UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 0-23100
TEAM SPORTS ENTERTAINMENT, INC.
(Exact name of small business issuer in its charter)
DELAWARE 22-2649848
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
16501 D NORTHCROSS DR.
HUNTERSVILLE, NORTH CAROLINA 28078
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER (704) 992-1290
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF EACH CLASS)
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 __.
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB __.
State issuer's revenues for its most recent fiscal year. $0
--
As of March 23, 2004, the registrant had outstanding 63,782,412 shares of its
Common Stock, par value of $.0001, its only class of voting securities. The
aggregate market value of the shares of Common Stock of the registrant held by
non-affiliates on March 23, 2004, was $1,238,000 based on the closing price on
the OTC Bulletin Board on that date. (See Item 5).
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes ___; No X .
TEAM SPORTS ENTERTAINMENT, INC.
TABLE OF CONTENTS
FORM 10-KSB
Part I
Page
PART I
Item 1 Description of Business 3
Item 2 Description of Property 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 8
Item 6 Management's Discussion and Analysis or Plan of Operation 9
Item 7 Financial Statements 17
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
Item 8A Controls and Procedures 40
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons 40
Item 10 Executive Compensation 42
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 45
Item 12 Certain Relationships and Related Transactions 47
Item 13 Exhibits and Reports on Form 8-K 50
Item 14 Principal Accountant Fees and Services 50
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial results, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. The following discussion and analysis should be read in conjunction
with the report on the Consolidated Financial Statements and the accompanying
Notes to Consolidated Financial Statements appearing later in this report. All
statements other than statements of historical fact included in this Annual
Report on Form 10-KSB are, or may be deemed to be, forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended. Important factors that
could cause actual results to differ materially from those discussed in such
forward-looking statements include, but are not limited to, the following: the
Company's current liquidity needs, as described in its periodic reports; changes
in the economy; inability of the Company to raise additional capital; the
Company's involvement in potential litigation; volatility of the Company's stock
2
price; the variability and timing of business opportunities; changes in
accounting policies and practices; the effect of organizational changes within
the Company; adverse state and federal regulation and legislation; and the
occurrence of extraordinary or catastrophic events and terrorist acts. These
factors and others involve certain risks and uncertainties that could cause
actual results or events to differ materially from management's views and
expectations. Inclusion of any information or statement in this report does not
necessarily imply that such information or statement is material. The Company
does not undertake any obligation to release publicly revised or updated
forward-looking information, and such information included in this report is
based on information currently available and may not be reliable after this
date.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Team Sports Entertainment, Inc. (together with its subsidiaries, hereinafter
referred to as the "Company", "Team Sports", "We" or "Us"), is a holding company
with one wholly owned subsidiary, Maxx Motorsports, Inc. ("Maxx"). Maxx, through
its wholly owned subsidiary, Team Racing Auto Circuit, LLC, a Delaware limited
liability company ("TRAC"), planned to develop, own, operate and sanction an
automotive racing league designed to provide content for television and tracks
while expanding the existing base of racing fans. The Company, which has been in
the development stage since its inception, May 15, 2001, did not establish
sources of revenue sufficient to fund the development of business and pay
operating expenses, resulting in a net loss of $15,054,021 from inception
through December 31, 2003. 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.
Team Sports Entertainment, Inc., a Delaware corporation, was originally
incorporated on July 25, 1985 as Horizon Capital Corp. It was known as
Reconversion Technologies, Inc. ("Reconversion") until May 1, 2000, at which
time the name was changed to Logisoft Corp. On May 15, 2001, the Company changed
its name from Logisoft Corp. to Team Sports Entertainment, Inc.
Keystone Laboratories, Inc. ("Keystone"), a Delaware corporation organized on
July 20, 1987 was acquired by Reconversion on November 20, 1997. Keystone is a
forensic urine drug screening and confirmatory testing laboratory.
On March 10, 2000, Reconversion acquired 100% of Logisoft Computer Products
Corp. ("LCP"), a New York corporation, and 100% of eStorefronts.net Corp.
("eStore"), an affiliate of LCP, in exchange for 12,000,000 shares of
Reconversion Common Stock. LCP and eStore created global and localized Internet
solutions for both traditional and pure e-business companies.
On March 9, 2000, as a requirement of the purchase on March 10, 2000,
Reconversion completed the sale of its wholly owned subsidiary, Keystone, for a
$720,000 non-interest bearing note payable in twelve monthly payments of
3
$60,000. Joel Holt, President and Chairman of the Board of Directors of both
Reconversion and Keystone, at the time, was the purchaser. Reconversion also
completed the sale of 5,500,000 shares of its Common Stock on March 9, 2000 for
$5,500,000 cash. The shares sold included 2,750,000 shares from the exercise of
warrants and 2,750,000 newly issued shares.
On May 15, 2001, the Company acquired all of the common stock of Maxx
Motorsports, Inc. and its wholly owned subsidiary, TRAC, in a tax-free stock
exchange for 7,750,000 shares of the Company's common stock. In addition, as a
part of this agreement, the Company issued 3,300,000 shares of its common stock
in exchange for the cancellation of $825,000 of Maxx's liabilities. The
liabilities consisted of $450,000 for cash advances and loans made to Maxx and
$375,000 for consulting fees incurred. In addition, the Company completed the
sale of its wholly owned subsidiaries, LCP and eStore, to a group of its
shareholders in exchange for 12,000,000 shares of the Company's common stock,
which were cancelled.
BUSINESS OF THE COMPANY
TRAC planned to develop, own, operate and sanction an automotive racing league
designed to provide content for television and tracks while expanding the
existing base of racing fans. The Company, which has been in the development
stage since its inception, May 15, 2001, did not establish sources of revenue
sufficient to fund the development of business and pay operating expenses,
resulting in a net loss of $15,054,021 from inception through December 31, 2003.
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 attempted to locate and negotiate with a
business entity for the merger of that target 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
4
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.
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.
5
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.
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.
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-KSB are advised to determine if the Company has
subsequently filed a Form 8-K.
6
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.
EMPLOYEES
At December 31, 2003, the Company had two part-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its office facility in Huntersville, North Carolina
on a month-to-month basis.
As a result of discontinuing the race operations and terminating the majority of
its employees, the Company vacated their office space and moved into the
temporary offices above. Future minimum lease payments for the remaining term of
the vacated lease are as follows: 2004--$126,368, 2005--$129,273, and
2006--$65,363. The Company has a letter of credit in the amount of $100,000,
which is secured by a cash deposit of this amount, and which partially
collateralizes the vacated lease obligation. The Company accrued the $100,000 in
September 2003 and expects to limit their loss to this amount.
ITEM 3. LEGAL PROCEEDINGS
On February 18, 2004, four Georgia shareholders filed suit in the Superior Court
of Fulton County against the Company's former CEO, William G. Miller of
Alpharetta, Georgia. The suit alleges breach of contract, wrongful conversion of
company monies, mismanagement, breach of fiduciary duty and fraud on the part of
the defendants while serving the Company in 2001 and 2002. The suit contends
Team Sport's shareholders suffered market losses in excess of $50 million. Also
named in the action was Jon Pritchett, who was president of the Company while
Miller was CEO.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our $0.0001 par value per share common stock ("Common Stock") is traded in the
over-the-counter market and is quoted on the NASD Over-The Counter Bulletin
Board ("OTCBB") under the symbol "TSPT.OB". Prior to May 18, 2001, the Company
was quoted on the OTCBB under the symbol "LGST" and prior to May 1, 2000, was
quoted on the OTCBB under the symbol "RTTK." The following tables set forth the
quarterly high and low daily bids for our Common Stock as reported by the OTCBB
for the two years ended December 31, 2003. The bids reflect inter-dealer prices
without adjustments for retail mark-ups, mark-downs or commissions and may not
represent actual transactions.
High Low
---- ---
2003:
Fourth quarter $.05 $.01
Third quarter $.23 $.01
Second quarter $.71 $.15
First quarter $.49 $.20
2002:
Fourth quarter $.47 $.14
Third quarter $.76 $.17
Second quarter $1.86 $.57
First quarter $1.91 $.62
The OTCBB is a quotation service sponsored by the National Association of
Securities Dealers ("NASD") that displays real-time quotes and volume
information in over-the-counter ("OTC") equity securities. The OTCBB does not
impose listing standards or requirements, does not provide automatic trade
executions and does not maintain relationships with quoted issuers. A company
traded on the OTCBB may face loss of market makers and lack of readily available
bid and ask prices for its stock and may experience a greater spread between the
bids and ask price of its stock and a general loss of liquidity with its stock.
