<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 March 31, 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
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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 March 31, 1998, there were outstanding 13,242,382 shares of the Registrant's
$.01 par value common stock.
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RACING CHAMPIONS CORPORATION
FORM 10-Q
MARCH 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997............................................ 3
Consolidated Statements of Income for the Quarters
Ended March 31, 1998 and 1997................................ 4
Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 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... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 12
Item 2. Changes in Securities and Use of Proceeds.................... 12
Item 3. Defaults Upon Senior Securities.............................. 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
Item 5. Other Information............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signatures................................................... 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,078 $ 6,463
Accounts receivable, net 11,038 11,227
Inventory 4,110 1,701
Other current assets 1,871 1,304
Property and equipment, net 9,639 9,011
Excess purchase price over net assets acquired, net 84,941 84,946
Other non-current assets 444 125
-----------------------------------
Total assets $114,121 $114,777
===================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and accrued expenses $ 12,604 $ 12,020
Bank term loans 14,650 15,600
Line of credit 2,500 5,000
Deferred income taxes 3,420 3,065
-----------------------------------
Total liabilities 33,174 35,685
Stockholders' equity 80,947 79,092
-----------------------------------
Total liabilities and stockholders' equity $114,121 $114,777
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------------
1998 1997
-------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $19,452 $15,187
Cost of sales 8,274 6,493
-------------------------------------
Gross profit 11,178 8,694
Selling, general and administrative
expenses 7,158 5,171
Amortization of intangible assets 556 554
-------------------------------------
Operating income 3,464 2,969
Interest expense 316 2,380
Other expense 57 43
-------------------------------------
Income before income taxes 3,091 546
Income tax expense 1,236 218
-------------------------------------
Net income $ 1,855 $ 328
=====================================
Net income available to common
stockholders $ 1,855 $ 73
=====================================
Net income per common share:
Basic $ 0.14 $ 0.01
=====================================
Diluted $ 0.14 $ 0.01
=====================================
Weighted average shares outstanding:
Basic 13,242 7,885
Diluted 13,570 8,214
</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 QUARTER ENDED MARCH 31,
---------------------------------
1998 1997
---------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,855 $ 328
Depreciation and amortization 1,274 1,361
Deferred taxes and interest 355 738
Changes in operating assets and liabilities (2,203) (29)
---------------------------------
Net cash provided by operating activities 1,281 2,398
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,347) (562)
Purchase price in excess of net assets
acquired (554) -
Increase in other non-current assets (315) -
---------------------------------
Net cash used by investing activities (2,216) (562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net (3,450) 2,017
Decrease in note receivable from officer - 22
Payments on shareholder debt - (8,942)
---------------------------------
Net cash used by financing activities (3,450) (6,903)
---------------------------------
Net decrease in cash and cash
equivalents (4,385) (5,067)
Cash and cash equivalents, beginning of
period 6,463 5,898
---------------------------------
Cash and cash equivalents, end of period $ 2,078 $ 831
=================================
Supplemental information:
Cash paid during the period for:
Interest $ 320 $ 1,649
Taxes $ 559 $ 31
</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. and Racing Champions Limited. All intercompany transactions
and balances have been eliminated.
The accompanying consolidated financial statements have been prepared by
management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of March 31, 1998 and the results of
operations for the three months ended March 31, 1998 and the cash flows of the
Company for the three 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 period ended March 31, 1998 are
not necessarily indicative of the operating results for the full year.
NOTE 2 - RECAPITALIZATION
On April 30, 1996, an investor group consummated a recapitalization (the
"Recapitalization") which involved the following: (a) the Company's purchase
of all of the outstanding stock of Racing Champions, Inc. ("RCI") and
substantially all of the assets of Dods-Meyer, Ltd. ("DML") (collectively the
"RCI Group"); (b) the acquisition by Banerjan Company Limited (subsequently
renamed Racing Champions Limited) of substantially all of the assets of Racing
Champions Limited, Garnett Services, Inc. and Hosten Investment Limited
(collectively the "RCL Group"); and (c) the contribution by the Company of all
the outstanding stock of Racing Champions Limited to RCI.
