SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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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
--- ---
On November 10, 2000, there were outstanding 14,661,583 shares of the
Registrant's $.01 par value common stock.
<PAGE>
RACING CHAMPIONS CORPORATION
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 2000 and 1999 and for the Nine
Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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>
September 30, 2000 December 31, 1999
-------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . $ 9,015 $ 12,265
Accounts receivable, net . . . . . . . . . 56,699 44,718
Inventory. . . . . . . . . . . . . . . . . 25,176 28,145
Other current assets . . . . . . . . . . . 14,532 17,734
Property and equipment, net. . . . . . . . 36,444 38,120
Excess purchase price over net assets
acquired, net. . . . . . . . . . . . . . 128,546 131,357
Other non-current assets . . . . . . . . . 3,816 3,943
-------------------- -------------------
Total assets . . . . . . . . . . . . . . . $ 274,228 $ 276,282
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses. . . $ 38,150 $ 33,990
Other current liabilities. . . . . . . . . 3,138 4,593
Bank term loans. . . . . . . . . . . . . . 106,125 115,000
Line of credit . . . . . . . . . . . . . . 8,000 8,000
Other long-term liabilities. . . . . . . . 15,479 12,851
-------------------- -------------------
Total liabilities. . . . . . . . . . . . . $ 170,892 $ 174,434
Stockholders' equity . . . . . . . . . . . 103,336 101,848
-------------------- -------------------
Total liabilities and stockholders' equity $ 274,228 $ 276,282
==================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $ 65,831 $ 82,631 $ 161,336 $ 175,390
Cost of sales . . . . . . . . . . . . . . . . 34,219 47,250 88,064 97,834
------------ ------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . 31,612 35,381 73,272 77,556
Selling, general and administrative expenses. 17,673 25,090 52,227 60,753
Amortization of intangible assets . . . . . . 947 947 2,848 2,578
Restructuring and other . . . . . . . . . . . - - - 6,400
------------ ------------ ------------ ------------
Operating income. . . . . . . . . . . . . . . 12,992 9,344 18,197 7,825
Interest expense. . . . . . . . . . . . . . . 3,271 2,563 8,562 5,144
Other expense . . . . . . . . . . . . . . . . 526 9 209 78
------------ ------------ ------------ ------------
Income before income taxes. . . . . . . . . . 9,195 6,772 9,426 2,603
Income tax expense. . . . . . . . . . . . . . 4,266 2,897 4,383 1,209
------------ ------------ ------------ ------------
Net income. . . . . . . . . . . . . . . . . . $ 4,929 $ 3,875 $ 5,043 $ 1,394
============ ============ ============ ============
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.34 $ 0.24 $ 0.34 $ 0.09
============ ============ ============ ============
Diluted. . . . . . . . . . . . . . . . . . . $ 0.33 $ 0.23 $ 0.33 $ 0.08
============ ============ ============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . 14,662 16,417 14,882 16,245
Diluted. . . . . . . . . . . . . . . . . . . 14,879 16,694 15,113 16,611
</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 nine months
ended September 30,
--------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 5,043 $ 1,394
Depreciation and amortization. . . . . . . . . . . . . 10,145 8,091
Deferred taxes and interest. . . . . . . . . . . . . . 4,334 1,322
Gain on sale of assets . . . . . . . . . . . . . . . . (31) (11)
Other. . . . . . . . . . . . . . . . . . . . . . . . . - -
Changes in operating assets and liabilities, net of
acquisition activity. . . . . . . . . . . . . . . . . (4,188) (12,249)
------------ ------------
Net cash provided by (used in) operating activities. 15,303 (1,453)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . (5,732) (6,722)
Proceeds from disposal of property and equipment . . . 273 1,596
Purchase price of Ertl, net of cash. . . . . . . . . . - (92,997)
Increase in other non-current assets . . . . . . . . . (192) (3,222)
------------ ------------
Net cash used in investing activities. . . . . . . . (5,651) (101,345)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net . . . . . . . . . . . . . . . (8,875) 108,000
Issuance of common stock . . . . . . . . . . . . . . . 1 2,321
Purchase of treasury stock . . . . . . . . . . . . . . (3,991) -
Expense recognized under option grants . . . . . . . . 17 17
------------ ------------
Net cash (used in) provided by financing activities. (12,848) 110,338
Effect of exchange rate on cash. . . . . . . . . . . (54) 213
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,250) 7,753
------------ ------------
Cash and cash equivalents, beginning of period. . . . . 12,265 6,242
------------ ------------
Cash and cash equivalents, end of period. . . . . . . . $ 9,015 $ 13,995
============ ============
Supplemental information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 9,682 $ 4,426
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . $ 845 $ 2,707
</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 September 30, 2000, the results of
operations for the three month and nine month periods ended September 30, 2000
