U.S. 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, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Transition Period from: ______________
Commission File Number: 001-13217
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
-----------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 91-1796903
------------------------------ ---------------------
(State or Other Jurisdiction of (I.R.S.
Incorporation or Organization) Identification Number)
4901 Vineland Rd., Suite 150
Orlando, FL 32811
--------------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (407) 648-4444
Check whether the Registrant (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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of May 20, 2003, 10,109,425 shares
of the Registrant's no par value Class A Common Stock and 1,000 shares of no par
value Class B Common Stock were outstanding.
Transitional Small Business Disclosure format: Yes[ ] No [X]
ORLANDO PREDATORS ENTERTAINMENT, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Financial Statements:
Balance Sheets as of March 31, 2003 and September 30, 2002 3-4
Statements of Operations for the Three and Six Months Ended
March 31, 2003 and 2002 5
Statements of Cash Flows for the
Six Months Ended March 31, 2003 and 2002 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 4. Controls and Procedures 17
Part II Other Information and Signatures 18
2
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2003 September 30, 2002
-------------- ------------------
(Unaudited)
CURRENT ASSETS:
Cash $ 270,488 $ 337,224
Accounts receivable, sponsorships 358,342 774,241
Accounts receivable, af2 1,584 23,065
AFL receivable, current portion 68,738 308,000
af2 expansion fees receivable 109,697 109,697
Assets available for sale -- 25,000
Inventory 42,127 37,335
Prepaid expenses 661,568 869,891
Other current assets 26,171 28,493
----------- -----------
Total Current Assets 1,538,715 2,512,946
PROPERTY AND EQUIPMENT, at cost, net 96,163 482,174
INVESTMENT IN AFL 4,032,650 4,032,650
AFL RECEIVABLE, net of current portion 576,136 576,136
NOTE RECEIVABLE, related party 300,000 --
MEMBERSHIP COST, net 1,157,917 1,157,917
af2 TEAM INVESTMENTS 567,705 1,135,411
OTHER ASSETS 83,780 167,309
----------- -----------
TOTAL ASSETS $ 8,353,066 $10,064,543
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2003 September 30, 2002
-------------- ------------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 675,463 $ 1,055,956
Accounts payable and accrued expenses, related party 13,194 --
Note payable-acquisition, current portion 150,000 150,000
af2 expansion fees payable 200,000 200,000
Deferred revenue 601,055 1,189,594
Due to AFL -- 50,000
------------ ------------
Total Current Liabilities 1,639,712 2,645,550
NOTE PAYABLE-ACQUISITION, net of current portion 450,000 450,000
BRIDGE LOANS PAYABLE 1,991,372 3,145,372
LINE OF CREDIT, related party 181,902 --
NOTE PAYABLE, related party 1,067,000 --
DEFERRED REVENUE, long term -- 71,936
DUE TO AFL, net of current portion -- 150,000
------------ ------------
5,329,986 6,462,858
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST -- 243,742
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,500,000 shares authorized; none
issued or outstanding -- --
Class A Common Stock, 15,000,000 shares
authorized; 10,109,425 and 7,394,840 issued and 16,010,483 13,910,031
outstanding, respectively
Class B Common Stock, 1,000 shares authorized;
1,000 issued and outstanding 5,000 5,000
Additional paid-in capital 4,839,729 4,499,354
Accumulated (deficit) (17,832,132) (15,056,442)
------------ ------------
Total Stockholders' Equity 3,023,080 3,357,943
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,353,066 $ 10,064,543
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Ticket $ 393,680 $ -- $ 708,145 $ --
Concession 25,977 -- 48,739 --
Advertising and promotions 167,159 -- 310,069 1,171
Sponsorship trade revenue 40,528 -- 46,546 --
Other 9,063 -- 11,832 206
----------- ----------- ----------- -----------
Total Revenue 636,407 -- 1,125,331 1,377
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operations 594,399 -- 1,145,880 --
Selling and promotional 181,626 -- 319,522 --
Trade expenses 27,988 7,151 39,096 16,377
General and administrative 370,548 251,368 661,164 679,203
Amortization -- -- -- 6,875
Depreciation 11,740 -- 20,662 235
Write-down of assets available for sale -- -- 25,000 --
----------- ----------- ----------- -----------
Total Costs and Expenses 1,186,301 258,519 2,211,324 702,690
----------- ----------- ----------- -----------
OPERATING (LOSS) (549,894) (258,519) (1,085,993) (701,313)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (79,385) (32,580) (134,156) (69,331)
Interest income 10,231 602 10,537 1,298
Interest income, AFL 39,665 64,705 87,487 132,899
Loan fees (171,408) (151,632) (427,308) (343,082)
Gain on sale of af2 membership -- -- 413,225 --
----------- ----------- ----------- -----------
Net Other Income (Expense) (200,897) (118,905) (50,215) (278,216)
----------- ----------- ----------- -----------
(LOSS) FROM CONTINUING OPERATIONS (750,791) (377,424) (1,136,208) (979,529)
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS (Note 7)
(Loss) from operations of discontinued
subsidiary (146,507) (274,733) (566,718) (429,108)
(Loss) on disposal of subsidiary (1,078,283) -- (1,078,283) --
----------- ----------- ----------- -----------
Total (Loss) From Discontinued Operations (1,224,790) (274,733) (1,645,001) (429,108)
----------- ----------- ----------- -----------
NET (LOSS) BEFORE MINORITY INTEREST (1,975,581) (652,157) (2,781,209) (1,408,637)
----------- ----------- ----------- -----------
MINORITY INTEREST -- -- 5,517 --
----------- ----------- ----------- -----------
NET (LOSS) $(1,975,581) $ (652,157) $(2,775,692) $(1,408,637)
=========== =========== =========== ===========
NET (LOSS) PER SHARE-BASIC AND DILUTED
Continuing operations $ (0.08) $ (0.05) $ (0.13) $ (0.14)
Discontinued operations:
Loss from operations (0.02) (0.04) (0.07) (0.06)
Loss on disposal (0.12) -- (0.13) --
----------- ----------- ----------- -----------
$ (0.22) $ (0.09) $ (0.33) $ (0.20)
=========== =========== =========== ===========
Weighted Average Number of Common
Shares Outstanding, basic and diluted 9,187,647 7,221,986 8,288,403 7,000,981
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six For the Six
Months Ended Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) from continuing operations before minority interest: $(1,136,208) $ (979,529)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 20,662 235
Stock based compensation 469,629 1,388,110
Gain on sale of af2 team (413,225) --
Loss on retirement of assets -- 2,288
Loss on assets available for sale 25,000 --
Changes in assets and liabilities:
Accounts receivable (735,559) (1,723,902)
Accounts receivable, af2 21,481 --
AFL, Interest income receivable -- (108,669)
