<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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-22635
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Racing Champions Corporation
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(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
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(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
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On March 31, 1999, there were outstanding 16,085,998 shares of the Registrant's
$.01 par value common stock.
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RACING CHAMPIONS CORPORATION
FORM 10-Q
MARCH 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998..................................................3
Consolidated Statements of Income for the Quarters
Ended March 31, 1999 and 1998......................................4
Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 1999 and 1998......................................5
Notes to Unaudited Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk..............................................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................15
Item 2. Changes in Securities and Use of Proceeds.........................15
Item 3. Defaults Upon Senior Securities...................................15
Item 4. Submission of Matters to a Vote of Security Holders...............15
Item 5. Other Information.................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15
Signatures........................................................17
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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, 1999 DECEMBER 31, 1998
-------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,833 $ 6,242
Accounts receivable, net 24,732 22,208
Inventory 15,022 14,228
Other current assets 7,010 4,376
Property and equipment, net 13,726 13,387
Excess purchase price over net assets acquired, net 99,067 99,726
Other non-current assets 343 337
-------------------------------------------------
Total assets $ 163,733 $ 160,504
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 22,094 $ 21,259
Bank term loans 21,000 22,000
Line of credit 12,000 12,000
Deferred income taxes 3,119 2,663
-------------------------------------------------
Total liabilities 58,213 57,922
Stockholders' equity 105,520 102,582
-------------------------------------------------
Total liabilities and stockholders' equity $ 163,733 $ 160,504
=================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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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 MARCH 31,
--------------------------------------------------------------
1999 1998
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 35,272 $ 28,639
Cost of sales 16,618 12,083
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Gross profit 18,654 16,556
Selling, general and administrative expenses
12,690 11,768
Amortization of intangible assets 713 663
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Operating income 5,251 4,125
Interest expense 564 792
Other expense 60 114
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Income before income taxes 4,627 3,219
Income tax expense 1,874 1,543
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Net income $ 2,753 $ 1,676
==============================================================
Net income per common share:
Basic $ 0.17 $ 0.11
==============================================================
Diluted $ 0.17 $ 0.10
==============================================================
Weighted average shares outstanding:
Basic 16,081 15,961
Diluted 16,557 16,359
</TABLE>
See accompanying notes to consolidated financial statements.
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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,
---------------------------------------------------
1999 1998
---------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,753 $ 1,676
Depreciation and amortization 1,547 1,612
Deferred taxes and interest 362 355
Gain on sale of assets 13 35
Other - 430
Changes in operating assets and liabilities (5,110) (5,666)
---------------------------------------------------
Net cash provided by operating activities (435) (1,558)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,201) (1,562)
Proceeds from disposal of property and
equipment 15 -
Purchase price in excess of net assets
acquired - (554)
Increase in other non-current assets (68) (221)
---------------------------------------------------
Net cash used by investing activities (1,254) (2,337)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net (1,000) (397)
Issuance of common stock 275 -
Expense recognized under option grants 5 -
---------------------------------------------------
Net cash used by financing activities (720) (397)
Net decrease in cash and cash
equivalents (2,409) (4,292)
---------------------------------------------------
Cash and cash equivalents, beginning of
period 6,242 6,904
---------------------------------------------------
Cash and cash equivalents, end of period $ 3,833 $ 2,612
===================================================
Supplemental information:
Cash paid during the period for:
Interest $ 493 $ 589
Taxes $ 186 $ 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 March 31, 1999 and the results of
operations and cash flows for the three months ended March 31, 1999.
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, 1998.
The results of operations for the three month period ended March 31, 1999 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.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
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<TABLE>
<CAPTION>
Six months ended Year ended
---------------- ----------
June 30, 1998 December 31, 1997
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<S> <C> <C>
Net Sales:
Racing Champions $48,855 $76,562
Wheels 23,856 7,491
Intercompany sales (1,379) (308)
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Combined $71,332 $83,745
======= =======
Net income:
Racing Champions $ 4,212 $ 7,875
Wheels (2,286) (6,792)
Intercompany eliminations
and tax adjustments (81) 2,421
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Combined $ 1,845 $ 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
diluted common share) for direct and other merger-related costs of $2.1 million
and $3.4 million pertaining to the merger and restructuring of the Companies'
combined operations.
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.
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.
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NOTE 4 - 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 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 MARCH 31, 1999 DECEMBER 31, 1998
----------------- --------- -------------- -----------------
<S> <C> <C> <C> <C>
Voting Common Stock 28,000,000 $.01 16,085,998 16,060,998
</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 acquisition of Wheels, 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 March
31, 1999, there was $12,000,000 outstanding on the revolving loan. The term loan
was in the principal amount of $25
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million, with final maturity at June 30, 2003. The outstanding balance on the
term loan at March 31, 1999 was $21,000,000 of which all was long term (see note
8.)