and the cash flows for the nine month period ended September 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 nine month periods ended
September 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 value 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
nine months ended September 30, 1999 assume that the Ertl acquisition occurred
as of January 1, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
September 30, 1999
------------------
<S> <C>
Net sales. . . . . . . . . . . $ 210,369
Loss before extraordinary item (2,512)
Net loss . . . . . . . . . . . (2,512)
Net loss per share:
Basic. . . . . . . . . . . . $ (0.15)
Diluted. . . . . . . . . . . $ -
</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
related to the re-focusing of the direct mail programs, $4.0 million related to
the reduction and consolidation of product lines and the remaining $0.2 million
related 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 approximately $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 September 30, 2000 and 1999 are as shown in the table below.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
------- -------
<S> <C> <C>
Collectible die-cast $45,195 $61,257
Other products 20,636 21,374
------- -------
Net sales $65,831 $82,631
Mass retailers $29,214 $35,339
Wholesale and trackside 28,590 35,135
Premium/promotional 7,272 9,827
Direct and other 755 2,330
------- -------
Net sales $65,831 $82,631
</TABLE>
7
<PAGE>
Amounts for the nine months ended September 30, 2000 and 1999 are as shown in
the table below.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
-------- --------
<S> <C> <C>
Collectible die-cast $112,745 $124,712
Other products 48,591 50,678
-------- --------
Net sales $161,336 $175,390
Mass retailers $ 64,479 $ 78,945
Wholesale and trackside 73,464 71,972
Premium/promotional 21,199 17,141
Direct and other 2,194 7,332
-------- --------
Net sales $161,336 $175,390
</TABLE>
Information for the quarter ended September 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 . . . . . . . . . . . . . . . . $60,690 $74,383
Foreign . . . . . . . . . . . . . . . . . . . 5,224 8,535
Sales and transfers between geographic areas (83) (287)
-------- --------
Combined total . . . . . . . . . . . . . . . . . . $65,831 $82,631
Operating income:
United States . . . . . . . . . . . . . . . . $12,175 $ 8,169
Foreign . . . . . . . . . . . . . . . . . . . 817 1,175
-------- --------
Combined total . . . . . . . . . . . . . . . . . . $12,992 $ 9,344
</TABLE>
8
<PAGE>
Information for the nine months ended September 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 . . . . . . . . . . . . . . . . . . . . $146,498 $163,366
Foreign . . . . . . . . . . . . . . . . . . . . . . . 15,309 13,384
Sales and transfers between geographic areas. . . . . (471) (1,360)
--------- ---------
Combined total . . . . . . . . . . . . . . . . . . . . . . $161,336 $175,390
Operating income:
United States . . . . . . . . . . . . . . . . . . . . $ 16,314 $ 6,658
Foreign . . . . . . . . . . . . . . . . . . . . . . . 1,883 1,167
--------- ---------
Combined total . . . . . . . . . . . . . . . . . . . . . . $ 18,197 $ 7,825
Identifiable assets:
United States . . . . . . . . . . . . . . . . . . . . $248,954 $290,105
Foreign . . . . . . . . . . . . . . . . . . . . . . . 25,274 19,272
--------- ---------
Combined total . . . . . . . . . . . . . . . . . . . . . . $274,228 $309,377
</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 September 30, 2000 and 1999 is calculated as follows:
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
------ ------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,043 $1,394
Other comprehensive income--foreign
currency translation adjustments . . . . . . . . . . . . . . . . . 418 213
------ ------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . $5,461 $1,607
</TABLE>
9
<PAGE>
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 September 30, 2000 December 31, 1999
----------------- ---------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Voting Common Stock 28,000,000 $ .01 14,661,583 15,657,208
</TABLE>
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 September 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, as further amended on August 31, 2000, which provides for a
revolving loan, a term loan, and the issuance of letters of credit. The
revolving loan allows the Company to borrow up to $20.0 million based upon
levels of the Company's accounts receivable and inventory. At September 30,
2000, the Company had $8.0 million outstanding on the revolving loan. The term
loan, with a remaining principal balance of $106.1 million at September 30,
2000, is due in scheduled quarterly payments ranging from $3.1 million to $4.0
million with a balloon payment on April 1, 2003. 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 0.15% and 1.75% or at a
LIBOR rate plus margin that varies between 0.90% and 3.50%. The applicable
margin is based on the Company's ratio of consolidated debt to consolidated
EBITDA and at September 30, 2000 was 1.50% for base rate loans and 3.25% 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
September 30, 2000, the commitment fee was 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, minimum EBITDA and maximum capital
expenditures. As of September 30, 2000, the Company was in compliance with
these key financial covenants.
