<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-22635
--------------
Racing Champions Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4088307
- --------------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
---------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 630-790-3507
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
On September 30, 1998, there were outstanding 15,974,819 shares of the
Registrant's $.01 par value common stock.
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RACING CHAMPIONS CORPORATION
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997............................................... 3
Consolidated Statements of Income for the Three Months Ended
September 30, 1998 and 1997 and for the Nine Months Ended
September 30, 1998 and 1997..................................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997............................... 5
Notes to Unaudited Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 13
Item 2. Changes in Securities and Use of Proceeds ...................... 13
Item 3. Defaults Upon Senior Securities................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............. 13
Item 5. Other Information............................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
Signatures...................................................... 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 8,737 $ 6,903
Restricted cash..................................... -- 3,300
Accounts receivable, net............................ 23,619 12,180
Inventory........................................... 13,727 4,412
Other current assets................................ 4,988 2,445
Property and equipment, net......................... 12,474 10,524
Excess purchase price over net assets acquired, net. 100,137 101,569
Other non-current assets............................ 351 1,934
-------- --------
Total.............................................. $164,033 $143,267
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses............... $ 28,736 $ 15,976
Acquisition notes payable........................... 2,000 5,250
Bank term loans..................................... 23,068 21,946
Line of credit...................................... 9,100 7,230
Other liabilities................................... 1,415 1,262
-------- --------
Total liabilities.................................. 64,319 51,664
Stockholders' equity................................ 99,714 91,603
-------- --------
Total liabilities and stockholders' equity......... $164,033 $143,267
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Quarter ended September 30, For the nine months ended September 30,
----------------------------------- ---------------------------------------
1998 1997 1998 1997
------- ------- -------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales..................................... $50,604 $24,291 $121,936 $66,436
Cost of sales................................. 23,351 10,761 54,602 29,657
------- ------- -------- -------
Gross profit.................................. 27,253 13,530 67,334 36,779
Selling, general and administrative expenses.. 16,260 7,497 41,253 20,488
Amortization of intangible assets............. 666 554 1,998 1,666
Merger related costs.......................... -- -- 5,525 --
------- ------- -------- -------
Operating income.............................. 10,327 5,479 18,558 14,625
Interest expense.............................. 625 303 2,159 4,854
Other expense................................. 71 65 223 150
------- ------- -------- -------
Income before income taxes.................... 9,631 5,111 16,176 9,621
Income tax expense............................ 3,856 1,897 6,566 3,970
------- ------- -------- -------
Net income before discontinued operations and
extraordinary item............................ 5,775 3,214 9,610 5,651
Discontinued operations, net of tax benefit of
$428.......................................... -- -- -- 1,032
Extraordinary charge for early extinguishment
of debt, net of tax benefit of $1,188........ -- -- 1,782 --
------- ------- -------- -------
Net income.................................... $ 5,775 $ 3,214 $ 7,828 $ 4,619
======= ======= ======== =======
Net income available to common stockholders... $ 5,775 $ 3,214 $ 7,828 $ 4,141
======= ======= ======== =======
Net income per share from continuing
operations:
Basic........................................ $ 0.36 $ 0.21 $ 0.60 $ 0.48
======= ======= ======== =======
Diluted...................................... $ 0.35 $ 0.20 $ 0.59 $ 0.46
======= ======= ======== =======
Net income per common share:
Basic........................................ $ 0.36 $ 0.21 $ 0.49 $ 0.35
======= ======= ======== =======
Diluted...................................... $ 0.35 $ 0.20 $ 0.48 $ 0.34
======= ======= ======== =======
Weighted average shares outstanding:
Basic........................................ 15,971 15,388 15,964 11,852
Diluted...................................... 16,430 15,811 16,396 12,215
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1998 1997
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 7,828 $ 4,619
Depreciation and amortization......................... 4,440 3,299
Deferred taxes and interest........................... 1,521 1,637
Provision for allowances for doubtful accounts........ 37 347
Other................................................. 6 96
Changes in operating assets and liabilities........... (10,188) (3,440)
-------- -------
Net cash provided by operating activities............. 3,644 6,558
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (4,516) (2,690)
Proceeds from disposal of property and equipment...... 189 --
Purchase price in excess of net assets acquired....... (554) 657
Increase in other non-current assets.................. (109) (146)
-------- -------
Net cash used by investing activities................. (4990) (2,179)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net.............................. 2,992 (17,501)
Issuance of common stock.............................. 138 74,723
Redemption of preferred stock......................... -- (7,862)
Distributions to stockholders......................... -- (1,570)
Payments on acquisition loans......................... (3,250) --
Payments on stockholder debt.......................... -- (51,847)
-------- -------
Net cash used by financing activities................. (120) (4,057)
-------- -------
Net increase (decrease) in cash and cash equivalents.. (1,466) 322
Cash and cash equivalents, beginning of period......... 10,203 6,215
-------- -------
Cash and cash equivalents, end of period............... $ 8,737 $ 6,537
======== =======
Supplemental information:
Cash paid during the period for:
Interest.............................................. $ 1,486 $ 6,686
Taxes................................................. $ 4,571 $ 36
</TABLE>
See accompanying notes to consolidated financial statements.
