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FORM 10-K
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ____.
Commission file number 0-22635
RACING CHAMPIONS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 36-4088307
- ----------------------------------- ----------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
- --------------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 630-790-3507
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NA NA
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the Registrant's common stock held by nonaffiliates as
of March 12, 2001: $24,301,676. Shares of common stock held by any executive
officer or director of the Registrant and any person who beneficially owns 10%
or more of the outstanding common stock have been excluded from this computation
because such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
Number of shares of the Registrant's common stock outstanding as of March 12,
2001: 14,685,583
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of the Stockholders
of the Registrant are incorporated by reference into Part III of this report.
PART I
ITEM 1 : BUSINESS
GENERAL
Racing Champions Corporation ("Racing Champions" or the "Company") is a leading
producer and marketer of collectibles and toys sold in multiple channels of
distribution and available at more than 20,000 retail outlets. The Company sells
American Muscle collectible die-cast vehicle replicas, NASCAR and NHRA die-cast
racing replicas, officially licensed die-cast replicas of automobiles, trucks,
agricultural, construction equipment and powered-recreational and sport
vehicles, plastic preschool products, AMT model kits, Press Pass sports trading
cards and NASCAR souvenirs and apparel. The Company has license agreements with
major U.S. automotive and equipment manufacturers and many of the major
motorsports sanctioning bodies, sponsors, team owners and their drivers, as well
as entertainment and media companies for their well-known characters and
properties. The Company sells its products primarily in North America, Europe
and Asia Pacific.
Since its inception in 1989, Racing Champions has capitalized on the growing
popularity of motorsports by offering an expanding line of high quality,
affordable racing replicas targeted toward racing fans and adult collectors.
Beginning in 1996, Racing Champions successfully expanded into classic and
custom vehicle collectibles by introducing a line of high quality die-cast
replicas of classic and late-model vehicles. Racing Champions continued this
expansion in 1997 by introducing additional lines of classic and custom vehicle
replicas. In 1998, Racing Champions introduced a new line of die-cast vehicle
replicas sold exclusively at hobby and collector shops. In 1999, the Company
increased its non-racing product lines by acquiring The Ertl Company, Inc. which
has produced die-cast collectibles for over 50 years.
Racing Champions is a holding company that was formed as a Delaware corporation
in April, 1996 for the purpose of consummating a recapitalization (the
"Recapitalization") that 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").
In June 1998, Racing Champions completed its acquisition of Wheels Sports Group,
Inc., which was subsequently renamed Racing Champions South, Inc. ("Racing
Champions South"). Racing Champions South develops, markets and distributes
collectible sports trading cards related to NASCAR, football and basketball
markets, and NASCAR souvenirs and apparel.
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of The Ertl Company, Inc. (subsequently renamed Racing
Champions Ertl, Inc.) and certain of its affiliates ("Ertl") for approximately
$94.6 million. Ertl develops, markets, and distributes agricultural and imprint
die-cast collectibles and hobby model kits. The operations of Ertl have been
fully integrated into those of Racing Champions, Inc. and operate under the
Racing Champions Ertl, Inc. and Racing Champions International Limited
subsidiaries.
PRODUCTS
DIE-CAST REPLICAS.
RACING VEHICLE REPLICAS: Racing Champions has produced die-cast racing vehicle
replicas since its inception in 1989. Racing Champions' racing vehicle replicas
include a comprehensive line of scaled stock cars, trucks and team transporters
representing a large number of the vehicles competing in the current year's
NASCAR Winston Cup Series, NASCAR Busch Grand National Series and the National
Hot Rod Association (NHRA) Championship Drag Racing Series. In 2000, Racing
Champions produced over 250 different styles of racing vehicle replicas,
including various sizes such as 1:64, 1:24 and 1:18 scale. The Company's racing
vehicle replicas generally retail at prices ranging from $2 to $70.
CLASSIC AND CUSTOM VEHICLE REPLICAS: In early 1996, Racing Champions introduced
its first line of classic and custom vehicle replicas. Racing Champions
introduced several additional lines in 1997 and 1998 to continue the expansion
of its classic and custom die-cast vehicle replica category. In 1999, the
Company launched Street Wheels, which are directed at a younger audience. The
classic and custom vehicle replica category was greatly expanded in 1999 with
the Ertl acquisition which added Ertl's custom imprint classic cars and American
Muscle die-cast vehicle collectibles, a line of vintage and modern automobiles
and trucks in 1:18 and 1:43 scales. In 2000, the Company expanded the American
Muscle product line to include additional scales and marketed a number of 1:64
and 1:24 scale products in this category. In 2001, the category is being
expanded to include 18 new American Muscle models to celebrate its tenth
anniversary, a Body Shop die-cast activity kit line and the second issue in the
Ford Precision 100 line. The Company's classic and custom vehicle replicas
retail at prices ranging from $2 to $70.
2
AGRICULTURAL, CONSTRUCTION EQUIPMENT AND RECREATIONAL POWERSPORT VEHICLE
REPLICAS: The agricultural and powersports die-cast vehicle replica category has
a wide range of products in various scales, including replicas of vintage and
modern tractors, farm implements and construction vehicles of major
manufacturers such as John Deere, Case IH and Ford New Holland and die-cast
replicas of ATV's, snowmobiles and motorcycles of major manufacturers such as
Polaris, Honda and Kawasaki. These products generally retail for $3 to $100. In
addition, Ertl's Precision brand is a line of highly detailed collectible
agricultural die-cast vehicle replicas which retail for $60 to $230.
OTHER DIE-CAST COLLECTIBLES: The Company also has a line of pewter figures under
the brand name of William Britain, which consists primarily of military and
ceremonial figures fashioned after historical European and U.S. events and
themes. The William Britain individual figures and sets are sold primarily to
gift and hobby shops and retail for $9 to $400.
OTHER PRODUCTS
PLASTIC MODEL KITS: The Company's model kits are marketed under the AMT and Esci
brand names and consist of injection molded plastic kits principally of vintage
and high performance automobiles, race cars, trucks, aircraft and spacecraft.
Plastic model kits generally retail for $7 to $15.
LICENSED PRESCHOOL ACTIVITY TOYS: The Company's licensed preschool line
encompasses several products and brand names. These products include outdoor
activity toys, toy books and vehicles under the John Deere Kids line; die-cast
trains, rail cars and plastic railway accessories under the Thomas the Tank
Engine line; and several licensed properties under a toy books line, such as
Peanuts, Scooby Doo, Tonka and Franklin the Turtle; and push and roll vehicles.
Toy books are a plastic rolling vehicle that opens to reveal a storybook.
Licensed preschool activity toys retail at prices ranging from $4 to $100.
SPORTS TRADING CARDS: Racing Champions designs and markets premium collectible
sports trading cards under the Press Pass brand name. Press Pass sports trading
cards primarily feature NASCAR race drivers, team owners and crew chiefs. Press
Pass has been an innovator in the collectible sports trading card industry,
having introduced season-long interactive cards, prism cards, 24-carat gold
signature cards, holofoil cards and "event-used" cards. Event-used cards contain
materials used in actual NASCAR races, including pieces of rubber taken from
tires, fire-suits and metal car parts. Press Pass also markets National Football
League and National Basketball Association draft pick trading cards. Draft pick
cards feature leading college players who are expected to be selected in the NFL
and the NBA drafts each year. The Company's sports trading cards have retail
prices ranging from $3 to $10.
APPAREL AND SOUVENIRS: Racing Champions distributes NASCAR-related merchandise
trackside at NASCAR events, to wholesale customers and to retailers. During
2000, merchandise distributed by Racing Champions included shirts, hats,
jackets, die-cast vehicle replicas, sunglasses, key chains, can coolers, bumper
stickers, license plates and souvenirs, all of which are produced by outside
manufacturers. These products generally retail for $2 to $150.
LICENSES
Racing Champions markets virtually all of its products under licenses from other
parties. These licenses are generally limited in scope and duration and
authorize the sale of specific licensed products on a nonexclusive basis for a
limited period of time. Racing Champions has approximately 800 licenses with
various race team owners, drivers, sponsors, agents, and entertainment
properties generally for terms of 1 to 3 years. Racing Champions' racing
replicas, collectible sports trading cards, apparel and souvenirs are officially
licensed by major race sanctioning bodies including NASCAR. Racing Champions has
license agreements with the major automobile, truck and equipment manufacturers,
including Chevrolet, Ford, Oldsmobile, Pontiac, Buick, Dodge, Chrysler,
Kenworth, John Deere, Polaris, Case IH and Honda.
Royalty rates for the Company's products vary by category but generally range in
aggregate for all licensors from 2% to 20% of the Company's sales price.
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(R), Ertl(R) and Press
Pass(R). A number of Ertl trademarks are also registered in foreign countries.
Racing Champions holds U.S. patents for its trading card display stand and model
vehicle and for its unique packaging system which includes a die-cast vehicle,
emblem and display stand. Racing Champions believes that there is significant
value in its Racing Champions and Ertl trademarks and plans to build additional
value through increased customer awareness of many of Racing Champions' other
trade names and trademarks.
3
SALES AND DISTRIBUTION
In 2000, approximately 41% of Racing Champions' net sales were distributed
through national and regional retail chains including K-Mart, Target, Toys 'R'
Us, Wal-Mart, Ames/Hills, Meijer and ShopKo. Racing Champions' products are sold
at more than 20,000 retail outlets.
In addition, Racing Champions sells to hobby and collector shops, to independent
toy stores, to original equipment manufacturer ("OEM") dealerships (such as John
Deere), to wholesale customers and trackside at racing events, which as a group
represented approximately 44% of net sales for 2000.
Racing Champions also distributes products through the premium/promotional
distribution channel. In total, this channel represented approximately 13% of
net sales for 2000. Premium/promotional customers offer the Company's customized
products to their customers through their own distribution outlets, through
special promotions or with the purchase of their product.
In 1998, Racing Champions began direct to consumer distribution, using direct
mail and the Internet. This channel represented approximately 2% of net sales
for 2000.
Racing Champions' internal sales force provides direct customer contact with
virtually all of Racing Champions' retail and wholesale accounts. This sales
force is supplemented by external sales representative organizations that are
divided geographically. These external sales representative organizations
provided more frequent and wider customer service and solicitation of the
national and regional retailers and supported approximately 33% of Racing
Champions' 2000 net sales. Racing Champions' internal sales force complements
the external sales force by providing a more limited direct relationship between
Racing Champions and the accounts assigned to the external sales force. Certain
large accounts are designated as "house accounts" and are handled exclusively by
Racing Champions' internal sales staff. External sales representatives generally
earn commissions of 1% to 10% of the net sales price from their accounts, and
their commissions are not affected by the involvement of Racing Champions'
internal sales force with a customer or sale. The Company also has a telesales
group that contacts smaller volume customers.
MARKETING
Racing Champions' marketing program is directed toward collectors, current users
and potential new customers that fit the demographic profile of Racing
Champions' target market. The focus of Racing Champions' marketing plan is to
increase awareness of the Company's product offerings and brand name. Racing
Champions utilizes the following media in its marketing plan.
ADVERTISING: Racing Champions places advertisements in collector's publications
with high, specific market penetration such as die-cast collector publications
and figure collector publications. Racing Champions also advertises in national
publications read by its targeted collectors and enthusiasts, such as NASCAR
Magazine, Child Magazine and Die Cast Digest.
PUBLIC RELATIONS: Racing Champions has developed a sustained public relations
effort to build relationships with editors at collector publications. Ongoing
product notices keep editors abreast of changing products, increase Racing
Champions' credibility and market acceptance, and encourage the editorial staffs
of these publications to give adequate coverage to Racing Champions' products.
CO-OP ADVERTISING: Racing Champions works closely with retail chains to plan and
execute ongoing retailer driven promotions and advertising. The programs usually
involve promotion of Racing Champions' products in retail customers' print
circulars, mailings and catalogs.
DIRECT CONSUMER: The Internet is an increasingly important part of Racing
Champions' marketing plan as collectors have quickly adopted the Internet as a
preferred way to communicate with other enthusiasts about their hobby. Racing
Champions has established a proprietary World Wide Web site (www.rcertl.com) on
the Internet that highlights its products, lists 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. The Company's alliance
with the Bradford Group and its new company web store, DieCastExpress.com, have
opened additional opportunities for sales and marketing in the direct to
consumer arena.
COMPETITION
Racing Champions competes with several large international toy and collectible
companies, such as Mattel, Inc., Hasbro, Inc., Action Performance Companies,
Inc. and Maisto Ltd., and with other producers of vehicle replicas and toys such
as Playing Mantis, Yat Ming, Jakks Pacific Inc., Burago, and Zindart/Corgi.
4
Racing Champions' Press Pass sports trading cards compete with full line
collectible sports trading card companies, primarily Topps, Upper Deck and
Fleer, and with several smaller companies with more limited product lines.
Competition in the distribution of the Company's products is intense and is
primarily based on product appeal, ability to capture shelf or rack space,
timely distribution, price and quality. Competition is also based on the ability
to obtain license agreements from entertainment companies, NASCAR race drivers,
professional athletes, professional sports leagues and players associations
authorizing the Company to use the name, photograph, likeness, autograph or
image of the personality on specific product lines to be sold through specific
distribution channels or retail outlets.
Racing Champions believes that its competitive position is enhanced by a number
of factors, including product quality, features, pricing and diversity, its
ability to recognize trends in its product markets and anticipate shifts in
consumer preferences, its success in designing and marketing new products, the
availability of adequate sources of manufacturing capacity, the ability of its
third party manufacturers to meet delivery schedules, and its ability to renew
existing licenses and to enter into new licenses. In addition, Racing Champions
has sought to develop loyalty for its brands, to produce products with a proven
track record of collectibility and consumer appeal, and to capture shelf space
at leading mass merchants and other retailers. Many of Racing Champions'
competitors have greater financial, technical, marketing and other resources
than Racing Champions.
