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: JUNE 30, 2004
Commission File Number: 0-23100
TEAM SPORTS ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
3930 GLADE ROAD, #108-380, COLLEYVILLE, TEXAS 76034
(Address of principal executive office)
16501 D NORTHCROSS DR, HUNTERSVILLE, NC 28078
(Former address of principal executive office)
(817) 675-4319
(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 July 31, 2004 was 63,782,412.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
INDEX
Page
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Balance Sheet as of June 30, 2004 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2004 and 2003, and the period from
inception (May 15, 2001), through June 30, 2004 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003, and the period from
inception (May 15, 2001), through June 30, 2004 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis or Plan of Operation 13-17
Item 3. Controls and Procedures 18
PART II OTHER INFORMATION 19-21
2
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,322
-------------
Total assets $ 1,322
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 41,923
Accrued expenses 18,509
Amounts payable to related parties 336,905
Accrued interest payable 367,403
Convertible promissory notes 3,035,250
-------------
Total liabilities 3,799,990
-------------
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 (19,679,664)
-------------
Total stockholders' deficit (3,798,668)
-------------
Total liabilities and stockholders' deficit $ 1,322
=============
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 JUNE 30, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
2004 2003
------------- -------------
DISCONTINUED OPERATIONS
Loss from discontinued operations $ (118,542) $ (542,904)
Income tax benefit -- --
------------- -------------
NET LOSS FROM DISCONTINUED OPERATIONS $ (118,542) $ (542,904)
============= =============
NET LOSS PER SHARE, BASIC AND DILUTED, FROM
DISCONTINUED OPERATIONS $ (0.00) $ (0.01)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 63,782,412 63,476,312
============= =============
See accompanying notes to condensed consolidated financial statements.
4
TEAM SPORTS ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003, AND THE PERIOD
FROM INCEPTION (MAY 15, 2001), THROUGH JUNE 30, 2004
(UNAUDITED)
FROM INCEPTION
(5/15/2001)
SIX MONTHS ENDED THROUGH
JUNE 30, JUNE 30,
2004 2003 2004
------------- ------------- -------------
DISCONTINUED OPERATIONS
Loss from discontinued operations $ (330,290) $ (1,007,267) $(15,384,311)
Income tax benefit -- -- --
------------- ------------- -------------
NET LOSS FROM DISCONTINUED OPERATIONS $ (330,290) $ (1,007,267) $(15,384,311)
============= ============= =============
NET LOSS PER SHARE, BASIC AND DILUTED, FROM
DISCONTINUED OPERATIONS $ (0.01) $ (0.02) $ (0.24)
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 63,782,412 63,476,312 63,072,850
============= ============= =============
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
SIX MONTHS ENDED JUNE 30, 2004 AND 2003, AND THE PERIOD
FROM INCEPTION (MAY 15, 2001), THROUGH JUNE 30, 2004
(UNAUDITED)
FROM INCEPTION
(5/15/2001)
SIX MONTHS ENDED THROUGH
JUNE 30, JUNE 30,
2004 2003 2004
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (330,290) $ (1,007,267) $(15,384,311)
Loss from discontinued operations (330,290) (1,007,267) (15,384,311)
------------- ------------- -------------
Loss from continuing operations -- -- --
Net cash used in discontinued operations (87,346) (287,517) (9,381,253)
------------- ------------- -------------
Net cash used in operations (87,346) (287,517) (9,381,253)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in discontinued operations -- -- (1,583,671)
------------- ------------- -------------
Net cash used in investing activities -- -- (1,583,671)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash from discontinued operations -- -- 10,966,246
------------- ------------- -------------
Net cash provided by financing activities -- -- 10,966,246
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (87,346) (287,517) 1,322
CASH AND CASH EQUIVALENTS, beginning of period 88,668 650,305 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 1,322 $ 362,788 $ 1,322
============= ============= =============
See accompanying notes to condensed consolidated financial statements.
6
TEAM SPORTS ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", and "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to other factors noted with such forward-looking
statements, include those discussed in Exhibit 99.1 filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on Form
10-KSB for fiscal year 2002.
NOTE 1--BASIS OF PRESENTATION
-----------------------------
The condensed consolidated financial statements include the accounts of
Team Sports Entertainment, Inc. and its wholly owned subsidiary, Maxx
Motorsports, Inc. ("Maxx"), and its wholly owned subsidiary, Team
Racing Auto Circuit, LLC ("TRAC") (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated
in consolidation. Maxx, through TRAC, planned to own, operate and
sanction an automotive racing league designed to provide content for
television and tracks while expanding the existing base of racing fans.
