SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-22635
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Racing Champions Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4088307
----------------- --------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
---------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 630-790-3507
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On March 31, 2000, there were outstanding 14,714,183 shares of the Registrant's
$.01 par value common stock.
<PAGE>
RACING CHAMPIONS CORPORATION
FORM 10-Q
MARCH 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1 Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the Quarters
Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market
Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Racing Champions Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . $ 10,915 $ 12,265
Accounts receivable, net. . . . . . . . . . . . . . 36,066 44,718
Inventory . . . . . . . . . . . . . . . . . . . . . 25,790 28,145
Other current assets. . . . . . . . . . . . . . . . 16,337 17,734
Property and equipment, net . . . . . . . . . . . . 37,178 38,120
Excess purchase price over net assets acquired, net 130,421 131,357
Other non-current assets. . . . . . . . . . . . . . 3,791 3,943
------------------- -------------------
Total assets . . . . . . . . . . . . . . . . . . $ 260,498 $ 276,282
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses . . . . . . . $ 30,257 $ 33,990
Other current liabilities . . . . . . . . . . . . . 2,863 4,593
Bank term loans . . . . . . . . . . . . . . . . . . 115,000 115,000
Line of credit. . . . . . . . . . . . . . . . . . . 1,000 8,000
Other long-term liabilities . . . . . . . . . . . . 13,886 12,851
------------------- -------------------
Total liabilities. . . . . . . . . . . . . . . . 163,006 174,434
Stockholders' equity. . . . . . . . . . . . . . . . 97,492 101,848
------------------- -------------------
Total liabilities and stockholders' equity . . . $ 260,498 $ 276,282
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Racing Champions Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
2000 1999
--------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . $ 45,427 $ 35,272
Cost of sales . . . . . . . . . . . . 26,611 16,618
--------------- --------------
Gross profit. . . . . . . . . . . . . 18,816 18,654
Selling, general and administrative
expenses. . . . . . . . . . . . . . 16,635 12,690
Amortization of intangible assets . . 947 713
--------------- --------------
Operating income. . . . . . . . . . . 1,234 5,251
Interest expense. . . . . . . . . . . 2,390 564
Other expense (income). . . . . . . . (55) 60
--------------- --------------
Income (loss) before income taxes . . (1,101) 4,627
Income tax expense (benefit). . . . . (290) 1,874
--------------- --------------
Net income (loss) . . . . . . . . . . (811) 2,753
=============== ==============
Net income (loss) per common share:
Basic . . . . . . . . . . . . . . . $ (0.05) $ 0.17
Diluted . . . . . . . . . . . . . . $ (0.05) $ 0.17
=============== ==============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 15,322 16,081
Diluted . . . . . . . . . . . . . . 15,564 16,557
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Racing Champions Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . $ (811) $ 2,753
Depreciation and amortization. . . . . . . . . . . . . 3,561 1,547
Deferred taxes and interest. . . . . . . . . . . . . . 1,277 362
Gain/loss on sale of assets. . . . . . . . . . . . . . (1) 13
Provision for allowances for doubtful accounts . . . . 230 -
Changes in operating assets and liabilities. . . . . . 6,608 (5,110)
------------ ------------
Net cash provided by (used in) operating activities. 10,864 (435)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . (1,665) (1,201)
Proceeds from disposal of property and equipment . . . 178 15
Decrease (increase) in other non-current assets. . . . 62 (68)
------------ ------------
Net cash used in investing activities. . . . . . . . (1,425) (1,254)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from bank, net . . . . . . . . . . . . . . . (7,000) (1,000)
Issuance of common stock . . . . . . . . . . . . . . . 1 275
Purchase of stock to be held in treasury . . . . . . . (3,796) -
Expense recognized under option grants . . . . . . . . 6 5
------------ ------------
Net cash used in financing activities. . . . . . . . (10,789) (720)
Net decrease in cash and cash equivalents. . . . . . (1,350) (2,409)
------------ ------------
Cash and cash equivalents, beginning of period . . . . . 12,265 6,242
------------ ------------
Cash and cash equivalents, end of period . . . . . . . . $ 10,915 $ 3,833
============ ============
Supplemental information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 2,028 $ 493
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . $ 394 $ 186
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Racing
Champions Corporation (the "Company") and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated.