Inventory (10,769) (13,954)
Prepaid expenses (810,699) (1,917,487)
Other assets 14,695 (2,902)
Accounts payable and accrued expenses 28,766 (376,125)
Due to AFL -- (74,000)
Accounts payable and accrued expenses, related party 13,194 (36,000)
Deferred revenue 1,797,070 3,236,903
----------- -----------
Net cash flows (to) continuing operations (715,963) (605,032)
Net cash flows (to) discontinued operations (566,718) (395,219)
----------- -----------
Net Cash Provided (Used in) Operating Activities (1,282,681) (1,000,251)
----------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment (1,219) (29,251)
Proceeds from the sale of assets available for sale -- 3,500
Collection of AFL receivable 239,262 121,324
----------- -----------
Net Cash Provided by Investing Activities 238,043 95,573
----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from issuance of Class A common stock -- 493,500
Proceeds from note payable-related party 750,000 --
Proceeds from line of credit-related party 181,902 --
Repayment of note payable-acquisition -- (400,000)
Repayment of note payable-bank -- (700,000)
Proceeds from bridge loans 46,000 2,325,372
----------- -----------
Net Cash Provided by Financing Activities 977,902 1,718,872
----------- -----------
INCREASE (DECREASE) IN CASH (66,736) 814,194
Cash and Cash Equivalents at Beginning of Period 337,224 281,492
----------- -----------
Cash and Cash Equivalents at End of Period $ 270,488 $ 1,095,686
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 18,907
=========== ===========
Taxes $ -- $ --
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
include 100% of the assets, liabilites, equity and operations of the
subsidiaries including Peoria Professional Football, Inc. ("Peoria), and
Louisiana Sports, LLC ("LA Sports"). The 10% membership interest in LA Sports
owned by a member of the Company's board of directors/significant stockholder
has been recorded as a minority interest. All significant intercompany balances
and transactions have been eliminated in consolidation. The operations of the
Orlando Predators ("Predators") have been presented as discontinued operations
because the Predators were sold in February 2003.
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the instructions for Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles.
In the opinion of management, the unaudited interim financial statements for the
three and six months ended March 31, 2003 are presented on a basis consistent
with the audited financial statements and reflect all adjustments, consisting
only of normal recurring accruals, necessary for fair presentation of the
results of such period. The results for the three and six months ended March 31,
2003 are not necessarily indicative of the results of operations for the full
year. These financial statements and related footnotes should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's Form 10-KSB filed with the Securities and Exchange Commission for the
year ended September 30, 2002.
Certain amounts in the prior period's financial statements have been
reclassified for comparative purposes to conform to the current year.
Prior to October 18, 2000, the operations of the Company included only the
operations of Predators. Subsequently, the Company formed Predators as a
separate division and assigned the football operations to Predators. In 2000,
the Company formed Peoria and acquired the right to operate an arenafootball2
("af2") (a minor league system of the AFL) team in Peoria, Illinois. The
accounting policies of Predators and Peoria are identical to the prior policies
of the Company. In addition to the rights to Peoria, the Company acquired the
rights to operate two additional teams in af2 markets formerly controlled by the
Indoor Football League, Inc. ("IFL"), a competing indoor football league. The
Company also acquired assets of the IFL, including indoor playing fields and
office equipment. These assets were classified as available for sale.
In July 2002, the Company formed LA Sports, a wholly owned subsidiary of the
Company. LA Sports formed IceGators Professional Hockey, LLC ("IceGators") and
Acadiana Bayou Bears Professional Football, LLC ("Bears"). LA Sports acquired
certain assets of the Louisiana IceGators, a professional hockey team that is a
member of the East Coast Hockey League ("ECHL"), which plays its home games in
Lafayette, Louisiana and assigned those assets to the IceGators. The Company
assigned the rights to an af2 membership to LA Sports, which then assigned those
rights to the Bears. In August 2002 the Company sold a 10% interest in LA Sports
to a member of its board of directors / significant stockholder for $250,000.
The Company selected Green Bay, Wisconsin and Lafayette, Louisiana as the home
territories for its two additional af2 teams. In October 2002, the Company
reached an agreement to sell Bismarck Professional Football, Inc. ("Bismarck"),
its wholly owned subsidiary, which owned the rights to the Green Bay af2 team to
a member of its board of directors / significant stockholder for $1,000,000,
paid by the cancellation of a $750,000 note payable and the return of the
minority interest in LA Sports (see note 6).
In February 2003, the Company sold the assets of the Predators to Orlando
Predators Football Team, LLC ("OPF"), a related party entity owned in part by
significant stockholders and a member of the board of directors, for $1,200,000
reduction in bridge loans and a $300,000 note receivable (see note 7).
In May 2003, the Company sold the assets of the IceGators to an unaffiliated
party in exchange for assumption of the Company's $600,000 note payable and
related accrued interest through the date of the sale (see note 8).
NOTE 2 - GOING CONCERN
The Company's unaudited consolidated financial statements are prepared using
accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplate the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses from operations since inception, has an accumulated deficit
of $17,832,132 through March 31, 2003, a working capital deficit of $100,997 and
continues to use significant amounts of cash in its operations. Management and
the Board of Directors have determined that it is in the best interest of the
Company to pursue the sales of its teams and its league membership rights.
During the six months ended March 31, 2003, the Company sold Bismarck to a
member of its board of directors / significant stockholder. The Company also
sold the assets of the Predators to an entity owned in part by significant
stockholders and a member of the board of directors. Subsequent to March 31,
2003, the Company sold the assets of the IceGators to an unrelated party for
reduction of a $600,000 note payable plus accrued interest through the date of
the sale. The Company is also negotiating with other unrelated parties for the
sale of Peoria.
