-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Goxng/05x8tO0S9N0mOOi3JlSjyamuhC6FePL9CeS5lc40IiR3A84RrVUrhEsaTa SeFjxdohgwkbkWKfzIuLtQ== 0001144204-03-000011.txt : 20030102 0001144204-03-000011.hdr.sgml : 20030101 20030102152659 ACCESSION NUMBER: 0001144204-03-000011 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20030102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORTAN UNITED INDUSTRIES INC CENTRAL INDEX KEY: 0001069308 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 760333165 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25513 FILM NUMBER: 03500827 BUSINESS ADDRESS: STREET 1: 3170 OLD HOUSTON RD CITY: HUNTSVILLE STATE: TX ZIP: 77340 BUSINESS PHONE: 4092952726 MAIL ADDRESS: STREET 1: 3170 OLD HOUSTON ROAD CITY: HUNTSVILLE STATE: TX ZIP: 77340 10KSB 1 doc1.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB - -------------------------------------------------------------------------------- [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 SPORTAN UNITED INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Commission file number: 000-25513 Texas 76-0333165 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 3170 Old Houston Road, Huntsville, Texas 77340 --------------------------------------------- ------ (Address of Principal Executive Office) (Zip Code) 936-577-1996 ------------ (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its fiscal year ended September 30, 2002 were $16,051. The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the common stock on the OTC Electronic Bulletin Board on December 30, 2002 was $60,174. As of December 30, 2002 registrant had 6,017,447 shares of common stock outstanding. PART I This annual report contains forward-looking statements. These statements relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company's or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any of the forward-looking statements after the date of this report to conform its prior statements to actual results. ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Company, founded in 1986, has competed in the sports trading card and memorabilia business. In 1998, Jason G. Otteson became Chief Executive Officer. In 1999, management concluded the trading card business was providing insufficient growth and subsequently sold the sports cards and supplies segment of its business. Under the management of Mr. Otteson, management elected to establish a more expanded and comprehensive marketing strategy, while electing to leave the trading card business. The Company proceeded down the novelty and memorabilia merchandise path after the sale of the trading card business. From this place, the expanded view began to focus around Internet fulfillment of products in the sports marketplace. The inventory requirements for the fulfillment business are very substantial. Today, Sportan has reduced operations to a minimal level while the company seeks to acquire a viable solution to provide stability in the future. This reduction in business is due to many factors, but primarily the lack of funding to weather the decline of the marketplace. Sportan is seeking solutions within merger related growth prospects while performing essential operations for cash flow needs. These operations consist of selling off closed out inventory and assets, collecting debt, negotiating payables, seeking viable merger candidates and various other alternative methods to revive the business in general. Sportan maintains a minimum amount of operations while it seeks solutions for growth while being willing and flexible to handle various amounts of historical business operations. 1 BUSINESS STRATEGY The Company's goal was to become a leading fulfillment center while specializing in fulfilling online sales of sports and related merchandise to include novelties apparel and collectibles. Management believes that it can, with adequate funding, develop fulfillment systems and processes that will be both economical and efficient in the distribution of product to both wholesale and retail customers. In addition, the Company has created its owns "Sports Portal" that contains both content as well as products and services related to the content. This site is currently not operating. The theme behind the "Sports Portal" is to become the haven for extreme sports fans while making desired products available. The merchandise could include caps, shirts, posters, collectibles, art, and special auctions on historic memorabilia. At the present time, Sportan has put on hold the growth of the business strategy until a viable solution is refined and honed, while Sportan seeks to solve the cash flow burdens that hinder such growth. The need for capital is crucial for the company to execute most facets of the company's business strategy. 2 PRODUCTS The Company distributes, on a limited basis, the remaining remnant inventory. Products include: Novelties Souvenirs with logos of major College or Professional sports teams. - Periodicals Books related to sports. Apparel Hats, Caps, Sweatshirts and related items, identified with branded logos. Artworks Paintings, serigraphs, photographs, posters identified with branded logos. - Collectibles NFL, NBA, MLB, NHL, NASCAR, etc. products for fans. The Company ships its products via United Parcel Service, Federal Express, United States mail, or motor freight depending on the customer's needs. If the products ordered are in stock, the Company's internal policy is to ship its products within 24 hours of the order. Solutions that Sportan can provide if funding is made available for fulfillment distribution are as follows: - Warehouse space (limited at current status) - Pick and ship - Inventory control - Guaranteed fast delivery 3 MARKETING AND SALES - The Company distributes