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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
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Commission file number 0-22635
Racing Champions Corporation
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(Exact name of Registrant as Specified in Its Charter)
Delaware 36-4088307
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 630-790-3507
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
NA NA
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
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(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 Issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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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
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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 13, 1998: $65,907,132
Number of shares of the Registrant's common stock outstanding as of March
13, 1998: 13,242,382
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
GENERAL
Racing Champions Corporation ("Racing Champions" or the "Company") is a
leading producer and marketer of collectibles. Racing Champions is best known
for its extensive line of officially licensed die cast replicas of actual race
cars and related vehicles from the five most popular U.S. professional racing
series, including NASCAR. Since its inception in 1989, Racing Champions has
capitalized on the growing popularity of motor sports 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 non-racing collectibles by introducing the Racing Champions Mint
line of die cast replicas of classic and late-model vehicles. Racing Champions
continued this expansion in 1997 with the introduction of additional lines of
non-racing vehicle replicas and two new lines of collectible pewter figures.
In 1998, Racing Champions plans to introduce Racing Champions Authentics, a new
line of die cast vehicle replicas sold exclusively at hobby and collector
shops, limited edition racing replicas relating to NASCAR's 50th anniversary,
additional lines of racing and classic and custom vehicle replicas, and a new
line of collectible pewter figures. From 1990, Racing Champions' first full
year of operations, through 1997, Racing Champions' net sales grew from
approximately $5 million to $77 million.
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
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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 29.5% of the outstanding shares of the Company's
common stock, par value $0.01 per share (the "Common Stock").
COLLECTIBLES INDUSTRY
The collectibles industry is composed of numerous niche markets served by
a wide variety of producers and distributors. Collectible products include
figurines, dolls, ceramic buildings, prints, plates, glass, ornaments, steins,
music boxes, trading cards and die cast items, including vehicles. Collectible
products are generally of high quality, produced in limited quantities and
targeted to adults. According to the Collectibles Industry Report for 1997 by
Unity Marketing, an independent market research firm, the collectibles industry
generated customer sales of approximately $9.2 billion in the United States in
1996. This represented a 15.0% increase from 1995 and a 30% increase from
1994. Demographic trends are expected to positively impact the industry, as
the baby boom generation ages and has higher discretionary income that can be
spent on leisure goods such as collectibles. Racing Champions is currently
focused on the following two segments of the collectibles market.
DIE CAST VEHICLE REPLICAS
The die cast vehicle industry generated consumer sales of approximately
$1.2 billion in the United States in 1996. Die cast vehicles include airplanes,
trains, tractors, and most significantly, automobiles and trucks and have been
produced for many years by a wide variety of companies. While a significant
percentage of die cast products have historically been sold as toys, an active
base of adult die cast collectors has developed over time. Various secondary
markets for die cast vehicles have subsequently developed with a number of
periodicals regularly reporting the secondary market value of a wide variety of
die cast vehicles.
Classic and Custom Vehicle Replicas. The primary market of classic and
custom die cast vehicle replicas is comprised of boys ages five and over and
adults. Collectible periodicals have for many years included die cast vehicles
such as 1:64 scale cars originally produced by Matchbox(R). While collector
interest in die cast cars continues, Racing Champions believes that the quality
of new 1:64 scale vehicles has declined over the years as other manufacturers
reduced features and costs in order to compete on a price basis with toys.
Racing Champions has targeted its classic and custom vehicle replicas to adult
collectors who make multiple purchases of die cast vehicles because of their
affinity for automobiles and trucks, the authenticity of the replicas and the
fun of collecting.
Racing Replicas. Due to the popularity of motor sports, racing replicas
emerged as a significant and growing category of the die cast vehicle industry.
The racing replica industry's primary market is racing fans and adult
collectors. Racing Champions believes that its customers are predominately
male with approximately 80% age 24 and older. These fans are attracted to
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racing replicas due to the highly detailed, precise nature of the replicas and
the popularity of racing and the teams, drivers and sponsors represented by the
replicas. Established secondary markets exist for racing replica products,
including Racing Champions', with market values reported in collector magazines
such as Becketts, Die Cast Digest and Tuff Stuff's RPM.
Racing Champions believes that demand for racing replicas will continue to
increase as the interest in motor sports grows. The North American motor
sports industry currently enjoys a large and growing spectator base with total
attendance in 1996 exceeding 15.4 million at 215 sanctioned events. By
comparison, approximately 14.6 million people attended the 240 NFL regular
season games. The most popular of the motor sports circuits is the NASCAR
Winston Cup Series. From 1990 to 1996, attendance at Winston Cup events
increased from approximately 3.3 million to 5.5 million, an increase of
approximately 67%. During the same period, sales of NASCAR licensed
merchandise have increased from $60 million to $770 million, a compound annual
growth rate of approximately 53%. Racing Champions has contributed to this
growth and has been NASCAR's leading licensee since 1992. Overall Nielsen
ratings for Winston Cup telecasts increased approximately 20% from 1994 to 1996
and household viewership increased approximately 27% for the same period. The
growth in motor sports in general, and NASCAR in particular, is expected to
continue for a number of reasons, including: (i) the opening of new
superspeedways in the Dallas/Ft. Worth and Los Angeles markets and the
inclusion of these markets in the 1997 Winston Cup Series; (ii) the expansion
and upgrade of many existing motor sports facilities throughout the U.S.; (iii)
the conducting of IRL and other non-NASCAR events at traditional NASCAR venues;
and (iv) increased television exposure in response to favorable ratings
increases.
COLLECTIBLE FIGURES AND FIGURINES
Collectible figures and figurines are the largest category within the
collectibles industry with over $3 billion in consumer sales in 1996. These
figures and figurines are produced in various mediums including acrylic,
plastic, porcelain, crystal and pewter and depict characters from a wide
variety of themes including nostalgia, entertainment, sports and wildlife. The
majority of this market includes higher quality figures and figurines which are
generally intended for display. These items are often offered in limited
edition sets, which enhances their collectibility. A portion of this market
includes collectible "action" figures, which typically are plastic, and
represent characters from comics, movies, television shows or professional
sports. Established secondary markets exist for collectible action figures,
with market values reported in collector magazines such as White's Collecting
Figures and Action Figure Digest.
Comic Book Characters. Comic books have been an entertainment medium
since their inception in the late 1930's. Many of today's favorite mythical
characters were created in the pages of comic books, including such popular
superheroes as Batman, Superman and Spiderman. Related entertainment products
such as movies and television programs increase the reach of comic book
characters to a wide spectrum of consumers and collectors. Comic books and
comic book characters have grown into a significant adult collectibles category
as a result of comic books' 60 year history, unique and imaginative characters
and thousands of published titles. The comic book character market primarily
attracts adult males and is supported through national and
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regional collector shows, auctions and dedicated publications such as
Overstreets Price Guides, Wizard Magazine and Fan Magazine.
Sports Collectibles. The sports collectible and memorabilia business has
grown over the last decade from primarily trading cards to encompass a large
variety of products including autographed equipment, pictures and replica
figures. The collector base consists of both children and adults, the majority
of whom are male. Sports memorabilia and collectible products are in high
demand due to the increase in media exposure and the celebrity status afforded
past and present athletes. Collector shows, auctions and dedicated
publications such as Becketts and Sports Collectors Digest help support the
growth in secondary market trading of sports collectibles and memorabilia which
has further enhanced collector interest in the category.
Star Trek Collectibles. With five television series, eight motion
pictures and more than 500 fan publications, Star Trek has developed into one
of the most popular and enduring entertainment and collectible franchises.
More than 200 licensees currently sell a wide variety of Star Trek merchandise
ranging from chess sets to 3-D collector plates. Paramount, the producer of
Star Trek, estimates that Star Trek products have generated more than $2.5
billion at retail since the inception of the first Star Trek television series
in the late 1960's.
PENDING ACQUISITION OF WHEELS SPORTS GROUP, INC.
Racing Champions has entered into an Agreement and Plan of Merger with
Wheels Sports Group, Inc. ("Wheels"), dated as of December 4, 1997, as amended
(the "Merger Agreement"), pursuant to which Racing Champions will acquire
Wheels in a tax-free reorganization. Wheels is a marketer and distributor of
officially licensed NASCAR-related merchandise, including collectibles, apparel
and souvenirs. The Merger Agreement contemplates that Racing Champions'
acquisition of Wheels will be effected by the merger of a wholly owned
subsidiary of Racing Champions into Wheels (the "Merger") pursuant to which the
stockholders of Wheels will receive 0.70 shares of Common Stock in exchange for
each outstanding share of Wheels common stock.
The obligations of the parties to cause the Merger to be consummated are
subject to the satisfaction or waiver in writing of certain conditions,
including approval by the stockholders of Wheels and Racing Champions, the
filing and effectiveness of a registration statement on Form S-4 with the
Securities and Exchange Commission which will include the joint proxy
statement/prospectus that will be used to solicit proxies from the stockholders
of Wheels and Racing Champions, and the receipt of necessary regulatory
approvals and other matters. Because there are significant conditions
remaining to be satisfied with respect to the pending Merger, no assurance can
be given that the Merger will be consummated or, if consummated, that the terms
of the Merger will be as presently contemplated.
BUSINESS STRATEGY
Racing Champions' objectives are to (i) expand its racing replica business
by capitalizing on the growing popularity of motor sports; (ii) leverage its
brand name, reputation with collectors and established distribution and
manufacturing relationships by developing new collectible
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products; and (iii) supplement its internal growth through the pursuit of
strategic acquisitions. Racing Champions' primary strategies for achieving
these objectives are as follows:
Focus on Collectible Racing Replicas. Racing Champions is uniquely
focused on developing collectible scaled die cast vehicle replicas, with an
emphasis on racing vehicles that compete in NASCAR racing events, one of the
fastest growing sports in the United States. Racing Champions believes that it
had the largest domestic share in 1997 of the collectible scaled die cast
racing replica category. Key to that achievement is the commitment of Racing
Champions to fostering the collectibility of its products, including carefully
managing quantities produced and continually freshening product offerings by
staggering release dates. Sales of Racing Champions' collectible NASCAR racing
replicas increased by more than 29% in 1997. In 1996, Racing Champions took its
expertise in racing die cast replicas and applied it to develop new lines of
non-racing vehicle replicas. Racing Champions' non-vehicle racing replicas
currently includes seven product lines and generated over $11 million of sales
in 1997.
Authenticity Through Licensing. Much of Racing Champions' success is
based upon its expertise in producing highly detailed collectibles with a
reputation for quality workmanship and authenticity. Producing authentic
collectibles generally requires Racing Champions to secure licensing agreements
with representatives of the item or person to be replicated. For example,
Racing Champions' NASCAR die cast racing replicas require licensing agreements
with that sport's organizing body, team owners, drivers, sponsors and vehicle
manufacturers, among others. Currently, Racing Champions maintains licenses
with over 90% of NASCAR teams. After the consummation of the Merger, Racing
Champions expects that Wheels' licensing arrangements will complement Racing
Champions' licensing arrangements and that the combined company will be well
positioned to pursue licenses with top drivers.
Primarily Mass Merchant Distribution. Racing Champions distributes its
products primarily through mass merchant retailers such as K-Mart, Target, Toys
'R' Us and Wal-Mart, which provides a strong demographic fit with Racing
Champions' targeted customers - male adults over age 25. By focusing on this
high volume channel of distribution, Racing Champions realizes substantial
economies of scale. By controlling product and selling costs, Racing Champions
can sell at reduced prices without adversely affecting quality. Racing
Champions has also consistently increased shelf space for its products, with
displays for Racing Champions' products in over 20,000 retail locations.
Maintain Dedicated External Manufacturing Relationships. Racing Champions
maintains long-standing relationships with independent, dedicated suppliers in
China for the production of its die cast products. Racing Champions Limited,
the Company's Hong Kong subsidiary (the "Hong Kong Subsidiary"), closely
oversees and coordinates production. Racing Champions believes that its
relationships with its suppliers provide many advantages, including
flexibility, reliability and lower costs. Within the last 12 months, two of
Racing Champions' suppliers have developed new facilities in the Racing
Industrial Zone (the "RIZ Complex") in China. Additional suppliers of Racing
Champions are in the process of developing facilities in the RIZ Complex. The
Hong Kong Subsidiary intends to establish an office in the RIZ Complex to house
its graphic design, engineering, quality control, production scheduling and
administrative personnel. Racing
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Champions believes that the development of the RIZ Complex should allow
increased production, greater efficiency and potential cost savings with
respect to the manufacture of Racing Champions' products.
Strong Growth Through New Products and New Distribution Channels. Key to
Racing Champions' growth strategy is the continuous development of new,
innovative products. For example, since 1996, Racing Champions has created and
expanded its non-racing die cast vehicle replica category to include seven
product lines which generated net sales of $11 million in 1997. After the
consummation of the Merger, the business of Wheels, a leading distributor and
marketer of NASCAR-licensed merchandise, will further broaden Racing Champions'
product offerings while adding significant distribution channels for Racing
Champions' die cast racing replicas.
Pursue Strategic Acquisitions. Racing Champions intends to supplement
internal growth through the pursuit of acquisitions to add new products and
extend Racing Champions' market reach. Racing Champions intends to focus its
acquisition strategy on companies like Wheels that complement Racing Champions'
collectible product offerings.
Experienced Management Team. Behind the success of Racing Champions is a
group of executives with nearly 100 years of combined experience in the
collectibles, consumer products and racing industries. The Racing Champions
management team includes Robert E. Dods, Racing Champions' President, and Boyd
L. Meyer, Racing Champions' Executive Vice President, who co-founded the RCI
Group in 1989 and maintain a significant equity interest in Racing Champions.
PRODUCTS
Racing Champions produces products in the die cast racing replica, classic
and custom vehicle replica and collectible figure categories. Since 1989,
Racing Champions has continually introduced new products and expanded its
product lines. Racing Champions' current products were introduced in the
following years:
YEAR OF
INTRODUCTION PRODUCTS
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1989 1:64 stock car
1990 1:87 team transporter
1991 1:64 team transporter; 1:24 stock car
1993 1:24 pit stop display; 1:64 and 1:24 Premier Edition
stock cars
1994 1:64 Indy style race car; 1:24 Indy style race car;
1:64 sprint car; 1:24 sprint car
1995 1:64 racing truck; 1:24 stock car with opening hood;
1:24 racing truck; 1:18 stock car with opening hood;
1:9 racing motorcycle; 1:24 top fuel dragster
1996 1:64 stock car with opening hood; 1:144 stock car;
1:64 top
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fuel dragster; 1:64 funny car; 1:64 pro stock drag
racer; 1:24 funny car; 1:24 pro stock drag racer;
1:64 Racing Champions Mint
1997 1:144 racing truck; 1:144 team transporter;
1:144 top fuel dragster; 1:144 funny car; 1:144 pro
stock drag racer; 1:24 Hot Rod Collection; 1:64 Hot Rod
Collection; 1:144 Hot Rod Collection; Comic Book
Champions pewter figures; Sports Champions pewter
figures; 1:144 Racing Champions Mint; 1:144 Truckin USA
transporter; 1:144 Dukes of Hazzard vehicles; 1:64
Stock Rods; 1:24 Stock Rods; 1:144 Stock Rods; 1:64
Police USA Collection.
RACING REPLICAS
Racing Champions' racing replicas include a comprehensive line of scaled
stock cars, trucks and team transporters representing most of the vehicles
competing in the current year's NASCAR Winston Cup Series, Busch Grand National
Series and Truck Series by Craftsman. Racing Champions also produces replicas
from other popular racing series including NHRA drag racing, CART and IRL Indy
style racing and World of Outlaws sprint car racing. In 1997, Racing Champions
produced over 1,000 different styles of racing replicas, including various
sizes such as 1:18, 1:24, 1:64, 1:87 and 1:144 scale. A 1:24 scale stock car
replica is approximately eight inches long whereas a 1:64 scale stock car
replica is approximately three inches long. Racing Champions' racing replicas
generally retail at prices ranging from $1 to $30.
NASCAR Vehicles. The NASCAR product line covers stock cars in the Winston
Cup and Busch Grand National Series and racing trucks in the NASCAR Truck
Series by Craftsman. NASCAR stock cars were Racing Champions' initial offering
in the collectible racing replica category. NASCAR products include race cars
and trucks, team transporters and pit stop displays which are produced in
various sizes including 1:18, 1:24, 1:64, 1:87 and 1:144 scale. The NASCAR
product line is produced in an annual Regular Edition as well as special
editions. The special editions are differentiated by more detailed painting,
special packaging and limited edition, serial numbered production runs. In
connection with NASCAR's 50th Anniversary celebration in 1998, Racing Champions
will launch four limited edition 50th Anniversary product lines in unique gold
packaging. Racing Champions also plans to introduce its Signature Drivers
Series in 1998. The Signature Driver Series will consist of 1:64 and 1:24
scale stock cars and 1:64 scale transporters which will feature opening hoods,
intricately designed interiors and engines, and driver-specific packaging.
Racing Champions has entered into licenses with various NASCAR stock car and
truck teams, drivers, agents and sponsors, which allow Racing Champions to
replicate race cars and race trucks and team transporters for over 100 teams.
Indy Style Cars. Racing Champions began production of Indy style cars in
1994. Indy style car products are produced in 1:24 and 1:64 scale sizes.
Racing Champions has entered into licenses which allow Racing Champions to
replicate over 30 cars. Racing Champions also holds a license from the
Indianapolis Motor Speedway to produce special event related vehicles.
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World of Outlaws Sprint Cars. Racing Champions began production of the
World of Outlaws sprint car racing product line in 1994. Sprint car products
are produced in 1:24 and 1:64 scale sizes. Racing Champions has entered into
licenses which allow Racing Champions to replicate over 30 cars.
National Hot Rod Association Drag Racers. Racing Champions introduced its
NHRA product line in 1995. NHRA products are currently produced in 1:24, 1:64
and 1:144 scale sizes. This product line includes licenses for the top fuel,
funny car and pro stock drag racing divisions which allow Racing Champions to
replicate over 55 vehicles.
CLASSIC AND CUSTOM VEHICLE REPLICAS
Racing Champions Mint. In early 1996, Racing Champions introduced the
Racing Champions Mint product line. The Racing Champions Mint is a new concept
building on Racing Champions' racing replica success but still focusing on the
collectible die cast vehicle market. Each month Racing Champions issues an
assortment of six serial numbered, highly detailed 1:64 scale replicas of
classic and late model cars and trucks in color schemes matching those used on
the actual vehicle. Each new issue is sequentially numbered and includes
releases of new models and new paint schemes. The replicas are selected from
actual vehicles manufactured over the past five decades. The limited
production of these replicas enhances their collectibility.
In 1997, Racing Champions introduced a 1:144 scale version of the Racing
Champions Mint. Also in 1997, Racing Champions entered into an agreement with
Petersen Publishing Company which allows for the use of the Motor Trend
Magazine trade name and trademarks on the Racing Champions Mint product line.
Racing Champions believes that the Motor Trend name increases the authenticity
of this product line and creates additional interest with collectors and
automobile enthusiasts. In addition, Racing Champions currently promotes this
product line in Motor Trend Magazine and on Motor Trend's cable television
show.
Hot Rod Collection. Due to the success of Racing Champions Mint and
consumer feedback, Racing Champions launched in early 1997 a new line of
collectible die cast hot rod car replicas. The Racing Champions Hot Rod
Collection is based on an exclusive license with Petersen Publishing Company's
Hot Rod Magazine and includes custom designed hot rod cars in 1:24 and 1:64
scale sizes. In addition to the license, Racing Champions will promote this
product line in Hot Rod Magazine and on Hot Rod Magazine's cable television
show and Power Tour of various U.S. cities. Like Racing Champions Mint, new
Hot Rod Collection models and styles will be released in monthly assortments.
Each vehicle in the Racing Champions Hot Rod Collection is produced in limited
quantity and includes a serial number to enhance collectibility.
Other. Racing Champions introduced several additional lines in 1997 to
continue the expansion of its non-racing vehicle replica category, and Racing
Champions plans to introduce new non-racing vehicle replica lines in 1998.
