding line of high
quality, affordable racing replicas targeted toward racing fans and adult
collectors. The Company believes that it has the largest domestic market share
in the die cast racing replica category. Beginning in 1996, the Company
successfully expanded into non-racing collectibles by introducing the Racing
Champions Mint line of die cast replicas of classic and late-model vehicles. The
Company is continuing this expansion in 1997 by introducing an additional line
of non-racing vehicle replicas and two new lines of collectible pewter figures.
From 1990, the Company's first full year of operations, through 1996, the
Company's net sales grew from approximately $5 million to $66 million.

COLLECTIBLES INDUSTRY

The collectibles industry is composed of numerous niche markets served by a
wide variety of producers and distributors. Collectible products include
figurines, dolls, ceramic buildings, prints, plates, glass, ornaments, steins,
music boxes, trading cards and die cast items, including vehicles. Collectible
products are generally of high quality, produced in limited quantities and
targeted to adults. According to the Collectibles Industry Report for 1996 by
Unity Marketing, an independent market research firm, the collectibles industry
generated customer sales of approximately $8.0 billion in the United States in
1995. This represented a 13.0% increase from 1994 and a 23.0% increase from
1993. Demographic trends are expected to positively impact the industry, as the
baby boom generation ages and has higher discretionary income that can be spent
on leisure goods such as collectibles. The Company is currently focused on the
following two segments of the collectibles market.

DIE CAST VEHICLE REPLICAS

The die cast vehicle industry generated consumer sales of approximately $1
billion in the United States in 1996. Die cast vehicles include airplanes,
trains, tractors, and most significantly, automobiles and trucks and have been
produced for many years by a wide variety of companies. While a significant
percentage of die cast products have historically been sold as toys, an active
base of adult die cast collectors has developed over time. Various secondary
markets for die cast vehicles have subsequently developed with a number of
periodicals regularly reporting the secondary market value of a wide variety of
die cast vehicles.

Non-racing Vehicle Replicas. The non-racing die cast vehicle replicas
primary market is comprised of boys ages five and over and adults. Collectible
periodicals have for many years included die cast vehicles such as 1:64 scale
cars originally produced by Matchbox(R). While collector interest in die cast
cars continues, the Company believes that the quality of new 1:64 scale vehicles
has declined over the years as other manufacturers reduced features and costs in
order to compete on a price basis with toys. The Company has targeted its Racing
Champions Mint and Hot Rod Collection to adult collectors who make multiple
purchases of die cast vehicles because of their affinity for automobiles and
trucks, the authenticity of the replicas and the fun of collecting.

Racing Replicas. Due to the popularity of motor sports, racing replicas
emerged as a significant and growing category of the die cast vehicle industry.
The racing replica industry's primary market is racing fans and adult
collectors. The Company believes that its customers are predominately male with
approximately 80% age 24 and older. These fans are attracted to racing replicas
due to the highly detailed, precise nature of the replicas and the popularity of
racing and the teams, drivers and sponsors represented by the replicas.
Established secondary markets exist for racing replica products, including the
Company's, with market values reported in collector magazines such as Becketts,
Die Cast Digest and Tuff Stuff's RPM.

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<PAGE> 33

The Company believes that demand for racing replicas will continue to
increase as the interest in motor sports grows. The North American motor sports
industry currently enjoys a large and growing spectator base with total
attendance in 1996 exceeding 15.4 million at 215 sanctioned events. By
comparison, approximately 14.6 million people attended the 240 NFL regular
season games. The most popular of the motor sports circuits is the NASCAR
Winston Cup Series. From 1990 to 1996, attendance at Winston Cup events
increased from approximately 3.3 million to 5.5 million, an increase of
approximately 67%. During the same period, sales of NASCAR licensed merchandise
have increased from $60 million to $770 million, a compound annual growth rate
of approximately 53%. Racing Champions has contributed to this growth and has
been NASCAR's leading licensee since 1992. Overall Nielsen ratings for Winston
Cup telecasts increased approximately 20% from 1994 to 1996 and household
viewership increased approximately 27% for the same period. The growth in motor
sports in general, and NASCAR in particular, is expected to continue for a
number of reasons, including: (i) the opening of new superspeedways in the
Dallas/Ft. Worth and Los Angeles markets and the inclusion of these markets in
the 1997 Winston Cup Series; (ii) the expansion and upgrade of many existing
motor sports facilities throughout the U.S.; (iii) the conducting of IRL and
other non-NASCAR events at traditional NASCAR venues; and (iv) increased
television exposure in response to favorable ratings increases.

COLLECTIBLE FIGURES AND FIGURINES

Collectible figures and figurines are the largest category within the
collectibles industry with over $3 billion in consumer sales in 1996. These
figures and figurines are produced in various mediums including acrylic,
plastic, porcelain, crystal and pewter and depict characters from a wide variety
of themes including nostalgia, entertainment, sports and wildlife. The majority
of this market includes higher quality figures and figurines which are generally
intended for display. These items are often offered in limited edition sets,
which enhances their collectibility. A portion of this market includes
collectible "action" figures, which typically are plastic, and represent
characters from comics, movies, television shows or professional sports.
Established secondary markets exist for collectible action figures, with market
values reported in collector magazines such as White's Collecting Figures and
Action Figure Digest.

Comic Book Characters. Comic books have been an entertainment medium since
their inception in the late 1930's. Many of today's favorite mythical characters
were created in the pages of comic books, including such popular superheroes as
Batman, Superman and Spiderman. Related entertainment products such as movies
and television programs increase the reach of comic book characters to a wide
spectrum of consumers and collectors. Comic books and comic book characters have
grown into a significant adult collectibles category as a result of comic books'
60 year history, unique and imaginative characters and thousands of published
titles. The comic book character market primarily attracts adult males and is
supported through national and regional collector shows, auctions and dedicated
publications such as Overstreets Price Guides, Wizard Magazine and Fan Magazine.

Sports Collectibles. The sports collectible and memorabilia business has
grown over the last decade from primarily trading cards to encompass a large
variety of products including autographed equipment, pictures and replica
figures. The collector base consists of both children and adults, the majority
of whom are male. Sports memorabilia and collectible products are in high demand
due to the increase in media exposure and the celebrity status afforded past and
present athletes. Collector shows, auctions and dedicated publications such as
Becketts and Sports Collectors Digest help support the growth in secondary
market trading of sports collectibles and memorabilia which has further enhanced
collector interest in the category.

BUSINESS STRATEGY

The Company's objectives are to (i) expand its racing replica business by
capitalizing on the growing popularity of motor sports and (ii) leverage its
brand name, reputation with collectors and established distribution and
manufacturing relationships by developing new collectible products. The
Company's primary strategies for achieving these objectives are as follows:

Produce Highly Detailed, Authentic Replicas. A significant component of the
Company's success is its expertise in producing highly detailed, scaled replicas
known for their quality workmanship and authenticity.

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Producing authentic collectibles generally requires the Company to secure
licensing agreements with the groups or individuals representing the item or
person to be replicated. As an example, the Company's racing replicas require
licensing agreements with racing teams, drivers and sponsors, vehicle
manufacturers and major racing series sanctioning bodies. The Company has
committed substantial resources toward the support of its licensing activities
which currently includes over 450 licenses and believes its licensing experience
and relationships with licensors provide it with a competitive advantage.

Develop New Collectible Products. The Company is continuously developing
new collectible products both within its current product categories and in new
areas. Management has developed specific criteria for evaluating and developing
new collectible products. These criteria include (i) the long-term viability and
market appeal of the person or object being replicated, (ii) the consumer's
desire to collect the product, (iii) the ability to produce ongoing series of
the product in a variety of styles, (iv) the suitability of the product for
distribution through mass merchant retailers and (v) an identifiable group of
targeted collectors for the product. These and other factors when taken together
allow Racing Champions to create innovative products designed to stimulate and
maintain collector interest. Since 1994, the Company has developed eight new
product lines, including Racing Champions Mint which generated $9.7 million in
net sales in its first year.

Foster Collectibility. To foster the collectibility of its product lines,
the Company carefully manages product quantities, staggers product release
dates, continuously freshens its product offerings, produces special editions,
utilizes distinctive packaging and adds additional features such as serial
numbers, display stands, emblems, trading cards and certificates of
authenticity. The Company has also enhanced collectibility by offering product
lines in a large variety of styles. As an example, the Company's racing replica
product category has over 900 different styles that are released in managed
quantities and require frequent updates due to changes in sponsors, vehicle
styling, graphics and drivers. The Company believes it has established
considerable brand loyalty among its collector base, many of whom purchase a
substantial number of the Company's products each year.

Offer Affordable Collectibles Through Mass Market Distribution. The Company
believes its distribution through mass merchants such as K-Mart, Target, Toys
'R' Us and Wal-Mart provides a strong demographic fit with its targeted
customers. By focusing on this high volume channel of distribution rather than
traditional collectible channels such as giftware, hobby and collector shops,
direct response and direct mail collector clubs, the Company also realizes
substantial economies of scale which lower its product and selling costs and in
turn allow the Company to sell at reduced prices without adversely affecting
quality. In order to broaden the potential collector base for its products, the
Company's replicas are affordably priced, typically under $30 at retail.

Maintain Dedicated External Manufacturing Relationships. The Company
believes that its dedicated supplier base together with the local oversight and
coordination provided by the Hong Kong Subsidiary provide it with certain
competitive advantages including a rapid product development capability and a
highly flexible, reliable and high quality supply source. All but two of its six
manufacturers are exclusively dedicated to the production of the Company's
products and all are privately owned by independent Chinese entrepreneurs. The
Company is not bound to specific order levels and consequently can quickly
adjust output levels in response to increased or decreased product demand. In
addition, the Company generally produces only enough product to satisfy current
outstanding orders which allows Racing Champions to maintain relatively low
inventory levels.

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PRODUCTS

The Company produces products in the die cast racing replica, non-racing
vehicle replica and collectible figure categories. Since 1989, the Company has
continually introduced new products and expanded its product lines. The
Company's current products were introduced in the following years:

<TABLE>
<CAPTION>
YEAR OF INTRODUCTION PRODUCTS
- -------------------- --------
<S> <C>
1989 1:64 stock car

1990 1:87 team transporter

1991 1:64 team transporter; 1:24 stock car

1993 1:24 pit stop display; 1:64 and 1:24 Premier Edition stock
cars

1994 1:64 Indy style race car; 1:24 Indy style race car; 1:64
sprint car; 1:24 sprint car

1995 1:64 racing truck; 1:24 stock car with opening hood; 1:24
racing truck; 1:18 stock car with opening hood; 1:9 racing
motorcycle; 1:24 top fuel dragster

1996 1:64 stock car with opening hood; 1:144 stock car; 1:64
top fuel dragster; 1:64 funny car; 1:64 pro stock drag
racer; 1:24 funny car; 1:24 pro stock drag racer; 1:64
Racing Champions Mint

1997 1:144 racing truck; 1:144 team transporter; 1:144 top fuel
dragster; 1:144 funny car; 1:144 pro stock drag racer;
1:24 Hot Rod Collection; 1:64 Hot Rod Collection; Comic
Book Champions pewter figures; Sports Champions pewter
figures; 1:144 Racing Champions Mint
</TABLE>

RACING REPLICAS

The Company's racing replicas include a comprehensive line of scaled stock
cars, trucks and team transporters representing most of the vehicles competing
in the current year's NASCAR Winston Cup Series, Busch Grand National Series and
Truck Series by Craftsman. The Company also produces replicas from other popular
racing series including NHRA drag racing, CART and IRL Indy style racing and
World of Outlaws sprint car racing, as well as Honda and Kawasaki racing
motorcycles. In 1996, Racing Champions produced over 900 different styles of
racing replicas, including various sizes such as 1:9, 1:18, 1:24, 1:64, 1:87 and
1:144 scale. A 1:24 scale stock car replica is approximately eight inches long
whereas a 1:64 scale stock car replica is approximately three inches long. The
Company's racing replicas generally retail at prices ranging from $1 to $30.

NASCAR Vehicles: The NASCAR product line covers stock cars in the Winston
Cup and Busch Grand National Series and racing trucks in the NASCAR Truck Series
by Craftsman. NASCAR stock cars were the Company's initial offering in the
collectible racing replica category. NASCAR products include race cars and
trucks, team transporters and pit stop displays which are produced in various
sizes including 1:18, 1:24, 1:64, 1:87 and 1:144 scale. The NASCAR product line
is produced in an annual Regular Edition as well as special Premier and Preview
Editions. The Premier Edition is differentiated by more detailed painting,
special packaging and limited edition, serial numbered production runs. The
Preview Edition is released during the fourth quarter of a calendar year in
color schemes and sponsors anticipated for the upcoming year of racing. The
Company has entered into licenses with various NASCAR stock car and truck teams,
drivers, agents and sponsors, which allow the Company to replicate race cars and
race trucks and team transporters for over 100 teams.

Indy Style Cars: The Company began production of Indy style cars in 1994.
Indy style car products are produced in 1:24 and 1:64 scale sizes. The Company
has entered into licenses which allow the Company to replicate over 30 cars. The
Company also holds a license from the Indianapolis Motor Speedway to produce
special event related vehicles.

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<PAGE> 36

World of Outlaws Sprint Cars. The Company began production of the World of
Outlaws sprint car racing product line in 1994. Sprint car products are produced
in 1:24 and 1:64 scale sizes. The Company has entered into licenses which allow
the Company to replicate over 30 cars.

National Hot Rod Association Drag Racers. The Company introduced its NHRA
product line in 1995. NHRA products are currently produced in 1:24, 1:64 and
1:144 scale sizes. This product line includes licenses for the top fuel, funny
car and pro stock drag racing divisions which allow the Company to replicate
over 55 vehicles.

Honda/Kawasaki Motorcycles. The Company also introduced its Honda/Kawasaki
racing motorcycle product line in 1995. These products are produced in the 1:9
scale size. The Company has licensing agreements with Honda and Kawasaki to use
their team logos on the Company's products and packaging.

NON-RACING VEHICLE REPLICAS

Racing Champions Mint. In early 1996, the Company introduced the Racing
Champions Mint product line. The Racing Champions Mint is a new concept building
on the Company's racing replica success but still focusing on the collectible
die cast vehicle market. Each month the Company issues an assortment of six
serial numbered, highly detailed 1:64 scale replicas of classic and late model
cars and trucks in color schemes matching those used on the actual vehicle. Each
new issue is sequentially numbered and includes releases of new models and new
paint schemes. The replicas are selected from actual vehicles manufactured over
the past five decades. The limited production of these replicas enhances their
collectibility. In addition, the package contains a collector quality die cast
emblem of the vehicle's hood ornament or other insignia.

In 1997, the Company plans to introduce a 1:144 scale version of the Racing
Champions Mint. Also in 1997, the Company has entered into an agreement with
Petersen Publishing Company which allows for the use of the Motor Trend Magazine
trade name and trademarks on the Racing Champions Mint product line. The Company
believes that the Motor Trend name increases the authenticity of this product
line and creates additional interest with collectors and automobile enthusiasts.
In addition, the Company plans to promote this product line in Motor Trend
Magazine and on Motor Trend's cable television show.

Hot Rod Collection. Due to the success of Racing Champions Mint and
consumer feedback, the Company launched in early 1997 a new line of collectible
die cast hot rod car replicas. The Racing Champions Hot Rod Collection is based
on an exclusive license with Petersen Publishing Company's Hot Rod Magazine and
includes custom designed hot rod cars in 1:24 and 1:64 scale sizes. In addition
to the license, the Company will promote this product line in Hot Rod Magazine
and on Hot Rod Magazine's cable television show and Power Tour of various U.S.
cities. Like Racing Champions Mint, new Hot Rod Collection models and styles
will be released in monthly assortments. Each vehicle in the Racing Champions
Hot Rod Collection is produced in limited quantity and includes a serial number
to enhance collectibility.

COLLECTIBLE PEWTER FIGURES

In 1997, the Company introduced a new product category, collectible pewter
figures. High quality pewter figures had not previously been widely available
through mass merchants. The Company's initial focus related to this product
category is two proven and highly recognizable licensed properties -- comic book
characters and popular athletes. Products in this category will be released in
continuing series. Replicas of individual comic book characters and popular
athletes will be produced in limited production runs and will not be repeated.
In order to further collectibility, all products will be hand numbered and sold
with a certificate of authenticity. The initial two collectible pewter figure
product lines include:

Comic Book Champions. The Company recently began producing the Comic Book
Champions line of collectible pewter replicas, and shipped the first Comic Book
Champions replicas in March 1997. Comic Book Champions is a series of pewter
replicas of comic book characters in action poses. Each figure is mounted on a
die cast stand in front of an encased miniature reproduction of a comic book
cover on which the character appeared. Comic Book Champions will be produced in
Gold, Silver and Modern Age series, representing different eras of comic book
publishing. The Company has separate, nonexclusive licensing agreements with

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<PAGE> 37

Marvel Characters, Inc. and DC Comics to use the likenesses of certain comic
book characters and the reproductions of the comic book covers for this product.
Figures in the initial releases will include Superman(R), Batman(R),
Spiderman(R), Captain America(R), the Incredible Hulk(R) and the Joker(R).

Sports Champions. The Company recently began producing the Sports Champions
line of collectible pewter replicas, and shipped the first Sports Champions
replicas in May 1997. Sports Champions is a series of pewter replicas of popular
athletes. Each replica is mounted on a die cast stand in front of an encased
miniature reproduction of a Sports Illustrated magazine cover on which the
athlete appeared. The Company has a licensing agreement with Sports Illustrated
to use its trade name and the reproductions of its magazine covers. The Company
is also negotiating licensing agreements with several major sports leagues
(including the National Football League, Major League Baseball, the National
Hockey League and the National Basketball Association) and has entered into
licenses with several professional athletes to use their likenesses on the
Sports Champions replicas. The Company anticipates entering into licensing
agreements with additional sports figures as the Sports Champions product line
is developed. The initial releases of the Sports Champions line will include
Muhammad Ali, Frank Thomas, Ken Griffey, Jr., Joe Montana and Arnold Palmer,
among others.

LICENSES

The Company markets virtually all of its products under licenses from other
parties. These licenses are generally limited in scope and duration and
authorize the sale of specific licensed products on a nonexclusive basis for a
limited period of time. The Company has over 450 licenses with various race team
owners, drivers, sponsors and agents, generally for terms of 1 to 3 years. The
Company's racing replicas are also officially licensed by major race sanctioning
bodies including NASCAR, CART, IRL, NHRA and World of Outlaws. Although the
Company generally does not pursue exclusive licenses, the Company's licensing
arrangements with NASCAR and World of Outlaws are exclusive through December 31,
1997. The Company has renewed its license agreement with NASCAR on a
nonexclusive basis for three years commencing on January 1, 1998. The Company
anticipates that certain of its competitors will also license the NASCAR
trademark on a nonexclusive basis for use on racing replicas in 1998, which
could result in increased competition for the Company's NASCAR racing replicas.
The Company has also obtained licenses to produce replicas of Honda and Kawasaki
racing motorcycles through January 31, 1998. The Company also has license
agreements with the major automobile and truck manufacturers, including
Chevrolet, Ford, Oldsmobile, Pontiac, Buick, Cadillac, Dodge, Chrysler and
Kenworth. The Company operates an office in Charlotte, North Carolina to
maintain its licenses for racing replicas for vehicles competing in the various
NASCAR and World of Outlaws series.

The Company has entered into additional licensing arrangements in
connection with the development of its Comic Book Champions and Sports Champions
product lines. The Company has separate licensing agreements with Marvel
Characters, Inc. and DC Comics (a division of Time Warner Entertainment Company
L.P.) to use the likenesses of certain comic book characters and the
reproductions of comic book covers on which they have appeared. The license
agreement with Marvel Characters, Inc. expires on December 31, 1999, while the
license agreement with DC Comics expires on December 31, 1998. The Company also
has a licensing agreement with Sports Illustrated to use its trade name and the
reproductions of magazine covers which expires on June 30, 1999. The Company is
negotiating licenses with the National Football League, Major League Baseball,
the National Hockey League and the National Basketball Association to produce
its Sports Champions replicas. The Company has entered into licensing agreements
with several professional athletes to use their likenesses on the Sports
Champions replicas, and anticipates entering into licensing agreements with
additional professional athletes as the Sports Champions product line is
developed.

