U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: MARCH 31, 2004
Commission File Number: 0-23100
TEAM SPORTS ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
16501 D NORTHCROSS DR, HUNTERSVILLE, NC 28078
(Address of principal executive office)
(704) 992-1290
(Issuer's telephone number)
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 [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of April 30, 2004 was 63,782,412.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
INDEX
PAGE
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Balance Sheet as of March 31, 2004 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003, and for the period from
inception (May 15, 2001), through March 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003, and for the period from
inception (May 15, 2001), through March 31, 2004 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis or Plan of Operation 14-20
Item 3. Controls and Procedures 21
PART II OTHER INFORMATION 22-24
2
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,001
Restricted cash 100,000
Prepaid expenses and other assets 1,448
-------------
Total assets $ 108,449
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 21,565
Accrued expenses 118,509
Amounts payable to related parties 336,905
Accrued interest payable 276,345
Convertible promissory notes 3,035,250
-------------
Total liabilities 3,788,574
-------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Preferred stock: $2.75 par value; authorized 2,000,000 shares;
no shares issued and outstanding --
Common stock: $.0001 par value; authorized 500,000,000 shares;
issued 63,901,212 shares and outstanding 63,782,412 shares 6,378
Additional paid-in capital 15,874,618
Accumulated deficit (19,561,121)
-------------
Total stockholders' deficit (3,680,125)
-------------
Total liabilities and stockholders' deficit $ 108,449
=============
See accompanying notes to condensed consolidated financial statements.
3
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003, AND THE PERIOD
FROM INCEPTION (MAY 15, 2001), THROUGH MARCH 31, 2004
(UNAUDITED)
FROM INCEPTION
(5/15/2001)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
2004 2003 2004
------------- ------------- -------------
DISCONTINUED OPERATIONS
Loss from discontinued operations $ (211,748) $ (526,126) $(15,265,769)
Income tax benefit -- -- --
------------- ------------- -------------
NET LOSS FROM DISCONTINUED OPERATIONS $ (211,748) $ (526,126) $(15,265,769)
============= ============= =============
NET LOSS PER SHARE, BASIC AND DILUTED, FROM
DISCONTINUED OPERATIONS $ (0.00) $ (0.01) $ (0.24)
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 63,782,412 63,476,312 63,011,414
============= ============= =============
See accompanying notes to condensed consolidated financial statements.
4
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003, AND THE PERIOD
FROM INCEPTION (MAY 15, 2001), THROUGH MARCH 31, 2004
(UNAUDITED)
FROM INCEPTION
(5/15/2001)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
2004 2003 2004
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (211,748) $ (526,126) $(15,265,769)
Loss from discontinued operations (211,748) (526,126) (15,265,769)
------------- ------------- -------------
Loss from continuing operations -- -- --
Net cash used in discontinued operations (81,667) (617,515) (9,375,574)
------------- ------------- -------------
Net cash used in operations (81,667) (617,515) (9,375,574)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in discontinued operations -- -- (1,583,671)
------------- ------------- -------------
Net cash used in investing activities -- -- (1,583,671)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash from discontinued operations -- -- 10,966,246
------------- ------------- -------------
Net cash provided by financing activities -- -- 10,966,246
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (81,667) (617,515) 7,001
CASH AND CASH EQUIVALENTS, beginning of period 88,668 650,305 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,001 $ 32,790 $ 7,001
============= ============= =============
See accompanying notes to condensed consolidated financial statements.
5
TEAM SPORTS ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", and "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to other factors noted with such forward-looking
statements, include those discussed in Exhibit 99.1 filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on Form
10-KSB for fiscal year 2002.
NOTE 1--BASIS OF PRESENTATION
-----------------------------
The condensed consolidated financial statements include the accounts of Team
Sports Entertainment, Inc. and its wholly owned subsidiary, Maxx Motorsports,
Inc. ("Maxx"), and its wholly owned subsidiary, Team Racing Auto Circuit, LLC
("TRAC") (collectively, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation. Maxx, through TRAC,
planned to own, operate and sanction an automotive racing league designed to
provide content for television and tracks while expanding the existing base of
racing fans. Accordingly, the operations of the Company are presented as those
of a development stage enterprise, from its inception (May 15, 2001), as
prescribed by Statement of Financial Accounting Standards No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company follows the AICPA SOP
98-5, "Reporting on the Costs of Start-Up Activities" in accounting for its
start-up activities. On August 26, 2003, the Board of Directors of the Company
unanimously approved a plan to immediately discontinue its racing operation. As
the racing operation was its only business, all operations of the Company have
been included in discontinued operations.