In addition, certain investors have policies against purchasing or holding OTC
securities. Both trading volume and the market value of our securities have
been, and will continue to be, materially affected by the trading on the OTCBB.
HOLDERS
At March 23, 2004, there were 683 holders of record of the Company's Common
Stock, an undetermined number of which represent more than one individual
participant in securities positions with the Company.
8
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and intends to
utilize current and future resources to implement its new plan of operations.
Therefore, it is not anticipated that cash dividends will be paid on the
Company's Common Stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes certain information as of December 31, 2003, with
respect to compensation plans (including individual compensation arrangements)
under which Common Stock of the Company is authorized for issuance:
NUMBER OF SECURITIES TO BE
ISSUED UPON EXERCISE OF WEIGHTED AVERAGE EXERCISE NUMBER OF SECURITIES
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS FUTURE ISSUANCE
------------- ------------------- ---------------------------- ---------------
Equity compensation plans approved
by security holders* 6,400,000 $ .99 1,100,000
Equity compensation plans not
approved by security holders # 4,500,000 .74 -
----------- ---------- -----------
Total 10,900,000 $ .89 1,100,000
=========== ========== ===========
* All options are granted under the Company's 2000 Stock Option Plan ("Plan"),
which authorizes the grant of options to purchase an aggregate of 3,000,000
shares and was approved by stockholders in April 2001. In 2001, the Board of
Directors approved the increase of authorized shares available under the Plan to
7,500,000 shares. This increase in authorized shares will be submitted to a vote
of the stockholders at the next annual meeting.
# On April 2, 2003, the Board of Directors approved the issuance of options to
acquire 8,800,000 common shares pursuant to the Plan. The necessary increase in
shares will be submitted to a vote of stockholders at the next annual meeting.
As a result of discontinuing the planned racing operation, 4,300,000 of the
options were forfeited since they were contingent upon the 2004 and 2005 race
season starting.
The material features of the Plan, the data for which is summarized under the
equity compensation plans approved by security holders in the table above, and
its warrant arrangements are summarized in Note 6 to the consolidated financial
statements that appear in Item 7.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. 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.
9
The Company will attempt to locate and negotiate with a business entity for the
merger of that target 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.
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.
10
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.
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.
11
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.
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-KSB 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.
12
GOING CONCERN FACTORS--LIQUIDITY
During 2003, the Company utilized cash at the beginning of the year of $650,305,
the release of $50,000 from restricted cash and $765,250 from the issuance of
the Convertible Notes to fund its operations. On August 26, 2003, the Board of
Directors unanimously approved a plan to immediately discontinue its racing
operations. As a result, the Company had reduced its staff to two part-time
people at December 31, 2003. Since August 26, 2003, certain shareholders and
creditors of the Company have been seeking a suitable acquisition candidate.
The Company had unrestricted cash balances at December 31, 2003 of $88,668. Team
Sports Entertainment, Inc. and Subsidiary have ceased its plans to begin a
racing league and all operations have been discontinued. In addition, current
liabilities of Team Sports Entertainment, Inc. and Subsidiary exceed its assets
by approximately $3,400,000, and its convertible promissory notes payable
obligations are in default. These conditions raise substantial doubt about Team
Sports Entertainment, Inc. and Subsidiary's ability to continue as a going
concern. Management's plans regarding these matters are described in Note 1 to
the consolidated financial statements. The consolidated financial statements do
not include any adjustments that may result from the outcome of these
uncertainties. 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, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. 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:
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 payment 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 December 31, 2003, TRAC had incurred
and paid in Phase II total costs of $2,545,781.
13
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 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
14
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 discontinue its racing operations and has
accrued $100,000 in lease settlement cost which is included in accrued expenses
on the consolidated balance sheet.
LOCAL OPERATOR AGREEMENT WITH FORMER CHIEF EXECUTIVE OFFICER
On August 25, 2001, the Company entered into an agreement in principle 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 consolidated balance sheet.
15
NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
This Statement amends SFAS 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
provisions of this statement effective January 1, 2003 with no impact on its
financial position or results of operations.
Effective January 1, 2003, we adopted FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures that must be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The adoption of this interpretation had no effect on the Company's
financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 requires a variable interest
entity ("VIE") to be consolidated by the primary beneficiary of the entity under
certain circumstances. FIN 46 is effective for all new VIE's created or acquired
after January 31, 2003. For VIE's created or acquired prior to February 1, 2003,
the provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company adopted this interpretation on
January 31, 2003 with no impact on its financial position or results of
operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." The Statement is effective for contracts entered into or
modified after June 30, 2003 and is to be applied prospectively. The Company
adopted this Statement on April 30, 2003 with no impact on its financial
position or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. Restatement is not permitted. The Company adopted this Statement on
July 1, 2003 with no impact on its financial position or results of operations.
16
CRITICAL ACCOUNTING POLICIES
With no current operations and only nominal assets, the Company currently has
not identified any accounting policies which they would deem critical.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Team Sports Entertainment, Inc. and
Subsidiary (a Development Stage Company) together with the reports thereon of
Guest & Company, P.C. dated March 22, 2004 for the year ended December 31, 2003
and Elliott Davis, LLC dated March 5, 2003 for the year ended December 31, 2002
is set forth as follows:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
No.
Auditor's Reports:
Guest & Company, P.C. 18
Elliott Davis, LLC 19
Consolidated Balance Sheet 20
Consolidated Statements of Operations 21
Consolidated Statements of Stockholders' Deficit 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24-37
17
GUEST & COMPANY, P.C.
7170 S. Braden Ave., Suite 100
Tulsa, OK 74136-6333
Phone: 918-481-5355 Fax: 918-481-5771
Independent Auditor's Report
Board of Directors and Stockholders
Team Sports Entertainment, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Team Sports
Entertainment, Inc. and Subsidiary (a development stage company) as of December
31, 2003 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the year ended December 31, 2003, and the period from
May 15, 2001 (inception) through December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Team Sports
Entertainment, Inc. and Subsidiary (a development stage company) at December 31,
2003 and the results of their operations and their cash flows for the year ended
December 31, 2003, and the period from May 15, 2001 (inception) through December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that Team Sports Entertainment, Inc. and Subsidiary (a development stage
company) will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, Team Sports Entertainment, Inc. and
Subsidiary have ceased its plans to begin a racing league and all operations
have been discontinued. In addition, current liabilities of Team Sports
Entertainment, Inc. and Subsidiary exceed its assets by approximately
$3,400,000, and its convertible promissory notes payable obligations are in
default. These conditions raise substantial doubt about Team Sports
Entertainment, Inc. and Subsidiary's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that may result
from the outcome of these uncertainties.
/s/ Guest & Company, P.C.
March 22, 2004
Tulsa, Oklahoma
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders
Team Sports Entertainment, Inc.
Huntersville, North Carolina
We have audited the accompanying consolidated balance sheet of Team Sports
Entertainment, Inc. and Subsidiary (a development stage company) as of December
31, 2002 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Team Sports
Entertainment, Inc. and Subsidiary (a development stage company) as of December
31, 2002 and the results of their operations, changes in stockholders' equity
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that Team Sports Entertainment, Inc. and Subsidiary (a development stage
company) will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, Team Sports Entertainment, Inc. and
Subsidiary has not yet commenced operations and its total liabilities and
commitments exceed current assets available to fund operations. This raises
substantial doubt about Team Sports Entertainment, Inc. and Subsidiary's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Elliott Davis, LLC
March 5, 2003
Columbia, South Carolina
19
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 88,668
Restricted cash 100,000
Prepaid expenses and other assets 35,661
-------------
Total assets $ 224,329
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 14,722
Amounts payable to related parties 333,627
Accrued expenses 123,794
Accrued interest payable 185,288
Convertible promissory notes 3,035,250
-------------
Total liabilities 3,692,681
-------------
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 (19,349,348)
-------------
Total stockholders' deficit (3,468,352)
-------------
Total liabilities and stockholders' deficit $ 224,329
=============
See accompanying notes to consolidated financial statements.
