UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-30444
SPORTS GROUP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3474394
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7730 E. GREENWAY RD., SUITE 203
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices)
(480) 443-0200
(Registrant's telephone number, including area code)
Check whether issuer (1) has 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 the registrant's Common Stock, $.001 per
value per share, as of August 11, 2000 was 9,488,267 shares.
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
Quarter Ended June 30, 2000
FORM 10-QSB
INDEX
Page Number
-----------
PART I - FINANCIAL INFORMATION 2
ITEM 1. FINANCIAL STATEMENTS 3-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 7-11
PART II - OTHER INFORMATION 12
ITEM 1. LEGAL PROCEEDINGS 12-14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15-19
SIGNATURES 20
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT OF INFORMATION FURNISHED
The accompanying financial statements have been prepared in accordance with
Form 10-QSB instructions and applicable items of Regulation S-B, and in the
opinion of management, contain all adjustments (consisting of only normal and
recurring accruals) necessary to present fairly the Company's financial position
as of June 30, 2000 and the Company's results of operations and statement of
cash flows for the three months ended June 30, 2000 and 1999 and the six months
ended June 30, 2000 and 1999. These results have been determined on the basis of
generally accepted accounting principles and practices applied consistently with
those used in the preparation of the Company's 1999 Annual Report on Form
10-KSB.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying financial
statements be read in conjunction with the financial statements and related
notes thereto incorporated by reference in the Company's 1999 Annual Report on
Form 10-KSB.
2
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SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 112,954
Trade and other accounts receivable, net of allowance 466,751
Inventories 265,557
Prepaid expenses and other assets 36,387
Deferred income taxes 91,001
Notes receivable - current portion, net of allowance 531,560
------------
Total current assets 1,504,210
PROPERTY AND EQUIPMENT, net 1,869,678
LEASE DEPOSITS 159,112
NOTES RECEIVABLE - less current portion 2,050,167
GOODWILL, net of accumulated amortization 5,225,070
DEFERRED INCOME TAXES 289,971
------------
TOTAL ASSETS $ 11,098,208
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 864,434
Accrued liabilities 920,158
Notes payable - current portion 1,197,854
Acquisition notes payable 672,158
Confirmed bankruptcy liabilities - current portion 357,525
------------
Total current liabilities 4,012,129
NOTES PAYABLE - long-term portion 610,508
ACQUISITION NOTES PAYABLE - long-term portion 192,814
CONFIRMED BANKRUPTCY LIABILITIES - long term portion 957,092
DEPOSITS HELD UNDER CONTRACT 160,000
DEFERRED FRANCHISE FEE INCOME 80,000
------------
Total liabilities 6,012,543
------------
STOCKHOLDERS' EQUITY:
Series A preferred stock, $10.00 par value,
575,000 shares designated, 575,000 issued 5,750,000
Series B preferred stock, $10.00 par value,
650,000 shares designated, 650,000 issued 6,500,000
Common stock, $.001 par value, 100,000,000 shares
authorized, 9,488,267 issued and outstanding 9,448
Paid in capital 4,627,069
Accumulated deficit (11,800,852)
------------
Total stockholders' equity 5,085,665
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,098,208
============
3
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SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
SIX AND THREE MONTHS ENDED JUNE 30, (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Three Months
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net product and store sales $ 4,261,081 $ 1,801,952 $ 2,104,590 $ 1,676,193
Franchise fees 597,143 122,632 529,643 84,387
Royalties 866,981 341,072 437,248 181,850
Rental income 123,600 257,106 61,800 152,706
------------ ------------ ------------ ------------
Total revenues 5,848,805 2,522,762 3,133,281 2,095,136
------------ ------------ ------------ ------------
EXPENSES:
Cost of product sales 1,535,286 781,565 774,492 697,017
Personnel expenses 1,829,001 583,610 1,029,546 486,613
Rent 866,667 520,688 431,957 386,428
Depreciation and amortization 283,683 71,671 201,028 69,080
General and administrative expenses 1,264,406 449,909 399,534 354,275
------------ ------------ ------------ ------------
Total expenses 5,779,043 2,407,443 2,836,557 1,993,413
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME 69,762 115,319 296,724 101,723
------------ ------------ ------------ ------------
OTHER (INCOME) AND EXPENSES
Gain on sales of assets (325,000) -- (325,000) --
Interest expense 147,975 77,143 81,088 44,675
Interest income (56,333) (8,122) (54,886) (4,189)
------------ ------------ ------------ ------------
Total other expense (income) (233,358) 69,021 (298,798) 40,486
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 303,120 46,298 595,522 61,237
INCOME TAX (BENEFIT) PROVISION -- -- 110,989 5,479
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ 303,120 $ 46,298 $ 484,533 $ 55,758
