FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___ to ____.
Commission file number 0-22635
RACING CHAMPIONS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 36-4088307
- ----------------------------------- ----------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
- --------------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 630-790-3507
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NA NA
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 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
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the Registrant's common stock held by nonaffiliates as
of March 15, 2000: $35,837,464. Shares of common stock held by any executive
officer or director of the Registrant and any person who beneficially owns 10%
or more of the outstanding common stock have been excluded from this computation
because such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
Number of shares of the Registrant's common stock outstanding as of March 15,
2000: 15,469,708.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of the Stockholders
of the Registrant are incorporated by reference into Part III of this report.
<PAGE>
PART I
ITEM 1 : BUSINESS
GENERAL
Racing Champions Corporation ("Racing Champions" or the "Company") is a leading
producer and marketer of collectibles. The Company is best known for its
extensive lines of officially licensed NASCAR die-cast racing replicas, Press
Pass trading cards, NASCAR souvenirs and apparel, Ertl agricultural, custom
imprint and American Muscle vehicle replicas and AMT model kits. The Company has
license agreements with major U.S. automotive manufacturers and many of the
major motorsports sanctioning bodies, sponsors, team owners and their drivers,
as well as entertainment and media companies for their well-known characters and
properties. The Company sells its products primarily in North America.
Since its inception in 1989, Racing Champions has capitalized on the growing
popularity of motorsports by offering an expanding line of high quality,
affordable racing replicas targeted toward racing fans and adult collectors.
Beginning in 1996, Racing Champions successfully expanded into classic and
custom vehicle collectibles by introducing a line of high quality die-cast
replicas of classic and late-model vehicles. Racing Champions continued this
expansion in 1997 by introducing additional lines of classic and custom vehicle
replicas. In 1998, Racing Champions introduced a new line of die-cast vehicle
replicas sold exclusively at hobby and collector shops. In 1999, the Company
increased its non-racing product lines by acquiring The Ertl Company, Inc. which
has produced die-cast collectibles for over 50 years.
Racing Champions is a holding company which was formed as a Delaware corporation
in April 1996 by an investor group (the "Investor Group") led by Willis Stein &
Partners, L.P., a private investment fund, for the purpose of consummating a
recapitalization (the "Recapitalization") which involved the acquisition by
Racing Champions of both Racing Champions, Inc., a privately held Illinois
corporation formed in 1989 (together with an affiliated company, the "RCI
Group"), and Racing Champions Limited, a privately held Hong Kong corporation
formed simultaneously in 1989 (together with certain affiliated companies, the
"RCL Group"). The RCI Group and the RCL Group, while under different ownership,
effectively operated as one entity with the RCI Group managing the licensing,
product development and sales operations, and the RCL Group managing the
overseas manufacturing and shipping operations. The RCI Group was owned equally
by Robert E. Dods and Boyd L. Meyer. The RCL Group was owned by Peter K.K.
Chung. Messrs. Dods, Meyer and Chung continue to serve as senior executives of
Racing Champions and collectively own approximately 24% of the outstanding
shares of the Company's common stock, par value $0.01 per share (the "Common
Stock").
In June 1998, Racing Champions completed its acquisition of Wheels Sports Group,
Inc., which was subsequently renamed Racing Champions South, Inc. ("Racing
Champions South"). Racing Champions South develops, markets and distributes
collectible sports trading cards related to NASCAR, football and basketball
markets, and NASCAR souvenirs and apparel.
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of The Ertl Company, Inc. (subsequently renamed Racing
Champions Ertl, Inc.) and certain of its affiliates ("Ertl") for approximately
$94.6 million. Ertl develops, markets and distributes die-cast collectibles,
model kits and licensed preschool activity toys.
PRODUCTS
COLLECTIBLE DIE-CAST
Racing Vehicle Replicas - Racing Champions has produced die-cast racing vehicle
replicas since its inception in 1989. Racing Champions' racing vehicle replicas
include a comprehensive line of scaled stock cars, trucks and team transporters
representing a large number of the vehicles competing in the current year's
NASCAR Winston Cup Series, NASCAR Busch Grand National Series and the National
Hot Rod Association (NHRA). In 1999, Racing Champions produced over 1,500
different styles of racing vehicle replicas, including various sizes such as
1:24, 1:64, 1:87 and 1:43 scale. The Company's racing vehicle replicas generally
retail at prices ranging from $2 to $60.
Classic and Custom Vehicle Replicas - In early 1996, Racing Champions introduced
its first line of classic and custom vehicle replicas. Racing Champions
introduced several additional lines in 1997 and 1998 to continue the expansion
of its classic and custom die-cast vehicle replica category. In 1999, the
Company launched Street Wheels, which are directed at a younger audience. The
classic and custom vehicle replica category was greatly expanded in 1999 with
the Ertl acquisition which added custom imprint classic cars and American Muscle
die-cast vehicle collectibles, a line of vintage and modern automobiles and
trucks in 1:18 and 1:43 scales. In 2000, the Company has expanded the American
Muscle product line to include additional scales and is marketing a number of
1:64 and 1:24 scale products in this category, including Street Wheels,
Classified Classics, Rat Fink, Mod Rods, Extreme Dream Machines and Custom
Cruisers. The Company's classic and custom vehicle replicas retail at prices
ranging from $2 to $79.
<PAGE>
Agricultural and Heavy Equipment Vehicle Replicas - The agricultural die-cast
vehicle replica category has a wide range of products in various scales,
including die-cast replicas of vintage and modern tractors, heavy equipment and
farm implements and construction equipment of major manufacturers such as John
Deere, Case IH and Ford New Holland. These products generally retail for $3 to
$50. In addition, Ertl's Precision brand is a line of highly detailed
collectible agricultural die-cast vehicle replicas which retail for $100 to
$200.
Other Die-Cast Collectibles - The Company also has a line of die-cast figures
under the brand name of William Britain, which consists primarily of military
and ceremonial figures fashioned after historical European and U.S. events and
themes. The William Britain individual figures and sets are sold primarily to
gift shops and retail for $15 to $225.
OTHER PRODUCTS
Model Kits - The Company's model kits are marketed under the AMT and Esci brand
names. Model kits consist of injection molded plastic and die-cast kits
principally of vintage and high performance automobiles, race cars, trucks,
aircraft and spacecraft. Model kits generally retail for $8 to $20.
Licensed Preschool Activity Toys - The Company's licensed preschool line
encompasses several products and brand names. These products include outdoor
activity toys, toybooks and vehicles under the John Deere Kids and Little Racers
lines; die-cast trains, rail cars and plastic railway accessories under the
Thomas the Tank Engine and Friends line; and several licensed properties under a
toybooks line, such as Peanuts, Richard Scarry, Tonka and Berenstein Bears.
Toybooks are a plastic rolling vehicle that opens to reveal a storybook.
Licensed preschool activity toys retail at prices ranging from $4 to $70.
Sports Trading Cards - Racing Champions designs and markets premium collectible
sports trading cards under the Press Pass and Wheels brand names. The Company
has been an innovator in the collectible sports trading card industry, having
introduced season-long interactive cards, prism cards, 24-carat gold signature
cards, holofoil cards and "game-used" cards. Game-used cards contain materials
used in actual NASCAR races, including pieces of rubber taken from tires,
fire-suits and metal car parts. The Company also markets National Football
League and National Basketball Association draft pick trading cards. Draft pick
cards feature leading college players who are expected to be selected in the NFL
and the NBA drafts each year. The Company's sports trading cards have retail
prices ranging from $3 to $10.
Apparel, Souvenirs and Games - Racing Champions distributes NASCAR-related
merchandise trackside at NASCAR events, to wholesale customers and to retailers.
During 1999, merchandise distributed by Racing Champions included T-shirts,
hats, jackets, die-cast vehicle replicas, sunglasses, key chains, can coolers,
bumper stickers, license plates and souvenirs, all of which are produced by
outside manufacturers. The Company also distributes a limited number of games.
These products generally retail for $2 to $150.
LICENSES
Racing Champions markets virtually all of its products under licenses from other
parties. These licenses are generally limited in scope and duration and
authorize the sale of specific licensed products on a nonexclusive basis for a
limited period of time. Racing Champions has approximately 600 licenses with
various race team owners, drivers, sponsors, agents, and entertainment
properties generally for terms of 1 to 3 years. Racing Champions' racing
replicas, collectible sports trading cards, apparel and souvenirs are also
officially licensed by major race sanctioning bodies including NASCAR. Racing
Champions also has license agreements with the major automobile and truck
manufacturers, including Ford, Chevrolet, Oldsmobile, Pontiac, Buick, Dodge,
Chrysler and Kenworth.
Royalty rates for die-cast replicas vary by category but generally range in
aggregate for all licensors from 4% to 20% of the Company's sales price. Certain
special or limited edition products may carry higher royalty rates. Royalty
rates related to other licensed products range in aggregate from 1% to 22% of
the Company's sales price. Royalties are generally paid on a quarterly basis.
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PATENTS AND TRADEMARKS
Racing Champions has registered several trademarks with the U.S. Patent and
Trademark Office, including the marks Racing Champions(TM), Ertl(TM) and Press
Pass(TM). A number of Ertl trademarks are also registered in foreign countries.
Racing Champions holds U.S. patents for its trading card display stand and model
vehicle and for its unique packaging system which includes a die-cast vehicle,
emblem and display stand. Racing Champions believes that there is significant
value in its Racing Champions and Ertl trademarks and plans to build additional
value through increased customer awareness of many of Racing Champions' other
trade names and trademarks.
SALES AND DISTRIBUTION
In 1999, approximately 43% of Racing Champions' net sales were distributed
through national and regional retail chains including K-Mart, Target, Toys 'R'
Us, Wal-Mart, Hills/Ames, Meijer and ShopKo. Racing Champions' products are sold
at more than 20,000 retail outlets throughout North America. Racing Champions
utilizes electronic data interchange with its major retail customers to monitor
retail inventories and point of sale information and receive and process
customer orders.
In addition, Racing Champions sells to hobby and collector shops, to wholesale
customers and trackside at racing events which as a group represented
approximately 42% of net sales for 1999.
Racing Champions also distributes products through the premium/promotional
distribution channel. In total, this channel represented approximately 11% of
net sales for 1999. Premium/promotional customers offer the Company's customized
products to their customers through their own distribution outlets, through
special promotions or with the purchase of their product.
In 1998, Racing Champions began direct to consumer distribution, using direct
mail and the Internet. This channel represented approximately 4% of net sales
for 1999.
Racing Champions' internal sales force provides direct customer contact with
virtually all of Racing Champions' retail and wholesale accounts. This sales
force is supplemented by external sales representative organizations which are
divided geographically. These external sales representative organizations
provide more frequent and wider customer service and solicitation of the
national and regional retailers and supported approximately 32% of Racing
Champions' 1999 net sales. Racing Champions' internal sales force complements
the external sales force by providing a more limited direct relationship between
Racing Champions and the accounts assigned to the external sales force. Certain
large accounts are designated as "house accounts" and are handled exclusively by
Racing Champions' internal sales staff. External sales representatives generally
earn commissions of 1.5% to 15% of the net sales price from their accounts, and
their commissions are not affected by the involvement of Racing Champions'
internal sales force with a customer or sale. The Company also has a telesales
group which contacts smaller volume customers.
MARKETING
Racing Champions' marketing program is directed toward collectors and potential
new customers that fit the demographic profile of Racing Champions' target
market. The focus of Racing Champions' marketing plan is to increase awareness
of the Company's product offerings and brand name. Racing Champions utilizes the
following media in its marketing plan.
Advertising - Racing Champions places advertisements in collector's publications
with high, specific market penetration such as die-cast collector publications
and figure collector publications. Racing Champions also advertises in national
publications read by its targeted collectors and enthusiasts, such as NASCAR
Magazine and Die Cast Digest.
Public Relations - Racing Champions has developed a sustained public relations
effort to build relationships with editors at collector publications. Ongoing
product notices keep editors abreast of changing products, increase Racing
Champions' credibility and market acceptance, and encourage the editorial staffs
of these publications to give adequate coverage to Racing Champions' products.
Co-op Advertising - Racing Champions works closely with retail chains to plan
and execute ongoing retailer driven promotions and advertising. The programs
usually involve promotion of Racing Champions' products in retail customers'
print circulars, mailings and catalogs.
Direct Consumer - The Internet is an increasingly important part of Racing
Champions' marketing plan as collectors have quickly adopted the Internet as a
preferred way to communicate with other enthusiasts about their hobby. Racing
Champions has established a proprietary World Wide Web site
(www.racingchampions.com) on the Internet which highlights its products, lists
product release dates and collects
3
<PAGE>
information directly from consumers. Racing Champions also gathers customer
information through customer letters, e-mail, telephone calls and product
surveys. Racing Champions uses this customer information for market research and
dissemination of new product information.
COMPETITION
Racing Champions competes with several large international companies, such as
Mattel, Inc., Hasbro, Inc., Action Performance Companies, Inc. and Maisto Ltd.,
and with other producers of racing and non-racing vehicle replicas such as
Playing Mantis, Yat Ming and Jakks Pacific Inc. Racing Champions' Press Pass
trading cards compete with full line collectible sports trading card companies,
primarily Upper Deck, and with several smaller companies with more limited
product lines.
Competition in the distribution of NASCAR-related merchandise is intense and is
primarily based on product appeal, ability to capture shelf or rack space,
timely distribution, price and quality. Competition is also based on the ability
to obtain license agreements with NASCAR race drivers, team owners and sponsors
authorizing the right to use the name, photograph, likeness, autograph or image
of the NASCAR personality on specific product lines to be sold through specific
distribution channels or retail outlets.
Racing Champions believes that its competitive position is enhanced by a number
of factors, including product quality, features, pricing and diversity, its
ability to recognize trends in its product markets and anticipate shifts in
consumer preferences, its success in designing and marketing new products, the
availability of adequate sources of manufacturing capacity and the ability of
its third party manufacturers to meet delivery schedules, and its ability to
renew existing licenses and to enter into new licenses. In addition, Racing
Champions has sought to develop loyalty for its brands, to produce products with
a proven track record of collectibility, and to capture shelf space at leading
mass merchants and other retailers. Many of Racing Champions' competitors have
greater financial, technical, marketing and other resources than Racing
Champions.
MANUFACTURING
Hong Kong Office - Racing Champions Limited, the Company's Hong Kong subsidiary
(the "Hong Kong Subsidiary"), has an office in Kowloon, Hong Kong and in the
Racing Industrial Zone in China and employs 164 people who oversee all aspects
of the manufacturing of Racing Champions' vehicle replicas and certain other
products. The Hong Kong Subsidiary sources raw materials and packaging, performs
engineering and graphic art functions, executes the production schedule,
provides on-site quality control, facilitates third-party safety testing and
coordinates the delivery of shipments for export from Hong Kong to the United
States.
Far East Manufacturing - Virtually all of Racing Champions' products, except
sports trading cards and apparel and souvenirs, are manufactured in China. The
Company employs four independently owned dedicated manufacturers who manufacture
only the Company's products as well as several contract manufacturers. All
products are manufactured to Racing Champions' specifications using molds and
tooling that are owned by Racing Champions. The dedicated and contract
manufacturers own the manufacturing equipment and machinery, and purchase raw
materials, hire workers and plan production which includes subassemblies, final
assemblies and packaging. Racing Champions purchases fully assembled and
packaged finished goods in master cartons for distribution to its customers.
Most of the dedicated and contract manufacturers have been supplying the Company
for more than five years. The Company's purchases in 1999 from the dedicated
manufacturers, Win Yield, Sharp Success, Sunrise and Shun Fung were 24.3%,
27.5%, 11.5%, and 5.2%, respectively, of the Company's total purchases of
die-cast vehicle replicas.
Collectible Sports Trading Cards Manufacturing - The production of collectible
sports trading cards begins with the conceptualization and design of a card
series. Racing Champions must coordinate the activities of various third party
contractors in the design and production process, including photographers,
printers, foil stampers and inkjetters. Following printing, foil stamping,
inkjetting and the placement of any other special effects on the cards, the card
sheets are delivered to a packager for cutting, collating and packaging. Racing
Champions generally prefers to coordinate the production of its collectible
sports trading cards through a limited number of suppliers. Racing Champions
believes that a number of alternate suppliers are available for each of the
primary functions necessary for production of collectible sports trading cards.
The production process generally requires from 90 to 180 days from
conceptualization of a card set to shipment. During the production process,
production delays are sometimes experienced due to a variety of factors such as
irregularities in foil stamping, chipping of trading cards during the cutting
process, and printing errors. In the past, Racing Champions has also encountered
production errors by its suppliers which have caused excess returns by
customers.
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Due to the lead time required for the production of collectible sports trading
cards, Racing Champions is required to develop production forecasts for the sale
of new products. These production forecasts are based on management's best
estimate of anticipated sales, which estimate in turn is based upon prior demand
for similar products, input received from distributors, market conditions at the
time a card is conceptualized and other factors. In the event Racing Champions'
production forecasts do not correctly estimate demand for collectible sports
trading cards, Racing Champions may be required to write down excess inventory
or may miss potential market opportunities.
Product Development - New product development is constantly occurring as Racing
Champions seeks to improve quality, update styles and add product lines. New
product design and updates are generally initiated domestically. The designing
process can take several days or a number of months depending upon whether the
process involves an enhancement to an existing product or a new product design.
Racing Champions has been able to develop new products and make design changes
quickly due to its rapid approval process, integrated Hong Kong Subsidiary and
dedicated and contract manufacturing.
Tooling - Racing Champions is continuously developing new tooling and molds to
produce its die-cast products. Racing Champions' engineering staff works closely
with outside tool makers to design and create new tooling. Depending on the size
and complexity of the model, tools can cost from $20,000 to $150,000. Racing
Champions often produces back-up tools for high volume models. Racing Champions
owns all of its tools and provides them to the manufacturers during production.
Tools are returned to Racing Champions when a product is no longer in production
and are stored for future use or destroyed.
Graphics - Existing product enhancements typically include graphics changes to
the vehicles for new color schemes, sponsor changes and/or driver changes and
revisions to product packaging. Graphics changes are photographed and forwarded
to the Hong Kong Subsidiary for incorporation into Racing Champions' product
line. Racing Champions' graphic arts personnel will redesign the car decorating
process in order to reflect the graphics changes. All changes are reviewed
domestically by Racing Champions personnel and samples are sent to racing teams,
sponsors or other licensors prior to production for their approval.
Product Safety - Racing Champions' products are designed, manufactured, packaged
and labeled to conform with the safety requirements of the American Society for
Testing and Materials and the Consumer Product Safety Commission and are
periodically reviewed and approved by independent safety testing laboratories.
Racing Champions carries product liability insurance coverage with a limit of
$26.0 million per occurrence. As of December 31, 1999, Racing Champions has
never received a product liability claim.
EMPLOYEES
As of December 31, 1999, Racing Champions had 519 employees, six of whom were
employed part-time. Racing Champions emphasizes the recruiting and training of
high quality personnel and, to the extent possible, promotes people from within
Racing Champions. 69 of Racing Champions' employees, all of whom work in the
distribution facility in Dyersville, IA, are covered by a collective bargaining
agreement. Racing Champions considers its employee relations to be good. Racing
Champions' continued success will depend in part on its ability to attract,
train and retain qualified personnel at all of its locations.