Royalty rates for racing replicas vary by racing category but generally
range in aggregate for all licensors from 12% to 19% of the Company's sales
price. Certain special or limited edition products may carry higher royalty
rates. Royalty rates related to non-racing vehicle replicas range in aggregate
from 3% to 10% of the Company's sales price. For collectible pewter figures the
Company expects to pay royalty rates in aggregate

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<PAGE> 38

from 10% to 23% of the Company's sales price depending on the number of parties
involved and the market value of the property or athlete. Royalties are
generally paid on a quarterly basis.

PATENTS AND TRADEMARKS

The Company has registered several trademarks with the U.S. Patent and
Trademark Office, including the mark "Racing Champions." Other trademark
registrations are currently pending, including Racing Champions Mint(TM), Comic
Book Champions(TM), Sports Champions(TM) and Collectible Champions(TM). The
Company holds a U.S. patent for its trading card, display stand and model
vehicle, and has a patent application pending for its unique packaging system
which includes a die cast vehicle, emblem and display stand. The Company
believes that there is significant value in its Racing Champions trade name and
trademark and plans to build additional value through increased customer
awareness of many of the Company's trade names and trademarks.

SALES AND DISTRIBUTION

In 1996, approximately 76% of the Company's net sales were distributed
through national and regional retail chains including K-Mart, Target, Toys 'R'
Us, Wal-Mart, Hills, Meijers and ShopKo. The Company's products are sold at more
than 20,000 retail outlets throughout North America. The Company utilizes
electronic data interchange with its major retail customers to monitor retail
inventories and point of sale information and receive and process customer
orders.

In addition, the Company sells to a limited number of wholesale customers
which as a group represented approximately 15% of net sales for 1996. The
wholesale channel distributes Racing Champions' products to hobby and collector
shops throughout North America. The Company's sales to this channel on a
percentage basis have been declining as its distribution through major national
and regional retailers has increased.

The Company also distributes products through the premium/promotional
distribution channel. In total, this channel represented approximately 9% of net
sales for 1996. Premium/promotional customers include Texaco, John Deere, Citgo,
NAPA, Kellogg's, Procter & Gamble, Mac Tools and Snap-On Tools. The Company's
premium/promotional customers offer the Company's customized products to their
customers through their own distribution outlets (e.g., Texaco, John Deere and
Citgo), through special promotions (e.g., Kellogg's and Procter & Gamble) or
with the purchase of their product (e.g., Snap-On Tools).

In total, the Company sells to approximately 300 customers. The Company's
internal sales force provides direct customer contact with virtually all of the
Company's retail and wholesale accounts. This sales force is supplemented by
five external sales representative organizations which are divided
geographically. These external sales representative organizations provide more
frequent and wider customer service and solicitation of the national and
regional retailers and support approximately 61% of the Company's 1996 net
sales. The Company's internal sales force complements the external sales force
by providing a more limited direct relationship between the Company and the
accounts assigned to the external sales force. In addition, certain large
accounts are designated as "house accounts" and are handled exclusively by the
Company's internal sales staff. Sales representatives generally earn commissions
of 3% to 5% of the net sales price from their accounts, and their commissions
are not affected by the involvement of the Company's internal sales force with a
customer or sale.

MARKETING

The Company is introducing marketing programs which are directed toward
collectors and potential new customers that fit the demographic profile of the
Company's target market. The focus of the Company's marketing plan is to
increase awareness of the Company's product offerings and brand name. The
Company utilizes the following media in its marketing plan.

Print Advertising. The Company places advertisements in collector's
publications with high, specific market penetration such as die cast collector
publications and figure collector publications. The Company also

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advertises in national publications read by its targeted collectors and
enthusiasts, such as NASCAR Magazine, Die Cast Digest, Hot Rod Magazine, Motor
Trend, DC and Marvel comic books, and Sports Illustrated.

Public Relations. The Company has developed a sustained public relations
effort to build relationships with editors at collector publications. Ongoing
product notices keep editors abreast of changing products, increase the
Company's credibility and market acceptance, and encourage the editorial staffs
of these publications to give adequate coverage to the Company's products.

Co-op Advertising. The Company works closely with retail chains to plan and
execute ongoing retailer driven promotions and advertising. The programs usually
involve promotion of the Company's products in retail customers' print
circulars, mailings and catalogs.

Direct Consumer. The Internet is an increasingly important part of the
Company's marketing plan as collectors have quickly adopted the Internet as a
preferred way to communicate with other enthusiasts about their hobby. The
Company has established a proprietary World Wide Web site (www.racingchamps.com)
on the Internet which highlights its products, lists product release dates and
collects information directly from consumers. The Company also gathers customer
information through customer letters, e-mail, telephone calls and product
surveys. The Company uses this customer information for market research and
dissemination of new product information.

COMPETITION

The Company believes that it had the largest domestic share in 1996 of the
collectible scaled die cast racing replica category. The Company competes with
the other producers of collectible scaled die cast racing replicas, such as
Action Performance Companies, Inc., which generally distribute their products
through direct marketing, collector clubs and wholesalers who, in turn,
distribute through hobby and collector shops. In contrast, most of the Company's
products are distributed through the mass merchant channel of distribution.
Mattel and Hasbro have also recently entered the racing replica market and are
expected to distribute competing die cast racing replicas in the mass merchant
channel of distribution.

The Company also competes with the producers of miniature die cast toy
vehicles such as Matchbox(R) and Hot Wheels(R) who, like the Company,
principally distribute through the mass merchant channel. In this market, the
Company competes with Tyco Toys, Inc. (Matchbox), Mattel, Inc. (Hot Wheels),
Lewis Galoob Toys, Inc. (Micro Machines(R)), Playing Mantis (Johnny
Lightning(R)) and Road Champs, Inc. as well as other domestic and foreign
producers of miniature die cast toy vehicles. Many of the Company's competitors
have greater financial, technical, marketing and other resources than the
Company.

The Company believes that its competitive position is enhanced by a number
of factors, including product quality, features, pricing and diversity, its
ability to recognize trends in its product markets and anticipate shifts in
consumer preferences, its success in designing and marketing new products, the
availability of adequate sources of manufacturing capacity and the ability of
its third party manufacturers to meet delivery schedules, and its ability to
renew existing licenses and to enter into new licenses. In addition, the Company
has sought to develop brand loyalty, to produce products with a proven track
record of collectibility, and to capture shelf space at leading mass merchants
and other retailers.

MANUFACTURING

Hong Kong Office. The Hong Kong Subsidiary is located in Kowloon, Hong Kong
and employs 28 people who oversee all aspects of the Company's product
manufacturing activities. The Hong Kong Subsidiary sources raw materials and
packaging, performs engineering and graphic art functions, executes the
production schedule, provides on-site quality control, facilitates third-party
safety testing and coordinates the delivery of shipments for export from Hong
Kong to the United States.

Die Cast Vehicle Manufacturing. Virtually all of the Company's die cast
vehicle products are manufactured by four independently owned factories located
in the Shenzhen region of China, approximately 30 to 40 miles from Hong Kong.
All of these factories (the "Dedicated Manufacturers") are exclusively dedicated
to manufacturing the Company's products and all are privately owned by
independent Chinese entrepreneurs. All

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products are manufactured to the Company's specifications using molds and
tooling that are owned by the Company. The Dedicated Manufacturers own the
manufacturing equipment and machinery, and purchase raw materials, hire workers
and plan production which includes subassemblies, final assemblies and
packaging. The Company purchases fully assembled and packaged finished goods in
master cartons for distribution to its customers. Most of the Dedicated
Manufacturers have been supplying the Company for more than five years. The
Company's purchases in 1996 from the Dedicated Manufacturers, Win Yield, Sharp
Success, Sunrise and Shun Fung, were 31.3%, 29.9%, 22.9% and 15.8%,
respectively, of the Company's total purchases of die cast vehicle replicas. See
"Certain Transactions."

Over the next 24 months, the Dedicated Manufacturers are planning to
upgrade their factory facilities. With oversight from the Company, the Dedicated
Manufacturers have located a site in Dongguan (approximately 50 miles from Hong
Kong) named the Racing Industrial Zone (the "RIZ Complex") which, when fully
developed, will serve as a complex in which each independent Dedicated
Manufacturer will operate a free standing factory facility. The factory
facilities at the RIZ Complex are being developed by a third party who will
lease the factory facilities to the Dedicated Manufacturers. The construction of
the first free standing facility is currently underway and is expected to be
completed and occupied by one of the Dedicated Manufacturers in mid-1997. The
Company intends to establish an office in the RIZ Complex. This office would
house many of the functions that are currently performed in the Company's
Kowloon, Hong Kong office as well as provide more direct oversight and
coordination of the production activities.

Pewter Figures Manufacturing. The Company has entered into a development
and supply agreement with M-B Sales, L.P. ("M-B") headquartered in Westmont,
Illinois. Under the direction of the Company, M-B is arranging for the sculpting
and manufacturing of the Company's new pewter figure product lines. M-B is best
known as a developer of figures and other creative promotional ideas for select
clients such as McDonald's Corporation and Nestle's. M-B has relationships with
over 20 independent manufacturing suppliers in the Far East and is employing two
of its primary manufacturing suppliers to produce the Comic Book Champions and
Sports Champions product lines to specifications set by the Company. M-B intends
to develop other manufacturing suppliers who will be capable of producing the
Company's pewter products.

Product Development. New product development is constantly occurring as the
Company seeks to improve quality, update styles and add product lines. New
product design and updates are generally initiated domestically. The designing
process can take several days or a number of months depending upon whether the
process involves an enhancement to an existing product or a new product design.
The Company has been able to develop new products and make design changes
quickly due to its rapid approval process, integrated Hong Kong Subsidiary and
dedicated manufacturing.

Tooling. The Company is continuously developing new tooling and molds to
produce its die cast and pewter products. The Company's engineering staff works
closely with outside tool makers to design and create new tooling. Depending on
the size and complexity of the model, tools can cost from $20,000 to $120,000.
The Company often produces back-up tools for high volume models. The Company
owns all of its tools and provides them to the manufacturers during production.
Tools are returned to the Company when a product is no longer in production and
are stored for future use or destroyed.

Graphics. Existing product enhancements typically include graphics changes
to the vehicles for new color schemes, sponsor changes and/or driver changes and
revisions to product packaging. Graphics changes are photographed and forwarded
to the Hong Kong Subsidiary for incorporation into the Company's product line.
The Company's graphic arts personnel will redesign the car decorating process in
order to reflect the graphics changes. All changes are reviewed domestically by
Company personnel and samples are sent to racing teams and sponsors prior to
production for their approval.

Product Safety. The Company's products are designed, manufactured, packaged
and labeled to conform with the safety requirements of the American Society for
Testing and Materials and the Consumer Product Safety Commission and are
periodically reviewed and approved by independent safety testing laboratories.
The Company carries product liability insurance coverage with a limit of $5.0
million per occurrence. As of the date of the Prospectus, the Company has never
received a product liability claim.

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EMPLOYEES

As of March 31, 1997, the Company had 78 employees, 76 of which were
employed full-time. The Company emphasizes the recruiting and training of high
quality personnel and, to the extent possible, promotes people from within the
Company. The Company's employees are not covered by collective bargaining
agreements, and the Company considers its employee relations to be good. The
Company's continued success will depend in part on its ability to attract, train
and retain qualified personnel at all of its locations.

FACILITIES

The Company's facilities are as follows:

<TABLE>
<CAPTION>
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
----------- ----------- -------- ----------------
<S> <C> <C> <C>
Corporate Headquarters.... 9,269 Glen Ellyn, Illinois January 2000
Foreign Headquarters...... 7,900 Kowloon, Hong Kong July 1998
Warehouse................. 19,183 Chicago, Illinois December 1998
Licensing Office.......... 600 Charlotte, North Carolina Month-to-Month
</TABLE>

REGULATION AND LEGAL MATTERS

In the normal course of business the Company 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.

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MANAGEMENT

DIRECTORS AND OFFICERS

The directors and officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert E. Dods........... 48 President and Director
Boyd L. Meyer............ 55 Executive Vice President and Director
Peter K.K. Chung......... 43 President of Racing Champions Limited and Director
Curtis W. Stoelting...... 37 Vice President - Finance and Operations and Secretary
John F. Olsen............ 43 Vice President - Sales
Peter J. Henseler........ 38 Vice President - Marketing
M. Kevin Camp............ 39 Vice President - Licensing and Assistant Secretary
Helena Lo................ 37 Finance and Administration Manager
Kelvin Ng................ 36 Engineering Manager
Rose Lam................. 34 Marketing and Customer Service Manager
Jody L. Taylor........... 28 Controller
Michael A. Midtgaard..... 31 Information Systems Manager
Patrick A. Meyer......... 28 National Sales Manager
Avy H. Stein............. 42 Director
Samuel B. Guren.......... 50 Director
Daniel M. Gill........... 33 Director
</TABLE>

The Company's executive officers include the President, the President of
Racing Champions Limited and all Vice Presidents.

Robert E. Dods has served as a director and as President of Racing
Champions since April 1996. Mr. Dods co-founded RCI in 1989, and has served as
President of RCI since inception. Prior to founding RCI in 1989 Mr. Dods and
Boyd L. Meyer owned and operated Dods-Meyer, Ltd., a manufacturers'
representative agency which focused on selling products to mass merchants.

Boyd L. Meyer has served as a director and as Executive Vice President of
Racing Champions since April 1996. Mr. Meyer co-founded RCI in 1989, and has
served as Executive Vice President of RCI since inception. Prior to founding RCI
in 1989 Mr. Meyer and Robert E. Dods owned and operated Dods-Meyer, Ltd., a
manufacturers' representative agency which focused on selling products to mass
merchants.

Peter K.K. Chung has served as a director of Racing Champions and as
President of Racing Champions Limited since April 1996. Mr. Chung formed the RCL
Group in 1989 to handle the overseas operating activities of RCI and has served
as President of Racing Champions Limited since inception. Prior to 1989 Mr.
Chung was a contract manufacturer for various products for export from China to
the United States and Europe.

Curtis W. Stoelting has served as Vice President - Finance and Operations
and Secretary of Racing Champions since April 1996. Mr. Stoelting has also
served as Vice President - Finance and Operations of RCI since 1994. Prior to
joining RCI, Mr. Stoelting was employed for 12 years by Arthur Andersen LLP in
Chicago, most recently as a Senior Manager. Mr. Stoelting is a Certified Public
Accountant.

John F. Olsen has served as Vice President - Sales of Racing Champions
since April 1996. Mr. Olsen has also served as Vice President - Sales of RCI
since 1993. Prior to joining RCI, Mr. Olsen worked for a sales representative
organization located in New York and in this capacity represented the Racing
Champions line since 1989.

Peter J. Henseler has served as Vice President - Marketing of Racing
Champions since April 1996. Mr. Henseler has also served as Vice
President - Marketing of RCI since March 1996. Prior to joining RCI,

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<PAGE> 43

Mr. Henseler was a director of marketing for McDonald's Corporation since 1988,
and was most recently responsible for in-store merchandising and worldwide
trademark licensing.

M. Kevin Camp has served as Vice President - Licensing and Assistant
Secretary of Racing Champions since April 1996. Mr. Camp has also served as Vice
President - Licensing of RCI since 1994. Prior to joining RCI, Mr. Camp held
various positions over a 10 year period while employed by NASCAR, most recently
serving as director of licensing and marketing.

Helena Lo has served as Finance and Administration Manager of Racing
Champions Limited since 1989. Ms. Lo received a bachelor's degree in Business
Administration and prior to joining Racing Champions Limited, Ms. Lo was
employed by a chartered accounting firm.

Kelvin Ng has served as Engineering Manager of Racing Champions Limited
since 1989. Mr. Ng is a degreed mechanical engineer with extensive experience in
replicating vehicles.

Rose Lam has served as Marketing and Customer Service Manager of Racing
Champions Limited since 1989. Prior to joining RCL, Ms. Lam pursued various
studies and received a bachelor's degree in economics.

Jody L. Taylor has served as Controller since June 1996. Prior to joining
the Company, Ms. Taylor was employed for five years by Arthur Andersen LLP in
Chicago, most recently as a manager. Ms. Taylor is a Certified Public
Accountant.

Michael A. Midtgaard has served as Information Systems Manager of Racing
Champions, Inc. since 1994. Prior to 1994, Mr. Midtgaard served RCI for over
three years in various operations and systems areas.

Patrick A. Meyer has served as National Sales Manager of Racing Champions
since July 1996. Prior to joining Racing Champions, Mr. Meyer was employed as a
sales representative by a seller of computer hardware from 1993 to 1996 and as a
sales representative by Adolph Coors Company from 1991 to 1993. Patrick A. Meyer
is the son of Boyd L. Meyer.

Avy H. Stein has served as a director since April 1996. Mr. Stein is a
founder and Managing Director of Willis Stein. Along with Mr. Willis, Mr. Stein
is responsible for managing Willis Stein. Prior to founding Willis Stein, Mr.
Stein served as a Managing Director of Continental Illinois Venture Corporation
from 1989 through 1994, where Mr. Stein, along with Mr. Willis, was responsible
for managing Continental's private equity investment activities. Mr. Stein is a
director of Tremont Corporation and Petersen Publishing Company.

Samuel B. Guren has served as a director since April 1996. Mr. Guren is a
Managing Director of Baird Capital Partners, an affiliate of Robert W. Baird &
Co. Incorporated. Prior to joining Baird Capital Partners in February 1996, Mr.
Guren was a co-founder and managing partner of venture funds affiliated with
William Blair & Company. Mr. Guren is a director of Four M Corporation.

Daniel M. Gill has served as a director since April 1996. Mr. Gill is a
founder and Managing Director of Willis Stein. Prior to founding Willis Stein,
Mr. Gill served as a Managing Director of Continental Illinois Venture
Corporation from 1989 through 1994, where Mr. Gill was responsible for
initiating and structuring acquisitions, working with portfolio company
management teams on an on-going basis and arranging for the disposition of
portfolio investments.

The Company's Board of Directors (the "Board of Directors"), in accordance
with the Amended and Restated By-Laws of the Company (the "By-Laws"), has fixed
the size of the Board of Directors at eight directors. Within 90 days after the
completion of the Offering, the Company intends to identify and appoint two
individuals who are not currently affiliated with the Company as the remaining
members of the Board of Directors. All directors are elected to serve until the
next annual meeting of stockholders and until their successors are elected and
qualified.

The Board of Directors intends to establish a Compensation Committee and an
Audit Committee upon or shortly after completion of the Offering. The Audit
Committee will be responsible for recommending to the Board of Directors the
appointment of independent auditors, reviewing the scope of annual audit
activities of the auditors, approving the audit fee payable to the auditors and
reviewing audit results. The Compensation

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<PAGE> 44

Committee will review and recommend to the Board of Directors the compensation
structure for the Company's officers and other managerial personnel, including
salary rates, participation in incentive compensation and benefit plans, fringe
benefits, noncash perquisites and other forms of compensation. The Compensation
Committee will also administer the Company's 1996 Key Employees Stock Option
Plan and the Racing Champions Corporation 1997 Stock Incentive Plan.

Executive officers will be elected each year at the annual meeting of
directors and will hold office until their resignation, death or removal, or
until the Board of Directors appoints a different person to the office.

Directors who are employees of the Company or are affiliates of members of
the Investor Group receive no compensation for services as members of either the
Board of Directors or committees thereof. Other directors will receive an annual
retainer of $7,500, payable in cash, and will receive a fee of $1,000 for each
Board of Directors meeting attended and $1,000 for each committee meeting
attended. Such fees for attendance at Board of Directors meetings and committee
meetings may not exceed $1,000 per day.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION INFORMATION. The following table sets forth certain
information concerning compensation paid to, earned by or awarded to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers for the eight month period ended December
31, 1996. The persons named in the table are sometimes referred to herein as the
"named executive officers."