Racing Champions introduced Stock Rods in 1997, which features the graphics of
current NASCAR stock cars on replicas of modern and vintage cars. In 1997,
Racing Champions also launched the Truckin USA line, which features
over-the-road transporters, and Police USA, which features police vehicles from
various U.S. cities and
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states from the 1930's to the 1990's. In 1998, Racing Champions plans to debut
the WCW and Hot Country Steel lines to complement the Truckin USA and Police
USA lines. Hot Country Steel will depict country music stars on "hot" cars,
while WCW vehicles will contain graphics associated with popular wrestlers in
versions from two popular wrestling associations, WCW and NWO.
COLLECTIBLE PEWTER FIGURES
In 1997, Racing Champions introduced a new product category, collectible
pewter figures. High quality pewter figures had not previously been widely
available through mass merchants. Racing Champions initially focused on two
proven and highly recognizable licensed properties -- comic book characters and
popular athletes. Products in this category are released in continuing series.
Replicas of individual comic book characters and popular athletes are produced
in limited production runs and will not be repeated. In order to further
collectibility, all products are hand numbered and sold with a certificate of
authenticity. In 1998, Racing Champions plans to introduce a new line of Star
Trek collectible pewter figures and vehicles.
Comic Book Champions. In early 1997, Racing Champions began producing the
Comic Book Champions line of collectible pewter replicas, and shipped the first
Comic Book Champions replicas in March 1997. Comic Book Champions is a series
of pewter replicas of comic book characters in action poses. Each figure is
mounted on a die cast stand in front of an encased miniature reproduction of a
comic book cover on which the character appeared. Comic Book Champions will be
produced in Gold, Silver and Modern Age series, representing different eras of
comic book publishing. Racing Champions has separate, nonexclusive licensing
agreements with Marvel Characters, Inc. and DC Comics to use the likenesses of
certain comic book characters and the reproductions of the comic book covers
for this product. Figures in the initial releases included Superman(R),
Batman(R), Spiderman(R), Captain America(R), the Incredible Hulk(R) and the
Joker(R).
Sports Champions. In 1997, Racing Champions began producing the Sports
Champions line of collectible pewter replicas, and shipped the first Sports
Champions replicas in May 1997. Sports Champions is a series of pewter
replicas of popular athletes. Each replica is mounted on a die cast stand in
front of an encased miniature reproduction of a Sports Illustrated magazine
cover on which the athlete appeared. Racing Champions has a licensing
agreement with Sports Illustrated to use its trade name and the reproductions
of its magazine covers. Racing Champions has entered into licensing agreements
with several major sports leagues (including the National Football League,
Major League Baseball and the National Hockey League) and has entered into
licenses with several professional athletes to use their likenesses on the
Sports Champions replicas. Racing Champions anticipates entering into
licensing agreements with additional sports figures as the Sports Champions
product line is developed. The initial releases of the Sports Champions line
included Muhammad Ali, Frank Thomas, Ken Griffey, Jr., and Joe Montana, among
others.
Star Trek Champions. Racing Champions plans to introduce a new line of
collectible pewter figures and vehicles based on the Star Trek motion pictures
in the second quarter of 1998.
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Racing Champions has a licensing agreement with Viacom Consumer Products, Inc.
to use the likenesses of characters and vehicles from the Star Trek motion
pictures. Initially, Racing Champions will release a monthly series of Star
Trek Champions collectibles with pewter replicas of legendary characters and
vehicles from the first eight Star Trek motion pictures, including Captain
James T. Kirk(TM), Mr. Spock(TM), Captain Picard(TM) and The U.S.S.
Enterprise(TM). Each hand sculpted figure is cast in pewter and mounted on a
die cast stand in front of a mini framed cell replica from the specific Star
Trek movie. Each figure is a unique one time release and is of limited
production.
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 over 450 licenses with various
race team owners, drivers, sponsors and agents, generally for terms of 1 to 3
years. Racing Champions' racing replicas are also officially licensed by major
race sanctioning bodies including NASCAR, CART, IRL, NHRA and World of Outlaws.
Although Racing Champions generally does not pursue exclusive licenses, Racing
Champions' licensing arrangements with NASCAR and World of Outlaws were
exclusive through December 31, 1997. Racing Champions has renewed its license
agreement with NASCAR on a nonexclusive basis for three years commencing on
January 1, 1998. Certain competitors have licensed the NASCAR trademark on a
nonexclusive basis for use on racing replicas, and Racing Champions anticipates
that other competitors may also license the NASCAR trademark on a nonexclusive
basis for use on racing replicas in 1998, which could result in increased
competition for Racing Champions' NASCAR racing replicas. Racing Champions
also has license agreements with the major automobile and truck manufacturers,
including Chevrolet, Ford, Oldsmobile, Pontiac, Buick, Cadillac, Dodge,
Chrysler and Kenworth. Racing Champions operates an office in Charlotte, North
Carolina to maintain its licenses for racing replicas for vehicles competing in
the various NASCAR and World of Outlaws series.
Racing Champions has entered into additional licensing arrangements in
connection with the development of its Comic Book Champions and Sports
Champions product lines. Racing Champions has separate licensing agreements
with Marvel Characters, Inc. and DC Comics (a division of Time Warner
Entertainment Company L.P.) to use the likenesses of certain comic book
characters and the reproductions of comic book covers on which they have
appeared. The license agreement with Marvel Characters, Inc. expires on
December 31, 1999, while the license agreement with DC Comics expires on
December 31, 1998. Racing Champions also has a licensing agreement with Sports
Illustrated to use its trade name and the reproductions of magazine covers
which expires on June 30, 1999. Racing Champions has also entered into a
license agreement with Viacom Consumer Products, Inc. in connection with Racing
Champions' planned development of a line of collectible pewter replicas of
characters and vehicles from the Star Trek motion pictures and television
series. Racing Champions has entered into licenses with the National Football
League, Major League Baseball and the National Hockey League to produce its
Sports Champions replicas. Racing Champions has entered into licensing
agreements with several professional athletes to use their likenesses on the
Sports Champions replicas, and
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anticipates entering into licensing agreements with additional professional
athletes as the Sports Champions product line is developed.
Royalty rates for racing replicas vary by racing category but generally
range in aggregate for all licensors from 12% to 19% of Racing Champions' sales
price. Certain special or limited edition products may carry higher royalty
rates. Royalty rates related to non-racing vehicle replicas range in aggregate
from 3% to 10% of Racing Champions' sales price. For collectible pewter
figures Racing Champions expects to pay royalty rates in aggregate from 10% to
23% of Racing Champions' sales price depending on the number of parties
involved and the market value of the property or athlete. Royalties are
generally paid on a quarterly basis.
PATENTS AND TRADEMARKS
Racing Champions has registered several trademarks with the U.S. Patent
and Trademark Office, including the marks Racing Champions(TM), Sports
Champions(TM) and Racing Champions Mint(TM). Other trademark registrations are
currently pending, including Comic Book Champions and Collectible Champions.
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 also has a patent
application pending for its pewter packaging system which includes a figurine
mounted on a display stand in front of a graphic reproduction associated with
the figurine. Racing Champions believes that there is significant value in its
Racing Champions trade name and trademark and plans to build additional value
through increased customer awareness of many of Racing Champions' other trade
names and trademarks.
SALES AND DISTRIBUTION
In 1997, approximately 78% of Racing Champions' net sales were
distributed through national and regional retail chains including K-Mart,
Target, Toys 'R' Us, Wal-Mart, Hills, Meijers 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 a limited number of wholesale
customers which as a group represented approximately 10% of net sales for 1997.
The wholesale channel distributes Racing Champions' products to hobby and
collector shops throughout North America. Racing Champions' sales to this
channel on a percentage basis have been declining as its distribution through
major national and regional retailers has increased.
Racing Champions also distributes products through the premium/promotional
distribution channel. In total, this channel represented approximately 12% of
net sales for 1997. Premium/promotional customers include Texaco, John Deere,
Citgo, Kellogg's, Procter & Gamble and Snap-On Tools. Racing Champions'
premium/promotional customers offer Racing Champions' customized products to
their customers through their own distribution outlets (e.g.,
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Texaco, John Deere and Citgo), through special promotions (e.g., Kellogg's and
Procter & Gamble) or with the purchase of their product (e.g., Snap-On Tools).
In total, Racing Champions sells to approximately 300 customers. 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 six 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 support approximately 58% of Racing
Champions' 1997 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.
In addition, certain large accounts are designated as "house accounts" and are
handled exclusively by Racing Champions' internal sales staff. Sales
representatives generally earn commissions of 3% to 8% 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.
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 Racing Champions' 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, Die Cast Digest, Hot Rod Magazine, Motor
Trend, DC and Marvel comic books, and Sports Illustrated. In early 1998,
Racing Champions began television advertising.
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.racingchamps.com) on the Internet which highlights its products, lists
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product release dates and collects 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.
In 1998, Racing Champions is testing direct marketing of products through
newspaper and magazine inserts.
COMPETITION
Racing Champions believes that it had the largest domestic share in 1997
of the collectible scaled die cast racing replica category. Racing Champions
competes with the other producers of collectible scaled die cast racing
replicas, such as Action Performance Companies, Inc., which generally
distribute their products through direct marketing, collector clubs and
wholesalers who, in turn, distribute through hobby and collector shops. In
contrast, most of Racing Champions' products are distributed through the mass
merchant channel of distribution. Mattel and Hasbro have also recently entered
the racing replica market and distribute competing die cast racing replicas in
the mass merchant channel of distribution.
Racing Champions also competes with the producers of miniature die cast
toy vehicles such as Matchbox(R) and Hot Wheels(R) who, like Racing Champions,
principally distribute through the mass merchant channel. In this market,
Racing Champions competes with Tyco Toys, Inc. (Matchbox), Mattel, Inc. (Hot
Wheels), Lewis Galoob Toys, Inc. (Micro Machines(R)), Playing Mantis (Johnny
Lightning(R)) and Road Champs, Inc. as well as other domestic and foreign
producers of miniature die cast toy vehicles. Many of Racing Champions'
competitors have greater financial, technical, marketing and other resources
than Racing Champions.
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 brand loyalty, to produce products with a
proven track record of collectibility, and to capture shelf space at leading
mass merchants and other retailers.
MANUFACTURING
Hong Kong Office. The Hong Kong Subsidiary is located in Kowloon, Hong
Kong and employs 58 people who oversee all aspects of Racing Champions' product
manufacturing activities. 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.
Die Cast Vehicle Manufacturing. Virtually all of Racing Champions' die
cast vehicle products are manufactured by five independently owned factories
located in China. All of these
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factories (the "Dedicated Manufacturers") are exclusively dedicated to
manufacturing Racing Champions' products and all are privately owned by
independent Chinese entrepreneurs. All products are manufactured to Racing
Champions' specifications using molds and tooling that are owned by Racing
Champions. The Dedicated 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 Manufacturers have been
supplying Racing Champions for more than five years. Racing Champions'
purchases in 1997 from the Dedicated Manufacturers, Win Yield, Sharp Success,
Sunrise, Shun Fung and Remax were 34%, 24%, 18%, 9% and 5%, respectively, of
Racing Champions' total purchases of die cast vehicle replicas.
The Dedicated Manufacturers have been and will continue upgrading their
manufacturing facilities. With oversight from Racing Champions, the Dedicated
Manufacturers have located a site in Dongguan (approximately 50 miles from Hong
Kong) named the Racing Industrial Zone (the "RIZ Complex") which, when fully
developed, will serve as a complex in which each independent Dedicated
Manufacturer will operate a free standing factory facility. The factory
facilities at the RIZ Complex are being developed by a third party who is
leasing the factory facilities to the Dedicated Manufacturers. Currently, two
of the Dedicated Manufacturers, Remax and Sunrise, have moved into their
factory facilities in the RIZ Complex and are manufacturing there. Win Yield
plans to move to the RIZ Complex in April 1998. Sharp Success and Shun Fung
expect to move there over the next 12 months. Racing Champions intends to
establish an office in the RIZ Complex. This office will house many of the
functions that are currently performed in Racing Champions' Kowloon, Hong Kong
office as well as provide more direct oversight and coordination of the
production activities.
Pewter Figures Manufacturing. Racing Champions manages the entire product
development process. Racing Champions contracts with outside sculptors to
develop individual sculptures that are used in the manufacturing process.
Racing Champions provides the final sculptures to outside manufacturers for
production. All sculptures and tools are returned to Racing Champions after
final production has been completed.
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 manufacturing.
Tooling. Racing Champions is continuously developing new tooling and
molds to produce its die cast and pewter 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 $120,000. Racing Champions often produces back-up tools for
high volume models. Racing Champions owns all of its tools and provides them
to
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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 and sponsors 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 $11.0 million per occurrence. As of December 31, 1997, Racing
Champions has never received a product liability claim.
EMPLOYEES
As of December 31, 1997, Racing Champions had 96 employees, 94 of whom
were employed full-time. Racing Champions emphasizes the recruiting and
training of high quality personnel and, to the extent possible, promotes people
from within Racing Champions. Racing Champions' employees are not covered by
collective bargaining agreements, and 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
Racing Champions' facilities are as follows:
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
----------- ----------- -------- ----------------
Corporate
Headquarters........ 12,280 Glen Ellyn, Illinois October 2000
Foreign
Headquarters........ 7,900 Kowloon, Hong Kong July 1998
Warehouse........... 19,183 Chicago, Illinois December 1998
Licensing Office.... 600 Charlotte, North Carolina Month-to-Month
ITEM 3. LEGAL PROCEEDINGS
On June 5, 1997, Petty Enterprises, Inc. filed a civil action in North
Carolina state court naming Racing Champions, Inc. ("RCI") as a defendant. The
complaint relates to Racing Champions' production and sale of racing replicas
bearing trademarks and trade names owned by
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the plaintiff under a license agreement and makes a number of allegations
regarding unauthorized production, advertisement, use and sale by Racing
Champions of such trademarks and trade names. The plaintiff seeks an
unspecified amount of compensatory and punitive damages and also seeks a court
order that Racing Champions cease production, sale or promotion of products
bearing the plaintiff's trademarks or trade names and deliver all such products
to the plaintiff for destruction. The Company filed an answer on June 30,
1997, denying all claims and asserting a counterclaim with respect to
approximately $80,000 of unpaid receivables. On July 12, 1997, the plaintiff
filed a reply denying the Company's counterclaim. The Company subsequently
removed the case to the U.S. District Court for the Middle District of North
Carolina. Discovery is proceeding in the case, and trial is currently
scheduled for January 11, 1999. Racing Champions intends to vigorously defend
the claims, although no assurances can be given as to the outcome of this
matter.
In the normal course of business Racing Champions also may be involved in
various legal proceedings from time to time. Racing Champions does not believe
it is currently involved in any claim or action the ultimate disposition of
which would have a material adverse effect on Racing Champions.
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, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is 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.
YEAR ENDED DECEMBER 31, 1997
QUARTER HIGH LOW
- ------- ---- ---
Second (from June 12, 1997)....... $16.125 $14.500
Third............................. 17.375 11.500
Fourth............................ 13.500 6.813
At December 31, 1997, there were approximately 72 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
The following table sets forth selected financial data with respect to
Racing Champions for each of the periods indicated. The selected financial data
for the fiscal year ended March 31, 1994 for the Predecessor -- RCL Group are
derived from unaudited combined financial statements, which are not included
herein. The data for the year ended December 31, 1993 for the Predecessor --
RCI Group are derived from audited combined financial statements which are not
included herein. The data for the years ended December 31, 1994 and 1995 and
for the four months ended April 30, 1996 are derived from the combined
financial statements of the Predecessor -- RCI Group, which have been audited
by Arthur Andersen LLP, independent public accountants. The data for the fiscal
years ended March 31, 1995 and 1996 and for the one month ended April 30, 1996
for the Predecessor -- RCL Group are derived from combined financial statements
which have been audited by Ernst & Young, independent auditors. The statement
of income data for the eight months ended December 31, 1996 and for the year
ended December 31, 1997 are derived from Racing Champions' consolidated
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants.
The pro forma financial data for the year ended December 31, 1996, which
give effect to the Recapitalization, the initial public offering of Common
Stock completed on June 17, 1997 (the "Offering") and the application of the
net proceeds from the Offering as if each had occurred on January 1, 1996, are
presented for informational purposes only and are not necessarily indicative of
the results of the future operations of Racing Champions or the actual results
that would have been achieved had the Recapitalization, the Offering and the
application of the net proceeds from the Offering occurred on such date. The
pro forma financial data for the year ended
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December 31, 1997, which give effect to the Offering and the application of the
net proceeds from the Offering as if each had occurred on January 1, 1997, are
also presented for informational purposes only and are not necessarily
indicative of the results of future operations of Racing Champions or the
actual results that would have been achieved had the Offering and the
application of the estimated net proceeds from the Offering occurred on such
date.
All of the data set forth below are qualified by reference to, and should
be read in conjunction with, the consolidated financial statements of Racing
Champions and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
(Amounts in thousands, except per share data)
------------------------------------------------------------------------------------------------
Predecessor - RCI Group (1) Racing Champions Pro Forma
---------------------------------------- -------------------------- -------------------------
Four months Eight months Year Year Year
Years Ended December 31, Ended ended ended ended ended
--------------------------- April 30, December 31, December 31, December 31, December 31,
1993 1994 1995 1996(2) 1996(2) 1997 1996(2) 1997
------- ------- ------- ---------- ------------ ----------- ----------- -----------
Statement of Income Data:
Net sales..................... $31,047 $43,268 $48,592 $16,614 $49,385 $76,562 $65,999 $76,562
Gross profit.................. 14,151 18,056 23,036 7,210 28,019 44,377 37,532 44,376
Operating income.............. 6,141 8,565 9,724 108 11,236 18,500 11,478 18,500
Net income (3)................ $ 5,722 $ 8,224 $ 9,392 $ 72 $ 2,551 $ 7,876 $ 5,082 $ 9,850
Net income available to
common stockholders......... $ 1,895 $ 7,397 $ 5,082 $ 9,850
Per Share Data:
Net income
Basic....................... $ 0.24 $ 0.71 $ 0.38 $ 0.74
Diluted..................... $ 0.23 $ 0.69 $ 0.37 $ 0.73
Weighted average common
shares and common share
equivalents outstanding (4)
Basic....................... 7,885 10,449 13,242 13,242
Diluted..................... 8,212 10,777 13,571 13,571
Predecessor - RCI Group (1)
--------------------------------------
One
Month
Fiscal years ended March 31, Ended
--------------------------- April 30,
1994 1995 1996 1996
------- ------- ------- -------
Statement of Income Data:
Net sales................... $18,399 $22,331 $37,322 $3,852
Gross profit................ 4,801 5,288 7,085 752
Operating income............ 1,949 2,066 2,725 507
Net income (5).............. $ 1,690 $ 2,079 $ 2,603 $ 488
December 31, 1997
-----------------
Actual
-----------------
Balance Sheet Data:
Working capital............. $ (275)
Total assets................ 114,778
Total debt.................. 20,600
Total stockholders'
equity...................... 79,092
- -----------------
(1) On April 30, 1996 Racing Champions acquired the RCI Group and the RCL
Group in the Recapitalization. Accordingly, certain information provided
for the predecessor groups is not
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comparable to the data of Racing Champions due to the effects of certain
purchase accounting adjustments and the financing related to the
Recapitalization. Also, the data from the predecessor groups are derived
from different fiscal year ends and are not comparable. Prior to the
Recapitalization, the RCL Group included Bergen Services Inc. ("Bergen"),
an entity that did not have any tangible assets or conduct any operations.
Racing Champions did not acquire Bergen pursuant to the Recapitalization.
(2) Data for the four months ended April 30, 1996 and pro forma statement of
income data for the year ended December 31, 1996 include a nonrecurring
incentive bonus expense of $2.4 million incurred in connection with the
Recapitalization, and data for the eight months ended December 31, 1996
and pro forma statement of income data for the year ended December 31,
1996 include a purchase accounting inventory write-up adjustment of $1.4
million as a result of the Recapitalization. Excluding the effects of the
nonrecurring incentive bonus expense and the inventory write-up
adjustment, Racing Champions' pro forma gross profit, operating income,
net income and net income per share for the year ended December 31, 1996
would have been (amounts in thousands, except per share data):
PERCENT OF
AMOUNT NET SALES
------ ----------
Net sales.......................... $65,999 100.0%
Gross profit....................... 38,899 58.9
Operating income................... 15,234 23.1
Net income......................... 7,336 11.1
Net income per share (Basic)....... $ 0.55 --
Net income per share (Diluted)..... $ 0.54 --
(3) Net income of the RCI Group does not include a provision for federal
income taxes as a result of the S corporation status for certain entities
in this group during the periods from January 1, 1992 to April 30, 1996.