MANUFACTURING
PRODUCT SOURCING: Racing Champions Limited, the Company's Hong Kong subsidiary
(the "Hong Kong Subsidiary"), has an office in Kowloon, Hong Kong and in the
Racing Industrial Zone in China and employs 154 people who oversee all aspects
of the sourcing of Racing Champions' vehicle replicas and certain other
products. The Hong Kong Subsidiary sources raw materials and packaging, performs
engineering and graphic art functions, executes the production schedule,
provides on-site quality control, facilitates third-party safety testing and
coordinates the delivery of shipments for export from China.
FAR EAST MANUFACTURING: Virtually all of Racing Champions' products, except
sports trading cards and apparel and souvenirs, are manufactured in China. The
Company employs four independently owned dedicated manufacturers who manufacture
only the Company's products, as well as approximately 12 other contract
manufacturers. All products are manufactured to Racing Champions' specifications
using molds and tooling that are owned by Racing Champions. The dedicated and
contract manufacturers own the manufacturing equipment and machinery, and
purchase raw materials, hire workers and plan production which includes
subassemblies, final assemblies and packaging. Racing Champions purchases fully
assembled and packaged finished goods in master cartons for distribution to its
customers. Most of the dedicated and contract manufacturers have been supplying
the Company for more than five years. The Company's purchases in 2000 from the
dedicated manufacturers, Sharp Success, Win Yield, Sunrise and Shun Fung were
26.8%, 19.5%, 10.4%, and 6.7%, respectively, of the Company's total product
purchases.
SPORTS TRADING CARDS AND NASCAR APPAREL AND SOUVENIR MANUFACTURING: The
production of sports trading cards and NASCAR apparel and souvenirs is completed
by third party contractors. Racing Champions creates the product design and
specifications and coordinates the activities of various third party
contractors. Racing Champions generally prefers to coordinate the production of
these products through a limited number of suppliers and believes that a number
of alternate suppliers are available for each of the primary functions necessary
for production of sports trading cards and NASCAR apparel and souvenirs.
PRODUCT DEVELOPMENT: New product development is constantly occurring as Racing
Champions seeks to improve quality, update styles and add product lines. New
product designs and updates are generally initiated in the U.S. or U.K. offices.
The designing process can take several days or a number of months depending upon
whether the process involves an enhancement to an existing product or a new
product design. Racing Champions has been able to develop new products and make
design changes quickly due to its rapid approval process, integrated Hong Kong
Subsidiary and dedicated and contract manufacturing.
TOOLING: Racing Champions is continuously developing new tooling and molds to
produce its die-cast products. Racing Champions' engineering staff works closely
with outside tool makers to design and create new tooling. Depending on the size
and complexity of the model, tools can cost from $15,000 to $135,000. Racing
Champions often produces back-up tools for high volume models. Racing Champions
owns all of its tools and provides them to the manufacturers during production.
Tools are returned to Racing Champions when a product is no longer in production
and are stored for future use or destroyed.
GRAPHICS: Existing product enhancements typically include graphics changes to
products for new color schemes and revisions to product packaging. New designs
and graphics changes are generally developed by Racing Champions personnel and
sent to licensors, if necessary, prior to production.
5
PRODUCT SAFETY: Racing Champions' products are designed, manufactured, packaged
and labeled to conform with the safety requirements of the American Society for
Testing and Materials and the Consumer Product Safety Commission and are
periodically reviewed and approved by independent safety testing laboratories.
Racing Champions carries product liability insurance coverage with a limit of
$26.0 million per occurrence. As of December 31, 2000, Racing Champions has
never received a product liability claim.
LOGISTICS: The Company's customers can purchase Racing Champions products either
in the United States or the United Kingdom, or directly from China. The Company
owns a distribution facility in Dyersville, Iowa and uses an independent third
party warehouse in the United Kingdom. Products purchased directly from China
are delivered from the contract manufacturers to freight forwarders or
consolidators designated by the customer.
EMPLOYEES
As of December 31, 2000, Racing Champions had 433 employees, 26 of whom were
employed part-time. Racing Champions emphasizes the recruiting and training of
high quality personnel and, to the extent possible, promotes people from within
Racing Champions. Sixty-one of Racing Champions' employees, all of whom work in
the distribution facility in Dyersville, Iowa, are covered by a collective
bargaining agreement. Racing Champions considers its employee relations to be
good. Racing Champions' continued success will depend in part on its ability to
attract, train and retain qualified personnel at all of its locations.
ITEM 2 : PROPERTIES
As of December 31, 2000, Racing Champions' facilities were as follows:
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
- ---------------------------------------------------- ----------- -------------------------- ----------------------------
Corporate Headquarters . . . . . . . . . . . . . . . 10,257 Glen Ellyn, IL October 2003
Hong Kong office . . . . . . . . . . . . . . . . . . 19,828 Kowloon, Hong Kong June 2002
Racing Champions South, Inc. office and warehouse. . 40,000 Mooresville, NC February 2002
Racing Champions Ertl, Inc. office and warehouse . . 499,500 Dyersville, IA Owned
Racing Champions International Limited office. . . . 5,419 Exeter, United Kingdom October 2013
Racing Champions International Limited warehouse (1) 71,026 Nottingham, United Kingdom September 2004
Racing Industrial Zone office, quarters and storage. 53,700 Dongguan City, China June 2002 through March 2003
(1) The Nottingham warehouse has been sublet to a third party and is no longer used in the Company's operations. U.K.
distribution activities have been contracted to an independent third party.
ITEM 3 : 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.
The Company is a defendant in a class action lawsuit in the U.S. District Court
for the Northern District of Illinois, Eastern Division under the caption Market
Street Securities, Inc., et al. v. Racing Champions Corporation, et al. The
lawsuit was filed by, and on behalf of, purchasers of the common stock of the
Company between February 1, 1999 and June 23, 1999. The complaint alleges that
the Company violated certain federal securities laws by issuing a series of
material misrepresentations to the market between February 1, 1999 and June 23,
1999, thereby artificially inflating the price of the Company's common stock.
The complaint seeks, among other things, an unspecified amount of compensatory
damages and trial costs and expenses. The defendants filed a motion to dismiss
all claims on October 16, 2000. After the court denied the defendants' motion to
dismiss, the Company filed an answer and affirmative defenses on December 18,
2000. On December 20, 2000, the court entered an order for conditional class
certification. The lawsuit is in the initial phases of discovery. The Company
intends to vigorously defend against the action, although no assurances can be
given as to the outcome of this matter.
On March 2, 2000, Telepresence Technologies, LLC filed a lawsuit against Racing
Champions South, Inc. and Racing Champions, Inc. in the United States District
Court for the Central District of California. The suit alleges that memorabilia
trading cards sold by these subsidiaries infringe a patent allegedly owned by
Telepresence. Telepresence seeks damages, costs, attorneys' fees and interest,
and further requests that damages be trebled on its allegation of willful
infringement. The Company intends to defend this suit vigorously. However, there
can be no assurance that the Company will ultimately be successful in the
defense of this suit.
6
A purported class action lawsuit was filed on August 21, 2000, in California
state court against Racing Champions South, Inc. and several other defendants in
a case entitled Chaset v. The Upper Deck Company, et al. The lawsuit purports to
include a proposed class of all U.S. residents who purchased sports cards
manufactured, licensed, marketed, sold or distributed by any defendant within a
time period of up to four years. The complaint alleges that the defendants have
violated the California unfair trade practices and consumer protection laws by
selling packs of sports trading cards containing random assortments of varying
values. The plaintiff seeks actual damages, attorneys' fees, pre- and
post-judgment interest, exemplary damages, and injunctive relief. The Company
disputes these claims and intends to vigorously defend its position, although no
assurance can be given as to the outcome of this matter.
In August 1999, a purported class action lawsuit was filed against the Company
in the U.S. District Court for the Southern District of California, in a case
entitled Dumas, et al. v. Racing Champions Corporation. The complaint alleges
that the defendants have violated RICO and the California Unfair Competition Law
by selling packs of sports trading cards containing random assortments of cards
of varying values. This lawsuit has been dismissed by the trial court and
currently is on appeal to the Ninth Circuit Court of Appeals. The appeal was
consolidated with appeals of seven virtually identical lawsuits filed by other
putative plaintiffs' classes. The Company disputes this claim and intends to
vigorously defend its position, although no assurances can be given as to the
outcome of this matter.
ITEM 4 : SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5 : MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $0.01 per share (the "Common Stock"), has
traded on the Nasdaq SmallCap Market under the symbol "RACN" since May 8, 2000.
Prior to May 8, 2000, the Common Stock traded on the Nasdaq National Market. The
following table sets forth the high and low closing sale prices for the Common
Stock as reported by the Nasdaq for the periods indicated.
Year Ended December 31, 1999
Quarter High Low
- ---------------------------- ------ ------
First. . . . . . . . . . . . $14.50 $10.63
Second . . . . . . . . . . . $17.88 $ 6.50
Third. . . . . . . . . . . . $ 8.13 $ 5.69
Fourth . . . . . . . . . . . $ 5.75 $ 3.56
Year Ended December 31, 2000
Quarter High Low
- ---------------------------- ------ ------
First. . . . . . . . . . . . $ 5.00 $ 3.13
Second . . . . . . . . . . . $ 3.53 $ 1.13
Third. . . . . . . . . . . . $ 1.78 $ 0.84
Fourth . . . . . . . . . . . $ 1.69 $ 0.84
At December 31, 2000, there were approximately 191 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. The Company's amended credit agreement contains a provision
restricting the Company's ability to pay dividends.
7
ITEM 6 : SELECTED FINANCIAL DATA (amounts in thousands, except per share data)
The following table sets forth selected financial data with respect to the
Company for each of the periods indicated. The data for the years ended December
31, 1996, 1997, 1998, 1999 and 2000 are derived from the Company's consolidated
financial statements which have been audited by Arthur Andersen LLP, as
indicated in their report included elsewhere herein.
The pro forma financial data for the year ended December 31, 1997, which gives
effect to the acquisitions of High Performance Sports Marketing, Inc. and Press
Pass Partners by Wheels Sports Group, Inc. ("Wheels") as if the purchases had
occurred on January 1, 1997 and as if Racing Champions' initial public offering
and Wheels' initial public offering had occurred on January 1, 1997, are
presented for informational purposes only and are not necessarily indicative of
the results of future operations of the Company or the actual results that would
have been achieved had such events occurred on such dates.
The pro forma financial data for the year ended December 31, 1999, which gives
effect to the acquisition of The Ertl Company, Inc. and certain of its
affiliates ("Ertl") as if the purchase had occurred on January 1, 1999, is
presented for informational purposes only and is not necessarily indicative of
the results of future operations of the Company or the actual results that would
have been achieved had such events occurred on such date.
Pro Forma
----------
Year Year Year Year Year Year Year
ended ended ended ended ended ended ended
Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31
1996 1997 (1) 1998 (1) 1999 (1) 2000 1997(1) 1999(1)
-------------- --------- --------- --------- -------- --------- ---------
STATEMENT OF INCOME DATA:
Net sales. . . . . . . . . . . . . . . $ 56,908 $ 83,745 $156,464 $231,360 $214,806 $105,605 $266,340
Gross profit . . . . . . . . . . . . . 30,974 45,103 85,614 98,677 98,478 52,332 109,586
Operating income . . . . . . . . . . . 12,098 13,262 23,123 8,972 23,047 13,040 4,735
Net income (loss) from
continuing operations. . . . . . . . $ 3,372 $ 4,536 $ 11,741 $ 535 $ 5,890 $ 5,418 $ (3,471)
PER SHARE DATA:
Net income (loss) from continuing
operations before extraordinary item
Basic. . . . . . . . . . . . . . . $ 0.29 $ 0.33 $ 0.73 $ 0.03 $ 0.40 $ 0.34 $ (0.21)
Diluted. . . . . . . . . . . . . . 0.28 0.32 0.71 0.03 0.39 0.33 -
Cash dividends . . . . . . . . . . . . - - - - - - -
Book value
Basic. . . . . . . . . . . . . . . $ 0.35 $ 7.46 $ 11.01 $ 6.27 $ 7.05
Diluted. . . . . . . . . . . . . . 0.34 7.26 10.64 6.14 6.93
Weighted average common shares and
common share equivalents outstanding
Basic. . . . . . . . . . . . . . . 9,318 12,279 15,982 16,249 14,827
Diluted. . . . . . . . . . . . . . 9,645 12,621 16,426 16,588 15,085
Dec. 31, 2000
--------------
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . $ 38,955
Total assets . . . . . . . . . . . . 252,449
Total debt . . . . . . . . . . . . . 97,000
Total stockholders' equity . . . . . 104,565
8
(1) The following supplemental financial data for the Company for the years ended December 31, 1999, 1998 and 1997 give
effect to the acquisition of The Ertl Company, Inc. as if the purchase had occurred on January 1, 1999, give effect to
the acquisitions of High Performance Sports Marketing, Inc. and Press Pass Partners by Wheels as if the purchases had
occurred on January 1, 1997, assume that the initial public offerings of Racing Champions and Wheels occurred on
January 1, 1997, and exclude certain non-recurring charges as reflected in the supplemental footnotes.
SUPPLEMENTAL FINANCIAL DATA
- -----------------------------
Year ended Year ended Year ended
(amounts in thousands, Dec. 31, Percent of Dec. 31, Percent of Dec. 31, Percent of
except per share data) 1999(a) Net sales 1998(b) Net sales 1997(c) Net sales
- ----------------------- --------- ----------- ----------- ----------- ----------- ----------
Net sales . . . . . . . $ 266,340 100.0% $ 156,464 100.0% $ 101,487 100.0%
Gross profit. . . . . . 115,387 43.3 85,614 54.7 52,790 52.0
Operating income. . . . 16,936 6.4 28,906 18.5 20,813 20.5
Net income. . . . . . . 3,788 1.4 15,602 10.0 10,081 9.9
Net income per share:
Basic . . . . . . . . $ 0.23 $ 0.98 $ 0.63
Diluted . . . . . . . $ 0.23 $ 0.95 $ 0.61
(a) Amounts exclude the following items: $2.4 million in inventory write-up in connection with the purchase of
Ertl, $3.4 million in inventory write-downs incurred in connection with the inventory liquidations and SKU
reductions related to the integration with Ertl and $6.4 million in restructuring and other charges that the
Company took during the second quarter of 1999 related to the alignment of Racing Champions product lines,
operations and direct mail efforts with the consolidated plans for those same areas at Ertl.