ITEM 2 : PROPERTIES
As of December 31, 1999, Racing Champions' facilities were as follows:
<TABLE>
<CAPTION>
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
- -------------------------------------- ----------- -------------------- --------------------
<S> <C> <C> <C>
Corporate Headquarters . . . . . . . . 12,280 Glen Ellyn, IL October 2000
Far East Headquarters. . . . . . . . . 19,828 Kowloon, Hong Kong June 2002
Racing Champions, Inc. warehouse . . . 31,583 Chicago, IL December 2000
Racing Champions South, Inc.
office and warehouse . . . . . . . . 40,000 Mooresville, NC February 2002
Racing Champions Ertl, Inc.
office and warehouse . . . . . . . . 499,000 Dyersville, IA Owned
Racing Champions International Limited Exeter,
office and warehouse . . . . . . . . 32,220 United Kingdom May 30, 2014
Racing Champions International Limited Nottingham,
warehouse. . . . . . . . . . . . . . 71,026 United Kingdom September 28, 2004
Racing Industrial Zone office,
quarters and storage . . . . . . . . 42,098 Dongguan City, China March 2001/June 2002
</TABLE>
The Chicago warehouse was closed and the lease agreement terminated on January
31, 2000 as part of the warehousing and product fulfillment integration efforts
with the facility in Dyersville, Iowa.
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ITEM 3 : LEGAL PROCEEDINGS
In May 1997, a proposed class action lawsuit was filed against several trackside
vendors, including Green's Racing Souvenirs, Inc., a wholly owned subsidiary of
the Company ("GRS"). The complaint alleges that the defendants have engaged in
price fixing activities at certain NASCAR events in violation of federal anti-
trust laws. The plaintiffs seek an unspecified amount of compensatory and
punitive damages and also an order enjoining the alleged price fixing practices.
GRS has entered into a joint defense agreement with certain co-defendants
pursuant to which defense costs are being reimbursed by defendant Americrown
Service Corporation. The existing joint defense agreement is to remain in effect
through class certification proceedings. The Company expects that GRS will
vigorously defend against the action, although no assurances can be given as to
the outcome of this matter.
In August 1999, a proposed class action lawsuit was filed against the Company.
The complaint alleges violations of RICO and the California Unfair Competition
Law. The plaintiffs allege that the Company has operated an illegal gambling
operation by selling packs of sports trading cards containing random assortments
of cards of varying values. The Company disputes this claim and intends to
vigorously defend its position, although no assurances can be given as to the
outcome of this matter.
ITEM 4 : SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5 : MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently traded on the Nasdaq National Market under the
symbol "RACN". The following table sets forth the high and low closing sale
prices for the Common Stock as reported by the Nasdaq National Market for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
QUARTER HIGH LOW
- ---------------------------- ------ ------
<S> <C> <C>
First. . . . . . . . . . . . $11.06 $ 7.81
Second . . . . . . . . . . . $12.63 $10.88
Third. . . . . . . . . . . . $13.50 $ 8.00
Fourth . . . . . . . . . . . $14.50 $10.25
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
QUARTER HIGH LOW
- ---------------------------- ------ ------
<S> <C> <C>
First. . . . . . . . . . . . $14.50 $10.63
Second . . . . . . . . . . . $17.88 $ 6.50
Third. . . . . . . . . . . . $ 8.13 $ 5.69
Fourth . . . . . . . . . . . $ 5.75 $ 3.56
</TABLE>
At December 31, 1999, there were approximately 175 holders of record of Common
Stock.
The Company has not paid any cash dividends on its Common Stock. The Company
intends to retain any earnings for use in the operation and expansion of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6 : SELECTED FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected financial data with respect to the
Company for each of the periods indicated. The data for the year ended December
31, 1995 and for the four months ended April 30, 1996 are derived from audited
combined financial statements of the Predecessor - RCI Group. The data for the
fiscal years ended March 31, 1995 and 1996 and for the one month ended April 30,
1996 are derived from audited combined financial statements of the Predecessor-
RCL Group. The data for the year ended December 31, 1996 is derived from the
Company's audited consolidated financial statements. The data for the years
ended December 31, 1997, 1998 and 1999 are derived from the Company's
consolidated financial statements which have been audited by Arthur Andersen
LLP, as indicated in their report included elsewhere herein.
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The pro forma financial data for the year ended December 31, 1997 which gives
effect to the acquisitions of High Performance Sports Marketing, Inc. and Press
Pass Partners by Wheels Sports Group Inc. ("Wheels") as if the purchases had
occurred on January 1, 1997 and as if Racing Champions' initial public offering
and Wheels' initial public offering had occurred on January 1, 1997 are
presented for informational purposes only and are not necessarily indicative of
the results of future operations of the Company or the actual results that would
have been achieved had such events occurred on such date.
The pro forma financial data for the year ended December 31, 1999, which gives
effect to the acquisition of The Ertl Company, Inc. and certain of its
affiliates ("Ertl") as if the purchase had occurred on January 1, 1999, is
presented for informational purposes only and is not necessarily indicative of
the results of future operations of the Company or the actual results that would
have been achieved had such events occurred on such date.
<TABLE>
<CAPTION>
PREDECESSOR - RCI
GROUP (1) THE COMPANY PRO FORMA
------------------ ----------------------------------------- --------------------
Four
Year months Year Year Year Year Year Year
ended ended ended ended ended ended ended ended
Dec. 31 Apr. 30 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31
1995 1996 1996 1997 (2) 1998 (2) 1999 (2) 1997 (2) 1999 (2)
-------- -------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales . . . . . . . . . $ 48,592 $ 16,614 $ 56,908 $ 83,745 $156,464 $231,360 $105,605 $266,340
Gross profit. . . . . . . . 23,036 7,210 30,974 45,103 85,614 98,677 52,332 109,586
Operating income. . . . . . 9,724 108 12,098 13,262 23,123 8,972 13,040 4,735
Net income (loss) from
continuing operations . . $ 9,392 $ 72 $ 3,372 $ 4,536 $ 11,741 $ 535 $ 5,418 $ (3,471)
-------- -------- -------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Net income (loss) from
continuing operations
before extraordinary item
Basic . . . . . . . . . $ 0.29 $ 0.33 $ 0.73 $ 0.03 $ 0.34 $ (0.21)
Diluted . . . . . . . . 0.28 0.32 0.71 0.03 0.33 --
Cash dividends. . . . . . . -- -- -- -- -- --
Book value
Basic . . . . . . . . . $ 0.35 $ 7.46 $ 11.01 $ 6.27
Diluted . . . . . . . . 0.34 7.26 10.64 6.14
-------- -------- -------- --------- --------- --------- --------- ---------
Weighted average common
shares and common share
equivalents outstanding
Basic . . . . . . . . . 9,318 12,279 15,982 16,249
Diluted . . . . . . . . 9,645 12,621 16,426 16,588
-------- -------- -------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR - RCL GROUP (1)
Fiscal Years One month
ended March 31, ended
1995 1996 Apr. 30, 1996
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales . . . . . . . . $22,331 $37,322 $ 3,852
Gross profit. . . . . . . 5,288 7,085 752
Operating income. . . . . 2,066 2,725 507
Net income. . . . . . . . $ 2,079 $ 2,603 $ 488
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, 1999 ACTUAL
<S> <C>
BALANCE SHEET DATA:
Working capital. . . . . . $ 39,028
Total assets . . . . . . . 276,282
Total debt . . . . . . . . 123,000
Total stockholders' equity 101,848
<FN>
_______________
(1) On April 30, 1996, Racing Champions Corporation acquired the RCI Group
and the RCL Group in a recapitalization transaction. Accordingly, the RCI Group
and RCL Group selected financial data is provided as predecessor companies to
Racing Champions Corporation (the Registrant).
(2) The following supplemental financial data for the Company for the years
ended December 31, 1999, 1998 and 1997 give effect to the acquisition of The
Ertl Company, Inc. as if the purchase had occurred on January 1, 1999, give
effect to the acquisitions of High Performance Sports Marketing, Inc. and Press
Pass Partners by Wheels as if the purchases had occurred on January 1, 1997,
assume that the initial public offerings of Racing Champions and Wheels occurred
on January 1, 1997, and exclude certain nonrecurring charges as reflected in the
supplemental footnotes.
</TABLE>
7
<PAGE>
SUPPLEMENTAL FINANCIAL DATA
<TABLE>
<CAPTION>
(Amounts in thousands, YEAR ENDED PERCENT OF YEAR ENDED PERCENT OF YEAR ENDED PERCENT OF
except per share data) DEC. 31, 1999(a) NET SALES DEC. 31, 1998(b) NET SALES DEC. 31, 1997(c) NET SALES
<S> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . $ 266,340 100.0% $ 156,464 100.0% $ 101,487 100.0%
Gross profit. . . . . . 115,387 43.3 85,614 54.7 52,790 52.0
Operating income. . . . 16,936 6.4 28,906 18.5 20,813 20.5
Net income. . . . . . . 3,788 1.4 15,602 10.0 10,081 9.9
Net income per share:
Basic . . . . . . . . $ 0.23 $ 0.98 $ 0.63
Diluted . . . . . . . $ 0.23 $ 0.95 $ 0.61
<FN>
__________________
(a) Amounts exclude the following items: $2.4 million in inventory write-up in connection with the purchase of
Ertl, $3.4 million in inventory write downs incurred in connection with the inventory liquidations and SKU reductions
related to the integration with Ertl and $6.4 million in restructuring and other charges that the Company took during
the second quarter of 1999 related to the alignment of Racing Champions product lines, operations and direct mail
efforts with the consolidated plans for those same areas at Ertl.
(b) Amounts exclude nonrecurring, merger-related and restructuring charges in connection with the acquisition of
Wheels of approximately $5.5 million, as well as approximately $0.3 million in nonrecurring compensation and rent
expense, $0.4 million in interest on deferred financing charges and $1.8 million in extraordinary charges for the
early extinguishment of debt. Merger transaction costs consisted primarily of fees for investment bankers of
approximately $0.6 million, professional advisers including legal and accounting of approximately $0.9 million and
financial printing and other related costs of approximately $0.6 million. Restructuring costs included primarily
severance for terminated employees of approximately $1.1 million, agreement extension costs of approximately $1.5
million and facility and other exit costs of approximately $0.8 million.
(c) Amounts exclude the following items: (1) charges for the discontinued operations of World of Racing, Inc. of
$1.5 million, (2) charges for the discontinued home decor product lines, including the goodwill related to the
Emerald Sports Group, Inc. acquisition of $0.7 million, (3) expenses related to the 1997 acquisitions which were
treated as pooling-of-interests of $0.3 million, (4) accounting and audit fees of $0.5 million related to acquisition
and year end accounting and auditing work, (5) one-time bonus payments of $0.2 million, (6) a net loss from the
Wheels' trading card operations of $2.9 million which includes approximately $0.7 million related to defective
products, (7) liquidation of discontinued High Performance product lines which generated $1.0 million in sales and
$1.3 million in cost of sales in 1997, (8) one-time bonus payments of $1.6 million which primarily relate to a
transfer of equity ownership to a key employee immediately prior to the Wheels acquisition of High Performance, (9)
costs of $0.3 million incurred in connection with the integration of the other Wheels acquisitions into the High
Performance facility in Mooresville, NC, (10) the impact of a discontinued Press Pass product line which generated
minimal net sales and $0.5 million in cost of sales in 1997, and (11) compensation and rent expense of $0.6 million.
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless indicated otherwise, references to "Racing Champions" or the "Company"
are to Racing Champions Corporation and its subsidiaries, including the
operations of the RCI Group and the RCL Group prior to April 30, 1996,
references to "Wheels" are to Wheels Sports Group, Inc. prior to its acquisition
by the Company on June 12, 1998, references to "Racing Champions South" are to
Wheels Sports Group, Inc., which was renamed Racing Champions South, Inc., after
its acquisition by the Company on June 12, 1998, references to "Ertl" are to The
Ertl Company, Inc., prior to the acquisition by the Company on April 13, 1999
and references to "Racing Champions Ertl" are to The Ertl Company, Inc., which
was renamed Racing Champions Ertl, Inc. after its acquisition by the Company on
April 13, 1999.
OVERVIEW
CORPORATE AND PRODUCT HISTORY
Racing Champions is a leading producer and marketer of collectibles sold at more
than 20,000 North American retail outlets. The Company is best known for its
extensive lines of officially licensed NASCAR die-cast racing replicas, Press
Pass trading cards, NASCAR souvenirs and apparel, Ertl agricultural, custom
imprint and American Muscle vehicle replicas and AMT model kits. The Company has
license agreements with major U.S. automotive manufacturers and many of the
major motorsports sanctioning bodies, sponsors, team owners and their drivers,
as well as entertainment and media companies for their well-known characters and
properties. The Company sells its products primarily in North America. Racing
Champions Limited, based in Hong Kong and China, oversees the production of the
Company's products. Racing Champions International Limited, based in the United
Kingdom, sells the Company's products in Europe and Asia.
8
<PAGE>
On April 30, 1996, the Investor Group led by Willis Stein & Partners, L.P., a
private investment fund, consummated the Recapitalization in which Racing
Champions was formed as a new holding company for the purpose of acquiring the
domestic operations of the RCI Group and the foreign operations of the RCL
Group. This acquisition was accounted for using the purchase method of
accounting.
In June 1997, Racing Champions sold 5,357,142 shares of its common stock in an
initial public offering. The net proceeds to the Company from the sale of the
stock were approximately $69 million, after deduction of commissions and
offering expenses. The net proceeds were used to redeem preferred stock issued
in the Recapitalization, repay stockholder notes issued in the Recapitalization
and repay bank borrowings incurred in connection with the Recapitalization.
In June 1998, Racing Champions acquired Wheels Sports Group, Inc., subsequently
renamed Racing Champions South, Inc. Racing Champions South markets and
distributes collectible sports trading cards related to the NASCAR, football and
basketball markets, and NASCAR souvenirs and apparel. In connection with this
acquisition, Racing Champions issued 2.7 million shares of Common Stock and
assumed outstanding options and warrants of Racing Champions South exercisable
to purchase up to 0.8 million shares of Common Stock. The transaction was
accounted for as a pooling of interests. All consolidated financial information
has been restated as if the transaction had been effected as of the beginning of
the earliest reporting period. In connection with the merger, the Company
recorded a charge to operating expenses in the second quarter of 1998 of
approximately $5.5 million, including $2.1 million for direct and other merger
related costs and $3.4 million relating to restructuring of the Companies'
combined operations. Merger transaction costs consisted primarily of fees for
investment bankers of approximately $0.6 million, professional advisors
including legal and accounting of approximately $0.9 million and financial
printing and other related costs of approximately $0.6 million. Restructuring
costs included primarily severance for terminated employees of approximately
$1.1 million, agreement extension costs of approximately $1.5 million and
facility and other exit costs of approximately $0.8 million. These costs were
expended by the Company prior to December 31, 1998.
Racing Champions decided to restructure Racing Champions South primarily to
facilitate the integration of six acquisitions made by Wheels in 1997. The two
largest acquisitions were made late in the fourth quarter of 1997, and had not
yet been fully integrated into the operations of Wheels. Management also wanted
to realign the operations of Wheels to conform to Racing Champions. This meant
integrating and operating under Racing Champions' internal operating policies
and procedures, primarily in the areas of sales and marketing, production and
order processing, and finance and administration. All restructuring charges were
accrued and expensed in the financial statements during the second quarter of
1998. The restructuring was substantially completed by the end of the third
quarter of 1998, with all restructuring charges expended before December 31,
1998. During this period, there were no changes in the original restructuring
plan or in the estimates recorded. The Company believes that the restructuring
will lower operating expenses, primarily in the area of selling, general and
administrative costs, in future periods.
As noted above, Wheels consummated a number of acquisitions during 1997 and
incurred significant expenses in connection with such acquisitions. A summary of
these acquisitions follows.
Diamond Sports Group, Inc. and Green's Racing Souvenirs, Inc. - On June 30,
1997, Wheels acquired 100% of the common stock of Diamond Sports Group, Inc.
("Diamond"), a privately-held corporation located in Charlotte, North Carolina,
in exchange for 485,000 shares of Wheels' common stock. Diamond is engaged in
merchandising NASCAR-oriented products and providing motorsports related
hospitality management and corporation promotions.
On October 4, 1997, Wheels acquired 100% of the common stock of Green's Racing
Souvenirs, Inc. ("GRS"), a privately-held company located in South Boston,
Virginia, in exchange for 175,000 shares of Wheels' common stock. GRS is engaged
in merchandising NASCAR-oriented racing souvenirs at race tracks.
Wheels accounted for each of the Diamond and GRS transactions using the
pooling-of-interests method of accounting for business combinations.
Accordingly, all prior period consolidated financial statements have been
restated to include the combined results of operations, financial position and
cash flows of Diamond and GRS.
9
<PAGE>
World of Racing, Inc. - Wheels acquired World of Racing, Inc. ("WOR") through a
wholly owned subsidiary on January 28, 1997, by exchanging 310,000 shares of
Wheels' common stock valued at $620,000 for 100% of the common stock of WOR. WOR
was a privately-held South Carolina corporation incorporated in August 1996 to
operate a fantasy race game. The transaction resulted in WOR becoming a
wholly-owned subsidiary of Wheels. Effective June 30, 1997, Wheels' Board of
Directors voted to discontinue the operations of WOR and dispose of its assets.
The acquisition of WOR was originally accounted for as a pooling-of-interests,
but the discontinuance of its operations required the use of purchase
accounting. The $561,914 unamortized goodwill, along with property, plant and
equipment with a net book value of approximately $132,000, were written off as
of June 30, 1997. In addition, as of June 30, 1997, Racing Champions recorded
estimated operating losses from June 30, 1997, through the end of the phase-out
period of approximately $222,000. Net liabilities of WOR at December 31, 1997,
amounted to approximately $116,000 and are included in other current liabilities
on the Company's consolidated balance sheet. The loss from operations and the
loss on disposition are presented as discontinued operations on the Company's
consolidated statement of income for the year ended December 31, 1997. Net
sales of WOR amounted to approximately $174,000 for the year ended December 31,
1997.
Emerald Sports Group, Inc. - On August 5, 1997, Wheels acquired 100% of the
common stock of Emerald Sports Group, Inc. ("Emerald"), a privately-held
corporation located in Charlotte, North Carolina, in exchange for 65,000 shares
of Wheels' common stock valued at $364,000. The transaction was accounted for as
a purchase and resulted in excess purchase price over the fair value of net
assets acquired of approximately $408,000. In December 1997, Wheels decided to
merge the operations of Emerald into those of Diamond and to dispose of
substantially all of Emerald's assets, with the exception of inventory, as of
December 31, 1997. As a result of the disposition of substantially all of
Emerald's assets and the discontinuance of its operations, Wheels recorded a
provision to reflect the impairment of unamortized goodwill related to the
Emerald acquisition of approximately $364,000, which is included in other
expense on the Company's consolidated statement of income for the year ended
December 31, 1997. In addition, costs totaling approximately $200,000 related to
the disposal were accrued at December 31, 1997, and subsequently paid in 1998.