7
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - CONTINGENCIES
The AFL is party to a number of lawsuits arising in the normal course of
business. The Company is contingently liable for its share of the outcomes.
NOTE 4 - COMMON STOCK
The Company issued 59,585 shares of its Class A Common Stock to various
individuals in connection with private placements. The shares were issued as an
offering cost since the Company was unable to register the original shares
offered by a specified date.
The Company issued 2,560,000 shares of the its Class A Common Stock in
connection with the sale of the Predators. The stock has been valued at
$1,971,200, the fair market value on the date the Predators sale closed.
The Company issued 95,000 shares of its Class A Common Stock to its Chief
Executive Officer as compensation for services rendered. The stock has been
valued at $72,050, the fair market value of the stock on the dates issuable.
NOTE 5 - NOTES PAYABLE
In October 2002 the Company received an additional $46,000 in bridge loan
funding bearing interest at 9.5% per year. The note holder received warrants to
purchase 11,500 shares of the Company's Class A Common Stock, exercisable at
$2.75 per share, plus warrants to purchase 4,600 shares of the Company Class A
Common Stock, exercisable at $2.50 per share, if the loan is not paid by
February 15, 2003. The Company computed the fair market value of the warrants
utilizing the Black-Scholes model and amortized the cost over the note period.
The warrants have been valued at $4,400 and the significant assumptions used in
the calculation of the warrants were a risk free interest rate of 2.07%,
volatility of 81.53% and a life of 3.3 years.
As part of the sale of the Predators (see Note 7), the bridge loans were
modified in January 2003 to extend the due date from August 14, 2003 to August
31, 2005 and the interest rate increased to 12% from 9.5%. Certain loan holders
agreed to reduce the debt by an aggregate of $1,200,000, decreasing the
outstanding debt to $1,991,372. The debt has been reclassified as long-term and
the Company is required to prepay principal from cash proceeds, if any, received
from the sale of the teams. Previously issued warrants were cancelled and note
holders received warrants to purchase 35,000 shares of the Company's Class A
Common Stock for each $100,000 of original principal amount under the bridge
loans, exercisable at $0.80 per share. The Company granted warrants to purchase
a total of 1,116,980 shares of the Company's Class A Common Stock valued at
$393,177 and will amortize the cost over the note period. The Company computed
the fair market value of warrants utilizing the Black-Scholes model Significant
assumptions used in the calculation of the warrants were a risk free interest
rate of 2.24%, volatility of 82.44% and a life of 3.1 years.
In October 2002, the Company borrowed $750,000 in the form of a 9.5% note
payable to a member of its board of directors / significant stockholder. The
note was due January 21, 2003 but was cancelled in October 2002 upon purchase of
Bismarck Professional Football, Inc. by the member of the board of directors /
significant stockholder. (See Note 6)
NOTE 6 - SALE OF af2 TEAM
In October 2002 the Company sold Bismarck Professional Football, Inc., its
wholly owned subsidiary, which owned the rights to the Green Bay af2 team to a
member of its board of directors/significant stockholder for $1,000,000 paid by
the cancellation of the $750,000 note payable entered into during October 2002
and the return of the 10% membership ("minority interest") in LA Sports sold in
August 2002 for $250,000. The Company recognized a gain of $413,225 on the sale
of Green Bay.
The Company also entered into a management agreement with the new owner of the
Green Bay team for a term of one year. The Company was to provide management
services to Green Bay and receive a $5,000 monthly fee. The Company's Chief
Executive Officer was to provide the management services and receive a monthly
fee of $5,000 when paid by Green Bay. In November 2002, the agreement was
terminated.
8
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SALE OF THE PREDATORS - DISCONTINUED OPERATIONS
On February 25, 2003, the Company sold the assets of the Predators to Orlando
Predators Football Team, LLC ("OPF"), a related party entity owned in part by
significant stockholders and a member of the board of directors. OPF purchased
substantially all of the assets of the Predators, excluding cash balances,
including accounts receivable, inventory, prepaid expenses, fixed assets, and
the AFL membership and assumed certain liabilities including certain trade
payables, trade and cash sponsorship deferred revenues, season ticket deferred
revenues, amounts due to the AFL, and liabilities arising as a result of certain
contracts. As consideration, the Company received a $1,200,000 reduction in the
bridge loans and a $300,000 note receivable from OPF due August 2005, which
accrues interest at 7% per year. The bridge loan holders have agreed to extend
the due date of the loans to August 31, 2005 in connection with the sale of the
Predators and in exchange for an increase in the interest rate from 9.5% to 12%
per annum and the cancellation of previously issued warrants and issuance of new
warrants at a reduced exercise price. The Company issued a promissory note in
the amount of $1,131,000 bearing interest at 7% per year to OPF to repay certain
2003 revenues received by the Company prior to sale of the Predators and issued
2,560,000 shares of the Company's Class A Common Stock to OPF valued at
$1,971,200, the fair market value of the common stock on the date of closing.
The Company will receive contingent payments if OPF receives non-expansion
distributions of $1,000,000 or more from the AFL during a given period, was to
receive between 25% and 50% of the net operational proceeds of OPF, and was to
receive between 25% and 50% of the net proceeds from the sale, merger, or
transfer of OPF. In addition, OPF had extended a non-revolving line of credit
for the benefit of the Company in an aggregate principal amount of $550,000
accruing interest at 7% per annum and maturing on January 31, 2013. The
operations of the Predators have been reported as discontinued operations.
In May 2003, the agreement was amended to provide for an increase in the line of
credit to $700,000 and a $650,000 reduction of the promissory note payable to
OPF, which will be recorded as a reduction of the loss on the sale of the team.
As consideration, the Company has agreed to forego it's right to a percentage
sharing of the net operational proceeds of OPF and forfeit its right to a
percentage sharing of any net proceeds from a subsequent sale, merger or
transfer of OPF. In addition, the Company has agreed to share in up to 25% of
the potential net operational losses of OPF resulting from the 2004 and 2005
playing seasons, not to exceed $250,000 in aggregate.
