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 June 30, 2000
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
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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
---------------------------------------------------------------
(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 August 14, 2000, there were outstanding 14,661,583 shares of the Registrant's
$.01 par value common stock.
<PAGE>
RACING CHAMPIONS CORPORATION
FORM 10-Q
JUNE 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets as of June 30,
2000 and December 31, 1999. . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2000 and 1999 and
for the Six Months Ended June 30, 2000 and 1999 . . . . . 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2000 and 1999 . . . . . . . 5
Notes to Unaudited Condensed Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . $ 20,718 $ 12,265
Accounts receivable, net . . . . . . . . . 40,684 44,718
Inventory. . . . . . . . . . . . . . . . . 28,793 28,145
Other current assets . . . . . . . . . . . 14,520 17,734
Property and equipment, net. . . . . . . . 36,720 38,120
Excess purchase price over net assets
acquired, net. . . . . . . . . . . . . . 129,483 131,357
Other non-current assets . . . . . . . . . 3,598 3,943
--------------- -------------------
Total assets . . . . . . . . . . . . . . . $ 274,516 $ 276,282
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses. . . $ 34,707 33,990
Other current liabilities. . . . . . . . . 2,822 4,593
Bank term loans. . . . . . . . . . . . . . 109,250 115,000
Line of credit . . . . . . . . . . . . . . 16,000 8,000
Other long-term liabilities. . . . . . . . 13,804 12,851
--------------- -------------------
Total liabilities. . . . . . . . . . . . . $ 176,583 $ 174,434
Stockholders' equity . . . . . . . . . . . 97,933 101,848
--------------- -------------------
Total liabilities and stockholders' equity $ 274,516 $ 276,282
=============== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $ 50,078 $ 57,487 $ 95,505 $ 92,759
Cost of sales . . . . . . . . . . . . . . . . 27,234 33,966 53,845 50,584
------------ ------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . 22,844 23,521 41,660 42,175
Selling, general and administrative expenses. 17,920 22,973 34,554 35,664
Amortization of intangible assets . . . . . . 953 917 1,900 1,630
Restructuring and other . . . . . . . . . . . - 6,400 - 6,400
------------ ------------ ------------ ------------
Operating income (loss) . . . . . . . . . . . 3,971 (6,769) 5,206 (1,519)
Interest expense. . . . . . . . . . . . . . . 2,923 2,017 5,291 2,581
Other expense (income). . . . . . . . . . . . (284) 9 (316) 69
------------ ------------ ------------ ------------
Income (loss) before income taxes . . . . . . 1,332 (8,795) 231 (4,169)
Income tax expense (benefit). . . . . . . . . 407 (3,561) 117 (1,688)
------------ ------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . . $ 925 $ (5,234) $ 114 $ (2,481)
============ ============ ============ ============
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.06 $ (0.32) $ 0.01 $ (0.15)
============ ============ ============ ============
Diluted. . . . . . . . . . . . . . . . . . . $ 0.06 $ (0.32) $ 0.01 $ (0.15)
============ ============ ============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . 14,663 16,234 14,993 16,158
Diluted. . . . . . . . . . . . . . . . . . . 14,889 16,234 15,228 16,158
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114 $ (2,481)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 7,009 4,738
Deferred taxes and interest . . . . . . . . . . . . . . . . . . . . . . . 1,411 837
Gain on sale of assets. . . . . . . . . . . . . . . . . . . . . . . . . . (1) (15)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15) -
Changes in operating assets and liabilities, net of acquisition activity. 5,001 (5,497)
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . . . 13,519 (2,418)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . (3,816) (3,568)
Proceeds from disposal of property and equipment. . . . . . . . . . . . . 239 453
Purchase price of Ertl, net of cash . . . . . . . . . . . . . . . . . . . - (92,997)
Increase in other non-current assets. . . . . . . . . . . . . . . . . . . 246 (3,057)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (3,331) (99,169)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net. . . . . . . . . . . . . . . . . . . . . . . . . 2,250 102,300
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . 2 2,319
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . (3,991) -
Expense recognized under option grants. . . . . . . . . . . . . . . . . . 11 11
------------ ------------
Net cash (used in) provided by financing activities . . . . . . . . . . (1,728) 104,630
Effect of exchange rate on cash . . . . . . . . . . . . . . . . . . . . (7) (146)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . 8,453 2,897
------------ ------------
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 12,265 6,242
------------ ------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . $ 20,718 $ 9,139
============ ============
Supplemental information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,080 $ 1,396
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 629 $ 2,539
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Racing
Champions Corporation ("the Company") and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated.