The accompanying condensed consolidated financial statements have been prepared
by management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of March 31, 2000, the results of
operations for the three month period ended March 31, 2000 and the cash flows
for the three month period ended March 31, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these consolidated financial statements
be read in conjunction with the consolidated financial statements and related
notes included in the Company's Form 10-K for the year ended December 31, 1999.
The results of operations for the three month period ended March 31, 2000 are
not necessarily indicative of the operating results for the full year.
NOTE 2 - BUSINESS COMBINATIONS
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of The Ertl Company, Inc. and certain of its affiliates
("Ertl") for approximately $95 million. This transaction has been accounted for
under the purchase method of accounting and accordingly, the operating results
of Ertl have been included in the Company's consolidated financial statements
since the date of acquisition. The purchase was funded with a draw-down on the
Company's credit facility (Note 7). The excess of the aggregate purchase price
over the fair market of net assets acquired of approximately $35 million is
being amortized over 40 years.
The following unaudited pro forma consolidated results of operations for the
three months ended March 31, 1999 assume that the Ertl acquisition occurred as
of January 1, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
March 31, 1999
----------------
<S> <C>
Net sales . . . $ 66,218
Net loss. . . . (868)
Loss per share:
Basic . . . . $ (0.05)
Diluted . . . (0.05)
</TABLE>
6
<PAGE>
Pro forma data does not purport to be indicative of the results that would have
been obtained had this acquisition actually occurred at the beginning of the
period presented and is not intended to be a projection of future results.
NOTE 3 - RESTRUCTURING AND OTHER CHARGES
In the second quarter of 1999, the Company recorded restructuring and other
charges of $6.4 million. These charges related to the Company's alignment of
operations, product lines and direct marketing efforts with the consolidation
plans for those same areas at Ertl. Approximately $2.2 million of the charges
relates 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.
As of March 31, 2000, all of these charges have been expended.
NOTE 4 - RECAPITALIZATION
On April 30, 1996, an investor group consummated a recapitalization (the
"Recapitalization") which involved the following: (a) the Company's purchase of
all of the outstanding stock of Racing Champions, Inc. ("RCI") and substantially
all of the assets of Dods-Meyer, Ltd. ("DML") (collectively the "RCI Group");
(b) the acquisition by Banerjan Company Limited (subsequently renamed Racing
Champions Limited) of substantially all of the assets of Racing Champions
Limited, Garnett Services, Inc. and Hosten Investment Limited (collectively the
"RCL Group"); and (c) the contribution by the Company of all the outstanding
stock of Racing Champions Limited to RCI.
The acquisitions were accounted for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired was
approximately $93.5 million. Of this excess, approximately $88.7 million has
been recorded as an intangible asset and is being amortized on a straight-line
basis over 40 years and approximately $4.9 million was recorded as inventory and
property and equipment.
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
7
<PAGE>
and by distribution channel. Amounts for the quarters ended March 31, 2000 and
1999 are as shown in the table below.
<TABLE>
<CAPTION>
(amounts in thousands) 2000 1999
------- -------
<S> <C> <C>
Collectible die-cast . . $32,274 $29,143
Other products . . . . . 13,153 6,129
------- -------
Net Sales. . . . . . . . $45,427 $35,272
------- -------
Mass retailers . . . . . $19,012 $23,140
Wholesale and trackside. 21,096 6,940
Premium/promotional. . . 4,775 2,343
Direct and other . . . . 544 2,849
------- -------
Net sales. . . . . . . . $45,427 $35,272
------- -------
</TABLE>
Information by geographic area is set forth in the table below. Operating
income represents income before income taxes and interest expense.