the remaining product to retailers that sell to the end user, customers of online companies, customers of the Company's Internet operations, and to customers of auction sites. Sales of sports related merchandise in general is influenced by the popularity of the sports to which the products relate. During 1994, Major League Baseball experienced a strike and the National Hockey League experienced a work stoppage. In 1998, the National Basketball Association also experienced a work stoppage. These labor disputes resulted in a loss of interest in these sports by many fans, which in turn, triggered a significant and immediate reduction in merchandise sales. There can be no assurance that similar labor disputes will not occur again or that the popularity of the sports for which the Company distributes sports merchandise will not decline for other reasons. Further labor disputes or any such decline in popularity could have a material adverse effect on the Company's business. COMPETITION The Company's ability to adequately execute its business strategy will be directly related to its ability to secure an adequate level of capital. There is no assurance that the Company will be able to raise sufficient capital to fully execute any part of its business strategy. Therefore, the competition at this stage is somewhat irrelevant until growth becomes viable. INSURANCE The Company has no insurance covering risks incurred in the ordinary course of business. The Company believes the lack of insurance coverage is acceptable at the given moment. There is no key-man life insurance for Jason G. Otteson at this point in time. The loss of Mr. Otteson, for any reason, could have a material adverse effect on the prospects of the Company. EMPLOYEES As of September 30, 2002, the Company employed one person. This number is down from two a year ago. Market factors and the lack of funding are the predominant reasons for this reduction. No employees are covered by a collective bargaining agreement. ITEM 2. DESCRIPTION OF PROPERTY The Company's headquarters facility, which includes its principal administrative offices, is located at 3170 Old Houston Road, Huntsville, Texas 77340. 4 ITEM 3. LEGAL PROCEEDINGS In September 2000, Racing Champions South Inc. sued us in the County Civil Court at Law No. 2 of Harris County, for the amount of approximately $30,000.00, alleging that we owed them money for delivered goods and merchandise. On January 14 2002, a judgment was granted to Racing Champions for the amount of $30,143.76. In February 2001, Riddell, Inc sued us in the 61st Judicial District Court of Harris County, for the amount of approximately $124,000, alleging that we owed them money for delivered goods and merchandise. We are in the process of evaluating the merits of the claim. In August 2001, C & J Fire and Safety was awarded a default judgment for the amount of $95.80 In December 2001, Duck House, Inc. sued Sportan United Industries, Inc. in the Court of Harris County, Texas, Precinct 1, Position 2, for the amount of approximately $2,500, alleging that Sportan owed money for delivered goods and merchandise. We are in the process of evaluating the merits of this claim. In April 2002, Casey's Distribution sued Sportan United Industries, Inc. in the Justice Court of Walker County, Texas, Precinct 4, Pack 1, for the amount of approximately $2,300, alleging that we owed them money for delivered goods and merchandise. On April 22nd, Casey's was awarded default judgment for the amount of $2,236.63. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Shares of the Company's common stock are listed on the OTC Electronic Bulletin Board under the symbol "SPTA.OB" On December 30, 2002, the Company's common stock closed at $0.01 per share. The Company is authorized to issue 50,000,000 shares of common stock, 6,017,447 of which were issued and outstanding at December 30, 2002. At November 1, 2002, there were approximately 106 holders of record of Company common stock. The table set forth below, for the periods indicated, lists the reported high and low sale prices per share of Company common stock on the OTC Electronic Bulletin Board since the common stock began trading on March 7, 2000. Sportan Common Stock ----------------------- High Low ------- ------- FISCAL 2000 and 2001 Quarter ended March 31, 2000 (beginning March 7) $ 2.00 $ 1.00 ------- ------- Quarter ended June 30, 2000 $ 2.25 $ 0.75 ------- ------- Quarter ended September 30, 2000 $ 2.22 $ 1.38 ------- ------- Quarter ended December 31, 2000 $ 1.44 $ 0.27 ------- ------- Quarter ended March 31, 2001 $ 0.27 $ 0.06 ------- ------- Quarter ended June 30, 2001 $ 0.19 $ 0.05 ------- ------- Quarter ended September 30, 2001 $ 0.05 $ 0.05 ------- ------- Quarter ended December 31, 2001 $ 0.05 $ 0.05 ------- ------- Quarter ended March 31, 2002 $ 0.05 $ 0.05 ------- ------- Quarter ended June 30, 2002 $0.00 * $0.00 * ------- ------- Quarter ended September 30, 2002 $ 0.05 $ 0.05 ------- ------- *were not trading during this period The Company has never paid any cash dividends on its common stock and does not anticipate paying cash dividends within the next two years. The Company anticipates that all earnings, if any, will be retained for development of its business. Any future dividends will be subject to the discretion of the board of directors and will depend on, among other things, future earnings, the Company's operating and financial condition, the Company's capital requirements and general business conditions. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth information for all securities issued without registration under the Securities Act, for the year ended September 30, 2002. DEFAULTS UPON SENIOR SECURITIES We currently have outstanding 2,144,006 shares of Series A Convertible Preferred Stock. We must pay a monthly 6% annualized dividend on the $.418 per share stated value, or $4,481 per month. As of the date of this report, we are currently 31 months behind on our dividend payments, or $135,008. 