(b) Amounts exclude non-recurring, merger-related and restructuring charges in connection with the acquisition
of Wheels of approximately $5.5 million, as well as approximately $0.3 million in non-recurring compensation
and rent expense, $0.4 million in interest on deferred financing charges and $1.8 million in extraordinary
charges for the early extinguishment of debt. Merger transaction costs consisted primarily of fees for
investment bankers of approximately $0.6 million, professional advisers including legal and accounting of
approximately $0.9 million and financial printing and other related costs of approximately $0.6 million.
Restructuring costs included primarily severance for terminated employees of approximately $1.1 million,
agreement extension costs of approximately $1.5 million and facility and other exit costs of approximately $0.8
million.
(c) Amounts exclude the following items: (1) charges for the discontinued operations of World of Racing,
Inc. of $1.5 million, (2) charges for the discontinued home decor product lines, including the goodwill related
to the Emerald Sports Group, Inc. acquisition of $0.7 million, (3) expenses related to the 1997 acquisitions
which were treated as pooling-of-interests of $0.3 million, (4) accounting and audit fees of $0.5 million
related to acquisition and year end accounting and auditing work, (5) one-time bonus payments of $0.2 million,
(6) a net loss from the Wheels' trading card operations of $2.9 million which includes approximately $0.7
million related to defective products, (7) liquidation of discontinued High Performance product lines which
generated $1.0 million in sales and $1.3 million in cost of sales in 1997, (8) one-time bonus payments of $1.6
million which primarily relate to a transfer of equity ownership to a key employee immediately prior to the
Wheels acquisition of High Performance, (9) costs of $0.3 million incurred in connection with the integration
of the other Wheels acquisitions into the High Performance facility in Mooresville, NC, (10) the impact of a
discontinued Press Pass product line which generated minimal net sales and $0.5 million in cost of sales in
1997, and (11) compensation and rent expense of $0.6 million.
9
ITEM 7 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless indicated otherwise, references to "Racing Champions" or the "Company"
are to Racing Champions Corporation and its subsidiaries, references to "Wheels"
are to Wheels Sports Group, Inc. prior to its acquisition by the Company on June
12, 1998, references to "Racing Champions South" are to Wheels Sports Group,
Inc., which was renamed Racing Champions South, Inc., after its acquisition by
the Company on June 12, 1998, and references to Ertl are to The Ertl Company,
Inc., prior to the acquisition by the Company on April 13, 1999 and references
to "Racing Champions Ertl" are to The Ertl Company, Inc., which was renamed
Racing Champions Ertl, Inc. after its acquisition by the Company on April 13,
1999.
OVERVIEW
CORPORATE AND PRODUCT HISTORY
Racing Champions is a leading producer and marketer of collectibles and toys
sold in multiple channels of distribution and available at more than 20,000
retail outlets. The Company sells American Muscle collectible die-cast vehicle
replicas, NASCAR and NHRA die-cast racing replicas, officially licensed die-cast
replicas of automobiles, trucks, agricultural, construction equipment and
powered-recreational and sport vehicles, plastic preschool products, AMT model
kits, Press Pass sports trading cards and NASCAR souvenirs and apparel. The
Company has license agreements with major U.S. automotive and equipment
manufacturers and many of the major motorsport 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, Europe and Asia Pacific. Racing Champions Limited,
based in Hong Kong and China, oversees the production of the majority of the
Company's products. Racing Champions International Limited, based in the United
Kingdom, sells the Company's products in Europe and Asia Pacific.
On April 30, 1996, Racing Champions was formed as a new holding company pursuant
to the Recapitalization for the purpose of acquiring the domestic operations of
the RCI Group and the foreign operations of the RCL Group. This acquisition was
accounted for using the purchase method of accounting.
In June 1997, Racing Champions sold 5,357,142 shares of its common stock in an
initial public offering. The net proceeds to the Company from the sale of the
stock were approximately $69 million, after deduction of commissions and
offering expenses. The net proceeds were used to redeem preferred stock issued
in the Recapitalization, repay stockholder notes issued in the Recapitalization
and repay bank borrowings incurred in connection with the Recapitalization.
In June 1998, Racing Champions acquired Wheels Sports Group, Inc., subsequently
renamed Racing Champions South, Inc. Racing Champions South markets and
distributes collectible sports trading cards related to the NASCAR, football and
basketball markets, and NASCAR souvenirs and apparel. In connection with this
acquisition, Racing Champions issued 2.7 million shares of Common Stock and
assumed outstanding options and warrants of Racing Champions South exercisable
to purchase up to 0.8 million shares of Common Stock. The transaction was
accounted for as a pooling of interests. All consolidated financial information
has been restated as if the transaction had been effected as of the beginning of
the earliest reporting period. In connection with the merger, the Company
recorded a charge to operating expenses in the second quarter of 1998 of
approximately $5.5 million, including $2.1 million for direct and other merger
related costs and $3.4 million relating to restructuring of the Companies'
combined operations. Merger transaction costs consisted primarily of fees for
investment bankers of approximately $0.6 million, professional advisors
including legal and accounting of approximately $0.9 million and financial
printing and other related costs of approximately $0.6 million. Restructuring
costs included primarily severance for terminated employees of approximately
$1.1 million, agreement extension costs of approximately $1.5 million and
facility and other exit costs of approximately $0.8 million. These costs were
expended by the Company prior to December 31, 1998.
Racing Champions decided to restructure Racing Champions South primarily to
facilitate the integration of six acquisitions made by Wheels in 1997. The two
largest acquisitions were made late in the fourth quarter of 1997, and had not
yet been fully integrated into the operations of Wheels. Management also wanted
to realign the operations of Wheels to conform with operations, policies, and
procedures of Racing Champions. This meant integrating and operating under
Racing Champions' internal operating policies and procedures, primarily in the
areas of sales and marketing, production and order processing, and finance and
administration. All restructuring charges were accrued and expensed in the
financial statements during the second quarter of 1998. The restructuring was
substantially completed by the end of the third quarter of 1998, with all
restructuring charges expended before December 31, 1998. During this period,
there were no changes in the original restructuring plan or in the estimates
recorded.
10
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of Ertl for approximately $94.6 million. Ertl markets and
distributes agricultural and imprint die-cast collectibles and hobby model kits.
This transaction has been accounted for under the purchase method of accounting
and accordingly, the operating results of Ertl have been included in the
Company's consolidated financial statements since the date of acquisition. The
purchase was funded with a draw-down on the Company's credit facility. The
excess of the aggregate purchase price over the fair market value of net assets
acquired of approximately $31.1 million is being amortized over 40 years.
SALES AND EXPENSES
Racing Champions' sales are recognized based upon transfer of title of product
to customers. Racing Champions does not sell its products on consignment and
ordinarily accepts returns only for defective merchandise. 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 concessions, or the Company may accept returns of this product
so it can be resold to other customers. These credits, concessions, and returns
are generally finalized annually. Returns and allowances have ranged from 7% to
9% of net sales over the last 3 fiscal years.
Mass merchant retailers purchase Racing Champions' products either domestically
in the United States or the United Kingdom with credit terms ranging from 30 to
120 days or directly in China with payment made by irrevocable letter of credit
or wire transfer. By acquiring the products in China, many of Racing Champions'
retail customers are able to realize efficiencies with respect to cost and
logistics in the distribution of the products to their retail locations. Because
Racing Champions incurs significantly lower distribution and administrative
costs with respect to direct shipments to customers from China, a price discount
of approximately 15% to 25% is granted. As a result, China shipments have lower
gross profit margins than domestic shipments. Therefore, the annual fluctuations
in the mix of United States and United Kingdom versus China 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 China shipments due to the saved distribution and administrative
costs. For the years ended December 31, 2000, 1999 and 1998, China shipments
constituted 13%, 22% and 45%, 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 2000, aggregate royalties by product
ranged from approximately 2% to 20% of Racing Champions' selling price. Sales
commissions ranging from 1% to 10% of net sales are paid quarterly to Racing
Champions' external sales representative organizations. In 2000, sales subject
to commissions represented 33% of net sales.
The following is a discussion and analysis of the Company's financial condition,
results of operations, liquidity and capital resources. The discussion and
analysis should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included elsewhere herein.
11
For the Year ended December 31,
------------------------------------
(amounts in thousands, 2000 2000 1999 1999 1998 1998
except per share data) Amount Percent Amount Percent Amount Percent
-------- -------- --------- -------- -------- --------
Net sales. . . . . . . . . . . . . . . . . . . $214,805 100.0% $231,360 100.0% $156,464 100.0%
Cost of sales. . . . . . . . . . . . . . . . . 116,328 54.2% 132,683 57.3% 70,850 45.3%
-------- -------- --------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . 98,478 45.8% 98,677 42.7% 85,614 54.7%
Selling, general and administrative expenses . 71,636 33.3% 79,762 34.5% 54,302 34.7%
Amortization of goodwill and other assets. . . 3,795 1.8% 3,543 1.5% 2,663 1.7%
Restructuring and other charges. . . . . . . . - 0.0% 6,400 2.8% - 0.0%
Merger related costs . . . . . . . . . . . . . - 0.0% - 0.0% 5,526 3.5%
-------- -------- --------- -------- -------- --------
Operating income . . . . . . . . . . . . . . . 23,047 10.7% 8,972 3.9% 23,123 14.8%
Interest expense . . . . . . . . . . . . . . . 11,375 5.3% 7,650 3.3% 2,751 1.8%
Other expense (income) . . . . . . . . . . . . 662 0.3% (105) 0.0% 400 0.2%
-------- -------- --------- -------- -------- --------
Income before income taxes . . . . . . . . . . 11,010 5.1% 1,427 0.6% 19,972 12.8%
Income tax expense . . . . . . . . . . . . . . 5,120 2.4% 892 0.4% 8,231 5.3%
-------- -------- --------- -------- -------- --------
Income before extraordinary item . . . . . . . 5,890 2.7% 535 0.2% 11,741 7.5%
Extraordinary charge for early extinguishment
of debt, net of tax benefit of $1,188. . . . - 0.0% - 0.0% 1,782 1.1%
-------- -------- --------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . $ 5,890 2.7% $ 535 0.2% $ 9,959 6.4%
======== ======== ========= ======== ======== ========
Earnings per share:
Net income per share
Basic. . . . . . . . . . . . . . . . . . . . $ 0.40 $ 0.03 $ 0.62
Diluted. . . . . . . . . . . . . . . . . . . $ 0.39 $ 0.03 $ 0.61
Weighted average shares outstanding
Basic. . . . . . . . . . . . . . . . . . . . 14,827 16,249 15,982
Diluted. . . . . . . . . . . . . . . . . . . 15,085 16,588 16,426
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales decreased $16.6 million, or 7.2%, to $214.8 million for the year ended
December 31, 2000 from $231.4 million for the year ended December 31, 1999. This
decrease was primarily attributable to the decrease in sales of NASCAR-related
products. The overall die-cast collectibles category decreased approximately 9%.
Non-racing die-cast collectibles increased approximately 25%, primarily due to
the product expansion and increased distribution of the American Muscle, custom
imprint and agricultural and construction equipment product lines. Die-cast
racing replicas decreased approximately 72%, primarily in NASCAR. Sales of other
products decreased approximately 7%, primarily due to the decline in trading
cards, NASCAR apparel and souvenirs and other collectibles that offset the
increase in the preschool product line. Sales in the preschool product line
increased approximately 79%, primarily due to the increases in John Deere Kids,
licensed toybooks and push and rolls. Sales of apparel and souvenirs decreased
approximately 52%, due to the weak performance in the NASCAR area.
GROSS PROFIT
Gross profit decreased $0.2 million, or 0.2%, to $98.5 million for the year
ended December 31, 2000 from $98.7 million for the year ended December 31, 1999.
The gross profit margin (as a percentage of net sales) increased to 45.8% in
2000 from 42.7% in 1999. The lower sales volume in 2000 negatively impacted the
gross profit for the year. The increase in the gross profit margin was
attributable to the integration of operations with Ertl, better sourcing of
products, lower product costs, and a reduction in sales of products with lower
margins. There were no major changes in the components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $8.2 million, or 10.3%,
to $71.6 million for the year ended December 31, 2000 from $79.8 million for the
year ended December 31, 1999. The decrease in selling, general and
administrative expenses is due to the integration of operations and tight
control of discretionary expenditures. As a percentage of net sales, selling,
general and administrative expenses decreased to 33.3% for the year ended
December 31, 2000 from 34.5% for the year ended December 31, 1999. Selling,
general, and administrative expenses for 2000 includes a $2.5 million
non-recurring charge related to minimum guaranteed royalty payments from
NASCAR-related licensing agreements which exceeded royalties earned on product
sales.
12
OPERATING INCOME
Operating income increased $14.0 million, or 156.9%, to $23.0 million for the
year ended December 31, 2000 from $9.0 million for the year ended December 31,
1999. As a percentage of net sales, operating income increased to 10.7% for the
year ended December 31, 2000 from 3.9% for the year ended December 31, 1999. The
increase in operating income is primarily a result of the decrease in selling,
general and administrative expenses in 2000. Operating income for 2000 was
negatively impacted by a non-recurring charge of $2.5 million taken in the
fourth quarter. This charge relates to minimum guaranteed royalty payments from
NASCAR-related licensing agreements that exceeded royalties earned on product
sales. Operating income for 1999 was negatively impacted by a charge of $6.4
million in restructuring and other charges that the Company took during the
second quarter of 1999. These charges related to the alignment of the Racing
Champions' operations, product lines and direct marketing efforts with the
consolidated plans for those same areas of Ertl.