5
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RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Racing Champions
Corporation (the "Company") and its wholly-owned subsidiaries, Racing
Champions, Inc., Racing Champions Limited, and Racing Champions South, Inc.
All intercompany transactions and balances have been eliminated.
The accompanying consolidated financial statements have been prepared by
management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of September 30, 1998 and the results of
operations for the three months and nine months ended September 30, 1998 and
the cash flows of the Company for the nine month period then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and related notes included in the Company's Form 10-K for the year ended
December 31, 1997.
The results of operations for the three month and nine month periods ended
September 30, 1998 are not necessarily indicative of the operating results for
the full year.
NOTE 2 - BUSINESS COMBINATION
On June 12, 1998, a subsidiary of the Company merged with Wheels Sports Group,
Inc. ("Wheels"), subsequently renamed Racing Champions South, Inc. The merger
was effected by exchanging 2.7 million shares of the Company's common stock for
all of the common stock of Wheels. Each share of Wheels was exchanged for 0.51
shares of the Company's common stock. In addition, outstanding Wheels'
warrants and stock options were converted at the same exchange ratio into
warrants and options to purchase the Company's common stock.
The merger has been accounted for as a pooling - of - interests. Accordingly,
all prior period consolidated financial statements presented have been restated
to include the results of operations, financial position and cash flows of
Wheels as though it had always been a part of the Company. Certain
reclassifications were made to the Wheels financial statements to conform to
the Company's presentations.
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The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net Sales:
Racing Champions $48,855 $76,562
Wheels 23,856 7,491
Intercompany sales (1,379) (308)
----------- ----------
Combined $71,332 $83,745
----------- ----------
Net income:
Racing Champions $ 4,212 $ 7,876
Wheels (2,074) (4,372)
Intercompany eliminations (81) --
----------- ----------
Combined $ 2,057 $ 3,504
----------- ----------
</TABLE>
In connection with the merger, the Company recorded a second quarter charge to
operating expenses of $5.5 million ($3.3 million after taxes, or $0.20 per
common share) for direct and other merger related costs pertaining to the
merger and certain restructuring.
Merger transaction costs consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Restructuring costs included severance for terminated employees and exit and
agreement extension costs.
Details of merger related costs follow.
<TABLE>
<S> <C>
Merger transaction costs $2.1
Restructuring costs 3.4
----
Total costs $5.5
</TABLE>
NOTE 3 - COMMON STOCK OFFERING
On June 17, 1997 Racing Champions Corporation sold 5,357,142 shares of its
common stock in an underwritten public offering (the "Offering"). The Offering
price was $14 per common share. The net proceeds to the Company from the sale
of the stock were approximately $69 million, after deduction of commissions and
offering expenses. Approximately $9 million of the net proceeds was used to
redeem preferred stock issued in the Recapitalization; $43 million was used to
repay shareholder notes issued in the Recapitalization; $17 million was used to
repay bank borrowings incurred in connection with the Recapitalization.