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.
Borrowings under this credit agreement were paid in full subsequent to March 31,
1999 (see note 8.)
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.
NOTE 8 - SUBSEQUENT EVENTS
On April 13, 1999 the Company completed the acquisition of The Ertl Company,
Inc. and certain of its affiliates. The transaction is being accounted for under
the purchase method of accounting. The all-cash purchase price of $104.5 million
was funded with the proceeds of a drawdown under the Company's new $175 million
credit facility.
The new credit agreement provides for a five year revolving loan, five year term
loan, and the issuance of letters of credit. The revolving loan allows the
Company to borrow up to $60.0 million at any time prior to March 31, 2004. At
April 13, 1999, the Company had $24.3 million outstanding on the revolving loan.
The term loan, in the principal amount of $115.0 million is due in scheduled
quarterly payments beginning June 30, 2000 with final maturity on March 31,
2004.
The term loan and the revolving term loan bear interest, at the Company's
option, at an alternate base rate plus a margin that varies between 0.00% and
0.50% or at a LIBOR rate plus margin that varies between 0.75% and 1.50%. The
applicable margin is based on the Company's ratio of consolidated debt to
consolidated EBITDA and is currently 0.50% for base rate loans and 1.50% for
LIBOR loans. The credit agreement also requires the Company to pay a commitment
fee determined by the ratio of consolidated debt to consolidated EBITDA.
Currently, the commitment fee is 0.30% per annum on the average daily unused
portion of the revolving loan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial condition,
results of operations, liquidity and capital resources. The discussion and
analysis should be read in conjunction with the Company's unaudited consolidated
financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales. Net sales increased $6.7 million, or 23.4%, to $35.3 million for
the three months ended March 31, 1999 from $28.6 million for the three months
ended March 31, 1998. The increase in sales is primarily attributable to a 52%
growth in sales of die-cast vehicle replicas. Furthermore, sales of other NASCAR
and licensed merchandise comprised nearly 20% of total sales for the quarter.
Gross profit. Gross profit increased $2.1 million, or 12.7%, to $18.7
million for the three months ended March 31, 1999 from $16.6 million for the
three months ended March 31, 1998. The gross profit margin (as a percentage of
net sales) decreased to 53.0% in 1999 compared to 58.0% in 1998. The Company
earned higher gross margins in the first quarter of 1998, mostly due to the
special 50th Anniversary NASCAR products that carried higher gross margin and
which are not being offered in 1999. There were no major changes in the
components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.9 million, or 7.6%, to $12.7 million for
the three months ended March 31, 1999 from $11.8 million for the three months
ended March 31, 1998. The increase in selling, general and administrative
expenses is primarily due to increased direct marketing expenses, which totaled
approximately $0.8 million or 2.3% of sales. Direct marketing expense for the
first quarter of 1998 was approximately $13,000. As a percentage of net sales,
selling, general and administrative expenses decreased to 36.0% for the three
months ended March 31, 1999 from 41.3% for the three months ended March 31,
1998.
Operating income. Operating income increased $1.2 million, or 29.3%, to $5.3
million for the three months ended March 31, 1999 from $4.1 million for the
three months ended March 31, 1998. As a percentage of net sales, operating
income increased to 15.0% for the three months ended March 31, 1999 from 14.3%
for the three months ended March 31, 1998. The increase in operating income is a
result of holding selling, general and administrative expenses relatively
constant over a larger volume of net sales.
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Interest expense. Interest expense of $0.6 million for the three months
ended March 31, 1999 and $0.8 million for the three months ended March 31, 1998
related primarily to bank term loans.
Income tax. Income tax expense for the three months ended March 31, 1999,
and March 31, 1998 include provisions for federal, state and Hong Kong income
taxes at an effective rate of 40.5% and 47.9%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations used net cash of $0.4 million during the three months
ended March 31, 1999. Capital expenditures for the three months ended March 31,
1999 were approximately $1.2 million, of which approximately $1.0 million was
for molds and tooling.
On June 11, 1998, the Company amended its credit agreement with BankBoston, N.A.
and certain other lenders. As discussed below, on April 13, 1999, the Company
paid all outstanding amounts under the amended credit agreement and entered into
a new credit facility. The amended credit agreement provided for a revolving
loan, a five year term loan and the issuance of letters of credit. The revolving
loan allowed 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 $12.0
million outstanding under the revolving loan at March 31, 1999. The term loan in
the principal amount of $21.0 million was due in scheduled quarterly payments
with final maturity on June 30, 2003. All borrowings under the credit agreement
were secured by substantially all of the assets of the Company.