20
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND DEVELOPMENT STAGE
FROM INCEPTION (MAY 15, 2001), THROUGH DECEMBER 31, 2003
FROM INCEPTION
YEARS ENDED (5/15/2001)
DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
2003 2002 2003
------------- ------------- -------------
DISCONTINUED OPERATIONS
Loss from discontinued operations $ (9,069,804) $ (3,563,238) $(15,054,021)
Income tax benefit -- -- --
------------- ------------- -------------
NET LOSS FROM DISCONTINUED OPERATIONS $ (9,069,804) $ (3,563,238) $(15,054,021)
============= ============= =============
NET LOSS PER SHARE, BASIC AND DILUTED, FROM
DISCONTINUED OPERATIONS $ (0.14) $ (0.06) $ (0.24)
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 63,594,559 62,603,845 62,938,329
============= ============= =============
See accompanying notes to consolidated financial statements.
21
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Deficit)
Accumulated
Common Stock Additional Stock During the
------------------------ Paid-in Subscription Accumulated Development
Shares Par Value Capital Recievable Deficit Stage Total
------------- --------- ------------- ----------- ------------- ------------- -------------
Balance at December 31, 2001 62,468,312 $ 6,247 $ 15,533,724 $ (350,000) $ (4,295,327) $ (2,420,979) $ 8,473,665
Common stock warrants exercised 100,000 10 37,490 37,500
Collection of stock subscription -- -- -- 350,000 -- -- 350,000
Issuance of common stock for
loan origination fees 908,000 91 226,909 -- -- -- 227,000
Net loss -- -- -- -- -- (3,563,238) (3,563,238)
------------- --------- ------------- ----------- ------------- ------------- -------------
Balance at December 31, 2002 63,476,312 6,348 15,798,123 -- (4,295,327) (5,984,217) 5,524,927
Issuance of common stock for
loan origination fees 306,100 30 76,495 -- -- -- 76,525
Net loss -- -- -- -- -- (9,069,804) (9,069,804)
------------- --------- ------------- ----------- ------------- ------------- -------------
Balance at December 31, 2003 63,782,412 $ 6,378 $ 15,874,618 $ -- $ (4,295,327) $(15,054,021) $ (3,468,352)
============= ========= ============= =========== ============= ============= =============
See accompanying notes to consolidated financial statements
22
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND DEVELOPMENT STAGE
FROM INCEPTION (MAY 15, 2001), THROUGH DECEMBER 31, 2003
FROM INCEPTION
YEARS ENDED (5/15/2001)
DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
2003 2002 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,069,804) $ (3,563,238) $(15,054,021)
Loss from discontinued operations (9,069,804) (3,563,238) (15,054,021)
------------- ------------- -------------
Loss from continuing operations -- -- --
Net cash used in discontinued operations (1,326,887) (6,617,891) (9,293,907)
------------- ------------- -------------
Net cash used in operations (1,326,887) (6,617,891) (9,293,907)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in discontinued operations (150,000) (2,277) (1,583,671)
------------- ------------- -------------
Net cash used in investing activities (150,000) (2,277) (1,583,671)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash from discontinued operations 915,250 2,594,729 10,966,246
------------- ------------- -------------
Net cash provided by financing activities 915,250 2,594,729 10,966,246
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (561,637) (4,025,439) 88,668
CASH AND CASH EQUIVALENTS, beginning of period 650,305 4,675,744 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 88,668 $ 650,305 $ 88,668
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes:
Interest $ 75,830 $ 66,300 $ 144,162
Income taxes $ -- $ -- $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for loan origination fees $ 76,525 $ 227,000 $ 303,525
Acquisition of equipment through capital lease $ -- $ -- $ 75,696
Acquisition of Maxx:
Current assets, excluding cash $ -- $ -- $ 50,000
Property and equipment -- -- 3,017
Goodwill -- -- 2,932,832
Common stock issued -- -- (2,762,500)
Liabilities assumed -- -- (178,136)
------------- ------------- -------------
Cash paid in excess of cash received in acquisition of Maxx $ -- $ -- $ 45,213
============= ============= =============
See accompanying notes to consolidated financial statements.
23
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Team
Sports Entertainment, Inc. (Team Sports) and its wholly owned
subsidiary, Maxx Motorsports, Inc. (Maxx) and its wholly owned
subsidiary, Team Racing Auto Circuit, LLC (TRAC), collectively
referred to as "the Company" or "the Companies". All significant
inter-company balances and transactions have been eliminated in
consolidation. Maxx, through its wholly owned subsidiary, TRAC,
planned to develop, own, operate and sanction an automotive racing
league (the League) designed to provide content for television and
tracks while expanding the existing base of racing fans. Accordingly,
the operations of the Companies are presented as those of a
development stage enterprise, from its inception (May 15, 2001), as
prescribed by Statement of Financial Accounting Standards (SFAS) 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.
Accordingly, all prior operations from business activities are
classified as discontinued operations in the accompanying consolidated
financial statements.
ORGANIZATION AND NATURE OF BUSINESS
Since the August 26, 2003 decision of the Board of Directors of the
Company to discontinue racing operations, certain stockholders and
creditors of the Company have been seeking an acquisition candidate.
Team Sports, a Delaware corporation, is a holding company with one
wholly owned subsidiary, Maxx, a South Carolina corporation. Maxx,
through its wholly owned subsidiary, TRAC, planned to develop, own,
operate, and sanction the League designed to provide content for
television and tracks while expanding the existing base of racing
fans.
On May 15, 2001, Team Sports changed its name from Logisoft
Corporation to Team Sports Entertainment, Inc. On May 15, 2001, Team
Sports acquired all of the common stock of Maxx in a tax-free stock
exchange for 7,750,000 shares of Team Sports common stock. In
addition, as a part of this agreement, Team Sports issued 3,300,000
shares of its common stock in exchange for $450,000 of Maxx's
liabilities and consulting fees to third parties in the amount of
$375,000 that were instrumental to the transaction. Also on this date,
Team Sports completed the sale of its wholly owned subsidiaries, LCP
and eStorefronts, who created global and localized Internet solutions
for both traditional and pure e-business companies, to a group of its
shareholders in exchange for 12,000,000 shares of Team Sports common
stock, which were canceled.
24
GOING CONCERN
The Companies have not established sources of revenues sufficient to
fund the development of business, projected operating expenses and
commitments for the last quarter of fiscal 2003 and fiscal year 2004.
The Company, which has been in the development stage since its
inception, May 15, 2001, has accumulated a net loss of $15,054,021
through December 31, 2003. The Company has ceased its plans to begin a
racing league and all operations have been discontinued. In addition,
current liabilities of the Companies exceed their assets by
approximately $3,400,000, and their convertible promissory notes
payable obligations are in default. These conditions raise substantial
doubt about the Companies' ability to continue as a going concern. The
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 the merger of that target
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.
CASH AND CASH EQUIVALENTS
The Companies consider all cash on hand, cash in banks and all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash and cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Cash and cash equivalents are considered restricted if they are unable
to be withdrawn without notice or penalty.
GOODWILL
SFAS No. 142, "Goodwill and Other Intangible Assets" has been applied
to the Maxx transaction. Accordingly, goodwill is not amortized but
reviewed for impairment at least annually or more frequently if
impairment indicators arise. On August 26, 2003, the Board of
Directors of the Company approved a plan to immediately discontinue
its racing operation. Accordingly, the net goodwill balance of
$2,810,627 was considered fully impaired and the adjustment is
included in loss from discontinued operations.
REVENUE RECOGNITION
Revenue from product sales is recognized when the related goods are
shipped and all significant obligations have been satisfied. Revenue
from services is recognized when the services are performed. No
revenue has been recognized.
STOCK OPTION PLANS
Team Sports 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.
25
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 statements 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 Team Sports employees, board of directors, advisory
committee members, and consultants.
SFAS No. 123 pro forma numbers are as follows for the years ended
December 31, 2003 and 2002 and from inception, May 15, 2001, to
December 31, 2003:
FROM
2003 2002 INCEPTION
------------ ------------ ------------
Net loss, as reported $ 9,069,804 $ 3,563,238 $15,054,021
Add: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 611,452 512,946 4,047,994
------------ ------------ ------------
Pro forma net loss $ 9,681,256 $ 4,076,184 $19,102,015
============ ============ ============
Pro forma basic and diluted net loss per share $ .15 $ .07 $ .30
============ ============ ============
Basic and diluted total net loss per share as
reported $ .14 $ .06 $ .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.