In April, 1997, Wheels completed an initial public offering of 1,035,000 shares
of its common stock at a price of $6.00 per share, resulting in net proceeds of
$4.7 million. Included as part of this offering were warrants for the purchase
of an additional 517,500 shares of common stock at an exercise price of $7.08
per share. The warrants which were immediately exercisable, expire in April
2002 and may be redeemed by the Company beginning April 1998 under certain
terms and conditions at a price of $0.05 per warrant. Holders of outstanding
warrants have no voting or other rights as a stockholder of the Company.
NOTE 4 - RECAPITALIZATION
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On April 30, 1996, an investor group consummated a recapitalization (the
"Recapitalization") which involved the following: (a) the Company's purchase
of all of the outstanding stock of Racing Champions, Inc. ("RCI") and
substantially all of the assets of Dods-Meyer, Ltd. ("DML") (collectively the
"RCI Group"); (b) the acquisition by Banerjan Company Limited (subsequently
renamed Racing Champions Limited) of substantially all of the assets of Racing
Champions Limited, Garnett Services, Inc. and Hosten Investment Limited
(collectively the "RCL Group"); and (c) the contribution by the Company of
all the outstanding stock of Racing Champions Limited to RCI.
The Recapitalization was financed with $40,000,000 of bank borrowings and the
issuance to management and the investor group of $8,020,000 of senior
subordinated notes, $38,245,820 of Series A junior subordinated notes,
$1,195,234 of Series B junior subordinated notes, $6,666,790 of the Company's
Series A preferred stock, $1,195,233 of the Company's Series B preferred stock,
$118,840 of the Company's nonvoting common stock and $881,160 of the Company's
common stock.
The acquisitions were accounted for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired was
$93,547,442. Of this excess, $88,663,805 has been recorded as an intangible
asset and is being amortized on a straight-line basis over 40 years and
$4,883,637 was recorded as inventory and property and equipment.
NOTE 5 - COMMON AND PREFERRED STOCK
Authorized and issued shares and par values of the Company's voting common
stock are as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT SHARES OUTSTANDING AT
AUTHORIZED SHARES PAR VALUE SEPTEMBER 30, 1998 DECEMBER 31, 1997
----------------- --------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Voting Common Stock 28,000,000 $.01 15,974,819 15,960,794
</TABLE>
On June 17, 1997, the Company filed its Restated Certificate of Incorporation
to eliminate the Series A preferred stock, Series B preferred stock and
nonvoting common stock.
NOTE 6 - DEBT
In conjunction with the Wheels acquisition, the Company amended its bank
agreement on June 11, 1998. The amended credit agreement provides for a
revolving loan and a five-year term loan. The revolving loan allows the
Company to borrow up to $12 million at any time prior to June 30, 2003, based
upon levels of the Company's accounts receivable, inventory and cash flows. At
September 30, 1998, there was $9,100,000 outstanding on the revolving loan.
The term loan is in the principal amount of $25 million, with final maturity at
June 30, 2003. The outstanding balance on the term loan at September 30, 1998
was $23,000,000 of which $4,250,000 was current
Borrowings under the credit agreement bear interest, at the Company's option,
at the bank's base rate plus a margin that varies between 0.00% and 0.75% or at
a reserve adjusted Eurodollar rate plus a margin that varies between 1.50% and
2.25%. All amounts outstanding under the credit agreement are secured by
substantially all of the assets of the Company.
8
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NOTE 7 - PER SHARE INFORMATION
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share." Furthermore, the consolidated
financial statements have been retroactively adjusted to reflect a
7.885261-for-one stock split issued on April 9, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial
condition, results of operations, liquidity and capital resources. The
discussion and analysis should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included
elsewhere herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Net sales. Net sales, increased $26.3 million or 108.2 %, to $50.6 million
for the three months ended September 30, 1998 from $24.3 million for the three
months ended September 30, 1997. The increase in sales is primarily
attributable to approximately 150% growth in sales of NASCAR racing replicas.
Sales in the custom and classic vehicle category also increased by 47% in the
third quarter of 1998 as compared to the third quarter of 1997.
