UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
---- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
---- TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NO. 0-22321
_______
WHEELS SPORTS GROUP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2007717
(State of other jurisdiction of (I. R .S. Employer
incorporation or organization) Identification No.)
1368 SALISBURY ROAD, MOCKSVILLE, NORTH CAROLINA 27028
(Address of principal executive offices)
(704) 634-3000
(Registrant's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
- -
State the number of shares outstanding in each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1997
COMMON STOCK 4,664,445
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997 3
Consolidated Statements of Operations for the quarters
ended September 30, 1996 and 1997, and for the
nine months ended September 30, 1996 and 1997 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1997 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12-16
PART II - OTHER INFORMATION 17
SIGNATURES 19
2
<PAGE>
WHEELS SPORTS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1996 1997
------------------- -----------
(Unaudited) (Unaudited)
ASSETS (Restated, Note 2)
Current assets:
Cash $ 257,750 $ 1,297,938
Accounts receivable, net of allowances 2,120,079 1,583,469
Inventories 570,081 1,020,974
Other current assets 101,664 165,336
----------- ----------
Total current assets 3,049,574 4,067,717
Property and equipment, net 579,615 832,746
Other assets 267,289 587,692
----------- ----------
Total assets $ 3,896,478 $ 5,488,155
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 138,500 $
Current maturities of long term debt 173,266 11,040
Loans from shareholders and officers 150,000
Accounts payable and accrued expenses 1,742,630 1,082,319
Deferred revenues 255,845 141,728
Net liabilities of discontinued operations 114,644
----------- ----------
Total current liabilities 2,460,241 1,349,731
Long-term debt, net of current portion 484,919 134,478
Total liabilities 2,945,160 1,484,209
----------- ----------
Stockholders' equity:
Note receivable from World of Racing,
Inc. (Note 9) (95,436)
Common stock 26,350 40,450
Additional paid in capital 339,670 6,627,165
Retained earnings/(Accumulated deficit) 680,734 (2,663,669)
--------- ----------
Total stockholders' equity 951,318 4,003,946
--------- ----------
Total liabilities and
stockholders' equity $ 3,896,478 $ 5,488,155
========= ==========
See notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
Quarter Ended September 30, September 30,
(Restated, Note 2) (Restated, Note 2)
1996 1997 1996 1997
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 730,177 $1,476,955 $3,271,609 $4,510,324
Cost of sales 764,468 1,055,606 2,176,346 3,769,847
------- --------- --------- ---------
Gross margin (34,291) 421,349 1,095,263 740,477
Selling, general and administrative expense 258,146 842,551 869,196 1,846,505
Other income/(expense), net (1,490) 28,192 (1,490) 55,378
------- --------- --------- ---------
Operating income (loss) (293,927) (393,010) 224,577 (1,050,650)
Interest expense (income), net 10,352 (17,880) 10,262 37,041
------- --------- --------- ---------
Net income (loss) from continuing
operations before income tax (benefit) (304,279) (375,130) 214,315 (1,087,691)
Income taxes (Note 5) - - - -
------- --------- --------- ---------
Net income (loss) from continuing (304,279) (375,130) 214,315 (1,087,691)
operations
Discontinued operations
Loss from discontinued operations, net
of income tax (benefit) of $0 - - - (427,730)
Loss from disposition of discontinued
operations, net of income tax
(benefit) of $0 - - - (1,032,350)
------- --------- --------- -----------
Net income (loss) $ (304,279) $ (375,130) $ 214,315 $(2,547,771)
======= ========= ========= ===========
Pro forma data (Note 5):
Net income (loss) from continuing
operations, as reported $ (304,279) $ (375,130) $ 214,315 $(1,087,691)
Pro forma income tax expense (121,712) - 85,726 -
-------- ---------- --------- ----------
Pro forma net income (loss) from
continuing operations $ (182,567) $ (375,130) $ 128,589 $(1,087,691)
======== ========== ========= ===========
Per share data:
Net income (loss) from continuing ($0.12) ($0.09) $0.08 ($0.30)
operations
Pro forma income (loss) from continuing
operations ($0.07) ($0.09) $0.05 ($0.30)
Loss from discontinued operations - - - ($0.39)
Net income (loss) ($0.12) ($0.09) $0.08 ($0.69)
Weighted average number of shares used
to compute per share data 2,635,000 4,128,732 2,635,000 3,671,435
========= ========= ========= =========