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(2) BONUS(3) OPTIONS (#) COMPENSATION(4)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert E. Dods, President...................... $333,333 $ -- -- $ --
Boyd L. Meyer, Executive Vice President........ 333,333 -- -- --
Peter K.K. Chung, President of Racing Champions
Limited...................................... 333,333 -- -- --
Curtis W. Stoelting, Vice President - Finance
and Operations and Secretary................. 100,178 139,072 83,008 1,381
John F. Olsen, Vice President - Sales.......... 83,511 80,350 41,304 2,024
</TABLE>

- ---------------

(1) All amounts are limited to compensation paid or earned after the
Recapitalization on April 30, 1996.

(2) Messrs. Dods, Meyer, Chung, Stoelting and Olsen receive annual base salaries
of $500,000, $500,000, $500,000, $150,000 and $125,000, respectively. See
"-- Employment Agreements."

(3) Consists of amounts paid pursuant to the Company's 1996 Key Employees
Performance Compensation Plan. See "-- 1996 Key Employees Performance
Compensation Plan."

(4) Consists of premiums paid by the Company for term life insurance under which
the named executive officer is the beneficiary.

43
<PAGE> 45

OPTIONS GRANTED DURING 1996. The following table provides certain
information regarding stock options granted to the named executive officers of
the Company during the year ended December 31, 1996.

OPTION/SAR GRANTS IN LAST YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
-------------------------------------------------------------------- RATES OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE ---------------------
NAME GRANTED(1) FISCAL YEAR PRICE EXPIRATION DATE 5% 10%
---- -------------------- ---------------- -------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Curtis W. Stoelting.... 83,008 25.0% $0.13 April 30, 2006 $6,786 $17,199
John F. Olsen.......... 41,504 12.5 0.13 April 30, 2006 3,393 8,600
</TABLE>

- ---------------

(1) Options become exercisable for 20% of the shares underlying the options on
April 30 of each year from 1997 to 2001.

FISCAL YEAR-END OPTION VALUES. The following table provides certain
information regarding the value of unexercised options held by the named
executive officers at December 31, 1996. No named executive officer exercised
any options during the year ended December 31, 1996.

AGGREGATED FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- -------------------------------------- -----------------------------------------
<S> <C> <C>
Curtis W. Stoelting........ 0/83,008 $0/1,068,313
John F. Olsen.............. 0/41,504 0/534,156
</TABLE>

- ---------------

(1) Calculated based on an assumed initial public offering price of $13.00 per
share.

1996 KEY EMPLOYEES STOCK OPTION PLAN. On April 30, 1996 in connection with
the Recapitalization, the Board of Directors adopted, and the Company's
stockholders subsequently approved, the 1996 Key Employees Stock Option Plan
(the "Stock Option Plan"). Under the Stock Option Plan, the Board of Directors,
or the Compensation Committee of the Board of Directors if so designated by the
Board of Directors, may grant options to purchase up to 415,041 shares of Common
Stock to executives or other key employees of the Company. Options granted under
the Stock Option Plan may be either "incentive stock options," which qualify for
special tax treatment under the Internal Revenue Code, or nonqualified stock
options. Options will expire at such time as the Board of Directors or
Compensation Committee determines, provided that no stock option may be
exercised later than the tenth anniversary (the fifth anniversary in certain
cases) of the date of its grant. Options cannot be exercised until the vesting
period, if any, specified by the Board of Directors or Compensation Committee
has expired. Options are not transferable other than by will or the laws of
descent and distribution, and may be exercised during the life of the employee
only by him or her. No options may be granted under the Stock Option Plan after
December 31, 2005, which is the date the Stock Option Plan terminates. However,
any options outstanding on December 31, 2005 will remain in effect in accordance
with their terms. The Company does not intend to grant additional options under
the Stock Option Plan.

The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than 100%
(110% for certain stockholders) of the fair market value of the Common Stock on
the date such option is granted. Payment of the exercise price may be made in
cash or by the surrender of shares of Common Stock having a fair market value on
the date of exercise equal to the exercise price.

Prior to the date hereof, options to purchase 332,033 shares were granted
to certain employees of the Company. Each of these options become exercisable
20% each year over five years commencing on the first anniversary of the date of
grant.

44
<PAGE> 46

STOCK INCENTIVE PLAN. On April 8, 1997, the Board of Directors of the
Company adopted, and the Company's stockholders approved, the Racing Champions
Corporation Stock Incentive Plan (the "Incentive Plan"). Under the Incentive
Plan, the Board of Directors, or the Compensation Committee of the Board of
Directors if so designated by the Board of Directors, may grant options to
purchase up to 311,852 shares of Common Stock to executives or other key
employees of the Company. Options granted under the Stock Option Plan may be
either "incentive stock options," which qualify for special tax treatment under
the Internal Revenue Code, or nonqualified stock options. Options will expire at
such time as the Board of Directors or Compensation Committee determines,
provided that no stock option may be exercised later than the tenth anniversary
(the fifth anniversary for certain stockholders) of the date of its grant.
Options cannot be exercised until the vesting period, if any, specified by the
Board of Directors or Compensation Committee has expired. Options are not
transferable other than by will or the laws of descent and distribution, and may
be exercised during the life of the employee only by him or her. No options may
be granted under the Stock Option Plan after April 8, 2007, which is the date
the Stock Option Plan terminates. However, any options outstanding on April 8,
2007 will remain in effect in accordance with their terms.

The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than 100%
(110% for certain shareholders) of the fair market value of the Common Stock on
the date such option is granted. Payment of the exercise price may be made in
cash or by the surrender of shares of Common Stock having a fair market value on
the date of exercise equal to the exercise price.

In the discretion of the Board of Directors or the Compensation Committee,
any option granted under the Incentive Plan may be accompanied by a reload
option. A reload option may be granted to an optionee who pays for the exercise
of all or part of an option with shares of Common Stock. The reload options
represent an additional option to acquire the same number of shares of Common
Stock as is used by the optionee to pay for the exercise of his underlying
option. A reload option is subject to all of the terms and conditions of the
underlying option, except that the exercise price for a reload option will be at
least equal to 100% of the fair market value of the Common Stock covered thereby
on the date the reload option is granted (i.e., the date the underlying option
is exercised). The reload option may only be exercised if the option period of
the underlying option to which the reload option relates has not expired.

The Company anticipates granting options to purchase up to 148,752 shares
of Common Stock with an exercise price equal to the initial public offering
price to officers and key employees of the Company on or before the closing of
the Offering, including options to purchase up to 78,852 shares of Common Stock
that will be accompanied by reload options.

EMPLOYEE STOCK PURCHASE PLAN. Effective upon the closing of the Offering,
the Company will implement the Racing Champions Corporation Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is designed
to comply with section 423 of the Internal Revenue Code and will provide
employees of the Company and its subsidiaries with the right to purchase shares
of Common Stock directly from the Company through payroll deductions at a
purchase price of at least 95% of fair market value of the Common Stock. Up to
200,000 shares of Common Stock may be offered under the Stock Purchase Plan in a
series of quarterly offerings beginning on July 1, 1997 and terminating on
December 31, 2001. Each participant may elect to have up to 10% of his base
salary invested in Common Stock pursuant to the Stock Purchase Plan, subject to
a limit of $25,000 per year based upon the fair market value of stock on the
date of grant.

1996 KEY EMPLOYEES PERFORMANCE COMPENSATION PLAN. On April 30, 1996 the
Board of Directors adopted the 1996 Key Employees Performance Compensation Plan
(the "Performance Compensation Plan"). Under the Performance Compensation Plan,
certain executive officers and other key employees of the Company will be
entitled to receive a cash bonus in the first quarter of 1997 based upon the
Company's consolidated earnings before income taxes, depreciation and
amortization from April 30, 1996 to December 31, 1996. On April 8, 1997, the
Board of Directors amended the Performance Compensation Plan to provide an
additional cash bonus to participants in the first quarter of 1998 based upon
the Company's

45
<PAGE> 47

consolidated earnings before income taxes, depreciation and amortization from
January 1, 1997 to December 31, 1997.

EMPLOYMENT AGREEMENTS. On April 30, 1996 the Company entered into separate
employment agreements with Messrs. Dods, Meyer, Stoelting and Olsen, and the
Hong Kong Subsidiary entered into an employment agreement with Mr. Chung
(collectively, the "Employment Agreements"). The Employment Agreements with
Messrs. Dods, Meyer and Chung each has a term of three years, and the Employment
Agreements with Messrs. Stoelting and Olsen each has a term of two years.
Pursuant to the Employment Agreements, Messrs. Dods, Meyer, Chung, Stoelting and
Olsen will receive base salaries of $500,000, $500,000, $500,000, $150,000 and
$125,000, respectively, and are entitled to participate in the Performance
Compensation Plan and the Stock Option Plan. The Employment Agreements with
Messrs. Dods, Meyer and Chung also provide that the executive officer is
eligible to participate in any medical, health, dental, disability and life
insurance policy as are in effect for the other two most senior executives of
the Company, while the Employment Agreements with Messrs. Stoelting and Olsen
provide that the executive officer is eligible to participate in any medical,
health, dental, disability and life insurance policy as are in effect for other
senior management of the Company excluding Messrs. Dods, Meyer and Chung.
Pursuant to the Employment Agreements, each executive officer has agreed not to
compete with the Company during employment and for a period of two years
following termination of employment and has agreed to maintain the
confidentiality of the Company's proprietary information and trade secrets.

Under the Employment Agreements, the Company may terminate the executive
officer's employment upon the executive officer's death or disability or if the
Board of Directors determines that termination is in the Company's best
interests. The executive officer may resign and terminate the Employment
Agreement at any time. If the executive officer's employment is terminated for
disability or death, the Company is required to continue to pay the executive
officer, his designated beneficiary or estate, whichever is applicable, the base
salary for a period of six months after his termination of employment. If
employment is terminated by the Company without cause or by the executive
officer with good reason, the executive officer is entitled to receive payment
of his base salary until the later of the first anniversary of the date of
termination or the end of his employment term under the Employment Agreement. In
addition, in the event of termination for death, disability, by the Company
without cause or by the executive officer with good reason, the executive
officer is entitled to receive all fringe benefits under his Employment
Agreement accrued prior to the termination date. If employment is terminated by
the Company for cause or by the executive officer without good reason, the
executive officer is not entitled to receive any base salary or fringe benefits
for periods after the termination date.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company did not have a Compensation Committee of the Board of Directors
prior to the completion of the Offering. As a result, the entire Board of
Directors was responsible for fixing the compensation to be paid to the
executive officers of the Company. Robert E. Dods and Boyd L. Meyer, the
Company's President and Executive Vice President, respectively, and Peter K.K.
Chung, President of Racing Champions Limited, participated in such deliberations
in their capacities as members of the Board of Directors.

46
<PAGE> 48

CERTAIN TRANSACTIONS

THE RECAPITALIZATION

On April 30, 1996, the Investor Group and the Company consummated the
Recapitalization which involved the following: (i) the Company's purchase of all
of the outstanding stock of RCI in exchange for the issuance by the Company of
three day notes in the principal amount of approximately $5.3 million (which the
Company has repaid in full), approximately $659,000 principal amount of Senior
Notes, approximately $1.4 million principal amount of Series A Junior Notes and
approximately $148,000 principal amount of Series B Junior Notes to each of
Robert E. Dods, the President and a director of the Company, and Boyd L. Meyer,
the Executive Vice President and a director of the Company, (ii) the Company's
purchase of substantially all of the assets of DML, a corporation 50% owned by
Robert E. Dods and 50% owned by Boyd L. Meyer, in exchange for a cash payment by
the Company of approximately $1.7 million and the issuance by the Company of
three day notes in the principal amount of approximately $28.3 million (which
the Company has repaid in full), approximately $4.0 million principal amount of
Senior Notes, approximately $8.4 million principal amount of Series A Junior
Notes and approximately $900,000 principal amount of Series B Junior Notes,
(iii) the acquisition by the Hong Kong Subsidiary of substantially all of the
assets of the RCL Group, foreign corporations owned by Peter K.K. Chung, a
director of the Company and the President of the Hong Kong Subsidiary, in
exchange for a cash payment of approximately $19.5 million and the issuance by
the Company of approximately $2.7 million principal amount of Senior Notes,
approximately $5.6 million principal amount of Series A Junior Notes, 13,163.36
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, and (iv) the contribution
by the Company of all of the outstanding stock of the Hong Kong Subsidiary to
RCI. DML was liquidated after the consummation of the Recapitalization, dividing
its assets equally between Robert E. Dods and Boyd L. Meyer. The amount of the
purchase price paid by the Company in each of these acquisitions was determined
through arms-length negotiations between representatives of the Investor Group
and Messrs. Dods, Meyer and Chung.

Pursuant to the Recapitalization, the Company also issued to the members of
the Investor Group, Curtis W. Stoelting, John F. Olsen, Peter J. Henseler and M.
Kevin Camp an aggregate of 4,447,252 shares of Common Stock at $0.13 per share,
51,082.48 shares of Series A Preferred Stock at $100 per share, and
approximately $21.6 million principal amount of Series A Junior Notes. The
foregoing purchasers acquired these securities in proportion to their current
ownership of Common Stock (Messrs. Henseler and Camp each currently own 19,713
shares of Common Stock). See "Principal Stockholders" and "--Other
Transactions."

Pursuant to the Recapitalization, the Company also issued to DML 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. These securities were
divided equally between Robert E. Dods and Boyd L. Meyer upon the liquidation of
DML.

Stockholders Agreement. In connection with the Recapitalization, the
Company entered into a Stockholders Agreement, dated as of April 30, 1996 (the
"Stockholders Agreement"), with the Investor Group, the RCL Group, DML, Robert
E. Dods, Boyd L. Meyer, Peter K.K. Chung, and certain other executive officers
of the Company. The Stockholders Agreement contains provisions with respect to
the election of directors of the Company and its subsidiaries, restrictions on
the transfer of shares of the Company's capital stock, preemptive rights and
cooperation among the parties in the event of a sale of the Company or an
initial public offering of shares of Common Stock. Each of the foregoing
provisions of the Stockholders Agreement will automatically terminate upon the
completion of the Offering.

Executive Securities Agreement. Pursuant to an Executive Securities
Agreement, dated as of April 30, 1996 (the "Executive Securities Agreement"), in
the event that Curtis W. Stoelting, John F. Olsen, Peter J. Henseler or M. Kevin
Camp cease to be employed by the Company or its subsidiaries for any reason,
first the Company and then the members of the Investor Group and Messrs. Dods,
Meyer and Chung (in proportion to the percentage of such securities held by each
such stockholder) have an option to purchase any or all of the Company's
securities held by such executive officer at its fair market value. The
provisions of the Executive Securities Agreement will automatically terminate
upon the completion of the Offering.

47
<PAGE> 49

Registration Agreement. Pursuant to a Registration Agreement, dated as of
April 30, 1996 (the "Registration Agreement"), the Company granted certain
registration rights. The Registration Agreement provides that the holders of a
majority of the shares of Common Stock held by the Investor Group may demand an
unlimited number of registrations, subject to certain limitations with respect
to timing and procedure. The holders of a majority of the shares of Common Stock
held by Robert E. Dods, Boyd L. Meyer, Peter K.K. Chung, DML and the RCL Group
may collectively demand one registration at any time after the first anniversary
of the completion of the Offering. Each of the foregoing parties, as well as
Curtis W. Stoelting, John F. Olsen, Peter J. Henseler and Kevin Camp, also have
the right to sell shares of Common Stock pursuant to any other registration,
subject to certain limitations.

CERTAIN INDEBTEDNESS

Senior Notes. The Company issued $8.0 million aggregate principal amount of
Senior Notes in connection with the Recapitalization. The Senior Notes were
scheduled to mature on April 30, 1997 and accrue interest at the Bank of
Boston's prime rate. The Senior Notes are unsecured obligations of the Company,
and all payments under the Senior Notes are subordinated to indebtedness under
the Credit Agreement and are senior to all existing and future subordinated
indebtedness of the Company, including amounts due under the Series A Junior
Notes and the Series B Junior Notes. Subject to the subordination provisions,
the Company may prepay amounts outstanding under the Senior Notes without
penalty at any time, in whole or in part. The Company repaid the Senior Notes on
March 31, 1997 using the proceeds from the Deferred Term Loan under the Credit
Agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

Series A Junior Notes. The Company issued approximately $38.2 million
aggregate principal amount of Series A Junior Notes in connection with the
Recapitalization. Principal amounts outstanding under the Series A Junior Notes
are due on April 30, 2004, 2005 and 2006. The Series A Junior Notes accrue
interest at 12.00% per year. The Series A Junior Notes are unsecured obligations
of the Company and all payments under the Series A Junior Notes are subordinated
to indebtedness under the Credit Agreement and to amounts outstanding under the
Senior Notes. The Series A Junior Notes rank senior in right of payment to
amounts outstanding under the Series B Junior Notes. Subject to the
subordination provisions, the Company may prepay amounts outstanding under the
Series A Junior Notes without penalty at any time, in whole or in part. The
Company anticipates using part of the proceeds of the Offering to repay amounts
outstanding under the Series A Junior Notes. See " Use of Proceeds."

Series B Junior Notes. The Company issued approximately $1.2 million
aggregate principal amount of Series B Junior Notes in connection with the
Recapitalization. Principal amounts outstanding under the Series B Junior Notes
are due on April 30, 2004, 2005 and 2006. The Series B Junior Notes accrue
interest at 12.00% per year. The Series B Junior Notes are unsecured obligations
of the Company, and all payments under the Series B Junior Notes are
subordinated to indebtedness under the Credit Agreement and to amounts
outstanding under the Senior Notes and the Series A Junior Notes. Subject to the
subordination provisions, the Company may prepay amounts outstanding under the
Series B Junior Notes without penalty at any time, in whole or in part. The
Company anticipates using part of the proceeds of the Offering to repay amounts
outstanding under the Series B Junior Notes. See " Use of Proceeds."

OTHER TRANSACTIONS

The Company leases warehouse space from D. W. Realty, Inc., a corporation
wholly owned by William L. Dods, brother of Robert E. Dods, President and a
director of the Company. The amount of the lease payments for the eight months
ended December 31, 1996 was $41,440 and the Company currently pays rent of
$5,490 per month. The Company believes that the terms of this lease are no less
favorable to the Company than could have been obtained from an unaffiliated
third party.

Eric Meyer, son of Boyd L. Meyer, Executive Vice President and a director
of the Company, is a principal of Reicher-Goerdt-Meyer Sales and Marketing, Inc.
("Reicher Goerdt"), one of the Company's external sales representative
organizations. For the eight months ended December 31, 1996, Eric Meyer was

48
<PAGE> 50

allocated approximately $85,000 of the sales commissions paid by the Company to
Reicher Goerdt. The Company expects that Reicher Goerdt will receive more than
50% of the Company's total sales commissions to external sales representative
organizations in 1997. The Company pays sales commissions to Reicher Goerdt at
the same rate and on no more favorable terms than for the Company's other sales
representative organizations.

Kwong Fai, a Hong Kong corporation controlled by Peter K.K. Chung,
President of the Hong Kong Subsidiary and a director of the Company, leases
office space to the Hong Kong Subsidiary for use as the Company's Hong Kong
headquarters. The amount of lease payments for the eight months ended December
31, 1996 was $241,036 and the Hong Kong Subsidiary currently pays rent of
$25,180 per month. The Company believes that the terms of this lease are no less
favorable to the Company than could have been obtained from an unaffiliated
party.

James Chung, Peter K.K. Chung's brother, owns 70% of Sunrise, one of the
Dedicated Manufacturers. For the eight months ended December 31, 1996, the
Company paid $4.0 million to Sunrise for the purchase of die cast vehicle
replicas. The Company expects to continue to make purchases from Sunrise during
1997. The Company believes that the terms for the purchase of products from
Sunrise are no less favorable to the Company than could have been obtained from
an unaffiliated party.