Gross profit. Gross profit increased $13.8 million, or 102.2%, to $27.3
million for the three months ended September 30, 1998 from $13.5 million for
the three months ended September 30, 1997. The gross profit margin (as a
percentage of net sales) decreased to 53.9% in 1998 compared to 55.5% in 1997
due to changes in product mix. There were no major changes in the components
of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.8 million, or 117.3%, to $16.3 million for
the three months ended September 30, 1998 from $7.5 million for the three
months ended September 30, 1997. As a percentage of net sales, selling,
general and administrative expenses increased to 32.2% for the three months
ended September 30, 1998 from 30.9% for the three months ended September 30,
1997. The increase in selling, general and administrative expenses is
primarily due to increased direct marketing and advertising expenses, which
totaled approximately $1.0 million or 2.0% of net sales. Direct marketing and
advertising expenses for the third quarter of 1997 were approximately $0.3
million or 1.2% of net sales.
Operating income. Operating income increased $4.8 million, or 87.3%, to
$10.3 million for the three months ended September 30, 1998 from $5.5 million
for the three months ended September 30, 1997. As a percentage of net sales,
operating income decreased to 20.4% for the three months ended September 30,
1998 from 22.6% for the three months ended September 30, 1997.
Interest expense. Interest expense of $0.6 million for the three months
ended September 30, 1998 and $0.3 million for the three months ended September
30, 1997 related primarily to bank term loans.
Income tax. Income tax expense for the three months ended September 30,
1998, and September 30, 1997 include provisions for federal, state and Hong
Kong income taxes at an effective rate of 40.0% and 37.1%, respectively.
9
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Net sales. Net sales, increased $55.5 million or 83.6%, to $121.9 million
for the nine months ended September 30, 1998 from $66.4 million for the nine
months ended September 30, 1997. The increase in sales was primarily
attributable to 80% growth in sales of NASCAR racing replicas. Sales in the
custom and classic vehicle category also increased by more than 80% in the
first nine months of 1998 as compared to the first nine months of 1997.
Gross profit. Gross profit increased $30.5 million, or 82.9%, to $67.3
million for the nine months ended September 30, 1998 from $36.8 million for the
nine months ended September 30, 1997. The gross profit margin (as a percentage
of net sales) decreased slightly to 55.2% in 1998 compared to 55.4% in 1997.
There were no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $20.8 million, or 101.5%, to $41.3 million
for the nine months ended September 30, 1998 from $20.5 million for the nine
months ended September 30, 1997. As a percentage of net sales, selling,
general and administrative expenses increased to 33.9% for the nine months
ended September 30, 1998 from 30.9% for the nine months ended September 30,
1997. The increase in selling, general and administrative expenses as a
percentage of net sales is primarily due to increased direct marketing and
advertising expenses of approximately $3.2 million or 2.6% of net sales.
Direct marketing and advertising expenses for the nine months ended September
30, 1997 were $0.7 million or 1% of net sales.
Operating income. Operating income increased $4.0 million, or 27.4%, to
$18.6 million for the nine months ended September 30, 1998 from $14.6 million
for the nine months ended September 30, 1997. As a percentage of net sales,
operating income decreased to 15.3% for the nine months ended September 30,
1998 from 22.0% for the nine months ended September 30, 1997. The decrease in
operating income as a percentage of net sales is a result of the merger-related
costs of $5.5 million incurred in conjunction with the Wheels acquisition, as
well as the increase in selling, general and administrative expenses noted
above. As a percentage of net sales, operating income excluding merger-related
costs decreased to 19.8% for the nine months ended September 30, 1998 from
22.0% for the nine months ended September 30, 1997.
Interest expense. Interest expense of $2.2 million for the nine months
ended September 30, 1998 related primarily to bank term loans and $4.9 million
for the nine months ended September 30, 1997 related primarily to bank term
loans and subordinated debt incurred in connection with the Recapitalization.
Income tax. Income tax expense for the nine months ended September 30,
1998, and September 30, 1997 include provisions for federal, state and Hong
Kong income taxes at an effective rate of 40.6% and 41.3%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $3.6 million during the nine
months ended September 30, 1998. This was primarily due to earnings from
operations. Capital expenditures for the nine months ended September 30, 1998
were approximately $4.5 million, of which approximately $3.2 million was for
molds and tooling.
On June 11, 1998, the Company amended its credit agreement with BankBoston,
N.A. and certain other lenders. The amended credit agreement provides for a
revolving loan, a five year term loan and the issuance of letters of credit.