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
Net sales:
United States . . . . . . . . . . . . . . . . . $ 40,529
Foreign . . . . . . . . . . . . . . . . . . . . 5,238
Sales and transfers between geographic areas. (340)
---------
Combined total. . . . . . . . . . . . . . . . . . $ 45,427
---------
Operating income:
United States . . . . . . . . . . . . . . . . . $ 683
Foreign . . . . . . . . . . . . . . . . . . . . 551
---------
Combined total. . . . . . . . . . . . . . . . . . $ 1,234
---------
Identifiable assets:
United States . . . . . . . . . . . . . . . . . $233,745
Foreign . . . . . . . . . . . . . . . . . . . . 26,753
---------
Combined total. . . . . . . . . . . . . . . . . . $260,498
---------
</TABLE>
NOTE 6 - COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distributions to owners, in a financial statement for the period in
which they are recognized.
8
<PAGE>
Comprehensive loss at March 31, 2000 is calculated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net loss . . . . . . . . . . . . . . $(811)
Other comprehensive income - foreign
currency translation adjustments . 51
------
Comprehensive loss . . . . . . . . . $(760)
======
</TABLE>
NOTE 7 - DEBT
In connection with the acquisition of Ertl, the Company entered into a new
credit agreement, 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 March 31, 2000, the Company had $1.0 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 March 31, 2000 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 March
31, 2000, 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 March 31, 2000, the Company was not in compliance with these key
financial covenants. The Company has obtained waivers for each of these
violations which extend through July 17, 2000. During the term of the waivers,
the Company may not borrow more than $16.0 million under the revolving loan and
outstanding borrowings under the credit agreement will bear interest at the
LIBOR rate plus 2.75%. Also, during the term of the waivers, the Company must
pay a waiver fee on the outstanding borrowings under the credit agreement at a
rate of 0.50% per annum. As of May 15, 2000, the Company had $16.0 million
outstanding on the revolving loan. The Company is in the process of negotiating
amended terms for its current bank agreement and the management of the Company
believes that the amendment will be completed on or before July 15, 2000.
9
<PAGE>
The Company's credit agreement also requires that the Company maintain an
interest rate protection agreement. Effective June 3, 1999, the Company entered
into an interest rate collar transaction covering $35 million of its debt, with
a cap based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement,
which has quarterly settlement dates, is in effect through June 3, 2002. During
the first quarter of 2000, the effect of this agreement was insignificant.
NOTE 8 - COMMON STOCK
Authorized and issued shares and par values of the Company's voting common stock
are as follows:
<TABLE>
<CAPTION>
Shares outstanding at Shares outstanding at
Authorized shares Par Value March 31, 2000 December 31, 1999
----------------- ---------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Voting Common Stock 28,000,000 $ .01 14,714,183 15,657,208
</TABLE>
On September 1, 1999, the Company announced that its board of directors had
authorized stock repurchases by the Company for a term of one year and up to an
aggregate amount of $10.0 million. At March 31, 2000, the Company had purchased
1,726,500 shares of its outstanding common stock for approximately $7.4 million.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial condition,
results of operations, liquidity and capital resources. The discussion and
analysis should be read in conjunction with the Company's unaudited consolidated
financial statements and notes thereto included elsewhere herein.
The Company acquired The Ertl Company, Inc. and certain of its affiliates
("Ertl") on April 13, 1999, in a transaction accounted for under the purchase
method of accounting. Accordingly, the operations of Ertl are included in the
Company's operations from the date of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net sales. Net sales increased $10.1 million, or 28.6%, to $45.4 million for
the three months ended March 31, 2000 from $35.3 million for the three months
ended March 31, 1999. The increase in sales is attributable to the acquisition
of Ertl. Sales in the Racing Champions brand die cast collectibles category
decreased approximately $20.0 million, quarter to quarter. This sales decrease
was primarily attributable to the weak performance in NASCAR die cast
collectibles, as compared to strong sales in the first quarter of 1999 coming
off of NASCAR's 50th Anniversary. Sales of other Racing Champions brand
products decreased approximately $2 million, mostly in the NASCAR apparel and
souvenirs category, quarter to quarter.
Gross profit. Gross profit increased $0.1 million, or 0.6%, to $18.8 million
for the three months ended March 31, 2000 from $18.7 million for the three
months ended March 31, 1999. The gross profit margin (as a percentage of net
sales) decreased to 41.4% in 2000 compared to 52.9% in 1999. The low volume in
the first quarter of 2000 negatively impacted the gross margin for that period.
