U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: September 30, 2003
Commission File Number: 0-23100
TEAM SPORTS ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2649848
(State of Incorporation) (IRS Employer ID No)
16501 D Northcross Dr, Huntersville, NC 28078
(Address of principal executive office)
13801 Reese Blvd West, Suite 150, Huntersville, NC 28078
(Former address of principal executive office)
(704) 992-1290
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of November 30, 2003 was 63,782,412.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
Team Sports Entertainment, Inc. and Subsidiary
Index
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheet as of September 30, 2003 3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2003 and 2002 and for the period
from inception, May 15, 2001 through September 30, 2003 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002 and for the period
from inception, May 15, 2001 through September 30, 2003 6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis or Plan of Operation 13-17
Item 3. Controls and Procedures 17-18
PART II OTHER INFORMATION 18-21
2
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Balance Sheet
September 30, 2003
(Unaudited)
Assets
Current assets
Cash and cash equivalents ............................................. $ 127,528
Restricted cash ....................................................... 100,000
Marketable equity securities .......................................... 53,428
Prepaid expenses and other assets ..................................... 92,979
------------
Total assets ....................................................... $ 373,935
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses ................................. $ 218,744
Amounts payable to related parties .................................... 264,805
Accrued interest payable .............................................. 86,861
Convertible promissory notes .......................................... 3,035,250
------------
Total liabilities .................................................. 3,605,660
------------
Commitments and contingencies
Stockholders' equity
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 ............................................ 15,874,617
Accumulated deficit ................................................... (19,112,720)
------------
Total stockholders' deficit ........................................ (3,231,725)
------------
Total liabilities and stockholders' equity .................... $ 373,935
============
See accompanying notes to condensed consolidated financial statements.
3
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended
September 30,
2003 2002
Discontinued operations
Loss from discontinued operations ....... $ (7,825,909) $ (616,878)
Income tax benefit ...................... -- --
------------ ------------
Net loss from discontinued operations $ (7,825,909) $ (616,878)
============ ============
Net loss per share, basic and diluted, from
Discontinued operations ................. $ (0.12) $ (0.01)
============ ============
Weighted average shares outstanding
Basic and diluted ....................... 63,639,344 62,568,312
============ ============
See accompanying notes to condensed consolidated financial statements.
4
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2003 and 2002 and Development Stage
from Inception (May 15, 2001), through September 30, 2003
(Unaudited)
From Inception
(5/15/2001)
Nine Months Ended through
September 30, September 30,
2003 2002 2003
Discontinued operations
Loss from discontinued operations ....... $(8,833,177) $ (2,883,619) $(14,817,393)
Income tax benefit
---------- ------------ -----------
Net loss from discontinued operations $(2,883,619) $ 8,833,177) $(14,817,393)
========== ============ ===========
Net loss per share, basic and diluted, from
Discontinued operations ................. $ (0.14) $ (0.05) $ (0.24)
========== ============ ===========
Weighted average shares outstanding
Basic and diluted ....................... 63,531,253 62,535,345 62,848,864
========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
5
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 and Development Stage
from Inception (May 15, 2001), through September 30, 2003
(Unaudited) From inception
(5/15/2001)
Nine Months Ended through
September 30, September 30,
2003 2002 2003
Cash flows from operating activities
Net loss ........................................... $ (8,833,177) $ (2,883,619) $(14,817,393)
Loss from discontinued operations ............. (8,833,177) (2,883,619) (14,817,393)
------------ ------------ ------------
Loss from continuing operations .......... -- -- --
Net cash used in discontinued operations ...... (1,438,027) (5,760,903) (9,405,047)
------------ ------------ ------------
Net cash used in operations .............. (1,438,027) (5,760,903) (9,405,047)
------------ ------------ ------------
Cash flows from investing activities
Net cash used in discontinued operations ...... -- -- (1,433,671)
------------ ------------ ------------
Net cash used in investing activities .... -- -- (1,433,671)
------------ ------------ ------------
Cash flows from financing activities
Net cash from discontinued operations ......... 915,250 1,973,799 10,966,246
------------ ------------ ------------
Net cash provided by financing activities 915,250 1,973,799 10,966,246
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (522,777) (3,787,104) 127,528
Cash and cash equivalents, beginning of period ..... 650,305 4,675,745 --
------------ ------------ ------------
Cash and cash equivalents, end of period ........... $ 127,528 $ 888,641 $ 127,528
============ ============ ============
See accompanying notes to condensed consolidated financial statements.