Accordingly, the operations of the Company are presented as those of a
development stage enterprise, from its inception (May 15, 2001), as
prescribed by Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises." The
Company follows the AICPA SOP 98-5, "Reporting on the Costs of Start-Up
Activities" in accounting for its start-up activities. On August 26,
2003, the Board of Directors of the Company unanimously approved a plan
to immediately discontinue its racing operation. As the racing
operation was its only business, all operations of the Company have
been included in discontinued operations.
The condensed consolidated financial statements included in this report
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission for interim reporting and
include all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for a
fair presentation. These condensed consolidated financial statements
have not been audited.
7
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations for interim reporting. The
Company believes that the disclosures contained herein are adequate to
make the information presented not misleading. However, these condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report for the year ended December 31, 2003, which is
included in the Company's Form 10-KSB for the year ended December 31,
2003. The financial data for the interim periods presented may not
necessarily reflect the results to be anticipated for the complete
year.
Certain reclassifications of the amounts presented for the comparative
period have been made to conform to the current presentation.
NOTE 2--GOING CONCERN
---------------------
The Company has been in the development stage since its inception (May
15, 2001) and has not established sources of revenue sufficient to fund
the development of business and pay operating expenses, resulting in a
net loss of $15,384,311 from inception through June 30, 2004. The
Company has ceased its plans to begin a racing league and all
operations have been discontinued. In addition, current liabilities of
the Company exceed their assets by approximately $3,799,000 and their
convertible promissory notes payable obligations are in default. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. These condensed consolidated financial
statements do not include any adjustments that may result from the
outcome of these uncertainties.
Since August 26, 2003, the Company has attempted to locate and
negotiate with a business entity for a merger of that business into the
Company. There can be no assurance that the Company will be able to
locate a suitable acquisition candidate before it exhausts its cash
reserves.
NOTE 3--DISCONTINUED OPERATIONS
-------------------------------
The Company has been in the development stage since its inception (May
15, 2001) and has not established sources of revenue sufficient to fund
the development of business and pay operating expenses, resulting in a
net loss of $15,384,311 from inception through June 30, 2004.
On August 26, 2003, the Board of Directors of the Company unanimously
approved a plan to immediately discontinue its racing operation. As the
racing operation was its only business, all operations of the Company
have been included in discontinued operations.
8
As a part of the evaluation of the assets of the Company, the following
assets were considered to be fully impaired based upon management's
expectation that they had no future value. These amounts have been
recorded as impairment losses and were included in loss from
discontinued operations during the quarter ended September 30, 2003.
Race car designs and manufacturing equipment $ 1,673,400
Production contract payments 2,545,781
Goodwill 2,810,627
-------------
Total $ 7,029,808
=============
NOTE 4--STOCK OPTION PLANS
--------------------------
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its stock option plan. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price.
SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123),
requires the Company to disclose pro forma information regarding option
grants made to its employees. SFAS No. 123 specifies certain valuation
techniques that produce estimated compensation charges that are
included in the pro forma results below. These amounts have not been
reflected in the Company's consolidated statement of operations,
because APB No. 25 specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of options granted
to the Company employees, board of directors, advisory committee
members, and consultants.
9
SFAS No. 123 pro forma numbers are as follows for the three and six
months ended June 30, 2004 and 2003, and for the period from inception
(May 15, 2001) through June 30, 2004:
Three Months Ended June 30, 2004 and 2003
-----------------------------------------
June 30,
2004 2003
------------ ----------
Net loss from discontinued operations,
as reported $ (118,542) $(542,904)
Add: Stock-based employee compensation
expense determined under fair value based
method for all awards -- (107,409)
Deduct: Stock-based employee compensation
included in reported net loss -- --
------------ ----------
Pro forma net loss $ (118,542) $(650,313)
============ ==========
Basic and diluted net loss per share:
Pro forma $ (.00) $ (.01)
As reported $ (.00) $ (.01)
Six Months Ended June 30, 2004 and 2003
---------------------------------------
From
inception
(May 15, 2001)
through
June 30, June 30,
2004 2003 2004
------------ ------------- -------------
Net loss from discontinued operations,
as reported $ (330,290) $ (1,007,267) $(15,384,311)
Add: Stock-based employee compensation
expense determined under fair value based
method for all awards -- (214,818) (4,047,994)
Deduct: Stock-based employee compensation
included in reported net loss -- -- --
------------ ------------- -------------
Pro forma net loss $ (330,290) $ (1,222,085) $(19,432,305)
============ ============= =============
Basic and diluted net loss per share:
Pro forma $ (.01) $ (.02) $ (.31)
As reported $ (.01) $ (.02) $ (.24)
10
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model. In
2001, the year in which all prior options were issued, the following
weighted average assumptions were used: risk-free interest rate based
on date of issuance and term between 3.83% and 4.93%, no expected
dividends, a volatility factor of 138.13% and an expected life of the
options of 3 to 10 years.