The accompanying condensed 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 June 30, 2000, the results of operations
for the three month and six month periods ended June 30, 2000 and the cash flows
for the six month period ended June 30, 2000.
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, 1999.
The results of operations for the three month and six month periods ended June
30, 2000 are not necessarily indicative of the operating results for the full
year.
NOTE 2 - BUSINESS COMBINATIONS
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of The Ertl Company, Inc. and certain of its affiliates
("Ertl") for approximately $95 million. This transaction has been accounted for
under the purchase method of accounting and, accordingly, the operating results
of Ertl have been included in the Company's consolidated financial statements
since the date of acquisition. The purchase was funded with a draw-down on the
Company's credit facility (Note 8). The excess of the aggregate purchase price
over the fair market of net assets acquired of approximately $35 million is
being amortized over 40 years.
The following unaudited pro forma consolidated results of operations for the six
months ended June 30, 1999 assume that the Ertl acquisition occurred as of
January 1, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
June 30, 1999
---------------
<S> <C>
Net sales. . . . . . . . . . . $ 127,958
Loss before extraordinary item (4,800)
Net loss . . . . . . . . . . . (4,800)
Net loss per share:
Basic. . . . . . . . . . . . $ (0.30)
Diluted. . . . . . . . . . . $ (0.30)
</TABLE>
6
<PAGE>
Pro forma data does not purport to be indicative of the results that would have
been obtained had this acquisition actually occurred at the beginning of the
periods presented and is not intended to be a projection of future results.
NOTE 3 - RESTRUCTURING AND OTHER CHARGES
In the second quarter of 1999, the Company recorded restructuring and other
charges of $6.4 million. These charges related to the Company's alignment of
operations, product lines and direct marketing efforts with the consolidation
plans for those same areas at Ertl. Approximately $2.2 million of the charges
relate to the re-focusing of the direct mail programs, $4.0 million relates to
the reduction and consolidation of product lines and the remaining $0.2 million
relates to operational consolidation, including severance and relocation costs.
All of these charges have been expended.
NOTE 4 - RECAPITALIZATION
Excess purchase price over the book value of the net assets acquired in
connection with the Company's recapitalization in 1996 of $88.7 million has been
recorded as an intangible asset and is being amortized on a straight-line basis
over 40 years.
NOTE 5 - BUSINESS SEGMENTS
In January 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." The Company has no separately
reportable segments in accordance with this standard. Under the enterprise wide
disclosure requirements of SFAS 131, the Company reports net sales, by each
group of product lines and by distribution channel. Amounts for the quarters
ended June 30, 2000 and 1999 are as shown in the table below.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
<S> <C> <C>
Collectible die-cast . . $35,274 $34,417
Other products . . . . . 14,804 23,070
Net sales. . . . . . . . $50,078 $57,487
Mass retailers . . . . . $16,251 $20,641
Wholesale and trackside. 23,778 29,526
Premium/promotional. . . 9,152 5,058
Direct and other . . . . 897 2,262
Net sales. . . . . . . . $50,078 $57,487
</TABLE>
7
<PAGE>
Amounts for the six months ended June 30, 2000 and 1999 are as shown in the
table below.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
<S> <C> <C>
Collectible die-cast . . $67,550 $63,668
Other products . . . . . 27,955 29,091
Net sales. . . . . . . . $95,505 $92,759
Mass retailers . . . . . $35,264 $43,347
Wholesale and trackside. 44,874 36,962
Premium/promotional. . . 13,927 7,533
Direct and other . . . . 1,440 4,917
Net sales. . . . . . . . $95,505 $92,759
</TABLE>
Information for the quarter ended June 30, 2000 and 1999 by geographic area is
set forth in the table below. Operating income represents income before income
taxes and interest expense.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
<S> <C> <C>
Net sales:
United States . . . . . . . . . . . . . . . . $45,315 $53,622
Foreign . . . . . . . . . . . . . . . . . . . 4,940 4,938
Sales and transfers between geographic areas. (177) (1,073)
Combined total . . . . . . . . . . . . . . . . . . $50,078 $57,487
Operating income:
United States . . . . . . . . . . . . . . . . $ 3,456 $(6,761)
Foreign . . . . . . . . . . . . . . . . . . . 515 (8)
Combined total . . . . . . . . . . . . . . . . . . $ 3,971 $(6,769)
</TABLE>
8
<PAGE>
Information for the six months ended June 30, 2000 and 1999 by geographic area
is set forth in the table below. Operating income represents income before
income taxes and interest expense.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
<S> <C> <C>
Net sales:
United States . . . . . . . . . . . . . . . . $ 85,809 $ 88,984
Foreign . . . . . . . . . . . . . . . . . . . 10,212 4,848
Sales and transfers between geographic areas. (516) (1,073)
Combined total . . . . . . . . . . . . . . . . . . $ 95,505 $ 92,759
Operating income:
United States . . . . . . . . . . . . . . . . $ 4,140 $ (1,511)
Foreign . . . . . . . . . . . . . . . . . . . 1,066 (8)
Combined total . . . . . . . . . . . . . . . . . . $ 5,206 $ (1,519)
Identifiable assets:
United States . . . . . . . . . . . . . . . . $248,493 $283,798
Foreign . . . . . . . . . . . . . . . . . . . 26,023 15,432
Combined total . . . . . . . . . . . . . . . . . . $274,516 $299,230
</TABLE>
NOTE 6 - COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distributions to owners, in a financial statement for the period in
which they are recognized.
