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 March 31, 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 or 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 par
value per share, as of May 12, 2000 was 8,951,735 shares.
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
Quarter Ended March 31, 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 7-10
PART II - OTHER INFORMATION 11
ITEM 1. LEGAL PROCEEDINGS 11-15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16-20
SIGNATURES 21
<PAGE>
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 March 31, 2000 and the results of operations and statement of cash flows
for the three months ended March 31, 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
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000 (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 163,249
Trade and other accounts receivable, net of allowance 476,998
Inventories 114,613
Prepaid expenses and other assets 92,716
Deferred income taxes 201,990
Notes receivable - current portion, net of allowance 197,798
------------
Total current assets 1,247,364
PROPERTY AND EQUIPMENT, net 2,814,284
LEASE DEPOSITS 155,811
NOTES RECEIVABLE - less current portion 1,185,101
GOODWILL, net of accumulated amortization 5,463,387
DEFERRED INCOME TAXES 289,970
------------
TOTAL ASSETS $ 11,155,917
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 945,245
Accrued liabilities 1,047,561
Notes payable - current portion 798,669
Acquisition notes payable 1,292,552
Confirmed bankruptcy liabilities - current portion 512,008
------------
Total current liabilities 4,596,035
NOTES PAYABLE - long-term portion 540,522
ACQUISITION NOTES PAYABLE - long-term portion 192,814
CONFIRMED BANKRUPTCY LIABILITIES - long term portion 846,986
DEPOSITS HELD UNDER CONTRACT 140,000
DEFERRED FRANCHISE FEE INCOME 238,400
------------
Total liabilities 6,554,757
------------
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, 8,951,735 issued and outstanding 8,227
Paid in capital 4,338,604
Accumulated deficit (11,995,671)
------------
Total stockholders' equity 4,601,160
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,155,917
============
3
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SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, (UNAUDITED)
2000 1999
----------- -----------
REVENUES:
Net product and store sales $ 2,156,491 $ 125,759
Franchise fees 67,500 38,245
Royalties 429,733 159,222
Rental income 61,800 104,400
----------- -----------
Total revenues 2,715,524 427,626
----------- -----------
EXPENSES:
Cost of product sales 760,794 84,548
Personnel expenses 799,455 96,997
Rent 434,710 134,260
Depreciation and amortization 82,655 2,591
General and administrative expenses 864,872 95,634
----------- -----------
Total expenses 2,942,486 414,030
----------- -----------
OPERATING (LOSS) INCOME (226,962) 13,596
----------- -----------
OTHER (INCOME) AND EXPENSES
Interest expense 66,887 32,468
Interest income (1,447) (3,933)
----------- -----------
Total other expense 65,440 28,535
----------- -----------
INCOME BEFORE INCOME TAXES (292,402) (14,939)
INCOME TAX (BENEFIT) PROVISION (110,989) (5,479)
----------- -----------
NET (LOSS) INCOME $ (181,413) $ (9,460)
=========== ===========
NET (LOSS) PER SHARE:
Basic $ (0.06) $ *
=========== ===========
Diluted $ (0.06) $ *
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 8,476,905 2,764,444
=========== ===========
Diluted 8,476,905 2,764,444
=========== ===========
* less than $(0.01) per share
4
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, (UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(181,413) $ (9,460)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 82,666 2,591
Deferred income taxes (110,989) (5,478)
Changes in assets and liabilities:
Trade and other accounts receivable (168,620) 12,618
Inventories 4,295 7,454
Refundable lease deposits (2,500) (7,734)
Prepaids and other current assets (50,335) 157
Other assets (12) 12,133
Accounts payable (7,210) 147,374
Accrued liabilities (6,513) (28,812)
Deferred franchise fee income 23,928 (3,244)
--------- ---------
Net cash provided by (used in) operating activities (416,703) 127,599
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (68,120) (42,042)
Collections on notes receivable 72,415 41,564
Proceeds from sale of property and equipment 350,000 --
--------- ---------