On April 2, 2003, the Board of Directors granted options to certain
employees and directors to acquire 8,800,000 shares of the Company's
common stock at prices ranging from $.42 to $1.00 per share. The
options were scheduled to vest as follows: 4,500,000 on April 2, 2003,
2,210,000 on the day the 2004 racing season commences and 2,090,000 on
the day the 2005 racing season commences. The following assumptions
were used: risk-free interest rate of 4.67%, no expected dividends, a
volatility factor of 127.59% and an expected life of the option of 1 to
2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, it is management's
opinion that the existing models do not necessarily provide a reliable
single measure of the fair value of the Company options.
NOTE 5--CONVERTIBLE PROMISSORY NOTES
------------------------------------
In April 2003, holders of $1,645,000 of the $2,270,000 convertible
promissory notes agreed to extend the maturity date of their respective
notes from August 31, 2003 to March 1, 2004. In addition, certain
holders of the notes increased the principal amount of their notes by
an aggregate amount of $765,250. A 10% loan origination fee was paid on
the increased principal balances through the issuance of 306,100 shares
of the Company's common stock to the holders of the notes at $.25 per
share. The origination fee of $76,525 was amortized over the terms of
the convertible promissory notes. Notes in the aggregate principle
amount of $625,000 bear interest at 8% per annum, require quarterly
interest payments, and matured August 31, 2003. The remaining notes, in
the aggregate principle amount of $2,410,250, bear interest at 8% per
annum, require quarterly interest payments, and matured March 1, 2004.
Each note is convertible into common stock of the Company at the rate
of $.20 per share. The common stock issuable upon conversion of the
convertible notes payable is restricted and may only be sold in
compliance with Rule 144 of the Securities Act of 1933, as amended.
At June 30, 2004, the Company owed accrued interest on the notes of
$367,403 and has not made any quarterly interest payments since May
2003. All notes are currently in default and the default rate of
interest is 12%, since the default occurred.
11
NOTE 6--COMMITMENTS AND CONTINGENCIES
-------------------------------------
On August 26, 2003, when the Board of Directors of the Company
discontinued racing operations, the Company was a party to the
following agreements:
o Racing Car Design and Construction Agreement
o Team Sales Brokerage Agreement
o Broadcasting Agreement
o Sales Provider Agreement for Sponsorship Opportunities
o Office Lease
o Local Operator Agreement with Former Chief Executive Officer
Management of the Company does not believe the Company has any
remaining liability under these agreements. Additional detail regarding
these agreements can be found in the Company's Form 10-KSB for the year
ended December 31, 2003.
During the three month period ended June 30, 2004, the landlord of the
office lease, which the Company vacated at the end of last year, drew
$100,000 on the letter of credit which had secured payment on the
lease. As a result, the $100,000 in restricted cash, which secured the
letter of credit, was paid.
NOTE 7--RELATED PARTIES
-----------------------
The Company has received loans and advances, principally for services,
from certain individuals considered to be related parties. The amount
due to these parties is as follows:
William Miller, former CEO $ 127,888
Robert Wussler, former Chairman of the Board of Directors 29,167
G. David Gordon, attorney, creditor and stockholder 89,850
Unpaid director fees 90,000
-----------
Total $ 336,905
===========
NOTE 8--LEGAL
-------------
On May 3, 2004, in the Chancery Court of the State of Delaware, five
shareholders, including former officers/directors of the Company, filed
suit against the Company's former Directors, Terry Washburn and Terry
Hansen. The suit alleges breach of fiduciary duty, mismanagement,
wrongful termination and conversion. The Company believes this is a
retaliation suit by Pritchett and Miller, two of the plaintiffs,
because of the legal proceeding brought against each of them in
Atlanta, Georgia. The Company has filed a motion to dismiss as a result
of the pending suit in Atlanta, Georgia.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company has been in the development stage since its inception (May 15, 2001)
and has not established sources of revenue sufficient to fund the development of
business and pay operating expenses, resulting in a net loss of $15,384,311 from
inception through June 30, 2004. Accordingly, on August 26, 2003, the Board of
Directors of the Company unanimously approved a plan to immediately discontinue
its racing operation. Since August 26, 2003, the Company has been attempting to
find a suitable acquisition candidate.