INTEREST EXPENSE
Interest expense of $11.4 million for the year ended December 31, 2000 and $7.7
million for the year ended December 31, 1999 related primarily to bank term
loans and a line of credit. The increase in interest expense, year to year, is
due primarily to increases in interest rates.
INCOME TAX
Income tax expense for the years ended December 31, 2000 and 1999 include
provisions for federal, state and foreign income taxes at an effective rate of
46.5% and 62.5%, respectively.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales increased $74.9 million, or 47.9%, to $231.4 million for the year
ended December 31, 1999 from $156.5 million for the year ended December 31,
1998. This increase was primarily attributable to the acquisition of Ertl. The
overall die-cast collectibles category increased approximately 39%. Non-racing
die-cast collectibles increased approximately 490%, primarily due to the
addition of the American Muscle, custom imprint and agricultural and
construction equipment product lines that were acquired in connection with the
Ertl acquisition. Die-cast racing replicas decreased approximately 60%,
primarily in NASCAR, with weak performance for the year as compared to the prior
year's NASCAR 50th Anniversary line. Sales of other products increased
approximately 77%, primarily due to the addition of the licensed preschool lines
and model kits that were acquired with Ertl. Sales of NASCAR apparel and
souvenirs decreased approximately 47%, mostly due to planned reductions based on
focusing product lines and reducing low volume SKU's in the apparel and
souvenirs category. The increase in sales, year over year, was due to the
increase in volume and product lines, primarily as a result of the Ertl
acquisition, as there were no price increases in 1999.
GROSS PROFIT
Gross profit increased $13.1 million, or 15.3%, to $98.7 million for the year
ended December 31, 1999 from $85.6 million for the year ended December 31, 1998.
The gross profit margin (as a percentage of net sales) decreased to 42.7% in
1999 from 54.7% in 1998. The Company earned a higher gross profit margin during
the year ended December 31, 1998 mostly due to the special 50th Anniversary
NASCAR die-cast and souvenir products that carried higher gross margins. The
lower than planned sales volume in the second through fourth quarters of 1999
negatively impacted the Company's gross profit margin. Also, the addition of the
Ertl operations, with a lower gross profit margin (in the range of 40% to 45%)
than the traditional Racing Champions gross profit margin, contributed to the
decrease in gross profit margin in 1999. Lastly, the effect of close-outs that
were made, primarily in the fourth quarter, negatively effected the gross profit
margin. These close-outs were necessary to liquidate excess inventories at the
end of the year in light of the overall market softness. There were no major
changes in the components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $25.5 million, or 47.0%,
to $79.8 million for the year ended December 31, 1999 from $54.3 million for the
year ended December 31, 1998. The increase in selling general and administrative
expenses is due to the acquisition of Ertl in early 1999. As a percentage of net
sales, selling, general and administrative expenses decreased to 34.5% for the
year ended December 31, 1999 from 34.7% for the year ended December 31, 1998.
This slight decrease as a percentage of net sales is due to tight management of
operating expenses. Furthermore, some operating efficiencies began to take
effect as the manufacturing, order processing and distribution entered into the
final phases of consolidation and full integration.
13
OPERATING INCOME
Operating income decreased $14.1 million, or 61.0%, to $9.0 million for the year
ended December 31, 1999 from $23.1 million for the year ended December 31, 1998.
As a percentage of net sales, operating income decreased to 3.9% for the year
ended December 31, 1999 from 14.8% for the year ended December 31, 1998. The
decrease in operating income is primarily a result of the $6.4 million in
restructuring and other charges that the Company took during the second quarter
of 1999. These charges relate to the alignment of the Racing Champions'
operations, product lines and direct marketing efforts with the consolidated
plans for those same areas of Ertl. Approximately $2.2 million of the charges
relate to the re-focusing of the direct mail programs, $4.0 million of the
charges relate to the reduction and consolidation of product lines and the
remaining $0.2 million of the charges relate to operational consolidation,
including severance and relocation costs. For the year ended December 31, 1999,
all of the charges related to direct mail were expended, approximately $3.7
million of the reduction and consolidation of product lines were expended and
approximately $0.1 million of the charges related to severance and relocation
were expended. The remainder of these charges was expended in the first quarter
of 2000. The operating margin was also negatively affected by the lower than
planned sales volume in the second through fourth quarters of 1999.
INTEREST EXPENSE
Interest expense of $7.7 million for the year ended December 31, 1999 and $2.8
million for the year ended December 31, 1998 related primarily to bank term
loans and line of credit. The increase in interest expense, year to year, is due
to increased borrowings in 1999 in connection with the acquisition of Ertl.
INCOME TAX
Income tax expense for the years ended December 31, 1999 and 1998 includes
provisions for federal, state and foreign income taxes at an effective rate of
62.5% and 41.2%, respectively. The increase in rate in 1999 is due primarily to
the non-deductible goodwill generated in the acquisition of Ertl.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents increased by $0.3 million for the year ended December
31, 2000, increased $6.0 million for the year ended December 31, 1999 and
decreased $0.7 million for the year ended December 31, 1998. Net cash provided
by operating activities was $38.6 million, $22.1 million and $2.6 million in
2000, 1999 and 1998, respectively. The change in net cash provided by operating
activities from 1999 to 2000 is primarily attributable to earnings from
operations and the decrease in inventory. The change in net cash provided by
operating activities from 1998 to 1999 is primarily attributable to the
decreases in accounts receivable, inventory and accounts payable and accrued
expenses (due to low sales volume and the liquidation of excess inventories).
Net cash used in investing activities was $8.2 million, $102.3 million and $7.2
million in 2000, 1999 and 1998, respectively. The decrease from 1999 to 2000 was
primarily attributable to the absence of acquisitions in 2000 and lower
purchases of property and equipment in 2000. The increase from 1998 to 1999 was
primarily attributable to the acquisition of Ertl in 1999.
Net cash (used in) provided by financing activities was $(30.0) million, $86.2
million and $3.9 million in 2000, 1999 and 1998, respectively. The decrease from
1999 to 2000 was due to more discretionary paydowns on the bank borrowing. The
increase from 1998 to 1999 was due to more bank borrowing in connection with the
acquisition of Ertl.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations provided net cash of $38.6 million during
the year ended December 31, 2000. This was primarily due to earnings from
operations and the decrease in inventory. Capital expenditures for the year
ended December 31, 2000 were approximately $8.2 million, of which approximately
$7.0 million was for molds and tooling.
During 2000, the Company made payments of $41 million on its bank borrowings.
The Company received $15 million in proceeds from its bank borrowings. The
Company also repurchased 1,007,600 shares of its outstanding common stock for
approximately $4 million.
During 1999, the Company made payments of $77.3 million on its bank borrowings.
The Company received $166.3 million in proceeds from its bank borrowings. The
Company also repurchased 775,500 shares of its outstanding common stock for
approximately $3.6 million.
During 1998, the Company made payments of approximately $5.3 million to
stockholders of the Company in settlement of notes payable outstanding from the
acquisitions of High Performance and Press Pass consummated in 1997. Included in
these payments was the release of $3.3 million of escrowed funds related to the
High Performance acquisition.
The Company entered into a credit agreement on April 13, 1999, amended on August
31, 2000, which provides for a revolving loan, term loan, and the issuance of
letters of credit. The revolving loan allows the Company to borrow up to $20.0
14
million based upon the Company's levels of inventory and accounts receivable. At
December 31, 2000, based on the Company's borrowing base calculation, the
Company had the ability to borrow $20.0 million. At December 31, 2000, the
Company had no amounts outstanding on the revolving loan. The term loan, in the
principal amount of $97.0 million at December 31, 2000, is due in scheduled
quarterly payments ranging from $3.5 million to $4.0 million with a final
balloon payment on April 1, 2003. All borrowings under the credit facility are
secured by substantially all of the assets of the Company.
The term loan and the revolving loan bear interest, at the Company's option, at
an alternate base rate plus a margin that varies between 0.15% and 1.75% or at a
LIBOR rate plus a margin that varies between 0.90% and 3.50%. The applicable
margin is based on the Company's ratio of consolidated debt to consolidated
EBITDA. At December 31, 2000 the margin in effect was 1.50% for base rate loans
and 3.25% for LIBOR loans. The credit agreement also requires the Company to pay
a commitment fee determined by the ratio of consolidated debt to consolidated
EBITDA. At December 31, 2000, the commitment fee in effect was 0.40% per annum
on the average daily unused portion of the revolving loan. During 2000, the
Company paid $0.1 million in commitment fees.
Under the terms of the Company's credit agreement, the Company is required to
comply with certain financial and non-financial covenants. The key financial
covenants include leverage ratio, minimum EBITDA and maximum capital
expenditures. As of December 31, 2000, the Company was in compliance with all of
these covenants.
The Company's Hong Kong subsidiary entered into a credit agreement with a bank
that provides for a line of credit of up to $2.0 million. Amounts borrowed under
this line of credit bear interest at the bank's prime rate or prevailing funding
cost, whichever is higher, and are cross-guaranteed by Racing Champions, Inc.,
Racing Champions Limited and Racing Champions Ertl, Inc. As of December 31, 2000
and 1999 there were no outstanding borrowings under this line of credit.
The Company's anticipated debt service obligations under the existing credit
facilities for 2001 for scheduled interest and principal payments are
approximately $24.0 million. Average annual debt service obligations under these
same facilities through April 2003 are approximately $52.9 million.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. Due to seasonal
increases in demand for the Company's collectibles and toys, working capital
financing requirements are usually highest during the third and fourth quarters.
The Company expects that capital expenditures during 2001, principally for molds
and tooling, will be approximately $11 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements may be identified by the use of forward-looking words or
phrases such as "anticipate," "believe," "could," "expect," "intend," "may,"
"planned," "potential," "should," "will" and "would." Such forward-looking
statements are inherently subject to known and unknown risks and uncertainties.
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; the Company may not be able to
manufacture, source and ship new and continuing products on a timely basis and
customers and consumers may not accept those products at prices sufficient for
the Company to profitably recover development, manufacturing, marketing, royalty
and other costs; the inventory policies of retailers, together with increased
reliance by retailers on quick response inventory management techniques, may
increase the risk of underproduction of popular items, overproduction of less
popular items and failure to achieve tight shipping schedules; competition in
the markets for the Company's products may increase significantly; the Company
is dependent upon continuing licensing arrangements with vehicle manufacturers,
agricultural equipment manufacturers, major race sanctioning bodies, race team
owners, drivers, sponsors, agents and other licensors; the Company may
experience unanticipated negative results of litigation; the Company relies upon
a limited number of independently owned factories located in China to
manufacture a significant portion of its vehicle replicas and certain other
products; the Company is dependent upon the continuing willingness of leading
retailers to purchase and provide shelf space for the Company's products; and
general economic conditions in the Company's markets. The Company undertakes no
obligation to make any revisions to the forward-looking statements contained in
this filing or to update them to reflect events or circumstances occurring after
the date of this filing.
15
ITEM 7A : QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's credit agreement requires that the Company maintain an interest
rate protection agreement. Effective June 3, 1999, the Company entered into an
interest rate collar transaction covering $35.0 million of its debt, with a cap
based on 30 day LIBOR rates of 8% and floor of 5.09%. The agreement, which has
quarterly settlement dates, is in effect through June 3, 2002. During 2000, the
effect of this agreement was insignificant.
Based on the Company's interest rate exposure on variable rate borrowings at
December 31, 2000, a one-percentage-point increase in average interest rates on
the Company's borrowings would increase future interest expense by approximately
$80,000 per month.
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 23 of this report.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly results of operations for
each of the quarters in the years ended December 31, 2000 and 1999. 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 2000
------------------
(amounts in thousands, except per share data) Q1 Q2 Q3 Q4
-------- -------- ------- -------
Net sales. . . . . . . . . . . . . . . . . . . . $45,427 $50,078 $65,831 $53,470
Cost of sales. . . . . . . . . . . . . . . . . . 26,611 27,234 34,219 28,264
-------- -------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . . 18,816 22,844 31,612 25,206
Selling, general and administrative expenses (1) 16,634 17,920 17,673 19,409
Amortization of goodwill and other assets. . . . 948 953 947 947
-------- -------- ------- -------
Operating income . . . . . . . . . . . . . . . . 1,234 3,971 12,992 4,850
Interest expense . . . . . . . . . . . . . . . . 2,368 2,923 3,271 2,813
Other expense (income) . . . . . . . . . . . . . (33) (284) 526 453
-------- -------- ------- -------
Income (loss) before income taxes. . . . . . . . (1,101) 1,332 9,195 1,584
Income tax expense (benefit) . . . . . . . . . . (290) 407 4,266 737
-------- -------- ------- -------
Net income (loss). . . . . . . . . . . . . . . . $ (811) $ 925 $ 4,929 $ 847
======== ======== ======= =======
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.06 $ 0.34 $ 0.06
Diluted. . . . . . . . . . . . . . . . . . . . - $ 0.06 $ 0.33 $ 0.06
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . 15,322 14,663 14,662 14,662
Diluted. . . . . . . . . . . . . . . . . . . . 15,564 14,889 14,879 14,875
(1) Selling, general and administrative expenses for the fourth quarter of 2000
includes a charge of $2.5 million related to minimum guaranteed royalty payments on
NASCAR-related licensing agreements which exceeded royalties earned on product sales.