Comprehensive income at June 30, 2000 and 1999 is calculated as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
<S> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 114 $(2,481)
Other comprehensive income-foreign currency translation adjustments. (51) (146)
Comprehensive income (loss). . . . . . . . . . . . . . . . . . . . . $ 63 $(2,627)
</TABLE>
NOTE 7 - COMMON 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 June 30, 2000 December 31, 1999
--------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Voting Common Stock 28,000,000 $ .01 14,661,583 15,657,208
</TABLE>
9
<PAGE>
On September 1, 1999, the Company announced that its board of directors had
authorized stock repurchases by the Company for a term of one year and up to an
aggregate amount of $10.0 million. At June 30, 2000, the Company had purchased
1,783,100 shares of its outstanding common stock for approximately $7.6 million.
NOTE 8 - DEBT
In connection with the acquisition of Ertl, the Company entered into a new
credit agreement, amended on August 30, 1999 and May 15, 2000, which 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 June 30, 2000, the Company had $16.0
million outstanding on the revolving loan. The term loan, in the principal
amount of $115.0 million, is due in scheduled quarterly payments beginning on
June 30, 2000 with final maturity on March 31, 2004. All borrowings under the
credit facility are secured by substantially all of the assets of the Company.
The term loan and the revolving loan bear interest, at the Company's option, at
an alternate base rate plus a margin that varies between 0.00% and 1.25% or at a
LIBOR rate plus margin that varies between 0.75% and 2.25%. The applicable
margin is based on the Company's ratio of consolidated debt to consolidated
EBITDA and at June 30, 2000 would have been calculated as 1.25% for base rate
loans and 2.25% 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. At June 30, 2000, the commitment fee would have been
calculated as 0.40% per annum on the average daily unused portion of the
revolving loan.
Under the terms of the Company's credit agreement, the Company is required to
comply with certain financial and non-financial covenants. The key financial
covenants include leverage ratio, fixed charge ratio and interest coverage
ratio. As of June 30, 2000, the Company was not in compliance with these key
financial covenants. The Company has obtained waivers for each of these
violations which extend through August 31, 2000. During the term of the
waivers, the Company may not borrow more than $16 million under the revolving
loan and the outstanding borrowings under the credit agreement will bear
interest at the LIBOR rate plus 2.75%. Also, during the term of the waivers,
the Company must pay a waiver fee on the outstanding borrowings under the credit
agreement at a rate of 0.50% per annum. As of August 14, 2000, the Company had
$16.0 million outstanding on the revolving loan. The Company is in the process
of negotiating amended terms for its current bank agreement and the management
of the Company believes that the amendment will be completed on or before August
31, 2000.
The Company's credit agreement also requires that the Company maintain an
interest rate protection agreement. Effective June 3, 1999, the Company entered
into an interest rate collar transaction covering $35 million of its debt, with
a cap based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement,
which has quarterly settlement dates, is in effect through June 3, 2002. During
the first and second quarters of 2000, the effect of this agreement was
insignificant.
10
<PAGE>
NOTE 9 - NET INCOME PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic net income
per share is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Certain options and warrants were not included in the
weighted average share calculation because the options' and warrants' exercise
prices were greater than the average market price of the common shares.
NOTE 10 - LEGAL PROCEEDINGS
The Company has certain contingent liabilities resulting from litigation and
claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
financial position or the results of the Company's operations.