The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These condensed
consolidated financial statements have not been audited.
6
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31, 2003,
which is included in the Company's Form 10-KSB for the year ended December 31,
2003. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
NOTE 2--GOING CONCERN
---------------------
The Company has been in the development stage since its inception (May 15,
2001), and has not established sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,265,769 from inception through March 31, 2004. The Company has ceased its
plans to begin a racing league and all operations have been discontinued. In
addition, current liabilities of the Company exceed their assets by
approximately $3,680,000 and their convertible promissory notes payable
obligations are in default. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. These condensed consolidated
financial statements do not include any adjustments that may result from the
outcome of these uncertainties.
Since August 26, 2003, the Company has attempted to locate and negotiate with a
business entity for a merger of that business into the Company. There can be no
assurance that the Company will be able to locate a suitable acquisition
candidate before it exhausts its cash reserves.
NOTE 3--DISCONTINUED OPERATIONS
-------------------------------
The Company has been in the development stage since its inception (May 15,
2001), and has not established sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,265,769 from inception through March 31, 2004.
On August 26, 2003, the Board of Directors of the Company unanimously approved a
plan to immediately discontinue its racing operation. As the racing operation
was its only business, all operations of the Company have been included in
discontinued operations.
7
As a part of the evaluation of the assets of the Company, the following assets
were considered to be fully impaired based upon management's expectation that
they had no future value. These amounts have been recorded as impairment losses
and were included in loss from discontinued operations during the quarter ended
September 30, 2003.
Race car designs and manufacturing equipment $ 1,673,400
Production contract payments 2,545,781
Goodwill 2,810,627
------------------
Total $ 7,029,808
==================
NOTE 4--STOCK OPTION PLANS
--------------------------
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its stock
option plan. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.
SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), requires
the Company to disclose pro forma information regarding option grants made to
its employees. SFAS No. 123 specifies certain valuation techniques that produce
estimated compensation charges that are included in the pro forma results below.
These amounts have not been reflected in the Company's consolidated statement of
operations, because APB No. 25 specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of options granted to the
Company employees, board of directors, advisory committee members, and
consultants.
8
SFAS No. 123 pro forma numbers are as follows for the three months ended March
31, 2004 and 2003, and for the period from inception (May 15, 2001), through
March 31, 2004:
From
inception
(May 15, 2001)
through
March 31, March 31,
2004 2003 2004
---- ---- ----
Net loss from discontinued operations,
as reported $ 211,748 $ 526,126 $ 15,265,769
Add: Stock-based employee compensation
expense determined under fair value based
method for all awards 138,552 107,409 4,186,546
Deduct: Stock-based employee compensation
included in reported net loss - - -
---------------- ---------------- ----------------
Pro forma net loss $ 350,300 $ 633,535 $ 19,452,315
================ ================ ================
Basic and diluted net loss per share:
Pro forma $ (.01) $ (.01) $ (.31)
As reported $ (.00) $ (.01) $ (.24)
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. In 2001, the year in
which all prior options were issued, the following weighted average assumptions
were used: risk-free interest rate based on date of issuance and term between
3.83% and 4.93%, no expected dividends, a volatility factor of 138.13% and an
expected life of the options of 3 to 10 years.
On April 2, 2003, the Board of Directors granted options to certain employees
and directors to acquire 8,800,000 shares of the Company's common stock at
prices ranging from $.42 to $1.00 per share. The options were scheduled to vest
as follows: 4,500,000 on April 2, 2003, 2,210,000 on the day the 2004 racing
season commences and 2,090,000 on the day the 2005 racing season commences. The
following assumptions were used: risk-free interest rate of 4.67%, no expected
dividends, a volatility factor of 127.59% and an expected life of the option of
1 to 2 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company employee stock options have characteristics significantly different
9
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, it is management's
opinion that the existing models do not necessarily provide a reliable single
measure of the fair value of the Company options.