6
The following Notes to Unaudited Condensed Consolidated Financial Statements and
Management's Discussion and Analysis or Plan of Operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", and "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to other factors noted with such forward-looking
statements, include those discussed in Exhibit 99.1 filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on Form
10-KSB for fiscal year 2002.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1--BASIS OF PRESENTATION
-----------------------------
The condensed consolidated financial statements include the accounts of Team
Sports Entertainment, Inc. and its wholly owned subsidiary, Maxx Motorsports,
Inc. ("Maxx"), and its wholly owned subsidiary, Team Racing Auto Circuit, LLC
("TRAC") (collectively, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation. Maxx, through TRAC,
planned to own, operate and sanction an automotive racing league designed to
provide content for television and tracks while expanding the existing base of
racing fans. Accordingly, the operations of the Company and its wholly owned
subsidiary are presented as those of a development stage enterprise, from its
inception, May 15, 2001, as prescribed by Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises."
The Company follows the AICPA SOP 98-5, "Reporting on the Costs of Start-Up
Activities" in accounting for its start-up activities.
The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These condensed
consolidated financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
7
contained herein are adequate to make the information presented not misleading.
However, these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31, 2002,
which is included in the Company's Form 10-KSB for the year ended December 31,
2002. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
NOTE 2--GOING CONCERN
The Company, which had 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
$14,817,393 from inception through September 30, 2003.
The Company is currently past due on convertible promissory notes in the amount
of $625,000 and accrued interest payments on all of the convertible promissory
notes. The Company does not have sufficient cash available to make payments
currently due. There can be no assurance that the Company will be able to find a
new business to acquire or be able to raise sufficient capital to make an
acquisition, in order to survive.
NOTE 3--DISCONTINUED OPERATIONS
-------------------------------
The Company, which had 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
$14,817,393 from inception through September 30, 2003.
On August 26, 2003, the Board of Directors of the Company unanimously approved a
plan to immediately discontinue its racing operation. As the racing operation
was its only business, all operations of the Company have been included in
discontinued operations.
As a part of the evaluation of the assets of the Company, the following assets
were considered to be fully impaired based upon management's expectation that
they had no future value. These amounts have been recorded as impairment losses
and are included in loss from discontinued operations.
Prepaid expenses and other assets .......... $ 50,000
Race car designs and manufacturing equipment 1,673,400
Other property and equipment ............... 102,416
Production contract payments ............... 2,545,781
Goodwill ................................... 2,810,627
----------
Total ................................. $7,182,224
==========
8
NOTE 4--PRODUCTION CONTRACT PAYMENTS AND COMMITMENTS
----------------------------------------------------
On October 22, 2001, TRAC entered into a Racing Car Design and Construction
Agreement with Riley & Scott Race Car Engineering ("Riley & Scott"). The
agreement required payments aggregating $1,515,000 during Phase I, which was 23
weeks, and included design, tooling, prototype construction and aero tooling.
Phase II of the agreement commenced after completion of Phase I and was planned
to be completed in 58 weeks. Phase II was based upon production of 100 racing
cars, at a cost of approximately $110,000 each, plus the cost of engines. The
agreement also provided for the contractor to be the sole provider of most
repair service. Phase I of the agreement was completed during April 2002, and
Phase II of the agreement commenced in April 2002. In August 2002, TRAC and
Riley & Scott agreed upon a revised schedule based on the delay of the initial
race season to 2004. This revised schedule required a $500,000 payment prior to
August 31, 2002 and subsequent monthly payments of $50,000 through March 31,
2003. Phase II of the agreement was placed on hold due to TRAC not meeting the
required payment schedule. At September 30, 2003, TRAC had incurred and paid in
Phase II total costs of $2,545,781.