(4) Weighted average shares outstanding has been computed using the treasury
stock method which includes dilutive Common Stock equivalents as if
outstanding during the respective periods.
(5) Net income of the RCL Group includes a provision for Hong Kong income
taxes at an effective rate of 16.5% for certain entities and no
provisions for other entities which were structured as tax-free British
Virgin Islands entities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Corporate and Product History. Racing Champions is a leading producer and
marketer of collectibles. The Company is best known for its extensive line of
officially licensed die cast replicas of actual race cars and related vehicles
from popular professional racing series, including NASCAR, NHRA, CART, IRL and
World of Outlaws. The majority of Racing Champions' products are sold through
mass retailers, such as Wal-Mart, K-Mart, Target and Toys'R'Us.
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Racing Champions has maintained strong profit margins while selling through the
mass retail channel by offering high quality, collectible products, managing
product availability, continuously updating its products, diligently
controlling costs and realizing economies of scale.
Racing Champions' predecessors, the RCI Group and the RCL Group, each
began operations in 1989 with an initial product line of die cast vehicles,
including racing car replicas. The RCI Group, owned by Robert E. Dods and Boyd
L. Meyer, operated Racing Champions' domestic operations, while the RCL Group,
owned by Peter K.K. Chung, operated Racing Champions' foreign operations. In
1990, Racing Champions shifted its focus to collectible stock car replicas and
in 1991 obtained the license to use the NASCAR trademark and logo on its
products and packaging. Racing Champions' initial racing replicas proved to be
popular with racing fans and adult collectors with net sales growing from $5.4
million in 1990 to $32.3 million in 1991. By 1992, many of Racing Champions'
retail customers had overestimated short-term consumer demand for racing
replicas and placed significant orders for Racing Champions' products as well
as for competitive products of varying quality and authenticity introduced by
new entrants to the racing replica market.
While Racing Champions' net sales grew dramatically to $45.8 million in
1992, significant excess inventories of racing replicas had built up at many of
Racing Champions' major customers. As a result, Racing Champions anticipated
reduced sales in 1993 and, in response, limited its production level.
In order to preserve the collector base it had already established and to
further differentiate itself from new market entrants producing lower quality
products, Racing Champions took several steps to enhance the collectibility of
its products in 1993. These steps included introducing annual editions,
limiting the number of units produced, staggering release dates, adding serial
numbers to certain production runs and generally improving quality. Despite a
net sales decline to $31.0 million in 1993, combined operating income as a
percentage of net sales increased.
Over the next three years, Racing Champions experienced considerable
growth in its NASCAR product line and through its introduction of collectible
racing replicas from other major professional racing series. Racing Champions
believes that the measures it undertook from 1993 through 1996 have
significantly enhanced the Racing Champions brand name, thereby increasing
demand for the Company's products. In turn, Racing Champions' mass merchant
customers have responded by providing increased shelf space for Racing
Champions' product lines. Racing Champions believes that its significantly
broader product lines, enhanced brand name recognition among collectors and
retailers and increased shelf space have positioned it to compete favorably in
its principal channel of distribution.
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. The acquisition costs in excess of the fair value of net assets
of the
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acquired businesses (goodwill) is being amortized on a straight-line basis over
a 40-year period for financial reporting purposes and for income tax purposes
is deducted over a 15-year period. After the consummation of the
Recapitalization, management owned approximately 45.6% of the Common Stock,
while members of the Investor Group owned approximately 54.4%.
Later in 1996, Racing Champions successfully expanded into non-racing
collectibles by introducing the Racing Champions Mint line of high quality
classic and late-model die-cast vehicle replicas. Racing Champions continued
this expansion in 1997 by introducing the Racing Champions Hot Rod Collection,
a line of collectible die-cast hot rod replicas which is supported by licensing
and marketing agreements with Petersen Publishing Company's Hot Rod Magazine.
Beginning in 1997, Racing Champions targeted comic book and sports
enthusiasts and figure collectors with two new lines of collectible pewter
figures, marketed under the names Comic Book Champions and Sports Champions,
and manufactured under licensing agreements with Marvel Characters, Inc., DC
Comics (a division of Time Warner Entertainment Company L.P.) and Sports
Illustrated. A third line, based on the popular Star Trek motion pictures and
television series, will debut in 1998.
Sales and Expenses. Racing Champions' sales are recognized as products
are shipped. 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, typically evaluated
and issued annually, have not had a material effect on Racing Champions'
historical financial statements.
Mass merchant retailers purchase Racing Champions' products either in the
United States 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. 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 United States 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, 1994, 1995, 1996 and
1997, Hong Kong shipments constituted 28.7%, 44.9%, 52.8% and 60.2%
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 1997,
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aggregate royalties by product ranged from approximately 3% to 19% of Racing
Champions' selling price. Sales commissions ranging from 3% to 8% of net sales
are paid quarterly to Racing Champions' external sales representative
organizations. In 1997, sales subject to commissions represented 58.4% of
total net sales.
The following is a discussion and analysis of Racing Champions
Corporation'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.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain items
reflected in the Consolidated Statements of Income of Racing Champions and its
predecessors and the percentage of net sales represented by these items.
RACING CHAMPIONS CORPORATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Pro forma
--------------------------------------- ---------------------------------------
Year ended Year ended
Year ended Eight months ended December 31, 1997 December 31, 1996
December 31, 1997 December 31, 1996 (Unaudited) (Unaudited)
----------------- ----------------- ----------------- -----------------
(in thousands, except per share data) Amount Percent Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $76,562 100.0% $49,385 100.0% $76,562 100.0% $65,999 100.0%
Cost of sales 32,186 42.0 21,366 43.3 32,186 42.0 27,100 41.1
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 44,376 58.0 28,019 56.7 44,376 58.0 38,899 58.5
Selling, general and administrative expense 23,660 30.9 15,244 30.9 23,660 30.9 21,426 32.5
Amortization of intangible assets 2,216 2.9 1,539 3.1 2,216 2.9 2,239 3.4
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 18,500 24.2 11,236 22.7 18,500 24.2 15,234 23.1
Interest expense 5,126 6.7 6,738 13.6 1,884 2.5 2,907 4.4
Other expenses 200 0.3 153 0.3 200 0.3 101 0.2
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,174 17.2 4,345 8.8 16,416 21.4 12,226 18.5
Income tax expense 5,298 6.9 1,794 3.6 6,566 8.6 4,890 7.4
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,876 10.3% $ 2,551 5.2% $ 9,850 12.8% $ 7,336 11.1%
===================================================================================================================================
Net income available to common stockholders $ 7,397 9.7% $ 1,895 3.8% $ 9,850 12.8% $ 7,336 11.1%
===================================================================================================================================
Net income per common share:
Basic $0.71 -- $0.24 -- $0.74 -- $0.55 --
Diluted $0.69 -- $0.23 -- $0.73 -- $0.54 --
Weighted average shares outstanding:
Basic 10,449 -- 7,885 -- 13,242 -- 13,242 --
Diluted 10,777 -- 8,212 -- 13,571 -- 13,571 --
Pro forma data for 1997 assume the Offering occurred on January 1, 1997.
Pro forma data for 1996 assume the Offering occurred on January 1, 1996. Pro
forma data for 1996 also includes an adjustment for a non-recurring bonus of
$2.4 million and an inventory write-up adjustment of $1.4 million associated
with the Recapitalization.
23
24
RCI GROUP
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
--------------------------------------- Four Months Ended
1994 1995 April 30, 1996
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Net sales......................... $43,268 100.0% $48,592 100.0% $16,614 100.0%
Cost of sales..................... 25,212 58.3 25,556 52.6 9,404 56.6
------- ------- ------- ------- ------- -------
Gross profit................... 18,056 41.7 23,036 47.4 7,210 43.4
Selling, general and
administrative expense............ 9,941 21.9 13,312 27.4 4,713 28.4
Nonrecurring bonus expense ....... -- -- -- -- 2,389 14.4
------- ------- ------- ------- ------- -------
Operating income............... 8,565 19.8 9,724 20.0 108 0.6
Interest expense 211 0.5 133 0.3 20 0.1
Other expense (income)............ (219) (0.5) 5 -- (23) (0.1)
------- ------- ------- ------- ------- -------
Income before income taxes..... 8,573 19.8 9,586 19.7 111 0.6
Income tax expense................ 349 0.8 194 0.4 39 0.2
------- ------- ------- ------- ------- -------
Net income..................... $ 8,224 19.0% $ 9,392 19.3% $ 72 0.4%
======= ======= ======= ====== ======= =======
RCL GROUP
(AMOUNTS IN THOUSANDS)
Years Ended March 31,
--------------------------------------- One Month Ended
1995 1996 April 30, 1996
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Net sales......................... $22,331 100.0% $37,322 100.0% $3,852 100.0%
Cost of sales..................... 17,043 76.3 30,237 81.0 3,100 80.5
------- ----- ------- ----- ------ -----
Gross profit................... 5,288 23.7 7,085 19.0 752 19.5
Selling, general and
administrative expense............ 3,222 14.4 4,360 11.7 245 6.4
------- ----- ------- ----- ------ -----
Operating income............... 2,066 9.3 2,725 7.3 507 13.1
Interest expense 55 0.3 130 0.3 13 0.3
Other expense (income)............ (113) (0.5) (179) (0.5) (28) (0.7)
------- ----- ------- ----- ------ -----
Income before income taxes..... 2,124 9.5 2,774 7.5 522 13.5
Income tax expense................ 45 0.2 171 0.5 34 0.9
------- ----- ------- ----- ------ -----
Net income..................... $ 2,079 9.3% $ 2,603 7.0% $ 488 12.6%
======= ======= ======= ====== ======= =======
RACING CHAMPIONS CORPORATION
PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1996
Net sales. Net sales increased $10.6 million, or 16.1%, to $76.6 million
for the year ended December 31, 1997 from $66.0 million for the year ended
December 31, 1996. This increase was primarily due to 29.9% growth in the
NASCAR racing replicas partially offset decreases by in other racing replicas
and in other non-vehicle products, 15.4% growth in classic and custom vehicles,
$4.5 million of sales attributable to the collectible pewter figures category,
a new product introduction in 1997, and a slight increase in prices in 1997.
24
25
Gross profit. Gross profit increased $5.5 million, or 14.1%, to $44.4
million for the year ended December 31, 1997 from $38.9 million for the year
ended December 31, 1996. The gross profit margin (as a percentage of net
sales) decreased to 58.0% in 1997 from 58.9% in 1996. This decrease is due to
the increase in Hong Kong shipments (to 60.2% of net sales in 1997 from 52.8%
of net sales in 1996) which have a lower gross profit margin than domestic
shipments. There were no major changes in the components of cost of sales in
1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.3 million, or 10.7%, to $23.7 million for
the year ended December 31, 1997 from $21.4 million for the year ended December
31, 1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 30.9% for the year ended December 31, 1997 from 32.5% for
the year ended December 31, 1996. The decrease in selling, general and
administrative expenses as a percentage of net sales was a result of spreading
selling and administrative expenses over higher sales volume. Amortization
expense of $2.2 million for each of the twelve month periods ended December 31,
1997 and 1996, respectively, related to intangible assets created in the
Recapitalization.
Operating income. Operating income increased $3.3 million, or 21.7%, to
$18.5 million for the year ended December 31, 1997, from $15.2 million for the
year ended December 31, 1996. As a percentage of net sales, operating income
increased to 24.2% for the year ended December 31, 1997 from 23.1% for the year
ended December 31, 1996.
Interest expense. Interest expense of $1.9 million and $2.9 million for
the years ended December 31,1997 and 1996, respectively, related primarily to
bank term loans and subordinated debt incurred in connection with the
Recapitalization.
Income tax. Income tax expense for the year ended December 31, 1997 and
December 31, 1996 include provisions for Federal, state and Hong Kong income
taxes at an effective rate of 40.0%.
YEAR ENDED DECEMBER 31, 1997
Net sales. Net sales were $76.6 million for the year ended December 31,
1997. Net sales for the year ended December 31, 1997 included three product
categories -- racing vehicle replicas, classic and custom vehicles and
collectible pewter figures.
Gross profit. Gross profit was $44.4 million for the year ended December
31, 1997. The gross profit margin (as a percentage of net sales) was 58.0%.
Net sales from Hong Kong shipments, which generate lower gross margins due to
price discounts, were 60.2% of net sales for the year ended December 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $23.7 million for the year ended December 31,
1997. As a percentage of net sales, selling, general and administrative
expenses were 30.9%. Amortization expense of $2.2 million or
25
26
2.9% of net sales for the year ended December 31, 1997, related to intangible
assets created in connection with the Recapitalization.
Operating income. Operating income for the year ended December 31, 1997
was $18.5 million or 24.2% of net sales. Excluding the amortization of
intangible assets, operating income was $20.7 million or 27.1% of net sales.
Interest expense. Interest expense of $5.1 million for the year ended
December 31, 1997, related primarily to bank term loans and subordinated debt
incurred in connection with the Recapitalization.
Income tax. Income tax expense for the year ended December 31, 1997
includes provisions for Federal, state and Hong Kong income taxes at an
effective rate of 40.2%.
EIGHT MONTHS ENDED DECEMBER 31, 1996
Net sales. Net sales were $49.4 million for the eight months ended
December 31, 1996. Net sales for the RCI Group and the RCL Group for the eight
months ended December 31, 1995 were $39.4 million. Net sales for the eight
months ended December 31, 1996 included shipments of racing vehicle replicas
and Racing Champions Mint products.
Gross profit. Gross profit was $28.0 million for the eight months ended
December 31, 1996. The gross profit margin was 56.7%. Included as a reduction
to gross profit was a purchase accounting inventory write-up adjustment which
resulted in an additional $1.4 million of cost of sales. Excluding the impact
of the inventory write-up adjustment, gross profit for the eight months ended
December 31, 1996 was $29.4 million or 59.5% of net sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $15.2 million in the eight months ended December
31, 1996. As a percentage of net sales, selling, general and administrative
expenses were 30.9%. Amortization expense of $1.5 million or 3.1% of net sales
in the eight months ended December 31, 1996 relates to intangible assets
created in connection with the Recapitalization.
Operating income. Operating income for the eight months ended December
31, 1996 was $11.2 million or 22.8% of net sales. Excluding the impact of the
inventory write-up adjustment and the amortization of intangible assets,
operating income was $14.1 million or 28.6% of net sales.
Interest expense. Interest expense was $6.7 million in the eight months
ended December 31, 1996. Interest expense related primarily to bank term loans
and subordinated debt incurred in connection with the Recapitalization.
Income tax. Income tax expense for the eight months ended December 31,
1996, includes provisions for Federal, state and Hong Kong income taxes at an
effective rate of 41.3%.
26
27
RCI GROUP
FOUR MONTHS ENDED APRIL 30, 1996
Net sales. Net sales were $16.6 million for the four months ended April
30, 1996. This period includes the first quarter of the year which has
historically been a lower volume quarter. Net sales for the RCI Group and the
RCL Group for the four months ended April 30, 1995 were $9.2 million. Net
sales for the four months ended April 30, 1996 included racing vehicle replicas
and the initial shipments of Racing Champions Mint products.
Gross profit. Gross profit was $7.2 million for the four months ended
April 30, 1996. The gross profit margin was 43.4%.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.7 million in the four months ended April 30,
1996. As a percentage of net sales, selling, general and administrative
expenses were 28.4%. Non-recurring bonus expense of $2.4 million or 14.4% of
net sales in the four months ended April 30, 1996 related to a one time payment
of incentive compensation in connection with the Recapitalization.
Operating income. Operating income for the four months ended April 30,
1996 was $108,000 or 0.6% of net sales. Excluding the impact of the
non-recurring bonus expense, operating income was $2.5 million or 15.0% of net
sales.
Interest expense. Interest expense was $20,000 in the four months ended
April 30, 1996. Interest expense related primarily to short-term working
capital bank loans.
Income tax. Income tax expense for the four months ended April 30, 1996
includes only a provision for state replacement taxes as the entities in the
RCI Group were S corporations and therefore not subject to Federal income
taxes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales. Net sales increased $5.3 million, or 12.2%, to $48.6 million
for 1995 from $43.3 million for 1994. The sales growth for 1995 was
attributable to (i) strong growth in the NASCAR racing replica category ($6.5
million), as Racing Champions expanded its NASCAR stock car product offerings
and introduced NASCAR racing trucks, and (ii) increases from other racing
replica product lines ($1.7 million) including the introduction in late 1995 of
NHRA top fuel dragster replicas. These increases were partially offset by a
decrease in a line of vintage automobile and airplane die cast coin banks ($2.9
million) produced by another company and resold to wholesalers by Racing
Champions. The sales increase in 1995 was accomplished despite the negative
impact on first quarter sales due to delays by the vehicle manufacturers in
finalizing stock car designs that in turn delayed Racing Champions' ability to
complete tooling on new models.
27
28
Gross profit. Gross profit increased $4.9 million, or 27.1%, to $23.0
million for 1995 from $18.1 million for 1994. The gross margin increased to
47.4% in 1995 from 41.7% in 1994. The increase in gross margin was due to a
2.5% price increase in 1995 coupled with stable product costs and a benefit of
1.7% from decorating and design efficiencies. In addition, gross profit
benefited by approximately 1.5% as a percent of net sales when Racing
Champions' products were classified as import duty free beginning January 1,
1995, a reduction from 7.0% of product cost in 1994.
Selling, general and administrative expense. Selling, general and
administrative expenses increased $3.8 million, or 40.0%, to $13.3 million for
1995 from $9.5 million for 1994. As a percentage of net sales, selling,
general and administrative expenses increased to 27.4% in 1995 from 21.9% in
1994. The increase in selling, general and administrative expenses was a
result of higher royalty expenses which increased 4.8% (as a percentage of net
sales) due to increased rates on new product categories and specialty
promotional programs. The remainder of the increase was attributable to
commissions expense which increased as a result of a higher percentage of total
sales being made to customers assisted by outside sales representatives.
Operating income. Operating income increased $1.2 million, or 14.1%, to
$9.7 million for 1995 from $8.5 million for 1994. As a percentage of net
sales, operating income increased to 20.0% for 1995 from 19.8% for 1994.
Income tax. Income tax expense for 1995 and 1994 includes provisions for
state replacement taxes for the RCI Group as these entities were S corporations
and therefore not subject to Federal income taxes.
RCL GROUP
ONE MONTH ENDED APRIL 30, 1996
Net sales. Net sales were $3.9 million for the one month ended April 30,
1996. Net sales consisted of related party sales to the RCI Group of $1.3
million. The remaining net sales (non-RCI Group sales) are redundant with the
net sales from Hong Kong shipments recorded by the RCI Group for April of 1996.
Gross profit. Gross profit was $752,000 for the one month ended April 30,
1996. The gross profit margin was 19.5%.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $245,000 in the one month ended April 30, 1996.
As a percentage of net sales, selling, general and administrative expenses was
6.4%.
Operating income. Operating income for the one month ended April 30, 1996
was $507,000 or 13.1% of net sales.
28
29
Interest expense. Interest expense was $13,000 in the one month ended
April 30, 1996. Interest expense related primarily to short-term working
capital bank loans.
Income tax. Income tax expense for the one month ended April 30, 1996
includes a provision for Hong Kong income taxes on certain entities in the RCL
Group while certain entities were tax free British Virgin Islands entities.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Net sales. Net sales increased $15.0 million, or 67.3%, to $37.3 million
for 1996 from $22.3 million for 1995. The sales growth for 1996 was
attributable to growth in NASCAR racing replica sales. Net sales consisted of
related party sales to the RCI Group of $11.3 million and $10.3 million in 1996
and 1995, respectively. The remaining net sales (non-RCI Group sales) are
redundant with the net sales from Hong Kong shipments recorded by the RCI
Group.
