1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for the transition period
from ____________ to ____________
Commission file number: 0-22321
WHEELS SPORTS GROUP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
North Carolina 56-2007717
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
149 Gasoline Alley Drive
Mooresville, North Carolina 28115
(Address of principal executive offices)
(704) 662-6442
(Issuer'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 past 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 of each of the issuer's classes of common
equity, as of the latest practicable date: 5,280,253 shares of the issuer's
Common Stock were outstanding as of May 14, 1998.
Transitional Small Business Disclosure Format:
Yes No X
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Index to Financial Statements
Page
----
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations - Three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 7
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Item 1. Financial Statements
Wheels Sports Group, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS (Unaudited)
Cash and cash equivalents $ 534 $ 440
Restricted cash 3,346 3,300
Accounts receivable, net of allowances of $2,386 5,221 1,247
Inventories 6,129 2,711
Other current assets 616 575
---------- ----------
Total current assets 15,846 8,273
Property and equipment, net of accumulated depreciation
of $365 and $300 respectively 1,499 1,513
Goodwill, net of amortization of $147 and
$39 respectively 17,097 17,205
Other 1,711 1,809
---------- ----------
Total assets $ 36,153 $ 28,800
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and current maturities of long-term debt $ 5,655 $ 2,496
Notes and other payables to stockholders 5,250 5,250
Accounts payable and accrued expenses 7,934 4,251
Other liabilities 596 621
---------- ----------
Total current liabilities 19,435 12,618
Long-term debt, net of current portion 5,974 6,081
Capital lease obligations 325 10
---------- ----------
Total liabilities 25,734 18,709
Stockholders' equity 10,419 10,091
========== ==========
Total liabilities and stockholders' equity $ 36,153 $ 28,800
========== ==========
See accompanying notes to consolidated financial statements.
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Wheels Sports Group, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
For the Quarter ended March 31,
-------------------------------
1998 1997
----------- ----------
(Unaudited) (Unaudited)
(Restated, Note 2)
Net sales $ 9,467 $ 2,019
Cost of sales 6,167 1,786
----------- ----------
Gross profit 3,300 233
Selling, general and administrative expenses 2,328 563
Amortization of goodwill 108 3
Other operating (income), net -- (17)
----------- ----------
Operating income (loss) 864 (316)
Interest expense, net 310 29
Amortization of debt discount and deferred financing costs 166 --
Other non-operating expense, net 60 --
----------- ----------
Income (loss) before income taxes 328 (345)
Income tax expense -- 5
----------- ----------
Net income (loss) from continuing operations 328 (350)
Loss from discontinued operations (162)
=========== ==========
Net income (loss) $ 328 $ (512)
=========== ==========
Per share data:
Net income (loss) from continuing operations:
Basic $ 0.06 $ (0.12)
=========== ==========
Diluted $ 0.06 (0.12)
=========== ==========
Loss from discontinued operations:
Basic $ -- $ (0.05)
=========== ==========
Diluted $ - $ (0.05)
=========== ==========
Net income (loss):
Basic $ 0.06 $ (0.17)
=========== ==========
Diluted $ 0.06 $ (0.17)
=========== ==========
Weighted average shares outstanding:
Basic 5,280,253 3,071,778
Diluted 5,351,968 3,071,778
See accompanying notes to consolidated financial statements.
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Wheels Sports Group, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the Quarter ended March 31,
-------------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
(Restated, Note 2)
Cash flows from operating activities:
Net income (loss) $ 328 $(512)
Provision for losses related to discontinued operations - 162
Depreciation and amortization 338 56
Provision for allowances for doubtful accounts
and returns - 100
Loss on disposition of assets 35 -
Changes in operating assets and liabilities:
Restricted cash (46) -
Accounts receivable (3,974) (268)
Inventories (3,418) 105
Other current assets (42) 91
Other noncurrent assets 14 (151)
Accounts payable and accrued expenses 3,683 316
Other liabilities (25) (256)
Discontinued operations noncash charges and
working capital changes - (138)
------ ----
Net cash used in operating
activities (3,107) (495)
------ ----
Cash flows from investing activities:
Disposition (acquisition) of property and equipment 231 (85)
------ ----
Net cash provided by (used in) investing activities 231 (85)
------ ----
Cash flows from financing activities:
Borrowing from bank, net 2,970 197
Borrowings from shareholders, net - 235
------ ----
Net cash provided by financing activities 2,970 432
------ ----
Net increase (decrease) in cash and cash equivalents 94 (148)
Cash and cash equivalents, beginning of period 440 317
------ ----
Cash and cash equivalents, end of period $ 534 $169
====== ====
Supplemental information
Cash paid during the period for:
Interest $ 269 $ 27
Supplemental non-cash investing and financing activities
Capital lease obligation originated $ 315 $ 0
See accompanying notes to consolidated financial statements.
