According to the Company’s FORM 10-K for the fiscal year ended December 31, 2001, the Company has settled the securities class action lawsuit originally filed in 2000 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. Pursuant to the settlement, the Company made a $1.8 million payment, which was covered by insurance. The Company incurred legal expenses of approximately $1.0 million in connection with this lawsuit that were not covered by insurance.
As reported in an earlier FORM 10-K for the fiscal year ended December 31, 2000, 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 original complaint charges that defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market thereby artificially inflating the price of Racing Champions common stock. Specifically, as alleged in the complaint, on February 23, 1999, the Company reported seemingly record earnings for its 1998 fiscal year, and represented that the Company would continue to experience growth in 1999. These statements were materially false and misleading when made because defendants did not disclose, and knew or recklessly disregarded, that the Company's sales were then being negatively impacted by the competition from Star Wars related merchandise and as a result, sales of the Company's products were declining significantly. When Racing Champions revealed, on June 23, 1999, that it was expecting a per share loss of $0.30 to $0.35 for its second fiscal quarter of 1999, Racing Champions common stock dropped by 60%. Defendants attributed the loss to poor sales, and the taking of a $6.4 million restructuring charge in connection with a corporate acquisition.