Gross profit. Gross profit increased $1.8 million, or 34.0%, to $7.1
million for 1996 from $5.3 million for 1995. The gross profit margin decreased
to 19.0% in 1996 from 23.7% in 1995. The decrease was due to an increase from
53.8% of 1995 net sales to 69.7% of 1996 net sales in non-RCI Group sales which
generate lower gross profit margins than sales to the RCI Group.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.2 million, or 35.5%, to $4.4 million for
1996 from $3.2 million for 1995. As a percentage of net sales, selling general
and administrative expenses decreased to 11.7% in 1996 from 14.4% in 1995. The
decrease in selling, general and administrative expenses as a percentage of net
sales was a result of an increase in the percentage of net sales represented by
non-RCI Group sales, which has the effect of spreading administrative expenses
over higher sales volumes.
Operating income. Operating income increased $659,000 or 31.9%, to $2.7
million in 1996 from $2.1 million for 1995. As a percentage of net sales,
operating income decreased to 7.3% for 1996 from 9.3% for 1995.
Interest expense. Interest expense increased to $130,000 for 1996 from
$55,000 for 1995. The increase was due to the bank working capital loans and
capital lease obligations.
Income tax. Income tax expense for 1996 and 1995 includes provisions for
Hong Kong income taxes on certain RCL Group entities while certain entities
were tax free British Virgin Islands entities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $12.6 million during the
year ended December 31, 1997. This was primarily due to earnings from
operations. Capital expenditures for the year ended December 31, 1997 were
approximately $3.8 million, of which approximately $3.2 million was for molds
and tooling.
29
30
On June 17, 1997, the Company revised and amended its credit agreement
with BankBoston, N.A. and certain other lenders. The revised and amended
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 $5.0 million at any time prior to June 28, 2002, based upon levels of the
Company's accounts receivable, inventory and cash flows and the amount of
letter of credit exposure. The Company had $5.0 million outstanding under the
revolving loan at December 31, 1997. The term loan in the principal amount of
$22.0 million is due in scheduled quarterly payments with final maturity on
June 28, 2002. All borrowings under the credit agreement 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 BankBoston's base rate plus a margin that varies between 0.00% and
0.75% or at a reserve adjusted Eurodollar rate plus margin that varies between
1.50% and 2.25%. The applicable margin is based on the Company's financial
performance and is currently 0.00% for base rate loans and 1.50% for Eurodollar
loans. The credit agreement requires the Company to pay a commitment fee of
0.50% per annum on the average daily unused portion of the revolving loan.
BankBoston's Hong Kong branch has made available to the Hong Kong
Subsidiary a line of credit of up to $5.0 million. Amounts borrowed under this
line of credit bear interest at the bank's cost of funds plus 2% and are
cross-guaranteed by Racing Champions, Inc. and the Hong Kong Subsidiary. At
December 31, 1997 the Hong Kong subsidiary had no outstanding borrowings under
this line of credit.
The Company's anticipated debt service obligations under the existing
credit facilities for 1998 for scheduled interest and principal payments and
repayment of the outstanding line of credit borrowings are approximately $10.3
million. Average annual debt service obligations under these same facilities
through September 2001 are approximately 4.8 million. In connection with the
proposed Merger with Wheels, the Company anticipates replacing Wheels' current
credit facility with borrowings from the Company's bank group. The Wheels
credit facility consists of a term loan in the amount of $7.7 million and a
revolving loan of up to $10.0 million. Estimated annual debt service
obligations of the Company including the Wheels credit facility would be
approximately $5.3 million through September 2003.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the timing of
the racing season. Due to seasonal increases in demand for the Company's
racing replicas, working capital financing requirements are usually highest
during the third quarter and fourth quarters. The Company expects that capital
expenditures during 1998, principally for molds and tooling, will be
approximately $4.0 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.
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31
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In early 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 130 and SFAS No.
131 are effective for periods beginning after December 15, 1997. Adoption of
these pronouncements is not expected to have a material impact on the
consolidated financial statements of Racing Champions.
YEAR 2000 COMPLIANCE
Racing Champions is reviewing its current computer applications with
respect to the year 2000 issue. Racing Champions does not believe that the
costs to modify its computer applications with respect to year 2000 compliance
with have a material effect on Racing Champions' financial condition or results
of operations. Racing Champions is currently unable to determine the effect on
Racing Champions of year 2000 compliance by its customers or suppliers.
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) there are
significant conditions remaining to be satisfied with respect to the Company's
pending acquisition of Wheels and no assurance can be given that such
acquisition will be consummated or, if consummated, that the terms of the
acquisition will be as presently contemplated; (5) the Company relies upon six
independently owned factories located in China to manufacture its racing
replicas and certain other products; (6) the Company is dependent upon the
continuing willingness of leading retailers to purchase and provide shelf space
for the Company's products.; and (7) general economic conditions in the
Company's markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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32
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-2 of this report.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for each of the quarters in the year ended December 31, 1997. 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.
FISCAL YEAR 1997
----------------------------------------------------
(in thousands, except per share amount) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------------------------
Net sales $15,187 $22,945 $22,487 $15,943
Cost of sales 6,493 9,351 9,212 7,129
- -----------------------------------------------------------------------------------------------------
Gross profit 8,694 13,594 13,275 8,814
Selling, general and administrative expenses 5,171 6,562 6,523 5,404
Amortization of intangible assets 554 554 554 554
- -----------------------------------------------------------------------------------------------------
Operating income 2,969 6,478 6,198 2,856
Interest expense 2,380 2,114 319 313
Other expense 43 45 65 47
- -----------------------------------------------------------------------------------------------------
Income before income taxes 546 4,319 5,814 2,496
Income tax expense 218 1,732 2,327 1,021
- -----------------------------------------------------------------------------------------------------
Net income $ 328 $ 2,587 $ 3,487 $ 1,475
=====================================================================================================
Net income available to common stockholders $ 79 $ 2,362 $ 3,487 $ 1,475
=====================================================================================================
Net income per common share:
Basic $ 0.01 $ 0.26 $ 0.26 $ 0.11
Diluted $ 0.01 $ 0.25 $ 0.26 $ 0.11
Weighted average shares outstanding:
Basic 7,885 9,004 13,242 13,242
Diluted 8,214 9,333 13,597 13,569
- -----------------------------------------------------------------------------------------------------
The following table sets forth unaudited quarterly results of operations
for each of the quarters in the eight months ended December 31, 1996. Data for
the second quarter 1996 begins May 1 and includes an inventory write-up
adjustment of $1.4 million associated with the Recapitalization. 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.
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33
EIGHT MONTHS ENDED DECEMBER 31, 1996
---------------------------------------
(in thousands, except per share amount) 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------------------------
Net sales $13,664 $23,034 $12,687
Cost of sales 6,733 9,376 5,257
- -----------------------------------------------------------------------------------------------------
Gross profit 6,931 13,658 7,430
Selling, general and administrative expenses 3,993 6,705 4,546
Amortization of intangible assets 384 576 579
- -----------------------------------------------------------------------------------------------------
Operating income 2,554 6,377 2,305
Interest expense 1,735 2,506 2,497
Other expense 42 51 60
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 777 3,820 (252)
Income tax expense (benefit) 422 1,727 (355)
- -----------------------------------------------------------------------------------------------------
Net income $ 355 $ 2,093 $ 103
=====================================================================================================
Net income (loss) available to common stockholders $ 198 $ 1,857 $ (160)
=====================================================================================================
Net income (loss) per common share:
Basic $ 0.02 $ 0.24 $ (0.02)
Diluted $ 0.02 $ 0.23 $ (0.02)
Weighted average shares outstanding:
Basic 7,885 7,885 7,885
Diluted 8,203 8,214 8,214
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
33
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
----------------------- -------- -------------------------------------
Robert E. Dods......... 49 President and Director
Boyd L. Meyer.......... 55 Executive Vice President and Director
Peter K.K. Chung....... 44 President of Racing Champions
Limited and Director
Curtis W. Stoelting.... 38 Vice President -- Finance and
Operations and Secretary
John F. Olsen.......... 46 Vice President -- Sales
Peter J. Henseler...... 39 Vice President -- Marketing
M. Kevin Camp.......... 40 Vice President -- Licensing and
Assistant Secretary
Avy H. Stein........... 42 Director
Samuel B. Guren........ 51 Director
Daniel M. Gill......... 34 Director
John S. Bakalar........ 50 Director
John J. Vosicky........ 49 Director
Robert E. Dods has served as a director and as President of Racing
Champions since April 1996. Mr. Dods co-founded RCI in 1989, and has served as
President of RCI since inception. Prior to founding RCI in 1989 Mr. Dods and
Boyd L. Meyer owned and operated Dods-Meyer, Ltd., a manufacturers'
representative agency which focused on selling products to mass merchants.
Boyd L. Meyer has served as a director and as Executive Vice President of
Racing Champions since April 1996. Mr. Meyer co-founded RCI in 1989, and has
served as Executive Vice President of RCI since inception. Prior to founding
RCI in 1989 Mr. Meyer and Robert E. Dods owned and operated Dods-Meyer, Ltd., a
manufacturers' representative agency which focused on selling products to mass
merchants.
Peter K.K. Chung has served as a director of Racing Champions and as
President of Racing Champions Limited since April 1996. Mr. Chung formed the
RCL Group in 1989 to handle the overseas operating activities of RCI and has
served as President of Racing Champions Limited since inception. Prior to 1989
Mr. Chung was a contract manufacturer for various products for export from
China to the United States and Europe.
Curtis W. Stoelting has served as Vice President -- Finance and Operations
and Secretary of Racing Champions since April 1996. Mr. Stoelting has also
served as Vice President --
34
35
Finance and Operations of RCI since 1994. Prior to joining RCI, Mr. Stoelting
was employed for 12 years by Arthur Andersen LLP in Chicago, most recently as a
Senior Manager. Mr. Stoelting is a Certified Public Accountant.
John F. Olsen has served as Vice President -- Sales of Racing Champions
since April 1996. Mr. Olsen has also served as Vice President -- Sales of RCI
since 1993. Prior to joining RCI, Mr. Olsen worked for a sales representative
organization located in New York and in this capacity represented the Racing
Champions line since 1989.
Peter J. Henseler has served as Vice President -- Marketing of Racing
Champions since April 1996. Mr. Henseler has also served as Vice President --
Marketing of RCI since March 1996. Prior to joining RCI, Mr. Henseler was a
director of marketing for McDonald's Corporation since 1989, and was most
recently responsible for in-store merchandising and worldwide trademark
licensing.
M. Kevin Camp has served as Vice President -- Licensing and Assistant
Secretary of Racing Champions since April 1996. Mr. Camp has also served as
Vice President -- Licensing of RCI since 1994. Prior to joining RCI, Mr. Camp
held various positions over a 10 year period while employed by NASCAR, most
recently serving as director of licensing and marketing.
Avy H. Stein has served as a director since April 1996. Mr. Stein is a
founder and Managing Director of Willis Stein & Partners, L.P. Along with Mr.
Willis, Mr. Stein is responsible for managing Willis Stein. Prior to founding
Willis Stein & Partners, L.P., Mr. Stein served as a Managing Director of
Continental Illinois Venture Corporation from 1989 through 1994, where Mr.
Stein, along with Mr. Willis, was responsible for managing Continental's
private equity investment activities. Mr. Stein is a director of Tremont
Corporation, Petersen Publishing Company and UC Television Network Corp.
Samuel B. Guren has served as a director since April 1996. Mr. Guren is a
Managing Director of Baird Capital Partners, an affiliate of Robert W. Baird &
Co. Incorporated. Prior to joining Baird Capital Partners in February 1996,
Mr. Guren was a co-founder and managing partner of venture funds affiliated
with William Blair & Company.
Daniel M. Gill has served as a director since April 1996. Mr. Gill is a
founder and Managing Director of Willis Stein & Partners, L.P. Prior to
founding Willis Stein & Partners L.P. Mr. Gill served as a Managing Director
of Continental Illinois Venture Corporation from 1989 through 1994, where Mr.
Gill was responsible for initiating and structuring acquisitions, working with
portfolio company management teams on an on-going basis and arranging for the
disposition of portfolio investments.
John S. Bakalar has served as a director since October 1997. Mr. Bakalar
is currently a private investor. From May 1993 to November 1997, Mr. Bakalar
was President and Chief Operating Officer of Rand-McNally, Inc., a printing and
publishing company, and from prior to 1993 until May 1993 Mr. Bakalar was
Executive Vice President and Chief Financial Officer of
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Rand-McNally, Inc. Mr. Bakalar also currently serves as an Advisory Partner of
Willis Stein & Partners, L.P.
John J. Vosicky has served as a director since October 1997. Mr. Vosicky
has been the Executive Vice President and Chief Financial Officer of Comdisco
Inc., a technology services company, since July 1994. Mr. Vosicky was Senior
Vice President and Chief Financial Officer of Comdisco Inc. from November 1985
to July 1994. Mr. Vosicky serves as a director of Comdisco Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Racing Champions' directors and executive officers, and persons who own more
than 10% of a registered class of Racing Champions' equity securities, to file
with the Commission initial reports of beneficial ownership and reports of
changes in beneficial ownership of Racing Champions' equity securities. The
rules promulgated by the Commission under Section 16(a) of the Exchange Act
require those persons to furnish Racing Champions with copies of all reports
filed with the Commission pursuant to Section 16(a). Based solely upon a
review of such forms actually furnished to Racing Champions, and written
representations of certain of Racing Champions' directors and executive
officers that no forms were required to be filed, all directors, executive
officers and 10% stockholders of Racing Champions have filed with the
Commission on a timely basis all reports required to be filed under Section
16(a) of the Exchange Act, except that Howard A. Schacter, the Company's Vice
President - Communications, filed a Form 5 on February 16, 1998 to report the
purchase of 1,200 shares of Common Stock in June 1997.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information concerning compensation
paid to, earned by or awarded to Racing Champions' Chief Executive Officer and
each of Racing Champions' four other most highly compensated executive officers
in fiscal 1997 for the years indicated below. The persons named in the table
are sometimes referred to herein as the "named executive officers."
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SUMMARY COMPENSATION TABLE(1)
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(2) OPTIONS (#) COMPENSATION
- -------------------------------------------- -------- -------- ----------- ------------
Robert E. Dods, President................... 1997 $500,000 $ -- -- $ --
1996 333,333 -- -- --
Boyd L. Meyer, Executive Vice President .... 1997 500,000 -- -- --
1996 333,333 -- -- --
Peter K.K. Chung, President of Racing 1997 500,000 -- -- --
Champions Limited........................... 1996 333,333 -- -- --
Curtis W. Stoelting, Vice President - 1997 150,000 245,066 33,653 5,943 (3)
Finance and Operations and Secretary........ 1996 100,178 139,072 83,008 1,381 (3)
John F. Olsen, Vice President - Sales....... 1997 125,000 171,546 25,338 6,919 (4)
1996 83,511 80,350 41,504 2,024 (4)
- -------------------------
(1) For 1996, all amounts are limited to compensation paid or earned after
the Recapitalization on April 30, 1996.
(2) Consists of amounts paid pursuant to the Racing Champions' 1996 Key
Employees Performance Compensation Plan. See "-- 1996 Key Employees
Performance Compensation Plan."
(3) For 1996, consists of premiums paid by Racing Champions for term life
insurance under which Mr. Stoelting is the beneficiary. For 1997,
consists of $1,193 of premiums paid by Racing Champions for term life
insurance under which Mr. Stoelting is the beneficiary and $4,750 of
matching contributions under the Racing Champions Savings Plan.
(4) For 1996, consists of premiums paid by Racing Champions for term life
insurance under which Mr. Olsen is the beneficiary. For 1997, consists of
$2,169 of premiums paid by Racing Champions for term life insurance under
which Mr. Olsen is the beneficiary and $4,750 of matching contributions
under the Racing Champions Savings Plan.
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OPTIONS GRANTED DURING 1997
The following table provides certain information regarding stock options
granted to the named executive officers of Racing Champions during the year
ended December 31, 1997.
OPTIONS/SAR GRANTS IN LAST YEAR
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---------------------- ---------- ------------- -------- ---------- -------- --------
Curtis W. Stoelting... 33,653(1) 21.6% $14.00 June 11, 2007 $296,299 $750,879
John F. Olsen......... 25,338(2) 16.3 14.00 June 11, 2007 222,974 565,291
(1) Options with respect to 22,473 shares were fully exercisable upon grant
and options with respect to 20% of 11,180 shares become exercisable on
June 11 of each year from 1998 to 2002.
(2) Options with respect to 16,953 shares were fully exercisable upon grant
and options with respect to 20% of 8,385 shares become exercisable on June
11 of each year from 1998 to 2002.
FISCAL YEAR-END OPTION VALUES
The following table provides certain information regarding the value of
unexercised options held by the named executive officers at December 31, 1997.
No named executive officer exercised any options during the year ended December
31, 1997.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
YEAR-END YEAR-END
----------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
- ----------------------- ----------- ------------- -------------- ----------------
Curtis W. Stoelting.... 39,075 77,586 $126,507 $506,014
John F. Olsen.......... 25,254 41,588 63,254 253,007
(1) Calculated based on closing sale price of $7.75 per share on December
31, 1997.
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1996 KEY EMPLOYEES STOCK OPTION PLAN
On April 30, 1996 in connection with the Recapitalization, the Company's
Board of Directors adopted, and Racing Champions' stockholders subsequently
approved, the 1996 Key Employees Stock Option Plan (the "Stock Option Plan").
Under the Stock Option Plan, the Board of Directors, or the Compensation
Committee of the Board of Directors if so designated by the Board of Directors,
may grant options to purchase up to 415,041 shares of Common Stock to
executives or other key employees of Racing Champions. Options granted under
the Stock Option Plan may be either "incentive stock options," which qualify
for special tax treatment under the Internal Revenue Code, or nonqualified
stock options. Options will expire at such time as the Board of Directors or
Compensation Committee determines, provided that no stock option may be
exercised later than the tenth anniversary (the fifth anniversary in certain
cases) of the date of its grant. Options cannot be exercised until the vesting
period, if any, specified by the Board of Directors or Compensation Committee
has expired. Options are not transferable other than by will or the laws of
descent and distribution, and may be exercised during the life of the employee
only by him or her. No options may be granted under the Stock Option Plan
after December 31, 2005, which is the date the Stock Option Plan terminates.
However, any options outstanding on December 31, 2005 will remain in effect in
accordance with their terms. Racing Champions does not intend to grant
additional options under the Stock Option Plan.
The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than
100% (110% for certain stockholders) of the fair market value of the Common
Stock on the date such option is granted. Payment of the exercise price may be
made in cash or by the surrender of shares of Common Stock having a fair market
value on the date of exercise equal to the exercise price.
Options to purchase 332,033 shares have been granted to certain employees
of Racing Champions under the Stock Option Plan. Each of these options become
exercisable 20% each year over five years commencing on the first anniversary
of the date of grant.
STOCK INCENTIVE PLAN
On April 8, 1997, the Board of Directors adopted, and Racing Champions'
stockholders approved, the Racing Champions Corporation Stock Incentive Plan
(the "Incentive Plan"). Under the Incentive Plan, the Board of Directors, or
the Compensation Committee of the Board of Directors if so designated by the
Board of Directors, may grant options to purchase up to 311,852 shares of
Common Stock to executives or other key employees of Racing Champions. Options
granted under the Stock Option Plan may be either "incentive stock options,"
which qualify for special tax treatment under the Internal Revenue Code, or
nonqualified stock options. Options will expire at such time as the Board of
Directors or Compensation Committee determines, provided that no stock option
may be exercised later than the tenth anniversary (the fifth anniversary for
certain stockholders) of the date of its grant. Options cannot be exercised
until the vesting period, if any, specified by the Board of Directors or
Compensation Committee has expired. Options are not transferable other than by
will or the laws of descent and distribution, and may be exercised during the
life of the employee only by him or her. No options
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may be granted under the Incentive Plan after April 8, 2007, which is the date
the Incentive Plan terminates. However, any options outstanding on April 8,
2007 will remain in effect in accordance with their terms.
The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than
100% (110% for certain stockholders) of the fair market value of the Common
Stock on the date such option is granted. Payment of the exercise price may be
made in cash or by the surrender of shares of Common Stock having a fair market
value on the date of exercise equal to the exercise price.