16
Fiscal Year 1999
------------------
(amounts in thousands, except per share data) Q1 Q2 Q3 Q4
------- -------- ------- --------
Net sales . . . . . . . . . . . . . . . . . . $35,272 $57,487 $82,631 $55,970
Cost of sales . . . . . . . . . . . . . . . . 16,618 33,966 47,250 34,849
------- -------- ------- --------
Gross profit. . . . . . . . . . . . . . . . . 18,654 23,521 35,381 21,121
Selling, general and administrative expenses. 12,690 22,973 25,090 19,009
Amortization of goodwill and other assets . . 713 917 947 965
Restructuring and other . . . . . . . . . . . - 6,400 - -
------- -------- ------- --------
Operating income (loss) (1) . . . . . . . . . 5,251 (6,769) 9,344 1,147
Interest expense (2). . . . . . . . . . . . . 564 2,017 2,563 2,506
Other expense (income). . . . . . . . . . . . 60 9 9 (183)
------- -------- ------- --------
Income (loss) before income taxes . . . . . . 4,627 (8,795) 6,772 (1,176)
Income tax expense (benefit). . . . . . . . . 1,874 (3,561) 2,897 (317)
------- -------- ------- --------
Net income (loss) . . . . . . . . . . . . . . $ 2,753 $(5,234) $ 3,875 $ (859)
======= ======== ======= ========
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . $ 0.17 $ (0.32) $ 0.24 $ (0.05)
Diluted . . . . . . . . . . . . . . . . . . $ 0.17 - $ 0.23 -
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . 16,081 16,234 16,417 16,261
Diluted . . . . . . . . . . . . . . . . . . 16,557 16,729 16,694 16,512
(1) The large operating loss for the second quarter was a result of the Company
recording a second quarter charge to operating expenses of approximately $6.4
million in restructuring and other charges related to the alignment of Racing
Champions' operations, product lines and direct marketing efforts with the
consolidated plans for those same areas of Ertl.
(2) Interest expense increased in the second quarter and for the remainder of
the year as the Company took on new bank borrowings of approximately $140.0 million
during the second quarter of 1999 to effect the acquisition of Ertl.
ITEM 9 : CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
17
PART III
ITEM 10 : DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers and directors of the Company is
incorporated herein by reference to the discussions under "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for the 2001 Annual Meeting of Stockholders which will
be filed on or before April 30, 2001.
ITEM 11 : EXECUTIVE COMPENSATION
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders which will be filed on or before April 30, 2001.
ITEM 12 : SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the discussion under "Security Ownership" in
the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders which
will be filed on or before April 30, 2001.
ITEM 13 : CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the discussions under "Executive
Compensation-Employment Agreements" and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders which will be filed on or before April 30, 2001.
ITEM 14 : EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
in Item 8 of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets - as of December 31, 2000 and 1999.
Consolidated Statements of Income - for the years ended December 31, 2000,
1999 and 1998.
Consolidated Statements of Stockholders' Equity - for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows - for the years ended December 31,
2000, 1999 and 1998.
Notes to consolidated financial statements.
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants.
Financial Statement Schedule for the years ending December 31, 2000, 1999
and 1998:
Schedule Number Description Page
- --------------- --------------------------------- -----
II Valuation and Qualifying Accounts 22
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information is shown in
the financial statements or notes thereto, and therefore have been omitted.
18
3. EXHIBITS:
Number Description
Exhibit 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-22635)).
Exhibit 3.2 First Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 0-22635)).
Exhibit 3.3 Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.1 Credit Agreement, dated as of April 13, 1999, by and among the Company, Racing Champions, Inc.,
Racing Champions South, Inc., Racing Champions Worldwide Limited, First Union National Bank, as
lender and agent, and the other lenders party thereto (incorporated by reference to Exhibit 99.2 of the
Company's Current Report on Form 8-K dated April 13, 1999 (File No. 0-22635)).
Exhibit 10.2 First Amendment to Credit Agreement, dated as of August 30, 1999, among the Company, Racing
Champions, Inc., Racing Champions South, Inc., Racing Champions Worldwide Limited, Green's
Racing Souvenirs, Inc., RCNA Holdings, Inc., The Ertl Company, Inc., Ertl Direct, Inc., First Union
National Bank, as agent and lender, and the other lenders party thereto (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1999 (File No. 0-22635)).
Exhibit 10.3 Second Amendment to Credit Agreement, dated as of May 15, 2000, among the Company, Racing
Champions, Inc., Racing Champions South, Inc., Racing Champions Worldwide Limited, First
Union National Bank, as agent and lender, and the other lenders party thereto (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 (File No. 0-22635)).
Exhibit 10.4 Waiver Letter dated July 14, 2000, relating to Second Amendment to Credit Agreement, dated as of
May 15, 2000, among the Company, Racing Champions, Inc., Racing Champions South, Inc., Racing
Champions Worldwide Limited, First Union National Bank, as agent and lender, and the other lenders
party thereto (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 (File No. 0-22635)).
Exhibit 10.5 Third Amendment to Credit Agreement, dated as of August 31, 2000, among the Company, Racing
Champions, Inc., Racing Champions South, Inc., Racing Champions Worldwide Limited, First Union
National Bank, as agent and lender, and the other lenders party thereto (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 (File No. 0-22635)).
Exhibit 10.6 Security Agreement, dated as of August 30, 1999, among the Company, Racing Champions, Inc.,
Racing Champions South, Inc., Racing Champions Worldwide Limited, Green's Racing Souvenirs,
Inc., RCNA Holdings, Inc., The Ertl Company, Inc., Ertl Direct, Inc., and First Union National Bank,
as agent and lender (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (File No. 0-22635)).
Exhibit 10.7 Stock and Asset Purchase Agreement, dated as of April 13, 1999, among U.S. Industries, Inc., JUSI
Holdings, Inc., USI Overseas Limited, USI Canada, Inc., Racing Champions Corporation, Racing
Champions, Inc., RCNA Holdings, Inc., Racing Champions Worldwide Limited and Racing
Champions Limited (incorporated by reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K dated April 13, 1999 (File No. 0-22635)).
Exhibit 10.8 Warrant Agreement, dated as of August 5, 1998, between the Company and BankBoston, N.A., as
warrant agent (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.9 Warrant dated December 31, 1997 issued by Wheels Sports Group, Inc. to Indosuez CM II, Inc.
(incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.10 Registration Rights Agreement, dated as of December 31, 1997, between Wheels Sports Group, Inc.
and Indosuez CM II, Inc. (incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.11 Warrant dated April 27, 1997 issued by Wheels Sports Group, Inc. to Schneider Securities, Inc.
19
(incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.12* Employment Agreement, dated as of April 30, 1999, by and between Racing Champions, Inc. and
Robert Dods (incorporated by reference to Exhibit 10.13 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 (File No. 0-22635)).
Exhibit 10.13* Employment Agreement, dated as of April 30, 1999, by and between Racing Champions, Inc. and
Boyd Meyer (incorporated by reference to Exhibit 10.14 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 (File No. 0-22635)).
Exhibit 10.14* Employment Agreement, dated as of April 30, 1999, by and between Racing Champions Limited and
Peter Chung (incorporated by reference to Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 (File No. 0-22635)).
Exhibit 10.15* Employment Agreement, dated as of October 20, 2000, by and between the Company and Curt Stoelting.
Exhibit 10.16* Employment Agreement, dated as of October 20, 2000, by and between the Company and Peter Henseler.
Exhibit 10.17* Employment Agreement, dated as of April 30, 1998, by and between Racing Champions, Inc. and Kevin
Camp (incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.18* 1996 Key Employees Stock Option Plan (incorporated by reference to Exhibit 10.19 of the Company's
Registration Statement on Form S-1 (Registration No. 333-22493) filed with the Securities and
Exchange Commission on February 27, 1997).
Exhibit 10.19* Racing Champions Corporation Stock Incentive Plan, as amended (incorporated by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (File No.
0-22635)).
Exhibit 10.20* Racing Champions Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.23 of the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-22493) filed with the Securities and Exchange Commission on April 11, 1997).
Exhibit 10.21* Wheels Sports Group, Inc. 1996 Omnibus Stock Plan (incorporated by reference to Exhibit 10.6 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22635)).
Exhibit 10.22* Amendment to Employment Agreement, dated as of September 19, 2000, by and between Racing Champions,
Inc. and Robert E. Dods.
Exhibit 10.23* Amendment to Employment Agreement, dated as of September 19, 2000, by and between Racing Champions,
Inc. and Boyd L. Meyer.
Exhibit 10.24* Amendment to Employment Agreement, dated as of September 19, 2000, by and between Racing Champions
Limited and Peter K.K. Chung.
Exhibit 21 Subsidiaries of the Company.
Exhibit 23 Consent of Arthur Andersen LLP.
Exhibit 24 Power of Attorney (included as part of the signature page hereof).
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K for the three months ended December 31,
2000.
(c) Exhibits: The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial statement schedules: The response to this portion of Item 14 is submitted as a separate section of
this report.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 22, 2001 Racing Champions Corporation
By: /s/ Robert E. Dods, Chief Executive Officer
-------------------------------------------
Robert E. Dods, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Robert E. Dods and
Curtis W. Stoelting, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments to the Form 10-K and file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated
/s/ Robert E. Dods Chief Executive Officer and Director March 22, 2001
- ---------------------- (Principal Executive Officer)
Robert E. Dods
/s/ Boyd L. Meyer Vice Chairman and Director March 22, 2001
- ----------------------
Boyd L. Meyer
/s/ Curtis W. Stoelting Executive Vice President, Chief Operating March 22, 2001
- ---------------------- Officer and Secretary (Principal Financial Officer
Curtis W. Stoelting and Principal Accounting Officer)
/s/ Peter K.K. Chung Director March 22, 2001
- ----------------------
Peter K.K. Chung
/s/ Avy H. Stein Director March 22, 2001
- ----------------------
Avy H. Stein
/s/ Daniel M. Gill Director March 22, 2001
- ----------------------
Daniel M. Gill
/s/ John S. Bakalar Director March 22, 2001
- ----------------------
John S. Bakalar
/s/ John J. Vosicky Director March 22, 2001
- ----------------------
John J. Vosicky
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Racing Champions Corporation and Subsidiaries:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Racing Champions
Corporation included in this annual report and issued our report thereon dated
February 19, 2001. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule of Valuation and
Qualifying Accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subject to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
February 19, 2001
SCHEDULE II
Valuation and Qualifying Accounts
Balance at Charged to Charged to
beginning costs and other Balance at
of year expenses accounts Deductions end of year
- -------------------------------- ---------- ---------- ---------- ------------ ------------
Allowance for doubtful accounts:
Year ended December 31, 1998 $2,686,000 $ 608,650 - $(2,194,650) $ 1,100,000
Year ended December 31, 1999 $1,100,000 $3,535,094 $2,338,383 $(1,518,528) $ 5,454,949
Year ended December 31, 2000 $5,454,949 $2,053,230 - $(4,176,915) $ 3,331,264
- -------------------------------- ---------- ---------- ---------- ------------ ------------
22
CONSOLIDATED BALANCE SHEETS
December 31,
-------------
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,581,542 $ 12,265,289
Accounts receivable, net of allowance for doubtful accounts
of $3,331,264 and $5,454,949 41,488,415 44,717,451
Income tax receivable 6,516,872 -
Inventory 18,650,953 28,144,875
Deferred and prepaid taxes 8,530,802 14,691,659
Prepaid expenses 3,481,743 2,889,304
Property held for sale - 152,564
------------- -------------
Total current assets 91,250,327 102,861,142
------------- -------------
Property and equipment:
Land 725,514 725,514
Buildings and improvements 4,935,668 4,916,152
Tooling 44,079,366 37,022,492
Other equipment 10,335,771 9,386,980
------------- -------------
60,076,319 52,051,138
Less- Accumulated depreciation (23,840,694) (13,931,161)
------------- -------------
36,235,625 38,119,977
Goodwill, net 123,534,772 132,847,251
Other assets 1,428,712 2,453,217
------------- -------------
Total assets $252,449,436 $276,281,587
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,790,940 $ 8,084,893
Accrued expenses 10,776,772 11,007,269
Accrued allowances 11,377,943 9,969,037
Accrued royalties 6,902,619 4,928,508
Line of credit - 8,000,000
Current maturities of term notes 14,000,000 17,250,000
Other current liabilities 2,447,012 4,593,178
------------- -------------
Total current liabilities 52,295,286 63,832,885
------------- -------------
Term notes, less current maturities 83,000,000 97,750,000
Deferred income taxes 8,971,794 5,811,630
Other long-term liabilities 3,617,638 7,038,839
------------- -------------
Total liabilities 147,884,718 174,433,354
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, voting, $ 01 par value, 28,000,000 shares authorized,
16,444,708 shares issued and 14,661,608 shares outstanding at December 31, 2000
and 16,432,708 shares issued and 15,657,208 shares outstanding at December 31, 1999 164,447 164,327
Stock warrants outstanding 728,740 728,740
Additional paid-in capital 89,265,424 89,241,161
Accumulated other comprehensive income (loss) 775,852 (16,991)
Retained earnings 21,218,320 15,327,723
------------- -------------
112,152,783 105,444,960
Treasury stock, at cost, 1,783,100 shares at December 31, 2000 and 775,500
at December 31, 1999 (7,588,065) (3,596,727)
------------- -------------
Total stockholders' equity 104,564,718 101,848,233
------------- -------------
Total liabilities and stockholders' equity $252,449,436 $276,281,587
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
23
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
--------------------------
2000 1999 1998
------------ ------------- ------------
Net sales $214,805,880 $231,360,417 $156,463,996
Cost of sales, related party 7,743,639 5,957,866 8,218,345
Cost of sales, other 108,584,057 126,725,490 62,631,886
------------ ------------- ------------
Gross profit 98,478,184 98,677,061 85,613,765
Selling, general and administrative expenses 71,636,219 79,762,220 54,302,304
Merger related costs - - 5,525,695
Restructuring and other charges - 6,400,000 -
Amortization of goodwill and other assets 3,794,757 3,542,579 2,663,278
------------ ------------- ------------
Operating income 23,047,208 8,972,262 23,122,488
Interest expense 11,374,822 7,650,127 2,750,781
Other expense (income) 662,036 (104,943) 399,499
------------ ------------- ------------
Income before income taxes 11,010,350 1,427,078 19,972,208
Income tax expense 5,119,753 891,574 8,231,028
------------ ------------- ------------
Income before extraordinary item 5,890,597 535,504 11,741,180
Extraordinary charge for early extinguishment of debt,
net of tax benefit of $1,188,000 - - 1,782,000
------------ ------------- ------------
Net income $ 5,890,597 $ 535,504 $ 9,959,180
============ ============= ============
Income per share before extraordinary item
Basic $ 0 40 $ 0 03 $ 0 73
Diluted $ 0 39 $ 0 03 $ 0 71
Income per share from extraordinary item
Basic $ - $ - $ 0 11
Diluted $ - $ - $ 0 11
Net income per share
Basic $ 0 40 $ 0 03 $ 0 62
Diluted $ 0 39 $ 0 03 $ 0 61
Weighted average shares outstanding
Basic 14,826,506 16,249,380 15,981,952
Diluted 15,085,045 16,587,947 16,425,852
The accompanying notes are an integral part of these consolidated statements.