NOTE 8 - SALE OF ICEGATORS
In May 2003, the Company sold the assets of the IceGators to an unaffiliated
party. The Company sold the ECHL franchise and fixed assets of the IceGators for
the assumption of the Company's $600,000 note payable plus accrued interest
through the date of the sale.
9
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Orlando Predators Entertainment, Inc. ("OPE", the "Company" or "we") was
organized as a Florida corporation in March 1997 and is in the sports and
entertainment business. OPE (i) owned and operated the Orlando Predators (the
"Predators"), a professional arena football team of the Arena Football League
(the "AFL" or the "League"), (ii) owns and operates one minor league team of the
arenafootball2 League ("af2"), the Peoria Pirates, which commenced play in the
2001 season, (iii) owns the rights to an additional af2 franchise, (iv) owned
and operated the Louisiana IceGators of the East Coast Hockey League ("ECHL"),
and (v) owns an additional approximately 9% net revenue interest in the League.
Arena football is played in an indoor arena on a padded 50-yard long football
field using eight players on the field for each team. Most of the game rules are
similar to college or other professional football game rules with certain
exceptions intended to make the game faster and more exciting. The ECHL is a
minor league ice hockey league. Most of the game rules are similar to other
professional hockey game rules
The Predators, Pirates, and IceGators are collectively referred to as the teams.
In October 2000, we entered into an agreement with af2 Enterprises LLC ("af2"),
which operates the arenafootball2 League to assist af2 in acquiring
substantially all of the assets of the Indoor Football League ("IFL") through
IFL Acquisition Company ("IFL Acq."), a wholly-owned subsidiary of af2. Under
the terms of our agreement with af2, we contributed (i) $1.1 million in cash
less credits of $251,165, (ii) a $1.75 million promissory note and (iii) 214,286
shares of Class A Common Stock (which we agreed to repurchase from the holders
at their election for $3.50 per share). In exchange, af2 granted us (i) three
af2 memberships in IFL markets, (ii) the first $1 million in expansion fees
earned by the af2 in IFL markets and (iii) all of the tangible personal property
assets of the IFL such as turf fields, football equipment and the like. In
February 2002, the agreement was modified pursuant to which we issued an
additional 35,000 shares to eliminate our 214,286 share repurchase requirement
and paid $400,000 to cancel the $1.75 million promissory note we had issued.
With respect to the three af2 memberships, we operate the Peoria Pirates, own
the rights to an additional af2 franchise and sold our rights to the Green Bay,
Wisconsin team in October 2002.
NBC Sports and the Arena Football League have reached an agreement to become
revenue-sharing partners in a national television contract beginning with the
2003 season. The AFL season began on January 31 and will conclude with ArenaBowl
XVII on Sunday, June 22, 2003. NBC's regular season broadcasts are shown live on
Sunday afternoons with up to four regional telecasts each week. NBC is the
exclusive national broadcaster of AFL games. AFL teams' local television
agreements will continue on a non-conflicting basis. All Playoff Games will be
broadcast live on Saturdays and Sundays beginning with the AFL's Wild Card games
on the weekend of May 24-25, 2003 and culminating with ArenaBowl XVII on June
22, 2003. The AFL will have a total of 22 broadcasts (15 regular season games
with up to four regional exposures, plus seven postseason games) on NBC
encompassing a total of 71 games (including all playoff games and ArenaBowl),
resulting in over 66 hours of live programming each year. The Company will share
in these revenues through its 9% net revenue interest in the League.
On July 31, 2002, we entered into an agreement to purchase the East Coast Hockey
League (ECHL) membership of the Louisiana IceGators (which plays its games in
Lafayette, Louisiana) and certain assets for $100,000 cash and a $600,000
promissory note bearing interest 5% per year, payable in four annual
installments of $150,000 each. We also assumed certain contracts under the sale
agreement. In May 2003, we entered into an asset purchase agreement to sell the
assets of the IceGators to an unrelated party for the assumption of the
Company's $600,000 note payable plus accrued interest through the date of the
sale.
We have incurred substantial and ongoing losses since our inception, aggregating
$17,832,132 through March 31, 2003. Moreover, recently our cash resources have
been reduced to the point that our ability to continue our operations has been
put into jeopardy. In order to generate cash, we decided to offer all of our
professional teams for sale, retaining only our aggregate 9% net revenue
interest in the League. Consistent with this strategy, we have sold assets of
the Predators, excluding cash, to a related party entity that is owned in part
by significant stockholders and a member of the Board of Directors.
Due to the urgency of our cash flow difficulties, we believe we may have sold
the Predators and IceGators for less than that which we would have received had
we the time to properly market the teams. Similarly, we believe we may also be
required to sell our other teams at prices below that which we would receive had
we the time to properly market the other team and league membership.
There can be no assurance that we will be successful in selling our remaining
team and league membership. However, if we are successful in selling our
remaining team and league membership, our revenue would be reduced to the
distributions, if any, we will receive generated by our 9% net revenue interest
in the League. While our operating expenses would also be substantially reduced,
we can give no assurance that we would be able to generate sufficient revenue
following the team and league membership sales to maintain our operations.
Except for the historical information contained herein, certain matters set
forth in this report are forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties that may
cause actual results to differ materially. These risks are detailed from time to
time in our periodic reports filed with the Securities and Exchange Commission.
These forward-looking statements speak only as of the date hereof. We disclaim
any intent or obligation to update these forward-looking statements.
10
Summary of Significant Accounting Policies
Consolidation and Minority Interest
The consolidated financial statements of the Company include 100% of the assets,
liability, equity and operations of the subsidiaries. The 10% membership
interest in LA Sports owned by a member of the Company's board of
directors/significant stockholder has been recorded as a minority interest. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Inventory
Inventory consists of team merchandise available for sale. Inventory is stated
at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation expense is provided on
a straight-line basis using the estimated useful lives of 5-10 years.
Maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the property accounts are relieved of costs
and accumulated depreciation and any resulting gain or loss is credited or
charged to operations
Restricted Investment
Restricted investment included in other assets consists of a $100,000 interest
bearing certificate of deposit with a financial institution, which also provides
a letter of credit to the AFL. The certificate of deposit is a requirement of
the AFL as security for the AFL's letter of credit.
The Company is also required to maintain a minimum cash balance of $91,000 as
collateral for the IceGators' workers' compensation insurance. This restricted
amount is included in the cash balance.
Membership Cost
The AFL membership was recorded at its cost of $1,989,860 and was being
amortized on a straight-line basis over 40 years. The Peoria af2 membership cost
was recorded at its cost of $550,000 and was being amortized on a straight-line
basis over 20 years. The ECHL membership was recorded at its cost of $640,000
and is not being amortized. Pursuant to SFAS 142 ("Goodwill and Other Intangible
Assets") and SFAS 144 ("Accounting for the Impairment or Disposal of Long-Lived
Assets"), the Company has evaluated its memberships in the AFL, af2 and the ECHL
for impairment and had determined as of September 30, 2002, that the fair value
of the AFL membership approximates $-0-. As a result the Company recorded a
$1,745,271 impairment charge related to the AFL membership during the year ended
September 30, 2002. As of March 31, 2003, the Company believes that no
impairment charge should be recognized on the af2 and ECHL memberships.
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No.
142 goodwill and other intangible assets (SFAS 142). Under SFAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no maximum
life). With respect to goodwill and intangible assets acquired prior to July 1,
2001, the Company was required to adopt SFAS 142 effective September 30, 2001.
The adoption of SFAS 142 caused a decrease of $19,312 in amortization expense
for the six months ended March 31, 2003 as compared to the same period in 2002.
Advertising Expenses
The Company utilizes direct-response advertising, eliciting sales to customers
who can be shown to have responded specifically to the advertising and resulting
in future economic benefits. Expenditures for advertising are capitalized and
then amortized over the course of the playing season. Advertising costs totaled
$82,630 and $-0- for the six months ended March 31, 2003 and 2002, respectively.
Revenue Recognition
The Company recognizes ticket, concession, play-off, and advertising and
promotions revenues as its home preseason, regular season and play-off (if any)
games are played. Generally, prior to each team's season, the Company begins
selling season tickets and sponsorship packages (advertising and promotions),
which are recorded as deferred revenues until each game is played. The Company
recognizes these revenues ratably over the course of the home games played.
Single game tickets are sold generally during each team's playing season. These
revenues are recognized as the applicable games are played. The Company receives
all ticket and advertising and promotion revenues for home play-off games (if
any) and receives play-off revenue sharing from other teams for away play-off
games (if any). The Company does not share in ticket or other revenues from any
preseason or regular season away games.
The Company recognizes its share of revenues from the leagues, when amounts are
deemed distributable by the leagues. The Company receives one share of league
revenues based upon the number of shares outstanding at the time the revenues
were earned by the leagues. League revenues (if any) generally consist of gross
expansion fees received by the league, any national sponsorship revenues and any
national television contract revenues. The Company may share in other league
revenues generated.
Football and Hockey Operations
Team, selling and promotional expenses (principally player and coaches salaries,
fringe benefits, insurance, game expenses, arena rentals and travel) are
recorded as expenses ratably over the course of the season. Accordingly,
expenses not yet incurred are recorded as prepaid expenses and are amortized
ratably as games are played. General and administrative expenses are charged to
operations as incurred.
11
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company sells sponsorships for cash, goods and services. In exchange, the
sponsor receives advertising and various benefits to games. The value of the
services has been estimated in the accompanying financial statements. Management
believes these estimates reasonably disclose the value of goods and services
received.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of temporary differences between the tax basis of
assets and liabilities and their financial statement amounts at the end of each
reporting period. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
represents the tax payable for the current period and the change during the
period in deferred tax assets and liabilities. Deferred tax assets and
liabilities have been netted to reflect the tax impact of temporary differences.
Deferred tax assets arise primarily from the net operating loss carryforward and
amortization of the membership costs which are not deductible for tax purposes
until the membership is sold.
Deferred tax liabilities result when depreciation for tax purposes exceeds
depreciation for book purposes. A valuation allowance equal to the net deferred
tax asset has been recorded at March 31, 2003 since management of the Company
has determined that it is more likely than not that the tax asset will not be
realized.
Concentrations of Risk
Concentrations of credit risk associated with accounts receivable is limited due
to accounts receivable transactions arising from sponsorship contracts, which
have a history of performance.
The supply of talented players is limited due to the competitive nature with
other professional football and hockey leagues.
The Company maintains all cash in deposit accounts, which at times may exceed
federally insured limits. The Company has not experienced a loss in such
accounts.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, notes payable, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items. The carrying value of non-current liabilities
approximates fair value based on references to interest rates on similar
instruments.
Earnings Per Common Share
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). This
Statement simplifies the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share, and makes them more comparable to international EPS standards. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic EPS.
In addition, the Statement requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123). Under the
provisions of SFAS No. 123, companies can either measure the compensation cost
of equity instruments issued under employee compensation plans using a fair
value based method, or can continue to recognize compensation cost using the
intrinsic value method under the provisions of APB No. 25. However, if the
provisions of APB No. 25 are continued, proforma disclosures of net income or
loss and earnings or loss per share must be presented in the financial
statements as if the fair value method had been applied. The Company recognizes
compensation costs under the provisions of APB No. 25 and provides the expanded
disclosure required by SFAS No. 123.
12
Recently Issued Accounting Pronouncements
In July 2001 the Financial Accounting Standards Board ("FASB") issued No. SFAS
141, Business Combinations. SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method. The
Company has implemented SFAS 141 and its adoption did not have a material effect
on its consolidated financial statements.
In July 2001 the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 and early adoption is encouraged.
SFAS No. 143 requires that the fair value of a liability for an asset's
retirement obligation be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The Company estimates that the new standard will not have a
material impact on its consolidated financial statements.
In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. SFAS No. 144 addresses accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and
expands the reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the entity and
that will be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company has implemented SFAS 144 and has determined that the
fair value of its AFL membership approximates $-0-. As a result, the Company
recorded a $1,745,271 impairment charge related to the AFL membership during the
year ended September 30, 2002.