High Performance Sports Marketing, Inc. - Effective October 24, 1997, Wheels
consummated the acquisition of High Performance Sports Marketing, Inc. ("High
Performance"). High Performance is engaged in the merchandising of NASCAR
apparel and souvenirs through mass market retailers and convenience stores.
Consideration paid by Wheels consisted of cash in the amount of $1,672,000,
promissory notes totaling $1,000,000 and 444,444 shares of Wheels' common stock
valued at $4,000,000. In addition, the terms of the merger agreement required an
additional cash payment to be made at closing of $3,250,000 (the "Additional
Cash Consideration"). Payment of the Additional Cash Consideration was made from
escrowed funds established in connection with Wheels' credit facility. In April
1998, Wheels negotiated the release of $500,000 of escrowed funds as partial
satisfaction of the Additional Cash Consideration. In addition, Wheels agreed to
pay an extension fee of $450,000 to the former High Performance stockholders,
$250,000 of which was paid on April 22, 1998. The remaining $200,000 of the
extension fee and the remaining $2,750,000 of the Additional Cash Consideration
was paid in June 1998. The transaction was accounted for as a purchase and
resulted in excess purchase price over the fair value of net assets acquired of
approximately $9.4 million.
Press Pass Partners - Effective December 31, 1997, Wheels consummated the
acquisition of Press Pass Partners ("Press Pass") through a transaction in which
the two corporate partners of Press Pass were merged into two newly formed
subsidiaries of Wheels. Press Pass is a designer and marketer of collectible
trading cards featuring NASCAR and other sports personalities. Consideration
paid by Wheels consisted of cash of $3,100,000, promissory notes totaling
$1,000,000 and 600,000 shares of Wheels' common stock valued at $4,200,000. The
promissory notes were subsequently repaid in 1998. The transaction was accounted
for as a purchase and resulted in excess purchase price over the fair value of
net assets acquired of approximately $7.8 million.
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of Ertl for approximately $94.6 million. Ertl develops,
markets and distributes agricultural and imprint die-cast collectibles and hobby
model kits. 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. The
excess of the aggregate purchase price over the fair market value of net assets
acquired of approximately $35.0 million is being amortized over 40 years.
10
<PAGE>
SALES AND EXPENSES
Racing Champions' sales are recognized based upon transfer of title of product
to customers. Racing Champions does not sell its products on consignment and
ordinarily accepts returns only for defective merchandise. Returns have
historically not been significant. In certain instances, where retailers are
unable to resell the quantity of products which they have purchased from Racing
Champions, Racing Champions may, in accordance with industry practice, assist
retailers in selling such excess inventory by offering credits and other price
concessions. These credits and other price concessions are evaluated and issued
annually.
Mass merchant retailers purchase Racing Champions' products either in the United
States or the United Kingdom with credit terms ranging from 30 to 120 days or
directly in Hong Kong with payment made by irrevocable letter of credit or wire
transfer. By acquiring the products in Hong Kong, many of Racing Champions'
retail customers are able to realize efficiencies with respect to cost and
logistics in the distribution of the products to their retail locations. Because
Racing Champions incurs significantly lower distribution and administrative
costs with respect to direct shipments to customers from Hong Kong, a price
discount of approximately 15% to 25% is granted. As a result, Hong Kong
shipments have lower gross profit margins than domestic shipments. Therefore,
the annual fluctuations in the mix of domestic versus Hong Kong shipments will
affect year-to-year comparability of net sales and gross profit margins.
However, Racing Champions believes that the operating income margin is
comparable for Hong Kong shipments due to the saved distribution and
administrative costs. For the years ended December 31, 1999, 1998 and 1997, Hong
Kong shipments constituted 22%, 45% and 52%, respectively, of net sales.
Racing Champions' three largest expense categories are cost of sales, royalties
and sales commissions. Cost of sales consists primarily of purchases of finished
products from Racing Champions' manufacturing suppliers. Royalties vary by
product category and are paid on a quarterly basis. Multiple royalties may be
paid on a product to various licensors. In 1999, aggregate royalties by product
ranged from approximately 1% to 22% of Racing Champions' selling price. Sales
commissions ranging from 1.5% to 15% of net sales are paid quarterly to Racing
Champions' external sales representative organizations. In 1999, sales subject
to commissions represented 32% of total net sales.
At December 31, 1997, Wheels had established reserves for doubtful accounts,
returns and allowances of $2,386,000. During 1997, it became apparent that a
trading card set issued in late 1996, Crown Jewels Elite, had been improperly
packed by Wheels' contract packer. As a result, substantial quantities of that
product which had been purchased by distributors were not fit for sale on a
retail basis. Although Wheels encouraged distributors to continue to sell the
product, Wheels accepted product returns and issued credits and price
concessions. Wheels recognized that a significant portion of the improperly
packaged card sets would eventually be returned. Also contributing to the need
for an increased reserve for doubtful accounts, returns and allowances at
December 31, 1997 was an overall weakness in the trading card industry which
reduced the ability of Wheels' major customers to sell through to retail,
thereby increasing the likelihood of returns or other credits. Several major
customers experienced financial difficulties during the later part of 1997, also
causing Wheels to increase its reserves accordingly.
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 audited consolidated
financial statements and notes thereto included elsewhere herein.
11
<PAGE>
RESULTS OF OPERATIONS
For the Year ended December 31,
<TABLE>
<CAPTION>
For the Year ended December 31,
- -----------------------------------------------------------------------------------------------------
(Amounts in thousands, 1999 1999 1998 1998 1997 1997
except per share data) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . $231,360 100.0% $156,464 100.0% $83,745 100.0%
Cost of sales . . . . . . . . . . . . . 132,683 57.3% 70,850 45.3% 38,642 46.1%
- -----------------------------------------------------------------------------------------------------
Gross profit. . . . . . . . . . . . . . 98,677 42.7% 85,614 54.7% 45,103 53.9%
Selling, general and
administrative expenses . . . . . . . 79,762 34.5% 54,302 34.7% 29,625 35.4%
Amortization of intangible assets . . . 3,543 1.5% 2,663 1.7% 2,216 2.7%
Restructuring and other charges . . . . 6,400 2.8% -- 0.0% -- 0.0%
Merger related costs. . . . . . . . . . -- 0.0% 5,526 3.5% -- 0.0%
- -----------------------------------------------------------------------------------------------------
Operating income. . . . . . . . . . . . 8,972 3.9% 23,123 14.8% 13,262 15.8%
Interest expense. . . . . . . . . . . . 7,650 3.3% 2,751 1.8% 5,220 6.2%
Other expense (income). . . . . . . . . (105) 0.0% 400 0.2% 200 0.2%
- -----------------------------------------------------------------------------------------------------
Income before income taxes. . . . . . . 1,427 0.6% 19,972 12.8% 7,842 9.4%
Income tax expense. . . . . . . . . . . 892 0.4% 8,231 5.3% 3,306 4.0%
- -----------------------------------------------------------------------------------------------------
Net income from continuing
operations before extraordinary item. 535 0.2% 11,741 7.5% 4,536 5.4%
Discontinued operations, net of tax
benefit of $428 . . . . . . . . . . . -- 0.0% -- 0.0% 1,032 1.2%
Extraordinary charge for early
extinguishment of debt, net
of tax benefit of $1,188. . . . . . . -- 0.0% 1,782 1.1% -- 0.0%
- -----------------------------------------------------------------------------------------------------
Net income. . . . . . . . . . . . . . . $ 535 0.2% $ 9,959 6.4% $ 3,504 4.2%
- -----------------------------------------------------------------------------------------------------
Dividends accrued on preferred stock. . -- 0.0% -- 0.0% 478 0.6%
- -----------------------------------------------------------------------------------------------------
Net income available to common
stockholders. . . . . . . . . . . . . $ 535 0.2% $ 9,959 6.4% $ 3,026 3.6%
- -----------------------------------------------------------------------------------------------------
Earnings per share:
Net income per share
Basic . . . . . . . . . . . . . . . $ 0.03 $ 0.62 $ 0.25
Diluted . . . . . . . . . . . . . . $ 0.03 $ 0.61 $ 0.24
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . 16,249 15,982 12,279
Diluted . . . . . . . . . . . . . . 16,588 16,426 12,621
- -----------------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales increased $74.9 million, or 47.9%, to $231.4 million for the year
ended December 31, 1999 from $156.5 million for the year ended December 31,
1998. This increase was primarily attributable to the acquisition of Ertl. The
overall die-cast collectibles category increased approximately 39%. Non-racing
die-cast collectibles increased approximately 490%, primarily due to the
addition of the American Muscle, custom imprint and agricultural and heavy
equipment product lines that were acquired in connection with the Ertl
acquisition. Die-cast racing replicas decreased approximately 60%, primarily in
NASCAR, with weak performance for the year as compared to last year's NASCAR
50th Anniversary line. Sales of other products increased approximately 77%,
primarily due to the addition of the licensed preschool lines and model kits
that were acquired with Ertl. Sales of NASCAR apparel and souvenirs decreased
approximately 47%, mostly due to planned reductions based on focusing product
lines and reducing low volume SKU's in the apparel and souvenirs category. The
increase in sales, year over year, was due to the increase in volume and product
lines, primarily as a result of the Ertl acquisition, as there were no
significant changes in pricing in 1999.
GROSS PROFIT
Gross profit increased $13.1 million, or 15.3%, to $98.7 million for the year
ended December 31, 1999 from $85.6 million for the year ended December 31, 1998.
The gross profit margin (as a percentage of net sales) decreased to 42.7% in
1999 from 54.7% in 1998. The Company earned a higher gross profit margin during
the year ended December 31, 1998 mostly due to the special 50th Anniversary
NASCAR die-cast and souvenir products that carried higher gross margins. The
lower than planned sales
12
<PAGE>
volume in the second through fourth quarters of 1999 negatively impacted the
Company's gross profit margin. Also, the addition of the Ertl operations, 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 in 1999. Lastly, the effect of close-outs that were made,
primarily in the fourth quarter, negatively affected the gross profit margin.
These close-outs were necessary to liquidate excess inventories at the end of
the year in light of the overall market softness. There were no major changes in
the components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $25.5 million, or 47.0%,
to $79.8 million for the year ended December 31, 1999 from $54.3 million for the
year ended December 31, 1998. The increase in selling general and administrative
expenses is due to the acquisition of Ertl in early 1999. As a percentage of net
sales, selling, general and administrative expenses decreased to 34.5% for the
year ended December 31, 1999 from 34.7% for the year ended December 31, 1998.
This slight decrease as a percentage of net sales is due to tight management of
operating expenses. Furthermore, some operating efficiencies are beginning to be
seen as the manufacturing, order processing and distribution are in the final
phases of consolidation and full integration. Amortization expense increased
approximately $0.9 million to $3.5 million for the year ended December 31, 1999
from $2.6 million for the year ended December 31, 1998. This increase is a
result of the intangible assets created in the acquisition of Ertl.
OPERATING INCOME
Operating income decreased $14.1 million, or 61.0%, to $9.0 million for the year
ended December 31, 1999 from $23.1 million for the year ended December 31, 1998.
As a percentage of net sales, operating income decreased to 3.9% for the year
ended December 31, 1999 from 14.8% for the year ended December 31, 1998. The
decrease in operating income is primarily a result of the $6.4 million in
restructuring and other charges that the Company took during the second quarter
of 1999 and the lower than planned sales volume in the second through fourth
quarters of 1999. The restructuring and other charges relate to the alignment of
the Racing Champions operations, product lines and direct marketing efforts with
the consolidated plans for those same areas of Ertl. Approximately $2.2 million
of the charges relate to the re-focusing of the direct mail programs, $4.0
million of the charges relate to the reduction and consolidation of product
lines and the remaining $0.2 million of the charges relate to operational
consolidation, including severance and relocation costs. For the year ended
December 31, 1999, all of the charges related to direct mail were expended,
approximately $3.7 million of the reduction and consolidation of product lines
were expended and approximately $0.1 million of the charges related to severance
and relocation were expended.
INTEREST EXPENSE
Interest expense of $7.7 million for the year ended December 31, 1999 and $2.8
million for the year ended December 31, 1998 related primarily to bank term
loans and line of credit. The increase in interest expense, year to year, is due
to increased borrowings in 1999 in connection with the acquisition of Ertl.
INCOME TAX
Income tax expense for the years ended December 31, 1999 and 1998 include
provisions for federal, state and foreign income taxes at an effective rate of
62.5% and 41.2%, respectively. The increase in rate in 1999 is due primarily to
the non-deductible goodwill generated in the acquisition of Ertl.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales increased $72.8 million, or 87.0%, to $156.5 million for the year
ended December 31, 1998 from $83.7 million for the year ended December 31, 1997.
This increase is primarily due to 66.6% growth in collectible die-cast replicas.
Within the collectible die-cast replica category, custom, classic and fantasy
vehicles increased 92.6%, primarily due to the introduction of WCW Nitro Street
Rods and the effect of a full year of Hot Rod custom replicas. The NASCAR
category increased 89.1% primarily due to the effect of a full year of Stock
Rods and due to the special editions that were available in 1998 to commemorate
NASCAR's 50th Anniversary. Net sales of other racing replicas and pewter figures
each decreased by approximately 70%. This decrease was due to a greater focus of
resources and capacity on the NASCAR and classic, custom and fantasy die-cast
vehicle categories. Trading cards and apparel and souvenirs increased by
approximately 50% due to the full year impact from the acquisitions made in 1997
and due to increased product distribution in 1998. Most of the increases in all
categories in 1998 were due to volume increases as prices increased only by
approximately 3% in most product lines in 1998.
13
<PAGE>
GROSS PROFIT
Gross profit increased $40.5 million, or 89.8%, to $85.6 million for the year
ended December 31, 1998 from $45.1 million for the year ended December 31, 1997.
The gross profit margin (as a percentage of net sales) increased to 54.7% in
1998 from 53.9% in 1997. The gross profit margin increase is due to the increase
in volume in 1998 and also due to the increase in domestic shipments (to 55% of
net sales in 1998 from 48% of net sales in 1997) which have a higher gross
profit margin than Hong Kong shipments. This increase was partially offset by
increased cost of sales on the other collectible and apparel and souvenir lines.
There were no major changes in the components of cost of sales in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $24.7 million, or 83.4%,
to $54.3 million for the year ended December 31, 1998 from $29.6 million for the
year ended December 31, 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 34.7% for the year ended December 31, 1998
from 35.4% for the year ended December 31, 1997. The decrease in selling,
general and administrative expenses as a percentage of net sales was a result of
spreading fixed selling and administrative expenses over higher sales volume.
Merger related costs of $5.5 million included: (a) transaction costs of $2.1
million consisting of fees for investment bankers of approximately $0.6 million,
professional advisors including legal and accounting of approximately $0.9
million and financial printing and other related costs of approximately $0.6
million; and (b) restructuring costs of $3.4 million consisting of severance for
terminated employees of approximately $1.1 million, agreement extension costs of
approximately $1.5 million and facility and other exit costs of approximately
$0.8 million. Amortization expense of $2.6 million and $2.2 million for the
years ended December 31, 1998 and 1997, respectively, related primarily to
intangible assets created in the Recapitalization.
OPERATING INCOME
Operating income increased $9.8 million, or 73.7%, to $23.1 million for the year
ended December 31, 1998 from $13.3 million for the year ended December 31, 1997.
As a percentage of net sales, operating income decreased to 14.8% for the year
ended December 31, 1998 from 15.8% for the year ended December 31, 1997. This
decrease was due to $5.5 million in merger-related costs incurred in connection
with the acquisition of Wheels Sports Group, Inc.
INTEREST EXPENSE
Interest expense of $2.8 million and $5.2 million for the years ended December
31, 1998 and 1997, respectively, related primarily to bank term loans and
subordinated debt incurred in connection with the Recapitalization. The decrease
in interest expense recognized in 1998 was a result of the use of proceeds from
the Company's initial public offering in 1997 for the repayment of certain
indebtedness resulting from the Recapitalization.
INCOME TAX
Income tax expense for the years ended December 31, 1998 and December 31, 1997
include provisions for federal, state and Hong Kong income taxes at an effective
rate of 41.2% and 42.2%, respectively.
EXTRAORDINARY CHARGE FOR EARLY EXTINGUISHMENT OF DEBT
The extraordinary charge of $1.8 million net of tax benefit of $1.2 million
recognized in 1998 related to the early extinguishment of debt and the
unamortized debt discount of obligations assumed from Wheels as a result of the
merger.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents increased by $6.0 million for the year ended December
31, 1999, decreased $0.7 million for the year ended December 31, 1998 and
increased $0.7 million for the year ended December 31, 1997. Net cash provided
by operating activities was $22.1 million, $2.6 million and $9.2 million in
1999, 1998 and 1997, respectively. The change in net cash provided by operating
activities from 1998 to 1999 is primarily attributable to the decreases in
accounts receivable, inventory and accounts payable and accrued expenses (due to
low sales volume and the liquidation of excess inventories.) The change in net
cash provided by operating activities from 1997 to 1998 is primarily
attributable to the increases in accounts receivable, inventory and accounts
payable and accrued expenses (due to increased sales volume). The large increase
in allowance for doubtful accounts in 1999 is primarily due to the
discontinuance of the direct marketing continuity program. The large increase in
the allowance for doubtful accounts in 1997 is due to a Wheels trading card set
that had been improperly packaged by a contract packer.
14
<PAGE>
Net cash used in discontinued operations in 1997 of $0.6 million was a result of
the Board of Directors of Wheels voting to discontinue the operation of WOR and
dispose of its assets. The acquisition of WOR was originally accounted for using
the pooling-of-interests method of accounting, but the discontinuance of its
operations required the use of purchase accounting. The $0.6 million in
unamortized goodwill, along with property, plant and equipment with a net book
value of approximately $0.1 million were written off as of June 30, 1997. In
addition, on June 30, 1997, Wheels recorded estimated operating losses from June
30, 1997, through the end of the phase-out period of approximately $0.2 million.
Net liabilities of WOR at December 31, 1997 amounted to approximately $0.1
million. Net sales of WOR amounted to approximately $0.2 million for the year
ended December 31, 1997.
Net cash used in investing activities was $102.3 million, $7.2 million and $8.1
million in 1999, 1998 and 1997, respectively. The increase from 1998 to 1999 was
primarily attributable to the acquisition of Ertl. The decrease from 1997 to
1998 was primarily attributable to less excess purchase price resulting from
acquisitions made under the purchase method of accounting. (Please refer to the
notes to the financial statements for a complete discussion of all acquisitions
made over the last three year period.)
Net cash provided by financing activities was $86.2 million, $3.9 million and
$0.2 million in 1999, 1998 and 1997, respectively. The increase from 1998 to
1999 was due to more bank borrowing in connection with the acquisition of Ertl.
The increase from 1997 to 1998 was due to less discretionary paydown on the bank
debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations provided net cash of $22.1 million during
the year ended December 31, 1999. This was primarily due to decreases in
accounts receivable, inventory and account payable and accrued expenses. Capital
expenditures for the year ended December 31, 1999 were approximately $9.9
million, of which approximately $6.6 million was for molds and tooling.