In the discretion of the Board of Directors or the Compensation Committee,
any option granted under the Incentive Plan may be accompanied by a reload
option. A reload option may be granted to an optionee who pays for the
exercise of all or part of an option with shares of Common Stock. The reload
options represent an additional option to acquire the same number of shares of
Common Stock as is used by the optionee to pay for the exercise of his
underlying option. A reload option is subject to all of the terms and
conditions of the underlying option, except that the exercise price for a
reload option will be at least equal to 100% of the fair market value of the
Common Stock covered thereby on the date the reload option is granted (i.e.,
the date the underlying option is exercised). The reload option may only be
exercised if the option period of the underlying option to which the reload
option relates has not expired.
In 1997, Racing Champions granted options to purchase 155,753 shares of
Common Stock with an exercise price of $14 per share to officers and key
employees of Racing Champions, including options to purchase up to 78,852
shares of Common Stock that were accompanied by reload options.
EMPLOYEE STOCK PURCHASE PLAN
The Racing Champions Corporation Employee Stock Purchase Plan (the "Stock
Purchase Plan") is designed to comply with section 423 of the Internal Revenue
Code and will provide employees of Racing Champions and its subsidiaries with
the right to purchase shares of Common Stock directly from Racing Champions
through payroll deductions at a purchase price of at least 95% of fair market
value of the Common Stock. Up to 200,000 shares of Common Stock may be offered
under the Stock Purchase Plan in a series of quarterly offerings beginning on
July 1, 1997 and terminating on December 31, 2001. Each participant may elect
to have up to 10% of his base salary invested in Common Stock pursuant to the
Stock Purchase Plan, subject to a limit of $25,000 per year based upon the fair
market value of stock on the date of grant.
1996 KEY EMPLOYEES PERFORMANCE COMPENSATION PLAN
On April 30, 1996 the Board of Directors adopted the 1996 Key Employees
Performance Compensation Plan (the "Performance Compensation Plan"). Under the
Performance Compensation Plan, certain executive officers and other key
employees of Racing Champions will be entitled to receive a cash bonus in the
first quarter of 1997 based upon Racing Champions' consolidated earnings before
income taxes, depreciation and amortization from April 30, 1996 to
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December 31, 1996. On April 8, 1997, the Board of Directors amended the
Performance Compensation Plan to provide an additional cash bonus to
participants in the first quarter of 1998 based upon Racing Champions'
consolidated earnings before income taxes, depreciation and amortization from
January 1, 1997 to December 31, 1997.
EMPLOYMENT AGREEMENTS
On April 30, 1996 Racing Champions entered into separate employment
agreements with Messrs. Dods, Meyer, Stoelting and Olsen, and the Hong Kong
Subsidiary entered into an employment agreement with Mr. Chung (collectively,
the "Employment Agreements"). The Employment Agreements with Messrs. Dods,
Meyer and Chung each has a term of three years, and the Employment Agreements
with Messrs. Stoelting and Olsen each has a term of two years. Pursuant to the
Employment Agreements, Messrs. Dods, Meyer, Chung, Stoelting and Olsen will
receive base salaries of $500,000, $500,000, $500,000, $150,000 and $125,000,
respectively, and are entitled to participate in the Performance Compensation
Plan and the Stock Option Plan. The Employment Agreements with Messrs. Dods,
Meyer and Chung also provide that the executive officer is eligible to
participate in any medical, health, dental, disability and life insurance
policy as are in effect for the other two most senior executives of Racing
Champions, while the Employment Agreements with Messrs. Stoelting and Olsen
provide that the executive officer is eligible to participate in any medical,
health, dental, disability and life insurance policy as are in effect for other
senior management of Racing Champions excluding Messrs. Dods, Meyer and Chung.
Pursuant to the Employment Agreements, each executive officer has agreed not to
compete with Racing Champions during employment and for a period of two years
following termination of employment and has agreed to maintain the
confidentiality of Racing Champions' proprietary information and trade secrets.
Under the Employment Agreements, Racing Champions may terminate the
executive officer's employment upon the executive officer's death or disability
or if the Board of Directors determines that termination is in Racing
Champions' best interests. The executive officer may resign and terminate the
Employment Agreement at any time. If the executive officer's employment is
terminated for disability or death, Racing Champions is required to continue to
pay the executive officer, his designated beneficiary or estate, whichever is
applicable, the base salary for a period of six months after his termination of
employment. If employment is terminated by Racing Champions without cause or
by the executive officer with good reason, the executive officer is entitled to
receive payment of his base salary until the later of the first anniversary of
the date of termination or the end of his employment term under the Employment
Agreement. In addition, in the event of termination for death, disability, by
Racing Champions without cause or by the executive officer with good reason,
the executive officer is entitled to receive all fringe benefits under his
Employment Agreement accrued prior to the termination date. If employment is
terminated by Racing Champions for cause or by the executive officer without
good reason, the executive officer is not entitled to receive any base salary
or fringe benefits for periods after the termination date.
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COMPENSATION OF DIRECTORS
Directors who are employees of Racing Champions or are affiliates of
members of the Investor Group receive no compensation for services as members
of either the Company's Board of Directors or committees thereof. Other
directors receive an annual retainer of $7,500, payable in cash, and receive a
fee of $1,000 for each Board meeting attended and $1,000 for each committee
meeting attended. Such fees for attendance at Board meetings and committee
meetings may not exceed $1,000 per day.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of December 31, 1997 by: (i) each of
Racing Champions' directors and named executive officers; (ii) all directors
and executive officers of Racing Champions as a group; and (iii) each person or
other entity known by Racing Champions to own beneficially more than 5% of the
outstanding Racing Champions Common Stock. Except as otherwise indicated in
the footnotes, each of the holders listed below has sole voting and investment
power over the shares beneficially owned.
SHARES OF PERCENT OF
COMMON COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED
------------------------------------ ------------ ------------
Robert E. Dods...................... 1,303,701 9.8%
Boyd L. Meyer(1).................... 1,303,701 9.8
Daniel M. Gill(2)................... 2,381,249 18.0
Peter K. K. Chung(3)................ 1,303,701 9.8
Samuel B. Guren(4).................. 651,431 4.9
Avy H. Stein(5)..................... 2,381,249 18.0
John S. Bakalar..................... -- --
John J. Vosicky..................... 10,000 *
Curtis W. Stoelting(6).............. 137,640 1.0
John F. Olsen(7).................... 44,967 *
Willis Stein & Partners, L.P.(8).... 2,381,249 18.0
All directors and executive
officers as a group
(12 persons)(9)..................... 7,226,322 54.1
------------
* Denotes less than 1%.
(1) Includes 343,798 shares of Common Stock held by the Meyer
Family Limited Partnership, for which Mr. Meyer serves as a general
partner and shares voting and investment power with members of his
immediate family who are the other general partners.
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(2) Represents shares of Common Stock held by Willis Stein &
Partners, L.P. Mr. Gill may be deemed to beneficially own the
shares of Common Stock owned by Willis Stein & Partners, L.P. by
virtue of his status as a Founding Member of Willis Stein &
Partners, L.L.C., the general partner of Willis Stein & Partners,
L.P.
(3) Represents shares of Common Stock held by a corporation
controlled by Mr. Chung.
(4) Represents shares of Common Stock held by Baird Capital
Partners II Limited Partnership and BCP II Affiliates Fund Limited
Partnership, entities for which Mr. Guren serves as a Managing
Director and shares voting and investment power with the other
Managing Directors. Mr. Guren disclaims beneficial ownership in all
shares of Common Stock held by Baird Capital Partners II Limited
Partnership or BCP II Affiliates Fund Limited Partnership.
(5) Represents shares of Common Stock held by Willis Stein &
Partners, L.P. Mr. Stein may be deemed to beneficially own the
shares of Common Stock owned by Willis Stein & Partners, L.P. by
virtue of his status as a Founding Member of Willis Stein &
Partners, L.L.C., the general partner of Willis Stein & Partners,
L.P.
(6) Includes 39,075 shares of Common Stock subject to stock
options which are currently exercisable.
(7) Includes 25,254 shares of Common Stock subject to stock
options which are currently exercisable.
(8) The general partner of Willis Stein & Partners, L.P. is
Willis Stein & Partners, L.L.C., a Delaware limited liability
company, of which John R. Willis, Avy H. Stein, Daniel M. Gill, Beth
F. Johnston, and Daniel H. Blumenthal are the Founding Members.
Each such person may, through Willis Stein & Partners, L.L.C., be
deemed to share the power to direct the voting and disposition of
all of the Common Stock held by Willis Stein & Partners, L.P. The
address of Willis Stein & Partners, L.P. is 227 West Monroe Street,
Suite 4300, Chicago, Illinois 60606.
(9) Includes (i) 1,303,701 shares of Common Stock held by a
corporation controlled by Mr. Chung, (ii) 343,798 shares of Common
Stock held by the Meyer Family Limited Partnership, for which Mr.
Meyer serves as a general partner and shares voting and investment
power with members of his immediate family who are the other general
partners, (iii) 2,381,249 shares of Common Stock for which Messrs.
Gill and Stein share voting and investment power and 651,431 shares
of
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Common Stock for which Mr. Guren shares voting and investment power
(Messrs. Gill, Stein and Guren disclaim beneficial ownership in
such shares of Common Stock) and (iv) 114,837 shares of Common
Stock subject to stock options which are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1996, pursuant to the Recapitalization, Racing Champions issued
$38.2 million of Series A Junior Subordinated Promissory Notes (the "Series A
Junior Notes"), $1.2 million of Series B Junior Subordinated Promissory Notes
(the "Series B Junior Notes"), $6.7 million of Series A Preferred Stock and
$1.2 million of Series B Preferred Stock to the Investor Group and Racing
Champions' senior management, including Robert E. Dods, Boyd L. Meyer, Peter
K.K. Chung, Curtis W. Stoelting, John F. Olsen, Peter J. Henseler and M. Kevin
Camp. On June 17, 1997, Racing Champions used a part of the proceeds from the
Offering to repay all amounts outstanding under the Series A Junior Notes and
the Series B Junior Notes and to redeem all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock. In connection with the repayment
of the notes and the redemption of the preferred stock, Racing Champions paid
$7.5 million to Mr. Dods, $7.5 million to Mr. Meyer, $7.5 million to Mr. Chung,
$649,000 to Mr. Stoelting, $130,000 to Mr. Olsen, $130,000 to Mr. Henseler and
$130,000 to Mr. Camp. Racing Champions also paid $19.6 million to Willis Stein
& Partners, L.P., an entity affiliated with Avy H. Stein and Daniel M. Gill,
two directors of Racing Champions, and an aggregate of $5.4 million to two
entities affiliated with Samuel B. Guren, a director of Racing Champions.
Racing Champions leases warehouse space from D. W. Realty, Inc., a
corporation wholly owned by William L. Dods, brother of Robert E. Dods,
President and a director of Racing Champions. The amount of the lease payments
for the year ended December 31, 1997 was $68,814 and Racing Champions currently
pays rent of $5,490 per month. Racing Champions believes that the terms of
this lease are no less favorable to Racing Champions than could have been
obtained from an unaffiliated third party.
Eric Meyer, son of Boyd L. Meyer, Executive Vice President and a director
of Racing Champions, is a principal of Reicher-Goerdt-Meyer Sales and
Marketing, Inc. ("Reicher Goerdt"), one of Racing Champions' external sales
representative organizations. For year ended December 31, 1997, Eric Meyer was
allocated approximately $168,239 of the sales commissions paid by Racing
Champions to Reicher Goerdt. Racing Champions pays sales commissions to
Reicher Goerdt at the same rate and on no more favorable terms than for Racing
Champions' other sales representative organizations.
James Chung, brother of Peter K.K. Chung, President of Racing Champions
Limited and a director of Racing Champions, owns 70% of Sunrise, one of the
manufacturers utilized by Racing Champions. For the year ended December 31,
1997, Racing Champions paid $5,242,441 to Sunrise for the purchase of die cast
vehicle replicas. Racing Champions expects to continue to make purchases from
Sunrise during 1998. Racing Champions believes that the terms for the purchase
of products from Sunrise are no less favorable to Racing Champions than could
have been obtained from an unaffiliated party.
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Racing Champions loaned $120,758 to Peter J. Henseler, Vice President --
Marketing of Racing Champions, on April 30, 1996, evidenced by a promissory
note that bears interest at 8% per year. Mr. Henseler used the proceeds of
this loan to purchase 19,713 shares of Common Stock and shares of preferred
stock and promissory notes of Racing Champions which were retired on June 17,
1997 using a part of the proceeds of Racing Champions' initial public offering.
These securities were pledged as collateral for the note. As of March 31,
1997, $98,599 of principal and interest was outstanding under this note. On
April 8, 1997, Mr. Henseler repaid all outstanding amounts under this note.
Willis Stein & Partners, L.P., a stockholder of Racing Champions, owns
approximately 28% of the equity securities of Petersen Holdings, L.L.C.
("Holdings") and 47% of the common stock of Brightview Communications Group,
Inc. ("Brightview"). Holdings and Brightview in turn own all of the equity
securities of Petersen Publishing Company, L.L.C. ("Petersen"). In addition,
Willis Stein & Partners, L.P. has the contractual ability to control the
policies and operations of Petersen. Racing Champions has entered into
licensing and marketing arrangements with Petersen in connection with the
Racing Champions Mint and Racing Champions Hot Rod Collection and made payments
of approximately $181,497 during the year ended December, 31 1997 to Petersen
in connection with these licenses.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Exhibits:
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
2.1 Agreement and Plan of Merger, dated as of December 4,
1997, among the Company, WSG Acquisition, Inc. and
Wheels Sports Group, Inc.
2.2 First Amendment to Agreement and Plan of Merger, dated
as of February 2, 1998, among the Company, WSG
Acquisition, Inc. and Wheels Sports Group, Inc.
2.3 Second Amendment to Agreement and Plan of Merger,
dated as of February 3, 1998, among the Company, WSG
Acquisition, Inc. and Wheels Sports Group, Inc.
2.4 Stockholder Agreement, dated as of December 4, 1997,
between the Company and Howard L. Correll, Jr.
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EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
3.1 Amended and Restated Certificate of Incorporation of
the Company (2)
3.2 Amended and Restated By-Laws of the Company (1)
10.1 Asset and Stock Purchase Agreement, dated as of April
30, 1996, among the Company, Racing Champions, Inc.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc.,
Hosten Investment Limited and Banerjan Company
Limited (1)
10.2 Stockholders Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc., Hosten
Investment Limited, Curt Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
10.3 Registration Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc., Hosten
Investment Limited, Curt Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
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EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.4 Executive Securities Agreement, dated as of April 30,
1996, by and among the Company, Curt Stoelting, John
Olsen, Peter Henseler, Kevin Camp, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer and Peter Chung (1)
10.5 Securities Purchase Agreement, dated as of April 30,
1996, by and among the Company, Willis Stein &
Partners, L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund Limited Partnership,
Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Curt Stoelting, John Olsen, Peter Henseler and Kevin
Camp (1)
10.6 Amendment No. 1 to Securities Purchase Agreement, dated
as of April 30, 1996, by and among the Company,
Willis Stein & Partners, L.P. and certain other
purchasers of the Company's stock (1)
10.7 Securities Purchase Agreement, dated as of April 30,
1996, by and between the Company and Dods-Meyer, Ltd.(1)
10.8 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
10.9 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
10.10 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and Robert
Dods (1)
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EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.11 Employment Agreement, dated as of April 30, 1996, by
and between Racing Champions, Inc. and Boyd Meyer (1)
10.12 Employment Agreement, dated as of April 30, 1996, by
and between Banerjan Company Limited and Peter Chung (1)
10.13 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and Curt
Stoelting (1)
10.14 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and Peter
Henseler (1)
10.15 Employment Agreement, dated as of April 30, 1996,
by and between Racing Champions, Inc. and John Olsen (1)
10.16 Employment Agreement, dated as of April 30, 1996, by
and between Racing Champions, Inc. and Kevin Camp (1)
10.17 1996 Key Employees Stock Option Plan (1)
10.18 1996 Key Employees Performance Compensation Plan (1)
10.19 Amendment No. 1 to 1996 Key Employees Performance
Compensation Plan (1)
10.20 Racing Champions Corporation Stock Incentive Plan (1)
10.21 Racing Champions Corporation Employee Stock Purchase
Plan (1)
21 Subsidiaries of the Company
24 Power of Attorney (included as part of the signature
page hereof)
27 Financial Data Schedule
48
49
- -------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-22493) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-22635) and incorporated herein
by reference.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months
ended December 31, 1997.
(c) Financial statement schedules.
49
50
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 10, 1998. 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 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.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 10, 1998
50
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Racing Champions, Inc. and Dods-Meyer, Ltd.:
We have audited in accordance with generally accepted auditing
standards, the combined financial statements of Racing Champions, Inc. and
Dods-Meyer, Ltd. and issued our report thereon dated February 15, 1997. 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 presented for purposes of additional analysis and is not a part of the basic
financial statements. This schedule has been subject to the auditing
procedures applied to the audits of the basic financial statements and, in our
opinion, fairly states in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1997
52
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)
ADDITIONS
BALANCE AT ----------------------------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ----------
Allowances deducted from related accounts
receivable balance sheet accounts of,
Racing Champions, Inc. and Dods-Meyer,
Ltd.
Year-ended December 31, 1994............. $240,000 $ -- $-- $ -- $240,000
Year-ended December 31, 1995............. 240,000 -- -- 40,000 200,000
Four months ended April 30, 1996 ........ 200,000 37,000 -- -- 257,000
Racing Champions Corporation
Eight months ended December 31, 1996..... 257,000 43,000 -- -- 300,000
Year ended December 31, 1997 ............ 300,000 -- -- -- 300,000
51
53
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.
RACING CHAMPIONS CORPORATION
By /s/ Robert E. Dods
---------------------------------
Robert E. Dods, President
Date: March 26, 1998
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
/s/ Robert E. Dods President and March 26, 1998
- ------------------------ Director (Principal
Robert E. Dods Executive Officer)
/s/ Boyd L. Meyer Executive Vice President March 26, 1998
- ------------------------ and Director
Boyd L. Meyer
/s/ Curtis W. Stoelting Vice President - Finance March 26, 1998
- ------------------------ and Operations and
Curtis W. Stoelting Secretary (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Peter K.K. Chung Director March 26, 1998
- ------------------------
Peter K.K. Chung
/s/ Samuel B. Guren Director March 26, 1998
- ------------------------
Samuel B. Guren
52
54
/s/ Avy H. Stein Director March 26, 1998
- ------------------------
Avy H. Stein
/s/ Daniel M. Gill Director March 26, 1998
- ------------------------
Daniel M. Gill
/s/ John S. Bakalar Director March 26, 1998
- ------------------------
John S. Bakalar
/s/ John J. Vosicky Director March 26, 1998
- ------------------------
John J. Vosicky
53
55
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997............... F-3
Consolidated Statements of Income for the eight months ended December 31,
1996 and the year ended December 31, 1997............................................... F-4
Consolidated Statements of Stockholders' Equity for the eight months ended
December 31, 1996 and the year ended December 31, 1997.................................. F-5
Consolidated Statements of Cash Flows for the eight months ended
December 31, 1996 and the year ended December 31, 1997.................................. F-6
Notes to Consolidated Financial Statements for the eight months ended
December 31, 1996 and the year ended December 31, 1997.................................. F-7
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
Report of Independent Public Accountants................................................ F-17
Combined Balance Sheets as of December 31, 1995 and April 30, 1996...................... F-18
Combined Statements of Income for the years ended December 31, 1994 and
1995, and for the four months ended April 30, 1996...................................... F-19
Combined Statements of Shareholders' Investment for the years ended
December 31, 1994 and 1995, and for the four months ended April 30, 1996................ F-20
Combined Statements of Cash Flows for the years ended December 31, 1994
and 1995 and for the four months ended April 30, 1996................................... F-21
Notes to Combined Financial Statements for the years ended December 31, 1994
and 1995 and for the four months ended April 30, 1996................................... F-22
RACING CHAMPIONS LIMITED, HOSTEN INVESTMENT LIMITED,
GARNETT SERVICES INC., BERGEN SERVICES INC.