</TABLE>
See notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
WHEELS SPORTS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Restated, Note 2)
1996 1997
------------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 214,315 $ (2,547,771)
Adjustments to reconcile net income
(loss) to net cash flows used in
operating activities:
Depreciation and amortization 31,222 69,149
Provision for allowances for doubtful accounts
and returns (80,296) 347,610
Write down of goodwill related to acquisition
of World of Racing, Inc. 657,350
Stock option granted and charged to expense 96,102
Loss on dispositions 1,490
Changes in operating assets and liabilities:
Accounts receivable, net of allowances 296,855 189,000
Note receivable (100,000)
Inventories (526,812) (450,893)
Other current assets 128,899 (63,672)
Accounts payable and accrued expenses 47,780 (660,311)
Deferred revenues (122,520) (114,117)
Other assets 57,589 53,118
Discontinued operations-net liabilities 114,644
---------- -------------
Net cash (used in) operating activities (51,478) (2,309,791)
---------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (31,956) (297,068)
Proceeds from disposition of assets 20,012
Cash investment in World of Racing, Inc., net of value
of assets acquired (52,350)
Cash investment in Emerald Sports Group (44,475)
---------- -------------
Net cash (used in) investing activities (11,944) (393,893)
---------- -------------
Cash flows from financing activities:
Increase in short term borrowings 600,000
Reductions in short term borrowings (890,000)
Loans from shareholders 125,000
Payments on loans from shareholders (3,446) (275,000)
Proceeds from long term debt 277,205
Payments on long-term debt (56,883) (361,167)
Purchase of treasury stock (25,000)
Distributions to shareholders (436,000)
Proceeds of public offering, net of expenses (78,794) 4,981,039
--------- ---------
Net cash provided by financing activities 113,082 3,743,872
--------- ---------
Net increase in cash 49,660 1,040,188
Cash, beginning of period 203,090 257,750
--------- ---------
Cash, end of period $ 252,750 $ 1,297,938
========= =========
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
WHEELS SPORTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 CONDENSED FINANCIAL STATEMENTS
------------------------------
The accompanying unaudited consolidated financial statements
include the accounts of Wheels Sports Group, Inc. and its
subsidiaries, Wheels Sports Group Acquisition, Inc. (a
discontinued business segment which operated as World of
Racing), Diamond Sports Group, Inc. and Emerald Sports Group,
Inc. These financial statements have been prepared by Wheels
Sports Group, Inc. (the "Company") without audit, pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted as allowed by such rules and
regulations. The Company believes that the disclosures are
adequate to make the information presented not misleading.
However, it is suggested that these financial statements be
read in conjunction with the Company's audited financial
statements for the year ended December 31, 1996.
In the opinion of the management, the accompanying unaudited
condensed financial statements prepared in conformity with
generally accepted accounting principles which require the use
of management estimates, contain all adjustments (including
normal recurring adjustments) necessary to present fairly the
financial position and results of operations and cash flows
for the periods presented.
NOTE 2 BUSINESS COMBINATIONS
---------------------
On January 28, 1997, the Company's newly incorporated
wholly-owned subsidiary, Wheels Sports Group Acquisition,
Inc., merged with World of Racing ("WOR") by exchanging
310,000 shares of the Company's common stock for 100% of the
common stock of WOR, a privately held South Carolina
corporation incorporated August 26, 1996, to operate a fantasy
race game. The transaction has been accounted for as a
purchase with the 310,000 shares valued at $620,000. On August
18, 1997 the Company's board of directors voted to discontinue
the operations of WOR and dispose of its assets. The $657,350
unamortized excess of the purchase price over the $43,086
value of the net assets acquired was written off as of June
30, 1997. The operations of WOR are presented as discontinued
operations. The acquisition of WOR was originally accounted
for as a pooling-of-interests, but the discontinuance of its
operations required the use of purchase accounting, thus the
1996 financial statements have been restated to reflect the
purchase method of accounting.