During the year ended December 31, 2003, the following weighted
average assumptions were used: risk-free interest rate of 4.67% based
on the date of issuance, no expected dividends, a volatility factor of
128% to 180% and an expected life of the options of 1 to 2 years.
Using these assumptions, the total value of stock options and rights
to receive stock granted in 2003 was $2,003,303. Options to acquire
8,800,000 shares of common stock were granted in 2003. These options
included grants for 4,300,000 shares which were contingent upon the
start of the 2004 and 2005 race seasons. Since the Company
discontinued operations and there will be no race seasons, these
options have been treated as forfeited and not included in the above
disclosure.
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 Team Sports employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a
reliable single measure of the fair value of Team Sports' options.
26
DEFERRED INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial and tax reporting in accordance with the liability method
under the provisions of SFAS No. 109, "Accounting for Income Taxes." A
valuation allowance is recorded to reduce the carrying amounts of
deferred tax assets unless management believes it is more likely than
not that such assets will be realized.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated under the provisions
of SFAS No. 128, "Earnings per Share," which established new standards
for computing and presenting earnings per share. SFAS No. 128 requires
Team Sports to report both basic earnings per share, which is based on
the weighted-average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted-average number of
common shares outstanding plus all potential dilutive shares
outstanding. At December 31, 2003 and 2002, all exercisable common
stock equivalents were antidilutive and are not included in the
earnings (loss) per share calculations.
ESTIMATES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information
by the Company.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
FASB Statement No. 123." This Statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company adopted this standard effective December
31, 2002 and has included the required disclosures in the notes to the
consolidated financial statements. The Company has not elected the
fair value treatment of stock-based compensation and the adoption of
this standard has no impact on its financial position.
Effective January 1, 2003, the Company adopted FASB Interpretation No.
("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 elaborates on the disclosures that must be made by a guarantor
in its interim and annual financial statements about its obligations
27
under certain guarantees. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the
guarantee. The adoption of this interpretation did not have a material
effect on the Company's financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires a
variable interest entity ("VIE") to be consolidated by the primary
beneficiary of the entity under certain circumstances. FIN 46 is
effective for all new VIE's created or acquired after January 31,
2003. For VIE's created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. The Company adopted this
interpretation on July 1, 2003 with no impact on its financial
position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities." The Statement is
effective for contracts entered into or modified after June 30, 2003
and is to be applied prospectively. The Company adopted this Statement
on July 1, 2003 with no impact on its financial position or results of
operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented
by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date
of the Statement and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. The Company adopted
this Statement on July 1, 2003 with no impact on its financial
position or results of operations.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
FAIR VALUE DETERMINATION
Financial instruments consist of cash, marketable securities,
promissory notes receivable, accounts payable, accrued expenses and
short-term borrowings. The carrying amount of these financial
instruments approximates fair value due to their short-term nature or
the current rates at which the Company could borrow funds with similar
remaining maturities.
28
ADVERTISING COSTS
Team Sports expenses advertising costs as incurred. Team Sports
recorded advertising costs of $20,925 and $175,225, respectively, for
the years ended December 31, 2003 and 2002.
COMPENSATED ABSENCES
Team Sports accounts for compensated absences in accordance with SFAS
No. 43, "Accounting for Compensated Absences."
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation.
NOTE 2. DISCONTINUED OPERATIONS
-----------------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. Accordingly, on August 26,
2003, the Board of Directors of the Company unanimously approved a plan to
immediately discontinue its racing operation.
The Company realized losses from its discontinued operations of $9,069,804 and
$3,563,238 in 2003 and 2002, respectively. The loss in 2003 includes an asset
impairment of $7,029,808 which includes goodwill of $2,810,627 and $4,219,181 in
payments associated with the race cars. The remainder of the loss in both
periods is primarily the selling, general and administrative costs associated
with attempting to implement the business plan.
NOTE 3. CONVERTIBLE PROMISSORY NOTES
----------------------------
In April 2003, holders of convertible promissory notes with a principal balance
of $1,645,000 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 extended term of the convertible promissory notes.
Notes in the aggregate principal 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 principal amount of $2,410,250, bear interest
at 8% per annum, require quarterly interest payments, and mature 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 December 31, 2003, the Company owed accrued interest on the notes of $185,288
and did not make the quarterly interest payments due on September 1, 2003 and
December 1, 2003. All notes are in default at December 31, 2003 and the default
rate of interest is 12% since the default occurred.
29
NOTE 4. INCOME TAXES
------------
Team Sports has not recorded a deferred tax benefit or expense for the years
ended December 31, 2003 and 2002, as all net deferred benefits have a full
valuation allowance.
Actual income tax expense applicable to earnings before discontinued operations
and income taxes is reconciled with the "normally expected" federal income tax
as follows:
2003 2002
------------ ------------
"Normally expected" income tax benefit $ 3,083,700 $ 1,211,500
Increase (decrease) in taxes resulting from:
State income taxes net of federal income
tax benefit 299,300 117,600
Nondeductible meals and entertainment (1,200) (2,600)
Valuation allowance (3,381,800) (1,326,500)
------------ ------------
Actual income tax expense $ -- $ --
============ ============
The net deferred taxes at December 31, 2003 are comprised of the following:
Net operating loss carryforward $ 14,626,000
Start-up cost carryforward 675,500
Capital loss carryforward 13,800
15,315,300
Valuation allowance (15,315,300)
-------------
Net deferred tax asset $ --
=============
Team Sports has available unused net operating loss carryforwards of $41,022,000
which will expire in various periods from 2007 to 2023, some of which may be
limited as to the amount available on an annual basis.
30
NOTE 5. LEASES
------
TRAC previously leased property under a noncancelable operating lease. The
operating lease consisted of office space that was to expire over the next three
years. Future minimum lease payments under the noncancelable operating lease as
of December 31, 2003 are as follows:
YEAR AMOUNT
---- -------------
2004 $ 126,368
2005 129,273
2006 65,363
-------------
Total $ 321,004
=============
A letter of credit was purchased guaranteeing the Companies' performance of
payment to this third party lessor. At December 31, 2003, the Company had an
outstanding letter of credit in the amount of $100,000 for use as partial
security for the office lease. The letter of credit is currently secured by cash
deposit. As noted above, the Company vacated the space prior to completion of
the lease and expects to forfeit the $100,000 cash deposit. The Company does not
expect to have any additional liability under the lease.
Team Sports recognized rent expense for leased facilities of $210,152 and
$119,145 in 2003 and 2002, respectively. The amount in 2003 includes $100,000
which the Company accrued upon their early departure from the leased space.
NOTE 6. COMMON STOCK OPTIONS AND WARRANTS
---------------------------------
In April 2000, Team Sports adopted its 2000 Stock Option Plan (the Plan) and the
Company's Board of Directors approved the same. Team Sports shareholders
approved the Plan in April 2001. The Plan was established to advance the
interests of Team Sports and its stockholders by attracting, retaining and
motivating key personnel. The Board of Directors, or a committee that it
appoints, is authorized to grant options to purchase the common stock of Team
Sports, not to exceed an aggregate of 3,000,000 shares. The Board of Directors,
or a committee that it appoints, is also authorized to establish the exercise
price and vesting terms of individual grants under the Plan. In 2001, the Board
of Directors approved a proposal to increase the number of authorized shares
available under the Plan not to exceed an aggregate of 7,500,000 shares.
Options granted under the Plan may be either "incentive stock options" intended
to qualify as such under the Internal Revenue Code, or "non-qualified stock
options." Team Sports expects that most options granted pursuant to the Plan
will be subject to vesting over a three or four-year period, such as 25%
increments on each annual grant date anniversary, during which the optionee must
continue to be an employee of Team Sports. The Board or the committee, if
applicable, may choose to impose different vesting requirements or none at all.
Options outstanding under the Plan have a maximum term of up to ten (10) years.