During 1999, the Company made payments of $77.3 million on its bank borrowings.
The Company received $166.3 million in proceeds from its bank borrowings. The
Company also repurchased 775,500 shares of its outstanding common stock for
approximately $3.6 million.
During 1998, the Company made payments of approximately $5.3 million to
stockholders of the Company in settlement of notes payable outstanding from the
acquisitions of High Performance and Press Pass consummated in 1997. Included in
these payments was the release of $3.3 million of escrowed funds related to the
High Performance acquisition.
During 1997, the Company received net proceeds of approximately $73.8 million
from its initial public offering. The Company used the net proceeds to repay
certain indebtedness and redeem outstanding preferred stock.
In connection with the acquisition of Ertl, the Company entered into a new
credit agreement on April 13, 2000, amended on August 30, 1999, 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 December 31, 1999, the Company had $8.0
million outstanding on the revolving loan. The term loan, in the principal
amount of $115.0 million, is due in scheduled quarterly payments beginning 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 a 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 December 31, 1999 was 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. At
December 31, 1999, the commitment fee was 0.30% 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 December 31, 1999, the Company was in compliance with all of these
covenants.
15
<PAGE>
The Company's Hong Kong subsidiary entered into a credit agreement with a bank
that provides for 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 3% and are
cross-guaranteed by RCI and RCL. As of December 31, 1999 and 1998 there were no
outstanding borrowings under this line of credit.
The Company's anticipated debt service obligations under the existing credit
facilities for 2000 for scheduled interest and principal payments are
approximately $26.8 million. Average annual debt service obligations under these
same facilities through March 2004 are approximately $30.6 million.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. Due to seasonal
increases in demand for the Company's collectibles, working capital financing
requirements are usually highest during the third and fourth quarters. 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 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
The Company's internal systems have experienced no material Year 2000 compliance
related problems. In addition, the Company is not aware of any material Year
2000 related issues with any of its customers, suppliers or other third parties
with whom the Company has business relationships. The costs associated with
remediating the Company's non-compliant systems have not been material. The
Company does not believe at this time that potential Year 2000 issues will
materially affect the Company's business, although no assurance can be given
that this will be the case.
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 relies upon four independently owned factories located in China to
manufacture a significant portion of its die-cast 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; and (6) general economic conditions in the Company's markets.
ITEM 7A : 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 1999, the
effect of this agreement was insignificant.
Based on the Company's interest rate exposure on variable rate borrowings at
December 31, 1999, 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.
16
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and notes thereto are filed
under this item beginning on page F-1 of this report.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly results of operations for
each of the quarters in the years ended December 31, 1999 and 1998. All
quarterly information was obtained from unaudited consolidated financial
statements not otherwise contained herein. The Company believes that all
necessary adjustments have been made to present fairly the quarterly information
when read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere herein. The operating results for any quarter are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Fiscal Year 1999
------------------------------------
(Amounts in thousands, except per share data) Q1 Q2 Q3 Q4
- ---------------------------------------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $35,272 $57,487 $82,631 $55,970
Cost of sales. . . . . . . . . . . . . . . . . 16,618 33,966 47,250 34,849
------- -------- ------- --------
Gross profit . . . . . . . . . . . . . . . . . 18,654 23,521 35,381 21,121
Selling, general, and administrative expenses. 12,690 22,973 25,090 19,009
Amortization of intangible assets. . . . . . . 713 917 947 966
Restructuring and other. . . . . . . . . . . . - 6,400 - -
------- -------- ------- --------
Operating income (loss)(1) . . . . . . . . . . 5,251 (6,769) 9,344 1,146
Interest expense (2) . . . . . . . . . . . . . 564 2,017 2,563 2,506
Other expense (income) . . . . . . . . . . . . 60 9 9 (183)
------- -------- ------- --------
Income (loss) before income taxes. . . . . . . 4,627 (8,795) 6,772 (1,177)
Income tax expense (benefit) . . . . . . . . . 1,874 (3,561) 2,897 (318)
------- -------- ------- --------
Net income (loss). . . . . . . . . . . . . . . $ 2,753 $(5,234) $ 3,875 $ (859)
------- -------- ------- --------
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.17 $ (0.32) $ 0.24 $ (0.05)
Diluted. . . . . . . . . . . . . . . . . . . $ 0.17 $ -- $ 0.23 --
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . 16,081 16,234 16,417 16,261
Diluted. . . . . . . . . . . . . . . . . . . 16,557 16,729 16,694 16,512
------- -------- ------- --------
<FN>
(1) The large operating loss for the second quarter was a result of the Company
recording a second quarter charge to operating expenses of approximately $6.4 million
in restructuring and other charges related to the alignment of Racing Champions'
operations, product lines and direct marketing efforts with the consolidated plans
for those same areas of Ertl.
(2) Interest expense increased in the second quarter and for the remainder of
the year as the Company took on new bank borrowings of approximately $140.0 million
during the second quarter of 1999 to effect the acquisition of Ertl.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
------------------
(Amounts in thousands, except per share data) Q1 Q2 (1) Q3 Q4
- ---------------------------------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $28,639 $ 42,693 $50,604 $34,528
Cost of sales. . . . . . . . . . . . . . . . . 12,083 19,168 23,351 16,248
------- -------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . 16,556 23,525 27,253 18,280
Selling, general, and administrative expenses. 11,768 18,751 16,260 13,049
Amortization of intangible assets. . . . . . . 663 669 666 665
------- -------- ------- -------
Operating income . . . . . . . . . . . . . . . 4,125 4,105 10,327 4,566
Interest expense . . . . . . . . . . . . . . . 792 743 625 591
Other expense. . . . . . . . . . . . . . . . . 114 39 71 176
------- -------- ------- -------
Income before income taxes . . . . . . . . . . 3,219 3,323 9,631 3,799
Income tax expense . . . . . . . . . . . . . . 1,543 1,372 3,856 1,460
------- -------- ------- -------
Net income before extraordinary item . . . . . 1,676 1,951 5,775 2,339
Extraordinary item . . . . . . . . . . . . . . -- 1,782 -- --
------- -------- ------- -------
Net income available to common stockholders. . $ 1,676 $ 169 $ 5,775 $ 2,339
------- -------- ------- -------
Net income per common share before
extraordinary item:
Basic. . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.12 $ 0.36 $ 0.15
Diluted. . . . . . . . . . . . . . . . . . $ 0.10 $ 0.12 $ 0.35 $ 0.14
Net income per common share:
Basic. . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.01 $ 0.36 $ 0.15
Diluted. . . . . . . . . . . . . . . . . . $ 0.10 $ 0.01 $ 0.35 $ 0.14
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 15,961 15,961 15,971 16,003
Diluted. . . . . . . . . . . . . . . . . . 16,359 16,292 16,430 16,502
------- -------- ------- -------
<FN>
______________
(1) Second quarter selling, general and administrative expenses include
approximately $5.5 million in non-recurring, merger-related and restructuring
charges incurred in connection with the acquisition of Wheels Sports Group, Inc. in
June 1998. Interest expense also includes approximately $0.4 million in interest
expense on deferred financing costs of Wheels prior to the acquisition. The
extraordinary item relates to the early extinguishment of debt on Wheels' books
that was paid at the time of the acquisition by the Company.
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers and directors of the Company is
incorporated herein by reference to the discussions under "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders which will
be filed on or before May 1, 2000.
ITEM 11 : EXECUTIVE COMPENSATION
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders which will be filed on or before May 1, 2000.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the discussion under "Security Ownership" in
the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders which
will be filed on or before May 1, 2000.
18
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the discussions under "Executive
Compensation--Employment Agreements" and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders which will be filed on or before May 1, 2000.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
Exhibit 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)).
Exhibit 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)).
Exhibit 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)).
Exhibit 10.1 Amended and Restated Credit Agreement, dated as of June
17, 1997, by and among the Company, Racing Champions, Inc.,
BankBoston, N.A., as lender and agent, and the other lenders
party thereto (incorporated by reference to Exhibit 10.1 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-22635)).
Exhibit 10.2 Amendment No. 3 to Amended and Restated Credit Agreement,
dated as of June 11, 1998, by and among the Company, Racing
Champions, Inc., BankBoston, N.A., as lender and agent, and the
other lenders party thereto (incorporated by reference to
Exhibit 99.1 of the Company's Current Report on Form 8-K dated
June 12, 1998 (File No. 0-22635) filed by the Company with the
Securities and Exchange Commission on June 29, 1998).
Exhibit 10.3 Amended and Restated Guarantee and Security Agreement,
dated as of June 17, 1997, by and among the Company, Racing
Champions, Inc. and BankBoston, N.A., as agent (incorporated by
reference to Exhibit 10.2 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (File No. 0-22635)).
Exhibit 10.4 Credit Agreement, dated as of April 13, 1999, 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
(incorporated by reference to Exhibit 99.2 of the Company's
Current Report on Form 8-K dated April 13, 1999 (File No. 0-22635)).
Exhibit 10.5 First Amendment to Credit Agreement, dated as of August
30, 1999, among the Company, Racing Champions, Inc., Racing
Champions South, Inc., Racing Champions Worldwide Limited,
Green's Racing Souvenirs, Inc., RCNA Holdings, Inc., The Ertl
Company, Inc., Ertl Direct, Inc., First Union National Bank, as
agent and lender, and the other lenders party thereto (incor-
porated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999
(File No. 0-22635)).
Exhibit 10.6 Security Agreement, dated as of August 30, 1999, among the
Company, Racing Champions, Inc., Racing Champions South, Inc.,
Racing Champions Worldwide Limited, Green's Racing Souvenirs,
Inc., RCNA Holdings, Inc., The Ertl Company, Inc., Ertl Direct,
Inc., and First Union National Bank, as agent and lender
(incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 (File No. 0-22635)).
Exhibit 10.7 Stock and Asset Purchase Agreement, dated as of April 13,
1999, among U.S. Industries, Inc., JUSI Holdings, Inc., USI
Overseas Limited, USI Canada, Inc., Racing Champions
Corporation, Racing Champions, Inc., RCNA Holdings, Inc.,
Racing Champions Worldwide Limited and Racing Champions Limited
(incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K dated April 13, 1999 (File No. 0-22635)).
Exhibit 10.8 Warrant Agreement, dated as of August 5, 1998, between the
Company and BankBoston, N.A., as warrant agent (incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
19
<PAGE>
Exhibit 10.9 Warrant dated December 31, 1997 issued by Wheels Sports
Group, Inc. to Indosuez CM II, Inc. (incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.10 Registration Rights Agreement, dated as of December 31,
1997, between Wheels Sports Group, Inc. and Indosuez CM II,
Inc. (incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (File No. 0-22635)).
Exhibit 10.11 Warrant dated April 27, 1997 issued by Wheels Sports
Group, Inc. to Schneider Securities, Inc. (incorporated by
reference to Exhibit 10.5 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.12* Employment Agreement, dated as of April 30, 1999, by and
between Racing Champions, Inc. and Robert Dods (incorporated by
reference to Exhibit 10.13 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (File No. 0-22635)).
Exhibit 10.13* Employment Agreement, dated as of April 30, 1999, by and
between Racing Champions, Inc. and Boyd Meyer (incorporated by
reference to Exhibit 10.14 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (File No. 0-22635)).
Exhibit 10.14* Employment Agreement, dated as of April 30, 1999, by and
between Racing Champions Limited and Peter Chung (incorporated
by reference to Exhibit 10.15 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-22635)).
Exhibit 10.15* Employment Agreement, dated as of April 30, 1998, by and
between Racing Champions, Inc. and Curt Stoelting (incorporated
by reference to Exhibit 10.7 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.16* Employment Agreement, dated as of April 30, 1998, by and
between Racing Champions, Inc. and Peter Henseler (incorporated
by reference to Exhibit 10.8 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.17* Employment Agreement, dated as of April 30, 1998, by and
between Racing Champions, Inc. and Kevin Camp (incorporated by
reference to Exhibit 10.10 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.18* 1996 Key Employees Stock Option Plan (incorporated by
reference to Exhibit 10.19 of the Company's Registration
Statement on Form S-1 (Registration No. 333-22493) filed with
the Securities and Exchange Commission on February 27, 1997).
Exhibit 10.19* Racing Champions Corporation Stock Incentive Plan, as amended.
Exhibit 10.20* Racing Champions Corporation Employee Stock Purchase
Plan (incorporated by reference to Exhibit 10.23 of the
Company's Pre-Effective Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-22493) filed with
the Securities and Exchange Commission on April 11, 1997).
Exhibit 10.21* Wheels Sports Group, Inc. 1996 Omnibus Stock Plan (incorporated
by reference to Exhibit 10.6 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 21 Subsidiaries of the Company.
Exhibit 23 Consent of Arthur Andersen LLP.
Exhibit 24 Power of Attorney (included as part of the signature page
hereof).
Exhibit 27 Financial Data Schedule.
<FN>
______________________
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months ended
December 31, 1999.
(c) Financial statement schedules.
</TABLE>
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: MARCH 24, 2000 RACING CHAMPIONS CORPORATION
By: /s/ Robert E. Dods, Chief Executive Officer
-------------------------------------------
Robert E. Dods, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Robert E. Dods and
Curtis W. Stoelting, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments to the Form 10-K and file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Robert E. Dods Chief Executive Officer and Director March 24, 2000
- ---------------------------- (Principal Executive Officer)
Robert E. Dods
/s/ Boyd L. Meyer President and Director March 24, 2000
- ----------------------------
Boyd L. Meyer
/s/ Curtis W. Stoelting Executive Vice President March 24, 2000
- ---------------------------- and Secretary(Principal Financial
Curtis W. Stoelting Officer and Principal Accounting Officer)
/s/ Peter K.K. Chung Director March 24, 2000
- ----------------------------
Peter K.K. Chung
/s/ Avy H. Stein Director March 24, 2000
- ----------------------------
Avy H. Stein
/s/ Daniel M. Gill Director March 24, 2000
- ----------------------------
Daniel M. Gill
/s/ John S. Bakalar Director March 24, 2000
- ----------------------------
John S. Bakalar
/s/ John J. Vosicky Director March 24, 2000
- ----------------------------
John J. Vosicky
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Racing Champions Corporation and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Racing Champions Corporation included in
this annual report and issued our report thereon dated February 21, 2000. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of Valuation and Qualifying Accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not a
part of the basic financial statements. This schedule has been subject to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 21, 2000
DESCRIPTION
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997 . . $ 494,000 $ 1,068,000 $ 1,124,000 -- $ 2,686,000
Year ended December 31, 1998 . . $ 2,686,000 $ 608,650 -- $(2,194,650) $ 1,100,000
Year ended December 31, 1999 . . $ 1,100,000 $ 3,535,094 $ 2,338,383 $(1,518,528) $ 5,454,949
</TABLE>
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 12,265,289 $ 6,242,149
Accounts receivable, net of allowance for doubtful
accounts of $5,454,949 and $1,100,000. . . . . . . . . . . . . . . 44,717,451 22,079,678
Other receivable. . . . . . . . . . . . . . . . . . . . . . . . . . -- 129,212
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,144,875 14,227,795
Deferred and prepaid taxes. . . . . . . . . . . . . . . . . . . . . 14,691,659 801,763
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,889,304 3,573,556
Property held for sale. . . . . . . . . . . . . . . . . . . . . . . 152,564 --
------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 102,861,142 47,054,153
------------- -------------
Property and equipment:
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725,514 --
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . 4,916,152 --
Tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,022,492 14,233,994
Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 9,386,980 5,369,794
------------- -------------
52,051,138 19,603,788
Less Accumulated depreciation . . . . . . . . . . . . . . . . . . . (13,931,161) (6,369,639)
------------- -------------
38,119,977 13,234,149
Property held for sale. . . . . . . . . . . . . . . . . . . . . . . -- 152,564
Excess purchase price over net assets acquired, net . . . . . . . . 131,357,353 99,726,572
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,943,115 337,050
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $276,281,587 $160,504,488
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,084,893 $ 9,627,308
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 11,007,269 3,847,343
Accrued allowances. . . . . . . . . . . . . . . . . . . . . . . . . 9,969,037 2,826,688
Accrued royalties . . . . . . . . . . . . . . . . . . . . . . . . . 4,928,508 4,958,052
Line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 12,000,000
Current maturities of term notes. . . . . . . . . . . . . . . . . . 17,250,000 4,375,000
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 4,593,178 --
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 63,832,885 37,634,391
Term notes, less current maturities . . . . . . . . . . . . . . . . 97,750,000 17,625,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 5,811,630 2,663,255
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . 7,038,839 --
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 174,433,354 57,922,646
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, voting, $.01 par value, 28,000,000 shares authorized,
16,432,708 issued and 15,657,208 outstanding at December 31, 1999
and 16,060,998 issued and outstanding at December 31, 1998. . . . . 164,327 160,610
Stock warrants outstanding. . . . . . . . . . . . . . . . . . . . . 728,740 2,376,040
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 89,241,161 85,252,973
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . (16,991) --
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 15,327,723 14,792,219
------------- -------------
105,444,960 102,581,842
Treasury stock, at cost, 775,500 shares . . . . . . . . . . . . . . (3,596,727) --
------------- -------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . 101,848,233 102,581,842
------------- -------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . $276,281,587 $160,504,488
------------- -------------
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $231,360,417 $156,463,996 $83,744,964
Cost of sales, related party. . . . . . . . . . . 5,957,866 8,218,345 5,242,441
Cost of sales, other. . . . . . . . . . . . . . . 126,725,490 62,631,886 33,399,973
------------- ------------ -----------
Gross profit. . . . . . . . . . . . . . . . . . . 98,677,061 85,613,765 45,102,550
Selling, general and administrative expenses. . . 79,762,220 54,302,304 29,624,815
Merger related costs. . . . . . . . . . . . . . . -- 5,525,695 --
Restructuring and other charges . . . . . . . . . 6,400,000 -- --
Amortization of intangible assets . . . . . . . . 3,542,579 2,663,278 2,216,278
------------- ------------ -----------
Operating income. . . . . . . . . . . . . . . . . 8,972,262 23,122,488 13,261,457
Interest expense. . . . . . . . . . . . . . . . . 7,650,127 2,750,781 5,219,853
Other (income) expense. . . . . . . . . . . . . . (104,943) 399,499 200,401
------------- ------------ -----------
Income before income taxes. . . . . . . . . . . . 1,427,078 19,972,208 7,841,203
Income tax expense. . . . . . . . . . . . . . . . 891,574 8,231,028 3,305,892
------------- ------------ -----------
Net income from continuing operations
before extraordinary item . . . . . . . . . . . 535,504 11,741,180 4,535,311
Discontinued operations, net of tax
benefit of $428,000 . . . . . . . . . . . . . . -- -- 1,032,080
Extraordinary charge for early extinguishment
of debt, net of tax benefit of $1,188,000 . . . -- 1,782,000 --
------------- ------------ -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 535,504 $ 9,959,180 $ 3,503,231
------------- ------------ -----------
Dividends accrued on preferred stock. . . . . . . -- -- 478,422
Net income available to common stockholders . . . $ 535,504 $ 9,959,180 $ 3,024,809
------------- ------------ -----------
Net income per share from continuing operations
Basic . . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.73 $ 0.33
Diluted . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.71 $ 0.32
Net income per share from discontinued operations
Basic . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ 0.08
Diluted . . . . . . . . . . . . . . . . . . . $ -- $ -- $ 0.08
Net income per share from extraordinary item
Basic . . . . . . . . . . . . . . . . . . . . $ -- $ 0.11 $ --
Diluted . . . . . . . . . . . . . . . . . . . $ -- $ 0.11 $ --
Net income per share
Basic . . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.62 $ 0.25
Diluted . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.61 $ 0.24
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . 16,249,380 15,981,952 12,279,111
Diluted . . . . . . . . . . . . . . . . . . . 16,587,947 16,425,852 12,620,696
------------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Stock Other Additional
Common Preferred Warrants Treasury Comprehensive Paid-in
Stock Stock Outstanding Stock Loss Capital
-------- ------------ ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996. . . . . . . $ 93,438 $ 656,827 $ -- $ -- $ -- $ 9,146,377
Distribution to subchapter S
stockholder . . . . . . . . . . . . . -- -- -- -- -- --
Adjustment for converting
from subchapter S to C. . . . . . . . -- -- -- -- -- 395,549
-------- ------------ ------------- ------------ --------------- -----------
BALANCE, JANUARY 1, 1997. . . . . . . . 93,438 656, 827 -- -- -- 9,541,926
-------- ------------ ------------- ------------ --------------- -----------
Net income. . . . . . . . . . . . . . . -- -- -- -- -- --
Issuance of stock in connection
with purchase of:
World of Racing, Inc.