On June 30, 1997, the Company acquired 100% of the common
stock of Diamond Sports Group, Inc. ("Diamond"), a privately
held corporation located in Charlotte,
6
<PAGE>
NOTE 2 BUSINESS COMBINATIONS - CONTINUED
---------------------------------
North Carolina, in exchange for 485,000 shares of the
Company's common stock. Diamond is engaged in merchandising
NASCAR oriented products and in providing hospitality and
other services to corporations involved in NASCAR stock car
racing. This transaction has been accounted for as a
pooling-of-interests. The December 31, 1996 balances have been
restated to reflect the acquisition of Diamond. A
reconciliation of the unaudited December 31, 1996 amounts
reported in the September 30, 1997 Form 10-QSB to the audited
amounts reported in the Form SB-2 is as follows:
December 31, 1996 December 31, 1996
Amounts Diamond Amounts per
per Audited SB-2 Sports Group Unaudited Form 10-QSB
Current assets $2,770,703 $278,871 $3,049,574
Total assets $3,266,320 $630,158 $3,896,478
Current liabilities $2,097,755 $362,486 $2,460,241
Total liabilities $2,235,124 $710,036 $2,945,160
Equity $1,031,196 $(79,878) $ 951,318
Details of the operations of the previously separate companies
before the June 30, 1997 acquisition of Diamond are as
follows:
<TABLE>
<CAPTION>
Six months ended June 30, 1996 Six months ended June 30, 1997
Wheels Diamond Wheels Diamond
Sports Group Sports Group Total Sports Group Sports Group Total
<S> <C> <C> <C> <C> <C> <C>
Revenues $2,078,706 $462,726 $2,541,432 $1,433,129 $1,600,240 $3,033,369
Net income (loss) from
continuing operations $ 463,478 $ 55,116 $ 518,594 $ (314,463) $ 101,902 $ (712,561)
Pro Forma income
tax expense $ 185,392 $ 22,046 $ 207,438 - $ 40,761 $ 40,761
Pro Forma net income
(loss) from continuing
operations $ 278,086 $ 33,070 $ 311,156 $(514,463) $ 61,141 $ (753,322)
</TABLE>
On August 5, 1997 the Company acquired 100% of the common
stock of Emerald Sports Group, a recently formed privately
held corporation located in Charlotte, North Carolina, in
exchange for 65,000 shares of the Company's common stock
valued at $364,000. The transaction has been accounted for as
a purchase. The $408,475 excess of cost over the value of net
assets acquired is being amortized on the straight line method
over ten years.
NOTE 3 NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In early 1997 the Financial Accounting Standards Board issued
SFAS 128, Earnings per Share", SFAS 130, "Reporting
Comprehensive Income" and SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information". Both pronouncements
are effective for periods beginning after December 15, 1997.
Adoption of these Statements is not expected to have a material
impact on the financial statements of the Company. Basic
earnings per share under SFAS 128 for the interim three and
nine month periods ended September 30, 1997 would be ($.09) and
($.71).
7
<PAGE>
NOTE 4 INVENTORIES
-----------
Inventories consisted of the following:
12-31-96 9-30-97
------------ ------------
Raw materials $ 19,595 $ 0
Work in process 488,594 534,264
Finished goods 61,892 486,710
---------- ---------
$ 570,081 $1,020,974
========= ==========
NOTE 5 INCOME TAXES
------------
Wheels Sports Group, Inc. and World of Racing, Inc. elected
under Subchapter S of the Internal Revenue Code to have their
taxable income included in the income tax returns of their
individual shareholders for all periods prior to January 1,
1997. Diamond Sports Group, Inc. made a similar election for
all periods prior to July 1, 1997. Subsequent to those dates,
the companies were taxable as regular Subchapter C
corporations.
For periods in which the companies were subject to the
Subchapter S elections, no taxes on income have been provided.
However, for informational purposes, the statements of
operations include a proforma income tax provision on taxable
income for financial statement purposes using statutory
federal and state rates that would have applied had the
companies been taxed as regular Subchapter C corporations.
For periods in which the companies were taxable as regular
corporations, no provision for an income tax benefit has been
recognized because the realization of such a benefit is
dependent on future taxable income. The Company intends to
record such a benefit when its realization is considered
assured.
NOTE 6 DISTRIBUTIONS TO SHAREHOLDERS
-----------------------------
In connection with the termination of the Subchapter S
elections of Wheels Sports Group, Inc. and Diamond Sports
Group, Inc., distributions of $400,000 and $36,000 were made
to those individual shareholders required to report on their
personal tax returns the taxable incomes of the respective
companies. These distributions represent the Company's
estimate of the shareholders' tax liability on the
corporations' income.
8
<PAGE>
NOTE 7 INITIAL PUBLIC OFFERING
-----------------------
On April 16, 1997, the Company's Registration Statement for
the sale of 1,035,000 shares of common stock and 1,035,000
warrants for the purchase of a total of 517,500 shares of
common stock was declared effective by the Securities and
Exchange Commission. Gross proceeds from the sale of the
shares and warrants were $6,210,000 and expenses of the
offering were $1,477,740. Of these expenses, $248,778 were
paid in 1996 and $1,228,962 were paid in 1997.
NOTE 8 STOCK OPTIONS
-------------
Between April 16, 1997 and September 30, 1997, the Company
awarded 764,500 options to purchase common stock to certain
employees and others. Options are exercisable at various dates
from September 10, 1997 to October 1, 2007, and at prices
ranging from $5.02 to $6.49 per share, with a weighted average
exercise price of $6.15 per share. As of September 30, 1997,
options to purchase 372,000 shares were exercisable at prices
ranging from $5.02 to $7.02 per share, with a weighted average
exercise price of $6.56 per share.