31
The Plan also provides that all options that are not vested will become vested
upon a change in control, unless the options are either assumed or substituted
with equivalent options. In addition, unvested options become vested, after a
change in control, if an optionee is subject to involuntary termination other
than for cause during that optionee's remaining vesting period after a change in
control. The Plan further provides that all options will be forfeited 90 days
after employment terminates.
In May 2001, Team Sports granted common stock options under the Plan to three
employees as part of their employment contracts for a total of 1,000,000 shares
of its common stock at an exercise price of $1.00 per share, which was above the
market price at the time. Accordingly, no additional compensation expense was
recorded, pursuant to APB No. 25. The options vested 83,333 shares on September
30, 2001, 333,332 shares on December 31, 2001, 333,334 shares on June 30, 2002
and the remaining 250,001 shares on June 30, 2003. Options representing 500,000
shares were forfeited due to termination of the employee in fiscal 2002.
In December 2001, Team Sports granted common stock options to its seven Advisory
Board members for a total of 1,750,000 shares of its common stock at an exercise
price of $1.00 per share, which was above the market price at the time. These
options have a 5-year life and are exercisable immediately. In addition, Team
Sports granted common stock options to its eight Board members for a total of
4,000,000 shares of its common stock, also exercisable at $1.00 per share, with
a 10-year life and are exercisable immediately. These 5,750,000 options were all
granted under the Plan.
A summary of stock option activity under the Plan during the years ended
December 31, 2003 and 2002 is as follows:
2003 2002
---------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------ -------- ---------- --------
Outstanding, beginning of year 6,400,000 $ .99 6,900,000 $ .99
Granted 8,800,000 .58 -- --
Exercised -- -- -- --
Forfeited (4,300,000) .42 (500,000) 1.00
------------ ----------
Outstanding, end of year 10,900,000 $ .89 6,400,000 $ .99
============ ==========
Options exercisable at year-end 10,900,000 $ .89 6,316,665 $ .99
Shares available for grant -- -- 1,100,000 --
As of December 31, 2003 and 2002, options to acquired 7,900,000 shares and
3,400,000 shares, respectively, have been approved by the Board of Directors but
have not been approved by the Shareholders.
Team Sports applies APB No. 25 and related interpretations in accounting for the
stock option plan.
32
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. These options included grants for 4,300,000 shares which were
contingent upon the start of the 2004 and 2005 race seasons. Since the Company
discontinued operations and there will be no race seasons, these options have
been treated as forfeited.
As a part of its issue of 28,977,000 shares of its common stock on May 15, 2001
for $7,244,250 in cash, Team Sports also issued warrants to purchase 14,488,500
shares of its common stock at a purchase price of $1.00 per share. These
warrants expire three (3) years from the effective date of the Securities and
Exchange Commission registration of the 28,977,000 shares of common stock.
In February of 2000, Team Sports issued 100,000 warrants which were exercisable
at $.375 per share and expired in February of 2003. Each warrant was for 1 share
of Team Sports common stock and the warrants were not part of the acquisition of
Maxx Motorsports. These warrants were exercised in March 2002.
Three investors exercised 350,000 Class A warrants prior to their expiration on
June 7, 2002, and executed non-interest bearing promissory notes for $350,000
which were originally due December 9, 2000. In November 2000, Team Sports' Board
of Directors extended the due date of these notes until December 9, 2001. These
notes were collected in April 2002.
NOTE 7. COMMON STOCK
------------
COMMON STOCK - The Company is authorized to issue up to 500,000,000 shares of
common stock with a par value of $.0001. At December 31, 2003, 63,901,212 shares
were issued and 63,782,412 shares were outstanding.
In 2001, Team Sports sold, pursuant to agreements, 28,977,000 shares of its
common stock for $7,244,250. The agreements required Team Sports to prepare and
file with the SEC, within 75 days of the acquisition of Maxx (May 15, 2001), a
registration statement covering these securities for an offering to be made on a
continuous basis pursuant to Rule 415 of the U.S. Securities and Exchange Act.
As a result of delays in obtaining certain information from outside parties that
was necessary to complete the registration, the registration statement was filed
after the end of the 75 day period. In accordance with the terms of the
agreements, Team Sports was required to issue an additional 2,897,700 common
shares effective May 15, 2001. These 31,874,700 shares are "restricted
securities" and may be sold only in compliance with Rule 144 of the Securities
and Exchange Act. The Company withdrew its registration statement during 2003.
PREFERRED STOCK--The Company is authorized to issue up to 2,000,000 shares of
Series A non-voting, cumulative preferred stock with a par value of $2.75. At
December 31, 2003, no preferred stock was issued or outstanding.
33
A 6% cumulative dividend is payable quarterly to stockholders of record on the
last day of the month prior to the dividend date. The Series A preferred stock
has a liquidation preference over Team Sports common stock as well as any other
classes of stock established by Team Sports.
NOTE 8. RELATED PARTY TRANSACTIONS
--------------------------
In 2003 and 2002, the Companies had various transactions with related parties,
primarily its board members and officers. The following is a summary of those
transactions:
2003 2002
---- ----
Payable to current and former officers and board members $ 269,056 $ 105,493
Consulting expenses 132,500 219,501
Directors' fees 70,500 70,500
Legal fees -- 85,684
Reimbursed aircraft expense -- 78,929
Legal fees owed to a shareholder and creditor 64,571 --
Team Sports had an employment agreement with its former Chief Executive Officer
(CEO). This agreement combined a base pay amount of $50,000 per month, with
$200,000 paid for consulting services from September 1, 2001 through December
31, 2001 and $300,000 paid for services from January 1, 2002 through June 30,
2002. In addition, the Companies obtained restricted certificates of deposit in
the amount of $480,000 to be paid if the CEO was employed at July 1, 2002 for
compensation through April 30, 2003. This entire amount was paid to the former
CEO prior to the termination of his employment on August 8, 2002. The former CEO
also received stock options to purchase 3,000,000 shares of Team Sports common
stock, of which 2,500,000 shares vested upon execution of the agreement and the
remaining 500,000 shares vested when the former CEO was accepted to the Board of
Directors in 2002. The stock option to acquire 2,500,000 shares is not granted
under the 2000 stock option plan described in Note 6 to these consolidated
financial statements.
On August 25, 2001, Team Sports entered into an agreement in principle with its
former CEO under which the CEO 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. The $100,000 was not escrowed, as required by the agreement, and is
included in the amounts payable to related parties on the consolidated balance
sheet.
In 2001, Team Sports granted common stock options to the Chairman of the Board
of Directors for a total of 1,000,000 shares of its common stock at an exercise
price of $.375 per share, which was above the market price at the time (based
upon common stock sales for cash near the same date). These options were
exercisable immediately and have a 3-year life. These stock options were not
granted under the 2000 Stock Option Plan.
34
NOTE 9. CONTINGENCIES
-------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. 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:
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 payment 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 December 31, 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.
35
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 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
36
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 discontinue its racing operations and has
accrued $100,000 in lease settlement cost which is included in accrued expenses
on the consolidated balance sheet.
LOCAL OPERATOR AGREEMENT WITH FORMER CHIEF EXECUTIVE OFFICER
On August 25, 2001, the Company entered into an agreement in principle 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 consolidated balance sheet.
NOTE 10. LEGAL MATTERS
-------------
On February 18, 2004, four Georgia shareholders filed suit in the Superior Court
of Fulton County against the Company's former CEO, William G. Miller of
Alpharetta, Georgia. The suit alleges breach of contract, wrongful conversion of
company monies, mismanagement, breach of fiduciary duty and fraud on the part of
the defendants while serving the Company in 2001 and 2002. The suit contends
Team Sport's shareholders suffered market losses in excess of $50 million. Also
named in the action was Jon Pritchett, who was president of the Company while
Miller was CEO.
37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOVEMBER 18, 2003 CHANGE
(a) Previous Independent Accountant
On November 18, 2003, Team Sports Entertainment, Inc. ("registrant" or the
"Company") notified Elliott Davis, LLC ("Davis") of Columbia, South Carolina
that effective November 18, 2003, Davis would be dismissed as the registrant's
independent accountant. Davis had served as the registrant's principal
independent accountant to audit the Company's financial statements for the
fiscal year ended December 31, 2002. The dismissal of Davis was approved by the
Board of Directors of the Company on November 18, 2003.