Net cash (used in) investing activities 354,295 (478)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable -- 332,500
Repayments on line of credit (199,555) --
Principal repayments on notes payable (150,602) (105,679)
Payments on confirmed bankruptcy liabilities (68,450) (152,089)
--------- ---------
Net cash provided by (used in) financing activities (418,607) 74,732
--------- ---------
INCREASE (DECREASE) IN CASH (481,015) 201,853
CASH, BEGINNING OF PERIOD 644,264 19,467
--------- ---------
CASH, END OF PERIOD $ 163,249 $ 221,320
========= =========
</TABLE>
5
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)
2000 1999
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 66,887 $ 32,468
======== ========
Income taxes paid $ -- $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued as preferred stock dividends $289,726
========
Sale of property & equipment under notes receivable $610,000 $ 65,000
======== ========
6
<PAGE>
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 and the Surf City Squeeze brand names, juice
bars and health food cafes that serve blended fruit drinks and healthy foods and
snacks in shopping malls, airports, hospitals and health clubs throughout the
United States and Canada. As of March 31, 2000, the Company, through its
subsidiaries, has approximately 209 total locations, of which 190 are either
franchised or licensed by third parties and 19 are directly owned and operated
by the Company or its subsidiaries. The Company's corporate stores operate under
the Frullati Cafe and Bakery brand name. The Company also sells proprietary
smoothie mixes and other nutrients and supplements to its franchisees and
licensees through its wholly owned subsidiaries.
7
<PAGE>
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 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 metropolitan area. 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. Thus,
the results of operations and statement of cash flow for the three months ended
March 31, 1999 are those of SCAC only.
Total operating revenues for the three months ended March 31, 2000,
increased by $2,287,898 to $2,715,524 from $427,626 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 ending
March 31, 1999 being those of SCAC only.
Cost of product sales increased to approximately 28% of operating revenue
for the three months ended March 31, 2000, compared to 20% of operating revenue
during the same three-month period of 1999. This increase was primarily the
result of the increase of net product and store sales during the first three
months of 2000 resulting from the acquisition of the corporate owned stores of
Selman and Fru-Cor.
Personnel costs increased by $702,458 to $ 799,455 for the three months
ended March 31, 2000, compared to $ 96,997 for the same period of 1999. This
increase in personnel costs was primarily attributable to the additional
personnel costs associated with the corporate stores owned by a subsidiary of
Selman and Fru-Cor.
Rent expense increased by $300,450 to $434,710 for the three months ended
March 31, 2000, compared to $ 134,260 for the same period of 1999. This increase
was primarily the result of additional rent expense associated with the
corporate stores owned by a subsidiary of Selman and Fru-Cor.
8
<PAGE>
Depreciation and amortization expense increased $80,064 to $82,655 for the
three months ended March 31, 2000, compared to $ 2,591 for the same period of
1999. This increase in depreciation and amortization expenses was primarily
attributable to the depreciation of the corporate 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 32% of total
operating revenues for the three months ended March 31, 2000 compared to 22% of
operating revenues during the three months ended March 31, 1999. This increase
was primarily attributable to an increase in professional fees during the three
months ended March 31, 2000 due to the Company's legal proceedings discussed in
more detail below.
Total other expenses increased by 36,905 to $ 65,440 for the three months
ended March 31, 2000, compared to $ 28,535 for the same period of 1999. This
increase is primarily due to an increase in interest expense to 66,887 during
the three months ended March 31, 2000 from 32,468 during the same period of
1999. This increase in interest expense is due to the additional borrowings of
$322,500 from the holder of the Company's Series B Preferred Stock in February
1999 and the $1,200,000 indebtedness the Company incurred to purchase Fru-Cor.