The Company's credit agreement also requires that the Company maintain an
interest rate protection agreement. Effective September 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 September
3, 2002. During the first three quarters of 2000, the effect of this agreement
was insignificant.
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 as their effect was antidilutive.
10
<PAGE>
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 complaint alleges 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net sales. Net sales decreased $16.8 million, or 20.3%, to $65.8 million for
the three months ended September 30, 2000 from $82.6 million for the three
months ended September 30, 1999. This decrease was primarily attributable to a
decrease of $16.0 million, quarter to quarter, in sales of die cast
collectibles. Most of this decrease was due to the weak performance in the
NASCAR category. Sales of other products decreased approximately $0.8 million
overall, with the strong performance in the licensed preschool lines being
offset by the declines in the model kits and the NASCAR souvenirs and apparel
categories.
Gross profit. Gross profit decreased $3.8 million, or 10.7%, to $31.6 million
for the three months ended September 30, 2000 from $35.4 million for the three
months ended September 30, 1999. The gross profit margin (as a percentage of
net sales) increased to 48.0% in 2000 compared to 42.8% in 1999. The low sales
volume in the third 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 $7.4 million, or 29.5%, to $17.7 million for
the three months ended September 30, 2000 from $25.1 million for the three
months ended September 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 26.8% for the three months
ended September 30, 2000 from 30.4% for the three months ended September 30,
1999.
Operating income. Operating income increased $3.7 million, or 39.8%, to $13.0
million for the three months ended September 30, 2000 from $9.3 million for the
three months ended September 30, 1999. As a percentage of net sales, operating
income increased to 19.7% for the three months ended September 30, 2000 from
11.3% for the three months ended September 30, 1999. The operating margin for
2000 has been positively impacted by the increase in the gross profit margin and
the decrease in selling, general and administrative expenses.
Interest expense. Interest expense of $3.3 million for the three months ended
September 30, 2000 and $2.6 million for the three months ended September 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 the
increase in interest rates quarter over quarter.
12
<PAGE>
Income tax. Income tax expense for the three months ended September 30, 2000
and 1999 includes provisions for federal, state and foreign income taxes at an
effective rate of 46.4% and 42.8%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net sales. Net sales decreased $14.1 million, or 8.0%, to $161.3 million for
the nine months ended September 30, 2000 from $175.4 million for the nine months
ended September 30, 1999. This decrease was primarily attributable to a
decrease of approximately $12.0 million, year to year, in sales of die cast
collectibles. This decrease was due to the weak performance in NASCAR die cast
collectibles, as compared to stronger sales in 1999. Sales of other products
decreased approximately $2.1 million, year to year, primarily in the NASCAR
apparel and souvenirs category and model kits.
Gross profit. Gross profit decreased $4.3 million, or 5.5%, to $73.3 million
for the nine months ended September 30, 2000 from $77.6 million for the nine
months ended September 30, 1999. The gross profit margin (as a percentage of
net sales) increased to 45.4% in 2000 compared to 44.2% in 1999. The lower
sales volume in 2000 as compared to 1999 negatively impacted the gross profit
for the 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 $8.6 million, or 14.1%, to $52.2 million for
the nine months ended September 30, 2000 from $60.8 million for the nine months
ended September 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 32.4% for the nine months ended September
30, 2000 from 34.6% for the nine months ended September 30, 1999.
Operating income. Operating income increased $10.4 million, or 133.3%, to $18.2
million for the nine months ended September 30, 2000 from $7.8 million for the
nine months ended September 30, 1999. As a percentage of net sales, operating
income increased to 11.3% for the nine months ended September 30, 2000 from 4.5%
for the nine months ended September 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 increase in gross profit margin and
the decrease in selling, general and administrative expenses.
Interest expense. Interest expense of $8.6 million for the nine months ended
September 30, 2000 and $5.1 million for the nine months ended September 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 and the increase in interest rates year
over year.
Income tax. Income tax expense for the nine months ended September 30, 2000 and
1999 includes provisions for federal, state and foreign income taxes at an
effective rate of 46.5% and 46.4%, respectively.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's operations provided net cash of $15.3 million during the nine
months ended September 30, 2000. Capital expenditures for the nine months ended
September 30, 2000 were approximately $5.7 million, of which approximately $5.1
million was for molds and tooling.