Peter K.K. Chung had previously provided personal loans to two of the
Company's Dedicated Manufacturers, Sharp Success and Win Yield, of $129,366 and
$62,096, respectively. In order to secure these loans, Mr. Chung became the 50%
and 20% owner of Sharp Success and Win Yield, respectively. Prior to January 1,
1997, Mr. Chung disposed of his ownership interests in Sharp Success and Win
Yield for consideration equal to his outstanding personal loans. In the future,
Mr. Chung does not intend to make loans or own interests in the Dedicated
Manufacturers or other manufacturing suppliers to the Company. For the eight
months ended December 31, 1996, the Company paid $5.6 million to Win Yield and
$5.7 million to Sharp Success for the purchase of die cast vehicle replicas. The
Company believes that the terms for the purchase of products from Win Yield and
Sharp Success during 1996 were no less favorable to the Company than could have
been obtained from an unaffiliated party.

The Company loaned $120,758 to Peter J. Henseler, Vice
President -- Marketing of the Company, on April 30, 1996, evidenced by a
promissory note that bears interest at 8% per year. Mr. Henseler used the
proceeds of this loan to purchase 19,713 shares of Common Stock, 220.43 shares
of Series A Preferred Stock and $95,615 principal amount of Series A Junior
Notes, and these securities have been pledged as collateral for the note. Mr.
Henseler is required to use 25% of all bonus compensation received from the
Company to repay principal and interest outstanding under the note. The note is
due on the earlier of (i) April 30, 2001 or (ii) the date of termination of Mr.
Henseler's employment by the Company for any reason. As of March 31, 1997,
$98,599 of principal and interest was outstanding under this note. On April 8,
1997, Mr. Henseler repaid all outstanding amounts under this note.

Willis Stein, a stockholder of the Company, owns approximately 28% of the
equity securities of Petersen Holdings, L.L.C. ("Holdings") and 47% of the
common stock of Brightview Communications Group, Inc. ("Brightview"). Holdings
and Brightview in turn own all of the equity securities of Petersen Publishing
Company, L.L.C. ("Petersen"). In addition, Willis Stein has the contractual
ability to control the policies and operations of Petersen. The Company has
entered into licensing and marketing arrangements with Petersen in connection
with the Racing Champions Mint and Racing Champions Hot Rod Collection and
anticipates making payments of approximately $400,000 in 1997 to Petersen in
connection with these licenses.

The Audit Committee of the Board of Directors will be responsible for
reviewing all future transactions between the Company and any officer or
director of the Company or any entity in which an officer or director has a
material interest. Any such transaction must be on terms no less favorable than
those that could be obtained on an arms-length basis from independent parties.

49
<PAGE> 51

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 31, 1997, and after the consummation of
the Offering by: (i) each of the Company's directors and named executive
officers; (ii) all directors and executive officers of the Company as a group;
(iii) stockholders (the "Selling Stockholders") potentially selling pursuant to
the Underwriters' over-allotment option and (iv) each person or other entity
known by the Company to own beneficially more than 5% of the outstanding Common
Stock. Except as otherwise indicated in the footnotes, each of the holders
listed below has sole voting and investment power over the shares beneficially
owned.

<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
BENEFICIALLY OWNED
SHARES OF SHARES --------------------------------------------
COMMON STOCK SUBJECT TO BEFORE AFTER AFTER EXERCISE OF
BENEFICIALLY OVER-ALLOTMENT THE THE OVER-ALLOTMENT
NAME OWNED OPTION OFFERING OFFERING(1) OPTION(1)
---- ------------ -------------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Robert E. Dods.............. 1,145,996 -- 14.5% 10.1% 9.8%
Boyd L. Meyer(2)............ 1,145,996 -- 14.5 10.1 9.8
Daniel M. Gill(3)........... 2,983,601 273,253 37.8 20.6 18.0
Peter K. K. Chung(4)........ 1,145,996 -- 14.5 10.1 9.8
Samuel B. Guren(5).......... 816,218 74,753 10.4 5.6 4.9
Avy H. Stein(6)............. 2,983,601 273,253 37.8 20.6 18.0
Curtis W. Stoelting(7)...... 115,167 -- 1.2 * *
John F. Olsen(8)............ 28,014 -- * * *
Willis Stein & Partners,
L.P.(9)................... 2,983,601 273,253 37.8 20.6 18.0
Baird Capital Partners II
Limited Partnership(10)... 629,306 57,635 8.0 4.3 3.8
Nassau Capital Partners
L.P.(11).................. 485,866 44,498 6.2 3.4 2.9
BCP II Affiliates Fund
Limited Partnership....... 186,912 17,118 2.4 1.3 1.1
NAS Partners I L.L.C........ 3,863 354 * * *
All directors and executive
officers as a group (10
persons)(12).............. 7,437,016 348,006 93.8 57.9 53.8
</TABLE>

- ---------------

* Denotes less than 1%.

(1) Gives effect to an agreement by the members of the Investor Group to
transfer upon the closing of the Offering a total of 157,705 shares of
Common Stock to each of Messrs. Dods, Meyer and Chung, with the amount
transferred to be divided pro rata among the Investor Group based upon the
current ownership of Common Stock by each member of the Investor Group.

(2) Includes 343,798 shares of Common Stock held by the Meyer Family Limited
Partnership, for which Mr. Meyer serves as a general partner and shares
voting and investment power with members of his immediate family who are
the other general partners.

(3) Represents shares of Common Stock held by Willis Stein, for which Mr. Gill
serves as a Managing Director and shares voting and investment power with
the other Managing Directors. Mr. Gill disclaims beneficial ownership in
all shares of Common Stock held by Willis Stein.

(4) Represents shares of Common Stock held by a corporation controlled by Mr.
Chung.

(5) Represents shares of Common Stock held by Baird Capital Partners II Limited
Partnership and BCP II Affiliates Fund Limited Partnership, entities for
which Mr. Guren serves as a Managing Director and shares voting and
investment power with the other Managing Directors. Mr. Guren disclaims
beneficial ownership in all shares of Common Stock held by Baird Capital
Partners II Limited Partnership or BCP II Affiliates Fund Limited
Partnership.

50
<PAGE> 52

(6) Represents shares of Common Stock held by Willis Stein, for which Mr. Stein
serves as a Managing Director and shares voting and investment power with
the other Managing Directors. Mr. Stein disclaims beneficial ownership in
all shares of Common Stock held by Willis Stein.

(7) Includes 16,602 shares of Common Stock subject to stock options which
became exercisable on April 30, 1997.

(8) Includes 8,301 shares of Common Stock subject to stock options which became
exercisable on April 30, 1997.

(9) The address of Willis Stein is 227 West Monroe Street, Suite 4300, Chicago,
Illinois 60606.

(10) The address of Baird Capital Partners II Limited Partnership is 777 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202.

(11) The address of Nassau Capital Partners L.P. is 22 Chambers Street,
Princeton, New Jersey 08542.

(12) Includes (i) 1,145,996 shares of Common Stock held by a corporation
controlled by Mr. Chung, (ii) 343,798 shares of Common Stock held by the
Meyer Family Limited Partnership, for which Mr. Meyer serves as a general
partner and shares voting and investment power with members of his
immediate family who are the other general partners, (iii) 2,983,601 shares
of Common Stock for which Messrs. Gill and Stein share voting and
investment power and 816,218 shares of Common Stock for which Mr. Guren
shares voting and investment power (Messrs. Gill, Stein and Guren disclaim
beneficial ownership in such shares of Common Stock) and (iv) 41,505 shares
of Common Stock subject to stock options which became exercisable on April
30, 1997.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

Under the Company's Amended and Restated Certificate of Incorporation
("Certificate of Incorporation"), the authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), 1,000,000 shares of Nonvoting Common Stock, par value $.01 per share
("Nonvoting Common Stock"), 100,000 shares of Series A Preferred Stock, par
value $.01 per share ("Series A Preferred Stock"), and 20,000 shares of Series B
Preferred Stock, par value $.01 per share ("Series B Preferred Stock").

COMMON STOCK

As of March 31, 1997, there are 6,948,156 shares of Common Stock
outstanding owned by 12 holders of record. Following the Offering, there will be
12,885,240 shares of Common Stock outstanding. Holders of Common Stock are
entitled to one vote for each share on all matters voted on by stockholders.
Holders of Common Stock do not have cumulative voting rights in the election of
directors, which means that the holders of shares entitled to more than 50% of
the voting power are able to elect all of the directors to be elected. The first
annual meeting of stockholders following the Offering is expected to be held
during April 1998.

Holders of Common Stock do not have preemptive rights, or any subscription,
redemption or conversion privileges. Subject to the rights of any holders of
Series A Preferred Stock or Series B Preferred Stock, all of which the Company
intends to redeem with part of the proceeds of the Offering, holders of Common
Stock are entitled to participate ratably in dividends on the Common Stock, if
any, as declared by the Board of Directors, and are entitled to share ratably in
all assets available for distribution to stockholders in the event of
liquidation or dissolution of the Company. The outstanding shares of Common
Stock are, and the Common Stock to be issued in the Offering will be, legally
issued, fully paid and nonassessable.

NONVOTING COMMON STOCK

As of March 31, 1997, 937,084 shares of Nonvoting Common Stock were
outstanding and held by three holders of record. The Nonvoting Common Stock
shares ratably with the Common Stock in dividends and distributions upon any
liquidation, dissolution or winding up of the Corporation. Holders of shares of

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<PAGE> 53

Nonvoting Common Stock do not have voting rights, except as required by law.
Each outstanding share of Nonvoting Common Stock will be converted into one
share of Common Stock upon the closing of the Offering and thereafter the
Certificate of Incorporation will be amended to eliminate the class of Nonvoting
Common Stock.

PREFERRED STOCK

As of March 31, 1997, 66,668.5 shares of Series A Preferred Stock were
outstanding and held by 12 holders of record and 11,952.33 shares of Series B
Preferred Stock were outstanding and held by three holders of record. The Series
A Preferred Stock and the Series B Preferred Stock each have a liquidation
preference, subject to adjustment, of $100 per share and accrue annual
cumulative dividends at 12% of the liquidation preference. The Series A
Preferred Stock and the Series B Preferred Stock share ratably in dividends in
priority to any dividends on the Common Stock or the Nonvoting Common Stock.
Upon the liquidation, dissolution or winding up of the Company, holders of the
Series A Preferred Stock are entitled to receive the liquidation value plus all
accrued and unpaid dividends prior to any payment with respect to the Series B
Preferred Stock, the Common Stock or the Nonvoting Common Stock, and the holders
of the Series B Preferred Stock are entitled to receive the liquidation
preference plus all accrued and unpaid dividends prior to any payment with
respect to the Common Stock or the Nonvoting Common Stock. The holders of Series
A Preferred Stock and Series B Preferred Stock are entitled to one vote per
share, voting as a single class with the holders of the Common Stock. Upon the
closing of the Offering, the Company intends to redeem all of the outstanding
shares of Series A Preferred Stock and Series B Preferred Stock, using $8.5
million of the proceeds of the Offering, and thereafter to amend the Certificate
of Incorporation to eliminate the classes of Series A Preferred Stock and Series
B Preferred Stock. See "Use of Proceeds."

TRANSFER AGENT

The First National Bank of Boston, Boston, Massachusetts, will be the
transfer agent for the Common Stock.

CERTAIN STATUTORY AND OTHER PROVISIONS

The provisions of the Certificate of Incorporation, the By-Laws and
Delaware statutory law described in this section may delay or make more
difficult acquisitions or changes of control of the Company not approved by the
Board of Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as a
publicly-traded company, to develop its business in a manner which will foster
its long-term growth without disruption caused by the threat of a takeover not
deemed by the Board of Directors to be in the best interests of the Company and
its stockholders. Such provisions could have the effect of discouraging
proposals involving an acquisition or change of control of the Company, although
such proposals, if made, might be considered desirable by a majority of the
Company's stockholders. Such provisions may also have the effect of making it
more difficult to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors.

Number of Directors; Vacancies. The By-Laws provide that the number of
directors shall be determined from time to time exclusively by vote of a
majority of the then authorized number of directors. The Certificate of
Incorporation provides that the Board of Directors has the exclusive right to
fill vacancies in the Board of Directors, including vacancies created by
expansion of the Board or the removal of a director, and that any director
elected to fill a vacancy shall serve until the next election of the class for
which such director shall have been chosen.

Advance Notice for Raising Business or Making Nominations at Annual
Meetings. The By-Laws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders of the Company
and for nominations by stockholders of candidates for election as directors at
an annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, including, without limitation,
Rule 14a-8 under the Securities Exchange Act of 1934, or any successor
provision, only such business may be conducted at an annual meeting of
stockholders as has been

52
<PAGE> 54

brought before the meeting by, or at the direction of, the Board of Directors,
or by a stockholder who has provided the Secretary of the Company timely written
notice of the stockholder's intention to bring such business before the meeting.
Only persons who are nominated by, or at the direction of, the Board of
Directors, or who are nominated at the meeting by a stockholder who has given
timely written notice to the Secretary prior to the meeting at which directors
are to be elected, will be eligible for election as directors of the Company.

All such notices shall include: (i) a representation that the person
sending the notice is a stockholder of record and will remain such through the
record date for the meeting; (ii) the name and address, as they appear on the
Company's books, of such stockholder; (iii) the class and number of the
Company's shares which are owned beneficially and of record by such stockholder;
and (iv) a representation that such stockholder intends to appear in person or
by proxy at such meeting to make the nomination or move for the consideration of
other business set forth in the notice. Notice as to proposals with respect to
any business to be brought before the meeting other than the election of
directors shall also set forth the text of the proposal and may set forth any
statement in support thereof that the stockholder wishes to bring to the
attention of the Company, and shall specify any material interest of such
stockholder in such business. Notice as to nominations of a director shall
identify the nominee and include the written consent of each nominee to serve as
a director if so elected.

Amendments to By-Laws. The By-Laws provide that the holders of at least a
majority of all shares of Common Stock then outstanding and entitled to vote
thereon shall have the power to adopt, amend, alter, change or repeal the
By-Laws. The Certificate of Incorporation and the By-Laws provide that the Board
of Directors may amend or repeal the By-Laws by a majority vote, provided that:
(i) no By-Law adopted by stockholders shall be amended, repealed or readopted by
the Board of Directors if the By-Law so adopted so provides; and (ii) a By-Law
adopted or amended by the stockholders that fixes a greater or lower quorum
requirement or a greater voting requirement for the Board of Directors than
otherwise provided in the General Corporation Law of the State of Delaware may
not be amended or repealed by the Board of Directors unless the By-Law expressly
provides that it may be amended or repealed by a specified vote of the Board of
Directors. Action by the Board of Directors to adopt or amend a By-Law that
changes the quorum or voting requirement for the Board of Directors must meet
the same quorum requirement and be adopted by the same vote required to take
action under the quorum and voting requirement then in effect, unless a
different voting requirement is specified as provided by the preceding sentence.

Additional Common Stock. The Board of Directors has the authority to issue
additional Common Stock subject to the limitations on the number of shares
authorized for issuance under the Certificate of Incorporation. The Company
believes that the Board of Directors' ability to issue additional Common Stock
could facilitate certain financings and acquisitions and provide a means for
meeting other corporate needs that might arise. The authorized but unissued
shares of Common Stock will be available for issuance without further action by
the Company's stockholders, unless stockholder action is required by applicable
law or the rules of any stock exchange or system on which the Common Stock may
then be listed. The Board of Directors' ability to issue additional Common Stock
could, under certain circumstances, either impede or facilitate the completion
of a merger, tender offer or other takeover attempt.

Delaware Antitakeover Statute. Under Section 203 of the Delaware General
Corporation Law, certain "business combinations" between a Delaware corporation,
whose stock generally is publicly traded or held of record by more than 2,000
stockholders, and an "interested stockholder" are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless (i) the business combination was approved by the board of
directors of the corporation before the other party to the transaction became an
interested stockholder, (ii) upon consummation of the transaction that made it
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a confidential
right to tender or vote stock held by the plan), or (iii) the business
combination was approved by the board of directors of the corporation and
ratified by holders of 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder

53
<PAGE> 55

following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.

The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any stockholder who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock.
Because Willis Stein became an "interested stockholder" before the amendment and
restatement of the Certificate of Incorporation and the Offering, Willis Stein
is exempted from the operation of Section 203 of the Delaware General
Corporation Law.

It is possible that these provisions and the ability of the Board of
Directors to issue additional shares of Common Stock will discourage other
persons from making a tender offer for or acquisitions of substantial amounts of
the Common Stock, or may delay changes in control or management of the Company.

The foregoing description of certain provisions of the Certificate of
Incorporation and the By-Laws does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Certificate of
Incorporation and the By-Laws, including definitions of certain terms in each
respective document.

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY

The Certificate of Incorporation and the By-Laws contain provisions
indemnifying directors and officers of the Company to the fullest extent
permitted by law. In addition, the Certificate of Incorporation contains
provisions limiting the personal liability of directors to the Company or
stockholders to the fullest extent permitted by law.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 12,885,240 shares of
Common Stock outstanding. Of these shares, the 5,000,000 shares of Common Stock
sold in the Offering will be freely tradable without restrictions under the
Securities Act of 1933 (the "Act"), except for shares purchased by an
"affiliate" of the Company which will be subject to the resale limitations (but
not holding period requirements) of Rule 144 thereunder. The remaining 7,885,240
shares of Common Stock were issued and sold by the Company in private
transactions in reliance upon various exemptions under the Act. Such shares will
be eligible for public sale if registered under the Act or sold in accordance
with Rule 144 thereunder. In general, under Rule 144 a person (or persons whose
shares are aggregated) including a person who may be deemed an "affiliate" of
the Company, who has beneficially owned his shares for at least one year is
entitled to sell within any three-month period that number of shares which does
not exceed the greater of 1% of the outstanding shares of Common Stock or the
average weekly trading volume during the four calendar weeks preceding each such
sale. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not and has not been deemed an "affiliate" of the Company for at least
three months and who has beneficially owned his shares for at least two years is
entitled to sell such shares under Rule 144(k) without regard to the limitations
discussed above. Based upon available information, the Company believes that,
following April 30, 1997, 7,885,240 of these shares, which are all held by
"affiliates" of the Company, will be immediately eligible for public sale,
subject to the resale limitations of Rule 144. However, the officers and
directors of the Company, certain stockholders and the Company have agreed not
to sell any of their shares of Common Stock to the public for a period of 180
days after the date of the Prospectus without the prior written consent of
Robert W. Baird & Co. Incorporated. The exercise of registration rights by
certain of the Company's significant stockholders, affiliates and executive
officers would permit such persons to sell shares of Common Stock upon
registration without regard to the limitations of Rule 144. The Company has
granted registration rights covering a total of 7,885,240 shares of Common
Stock. See "Certain Transactions -- The Recapitalization -- Registration
Agreement."

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<PAGE> 56

The preceding description does not give effect to the shares of Common
Stock which may be offered and sold pursuant to the Stock Option Plan or the
Incentive Plan. See "Management -- Executive Compensation -- 1996 Key Employees
Stock Option Plan" and "-- Stock Incentive Plan." The Company intends to file a
registration statement on Form S-8 under the Act not earlier than 90 days after
the date of this Prospectus to register the shares of Common Stock issuable
under the Stock Option Plan and the Incentive Plan, which shares, after
registration, will be immediately available for sale in the public market,
subject to the volume and other limitations of Rule 144 for shares held by
affiliates. As of the date of this Prospectus, options to purchase 332,033
shares of Common Stock have been granted under the Stock Option Plan, 66,407 of
which are currently exercisable. The Company anticipates granting options under
the Incentive Plan to purchase up to 148,752 shares of Common Stock with an
exercise price equal to the initial public offering price on or before the
closing of the Offering, including options to purchase up to 78,852 shares of
Common Stock that will be accompanied by reload options.

Since there has been no public market for the Common Stock prior to the
Offering, no predictions can be made as to the effect, if any, that market sales
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock.