For options on 107,000 shares granted to non-employees, the
Company will recognize expense at $4.20 per optioned share
over the vesting period or, for options granted in connection
with royalty agreements with NASCAR personalities, over the
royalty period. The vesting period is generally one year and
the current average royalty period is three years. Expense of
$73,380 and $121,100 was recognized in the quarter and the
nine months ended September 30, 1997, respectively.
The remaining 657,500 options to employees will be accounted
for using the intrinsic value method whereby expense is
recognized only when the option price is lower than the market
price at the date of the grant. Disclosure of the value of the
options under Statement 123 of the Financial Accounting
Standards Board will be provided in the 1997 audited financial
statements.
9
<PAGE>
NOTE 9 RESTATEMENTS OF AND CHANGES IN EQUITY ACCOUNTS
-----------------------------------------------
The following table presents the restatements of and changes
in the equity accounts of the Company as a result of the
pooling-of-interests of Diamond Sports Group, the purchase of
World of Racing, Inc., and of other transactions during the
nine months ended September 30, 1997.
<TABLE>
<CAPTION>
Note Receivable (Accumulated
from Deficit)/
Shares World of Common Additional Retained
Outstanding Racing, Inc. Stock Paid in Capital Earnings
------------ --------------- ------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996, as
originally reported 2,150,000 $(95,436) $ 21,500 $ 344,500 $ 760,632
Pooling of Diamond Sport Group, Inc. 485,000 4,850 (4,830) (79,898)
-------- -------- ------- -------- --------
Balances, December 31, 1996,
as restated 2,635,000 (95,436) 26,350 339,670 680,734
Issuance of common stock in
connection with purchase of:
World of Racing, Inc. 310,000 3,100 616,900
Emerald Sports Group, Inc. 65,000 650 363,350
Distribution to shareholders for payment
of Subchapter S tax liabilities (436,000)
Write off of note upon termination
of WOR. 95,436
Effect of converting from Subchapter S
to regular corporation for tax purposes 360,632 (360,632)
Net proceeds from initial
public offering 1,035,000 10,350 4,721,911
Stock options granted 224,702
Net loss through September 30, 1997 (2,547,771)
---------- ---------- --------- ---------- -----------
Balances, September 30, 1997 4,045,000 $ - $ 40,450 $6,627,165 $(2,663,669)
========= ========== ========= ========== ===========
</TABLE>
NOTE 10 SUBSEQUENT EVENTS
-----------------
On October 4, 1997, the Company acquired Greens Racing
Souvenirs, Inc., ("GRS") a privately held company located in
South Boston, Virginia, and which sells NASCAR oriented racing
souvenirs at race tracks and by mail. Consideration was
175,000 shares of stock of the Company. The transaction
will be accounted for as a pooling-of-interests.
The following table presents the pro forma effect of including
the acquisition of GRS in these financial statements.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September
1996 1997 1996 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,195,536 $1,882,266 $4,755,136 $5,899,535
Net income (loss) from
continuing operations $ (288,406) $(390,893) $499,932 $(395,019)
Loss from continuing operations $(1,460,080)
Net income (loss) $ (288,408) $(390,893) $499,932 $(2,395,099)
Per share data:
Net income (loss) from
continuing operations ($0.11) ($0.09) $0.19 ($0.25)
Loss from continuing operations - - - ($0.40)
Net income (loss) ($0.11) ($0.09) $0.19 ($0.65)
</TABLE>
10
<PAGE>
NOTE 10 SUBSEQUENT EVENTS - CONTINUED
On October 3, 1997, the Company announced it had signed
definitive agreements to acquire High Performance Sports
Marketing ("HPSM") of Mooresville, North Carolina, a privately
held distributor of NASCAR merchandise and apparel, and Press
Pass Partners, of Dallas, Texas, a privately held company
which designs and markets collectible sports trading cards.
The acquisition of HPSM was completed on October 24, 1997.
Included in the consideration for HPSM is $3,250,000 in notes
which are payable on November 28, 1997. Should the notes not
be paid when due, the sellers of HPSM have the right to
rescind the transaction. The acquisition of Press Pass is
contingent on the Company's obtaining financing for the
transaction, and is expected to close before December 31,
1997. The Company will be required to obtain additional
financing to meet the terms of both acquisitions, and it has
engaged the investment banking firm of Morgan Keegan & Company
to advise it in obtaining the capital required for the
acquisitions and for funding post acquisition working capital
needs.