Davis' audit report for the fiscal year ended December 31, 2002 and note 1 to
the corresponding financial statements, contained a modification regarding the
Company's ability to continue as a going concern due to the Company not having
commenced operations and its total liabilities and commitments exceed current
assets available to fund operations and such audit report stated these factors
raised "substantial doubt" about the Company's ability to continue as a going
concern (the "Going Concern Modification"). The audited financial statements of
the Company for the fiscal year ended December 31, 2002 did not include any
adjustments in respect of the Going Concern Modification.
Other than the Going Concern Modification, the audit report of Davis on the
financial statements of the Company for the fiscal year ended December 31, 2002,
and any subsequent interim period, did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
In connection with the audit of the financial statements of the Company for the
fiscal year ended December 31, 2002 and any subsequent interim period, the
Company had no disagreements with Davis on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of Davis, would have
caused Davis to make reference to the subject matter of the disagreement(s) in
connection with Davis' report.
During the Company's fiscal year ended December 31, 2002, and any subsequent
period, Davis did not advise the Company of any of the matters identified in
paragraph (a)(1)(v) of Item 304 of Regulation S-K.
(b) New Independent Accountant
As of November 18, 2003, the Company engaged Guest & Company, P.C. ("Guest") of
Tulsa, Oklahoma as its new independent accountant. The engagement of Guest was
approved by the Board of Directors of the Company on November 18, 2003. Guest
was the Company's independent accountant for fiscal year ended December 31, 2001
and the subsequent interim periods until December 11, 2002.
38
During the period that Davis was independent accountant for the registrant,
December 11, 2002 through November 18, 2003, neither the Company nor anyone
acting on the Company's behalf consulted Guest regarding either: (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statement, and neither a written report nor oral advise
was provided by Guest to the Company that Guest concluded was an important
factor considered by the Company in reaching a decision as to any such
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a "disagreement," as that term is defined in Item
304(a)(1)(v) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a "reportable event," as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
DECEMBER 11, 2002 CHANGE
The Company, effective December 11, 2002, engaged Davis as its independent
auditors to audit the Company's consolidated financial statements for the year
ended December 31, 2002. Davis commenced its engagement in the fiscal fourth
quarter with the audit of the Company's consolidated financial statements for
the fiscal year ended December 31, 2002. The decision to dismiss Guest, the
Company's prior independent auditors, and to retain Davis as the Company's
independent auditors was made by the Audit Committee of the Board of Directors.
The Company's auditor for the 2001 fiscal year was Guest. Neither Guest's report
on the Company's consolidated financial statements for the year ended December
31, 2001 nor Davis's report on the Company's consolidated financial statements
for the year ended December 31, 2002, contained an adverse opinion or disclaimer
of opinion, nor was it otherwise modified as to uncertainty, audit scope or
accounting principles, except that the report of Davis contains a Going Concern
Modification. See "Item 6. Management's Discussion and Analysis or Plan of
Operation - Going Concern Factors - Liquidity."
During the year ended December 31, 2001 and through the date of the Current
Report on Form 8-K dated December 11, 2002, there were no disagreements between
the Company and Guest on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to Guest's satisfaction, would have caused Guest to make reference to
the subject matter of the disagreement in connection with its report on the
Company's consolidated financial statements for such year and there were no
reportable events as defined in Item 304(a)(1)(iv)(B) of Regulation S-B.
During the two most recent fiscal years ended December 31, 2001 and 2000 and
through March 5, 2003, the Company has not consulted with Davis regarding either
(i) the application of accounting principles to a specific completed or
contemplated transaction; or the type of audit opinion that might be rendered on
the Company's consolidated financial statements, and neither written nor oral
advice was provided to the Company that Davis concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing,
or financial reporting issues; or (ii) any matter that was either the subject of
a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-B
and the related instructions to Item 304 of Regulation S-B.
39
ITEM 8A. CONTROLS AND PROCEDURES
(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 December
31, 2003, and, based on its evaluation, our principal executive officer has
concluded that these controls and procedures are effective. The Company
discontinued its racing operations in August 2003 and has since retained a
third-party consultant to assist in determining required disclosures.
(b) Changes in Internal Controls
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
EXECUTIVE OFFICERS AND DIRECTORS
The following section sets forth the names, ages and current positions with the
Company held by the Directors, Executive Officers and Significant Employees;
together with the year such positions were assumed. There is no immediate family
relationship between or among any of the Directors, Executive Officers or
Significant Employees, and the Company is not aware of any arrangement or
understanding between any Director or Executive Officer and any other person
pursuant to which he was elected to his current position. Each Executive Officer
will serve until he or she resigns or is removed or otherwise disqualified to
serve, or until his or her successor is elected and qualified.
40
Each Director will serve until he or she resigns or is removed or otherwise
disqualified to serve or until his or her successor is elected. The Company
currently has one Director. The Board of Directors does not expect to appoint
additional Directors until a potential acquisition is identified.
DATE FIRST
NAME AGE POSITION ELECTED/APPOINTED
---- --- -------- -----------------
Terry Hanson 56 President and August 2002
Acting CEO
Terry Washburn 50 Director and May 2001
Chairman of
Audit Committee
TERRY HANSON, 56, Director from December 2002 until August 2003, President/Chief
Operating Officer since August 2002 and acting CEO since September 2003. Mr.
Hanson is a veteran sports executive and was named Executive Vice-President of
TRAC from June 2001 to August 2002. Mr. Hanson owns and operates Hanson
Enterprises which specializes in Sports Media Consulting. His client list
includes Infinity Radio, John Boy and Billy Radio Network, ESPN Golf and
assorted broadcast talent that he represents in contract negotiations. Mr.
Hanson was Vice-President for Sports at Turner Broadcasting from 1978-84 and
served as Broadcast Chief and President of PGA Tour Productions from 1984
through 1991. He relocated to Charlotte, North Carolina in 1991 as President of
the Raycom Management Group and held that position until Hanson Enterprises was
formed in 1995.
TERRY WASHBURN, 50, Director since May 2001, Chief Executive Officer from April
2001 to August 2001. Mr. Washburn is the President of Eurovest, Inc., a private
venture capital firm, which specializes in private placement of capital as well
as providing consulting services in strategic planning, business development and
organizational management. He is also the Chief Executive Officer of Premier
Concepts, Inc., a company specializing in marketing and retailing of high-end
faux jewelry. Mr. Washburn earned a Bachelor of Business Administration from the
University of Oklahoma, a Master of Divinity from the Southwestern Baptist
Theological Seminary in Ft. Worth, Texas and a Doctor of Ministry from the
Fuller Theological Seminary in Pasadena, California. Mr. Washburn also serves on
the Board of Directors of SGD Holdings, Ltd. and Premier Concepts, Inc.
AUDIT COMMITTEE
The Board of Directors has determined that Terry Washburn meets the requirements
of a financial expert and serves as Chairman of the Audit Committee. Mr.
Washburn is independent as specified in Item 7 (d)(3)(iv) of Schedule 14A under
the Exchange Act.
The small business issuer has a separately designated standing audit committee
established in accordance with Section 3 (a)(58)(A) of the Exchange Act, which
is currently made up of Mr. Washburn.
41
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock to file initial reports of ownership and
changes in ownership with the SEC. Additionally, SEC regulations require that
the Company identify any individuals for whom one of the referenced reports was
not filed on a timely basis during the most recent fiscal year or prior fiscal
years. To the Company's knowledge, based solely on a review of reports furnished
to it, Terry Washburn and Terry Hanson did not timely file their required Form 5
for fiscal 2003.
CODE OF ETHICS
The Company had intended to adopt a code of ethics to apply to its principal
executive officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions; however, the Company
discontinued its race operations in August 2003 and has determined it should
wait until it made an acquisition before adopting a code of ethics.
ITEM 10. EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive
compensation matters to the extent they are not delegated to the Chief Executive
Officer.
SUMMARY COMPENSATION TABLE
The following table shows the compensation of the Company's Chief Executive
Officer and each executive officer whose total cash compensation exceeded
$100,000 for the three years ended December 31, 2003.