The Recapitalization was financed with $40,000,000 of bank borrowings and the
issuance to management and the investor group of $8,020,000 of senior
subordinated notes, $38,245,820 of Series A junior subordinated notes,
$1,195,234 of Series B junior subordinated notes, $6,666,790 of the Company's
Series A preferred stock, $1,195,233 of the Company's Series B preferred stock,
$118,840 of the Company's nonvoting common stock and $881,160 of the Company's
common stock.
The acquisitions were accounted for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired was
$93,547,442. Of
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this excess, $88,663,805 has been recorded as an intangible asset and is being
amortized on a straight-line basis over 40 years and $4,883,637 was recorded
as inventory and property and equipment.
NOTE 3 - COMMON STOCK OFFERING
On June 17, 1997 the Company sold 5,357,142 shares of its common stock in an
underwritten public offering (the "Offering"). The Offering price was $14 per
common share. The net proceeds to the Company from the sale of the stock were
approximately $69 million, after deduction of commissions and offering
expenses. Approximately $9 million of the net proceeds was used to redeem
preferred stock issued in the Recapitalization; $43 million was used to repay
shareholder notes issued in the Recapitalization; and $17 million was used to
repay bank borrowings incurred in connection with the Recapitalization.
NOTE 4 - COMMON AND PREFERRED STOCK
Authorized and issued shares and the par value of the Company's voting common
stock are as follows:
<TABLE>
<CAPTION>
SHARES SHARES
OUTSTANDING AT OUTSTANDING AT
AUTHORIZED SHARES PAR VALUE MARCH 31, 1998 DECEMBER 31, 1997
----------------- --------- -------------- -----------------
<S> <C> <C> <C> <C>
Voting Common Stock 20,000,000 $.01 13,242,382 13,242,382
</TABLE>
On June 17, 1997, the Company filed its Amended and Restated Certificate of
Incorporation to eliminate its Series A preferred stock, Series B preferred
stock and nonvoting common stock.
NOTE 5 - DEBT
In conjunction with the Offering, the Company revised and amended its bank
agreement on June 17, 1997. The amended credit agreement provides for a
revolving loan and a five-year term loan. The revolving loan allows the
Company to borrow up to $5 million at any time prior to June 28, 2002, based
upon levels of the Company's accounts receivable, inventory and cash flows. At
March 31, 1998, there was $2,500,000 outstanding on the revolving loan. The
term loan is in the principal amount of $22 million, with final maturity at
June 28, 2002. The outstanding balance on the term loan at March 31, 1998 was
$14,650,000, of which $4,000,000 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.
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NOTE 6 - NET INCOME PER SHARE
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.
NOTE 7 - PENDING ACQUISITION OF WHEELS SPORTS GROUP, INC.
On December 5, 1997, the Company announced the execution of a definitive
agreement, which provides that Wheels Sports Group, Inc. ("Wheels"), a recently
consolidated group of marketers and distributors of officially licensed
NASCAR-related merchandise, will be acquired by the Company. The acquisition,
which is subject to due diligence, approval by the stockholders of the Company
and Wheels, the filing and effectiveness of a registration statement on Form
S-4 with the Securities and Exchange Commission which will include the joint
proxy statement/prospectus that will be used to solicit proxies from the
stockholders of the Company and Wheels, and other customary closing conditions,
is expected to close in the first half of 1998. The transaction is planned as
a stock-for-stock exchange and will be accounted for as a pooling of interests.