Consideration for High Performance Sports Marketing was
444,445 shares of the Company's common stock, cash of
$1,672,000, and notes of $1,000,000, plus an additional cash
payment of $3,250,000 due by November 28, 1997. The
acquisition of HPSM resulted in goodwill (the excess of
purchase price over the fair value of assets acquired) of
approximately $8 million. Consideration for Press Pass is
expected to be 600,000 shares of the Company's common stock,
cash of $3,000,000, and notes of $1,000,000. The acquisition
of Press Pass is expected to result in goodwill of
approximately $8 million. Both acquisitions will be accounted
for as purchases.
.
11
<PAGE>
WHEELS SPORTS GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's business is seasonal in nature and therefore the results of
operations for any one or more quarters or its financial condition at any
specific time are not necessarily indicative of annual results, continuing
trends, or future financial condition. Historically, the Company's net sales
have been highest in the early and middle of the NASCAR Winston Cup season which
starts in February and ends in November.
CORPORATE ACQUISITIONS
On June 30, 1997, the Company acquired Diamond Sports Group, ("Diamond") a
privately held Charlotte, North Carolina company involved in merchandising
NASCAR oriented products. On August 5, 1997 the Company acquired Emerald Sports
Group, ("Emerald") a privately held Charlotte, North Carolina company involved
in merchandising NASCAR related home decor fabric products. On October 4, 1997,
the Company acquired Greens Racing Souvenirs, ("GRS") a privately held South
Boston, Virginia company that sells NASCAR merchandise trackside at NASCAR races
and by mail. On October 24, 1997 the Company acquired High Performance Sports
Marketing, ("HPSM") a privately held Mooresville, North Carolina company that
distributes NASCAR merchandise. On October 3, 1997 the Company signed a
definitive agreement to acquire the business of Press Pass Partners, ("Press
Pass"), a Dallas, Texas partnership which designs and distributes collectible
items, primarily NASCAR trading cards. The acquisition of Press Pass is expected
to close prior to December 31, 1997. The terms of these acquisitions are
described in Notes 2 and 10 to the financial statements.
DISCONTINUED OPERATIONS
Revenues for the fantasy race game operated by the Company's subsidiary, World
of Racing ("WOR") were significantly below anticipated levels during the second
quarter and the first part of the third quarter. By early August it had become
apparent that revenues for the balance of the year would not improve and that
the game would not become profitable without significant investment and
restructuring. Consequently, on August 18, 1997 the Company's board of directors
decided to terminate operations of WOR. The January 1997 acquisition of WOR was
originally accounted for as a pooling-of-interests, but the decision to
terminate its operations required that the acquisition be accounted for as a
purchase. Since the decision to terminate operations was made prior to the
original issuance of the June 30 financial statements, the June 30, 1997
financial statements were reissued to present the financial position and results
of operations of WOR as discontinued operations.
12
<PAGE>
FINANCIAL CONDITION
As of September 30, 1997, the Company's principal sources of liquidity included
cash of $1,298,000 and net accounts receivable of $1,583,000. As of such date,
current assets were $4,068,000 as compared to current liabilities of $1,350,000.
Current liabilities included a $375,000 accrual for future costs related to the
discontinued operations of WOR. Long-term debt net of current maturities was
$135,000.
During the nine months ended September 30, 1997 the Company's financial
condition strengthened as a result of its successful initial public offering of
1,035,000 shares of common stock and 1,035,000 warrants, which resulted in net
proceeds of $4,732,000. This was in part offset by losses from the discontinued
operations of WOR, operating losses in the Company's trading card business,
substantial reductions in both bank debt and trade accounts payable, and capital
expenditures. Proceeds of the public offering were used to repay $890,000 in
short term bank borrowings, fund approximately $630,000 in costs relating to the
subsequently discontinued operations of WOR, and pay $150,000 for the
acquisition of land for the construction of an office and warehouse building. An
additional $309,000 of the proceeds was used to pay off a capitalized lease
obligation and obtain title to a building occupied by Diamond. Of the $890,000
in bank borrowings, $400,000 had been incurred to fund a distribution to
shareholders to pay their personal tax liabilities on income of the Company, as
disclosed in Note 6 to the Consolidated Financial Statements, and $490,000 had
been incurred to provide working capital. The balance of the proceeds were used
to increase working capital, including funding a reduction of $1,100,000 in
accounts payable and accrued expenses. The remaining working capital will be
used for anticipated expansion of the business of the Company's subsidiaries,
Diamond, Emerald, GRS, and HPSM, for expansion of marketing and promotional
activities, and for general corporate purposes.