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE:
Basic $ 0.03 $ 0.01 $ 0.05 $ 0.01
============ ============ ============ ============
Diluted $ 0.01 $ 0.01 $ 0.01 $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 8,801,389 4,617,403 9,128,614 6,450,000
============ ============ ============ ============
Diluted 22,968,056 6,322,744 23,547,677 9,770,622
============ ============ ============ ============
</TABLE>
4
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SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ 303,120 $ 46,298
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 283,683 71,671
Gain on Sale of Assets (325,000) --
Changes in assets and liabilities:
Trade and other accounts receivable (158,373) (110,892)
Inventories (146,649) (13,024)
Prepaids and other current assets 5,994 83,447
Accounts payable (88,021) 179,653
Accrued liabilities (133,916) (105,498)
Deferred franchise fee income (216,220) (28,288)
----------- -----------
Net cash provided by (used in) operating activities (475,382) 123,367
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (470,309) (8,825)
Collections on notes receivable 93,586 81,351
Proceeds from sale of property and equipment 1,275,000 --
----------- -----------
Net cash provided by (used in) investing activities 898,277 72,526
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable 70,000 332,500
Principal repayments on notes payable (911,378) (147,487)
Payments on confirmed bankruptcy liabilities (112,827) (293,307)
----------- -----------
Net cash provided by (used in) financing activities (954,205) (108,294)
----------- -----------
INCREASE (DECREASE) IN CASH (531,310) 87,599
CASH, BEGINNING OF PERIOD 644,264 19,467
----------- -----------
CASH, END OF PERIOD $ 112,954 $ 107,066
=========== ===========
</TABLE>
5
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SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED)
--------------------------------------------------------------------------------
2000 1999
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 94,874 $ 53,748
========== ==========
Income taxes paid $ -- $ --
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued as preferred stock dividends $ 579,452
========== ==========
Sale of property & equipment under notes receivable $1,830,000 $ 65,000
========== ==========
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Certain of the information discussed in this quarterly report, and in particular
in this section entitled "Management's Discussion and Analysis or Plan of
Operation," contain forward-looking statements that involve risks and
uncertainties that might adversely affect the Company's operating results in the
future in a material way. The words "believes," "may," "likely," "expects,"
"anticipates," and similar expressions identify forward-looking statements,
which speak only as of the date the statement was made. Such forward-looking
statements are within the meaning of that term in Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements may include, but are not limited to, projections of
revenues, including sales of franchises and corporate owned locations, income or
loss, plans for future operations, and financing needs or plans. Statements in
the Company's Annual Report on Form 10-KSB, including the Notes to the Company's
Consolidated Financial Statements and "Management Discussion and Analysis or
Plan of Operation", describe factors, among others, that could contribute to
such differences. Such factors include, without limitation, the effect of
national and regional economic and market conditions in the U.S. where the
Company franchises and operates store locations, costs of labor and employee
benefits, costs of marketing, the success or failure of marketing efforts, costs
of food and non-food items used in the operation of the Company's stores,
intensity of competition for locations and franchisees as well as customers,
perception of food safety, spending patterns and demographic trends, legal
claims and litigation, the availability of financing for the Company and its
franchisees at reasonable interest rates, and legislation and governmental
regulations affecting the Company's business. Many of these factors are beyond
the Company's control.
OVERVIEW
Sports Group International, Inc. (the "Company") operates and franchises,
under the Frullati Cafe and Bakery, Surf City Squeeze, Rollerz, and Tahi Mana
brand names, juice bars and health food cafes that serve blended fruit drinks,
sandwiches, salads, soups, baked goods, healthy snacks, and nutritional
supplements in shopping malls, airports, medical centers, office buildings and
health clubs throughout the United States and Canada. As of June 30, 2000, the
Company, through its subsidiaries, has approximately 203 total locations, of
which 188 are either franchised or licensed by third parties and 15 are directly
owned and operated by the Company or its subsidiaries. The Company's corporate
stores operate under the Frullati Cafe and Bakery, Rollerz, and Tahi Mana brand
names. The Company also sells proprietary smoothie mixes and other nutrients and
supplements to its franchisees and licensees through its wholly owned
subsidiaries.