In April 2002 the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections ("SFAS
145"). This statement rescinds the requirement in SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, that material gains and losses on the
extinguishment of debt be treated as extraordinary items. The statement also
amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the accounting for sale-leaseback transactions and the accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Finally the standard makes a number of
consequential and other technical corrections to other standards. The provisions
of the statement relating to the rescission of SFAS 4 are effective for fiscal
years beginning after May 15, 2002. Provisions of the statement relating to the
amendment of SFAS 13 are effective for transactions occurring after May 15, 2002
and the other provisions of the statement are effective for financial statements
issued on or after May 15, 2002. The Company has reviewed SFAS 145 and its
adoption is not expected to have a material effect on its consolidated financial
statements.
In July 2002 the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities ("SFAS 146"). SFAS 146 applies to costs associated with an exit
activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. SFAS 146
will require a Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), and
requires liabilities associated with exit and disposal activities to be expensed
as incurred and can be measured at fair value. SFAS 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
with earlier adoption encouraged. The Company has reviewed SFAS 146 and its
adoption may have a material effect on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation from the
intrinsic value based method of accounting. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Under the provisions of SFAS No. 148, companies that choose to adopt
the accounting provisions of SFAS No. 123 will be permitted to select from three
transition methods: Prospective method, Modified Prospective method and
Retroactive Restatement method. The transition and annual disclosure provisions
of SFAS No. 148 are effective for the fiscal years ending after December 15,
2002. We are currently evaluating SFAS No. 148 to determine if we will adopt
SFAS No. 123 to account for employee stock options using the fair value method.
13
Results of Operations
Three Months Ended March 31, 2003 Compared To The Three Months Ended March 31,
2002
The following discussion does not include the discontinued operations of the
Predators, which are discussed later in this section.
Revenues
--------
We recognize game revenues and expenses over the course of the season. The af2
season is from March through August and the hockey season is from October
through May. During the three months ended March 31, 2003 the Pirates played one
home game as compared to no games during the same period in 2002. During the
three months ended March 31, 2003, the IceGators played 19 home games and 18
away games.
Revenues for the three months ended March 31, 2003 were $636,407 compared to
$-0- for the three months ended March 31, 2002. The increase was principally due
to increase in ticket, concession, and advertising and promotions revenues due
to the IceGator 2002-2003 hockey season.
Selling and Promotional Expenses
--------------------------------
Selling and promotional expenses were $181,626 for the three months ended March
31, 2003 compared to $-0- for the three months ended March 31, 2002. The
increase in selling and promotional expenses is primarily a result of the
IceGator 2002-2003 hockey season.
Operations
----------
Operating expenses were $594,399 for the three months ended March 31, 2003
compared to $-0- for the three months ended March 31, 2002. Operating expenses
consist primarily of player and coaching staff salaries and benefits and game
production costs. The increase in operating expenses is a result primarily of
the IceGator hockey season.
Trade Expenses
--------------
Trade expenses were $27,988 for the three months ended March 31, 2003 compared
to $7,151 for the three months ended March 31, 2002. The teams trade sponsorship
opportunities at home games in exchange for goods or services. The value of
trade expenses are expensed as incurred, while trade revenues are recognized
when home games are played. The expenses during the three months ended March 31,
2003 consisted primarily of team meals, player medical costs, wireless phone
service, web site and computer maintenance, advertising, furniture rentals and
hotel accommodations. The expenses during the three months ended March 31, 2002
consisted primarily of wireless phone services, web site and computer
maintenance and furniture rentals. The increase in trade expenses is a result of
the IceGator hockey season.
General and Administrative Expenses
-----------------------------------
General and administrative expenses of $370,548 increased by $119,180 or 47% for
the three months ended March 31, 2003 compared to $251,368 for the three months
ended March 31, 2002. The increase was primarily due to addition of the
IceGators. Management believes that general and administrative expenses will be
lower in future periods due to decreased staffing and other cost cutting
procedures.
Interest Income/Expense
-----------------------
Interest income and interest income AFL were $10,231 and $39,665, respectively
during the three months ended March 31, 2003 as compared to $602 and $64,705,
respectively for the three months ended March 31, 2002. The decrease in interest
income, AFL is due to the reduction of the principal balance of the note
receivable from the AFL.
Interest expense during the three months ended March 31, 2003 was $79,385 as
compared to $32,580 for the three months ended March 31, 2002. The increased
interest expense is attributable to the bridge loans which closed in March of
2002 and the issuance of a note payable due to a non-affiliate as a result of
the acquisition of the IceGators.
Loan Fees
---------
We have granted warrants to purchase 797,843 shares of our Class A Common Stock
in connection with the bridge loan financing which were valued utilizing the
Black-Scholes model totaling $1,141,852. During the three months ended March 31,
2003, we expensed $111,608 of related loan fees, which were amortized over the
initial term of the loan. The Company also paid a $285,000 finders fee related
to the bridge loans. The fee was amortized as a loan fee over the term of the
loan and $22,940 of the finder's fee was expensed during the quarter ended March
31, 2003.
In connection with the sale of the Predators, the bridge loans were extended and
the related warrants were exchanged for warrants to purchase 1,116,980 shares of
our Class A Common Stock for a reduced price of $0.80 per share. The warrants
were valued utilizing the Black-Scholes model totaling $393,177 and are being
amortized over the term of the amended bridge loans. During the three months
ended March 31, 2003, we recorded $36,860 of related expense.
Operations of the Predators - Discontinued Operations
-----------------------------------------------------
We have reported the operations of the Predators as discontinued operations. We
sold the Predators on February 25, 2003. The Predators had assets of
approximately $2,752,000 and liabilities of approximately $3,174,000 as of
January 31, 2003, the effective date of the sale. The Predators had a loss from
operations of approximately $147,000 during the three months ended March 31,
2003. We recognized a loss of approximately $1,078,000 on the sale of the
Predators
14
Six Months Ended March 31, 2003 Compared To The Six Months Ended March 31, 2002
The following discussion does not include the discontinued operations of the
Predators, which are discussed later in this section.
Revenues
--------
The Company recognizes game revenues and expenses over the course of the season.