(158,100 shares). . . . . . . . . . . 1,581 -- -- -- -- 618,419
Emerald Sports Group, Inc.
(33,150 shares) . . . . . . . . . . . 331 -- -- -- -- 363,669
High Performance Sports
Marketing, Inc. (226,666 shares). . . 2,267 -- -- -- -- 3,997,733
Press Pass Partners
(306,000 shares). . . . . . . . . . . 3,060 -- -- -- -- 4,196,940
Initial public offering . . . . . . . . 58,850 -- 739,126 -- -- 72,734,273
Redemption of preferred stock . . . . . -- (1,135,249) -- -- -- (7,861,237)
Accrued dividends . . . . . . . . . . . -- 478,422 -- -- -- --
Consolidation of World of Racing, Inc.. -- -- -- -- -- --
Stockholder loan repayments . . . . . . -- -- -- -- -- --
Issuance of stock warrants to bank. . . -- -- 1,647,300 -- -- --
Stock warrants exercised. . . . . . . . 81 -- (10,386) -- -- 121,665
Stock options issued. . . . . . . . . . -- -- -- -- -- 521,686
Comprehensive income
-------- ------------ ------------- ------------ --------------- -----------
BALANCE, DECEMBER 31, 1997. . . . . . . 159,608 -- 2,376,040 -- -- 84,235,074
-------- ------------ ------------- ------------ --------------- -----------
Net income. . . . . . . . . . . . . . . -- -- -- -- -- --
Stock issued upon option exercise . . . 1,002 -- -- -- -- 1,006,491
Expense recognized under stock
option grant. . . . . . . . . . . . . -- -- -- -- -- 11,408
Comprehensive income
-------- ------------ ------------- ------------ --------------- -----------
BALANCE, DECEMBER 31, 1998. . . . . . . 160,610 -- 2,376,040 -- -- 85,252,973
-------- ------------ ------------- ------------ --------------- -----------
Net income. . . . . . . . . . . . . . . -- -- -- -- -- --
Stock issued upon option exercise . . . 1,119 -- -- -- -- 538,619
Expense recognized under stock
option grant. . . . . . . . . . . . . -- -- -- -- -- 22,824
Stock warrants exercised. . . . . . . . 2,598 -- (1,647,300) -- -- 3,426,745
Treasury stock acquisition. . . . . . . -- -- -- (3,596,727) -- --
Other comprehensive loss- foreign
currency translation adjustments. . . -- -- -- -- (16,991) --
Comprehensive income
-------- ------------ ------------- ------------ --------------- -----------
BALANCE, DECEMBER 31, 1999. . . . . . . $164,327 $ -- $ 728,740 $(3,596,727) $ (16,991) $89,241,161
-------- ------------ ------------- ------------ --------------- -----------
Stockholder Compre-
Loans & Total hensive
Retained Notes Stockholders' Income
Earnings Receivable Equity (Loss)
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996. . . . . . . $ 2,635,116 $ (108,425) $ 12,423,333 $ --
Distribution to subchapter S
stockholder . . . . . . . . . . . . . (431,337) -- (431,337) --
Adjustment for converting
from subchapter S to C. . . . . . . . (395,549) -- -- --
------------ ------------- --------------- -----------
BALANCE, JANUARY 1, 1997. . . . . . . . 1,808,230 (108,425) 11,991,996 --
------------ ------------- --------------- -----------
Net income. . . . . . . . . . . . . . . 3,503,231 -- 3,503,231 3,503,231
Issuance of stock in connection
with purchase of:
World of Racing, Inc.
(158,100 shares). . . . . . . . . . . -- -- 620,000 --
Emerald Sports Group, Inc.
(33,150 shares) . . . . . . . . . . . -- -- 364,000 --
High Performance Sports
Marketing, Inc. (226,666 shares). . . -- -- 4,000,000 --
Press Pass Partners
(306,000 shares). . . . . . . . . . . -- -- 4,200,000 --
Initial public offering . . . . . . . . -- -- 73,532,249 --
Redemption of preferred stock . . . . . -- -- (8,996,486) --
Accrued dividends . . . . . . . . . . . (478,422) -- -- --
Consolidation of World of Racing, Inc.. -- 95,436 95,436 --
Stockholder loan repayments . . . . . . -- 12,989 12,989 --
Issuance of stock warrants to bank. . . -- -- 1,647,300 --
Stock warrants exercised. . . . . . . . -- -- 111,360 --
Stock options issued. . . . . . . . . . -- -- 521,686 --
Comprehensive income $ 3,503,231
------------ ------------- --------------- -----------
BALANCE, DECEMBER 31, 1997. . . . . . . 4,833,039 -- 91,603,761
------------ ------------- --------------- -----------
Net income. . . . . . . . . . . . . . . 9,959,180 -- 9,959,180 9,959,180
Stock issued upon option exercise . . . -- -- 1,007,493 --
Expense recognized under stock
option grant. . . . . . . . . . . . . -- -- 11,408 --
Comprehensive income $ 9,959,180
------------ ------------- --------------- -----------
BALANCE, DECEMBER 31, 1998. . . . . . . 14,792,219 -- 102,581,842
------------ ------------- --------------- -----------
Net income. . . . . . . . . . . . . . . 535,504 -- 535,504 535,504
Stock issued upon option exercise . . . -- -- 539,738 --
Expense recognized under stock
option grant. . . . . . . . . . . . . -- -- 22,824 --
Stock warrants exercised. . . . . . . . -- -- 1,782,043 --
Treasury stock acquisition. . . . . . . -- -- (3,596,727) --
Other comprehensive loss- foreign
currency translation adjustments -- -- (16,991) $ (16,991)
Comprehensive income. . . . . . . . . . $ 518,519
------------ ------------- --------------- -----------
BALANCE, DECEMBER 31, 1999. . . . . . . $15,327,723 $ -- $ 101,848,233
------------ ------------- --------------- -----------
</TABLE>
The accompanying notes are in integral part of these consolidated statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 535,504 $ 9,959,180 $ 3,503,231
Adjustments to reconcile net income to net cash
provided by operating activities
Loss from discontinued operations. . . . . . . . . . . . -- -- 1,032,080
Extraordinary item . . . . . . . . . . . . . . . . . . . -- 1,782,000 --
Depreciation . . . . . . . . . . . . . . . . . . . . . . 7,491,888 3,269,853 2,151,783
Stock option expense . . . . . . . . . . . . . . . . . . -- -- 521,686
Provision for uncollectible accounts . . . . . . . . . . 2,378,702 -- 1,068,000
Interest on deferred financing costs . . . . . . . . . . 228,936 12,862 462,587
Write-off of unamortized goodwill related to Emerald . . -- -- 364,000
Amortization of intangibles. . . . . . . . . . . . . . . 3,542,579 2,663,278 2,216,280
Gain (loss) on disposition of assets . . . . . . . . . . 25,043 -- (9,530)
Deferred income taxes. . . . . . . . . . . . . . . . . . 599 1,944,095 (501,828)
Deferred interest on junior subordinated debt. . . . . . -- -- 1,375,890
Changes in operating assets and liabilities, net
of acquisition activity:
Accounts receivable and other receivable . . . . . . 2,240,257 (10,029,643) (5,076,821)
Inventory. . . . . . . . . . . . . . . . . . . . . . 18,870,223 (9,816,215) (721,594)
Prepaid expenses . . . . . . . . . . . . . . . . . . 2,027,666 (1,840,720) (135,931)
Accounts payable and accrued expenses. . . . . . . . (14,222,269) 4,661,835 2,928,425
Other liabilities. . . . . . . . . . . . . . . . . . (1,032,590) -- --
-------------- ------------- -------------
Net cash provided by continuing operating activities 22,086,538 2,606,525 9,178,258
Net cash used in discontinued operations . . . . . . -- -- (630,000)
INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . . . . . (9,885,390) (6,554,852) (4,144,760)
Purchase of property held for sale . . . . . . . . . . . . -- -- (152,000)
Proceeds from disposal of property and equipment . . . . . 2,136,899 421,929 --
Purchase price of Ertl, net of cash. . . . . . . . . . . . (92,996,967) -- --
Purchase price in excess of net assets acquired. . . . . . -- ( 802,421) (3,731,575)
Increase in other non-current assets . . . . . . . . . . . (1,507,729) (215,841) --
Issuance of note receivable. . . . . . . . . . . . . . . . -- -- (50,000)
-------------- ------------- -------------
Net cash used in investing activities. . . . . . . . (102,253,187) (7,151,185) (8,078,335)
FINANCING ACTIVITIES
Initial public offering. . . . . . . . . . . . . . . . . . -- -- 73,781,027
Issuance of stock. . . . . . . . . . . . . . . . . . . . . 539,738 1,007,493 --
Redemption of preferred stock. . . . . . . . . . . . . . . -- -- (7,862,000)
Expense recognized for option grant. . . . . . . . . . . . 22,824 11,408 --
Cash dividends paid on preferred stock . . . . . . . . . . -- -- (1,134,486)
Proceeds from bank term loans. . . . . . . . . . . . . . . 115,000,000 12,002,111 8,000,000
Payment on bank term loans . . . . . . . . . . . . . . . . (22,000,000) (11,948,184) (29,300,000)
Net borrowings (payments) on line of credit. . . . . . . . (4,000,000) 4,770,224 6,485,650
Payment of junior subordinated notes . . . . . . . . . . . -- -- (39,441,054)
Payment of deferred interest on junior subordinated notes. -- -- (3,403,651)
Payment of senior subordinated notes . . . . . . . . . . . -- -- (8,020,000)
Decrease in due to stockholders. . . . . . . . . . . . . . -- (5,250,000) (1,117,008)
Proceeds from long-term debt, net of restricted cash . . . -- -- 6,470,783
Payments on long-term debt and capital leases. . . . . . . -- (10,107) (2,674,692)
Proceeds from exercise of warrants . . . . . . . . . . . . 1,782,043 -- 111,360
Payment of deferred financing costs. . . . . . . . . . . . (1,558,089) -- (1,379,791)
Distributions to Subchapter S stockholders . . . . . . . . -- -- (431,337)
Purchase of treasury stock . . . . . . . . . . . . . . . . (3,596,727) -- --
Decrease in note receivable from officer . . . . . . . . . -- -- 133,747
Release of escrowed cash . . . . . . . . . . . . . . . . . -- 3,300,000 --
-------------- ------------- -------------
Net cash provided by financing activities. . . . . . 86,189,789 3,882,945 218,548
Net increase (decrease) in cash and cash equivalents . . . . 6,023,140 (661,715) 688,471
Cash and cash equivalents, beginning of year . . . . . . . . 6,242,149 6,903,864 6,215,393
-------------- ------------- -------------
Cash and cash equivalents, end of year . . . . . . . . . . . $ 12,265,289 $ 6,242,149 $ 6,903,864
-------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period . . . . . . . . . $ 7,150,393 $ 2,621,554 $ 7,180,416
Cash paid for taxes during the period. . . . . . . . . . . $ 3,707,704 $ 6,820,559 $ 1,792,649
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Proceeds from long-term debt placed in escrow. . . . . . . $ -- $ -- $ 3,330,000
Debt incurred in conjunction with acquisitions . . . . . . $ -- $ -- $ 5,250,000
Stock issued to affect acquisitions. . . . . . . . . . . . $ -- $ -- $ 8,200,000
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: DESCRIPTION OF BUSINESS
Founded in 1989, Racing Champions Corporation ("RCC") and Subsidiaries, Racing
Champions Inc. ("RCI"), Racing Champions Ertl, Inc. ("RCE"), Racing Champions
Limited ("RCL"), Racing Champions International Limited ("RCIL") and Racing
Champions South, Inc. ("RCS") (collectively "the Company") is a leading producer
and marketer of collectibles. The Company is best known for its extensive lines
of officially licensed NASCAR die-cast racing replicas, Press Pass trading
cards, NASCAR apparel and souvenirs, Ertl agricultural, custom imprint and
American Muscle vehicle replicas and AMT model kits. The Company has license
agreements with major U.S. automotive manufacturers and many of the major
motorsports sanctioning bodies, sponsors, team owners and their drivers, as well
as entertainment and media companies for their well-known characters and
properties. The Company sells its products primarily in North America. RCL,
based in Hong Kong and China, oversees the production of the Company's products.
RCIL, based in the United Kingdom, sells the Company's products in Europe and
Asia.
NOTE 2: RECAPITALIZATION AND KEY ACQUISITIONS
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 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 RCL to RCI.
These acquisitions were accounted for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired was
$93.6 million. Of this excess $88.7 million has been recorded as an intangible
asset and is being amortized on a straight-line basis over forty years and $4.9
million was recorded as inventory and property and equipment.
RACING CHAMPIONS CORPORATION AND WHEELS SPORTS GROUP, INC.
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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
(amounts in thousands) JUNE 30, 1998 DEC. 31, 1997
- ----------------------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Net sales:
Racing Champions. . . . . . . . . . . . . . . . . . . . . . . . $ 48,855 $ 76,562
Wheels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,856 7,491
Intercompany sales. . . . . . . . . . . . . . . . . . . . . . . (1,379) (308)
------------------ ---------------
$ 71,332 $ 83,745
------------------ ---------------
Net Income:
Racing Champions. . . . . . . . . . . . . . . . . . . . . . . . $ 4,212 $ 7,875
Wheels (includes $1.6 million of merger costs and $1.8 million
of extraordinary charges, net of income taxes). . . . . . . . (2,074) (6,792)
Intercompany eliminations and income tax adjustments. . . . . . (81) 2,421
------------------ ---------------
$ 2,057 $ 3,504
------------------ ---------------
</TABLE>
F-5
<PAGE>
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 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.
RACING CHAMPIONS CORPORATION AND THE ERTL COMPANY, INC.
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of The Ertl Company, Inc. (subsequently renamed Racing
Champions Ertl, Inc.) and certain of its affiliates ("Ertl") for approximately
$94.6 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 allocated assets acquired of approximately $35.0 million is
being amortized over 40 years. The purchase price was based on preliminary
estimates and will be adjusted as appropriate.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1999 and 1998 assume that the Ertl acquisition occurred
as of January 1 of each year:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data) DECEMBER 31, 1999 DECEMBER 31, 1998
- --------------------------------------------- ------------------- ------------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $ 266,340 $ 329,175
Income (loss) before extraordinary item . . . (3,471) 8,872
------------------- ------------------
Net income (loss) . . . . . . . . . . . . . . (3,471) 7,090
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . $ (0.21) $ 0.44
------------------- ------------------
Diluted . . . . . . . . . . . . . . . . . . -- $ 0.43
------------------- ------------------
</TABLE>
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: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Foreign Currency Translation/Transaction - The
financial statements consolidate the accounts of RCC and its wholly owned
subsidiaries. All intercompany items and transactions have been eliminated.
Foreign subsidiary assets and liabilities are reported in the local currency and
translated at the rates of exchange at the balance sheet date while income
statement accounts are translated at the average exchange rates in effect during
the period. Exchange gains and losses resulting from translations for the year
ended December 31, 1999 have been recorded in stockholders' equity. Exchange
gains and losses for the years ended December 31, 1998 and 1997 were
insignificant.
Revenue Recognition - The Company recognizes revenue based upon transfer of
title of product to customers. The Company provides for estimated credit and
other price concessions.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with original maturities of 90 days or less to be cash equivalents. Such
investments are stated at cost, which approximate fair value.
Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-6
<PAGE>
Inventory - Inventory consists of finished goods and is stated at the lower of
cost or market. Cost is determined by the first-in, first-out method, and market
represents the lower of replacement cost or estimated net realizable value.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method for financial statement
purposes at rates adequate to depreciate the cost of applicable assets over
their expected useful lives. Accelerated methods are used for income tax
purposes. Repairs and maintenance are charged to expense as incurred. Gains or
losses resulting from sales or retirements are recorded as incurred, at which
time related costs and accumulated depreciation are removed from the accounts.
The estimated useful lives used in computing depreciation for financial
statement purposes are as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTIONS ESTIMATED USEFUL LIFE
- -------------------------- ---------------------
<S> <C>
Buildings and improvements 3-40 years
Tooling. . . . . . . . . . 3-8 years
Other equipment. . . . . . 3-13 years
</TABLE>
Property Held for Sale - Property held for sale consists of land and related
improvements at December 31, 1999 and 1998. Property held for sale is stated at
the lower of cost or estimated net realizable value.
Excess Purchase Price Over Net Assets Acquired -Excess purchase price over net
assets acquired (goodwill) is amortized over 40 years on a straight-line basis.
Approximately $88.7 million of this goodwill is tax deductible over 15 years.
Amortization expense relating to excess of purchase price over the net assets
for the years ended December 31, 1999, 1998, and 1997 was approximately, $3.4
million, $2.6 million and $2.2 million, respectively. Accumulated amortization
was approximately $9.5 million and $6.1 million at December 31, 1999 and 1998,
respectively. The Company reviews excess purchase price over net assets acquired
for impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. To date, no such events or changes in
circumstances have occurred.
Other Assets - Other assets at December 31, 1999 and 1998 consist primarily of
refundable deposits for leased equipment, pension assets, acquisition and
recapitalization costs and deferred financing fees.
Concentration of Credit Risk - Concentration of credit risk is limited to trade
accounts receivable and is subject to the financial conditions of certain major
customers in which there were two customers accounting for approximately 12% and
11% of net sales for the year ended December 31, 1999, two customers accounting
for approximately 14% and 12% of net sales for the year ended December 31, 1998
and three customers accounting for approximately 22%, 16%, and 11% of net sales
for the year ended December 31, 1997. Additionally, at December 31, 1999 one
customer accounted for approximately 20% of accounts receivable and at December
31, 1998 three customers accounted for approximately 16%, 15%, and 10% of
accounts receivable. The Company does not require collateral or other security
to support customers' receivables. The Company conducts periodic reviews of its
customers' financial conditions and vendor payment practices to minimize
collection risks on trade accounts receivable. The Company has purchased credit
insurance which covers a portion of its receivables from major customers.