The agreement terms included that upon temporary cessation or early termination
of the agreement, Riley & Scott shall have all rights and title to all racing
cars, components, vendored components and spares ("Post Termination Inventory")
then in its possession. 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.
NOTE 5--STOCK OPTION PLANS
--------------------------
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock
Issued to Employees, and related interpretations, in accounting for its stock
option plan. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.
9
SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123), requires
the Company to disclose pro forma information regarding option grants made to
its employees. SFAS No. 123 specifies certain valuation techniques that produce
estimated compensation charges that are included in the pro forma results below.
These amounts have not been reflected in the Company's consolidated statement of
operations, because APB No. 25 specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of options granted to the
Company employees, board of directors, advisory committee members, and
consultants.
SFAS No. 123 pro forma numbers are as follows for the nine months ended
September 30, 2003 and 2002 and for the period from inception (May 15, 2001)
through September 30, 2003:
From
Inception
to
September 30, Septem-
2002 2003 ber 30, 2003
---- ---- ------------
Net loss from discontinued operations,
as reported $ 8,833,177 $ 2,883,619 $ 14,817,393
Add: Stock-based employee compensation
expense determined under fair value based
method for all awards 1,464,659 582,893 6,671,540
Deduct: Stock-based employee compensation
included in reported net loss - - -
---------------- --------------- ---------------
Pro forma net loss $ 10,297,836 $ 3,466,512 $ 21,488,933
================ =============== ================
Basic and diluted net loss per share:
Pro forma $ (.16) $ (.06) $ (.34)
As reported $ (.14) $ (.05) $ (.24)
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. In 2001, the year in
which all prior options were issued, the following weighted average assumptions
were used: risk-free interest rate based on date of issuance and term between
3.83% and 4.93%, no expected dividends, a volatility factor of 138.13% and an
expected life of the options of 3 to 10 years.
On April 2, 2003, the Board of Directors granted options to certain employees
and directors to acquire 8,800,000 shares of the Company's common stock at
prices ranging from $.42 to $1.00 per share. The options were scheduled to vest
10
as follows: 4,500,000 on April 2, 2003, 2,210,000 on the day the 2004 racing
season commences and 2,090,000 on the day the 2005 racing season commences. The
following assumptions were used: risk-free interest rate of 4.67%, no expected
dividends, a volatility factor of 127.59% and an expected life of the option of
1 to 2 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, it is management's
opinion that the existing models do not necessarily provide a reliable single
measure of the fair value of the Company options.
NOTE 6--CONVERTIBLE PROMISSORY NOTES
------------------------------------
In April 2003, holders of $1,645,000 of the $2,270,000 convertible promissory
notes agreed to extend the maturity date of their respective notes from August
31, 2003 to March 1, 2004. In addition, certain holders of the notes increased
the principal amount of their notes by an aggregate amount of $765,250. A 10%
loan origination fee was paid on the increased principal balances through the
issuance of 306,100 shares of the Company's common stock to the holders of the
notes at $.25 per share. The origination fee of $76,525 is being amortized over
the terms of the convertible promissory notes. Notes in the aggregate principle
amount of $625,000 bear interest at 8% per annum, require quarterly interest
payments, and matured August 31, 2003. The remaining notes, in the aggregate
principle amount of $2,410,250, bear interest at 8% per annum, require quarterly
interest payments, and 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 September 30, 2003, the Company owed accrued interest on the notes of $86,861
and did not make the quarterly interest payment due in August 2003.
NOTE 7--COMMITMENTS AND CONTINGENCIES
-------------------------------------
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.
11
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:
2004 $10,285,000
2005 10,640,000
-----------
Total minimum contract payments $20,925,000
===========
Management is of the opinion that this agreement was terminated without future
liability to the Company when racing operations were discontinued.
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
12
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.
A letter of credit was purchased to guarantee the Company's performance or
payment to a third party on their office lease. Restricted cash in the amount
of $100,000 is collateral on the letter of credit. The Company has accrued
$100,000 in lease settlement cost which is included in accounts payable on the
condensed consolidated balance sheet.