7
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The Company derives its revenues primarily from franchise and license fees,
sales from its company-owned stores, and sales of nutritional and health food
products to its franchisees and licensees. The Company's long-term strategy is
to operate primarily as a franchisor, and through strategic acquisitions and
internal growth, to become one of the larger franchisors of juice bars, healthy
food cafes, and other retail food concepts in the United States and select
international markets that include Canada, the Middle East, Australia, and
certain Pacific Rim countries. The Company also plans to operate a limited
number of company-owned stores in certain key markets where the stores can be
geographically concentrated. Currently, the majority of the company-owned stores
are located in the Dallas-Ft. Worth and Phoenix, Arizona metropolitan areas. The
Company has not yet identified other areas where it may wish to operate
company-owned stores.
RESULTS OF OPERATIONS
There were no significant operations in Sports Group International, Inc.
prior to its merger with Surf City Squeeze Acquisition Corp. II ("SCAC") on
March 15, 1999. The Sports Group International, Inc. and SCAC transaction was
accounted for as a recapitalization of SCAC, with SCAC as the acquirer. The
results of operations and statement of cash flow for the three months and six
months ended June 30, 1999 are those of SCAC for the entire period and Selman
Systems, Inc. from May 21, 1999 until June 30, 1999.
Total operating revenues for the six months ended June 30, 2000, increased
by $3,326,043 to $5,848,805 from $2,522,762 during the same period in 1999. For
the three months ending June 30, 2000, total operating revenues increased by
$1,038,145 to $3,133,281 from $2,095,136 during the same period in 1999. The
increase in operating revenues resulted from the Company's acquisition of Selman
Systems, Inc. ("Selman") on May 21, 1999 and Fru-Cor, Inc. ("Fru-Cor") on July
7, 1999, compared to the operating revenues for the three months and six months
ending June 30, 1999 being primarily those of SCAC, with only approximately five
weeks of revenues from Selman in the three month period ending June 30, 1999.
Cost of product sales decreased to approximately 26 % of operating revenue
for the six months ended June 30, 2000, compared to 31 % of operating revenue
during the same six month period of 1999. For the three months ended June 30,
2000, cost of product sales decreased to approximately 25 % of operating revenue
for the three months ended June 30, 2000, compared to 33 % of operating revenue
during the same three month period of 1999. These decreases were primarily the
result of the Company negotiating improved pricing for its products with its
suppliers due to a combination of the following: (i) the Company hiring a
full-time purchasing director in July, 1999; and (ii) the Company's total number
of outlets nearly doubling due to the acquisition of Selman and Fru-Cor.
Personnel costs increased by $1,245,391 to $1,829,001 for the six months
ended June 30, 2000, compared to $583,610 for the same period of 1999. For the
three months ended June 30, 2000, personnel costs increased by $542,933 to
$1,029,546, compared to $486,613 for the same period of 1999. This increase in
8
<PAGE>
personnel costs was primarily attributable to the additional personnel costs
associated with the company-owned stores owned by a subsidiary of Selman and
Fru-Cor.
Rent expense increased by $345,979 to $866,667 for the six months ended
June 30, 2000, compared to $520,688 for the same period of 1999. For the three
months ended June 30, 2000, rent expense increased by $45,529 to $431,957,
compared to $386,428 during the same three month period of 1999. This increase
was primarily the result of additional rent expense associated with the
company-owned stores owned by a subsidiary of Selman and Fru-Cor.
Depreciation and amortization expense increased $212,012 to $283,683 for
the six months ended June 30, 2000, compared to $71,671 for the same period of
1999. For the three months ended June 30, 2000, depreciation and amortization
increased by $131,948 to $201,028, compared to $69,080 during the same period of
1999. This increase in depreciation and amortization expenses was primarily
attributable to the depreciation of the company-owned stores owned by a
subsidiary of Selman and Fru-Cor and the amortization of goodwill attributable
to the purchase of Selman and Fru-Cor.