Report of Independent Auditors.......................................................... F-25
Combined Balance Sheets as of March 31, 1995 and 1996 and April 30, 1996................ F-26
Combined Statements of Income for the years ended March 31, 1995 and
1996 and for the one month ended April 30, 1996......................................... F-27
Combined Statements of Changes in Shareholders' Equity for the years ended
March 31, 1995 and 1996 and for the one month ended April 30, 1996...................... F-28
Combined Statements of Cash Flows for the years ended March 31, 1995 and
1996 and for the one month ended April 30, 1996......................................... F-29
Notes to Combined Financial Statements.................................................. F-30
F-1
56
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, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the year ended December 31, 1997, and for the eight
months ended December 31, 1996. 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 financial position of Racing Champions Corporation
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997, and for
the eight months ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 10, 1998
F-2
57
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
ASSETS 1997 1996
- ---------------------------------------------------------------------------- --------------- -------------
Current assets:
Cash and cash equivalents $ 6,463,434 $ 5,897,911
Accounts receivable, net of allowance for doubtful accounts of $300,000 11,226,609 5,359,473
Note receivable from officer - 120,758
Inventory 1,700,675 1,264,317
Deferred and prepaid taxes 145,813 1,255,131
Prepaid expenses 1,158,205 343,210
-------------- -------------
Total current assets 20,694,736 14,240,800
-------------- -------------
Property and equipment:
Tooling 9,962,090 6,717,375
Other equipment 1,878,768 1,349,973
-------------- -------------
11,840,858 8,067,348
Less- Accumulated depreciation (2,829,989) (839,282)
-------------- -------------
9,010,869 7,228,066
Excess purchase price over net assets acquired, net 84,946,274 87,139,838
Other assets 125,713 471,334
-------------- -------------
Total assets $ 114,777,592 $ 109,080,038
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 3,489,170 $ 1,777,690
Accrued expenses 5,716,383 5,757,175
Accrued royalties 2,814,380 1,890,857
Due to stockholders - 945,373
Line of credit 5,000,000 -
Current maturities of bank term notes 3,950,000 6,200,000
Senior subordinated debt to stockholders - 8,020,000
-------------- -------------
Total current liabilities 20,969,933 24,591,095
Bank term notes, less current maturities 11,650,000 30,700,000
Junior subordinated debt to stockholders - 39,441,054
Deferred interest on junior subordinated debt - 1,938,083
Deferred income taxes 3,065,210 996,575
-------------- -------------
Total liabilities 35,685,143 97,666,807
-------------- -------------
Stockholders' equity:
Preferred stock, Series A, $.01 par value, no shares authorized, issued,
or outstanding at December 31, 1997, and 100,000 shares authorized,
66,668 issued and outstanding at December 31, 1996, with a liquidation
value of $7,223,107 at December 31, 1996 - 556,974
Preferred stock, Series B, $.01 par value, no shares authorized,
issued, or outstanding at December 31, 1997, and 20,000 shares
authorized, 11,952 issued and outstanding at December 31, 1996, with a liquidation
value of $1,294,333 at December 31, 1996 - 99,853
Common stock, voting, $.01 par value, 20,000,000 shares authorized,
13,242,382 and 6,948,156 shares issued and outstanding at December
31, 1997 and 1996, respectively 132,424 69,482
Common stock, nonvoting, $.01 par value, no shares authorized, issued, or
outstanding at December 31, 1997, and 1,000,000 shares authorized,
937,084 issued and outstanding at December 31, 1996 - 9,371
Additional paid-in capital 69,667,564 8,782,383
Retained earnings 9,292,461 1,895,168
-------------- -------------
Total stockholders' equity 79,092,449 11,413,231
-------------- -------------
Total liabilities and stockholders' equity $ 114,777,592 $ 109,080,038
============== =============
The accompanying notes are an integral part of these
consolidated balance sheets
F-3
58
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Net sales $76,562,382 $49,384,893
Cost of sales, related party 5,242,441 3,990,651
Cost of sales, other 26,943,269 17,374,793
------------ -----------
Gross profit 44,376,672 28,019,449
Selling, general and administrative expenses 23,660,433 15,244,449
Amortization of intangible assets 2,216,278 1,539,101
------------ -----------
Operating income 18,499,961 11,235,899
Interest expense 5,125,953 6,737,725
Other expense 200,401 153,471
------------ -----------
Income before income taxes 13,173,607 4,344,703
Income tax expense 5,297,892 1,793,495
------------ -----------
Net income 7,875,715 2,551,208
Dividends accrued on preferred stock 478,422 656,040
------------ -----------
Net income available to common stockholders $ 7,397,293 $ 1,895,168
============ ===========
Net income per common share:
Basic earnings per share $0.71 $0.24
============ ===========
Diluted earnings per share $0.69 $0.23
============ ===========
Weighted average shares outstanding:
Basic 10,448,780 7,885,240
Diluted 10,777,483 8,211,588
The accompanying notes are an integral part of these
consolidated statements.
F-4
59
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PREFERRED PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
------- ------------- ------------ ----------- -------------
Balance, May 1, 1996 $ 78,853 $ 787 $ 8,782,383 $ - $ 8,862,023
Net income - - - 2,551,208 2,551,208
Accrued dividends - 656,040 - (656,040) -
-------- ----------- ----------- --------- ------------
Balance, December 31, 1996 78,853 656,827 8,782,383 1,895,168 11,413,231
Net income - - - 7,875,715 7,875,715
Accrued dividends - 478,422 - (478,422) -
Initial public offering 53,571 - 68,746,418 - 68,799,989
Redemption of preferred stock - (1,135,249) (7,861,237) - (8,996,486)
-------- ----------- ----------- ---------- ------------
Balance, December 31, 1997 $132,424 $ - $69,667,564 $9,292,461 $ 79,092,449
======== =========== =========== ========== ============
The accompanying notes are an integral part of these
consolidated statements.
F-5
60
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------------
Cash flows from operating activities:
Net income $ 7,875,715 $ 2,551,208
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 1,990,702 826,052
Amortization on intangible assets 2,216,280 1,539,099
Amortization of deferred financing costs 462,587 745,820
Deferred income taxes 2,072,172 884,190
Deferred interest on junior subordinated debt 1,375,890 1,938,083
Changes in operating assets and liabilities-
Accounts receivable (5,867,136) (654,921)
Inventory (436,358) 1,647,698
Prepaid expenses 290,786 (220,591)
Accounts payable and accrued expenses 2,594,211 1,572,972
------------ ------------
Net cash provided by operating activities 12,574,849 10,829,610
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (3,773,509) (2,348,107)
Cash used for acquisitions, net - (27,781,355)
Issuance of note receivable (50,000) -
------------ ------------
Net cash used by investing activities (3,823,509) (30,129,462)
------------ ------------
Cash flows from financing activities:
Stock issued for cash - 5,661,309
Initial public offering 68,799,989 -
Redemption of preferred stock (7,862,000) -
Cash dividends paid on preferred stock (1,134,486) -
Proceeds from bank term loans 8,000,000 40,000,000
Payment on bank term loans (29,300,000) (3,100,000)
Net borrowings on line of credit 5,000,000 -
Proceeds from issuance of junior subordinated notes - 21,570,570
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) -
Payment of three day notes - (38,934,116)
Decrease in due to stockholders (945,373) -
Decrease in note receivable from officer 120,758 -
------------ ------------
Net cash provided (used) by financing activities (8,185,817) 25,197,763
------------ ------------
Net increase in cash and cash equivalents 565,523 5,897,911
Cash and cash equivalents, beginning of period 5,897,911 -
------------ ------------
Cash and cash equivalents, end of period $ 6,463,434 $ 5,897,911
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 7,031,305 $ 5,422,846
Cash paid for taxes during the period 1,792,649 4,339,689
============ ============
Supplemental disclosure of noncash transactions:
Issuance of stock for acquisitions $ - $ 3,200,713
Issuance of junior subordinated notes for acquisitions - 17,870,484
Issuance of senior subordinated notes for acquisitions - 8,020,000
Issuance of three day notes for acquisitions - 38,934,116
Issuance of stock and junior subordinated note to officer for note
receivable - 120,758
============ ============
The accompanying notes are an integral part of these
consolidated statements.
F-6
61
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Racing Champions Corporation ("RCC") and Subsidiaries (collectively "the
Company") is a producer and marketer of collectibles. The Company is known
for its extensive line of officially licensed, high quality collectible
replicas of actual race cars and related vehicles from the most popular
U.S. professional racing series, including NASCAR stock car racing,
National Hot Rod Association drag racing, Championship Auto Racing Teams
and Indy Racing League Indy-style racing and World of Outlaws sprint car
racing. The Company also produces and markets classic and custom vehicles
and collectible pewter figures. Products are manufactured in numerous
styles for the following customer bases: national and regional retail
chains; collector and hobby shops and premium sales to corporations.
Racing Champions, Inc., a wholly owned subsidiary of Racing Champions
Corporation, has license agreements with the major U.S. automotive
manufacturers and most of the major motor sport 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 ("RCL"), a wholly owned Hong Kong subsidiary of RCI, oversees the
production of the Company's products.
2. 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 the Hong Kong
subsidiary to RCI.
The Recapitalization was financed with $40,000,000 of bank borrowings and
the issuance to management and the investor group of $8,020,000 of senior
subordinated notes, $38,245,820 of Series A junior subordinated notes,
$1,195,233 of the Company's Series B preferred stock, $118,840 of the
Company's nonvoting common stock and $881,160 of the Company's common
stock.
The acquisitions were accounted for using the purchase method of
accounting. The acquisitions involved the following: (a) the Company's
purchase of all the outstanding stock of RCI in exchange for the issuance
by the Company of three day notes for $10,630,014, senior subordinated
notes of $1,327,808, Series A junior subordinated notes of $2,746,848 and
Series B junior subordinated Notes of $295,330; (b) the Company's purchase
of substantially all of the assets DML for a cash payment of $1,728,107,
and the issuance by the Company of three-day notes for $28,304,102, senior
subordinated notes of $4,025,525, Series A junior subordinated notes of
$8,369,985, Series B; juniors subordinated notes of $899,904, 2,422.06
shares of Series A preferred stock at a price of $100 per share, 11,952.33
shares of Series B preferred stock at a price of $100 per share, 1,354,908
shares of common stock at a price of $0.13 per share and 937,084 shares of
nonvoting common stock at a price of $0.13 per share; (c) the Company's
purchase of substantially all of the assets of RCL for a cash payment of
$1,500,000; (d) the Company's purchase of substantially
F-7
62
all of the assets of Hosten Investment Limited for a cash payment of
$50,000; and (e) the Company's purchase of substantially all of the assets
of Garnett Services, Inc. for a cash payment of $17,976,667, and the
issuance by the Company of senior subordinated notes of $2,666,667, Series
A junior subordinated notes of $5,558,417, 13,163.36 shares of Series A
preferred stock at a price of $100 per share, and 1,145,996 shares of
common stock at a price of $0.13 per share.
The excess purchase price over the book value of the net assets acquired
was $93,547,442. Of this excess $88,663,805 has been recorded as an
intangible asset and is being amortized on a straight-line basis over 40
years and $4,883,637 was recorded as inventory and property and equipment.
3. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION/TRANSACTIONS
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 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, 1997, and the eight months ended December 31, 1996, were
insignificant; however, if they were significant, the Company would have
recorded such gains and losses in stockholders' equity in a cumulative
adjustment account.
Transactions in foreign currencies are translated into the local currency
at the rates which prevailed at the time of the transactions. Gains and
losses on foreign currency transactions are included in income. For the
year ended December 31, 1997, and the eight months ended December 31,
1996, gains and losses of such transactions were insignificant.
REVENUE RECOGNITION
The Company recognizes revenue based upon shipment of product to
customers.
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
valued at market prices.
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.
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 have been recorded at their fair value as of the
date of the Recapitalization. Items purchased after the Recapitalization
were recorded at cost. Depreciation is computed using the straight-line
F-8
63
method for financial statement purposes. Accelerated methods are used for
income tax purposes. The estimated useful lives used in computing
depreciation for financial statement purposes are as follows:
ASSET DESCRIPTIONS ESTIMATED USEFUL LIVES
----------------------------- --------------------------
Tooling 4-8 years
Furniture and office equipment 7 years
Leasehold improvements 3-10 years
Computer systems 5 years
==========================
EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED
Excess of purchase price over net assets acquired is amortized over 40
years on a straight-line basis and is tax deductible over 15 years. The
Company periodically evaluates the carrying value of goodwill for possible
impairment based upon expected future undiscounted operating cash flows.
Amortization expense relating to excess of purchase price over the net
assets as of December 31, 1997, and for the eight months ended December
31, 1996, was approximately $2,100,000 and $1,400,000, respectively.
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 three customers accounting for approximately 22%, 16% and 11%
of net sales for the year ended December 31, 1997, and 17%, 19% and 15% of
net sales for the eight months ended December 31, 1996. Additionally, at
December 31, 1997, four customers accounted for approximately 16%, 16%,
12% and 11% of accounts receivable and at December 31, 1996, three
customers accounted for approximately 27%, 14%, and 13% 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 insurance which covers a portion of its receivables from major
customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, accounts payable, accrued
expenses and notes payable approximate fair value because of the
short-term nature of the items. The carrying values of the line of credit
and the term loan approximate their fair value primarily due to the
floating interest rates associated with the debt instrument.
ACCOUNTING FOR STOCK-BASED COMPENSATION
With respect to stock options granted to employees, SFAS No. 123 permits
companies to continue using the accounting method promulgated by the
Accounting Principles Board Opinion No. 25 ("APB No. 25") "Accounting for
Stock Issued to Employees," to measure compensation or to adopt the fair
value based method prescribed by SFAS No. 123. The Company has elected to
continue to measure compensation cost under APB No. 25. If the APB No. 25
method is continued, pro forma disclosures are required as if SFAS No. 123
accounting provisions were followed.
F-9
64
NET INCOME PER SHARE
In December, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share." The following table discloses the
provisions set forth in SFAS No. 128:
FOR THE YEAR ENDED
DECEMBER 31, 1997
--------------------------------------------
WEIGHTED PER
NET AVERAGE SHARE
INCOME SHARES AMOUNT
---------- ---------- ---------
Basic net income per share
Net income available to common stockholders $7,397,293 10,448,780 $0.71
=====
Plus effect of dilutive securities
Stock options - 328,703
----------- -----------
Diluted net income per share
Net income available to common stockholders
plus assumed conversions
$7,397,293 10,777,483 $ .69
========== =========== =====
Options to purchase 185,753 shares of common stock at a price ranging between
$14 and $15 per share were outstanding during 1997, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
The options, which expire from June 11, 2007, through October 23, 2007, were
still outstanding at the end of 1997.
FOR THE EIGHT MONTHS ENDED
DECEMBER 31, 1996
------------------------------------------
WEIGHTED PER
NET AVERAGE SHARE
INCOME SHARES AMOUNT
-------- ---------- ---------
Basic net income per share
Net income available to common stockholders $1,895,168 7,885,240 $0.24
=====
Plus effect of dilutive securities
Stock options - 326,348
---------- ----------
Diluted net income per share
Net income available to common stockholders
plus assumed conversions $1,895,168 8,211,588 $0.23
========== ========= =====
F-10
65
4. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Pretax income
United States $13,028,555 $4,247,843
Foreign 145,052 96,860
----------- ----------
$13,173,607 $4,344,703
=========== ==========
The significant components of income tax expense are as follows:
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ --------------
Current
Federal $2,733,091 $ 749,095
State 482,310 160,210
Foreign 10,319 -
------------ --------------
3,225,720 909,305
------------ --------------
Deferred
Federal 1,736,604 730,005
State 306,460 137,626
Foreign 29,108 16,559
------------ --------------
2,072,172 884,190
------------ --------------
$5,297,892 $ 1,793,495
============ ==============
A reconciliation of statutory Federal tax rate and actual effective income
tax rate is as follows:
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
Statutory rate 34.0% 34.0%
State taxes, net of Federal benefit 4.8 4.8
Other 1.4 2.5
------------ -------------
Effective rate 40.2% 41.3%
============ =============
F-11
66
The significant components of deferred tax assets and liabilities are as
follows:
DECEMBER 31,
-----------------------------
1997 1996
------------- -----------
Deferred income tax assets
Valuation allowances $ 108,848 $ 112,385
------------- -----------
Deferred income tax liabilities
Intangible assets 2,452,633 732,416
Property and equipment 612,577 264,159
------------- -----------
Total deferred income tax liabilities 3,065,210 996,575
------------- -----------
$2,956,362 $ 884,190
============= ===========
5. DEBT
In conjunction with its initial public offering, the Company revised and
amended its bank agreement on June 17, 1997. The amended credit agreement
provides for a revolving loan and a five-year term loan. The revolving
loan allows the Company to borrow up to $5 million at any time prior to
June 28, 2002, based upon levels of the Company's accounts receivable,
inventory and cash flows. At December 31, 1997, there were $5,000,000 of
borrowings outstanding on the revolving loan. The term loan is in the
principal amount of $22 million, with final maturity at June 28, 2002. The
outstanding balance on the term loan at December 31, 1997, was
$15,600,000, of which $3,950,000 was current.
Borrowings under the credit agreement bear interest, at the Company's
option, at the bank's base rate plus a margin that varies between 0.0% and
0.75% or at a reserve adjusted Eurodollar rate plus a margin that varies
between 1.5% and 2.25%. All amounts outstanding under the credit agreement
are secured by substantially all of the assets of the Company. Under the
agreement, the Company is subject to certain financial covenants relating
to, among other things, maintenance of financial ratios and other
covenants. The Company was in compliance with all its covenants through
the date of this report.
In September, 1997, the Company entered into a two-year interest rate swap
agreement with its primary lender. Under this agreement, the Company
hedges on a quarterly basis, a notional amount ranging between $7 million
and $10 million through September, 1999, at a reserve adjusted Euro-rate
of 6.20%. During 1997, the impact of this agreement was immaterial.
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 million. Amounts
borrowed under this line of credit bear interest at the bank's cost of
funds plus 2% and are cross-guaranteed by RCI and RCL. As of December 31,
1997 and 1996, there were no outstanding borrowings under this line of
credit.
F-12
67
Long-term debt consists of the following:
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
Term Loans A and B payable to the bank, bearing interest ranging from
8.25% to 8.75% as of December 31, 1996, interest payable every
quarter, repaid in 1997 $ - $36,900,000
Senior subordinated notes payable to stockholders, interest at a
designated bank's base rate, repaid in 1997 - 8,020,000
Series A junior Subordinated notes payable to stockholders, interest at 12%; 40%
of interest earned is payable each March 1, June 1, September 1 and December
1, repaid in 1997 - 38,245,820
Series B junior Subordinated notes payable to stockholders; interest at 12%; 40%
of interest earned is payable each March 1, June 1, September 1 and December
1, repaid in 1997 - 1,195,234
Term loan payable to the bank, bearing interest at 7.1875% as of
December 31, 1997, with principal in amounts varying from $940,000 to
$1,250,000, plus interest, payable quarterly through September, 2001 15,600,000 -
------------ ------------
15,600,000 84,361,054
Less- Current maturities 3,950,000 14,220,000
------------ ------------
$11,650,000 $70,141,054
============ ============
Principal maturities of long-term debt are as follows:
December 31-
1999 $ 4,375,000
2000 4,875,000
2001 2,400,000
-------------
Total long-term debt $11,650,000
=============
6. 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.
7. 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
20,000,000 shares of voting common stock and 1,000,000 shares of nonvoting
common stock. The accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
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 $69 million, after deduction of
commissions and offering expenses. Approximately $9 million of the net
proceeds was used to redeem
F-13
68
preferred stock issued in the Recapitalization; $43 million was used to
repay shareholder notes issued in the Recapitalization; and $17 million
was used to repay bank borrowings incurred in connection with the
Recapitalization.
In connection with the Recapitalization that occurred in April, 1996, the
Company issued preferred stock, which accrued dividends at 12% per year.
On June 17, 1997, the Company filed its Restated Certificate of
Incorporation to eliminate the Series A preferred stock, Series B
preferred stock, and nonvoting common stock. All nonvoting common stock
was exchanged on a 1 for 1 basis for common stock of the Company.
8. STOCK OPTIONS
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. On June 11 and October 23, 1997, the Company
granted 149,753 and 6,000 options, respectively, to purchase shares of
common stock at an exercise 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.