During the second quarter of 2000, class action lawsuits were filed against the
Company, two of its officers and a former director. The complaints allege that
the Company violated certain federal securities laws by issuing a series of
material misrepresentations to the market between February 1, 1999 and June 23,
1999, thereby artificially inflating the price of the Company's common stock.
The Company intends to vigorously defend against the action, although no
assurances can be given as to the outcome of this matter.
11
<PAGE>
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.
The Company acquired The Ertl Company, Inc. and certain of its affiliates
("Ertl") on April 13, 1999, in a transaction accounted for under the purchase
method of accounting. Accordingly, the operations of Ertl are included in the
Company's operations from the date of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net sales. Net sales decreased $7.4 million, or 12.9%, to $50.1 million for
the three months ended June 30, 2000 from $57.5 million for the three months
ended June 30, 1999. This sales decrease was attributable to the weak
performance in NASCAR die cast collectibles, as compared to stronger sales in
the second quarter of 1999. Sales of non-racing die cast collectibles increased
approximately $10.5 million, quarter to quarter. However, this increase was
offset by the poor sales in the racing die cast collectibles category that
decreased approximately $9.6 million, quarter to quarter. Sales of other
products decreased approximately $8.4 million. This decrease was primarily
attributable to the decrease in model kits as compared to the 1999 second
quarter which included significant sales of Star Wars model kits. There was
also a decrease in the apparel and souvenirs category, quarter to quarter, due
to the decline in NASCAR licensed products.
Gross profit. Gross profit decreased $0.7 million, or 3.0%, to $22.8
million for the three months ended June 30, 2000 from $23.5 million for the
three months ended June 30, 1999. The gross profit margin (as a percentage of
net sales) increased to 45.5% in 2000 compared to 40.9% in 1999. The low sales
volume in the second quarter of 2000 negatively impacted the gross profit for
that period. The increase in the gross profit margin was attributable to the
integration of operations with Ertl, better sourcing of products and lower
product costs. There were no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $5.1 million, or 22.2%, to $17.9 million for
the three months ended June 30, 2000 from $23.0 million for the three months
ended June 30, 1999. The decrease in selling, general and administrative
expenses is due to the integration of operations and tight control of
discretionary expenditures. As a percentage of net sales, selling, general and
administrative expenses decreased to 35.7% for the three months ended June 30,
2000 from 40.0% for the three months ended June 30, 1999.
Operating income. Operating income increased $10.8 million, or 158.8%, to
$4.0 million for the three months ended June 30, 2000 from an operating loss of
$6.8 million for the three months ended June 30, 1999. As a percentage of net
sales, operating income increased to 8.0% for the three months ended June 30,
2000 from (11.8)% for the three months ended June 30, 1999. The operating
income for the second quarter of 1999 reflects a $6.4 million restructuring and
other charge. The operating margin for 2000 has been positively impacted by the
decrease in selling, general and administrative expenses.
12
<PAGE>
Interest expense. Interest expense of $2.9 million for the three months
ended June 30, 2000 and $2.0 million for the three months ended June 30, 1999
relates primarily to bank term loans and line of credit borrowings. The
increase in interest expense, quarter to quarter, is primarily due to increased
borrowings in connection with the acquisition of Ertl. Interest expense for
2000 has also been impacted by the increase in interest rates quarter over
quarter.
Income tax. Income tax expense for the three months ended June 30, 2000, and
June 30, 1999 includes provisions for federal, state and foreign income taxes at
an effective rate of 30.6% and 40.5%, respectively. The provision in 2000 is
based upon management's preliminary estimates of the effective tax rate for the
consolidated Company. The final rate will be determined upon filing of the
consolidated tax return on or before September 15, 2000. Management does not
believe that the final rate will produce materially different results than those
reflected herein.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales. Net sales increased $2.7 million, or 2.9%, to $95.5 million for
the six months ended June 30, 2000 from $92.8 million for the six months ended
June 30, 1999. This sales increase was attributable to the strong performance
in non-racing die cast collectibles. Sales of non-racing die cast collectibles
increased approximately $29.2 million, year to year, which more than offset the
sales decline in racing die cast collectibles of $25.3 million. Sales of other
Racing Champions brand products decreased approximately $1.4 million, year to
year, primarily in the NASCAR apparel and souvenirs category.