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. There were no major
changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.9 million, or 30.7%, to $16.6 million for
the three months ended March 31, 2000 from $12.7 million for the three months
ended March 31, 1999. The increase in selling, general and administrative
expenses is due to the addition of the Ertl operations. As a percentage of net
sales, selling, general and administrative expenses increased slightly to 36.6%
for the three months ended March 31, 2000 from 36.0% for the three months ended
March 31, 1999. The increase as a percent of sales is a result of
11
<PAGE>
the addition of Ertl as well as spreading fixed operating expenses over the low
sales volume in the first quarter of 2000.
Operating income. Operating income decreased $4.1 million, or 77.4%, to $1.2
million for the three months ended March 31, 2000 from $5.3 million for the
three months ended March 31, 1999. As a percentage of net sales, operating
income decreased to 2.6% for the three months ended March 31, 2000 from 15.0%
for the three months ended March 31, 1999. The operating margin has been
negatively impacted by the low sales volume in the first quarter of 2000.
Interest expense. Interest expense of $2.4 million for the three months ended
March 31, 2000 and $0.6 million for the three months ended March 31, 1999
related primarily to bank term loans and line of credit borrowings. The
increase in interest expense, quarter to quarter, is due to increased borrowings
in connection with the acquisition of Ertl.
Income tax. Income tax expense for the three months ended March 31, 2000, and
March 31, 1999 include provisions for federal, state and foreign income taxes at
an effective rate of 26.3% and 40.5%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $10.9 million during the three
months ended March 31, 2000. Capital expenditures for the three months ended
March 31, 2000 were approximately $1.7 million, of which approximately $1.5
million was for molds and tooling.
On April 13, 1999, in conjunction with the Company's acquisition of Ertl, the
Company paid all outstanding amounts on its prior credit facility and entered
into a new credit facility, which was amended on August 30, 1999. The new credit
agreement provides for a revolving loan, a five year term loan and the issuance
of letters of credit. The revolving loan allows the Company to borrow up to
$60.0 million at any time prior to March 31, 2004. At March 31, 2000, the
Company had $1.0 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 term loan bear interest, at the Company's
option, at an alternate base rate plus a margin that varies between 0.00% and
1.25% or at a LIBOR rate plus 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 March 31, 2000 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
12
<PAGE>
total debt to consolidated EBITDA. At March 31, 2000, 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 March 31, 2000, the Company was not in compliance with these key
financial covenants. The Company has obtained waivers for each of these
violations which extend through July 17, 2000. During the term of the waivers,
the Company may not borrow more than $16.0 million under the revolving loan and
outstanding borrowings under the credit agreement will bear interest at the
LIBOR rate plus 2.75%. Also, during the term of the waivers, the Company must
pay a waiver fee on the outstanding borrowings under the credit agreement at a
rate of 0.50% per annum. As of May 15, 2000, the Company had $16.0 million
outstanding on the revolving loan. The Company is in the process of negotiating
amended terms for its current bank agreement and the management of the Company
believes that the amendment will be completed on or before July 15, 2000.
The Company's anticipated debt service obligations under the new credit
facilities for the remainder of 2000 for scheduled principal and interest
payments are approximately $24.3 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. The Company's
working capital requirements fluctuate during the year based on the seasonality
related to sales. Due to seasonal increases in demand for the Company's
products, working capital financing requirements are usually highest during the
third quarter and fourth quarter. The Company expects that capital expenditures
during 2000, principally for molds and tooling, will be approximately $11.0
million. The Company believes that its cash flow from operations and cash on
hand will be sufficient to meet its working capital and capital expenditure
requirements and provide the Company with adequate liquidity to meet anticipated
operating needs into the third quarter of 2000. However, if the Company's
capital requirements vary materially from those currently planned, the Company
may require additional debt or equity financing. There can be no assurance that
financing, if needed, would be available on terms acceptable to the Company, if
at all. Any inability by the Company to successfully negotiate an amendment to
its bank agreement may have a material adverse effect on the Company's business
and financial condition.