General and administrative expenses increased to approximately 22 % of
total operating revenues for the six months ended June 30, 2000, compared to 18%
of operating revenues during the six months ended June 30, 1999. For the three
month period ending June 30, 2000, general and administrative expenses decreased
to 13 % of operating revenue compared to 17 % during the same period of 1999.
The increase during the six months ended June 30, 2000 was primarily
attributable to an increase in professional fees during the first three months
of 2000 due to the Company's legal proceedings discussed in more detail below
and in the Company's 1999 Form 10-KSB. The decrease in general and
administrative expenses as a percentage of total operating revenues during the
three months ended June 30, 2000 was primarily due to a reduction in
professional fees due to the settlement and/or completion of all material
litigation involving the Company during the three month period ended June 30,
2000.
Total other income increased by $302,379 to $233,358 for the six months
ended June 30, 2000, compared to a loss of $69,021 for the same period of 1999.
For the three months ended June 30, 2000, total other income increased by
$339,284 to $298,798, compared to a loss of $40,486 during the same period of
1999. These increases are due to a one-time gain on the sale of certain
company-owned stores of $325,000 realized during the three months ended June 30,
2000. This one-time gain was partially offset by an increase in interest expense
due to the additional borrowings of $322,500 from the holder of the Company's
Series B Preferred Stock in February 1999, the $1,200,000 indebtedness the
Company incurred to purchase Fru-Cor on July 7, 1999, and the $1,000,000 credit
facility obtained in December, 1999 and discussed in more detail below.
The Company's consolidated operating income increased by $256,822 to
$303,120 for the six months ended June 30, 2000, from operating income of
$46,298 for the six months ended June 30, 1999. For the three months ended June
9
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30, 2000, the Company's consolidated operating income increased by $428,775 to
$484,533, compared to operating income of $55,758 during the same three month
period of 1999. This increase in the Company's consolidated operating income for
the six and three months ended June 30, 2000 was primarily the result of a
$325,000 one-time gain realized from the sale of certain of the Company's
corporate stores and improved sales at the Company's franchised and
company-owned stores during the three month period ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that it will have sufficient liquidity to sustain
its operations over the next 12 months. In late December 1999, the Company
obtained a $1,000,000 credit facility from a national banking institution. The
Company has drawn a significant portion of the $1,000,000 credit facility to
satisfy current obligations. The Company continues evaluating offers to sell its
remaining company-owned stores in the Dallas, Texas area to raise additional
cash for operating and financing purposes.
The Company does not anticipate the need for significant capital
expenditures in the near future. However, if certain prospective store locations
would be better as company-owned stores rather than franchised locations, the
Company may require significant capital to build and open those prospective
stores.
Net cash used by operating activities was approximately $475,382 for the
first six months of 2000, compared to net cash provided by operating activities
of $123,367 for the corresponding period of 1999. The primary reason for this
change was an increase in inventories and accounts payable due to the Company
opening its first two Tahi Mana stores, the construction of its first corporate
Frullati Cafe & Bakery store in California, and the purchase of the Rollerz
concept, including the first company-owned Rollerz store, during the first six
months of 2000; a decrease in deferred franchise fee income during the first
half of 2000 as the Company completed its obligations to certain newly
franchised locations; and a $325,000 one-time gain realized on the sale of six
company-owned Frullati Cafe & Bakery stores during the three months ended June
30, 2000. In certain instances when the Company sells corporate locations, a
portion of the purchase price is deferred and contingent on the purchaser
obtaining a renewal or extension of the commercial real estate lease for the
Frullati Cafe & Bakery location purchased. The uses of cash detailed above were
partially offset by an increase in net income and depreciation and amortization
during the first six months of 2000 compared to the first six months of 1999.
Net cash provided by investing activities was approximately $898,277 for
the first six months of 2000 compared to net cash provided by financing
activities of $72,526 during the comparable period of 1999. The primary reason
for this increase was the receipt of $1,275,000 from the sale of company-owned
Frullati Cafe & Bakery stores in the first six months of 2000. These proceeds
were partially offset by an increase of approximately $460,000 in purchases of
property and equipment arising from the purchase and/or development of four
10
<PAGE>
additional company-owned stores during the first six months of 2000, including
the first two Tahi Mana locations, the first Rollerz location, and the Company's
first Frullati Cafe & Bakery location in the state of California.