NOTE 5--CONVERTIBLE PROMISSORY NOTES
------------------------------------
In April 2003, holders of $1,645,000 of the $2,270,000 convertible promissory
notes agreed to extend the maturity date of their respective notes from August
31, 2003 to March 1, 2004. In addition, certain holders of the notes increased
the principal amount of their notes by an aggregate amount of $765,250. A 10%
loan origination fee was paid on the increased principal balances through the
issuance of 306,100 shares of the Company's common stock to the holders of the
notes at $.25 per share. The origination fee of $76,525 is being amortized over
the terms of the convertible promissory notes. Notes in the aggregate principle
amount of $625,000 bear interest at 8% per annum, require quarterly interest
payments, and matured August 31, 2003. The remaining notes, in the aggregate
principle amount of $2,410,250, bear interest at 8% per annum, require quarterly
interest payments, and matured March 1, 2004. Each note is convertible into
common stock of the Company at the rate of $.20 per share. The common stock
issuable upon conversion of the convertible notes payable is restricted and may
only be sold in compliance with Rule 144 of the Securities Act of 1933, as
amended.
At Mach 31, 2004, the Company owed accrued interest on the notes of $276,345 and
has not made any quarterly interest payments since May 2003. All notes are
currently in default and the default rate of interest is 12%, since the default
occurred.
NOTE 6--COMMITMENTS AND CONTINGENCIES
-------------------------------------
RACING CAR DESIGN AND CONSTRUCTION AGREEMENT - On October 22, 2001, TRAC entered
into a Racing Car Design and Construction Agreement with Riley & Scott Race Car
Engineering ("Riley & Scott"). The agreement required payments aggregating
$1,515,000 during Phase I, which was 23 weeks, and included design, tooling,
prototype construction and aero tooling. Phase II of the agreement commenced
after completion of Phase I and was planned to be completed in 58 weeks. Phase
II was based upon production of 100 racing cars, at a cost of approximately
$110,000 each, plus the cost of engines. The agreement also provided for the
contractor to be the sole provider of most repair service. Phase I of the
agreement was completed during April 2002, and Phase II of the agreement
commenced in April 2002. In August 2002, TRAC and Riley & Scott agreed upon a
revised schedule based on the delay of the initial race season to 2004. This
revised schedule required a $500,000 payment prior to August 31, 2002, and
subsequent monthly payments of $50,000 through March 31, 2003. Phase II of the
agreement was placed on hold due to TRAC not meeting the required payment
schedule. At September 30, 2003, TRAC had incurred and paid in Phase II total
costs of $2,545,781.
10
The agreement terms included that upon temporary cessation or early termination
of the agreement, Riley & Scott shall have all rights and title to all tangible
and intangible Phase I products and components, all racing cars, components,
vendored components and spares ("Post Termination Inventory") then in its
possession. When the agreement was terminated, Riley & Scott had possession of
all Post Termination Inventory. Riley & Scott may sell all or part of the Post
Termination Inventory in any arms length transaction in a bona fide transaction
to the buyer offering the highest price. In the event that the amount realized
in any such sale is less than the total amount due as of the termination date,
Riley & Scott shall be entitled to money damages equal to the difference between
the net proceeds of the sale and the full amount due as of the termination date
plus penalties to include attorney's fees, interest on delinquent amounts,
storage fees, insurance, broker's fees, and advertising expenses. In the event
that the sales price of the Post Termination Inventory exceeds Riley & Scott's
cost and penalties, TRAC would receive 75% of the excess.
Management of the Company has determined that the Company would be unlikely to
recover anything from the ultimate sale by Riley & Scott. Accordingly, the
related assets have been considered fully impaired. Management does not believe
the Company has any remaining liability to Riley & Scott.
TEAM SALES BROKERAGE AGREEMENT - In June 2002, TRAC engaged Moag & Company to be
the exclusive broker of all team sales for a one-year term, and in June 2003,
TRAC and Moag & Company amended and restated their agreement to extend the term
of the agreement through April 16, 2004 (the "Moag Agreement"). TRAC was
attempting, through Moag & Company, to sell at least six teams for its inaugural
race season of 2004. Under the Moag Agreement, TRAC paid an initial fee of
$25,000 and would have paid to Moag & Company upon each sale of a team a cash
fee of $400,000 and warrants to purchase $200,000 of common stock, with an
exercise price per share equal to the greater of $1.00 or the ten-day average
closing price for the common stock ("Moag Warrants"). The Moag Warrants were to
be for a seven-year term and become exercisable in equal installments over the
first four years they would have been outstanding. Management is of the opinion
that this agreement was terminated without future liability when racing
operations were discontinued.
