-----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, NxvdpgPDiPD+TeIXqz1tt4ckBxNnvH/ldeLajHe3Vp0CgE68m+BR/94aALI1A23Y PsevXBG5QUhQ6z1O5egV4Q== 0000771856-99-000005.txt : 19990730 0000771856-99-000005.hdr.sgml : 19990730 ACCESSION NUMBER: 0000771856-99-000005 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPIONS SPORTS INC CENTRAL INDEX KEY: 0000771856 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 521401755 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-17263 FILM NUMBER: 99673142 BUSINESS ADDRESS: STREET 1: 2500 WILSON BLVD STREET 2: SUITE 305 CITY: ARLINGTON STATE: VA ZIP: 22201 BUSINESS PHONE: 703-526-04 MAIL ADDRESS: STREET 1: 1749 OLD MEADOW RD STREET 2: STE 610 CITY: MCLEAN STATE: VA ZIP: 22102 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL GROUP INC DATE OF NAME CHANGE: 19860319 10KSB 1 ANNUAL REPORT FOR CHAMPIONS SPORTS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Mark One [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ________ Commission file number 0-17263 CHAMPIONS SPORTS, INC. (Exact name of registrant as specified in its charter) Delaware 52-1401755 (State or other jurisdiction of (I.R.S. Employer organization) Identification No.) 2420 Wilson Blvd., Suite 214, Arlington, VA 22201 (Address of principal executive offices) (Zip code) (703) 526-0400 (Registrant's telephone number, including area code) Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share (Title of Class) Preferred Stock, par value $10.00 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all report required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 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 Check if 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. [X] For the year ended April 30, 1999, the revenues of the registrant were $2,197,667. The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant, based on the average bid and asked price on July 19, 1999, was approximately $600,000. As of July 19,1999, the Registrant had a total of 8,513,591 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None -2- PART I Item 1. Business (a) Development of Business. CHAMPIONS Sports, Inc. (the "Company" or "CSI") was incorporated under the laws of the State of Delaware on June 4, 1985 under the name "International Group, Inc." In September 1985, the Company completed a public offering of 40,000,000 Units, each Unit consisting of one share of Common Stock and warrants to purchase three shares of Common Stock, at a price of $0.01 per Unit. The net proceeds of the offering to the Company were approximately $357,000. On January 16, 1986, the Company acquired 100% of the outstanding shares of CHAMPIONS Sports International, Inc. ("CSII"), in exchange for 195,555,555 shares of the Company's Common Stock. In February, 1986, International Group, Inc. changed its name to CHAMPIONS Sports, Inc. Between 1987 and 1988, most of the original warrants issued in September 1985 were exercised by stockholders and consequently the Company received additional capital of $2,356,268. On September 12, 1989, CSII was merged with and into the Company, with the Company as the surviving corporation. In November 1991, the Company effected a reverse split of its outstanding shares on a 1 for 100 basis. In November 1992, the Company completed a public offering of 350,000 Shares of Series A 12% Cumulative Convertible Preferred Stock. In March 1993, the Company completed an exchange offer converting all, except 64,575 preferred shares, into 2,171,657 shares of common stock. Subsequently. an additional 11,250 preferred shares have been converted into 52,988 shares of common stock. The Company is a licensee of one CHAMPIONS Sports Bar Restaurant and the exclusive supplier of sports memorabilia and consultant to Marriott International, Inc. (Marriott). Effective November, 1997, the Company sold the rights to the CHAMPIONS brand to Marriott and became a licensee of CHAMPIONS Sports Bar Restaurants and an exclusive supplier of sports memorabilia and a consultant to all new managed Marriott and Renaissance Hotel sports bar restaurants worldwide. At April 30, 1999, the Company owns the one CHAMPIONS Sports Bar Restaurant in San Antonio, Texas. (b) Description of Business. 1. Concept The Company operates a restaurant in San Antonio, Texas by the name of CHAMPIONS which has a sports theme concept that combines casual dining, sports viewing with strategic marketing and promotions. The CHAMPIONS popularity is defined in the CHAMPIONS motto: "Good -3- Food, Good Times, Good Sports." This concept is based, in large measure, on the format implemented in the first CHAMPIONS location which opened in the Georgetown section of Washington, D.C. in 1983. The Company does not own, operate or manage this property nor does it receive any revenues or continuing royalties therefrom. A strong food component was added to the original concept so that the CHAMPIONS in San Antonio, Texas is a full-fledged restaurant as well as bar. The sports theme of CHAMPIONS is based upon management's belief that sports appeals to most socio-economic, age and gender groups worldwide. The sports atmosphere at CHAMPIONS is created by the presence of hundreds of items of original sports memorabilia such as uniforms, sports