In connection with the acquisition of Ertl, the Company entered into a new
credit agreement, as further amended on August 31, 2000, which provides for a
revolving loan, a term loan, and the issuance of letters of credit. The
revolving loan allows the Company to borrow up to $20.0 million based upon
levels of the Company's accounts receivable and inventory. At September 30,
2000, the Company had $8.0 million outstanding on the revolving loan. The term
loan, with a remaining principal amount of $106.1 million at September 30, 2000,
is due in scheduled quarterly payments ranging from $3.1 million to $4.0 million
with a balloon payment of $73.0 million on April 1, 2003. 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 0.15% and 1.75% or at a
LIBOR rate plus margin that varies between 0.90% and 3.50%. The applicable
margin is based on the Company's ratio of consolidated debt to consolidated
EBITDA and at September 30, 2000 was 1.50% for base rate loans and 3.25% 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
September 30, 2000, the commitment fee was 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, minimum EBITDA and maximum capital
expenditures. As of September 30, 2000, the Company was in compliance with
these key financial covenants.
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 $6.0 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 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 $8.5
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.
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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 may not be able to manufacture,
source and ship new and continuing products on a timely basis and customers and
consumers may not accept those products at prices sufficient for the Company to
profitably recover development, manufacturing, marketing, royalty and other
costs; (2) the inventory policies of retailers, together with increased reliance
by retailers on quick response inventory management techniques, may increase the
risk of underproduction of popular items, overproduction of less popular items
and failure to achieve tight shipping schedules; (3) competition in the markets
for the Company's products may increase significantly; (4) 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; (5) the Company may
experience unanticipated negative results of litigation; (6) the Company relies
upon a limited number of independently owned factories located in China to
manufacture a significant portion of its vehicle replicas and certain other
products; (7) the Company is dependent upon the continuing willingness of
leading retailers to purchase and provide shelf space for the Company's
products; and (8) general economic conditions in the Company's markets. The
Company undertakes no obligation to make any revisions to the forward-looking
statements contained in this report or to update them to reflect events or
circumstances occurring after the date of this report.
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 September 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 September 3, 2002.
During the first three quarters of 2000, the effect of this agreement was
insignificant.
Based on the Company's interest rate exposure on variable rate borrowings at
September 30, 2000, a one-percentage-point increase in average interest rates on
the Company's borrowings would increase future interest expense by approximately
$95,000 per month.
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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 filed a motion to dismiss all
claims in the consolidated class action complaints on October 16, 2000. In
November 2000, the plaintiffs filed a motion for certification of the class.
The Company intends to vigorously defend against the action, although no
assurances can be given as to the outcome of this matter.
On March 2, 2000, Telepresence Technologies, LLC filed a lawsuit against
Racing Champions South, Inc. and Racing Champions, Inc. in the United States
District Court for the Central District of California. The suit alleges that
trading cards sold by these subsidiaries infringe a patent allegedly owned by
Telepresence. Telepresence seeks damages, costs, attorneys' fees, and interest,
and further requests that damages be trebled on its allegation of willful
infringement. The Company intends to defend this suit vigorously. However,
there can be no assurance that the Company will ultimately be successful in the
defense of this suit.
A purported class action lawsuit was filed on August 21, 2000, in
California state court against Racing Champions South, Inc. and several other
defendants in a case entitled Nicholas Chaset v. The Upper Deck Company, et al.
The lawsuit purports to include a proposed class of all U.S. residents who
purchased sports cards manufactured, licensed, marketed, sold, or distributed by
any defendant within a time period of up to four years. The complaint alleges
that the defendants have operated an illegal gambling operation by selling packs
of sports trading cards containing random assortments of varying values. The
plaintiff makes various state law claims, including unlawful, unfair and
fraudulent business practices, misleading advertising and violations of consumer
protection statutes. The plaintiff seeks actual damages, attorneys' fees, pre-
and post-judgment interest, exemplary damages, and injunctive relief. The
Company disputes these claims and intends to vigorously defend its position,
although no assurance can be given as to the outcome of this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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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 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 September 30, 1998 (File No.
0-22635) filed by the Company with the Securities and Exchange
Commission on August 14, 1998).
10.1 Third Amendment to Credit Agreement, dated as of August 31,
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 third quarter of 2000.
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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 10th day of November, 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,
Chief Operating Officer and Secretary
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