ANNUAL COMPENSATION
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
Terry Hanson (CEO since 2003 $ 127,500 $ - $ -
September 2003, COO and 2002 $ 100,000 - -
President since August 2002)(3) 2001 N/A N/A N/A
Charles Bradshaw (CEO from 2003 $ - - -
August 2002 through August 2002 $ - - -
2003) 2001 N/A N/A N/A
William G. Miller (CEO from 2003 N/A N/A N/A
September 1, 2001 through 2002 $ 780,000 (2) - -
July 25, 2002) 2001 $ 200,000 - -
Terry Washburn (CEO from 2003 N/A N/A N/A
May 2001 through August 2001) 2002 N/A N/A N/A
2001 - - -
Robert Lamy (CEO from Nov- 2003 N/A N/A N/A
ember 8, 2000 to May 15, 2001) 2002 N/A N/A N/A
2001 $ 44,792 - -
42
LONG TERM COMPENSATION AWARDS
NUMBER OF
SHARES UNDERLYING
NAME YEAR OPTIONS
---- ---- -------
Terry Hanson 2003 3,000,000 (4)
2002 -
2001 N/A
Charles Bradshaw 2003 3,000,000 (4)
2002 -
2001 500,000 (1)
William G. Miller 2003 N/A
2002 -
2001 3,000,000 (1)(2)
Terry Washburn 2003 N/A
2002 N/A
2001 650,000 (1)
Robert Lamy 2003 N/A
2002 N/A
2001 -
(1) Options for 500,000 shares each were granted under the 2000 Stock Option
Plan which was adopted in April 2000.
(2) Prior to his termination, Mr. Miller was prepaid $480,000 for services to be
rendered from July 1, 2002 through April 30, 2003. The Company believes that,
because Mr. Miller was terminated for cause on July 25, 2002, he was not
entitled to substantially all of such amount. The Company also believes that
because Mr. Miller was terminated for cause, the options for 3,000,000 shares of
Common Stock have terminated. See "Item 12. Certain Relationships and Related
Transactions - Transactions with William G. Miller."
43
(3) Mr. Hanson also received a standard package of medical, dental and life
insurance, vacation and other benefits, the aggregate amount of which did not
exceed 10% of the total annual salary and bonus reported for Mr. Hanson.
(4) Options were granted outside the 2000 Stock Option Plan. The option grants
of 3,000,000 shares each include 1,000,000 shares which vested when granted and
2,000,000 shares which were subject to commencement of the 2004 and 2005 racing
season. Accordingly, 2,000,000 shares of each option will not vest and has been
treated as forfeited.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF SECURITIES % OF TOTAL OPTIONS/
UNDERLYING OPTIONS/ SARS GRANTED TO EXERCISE
SARS EMPLOYEES IN OR BASE EXPIRATION
GRANTED (#) FISCAL YEAR ($/SHARE) DATE
----------- ----------- --------- ----
Terry Hanson
- vested 1,000,000 11.4% $.42 2006
- unvested (1) 2,000,000 22.7% $.42 2006
Charles Bradshaw
- vested 1,000,000 11.4% $.42 2006
- unvested (1) 2,000,000 22.7% $.42 2006
William G. Miller N/A N/A N/A N/A
Terry Washburn N/A N/A N/A N/A
Robert Lamy N/A N/A N/A N/A
(1) These option grants were contingent upon the race season starting in 2004
and 2005. Since the Company has discontinued race operations, these options will
be treated as forfeited.
At fiscal year-end, there were no unexercised in-the-money options and the
Company does not have a long term incentive plan.
DIRECTOR COMPENSATION
Directors are currently paid $1,500 for each quarterly board meeting they attend
plus actual expenses incurred for meeting attendance. Upon the initial election
of the Board, each Director received options to purchase 500,000 shares of
common stock at an exercise price of $1.00 per share as founder shares.
Effective October 1, 2003, all Directors who are not full-time salaried
employees of the Company were to receive a $20,000 annual retainer fee, $1,500
per board meeting attended in person, $750 for each board meeting attended by
conference call, and an additional $750 per member for each committee meeting
not held on the same day as board meetings and calls. As a result of the
decision to discontinue race operations and the ultimate resignation of all but
one member of the Board of Directors, the forgoing change was not implemented.
44
EMPLOYMENT AGREEMENTS
See the discussion in "Item 12. Certain Relationships and Related Transactions"
regarding the employment agreement between the Company and William G. Miller.
REPRICING OPTIONS
The Company did not adjust or amend the exercise price of stock options or SAR's
previously awarded during the year ended December 31, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table indicates all persons who, as of March 23, 2004, the most
recent practicable date, are known by the Company to own beneficially more than
5% of any class of the Company's outstanding voting securities. As of March 23,
2004, there were 63,782,412 shares of the Company's common stock outstanding.
Except as otherwise indicated below, to the best of the Company's knowledge,
each person named in the table has sole voting and investment power with respect
to the securities beneficially owned by them as set forth opposite their name.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
-------------- ---------------- ---------------- ----------
Common William G. Miller 6,036,037 (1) 8.78%
5025 Harrington Road
Alpharetta, GA 30022
Common Robert Wussler 4,596,000 (2) 6.84%
C/O Ted Turner Pictures
133 Luckie NW
Atlanta, GA 30303
(1) Includes warrant for 2,000,000 shares of common stock and options for
3,000,000 shares of common stock which were granted pursuant to an employment
agreement with the Company. Because Mr. Miller was terminated for cause
effective July 25, 2002, the Company believes that the options for 3,000,000
shares of common stock have terminated. See "Item 12. Certain Relationships and
Related Transactions - Transactions with William G. Miller."
(2) Includes options for 3,750,000 shares.
45
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the beneficial ownership of the Company's voting
securities of all Directors of the Company and all Executive Officers who are
not Directors of the Company, and all officers and directors as a group, as of
March 23, 2004, the most recent practicable date. As of March 23, 2004, there
were 63,782,412 shares of the Company's common stock outstanding. Except as
otherwise indicated below, to the best of the Company's knowledge, each person
named in the table has sole voting and investment power with respect to the
securities beneficially owned by them as set forth opposite their name. All
options are currently exercisable, unless otherwise indicated. The address of
each person named below is 16501 D Northcross Dr, Huntersville, NC 28078.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
-------------- ---------------- ---------------- ----------
Common Terry Washburn 650,000 (1) 1.01%
Common Terry Hanson 1,000,000 (2) 1.54%
Common All officers and directors 1,650,000 2.52%
as a Group (2 persons)
(1) All shares shown as owned by Mr. Washburn underlie options granted by the
Company.
(2) All shares shown as owned by Mr. Hanson underlie options granted by the
Company.
46
EQUITY COMPENSATION PLAN INFORMATION
This table provides certain information as of December 31, 2003, with respect to
our equity compensation plan:
NUMBER OF
SECURITIES
AWARDED PLUS
NUMBER OF
SECURITIES
TO BE ISSUED NUMBER OF
UPON EXERCISE SECURITIES
NUMBER OF OF OPTIONS, TO BE ISSUED NUMBER OF
SECURITIES WARRANTS OR UPON EXERCISE SECURITIES
AUTHORIZED RIGHTS OF OUTSTANDING REMAINING
FOR ISSUANCE GRANTED OPTIONS, AVAILABLE
UNDER THE DURING LAST WARRANTS OR FOR FUTURE
NAME OF PLAN PLAN FISCAL YEAR RIGHTS ISSUANCE
------------ ---- ----------- ------ --------
Logisoft Corp. 2000
Stock Option Plan (1) 7,500,000 -- 6,400,000 1,100,000
Amendment to Logisoft
Corp. 2000 Stock Option
Plan * -- 4,500,000 4,500,000 --
----------- ----------- ----------- -----------
7,500,000 4,500,000 10,900,000 1,100,000
=========== =========== =========== ===========
(1) The Board of Directors has approved the increase from 3,000,000 shares to
7,500,000 shares authorized for issuance by the Plan. Shareholder approval is
required to authorize the increase to 7,500,000 shares.
(2) The Board of Directors approved the issuance of options for 8,800,000
shares, which were subject to Shareholder approval. As a result of discontinuing
operations, options for 4,300,000 shares were forfeited since they were
contingent upon the race season starting in 2004 and 2005.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH WILLIAM G. MILLER
EMPLOYMENT AGREEMENT - William G. Miller became an employee of the Company on
September 4, 2001. On October 10, 2001, Mr. Miller was appointed by the Board of
Directors as the Chief Executive Officer and a director of the Company.