The af2 season is from March through August and from October through May for
hockey. During the six months ended March 31, 2003 the Pirates played one home
game as compared to no games during the same period in 2002. During the six
months ended March 31, 2003, the IceGators played 36 home games and 36 away
games.
Revenues for the six months ended March 31, 2003 were $1,125,331 compared to
$1,377 for the six months ended March 31, 2002. The increase was principally due
to Increase in ticket, concession, and advertising and promotions revenues due
to the IceGator 2002-2003 hockey season.
Selling and Promotional Expenses
--------------------------------
Selling and promotional expenses were $319,522 for the six months ended March
31, 2003 compared to $-0- for the six months ended March 31, 2002. The increase
in selling and promotional expenses is a result primarily of the IceGator
2002-2003 hockey season.
Operations
----------
Operating expenses were $1,145,880 for the six months ended March 31, 2003
compared to $-0- for the six months ended March 31, 2002. Operating expenses
consist primarily of player and coaching staff salaries and benefits and game
production costs. The increase in operating expenses is a result primarily of
the IceGator hockey season.
Trade Expenses
--------------
Trade expenses were $39,096 for the six months ended March 31, 2003 compared to
$16,377 for the six months ended March 31, 2002. The teams trade sponsorship
opportunities at home games in exchange for goods or services. The value of
trade expenses are expensed as incurred, while trade revenues are recognized
when home games are played. The expenses during the six months ended March 31,
2003 consisted primarily of team meals, player medical costs, wireless phone
services, web site and computer maintenance, advertising, hotel accommodations
and furniture rentals. The expenses during the six months ended March 31, 2002
consisted primarily of wireless phone services, web site and computer
maintenance and furniture rentals. The increase in trade expenses is a result of
the IceGator hockey season.
General and Administrative Expenses
-----------------------------------
General and administrative expenses of $661,164 decreased by $18,039 or 3% for
the six months ended March 31, 2003 compared to $679,203 for the six months
ended March 31, 2002. The decrease was primarily due to the recording of the
fair market value of options granted to USV during the quarter ended December
31, 2001. The decrease was offset by the increase in other general and
administrative expense due in part to the addition of the IceGators. Management
believes that general and administrative expenses will be lower in future
periods due to decreased staffing and other cost cutting procedures.
Interest Income/Expense
-----------------------
Interest income and interest income AFL were $10,537 and $87,487, respectively
during the six months ended March 31, 2003 as compared to $1,298 and $132,899,
respectively for the six months ended March 31, 2002. The decrease in interest
income, AFL is due to the reduction of the principal balance of the note
receivable from the AFL.
Interest expense during the six months ended March 31, 2003 was $134,156 as
compared to $69,331 for the prior period. The increased interest expense is
attributable to the bridge loans which closed in March of 2002 and the issuance
of a note payable due to a non-affiliate as a result of the acquisition of the
IceGators.
Loan Fees
---------
We have granted warrants to purchase 797,843 shares of our Class A Common Stock
in connection with the bridge loan financing which were valued utilizing the
Black-Scholes model totaling $1,141,852. During the six months ended March 31,
2003, we expensed $321,629 of related loan fees, which were amortized over the
initial term of the loan. The Company also paid a $285,000 finders fee related
to the bridge loans. The fee was amortized as a loan fee over the term of the
loan. $68,819 of the finders fee was expensed during the six months ended March
31, 2003.
In connection with the sale of the Predators, the bridge loans were extended and
the related warrants were exchanged for warrants to purchase 1,116,980 shares of
our Class A Common Stock for a reduced price of $0.80 per share. The warrants
were valued utilizing the Black-Scholes model totaling $393,177 and are being
amortized over the term of the amended bridge loans. During the six months ended
March 31, 2003, we recorded $36,860 of related expense.
Operations of the Predators - Discontinued Operations
-----------------------------------------------------
We have reported the operations of the Predators as discontinued operations. We
sold the Predators on February 25, 2003. The Predators had assets of
approximately $2,752,000 and liabilities of approximately $3,174,000 as of
January 31, 2003, the effective date of the sale. The Predators had a loss from
operations of approximately $567,000 during the six months ended March 31, 2003.
We recognized a loss of approximately $1,078,000 on the sale of the Predators.
15
Liquidity and Capital Resources
Historically, we have financed net operating losses primarily with expansion
proceeds and note receivable and interest payments from the AFL, the sale of our
securities and third party and related party loans.
In October 2000, we entered into an agreement with af2 Enterprises LLC ("af2"),
which operates the arenafootball2 League to assist af2 in acquiring
substantially all of the assets of the Indoor Football League ("IFL") through
IFL Acquisition Company ("IFL Acq."), a wholly-owned subsidiary of af2. Under
the terms of our agreement with af2, we contributed (i) $1.1 million in cash
less credits of $251,165, (ii) a $1.75 million promissory note and (iii) 214,286
shares of Class A Common Stock (which we agreed to repurchase from the holders
at their election for $3.50 per share). In exchange, af2 granted us (i) three
af2 memberships in IFL markets, (ii) the first $1 million in expansion fees
earned by the af2 in IFL markets and (iii) all of the tangible personal property
assets of the IFL such as turf fields, football equipment and the like. In
February 2002, the agreement was modified pursuant to which we issued an
additional 35,000 shares to eliminate our 214,286 share repurchase requirement
and paid $400,000 to cancel the $1.75 million promissory note we had issued.
With respect to the three af2 memberships, we operate the Peoria Pirates and the
rights to an additional af2 franchise and sold our rights to the Green Bay,
Wisconsin team in October 2002.
We completed a private placement of $2,500,372 in notes payable in March 2002.