The term loan and the revolving term loan beared interest, at the Company's
option, at BankBoston's base rate plus a margin that varied between 0.00% and
0.75% or at a reserve adjusted Eurodollar rate plus margin that varied between
1.50% and 2.25%. The applicable margin was based on the Company's financial
performance and was 0.00% for base rate loans and 1.50% for Eurodollar loans.
The credit agreement required 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 March
31, 1999 the Hong Kong subsidiary had no outstanding borrowings under this line
of credit.
On April 13, 1999, in conjunction with the Company's acquisition of The Ertl
Company, Inc. and certain of its affiliates ("Ertl"), the Company paid all
outstanding amounts on its current credit facility and entered into a new credit
facility. The new credit agreement
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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 $60.0 million
at any time prior to March 31, 2004. At April 13, 1999, the Company had $24.3
million outstanding on the revolving loan. The term loan in the principal amount
of $115.0 million is due in scheduled quarterly payments beginning June 30, 2000
with final maturity on March 31, 2004.
The term loan and the revolving term loan bear interest, at the Company's
option, at an alternate base rate plus a margin that varies between 0.00% and
0.50% or at a LIBOR rate plus margin that varies between 0.75% and 1.50%. The
applicable margin is based on the Company's ratio of consolidated debt to
consolidated EBITDA and is currently 0.50% for base rate loans and 1.50% for
LIBOR loans. The credit agreement also requires the Company to pay a commitment
fee determined by the ratio of consolidated total debt to consolidated EBITDA.
Currently, the commitment fee is 0.30% per annum on the average daily unused
portion of the revolving loan.
The Company's anticipated debt service obligations under the new credit facility
for 1999 for scheduled interest payments are approximately $6.0 million. Average
annual debt service obligations under these same facilities through March, 2004
are approximately $34.5 million.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the timing of
the racing season. Due to seasonal increases in demand for the Company's racing
replicas, working capital financing requirements are usually highest during the
third quarter and fourth quarters. The Company expects that capital expenditures
during 1999, principally for molds and tooling, will be approximately $7.5
million. The Company believes that its cash flow from operations, cash on hand
and borrowings under the new credit facility 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 PREPARATIONS
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")
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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 second quarter of 1999. The
Company has circulated surveys to approximately 100 of its key third party
vendors and customers. Through March 31, 1999, approximately 52% 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 March 31, 1999 has been approximately
$125,000. The estimated costs to complete all planned upgrades for the remaining
systems still not compliant is not expected to exceed $100,000.
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 second
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 second 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.
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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) 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 currently anticipated;
(5) the Company relies upon five 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; (7) the Company's ability to
integrate and assimilate the business of Ertl; (8) Ertl's sales have
historically been seasonal, with an increase in sales in the third and
fourth quarters of the calendar year, and this seasonality may affect the
Company's operating results in future periods; and (9) general economic
conditions in the Company's markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the terms of the Company's credit agreement, the Company is
sensitive to an increase in interest rates. In order to reduce its sensitivity
to interest rate increases, in September 1997, the Company entered into a
two-year interest rate swap agreement with its primary lender. Under this
agreement, the Company hedges on a quarterly basis, a notional amount ranging
between $7 million and $10 million through September, 1999, at a reserve
adjusted Euro-rate of 6.20%. During the first quarters of 1999 and 1998, the
impact of this agreement was insignificant.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 1999.
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 Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 0-22635) filed by the Company
with the Securities and Exchange Commission on March 29,
1999).
3.2 First Amendment to Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the
15
<PAGE> 16
year ended December 31, 1998 (File No. 0-22635) filed by
the Company with the Securities and Exchange Commission
on March 29, 1999).
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: None in the first quarter of 1999.
16
<PAGE> 17
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 14th day of May, 1999.
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 - Finance and Operations and
Secretary
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,833
<SECURITIES> 0
<RECEIVABLES> 25,976
<ALLOWANCES> 1,244
<INVENTORY> 15,022
<CURRENT-ASSETS> 50,597
<PP&E> 20,776
<DEPRECIATION> 7,202
<TOTAL-ASSETS> 163,733
<CURRENT-LIABILITIES> 55,196
<BONDS> 33,000
0
0
<COMMON> 161
<OTHER-SE> 87,909
<TOTAL-LIABILITY-AND-EQUITY> 163,733
<SALES> 35,272
<TOTAL-REVENUES> 38,090
<CGS> 14,758
<TOTAL-COSTS> 16,618
<OTHER-EXPENSES> 13,403
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 564
<INCOME-PRETAX> 4,627
<INCOME-TAX> 1,874
<INCOME-CONTINUING> 2,753
<DISCONTINUED> 0
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