24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Stock Other Additional Total
Common Warrants Treasury Comprehensive Paid-in Retained Stockholders'
Stock Outstanding Stock Income (Loss) Capital Earnings Equity
-------- ------------- ------------ -------------- ----------- ----------- -------------
Balance, December 31, 1997 $159,608 $ 2,376,040 $ - $ - $84,235,074 $ 4,833,039 $ 91,603,761
Net income - - - - - 9,959,180 9,959,180
Stock issued upon option exercise 1,002 - - - 1,006,491 - 1,007,493
Expense recognized under stock
option grant - - - - 11,408 - 11,408
Comprehensive income
-------- ------------- ------------ -------------- ----------- ----------- -------------
Balance, December 31, 1998 160,610 2,376,040 - - 85,252,973 14,792,219 102,581,842
Net income - - - - - 535,504 535,504
Stock issued upon option exercise 1,119 - - - 538,619 - 539,738
Expense recognized under stock
option grant - - - - 22,824 - 22,824
Stock warrants exercised 2,598 (1,647,300) - - 3,426,745 - 1,782,043
Treasury stock acquisition - - (3,596,727) - - - (3,596,727)
Other comprehensive loss-foreign
currency translation adjustments - - - (16,991) - - (16,991)
Comprehensive income
-------- ------------- ------------ -------------- ----------- ----------- -------------
Balance, December 31, 1999 164,327 728,740 (3,596,727) (16,991) 89,241,161 15,327,723 101,848,233
Net income - - - - - 5,890,597 5,890,597
Stock issued upon option exercise 120 - - - 1,440 - 1,560
Expense recognized under stock
option grant - - - - 22,823 - 22,823
Treasury stock acquisition - - (3,991,338) - - - (3,991,338)
Other comprehensive income-foreign
currency translation adjustments - - - 792,843 - - 792,843
Comprehensive income
-------- ------------- ------------ -------------- ----------- ----------- -------------
Balance, December 31, 2000 $164,447 $ 728,740 $(7,588,065) $ 775,852 $89,265,424 $21,218,320 $104,564,718
======== ============= ============ ============== =========== =========== =============
Comprehensive
Income (Loss)
--------------
Balance, December 31, 1997
Net income $ 9,959,180
Stock issued upon option exercise -
Expense recognized under stock
option grant -
--------------
Comprehensive income 9,959,180
Balance, December 31, 1998
Net income 535,504
Stock issued upon option exercise -
Expense recognized under stock
option grant -
Stock warrants exercised -
Treasury stock acquisition -
Other comprehensive loss-foreign
currency translation adjustments (16,991)
--------------
Comprehensive income 518,513
Balance, December 31, 1999
Net income 5,890,597
Stock issued upon option exercise -
Expense recognized under stock
option grant -
Treasury stock acquisition -
Other comprehensive income-foreign
currency translation adjustments 792,843
--------------
Comprehensive income $ 6,683,440
==============
Balance, December 31, 2000
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------
2000 1999 1998
------------- -------------- -------------
OPERATING ACTIVITIES
Net income $ 5,890,597 $ 535,504 $ 9,959,180
Adjustments to reconcile net income to net cash provided by operating activities-
Extraordinary item - - 1,782,000
Depreciation 9,603,872 7,491,888 3,269,853
Stock option expense 22,824 22,824 11,408
Provision for uncollectible accounts 2,053,229 2,378,702 -
Interest on deferred financing costs 423,092 228,936 12,862
Amortization of goodwill and other assets 3,794,757 3,542,579 2,663,278
(Gain) loss on disposition of assets (19,968) 25,043 -
Deferred income taxes 9,916,431 599 1,944,095
Changes in operating assets and liabilities, net of acquisition activity:
Accounts and income tax receivable (4,685,001) 2,240,257 (10,029,643)
Inventory 8,887,297 18,870,223 (9,816,215)
Prepaid expenses 3,620,631 2,027,666 (1,840,720)
Accounts payable and accrued expenses 2,315,242 (14,222,269) 4,661,835
Other liabilities (3,199,835) (1,032,590) -
------------- -------------- -------------
Net cash provided by operating activities 38,623,168 22,109,362 2,617,933
INVESTING ACTIVITIES
Purchase of property and equipment (8,217,973) (9,885,390) (6,554,852)
Proceeds from disposal of property and equipment 276,641 2,136,899 421,929
Purchase price of Ertl, net of cash - (92,996,967) -
Purchase price in excess of net assets acquired - - (802,421)
Increase in other non-current assets (279,657) (1,507,729) (215,841)
------------- -------------- -------------
Net cash used in investing activities (8,220,989) (102,253,187) (7,151,185)
FINANCING ACTIVITIES
Issuance of stock 1,560 539,738 1,007,493
Proceeds from bank term loans - 115,000,000 12,002,111
Payment on bank term loans (18,000,000) (22,000,000) (11,948,184)
Net borrowings (payments) on line of credit (8,000,000) (4,000,000) 4,770,224
Decrease in due to stockholders - - (5,250,000)
Payments on long-term debt and capital leases - - (10,107)
Proceeds from exercise of warrants - 1,782,043 -
Payment of deferred financing costs - (1,558,089) -
Purchase of stock to be held in treasury (3,991,338) (3,596,727) -
Release of escrowed cash - - 3,300,000
------------- -------------- -------------
Net cash (used in) provided by financing activities (29,989,778) 86,166,965 3,871,537
Effect of exchange rate changes on cash (96,148) - -
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 316,253 6,023,140 (661,715)
Cash and cash equivalents, beginning of year 12,265,289 6,242,149 6,903,864
------------- -------------- -------------
Cash and cash equivalents, end of year $ 12,581,542 $ 12,265,289 $ 6,242,149
============= ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 12,602,079 $ 7,150,393 $ 2,621,554
Cash paid for taxes during the period $ 1,877,427 $ 3,707,704 $ 6,820,559
The accompanying notes are an integral part of these consolidated statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 : DESCRIPTION OF BUSINESS
Founded in 1989, Racing Champions Corporation ("RCC") and Subsidiaries, Racing
Champions, Inc. ("RCI"), Racing Champions Ertl, Inc. ("RCE"), Racing Champions
Limited ("RCL"), Racing Champions International Limited ("RCIL") and Racing
Champions South, Inc. ("RCS") (collectively "the Company") is a leading producer
and marketer of collectibles and toys. The Company sells American Muscle
die-cast vehicle replicas, NASCAR and NHRA die-cast racing replicas, officially
licensed die-cast replicas of automobiles, trucks, agricultural, construction
equipment and powered-recreational and sport vehicles, plastic preschool
products, AMT model kits, Press Pass sports trading cards and NASCAR souvenirs
and apparel. The Company has license agreements with major U.S. automotive and
equipment manufacturers and many of the major motorsports sanctioning bodies,
sponsors, team owners and their drivers, as well as entertainment and media
companies for their well-known characters and properties. The Company sells its
products primarily in North America, Europe and Asia Pacific. RCL, based in Hong
Kong and China, oversees the production of the Company's products. RCIL, based
in the United Kingdom, sells the Company's products in Europe and Asia Pacific.
NOTE 2 : RECAPITALIZATION AND KEY ACQUISITIONS
RECAPITALIZATION
Purchase price in excess of the book value of the net assets acquired in
connection with the Company's recapitalization ("Recapitalization") in 1996 of
$88.7 million, which is deductible for tax purposes, has been recorded as an
intangible asset and is being amortized on a straight-line basis over forty
years.
RACING CHAMPIONS CORPORATION AND WHEELS SPORTS GROUP, INC.
On June 12, 1998, a subsidiary of the Company merged with Wheels Sports Group,
Inc. ("Wheels"), subsequently renamed Racing Champions South, Inc. The merger
was effected by exchanging 2.7 million shares of the Company's common stock for
all of the common stock of Wheels. Each share of Wheels was exchanged for 0.51
shares of the Company's common stock. In addition, outstanding Wheels' warrants
and stock options were converted at the same exchange ratio into warrants and
options to purchase the Company's common stock.
The merger has been accounted for as a pooling-of-interests. Accordingly, all
prior period consolidated financial statements presented have been restated to
include the results of operations, financial position and cash flows of Wheels
as though it had always been a part of the Company. Certain reclassifications
were made to the Wheels financial statements to conform to the Company's
presentations.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
Six months ended
(amounts in thousands) June 30, 1998
- ----------------------------------------------------------------- ----------------
Net sales:
Racing Champions $ 48,855
Wheels 23,856
Intercompany sales (1,379)
----------------
$ 71,332
================
Net income:
Racing Champions $ 4,212
Wheels (includes $1 6 million of merger costs and $1 8 million
of extraordinary charges, net of income taxes) (2,074)
Intercompany eliminations and income tax adjustments (81)
----------------
$ 2,057
================
27
In connection with the merger, the Company recorded a second quarter charge to
operating expenses of $5.5 million ($3.3 million after taxes, or $0.20 per
diluted common share) for direct and other merger related costs of $2.1 million
and $3.4 million pertaining to restructuring of the Companies' combined
operations.
Merger transaction costs consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
Restructuring costs included severance for terminated employees and exit and
agreement extension costs.
RACING CHAMPIONS CORPORATION AND THE ERTL COMPANY, INC.
On April 13, 1999, certain subsidiaries of the Company purchased 100% of the
outstanding shares of The Ertl Company, Inc. (subsequently renamed Racing
Champions Ertl, Inc.) and certain of its affiliates ("Ertl") for approximately
$94.6 million. This transaction has been accounted for under the purchase method
of accounting and accordingly, the operating results of Ertl have been included
in the Company's consolidated financial statements since the date of
acquisition. The purchase was funded with a draw-down on the Company's credit
facility (Note 7). The excess of the aggregate purchase price over the fair
market value of net assets acquired of approximately $31.1 million is being
amortized over 40 years.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1999 and 1998 assume that the Ertl acquisition occurred
as of January 1 of each year.
(amounts in thousands, except per share data): December 31, 1999 December 31, 1998
- ---------------------------------------------- ------------------- ------------------
Net sales $ 266,340 $ 329,175
(Loss) income before extraordinary item (3,471) 8,872
Net (loss) income (3,471) 7,090
(Loss) earnings per share:
Basic $ (0 21) $ 0 44
Diluted - $ 0 43
Pro forma data does not purport to be indicative of the results that would have
been obtained had this acquisition actually occurred at the beginning of the
periods presented and is not intended to be a projection of future results.
NOTE 3 : STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The financial statements consolidate the accounts
of RCC and its wholly owned subsidiaries. All intercompany items and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION/TRANSACTIONS: Foreign subsidiary assets and
liabilities are reported in the local currency and translated at the rates of
exchange at the balance sheet date while income statement accounts are
translated at the average exchange rates in effect during the period. Exchange
gains and losses resulting from translations for the years ended December 31,
2000 and 1999 have been recorded in the accompanying consolidated statements of
stockholders' equity. Exchange gains and losses prior to 1999 were
insignificant. The net exchange loss resulting from transactions in foreign
currencies for the year ended December 31, 2000 was $0.5 million and is included
in the accompanying consolidated statements of income. Exchange gains and losses
resulting from transactions in foreign currencies for the years prior to 2000
were insignificant.
REVENUE RECOGNITION: The Company recognizes revenue based upon transfer of title
of product to customers. The Company provides for estimated credit and other
concessions.
SHIPPING AND HANDLING COSTS: Shipping and handling costs are included in
selling, general and administrative expenses in the accompanying consolidated
income statement. For the years ended December 31, 2000, 1999 and 1998, shipping
and handling costs were $4.4 million, $3.4 million and $0.5 million,
respectively.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with original maturities of 90 days or less to be cash equivalents. Such
investments are stated at cost, which approximates fair value.
28
USE OF ESTIMATES: The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States 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 are recorded at cost.
Depreciation is computed using the straight-line method for financial statement
purposes at rates adequate to depreciate the cost of applicable assets over
their expected useful lives. Accelerated methods are used for income tax
purposes. Repairs and maintenance are charged to expense as incurred. Gains or
losses resulting from sales or retirements are recorded as incurred, at which
time related costs and accumulated depreciation are removed from the accounts.
The estimated useful lives used in computing depreciation for financial
statement purposes are as follows:
Asset Descriptions Estimated Useful Life
- -------------------------- ---------------------
Buildings and improvements 2-40 years
Tooling 3-8 years
Other equipment 3-13 years
PROPERTY HELD FOR SALE: Property held for sale consists of land and related
improvements at December 31, 1999. Property held for sale is stated at the lower
of cost or estimated net realizable value. This property was sold for its
approximate book value in 2000.