Gross profit. Gross profit decreased $0.5 million, or 1.2%, to $41.7
million for the six months ended June 30, 2000 from $42.2 million for the six
months ended June 30, 1999. The gross profit margin (as a percentage of net
sales) decreased to 43.7% in 2000 compared to 45.5% in 1999. The inclusion of
the Ertl operations for the entire six months of 2000, with a lower gross profit
margin (in the range of 40% to 45%) than the traditional Racing Champions gross
profit margin, contributed to the decrease in gross profit margin. There were
no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $1.1 million, or 3.1%, to $34.6 million for
the six months ended June 30, 2000 from $35.7 million for the six months ended
June 30, 1999. The decrease in selling, general and administrative expenses is
due to the integration of operations and tight control of discretionary
expenditures. As a percentage of net sales, selling, general and administrative
expenses decreased to 36.2% for the six months ended June 30, 2000 from 38.5%
for the six months ended June 30, 1999.
Operating income. Operating income increased $6.7 million, or 446.7%, to
$5.2 million for the six months ended June 30, 2000 from an operating loss of
$1.5 million for the six months ended June 30, 1999. As a percentage of net
sales, operating income increased to 5.4% for the six months ended June 30, 2000
from (1.6%) for the six months ended June 30, 1999. The operating income for
1999 reflects a $6.4 million restructuring and other charge. The operating
margin for 2000 has been positively impacted by the decrease in selling, general
and administrative expenses.
Interest expense. Interest expense of $5.3 million for the six months ended
June 30, 2000 and $2.6 million for the six months ended June 30, 1999 relates
primarily to bank term loans and line of credit borrowings. The increase in
interest expense, year to year, is due to increased borrowings in connection
with the acquisition of Ertl. Interest expense for 2000 has also been impacted
by the increase in interest rates year over year.
13
<PAGE>
Income tax. Income tax expense for the six months ended June 30, 2000 and
June 30, 1999 includes provisions for federal, state and foreign income taxes at
an effective rate of 50.6% and 40.5%, respectively. The provision in 2000 is
based upon management's preliminary estimates of the effective tax rate for the
consolidated Company. The final rate will be determined upon filing of the
consolidated tax return on or before September 15, 2000. Management does not
believe that the final rate will produce materially different results than those
reflected herein.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's operations provided net cash of $13.5 million during the six
months ended June 30, 2000. Capital expenditures for the six months ended June
30, 2000 were approximately $3.8 million, of which approximately $3.3 million
was for molds and tooling.
On April 13, 1999, in conjunction with the Company's acquisition of Ertl, the
Company paid all outstanding amounts on its current credit facility and entered
into a new credit facility, which was amended on August 30, 1999 and May 15,
2000. The new 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 $60.0 million at any time prior to March 31, 2004. At
June 30, 2000, the Company had $16.0 million outstanding on the revolving loan.
The term loan in the principal amount of $115.0 million is due in scheduled
quarterly payments beginning on June 30, 2000 with final maturity on March 31,
2004. All borrowings under the credit facility 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 an alternate base rate plus a margin that varies between 0.00% and
1.25% or at a LIBOR rate plus margin that varies between 0.75% and 2.25%. The
applicable margin is based on the Company's ratio of consolidated debt to
consolidated EBITDA and at June 30, 2000 would have been calculated as 1.25% for
base rate loans and 2.25% 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. At June 30, 2000, the commitment fee would
have been calculated as 0.40% per annum on the average daily unused portion of
the revolving loan.
Under the terms of the Company's credit agreement, the Company is required to
comply with certain financial and non-financial covenants. The key financial
covenants include leverage ratio, fixed charge ratio and interest coverage
ratio. As of June 30, 2000, the Company was not in compliance with these key
financial covenants. The Company has obtained waivers for each of these
violations that extend through August 31, 2000. During the term of the waivers,
the Company may not borrow more than $16.0 million under the revolving loan and
outstanding borrowings under the credit agreement will bear interest at the
LIBOR rate plus 2.75%. Also, during the term of the waivers, the Company must
pay a waiver fee on the outstanding borrowings under the credit agreement at a
rate of 0.50% per annum. As of August 14, 2000, the Company had $16.0 million
outstanding on the revolving loan. The Company is also in the process of
negotiating amended terms for its current bank agreement and the management of
the Company believes that the amendment will be completed on or before August
31, 2000.
The Company's anticipated debt service obligations under the existing credit
facilities for the remainder of 2000 for scheduled principal and interest
payments are approximately $17.8 million. Average annual debt service
obligations under these same facilities through March, 2004 are approximately
$31.1 million.