The Company will attempt to locate and negotiate with a business entity for a
merger of that business into the Company. In certain instances, a target
business may wish to become a subsidiary of the Company or may wish to
contribute assets to the Company rather than merge. No assurances can be given
that the Company will be successful in locating or negotiating with any target
business.
Management believes that there are perceived benefits to being a reporting
company with a class of publicly traded securities. These are commonly thought
to include (1) the ability to use registered securities to make acquisition of
assets or businesses; (2) increased visibility in the financial community; (3)
the facilitation of borrowing from financial institutions; (4) improved trading
efficiency; (5) shareholder liquidity; (6) greater ease in subsequently raising
capital; (7) compensation of key employees through stock options; (8) enhanced
corporate image; and (9) a presence in the United States capital market.
A business entity, if any, which may be interested in a business combination
with the Company may include (1) a company for which a primary purpose of
becoming public is the use of its securities for the acquisition of assets or
businesses; (2) a company which is unable to find an underwriter of its
securities or is unable to find an underwriter of securities on terms acceptable
to it; (3) a company which wishes to become public with less dilution of its
common stock than would occur normally upon an underwriting; (4) a company which
believes that it will be able to obtain investment capital on more favorable
terms after it has become public; (5) a foreign company which may wish an
initial entry into the United States securities market; (6) a special situation
company, such as a company seeking a public market to satisfy redemption
requirements under a qualified Employee Stock Option Plan; or (7) a company
seeking one or more of the other perceived benefits of becoming a public
company.
Management is actively engaged in seeking a qualified private company as a
candidate for a business combination. The Company is authorized to enter into a
definitive agreement with a wide variety of private businesses without
limitation as to their industry or revenues. It is not possible at this time to
predict with which private company, if any, the Company will enter into a
definitive agreement or what will be the industry, operating history, revenues,
future prospects or other characteristics of that company.
13
The Company may seek a business opportunity with entities which have recently
commenced operations, or which wish to utilize the public marketplace in order
to raise additional capital in order to expand into new products or markets, to
develop a new product or service, or for other corporate purposes. The Company
may acquire assets and establish wholly owned subsidiaries in various businesses
or acquire existing businesses as subsidiaries.
Management of the Company, which in all likelihood will not be experienced in
matters relating to the business of a target business, will rely upon its own
efforts in accomplishing the business purposes of the Company. Outside
consultants or advisors may be utilized by the Company to assist in the search
for qualified target companies. If the Company does retain such an outside
consultant or advisor, any cash fee earned by such person will need to be
assumed by the target business, as the Company has limited cash assets with
which to pay such obligation.
The analysis of new business opportunities will be undertaken by, or under the
supervision of, the officers and directors of the Company, who are not
professional business analysts. In analyzing prospective business opportunities,
management may consider such matters as the available technical, financial and
managerial resources; working capital and other financial requirements; history
of operations, if any; prospects for the future; nature of present and expected
competition; the quality and experience of management services which may be
available and the depth of that management; the potential for further research,
development, or exploration; specific risk factors not now foreseeable but which
then may be anticipated to impact the proposed activities of the Company; the
potential for growth or expansion; the potential for profit; the perceived
public recognition or acceptance of products, services, or trades; name
identification; and other relevant factors.
Management does not have the capacity to conduct as extensive an investigation
of a target business as might be undertaken by a venture capital fund or similar
institution. As a result, management may elect to merge with a target business
that has one or more undiscovered shortcomings and may, if given the choice to
select among target businesses, fail to enter into an agreement with the most
investment-worthy target business.
Following a business combination, the Company may benefit from the services of
others in regard to accounting, legal services, underwritings and corporate
public relations. If requested by a target business, management may recommend
one or more underwriters, financial advisors, accountants, public relations
firms or other consultants to provide such services.
A potential target business may have an agreement with a consultant or advisor
providing that services of the consultant or advisor be continued after any
business combination. Additionally, a target business may be presented to the
Company only on the condition that the services of a consultant or advisor be
continued after a merger or acquisition. Such pre-existing agreements of target
businesses for the continuation of the services of attorneys, accountants,
advisors or consultants could be a factor in the selection of a target business.
14
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-QSB are advised to determine if the Company has
subsequently filed a Form 8-K.