The revolving loan allows the Company to borrow up to $12.0 million at any time
prior to June 30, 2003, based upon levels of the Company's accounts receivable,
inventory and cash flows and the amount of letter of credit exposure. The
Company had $9.1 million outstanding under the revolving loan at September 30,
1998. The term loan in the principal amount of $23.0 million as of September
30, 1998, is due in scheduled quarterly payments with final maturity on June
30, 2003. All borrowings under the credit agreement are secured by
substantially all of the assets of the Company.
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The term loan and the revolving term loan bear interest, at the Company's
option, at BankBoston's base rate plus a margin that varies between 0.00% and
0.75% or at a reserve adjusted Eurodollar rate plus margin that varies between
1.50% and 2.25%. The applicable margin is based on the Company's financial
performance and is currently 0.00% for base rate loans and 1.50% for Eurodollar
loans. The credit agreement requires the Company to pay a commitment fee of
0.50% per annum on the average daily unused portion of the revolving loan.
BankBoston's Hong Kong branch has made available to the Company's Hong Kong
subsidiary a line of credit of up to $5.0 million. Amounts borrowed under this
line of credit bear interest at the bank's cost of funds plus 2% and are
cross-guaranteed by Racing Champions Inc. and the Hong Kong subsidiary. At
September 30, 1998 the Hong Kong subsidiary had no outstanding borrowings under
this line of credit.
The Company's anticipated debt service obligations under the existing credit
facilities for the remainder of 1998 for scheduled interest and principal
payments on bank term loans are approximately $1.5 million. Average annual
debt service obligations under these same facilities through June, 2003 are
approximately $5.8 million.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the timing of
the racing season. Due to seasonal increases in demand for the Company's
racing replicas, working capital financing requirements are usually highest
during the third and fourth quarters. The Company expects that capital
expenditures during 1998, principally for molds and tooling, will be
approximately $5.0 million. 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 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.
YEAR 2000 ISSUE
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because
the Year 1900 could also be translated as two zeroes, systems which use two
digits could read the date incorrectly for a number of date-sensitive
applications, resulting in potential calculation errors or the shutdown of
major systems. The Company has undertaken various initiatives intended to
ensure that its computer hardware and software and other systems will function
properly with respect to dates in the Year 2000 and thereafter. The systems
subject to potential Year 2000 issues include not only information technology
("IT") systems, such as accounting and data processing, order processing and
communications systems, but also non-IT systems, such as alarm systems, fax
machines or other miscellaneous systems.
The Company's State of Readiness. The Company's Year 2000 compliance program
has focused on two initiatives: (1) a review of significant internal IT and
non-IT systems to determine the extent of potential Year 2000 issues and to
effect necessary upgrades with respect to Year 2000 compliance, and (2) the
circulation of surveys to the Company's major vendors and customers to assess
their Year 2000 readiness. The Company's main internal systems, including IT
systems such as financial systems and core order processing systems, and non-IT
systems have been tested and are either currently Year 2000 compliant or are
expected to be Year 2000 compliant by the end of the first quarter of 1999.
The Company has circulated surveys to approximately 100 of its key third party
vendors and customers. To date, approximately 25 of these surveys have been
returned to the Company, and none of the surveys which have been returned
indicate significant Year 2000 compliance issues.
Costs to Address the Company's Year 2000 Issues. The majority of the Company's
internal Year 2000 issues have been or will be corrected through systems
upgrades for other business purposes or normal maintenance contracts. The
costs of such upgrades through September 30, 1998 has been approximately
$100,000. The estimated costs to complete all planned upgrades for the
remaining systems still not compliant is not expected to exceed $200,000.
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Risks to the Company for Year 2000 Issues. The Company believes that its
reasonably likely worse case scenario would be to revert to manual order
processing for orders currently processed through EDI systems and the Company's
internal order processing systems. The Company will continue to monitor the
Year 2000 compliance of its customers and vendors. A number of risks relating
to the Year 2000 issue may be out of the Company's control, including reliance
on outside links for essential services such as communications and power.
There can be no assurance that a failure of systems of third parties on which
the Company's systems and operations will rely to be Year 2000 compliant will
not have a material adverse effect on the Company's business, financial
condition or operating results.