Net cash used in financing activities for the first six months of 2000 was
approximately $954,205 compared to net cash used in financing activities of
$108,294 during the same period of 1999. The significant reasons for this
increase were an increase in the repayment of the Company's outstanding debt,
including confirmed bankruptcy liabilities of approximately $583,000 during the
first six months of 2000 compared to the same period of 1999 and a net reduction
in borrowings in the first half of 2000 compared to a net increase in borrowings
in the first half of 1999.
The Company believes that it can effectively implement its growth plans for
the current fiscal year's operations with the $1,000,000 credit facility
discussed above. Additionally, the Company renegotiated the $1,200,000 Fru-Cor
acquisition note in May, 2000 to provide for the repayment of the note over the
remainder of 2000. As of July 31, 2000, the principal balance of the Fru-Cor
acquisition note has been reduced to $500,000. The Company also has sold three
additional company-owned Frullati Cafe & Bakery stores in the Dallas, Texas area
since June 30, 2000 to provide additional cash for debt-service and general
corporate purposes. Nevertheless, the Company is seeking additional debt or
equity financing from various sources, including investment banks and private
investors, to fund future expansion and for potential future acquisitions.
The Company has never paid cash dividends on its common stock and does not
anticipate a change in this policy in the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Factors that may affect the Company's future results are described in
detail at pages 21-22 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999. SEE PART I, ITEM 2, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RISK FACTORS.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following litigation has all been disclosed in the Company's Form
10-KSB for the year ended December 31, 1999. Each of these items of litigation
is again disclosed in this Form 10-QSB due to material developments occurring in
each case during the three months ended June 30, 2000.
SGI AND RELATED LITIGATION:
On March 15, 1999, the Company entered into a Merger Agreement and Plan of
Reorganization ("Merger Agreement") with Sports Group International, Inc., a
Delaware Corporation ("SGI"). According to the terms of the Merger Agreement,
the merger was to close on or before May 30, 1999, if certain conditions were
met. The merger, if completed, would have required the Company to exchange its
shares for shares of SGI held by approximately 300 SGI shareholders. The Merger
Agreement did not require the shares of the surviving corporation to be
registered with the Securities and Exchange Commission or under applicable state
law prior to the consummation of the merger. The merger was subject to certain
conditions, including the truth of all representations and warranties in the
Merger Agreement, and no substantial adverse change in the financial condition
or operations of SGI. On June 25, 1999, the Company's legal counsel sent a
letter to the Board of Directors of SGI notifying SGI that the Merger Agreement
was terminated because SGI had failed to comply with certain conditions of the
Merger Agreement in a timely fashion. Following receipt of the letter, the SGI
Board of Directors notified the Company that SGI contended that the Merger
Agreement between the Company and SGI had been "completed."
On July 29, 1999, the Company filed a Complaint for Declaratory Relief
against SGI in the Superior Court of the State of California, in the County of
San Diego, case no. GIC 733034. The Company requested entry of an order
declaring that: (1) the Merger Agreement expired under its own terms and
conditions on May 30, 1999, due to SGI's failure to satisfy the condition
precedent to the consummation of the merger; (2) the Company properly terminated
the Merger Agreement; (3) SGI has no interest in or right to shares of the
Company; and (4) the Company has no liability to SGI, its creditors or
shareholders. On September 14, 1999, SGI and certain individual SGI shareholders
filed a cross-complaint against the Company, alleging breach of the Merger
Agreement and seeking declaratory and injunctive relief. SGI also sought
monetary damages in an unspecified amount.
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The court denied SGI's request for temporary injunctive relief. In late
March, 2000, the matter was tried before a judge in San Diego Superior Court. On
April 14, 2000, the court ruled in the Company's favor on its declaratory relief
action against SGI. The court found that the Company and SGI did not merge in
1999, and that the Company was justified in rejecting the proposed merger with
SGI. The court's decision establishes that the Company and SGI are separate and
independent entities. The court also ruled in the Company's favor on SGI's cross
complaint for breach of contract, determining that the Company did not breach
the plan of merger when it rejected the proposed merger with SGI. The Company is
currently attempting to recover its attorneys' fees and costs incurred in this
matter from SGI and its principals.
The SGI litigation described above has also resulted in ancillary
litigation. For the most part, the claims against the Company associated with
this litigation assert that the Company is obligated for certain liabilities of
SGI which the Company would have assumed if the SGI merger had been consummated.