GOODWILL: Purchase price in excess of identifiable net assets acquired
(goodwill) is amortized over 40 years on a straight-line basis. Approximately
$88.7 million of this goodwill is tax deductible over 15 years. Amortization
expense relating to goodwill for the years ended December 31, 2000, 1999, and
1998 was approximately $3.7 million, $3.4 million and $2.6 million,
respectively. Accumulated amortization was $13.2 million and $9.5 million at
December 31, 2000 and 1999, respectively. The Company reviews goodwill for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. To date, no such events or changes in
circumstances have occurred.
OTHER ASSETS: Other assets at December 31, 2000 and 1999 consist primarily of
refundable deposits for leased equipment and deferred financing fees. The
deferred financing fees are being amortized over four years on a straight-line
basis.
CONCENTRATION OF CREDIT RISK: Concentration of credit risk is limited to trade
accounts receivable and is subject to the financial conditions of certain major
customers in which there were two customers accounting for approximately 12% and
14% of net sales for the year ended December 31, 2000, two customers accounting
for approximately 12% and 11% of net sales for the year ended December 31, 1999
and two customers accounting for approximately 14% and 12% of net sales for the
year ended December 31, 1998. Additionally, at December 31, 2000, one customer
accounted for approximately 25% of accounts receivable and at December 31, 1999,
one customer accounted for approximately 20% of accounts receivable. The Company
does not require collateral or other security to support customers' receivables.
The Company conducts periodic reviews of its customers' financial conditions and
vendor payment practices to minimize collection risks on trade accounts
receivable. The Company has purchased credit insurance which covers a portion of
its receivables from major customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash, receivables,
accounts payable and accrued expenses approximate fair value because of the
short-term nature of the items. The carrying amounts of the Company's lines of
credit, notes and other payables approximate their fair values either due to
their short-term nature, the variable rates associated with these debt
instruments or based on current rates offered to the Company for debt with
similar characteristics.
ADVERTISING: The Company expenses the production costs of advertising the first
time the advertising takes place except for certain direct-response advertising,
which is capitalized and amortized over its expected period of future benefits.
At December 31, 2000 and 1999, no direct-response advertising was included in
prepaid expenses. Direct-response advertising relating to prior prepaid expenses
that were expensed for the years ended December 31, 2000 and 1999 was
approximately $0 and $1.8 million, respectively.
29
INCOME TAXES: The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, deferred income taxes are recognized
for the expected future tax consequences of temporary differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company accounts for stock-based
compensation arrangements with employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense is based on the difference, if any, on the measurement date, between the
estimated fair value of the Company's stock and the exercise price of options to
purchase that stock. The compensation expense is amortized on a straight-line
basis over the vesting period of the options. To date, no compensation expense
has been recorded related to stock-based compensation agreements with employees.
The Company accounts for stock-based compensation arrangements with
non-employees in accordance with SFAS No. 123. SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans. Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award, which is calculated using an option pricing model,
and is recognized over the service period, which is usually the vesting period.
Approximately $23,000, $23,000 and $11,000 has been recorded as compensation
expense for stock-based compensation agreements with non-employees for the years
ended December 31, 2000, 1999 and 1998, respectively.
NET INCOME PER SHARE: The Company computes net income per share in accordance
with SFAS No. 128, "Earnings Per Share." Under the provisions of SFAS No. 128,
basic net income per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income for the period
by the weighted average number of common and common equivalent shares
outstanding during the period. The following table discloses the provisions set
forth in SFAS No. 128: (amounts in thousands, except per share data)
Weighted
Net Average Per Share
For the year ended December 31, 2000 Income Shares Amount
- ------------------------------------- ------- -------- ----------
Basic net income per share:
Net income $ 5,890 14,827 $ 0.40
Plus effect of dilutive securities:
Stock options and warrants - 258 -
------- ------- ----------
Diluted net income per share:
Net income plus assumed conversions $ 5,890 15,085 $ 0.39
======= ======= ==========
Options and warrants to purchase 877,374 shares of common stock at prices
ranging from $5.00 to $15.00 were outstanding during 2000 but were not included
in the computation of diluted earnings per share because the options' and
warrants' exercise prices were greater than the average market price of the
common shares.
Weighted
Net Average Per Share
For the year ended December 31, 1999 Income Shares Amount
- ------------------------------------- ------- -------- ----------
Basic net income per share:
Net income $ 535 16,249 $ 0.03
Plus effect of dilutive securities:
Stock options and warrants - 339 -
------- ------- ----------
Diluted net income per share:
Net income plus assumed conversions $ 535 16,588 $ 0.03
======= ======= ==========
30
Options and warrants to purchase 749,104 shares of common stock at prices
ranging from $9.84 to $16.18 were outstanding during 1999 but were not included
in the computation of diluted earnings per share because the options' and
warrants' exercise prices were greater than the average market price of the
common shares.
Weighted
Net Average Per Share
For the year ended December 31, 1998 Income Shares Amount
- ------------------------------------- ------- -------- ----------
Basic net income per share:
Net income $ 9,959 15,982 $ 0.62
Plus effect of dilutive securities:
Stock options and warrants - 444 -
------- ------- ----------
Diluted net income per share:
Net income plus assumed conversions $ 9,959 16,426 $ 0.61
======= ======= ==========
Options and warrants to purchase 611,114 shares of common stock at prices
ranging from $11.27 to $16.18 were outstanding during 1998 but were not included
in the computation of diluted earnings per share because the options' and
warrants' exercise prices were greater than the average market price of the
common shares.
COMPREHENSIVE INCOME: The Company reports comprehensive income in accordance
with SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires
companies to report all changes in equity during a period, except those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The Company has chosen to
disclose comprehensive income, which encompasses net income and foreign currency
translation adjustments, as part of the consolidated statements of stockholders'
equity. The income tax expense (benefit) related to the foreign currency
translation adjustments in 2000 and 1999 was $368,672 and ($10,619),
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS: In June, 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which was amended by several subsequent standards. These
standards require that an entity recognize derivative instruments as either
assets or liabilities on its balance sheet and measure those instruments at fair
value. Changes in the fair value of derivative instruments are to be recorded
each period in earnings or part of a hedged transaction. These Standards become
effective for the Company on January 1, 2001. The Company will record the effect
of adopting this Statement in the first quarter of 2001. The effect of adopting
this Statement will not be material to the Company's financial condition or
results of operations.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the current year presentation.
NOTE 4 : RESTRUCTURING AND OTHER CHARGES
In the second quarter of 1999, the Company recorded restructuring and other
charges of $6.4 million. These charges related to the Company's alignment of
operations, product lines and direct marketing efforts with the consolidation
plans for those same areas at RCE. Approximately $2.2 million of the charges
relate to the re-focusing of the direct mail programs, $4.0 million relates to
the reduction and consolidation of product lines and the remaining $0.2 million
relates to operational consolidation, including severance and relocation costs.
For the year ended December 31, 1999, all of the charges related to direct mail
were expended, approximately $3.7 million of the reduction and consolidation of
product lines were expended and approximately $0.1 million of the charges
related to severance and relocation were expended. The remainder of these
charges was expended in the first quarter of 2000.
31
NOTE 5 : BUSINESS SEGMENT
In January 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." The Company has no separately reportable
segments in accordance with this standard. Under the enterprise wide disclosure
requirements of SFAS 131, the Company reports net sales by each group of product
lines and by distribution channel. Amounts for the years ended December 31,
2000, 1999 and 1998 are as shown in the tables below.
(amounts in thousands) 2000 1999 1998
- ------------------------ -------- -------- --------
Collectible die-cast $149,103 $164,406 $118,658
Other products 65,703 66,954 37,806
-------- -------- --------
Net sales $214,806 $231,360 $156,464
======== ======== ========
Mass retailers $ 88,434 $100,549 $107,301
Wholesale and trackside 94,059 97,010 28,392
Premium/promotional 28,978 25,135 12,320
Direct and other 3,335 8,666 8,451
-------- -------- --------
Net sales $214,806 $231,360 $156,464
======== ======== ========
Other products include model kits, licensed preschool products, sports trading
cards, apparel, souvenirs and games.
Information by geographic area for the years ended December 31, 2000 and 1999 is
set forth in the table below. Operating income represents income before income
taxes, interest expense and other expense (income).
(amounts in thousands) 2000 1999
- ----------------------------------------------- --------- ---------
Net sales:
United States $194,831 $213,417
Foreign 21,238 21,986
Sales and transfers between geographic areas (1,263) (4,043)
--------- ---------
Combined total $214,806 $231,360
========= =========
Operating income:
United States $ 19,758 $ 6,284
Foreign 3,289 2,688
--------- ---------
Combined total $ 23,047 $ 8,972
========= =========
Identifiable assets:
United States $224,380 $248,049
Foreign 28,069 28,233
--------- ---------
Combined total $252,449 $276,282
========= =========
32
NOTE 6 : INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
Year ended Year ended Year ended
(amounts in thousands) Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998
- ---------------------- -------------- -------------- --------------
Pretax income:
United States $ 8,745 $ 263 $ 19,773
Foreign 2,265 1,164 199
-------------- -------------- --------------
$ 11,010 $ 1,427 $ 19,972
============== ============== ==============
The significant components of income tax expense are as follows:
Year ended Year ended Year ended
(amounts in thousands) Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998
-------------- -------------- --------------
Current
Federal $ - $ - $ 5,018
State - - 717
Foreign 610 293 3
-------------- -------------- --------------
610 293 5,738
-------------- -------------- --------------
Deferred
Federal 3,946 493 2,180
State 564 106 311
Foreign - - 2
-------------- -------------- --------------
4,510 599 2,493
-------------- -------------- --------------
Income tax expense $ 5,120 $ 892 $ 8,231
============== ============== ==============
A reconciliation of the statutory Federal tax rate and actual effective income
tax rate is as follows:
Year ended Year ended Year ended
Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998
-------------- -------------- --------------
Statutory rate 35 0% 34 0% 34 0%
State taxes, net of federal benefit 4 9 4 8 4 8
Foreign (0 8) (7 2) -
Other-non-deductible goodwill 7 4 30 8 2 4
-------------- -------------- --------------
Effective rate 46 5% 62 5% 41 2%
============== ============== ==============
33
The significant components of deferred tax assets and liabilities are as
follows:
December 31,
--------------
(amounts in thousands) 2000 1999
- ----------------------------------- -------------- --------
Deferred tax assets
Reserves and allowances $ 6,482 $ 3,921
Net operating loss 3,444 6,515
Other 1,506 1,531
-------------- --------
Total deferred tax assets 11,432 11,967
Deferred tax liabilities
Goodwill and other assets (5,710) (5,435)
Property and equipment (3,978) (1,783)
Other (2,727) -
-------------- --------
Total deferred tax liabilities (12,415) (7,218)
-------------- --------
Net deferred tax (liability) asset $ (983) $ 4,749
============== ========
The Company has approximately $8.6 million of net operating losses that have not
been realized that can be carried forward twenty years (expiring in 2020) for
federal and state income tax purposes.
NOTE 7 : DEBT
The Company entered into a credit agreement on April 13, 1999, amended on August
31, 2000, which provides for a revolving loan, term loan, and the issuance of
letters of credit. The revolving loan allows the Company to borrow up to $20.0
million prior to April 1, 2003, based upon the Company's levels of inventory and
accounts receivables. At December 31, 2000, based on the Company's borrowing
base calculation, the Company had the ability to borrow $20.0 million. At
December 31, 2000, the Company had no amounts outstanding on the revolving loan.
The term loan, in the principal amount of $97.0 million at December 31, 2000, is
due in scheduled quarterly payments ranging from $3.5 million to $4.0 million
with a final balloon payment on April 1, 2003. All borrowings under the credit
facility are secured by substantially all of the assets of the Company.
The term loan and the revolving loan bear interest, at the Company's option, at
an alternate base rate plus a margin that varies between 0.15% and 1.75% or at a
LIBOR rate plus a margin that varies between 0.90% and 3.50%. The applicable
margin is based on the Company's ratio of consolidated debt to consolidated
EBITDA. At December 31, 2000 the margin in effect was 1.50% for base rate loans
and 3.25% for LIBOR loans. The credit agreement also requires the Company to pay
a commitment fee determined by the ratio of consolidated debt to consolidated
EBITDA. At December 31, 2000, the commitment fee was 0.40% per annum on the
average daily unused portion of the revolving loan. During 2000, the Company
paid $0.1 million in commitment fees.
Under the terms of the Company's credit agreement, the Company is required to
comply with certain financial and non-financial covenants. The key financial
covenants include leverage ratio, minimum EBITDA and maximum capital
expenditures. As of December 31, 2000, the Company was in compliance with all of
these covenants.
The Company's credit agreement also requires that the Company maintain an
interest rate protection agreement. Effective June 3, 1999, the Company entered
into an interest rate collar transaction covering $35.0 million of its debt,
with a cap based on 30 day LIBOR rates of 8.0% and floor of 5.09%. The
agreement, which has quarterly settlement dates, is in effect through June 3,
2002. During 2000 and 1999, the effect of this agreement was insignificant.
34
The Company's Hong Kong subsidiary entered into a credit agreement with a bank
that provides for a line of credit of up to $2.0 million. Amounts borrowed under
this line of credit bear interest at the bank's prime rate or prevailing funding
cost, whichever is higher, and are cross-guaranteed by RCI, RCE and RCL. As of
December 31, 2000 and 1999 there were no outstanding borrowings under this line
of credit.
In 1998, in connection with the acquisition of Wheels, the Company retired bank
debt of Wheels that had a discount associated with it. Thus, the unamortized
discount on the debt at the time of the merger has been recorded as an
extraordinary item in the accompanying consolidated statement of income for
1998, related to the early extinguishment of this debt. During 1999, warrants
valued at $1.6 million issued by Wheels in conjunction with its 1997 debt
agreement were exercised.