The Company's Year 2000 Contingency Plans. By the end of the first quarter of
1999, the Company expects to be fully Year 2000 compliant. To the extent that
any of the Company systems are not Year 2000 compliant by the end of the first
quarter of 1999, the Company believes that it will have time to implement
alternative IT systems or manual systems by the end of 1999 which should reduce
the risk of non-compliance to the Company.
FORWARD LOOKING STATEMENTS
A number of the matters discussed in this report that are not historical or
current facts deal with potential future circumstances and developments. The
Company's actual results and future developments could differ materially from
the results or developments expressed in, or implied by, these forward-looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward looking statements include, but are not
limited to, the following: (1) the Company's growth is dependent upon its
ability to continue to conceive, design, source and market new products and
upon its continuing market acceptance of its existing and future products; (2)
competition in the markets for the Company's products may increase
significantly; (3) the Company is dependent upon continuing licensing
arrangements with race team owners, drivers, sponsors, agents, vehicle
manufacturers, major race sanctioning bodies and other licensors; (4) the
Company relies upon six independently owned factories located in China to
manufacture its racing replicas and certain other products; (5) the Company is
dependent upon the continuing willingness of leading retailers to purchase and
provide shelf space for the Company's products; (6) the Company's ability to
integrate and assimilate the business of Wheels; (7) the Company's assessment
of the Year 2000 issue, including its identification, assessment, remediation
and testing efforts, the dates on which the Company believes it will complete
such efforts and the costs associated with such efforts, is based upon
management's estimates, which were derived from numerous assumptions regarding
future events, available resources, third-party remediation plans, the accuracy
of testing of the affected systems and other factors, and no assurance can be
given that these estimates will prove correct or that actual results will not
differ materially from those currently anticipated; and (8) the Company may be
adversely affected by general economic conditions in its markets. Further
information on other factors which could affect the financial condition,
results of operations or business of the Company are described in the Company's
other filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 18, 1998, Racing Champions, Inc., a wholly owned subsidiary of the
Company ("RCI"), entered into a settlement agreement with Petty Enterprises,
Inc. ("Petty") with respect to a civil action filed by Petty in North Carolina
state court naming RCI as a defendant. The Company accrued an estimated
settlement amount in the Company's financial statements in prior periods. The
settlement agreement did not have a material impact on the Company's financial
position and provided the Company with a release from all liability relating to
this matter.
On May 4, 1997, a proposed class action lawsuit was filed in U.S. District
Court in Georgia against several trackside vendors, including Green's Racing
Souvenirs, Inc. ("GRS"), an indirect wholly-owned subsidiary of the Company.
The complaint alleges that the defendants have engaged in price fixing
activities at certain NASCAR events in violation of federal anti-trust laws.
Plaintiffs seek an unspecified amount of compensatory and punitive damages and
also an order enjoining the alleged price fixing practices. GRS has entered
into a joint defense agreement with certain co-defendants pursuant to which
defense costs are being reimbursed by defendant Americrown Service Corporation.
The existing joint defense agreement is to remain in effect through class
certification proceedings, which are expected to be completed during late 1998.
The Company expects that the action will be dismissed if class certification is
not obtained. In the event class certification is obtained, the Company
expects that GRS would vigorously defend against the action, although no
assurances can be given as to the outcome of this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter
13
<PAGE> 14
ended June 30, 1997 (File No. 0-22635) filed by the Company with
the Securities and Exchange Commission on August 14, 1997).
3.2 First Amendment to Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit
99.2 of the Company's Current Report on Form 8-K dated June 12,
1998 (File No. 0-22635) filed by the Company with the Securities
and Exchange Commission on June 29, 1998).
3.3 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.3 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (File No. 0-22635) filed
by the Company with the Securities and Exchange Commission on
August 14, 1998).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Form 8-K/A on August 26, 1998, amending Item 7
of the Form 8-K originally filed on June 29, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 13th day of November 1998.
RACING CHAMPIONS CORPORATION
By /s/ Robert E. Dods
-------------------------------------------
Robert E. Dods, Chief Executive Officer
By /s/ Curtis W. Stoelting
-------------------------------------------
Curtis W. Stoelting, Executive
Vice President and Secretary
15
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