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Wheels Sports Group, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Condensed Financial Statements
The accompanying unaudited consolidated financial statements include
the accounts of Wheels Sports Group, Inc. ("Wheels") and its wholly-owned
subsidiaries (collectively referred to as the "Company"). All material
intercompany transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position, results of operations and cash flows of the
Company for the periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated unaudited financial statements should be read in conjunction with
the Company's Form 10-KSB for the year ended December 31, 1997.
The results of operations for the three-month period ended March 31,
1998 are not necessarily indicative of the operating results for the full year.
Note 2 - Business Combinations
On January 28, 1997, the Company acquired World of Racing ("WOR")
through a wholly-owned subsidiary in a stock-for-stock transaction accounted for
using the purchase method of accounting. Effective June 30, 1997, the Company's
board of directors voted to discontinue the operations of WOR and dispose of its
assets. The unamortized excess of the purchase price over the net assets
acquired was written off as of June 30, 1997. The operations of WOR are
presented as discontinued operations.
On June 30, 1997, the Company acquired 100% of the common stock of
Diamond Sports Group, Inc. ("Diamond") in a stock-for-stock transaction. On
October 4, 1997, the Company acquired 100% of the common stock of Green's Racing
Souvenirs, Inc. ("GRS") in a stock-for-stock transaction. The Diamond and GRS
transactions have been accounted for using the pooling-of-interests method of
accounting. Accordingly, all prior period consolidated financial statements have
been restated to include the combined financial position, results of operations
and cash flows of Diamond and GRS.
On October 24, 1997, the Company acquired 100% of the stock of High
Performance Sports Marketing ("High Performance") and on December 31, 1997 the
Company acquired 100% of Press Pass Partners ("Press Pass"). Both transactions
were accounted for using the purchase method of accounting.
Note 3 - Inventories
Inventories consist of the following:
March 31, December 31,
1998 1997
--------- ------------
Raw materials and work in process $ 148 $ 198
Finished goods 5,981 2,513
--------- --------
$ 6,129 $ 2,711
========= ========
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Note 4 - Debt
Under the terms of the Company's primary credit facility, the Company
is required to comply with certain financial and other covenants. Failure to
maintain compliance with these covenants constitutes a default under the terms
of this credit facility and, as such, gives the lender the right to accelerate
repayment of outstanding borrowings or seek other remedies of default as
provided for in the loan agreement. At March 31, 1998, the Company was in
violation of substantially all of the financial covenants under this credit
facility. The Company subsequently obtained a waiver from the lender for all
violations through April 22, 1998, and has negotiated revised covenants for the
balance of 1998.
Note 5 - Proposed Merger
On December 5, 1997, the Company announced execution of a definitive
agreement to merge with a wholly-owned subsidiary of Racing Champions
Corporation ("Racing Champions"), a publicly-owned Delaware corporation. The
transaction is planned as a stock-for-stock exchange to be accounted for as a
pooling of interests. Under the terms of the agreement, as amended, each share
of the Company's outstanding common stock will be exchanged for 0.51 shares of
Racing Champions common stock. The merger, which is subject to stockholder
approval and other closing conditions, is expected to close in the second
quarter of 1998. Also, under terms of the agreement, the Company may be
obligated to pay Racing Champions a termination fee of up to $4,000,000 if the
merger is terminated due to the occurrence of certain events or conditions as
specified in the agreement, one of which is the Company's failure to obtain
necessary stockholder approval of the proposed merger. In management's opinion,
the Company will be successful in complying with the terms and conditions of the
merger agreement, as amended, such that management does not expect to incur a
termination fee obligation in the event the proposed merger is not consummated.
In the event such an obligation is incurred, funding of any such liability would
likely require additional working capital financing.
During the quarter ended March 31, 1998, the Company entered into a
sale-leaseback transaction with Racing Champions whereby certain property and
equipment was sold to Racing Champions for $315,000 and subsequently leased back
to the Company. The underlying lease has been accounted for as a capital lease
and, accordingly, a capital lease obligation of $315,000 has been recorded as of
March 31, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is engaged in merchandising NASCAR oriented products,
including apparel, collectible trading cards and accessories and providing
motorsports related hospitality management and corporation promotions. The
Company significantly expanded the size and breadth of its business in 1997 by
raising $4.7 million through its initial public offering in April and by
conducting multiple acquisitions of other companies, several of which were
larger than the Company at the date of acquisition. Reference is made to the
Company's Form 10-KSB for the year ended December 31, 1997 for a full discussion
of the initial public offering and the businesses acquired. These acquisitions
make comparisons between the first quarter of 1998 and the first quarter of 1997
of very limited value in understanding the current operations and financial
condition of the Company.