The acquisitions of HPSM and Press Pass will require the Company to raise
additional capital to fund the acquisitions, retire certain short term notes
issued and to be issued in conjunction with those acquisitions, and to provide
working capital for those companies. The Company has engaged the investment
banking firm of Morgan Keegan & Company to advise it in obtaining additional
capital. As of this date, the Company has received proposals from several
possible sources of capital, but has not reached a definitive agreement to
obtain the financing required by the acquisitions of HPSM and Press Pass. There
is no assurance that such financing will be obtained. Should financing not be
obtained, the previous owners of HPSM have the right to rescind the completed
acquisition of HPSM and the owners of Press Pass have the right to terminate
their acquisition agreement. Should the Company become involved in additional
new business ventures requiring additional working capital, the Company would be
required to obtain additional financing.
During the first quarter of 1997, the Company experienced slightly slower than
usual collections and higher than usual returns on a trading card set sold in
late 1996, Crown Jewels Elite. During that quarter, the Company accepted product
returns totaling $56,000 and increased its reserves for additional returns by
$54,000. During the second quarter of 1997, it became apparent that the Crown
Jewels Elite product had been improperly packaged by the Company's contract
packager and that there was a substantial problem collecting accounts receivable
relating to that product line. The Company recognized that the packaging of
Crown Jewels Elite did not meet industry standards and therefore the product was
less salable by its dealers and distributors. The Company
13
<PAGE>
was constrained to accept product returns and issued approximately $334,000 in
credits and price concessions to its customers. As a result, during the six
months ended June 30, 1997, the Company increased its reserves for returns by
$347,000, of which $54,000 was in the first quarter and $293,000 was in the
second quarter. During the third quarter, the Company accepted returns and
granted price concessions on Crown Jewels Elite of $317,000, all of which was
charged to the reserve. Management does not anticipate any further significant
returns or price concessions. The Company has filed suit against the packager of
Crown Jewels Elite seeking unspecified damages.
The $1,087,000 net loss from continuing operations was primarily funded by the
proceeds of the initial public offering. Accounts receivable decreased by
$537,000 which was largely offset by an increase in inventories of $451,000. The
increase in inventories includes finished goods increases of $118,000 at Diamond
and $306,000 at Wheels, results of the growth in Diamond's business and the
unsold balance of products which Wheels introduced in the third quarter
($187,000) and the first half of 1997 ($119,000). Accounts payable decreased by
$660,000, the result of a $239,000 increase at Diamond and a $899,000 decrease
at Wheels. The decrease at Wheels resulted from an unusually high level of trade
payables at December 31, 1996, based on special extended trade terms granted by
vendors compared to an unusually low level of trade payables as Wheels took
advantage of cash discounts on invoices for products to be released in the
fourth quarter of 1997. Deferred revenues, which represents advance payments of
royalties and fees by corporate customers of Diamond, decreased by $106,000.
Other assets increased $320,000, primarily as a result of an increase from
recording $408,000 of goodwill in connection with the purchase of Emerald Sports
Group.
Capital expenditures were $297,000, including $150,000 for the acquisition of
land. Payments on long term debt totaled $361,000, including payment in full of
a capitalized lease obligation of $289,000. Short term debt, including loans
from shareholders and officers, was reduced by $440,000.
The Company is currently evaluating its needs for office and warehouse space in
light of the corporate acquisitions described above. In particular, the
Company's management expects that the two parcels of vacant land in Mocksville,
North Carolina on which the Company had planned to construct an office and
warehouse facility will be sold and the Company's headquarters will move to the
HPSM facility in Mooresville, North Carolina.
RESULTS OF OPERATIONS
Consolidated net revenues during the quarter ended September 30, 1997 were
$1,476,000 compared to $730,000 during the same quarter in the prior year, an
increase of $746,000 or 102%. Consolidated net revenues for the nine months
ended September 30, 1997 were $4,510,000 compared to $3,272,000 for the same
nine month period in the prior year, an increase of $1,238,000 or 38%. During
the third quarter of 1997, Wheels released one trading card set, Viper `97,
which produced substantially all of its $692,000 revenue. During the third
quarter of 1996, Wheels released no new trading card sets and generated $244,000
in revenues from sales of previously released cards. During the third quarter of
1997, Diamond had revenues of $784,000 compared to $498,000 in the third quarter
of 1996, an increase of $298,000 or 61%. Of this increase, $264,000 was
attributable to increased sales of merchandise, with the balance attributable to
fees from hospitality and other services.