The Company's consolidated operating loss increased to $ 226,962 for the
three months ended March 31, 2000, from operating income of $ 13,596 for the
three months ended March 31, 1999. The operating loss for the three-month ended
March 31, 2000 was a result of an increase in professional fees for the three
months ended March 31, 2000 due to the Company's legal proceedings as discussed
in more detail below.
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 the full amount of the $1,000,000 credit facility to satisfy
current obligations. The Company is currently evaluating offers to sell certain
company-owned stores 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.
9
<PAGE>
Net cash used by operating activities was approximately $416,703 for the
first three months of 2000, compared to net cash provided by operating
activities of $127,599 for the corresponding period of 1999. The primary reason
for this increase was an increase in accounts receivable and prepaid assets due
to the consolidation of the Company's corporate offices. The Company expects
that this increase will reverse by the end of 2000.
Net cash provided by investing activities was approximately $354,295 for
the first three months of 2000 compared to net cash used in financing activities
of $ 478 during the comparable period of 1999. The primarily reason for this
increase was the sale of corporate stores in the first three months of 2000.
Net cash used in financing activities for the first three months of 2000
was approximately $418,607 compared to net cash provided by financing activities
of $74,732 during the same period of 1999. The significant reason for this
increase was a net reduction in borrowings in the first quarter of 2000 compared
to a net increase in borrowings in the first quarter 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 has recently completed the
renegotiation of the $1,200,000 Fru-Cor acquisition note to provide for
repayment of the note over the remainder of 2000. The Company also has sold four
additional corporate stores since March 31, 2000 to provide 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 our 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.
10
<PAGE>
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 quarter ended March 31, 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 has 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 seeks monetary
damages in an unspecified amount.
11
<PAGE>
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 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.
Since the court has now ruled that the Company and SGI did not merge and are
independent entities, the Company believes that the following ancillary
litigation will be resolved in its favor because it has no legal responsibility
for the debts and other obligations of SGI.
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. In JEFF KUDLA V. SPORTS GROUP INTERNATIONAL, INC., the plaintiff asserts
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. In MAKO CAPITAL,
INC. V. SPORTS GROUP INTERNATIONAL, INC., the plaintiff alleges a breach of
contract arising out of loans made by Mako Capital to SGI in the approximate
amount of $250,000.
In addition, the Company has been notified that Spalding Sports Worldwide,
Inc. ("Spalding") has threatened to assert a claim against the Company in the
amount of $275,000 in connection with royalties allegedly owed to Spalding
pursuant to a license agreement between Spalding and SGI.
The Company has advised Spalding that it is not a party to the license
agreement and that it has not assumed any of SGI's liabilities in connection
with the Merger Agreement discussed above. As of this date, Spalding has not
filed suit against the Company. Given the court's recent decision in the SGI
litigation discussed above, the Company believes it is highly unlikely Spalding
will commence any legal action against the Company over royalties arising from
SGI's license with Spalding.
12
<PAGE>
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. ("Surf City") that were discharged in
bankruptcy. 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.
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
is currently filing a motion with the court to recover its attorneys' fees and
costs incurred in the defense of this matter.
13
<PAGE>
ROYAL MARKETING INTERNATIONAL, INC.:
Royal Marketing International, Inc., a Frullati Cafe and Bakery franchisee,
has sued Frullati Franchise Systems, Inc. and Frullati, Inc. (collectively,
"Frullati") for a breach of contract, breach of the implied covenant of good
faith and fair dealing, tortuous interference with contract, violation of the
Texas Unfair Trade & Deceptive Practices Act, fraud in the inducement, common
law fraud, misrepresentation, negligent misrepresentation and rescission, in
District Court for Dallas County, Texas. The franchisee seeks damages of
approximately $400,000. The franchisee alleges that it purchased the right to
open two franchises in the Miami, Florida area, and was responsible for the
construction/build-out of the stores. The franchisee alleges that the cost of
construction ran over what was estimated by Frullati and that the stores did not
perform to the franchisee's expectations or the "estimate" the plaintiff alleges
it received from Frullati. Subsequent to the filing of the complaint, Frullati
was able to negotiate reductions in the cost of construction, bringing the final
cost within the initially projected amount. The Company believes that the
franchisee owes Frullati approximately $ 135,000 for the cost of construction,
past due rent and royalties, and has filed a cross-complaint against Royal
Marketing in the district court action for that amount. In early January, 2000,
Royal Marketing, Inc., Frulatti Franchise Systems, Inc. and Frulatti, Inc.