equipment, posters, advertising, signs, magazine covers, official programs, film posters, and photographs from local, national and international celebrities and sporting events, past and present. The sports decor seeks to establish a feeling a comfort and belonging for all customers. In addition, CHAMPIONS atmosphere is enhanced by sports programming and viewing which is accomplished through a network of strategically placed TV monitors designed to continuously show local, national and international sporting events without taking away from the casual dining experience. Although sports is a theme in CHAMPIONS restaurants it is not the dominant factor. At the heart of the CHAMPIONS concept is the food. The menu, which attracts guests for lunch, happy hour and dinner, appeals to those interested in dining at a moderate price. It incorporates traditional American cuisine as well as popular regional items. CHAMPIONS average check is about $14.25 per person, placing it within the "casual dining" segment of the restaurant industry. This segment seeks to attract customers who want a higher quality of food and service than that commonly provided at "fast food" or "family style" restaurants.. Although no element of he CHAMPIONS concept is unique, the combination of food, atmosphere, sports memorabilia, sports viewing, marketing and promotions defines the concept. Effective November, 1997, the Company sold the rights to the CHAMPIONS brand to Marriott and became a licensee of CHAMPIONS Sports Bar Restaurants and an exclusive supplier of sports memorabilia and a consultant to all new managed Marriott and Renaissance Hotel sports bar restaurants worldwide. 2. Operations As of the end of the fiscal year, the Company was engaged in the following types of operations: (i) Company-Owned Operation The Company currently operates one Company-owned restaurant. This location is licensed from Marriott, royalty free, to use the name CHAMPIONS pursuant to a licensing agreement signed in FY 1998. This CHAMPIONS sports bar restaurant has been in operation since 1989 and is located in the River Center Mall in San Antonio, Texas. The San Antonio restaurant provided approximately 78% of the Company's revenues for FY 1999, as reflected in the consolidated financial statements included herein. -4- (ii) Supplier of Sports Memorabilia and Consulting Services to Marriott Effective November 1997, the Company sold the rights to the CHAMPIONS brand to Marriott and became a licensee of CHAMPIONS Sports Bar Restaurants and an exclusive supplier of sports memorabilia and a consultant to all new managed Marriott and Renaissance Hotel sports bar restaurants worldwide. Under the terms of this agreement, Marriott is required to purchase sports memorabilia and for the Company to serve as a consultant for each new CHAMPIONS or like sports bar restaurant that opens in a new Marriott or Renaissance Hotel worldwide at the same prescribed prices (with increases pegged to the Consumer Price Index) as paid to the Company by Marriott in its previous agreement, except that Marriott will not pay any annual fees as before. In FY 1999, the Company signed agreements to provide sports memorabilia to Champions locations in Turkey, Panama, People's Republic of China, and Cancun, Mexico. Marriott hotel locations accounted for about 20% of the Company's revenues for FY 1999, as reflected in the consolidated financial statements included herein. 3. Competition The food and beverage industry is highly competitive. Food and beverage businesses are affected by changing customer tastes, local and national economic conditions that affect spending habits, population shifts and traffic patterns. Quality of service, attractiveness of facilities and price are also important factors. The popularity of the concept of sports bar restaurants has spawned a number of companies seeking to capitalize on that market. While the Company believes that the Champions concept is superior, there are other "sports" bar restaurants in operation. The sports memorabilia business is also highly competitive. There is no assurance that the Company will be the exclusive supplier of sports memorabilia to all new Marriott and Renaissance Sports Bar Restaurants if its agreement with Marriott is not renewed in November, 1999. 4. Service Mark The Company sold the federally registered service mark "Champions" to Marriott pursuant to the November, 1997 agreement and transferred to Marriott all of its international service marks that the Company had registered. . 