In FISCH, SPIEGLER, GINSBURG, LADNER & ATTERIAN V. SPORTS GROUP
INTERNATIONAL, INC., the plaintiff has asserted a claim for $42,000, plus
pre-judgment interest, attorneys' fees and costs, alleging that the Company
assumed all of SGI's liabilities pursuant to the merger agreement described
above (the "Fisch Action"). The Fisch Action was voluntarily dismissed without
prejudice by the plaintiff in late May, 2000. In JEFF KUDLA V. SPORTS GROUP
INTERNATIONAL, INC., the plaintiff asserted that the Company is liable for
$25,000, plus interest, attorneys' fees and costs relating to alleged bridge
loans made to SGI in March 1999 (the "Kudla Action"). The Kudla Action was
voluntarily dismissed without prejudice in early June, 2000. In MAKO CAPITAL,
INC. V. SPORTS GROUP INTERNATIONAL, INC., the plaintiff alleged a breach of
contract arising out of loans made by Mako Capital to SGI in the approximate
amount of $250,000 (the "Mako Action"). In late-July, 2000, the Company's motion
for summary judgment in the Mako Action was granted by a Judge in the San Diego
County Superior Court.
FRANNET:
On December 31, 1998, FranNet Southern California, Inc., a California
corporation, and Allan S. Craven, an individual, doing business as Franchise
Resource/Franchise Network (hereinafter, "FranNet") filed a complaint against
Surf City Squeeze Franchise Corp. ("SCSFC") alleging that SCSFC is liable for
certain debts of Surf City Squeeze, Inc. that were discharged in bankruptcy (the
"FranNet Lawsuit"). The lawsuit arises out of a contract between FranNet and
Surf City for the acquisition of franchisees. Surf City believes that FranNet
billed and was paid for its work. In 1997, FranNet filed a demand for
arbitration for sums it claims it was due from Surf City's sale of franchises.
Shortly after the arbitration hearing, Surf City filed its Chapter 11 Bankruptcy
Petition. FranNet obtained an order lifting the Bankruptcy Court's stay order
and the arbitrator ruled in favor of FranNet and awarded FranNet Southern
California $67,159.15 and Franchise Resource $28,056.25 in commissions.
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In addition, the arbitrator ordered Surf City to pay FranNet's attorneys'
fees of $17,000.00, administrative fees of $1,950.00 and the arbitrator's
compensation of $1,350.00. As a result of Surf City's bankruptcy, FranNet's
award was treated as an unsecured claim and included in Surf City's Plan of
Reorganization. FranNet's attempt to amend the Demand to include SCSFC as a
party was denied by the arbitrator.
FranNet sought to enforce the arbitration award against SCSFC in the Orange
County Superior Court, under a statute which permits a party who has a contract
with another party to sue a related party who "received all of the benefits of
the underlying contract." FranNet's Motion for Summary Judgment was denied on
November 30, 1999.
The FranNet matter was tried in mid-February, 2000. After FranNet presented
its case, the court granted judgment in favor of SCSFC on several grounds. SCSFC
subsequently filed a motion to recover its attorneys' fees and costs incurred in
the defense of this matter, and was awarded $30,000 from FranNet (the "Fee
Award").
In May, 2000, FranNet filed its notice of intention to move for a new
trial. In June, 2000, the parties entered into a settlement agreement whereby
the FranNet lawsuit was dismissed with prejudice, the parties mutually released
one another from any further causes of action arising under the facts of the
FranNet lawsuit, and SCSFC accepted a lump sum payment and other consideration
in full satisfaction of the Fee Award.
Other than the foregoing and the items discussed in the Company's annual
report on Form 10-KSB for the year ended December 31, 1999, there are no other
pending material legal proceedings to which the Company is a party or to which
the Company's property is subject. In addition, from time to time, the Company
is involved in litigation and proceedings arising out of the ordinary course of
its business, primarily involving landlords and franchisees. The Company does
not believe that any of the litigation arising out of its ordinary course of
business will have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 Order Confirming First Modified Joint Plan of
Reorganization Proposed by the Debtor and the
Official Committee of Unsecured Creditors,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
2.2 First Modified Joint Plan of Reorganization
Proposed by the Debtor and the Official Committee
of Unsecured Creditors dated May 13, 1997, as
amended July 22, 1997, incorporated by reference
to the Company's Registration Statement on Form
10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
2.3 Amended Disclosure Statement accompanying First
Modified Joint Plan of Reorganization Proposed by
the Debtor and the Official Committee of Unsecured
Creditors dated May 13, 1997, as amended July 22,
1997, incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
2.4 Share Purchase Agreement between Sports Group
International, Inc. and Surf City Acquisition
Corporation II dated March 15, 1999, incorporated
by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities
and Exchange Commission on December 20, 1999, File
No. 0-30444.