6 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS This Management's Discussion and Analysis as of September 30, 2002 should be read in conjunction with the audited condensed consolidated financial statements and notes thereto set forth in this report. GENERAL The Company recognizes revenues from sales of sports memorabilia and fulfillment services at the time of shipment. General and administrative costs are charged to expense as incurred. Property, plant and equipment are recorded at cost and depreciated using an appropriate accounting method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over the estimated useful lives. The cost and related accumulated depreciation of the assets are removed from the accounts upon disposition. SEASONALITY Sales of sports-related memorabilia products tend to be more constant, with sales peaks during holiday seasons and the then current sport season. RESULTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO THE SAME PERIOD IN 2001 REVENUES. For the year ended September 30, 2002, revenues decreased to $16,057 from $249,565 during the year ended September 30, 2001. The decrease of 94% was attributable to Sportan reducing its business strategy due to the decline of the marketplace and lack of capital infusion. In addition, the Company believes its sales were reduced due to its allocation of resources to development of infrastructure for its business model. COST OF SALES. For the year ended September 30, 2002, cost of sales decreased to $0.00 from $266,035 during the year ended September 30, 2001. The decrease was due to the writing off of inventory as of September 30, 2001 to a zero balance. Subsequently, there has been no purchasing of product. GENERAL AND ADMINISTRATIVE EXPENSES. For the year ended September 30, 2002, general and administrative expenses decreased to $143,245 from $528,345 during the year ended September 30, 2001. The decrease of 73% was attributable to reduction in operations as discussed above. NET LOSS. For the year ended September 30, 2002, the Company's net loss decreased to $199,155 from $597,742 during the year ended September 30, 2001. The decrease was attributable to the large decrease in revenues. HISTORICAL CASH FLOWS CASH FLOW FROM OPERATING ACTIVITIES. The Company's net cash flow from operating activities resulted in cash used by operations of $37,999 for the year ended September 30, 2002, compared to cash used by operations of $169,349 for the year ended September 30, 2001. The decrease in cash used from operations for fiscal 2001 was due to the Company's decreased net loss, due to the factors discussed above. CASH FLOW FROM INVESTING ACTIVITIES. The Company's net cash provided by investing activities for the year ended September 30, 2002 decreased to $4,792, compared to net cash provided by investing activities of the year ended September 30,2001 of $6,415. The decrease in 2002 was attributed to reduced sales of assets. CASH FLOW FROM FINANCING ACTIVITIES. The Company's net cash flows provided from financing activities for the year ended September 30, 2002 was $33,057, 7 compared to net cash flows provided from financing activities of $148,219 for the year ended September 30, 2001. The decrease is attributed to the company obtaining fewer loans from its stockholders. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, the Company had negative working capital of $1,152,943, and cash of $0.00. During the next five years, the Company has the sole option of converting its preferred shares back to the same number of common shares or it may purchase any or all of them at the $.418 per share stated value, or up to $896,195. In addition, the Company must pay a monthly 6% annualized dividend on the $.418 per share stated value, or $4,481 per month, with total minimum dividends of $250,000 due regardless of when it elects to purchase or convert this stock. As of December 2002, the Company is 32 months behind on its dividend payments. At the end of five years, if the Company has taken no action, this preferred stock automatically converts back to the same number of common shares. The Company has borrowed $596,299 from its stockholders in the form of notes payable, of which all is due on demand. The Company has borrowed working capital from its stockholders in the past, but it should not be assumed that such funds will be available in the future. Based on the Company's current operating position, the Company must raise at least $1,000,000 in additional funding to pay its outstanding accounts payables and to continue to operate its business through September 30, 2003. At the present time, the Company has no commitments for capital. If the Company is unable to obtain additional financing in the near future, it may be required to continue to find some other way to bring cash flows into balance. In the future, the Company may continue to experience reduced operations. This may result in volatility in the price or value of its common stock. Accordingly, period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as an indication of future results of operations. Due to the foregoing factors, it is likely that in one or more future periods our operating results will be below the expectations of the investor. 