On August 25, 2001, the Company entered into an agreement in principal with its
former Chief Executive Officer under which the former Chief Executive Officer
would become the local operator of a market. The agreement stated that the cost
would be $100,000 plus the cost of the nine racing cars and three haulers to
obtain the operating rights for the team, which was substantially less than
amounts anticipated to be paid by other local operators. Under the agreement,
the $100,000 was to be kept in an escrow account. The funds are not currently
escrowed and the $100,000 is included in accounts payable on the condensed
consolidated balance sheet.
Item 2. Management's Discussion and Analysis or Plan of Operation.
On May 15, 2001, the Company completed the acquisition of Maxx and TRAC. TRAC
had plans 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. TRAC would have initially consisted
of multi-car teams, strategically positioned in major North American television
markets located near major motorsport venues. Each team would have represented
the city or state where it was located. The initial TRAC racing season was
planned to start in the second quarter of 2004 and would have consisted of a
regular season race schedule, with an all-star race and a Championship Race.
TRAC planned to incorporate the use of aerodynamically similar cars,
fuel-injection engines and other innovative competition standards to increase
parity among the teams without diminishing the entertainment value.
Our business plan provided that TRAC initially would enter into operating
agreements ("Operating Agreements") with at least six third-party operators
("Area Operators") to be identified by TRAC with respect to the local operations
of a TRAC racing team. Each Area Operator would have paid a fee to TRAC to
obtain the right to operate the team in its market. TRAC also expected to
generate revenues from national television, radio and other media agreements
(including rights, fees and/or revenue sharing from sales of advertising time),
sales of national corporate sponsorships for the League and for League events
(such as the Championship Race), sales of sponsorships of the teams, ticket
sales for the Championship Race and license fees from sales of officially
licensed merchandise. Finally, TRAC hoped to receive fees from additional
operators to obtain the right to operate additional teams that may be organized
beyond the original six teams ("Expansion Fees"). In addition to the rights fee
payable to TRAC, TRAC expected to require each Area Operator to bear all local
expenses of operating the team, including the costs of all personnel (other than
drivers) necessary to operate the team. Drivers would have been employees of
TRAC and assigned to the teams. TRAC expected to enter into a lease for each
racing venue. TRAC expected to require the Area Operator to be responsible for
performing all local operations of the team, including presenting its home
races, marketing the team and selling tickets for the races, maintenance and
repair of the cars, and payments under the leases for its racing venue.
13
The Company, which had 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
$14,817,393 from inception through September 30, 2003.
On August 26, 2003, the Board of Directors of the Company unanimously approved a
plan to immediately discontinue its racing operation. As the racing operation
was its only business, all operations of the Company have been included in
discontinued operations.
As a part of the evaluation of the assets of the Company, the following assets
were considered to be fully impaired based upon management's expectation that
they had no future value. These amounts have been recorded as impairment losses
and are included in loss from discontinued operations.
Prepaid expenses and other assets .......... $ 50,000
Race car designs and manufacturing equipment 1,673,400
Other property and equipment ............... 102,416
Production contract payments ............... 2,545,781
Goodwill ................................... 2,810,627
----------
Total ................................. $7,182,224
==========
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
14
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:
2004 $10,285,000
2005 10,640,000
-----------
Total minimum contract payments $20,925,000
===========
Management is of the opinion that this agreement was terminated without future
liability to the Company when racing operations were discontinued.
On October 22, 2001, TRAC entered into a Racing Car Design and Construction
Agreement with Riley & Scott Race Car Engineering ("Riley & Scott"). The
agreement required payments aggregating $1,515,000 during Phase I, which was 23
weeks, and included design, tooling, prototype construction and aero tooling.