15
<PAGE>
2.5 Membership Interest Purchase Agreement between
Sports Group International, Inc. and Apache Peak
Capital, L.LC., dated March 12, 1999, incorporated
by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities
and Exchange Commission on December 20, 1999, File
No. 0-30444.
2.6 Share Purchase Agreement between Sports Group
International, Inc., Ziad S. Dalal and Selman
Systems, Inc. dated May 21, 1999, incorporated by
reference to the Company's Registration Statement
on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
2.7 Stock Purchase Agreement between Selman Systems,
Inc., Kenneth L. Musgrave, Ltd., Tony Condor and
Larry Pearce dated May 21, 1999, incorporated by
reference to the Company's Registration Statement
on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
3.1 Amended and Restated Articles of Incorporation of
Sports Group International, Inc., incorporated by
reference to the Company's Registration Statement
on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
3.2 Bylaws of Sports Group International, Inc.,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
4.1 Promissory Note with United Texas Bank,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
16
<PAGE>
4.2 Bank One Promissory Note, incorporated by
reference to the Company's Registration Statement
on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
4.3 Promissory Note between SCAC and the Petersen
Trust, incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
4.4 Consent and Waiver of Terms of Series A Preferred
Stock, incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
10.1 Sports Group International, Inc.'s 1999 Stock
Option Plan, incorporated by reference to the
Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission
on December 20, 1999, File No. 0-30444.
10.2 Employment Agreement between Mr. Kevin A.
Blackwell and Sports Group International, Inc.
dated October 1, 1999, incorporated by reference
to the Company's Registration Statement on Form
10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
10.3 Employment Agreement between Mr. David A. Guarino
and Sports Group International, Inc. dated October
1, 1999, incorporated by reference to the
Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission
on December 20, 1999, File No. 0-30444.
17
<PAGE>
10.4 Series B Preferred Stock and Warrant Purchase
Agreement between Sports Group International,
Inc., Robert E. Petersen and Margaret Petersen
dated May 20, 1999, incorporated by reference to
the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission
on December 20, 1999, File No. 0-30444.
10.5 Warrant to purchase 1,000,000 shares of the
Company's Common Stock, incorporated by reference
to the Company's Registration Statement on Form
10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
10.6 Master Franchise Agreement between Surf City
Squeeze Franchise Corp. and 1238176 Ontario, Inc.
dated July 7, 1998, incorporated by reference to
the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission
on December 20, 1999, File No. 0-30444.
10.7 Indemnification Agreement for Kathryn Blackwell,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
10.8 Indemnification Agreement for Kevin Blackwell,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
10.9 Indemnification Agreement for David Guarino,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
18
<PAGE>
10.10 Indemnification Agreement for Robert Corliss,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
10.11 Indemnification Agreement for Don Plato,
incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
10.12 Compromise Settlement and Non-Modification
Agreement between Sports Group International,
Inc., Selman Systems, Inc., and Ziad S. Dalal,
dated February 1, 2000, incorporated by reference
to the Company's Amendment No. 1 to its Form
10-SB/A Registration Statement filed with the
Securities and Exchange Commission on February 16,
2000.
11* Computation of Per Share Earnings - Located in the
June 30, 2000 Statement of Operations filed
herewith on page 4.
21 Subsidiary Information. (See Chart), incorporated
by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities
and Exchange Commission on December 20, 1999, File
No. 0-30444.
27* Financial Data Schedule.
----------
* Filed herewith.
(b) Reports on Form 8-K
NONE
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPORTS GROUP INTERNATIONAL, INC.
(Registrant)
By: /s/ Kevin Blackwell Date: August 11, 2000
---------------------------------
Kevin Blackwell
President, CEO, and Director
By: /s/ David Guarino Date: August 11, 2000
---------------------------------
David Guarino
Vice President, Chief Financial Officer, and Director
(Principal Financial and Accounting Officer)
20