Fair Value of Financial Instruments - The carrying amounts of cash, receivables,
accounts payable and accrued expenses approximate fair value because of the
short-term nature of the items. The carrying amounts of the Company's lines of
credit, notes and other payables approximate their fair values either due to
their short-term nature, the variable rates associated with these debt
instruments or based on current rates offered to the Company for debt with
similar characteristics.
Advertising - The Company expenses the production costs of advertising the first
time the advertising takes place except for certain direct-response advertising,
which is capitalized and amortized over its expected period of future benefits.
At December 31, 1999 and 1998, approximately $0 and $1.1 million, of
direct-response advertising was included in prepaid expenses. Direct-response
advertising relating to these prepaid expenses that were expensed for the years
ended December 31, 1999 and 1998 was approximately $1.8 million and $1.4
million, respectively.
F-7
<PAGE>
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS No. 109, deferred income taxes are
recognized for the expected future tax consequences of temporary differences
between financial statement carrying amounts and the tax bases of existing
assets and liabilities using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
Accounting for Stock-Based Compensation - The Company accounts for stock-based
compensation arrangements with employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense is based on the difference, if any, on the measurement date, between the
estimated fair value of the Company's stock and the exercise price of options to
purchase that stock. The compensation expense is amortized on a straight-line
basis over the vesting period of the options.
The Company accounts for stock-based compensation arrangements with nonemployees
in accordance with SFAS No. 123. SFAS No. 123 establishes a fair value based
method of accounting for stock-based compensation plans. Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award, which is calculated using an option pricing model, and is
recognized over the service period, which is usually the vesting period.
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. The following table discloses the provisions set
forth in SFAS No. 128: (amounts in thousands, except per share data)
<TABLE>
<CAPTION>
WEIGHTED
NET AVERAGE PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1999 INCOME SHARES AMOUNT
- -------------------------------------------------------------------- ------- -------- ----------
<S> <C> <C> <C>
Basic net income per share:
Net income available to common stockholders. . . . . . . . . . . . . $ 535 16,249 $ 0.03
Plus effect of dilutive securities:
Stock options and warrants . . . . . . . . . . . . . . . . . . . . . -- 339 --
------- -------- ----------
Diluted net income per share:
Net income available to common stockholders plus assumed conversions $ 535 16,588 $ 0.03
------- -------- ----------
</TABLE>
Options and warrants to purchase 749,104 shares of common stock at prices
ranging from $9.84 to $16.18 were outstanding during 1999 but were not included
in the computation of diluted earnings per share because the options' and
warrants' exercise price was greater than the average market price of the common
shares.
<TABLE>
<CAPTION>
WEIGHTED
NET AVERAGE PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1998 INCOME SHARES AMOUNT
- -------------------------------------------------------------------- ------- -------- ----------
<S> <C> <C> <C>
Basic net income per share:
Net income available to common stockholders. . . . . . . . . . . . . $ 9,959 15,982 $ 0.62
Plus effect of dilutive securities:
Stock options and warrants . . . . . . . . . . . . . . . . . . . . . -- 444 --
------- -------- ----------
Diluted net income per share:
Net income available to common stockholders plus assumed conversions $ 9,959 16,426 $ 0.61
------- -------- ----------
</TABLE>
Options and warrants to purchase 611,114 shares of common stock at prices
ranging from $11.27 to $16.18 were outstanding during 1998 but were not included
in the computation of diluted earnings per share because the options' and
warrants' exercise price was greater than the average market price of the common
shares.
F-8
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
NET AVERAGE PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997 INCOME SHARES AMOUNT
- -------------------------------------------------------------------- ------- -------- ----------
<S> <C> <C> <C>
Basic net income per share:
Net income available to common stockholders. . . . . . . . . . . . . $ 3,025 12,279 $ 0.25
Plus effect of dilutive securities:
Stock options and warrants . . . . . . . . . . . . . . . . . . . . . -- 342 --
------- -------- ----------
Diluted net income per share:
Net income available to common stockholders plus assumed conversions $ 3,025 12,621 $ 0.24
------- -------- ----------
</TABLE>
Options and warrants to purchase 505,366 shares of common stock at prices
ranging from $13.48 to $16.18 per share were outstanding during 1997 but were
not included in the computation of diluted earnings per share because the
options' and warrants' exercise price was greater than the average market price
of the common shares.
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. The Company has chosen to
disclose comprehensive income, which encompasses net income and foreign currency
translation adjustments, as part of the consolidated statements of stockholders'
equity.
Recent Accounting Pronouncements - In June, 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard requires that an entity recognize derivatives
as either assets or liabilities on its balance sheet and measure those
instruments at fair value. As a result of SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities- Deferral of the Effective Date of
SFAS No. 133", the Company will adopt this standard in the first quarter of
2001. Based on current circumstances, the Company does not believe that
application of SFAS No. 133 will have a material effect on the Company's
financial condition or results of operations.
Reclassifications - Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE 4 : 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.
For the year ended December 31, 1999, all of the charges related to direct mail
were expended, approximately $3.7 million of the reduction and consolidation of
product lines were expended and approximately $0.1 million of the charges
related to severance and relocation were expended.
F-9
<PAGE>
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 years ended December
31, 1999 and 1998 are as shown in the tables below. Information for the year
ended December 31, 1997 is not available.
<TABLE>
<CAPTION>
(amounts in thousands) 1999 1998
- ------------------------ -------- --------
<S> <C> <C>
Collectible die-cast . . $164,406 $118,658
Other products . . . . . 66,954 37,806
-------- --------
Net sales. . . . . . . . $231,360 $156,464
-------- --------
Mass retailers . . . . . $100,549 $107,301
Wholesale and trackside. 97,010 28,392
Premium/promotional. . . 25,135 12,320
Direct and other . . . . 8,666 8,451
-------- --------
Net sales. . . . . . . . $231,360 $156,464
-------- --------
</TABLE>
In 1999, Other products includes model kits, licensed preschool products, sports
trading cards, apparel, souvenirs and games. In 1998 this category included
$13,039 of trading cards and other collectibles and $24,767 of apparel and
souvenirs.
Information by geographic area is set forth in the tables below. Operating
income represents income before income taxes and interest expense.
<TABLE>
<CAPTION>
(amounts in thousands)
- --------------------------------------------------------
<S> <C>
Net sales:
United States . . . . . . . . . . . . . . . . $213,417
Foreign . . . . . . . . . . . . . . . . . . . 21,986
Sales and transfers between geographic areas. (4,043)
---------
Combined total. . . . . . . . . . . . . . . . $231,360
---------
Operating income:
United States . . . . . . . . . . . . . . . . $ 6,284
Foreign . . . . . . . . . . . . . . . . . . . 2,688
---------
Combined total. . . . . . . . . . . . . . . . $ 8,972
---------
Identifiable assets:
United States . . . . . . . . . . . . . . . . $248,049
Foreign . . . . . . . . . . . . . . . . . . . 28,233
---------
Combined total $276,282
---------
</TABLE>
NOTE 6 : OTHER BUSINESS COMBINATIONS
DIAMOND SPORTS GROUP, INC. AND GREEN'S RACING SOUVENIRS, INC.
On June 30, 1997, Wheels acquired 100% of the common stock of Diamond Sports
Group, Inc. ("Diamond") in exchange for 485,000 shares of the Wheels' common
stock.
On October 4, 1997, Wheels acquired 100% of the common stock of Green's Racing
Souvenirs, Inc. ("GRS") in exchange for 175,000 shares of the Wheels' common
stock.
The Diamond and GRS transactions constituted tax-free reorganizations and each
has been accounted for using the pooling-of-interests method of accounting for
business combinations. Accordingly, all prior period consolidated financial
statements have been restated to include the combined results of operations,
financial position and cash flows of Diamond and GRS. There were no material
transactions between or among Diamond, GRS and Wheels prior to the combination.
Certain reclassifications have been made to Diamonds' and GRS' financial
statements to conform to the Company's basis of presentation.
F-10
<PAGE>
WORLD OF RACING, INC.
Wheels acquired World of Racing, Inc. ("WOR") through a wholly owned subsidiary
on January 28, 1997, by exchanging 310,000 shares of the Wheels' common stock
valued at $620,000 for 100% of the common stock of WOR.
Effective June 30, 1997, Wheels' Board of Directors voted to discontinue the
operations of WOR and dispose of its assets. The acquisition of WOR was
originally accounted for as a pooling-of-interests, but the discontinuance of
its operations required the use of purchase accounting. The $561,914 unamortized
goodwill, along with property plant and equipment with a net book value of
approximately $132,000, were written off as of June 30, 1997. In addition, on
June 30, 1997, Wheels recorded estimated operating losses from June 30, 1997,
through the end of the phase-out period of approximately $222,000. The loss from
operations and the loss on disposition are presented as discontinued operations
on the accompanying consolidated statement of income for the year ended December
31, 1997. Net sales of WOR amounted to approximately $174,000 for the year ended
December 31, 1997.
EMERALD SPORTS GROUP, INC.
On August 5, 1997, Wheels acquired 100% of the common stock of Emerald Sports
Group, Inc. ("Emerald") in exchange for 65,000 shares of Wheels' common stock
valued at $364,000. The transaction was accounted for as a purchase and resulted
in excess purchase price over the fair value of net assets acquired of
approximately $408,000.
In December 1997, Wheels decided to merge the operations of Emerald into those
of Diamond and to dispose of substantially all of Emerald's assets, with the
exception of inventory, as of December 31, 1997. Accordingly, Wheels recorded
provisions to write-off unamortized goodwill related to the Emerald acquisition
of approximately $364,000, which is included in other expense on the
accompanying consolidated statement of income for the year ended December 31,
1997. In addition, certain costs totaling approximately $200,000 related to the
disposal were accrued at December 31, 1997, and are included in other expenses
in the accompanying consolidated statement of income.
HIGH PERFORMANCE SPORTS MARKETING, INC.
Effective October 24, 1997, Wheels consummated the acquisition of High
Performance Sports Marketing, Inc. ("High Performance"). The transaction was
accounted for as a purchase and resulted in excess purchase price over the fair
value of net assets acquired (assets acquired were approximately $2.3 million
and liabilities assumed were approximately $1.7 million) of approximately $9.4
million. Consideration paid by Wheels consisted of cash in the amount of
approximately $1.7 million, promissory notes totaling $1.0 million, and 444,444
shares of Wheels' common stock valued at $4.0 million. In addition, the terms of
the purchase agreement between High Performance and Wheels required an
additional cash payment to be made at closing of approximately $3.3 million (the
"Additional Cash Consideration"). Payment of the Additional Cash Consideration
was paid out of escrowed funds ("Escrowed Funds") established in connection with
Wheels' Credit Facility obtained December 31, 1997. In December 1997, certain
officers and directors of Wheels executed a pledge agreement under which an
aggregate of approximately 1 million shares of personally-owned stock of Wheels
was pledged to secure payment of the Additional Cash Consideration.
In April 1998, Wheels negotiated the release of $500,000 of Escrowed Funds as
partial satisfaction of the Additional Cash Consideration. In addition, Wheels
agreed to pay an extension fee of $450,000 to the former High Performance
stockholders, $250,000 of which was paid on April 22, 1998. The remaining
$200,000 was paid on June 12, 1998 along with the remainder of the Additional
Cash Consideration.
PRESS PASS PARTNERS
Effective December 31, 1997, Wheels consummated the acquisition of Press Pass
Partners ("Press Pass") through a transaction in which the two corporate
partners of Press Pass were merged into two newly formed subsidiaries of the
Company. The transaction was accounted for as a purchase and resulted in excess
purchase price over the fair value of net assets acquired (assets acquired were
approximately $2.0 million and liabilities assumed were approximately $1.5
million) of approximately $7.8 million. Consideration paid by Wheels consisted
of cash of $3.1 million, promissory notes totaling $1.0 million, and 600,000
shares of Wheels' common stock valued at $4.2 million.
F-11
<PAGE>
NOTE 7: INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(amounts in thousands) DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
- ---------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Pretax income:
United States. . . . $ 263 $ 19,773 $ 7,696
Foreign. . . . . . . 1,164 199 145
-------------- -------------- --------------
$ 1,427 $ 19,972 $ 7,841
-------------- -------------- --------------
</TABLE>
The significant components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(amounts in thousands) DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
- ---------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Current
Federal. . . . . . . $ -- $ 5,018 $ 2,733
State. . . . . . . . -- 717 482
Foreign. . . . . . . 293 3 10
-------------- -------------- --------------
293 5,738 3,225
-------------- -------------- --------------
Deferred
Federal. . . . . . . 493 2,180 45
State. . . . . . . . 106 311 6
Foreign. . . . . . . -- 2 29
-------------- -------------- --------------
599 2,493 80
-------------- -------------- --------------
Income tax expense . . $ 892 $ 8,231 $ 3,305
-------------- -------------- --------------
</TABLE>
A reconciliation of statutory Federal tax rate and actual effective income tax
rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory rate. . . . . . . . . . . 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.9 4.8 4.8
Foreign . . . . . . . . . . . . . . (7.2) -- --
Other-non-deductible goodwill . . . 30.8 2.4 3.4
-------------- -------------- --------------
Effective rate. . . . . . . . . . . 62.5% 41.2% 42.2%
-------------- -------------- --------------
</TABLE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
(amounts in thousands) 1999 1998
- ----------------------------------- -------- --------
<S> <C> <C>
Deferred tax assets
Reserves and allowances . . . . . $ 3,921 $ 380
Net operating loss. . . . . . . . 6,515 1,669
Other . . . . . . . . . . . . . . 1,531 180
-------- --------
Total deferred tax assets . . . 11,967 2,229
Deferred tax liabilities
Intangible assets . . . . . . . . (5,435) (3,948)
Property and equipment. . . . . . (1,783) (564)
-------- --------
Total deferred tax liabilities. (7,218) (4,512)
-------- --------
Net deferred tax asset (liability). $ 4,749 $(2,283)
-------- --------
</TABLE>
The Company has approximately $16.0 million of net operating losses that can be
carried back two years, and the remainder carried forward twenty years (expiring
2019) for federal and Illinois income tax purposes.
F-12
<PAGE>
NOTE 8 : DEBT
In conjunction with the Company's initial public offering, the Company revised
and amended its bank agreement on June 17, 1997. The amended credit agreement
provided for a revolving loan and a five-year term loan. The revolving loan was
amended on June 11, 1998 in conjunction with the business combination of RCC and
Wheels. The amended agreement provided for a revolving loan which allowed the
Company to borrow up to $12.0 million at any time prior to June 30, 2003. The
term loan was amended on June 11, 1998 increasing the principal amount to $25.0
million and extending the final maturity to June 30, 2003. The entire amount of
this debt outstanding was repaid upon the acquisition of Ertl.
In connection with the acquisition of Ertl, the Company entered into a new
credit agreement on April 13, 1999, amended on August 30, 1999, 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 December 31, 1999, the Company had $8.0
million outstanding on the revolving loan. The term loan, in the principal
amount of $115.0 million, is due in scheduled quarterly payments beginning 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 a 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 December 31, 1999 was 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. At
December 31, 1999, the commitment fee was 0.30% 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 December 31, 1999, the Company was in compliance with all of these
covenants.
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 $35.0 million of its debt,
with a cap based on 30 day LIBOR rates of 8.0% and floor of 5.09%. The
agreement, which has quarterly settlement dates, is in effect through June 3,
2002. During 1999, the effect of this agreement was insignificant.
The Company's Hong Kong subsidiary entered into a credit agreement with a bank
that provides for 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 3% and are
cross-guaranteed by RCI and RCL. As of December 31, 1999 and 1998 there were no
outstanding borrowings under this line of credit.
On December 31, 1997, Wheels established a Credit Facility with Credit Agricole
Indosuez. In connection with establishing this facility, Wheels granted to
Credit Agricole Indosuez a warrant to purchase 509,358 shares of Wheels' common
stock at a price of $3.50 per share. The warrant is exercisable through December
31, 2007. The exercise price and number of shares to be purchased are subject,
from time to time, to certain antidilutive adjustments. Wheels recorded a
discount on long term debt obtained under the Credit Facility based on the
estimated fair value of the warrants at December 31, 1997. Wheels amortized the
discount and included it as a component of interest expense over the term of the
term loans using the effective interest rate method. Wheels also incurred
financing costs, which were deferred and amortized over the term of the Credit
Facility.
All obligations outstanding under the Credit Agricole Indosuez Credit Facility
were paid in full in conjunction with the merger of Wheels and RCC, and the
related warrant was converted into a warrant to purchase the combined Company's
stock, discussed in Note 2. The unamortized discount on the debt at the time of
the merger has been recorded as an extraordinary item in the accompanying
consolidated statement of income for 1998, related to the early extinguishment
of this debt. The warrant was exercised in full in 1999.
F-13
<PAGE>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
(amounts in thousands) 1999 1998
- ------------------------------------------------------------------------ -------- -------
<S> <C> <C>
Term loan payable to banks, bearing interest ranging at 7.60% and
7.68% as of December 31, 1999, with principal payments in amounts
varying from $5,750 to $8,625 with final payment due March 31, 2004. . $115,000 $ --
Term loan payable to the bank, bearing interest ranging from 6.6875% to
6.8125% as of December 31, 1998, with principal payments in amounts
varying from $1,000 to $1,500 with final payment due June 30, 2003 . . -- 22,000
-------- -------
115,000 22,000
Less -current maturities . . . . . . . . . . . . . . . . . . . . . . . . 17,250 4,375
-------- -------
$ 97,750 $17,625
-------- -------
</TABLE>
Principal maturities of long-term debt are as follows: (amounts in thousands)
<TABLE>
<CAPTION>
<S> <C>
2001 . . . . . . . . $27,313
2002 . . . . . . . . 28,750
2003 . . . . . . . . 33,062
2004 . . . . . . . . 8,625
-------
Total long-term debt $97,750
-------
</TABLE>
NOTE 9 : COMMITMENTS AND CONTINGENCIES
Rental expense under cancellable and noncancellable operating leases amounted to
approximately $3.2 million for the year ended December 31, 1999. Commitments for
future minimum lease payments with terms extending beyond one year at December
31, 1999, for noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
- ------------------------------
<S> <C>
2000 . . . . . . . . . $2,956
2001 . . . . . . . . . 1,951
2002 . . . . . . . . . 1,421
2003 . . . . . . . . . 1,018
2004 . . . . . . . . . 668
Thereafter . . . . . . $ 532
------
</TABLE>
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.
In May 1997, a proposed class action lawsuit was filed against several trackside
vendors, including GRS. The complaint alleges that the defendants have engaged
in price fixing activities at certain NASCAR events in violation of federal
anti-trust laws. Plaintiffs seek an unspecified amount of compensatory and
punitive damages and also an order enjoining the alleged price fixing practices.