55
<PAGE> 57

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters listed
below, and the Underwriters, for whom Robert W. Baird & Co. Incorporated,
William Blair & Company, L.L.C. and J.C. Bradford & Co. are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company, the respective number of shares of Common Stock set forth opposite
their names below.

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
------------ -----------------
<S> <C>
Robert W. Baird & Co. Incorporated..........................
William Blair & Company, L.L.C..............................
J.C. Bradford & Co..........................................

---------
Total............................................. 5,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The Underwriters are obligated to
purchase all the shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, if any are purchased.

The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and may offer the Common
Stock to certain dealers at such prices less a concession of not in excess of
$ per share and that the Underwriters and such dealers may reallow a
concession of not in excess of $ per share to certain brokers or other
dealers. The public offering price and concessions and reallowances to dealers
may be changed by the Representatives after the commencement of the Offering.

As a result of the ownership of capital stock of the Company by Baird
Capital Partners II Limited Partnership and BCP II Affiliates Fund Limited
Partnership, the Company may be deemed an affiliate of Robert W. Baird & Co.
Incorporated within the meaning of Section 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. and accordingly, the Offering
is being made in conformity with such Conduct Rules regarding the underwriting
of securities of an affiliate. In that regard, J.C. Bradford & Co. will assume
the responsibilities of acting as a qualified independent underwriter in pricing
the Offering and conducting due diligence. The initial public offering price
will not be higher than the price recommended by the qualified independent
underwriter. See "The Recapitalization" and "Certain Transactions" for a
description of transactions between the Company and Baird Capital Partners II
Limited Partnership and BCP II Affiliates Fund Limited Partnership.

The Company has granted to the Underwriters an option, exercisable within
30 days after the date of the Offering, to purchase up to an additional 357,142
shares of Common Stock and the Selling Stockholders have granted to the
Underwriters an option, exercisable within 30 days after the date of the
Offering, to purchase up to 392,858 shares of Common Stock to cover
over-allotments, at the same price per share to be paid by the Underwriters for
the other shares offered hereby. If the Underwriters purchase any such
additional shares pursuant to this option, each of the Underwriters will be
committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments, if any, in connection with the Offering.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify, or to contribute to payments made by, each other with respect to
certain civil liabilities, including certain civil liabilities under the Act.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives.

56
<PAGE> 58

The factors considered in determining the initial public offering price include
the history of and prospects for the business in which the Company operates,
past and present operations, revenues and earnings of the Company and the trend
of such earnings, the prospects for such earnings, the Company's capital
requirements, percentage of ownership to be held by investors following the
Offering, the general condition of the securities markets at the time of the
Offering and the demand for similar securities of reasonably comparable
companies. The estimated initial public offering price range set forth on the
cover page of the Prospectus is subject to change as a result of market
conditions and other factors.

The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the securities to
be higher than it would otherwise be in the absence of such transactions.

The Representatives have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority.

The Company and its directors, officers and certain other stockholders have
agreed not to sell, contract to sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of the Prospectus without
the prior written consent of Robert W. Baird & Co. Incorporated.

The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Commission as an exhibit to the Registration Statement of which this Prospectus
forms a part. See "Additional Information."

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c., Milwaukee, Wisconsin. Certain legal matters will be passed
upon for the Underwriters by McDermott, Will & Emery, Chicago, Illinois.

EXPERTS

The financial statements and schedule of the Company at December 31 1996,
and for the eight months ended December 31, 1996 and the financial statements of
the RCI Group at December 31, 1995 and April 30, 1996 and for each of the two
years in the period ended December 31, 1995 and the four months ended April 30,
1996, appearing in the Prospectus and in the Registration Statement, have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included herein in reliance upon such reports given upon the
authority of such firm as experts in giving said reports.

The financial statements of the RCL Group at March 31, 1996 and April 30,
1996, and for each of the two years in the period ended March 31, 1996 and the
one month period ended April 30, 1996, appearing in the Prospectus and in the
Registration Statement have been audited by Ernst & Young, independent auditors,
as set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included herein in reliance upon such report
given upon the authority of such firm as experts in giving said report.

57
<PAGE> 59

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
under the Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in the Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Common Stock
offered hereby, reference is hereby made to the Registration Statement and such
exhibits and schedules. The Registration Statement and the exhibits and
schedules thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such documents may be
obtained from the Commission at the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited financial statements
for the first three quarters of each year.

58
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

Report of Independent Public Accountants.................... F-2

Consolidated Balance Sheet as of December 31, 1996 and March
31, 1997 (Unaudited)...................................... F-3

Consolidated Statement of Income for the eight months ended
December 31, 1996 and three months ended March 31, 1997
(Unaudited)............................................... F-4

Consolidated Statement of Stockholders' Equity for the eight
months ended December 31, 1996 and three months ended
March 31, 1997 (Unaudited)................................ F-5

Consolidated Statement of Cash Flows for the eight months
ended December 31, 1996 and three months ended March 31,
1997 (Unaudited).......................................... F-6

Notes to Consolidated Financial Statements for the eight
months ended December 31, 1996 and three months ended
March 31, 1997 (Unaudited)................................ F-7

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

Report of Independent Public Accountants.................... F-15

Combined Balance Sheets as of December 31, 1995 and April
30, 1996.................................................. F-16

Combined Statements of Income for the years ended December
31, 1994 and 1995, and for the four months ended April 30,
1996...................................................... F-17

Combined Statements of Shareholders' Investment for the
years ended December 31, 1994 and 1995, and for the four
months ended April 30, 1996............................... F-18

Combined Statements of Cash Flows for the years ended
December 31, 1994 and 1995 and for the four months ended
April 30, 1996............................................ F-19

Notes to Combined Financial Statements for the years ended
December 31, 1994 and 1995 and for the four months ended
April 30, 1996............................................ F-20

RACING CHAMPIONS LIMITED, HOSTEN INVESTMENT LIMITED, GARNETT
SERVICES INC., BERGEN SERVICES INC.

Report of Independent Auditors.............................. F-23

Combined Balance Sheets as of March 31, 1995 and 1996 and
April 30, 1996............................................ F-24

Combined Statements of Income for the years ended March 31,
1995 and 1996 and for the one month ended April 30,
1996...................................................... F-25

Combined Statements of Changes in Shareholders' Equity for
the years ended March 31, 1995 and 1996 and for the one
month ended April 30, 1996................................ F-26

Combined Statements of Cash Flows for the years ended March
31, 1995 and 1996 and for the one month ended April 30,
1996...................................................... F-27

Notes to Combined Financial Statements...................... F-28
</TABLE>

F-1
<PAGE> 61

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Racing Champions Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheet of RACING
CHAMPIONS CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the eight months ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Racing
Champions Corporation and Subsidiaries as of December 31, 1996, and the results
of its operations and its cash flows for the eight months ended December 31,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 15, 1997
(except with respect to matters discussed
in Note 11 as to which the date

is April 9, 1997)

F-2
<PAGE> 62

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,897,911 $ 831,052
Accounts receivable, net of allowance for doubtful
accounts of $300,000.................................... 5,359,473 4,539,851
Note receivable, officer.................................. 120,758 98,599
Inventory................................................. 1,264,317 1,358,720
Deferred and prepaid taxes................................ 1,255,131 932,819
Prepaid expenses.......................................... 343,210 794,383
------------ ------------
Total current assets.................................... 14,240,800 8,555,424
------------ ------------
Property and equipment:
Tooling................................................... 6,717,375 7,175,215
Other equipment........................................... 1,349,973 1,453,736
------------ ------------
8,067,348 8,628,951
Less -- accumulated depreciation.......................... (839,282) (1,366,652)
------------ ------------
7,228,066 7,262,299
Excess purchase price over net assets acquired, net......... 87,139,838 86,591,447
Other assets................................................ 471,334 185,974
------------ ------------
Total assets....................................... $109,080,038 $102,595,144
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,777,690 $ 539,906
Accrued expenses.......................................... 5,757,175 5,560,911
Accrued royalties......................................... 1,890,857 2,723,231
Due to stockholders....................................... 945,373 --
Current maturities of bank term notes..................... 6,200,000 7,800,000
Senior subordinated debt to stockholders.................. 8,020,000 --
------------ ------------
Total current liabilities............................... 24,591,095 16,624,048
Bank term notes, less current maturities.................... 30,700,000 31,117,000
Junior subordinated debt to stockholders.................... 39,441,054 39,441,054
Deferred interest on junior subordinated debt............... 1,938,083 2,677,213
Deferred income taxes....................................... 996,575 994,949
------------ ------------
Total liabilities.................................. 97,666,807 90.854,264
------------ ------------
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 100,000 shares
authorized, 66,668 issued and outstanding and
liquidation value of $7,223,107 at December 31, 1996,
and $7,438,945 at March 31, 1997 and no shares issued or
outstanding pro forma................................... $ 556,974 $ 772,812 $ --
Preferred stock, Series B, $.01 par value, 20,000 shares
authorized, 11,952 issued and outstanding and
liquidation value of $1,294,333 at December 31, 1996 and
$1,333,088 at March 31, 1997 and no shares issued or
outstanding pro forma................................... 99,853 138,548 --
Common stock, voting, $.01 par value, 20,000,000 shares
authorized, 6,948,156 shares issued and outstanding at
December 31, 1996, and March 31, 1997 and 7,885,240
shares issued and outstanding pro forma................. 69,482 69,482 78,853
Common stock, nonvoting, $.01 par value, 1,000,000 shares
authorized, 937,084 shares issued and outstanding at
December 31, 1996 and March 31, 1997 and no shares
issued or outstanding pro forma......................... 9,371 9,371 --
Additional paid-in capital................................ 8,782,383 8,782,383 921,710
Retained earnings......................................... 1,895,168 1,968,284 1,968,284
------------ ------------ ------------
Total stockholders' equity.............................. 11,413,231 11,740,880 $ 2,968,847
------------ ------------ ============
Total liabilities and stockholders' equity......... $109,080,038 $102,595,144
============ ============
</TABLE>

The accompanying notes are an integral part of this balance sheet.

F-3
<PAGE> 63

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $49,384,893 $15,187,478

Cost of sales, related party................................ 3,990,651 1,407,098

Cost of sales, other........................................ 17,374,793 5,086,159
----------- -----------
Gross profit.............................................. 28,019,449 8,694,221

Selling, general and administrative expense................. 15,244,449 5,170,768

Amortization of intangible assets........................... 1,539,101 554,069
----------- -----------
Operating income.......................................... 11,235,899 2,969,384

Interest expense............................................ 6,737,725 2,380,513

Other expense............................................... 153,471 42,930
----------- -----------
Income before income taxes................................ 4,344,703 545,941

Income tax expense.......................................... 1,793,495 218,292
----------- -----------
Net income................................................ 2,551,208 327,649

Dividends accrued on preferred stock........................ 656,040 254,533
----------- -----------
Net income available to common stockholders............... $ 1,895,168 $ 73,116
=========== ===========
Net income per common share................................. $0.23 $0.01
=========== ===========
Average number of common shares outstanding................. 8,214,273 8,214,273
=========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-4
<PAGE> 64

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1996.................. $78,853 $ 787 $8,782,383 $ -- $ 8,862,023
Net income.......................... -- -- -- 2,551,208 2,551,208
Accrued dividends................... -- 656,040 -- (656,040) --
------- -------- ---------- ---------- -----------
Balance, December 31, 1996............ $78,853 $656,827 $8,782,383 $1,895,168 $11,413,231
======= ======== ========== ========== ===========
Net income (unaudited).............. -- -- -- 327,649 327,649
Accrued dividends (unaudited)....... -- 254,533 -- (254,533) --
------- -------- ---------- ---------- -----------
Balance, March 31, 1997 (unaudited)... $78,853 $911,360 $8,782,383 $1,968,284 $11,740,880
======= ======== ========== ========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE> 65

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,551,208 $ 327,649
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 826,052 527,369
Amortization on intangible assets...................... 1,539,099 554,069
Amortization of deferred financing costs............... 745,820 279,682
Deferred income taxes.................................. 884,190 (1,626)
Deferred interest on junior subordinated debt.......... 1,938,083 739,130
Changes in operating assets and liabilities:
Accounts receivable.................................. (654,921) 819,622
Inventory............................................ 1,647,699 (94,403)
Prepaid expenses..................................... (220,591) (128,861)
Accounts payable and accrued expenses................ 1,572,971 (625,389)
------------ -----------
Net cash provided by operating activities......... 10,829,610 2,397,242
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,348,107) (561,604)
Cash used for acquisitions, net........................... (27,781,355) --
------------ -----------
Net cash used by investing activities............. (30,129,462) (561,604)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issued for cash..................................... $ 5,661,309 $ --
Proceeds from bank term loans............................. 40,000,000 8,000,000
Payment on bank term loans................................ (3,100,000) (5,983,000)
Proceeds from issuance of Junior Subordinated notes....... 21,570,570 --
Payment of three day notes................................ (38,934,116) --
Decrease in due to stockholders........................... -- (8,941,656)
Decrease in notes receivable from officer................. -- 22,159
------------ -----------
Net cash provided (used) by financing
activities...................................... 25,197,763 (6,902,497)
------------ -----------
Net increase (decrease) in cash and cash
equivalents..................................... 5,897,911 (5,066,859)
Cash and cash equivalents, beginning of period.............. -- 5,897,911
------------ -----------
Cash and cash equivalents, end of period.................... $ 5,897,911 $ 831,052
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period.................. $ 5,422,846 $ 1,649,046
Cash paid for taxes during the period..................... 4,339,689 30,685
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Issuance of stock for acquisitions........................ $ 3,200,713 $ --
Issuance of Junior Subordinated notes for acquisitions.... 17,870,484 --
Issuance of Senior Subordinated notes for acquisitions.... 8,020,000 --
Issuance of three day notes for acquisitions.............. 38,934,116 --
Issuance of stock and Junior Subordinated note to officer
for note receivable.................................... 120,758 --
============ ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-6
<PAGE> 66

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTHS THEN ENDED IS UNAUDITED)

1. DESCRIPTION OF BUSINESS

Racing Champions Corporation ("RCC") and Subsidiaries (collectively "the
Company") is a producer and marketer of collectible scaled die cast vehicle
replicas. The Company is known for its extensive line of officially licensed,
high quality collectible replicas of actual race cars and related vehicles from
the most popular U.S. professional racing series, including NASCAR stock car
racing, National Hot Rod Association drag racing, Championship Auto Racing Teams
and Indy Racing League Indy-style racing, World of Outlaws sprint car racing, as
well as Honda and Kawasaki racing motorcycles. Products are manufactured in
numerous styles for the following customer bases: national and regional retail
chains; collector and hobby shops and premium sales to corporations. Racing
Champions, Inc., a wholly owned subsidiary of Racing Champions Corporation, has
license agreements with the major U.S. automotive manufacturers and most of the
major motor sport sponsors, team owners and their drivers. The Company sells its
products primarily in North America. Racing Champions Limited ("RCL"), a wholly
owned Hong Kong subsidiary of RCI, oversees the production of the Company's
products.

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 the Hong Kong subsidiary 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, 13,163.36 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.

F-7
<PAGE> 67

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 forty years and
$4,883,637 was recorded as inventory and property and equipment.

3. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION/TRANSACTIONS

The financial statements consolidate the accounts of RCC and its wholly
owned subsidiaries. All intercompany items and transactions have been
eliminated.

Foreign subsidiary assets and liabilities are translated at the rates of
exchange at the balance sheet date while income statement accounts are
translated at the average exchange rates in effect during the period.
Accordingly, exchange gains and losses resulting from translations for the eight
months ended December 31, 1996 and the three months ended March 31, 1997 were
insignificant, however, if they were significant, the Company would have
recorded such gains and losses in stockholders' equity in a cumulative
adjustment account.

Transactions in foreign currencies are translated into the local currency
at the rates which prevailed at the time of the transactions. Gains and losses
on foreign currency transactions are included in income. For the eight months
ended December 31, 1996 and the three months ended March 31, 1997, gains and
losses of such transactions were insignificant.

REVENUE RECOGNITION

The Company recognizes revenue based upon shipment of product to customers.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Such investments are
valued at market prices.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INVENTORY

Inventory consists of finished goods and is stated at the lower of cost or
market. Cost is determined by the first-in, first-out method, and market
represents the lower of replacement cost or estimated net realizable value.

PROPERTY AND EQUIPMENT

Property and equipment have been recorded at their fair value as of the
date of the Recapitalization and for items purchased after the Recapitalization
were recorded at cost. Depreciation is computed using the straight-line method
for financial statement purposes with estimated useful lives for tooling of four
years and for other equipment of two to ten years. Accelerated methods are used
for income tax purposes.

F-8
<PAGE> 68

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED

Excess of purchase price over net assets acquired is amortized over 40
years on a straight-line basis and is tax deductible over 15 years. The Company
periodically evaluates the carrying value of goodwill for possible impairment
based upon expected future undiscounted operating cash flows.

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.

CONCENTRATION OF CREDIT RISK

Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial conditions of certain major customers in which there
were three customers accounting for approximately 19%, 17% and 15% of net sales
for the eight months ended December 31, 1996. Additionally, at December 31,
1996, three customers accounted for approximately 27%, 14% and 13% of accounts
receivable. The Company does not require collateral or other security to support
customers' receivables. The Company conducts periodic reviews of its customers'
financial conditions and vendor payment practices to minimize collection risks
on trade accounts receivable. The Company has purchased insurance which covers a
portion of its receivables from major customers.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, receivables, accounts payables, accrued
expenses and notes payable approximate fair value because of the short-term
nature of the items. The carrying value of the debt resulting from the
recapitalization approximates its fair value based on current interest rates,
coupled with the expected near term payoff of the debt with the proceeds from
the proposed initial public offering.

ACCOUNTING FOR STOCK-BASED COMPENSATION

4. INCOME TAXES:

For financial reporting purposes, income before income taxes includes the
following components:

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Pretax income:
United States............................ $4,247,843 $509,110
Foreign.................................. 96,860 36,831
---------- --------
$4,344,703 $545,941
========== ========
</TABLE>

F-9
<PAGE> 69

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The significant components of income tax expense are as follows:

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Current
Federal.................................. $ 749,095 $(564,631)
State.................................... 160,210 (99,641)
Foreign.................................. -- --
---------- ---------
909,305 (664,272)
---------- ---------
Deferred
Federal.................................. 730,005 750,179
State.................................... 137,626 132,385
Foreign.................................. 16,559 --
---------- ---------
884,190 882,564
---------- ---------
$1,793,495 $ 218,292
========== =========
</TABLE>

A reconciliation of statutory Federal tax rate and actual effective income
tax rate is as follows:

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Statutory rate.............................. 34.0% 34.0%
State taxes, net of federal benefit......... 4.8 4.8
Other....................................... 2.5 1.2
---- ----
Effective rate.............................. 41.3% 40.0%
==== ====
</TABLE>

The significant components of deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Deferred income tax assets
Valuation allowances...................... $112,385 $112,385
-------- --------
Deferred income tax liabilities
Intangible assets......................... 732,416 741,715
Property and equipment.................... 264,159 253,234
-------- --------
Total deferred income tax
liabilities..................... 996,575 994,949
-------- --------
$884,190 $882,564
======== ========
</TABLE>

5. DEBT

The Company entered into a Credit Agreement with a group of banks that
provides for a revolving loan, Term Loan A, Term Loan B and a Deferred Term
Loan. The revolving loan allows the Company to borrow up to $5 million prior to
April 30, 2001, based upon levels of the Company's accounts receivable,
inventory and cash flows. As of December 31, 1996, the Company had not borrowed
under the revolving loan. The Credit Agreement also provides the Company with
the ability to borrow up to $8 million under the Deferred Term

F-10
<PAGE> 70

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Loan at any time between March 31, 1997, and April 30, 1997, to refinance the $8
million Senior Subordinated Notes. Eight million dollars was borrowed under the
Deferred Term Loan on March 31, 1997.