BROADCASTING AGREEMENT - In April 2003, the Company entered into an agreement
with ESPN, Inc. and ESPN Productions, Inc. (together, "ESPN"), pursuant to which
ESPN was to provide for the live broadcasting of at least 13 two-hour League
events and produce these television events for the 2004 and 2005 racing seasons
(the "ESPN Agreement"). TRAC, subject to ESPN approvals, had the right to sell
national television advertising (16 units per hour per event), billboard and
signage advertising and sponsorships. The ESPN Agreement required TRAC to pay
expected production fees ("Production Fees") of $525,000 per event in 2004 and
$550,000 per event in 2005, with 6% annual increases thereafter during
successive contract renewal periods, and an initial Production Fee of $375,000
payable in October 2003 for animation, graphics, music and track surveys, with
$30,000 each year thereafter for upgrades. TRAC would also have paid ESPN
consideration for broadcasting all TRAC racing league ("League") events on a per
11
event basis ("Broadcast Consideration") in the 2004 and 2005 seasons aggregating
to $3,460,000 each year, with increases of 5% each year thereafter. The ESPN
Agreement was to cover the 2004 and 2005 League seasons, with ESPN having
successive options to renew the agreement, first, through the 2007 season,
second, through the 2009 season and finally, through the 2015 season. Before the
expiration of the ESPN Agreement, TRAC would have been required to negotiate
exclusively with ESPN for sixty days for broadcast rights, to make an offer to
ESPN if negotiations did not result in a new ESPN agreement and to make a
re-offer to ESPN if a third party offered to broadcast League events, which
re-offer would have been on the same terms as those of the third party's offer.
TRAC could terminate the agreement with ESPN either upon ESPN making material
changes to its broadcast schedule or in the first year of the final renewal
period upon payment of a $30 million termination fee to ESPN. Under the
contract, the Company would have been required to make the following minimum
payments:
2003 $ 375,000
2004 10,285,000
2005 10,640,000
------------------
Total minimum contract payments $ 21,300,000
==================
Management is of the opinion that this agreement was terminated without future
liability to the Company when racing operations were discontinued.
SALES PROVIDER AGREEMENT FOR SPONSORSHIP OPPORTUNITIES - In April 2003, TRAC
entered into an agreement with Raycom Sports ("Raycom") pursuant to which Raycom
became the exclusive sales provider of all TRAC sponsorship opportunities
including, media packages, car and team sponsor packages, and TRAC event and
league sponsor packages for a period to expire on July 1, 2005. Under this
agreement, TRAC was to pay Raycom a sales commission equal to 12.5% of the
amount that TRAC actually collected from sponsors. TRAC agreed to pay Raycom a
monthly nonrefundable advance against its sales commission in the amount of
$14,000. Each sales commission payment was to be reduced by an amount equal to
the aggregate amount of such monthly advances not previously netted against
sales commissions. Management is of the opinion that this agreement was
terminated without future liability to the Company when racing operations were
discontinued.
LETTER OF CREDIT FOR OFFICE LEASE - A letter of credit was purchased to
guarantee the Company's performance of payment to a third party on their vacated
office lease. Restricted cash in the amount of $100,000 is collateral on the
letter of credit. The Company vacated the premises upon its decision to
terminate its racing operations and has accrued $100,000 in lease settlement
cost which is included in accrued expenses on the condensed consolidated balance
sheet.
12
LOCAL OPERATOR AGREEMENT WITH FORMER CHIEF EXECUTIVE OFFICER - On August 25,
2001, the Company entered into an agreement in principal with its former Chief
Executive Officer under which the former Chief Executive Officer would become
the local operator of a market. The agreement stated that the cost would be
$100,000 plus the cost of the nine racing cars and three haulers to obtain the
operating rights for the team, which was substantially less than amounts
anticipated to be paid by other local operators. Under the agreement, the
$100,000 was to be kept in an escrow account. The funds are not currently
escrowed and the $100,000 is included in amounts payable to related parties on
the condensed consolidated balance sheet.