GRS has entered into a joint defense agreement with certain co-defendants
pursuant to which defense costs are being reimbursed by defendant Americrown
Service Corporation. The existing joint defense agreement is to remain in effect
through class certification proceedings. The Company expects that GRS would
vigorously defend against the action, although no assurances can be given as to
the outcome of this matter.
In August, 1999, a proposed class action lawsuit was filed against the Company.
The complaint alleges violations of RICO and the California Unfair Competition
Law. Plaintiffs allege that the Company has operated an illegal gambling
operation by selling packs of sports trading cards containing random assortments
of cards of varying values. The Company disputes this claim and intends to
vigorously defend its position, although no assurances can be given as to the
outcome of this matter.
F-14
<PAGE>
NOTE 11 : CAPITAL STOCK
On April 9, 1997, the Company issued a 7.885261-for-one stock split of common
stock and increased in the number of authorized shares to 20.0 million shares of
voting common stock and 1.0 million shares of nonvoting common stock. The
accompanying financial statements have been retroactively adjusted to reflect
the stock split.
On June 11, 1998, in conjunction with the merger of Wheels and Racing Champions
Corporation, discussed in Note 2, the Company increased the total number of
authorized shares of common stock to 28.0 million shares.
On June 17, 1997, the Company sold 5,357,142 shares of its common stock in an
initial public offering. The net proceeds to the Company from the sale of the
stock were approximately $68.7 million, after deduction of commissions and
offering expenses. Approximately $9.0 million of the net proceeds were used to
redeem preferred stock issued in the Recapitalization; $42.8 million was used to
repay stockholder notes issued in the Recapitalization; and $16.9 million was
used to repay bank borrowings incurred in connection with the Recapitalization.
In addition, the Company filed its Restated Certificate of Incorporation to
eliminate the preferred stock and the nonvoting common stock. All nonvoting
common stock was exchanged on a 1 for 1 basis for common stock of the Company.
In April 1997, Wheels completed an initial public offering of 1,035,000 shares
of Wheels' common stock at a price of $6.00 per share, resulting in net proceeds
of approximately $4.7 million. Included as part of the offering were warrants
for the purchase of an additional 517,500 shares of Wheels' 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. In addition, Wheels agreed to issue and sell to the underwriter
of its public offering, for nominal consideration, warrants to purchase an
aggregate of 90,000 shares of Wheels' common stock and an additional 90,000
Wheels warrants at a price of $8.70 per Wheels common share, commencing April
1998 and expiring in April 2003. Warrants subject to purchase under warrants
issued to the underwriter have terms identical to those sold as part of Wheels
initial public offering. Wheels assigned $739,126 of the total net proceeds of
the offering to the value of stock warrants issued.
Further, Wheels entered into an agreement with the underwriter which provided
that, if the underwriter arranged for the purchase or sale of substantially all
of the assets of Wheels, or for a merger, consolidation or acquisition accepted
by Wheels during the five-year period ending April 2002, Wheels would pay the
underwriter a fee ranging from 3% - 5% of the total consideration received. In
connection with this, Wheels agreed to pay the underwriter a consulting fee of
$70,000. This amount was accounted for as a cost of the initial public offering.
NOTE 12 : TREASURY STOCK REPURCHASE PROGRAM
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 December 31, 1999, the Company had
repurchased 775,500 shares of its outstanding common stock for approximately
$3.6 million.
NOTE 13 : STOCK OPTION PLAN
The Company has adopted a 1996 Employee Stock Option Plan for its key employees.
The Employee Stock Option Plan is administered by the Board of Directors. The
Company has reserved 415,041 shares of common stock for issuance under the plan.
On April 30, 1996 and June 1, 1996, the Company granted 311,281 and 20,752
options, respectively, to purchase shares of common stock at an exercise price
equal to fair market value as determined by the Board of Directors in connection
with the Recapitalization. These options vest equally over a five year period.
The options will expire on the earlier of the tenth anniversary of the date of
grant or 30 days after the date of termination of the employees' employment with
the Company.
In April, 1997 the Company adopted the Racing Champions Corporation Stock
Incentive Plan, under which the Board of Directors may grant options to purchase
up to 311,852 shares of common stock to executives or key employees of the
Company. In 1997, the Company granted 185,753 options to purchase shares of
common stock at an exercise price equal to fair market value. In 1998 this plan
was amended to allow the granting of options to purchase up to 600,000 shares of
common stock. In 1998 the Company granted options to purchase 390,601 shares at
a price equal to fair market value. Part of these options vested immediately and
the rest vest over a five year period. These options expire on the tenth
anniversary of the date of grant or 90 days after the date of termination of the
employees' employment with the Company. In 1999, the plan was amended to allow
the granting of options to purchase up to 1,500,000 shares of common stock.
During 1999, the Company granted options to purchase 354,250 shares at a price
equal to fair market value. All of these options vest over a five year period.
F-15
<PAGE>
As part of the merger with Wheels, the Company adopted the Wheels 1996 Omnibus
Stock plan, under which the Company has 400,000 shares of its common stock
reserved for issuance under this plan. In 1997, 254,940 options to purchase
shares of the Company's common stock were granted.
Stock option activity for the Company's stock option plans for the years ended
December 31, 1997, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED SHARES
AVERAGE AVAILABLE FOR
SHARES PRICE EXERCISE PRICE FUTURE GRANTS
------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Outstanding as of December 31, 1996 332,033 483,008
1997
Granted . . . . . . . . . . . . . 440,693 $ 9.84-$16.18 $ 12.91
Exercised . . . . . . . . . . . . -- -- --
Canceled. . . . . . . . . . . . . 1,275 $ 11.57 $ 11.57
------- ------------- --------------- -------------
Outstanding as of December 31, 1997 771,451 643,590
------- ------------- --------------- -------------
1998
Granted . . . . . . . . . . . . . 390,601 $9.187-$13.50 $ 11.35
Exercised . . . . . . . . . . . . 100,204 $ 0.13-$14.00 $ 10.05
Cancelled . . . . . . . . . . . . 195,116 $ 9.84-$16.18 $ 12.61
------- ------------- --------------- -------------
Outstanding as of December 31, 1998 866,732 448,105
------- ------------- --------------- -------------
1999
Granted . . . . . . . . . . . . . 354,250 $ 5.00-$10.94 $ 7.47
Exercised . . . . . . . . . . . . 111,912 $ 0.13-$11.57 $ 4.82
Cancelled . . . . . . . . . . . . 146,300 $ 0.13-$14.00 $ 11.04
------- ------------- --------------- -------------
Outstanding as of December 31, 1999 962,770 1,140,155
------- ------------- --------------- -------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- --------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
0.13. . . . . . 250,529 7.3 $ 0.13 150,317 $ 0.13
5.00 to 12.00 . 519,956 9.1 $ 8.56 75,165 $ 10.79
12.73 to 16.18. 192,285 7.7 $ 13.97 110,813 $ 13.86
----------- ---------------- ----------------- ----------- -----------------
</TABLE>
Had compensation costs for the stock options issued been determined based on the
fair value at their grant date consistent with SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data) 1999 1998 1997
- --------------------------------------------- ----- ------ ------
<S> <C> <C> <C>
Net Income available to common stockholders
As reported . . . . . . . . . . . . . . . . $ 535 $9,959 $3,025
Pro forma . . . . . . . . . . . . . . . . . $ 407 $9,558 $2,532
----- ------ ------
Basic net income per share
As reported . . . . . . . . . . . . . . . . $0.03 $ 0.62 $ 0.25
Pro forma . . . . . . . . . . . . . . . . . $0.03 $ 0.60 $ 0.21
----- ------ ------
Diluted net income per share
As reported . . . . . . . . . . . . . . . . $0.03 $ 0.61 $ 0.24
Pro forma . . . . . . . . . . . . . . . . . $0.02 $ 0.58 $ 0.20
----- ------ ------
</TABLE>
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model assuming, among other things, no dividend
yield, risk free rates of return from 5.17% to 6.2%, volatility factors of 56.1%
to 80.8%, and expected life of 6 to 10 years. The weighted average fair value of
options granted under the Company's stock plan for the years ended December 31,
1999, 1998 and 1997 was $5.76, $6.98 and $6.91 per share, respectively.
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest over
several years, compensation expense is recognized as the options vest and
additional awards may be granted.
F-16
<PAGE>
NOTE 14 : RELATED PARTY TRANSACTIONS
The Company purchased approximately $6.0 million, $8.2 million, and $5.2 million
of product during 1999, 1998 and 1997, respectively from a company controlled by
a relative of one of the Company's stockholders. The Company believes these
purchases were negotiated at arms-length in the normal course of business.
The Company leases warehouse space from a party related to an officer/director
of the Company. Rent expense for the years ended December 31, 1999, 1998, and
1997 was $95,640, $82,120, and $68,814, respectively. The Company believes this
transaction was negotiated at arms-length in the normal course of business.
RCS leases certain buildings which are owned by stockholders and/or directors of
the Company. These leases are accounted for as operating leases and have terms
from 1 to 5 years. The Company incurred rental expense on these leases of
$51,598 during the year ended December 31, 1997. In 1998 and 1999 the lessor was
no longer a related party.
RCS entered into a lease for a building on October 1, 1996, with a company owned
by three of the former stockholders of Diamond. The lease term was for three
years with an option to purchase the building during the lease term and a
mandatory purchase requirement at the end of 1999. The lease was capitalized
using a rate of 9%. Minimum monthly lease payments were $2,400. Lease payments,
representing interest, made during the year ended December 31, 1997, were
$19,200. In August 1997, the Company exercised its right to purchase the
building for approximately $308,000; accordingly, the capital lease obligation
has been removed from the books at December 31, 1997. In 1998, the Company sold
the building for approximately the net book value.
The Company pays sales commissions to an external sales representative
organization, of which one of the principals of this organization is a relative
of an officer/director of the Company. For the years ended December 31, 1999,
1998, and 1997, commissions of $166,882, $283,226 and $168,239, respectively
were allocated to the related principal. The Company believes this transaction
was negotiated at arms-length in the normal course of business.
NOTE 15 : EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) savings plan as of December, 1996, which became
effective on January 1, 1997. Employees meeting certain eligibility
requirements, as defined, may contribute up to 15% of pre-tax gross wages,
subject to certain restrictions. The Company makes matching contributions of 50%
of the employees contributions up to 5% of employee wages. For the years ended
December 31, 1999, 1998 and 1997 the Company's contributions were approximately
$233,000, $94,000 and $46,000, respectively.
As part of the purchase of Ertl, the Company acquired the Ertl Income Pension
Plan for Hourly Employees. Benefits under this plan, which covers union
employees, are based on a stated amount for specified years of service as
negotiated in the respective collective bargaining agreements. The Company's
funding policy is to make contributions in amounts actuarially determined by an
independent consulting actuary to fund the benefits to be provided.
Net periodic cost of the defined benefit plan included the following components:
(amounts in thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 1, 1999 - DECEMBER 31, 1999:
- --------------------------------------------------
<S> <C>
Benefits earned during the period (service cost) . $ 85
Interest cost on projected benefit obligation. . . 413
Expected return on plan assets . . . . . . . . . . (488)
------
Net periodic pension costs . . . . . . . . . . . . $ 10
------
</TABLE>
F-17
<PAGE>
The change in benefit obligation and plan assets and reconciliation of funded
status are as follows: (amounts in thousands)
<TABLE>
<CAPTION>
CHANGE IN PROJECTED BENEFIT OBLIGATION DURING THE PERIOD:
- -------------------------------------------------------------
<S> <C>
Projected benefit obligation, April 1, 1999 . . . . . . . . . $ 7,959
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . 85
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . 413
Actuarial gain. . . . . . . . . . . . . . . . . . . . . . . . (927)
Benefits and noninvestment trust expenses paid. . . . . . . . (256)
--------
Projected benefit obligation, December 31, 1999 . . . . . . . $ 7,274
--------
CHANGE IN PLAN ASSETS DURING THE PERIOD:
Plan assets at fair value, April 1, 1999. . . . . . . . . . . $ 6,919
Actual return on plan assets. . . . . . . . . . . . . . . . . 122
Contributions . . . . . . . . . . . . . . . . . . . . . . . . 37
Benefits and noninvestment expenses paid. . . . . . . . . . . (256)
--------
Plan assets at fair value, December 31, 1999. . . . . . . . . $ 6,822
--------
RECONCILIATION OF ACCRUED AND TOTAL AMOUNT RECOGNIZED:
Funded status of the plan . . . . . . . . . . . . . . . . . . $ (453)
Unrecognized net gain . . . . . . . . . . . . . . . . . . . . (561)
--------
Net accrued benefit cost. . . . . . . . . . . . . . . . . . . $(1,014)
--------
Assumptions used for the year end disclosure were as follows:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . 7.75%
Expected return on plan assets. . . . . . . . . . . . . . . . 9.50%
Mortality table . . . . . . . . . . . . . . . . . . . . . . . 71 GAT
--------
Assumptions used for the 1999 period expense were as follows:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . 7.00%
Expected return on plan assets. . . . . . . . . . . . . . . . 9.00%
Mortality table . . . . . . . . . . . . . . . . . . . . . . . 83GAM
--------
</TABLE>
The assets of the defined benefit plan are primarily invested in listed stocks
and bonds.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Racing Champions Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of RACING CHAMPIONS
CORPORATION (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of income, stockholders' equity
and cash flows for each year in the three year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Racing Champions
Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each year in the three year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 21, 2000
F-19
Exhibit 10.19
RACING CHAMPIONS CORPORATION
STOCK INCENTIVE PLAN
Article 1. Establishment and Purpose
-------------------------------------
1.1 Establishment. Racing Champions Corporation, a Delaware
-------------
corporation (the "Company"), hereby establishes a stock option plan for
employees and others providing services to the Company, as described herein,
which shall be known as the Racing Champions Corporation Stock Incentive Plan
(the "Plan"). It is intended that certain of the options issued pursuant to the
Plan to employees of the Company may constitute incentive stock options within
the meaning of section 422 of the Internal Revenue Code, and that other options
issued pursuant to the Plan shall constitute nonstatutory options. The Board
shall determine which options are to be incentive stock options and which are to
be nonstatutory options and shall enter into option agreements with recipients
accordingly.
1.2 Purpose. The purpose of the Plan is to provide a means for the
-------
Company to attract and retain competent personnel and to provide to
participating directors, officers and other key employees long term incentives
for high levels of performance by providing them with a means to acquire a
proprietary interest in the Company's success.
Article II. Definitions
------------------------
2.1 Definitions. For purposes of this Plan, the following terms shall
-----------
be defined as follows:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means the definition of Cause in Optionee's employment
agreement, if any, with the Company. If no such employment agreement or
definition in such agreement exists, Cause means (i) breach by Optionee of any
covenant not to compete or confidentiality agreement with the Company, (ii)
failure by Optionee to substantially perform his duties to the reasonable
satisfaction of the Board, (iii) serious misconduct by Optionee which is
demonstrably and substantially injurious to the Company, (iv) fraud
<PAGE>
or dishonesty by Optionee with respect to the Company, (v) material
misrepresentation by Optionee to a stockholder or director of the Company or
(vi) acts of negligence by Optionee in performance of Optionee's duties that are
substantially injurious to the Company. The Board, by majority vote, shall make
the determination of whether Cause exists.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(d) "Commission" means the Securities and Exchange Commission or any
successor agency.
(e) "Committee" means the Committee provided for by Article IV hereof,
which may be created at the discretion of the Board.
(f) "Company" means Racing Champions Corporation, a Delaware
corporation.
(g) "Consultant" means any person or entity, including an officer or
director of the Company who provides services (other than as an Employee) to the
Company and includes a Qualified Director, as defined below.
(h) "Date of Exercise" means the date the Company receives notice, by
an Optionee, of the exercise of an Option pursuant to section 9.1 of this Plan.
Such notice shall indicate the number of shares of Stock the Optionee intends to
purchase upon exercise of an Option.
(i) "Employee" means any person, including an officer or director of
the Company, who is employed by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
(k) "Fair Market Value" means the fair market value of Stock upon which
an Option is granted under this Plan, as determined by the Board. If the Stock
is traded on an over-the-counter securities market or national securities
exchange, "Fair Market Value" shall mean an amount equal to the average of the
highest and lowest reported sales prices of the Stock reported on such
over-the-counter
2
<PAGE>
market or such national securities exchange on the applicable date or, if no
sales of Stock have been reported for that date, on the next preceding date for
which sales where reported.
(l) "Incentive Stock Option" means an Option granted under this Plan
which is intended to qualify as an "incentive stock option" within the meaning
of section 422 of the Code.
(m) "IRS" means the Internal Revenue Service, or any successor agency.
(n) "Nonstatutory Option" means an Option granted under this Plan which
is not intended to qualify as an incentive stock option within the meaning of
section 422 of the Code. Nonstatutory Options may be granted at such times and
subject to such restrictions as the Board shall determine without conforming to
the statutory rules of section 422 of the Code applicable to incentive stock
options.
(o) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified period of time. For
purposes of this Plan, an Option may be an Incentive Stock Option, a
Nonstatutory Option or a Reload Option.
(p) "Optionee" means an Employee or Consultant holding an Option under
the Plan.
(q) "Parent Corporation" shall have the meaning set forth in section
424(e) of the Code with the Company being treated as the employer corporation
for purposes of this definition.
(r) "Qualified Director" means a director who is both (a) a
"Non-Employee Director" as defined in Rule 16b-3(b)(3)(i), as promulgated by the
Commission under the Exchange Act, or any successor definition adopted by the
Commission, and (b) an "Outside Director" as defined by section 162(m) of the
Code and the regulations promulgated thereunder, or any successor definition
adopted by the IRS.
(s) "Reload Option" means an Option granted pursuant to section 8.1 of
this Plan.
3
<PAGE>
(t) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission
under Section 16(b) of the Exchange Act, as amended from time to time.
(u) "Significant Stockholder" means an individual who, within the
meaning of section 422(b)(6) of the Code, owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company. In determining whether an individual is a Significant Stockholder, an
individual shall be treated as owning stock owned by certain relatives of the
individual and certain stock owned by corporations in which the individual is a
partner, and estates or trusts of which the individual is a beneficiary, all as
provided in section 424(d) of the Code.
(v) "Stock" means the Common Stock, par value $.01 per share, of the
Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
-----------------
any masculine terminology when used in this Plan also shall include the feminine
gender and the definition of any term herein in the singular shall also include
the plural.
Article III. Eligibility and Participation.
--------------------------------------------
3.1 Eligibility and Participation. All Employees are eligible to
-------------------------------
participate in this Plan and receive Incentive Stock Options and/or Nonstatutory
Options. All Consultants are eligible to participate in this Plan and receive
Nonstatutory Options hereunder. Optionees in the Plan shall be selected by the
Board from among those Employees and Consultants who, in the opinion of the
Board, are in a position to contribute materially to the Company's continued
growth and development and to its long-term financial success.
Article IV. Administration.
----------------------------
4.1 Administration. The Board shall be responsible for administering
--------------
the Plan.