5. Government Regulation The Company's CHAMPIONS sports bar restaurant is subject to federal, state and local governmental regulations, including regulations relating to alcoholic beverage control, public health and safety, zoning and fire codes. The failure to retain food, liquor or other licenses would adversely affect the operations of the Company's restaurant. While the Company has not experienced and does not anticipate any problems in retaining required licenses, permits or approvals, any difficulties, delays or failures in retaining such licenses, permits or approvals could adversely affect the restaurant. The license to sell alcoholic beverages must be renewed annually -5- and may be suspended or revoked at any time for cause, including violation by the Company or its employees of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of patrons or employees, advertising, wholesale purchasing, and inventory control, handling and storage. However, the restaurant is operated in accordance with standardized procedures designed to assure compliance with all applicable codes and regulations. The Company may be subject to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to such person. While the Company carries liquor liability coverage, a judgment against the Company under a dram-shop statute in excess of the Company's liability coverage, or inability to continue to obtain such insurance coverage at reasonable costs, could have a material adverse effect on the Company. The Company is also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986 and various state laws governing such matters as minimum wages, overtime, tip credits and other working conditions. A significant number of the Company's hourly personnel are paid at rates related to the federal minimum wage and, accordingly, increases in the minimum wage or decreases in the allowable tip credit will increase the Company's labor cost. 6. Employees As of April 30, 1999, the Company had 2 full-time employees in its corporate office in Arlington, Virginia and 45 employees (both management and hourly) at its San Antonio restaurant. Item 2. Properties. The Company is leasing, on a month to month basis, its corporate office space located at 2420 Wilson Blvd., Suite 214, Arlington, VA 22201. The Company's rental payments are $400 per month. The Company is leasing 5,289 square feet of space for its restaurant in San Antonio, TX pursuant to a lease which expires in November 2004. The lease provides monthly rental payments of $18,650 including CAM charges and real estate taxes. In addition, the lease requires a percentage of the unit's revenues at the location in excess of $1,745,000 per year. Item 3. Legal Proceedings. The Company knows of no material pending legal proceedings as to which the Company is a -6- party or of which its properties are the subject, and no such proceedings are known to the Company to be contemplated by governmental authorities. Item 4. Submission of Matters to a Vote of Security Holders. None PART II Item 5. Markets for Common Equity & Related Stockholder Matters. (a) Principal Market or Markets. In FY 1995, the Common Stock was traded on the NASDAQ SmallCap Market until June 24, 1994. At that time, the Common Stock was delisted from the NASDAQ SmallCap Market for falling below the minimum financial requirements. The Common Stock is presently trading on the OTC Bulletin Board under the symbol CSBR. In October 1993, the series A 12% Cumulative Convertible Preferred Stock was delisted from NASDAQ due to lack of the required two market makers necessary for continued listing and has not been trading since. Common Stock High Low $ $ Fiscal 1999 First Quarter 0.50 0.19 Second Quarter 0.27 0.07 Third Quarter 0.14 0.06 Fourth Quarter 0.09 0.06 -7- Fiscal 1998 First Quarter 0.68 0.50 Second Quarter 0.75 0.43 Third Quarter 0.59 0.25 Fourth Quarter 0.36 0.22 (b) Approximate Number of Holders of Common Stock and the Preferred Stock. The number of holders of record of the Company's common stock as of July 19 1999, was 2,150 and the Company estimates that there are approximately3,000 additional beneficial shareholders. There are about 30 beneficial holders of the Company's preferred stock as of July 19, 1999. (c) Dividends. Holders of common stock are entitled to receive such dividends as may be declared by the Company's Board of Directors. No dividends have been paid with respect to the Company's common stock and no dividends are anticipated to be paid in the foreseeable future. Since November, 1994, the Company's Board of Directors voted each year to defer payment of the annual dividend of $67,290 on the Series A, 12%, Cumulative Preferred Stock, in order to preserve the Company's cash reserves. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. (a) Results of Operations for Fiscal Years 1999 and 1998. Revenues For the fiscal year ended April 30, 1999, the Company's revenues decreased by 5.6% to $2,197,677 versus $2,327,778in fiscal year 1998. -8- By component, food and beverage sales decreased 8.3% to $1,714,237 for FY1999 compared to $1,869,646 in FY 1998. The Company's management attributes the decrease in food and beverage sales to a delay in the NBA season during FY 1999 in which the customer count decreased. In FY 1998, the San Antonio CHAMPIONS benefitted from two, one time events, the Big Twelve Tournament and the NCAA Championship. The food to beverage ratio for the San Antonio location was approximately 60/40 for both comparable years. Revenues from merchandise and memorabilia sales and continuing license fees accounted for 19.8% of the Company's total revenue in FY 1999 compared to 18.1% in FY 1998. Sales of memorabilia are directly tied to the number of new Champions locations which open during the fiscal year. In FY 1999, the Company signed agreements to provide sports memorabilia to Champions locations in Turkey, Panama, People's Republic of China, and Cancun, Mexico. In FY 1998, the Company opened two Champions locations and received continuing licensing