NOTE 7--RELATED PARTIES
-----------------------
The Company has received loans and advances, principally for services, from
certain individuals considered to be related parties. The amount due to these
parties is as follows:
William Miller, former CEO $ 127,888
Robert Wussler, former Chairman of the Board of Directors 29,167
G. David Gordon, attorney, creditor and stockholder 89,850
Unpaid director fees 90,000
---------------
Total $ 336,905
===============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company has been in the development stage since its inception (May 15,
2001), and has not established sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,265,769 from inception through March 31, 2004. Accordingly, on August 26,
2003, the Board of Directors of the Company unanimously approved a plan to
immediately discontinue its racing operation. Since August 26, 2003, the Company
has been attempting to find a suitable acquisition candidate.
The Company will attempt to locate and negotiate with a business entity for a
merger of that business into the Company. In certain instances, a target
business may wish to become a subsidiary of the Company or may wish to
contribute assets to the Company rather than merge. No assurances can be given
that the Company will be successful in locating or negotiating with any target
business.
Management believes that there are perceived benefits to being a reporting
company with a class of publicly traded securities. These are commonly thought
to include (1) the ability to use registered securities to make acquisition of
assets or businesses; (2) increased visibility in the financial community; (3)
the facilitation of borrowing from financial institutions; (4) improved trading
efficiency; (5) shareholder liquidity; (6) greater ease in subsequently raising
capital; (7) compensation of key employees through stock options; (8) enhanced
corporate image; and (9) a presence in the United States capital market.
A business entity, if any, which may be interested in a business combination
with the Company may include (1) a company for which a primary purpose of
becoming public is the use of its securities for the acquisition of assets or
businesses; (2) a company which is unable to find an underwriter of its
securities or is unable to find an underwriter of securities on terms acceptable
to it; (3) a company which wishes to become public with less dilution of its
common stock than would occur normally upon an underwriting; (4) a company which
believes that it will be able to obtain investment capital on more favorable
terms after it has become public; (5) a foreign company which may wish an
initial entry into the United States securities market; (6) a special situation
company, such as a company seeking a public market to satisfy redemption
requirements under a qualified Employee Stock Option Plan; or (7) a company
seeking one or more of the other perceived benefits of becoming a public
company.
Management is actively engaged in seeking a qualified private company as a
candidate for a business combination. The Company is authorized to enter into a
definitive agreement with a wide variety of private businesses without
limitation as to their industry or revenues. It is not possible at this time to
predict with which private company, if any, the Company will enter into a
definitive agreement or what will be the industry, operating history, revenues,
future prospects or other characteristics of that company.
14
The Company may seek a business opportunity with entities which have recently
commenced operations, or which wish to utilize the public marketplace in order
to raise additional capital in order to expand into new products or markets, to
develop a new product or service, or for other corporate purposes. The Company
may acquire assets and establish wholly owned subsidiaries in various businesses
or acquire existing businesses as subsidiaries.
Management of the Company, which in all likelihood will not be experienced in
matters relating to the business of a target business, will rely upon its own
efforts in accomplishing the business purposes of the Company. Outside
consultants or advisors may be utilized by the Company to assist in the search
for qualified target companies. If the Company does retain such an outside
consultant or advisor, any cash fee earned by such person will need to be
assumed by the target business, as the Company has limited cash assets with
which to pay such obligation.
The analysis of new business opportunities will be undertaken by, or under the
supervision of, the officers and directors of the Company, who are not
professional business analysts. In analyzing prospective business opportunities,
management may consider such matters as the available technical, financial and
managerial resources; working capital and other financial requirements; history
of operations, if any; prospects for the future; nature of present and expected
competition; the quality and experience of management services which may be
available and the depth of that management; the potential for further research,
development, or exploration; specific risk factors not now foreseeable but which
then may be anticipated to impact the proposed activities of the Company; the
potential for growth or expansion; the potential for profit; the perceived
public recognition or acceptance of products, services, or trades; name
identification; and other relevant factors.
Management does not have the capacity to conduct as extensive an investigation
of a target business as might be undertaken by a venture capital fund or similar
institution. As a result, management may elect to merge with a target business
that has one or more undiscovered shortcomings and may, if given the choice to
select among target businesses, fail to enter into an agreement with the most
investment-worthy target business.
Following a business combination, the Company may benefit from the services of
others in regard to accounting, legal services, underwritings and corporate
public relations. If requested by a target business, management may recommend
one or more underwriters, financial advisors, accountants, public relations
firms or other consultants to provide such services.