The Board is authorized to interpret the Plan, to prescribe, amend, and
rescind rules and regulations relating to the Plan, to provide for conditions
and assurances deemed necessary or advisable to protect the interests of the
Company, and to make all other determinations necessary or advisable for the
administration
4
<PAGE>
of the Plan, but only to the extent not contrary to the express provisions of
the Plan. Determinations, interpretations or other actions made or taken by the
Board pursuant to the provisions of this Plan shall be final and binding and
conclusive for all purposes and upon all persons.
At the discretion of the Board, this Plan may be administered by a
Committee which shall be a compensation committee of the Board, consisting
solely of two or more Qualified Directors. The members of such Committee may be
directors who are eligible to receive Options under this Plan, but Options may
be granted to such persons only by action of the full Board and not by action of
the Committee. Such Committee shall have full power and authority, subject to
the limitations of the Plan and any limitations imposed by the Board, to
construe, interpret and administer this Plan and to make determinations which
shall be final, conclusive and binding upon all persons, including, without
limitation, the Company, the stockholders, the directors and any persons having
any interests in any Options which may be granted under this Plan and, by
resolution providing for the creation and issuance of any such Option, to fix
the terms upon which, the time or times at or within which, and the price or
prices at which any such shares may be purchased from the Company upon the
exercise of such Option, which terms, time or times and price or prices shall,
in every case, be set forth or incorporated by reference in the instrument or
instruments evidencing such Option, and shall be consistent with the provisions
of the Plan.
The Board may from time to time remove members from, or add members to, the
Committee. The Board may terminate the Committee at any time. Vacancies on the
Committee, howsoever caused, shall be filled by the Board. The Committee shall
select one of its members as Chairman, and shall hold meetings at such times and
places as the Chairman may determine. A majority of the Committee at which a
quorum is present, or acts reduced to or approved in writing by all of the
members of the Committee, shall be the valid acts of the Committee. A quorum
shall consist of two-thirds of the members of the Committee.
Where the Committee has been created by the Board, references herein to
actions to be taken by the Board shall be deemed to refer to the Committee as
well, except where limited by this Plan or by the Board.
The Board shall have all of the enumerated powers of the Committee but
shall not be limited to such powers. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.
5
<PAGE>
4.2 Special Provisions for Grants to Officers or Directors. Rule 16b-3
------------------------------------------------------
provides that the grant of a stock option to a director or officer of a company
subject to the Exchange Act will be exempt from the provisions of Section 16(b)
of the Exchange Act if the conditions set forth in Rule 16b-3 are satisfied.
Unless otherwise specified by the Board, grants of Options hereunder to
individuals who are officers or directors of the Company for purposes of Section
16(b) of the Exchange Act shall be made in a manner that satisfies the
conditions of Rule 16b-3.
Article V. Stock Subject to the Plan.
--------------------------------------
5.1 Number. The total number of shares of Stock hereby made available
------
and reserved for issuance under the Plan shall be 1,500,000. The aggregate
number of shares of Stock available under this Plan shall be subject to
adjustment as provided in section 5.3. The total number of shares of Stock may
be authorized but unissued shares of Stock, or shares acquired by purchase as
directed by the Board from time to time in its discretion, to be used for
issuance upon exercise of Options granted hereunder.
5.2 Unused Stock; Payment with Stock. If an Option shall expire or
------------------------------------
terminate for any reason without having been exercised in full, the unpurchased
shares of Stock subject thereto shall (unless the Plan shall have terminated)
become available for other Options under the Plan. In addition, upon the full
or partial payment of any option price by the transfer to the Company of shares
of Stock pursuant to section 7.7, upon satisfaction of tax withholding
obligations with shares of Stock pursuant to section 15.1 or any other payment
made or benefit realized under this Plan by the transfer or relinquishment of
shares of Stock, only the net number of shares of Stock actually issued or
transferred by the Company, after subtracting the number of shares of Stock so
transferred or relinquished, will be charged against the maximum share
limitation set forth in section 5.1 above.
5.3 Adjustment in Capitalization. In the event of any change in the
------------------------------
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification or other similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the Option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate Option price to be paid therefor upon
exercise of the Option.
6
<PAGE>
Article VI. Duration of the Plan.
----------------------------------
6.1 Duration of the Plan. The Plan shall be in effect for ten years
-----------------------
from the date of its approval by the Company's stockholders. Any Options
outstanding at the end of such period shall remain in effect in accordance with
their terms. The Plan shall terminate before the end of such period if all
Stock subject to the Plan has been purchased pursuant to the exercise of Options
granted under the Plan.
Article VII. Terms of Stock Options.
-------------------------------------
7.1 Grant of Options. Subject to section 5.1, Options may be granted
------------------
to Employees or Consultants at any time and from time to time as determined by
the Board; provided, however, that Consultants may receive only Nonstatutory
Options and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
nature of services rendered by such Employee or Consultant, their present and
potential contributions to the Company, and such other factors as the Board in
its discretion shall deem relevant. The Board shall also determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Option.
In the cases of Incentive Stock Options, the total Fair Market Value
(determined at the date of grant) of shares of Stock with respect to which
Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year under all plans of the Company under which incentive
stock options may be granted (and all such plans of any Parent Corporation and
any subsidiary corporations of the Company) shall not exceed $100,000.
(Hereinafter, this requirement is sometimes referred to as the "$100,000
Limitation.")
Nothing in this Article VII of the Plan shall be deemed to prevent the
grant of Options permitting exercise in excess of the maximums established by
the preceding paragraph where such excess amount is treated as a Nonstatutory
Option.
7.2 No Tandem Options. Where an Option granted under this Plan is
-------------------
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under section 422 of the Code.
7
<PAGE>
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
-------------------------------------------------------------------
Specified. As determined by the Board on the date of grant, each Option shall
-------
be evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by section 11.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; in the case of an Incentive Stock Option, a provision implementing
the $100,000 Limitation; and any other terms and conditions as shall be
determined by the Board at the time of grant of the Option.
All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.
7.4 Option Price. No Incentive Stock Option granted pursuant to this
-------------
Plan shall have an Option price that is less than the Fair Market Value of Stock
on the date the Option is granted. Incentive Stock Options granted to
Significant Stockholders shall have an Option price of not less than 110 percent
of the Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be established by the Board.
7.5 Term of Options. Each Option shall expire at such time as the
-----------------
Board shall determine when it is granted, provided, however, that no Option
shall be exerciseable later than the tenth anniversary date of its grant.
7.6 Exercise of Options. Options granted under this Plan shall be
---------------------
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment. Payment for all shares of Stock shall be made at the time
-------
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Such payment may be made in cash,
outstanding shares of Stock, in combinations thereof, or any other method of
payment approved by the Board; provided, however, that (i) the deposit of any
withholding tax shall be made in accordance with applicable law and (ii) that
such shares of Stock used to pay the exercise price have been held by the
Participant for at least six months prior to the exercise date. If shares of
Stock are being used in part or full payment for the shares to be acquired upon
exercise of the Option, such
8
<PAGE>
shares shall be valued for the purpose of such exchange as of the date of
exercise of the Option at the Fair Market Value of the shares. Any certificates
evidencing shares of Stock used to pay the purchase price shall be accompanied
by stock powers duly endorsed in blank by the registered holder of the
certificate (with signatures thereon guaranteed). In the event the certificates
tendered by the holder in such payment cover more shares than are required for
such payment, the certificate shall also be accompanied by instructions from the
holder to the Company's transfer agent with regard to the disposition of the
balance of the shares covered thereby.
Article VIII. Reload Options.
-----------------------------
8.1 Grants of Reload Options. Concurrently with any award of Options,
-------------------------
the Board may grant Reload Options to purchase a number of shares of Stock equal
to the sum of (i) the number of outstanding shares of Stock used to exercise the
underlying Option pursuant to section 7.7, and (ii) the number of shares of
Stock used to satisfy any tax withholding requirement incident to the exercise
of the underlying Options pursuant to section 15.1. If the Board grants Reload
Options in connection with a grant of Options, the Option Agreement with respect
to such underlying Options shall state that Reload Options have been granted
with respect to the underlying Options. Upon exercise of an underlying Option,
the Reload Option will be evidenced by an amendment to the underlying Option
Agreement. No additional Reload Options will be granted to the Optionee when
Options are exercised pursuant to the terms of this Plan following termination
of the Optionee's employment.
8.2 Terms of Reload Options. A Reload Option will be subject to all of
-----------------------
the terms and conditions of the underlying Option, except that (i) the option
price per share of Stock purchasable under a Reload Option shall be equal to the
Fair Market Value of the Stock at time of grant upon exercise of the underlying
Option, and (ii) the term of the Reload Option will equal the remaining option
term of the underlying Option.
Article IX. Written Notice, Issuance of Stock Certificates, Stockholder
------------------------------------------------------------------------
Privilege.
---------
9.1 Written Notice. An Optionee wishing to exercise an Option shall
---------------
give written notice to the Company, in the form and manner prescribed by the
Board. Full payment for the Options exercised, as provided in section 7.7
above, must accompany the written notice.
9
<PAGE>
9.2 Issuance of Stock Certificate. As soon as practicable after the
--------------------------------
receipt of written notice and payment, the Company shall deliver to the Optionee
or to a nominee of the Optionee a certificate or certificates for the requisite
number of shares of Stock.
9.3 Privileges of a Stockholder. An Optionee or any other person
------------------------------
entitled to exercise an Option under this Plan shall not have stockholder
privileges with respect to any Stock covered by the Option until the date of
issuance of a stock certificate for such Stock.
Article X. Termination of Employment or Services.
-------------------------------------------------
Except as otherwise expressly specified by the Board, all Options granted
under this Plan shall be subject to the following termination provisions.
10.1 Death. If an Optionee's employment in the case of an Employee, or
-----
provision of services as a Consultant in the case of a Consultant, terminates by
reason of death, the Option may thereafter be exercised at any time prior to the
expiration date of the Option or within 12 months after the date of such death,
whichever period is the shorter, by the person or persons entitled to do so
under the Optionee's will or, if the Optionee shall fail to make a testamentary
disposition of an Option or shall die intestate, the Optionee's legal
representative or representatives. The Option shall be exercisable only to the
extent that such Option was exercisable as of the date of death.
10.2 Termination Other Than for Cause or Due to Death. In the event of
------------------------------------------------
an Optionee's termination of employment in the case of an Employee, or
termination of the provision of services as a Consultant in the case of a
Consultant, other than for Cause or by reason of death, the Optionee may
exercise such portion of his Option as was exercisable by him at the date of
such termination (the "Termination Date") at any time within three months of the
Termination Date; provided, however, that where the Optionee is an Employee, and
is terminated due to disability within the meaning of Code section 422, he may
exercise such portion of his Option as was exercisable by him on his Termination
Date within one year of his Termination Date. In any event, the Option cannot
be exercised after the expiration of the original term of the Option. Options
not exercised within the applicable period specified above shall terminate.
In the case of an Employee, a change of duties or position within the
Company, if any, shall not be considered a termination of employment for
purposes of this Plan. The Option Agreements may contain such provisions as the
10
<PAGE>
Board shall approve with respect to the effect of approved leaves of absence
upon termination of employment.
10.3 Termination for Cause. In the event of an Optionee's termination
----------------------
of employment in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company for Cause, any Option or Options held by him under the Plan, to the
extent not exercised before such termination, shall forthwith terminate.
Article XI. Rights of Optionees
--------------------------------
11.1 Service. Nothing in this Plan shall interfere with or limit in
-------
any way the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Employee any right to
continue in the employ of the Company, or upon any Consultant any right to
continue to provide services to the Company.
11.2 Nontransferability. Options granted under this Plan shall be
------------------
nontransferable by the Optionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
Article XII. Amendment, Modification
-------------------------------------
and Termination of the Plan
---------------------------
12.1 Amendment, Modification, and Termination of the Plan.
-----------------------------------------------------------
The Board may at any time terminate and from time to time may amend or modify
the Plan provided, however, that no such action of the Board, without approval
of the stockholders, may:
(a) increase the total amount of Stock which may be purchased through
Options granted under the Plan, except as provided in Article V;
(b) change the class of Employees or Consultants eligible to receive
Options; or
(c) extend the maximum exercise period under section 7.5.
11
<PAGE>
No amendment, modification or termination of the Plan shall in any manner
adversely affect any outstanding Option under the Plan without the consent of
the Optionee holding the Option.
Article XIII. Acquisition, Merger and Liquidation
--------------------------------------------------
13.1 Acquisition. Notwithstanding anything herein to contrary, in the
-----------
event that an Acquisition (as defined below) occurs with respect to the Company,
the Company shall have the option, but not the obligation, to cancel Options
outstanding as of the effective date of Acquisition, whether or not such Options
are then exercisable, in return for payment to the Optionees for each Option of
an amount equal to a reasonable, good faith estimate of an amount (hereinafter
the "Spread") equal to the difference between the net amount per share payable
in the Acquisition, or as a result of the Acquisition, less the exercise price
per share of the Option. In estimating the Spread, appropriate adjustments to
give effect to the existence of the options shall be made, such as deeming the
Options to have been exercised, with the Company receiving the exercise price
payable thereunder, and treating the shares receivable upon exercise of the
Options as being outstanding in determining the net amount per share. For
purposes of this section, an "Acquisition" shall mean any transaction in which
substantially all of the Company's assets are acquired or in which a controlling
amount of the Company's outstanding shares are acquired, in each case by a
single person or entity or an affiliated group of persons and/or entities. For
purposes of this section a controlling amount shall mean more than 50% of the
issued and outstanding shares of stock of the Company. The Company shall have
such an option regardless of how the Acquisition is effectuated, whether by
direct purchase, through a merger or similar corporate transaction, or
otherwise. In cases where the acquisition consists of the acquisition of assets
of the Company, the net amount per share shall be calculated on the basis of the
net amount receivable with respect to shares upon a distribution and liquidation
by the Company after giving effect to expenses and charges, including but not
limited to taxes, payable by the Company before the liquidation can be
completed.
Where the Company does not exercise its option under this section 13.1, the
remaining provisions of this Article XIII shall apply, to the extent applicable.
13.2 Merger or Consolidation. Subject to section 13.1 and to any
-------------------------
required action by the stockholders, if the Company shall be the surviving
corporation in any merger or consolidation, any Option granted hereunder shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to the Option would have been entitled in such merger or
consolidation.
12
<PAGE>
13.3 Other Transactions. Subject to section 13.1, dissolution or a
-------------------
liquidation of the Company or a merger and consolidation in which the Company is
not the surviving corporation shall cause every Option outstanding hereunder to
terminate as of the effective date of the dissolution, liquidation, merger or
consolidation. However, the Optionee either (i) shall be offered a firm
commitment whereby the resulting or surviving corporation in a merger or
consolidation will tender to the Optionee an option (the "Substitute Option") to
purchase its shares on terms and conditions both as to number of shares and
otherwise, which will substantially preserve to the Optionee the rights and
benefits of the Option outstanding hereunder granted by the Company, or (ii)
shall have the right immediately prior to such dissolution, liquidation, merger,
or consolidation to exercise any unexercised Options whether or not then
exercisable, subject to the provisions of this Plan. The Board shall have
absolute and uncontrolled discretion to determine whether the Optionee has been
offered a firm commitment and whether the tendered Substitute Option will
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder. In any event, any Substitute Option for an Incentive
Stock Option shall comply with the requirements of the Code.
Article XIV. Securities Registration
------------------------------------
14.1 Securities Registration. In the event that the Company shall deem
-----------------------
it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.
Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he is acquiring such
shares for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, and (b) that before any
transfer in connection with the resale of such shares, he will obtain the
written opinion of counsel to the Company, or other counsel acceptable to the
Company, that such shares may be transferred. The Company may also require that
the certificates representing such shares contain legends reflecting the
foregoing.
13
<PAGE>
Article XV. Tax Withholding
----------------------------
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
----------------
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state and local withholding tax requirements.
Unless otherwise determined by the Board, withholding obligations may be settled
with Stock, including Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company, its subsidiaries
and affiliates shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment otherwise due to the participant.
Article XVI. Indemnification
-----------------------------
16.1 Indemnification. To the extent permitted by law, each person who
---------------
is or shall have been a member of the Board shall be indemnified and held
harmless by the Company against and from any loss, cost, liability, or expense
that may be imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may be a party
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of judgment in any such action, suit or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
it on his own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's articles of incorporation or bylaws, as a matter of
law, or otherwise, or any power that the Company may have to indemnify them or
hold them harmless.
Article XVII. Requirements of Law
----------------------------------
17.1 Requirements of Law. The granting of Options and the issuance of
--------------------
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan and all agreements hereunder shall be
--------------
construed in accordance with and governed by the laws of the state of Delaware.
14
<PAGE>
Article XVIII. Compliance with Code
------------------------------------
18.1 Compliance with Code. Incentive Stock Options granted hereunder
----------------------
are intended to qualify as "incentive stock options" under Code section 422. If
any provision of this Plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code. Options granted hereunder to any person who is a "covered employee"
under Code section 162(m) at any time when the Company is subject to Code
section 162(m) are intended to qualify as performance-based compensation within
the meaning of Code section 162(m)(4)(C). If any provision of this Plan is
susceptible to more than one interpretation, such interpretation shall be given
thereto as is consistent with Options granted under this Plan to such "covered
employees" being treated as performance-based compensation under Code section
162(m).
15
Exhibit 21
Subsidiaries of Racing Champions Corporation
As of March 24, 2000, the subsidiaries of Racing Champions Corporation were
as follows:
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- -------------------------------------- -----------------------------
<S> <C>
Racing Champions, Inc Illinois
Racing Champions Limited Hong Kong
Racing Champions South, Inc North Carolina
Racing Champions Ertl, Inc Delaware
Green's Racing Souvenirs, Inc. Virginia
DiecastExpress.com, Inc. Delaware
Racing Champions Worldwide Limited United Kingdom
Racine Champions International Limited United Kingdom
RCNA Holdings, Inc. Delaware
</TABLE>
______________
All subsidiaries are wholly owned, directly or indirectly, by Racing
Champions Corporation.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 21, 2000 included in this Form 10-K into
the Company's previously filed Registration Statements on Form S-8 (File Nos.
333-50957, 333-50959, 333-58037, 333-58035 and 333-81705) and on Form S-3 (File
No. 333-71629). It should be noted that we have not audited any financial
statements of the Company subsequent to December 31, 1999 or performed any audit
procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
March 23, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 0
<CASH> 12265
<SECURITIES> 0
<RECEIVABLES> 50172
<ALLOWANCES> 5455
<INVENTORY> 28145
<CURRENT-ASSETS> 102861
<PP&E> 52051
<DEPRECIATION> 13931
<TOTAL-ASSETS> 276282
<CURRENT-LIABILITIES> 63833
<BONDS> 123000
0
0
<COMMON> 164
<OTHER-SE> 101684
<TOTAL-LIABILITY-AND-EQUITY> 276282
<SALES> 252032
<TOTAL-REVENUES> 252032
<CGS> 119339
<TOTAL-COSTS> 132683
<OTHER-EXPENSES> 89705
<LOSS-PROVISION> 2379
<INTEREST-EXPENSE> 7650
<INCOME-PRETAX> 1427
<INCOME-TAX> 892
<INCOME-CONTINUING> 535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 535
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