Under the terms of the agreement, each of Wheels' outstanding shares of common
stock (approximately 5.3 million shares outstanding at December 31, 1997), will
be exchanged for 0.51 shares of the Company's common stock. The 0.51 exchange
ratio is subject to adjustment if the average closing price of the Company's
common stock for the 10 trading days prior to the consummation of the
acquisition is less than $7.50 per share or greater than $14.00 per share.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial
condition, results of operations, and 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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net sales. Net sales increased $4.2 million or 27.6%, to $19.4 million
for the three months ended March 31, 1998 from $15.2 million for the three
months ended March 31, 1997. The increase in sales was primarily attributable
to 30% growth in sales of NASCAR racing replicas. Sales in the custom and
classic vehicle category also increased by more than two times in the first
quarter of 1998 as compared to the first quarter of 1997.
Gross profit. Gross profit increased $2.5 million, or 28.7%, to $11.2
million for the three months ended March 31, 1998 from $8.7 million for the
three months ended March 31, 1997. The gross profit margin (as a percentage of
net sales) increased slightly to 57.7% in 1998 compared to 57.2% 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 $2.0 million, or 38.5%, to $7.2 million for
the three months ended March 31, 1998 from $5.2 million for the three months
ended March 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased to 37.1% for the three months ended March 31,
1998 from 34.2% for the three months ended March 31, 1997. The increase in
selling, general and administrative expenses as a percentage of nets sales is
primarily due to the increased advertising in the form of television and print
media, which totaled approximately $0.8 million or 4.4% of net sales. These
same expenses were not incurred in the first quarter of 1997.
Operating income. Operating income increased $0.5 million, or 16.7%, to
$3.5 million for the three months ended March 31, 1998 from $3.0 million for
the three months ended March 31, 1997. As a percentage of net sales, operating
income decreased to 18.0% for the three months ended March 31, 1998 from 19.7%
for the three months ended March 31, 1997.
Interest expense. Interest expense of $0.3 million for the three months
ended March 31, 1998 related primarily to bank term loans and $2.4 million for
the three months ended March 31, 1997 related primarily to bank term loans and
subordinated debt incurred in connection with the Recapitalization.
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Income tax. Income tax expense for the three months ended March 31, 1998,
and March 31, 1997 include provisions for Federal, state and Hong Kong income
taxes at an effective rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $1.3 million during the three
months ended March 31, 1998. This was primarily due to earnings from
operations. Capital expenditures for the three months ended March 31, 1998
were approximately $1.3 million, of which approximately $1.0 million was for
molds and tooling.
On June 17, 1997, the Company revised and amended its credit agreement with
BankBoston, N.A. and certain other lenders. The revised and amended credit
agreement provides for a revolving loan, a five year term loan and the issuance
of letters of credit. The revolving loan allows the Company to borrow up to
$5.0 million at any time prior to June 28, 2002, based upon levels of the
Company's accounts receivable, inventory and cash flows and the amount of
letter of credit exposure. The Company had $2.5 million outstanding under the
revolving loan at March 31, 1998. The term loan in the principal amount of
$22.0 million is due in scheduled quarterly payments with final maturity on
June 28, 2002. All borrowings under the credit agreement are secured by
substantially all of the assets of the Company.
The term loan and the revolving term loan bear interest, at the Company's
option, at BankBoston's base rate plus a margin that varies between 0.00% and
0.75% or at a reserve adjusted Eurodollar rate plus margin that varies between
1.50% and 2.25%. The applicable margin is based on the Company's financial
performance and is currently 0.00% for base rate loans and 1.50% for Eurodollar
loans. The credit agreement requires the Company to pay a commitment fee of
0.50% per annum on the average daily unused portion of the revolving loan.
BankBoston's Hong Kong branch has made available to the Company's Hong Kong
subsidiary a line of credit of up to $5.0 million. Amounts borrowed under this
line of credit bearing interest at the bank's cost of funds plus 2% and are
cross-guaranteed by Racing Champions, Inc. and the Hong Kong subsidiary. At
March 31, 1998 the Hong Kong subsidiary had no outstanding borrowing 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 and repayment of the outstanding line of credit borrowings are
approximately $6.5 million. Average annual debt service obligations under
these same facilities through September, 2001 are approximately $4.8 million.