A potential target business may have an agreement with a consultant or advisor
providing that services of the consultant or advisor be continued after any
business combination. Additionally, a target business may be presented to the
Company only on the condition that the services of a consultant or advisor be
continued after a merger or acquisition. Such pre-existing agreements of target
businesses for the continuation of the services of attorneys, accountants,
advisors or consultants could be a factor in the selection of a target business.
15
In implementing a structure for a particular business acquisition, the Company
may become a party to a merger, consolidation, reorganization, joint venture, or
licensing agreement with another corporation or entity. It may also acquire
stock or assets of an existing business. On the consummation of a transaction,
it is likely that the present management and shareholders of the Company will no
longer be in control of the Company. In addition, it is likely that the
Company's officers and directors will, as part of the terms of the acquisition
transaction, resign and be replaced by one or more new officers and directors.
It is anticipated that any securities issued in any such reorganization would be
issued in reliance upon exemption from registration under applicable federal and
state securities laws. In some circumstances, however, as a negotiated element
of its transaction, the Company may agree to register all or a part of such
securities immediately after the transaction is consummated or at specified
times thereafter. If such registration occurs, of which there can be no
assurance, it will be undertaken by the surviving entity after the Company has
entered into an agreement for a business combination or has consummated a
business combination and the Company is no longer considered a blank check
company. The issuance of additional securities and their potential sale into any
trading market which may develop in the Company's securities may depress the
market value of the Company's securities in the future if such a market
develops, of which there is no assurance.
While the terms of a business transaction to which the Company may be a party
cannot be predicted, it is expected that the parties to the business transaction
will desire to avoid the creation of a taxable event and thereby structure the
acquisition in a tax-free reorganization under Sections 351 or 368 of the
Internal Revenue Code of 1986, as amended.
With respect to any merger or acquisition negotiations with a target business,
management expects to focus on the percentage of the Company which target
business shareholders would acquire in exchange for their shareholdings in the
target business. Depending upon, among other things, the target business' assets
and liabilities, the Company's shareholders will in all likelihood hold a
substantially lesser percentage ownership interest in the Company following any
merger or acquisition. Any merger or acquisition effected by the Company can be
expected to have a significant dilutive effect on the percentage of shares held
by the Company's shareholders at such time.
No assurances can be given that the Company will be able to enter into a
business combination, as to the terms of a business combination, or as to the
nature of the target business.
16
As of the date hereof, management has not made any final decision concerning or
entered into any agreements for a business combination. When any such agreement
is reached or other material fact occurs, the Company will file notice of such
agreement or fact with the Securities and Exchange Commission on Form 8-K.
Persons reading this Form 10-QSB are advised to determine if the Company has
subsequently filed a Form 8-K.
The Company anticipates that the selection of a business opportunity in which to
participate will be complex and without certainty of success. Management
believes (but has not conducted any research to confirm) that there are numerous
firms seeking the perceived benefits of a publicly registered corporation. Such
perceived benefits may include facilitating or improving the terms on which
additional equity financing may be sought, providing liquidity for incentive
stock options or similar benefits to key employees, increasing the opportunity
to use securities for acquisitions, and providing liquidity for shareholders and
other factors. Business opportunities may be available in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex.
GOING CONCERN FACTORS--LIQUIDITY
The Company has been in the development stage since its inception (May 15,
2001), and has not established sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,265,769 from inception through March 31, 2004. The Company has ceased its
plans to begin a racing league and all operations have been discontinued. In
addition, current liabilities of the Company exceed their assets by
approximately $3,680,000 and their convertible promissory notes payable
obligations are in default. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. These condensed consolidated
financial statements do not include any adjustments that may result from the
outcome of these uncertainties.
Since August 26, 2003, the Company has attempted to locate and negotiate with a
business entity for a merger of that business into the Company. There can be no
assurance that the Company will be able to locate a suitable acquisition
candidate before it exhausts its cash reserves.