8 ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS The financial statements commencing on page F-1 have been audited by Malone & Bailey, PLLC, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The Company's directors and executive officers are: NAME AGE POSITION Jason G. Otteson 30 Chairman of the board of directors, president and chief executive officer Kay L. Ekis 41 Secretary JASON G. OTTESON has served as chief executive officer and a consultant of the Company since January 1998. Since February 1997, Mr. Otteson has served as director of the Company. From August 1996 to January 1998, Mr. Otteson served as vice president of the Company. From November 1996 through December 1997, Mr. Otteson served as a consultant for Premier Medical Technology, Inc. Mr. Otteson received a marketing degree with a minor in finance from Stephen F. Austin State University in 1996. KAY L. EKIS has served as secretary since August 2000. From July 1998 until January 2002, Ms. Ekis served as the Accounting/Office Manager of the Company. From June 1997 through July 1998, Ms. Ekis served as the Accountant to Home Healthcare of Huntsville. From September 1991 through June 1997, Ms Ekis served as the office manager/accountant for Heil Tank Services, Inc. in Houston, Texas and Huntsville, Texas. Ms. Ekis received a degree in accounting from Sam Houston State University in 1988. The Company's directors hold office until the next annual meeting of the stockholders and until their successors are duly elected and qualified. Directors are reimbursed for out-of-pocket expenses to attend meetings. The Company does not maintain compensation, audit, executive, or nominating committees. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own beneficially more than ten percent of the common stock of the Company, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely on the reports received by the Company and on written representations from certain reporting persons, the Company believes that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements. 10 ITEM 10. EXECUTIVE COMPENSATION The following table provides information regarding compensation paid to the Company's chief executive officer. No other executive officer received in excess of $100,000 in compensation during the fiscal year ended September 30, 2002. Summary Compensation Table
Annual ------ Compensation Long Term Compensation ------------ ---------------------- Awards Securities Name and Restricted Underlying All Other Principal Positions Year Salary ($) stock award(s) ($) Options/SARs (#) Compensation ($) - ------------------- ---- ---------- ------------------ ------------------ ---------------- Jason G. Otteson, 2002 $0.00 Chief Executive Officer 2001 $37,500 -- -- -- 2000 $50,348 -- 1,200,000 -- 1999 $50,000 -- -- -- 1998 $50,000 -- -- --
Due to the current status of the Company, Jason Otteson has opted to forego and to accrue his salary from July 2001 until the cash flow needs improve. In July 2000, the Company entered into a three-year employment agreement with Mr. Otteson. The agreement provides for a base annual salary of $102,000, and a sign-on bonus of $100,000. The sign-on bonus has not been paid and Mr. Otteson has agreed to accept a demand note payable at an interest rate of 12% until paid. Mr. Otteson has agreed that 50% of his annual salary may be paid in the form of note payables and in shares of common stock. The agreement provides for the issuance of a warrant to purchase 750,000 shares of common stock at an exercise price equal to the fair market value on the date of grant, which was $1.44 per share, expiring in five years, vesting in thirds beginning July 1, 2001. If Mr. Otteson is terminated without cause, the Company must make a payment equal to two years annual salary. If Mr. Otteson is disabled or dies, the Company must continue his salary through the remainder of the term of the agreement. If Mr. Otteson is terminated after a change of control in the Company, the Company must make a payment of 150% of Mr. Otteson's highest annual salary, and the amount of any bonus received during the previous year. In addition, in exchange for Mr. Otteson's options, the Company will make a payment equal to the fair market value of the Company's common stock multiplied by the number of shares underlying such options. In September 2000, the Company entered into a three-year employment agreement with Ms. Kay L. Ekis. The agreement provides for a base annual salary of $33,000, and a sign-on bonus of $15,000, of which $3,500 has been paid and the remaining amounts are due on the receipt of future funding of the Company. Ms. Ekis left Sportan in January 2002. STOCK OPTIONS AND WARRANTS The Company's 1999 Stock Option Plan provides for the issuance of an aggregate 1,000,000 shares of common stock, which was amended in September 2000 to provide for the issuance of an additional 1,000,000 shares subject to shareholder approval, upon the exercise of options granted under the plan. As of September 30, 2001, options to purchase an aggregate of 1,557,500 shares of common stock were outstanding under the plan. This total does not include the warrant to purchase 750,000 shares of common stock at an exercise price of $1.44 per share, expiring in five years, vesting in thirds beginning July 1, 2001, that was issued to Mr. Otteson pursuant to his employment agreement. 11 AGGREGATED OPTION EXERCISES IN 2000 AND YEAR-END OPTION VALUES
SHARES ACQUIRED ON VALUE NUMBER OF UNEXERCISED VALUE OF UNEXERCISED NAME EXERCISE (#) REALIZED ($) OPTIONS AT FY-END IN-THE-MONEY OPTIONS ---- ------------ ------------ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Jason G. Otteson, Chief Executive Officer - - 500,000 700,000 -- --
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of January 09, 2002 the number and percentage of outstanding shares of Company Common Stock owned by (i) each person known to the Company to beneficially own more than 5% of its outstanding Common Stock, (ii) each director, (iii) each named executive officer, and (iv) all executive officers and directors as a group.