Borrowings under the Credit Agreement bear interest, at the Company's
option, at the banks' designated base rate plus a margin that varies between .5%
and 1.25% or at a reserve adjusted Eurodollar rate plus a margin that varies
between 2% and 3.25%. All amounts outstanding under the Credit Agreement are
secured by substantially all assets of the Company and are subject to certain
financial and other covenants. At December 31, 1996, and March 31, 1997 the
Company was in compliance with these covenants.

The Senior Subordinated Notes are unsecured obligations of the Company and
all payments under these notes are subordinated to indebtedness under the Credit
Agreement and are senior to all existing and future subordinated indebtedness of
the Company including amounts due under the Series A and Series B Junior
Subordinated Notes.

The Series A Junior Subordinated Notes are unsecured obligations of the
Company and all payments under these notes are subordinated to indebtedness
under the Credit Agreement and to amounts outstanding under the Senior
Subordinated Notes, and rank senior in right of payment to amounts outstanding
under the Series B Junior Subordinated Notes.

The Series B Junior Subordinated Notes are unsecured obligations of the
Company, and all payments under these notes are subordinated to indebtedness
under the Credit Agreement and to amounts outstanding under the Senior
Subordinated Notes and the Series A Junior Subordinated Notes.

The Company's Hong Kong subsidiary entered into a credit agreement with a
bank that provides for 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 RCI and RCL. As of December 31, 1996, and March 31, 1997
there were no outstanding borrowings under this line of credit.

F-11
<PAGE> 71

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LONG-TERM DEBT CONSISTS OF THE FOLLOWING:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Term Loan A payable to the bank, bearing interest at 8.25%
as of December 31, 1996, interest payable every quarter;
principal of $1,500,000 due every quarter from September,
1996, through April, 2001................................. $27,000,000 $21,117,000
Term Loan B payable to the bank, bearing interest at 8.75%
as of December 31, 1996, interest payable every quarter;
principal of $50,000 due every quarter from September,
1996, through December, 2000, and $1,000,000 due every
quarter from March, 2001 to March, 2002, with a final
payment of $4,100,000 in April, 2002...................... 9,900,000 9,800,000
Deferred Term Notes payable to bank, bearing interest at
8.41% as of March 31, 1997, interest payable every
quarter; principal of $400,000 due every quarter from
June, 1997 through December, 2000, and $500,000 due every
quarter from March, 2001 to December, 2001................ -- 8,000,000
Senior Subordinated Notes payable to stockholders, interest
at a designated bank's base rate (8.25% at December 31,
1996), principal payable of $20,000, January 1, 1997; and
$8,000,000 with all accrued and unpaid interest due April
30, 1997.................................................. 8,020,000 --
Series A Junior Subordinated Notes payable to stockholders;
interest at 12%; 40% of interest earned is payable each
March 1, June 1, September 1 and December 1; principal
amounts of $9,042,995 due each April 30 beginning 2004
with all accrued and unpaid interest due April 30, 2006... 38,245,820 38,245,820
Series B Junior Subordinated Notes payable to stockholders;
interest at 12%; 40% of interest earned is payable each
March 1, June 1, September 1 and December 1; principal
payments of $398,411 due each April 30 beginning 2004,
with all accrued and unpaid interest due April 30, 2006... 1,195,234 1,195,234
----------- -----------
84,361,054 78,358,054
Less -- Current maturities.................................. 14,220,000 7,800,000
----------- -----------
$70,141,054 $70,558,054
=========== ===========
</TABLE>

PRINCIPAL MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
1998........................................................ $ 6,200,000 $ 7,800,000
1999........................................................ 6,200,000 7,800,000
2000........................................................ 6,200,000 5,967,000
2001........................................................ 7,000,000 5,500,000
2002........................................................ 5,100,000 4,050,000
Thereafter.................................................. 39,441,054 39,441,054
----------- -----------
Total long-term debt.............................. $70,141,054 $70,558,054
=========== ===========
</TABLE>

F-12
<PAGE> 72

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. PREFERRED STOCK:

The preferred stock accrues dividends at 12% per year and dividends are
cumulative and accrue from day to day, whether or not earned or declared,
commencing with the date of issue of such share. No dividends have been paid to
date.

In the event of any liquidation, holders of the Series A Preferred Stock
are entitled to receive the liquidation value plus all accrued and unpaid
dividends prior to any payment with respect to the Series B Preferred Stock, the
Common Stock or the Nonvoting Common Stock. The holders of the Series B
Preferred Stock are entitled to receive the liquidation preference plus all
accrued and unpaid dividends prior to any payment with respect to the Common
Stock or the Nonvoting Common Stock.

7. STOCK OPTION PLAN:

The Company has adopted a 1996 Employee Stock Option Plan for its key
employees. The Employee Stock Option Plan is administered by the Board of
Directors. The Company has reserved 415,041 shares of common stock for issuance
under the plan. On April 30, 1996 and June 1, 1996, the Company granted 311,281
and 20,752 options, respectively, to purchase shares of common stock at an
exercise price equal to fair market value as determined by the Board of
Directors in connection with the Recapitalization. These options vest equally
over a five year period. The options will expire on the earlier of the tenth
anniversary of the date of grant or 30 days after the date of termination of the
employees' employment with the Company.

Stock option activity for the employees' stock option plan for the eight
months ended December 31, 1996, is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE PRICE
------- ----- --------
<S> <C> <C> <C>
Granted................................. 332,033 $0.13 $0.13
Exercised............................... -- -- --
Canceled................................ -- -- --
-------
Outstanding as of December 31, 1996..... 332,033 $0.13 $0.13
======= ===== =====
Stock options exercisable at
December 31, 1996..................... --
=======
Shares available for future grants...... 83,008
=======
</TABLE>

There was no stock option activity during the three months ending March 31,
1997.

The fair value of each option is estimated on the date of grant based on
the Black-Scholes option pricing model assuming, among other things, no dividend
yield, a risk free rate of 6.87% to 7.03%, and expected life of 10 years. The
weighted average fair value of options granted under the Company's stock plan
for the eight months ended December 31, 1996 was $.06 per share. As of December
31, 1996, the remaining contracted life of all options was approximately ten
years.

8. RELATED PARTY TRANSACTION

The Company purchased $3,990,651 and $1,407,098 of product during the eight
months ended December 31, 1996 and the three months ended March 31, 1997,
respectively from a company controlled by a relative of one of the Company's
stockholders.

F-13
<PAGE> 73

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company leases warehouse and office space from parties related to
officers/directors of the Company. Rent expense for the eight months ended
December 31, 1996 and the three months ended March 31, 1997 was $282,476 and
$109,042, respectively.

The Company pays sales commissions to an external sales representative
organization, of which one of the principals of this organization is a relative
of an officer/director of the Company. For the eight months ended December 31,
1996 and the three months ended March 31, 1997, commissions of $85,393 and
$40,066, respectively were allocated to the related principal.

9. EMPLOYEE BENEFIT PLAN

The Company adopted a 401(k) savings plan as of December, 1996, which
became effective on January 1, 1997. Employees meeting certain eligibility
requirements, as defined, may contribute up to 15% of pretax gross wages,
subject to certain restrictions. The Company will make matching contributions of
50% of the employees' contributions' up to 5% of employee wages.

10. PRO FORMA DATA (UNAUDITED)

The pro forma balance sheet amounts give effect to the redemption of
preferred stock and the conversion of the nonvoting common stock to voting
common stock at March 31, 1997. The amounts do not assume the receipt of
offering proceeds.

11. SUBSEQUENT EVENT

PROPOSED INITIAL PUBLIC OFFERING

On February 27, 1997, the Company filed a Registration Statement with
regard to an initial public offering of its common stock. Under the proposed
offering, the Company intends to sell to the public 5,000,000 shares of common
stock. The Company proposes to use approximately $59,700,000 of the net proceeds
to repay subordinated debt owed to certain stockholders of the Company and bank
borrowings, and to redeem all of the outstanding shares of preferred stock.

STOCK SPLIT

On April 9, 1997, the Company issued a 7.885261-for-one stock split of
common stock and increased in the number of authorized shares to 20,000,000
shares of voting common stock and 1,000,000 shares of nonvoting common stock.
The accompanying financial statements have been retroactively adjusted to
reflect the stock split.

F-14
<PAGE> 74

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Racing Champions, Inc. and Dods-Meyer, Ltd.:

We have audited the accompanying combined balance sheets of RACING
CHAMPIONS, INC. (an Illinois corporation) and DODS-MEYER, LTD. (an Illinois
corporation) as of December 31, 1995 and April 30, 1996, and the related
combined statements of income, shareholders' investment and cash flows for the
years ended December 31, 1994 and 1995 and for the four months ended April 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Racing Champions,
Inc. and Dods-Meyer, Ltd. as of December 31, 1995 and April 30, 1996, and the
results of their operations and their cash flows for the years ended December
31, 1994 and 1995 and for the four months ended April 30, 1996, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 15, 1997

F-15
<PAGE> 75

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,461,234 $ 255,466
Accounts receivable, net of allowance for doubtful
accounts of $200,000 and $257,000 in 1995 and 1996,
respectively........................................... 3,495,736 3,569,178
Inventory................................................. 711,743 1,553,075
Other current assets...................................... 170,228 453,939
---------- ----------
Total current assets................................... 6,838,941 5,831,658
---------- ----------
Property and equipment:
Tooling................................................... 4,317,008 5,246,778
Other equipment........................................... 398,575 418,969
---------- ----------
4,715,583 5,665,747
Less-accumulated depreciation............................. 3,284,576 3,644,575
---------- ----------
1,431,007 2,021,172
---------- ----------
Total assets.................................... $8,269,948 $7,852,830
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable.......................................... $ 83,510 $ 548,040
Accrued expenses.......................................... 1,901,413 1,447,239
Accrued bonus............................................. -- 2,501,439
Accrued royalties......................................... 1,477,506 863,673
Accrued distributions..................................... 500,000 811,344
Due to related party...................................... 900,522 1,500,489
Note payable to related party............................. 1,120,000 1,140,000
---------- ----------
Total current liabilities.............................. 5,982,951 8,812,224
---------- ----------
Shareholders' investment:
Common stock, Racing Champions, Inc., no par value, 5,000
shares authorized, 1,000 shares issued and
outstanding............................................ 400 400
Common stock, Dods-Meyer, Ltd., no par value, 10,000
shares authorized, 1,000 shares issued and
outstanding............................................ 1,000 1,000
Additional paid-in capital................................ 9,600 9,600
Retained earnings (deficit)............................... 2,275,997 (970,394)
---------- ----------
Total shareholders' investment......................... 2,286,997 (959,394)
---------- ----------
Total liabilities and shareholders'
investment.................................. $8,269,948 $7,852,830
========== ==========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-16
<PAGE> 76

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- APRIL 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $43,267,924 $48,592,178 $16,614,029
Cost of sales, related party........................ 25,212,148 25,556,121 9,403,514
----------- ----------- -----------
Gross profit...................................... 18,055,776 23,036,057 7,210,515
Selling, general and administrative expenses........ 9,491,222 13,312,053 4,713,344
Nonrecurring bonus expense.......................... -- -- 2,389,218
----------- ----------- -----------
Operating income.................................. 8,564,554 9,724,004 107,953
Interest expense.................................... (210,876) (132,758) (20,000)
Other income........................................ 218,985 141,932 36,299
Other expense....................................... -- (147,292) (13,452)
----------- ----------- -----------
Income before income taxes........................ 8,572,663 9,585,886 110,800
Income tax expense.................................. 348,699 193,500 39,000
----------- ----------- -----------
Net income........................................ $ 8,223,964 $ 9,392,386 $ 71,800
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-17
<PAGE> 77

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED STATEMENTS OF SHAREHOLDERS' INVESTMENT

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS INVESTMENT
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993....................... $1,400 $9,600 $(1,840,353) $(1,829,353)
Net income..................................... -- -- 8,223,964 8,223,964
Distributions.................................. -- -- (4,000,000) (4,000,000)
------ ------ ----------- -----------
Balance, December 31, 1994....................... 1,400 9,600 2,383,611 2,394,611
Net income..................................... -- -- 9,392,386 9,392,386
Distributions.................................. -- -- (9,500,000) (9,500,000)
------ ------ ----------- -----------
Balance, December 31, 1995....................... 1,400 9,600 2,275,997 2,286,997
Net income..................................... -- -- 71,800 71,800
Distributions.................................. -- -- (3,318,191) (3,318,191)
------ ------ ----------- -----------
Balance, April 30, 1996.......................... $1,400 $9,600 $ (970,394) $ (959,394)
====== ====== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-18
<PAGE> 78

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------- APRIL 30,
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 8,223,964 $ 9,392,386 $ 71,800
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.................................. 678,583 711,778 359,999
Deferred income taxes......................... 196,256 -- --
Changes in operating assets and liabilities
Accounts receivable......................... (274,665) (895,104) (73,442)
Inventory................................... 602,899 (379,348) (841,332)
Other current assets........................ 32,694 (170,228) (283,711)
Accounts payable and accrued expenses....... (395,462) 1,115,250 1,897,962
Due to related party........................ (51,254) 496,484 599,967
----------- ------------ -----------
Net cash provided by operating
activities.......................... 9,013,015 10,271,218 1,731,263
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (1,128,788) (1,076,826) (950,164)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank note............................ (50,000) (950,000) --
Change in shareholders' notes payable............ (1,615,000) -- 20,000
Distributions to shareholders.................... (3,100,000) (9,900,000) (3,006,847)
----------- ------------ -----------
Net cash used in financing
activities.......................... (4,765,000) (10,850,000) (2,986,847)
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents.................... 3,119,227 (1,655,608) (2,205,768)
Cash and cash equivalents, beginning of period..... 997,615 4,116,842 2,461,234
----------- ------------ -----------
Cash and cash equivalents, end of period........... $ 4,116,842 $ 2,461,234 $ 255,466
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period......... $ 220,340 $ 72,758 $ --
Cash paid for taxes during the period............ 871,395 88,968 --
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-19
<PAGE> 79

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE FOUR MONTHS ENDED APRIL 30, 1996

1. DESCRIPTION OF BUSINESS

Racing Champions, Inc. ("RCI") and Dods-Meyer, Ltd. ("DML") (collectively
"the Company") is a leading producer and marketer of collectible scaled die cast
vehicle replicas. The Company is best known for its extensive line of officially
licensed, high-quality collectible replicas of actual race cars and related
vehicles from the most popular U.S. professional racing series, including NASCAR
stock car racing, National Hot Rod Association drag racing, Championship Auto
Racing Teams and Indy Racing League Indy-style racing, World of Outlaws sprint
car racing as well as Honda and Kawasaki racing motorcycles. Products are
manufactured in numerous styles for the following customer bases: national and
regional retail chains, collector and hobby shops and premium sales to
corporations. RCI has license agreements with the major U.S. automotive
manufacturers and most of the major motor sport sponsors, team owners and their
drivers.

RCI sells its products primarily in North America through sales
representatives of DML, which is owned by shareholders of RCI. Racing Champions
Limited ("RCL"), a Hong Kong company owned by a related party, oversees the
production of RCI products.

On April 30, 1996, the Company was part of a recapitalization which
involved the Company and RCL and other affiliates of RCL, whereby a new holding
company, Racing Champions Corporation, acquired all stock of RCI and all
operating assets of DML.

2. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF COMBINATION

The financial statements combine the accounts of RCI and DML after
elimination of intercompany items and transactions.

REVENUE RECOGNITION

The Company recognizes revenue based upon shipment of product to customers.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalent. Such investments are valued
at market prices.

USE OF ESTIMATES

INVENTORY

F-20
<PAGE> 80

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method for financial statement purposes with estimated useful
lives for tooling of two years and for other equipment of five to ten years.
Accelerated methods are used for income tax purposes.

INCOME TAXES

DML has elected to be treated as an S Corporation under the Internal
Revenue Code pursuant to which profits and losses are allocated to the
shareholders for inclusion in their personal tax returns. As of January 1, 1994,
RCI elected to be treated as an S Corporation. Accordingly, a deferred tax asset
of $196,256 was charged to tax expense as of January 1, 1994. The remaining tax
expense for 1995 and 1996 is due to Illinois replacement taxes.

RELATED-PARTY TRANSACTIONS

RCL's beneficial owner is a warrant holder in RCI. The stock purchase
warrant was issued in 1993 and allows the holder to purchase 500 shares of
common stock for an aggregate price of $1,000,000 and contains certain
anti-dilution provisions. The warrant is exercisable on December 30, 2003, or
upon the occurrence of certain events including a change in control, as defined,
or a filing of a registration statement for an initial public offering of the
Company's common stock. At December 31, 1995 and 1994, RCI had 500 shares of
common stock held in reserve for the exercise of this warrant. This warrant was
canceled on April 30, 1996 as part of the recapitalization of the Company.

In addition to payments related to the purchase of products, RCI paid RCL
fees of 30.5% of the cost of product shipped, which amounted to $1,772,000 in
1994, $2,123,414 in 1995 and $831,832 in 1996 which have been included in Cost
of sales, Related party, on the accompanying Combined Statements of Income.

STOCK DIVIDEND

On December 20, 1994, RCI's shareholders and directors declared a 24-to-1
stock dividend to shareholders of RCI's common stock, thereby effecting a
24-to-1 stock split. This split has been retroactively reflected in the
accompanying financial statements.

CONCENTRATION OF CREDIT RISK

Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial conditions of certain major customers in which one
customer accounted for approximately 11% of net sales for the year ended
December 31, 1994, two customers accounted for approximately 15% and 10% of net
sales for the year ended December 31, 1995 and three customers accounted for
approximately 16%, 15% and 15% of net sales for the four months ended April 30,
1996. The Company does not require collateral or other security to support
customers' receivables. The Company conducts periodic reviews of its customers'
financial conditions and vendor payment practices to minimize collection risks
on trade accounts receivable. The Company insures its receivables for major
customers with a third party.

3. NOTES PAYABLE

During 1995, the Company entered into a revolving line of credit agreement
with a bank which extends through April, 1996. The maximum amount of borrowings
was the lesser of $4,000,000 or the collateral availability, as defined in the
agreement. The agreement required maintenance of certain covenants and was
secured by substantially all of the assets of the Company. As of April 30, 1996,
there was no outstanding balance on this line of credit. On April 30, 1996, as
part of the recapitalization (see Note 1) this agreement was canceled.

F-21
<PAGE> 81

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

The Company has an unsecured promissory note payable to a related party (a
former shareholder) of $1,120,000 and $1,140,000 at December 31, 1995, and April
30, 1996, respectively, including accrued interest. Interest charged at 6% is
payable at maturity.

4. STOCK OPTION PLAN

During 1994, RCI established a stock option plan, under which up to 100
shares of RCI's common stock may be granted to key employees. Under this Plan,
options to purchase a total of 74.76 shares of RCI common stock at $3,960 per
share were issued during 1994. The options were issued at an exercise price
equal to fair market value. The options are exercisable upon the earlier of a
change in control of RCI, as defined, or an initial public offering of RCI's
common stock. The options expire five years from the date they become
exercisable. The options outlined above were canceled in connection with the
recapitalization (see Note 1).

F-22
<PAGE> 82

REPORT OF INDEPENDENT AUDITORS

The Shareholders
Racing Champions Limited,
(Incorporated in Hong Kong with limited liability)
Hosten Investment Limited,
(Incorporated in Hong Kong with limited liability)
Garnett Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)
Bergen Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)

We have audited the accompanying combined balance sheets of Racing
Champions Limited, Hosten Investment Limited, Garnett Services Inc. and Bergen
Services Inc. (hereinafter collectively referred to as "the Racing Champions
Limited Group" or "the RCL Group") as of March 31, 1995, 1996 and April 30, 1996
and the related combined statements of income, changes in shareholders' equity
and cash flows for each of the two years in the period ended March 31, 1996 and
the one month period ended April 30, 1996. These financial statements are the
responsibility of the RCL Group's management. Our responsibility is to express
an opinion on these 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the RCL
Group as of March 31, 1995, 1996 and April 30, 1996, and the combined results of
its operations and its cash flows for each of the two years in the period ended
March 31, 1996 and for the one month period ended April 30, 1996 in conformity
with accounting principles generally accepted in the United States of America.