DISCONTINUED OPERATIONS
The Company has been in the development stage since its inception (May 15,
2001), and has not established sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,265,769 from inception through March 31, 2004. Accordingly, on August 26,
2003, the Board of Directors of the Company unanimously approved a plan to
immediately discontinue its racing operation. While the Company does not expect
any additional liability, the following agreements were in place when the
Company discontinued its racing operation:
17
RACING CAR DESIGN AND CONSTRUCTION AGREEMENT - On October 22, 2001, TRAC entered
into a Racing Car Design and Construction Agreement with Riley & Scott Race Car
Engineering ("Riley & Scott"). The agreement required payments aggregating
$1,515,000 during Phase I, which was 23 weeks, and included design, tooling,
prototype construction and aero tooling. Phase II of the agreement commenced
after completion of Phase I and was planned to be completed in 58 weeks. Phase
II was based upon production of 100 racing cars, at a cost of approximately
$110,000 each, plus the cost of engines. The agreement also provided for the
contractor to be the sole provider of most repair service. Phase I of the
agreement was completed during April 2002, and Phase II of the agreement
commenced in April 2002. In August 2002, TRAC and Riley & Scott agreed upon a
revised schedule based on the delay of the initial race season to 2004. This
revised schedule required a $500,000 payment prior to August 31, 2002, and
subsequent monthly payments of $50,000 through March 31, 2003. Phase II of the
agreement was placed on hold due to TRAC not meeting the required payment
schedule. At September 30, 2003, TRAC had incurred and paid in Phase II total
costs of $2,545,781.
The agreement terms included that upon temporary cessation or early termination
of the agreement, Riley & Scott shall have all rights and title to all tangible
and intangible Phase I products and components, all racing cars, components,
vendored components and spares ("Post Termination Inventory") then in its
possession. When the agreement was terminated, Riley & Scott had possession of
all Post Termination Inventory. Riley & Scott may sell all or part of the Post
Termination Inventory in any arms length transaction in a bona fide transaction
to the buyer offering the highest price. In the event that the amount realized
in any such sale is less than the total amount due as of the termination date,
Riley & Scott shall be entitled to money damages equal to the difference between
the net proceeds of the sale and the full amount due as of the termination date
plus penalties to include attorney's fees, interest on delinquent amounts,
storage fees, insurance, broker's fees, and advertising expenses. In the event
that the sales price of the Post Termination Inventory exceeds Riley & Scott's
cost and penalties, TRAC would receive 75% of the excess.
Management of the Company has determined that the Company would be unlikely to
recover anything from the ultimate sale by Riley & Scott. Accordingly, the
related assets have been considered fully impaired. Management does not believe
the Company has any remaining liability to Riley & Scott.
TEAM SALES BROKERAGE AGREEMENT - In June 2002, TRAC engaged Moag & Company to be
the exclusive broker of all team sales for a one-year term, and in June 2003,
TRAC and Moag & Company amended and restated their agreement to extend the term
of the agreement through April 16, 2004 (the "Moag Agreement"). TRAC was
attempting, through Moag & Company, to sell at least six teams for its inaugural
race season of 2004. Under the Moag Agreement, TRAC paid an initial fee of
$25,000 and would have paid to Moag & Company upon each sale of a team a cash
fee of $400,000 and warrants to purchase $200,000 of common stock, with an
exercise price per share equal to the greater of $1.00 or the ten-day average
closing price for the common stock ("Moag Warrants"). The Moag Warrants were to
be for a seven-year term and become exercisable in equal installments over the
first four years they would have been outstanding. Management is of the opinion
that this agreement was terminated without future liability when racing
operations were discontinued.
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BROADCASTING AGREEMENT - In April 2003, the Company entered into an agreement
with ESPN, Inc. and ESPN Productions, Inc. (together, "ESPN"), pursuant to which
ESPN was to provide for the live broadcasting of at least 13 two-hour League
events and produce these television events for the 2004 and 2005 racing seasons
(the "ESPN Agreement"). TRAC, subject to ESPN approvals, had the right to sell
national television advertising (16 units per hour per event), billboard and
signage advertising and sponsorships. The ESPN Agreement required TRAC to pay
expected production fees ("Production Fees") of $525,000 per event in 2004 and
$550,000 per event in 2005, with 6% annual increases thereafter during
successive contract renewal periods, and an initial Production Fee of $375,000
payable in October 2003 for animation, graphics, music and track surveys, with
$30,000 each year thereafter for upgrades. TRAC would also have paid ESPN
consideration for broadcasting all TRAC racing league ("League") events on a per
event basis ("Broadcast Consideration") in the 2004 and 2005 seasons aggregating
to $3,460,000 each year, with increases of 5% each year thereafter. The ESPN
Agreement was to cover the 2004 and 2005 League seasons, with ESPN having
successive options to renew the agreement, first, through the 2007 season,
second, through the 2009 season and finally, through the 2015 season. Before the
expiration of the ESPN Agreement, TRAC would have been required to negotiate
exclusively with ESPN for sixty days for broadcast rights, to make an offer to
ESPN if negotiations did not result in a new ESPN agreement and to make a
re-offer to ESPN if a third party offered to broadcast League events, which
re-offer would have been on the same terms as those of the third party's offer.