The stock option activity for the Company's stock option plan is as follows:
WEIGHTED
AVERAGE
PRICE EXERCISE
SHARES RANGES PRICE
---------- ------------- -----------
Outstanding at May 1, 1996
Granted 332,033 $ 0.13 $0.13
---------- ------------- -----------
Outstanding as of December 31, 1996 332,033 $ 0.13 $0.13
Granted 155,753 $14.00 $14.00
---------- ------------- -----------
Outstanding as of December 31, 1997 487,786 $0.13-$14.00 $4.56
========== ============= ===========
Options exercisable at December 31, 1996 -
==========
Options exercisable at December 31, 1997 145,258 $7.66
========== ===========
The Company also issued 30,000 options to an outside sales representative
on August 13, 1997, at an exercise price equal to fair market value. These
options vest ratably over the term of the contract that the Company has
with this sales representative, which is approximately three years.
Compensation expense associated with these options at December 31, 1997,
was insignificant. The weighted average fair value of these options at the
date of grant was $6.91 per share, based upon the assumptions described
below using the Black - Scholes option pricing model. At December 31,
1997, none of these options were exercisable.
F-14
69
In determining pro forma net income available to common stockholders in
accordance with SFAS No. 123, 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, a risk free rate of 6.04%
to 6.56% and 6.87% to 7.03% in 1997 and 1996, respectively, volatility
factor of 41% and 0% for options granted in 1997 and 1996, respectively,
and expected life of 10 years. The weighted average fair value of options
granted under the Company's stock plans for the year ended December 31,
1997 and the eight months ended December 31, 1996, was $8.95 and $.06 per
share, respectively. As of December 31, 1997, the weighted average
remaining contractual life of all options was approximately nine years.
For the year ended December 31, 1997, and for the eight months ended
December 31, 1996, net income available to common stockholders and diluted
earnings per share were $7,397,293 and $0.69 and $1,895,168 and $0.23,
respectively. Under SFAS No. 123, pro forma net income available to common
stockholders and pro forma diluted earnings per share for the year ended
December 31, 1997, and for the eight months ended December 31, 1996, would
have been $6,904,598 and $0.64, and $1,893,493 and $0.23, 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.
9. RELATED-PARTY TRANSACTIONS
The Company purchased $5,242,441 and $3,990,651 of product during the year
ended December 31, 1997, and the eight months ended December 31, 1996,
respectively, from a company controlled by a relative of one of the
Company's stockholders.
During the eight months ended December 31, 1996, an officer of the Company
held ownership interests in two of the Company's suppliers. These
interests were disposed of by December 31, 1996. For the eight months
ended December 31, 1996, the Company paid $5.6 million and $5.7 million to
these suppliers, respectively, for purchases of die cast vehicle replicas.
The Company leases warehouse space, from a party related to a director of
the Company. Rent expense for the year ended December 31, 1997, and the
eight months ended December 31, 1996, was $68,814 and $41,440
respectively.
During the eight months ended December 31, 1996 the Company leased
office space from a party related to a director of the Company.
Rent expense for the eight months ended December 31, 1996 was $241,036.
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 year ended
December 31, 1997, and the eight months ended December 31, 1996,
commissions of $168,239 and $85,393, respectively, were allocated to the
related principal.
10. EMPLOYEE BENEFIT PLAN
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 will make
matching contributions of 50% of the employees contributions up to 5% of
employee wages. In 1997, the Company's contributions were approximately
$46,000.
11. RECENTLY ISSUED PRONOUNCEMENTS
In early 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS
F-15
70
No. 130 and No. 131 are effective for periods beginning after December 15,
1997. Adoption of these pronouncements is not expected to have a material
impact on the consolidated financial statements of the Company.
12. SUBSEQUENT EVENT
On December 5, 1997, the Company announced execution of a definitive
agreement, which provides that Wheels Sports Group, Inc., a recently
consolidated group of marketers and distributors of officially licensed
NASCAR-related merchandise, will be acquired by Racing Champions. The
acquisition, which is subject to due diligence, stockholder approval, and
other customary closing conditions, is expected to close in the first half
of 1998. The transaction is planned as a stock-for-stock exchange and will
be accounted for as a pooling of interests. Under the terms of the
agreement, each of Wheels Sports Group, Inc's. outstanding shares of
common stock, (approximately 5.3 million shares outstanding at December
31, 1997), will be exchanged for 0.70 shares of the Company's common
stock.
F-16
71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Racing Champions, Inc. and Dods-Meyer, Ltd.:
We have audited the accompanying combined balance sheets of RACING
CHAMPIONS, INC. (an Illinois corporation) and DODS-MEYER, LTD. (an Illinois
corporation) as of December 31, 1995 and April 30, 1996, and the related
combined statements of income, shareholders' investment and cash flows for the
years ended December 31, 1994 and 1995 and for the four months ended April 30,
1996. 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 combined financial position of Racing
Champions, Inc. and Dods-Meyer, Ltd. as of December 31, 1995 and April 30, 1996,
and the results of their operations and their cash flows for the years ended
December 31, 1994 and 1995 and for the four months ended April 30, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1997
F-17
72
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED BALANCE SHEETS
DECEMBER 31, APRIL 30,
1995 1996
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................ $2,461,234 $ 255,466
Accounts receivable, net of allowance for doubtful
accounts of $200,000 and $257,000 in 1995 and 1996,
respectively........................................... 3,495,736 3,569,178
Inventory................................................ 711,743 1,553,075
Other current assets..................................... 170,228 453,939
------------ -----------
Total current assets................................... 6,838,941 5,831,658
------------ -----------
Property and equipment:
Tooling.................................................. 4,317,008 5,246,778
Other equipment.......................................... 398,575 418,969
------------ -----------
4,715,583 5,665,747
Less-accumulated depreciation............................ 3,284,576 3,644,575
------------ -----------
1,431,007 2,021,172
------------ -----------
Total assets....................................... $8,269,948 $7,852,830
============ ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable......................................... $ 83,510 $ 548,040
Accrued expenses......................................... 1,901,413 1,447,239
Accrued bonus............................................ -- 2,501,439
Accrued royalties........................................ 1,477,506 863,673
Accrued distributions.................................... 500,000 811,344
Due to related party..................................... 900,522 1,500,489
Note payable to related party............................ 1,120,000 1,140,000
------------ -----------
Total current liabilities.............................. 5,982,951 8,812,224
------------ -----------
Shareholders' investment:
Common stock, Racing Champions, Inc., no par value,
5,000 shares authorized, 1,000 shares issued and
outstanding............................................ 400 400
Common stock, Dods-Meyer, Ltd., no par value, 10,000
shares authorized, 1,000 shares issued and
outstanding............................................ 1,000 1,000
Additional paid-in capital............................... 9,600 9,600
Retained earnings (deficit).............................. 2,275,997 (970,394)
------------ -----------
Total sahreholders' investment.............................. 2,286,997 (959,394)
------------ -----------
Total liabilities and shareholders' investment..... $8,269,948 $7,852,830
============ ===========
The accompanying notes are an integral part of these balance sheets.
F-18
73
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF INCOME
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- APRIL 30,
1994 1995 1996
----------- ------------ -----------
Net sales............................. $43,267,924 $48,592,178 $16,614,029
Cost of sales, related party.......... 25,212,148 25,556,121 9,403,514
----------- ------------ -----------
Gross profit........................ 18,055,776 23,036,057 7,210,515
Selling, general and administrative
expenses............................ 9,491,222 13,312,053 4,713,344
Nonrecurring bonus expense............ -- -- 2,389,218
----------- ------------ -----------
Operating income.................... 8,564,554 9,724,004 107,953
Interest expense...................... (210,876) (132,758) (20,000)
Other income.......................... 218,985 141,932 36,299
Other expense......................... -- (147,292) (13,452)
----------- ------------ -----------
Income before income taxes.......... 8,572,663 9,585,886 110,800
Income tax expense.................... 348,699 193,500 39,000
----------- ------------ -----------
Net income.......................... $ 8,223,964 $9,392,386 $ 71,800
=========== ============ ===========
The accompanying notes are an integral part of these statements.
F-19
74
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF SHAREHOLDERS' INVESTMENT
ADDITIONAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS INVESTMENT
----------- ----------- -------------- -------------
Balance, December 31, 1993 $ 1,400 $ 9,600 $ (1,840,353) $ (1,829,353)
Net income -- -- 8,223,964 8,223,964
Distributions -- -- (4,000,000) (4,000,000)
----------- ----------- -------------- -------------
Balance, December 31, 1994 1,400 9,600 2,383,611 2,394,611
Net income -- -- 9,392,386 9,392,386
Distributions -- -- (9,500,000) (9,500,000)
----------- ----------- -------------- -------------
Balance, December 31, 1995 1,400 9,600 2,275,997 2,286,997
Net income -- -- 71,800 71,800
Distributions -- -- (3,318,191) (3,318,191)
----------- ----------- -------------- -------------
Balance, April 30, 1996 $ 1,400 $ 9,600 $ (970,394) $ (959,394)
=========== =========== ============== =============
The accompanying notes are an integral part of these statements.
F-20
75
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------- APRIL 30,
1994 1995 1996
-------------- --------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 8,223,964 $ 9,392,386 $ 71,800
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation......................................... 678,583 711,778 359,999
Deferred income taxes................................ 196,256 -- --
Changes in operating assets and liabilities
Accounts receivable................................ (274,665) (895,104) (73,442)
Inventory.......................................... 602,899 (379,348) (841,332)
Other current assets............................... 32,694 (170,228) (283,711)
Accounts payable and accrued expenses.............. (395,462) 1,115,250 1,897,962
Due to related party............................... (51,254) 496,484 599,967
-------------- --------------- -------------
Net cash provided by operating activities........ 9,013,015 10,271,218 1,731,263
-------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................... (1,128,788) (1,076,826) (950,164)
-------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank note.................................. (50,000) (950,000) --
Change in shareholders' notes payable.................. (1,615,000) -- 20,000
Distributions to shareholders.......................... (3,100,000) (9,900,000) (3,006,847)
-------------- --------------- -------------
Net cash used in financing activities............ (4,765,000) (10,850,000) (2,986,847)
-------------- --------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................... 3,119,227 (1,655,608) (2,205,768)
Cash and cash equivalents, beginning of period............ 997,615 4,116,842 2,461,234
-------------- --------------- -------------
Cash and cash equivalents, end of period.................. $ 4,116,842 $ 2,461,234 $ 255,466
============== =============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period............... $ 220,340 $ 72,758 $ --
Cash paid for taxes during the period.................. 871,395 88,968 --
============== =============== =============
The accompanying notes are an integral part of these statements.
F-21
76
RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE FOUR MONTHS ENDED APRIL 30, 1996
1. DESCRIPTION OF BUSINESS
Racing Champions, Inc. ("RCI") and Dods-Meyer, Ltd. ("DML")
(collectively "the Company") is a leading producer and marketer of collectible
scaled die cast vehicle replicas. The Company is best known for its extensive
line of officially licensed, high-quality collectible replicas of actual race
cars and related vehicles from the most popular U.S. professional racing series,
including NASCAR stock car racing, National Hot Rod Association drag racing,
Championship Auto Racing Teams and Indy Racing League Indy-style racing, World
of Outlaws sprint car racing as well as Honda and Kawasaki racing motorcycles.
Products are manufactured in numerous styles for the following customer bases:
national and regional retail chains, collector and hobby shops and premium sales
to corporations. RCI has license agreements with the major U.S. automotive
manufacturers and most of the major motor sport sponsors, team owners and their
drivers.
RCI sells its products primarily in North America through sales
representatives of DML, which is owned by shareholders of RCI, Racing Champions
Limited ("RCL"), a Hong Kong company owned by a related party, oversees the
production of RCI products.
On April 30, 1996, the Company was part of a recapitalization which
involved the Company and RCL and other affiliates of RCL, whereby a new holding
company, Racing Champions Corporation, acquired all stock of RCI and all
operating assets of DML.
2. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The financial statements combine the accounts of RCI and DML after
elimination of intercompany items and transactions.
REVENUE RECOGNITION
The Company recognizes revenue based upon shipment of product to
customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalent. Such investments are valued
at market prices.
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-22
77
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 with estimated
useful lives for tooling of two years and for other equipment of five to ten
years. Accelerated methods are used for income tax purposes.
INCOME TAXES
DML has elected to be treated as an S Corporation under the Internal
Revenue Code pursuant to which profits and losses are allocated to the
shareholders for inclusion in their personal tax returns. As of January 1, 1994,
RCI elected to be treated as an S Corporation. Accordingly, a deferred tax asset
of $196,256 was charged to tax expense as of January 1, 1994. The remaining tax
expense for 1995 and 1996 is due to Illinois replacement taxes.
RELATED-PARTY TRANSACTIONS
RCL's beneficial owner is a warrant holder in RCI. The stock purchase
warrant was issued in 1993 and allows the holder to purchase 500 shares of
common stock for an aggregate price of $1,000,000 and contains certain
anti-dilution provisions. The warrant is exercisable on December 30, 2003, or
upon the occurrence of certain events including a change in control, as defined,
or a filing of a registration statement for an initial public offering of the
Company's common stock. At December 31, 1995 and 1994, RCI had 500 shares of
common stock held in reserve for the exercise of this warrant. This warrant was
canceled on April 30, 1996 as part of the recapitalization of the Company.
In addition to payments related to the purchase of products, RCI paid
RCL fees of 30.5% of the cost of product shipped, which amounted to $1,772,000
in 1994, $2,123,414 in 1995 and $831,832 in 1996 which have been included in
Cost of sales, Related party, on the accompanying Combined Statements of Income.
STOCK DIVIDEND
On December 20, 1994, RCI's shareholders and directors declared a
24-to-1 stock dividend to shareholders of RCI's common stock, thereby effecting
a 24-to-1 stock split. This split has been retroactively reflected in the
accompanying financial statements.
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
one customer accounted for approximately 11% of net sales for the year ended
December 31, 1994, two customers accounted for approximately 15% and 10% of net
sales for the year ended December 31, 1995 and three customers accounted for
approximately 16%, 15% and 15% of net sales for the four months ended April 30,
1996. 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 insures its receivables for major
customers with a third party.
F-23
78
3. NOTES PAYABLE
During 1995, the Company entered into a revolving line of credit
agreement with a bank which extends through April, 1996. The maximum amount of
borrowings was the lesser of $4,000,000 or the collateral availability, as
defined in the agreement. The agreement required maintenance of certain
covenants and was secured by substantially all of the assets of the Company. As
of April 30, 1996, there was no outstanding balance on this line of credit. On
April 30, 1996, as part of the recapitalization (see Note 1) this agreement was
canceled.
The Company has an unsecured promissory note payable to a related party
(a former shareholder) of $1,120,000 and $1,140,000 at December 31, 1995, and
April 30, 1996, respectively, including accrued interest. Interest charged at 6%
is payable at maturity.
4. STOCK OPTION PLAN
During 1994, RCI established a stock option plan, under which up to 100
shares of RCI's common stock may be granted to key employees. Under this Plan,
options to purchase a total of 74.76 shares of RCI common stock at $3,960 per
share were issued during 1994. The options were issued at an exercise price
equal to fair market value. The options are exercisable upon the earlier of a
change in control of RCI, as defined, or an initial public offering of RCI's
common stock. The options expire five years from the date they become
exercisable. The options outlined above were canceled in connection with the
recapitalization (see Note 1).
F-24
79
REPORT OF INDEPENDENT AUDITORS
The Shareholders
Racing Champions Limited,
(Incorporated in Hong Kong with limited liability)
Hosten Investment Limited,
(Incorporated in Hong Kong with limited liability)
Garnett Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)
Bergen Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)
We have audited the accompanying combined balance sheets of Racing
Champions Limited, Hosten Investment Limited, Garnett Services Inc. and Bergen
Services Inc. (hereinafter collectively referred to as "the Racing Champions
Limited Group" or "the RCL Group") as of March 31, 1995, 1996 and April 30, 1996
and the related combined statements of income, changes in shareholders' equity
and cash flows for each of the two years in the period ended March 31, 1996 and
the one month period ended April 30, 1996. These financial statements are the
responsibility of the RCL Group's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
RCL Group as of March 31, 1995, 1996 and April 30, 1996, and the combined
results of its operations and its cash flows for each of the two years in the
period ended March 31, 1996 and for the one month period ended April 30, 1996 in
conformity with accounting principles generally accepted in the United States of
America.
ERNST & YOUNG
Hong Kong
February 19, 1997
F-25
80
RACING CHAMPIONS LIMITED GROUP
COMBINED BALANCE SHEETS
(IN U.S. DOLLARS)
MARCH 31,
--------------------------------
APRIL 30,
------------
NOTES 1995 1996 1996
------- ------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 43,277 $ 301,240 $ 50,875
Trade receivables, net................................. 996,405 1,739,938 1,470,941
Prepayments, deposits and other receivables............ 577,134 282,213 237,122
Amount due from Racing Champions, Inc. ("RCI")......... 596,828 442,660 572,434
Amount due from affiliates............................. 9 1,032,754 -- 111,965
------------ ------------- ------------
Total current assets................................. 3,246,398 2,766,051 2,443,337
Fixed assets.............................................. 8 & 13 474,461 433,952 411,699
Other asset............................................... 3 -- -- 879,690
Deferred income taxes..................................... 4,560 60,440 65,713
------------ ------------- ------------
Total assets....................................... $ 3,725,419 $ 3,260,443 $ 3,800,439
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts, secured............................... 12 $ 320,384 $ -- $ --
Current portion of obligations under capital lease..... 13 49,596 148,151 147,888
Accounts payable and accrued liabilities............... 7 794,598 723,655 992,660
Amount due to affiliates............................... 9 -- 218,790 --
Income tax payable..................................... 38,872 136,768 151,086
------------ ------------- ------------
Total current liabilities............................ 1,203,450 1,227,364 1,291,634
Long-term obligations under capital lease................. 13 72,834 175,320 163,237
------------ ------------- ------------
Total liabilities.................................. 1,276,284 1,402,684 1,454,871
Contingencies and commitments............................. 16
Shareholders' equity:
Share capital.......................................... 14 129,369 129,369 129,369
Retained earnings...................................... 2,319,766 1,728,390 2,216,199
------------ ------------- ------------
Total shareholders' equity........................... 2,449,135 1,857,759 2,345,568
------------ ------------- ------------
Total liabilities and shareholders' equity......... $ 3,725,419 $ 3,260,443 $ 3,800,439
============ ============= ============
The accompanying notes are an integral part of these
combined financial statements.
F-26
81
RACING CHAMPIONS LIMITED GROUP
COMBINED STATEMENTS OF INCOME
(IN U.S. DOLLARS)
ONE MONTH
YEARS ENDED MARCH 31, ENDED
---------------------------------- APRIL 30,
NOTES 1995 1996 1996
--------- -------------- -------------- ------------
Sales:
Related party -- RCI..................... $10,316,438 $11,308,084 $1,304,352
Other customers.......................... 12,014,547 26,013,536 2,547,775
-------------- -------------- ------------
Total sales............................ 22,330,985 37,321,620 3,852,127
-------------- -------------- ------------
Cost of sales:
Related party purchases.................. 15 (8,161,941) (11,245,727) (1,719,700)
Other purchases.......................... (4,776,869) (7,643,479) (307,945)
Commission paid to RCI................... 15 (5,777,498) (13,745,461) (1,331,278)
-------------- -------------- ------------
Total cost of sales.................... (18,716,308) (32,634,667) (3,358,923)
-------------- -------------- ------------
Commission received from RCI................ 15 1,673,212 2,398,325 258,387
-------------- -------------- ------------
Gross profit........................... 5,287,889 7,085,278 751,591
Depreciation of fixed assets................ (360,177) (392,079) (29,268)
Selling and administrative expenses......... 15 (2,861,294) (3,968,028) (215,760)
-------------- -------------- ------------
Operating income....................... 2,066,418 2,725,171 506,563
Financial expenses, net..................... 4 & 15 (55,239) (130,004) (12,755)
Other income, net........................... 5 113,085 178,534 28,512
-------------- -------------- ------------
Income before income taxes............. 2,124,264 2,773,701 522,320
Income taxes................................ 6 (45,312) (170,677) (34,511)
-------------- -------------- ------------
Net income............................. $2,078,952 $2,603,024 $487,809
============== ============== ============
The accompanying notes are an integral part of these
combined financial statements.