FINANCIAL CONDITION
During the quarter ended March 31, 1998, the Company increased its
investment in accounts receivable by $4.0 million to $5.2 million from $1.2
million, and its investment in inventories by $3.4 million to $6.1 million from
$2.7 million. Both increases reflect the normal seasonality to the NASCAR
industry, since the first race of the Winston Cup series occurs in mid-February
at Daytona Beach, Florida. The increases in accounts receivable and inventories
were largely funded by increases of $3.2 million in bank borrowings, to $5.7
million from $2.5 million, and $3.7 million in accounts payable and accrued
expenses, to $7.9 million from $4.2 million.
RESULTS OF OPERATIONS
A comparative analysis of the Company's operating results between first
quarter 1998 and first quarter 1997 is significantly effected by the
acquisitions of High Performance Sports Marketing, Inc. ("High Performance") and
Press Pass Partners ("Press Pass") occurring in the last quarter of 1997. As a
result, consolidated net sales, cost of goods sold and selling, general and
administrative expenses have increased significantly from historical levels, as
restated, prior to these two acquisitions.
NET SALES
Net Sales totaled $9.4 million for the first quarter of 1998, of which
$7.0 million is attributable to the Company's retail merchandise business,
including track-side sales, and $2.4 million attributable to its trading card
business. Net sales for the comparable period in 1997 were $0.7 million for
trading cards and $1.3 million for other merchandise. During the first quarter
of 1998, the Company operated 13 track-side trailers at NASCAR sponsored events,
an increase of 10 from the three operated during the first quarter of 1997, and
had substantial sales into mass merchandisers and convenience stores. These new
channels of distribution were obtained through the acquisition of High
Performance. The increase in retail sales is in part attributable to the sales
from several newly licensed properties, including Bill Elliott, the Cartoon
Network, Winston Cup Racing, Jeff Burton and Ford Racing. In addition, the
Company continues to focus on expanding its retail distribution network.
During the first quarter of 1998, the Company produced two new trading
card sets, one under the Wheels brand and one under the Press Pass brand. Both
sets were well received by the Company's network of specialty hobby dealers and
mass-market retailers, and substantially all of both sets were sold.
Historically, Press Pass branded product usually sold out but Wheels branded
product did not.
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GROSS PROFIT
Gross profit during the first quarter of 1998 amounted to $3.3 million,
of which approximately $1.0 million is attributable to the trading card
business and approximately $2.3 million is attributable to the retail sale of
other merchandise. As a percent of total net sales, gross profit was 35%. Gross
profit for trading cards was 43% of net sales and for other merchandise it was
32% of net sales. During the first quarter of 1997, the trading card business,
which was conducted solely under the Wheels brand, had a negative gross profit
of $0.1 million after a provision for returns of $0.1 million, and gross profit
from other merchandise was $0.3 million, or 23% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $2.3 million
during the first quarter of 1998, consisting primarily of payroll-related costs
of management and support personnel located at the Company's corporate offices
and expenses related to integrating all operations of acquired companies in a
single location. Corporate payroll costs have increased significantly from the
first quarter of 1997 due primarily to the Company's larger management structure
resulting from the acquisitions of High Performance and Press Pass in the last
fiscal quarter of 1997.
INTEREST EXPENSE
Interest expense of approximately $479,000 in the first quarter of 1998
relates primarily to the Company's term loan and revolver borrowings under the
credit facility entered into in the last quarter of 1997 to fund the
acquisitions of High Performance and Press Pass. Included in the first quarter
1998 interest expense is approximately $166,000 related to amortization of the
term loan discount and deferred financing costs.
NON-OPERATING EXPENSES
Other non-operating expenses include a loss of $35,000 on the sale of a
building formerly occupied by Diamond Sports Group Inc.
SEASONALITY
The Company's business exhibits some seasonality. Historically, net
sales have been the highest in spring and summer months following commencement
of the NASCAR racing season in late February of each year. As a result,
quarterly net sales in future periods may vary and may not be indicative of net
sales in subsequent comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's principal sources of liquidity
included cash of $534,000 and borrowings available under its primary credit
facility. Under the credit facility, the Company may borrow up to $10 million in
revolving loans, with actual availability of funds depending on a borrowing base
which includes certain accounts receivable and inventories. Available borrowings
under this credit facility were $1.3 million at March 31,1998.