TRAC could terminate the agreement with ESPN either upon ESPN making material
changes to its broadcast schedule or in the first year of the final renewal
period upon payment of a $30 million termination fee to ESPN. Under the
contract, the Company would have been required to make the following minimum
payments:
2003 $ 375,000
2004 10,285,000
2005 10,640,000
------------------
Total minimum contract payments $ 21,300,000
==================
Management is of the opinion that this agreement was terminated without future
liability to the Company when racing operations were discontinued.
SALES PROVIDER AGREEMENT FOR SPONSORSHIP OPPORTUNITIES - In April 2003, TRAC
entered into an agreement with Raycom Sports ("Raycom") pursuant to which Raycom
became the exclusive sales provider of all TRAC sponsorship opportunities
including, media packages, car and team sponsor packages, and TRAC event and
league sponsor packages for a period to expire on July 1, 2005. Under this
agreement, TRAC was to pay Raycom a sales commission equal to 12.5% of the
amount that TRAC actually collected from sponsors. TRAC agreed to pay Raycom a
monthly nonrefundable advance against its sales commission in the amount of
$14,000. Each sales commission payment was to be reduced by an amount equal to
the aggregate amount of such monthly advances not previously netted against
sales commissions. Management is of the opinion that this agreement was
terminated without future liability to the Company when racing operations were
discontinued.
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LETTER OF CREDIT FOR OFFICE LEASE - A letter of credit was purchased to
guarantee the Company's performance of payment to a third party on their vacated
office lease. Restricted cash in the amount of $100,000 is collateral on the
letter of credit. The Company vacated the premises upon its decision to
terminate its racing operations and has accrued $100,000 in lease settlement
cost which is included in accrued expenses on the condensed consolidated balance
sheet.
LOCAL OPERATOR AGREEMENT WITH FORMER CHIEF EXECUTIVE OFFICER - On August 25,
2001, the Company entered into an agreement in principal with its former Chief
Executive Officer under which the former Chief Executive Officer would become
the local operator of a market. The agreement stated that the cost would be
$100,000 plus the cost of the nine racing cars and three haulers to obtain the
operating rights for the team, which was substantially less than amounts
anticipated to be paid by other local operators. Under the agreement, the
$100,000 was to be kept in an escrow account. The funds are not currently
escrowed and the $100,000 is included in amounts payable to related parties on
the condensed consolidated balance sheet.
CURRENT OPERATIONS
The Company had two employees until March 31, 2004, and is completing the
wind-down of the racing business. Certain shareholders and creditors of the
Company are evaluating other business opportunities. Any new business would
require raising additional capital and would probably result in a substantial
dilution of existing stockholders.
ASSET IMPAIRMENT
As a part of the evaluation of the assets of the Company upon discontinuing its
operations, the following assets were considered to be fully impaired based upon
management's expectation that they had no future value. These amounts have been
recorded as impairment losses and were included in the loss from discontinued
operations during the quarter ended September 30, 2003.
Race car designs and manufacturing equipment $ 1,673,400
Production contract payments 2,545,781
Goodwill 2,810,627
-=----------------
Total $ 7,029,808
==================
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ITEM 3. CONTROLS AND PROCEDURES
The Company discontinued operations on August 26, 2003, and subsequently
terminated the majority of its employees. A third-party consultant was retained
to communicate to management the disclosures required by reports that are filed
under the Exchange Act.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal executive
officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of March 31,
2004, and, based on its evaluation, our principal executive officer has
concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
Other than as discussed above, there have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation described above, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--
Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K--
None.
SIGNATURES
In accordance with the requirements 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.
TEAM SPORTS ENTERTAINMENT, INC.
May 5, 2004 BY: /S/ TERRY HANSON
---------------------------------------
Terry Hanson, President, Acting CEO,
and principal financial and accounting
officer
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