14
<PAGE>
Consolidated cost of sales during the third quarter of 1997 was $1,056,000 as
compared to $764,000 during the third quarter, 1996, an increase of $292,000 or
38%. As a percentage of net revenues, consolidated cost of sales was 71% in the
third quarter of 1997 as compared to 105% in the third quarter of 1996. The
decrease in cost of sales as a percentage of revenues occurred at both Wheels
and Diamond, with cost of sales declining from 149% to 84% at Wheels and from
82% to 60% at Diamond. At Wheels, the third quarter of 1996 cost of sales as a
percentage of revenue was extraordinarily high because of the low volume of
revenue during the period. At Diamond, the decline in cost of sales as a
percentage of revenue resulted primarily from improvements in the margins on fee
revenues. Consolidated cost of sales for the nine months ended September 30,
1997 was $3,769,000 compared to $2,176,000 for the same period in the prior
year, an increase of $1,593,000 or 73%. Of this increase, $703,000 occurred at
Wheels and $890,000 occurred at Diamond, in both cases as a result of increased
sales volume.
Gross margin during the third quarter of 1997 was $421,000 as compared to
($34,000) during the third quarter of 1996. The improvement in gross margin was
primarily attributable to the lower revenues at Wheels in the third quarter of
1996 and the improvement in both revenues and profitability at Diamond in the
third quarter of 1997.
Selling, general and administrative expenses increased $584,000, or 226%, from
$258,000 in the third quarter of 1996 to $843,000 in the third quarter of 1997.
Of this increase, $234,000 is attributable to Diamond and $350,000 is
attributable to Wheels. As a percentage of consolidated net revenues, such
expenses increased from 35% in the third quarter of 1996 to 57% in the third
quarter of 1997. For the nine months ended September 30, 1997, selling, general
and administrative expenses increased $978,000, or 113%, from $869,000 in the
same period of 1996 to $1,847,000 in 1997. Of this increase, $481,000 is
attributable to Diamond (which had started business in late 1995 and had only
limited operations during early 1996), and $497,000 is attributable to Wheels.
The increases at Diamond resulted from its growth in revenues and operations
while the increases at Wheels resulted from costs related to its acquisition
activities and the costs involved with being a publicly owned company.
The Company had elected under Subchapter S of the Internal Revenue Code to have
its income taxed on the returns of its individual shareholders for periods prior
to 1997. Diamond made a similar election for periods ending prior to its June
30, 1997 acquisition by the Company. For that reason, no provision for income
tax expense has been made for any period prior to 1997. The operating losses
incurred by the Company in the first half of 1997 will create taxable losses
which can be deductible against taxable income in 1997, and possibly later
years. However, the Company does not intend to record any future tax benefit
from those losses until the timing and amount of their realization is
substantially assured.
As a result of the foregoing, the consolidated net loss from continuing
operations for the third quarter of 1997 was $375,000 as compared to a
consolidated net loss from continuing operations of $304,000 during the third
quarter of 1996. For the nine months ended September 30, 1997, the consolidated
net loss from continuing operations was $1,088,000 as compared to a consolidated
net income from continuing operations of $214,000 for the same period of 1996.
Included in that loss is the $130,000 net income of Diamond and the $1,218,000
net loss of Wheels.
15
<PAGE>
The $427,000 loss from discontinued operations in the nine months ended
September 30, 1997 includes the operating losses of the Company's subsidiary,
World of Racing, prior to the decision to terminate its operations. The
$1,032,000 loss from disposition of discontinued operations consists of the
write off of $657,000 in goodwill which arose from the purchase of WOR and a
provision of $375,000 for losses to be incurred in connection with the
termination of operations.
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements that are contained in this release that are not purely historical
are forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934, including
statements regarding the Company's expectations, hopes, intentions or strategies
regarding the future. Forward looking statements include expectations of trends
to continue through the remainder of the year and plans and objectives for
future operations, including operating margins. Forward looking statements
involve a number of risks and uncertainties. Among other factors that could
cause actual results to differ materially are the following: economic and market
conditions in the collectible sports trading card industry, the NASCAR race
industry, and the general economy; competitive factors, such as price pressures
or the entry of new competitors or increased competition in the collectible
sports trading card market or other NASCAR-related markets; the ability to
secure financing for acquisitions, expansion or capital expenditures;
termination or non-renewal of one or more licenses with well-known NASCAR race
drivers; inventory risks due to shifts in market demand or inaccurate production
forecasting; decrease in collectors' interest in the Company's cards; the
Company's ability to finance and conclude certain business acquisitions; and the
risk factors set forth in the Company's Registration Statement on Form SB-2
(Registration No. 333-6340). The reader should consult these risk factors as
well as risk factors listed from time to time in the Company's reports on Forms
10-QSB, 10-KSB and other filings under the Securities Act of 1934, as amended,
Annual Reports to Shareholders, and other registration statements filed pursuant
to the Securities Act of 1933, as amended. All forward looking statements
included herein are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward looking
statements. There can be no assurance that the Company will not experience
material fluctuations in future operating results on a quarterly or annual
basis, which would materially and adversely affect the Company's business,
financial condition and results of operations.