ERNST & YOUNG
Hong Kong

February 19, 1997

F-23
<PAGE> 83

RACING CHAMPIONS LIMITED GROUP

COMBINED BALANCE SHEETS
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
MARCH 31,
----------------------- APRIL 30,
NOTES 1995 1996 1996
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 43,277 $ 301,240 $ 50,875
Trade receivables, net.......................... 996,405 1,739,938 1,470,941
Prepayments, deposits and other receivables..... 577,134 282,213 237,122
Amount due from Racing Champions, Inc.
("RCI")...................................... 596,828 442,660 572,434
Amount due from affiliates...................... 9 1,032,754 -- 111,965
---------- ---------- ----------
Total current assets......................... 3,246,398 2,766,051 2,443,337
Fixed assets...................................... 8 & 13 474,461 433,952 411,699
Other asset....................................... 3 -- -- 879,690
Deferred income taxes............................. 4,560 60,440 65,713
---------- ---------- ----------
Total assets............................ $3,725,419 $3,260,443 $3,800,439
========== ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts, secured........................ 12 $ 320,384 $ -- $ --
Current portion of obligations under capital
lease........................................ 13 49,596 148,151 147,888
Accounts payable and accrued liabilities........ 7 794,598 723,655 992,660
Amount due to affiliates........................ 9 -- 218,790 --
Income tax payable.............................. 38,872 136,768 151,086
---------- ---------- ----------
Total current liabilities.................... 1,203,450 1,227,364 1,291,634
Long-term obligations under capital lease......... 13 72,834 175,320 163,237
---------- ---------- ----------
Total liabilities....................... 1,276,284 1,402,684 1,454,871
Contingencies and commitments..................... 16
Shareholders' equity:
Share capital................................... 14 129,369 129,369 129,369
Retained earnings............................... 2,319,766 1,728,390 2,216,199
---------- ---------- ----------
Total shareholders' equity................... 2,449,135 1,857,759 2,345,568
---------- ---------- ----------
Total liabilities and shareholders'
equity................................ $3,725,419 $3,260,443 $3,800,439
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-24
<PAGE> 84

RACING CHAMPIONS LIMITED GROUP

COMBINED STATEMENTS OF INCOME
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
------------------------------- ENDED
NOTES 1995 1996 APRIL 30, 1996
------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales:
Related party - RCI........................ $ 10,316,438 $ 11,308,084 $ 1,304,352
Other customers............................ 12,014,547 26,013,536 2,547,775
------------ ------------ -----------
Total sales............................. 22,330,985 37,321,620 3,852,127
------------ ------------ -----------
Cost of sales:
Related party purchases.................... 15 (8,161,941) (11,245,727) (1,719,700)
Other purchases............................ (4,776,869) (7,643,479) (307,945)
Commission paid to RCI..................... 15 (5,777,498) (13,745,461) (1,331,278)
------------ ------------ -----------
Total cost of sales..................... (18,716,308) (32,634,667) (3,358,923)
------------ ------------ -----------
Commission received from RCI................. 15 1,673,212 2,398,325 258,387
------------ ------------ -----------
Gross profit............................ 5,287,889 7,085,278 751,591
Depreciation of fixed assets................. (360,177) (392,079) (29,268)
Selling and administrative expenses.......... 15 (2,861,294) (3,968,028) (215,760)
------------ ------------ -----------
Operating income........................ 2,066,418 2,725,171 506,563
Financial expenses, net...................... 4 & 15 (55,239) (130,004) (12,755)
Other income, net............................ 5 113,085 178,534 28,512
------------ ------------ -----------
Income before income taxes.............. 2,124,264 2,773,701 522,320
Income taxes................................. 6 (45,312) (170,677) (34,511)
------------ ------------ -----------
Net income.............................. $ 2,078,952 $ 2,603,024 $ 487,809
============ ============ ===========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-25
<PAGE> 85

RACING CHAMPIONS LIMITED GROUP

COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
COMBINED RETAINED
SHARE CAPITAL EARNINGS TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Balance at March 31, 1994.............................. $129,369 $ 2,868,872 $ 2,998,241
Net income........................................... -- 2,078,952 2,078,952
Dividends............................................ -- (2,628,058) (2,628,058)
-------- ----------- -----------
Balance at March 31, 1995.............................. 129,369 2,319,766 2,449,135
Net income........................................... -- 2,603,024 2,603,024
Dividends............................................ -- (3,194,400) (3,194,400)
-------- ----------- -----------
Balance at March 31, 1996.............................. 129,369 1,728,390 1,857,759
Net income........................................... -- 487,809 487,809
-------- ----------- -----------
Balance at April 30, 1996.............................. $129,369 $ 2,216,199 $ 2,345,568
======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-26
<PAGE> 86

RACING CHAMPIONS LIMITED GROUP

COMBINED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
------------------------- ENDED
1995 1996 APRIL 30, 1996
----------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,078,952 $ 2,603,024 $ 487,809
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on disposal of fixed assets.................. (51,809) (147,616) --
Depreciation....................................... 360,177 392,079 29,268
Deferred income taxes.............................. (29,961) (55,880) (5,273)
Decrease (increase) in assets:
Trade receivables, net........................... (107,845) (743,533) 268,997
Prepayments, deposits and other receivables...... (201,268) 294,921 45,091
Amount due from RCI.............................. 7,348 154,168 (129,774)
Amount due from affiliates....................... (679,856) 1,032,754 (111,965)
Tax refund....................................... 240,642 -- --
Increase (decrease) in liabilities:
Amounts due to affiliates........................ -- 218,790 (218,790)
Accounts payable and accrued liabilities......... 63,950 (70,943) 269,005
Income taxes payable............................. 38,355 97,896 14,318
----------- ----------- ---------
Net cash provided by operating activities..... 1,718,685 3,775,660 648,686
----------- ----------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.............................. (75,914) (35,390) (7,015)
Purchase of other asset............................... -- -- (879,690)
Proceeds from disposal of fixed assets................ 139,715 162,995 --
----------- ----------- ---------
Net cash provided by (used in) investing
activities.................................. 63,801 127,605 (886,705)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayment) of bank overdrafts............... 320,384 (320,384) --
Dividends paid........................................ (2,628,058) (3,194,400) --
Net payments under finance lease...................... (112,426) (130,518) (12,346)
----------- ----------- ---------
Net cash used in financing activities......... (2,420,100) (3,645,302) (12,346)
Net increase (decrease) in cash and cash
equivalents................................. (637,614) 257,963 (250,365)
Cash and cash equivalents, at beginning of year......... 680,891 43,277 301,240
----------- ----------- ---------
Cash and cash equivalents, at end of year............... $ 43,277 $ 301,240 $ 50,875
=========== =========== =========
SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Interest paid......................................... $ 41,735 $ 67,038 $ 4,666
Income taxes paid..................................... 36,918 128,661 25,466
Inception of a capital lease contract................. 112,894 331,559 --
=========== =========== =========
</TABLE>

F-27
<PAGE> 87

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Racing Champions Limited ("RCL"), Bergen Services Inc. ("BSI"), and Hosten
Investments ("HIL") were formed in 1989, 1989 and 1991, respectively to act as
purchasing and sales agents of collectible scaled replicas of race cars and
other vehicles for Garnett Services Inc. ("GSI"). BSI and GSI were incorporated
in the British Virgin Islands ("BVI"), and RCL and HIL were incorporated in Hong
Kong. RCL, BSI, GSI and HIL are collectively referred to as "the Racing
Champions Limited Group" or "the RCL Group".

Substantially all the RCL Group's products are sold to Racing Champions,
Inc. ("RCI"), a related party, and other customers in the United States of
America. Effective on May 1, 1996, the operations of RCL, HIL and GSI have been
acquired by Racing Champions, Inc.

2. BASIS OF PRESENTATION

The combined financial statements of the RCL Group have been prepared based
on the historical financial statements of the RCL Group of companies for the
years ended March 31, 1995 and 1996 and for one month ended April 30, 1996, in
accordance with accounting principles generally accepted in the United States of
America. All significant intercompany balances and transactions have been
eliminated.

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

(A) FIXED ASSETS AND DEPRECIATION

Fixed assets are stated at cost less accumulated depreciation.

Depreciation of fixed assets is calculated on the straight-line basis to
write off the cost less estimated residual value of each asset over its
estimated useful life. The principal annual rates used for this purpose are as
follows:

<TABLE>
<S> <C>
Leasehold improvements...................................... 25%
Furniture and fixtures...................................... 20%
Office equipment............................................ 20%
Motor vehicles.............................................. 30%
</TABLE>

(B) INCOME TAXES

Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".

The RCL Group's functional currency is Hong Kong dollars ("HK$"). Foreign
currency transactions and monetary assets and liabilities denominated in foreign
currencies are translated into HK$ at the respective applicable rates of
exchange. Monetary assets and liabilities denominated in foreign currencies are
translated into HK$ at the applicable rate of exchange at the balance sheet
date. The resulting exchange gains or losses are credited or charged to the
statements of income.

The financial statements of the RCL Group where the HK$ is the functional
currency have been translated into U.S. dollars for reporting purpose in
accordance with FASB Statement No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement accounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported separately as a
component of shareholders' equity.

F-28
<PAGE> 88

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(D) OTHER ASSET

Other asset consists of a golf club membership debenture that is stated at
purchase cost which approximates its fair market value.

(E) REVENUE RECOGNITION

Revenue from the sale of the RCL Group's products is recognized when the
products are shipped to customers.

(F) RETIREMENT BENEFITS

The RCL Group participates in a defined contribution retirement plan
administered by an insurance company (the "Retirement Plan"). All staff covered
under the Retirement Plan are entitled to a lump sum payment, payable by the
insurance company, upon their retirement equal to the sum of employees'
contributions plus the employer's contribution. The RCL Group is required to
make contributions to the Retirement Plan at a rate of 5% of the salaries of its
existing staff. The retirement benefits contributions are charged to the
statements of income as services are provided.

Contributions made to the retirement plan during the years ended March 31,
1995, 1996 and one month ended April 30, 1996 were $17,322, $17,540 and $1,068,
respectively.

(G) CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and demand deposits with
banks with a term to maturity of three months or less at the date of
acquisition.

(H) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

4. FINANCIAL EXPENSES, NET

Financial expenses, net consist of:

<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
------------------------ APRIL 30,
1995 1996 1996
-------- --------- ---------
<S> <C> <C> <C>
Interest income.......................... $ 32,915 $ 13,982 $ 61
Interest expenses on:
Bank overdrafts........................ (28,315) (46,598) (2,843)
Capital leases......................... (13,420) (20,440) (1,823)
Bank charges............................. (46,419) (76,948) (8,150)
-------- --------- --------
$(55,239) $(130,004) $(12,755)
======== ========= ========
</TABLE>

F-29
<PAGE> 89

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. OTHER INCOME, NET

Other income, net consists of:

<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
----------------------- APRIL 30,
1995 1996 1996
-------- -------- ---------
<S> <C> <C> <C>
Foreign exchange gains/(losses), net...... $(20,564) $ 3,265 $ 51
Gains on disposal of fixed assets......... 51,809 147,616 --
Miscellaneous income...................... 81,840 27,653 28,461
-------- -------- -------
$113,085 $178,534 $28,512
======== ======== =======
</TABLE>

6. INCOME TAXES

The companies in the RCL Group operate both in Hong Kong and other
jurisdictions. Details of the related provision for income taxes are as follows:

<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
----------------------- APRIL 30,
1995 1996 1996
---------- ---------- ---------
<S> <C> <C> <C>
Income before income taxes:
Hong Kong................................. $ 322,039 $1,182,021 $209,159
Other jurisdictions....................... 1,802,225 1,591,680 313,161
---------- ---------- --------
$2,124,264 $2,773,701 $522,320
========== ========== ========
Income tax provision:
Current:
Hong Kong.............................. $ 75,273 $ 226,557 $ 39,784
Other jurisdictions.................... -- -- --
---------- ---------- --------
75,273 226,557 39,784
---------- ---------- --------
Deferred, Hong Kong....................... (29,961) (55,880) (5,273)
---------- ---------- --------
$ 45,312 $ 170,677 $ 34,511
========== ========== ========
</TABLE>

Income earned by BSI and GSI outside the BVI is not subject to tax.

Those companies carrying on business in Hong Kong are subject to Hong Kong
profits tax on their income arising in or derived from Hong Kong after adjusting
for income and expense items which are not assessable or deductible for income
tax purposes. As such, current income taxes are calculated at a statutory tax
rate of 16.5%.

F-30
<PAGE> 90

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income before
income taxes is as follows:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
--------------------- ENDED
1995 1996 APRIL 30, 1996
--------- --------- --------------
<S> <C> <C> <C>
Statutory Hong Kong tax rates.............. 16.5% 16.5% 16.5%
========= ========= ========
Computed expected tax expense.............. $ 350,503 $ 457,661 $ 86,183
Lower tax rate of BVI companies............ (297,367) (262,627) (51,672)
Non-deductible/(taxable) items:
Gains on disposal of fixed assets........ (8,548) (24,357) --
Expenses................................. 724 -- --
--------- --------- --------
$ 45,312 $ 170,677 $ 34,511
========= ========= ========
</TABLE>

Deferred income taxes represent temporary differences on depreciation
allowance of fixed assets. No valuation allowance for deferred income tax assets
has been recorded.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:

<TABLE>
<CAPTION>
MARCH 31,
-------------------- APRIL 30,
1995 1996 1996
-------- -------- ---------
<S> <C> <C> <C>
Accounts payable............................. $734,443 $552,361 $818,856
Accrued liabilities.......................... 60,155 171,294 173,804
-------- -------- --------
$794,598 $723,655 $992,660
======== ======== ========
</TABLE>

8. FIXED ASSETS

Fixed assets consist of:

<TABLE>
<CAPTION>
MARCH 31,
-------------------------- APRIL 30,
1995 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements............... $ 506,553 $ 510,285 $ 510,285
Furniture and fixtures............... 249,495 255,391 255,391
Office equipment..................... 258,198 253,319 260,334
Motor vehicles....................... 487,677 453,239 453,239
----------- ----------- -----------
1,501,923 1,472,234 1,479,249
Less: Accumulated depreciation....... (1,027,462) (1,038,282) (1,067,550)
----------- ----------- -----------
$ 474,461 $ 433,952 $ 411,699
=========== =========== ===========
</TABLE>

F-31
<PAGE> 91

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. AMOUNT DUE FROM (TO) AFFILIATES

Amounts due from (to) affiliates consist of:

<TABLE>
<CAPTION>
MARCH 31,
----------------------- APRIL 30,
1995 1996 1996
---------- --------- ---------
<S> <C> <C> <C>
Advances from (to) directors............. $ (96,460) $ 450,385 $ 34,605
Advances from shareholders............... 121,839 117,455 956,112
Advances from (to) related companies..... 1,007,375 (786,630) (878,752)
---------- --------- ---------
$1,032,754 $(218,790) $ 111,965
========== ========= =========
</TABLE>

Amounts due to/from directors and shareholders relate to short-term
advances. Amounts due to/from related companies pertain to short-term advances
to related parties described in Notes 1 and 15.

10. CONCENTRATION OF RISKS

Financial instruments which potentially subject the RCL Group to a
concentration of credit risk consist of cash deposits and trade receivables.

(i) Cash deposits

The RCL Group places its cash deposits with international banks in
Hong Kong.

(ii) Trade receivables

As of April 30, 1996, approximately 28.0% and 48.8% of the total trade
receivables balance were due from Racing Champions, Inc. and the two other
largest customers, respectively. The RCL Group does not have a policy of
requiring collateral for trade receivables.

Racing Champions, Inc. and the two other largest customers account for
approximately 46% and 10%; 30% and 23%; 34% and 22% of net sales, respectively,
for each of the two years ended March 31, 1995 and 1996 and one month period
ended April 30, 1996.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments are set out as follows:

(i) Cash deposits

The cash deposits are stated at cost which approximates market value.

(ii) Trade receivables and amounts due from related companies

Trade receivables and the amounts due from related companies are
stated at their book value less provision for doubtful debts, which
approximates the fair market value.

(iii) Other asset

Other asset is stated at purchase cost which approximates its fair
value based on current market value.

(iv) Other financial instruments

All other financial instruments are stated at their book value which
approximates their fair values.

F-32
<PAGE> 92

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

12. BANKING FACILITIES

The RCL Group has banking facilities of $13,628,719 for overdrafts and
trade finance. Unused facilities as of April 30, 1996 amounted to $13,628,719.

The banking facilities of the RCL Group were secured by mortgages over a
director's personal leasehold land and buildings and corporate guarantees given
by the RCL Group and two directors totalling $8,150,065.

The bank overdrafts carry interest at 2.5% above the Hong Kong prime
lending rate, a weighted average of 11.5% as of April 30, 1996.

13. CAPITAL LEASES

The RCL Group leases motor vehicles under capital leases. Leases meeting
certain specific criteria are accounted for as the acquisition of an asset. The
principal amounts of leases that have been capitalized were as follows:

<TABLE>
<CAPTION>
MARCH 31,
------------------------------- APRIL 30,
1995 1996 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Motor vehicles......................... $ 487,677 $ 453,239 $ 453,239
Less: Accumulated amortization......... (361,278) (172,414) (183,745)
--------- --------- ---------
$ 126,399 $ 280,825 $ 269,494
========= ========= =========
</TABLE>

Amortization of the leased assets is included in depreciation expenses.

At April 30, 1996, future minimum payments under capital leases with
initial terms of one year or more consisted of the following:

<TABLE>
<S> <C>
Year ending April 30:
1996................................................... $ 170,026
1997................................................... 170,026
1998................................................... 16,603
---------
Total minimum lease payments............................. 356,655
Less: Interest elements.................................. (45,530)
---------
Present value of net minimum lease payments.............. 311,125
Less: current portion.................................... (147,888)
---------
Long term portion........................................ $ 163,237
=========
</TABLE>

14. SHARE CAPITAL

Share capital represented an aggregate amount of the nominal value of
issued share capital of RCL, HIL, GSI and BSI as follows:

<TABLE>
<CAPTION>
RCL HIL BSI GSI
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Authorized share capital.... US$129,366 US$1,293.66 US$50,000 US$50,000
Issued share capital........ US$129,366 US$ .26 US$ 2 US$ 1
Stated value per share...... US$ .13 US$ .13 US$ 1 US$ 1
</TABLE>

F-33
<PAGE> 93

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

15. RELATED PARTY BALANCES AND TRANSACTIONS

The RCL Group paid commissions to RCI on all shipments to customers other
than RCI. These commissions represented the gross profit earned on these sales.
The RCL Group received agency fee income from RCI on all shipments based upon a
percentage of the cost of the items sold.

A significant proportion of RCL Group's products was purchased from vendors
who were either directly or indirectly, and partially owned by the RCL Group's
shareholders. Also, RCL Group paid rents to affiliated companies of $539,385,
$554,274 and $40,065 for the years ended March 31, 1995 and 1996 and the one
month ended April 30, 1996, respectively.

16. CONTINGENCIES AND COMMITMENTS

The RCL Group had the following capital commitments and contingencies:

(i) The RCL Group had bills discounted with recourse amounting to
$498,327, $63,087 and $256,668 as of March 31, 1995, March 31, 1996 and
April 30, 1996, respectively.

(ii) The RCL Group had guarantees of banking facilities granted to a
director amounting to $1,936,879, $1,888,191 and $2,018,111 as of March 31,
1995, March 31, 1996 and April 30, 1996, respectively.

(iii) Operating leases:

The RCL Group leases land and buildings under non-cancellable
operating lease arrangements. Future minimum payments under
non-cancellable operating leases with initial terms of one year or more
consisted of the following at April 30, 1996.