Long-term debt consists of the following:
December 31,
-------------
(amounts in thousands) 2000 1999
- ------------------------------------------------------------------------------------- ------------- --------
Term loan payable to banks, bearing interest at 9.89%, 9.9% and 9.92%
as of December 31, 2000, with quarterly principal payments in amounts varying from
$3,500 to $4,000 and final balloon payment due April 1, 2003 $ 97,000 $115,000
Less - current maturities 14,000 17,250
------------- --------
$ 83,000 $ 97,750
============= ========
Principal maturities of long-term debt are as follows: (amounts in thousands)
- -------------------------------------------------------------------------------------
2002 $ 16,000
2003 67,000
-------------
Total long-term debt $ 83,000
=============
NOTE 8 : COMMITMENTS AND CONTINGENCIES
Rental expense for office and warehouse space and equipment under cancellable
and noncancellable operating leases amounted to approximately $2.7 million, $3.2
million and $1.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Commitments for future minimum lease payments with terms extending
beyond one year at December 31, 2000, for noncancellable operating leases are as
follows:
(amounts in thousands)
- ----------------------
2001 $2,248
2002 1,655
2003 1,196
2004 651
2005 234
Thereafter 645
------
Total $6,629
======
The Company 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. The Company has approximately 800 licenses with various
vehicle and equipment manufacturers, race team owners, drivers, sponsors, agents
and entertainment properties, generally for terms of one to three years. Many of
the licenses include minimum guaranteed royalty payments that the Company must
pay whether or not they meet specified sales targets. The Company believes it
either achieved its minimum guarantees or has accrued for the costs related to
these guarantees for 2000. During 2000, the Company recorded a $2.5 million
charge related to minimum guaranteed royalty payments from NASCAR-related
license agreements that exceeded royalties earned on product sales. Royalty
costs are included in selling, general and administrative expenses in the
accompanying consolidated income statement.
35
NOTE 9 : 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.
The Company is a defendant in a class action lawsuit in the U.S. District Court
for the Northern District of Illinois, Eastern Division under the caption Market
Street Securities, Inc., et al. v. Racing Champions Corporation, et al. The
lawsuit was filed by, and on behalf of, purchasers of the common stock of the
Company between February 1, 1999 and June 23, 1999. The complaint alleges that
the Company violated certain federal securities laws by issuing a series of
material representations to the market between February 1, 1999 and June 23,
1999, thereby artificially inflating the price of the Company's common stock.
The complaint seeks, among other things, an unspecified amount of compensatory
damages and trial costs and expenses. The defendants filed a motion to dismiss
all claims on October 16, 2000. After the court denied the defendants' motion to
dismiss, the Company filed an answer and affirmative defenses on December 18,
2000. On December 20, 2000, the court entered an order for conditional class
certification. The lawsuit is in the initial phases of discovery. The Company
intends to vigorously defend against the action, although no assurances can be
given as to the outcome of this matter.
On March 2, 2000, Telepresence Technologies, LLC filed a lawsuit against Racing
Champions South, Inc. and Racing Champions, Inc. in the United States District
Court for the Central District of California. The suit alleges that memorabilia
trading cards sold by these subsidiaries infringe a patent allegedly owned by
Telepresence. Telepresence seeks damages, costs, attorneys' fees and interest,
and further requests that damages be trebled on its allegation of willful
infringement. The Company intends to defend this suit vigorously. However, there
can be no assurance that the Company will ultimately be successful in the
defense of this suit.
A purported class action lawsuit was filed on August 21, 2000, in California
state court against Racing Champions South, Inc. and several other defendants in
a case entitled Chaset v. The Upper Deck Company, et al. The lawsuit purports to
include a proposed class of all U.S. residents who purchased sports cards
manufactured, licensed, marketed, sold or distributed by any defendant within a
time period of up to four years. The complaint alleges that the defendants have
violated the California unfair trade practices and consumer protection laws by
selling packs of sports trading cards containing random assortments of varying
values. The plaintiff seeks actual damages, attorneys' fees, pre- and
post-judgement interest, exemplary damages, and injunctive relief. The Company
disputes these claims and intends to vigorously defend its position, although no
assurance can be given as to the outcome of this matter.
In August, 1999, a purported class action lawsuit was filed against the Company
in the U.S. District Court for the Southern District of California, in a case
entitled Dumas, et al. v. Racing Champions Corporation. The complaint alleges
the defendants have violated RICO and the California Unfair Competition Law by
selling packs of sports trading cards containing random assortments of cards of
varying values. This lawsuit has been dismissed by the trial court and currently
is on appeal to the Ninth Circuit Court of Appeals. The appeal was consolidated
with appeals of seven virtually identical lawsuits filed by other putative
plaintiffs' classes. The Company disputes this claim and intends to vigorously
defend its position, although no assurances can be given as to the outcome of
this matter.
NOTE 10 : CAPITAL STOCK
On June 11, 1998, in conjunction with the merger of Wheels and Racing Champions
Corporation, discussed in Note 2, the Company increased the total number of
authorized shares of common stock to 28.0 million shares.
In April 1997, Wheels completed an initial public offering. Included as part of
the offering were warrants to purchase an additional 517,500 shares of Wheels'
common stock at an exercise price of $7.08 per share. The warrants, which were
immediately exercisable, expire in April 2002 and may be redeemed by the Company
under certain terms and conditions at a price of $0.05 per warrant. A holder of
outstanding warrants has no voting or other rights as a stockholder of the
Company. In addition, Wheels agreed to issue and sell to the underwriter of its
public offering, for nominal consideration, warrants to purchase an aggregate of
90,000 shares of Wheels' common stock and an additional 90,000 Wheels warrants
at a price of $8.70 per Wheels common share, commencing April 1998 and expiring
in April 2003. Warrants subject to purchase under warrants issued to the
underwriter have terms identical to those sold as part of Wheels initial public
offering. Wheels assigned $739,126 of the total net proceeds of the offering to
the value of stock warrants issued.
36
NOTE 11 : STOCK REPURCHASE PROGRAM
On September 1, 1999, the Company announced that its board of directors had
authorized stock repurchases by the Company for a term of one year and up to an
aggregate amount of $10.0 million. At December 31, 1999, the Company had
repurchased 775,500 shares of its outstanding common stock for approximately
$3.6 million. During 2000, the Company repurchased 1,007,600 shares of its
outstanding common stock for approximately $4.0 million.
NOTE 12 : STOCK OPTION PLAN
The Company has an 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.
The Company maintains a stock incentive plan, under which the Board of Directors
may grant options to purchase up to 1,500,000 shares of common stock to
executives or key employees of the Company. In 1997, the Company granted 185,753
options to purchase shares of common stock at an exercise price equal to fair
market value. In 1998 the Company granted options to purchase 390,601 shares at
a price equal to fair market value. Part of these options vested immediately and
the rest vest over a five-year period. These options expire on the tenth
anniversary of the date of grant or 90 days after the date of termination of the
employees' employment with the Company. During 1999, the Company granted options
to purchase 354,250 shares at a price equal to fair market value. All of these
options vest over a five-year period. During 2000, the Company granted options
to purchase 390,000 shares at a price equal to fair market value. All of these
options vest over a five-year period.
The Company also maintains an omnibus stock plan, under which the Company has
400,000 shares of its common stock reserved for issuance. In 1997, 254,940
options to purchase shares of the Company's common stock were granted under this
plan.
Stock option activity for the Company's stock option plans for the years ended
December 31, 1998, 1999 and 2000, is as follows:
Weighted Shares
Average Available for
Shares Price Exercise Price Future Grants
--------- ---------------- --------------- -------------
Outstanding as of December 31, 1997 771,451 $ 7.21 643,590
1998
Granted 390,601 $9 187 - $ 13 50 $ 11 35
Exercised 100,204 $ 0 13 - $ 14 00 $ 10 05
Cancelled 195,116 $ 9 84 - $ 16 18 $ 12 61
--------- ---------------- --------------- -------------
Outstanding as of December 31, 1998 866,732 $ 7 71 448,105
1999
Granted 354,250 $ 5 00 - $ 10 94 $ 7 47
Exercised 111,912 $ 0 13 - $ 11 57 $ 4 82
Cancelled 146,300 $ 0 13 - $ 14 00 $ 11 04
--------- ---------------- --------------- -------------
Outstanding as of December 31, 1999 962,770 $ 7 44 1,140,155
2000
Granted 390,000 $ 1 41 - $ 1 56 $ 1 49
Exercised 12,000 $ 0 13 $ 0 13
Cancelled 94,650 $ 5 00 - $14 00 $ 10 03
--------- ---------------- --------------- -------------
Outstanding as of December 31, 2000 1,246,120 $ 5.45 844,805
========= ===============
Exercisable as of December 31, 2000 474,195 $ 7.30
========= ===============
Exercisable as of December 31, 1999 359,559 $ 8.09
========= ===============
Exercisable as of December 31, 1998 399,351 $ 8.54
========= ===============
37
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- ----------- ---------------- ----------------- ----------- -----------------
$0.13 to $1.56 628,529 5.4 $ 0.97 180,423 $ 0.13
$5.00 to $12.00 431,306 8.1 $ 8.31 137,575 $ 9.19
$12.73 to $16.18 186,285 6.7 $ 13.97 156,197 $ 13.90
Had compensation costs for the stock options issued been determined based on the
fair value at their grant date consistent with SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
(amounts in thousands, except per share data) 2000 1999 1998
- --------------------------------------------- ------ ----- ------
Net Income
As reported $5,890 $ 535 $9,959
Pro forma $5,878 $ 407 $9,558
Basic net income per share
As reported $ 0.40 $0.03 $ 0.62
Pro forma $ 0.40 $0.03 $ 0.60
Diluted net income per share
As reported $ 0.39 $0.03 $ 0.61
Pro forma $ 0.39 $0.02 $ 0.58
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model assuming, among other things, no dividend
yield, risk free rates of return from 5.73% to 5.74%, volatility factors of
79.93% to 80.90%, and expected life of 5 to 10 years. The weighted average fair
value of options granted under the Company's stock plan for the years ended
December 31, 2000, 1999 and 1998 was $1.26, $5.76 and $6.98 per share,
respectively.
The pro forma disclosure is not likely to be indicative of pro forma results
that 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.
NOTE 13 : RELATED PARTY TRANSACTIONS
The Company purchased approximately $7.7 million, $6.0 million, and $8.2 million
of product during 2000, 1999 and 1998, respectively from a company controlled by
a relative of one of the Company's stockholders/directors.
The Company leased warehouse space from a party related to an officer/director
of the Company. Rent expense for the years ended December 31, 2000, 1999, and
1998 was $7,970, $95,640, and $82,120, respectively. This lease was terminated
in February, 2000.
The Company pays sales commissions to an external sales representative
organization, of which one of the principals of this organization is a relative
of an officer/director of the Company. For the years ended December 31, 2000,
1999, and 1998, commissions of $144,662, $166,882 and $283,226, respectively
were allocated to the related principal.
NOTE 14 : EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan. Employees meeting certain eligibility
requirements, as defined, may contribute up to 15% of pre-tax gross wages,
subject to certain restrictions. The Company makes matching contributions of 50%
of the employees' contributions up to 5% of employee wages. For the years ended
December 31, 2000, 1999 and 1998 the Company's contributions were approximately
$0.3 million, $0.2 million and $0.1 million, respectively.
38
The Company also maintains a pension plan for hourly union employees. Benefits
under this plan are based on a stated amount for specified years of service as
negotiated in the respective collective bargaining agreements. The Company's
funding policy is to make contributions in amounts actuarially determined by an
independent consulting actuary to fund the benefits to be provided.
Net periodic cost of the defined benefit plan included the following components:
For the period
For the year ended April 1, 1999 -
(amounts in thousands) December 31, 2000 December 31, 1999
- ------------------------------------------------ -------------------- -------------------
Benefits earned during the period (service cost) $ 99 $ 85
Interest cost on projected benefit obligation 555 413
Expected return on plan assets (706) (488)
Amortization of unrecognized gain (6) -
-------------------- -------------------
Net periodic pension costs $ (58) $ 10
==================== ===================
The change in benefit obligation and plan assets and reconciliation of funded
status are as follows:
(amounts in thousands) 2000 1999
- ---------------------------------------------------------- ------- --------
CHANGE IN PROJECTED BENEFIT OBLIGATION DURING THE PERIOD:
Projected benefit obligation, beginning of period $7,274 $ 7,959
Service cost 99 85
Interest cost 555 413
Actuarial loss (gain) 525 (927)
Benefits and noninvestment trust expenses paid (342) (256)
------- --------
Projected benefit obligation, end of period $8,111 $ 7,274
------- --------
CHANGE IN PLAN ASSETS DURING THE PERIOD:
Plan assets at fair value, beginning of period $6,821 $ 6,919
Actual return on plan assets 672 122
Employer Contributions 967 37
Benefits and noninvestment expenses paid (342) (256)
------- --------
Plan assets at fair value, end of period $8,118 $ 6,822
------- --------
RECONCILIATION OF ACCRUED AND TOTAL AMOUNT RECOGNIZED:
Funded status of the plan $ 7 $ (453)
Unrecognized net gain 4 (561)
------- --------
Net prepaid (accrued) benefit cost $ 11 $(1,014)
======= ========
Assumptions used for the year-end disclosure were as follows:
2000 1999
------- -------
Discount rate 7 25% 7 75%
Expected return on plan assets 9 50% 9 50%
Mortality table 83 GAM 71 GAT
39
Assumptions used for the period expense were as follows:
2000 1999
------- -------
Discount rate 7 75% 7 00%
Expected return on plan assets 9 50% 9 00%
Mortality table 83 GAM 83 GAM
The assets of the defined benefit plan are primarily invested in listed stocks
and bonds.
40
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, 2000
and 1999 and the related consolidated statements of income, stockholders' equity
and cash flows for each year in the three-year period ended December 31, 2000.
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 did not audit the financial statements of Racing Champions
Worldwide Limited, which statements reflect total assets and total net sales of
10.4% and 9.9% in 2000, of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for those entities, is
based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Racing Champions Corporation and
subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each year in the three-year period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 19, 2001
41