Number of Shares of Common Stock Name and Address of Beneficial Owner Beneficially Owned Percentage of Ownership Jason G. Otteson 3,590,994 59.7% Connie Logan 1,594,006 26.5% Kay Ekis 55,000 less than 1% All executive officers and directors as a group (2 persons) 3,645,994 60.6%
Of Ms. Logan's shares, 1,544,006 shares are represented by shares of the Company's Series A preferred stock, which provide for the right to vote the preferred stock on a share for share basis. The business address of the above persons is the same as the address of the Company's principal executive office. 12 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has borrowed an aggregate of $596,299 from Mr. Otteson, at interest rates between 10-18%, of which all balances are currently due on demand. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are to be filed as part of the annual report: EXHIBIT NO. IDENTIFICATION OF EXHIBIT Exhibit 3.1(1) Amended and Restated Articles of Incorporation of Sportan United Industries, Inc. Exhibit 3.2(1) Bylaws of Sportan United Industries, Inc. Exhibit 4.1(1) Common Stock Certificate, Sportan United Industries, Inc. Exhibit 10.1(1) Sportan United Industries, Inc. 1999 Stock Option Plan Exhibit 10.3(4) Jason G. Otteson Employment Agreement Exhibit 16.1(2) Letter on change in certifying accountant Exhibit 23.1(5) Consent of Malone & Bailey, PLLC ____________________ (1) Filed previously on registration statement Form 10-SB SEC File No. 000-25513. (2) Filed previously on current report Form 8-K/A SEC File No. 000-25513. (3) Filed previously on annual report for year ended September 30, 1999 Form 10-KSB. (4) Filed previously on annual report for year ended September 30, 2000 Form 10-KSB. (5) Filed herewith. (b) There have been no reports filed on Form 8-K during the last quarter of the period covered by this report. 13 SIGNATURES ---------- In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Sportan United Industries, Inc. By: /s/ Jason G. Otteson ----------------------------------------------- Jason G. Otteson, Chairman of the Board, President, Chief Executive Officer, and Treasurer ___________________________ In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----- /s/ Jason G. Otteson Chairman of the Board, President, December 30, 2002 - ------------------------ Chief Executive Officer, and Treasurer Jason G. Otteson
14 INDEPENDENT AUDITORS' REPORT Board of Directors Sportan United Industries, Inc. Huntsville, Texas We have audited the accompanying balance sheet of Sportan United Industries, Inc. as of September 30, 2002, and the related statements of operations, changes in stockholders' deficit, and cash flows for the two years then ended. These financial statements are the responsibility of Sportan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sportan United Industries, Inc. as of September 30, 2002, and the results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Sportan will continue as a going concern. As discussed in Note 2 to the financial statements, Sportan has suffered recurring losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. MALONE & BAILEY, PLLC www.malone-bailey.com Houston, Texas December 9, 2002 F-1 SPORTAN UNITED INDUSTRIES, INC. BALANCE SHEET As of September 30, 2002
ASSETS Property and equipment, net of $1,662 accumulated depreciation $ 1,483 ================ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable $ 355,494 Accrued expenses 23,481 Accrued salary due to stockholder 179,152 Notes payable to stockholders 596,299 ---------------- Total Current Liabilities 1,154,426 ---------------- STOCKHOLDERS' DEFICIT Convertible preferred stock, $.001 par value, 10,000,000 shares authorized, 2,144,006 shares issued and outstanding 2,144 Common stock, $.001 par value, 50,000,000 shares authorized, 6,017,447 issued and outstanding 6,017 Paid in capital 707,430 Retained deficit (1,868,534) ---------------- Total Stockholders' Deficit (1,152,943) ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,483 ================
See accompanying summary of accounting policies and notes to financial statements. F-2 SPORTAN UNITED INDUSTRIES, INC. STATEMENTS OF OPERATIONS For the Years Ended September 30, 2002 and 2001
2002 2001 --------- --------- Revenues $ 16,051 $ 249,565 Cost of Sales 266,035 --------- --------- Gross Margin 16,051 ( 16,470) Selling, general and administrative (130,292) (512,945) Depreciation ( 12,953) ( 15,400) Impairment loss ( 19,006) Gain on sale of assets 1,955 2,182 --------- --------- Operating Loss (144,245) (542,633) Other Income and (Expense) Interest expense ( 54,161) ( 55,398) Other ( 749) 289 --------- --------- Net loss (199,155) (597,742) Preferred stock dividends ( 53,770) ( 53,770) --------- --------- Net loss available to common shareholders $(252,925) $(651,512) ========= ========= Basic and diluted loss per common share $ (.04) $ (.11) Weighted average common shares outstanding 6,017,447 5,934,808