16
<PAGE>
- -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) The Company entered into an Agreement and Plan
of Reorganization (the "Agreement"), dated June 30,
1997, among Wheels Sports Group, Inc. (the
"Company"), Emerald Sports Group, Inc. ("Emerald"),
Diamond Sports Group, Inc., a wholly owned subsidiary
of the Company (the "Subsidiary") and the three
shareholders of Emerald (the "shareholders") pursuant
to which Emerald Sports Group, Inc. ("Emerald")
merged into Diamond (the "Merger"). Pursuant to the
Merger, which was completed on August 5, 1997, 65,000
unregistered shares of the Company's Common Stock
were issued to the Shareholders.
(d) The Company registered 1,035,000 shares of Common
Stock and 1.035,000 warrants for sale to the public
at a price of $6.00 per each one share and one
warrant unit on a Form SB-2 Registration Statement
(Reg. No. 333-6340) (the "Registration Statement")
declared effective on April 16, 1997. Two warrants
entitle the holder to purchase one share of Common
Stock at a price of $7.08. The Company also
registered the 517,500 shares of Common Stock
underlying the public warrants, and 135,000 shares of
Common Stock underlying certain warrants issued or
issuable to Schneider Securities, Inc., the
underwriter of the public offering.
The offering of 900,000 shares and 900,000 warrants
was completed in April 1997 and the over-allotment
closing on 135,000 shares and 135,000 warrants was
completed in May 1997, for aggregate gross proceeds
of $6,210,000. Expenses incurred by the Company in
connection with the issuance and distribution of the
securities registered for the underwriting discounts
and commissions were $621,000, expenses paid to or
for underwriters were $186,300, and other expenses
(consisting of registration fees, filing fees, legal
fees, printing and engraving, consulting fees,
accounting fees and transfer agent fees ) were
$680,790, for total expenses of $1,488,090. None of
such expenses were direct or indirect payments to
directors, officers or their associates or to persons
owning ten percent or more of any class of equity
securities of the Company or to affiliates of the
Company. The resulting net offering proceeds to the
Company after payment of all expenses was $4,721,910.
17
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS-CONTINUED
The following table presents the Company's use of the
net offering proceeds from the effective date of the
Registration Statement through September 30,1997, and
a comparison to the Company's anticipated uses of
those funds as presented in the Use of Proceeds
section in the Registration Statement.
<TABLE>
<CAPTION>
Actual Use Use of Proceeds
by Company in Registration
Statement
<S> <C> <C>
Payments on bank debt $ 890,000 $ 650,000
Purchase of land and building 459,000 250,000
Cash advanced to WOR
for working capital 630,000 1,200,000
Cash invested in joint project
with Action Performance 80,000 400,000
Additional marketing and
promotion expenses 50,000 500,000
Reduction in outstanding
current liabilities 1,100,000 250,000
Increase in working capital
for general corporate
purposes 1,782,000 1,724,000
------------------ --------------
Total proceeds in the period $ 4,991,000 $ 4,974,000
Less: expenses paid prior
to the period 248,000
expenses paid after
the period 11,000
------------
Net proceeds from the offering $ 4,732,000
</TABLE>
18
<PAGE>
PART II - OTHER INFORMATION-CONTINUED
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-QSB to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 18, 1997 By: /s/ Howard L. Correll, Jr.
Howard L. Correll, Jr.
President and Chief Executive Officer
Dated: November 18, 1997 By: /s/ F. Scott M. Chapman
F. Scott M. Chapman
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JAN-01-1997
<CASH> 1,297,938
<SECURITIES> 0
<RECEIVABLES> 1,899,498
<ALLOWANCES> 316,029
<INVENTORY> 1,020,974
<CURRENT-ASSETS> 4,067,717
<PP&E> 978,663
<DEPRECIATION> 145,917
<TOTAL-ASSETS> 5,488,155
<CURRENT-LIABILITIES> 1,349,731
<BONDS> 0
0
0
<COMMON> 40,450
<OTHER-SE> 3,963,496
<TOTAL-LIABILITY-AND-EQUITY> 5,488,155
<SALES> 0
<TOTAL-REVENUES> 4,510,324
<CGS> 3,769,847
<TOTAL-COSTS> 1,846,505
<OTHER-EXPENSES> (55,378)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,041)
<INCOME-PRETAX> (1,087,691)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,087,691)
<DISCONTINUED> (1,460,080)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,547,771)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