Phase II of the agreement commenced after completion of Phase I and was planned
to be completed in 58 weeks. Phase II was based upon production of 100 racing
cars, at a cost of approximately $110,000 each, plus the cost of engines. The
agreement also provided for the contractor to be the sole provider of most
repair service. Phase I of the agreement was completed during April 2002, and
Phase II of the agreement commenced in April 2002. In August 2002, TRAC and
Riley & Scott agreed upon a revised schedule based on the delay of the initial
race season to 2004. This revised schedule required a $500,000 payment prior to
August 31, 2002 and subsequent monthly payments of $50,000 through March 31,
2003. Phase II of the agreement was placed on hold due to TRAC not meeting the
required payment schedule. At September 30, 2003, TRAC had incurred and paid in
Phase II total costs of $2,545,781.
The agreement terms included that upon temporary cessation or early termination
of the agreement, Riley & Scott shall have all rights and title to all racing
cars, components, vendored components and spares ("Post Termination Inventory")
then in its possession. 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.
15
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.
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.
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.
Discontinued operations
The Company, which had 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
$14,817,393 from inception through September 30, 2003.
On August 26, 2003, the Board of Directors of the Company unanimously approved a
plan to immediately discontinue its racing operation. As the racing operation
was its only business, all operations of the Company have been included in
discontinued operations.
Current operations
The Company has reduced its staff to two employees and is completing the
wind-down of the racing business, while evaluating other business opportunities.
Any new business would require raising additional capital and would probably
result in a substantial dilution of existing stockholders.
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Asset impairment
On August 26, 2003, the Board of Directors of the Company unanimously approved a
plan to immediately discontinue its racing operation. As the racing operation
was its only business, all operations of the Company have been included in
discontinued operations.
As a part of the evaluation of the assets of the Company, the following assets
were considered to be fully impaired based upon management's expectation that
they had no future value. These amounts have been recorded as impairment losses
and are included in loss from discontinued operations.
Prepaid expenses and other assets .......... $ 50,000
Race car designs and manufacturing equipment 1,673,400
Other property and equipment ............... 102,416
Production contract payments ............... 2,545,781
Goodwill ................................... 2,810,627
----------
Total ................................. $7,182,224
==========
Item 3. Controls and Procedures
The Company discontinued operations on August 26, 2003 and subsequently
terminated the majority of its employees. A third-party consultant was
retained to communicate to management the disclosures required by reports
that are filed under the Exchange Act.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports that are filed under the Exchange Act is accumulated and
communicated to management, including the principal executive officer, as
appropriate to allow timely decisions regarding required disclosure. Under
the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
September 30, 2003, and, based on its evaluation, our principal executive
officer has concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
Other than as discussed above, there have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation described above,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
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PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--
Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K--
On November 18, 2003, 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.
Other than a Going Concern Modification, the audit reports 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 audits 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.
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.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEAM SPORTS ENTERTAINMENT, INC.
December 15, 2003 By: /s/ Terry Hanson
------------------------------------
Terry Hanson, President, Acting CEO,
and principal financial and accounting
officer
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Exhibit 31.1
TEAM SPORTS ENTERTAINMENT, INC. FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Terry Hanson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Team Sports
Entertainment, Inc. (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have;
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
my supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to me by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred
during the registrant's current fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and;
5. I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Terry Hanson
Terry Hanson President and
Acting CEO (and equivalent
of chief financial officer)
December 15, 2003
20
Exhibit 32.1
TEAM SPORTS ENTERTAINMENT, INC. FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Terry Hanson, certify that
1. I am the President and Acting chief executive officer of Team Sports
Entertainment, Inc.
2. Attached to this certification is Form 10-QSB for the quarter ended
September 30, 2003, a periodic report (the "periodic report") filed by
the issuer with the Securities Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities and Exchange Act of 1934 (the
"Exchange Act"), which contains financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that
o The periodic report containing the financial statements
fully complies with the requirements of Section 13(a) or 15(d)
of the Exchange Act, and
o The information in the periodic report fairly presents, in all
material respects, the financial condition and results of
operations of the issuer for the periods presented.
December 15, 2003 /s/ Terry Hanson
------------------
Terry Hanson
President and Acting CEO
(and equivalent of chief financial officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Team Sports Entertainment, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
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