See accompanying summary of accounting policies and notes to financial statements. F-3 SPORTAN UNITED INDUSTRIES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the Years Ended September 30, 2002 and 2001
Preferred Preferred Common Common Shares Amount Shares Amount --------- ------ --------- ------- Balances at September 30, 2000 2,144,006 $2,144 5,767,445 $5,767 Common stock issued - for services 250,002 250 Preferred stock dividends Net loss --------- ------- --------- ------- Balances at September 30, 2001 2,144,006 2,144 6,017,447 6,017 Net loss --------- ------- --------- ------- Balances at September 30, 2002 2,144,006 $ 2,144 6,017,447 $ 6,017 ========= ========= ======== ========= =======
See accompanying summary of accounting policies and notes to financial statements. F-4 SPORTAN UNITED INDUSTRIES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the Years Ended September 30, 2002 and 2001 Paid In Retained Capital Deficit Totals -------- ----------- ----------- Balances at September 30, 2000 $641,544 $(1,071,637) $( 422,182) Common stock issued - for services 69,701 69,951 Preferred stock dividends (3,815) ( 3,815) Net loss ( 597,742) ( 597,742) -------- ----------- ----------- Balances at September 30, 2001 707,430 (1,669,379) ( 953,788) Net loss ( 199,155) ( 199,155) -------- ----------- ----------- Balances at September 30, 2002 $707,430 $(1,868,534) $(1,152,943) ======== =========== =========== See accompanying summary of accounting policies and notes to financial statements. F-5 SPORTAN UNITED INDUSTRIES, INC. STATEMENTS OF CASH FLOWS For the Years Ended September 30, 2002 and 2001 2002 2001 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(199,155) $(597,742) Adjustments to reconcile net loss to net cash used by operating activities: Stock issued for services 69,951 Depreciation 12,953 15,400 Impairment loss 19,006 Gain on disposal of property and equipment ( 1,955) ( 2,182) Net change in Accounts receivable 3,510 112,522 Accounts receivable-related parties 6,023 Inventory 223,451 Other current assets ( 4,546) Accounts payable ( 37,229) 60,424 Accrued expenses 158,848 ( 46,627) --------- --------- NET CASH USED BY OPERATING ACTIVITIES ( 37,999) (169,349) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment 4,792 6,415 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment on line of credit ( 99,000) Proceeds from notes payable to stockholders 33,057 194,595 Stock subscription receivable 4,359 Accrued salary to shareholder 64,500 Net change in stockholder advances to the company ( 16,235) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 33,057 148,219 --------- --------- NET CHANGE IN CASH ( 150) ( 14,715) CASH BALANCES -Beginning of period 150 14,865 --------- --------- -End of period $ 0 $ 150 ========= ========= Supplemental Disclosures Interest paid $ 0 $ 0 Income taxes paid 0 0 Non-Cash Disclosures Exchange fixed assets for accounts payable $ 4,400 Dividends offset against accounts receivable-shareholders $ 3,815 See accompanying summary of accounting policies and notes to financial statements. F-6 SPORTAN UNITED INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations and organization. Sportan United Industries, Inc. was incorporated on March 15, 1991. Sportan was a distributor of sports novelties and memorabilia primarily to retail outlets in the United States. Sportan ceased operating in early 2002. Cash and cash equivalents. For purposes of the statements of cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less. Allowance for Doubtful Accounts. Earnings are charged with a provision for doubtful accounts based on a current review of the collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Property and Equipment. Property and equipment are stated at cost. Sportan depreciates property and equipment by the straight-line method over the estimated useful lives of the related assets as follows: Computer equipment & software 5 years $ 3,145 Less accumulated depreciation (1,662) --------- $ 1,483 ========= Impairment of Long-Lived Assets. Sportan reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. Sportan assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the estimated future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. Revenue Recognition. Revenues are recognized as goods are shipped from Sportan's warehouse. Shipments directly to customers from a third party vendor are recognized at the time of shipment from vendor. Federal Income Taxes. Sportan uses the liability method in accounting for income taxes, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect future tax returns. Deferred tax assets and liabilities are adjusted for tax rate changes in the year changes are enacted. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in Sportan's tax returns. Use of Estimates. The preparation of these 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during F-7 the reporting period. Actual results could differ from those estimates. Stock options are accounted for by following Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and by following Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, which established a fair-value-based method of accounting for stock-based compensation plans. Loss per share is reported under Statement No. 128 of the Financial Accounting Standards Board ("FAS 128"), which requires the calculation of basic and diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share are not shown here because such effect would be anti-dilutive. Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation. Recently issued accounting pronouncements. Sportan does not expect the adoption of recently issued accounting pronouncements to have a significant impact on Sportan's results of operations, financial position or cash flow. NOTE 2 - GOING CONCERN As shown in the accompanying financial statements, Sportan has incurred recurring net losses, ceased operations and has a net stockholders deficit of $1,152,943 as of September 30, 2002. These conditions create an uncertainty as to Sportan's ability to continue as a going concern. Management is trying to raise additional capital through sales of its common stock as well as seeking financing from third parties. The financial statements do not include any adjustments that might be necessary if Sportan is unable to continue as a going concern. NOTE 3 - INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2002, are as follows: Deferred tax assets: Net operating loss carryforward $ 567,000 Less: valuation allowance (567,000) ------------ Net current deferred tax assets $ 0 ============ Sportan has net operating loss carryforwards of approximately $1,670,000 as of September 30, 2002, which expire through year 2021. F-8 NOTE 4 - COMMITMENT As of December 9, 2002, Sportan maintained its offices on a temporary basis in the home of its president, pursuant to an oral agreement on a rent-free, month-to-month basis. Up until September 30, 2002 Sportan rented its principal facility from a stockholder of Sportan (see Note 5). Total rent expense under all lease agreements amounted to approximately $10,000 and $24,000 for each of the years ended September 30, 2002 and 2001, respectively. NOTE 5 - RELATED PARTY TRANSACTIONS Sportan is involved in various transactions with stockholders or officers of Sportan. The transactions and amounts incurred with these individuals are detailed as follows:
2002 2001 -------- -------- Transaction: Rent - principal facility $ 10,000 $ 24,000 Interest 54,161 40,648 Notes payable to stockholders consist of the following: Notes payable to two stockholders bearing interest at 12% annually, balances are due on demand, and interest is being accrued. $ 53,500 $ 53,500 Notes payable to one stockholder, bearing interest at rates ranging from 10%-18% annually, balances are due on demand, and interest is being accrued. 407,969 374,912 Accrued interest on notes payable 113,261 59,100 Payments of accounts payable 21,569 21,583 -------- -------- $ 596,299 $509,095 ======== ========
Sportan entered into an employment arrangement with its president and CEO as of July 1, 2000. The employment contract specifies a sign-on bonus of $100,000, payable on demand and recorded as a note payable carrying interest at 12% per annum and an annual salary of $102,000. Additionally, the agreement calls for warrants to purchase 1,000,000 shares of common stock at fair market value to be granted in increments of 250,000 per year for the next four years. These warrants will expire five years from the date of grant. As of September 30, 2002, none of these warrants had been granted. NOTE 6 - PREFERRED STOCK Sportan has 2,144,006 shares of cumulative preferred stock outstanding. Holders of the preferred shares are entitled to receive cash dividends at the annual rate of 6%, on a share value of $0.418 per share, cumulative monthly. There were no dividends declared in fiscal year 2002. For the year ending September F-9 30, 2001, $3,815 was declared and offset against accounts receivable from one shareholder. The balance of $49,955 for the year was not declared. As of September 30, 2002, there was $121,565 in cumulative preferred stock dividends not declared by the Board of Directors. The preferred shares will automatically be converted to common shares, one for one, on April 1, 2005. Shares are redeemable at the stated value by Sportan on or after April 1, 2000, with a prepayment penalty of $250,000 less all previously paid dividends up to $250,000. Holders of preferred shares are entitled to receive dividends at the same rate as dividends paid on common stock. Holders of preferred shares have the same voting rights as holders of common shares. The preferred shares rank senior to common shareholders. The preferred shares have a liquidation preference of $.418 per share. NOTE 7 - COMMON STOCK TRANSACTIONS In March 2001, Sportan issued 50,000 shares to each of three employees for