Effective January 1, 2002 (the "Effective Date"), the Company entered into an
Employment Agreement (the "Miller Employment Agreement") with Mr. Miller, which
set forth the terms of his employment as Chief Executive Officer.
47
The Miller Employment Agreement provided that Mr. Miller would be employed for a
period of 16 months from the Effective Date, unless earlier terminated. Mr.
Miller was entitled to receive compensation as follows:
(a) Base salary of $50,000 per month (the "Base Salary");
(b) An option to purchase 2,500,000 shares of the Company's common stock, which
vested immediately at an exercise price of $0.35 per share (the "CEO Option");
(c) An option to purchase 500,000 shares of the Company's common stock, as a
result of his being appointed to the Board of Directors, at an exercise price of
$1.00 per share and which vested immediately (the "Director Option");
(d) The right to participate in the Company's various employee benefit plans, to
be reimbursed for typical business expenses, and to receive various standard
benefits; and
(e) In the event that TRAC began its first race with a minimum of eight racing
teams by July 1, 2003 (the "Bonus Event") and Mr. Miller was employed by the
Company for a period of 12 months as its Chief Executive Officer, then
(i) A cash bonus in the amount of $1,000,000 (the "Cash Bonus"), and
(ii) an option to purchase 1,000,000 shares of the Company's common stock that
would vest upon the occurrence of the Bonus Event (the "Bonus Option").
In the event that Mr. Miller had exercised his right to terminate his employment
or he was terminated without cause, he would be entitled to act as an
independent consultant to the Company and to receive $50,000 per month as
payment for those services until April 30, 2003.
The Miller Employment Agreement prohibits Mr. Miller, during the term of his
employment and for the two-year period following termination of his employment,
without the prior consent of the Board of Directors, from (i) soliciting
customers or clients of the Company for the purpose of providing services to
them, or (ii) soliciting employees or independent contractors of the Company for
employment or services. Mr. Miller also is prohibited from competing with the
Company, without the prior written consent of the Board of Directors, during the
term of his employment and for the two-year period following his termination.
The Company terminated Mr. Miller's employment effective July 25, 2002 (the
"Termination Date"). In accordance with the terms of the Miller Employment
Agreement, Mr. Miller already had received advance payment of his Base Salary
through April 30, 2003. Because Mr. Miller was not employed for a period of 12
months as the Chief Executive Officer and because the Bonus Event did not occur,
management believes that the Bonus Option and the Cash Bonus did not vest.
Moreover, the Company contends that Mr. Miller's employment was terminated for
cause and that, as a result, the CEO Option and Director Option are terminated
and the Base Salary was not earned after the Termination Date.
Mr. Miller has disputed the Company's contention that he was terminated for
cause. The Company has attempted without success to negotiate a resolution of
this matter with Mr. Miller.
48
ATLANTA TEAM OPERATING RIGHTS - With the knowledge and approval of the Board of
Directors, the Company entered into a nonbinding Agreement in Principle with Mr.
Miller ("AIP No. 1") pursuant to which it agreed to negotiate with Mr. Miller to
finalize definitive agreements for Mr. Miller to obtain operating rights to the
Atlanta TRAC team (the Atlanta Team") for a purchase price of $10,000,000. AIP
No. 1 was dated June 19, 2001 and was accepted and agreed to by Mr. Miller on
August 8, 2001. Subsequently, the Company began negotiations with Mr. Miller to
employ him as the Chief Executive Officer. With the knowledge and approval of
the Board of Directors, the Company reduced the Atlanta Team purchase price in
connection with Mr. Miller's overall employment package with the Company. A
definitive agreement was not executed by April 30, 2003, and therefore, AIP No.
1 expired in accordance with its terms.
A second Agreement in Principle ("AIP No. 2") on the same subject, dated August
25, 2001 was executed apparently on or about December 11, 2001, by Mr. Miller
and Jon Pritchett, purportedly acting on behalf of the Company as its Chief
Operating Officer. 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. The Company contends that AIP No. 2 differs from
AIP No. 1 in material respects that were not approved by the Board of Directors,
that its execution was not authorized by the Company, and that it is void. Mr.
Miller maintains that AIP No. 2 is an enforceable obligation of the Company. The
Company has attempted without success to negotiate a resolution of this matter
with Mr. Miller.
PAYMENTS TO ROBERT WUSSLER
In May 2001, the Company and Robert J. Wussler, the Chairman of the Board until
February 5, 2004, entered into an agreement pursuant to which Mr. Wussler agreed
to assist the Company in obtaining a national television contract and to join
the Board of Directors. The Company agreed to pay Mr. Wussler certain fees and
to grant certain options to purchase shares of common stock. The Company and Mr.
Wussler have agreed to terminate this agreement in exchange for a grant on April
2, 2003 of options to purchase 2,250,000 shares (immediately exercisable) at an
exercise price of $1.00 per share. Mr. Wussler received $70,833.39 under the
agreement prior to its termination and was paid an additional $20,000 after
termination of the agreement. Mr. Wussler is not entitled to any further
payments under this Agreement.
CALE YARBOROUGH CONSULTING AGREEMENT
Mr. Yarborough, a Director until he resigned in September 2003, also served as
TRAC's national spokesman. For his duties as national spokesman, Mr. Yarborough
received $150,000 annually.
49
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index at Page 52.
(b) Reports on Form 8-K - There was one report filed on Form 8-K during the
quarter ended December 31, 2003:
(1) The Company filed form 8-K on November 24, 2003 to report that on
November 18, 2003 the Company had dismissed Elliott Davis, LLC,
who was their independent accountant and retained Guest & Company,
P.C. as its independent accountant.
Pursuant to General Instruction B of Form 8-K, any reports previously or in the
future submitted under Item 9 are not deemed to be "filed" for the purpose of
Section 18 of the Securities Exchange Act of 1934 and the Company is not subject
to the liabilities of that section. The Company is not incorporating, and will
not incorporate, by reference these reports into a filing under the Securities
Act of 1933, as amended, or the Exchange Act of 1934, as amended.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES - The aggregate fees billed as of March 23, 2004 for professional
services rendered by the Company's current accountant was $14,750 for the audit
of the Company's annual financial statements for the fiscal year ended December
31, 2003 and for review of the applicable Forms 10-QSB for fiscal 2003. The
Company's prior accountant billed $45,865 during fiscal 2003 for the prior year
audit and review of the applicable Forms 10-QSB for fiscal 2003.
AUDIT-RELATED FEES - None.
TAX FEES - None for 2003 and $3,400 for 2002.
ALL OTHER FEES - Other than the services described above, no other fees were
billed for services rendered by the principal accountant during fiscal 2003.
AUDIT COMMITTEE POLICIES AND PROCEDURES - Not applicable.
If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees -
Not applicable.
50
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEAM SPORTS ENTERTAINMENT, INC.
/s/ Terry Hanson
---------------------------------------
Terry Hanson, President and Acting CEO
(equivalent of Chief Financial Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
March 30, 2004 /s/ Terry Hanson
---------------------------------------
Terry Hanson, President and Acting CEO
March 30, 2004 /s/ Terry Washburn
---------------------------------------
Terry Washburn, Director
51
EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM TEAM SPORTS ENTERTAINMENT, INC. (THE "COMPANY") UPON REQUEST AND PAYMENT OF
THE COMPANY'S COSTS IN FURNISHING SUCH COPIES. COPIES MAY ALSO BE OBTAINED FROM
THE SECURITIES AND EXCHANGE COMMISSION FOR A SLIGHT CHARGE. (The foregoing is
not applicable to the original(s) hereof.)
EXHIBIT INDEX
Securities and
Exchange
Commission Page
Exhibit No. Type of Exhibit Number
2 Plan of acquisition, reorganization, arrangement, N/A
liquidation, or succession
3(i) Articles of incorporation N/A
3(ii) By-laws N/A
4 Instruments defining the rights of holders, incl. Indentures N/A
9 Voting trust agreement N/A
10 Material contracts N/A
11 Statement re: computation of per share earnings Item 7
16 Letter on change in certifying accountant N/A
18 Letter on change in accounting principles N/A
21 Subsidiaries of the Registrant Item 1
22 Published report regarding matters submitted to vote N/A
23 Consent of experts and counsel N/A
24 Power of Attorney N/A
31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002 53
32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002 54
52