settled this lawsuit for a nominal payment and the case has been dismissed with
prejudice.
ZIAD S. DALAL:
Mr. Ziad Dalal ("Dalal") was the sole shareholder of Selman prior to the
Company's purchase of Selman in May 1999. Under the Company's agreement to
purchase the stock of Selman, the Company assumed: (i) a loan evidenced by a
note between Selman and United Texas Bank in the original principal amount of
$576,000 ("United Texas Note"); (ii) a loan between Selman and Bank One in the
original principal amount of $100,000 ("Bank One Note"), (iii) a promissory note
between Selman and Fru-Cor in the amount of $1,200,000, and (iv) a promissory
note between Selman and Dalal in the amount of $300,000 ("Dalal Note").
On the day following the closing of the Company's purchase of Selman's
stock, Dalal's attorney requested that the Company execute a Closing Agreement
which provided that the Company and Selman were to have Dalal removed as a
guarantor on the United Texas Note and the Bank One Note. The Company executed
the Closing Agreement. The Closing Agreement provided that if the Company and
Selman did not obtain a release of Dalal's personal guarantee on these two bank
notes within forty-five days of the closing, that failure would be an event of
default under the Dalal Note, causing the entire $300,000 balance to be
immediately due and payable.
14
<PAGE>
The Company and Selman failed to obtain Dalal's personal guarantee release
on the Bank One Loan and United Texas Note within forty-five (45) days of the
closing, and Dalal subsequently sued Selman and the Company in District Court
for Dallas County for full payment of the Dalal Note, and for interest and
related costs. The Company, by obtaining a $1,000,000 credit facility in late
December 1999, paid the United Texas Note and Bank One Note in full and, on
February 1, 2000, settled the Dalal suit. Under the settlement agreement, the
Dalal Note was restructured to provide for 36 monthly payments, beginning
February 1, 2000, each in the amount of $9,540. The Dalal suit will remain
pending in Dallas County District Court subject to the Company performing as
agreed under the restructured Dalal Note.
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
15
<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.
16
<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.
17
<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.
18
<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.
19
<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 March
31, 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
20
<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: May 18, 2000
-----------------------------------------------------
Kevin Blackwell
President, CEO, and Director
By: /s/ David Guarino Date: May 18, 2000
-----------------------------------------------------
David Guarino
Vice President, Chief Financial Officer, and Director
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS OF SPORTS GROUP INTERNATIONAL, INC. AS OF MARCH
31, 2000, INCLUDED IN THE FORM 10-QSB AND IS QUALIFIED IN IS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 163,249
<SECURITIES> 0
<RECEIVABLES> 476,998
<ALLOWANCES> (22,987)
<INVENTORY> 114,613
<CURRENT-ASSETS> 1,247,364
<PP&E> 2,814,284
<DEPRECIATION> (331,199)
<TOTAL-ASSETS> 11,155,917
<CURRENT-LIABILITIES> 4,596,035
<BONDS> 3,643,029
0
12,250,000
<COMMON> 8,227
<OTHER-SE> (7,657,067)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 2,156,491
<TOTAL-REVENUES> 2,715,524
<CGS> 760,794
<TOTAL-COSTS> 2,942,486
<OTHER-EXPENSES> 65,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,887
<INCOME-PRETAX> (292,402)
<INCOME-TAX> (110,989)
<INCOME-CONTINUING> (181,413)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (181,413)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
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