During the third quarter 2002, we received an additional $50,000. The notes bear
interest at 9.5% and principal and interest are due 18 months after the note
date. We granted warrants to the note holders to purchase a total of 510,074
shares of the Company's Class A Common Stock for $2.75 based upon 20,000 shares
for each $100,000 in principal balance, which are exercisable until February 1,
2006. As part of the private placement, an employee/significant stockholder and
former officer and director of the Company converted a note payable of $175,000
to a note payable in the private placement. If we repay the loans within one
year, warrants to purchase 10,000 shares (for each $100,000 of principal
balance) of the Company's Class A Common Stock will be cancelled. We computed
the fair market value of the warrants utilizing the Black-Scholes model and will
amortize the cost over the note period. The warrants have been valued at
$902,950 and the significant assumptions used in the calculation of the warrants
were risk free interest rates of 3.74% to 4.03% an average volatility of 82% and
an average life of four years. The notes are collateralized by our two
non-voting interests in the Arena Football League.
In July 2002, our Board of Directors voted to increase the maximum offering in
the private placement to a total of $3,850,000 under the same terms as the
original agreement. In addition, we have agreed to grant warrants to purchase an
additional 5,000 shares of the Company's Class A Common Stock for $2.50 for each
$100,000 loaned to the existing note holders as an incentive to increase the
maximum offering size. All original note holders signed a settlement agreement
changing the loan date to February 15, 2002, with a due date of August 14, 2003.
An additional $595,000 was received as of September 30, 2002, bringing the total
outstanding bridge loans to $3,145,372. In October 2002 the Company received an
additional $46,000 in bridge loan funding. The note holder received warrants to
purchase 11,500 shares of the Company's Class A Common Stock, exercisable at
$2.75 per share, plus warrants to purchase 4,600 shares of the Company Class A
Common Stock, exercisable at $2.50 per share, if the loan is not paid by
February 15, 2003. The Company computed the fair market value of the warrants
utilizing the Black-Scholes model and will amortize the cost over the note
period. The warrants have been valued at $4,400 and the significant assumptions
used in the calculation of the warrants were a risk free interest rate of 2.07%,
volatility of 81.53% and a life of 3.3 years.
As part of the sale of the Predators, the bridge loans were modified in January
2003 to extend the due date from August 14, 2003 to August 31, 2005 and the
interest rate increased to 12% from 9.5%. Certain loan holders agreed to reduce
the debt by an aggregate of $1,200,000, decreasing the outstanding debt to
$1,991,372. The debt has been reclassified as long-term and the Company is
required to prepay principal from cash proceeds, if any, received from the sale
of the teams. Previously issued warrants were cancelled and note holders
received warrants to purchase 35,000 shares of the Company's Class A Common
Stock for each $100,000 of original principal amount under the bridge loans,
exercisable at $0.80 per share. The Company granted warrants to purchase a total
of 1,116,980 shares of the Company's Class A Common Stock valued at $393,177 and
will amortize the cost over the note period. The Company computed the fair
market value of warrants utilizing the Black-Scholes model Significant
assumptions used in the calculation of the warrants were a risk free interest
rate of 2.24%, volatility of 82.44% and a life of 3.1 years.
We have incurred substantial and ongoing losses since our inception, aggregating
$17,832,132 through March 31, 2003. Moreover, recently our cash resources have
been reduced to the point that our ability to continue our operations has been
put into jeopardy. In order to generate cash, we decided to offer all of our
professional teams for sale, retaining only our aggregate 9% net revenue
interest in the League. Consistent with this strategy, we have sold the assets
of the Predators, excluding cash, to a related party entity that is owned in
part by significant stockholders and a member of the Board of Directors for
$1,200,000 reduction in bridge loans and a $300,000 note receivable and the
assumption of debt and issuance of 2,560,000 shares of the Company's Class A
Common Stock.. We have also sold the assets of the IceGators to an unrelated
party for assumption of the Company's $600,000 note payable and related accrued
interest through the date of the sale.
Due to the urgency of our cash flow difficulties, we believe we may have sold
the Predators and IceGators for less than that which we would have received had
we the time to properly market the teams. Similarly, we believe we may also be
required to sell our other teams at prices below that which we would receive had
we the time to properly market the other team and league membership.
There can be no assurance that we will be successful in selling our remaining
team and league membership. However, if we are successful in selling our
remaining team and league membership, our revenue would be reduced to the
distributions, if any, we will receive generated by our 9% net revenue interest
in the League. While our operating expenses would also be substantially reduced,
we can give no assurance that we would be able to generate sufficient revenue
following the team and league membership sales to maintain our operations.
16
PART I. FINANCIAL INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of our quarterly report on Form 10-QSB,
we carried out an evaluation, under the supervision and with the participation
of our chief executive officer and chief financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures. Based on
this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports.
In accordance with SEC requirements, our chief executive officer and chief
financial officer note that, since the date of the most recent evaluation of our
disclosure controls and procedures to the date of our Quarterly Report on Form
10-QSB, there have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including the chief executive officer and our chief financial
officer, does not expect that our disclosure controls or our internal controls
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
17
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS FOR WORKING CAPITAL
The Company issued 59,585 shares of its Class A Common Stock to various
individuals in connection with private placements. The shares were issued as an
offering cost since the Company was unable to register the original shares
offered by a specified date.
The Company issued 2,560,000 shares of the its Class A Common Stock in
connection with the sale of the Predators. The stock has been valued at
$1,971,200, the fair market value on the date the Predators sale closed.
The Company issued 95,000 shares of its Class A Common Stock to its Chief
Executive Officer as compensation for services rendered. The stock has been
valued at $72,050, the fair market value of the stock on the dates issuable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Current report on Form 8-K/A filed October 15, 2002, items 5 and 7.
Current report on Form 8-K filed November 5, 2002, item 5.
Current report on Form 8-K filed February 18, 2003, item 5.
Current report on Form 8-K filed March 12, 2003, item 7.
Current report on Form 8-K filed May 15, 2003, item 5.
18
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 thereto duly authorized.
THE ORLANDO PREDATORS ENTERTAINMENT, INC.
Registrant
/s/ Keli Davis
-----------------------
Keli Davis
Chief Financial Officer
Date: May 20, 2003
19
Certification of Periodic Report
I, Keli Davis, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Orlando Predators
Entertainment, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Keli Davis
-----------------------------------
Keli Davis,
Chief Financial Officer
20
Certification of Periodic Report
I, Eric Margenau, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Orlando Predators
Entertainment, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Eric Margenau
-----------------------------------
Eric Margenau,
Chief Executive Officer
21