F-27
82
RACING CHAMPIONS LIMITED GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)
COMBINED RETAINED
SHARE CAPITAL EARNINGS TOTAL
------------- ----------- ----------
Balance at March 31, 1994.......................... $129,369 $2,868,872 $2,998,241
Net income...................................... -- 2,078,952 2,078,952
Dividends....................................... -- (2,628,058) (2,628,058)
------------- ----------- ----------
Balance at March 31, 1995.......................... 129,369 2,319,766 2,449,135
Net income...................................... -- 2,603,024 2,603,024
Dividends....................................... -- (3,194,400) (3,194,400)
------------- ----------- ----------
Balance at March 31, 1996.......................... 129,369 1,728,390 1,857,759
Net income...................................... -- 487,809 487,809
------------- ----------- ----------
Balance at April 30, 1996.......................... $129,369 $2,216,199 $2,345,568
============= =========== ==========
The accompanying notes are an integral part of these
combined financial statements.
F-28
83
RACING CHAMPIONS LIMITED GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
YEARS ENDED MARCH 31, ONE MONTH
------------------------------- ENDED
1995 1996 APRIL 30, 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 2,078,952 $ 2,603,024 $ 487,809
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on disposal of fixed assets............................ (51,809) (147,616) --
Depreciation................................................. 360,177 392,079 29,268
Deferred income taxes........................................ (29,961) (55,880) (5,273)
Decrease (increase) in assets:
Trade receivables, net..................................... (107,845) (743,533) 268,997
Prepayments, deposits and other receivables................ (201,268) 294,921 45,091
Amount due from RCI........................................ 7,348 154,168 (129,774)
Amount due from affiliates................................. (679,856) 1,032,754 (111,965)
Tax refund................................................. 240,642 -- --
Increase (decrease) in liabilities:
Amounts due to affiliates.................................. -- 218,790 (218,790)
Accounts payable and accrued liabilities................... 63,950 (70,943) 269,005
Income taxes payable....................................... 38,355 97,896 14,318
-------------- -------------- --------------
Net cash provided by operating activities................ 1,718,685 3,775,660 648,686
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets..................................... (75,914) (35,390) (7,015)
Purchase of other asset...................................... -- -- (879,690)
Proceeds from disposal of fixed assets....................... 139,715 162,995 --
-------------- -------------- --------------
Net cash provided by (used in) investing activities...... 63,801 127,605 (886,705)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayment) of bank overdrafts...................... 320,384 (320,384) --
Dividends paid............................................... (2,628,058) (3,194,400) --
Net payments under finance lease............................. (112,426) (130,518) (12,346)
-------------- -------------- --------------
Net cash used in financing activities.................... (2,420,100) (3,645,302) (12,346)
Net increase (decrease) in cash and cash equivalents..... (637,614) 257,963 (250,365)
Cash and cash equivalents, at beginning of year................. 680,891 43,277 301,240
-------------- -------------- --------------
Cash and cash equivalents, at end of year....................... $ 43,277 $ 301,240 $ 50,875
============== ============== ==============
SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Interest paid................................................ $ 41,735 $ 67,038 $ 4,666
Income taxes paid............................................ 36,918 128,661 25,466
Inception of a capital lease contract........................ 112,894 331,559 --
============== ============== ==============
The accompanying notes are an integral part
of these combined financial statements
F-29
84
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Racing Champions Limited ("RCL"), Bergen Services Inc. ("BSI"), and
Hosten Investments ("HIL") were formed in 1989, 1989 and 1991, respectively to
act as purchasing and sales agents of collectible scaled replicas of race cars
and other vehicles for Garnett Services Inc. ("GSI"). BSI and GSI were
incorporated in the British Virgin Islands ("BVI"), and RCL and HIL were
incorporated in Hong Kong. RCL, BSI, GSI and HIL are collectively referred to as
"the Racing Champions Limited Group" or "the RCL Group".
Substantially all the RCL Group's products are sold to Racing
Champions, Inc. ("RCI"), a related party, and other customers in the United
States of America. Effective on May 1, 1996, the operations of RCL, HIL and GSI
have been acquired by Racing Champions, Inc.
2. BASIS OF PRESENTATION
The combined financial statements of the RCL Group have been prepared
based on the historical financial statements of the RCL Group of companies for
the years ended March 31, 1995 and 1996 and for one month ended April 30, 1996,
in accordance with accounting principles generally accepted in the United States
of America. All significant intercompany balances and transactions have been
eliminated.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(A) FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight-line basis
to write off the cost less estimated residual value of each asset over its
estimated useful life. The principal annual rates used for this purpose are as
follows:
Leasehold improvements.................. 25%
Furniture and fixtures.................. 20%
Office equipment........................ 20%
Motor vehicles.......................... 30%
(B) INCOME TAXES
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
F-30
85
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(C) FOREIGN CURRENCY TRANSLATION
The RCL Group's functional currency is Hong Kong dollars ("HK$").
Foreign currency transactions and monetary assets and liabilities denominated in
foreign currencies are translated into HK$ at the respective applicable rates of
exchange. Monetary assets and liabilities denominated in foreign currencies are
translated into HK$ at the applicable rate of exchange at the balance sheet
date. The resulting exchange gains or losses are credited or charged to the
statements of income.
The financial statements of the RCL Group where the HK$ is the
functional currency have been translated into U.S. dollars for reporting purpose
in accordance with FASB Statement No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement accounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported separately as a
component of shareholders' equity.
(D) OTHER ASSET
Other asset consists of a golf club membership debenture that is stated
at purchase cost which approximates its fair market value.
(E) REVENUE RECOGNITION
Revenue from the sale of the RCL Group's products is recognized when
the products are shipped to customers.
(F) RETIREMENT BENEFITS
The RCL Group participates in a defined contribution retirement plan
administered by an insurance company (the "Retirement Plan"). All staff covered
under the Retirement Plan are entitled to a lump sum payment, payable by the
insurance company, upon their retirement equal to the sum of employees'
contributions plus the employer's contribution. The RCL Group is required to
make contributions to the Retirement Plan at a rate of 5% of the salaries of its
existing staff. The retirement benefits contributions are charged to the
statements of income as services are provided.
Contributions made to the retirement plan during the years ended March
31, 1995, 1996 and one month ended April 30, 1996 were $17,322, $17,540 and
$1,068, respectively.
(G) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks with a term to maturity of three months or less at the date of
acquisition.
F-31
86
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(H) USE OF ESTIMATES
The preparation of 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.
4. FINANCIAL EXPENSES, NET
Financial expenses, net consist of:
ONE MONTH
YEARS ENDED MARCH 31, ENDED
------------------------ APRIL 30,
1995 1996 1996
--------- ---------- ---------
Interest income............. $ 32,915 $ 13,982 $ 61
Interest expenses on:
Bank overdrafts.......... (28,315) (46,598) (2,843)
Capital leases........... (13,420) (20,440) (1,823)
Bank charges................ (46,419) (76,948) (8,150)
--------- ---------- ---------
$(55,239) $(130,004) $(12,755)
========= ========== =========
5. OTHER INCOME, NET
Other income, net consists of:
ONE MONTH
YEARS ENDED MARCH 31, ENDED
----------------------- APRIL 30,
1995 1996 1996
---------- ---------- ----------
Foreign exchange gains/(losses), net $(20,564) $ 3,265 $ 51
Gains on disposal of fixed assets 51,809 147,616 --
Miscellaneous income 81,840 27,653 28,461
---------- ---------- ----------
$113,085 $178,534 $28,512
========== ========== ==========
F-32
87
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
6. INCOME TAXES
The companies in the RCL Group operate both in Hong Kong and other
jurisdictions. Details of the related provision for income taxes are as follows:
One Month
Years Ended March 31, Ended
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
Income before income taxes:
Hong Kong.............................. $ 322,039 $ 1,182,021 $ 209,159
Other jurisdictions.................... 1,802,225 1,591,680 313,161
------------ ------------ ------------
$ 2,124,264 $ 2,773,701 $ 522,320
============ ============ ============
Income tax provision:
Current:
Hong Kong........................... $ 75,273 $ 226,557 $ 39,784
Other jurisdictions................. -- -- --
------------ ------------ ------------
75,273 226,557 39,784
------------ ------------ ------------
Deferred, Hong Kong.................... (29,961) (55,880) (5,273)
------------ ------------ ------------
$ 45,312 $ 170,677 $ 34,511
============ ============ ============
Income earned by BSI and GSI outside the BVI is not subject to tax.
Those companies carrying on business in Hong Kong are subject to Hong
Kong profits tax on their income arising in or derived from Hong Kong after
adjusting for income and expense items which are not assessable or deductible
for income tax purposes. As such, current income taxes are calculated at a
statutory tax rate of 16.5%.
F-33
88
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income before
income taxes is as follows:
One Month
Years Ended March 31, Ended
---------------------------- April 30,
1995 1996 1996
------------ ------------ -----------
Statutory Hong Kong tax rates:............ 16.5% 16.5% 16.5%
------------ ------------ -----------
Computed expected tax expense............. $ 350,503 $ 457,661 $ 86,183
Lower tax rate of BVI companies........... (297,367) (262,627) (51,672)
Non-deductible/(taxable) items:
Gains on disposal of fixed assets...... (8,548) (24,357) --
Expenses............................... 724 -- --
------------ ------------ -----------
$ 45,312 $ 170,677 $ 34,511
============ ============ ===========
Deferred income taxes represent temporary differences on depreciation
allowance of fixed assets. No valuation allowance for deferred income tax assets
has been recorded.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
Accounts payable.......................... $ 734,443 $ 552,361 $ 818,856
Accrued liabilities....................... 60,155 171,294 173,804
------------ ------------ ------------
$ 794,598 $ 723,655 $ 992,660
============ ============ ============
8. FIXED ASSETS
Fixed assets consist of:
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ -------------
Leasehold improvements.................... $ 506,553 $ 510,285 $ 510,285
Furniture and fixtures.................... 249,495 255,391 255,391
Office equipment.......................... 258,198 253,319 260,334
Motor vehicles............................ 487,677 453,239 453,239
------------ ------------ -------------
1,501,923 1,472,234 1,479,249
Less: Accumulated depreciation........... (1,027,462) (1,038,282) (1,067,550)
------------ ------------ -------------
$ 474,461 $ 433,952 $ 411,699
============ ============ =============
F-34
89
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
9. AMOUNT DUE FROM (TO) AFFILIATES
Amounts due from (to) affiliates consist of:
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
Amounts due from (to) directors........... $ (96,460) $ 450,385 $ 34,605
Amounts due from shareholders............. 121,839 117,455 956,112
Amounts due from (to) related
companies.............................. 1,007,375 (786,630) (878,752)
------------ ------------ ------------
$ 1,032,754 $ (218,790) $ 111,965
============ ============ ============
Amounts due to/from directors and shareholders relate to short-term
advances. Amounts due to/from related companies pertain to short-term advances
to related parties described in Notes 1 and 15.
10. CONCENTRATION OF RISKS
Financial instruments which potentially subject the RCL Group to a
concentration of credit risk consist of cash deposits and trade receivables.
(i) Cash deposits
The RCL Group places its cash deposits with international banks in
Hong Kong.
(ii) Trade receivables
As of April 30, 1996, approximately 28.0% and 48.8% of the total trade
receivables balance were due from Racing Champions, Inc. and the two other
largest customers, respectively. The RCL Group does not have a policy of
requiring collateral for trade receivables.
Racing Champions, Inc. and the second largest customers account for
approximately 46% and 10%; 30% and 23%; 34% and 22% of net sales, respectively,
for each of the two years ended March 31, 1995 and 1996 and one month period
ended April 30, 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments are set out as follows:
(i) Cash deposits
The cash deposits are stated at cost which approximates market value.
(ii) Trade receivables and amounts due from related companies
F-35
90
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
Trade receivables and the amounts due from related companies are stated
at their book value less provision for doubtful debts, which approximates the
fair market value.
(iii) Other asset
Other asset is stated at purchase cost which approximates its fair
value based on current market value.
(iv) Other financial instruments
All other financial instruments are stated at their book value
which approximates their fair values.
12. BANKING FACILITIES
The RCL Group has banking facilities of $13,628,719 for overdrafts and
trade finance. Unused facilities as of April 30, 1996 amounted to $13,628,719.
The banking facilities of the RCL Group were secured by mortgages over
a director's personal leasehold land and buildings and corporate guarantees
given by the RCL Group and two directors totaling $8,150,065.
The bank overdrafts carry interest at 2.5% above the Hong Kong prime
lending rate, a weighted average of 11.5% as of April 30, 1996.
13. CAPITAL LEASES
The RCL Group leases motor vehicles under capital leases. Leases
meeting certain specific criteria are accounted for as the acquisition of an
asset. The principal amounts of leases that have been capitalized were as
follows:
March 31,
---------------------------- April 30,
1995 1996 1996
------------ ------------ ------------
Motor vehicles............................ $ 487,677 $ 453,239 $ 453,239
Less: Accumulated amortization........... (361,278) (172,414) (183,745)
------------ ------------ ------------
$ 126,399 $ 280,825 $ 269,494
============ ============ ============
Amortization of the leased assets is included in depreciation expenses.
F-36
91
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
At April 30, 1996, future minimum payments under capital leases with
initial terms of one year or more consisted of the following:
Year ending April 30:
1996.......................................................... $ 170,026
1997.......................................................... 170,026
1998.......................................................... 16,603
--------------
Total minimum lease payments..................................... 356,655
Less: Interest elements.......................................... (45,530)
--------------
Present value of net minimum lease payments...................... 311,125
Less: current portion............................................ (147,888)
--------------
Long term portion................................................ $ 163,237
==============
14. SHARE CAPITAL
Share capital represented an aggregate amount of the nominal value of
issued share capital of RCL, HIL, GSI and BSI as follows:
RCL HIL BSI GSI
---------- ----------- --------- ---------
Authorized share capital........ US$129,366 US$1,293.66 US$50,000 US$50,000
Issued share capital............ US$129,366 US$ .26 US$ 2 US$ 1
Stated value per share.......... US$ .13 US$ .13 US$ 1 US$ 1
15. RELATED PARTY BALANCES AND TRANSACTIONS
The RCL Group paid commissions to RCI on all shipments to customers
other than RCI. These commissions represented the gross profit earned on these
sales. The RCL Group received agency fee income from RCI on all shipments based
upon a percentage of the cost of the items sold.
A significant proportion of RCL Group's products was purchased from
vendors who were either directly or indirectly, and partially owned by the RCL
Group's shareholders. Also, RCL Group paid rents to affiliated companies of
$539,385, $554,274 and $40,065 for the years ended March 31, 1995 and 1996 and
the one month ended April 30, 1996, respectively.
16. CONTINGENCIES AND COMMITMENTS
The RCL Group had the following capital commitments and contingencies:
(i) The RCL Group had bills discounted with recourse amounting to
$498,327, $63,087 and $256,668 as of March 31, 1995, March 31, 1996 and
April 30, 1996, respectively.
(ii) The RCL Group had guarantees of banking facilities granted to
a director amounting to $1,936,879, $1,888,191 and $2,018,111 as of March
31, 1995, March 31, 1996 and April 30, 1996, respectively.
F-37
92
RACING CHAMPIONS LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)
(iii) Operating leases:
The RCL Group leases land and buildings under non-cancelable
operating lease arrangements. Future minimum payments under non-cancelable
operating leases with initial terms of one year or more consisted of the
following at April 30, 1996.
For the year ended April 30,
1997...................................... $ 59,931
1998...................................... 186,287
----------
$ 246,218
==========
Rental expenses under all operating leases were $539,385 and
$554,274 for the years ended March 31, 1995 and 1996, respectively, and
$40,065 for the one month ended April 30, 1996.
17. POST BALANCE SHEET EVENTS
Subsequent to the balance sheet date, on May 1, 1996, RCL, HIL, GSI
(the "Companies") and Racing Champions, Inc. ("RCI") entered into an asset and
stock purchase agreement (the "Agreement"). Pursuant to the Agreement, the
Companies agreed to sell certain of their assets and liabilities with a net book
value of $647,229 at April 30, 1996 to Banerjan Company Limited ("Banerjan"), a
wholly-owned subsidiary of RCI for total consideration of $29,213,420.
Thereafter, the Companies ceased business and the name of Racing Champions
Limited was released to Banerjan Company Limited, which was renamed Racing
Champions Limited, a wholly-owned subsidiary of RCI.
F-38
93
EXHIBIT INDEX
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
2.1 Agreement and Plan of Merger, dated as
of December 4, 1997, among the Company,
WSG Acquisition, Inc. and Wheels Sports
Group, Inc.
2.2 First Amendment to Agreement and Plan
of Merger, dated as of February 2,
1998, among the Company, WSG Acquisition,
Inc. and Wheels Sports Group, Inc.
2.3 Second Amendment to Agreement and Plan
of Merger, dated as of February 3,
1998, among the Company, WSG Acquisition,
Inc. and Wheels Sports Group, Inc.
2.4 Stockholder Agreement, dated as of
December 4, 1997, between the Company and
Howard L. Correll, Jr.
3.1 Amended and Restated Certificate of
Incorporation of the Company (2)
3.2 Amended and Restated By-Laws of
the Company (1)
10.1 Asset and Stock Purchase Agreement,
dated as of April 30, 1996, among the
Company, Racing Champions, Inc., Robert
Dods, Boyd Meyer, Peter Chung, Dods-Meyer,
Ltd., Racing Champions Limited, Garnett
Services, Inc., Hosten Investment
Limited and Banerjan Company Limited (1)
94
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
10.2 Stockholders Agreement, dated as of
April 30, 1996, by and among the
Company, Willis Stein & Partners,
L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund
Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc.,
Hosten Investment Limited, Curt
Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
10.3 Registration Agreement, dated as
of April 30, 1996, by and among the
Company, Willis Stein & Partners,
L.P., Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund
Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc.,
Hosten Investment Limited, Curt
Stoelting, John Olsen, Peter Henseler
and Kevin Camp (1)
10.4 Executive Securities Agreement, dated as
of April 30, 1996, by and among the
Company, Curt Stoelting, John Olsen, Peter
Henseler, Kevin Camp, Willis Stein
& Partners, L.P., Baird Capital Partners
II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Robert Dods, Boyd Meyer and Peter Chung (1)
10.5 Securities Purchase Agreement, dated as
of April 30, 1996, by and among the
Company, Willis Stein & Partners, L.P.,
Baird Capital Partners II Limited
Partnership, BCP II Affiliates Fund
Limited Partnership, Nassau Capital
Partners L.P., NAS Partners I L.L.C.,
Curt Stoelting, John Olsen, Peter
Henseler and Kevin Camp (1)
ii
95
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
10.6 Amendment No. 1 to Securities Purchase
Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein
& Partners, L.P. and certain other
purchasers of the Company's stock (1)
10.7 Securities Purchase Agreement, dated as
of April 30, 1996, by and between the
Company and Dods-Meyer, Ltd. (1)
10.8 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
10.9 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
10.10 Employment Agreement, dated as of April
30, 1996, by and between Racing Champions,
Inc. and Robert Dods (1)
10.11 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Boyd Meyer (1)
10.12 Employment Agreement, dated as of April 30,
1996, by and between Banerjan Company
Limited and Peter Chung (1)
10.13 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Curt Stoelting (1)
10.14 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Peter Henseler (1)
iii
96
EXHIBIT SEQUENTIAL PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ---------------
10.15 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and John Olsen (1)
10.16 Employment Agreement, dated as of April 30,
1996, by and between Racing Champions, Inc.
and Kevin Camp (1)
10.17 1996 Key Employees Stock Option Plan (1)
10.18 1996 Key Employees Performance Compensation
Plan (1)
10.19 Amendment No. 1 to 1996 Key Employees
Performance Compensation Plan (1)
10.20 Racing Champions Corporation Stock Incentive
Plan (1)
10.21 Racing Champions Corporation Employee Stock
Purchase Plan (1)
21 Subsidiaries of the Company
24 Power of Attorney (included as part of the
signature page hereof)
27 Financial Data Schedule
- -------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-22493) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 0-22635) and incorporated herein
by reference.
iv