14
<PAGE>
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 seasonality
related to sales. Due to seasonal increases in demand for the Company's
products, working capital financing requirements are usually highest during the
third quarter and fourth quarter. The Company expects that capital expenditures
during 2000, principally for molds and tooling, will be approximately $11.0
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 through the fourth
quarter of 2000. However, if the Company's capital requirements vary materially
from those currently planned, the Company may require additional debt or equity
financing. There can be no assurance that financing, if needed, would be
available on terms acceptable to the Company, if at all. Any inability by the
Company to successfully negotiate an amendment to its bank agreement may have a
material adverse effect on the Company's business and financial condition.
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 vehicle manufacturers, agricultural equipment manufacturers,
major race sanctioning bodies, race team owners, drivers, sponsors, agents and
other licensors; (4) the Company relies upon four independently owned factories
located in China to manufacture a significant portion of its vehicle 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 negotiate an amendment to its
current bank agreement on or before August 31, 2000 and the terms of any such
amendment that may be completed; (7) the Company's ability to obtain financing
if it is unable to reach an agreement with its lenders or if the Company's
capital requirements change; and (8) general economic conditions in the
Company's markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's credit agreement requires that the Company maintain an interest
rate protection agreement. Effective June 3, 1999, the Company entered into an
interest rate collar transaction covering $35 million of its debt, with a cap
based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement, which has
quarterly settlement dates, is in effect through June 3, 2002. During the first
and second quarters of 2000, the effect of this agreement was insignificant.
Based on the Company's interest rate exposure on variable rate borrowings at
June 30, 2000, a one-percentage-point increase in average interest rates on the
Company's borrowings would increase future interest expense by approximately
$120,000 per month.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Four putative class action lawsuits were filed in U.S. District Court for
the Northern District of Illinois, Eastern Division, against the Company, two of
its officers and a former director. On August 3, 2000, these lawsuits were
consolidated into a single class action under the caption Market Street
Securities v. Racing Champions Corporation et al. The consolidated cases were
filed by, and on behalf of, purchasers of the common stock of the Company
between February 1, 1999 and June 23, 1999. The complaints allege that the
Company violated certain federal securities laws by issuing a series of material
misrepresentations to the market between February 1, 1999 and June 23, 1999,
thereby artificially inflating the price of the Company's common stock. The
complaints seek, among other things an unspecified amount of compensatory
damages and trial costs and expenses. The Company intends to vigorously defend
against the action, although no assurances can be given as to the outcome of
this matter.
In May 1997, a proposed class action lawsuit was filed against several
track side vendors, including Green's Racing Souvenirs, Inc., a wholly owned
subsidiary of the Company ("GRS"). The U.S. District Court for the Northern
District of Atlanta has approved a settlement of this lawsuit, subject to a
final hearing scheduled for August 25, 2000. The settlement amount allocated to
GRS is not material to 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.
The annual meeting of stockholders of the Company was held on May 12, 2000.
16
<PAGE>
The matters voted upon, including the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as to each
such matter were as follows:
Proposal 1: Election of directors
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
John S. Bakalar. 13,916,902 162,597
Peter K.K. Chung 13,899,651 179,848
Robert E. Dods . 13,908,562 170,937
Daniel M. Gill . 13,913,041 166,458
Boyd L. Meyer. . 13,909,962 169,537
Avy H. Stein . . 13,913,541 165,958
John J. Vosicky. 13,913,941 165,558
</TABLE>
Proposal 2: Ratification of appointment of Arthur Andersen LLP as auditors of
the Company
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
---------- ------- ------- ----------------
<S> <C> <C> <C>
13,996,720 66,323 16,456 0
</TABLE>
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 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).
10.1 Second Amendment to Credit Agreement, dated as of May 15, 2000, by
and among the Company, Racing Champions, Inc., Racing Champions South, Inc.,
Racing Champions Worldwide Limited, First Union National Bank, as lender and
agent, and the other lenders party thereto.
10.2 Waiver Letter dated July 14, 2000, relating to Second Amendment to
Credit Agreement, dated as of May 15, 2000, by and among the Company, Racing
Champions, Inc., Racing Champions South, Inc., Racing Champions Worldwide
Limited, First Union National Bank, as lender and agent, and the other lenders
party thereto.
27 Financial Data Schedule.
(b) Reports on Form 8-K: None in the second quarter of 2000.
17
<PAGE>
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 August, 2000.
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
18