In connection with the proposed acquisition of Wheels, the Company anticipates
replacing Wheels' current credit facilities with borrowings from the Company's
bank group. The Wheels credit facility consists of a term loan in the amount
of $7.7 million and a revolving loan of up to $10.0 million. Estimated annual
debt
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service obligations of the Company including the Wheels credit facilities
would be approximately $5.3 million through September, 2003.
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. The Company estimates that capital expenditures during
fiscal 1998, principally for molds and tooling, will be approximately $4.0
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.
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 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 licensers; (4) there are
significant conditions remaining to be satisfied with respect to the Company's
pending acquisition of Wheels and no assurance can be given that such
acquisition will be consummated or, if consummated, that the terms of the
acquisition will be as presently contemplated; (5) the Company relies upon six
independently owned factories located in China to manufacture its racing
replicas and certain other products; (6) the Company is dependent upon the
continuing willingness of leading retailers to purchase and provide shelf space
for the Company's products; and (7) 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
The Company did not hold any market sensitive instruments during the
period covered by this report.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 5, 1997, Petty Enterprises, Inc. filed a civil action in North
Carolina state court naming Racing Champions, Inc., a wholly-owned subsidiary
of the Company, as a defendant. The complaint relates to the Company's
production and sale of racing replicas bearing trademarks or trade names owned
by the plaintiff under a license agreement and makes a number of allegations
regarding unauthorized production, advertisement, use and sale by the Company
of such trademarks and trade names. The plaintiff seeks an unspecified amount
of compensatory and punitive damages and also seeks a court order that the
Company cease production, sale or promotion of products bearing the plaintiff's
trademarks or trade names and deliver all such products to the plaintiff for
destruction. The Company filed an answer on June 30, 1997, denying all claims
and asserting a counterclaim with respect to approximately $80,000 of unpaid
receivables. On July 12, 1997, the plaintiff filed a reply denying the
Company's counterclaim. The Company subsequently removed the case to the U.S.
District Court for the Middle District of North Carolina. Discovery is
proceeding in the case, and trial is currently scheduled for January 11, 1999.
The Company intends to vigorously defend the claims, although no assurances can
be given as to the outcome of this matter.
In the normal course of business the Company also may be involved in
various legal proceedings from time to time. The Company does not believe it
is currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company
during the first quarter of 1998.
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ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 (File No. 0-22635) filed by the Company
with the Securities and Exchange Commission on
August 14, 1997).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-22493)
filed by the Company with the Securities and Exchange
Commission on April 11, 1997).
27 Financial Data Schedule
(b) Reports on Form 8-K: None in the first quarter of 1998.
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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 May, 1998.
RACING CHAMPIONS CORPORATION
By /s/ Robert E. Dods
-------------------------------------
Robert E. Dods, President
By /s/ Curtis W. Stoelting
-------------------------------------
Curtis W. Stoelting, Vice President -
Finance and Operations and Secretary
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,078
<SECURITIES> 0
<RECEIVABLES> 11,337
<ALLOWANCES> 300
<INVENTORY> 4,110
<CURRENT-ASSETS> 19,097
<PP&E> 13,188
<DEPRECIATION> 3,549
<TOTAL-ASSETS> 114,121
<CURRENT-LIABILITIES> 19,104
<BONDS> 17,150
0
0
<COMMON> 132
<OTHER-SE> 69,668
<TOTAL-LIABILITY-AND-EQUITY> 114,121
<SALES> 19,452
<TOTAL-REVENUES> 20,700
<CGS> 6,600
<TOTAL-COSTS> 8,274
<OTHER-EXPENSES> 7,714
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316
<INCOME-PRETAX> 3,091
<INCOME-TAX> 1,236
<INCOME-CONTINUING> 1,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,855
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