services rendered for a total of 150,000 shares. The shares were valued at the then trading price of approximately $.06 per share for a total value of $9,000. In March 2001, Sportan entered into a consulting agreement with a consulting firm. Under the agreement Sportan was to issue 100,000 shares at the then trading price of approximately $.06 per share for a total value of $6,300, for services provided by the firm from October 2000 through February 2001. Additionally, Sportan agreed to issue $5,000 in common stock every month for ongoing consulting services. This agreement has since been canceled. In January 2002, the agreement was replaced with a new consulting agreement that calls for the issuance of 200,000 shares of common stock valued at the then trading price of approximately $.05 per share for a total value of $10,000, for services rendered for the fifteen month period from October 2000 to December 2001. For the twelve months ended September 30, 2001, $8,000 in consulting expense has been recognized and accrued. The 6,017,447 common shares outstanding does not take into account the 200,000 shares of common stock covered by this agreement. There were no stock issuances in fiscal year 2002. NOTE 8 - STOCK OPTIONS AND WARRANTS Sportan follows the disclosure requirements of FASB Statement 123, Accounting for Stock Based Compensation Plans. Sportan's Stock Option Plan provides for the grant of non-qualified options to directors, employees and consultants of Sportan, and opportunities for directors, officers, employees and consultants of Sportan to make purchases of stock in Sportan. In addition, Sportan issues stock warrants from time to time to employees, consultants, stockholders and creditors as additional financial incentives. The plans and warrants issuance are administered by the Board of Directors, who have substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions, if any. F-10 Sportan uses the intrinsic value method of calculating compensation expense, as described and recommended by APB Opinion 25, and allowed by FASB Statement 123. For the years ended September 30, 2002 and 2001, no compensation expense has been recognized because no options or warrants were issued. Summary information regarding options and warrants is as follows:
Wtd. Avg. Wtd. Avg. Share Share Options Price Warrants Price --------- --------- --------- ------ Outstanding at September 30, 2000: 1,570,000 $ 1.16 469,222 $ .81 Year ended September 30, 2001: Canceled (12,500) --------- --------- --------- ------ Outstanding at September 30, 2001 1,557,500 $ 1.16 469,222 $ .81 Year ended September 30, 2002 Canceled (20,000) (454,222) --------- --------- --------- ------ 1,537,500 $ 1.16 15,000 $ .81 ========= ========= ========= ======
Options outstanding and exercisable as of September 30, 2002:
- - Outstanding - - Exercisable Number Remaining Number Exercise Price of Shares life of Shares --------- --------- ----------- $.75 410,000 11 years 0 .83 200,000 3 years 0 1.38 177,500 9 years 177,500 1.43 750,000 3 years 750,000 --------- ----------- 1,537,500 927,500 ========= ===========
Warrants outstanding and exercisable as of September 30, 2002:
- - Outstanding - - Exercisable Number Remaining Number Exercise Price of Shares life of Shares --------- --------- ----------- ..25 15,000 3 years 15,000
F-11 Had compensation cost for Sportan's stock-based compensation plan been determined based on the fair value at the grant dates for awards under those plans consistent with the Black-Scholes option-pricing model suggested by FASB Statement 123, Sportan's net losses and loss per share would have been increased to the pro forma amount indicated below:
2002 2001 --------- --------- Net loss available for common shareholders -As reported $(252,925) $(613,963) -Pro forma (252,925) (958,108) Net loss per share -As reported ( 0.04) ( 0.11) -Pro forma ( 0.04) ( 0.16)
Variables used in the Black-Scholes option-pricing model include (1) 5.0% risk-free interest rate, (2) expected option life is the actual remaining life of the options as of each year end, (3) expected volatility is the actual historical stock price fluctuation volatility and (4) zero expected dividends. NOTE 9 - DISPOSITION OF FIXED ASSETS During the year ended September 30, 2002, Sportan disposed of all of its property and equipment other than two computers. Sportan received $4,792 in cash and relief of $4,400 in accounts payable. As a result, Sportan realized a gain of $1,955. NOTE 10 - IMPAIRMENT LOSS As of September 30, 2002, Sportan determined its trademark and patent and capitalized software, valued at $1,355 and 17,651 respectively, was fully impaired. An impairment loss of $19,006 has been taken for the year ended September 30, 2002. NOTE 11 - MAJOR CUSTOMERS AND VENDORS During the years ended September 30, 2002 and 2001, no vendor or customer accounted for greater than 10% of total expenditures or revenues. F-12 -----END PRIVACY-ENHANCED MESSAGE-----