13
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FORWARD-LOOKING STATEMENTS
A number of the matters discussed in this report that are not historical or
current facts deal with potential future circumstances and developments. The
Company's actual results and future developments could differ materially from
the results or developments expressed in, or implied by, these forward-looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, but are not
limited to, the following: (1) the Company's growth is dependent upon its
ability to continue to conceive, design, source and market new products and upon
continuing market acceptance of its existing and future products; (2)
competition in the markets for the Company's products may increase
significantly; (3) the Company is dependent upon continuing licensing
arrangements with vehicle manufacturers, agricultural equipment manufacturers,
major race sanctioning bodies, race team owners, drivers, sponsors, agents and
other licensors; (4) the Company relies upon four independently owned factories
located in China to manufacture a significant portion of its vehicle replicas
and certain other products; (5) the Company is dependent upon the continuing
willingness of leading retailers to purchase and provide shelf space for the
Company's products; (6) the Company's ability to negotiate an amendment to its
current bank agreement on or before July 15, 2000 and the terms of any such
amendment that may be completed; (7) the Company's ability to obtain financing
if it is unable to reach an agreement with its lenders or if the Company's
capital requirements change; and (8) general economic conditions in the
Company's markets.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's credit agreement requires that the Company maintain an interest
rate protection agreement. Effective June 3, 1999, the Company entered into an
interest rate collar transaction covering $35 million of its debt, with a cap
based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement, which has
quarterly settlement dates, is in effect through June 3, 2002. During the
quarter ended March 31, 2000, the effect of this agreement was insignificant.
Based on the Company's interest rate exposure on variable rate borrowings at
March 31, 2000, a one-percentage-point increase in average interest rates on the
Company's borrowings would increase future interest expense by approximately
$120,000 per month.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2000, a lawsuit was filed in U.S. District Court for the
Central District of California against certain of the Company's subsidiaries.
The complaint makes patent infringement claims against the Company relating to
certain sports trading cards that incorporate memorabilia. The plaintiff claims
damages in excess of $4,000,000, and also alleges that such damages be trebled
in an amount in excess of $12,000,000. The Company disputes the claims and
intends to vigorously defend its position, although no assurances can be given
as to the outcome of this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company during
the first quarter of 2000.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (File No. 0-22635)
filed by the Company with the Securities and Exchange Commission on
March 29, 1999).
3.2 First Amendment to Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (File
No. 0-22635) filed by the Company with the Securities and Exchange
Commission on March 29, 1999).
16
<PAGE>
3.3 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 0-22635) filed by the
Company with the Securities and Exchange Commission on August 14, 1998).
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: None in the first quarter of 2000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 15th day of May, 2000.
RACING CHAMPIONS CORPORATION
By /s/ Robert E. Dods
----------------------------------------
Robert E. Dods, Chief Executive Officer
(Duly Authorized Officer)
By /s/ Curtis W. Stoelting
------------------------------------------
Curtis W. Stoelting, Executive Vice
President - Finance and Operations and
Secretary (Principal Financial Officer and
Principal Accounting Officer)
18
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,915
<SECURITIES> 0
<RECEIVABLES> 41,564
<ALLOWANCES> 5,498
<INVENTORY> 25,790
<CURRENT-ASSETS> 89,108
<PP&E> 53,719
<DEPRECIATION> 16,541
<TOTAL-ASSETS> 260,498
<CURRENT-LIABILITIES> 57,121
<BONDS> 116,000
0
0
<COMMON> 164
<OTHER-SE> 97,328
<TOTAL-LIABILITY-AND-EQUITY> 260,498
<SALES> 45,427
<TOTAL-REVENUES> 48,476
<CGS> 21,310
<TOTAL-COSTS> 26,611
<OTHER-EXPENSES> 17,582
<LOSS-PROVISION> 230
<INTEREST-EXPENSE> 2,390
<INCOME-PRETAX> (1,101)
<INCOME-TAX> (290)
<INCOME-CONTINUING> (811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (811)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