15
The Company anticipates that the selection of a business opportunity in which to
participate will be complex and without certainty of success. Management
believes (but has not conducted any research to confirm) that there are numerous
firms seeking the perceived benefits of a publicly registered corporation. Such
perceived benefits may include facilitating or improving the terms on which
additional equity financing may be sought, providing liquidity for incentive
stock options or similar benefits to key employees, increasing the opportunity
to use securities for acquisitions, and providing liquidity for shareholders and
other factors. Business opportunities may be available in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex.
GOING CONCERN FACTORS--LIQUIDITY
The Company, has been in the development stage since its inception (May 15,
2001) and has not established sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,384,311 from inception through June 30, 2004. The Company has ceased its
plans to begin a racing leagueandalloperationshavebeendiscontinued.In
addition, current liabilities of the Company exceed their assets by
approximately $3,799,000 and their convertible promissory notes payable
obligations are in default. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. These condensed consolidated
financial statements do not include any adjustments that may result from the
outcome of these uncertainties.
Since August 26, 2003, the Company has attempted to locate and negotiate with a
business entity for a merger of that business into the Company. There can be no
assurance that the Company will be able to locate a suitable acquisition
candidate before it exhausts its cash reserves.
On May 3, 2004, in the Chancery Court of the State of Delaware, five
shareholders, including former officers/directors of the Company, filed suit
against the Company's former Directors, Terry Washburn and Terry Hansen. The
suit alleges breach of fiduciary duty, mismanagement, wrongful termination and
conversion. The Company believes this is a retaliation suit by Pritchett and
Miller, two of the plaintiffs, because of the legal proceeding brought against
each of them in Atlanta, Georgia. The Company has filed a motion to dismiss as a
result of the pending suit in Atlanta, Georgia.
DISCONTINUED OPERATIONS
The Company has been in the development stage since its inception (May 15, 2001)
and has not established sources of revenue sufficient to fund the development of
business and pay operating expenses, resulting in a net loss of $15,384,311 from
inception through June 30, 2004. On August 26, 2003, when the Board of Directors
of the Company discontinued racing operations, the Company was a party to the
following agreements:
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o Racing Car Design and Construction Agreement
o Team Sales Brokerage Agreement
o Broadcasting Agreement
o Sales Provider Agreement for Sponsorship Opportunities
o Office Lease
o Local Operator Agreement with Former Chief Executive Officer
Management of the Company does not believe the Company has any remaining
liability under these agreements. Additional detail regarding these agreements
can be found in the Company's Form 10-KSB for the year ended December 31, 2003.
During the three month period ended June 30, 2004, the landlord of the office
lease, which the Company vacated at the end of last year, drew $100,000 on the
letter of credit which had secured payment on the lease. As a result, the
$100,000 in restricted cash, which secured the letter of credit, was paid.
CURRENT OPERATIONS
The Company had two employees until March 31, 2004, and is completing the
wind-down of the racing business. Certain shareholders and creditors of the
Company are evaluating other business opportunities. Any new business would
require raising additional capital and would probably result in a substantial
dilution of existing stockholders.
ASSET IMPAIRMENT
As a part of the evaluation of the assets of the Company upon discontinuing its
operations, the following assets were considered to be fully impaired based upon
management's expectation that they had no future value. These amounts have been
recorded as impairment losses and were included in the loss from discontinued
operations during the quarter ended September 30, 2003.
Race car designs and manufacturing equipment $ 1,673,400
Production contract payments 2,545,781
Goodwill 2,810,627
-------------
Total $ 7,029,808
=============
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ITEM 3. CONTROLS AND PROCEDURES
The Company discontinued operations on August 26, 2003, and subsequently
terminated the majority of its employees. A third-party consultant was retained
to communicate to management the disclosures required by reports that are filed
under the Exchange Act.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal executive
officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of June 30,
2004, and, based on its evaluation, our principal executive officer has
concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
Other than as discussed above, there have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation described above, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 3, 2004, in the Chancery Court of the State of Delaware, five
shareholders, including former officers/directors of the Company, filed suit
against the Company's former Directors, Terry Washburn and Terry Hansen. The
suit alleges breach of fiduciary duty, mismanagement, wrongful termination and
conversion. The Company believes this is a retaliation suit by Pritchett and
Miller, two of the plaintiffs, because of the legal proceeding brought against
each of them in Atlanta, Georgia. The Company has filed a motion to dismiss as a
result of the pending suit in Atlanta, Georgia.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--
Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K--
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEAM SPORTS ENTERTAINMENT, INC.
August 19, 2004 By: /s/ Terry Hanson
---------------------------------------
Terry Hanson, President, Acting CEO,
and principal financial and accounting
officer
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