<TABLE>
<S> <C>
For the year ended April 30,
1997...................................................... $ 59,931
1998...................................................... 186,287
--------
$246,218
========
</TABLE>

Rental expenses under all operating leases were $539,385 and
$554,274 for the years ended March 31, 1995 and 1996, respectively, and
$40,065 for the one month ended April 30, 1996.

17. POST BALANCE SHEET EVENTS

Subsequent to the balance sheet date, on May 1, 1996, RCL, HIL, GSI (the
"Companies") and Racing Champions, Inc. ("RCI") entered into an asset and stock
purchase agreement (the "Agreement"). Pursuant to the Agreement, the Companies
agreed to sell certain of their assets and liabilities to Banerjan Company
Limited ("Banerjan"), a wholly-owned subsidiary of RCI. Certain non-business
assets and the golf club membership debenture were not sold to Banerjan.
Thereafter, the Companies ceased business and the name of Racing Champions
Limited was released to Banerjan, which was renamed Racing Champions Limited, a
wholly owned subsidiary of RCI.

F-34
<PAGE> 94

======================================================

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
The Recapitalization................... 12
Use of Proceeds........................ 13
Dividend Policy........................ 13
Dilution............................... 14
Capitalization......................... 15
Selected Financial Data................ 16
Pro Forma Statements of Income......... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 31
Management............................. 41
Certain Transactions................... 47
Principal Stockholders................. 50
Description of Capital Stock........... 51
Shares Eligible for Future Sale........ 54
Underwriting........................... 56
Legal Matters.......................... 57
Experts................................ 57
Additional Information................. 58
Index to Financial Statements.......... F-1
</TABLE>

------------------------

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================

5,000,000 SHARES
RACING CHAMPIONS LOGO
COMMON STOCK
----------------------

PROSPECTUS
----------------------
ROBERTW. BAIRD & CO.
INCORPORATED

WILLIAM BLAIR & COMPANY

J.C. BRADFORD & CO.
, 1997

======================================================
<PAGE> 95

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Not including underwriting discounts and commissions, the expenses of
issuance and distribution which are to be paid by the Company are estimated as
follows:

<TABLE>
<CAPTION>
ITEM AMOUNT
---- -------
<S> <C>
Securities and Exchange Commission Registration Fee......... $24,394
NASD Filing Fee............................................. $ 8,550
NASDAQ Application Fee...................................... $50,000
Legal Fees and Expenses..................................... $ *
Transfer Agent Fees and Expenses............................ $ *
Accounting Fees and Expenses................................ $ *
Miscellaneous Expenses...................................... $ *
Printing and Engraving...................................... $ *
-------
Total............................................. $ *
=======
</TABLE>

- ---------------

* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Set forth below is a description of certain provisions of the Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") of
Racing Champions Corporation (the "Company"), the Amended and Restated By-Laws
of the Company (the "By-Laws") and the Delaware General Corporation Law
("DGCL"). This description is qualified in its entirety by reference to the
Certificate of Incorporation, the By-Laws and the DGCL.

The Certificate of Incorporation provides that, to the full extent provided
by law, a director will not be personally liable to the Company or its
stockholders for or with respect to any acts or omissions in the performance of
his or her duties as a director. The DGCL provides that a corporation may limit
or eliminate a director's personal liability for monetary damages to the
corporation or its stockholders, except for liability (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of section 174 of the DGCL or (iv) with respect to any
transaction from which the director derived an improper personal benefit.

Under the DGCL, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. With respect to actions by or in the right
of the corporation as a derivative action, section 145 of the DGCL provides that
a corporation may indemnify directors, officers and other persons as described
above, except if such person has been adjudged to be liable to the corporation,
unless the court in which such action or suit was brought determines in view of
all of the circumstances of the case that such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.

The Certificate of Incorporation and Article V of the By-Laws provide for
the mandatory indemnification of directors, officers, employees or agents of the
Company to the full extent permitted by the DGCL. The By-Laws also contain a
nonexclusivity clause which provides in substance that the indemnification
rights under the Amended and Restated By-Laws shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any agreement with the Company, any By-Law or otherwise.

II-1
<PAGE> 96

The DGCL permits and Article V of the By-Laws authorizes the Company to
purchase and maintain insurance on behalf of any director, officer, employee or
agent of the Company against any liability asserted against or incurred by them
in such capacity or arising out of their status as such whether or not the
Company would have the power to indemnify such director, officer, employee or
agent against such liability under the applicable provisions of the DGCL, the
Certificate of Incorporation or the By-Laws.

The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On April 30, 1996, the Company issued an aggregate of 4,447,252 shares of
Common Stock, 51,082.48 shares of Series A Preferred Stock and $21,570,570
principal amount of Series A Junior Subordinated Promissory Notes, for an
aggregate purchase price of $27,242,875 in cash and promissory notes to nine
purchasers, including four executive officers of the Company and five
institutional investors. The purchasers paid a purchase price of $0.13 per share
of Common Stock and $100 per share of Series A Preferred Stock, and paid face
value for the Series A Junior Subordinated Notes. These securities were issued
in reliance upon the exemption from registration provided by section 4(2) of the
Securities Act of 1933.

On April 30, 1996, the Company acquired all of the outstanding stock of
Racing Champions, Inc. and substantially all of the assets of Dods-Meyer, Ltd.
("DML"), and a subsidiary of the Company acquired substantially all of the
assets of Racing Champions Limited ("RCL"), Hosten Investment Limited ("HIL")
and Garnett Services, Inc. ("GSI"). In consideration for such stock and assets,
the Company and its subsidiary issued an aggregate principal amount of
$38,934,116 of Three Day Promissory Notes, an aggregate principal amount of
$19,526,667 of Minute Notes, an aggregate principal amount of $8,020,000 of
Senior Subordinated Promissory Notes, an aggregate principal amount of
$16,675,250 of Series A Junior Subordinated Promissory Notes, an aggregate
principal amount of $1,195,234 of Series B Junior Subordinated Promissory Notes,
an aggregate of 13,163.36 shares of Series A Preferred Stock and an aggregate of
1,145,996 shares of Common Stock, to RCL, HIL, GSI, DML, Robert Dods and Boyd
Meyer. These securities were issued in reliance upon the exemption from
registration provided by section 4(2) of the Securities Act of 1933.

On April 30, 1996, the Company issued 1,354,908 shares of Common Stock,
937,084 shares of Nonvoting Common Stock, 2,422.06 shares of Series A Preferred
Stock and 11,952.33 shares of Series B Preferred Stock to DML. DML paid a
purchase price of $0.13 per share of Common Stock, $0.13 per share of Nonvoting
Common Stock, $100 per share of Series A Preferred Stock and $100 per share of
Series B Preferred Stock. These securities were issued in reliance upon the
exemption from registration provided by section 4(2) of the Securities Act of
1933.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1* Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated By-Laws.
4.1** Amended and Restated Certificate of Incorporation (same as Exhibit 3.1).
4.2** Amended and Restated By-Laws (same as Exhibit 3.2).
5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
</TABLE>

II-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1** Asset and Stock Purchase Agreement, dated as of April 30, 1996, by and among the
Company, Racing Champions, Inc., Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer,
Ltd., Racing Champions Limited, Garnett Services, Inc., Hosten Investment Limited and
Banerjan Company Limited.

10.2** Stockholders Agreement, dated as of April 30, 1996, by and among the Company, Willis
Stein & Partners, L.P., Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners L.P., NAS Partners I
L.L.C., Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc., Hosten Investment Limited, Curt Stoelting, John Olsen,
Peter Henseler and Kevin Camp.

10.3** Registration Agreement, dated as of April 30, 1996, by and among the Company, Willis
Stein & Partners, L.P., Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners L.P., NAS Partners I
L.L.C., Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc., Hosten Investment Limited, Curt Stoelting, John Olsen,
Peter Henseler and Kevin Camp.

10.4** Executive Securities Agreement, dated as of April 30, 1996, by and among the Company,
Curt Stoelting, John Olsen, Peter Henseler, Kevin Camp, Willis Stein & Partners, L.P.,
Baird Capital Partners II Limited Partnership, BCP II Affiliates Fund Limited
Partnership, Nassau Capital Partners L.P., NAS Partners I L.L.C., Robert Dods, Boyd
Meyer and Peter Chung.

10.5** Securities Purchase Agreement, dated as of April 30, 1996, by and among the Company,
Willis Stein & Partners, L.P., Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners L.P., NAS Partners I
L.L.C., Curt Stoelting, John Olsen, Peter Henseler and Kevin Camp.

10.6** Amendment No. 1 to Securities Purchase Agreement, dated as of April 30, 1996, by and
among the Company, Willis Stein & Partners, L.P. and certain other purchasers of the
Company's stock.

10.7** Securities Purchase Agreement, dated as of April 30, 1996, by and between the Company
and Dods-Meyer, Ltd.

10.8** Promissory Note dated April 30, 1996 from Peter Henseler to the Company.

10.9** Executive Securities Pledge Agreement, dated as of April 30, 1996, between Peter
Henseler and the Company.

10.10** Credit Agreement, dated as of April 30, 1996, by and among the Company, Racing
Champions, Inc. and The First National Bank of Boston, as Agent.

10.11** Guarantee and Security Agreement, dated as of April 30, 1996, by and among the Company,
Racing Champions, Inc. and The First National Bank of Boston, as Agent.

10.12** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Robert Dods.

10.13** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Boyd Meyer.

10.14** Employment Agreement, dated as of April 30, 1996, by and between Banerjan Company
Limited and Peter Chung.

10.15** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Curt Stoelting.

10.16** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Peter Henseler.

10.17** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and John Olsen.
</TABLE>

II-3
<PAGE> 98

<TABLE>
<S> <C>
10.18** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Kevin Camp.
10.19** 1996 Key Employees Stock Option Plan.
10.20** 1996 Key Employees Performance Compensation Plan.
10.21** Amendment No. 1 to 1996 Key Employees Performance Compensation Plan.
10.22** Racing Champions Corporation 1997 Stock Incentive Plan.
10.23** Racing Champions Corporation Employee Stock Purchase Plan.
21** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young.
23.3 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. (included in its
opinion filed as Exhibit 5 hereto).
24** Power of Attorney.
27 Financial Data Schedule.
</TABLE>

- ---------------
* To be filed by amendment.

** Previously filed.

(b) FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>

ITEM 17. UNDERTAKINGS

The undersigned Registrant undertakes as follows:

(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(c) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(d) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offer therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Pre-Effective Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Glen Ellyn, State of Illinois, on the 9th day of May, 1997.

RACING CHAMPIONS CORPORATION

By /s/ ROBERT E. DODS
------------------------------------
Robert E. Dods, President

Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to Registration Statement has been signed by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT E. DODS President and Director May 9, 1997
- ----------------------------------------------------- (Principal Executive Officer)
Robert E. Dods

* Executive Vice President and May 9, 1997
- ----------------------------------------------------- Director
Boyd L. Meyer

* Director May 9, 1997
- -----------------------------------------------------
Peter K.K. Chung

* Director May 9, 1997
- -----------------------------------------------------
Samuel B. Guren

* Director May 9, 1997
- -----------------------------------------------------
Avy H. Stein

* Director May 9, 1997
- -----------------------------------------------------
Daniel M. Gill

* Vice President-Finance and May 9, 1997
- ----------------------------------------------------- Operations and Secretary
Curtis W. Stoelting (Principal Accounting Officer
and Principal Financial Officer)

*By /s/ ROBERT E. DODS May 9, 1997
------------------------------------------------
Robert E. Dods,
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 100

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Racing Champions Corporation and Subsidiaries and the
Shareholders of Racing Champions, Inc. and Dods-Meyer, Ltd.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Racing Champions Corporation and
Subsidiaries and the combined financial statements of Racing Champions, Inc. and
Dods-Meyer, Ltd. included in this Registration Statement and issued our reports
thereon dated February 15, 1997 (except with respect to matters discussed in
Note 11 as to which the date is April 9, 1997). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule of Valuation and Qualifying Accounts is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not a part of the basic financial statements. This schedule has been subject to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 15, 1997
(except with respect to matters discussed
in Note 11 as to which the date

is April 9, 1997)

<PAGE> 101

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances deducted from related accounts
receivable balance sheet accounts of:
Racing Champions, Inc. and Dods-Meyer,
Ltd.
Year-ended December 31, 1994........... $240,000 $ -- $ -- $ -- $240,000
Year-ended December 31, 1995........... 240,000 -- -- 40,000 200,000
Four months ended April 30, 1996....... 200,000 57,000 -- -- 257,000
Racing Champions Corporation
Eight months ended December 31, 1996... 257,000 43,000 -- -- 300,000
Allowances deducted from related inventory
balance sheet accounts of:
Racing Champions Corporation
Eight months ended December 31, 1996... -- 100,000 129,119 -- 229,119
</TABLE>
<PAGE> 102

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1* Form of Underwriting Agreement

3.1** Amended and Restated Certificate of Incorporation

3.2** Amended and Restated By-Laws.

4.1** Amended and Restated Certificate of Incorporation (same as
Exhibit 3.1).

4.2** Amended and Restated By-Laws (same as Exhibit 3.2).

5 Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c.

10.1** Asset and Stock Purchase Agreement, dated as of April 30,
1996, by and among the Company, Racing Champions, Inc.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc., Hosten
Investment Limited and Banerjan Company Limited.

10.2** Stockholders Agreement, dated as of April 30, 1996, by and
among the Company, Willis Stein & Partners, L.P., Baird
Capital Partners II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital Partners L.P., NAS
Partners I L.L.C., Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions Limited, Garnett
Services, Inc., Hosten Investment Limited, Curt Stoelting,
John Olsen, Peter Henseler and Kevin Camp.

10.3** Registration Agreement, dated as of April 30, 1996, by and
among the Company, Willis Stein & Partners, L.P., Baird
Capital Partners II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital Partners L.P., NAS
Partners I L.L.C., Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions Limited, Garnett
Services, Inc., Hosten Investment Limited, Curt Stoelting,
John Olsen, Peter Henseler and Kevin Camp.

10.4** Executive Securities Agreement, dated as of April 30, 1996,
by and among the Company, Curt Stoelting, John Olsen, Peter
Henseler, Kevin Camp, Willis Stein & Partners, L.P., Baird
Capital Partners II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital Partners L.P., NAS
Partners I L.L.C., Robert Dods, Boyd Meyer and Peter Chung.

10.5** Securities Purchase Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein & Partners, L.P.,
Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners
L.P., NAS Partners I L.L.C., Curt Stoelting, John Olsen,
Peter Henseler and Kevin Camp.

10.6** Amendment No. 1 to Securities Purchase Agreement, dated as
of April 30, 1996, by and among the Company, Willis Stein &
Partners, L.P. and certain other purchasers of the Company's
stock.

10.7** Securities Purchase Agreement, dated as of April 30, 1996,
by and between the Company and Dods-Meyer, Ltd.

10.8** Promissory Note dated April 30, 1996 from Peter Henseler to
the Company.

10.9** Executive Securities Pledge Agreement, dated as of April 30,
1996, between Peter Henseler and the Company.

10.10** Credit Agreement, dated as of April 30, 1996, by and among
the Company, Racing Champions, Inc. and The First National
Bank of Boston, as Agent.

10.11** Guarantee and Security Agreement, dated as of April 30,
1996, by and among the Company, Racing Champions, Inc. and
The First National Bank of Boston, as Agent.

10.12** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Robert Dods.
</TABLE>

<PAGE> 103

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.13** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Boyd Meyer.

10.14** Employment Agreement, dated as of April 30, 1996, by and
between Banerjan Company Limited and Peter Chung.

10.15** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Curt Stoelting.

10.16** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Peter Henseler.

10.17** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and John Olsen.

10.18** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Kevin Camp.

10.19** 1996 Key Employees Stock Option Plan.

10.20** 1996 Key Employees Performance Compensation Plan.

10.21** Amendment No. 1 to 1996 Key Employees Performance
Compensation Plan.

10.22** Racing Champions Corporation 1997 Stock Incentive Plan.

10.23** Racing Champions Corporation Employee Stock Purchase Plan.

21** Subsidiaries of the Company.

23.1 Consent of Arthur Andersen LLP.

23.2 Consent of Ernst & Young.

23.3 Consent of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. (included in its opinion filed as Exhibit 5
hereto).

24** Power of Attorney.

27 Financial Data Schedule
</TABLE>

- ---------------

* To be filed by amendment.

** Previously filed.

<PAGE> 1

EXHIBIT 5

[REINHART, BOERNER, VAN DEUREN, NORRIS & RIESELBACH, S.C. LETTERHEAD]

May 9, 1997

Racing Champions Corporation

800 Roosevelt Road

Building C, Suite 320

Glen Ellyn, IL 60137

Gentlemen: Re: Registration Statement on Form S-1

(Securities and Exchange

Commission File No.
333-22493)

We have acted as counsel for Racing Champions Corporation, a Delaware
corporation (the "Company"), in connection with the offering by the Company and
certain of its stockholders to the public of 5,750,000 shares of common stock,
par value $.01 per share (the "Shares"), pursuant to a registration statement
filed under the Securities Act of 1933, as amended (the "Act").

In such capacity, we have examined, among other documents, the Registration
Statement (the "Registration Statement") on Form S-1 (File No. 333-22493) filed
by the Company with the Securities and Exchange Commission (the "Commission") on
February 27, 1997, as amended by Amendment No. 1 filed with the Commission on
April 11, 1997 and by Amendment No. 2 filed with the Commission on the date
hereof or shortly hereafter, including the prospectus contained therein,
covering the public offering of the Shares. Based upon the foregoing, and upon
such further examination as we have deemed relevant and necessary, we are of the
opinion that the Shares have been legally and validly authorized under the
Certificate of Incorporation of the Company and the laws of the State of
Delaware and, when issued and paid for in accordance with the descriptions set
forth in the Registration Statement, the Shares will constitute duly and validly
issued and outstanding and fully paid and nonassessable Common Stock of the
Company under the laws of the State of Delaware.

We hereby consent to the use of our name beneath the caption "Legal
Matters" in the prospectus forming part of the Registration Statement and to the
filing of a copy of this opinion as an exhibit thereto. In giving our consent,
we do not admit that we are "experts" within the meaning of Section 11 of the
Act or within the category of persons whose consent is required by Section 7 of
the Act.

Yours very truly,

REINHART, BOERNER, VAN DEUREN,

NORRIS & RIESELBACH, s.c.

By /s/ JAMES M. BEDORE

------------------------------------

James M. Bedore

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

Re: Racing Champions Corporation
Pre-Effective Amendment No. 2 to
Form S-1 Registration Statement

As independent public accountants, we hereby consent to the use of our
reports dated February 15, 1997, and to all references to our Firm included in
or made a part of this Registration Statement.

s/ ARTHUR ANDERSEN LLP
Chicago, Illinois

May 9, 1997

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference of our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 19, 1997 with
respect to the Combined financial statements of Racing Champions Limited Group,
in the Registration Statement (Form S-1 No. 333-22493) and related Prospectus
of Racing Champions Corporation for the registration of 5,000,000 shares of its
common stock.

Hong Kong

May 9, 1997 s/ Ernst & Young

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 831,052
<SECURITIES> 0
<RECEIVABLES> 4,839,851
<ALLOWANCES> 300,000
<INVENTORY> 1,358,720
<CURRENT-ASSETS> 8,555,424
<PP&E> 8,628,951
<DEPRECIATION> 1,366,652
<TOTAL-ASSETS> 102,595,144
<CURRENT-LIABILITIES> 16,624,048
<BONDS> 81,035,267
0
911,360
<COMMON> 78,853
<OTHER-SE> 8,782,383
<TOTAL-LIABILITY-AND-EQUITY> 102,595,144
<SALES> 15,187,478
<TOTAL-REVENUES> 16,141,232
<CGS> 6,493,257
<TOTAL-COSTS> 11,664,025
<OTHER-EXPENSES> 3,195,804
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,380,513
<INCOME-PRETAX> 545,941
<INCOME-TAX> 218,292
<INCOME-CONTINUING> 327,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 327,649
<EPS-PRIMARY> .01
<EPS-DILUTED> .01

</TABLE>