As of March 31, 1998 current assets were $15.8 million as compared to
current liabilities of $19.4 million. Current liabilities included $5.25 million
in notes payable to stockholders of the Company of which notes totaling $3.25
million are to be repaid through the release of $3.3 million held pursuant to an
escrow agreement with the Company's primary lender. The $3.3 million and accrued
interest thereon is recorded as restricted cash on the Company's December 31,
1997 and March 31, 1998 balance sheets. The Company's management believes
working capital requirements will be met by borrowing under its credit facility,
and that payments on the debts to stockholders and other lenders will be made
from the escrowed funds and cash flows generated by operations.
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Long-term debt at March 31, 1998, net of current maturities, totaled
$6.0 million, which is net of unamortized discount of $1.6 million. Of that
debt, $5.9 million is due to the Company's primary lender.
The Company has met its working capital needs through funds generated
from operations and available borrowings under its credit facilities. The
Company's working capital requirements fluctuate during the year based on the
timing of the racing season. The Company believes that its cash flow from
operations, cash on hand and available borrowings under its credit facilities
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.
Under the terms of the Company's primary credit facility, the Company
is required to comply with certain financial and other covenants which, among
other things, place restrictions on the payment of dividends and require the
Company to achieve certain financial ratios. This credit facility also places
significant restrictions on the Company's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain investments
or loans and to sell or otherwise dispose of a substantial portion of assets.
Failure to maintain compliance with these covenants constitutes a default under
the terms of this credit facility and, as such, gives the lender the right to
accelerate repayment of outstanding borrowings or seek other remedies of default
as provided for in the loan agreement.
At March 31, 1998, the Company was in violation of substantially all of
the financial covenants under this credit facility. The Company subsequently
obtained a waiver from the lender for all violations through April 22, 1998, and
has negotiated revised covenants for the balance of 1998. In management's
opinion, the Company will be able to maintain compliance with all loan
covenants, as revised, of this credit facility in 1998.
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements that are contained in this filing 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; decreases in collectors' interest in the Company's cards; and the
risk factors set forth in the Company's Form 10-KSB for the year ended December
31, 1997. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has previously reported in its Form 10-KSB for the year
ended December 31, 1997 a proposed class action lawsuit filed on May 4, 1997
against several trackside vendors, including Green's Racing Souvenirs, Inc., one
of the Company's wholly owned subsidiaries. There have been no material
developments during the quarter for which this report is filed.
Except for the above referenced proposed action, the Company is not a
defendant in any material litigation and is not aware of any threatened or
pending legal action which would have a material adverse effect on the Company's
business, operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None
(b) Not applicable
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
11.1 Computation of Basic Earnings Per Share
11.2 Computation of Diluted Earnings Per Share
27 Financial Data Schedule
(b) The Company filed the following four reports on Form 8-K
during the quarter for which this report is being filed:
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(1) On January 14, 1998, the Company filed a report on
Form 8-K, dated January 8, 1998, reporting the
engagement of new independent accountants. The
resignation of the Company's former accountants was
reported on Form 8-K, dated December 8, 1997, filed
December 8, 1997, as amended December 19, 1997.
(2) On January 15, 1998, the Company filed a report on
Form 8-K, dated December 31, 1997, reporting the
acquisition of Press Pass Partners and the
establishment of a credit facility with Credit
Agricole Indosuez.
(3) On February 3, 1998, the Company filed an amendment
to its report on Form 8-K dated December 31, 1997,
filing as an exhibit to such Form 8-K the Credit
Agreement with Credit Agricole Indosuez.
(4) On March 31, 1998, the Company filed an amendment to
its report on Form 8-K dated June 30, 1997, filing
the financial statements of Diamond Sports Group,
Inc. and proforma financial statements of Diamond
Sports Group, Inc. and the Company.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report on Form 10-QSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
WHEELS SPORTS GROUP, INC.
Dated: May 19, 1998 By: /s/ Victor H. Shaffer
------------------------------------
Victor H. Shaffer, Interim Chief
Executive Officer
Dated: May 19, 1998 By: /s/ F. Scott M. Chapman
------------------------------------
F. Scott M. Chapman, Chief Financial
Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Basic Earnings Per Share
11.2 Computation of Diluted Earnings Per Share
27 Financial Data Schedule