fees, which were discontinued in FY 1999 pursuant to the November, 1997 agreement with Marriott for the sale of the rights to the CHAMPIONS brand. During FY 1999, the Company received other revenues of $22,986 from vendor promotional rebates and commissions compared to $24,834 in FY 1998. Interest income represented 1% of the Company's total revenues in FY 1999 and less than 1% in the comparable year. 2. Expenses The Company's cost of food and beverage during the year ended April 30, 1999 was 26.7% of related sales, compared to 27.6% in the preceding year. This slight decrease in product costs in FY 1999 is attributed to stable wholesale prices , as there was no retail price adjustments during either comparable year. Restaurant payroll and related costs remained constant during both comparable years at 35.09% of food and beverage sales in FY 1999 and 34.9% of related sales in FY1998. Restaurant occupancy costs for FY 1999 increased 8% to $206,888 from $191,644 due to increases in common area charges and real estate tax assessments passed through by the landlord. Other restaurant costs remained constant at 21.3% and 21.9% of related food and beverage sales. General and administrative costs incurred in FY 1999 were $346,176 and$341,734 in FY 1998. The primary components of G&A expenses are operating the Company's corporate office, including salaries. Interest expense in both FY 1999 and 1998 was less than 1% of the Company's expenses. 3. Profits / Losses For FY 1999 the Company's net income was $16,397 from its operations, before dividends accrued on the outstanding preferred stock of $67,290, creating a net loss available to common -9- shareholders of $50,893. For FY 1998, the Company's net income was $354,182 before the dividend accrued on the outstanding preferred stock of $67,290, producing a net income available for common shareholders of $286,892. For FY 1998, the Company generated a profit of $71,481 on a consolidated basis, from its operations, and a $290,641 gain from the sales of the Champions brand and trademark to Marriott in FY 1998. (b) Liquidity and Capital Resources for Fiscal Years 1999 and 1998 The Company's cash position on April 30, 1999 was $726,241 compared to $631,230 on April 30, 1998, an increase of $95,011. During the past fiscal year, the Company's operating activities generated cash in excess of expenses of $105,486. The Company realized a gain on the disposal of a fixed assets of $4,000, reduced its inventories by $49,418 and current liabilities by $20,233. The Company purchased equipment for $32,286 and repaid capitol lease for $5,756. Cash used to pay interest was $5,097. The Company's operating activities provided sufficient cash flow for the Company to meet its cash needs During FY 1998, the Company operating activities generated cash in excess of expenses of $422,708 including the one time gain for the sale of the Champions trademark and brand to Marriott. The Company's operating activities provided sufficient cash flow for the Company to meet its cash needs. Also, the Company reduced its current assets by nearly $19,000 and reduced its accounts payable and other accrued expenses by approximately $10,000. The Company utilized $17,225 to purchase new equipment and additional $17,201 to repay borrowings. The Company had an income tax expense of $7,490 in FY 1998. The Company's working capital as of April 30, 1999 was a $535,863 contrasted to a $549,005 on April 30, 1998. The Company is actively pursuing merger or acquisition candidates and other investment opportunities to meet its longer term liquidity needs. There is no assurance that the Company will be able to structure such a merger or acquisition on terms satisfactory to the Company. (c) Miscellaneous Stockholders' equity on April 30, 1999 was $887,670 compared to $938,563 on April 30, 1998. In FY 1999 and 1998, the Company's Board of Directors voted to defer payment of the 12% annual dividend of the Company's preferred stock, in the amount of $67,290 for each year, in order to preserve the Company's cash reserves. This dividend is cumulative and has been -10- recorded on the Company's balance sheet as a current liability. In addition, in FY 1999 and 1998, the Board of Directors voted to defer the annual meeting of security holders in order to preserve the Company's cash reserves. The agreement between Business Expansion Capitol Corporation and Champions Sports expired in October, 1998 and was not renewed. This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Act of 1995) that inherently involves risk and uncertainties. The Company's actual result could differ materially for those anticipated in there forward-looking statements as a result of unforeseen external factors. These factors may include, but are not limited to, changes in general economic conditions, customer acceptance of products offered and other general competitive factors. (d) Year 2000 The Company has taken appropriate measures by purchasing software and computer equipment that is compliant with identifying the year 2000. However, the Company relies on outside vendors and financial institutions and there is no assurance that these vendors and financial institutions will be able to meet the year 2000 requirements. Item 7. Financial Statements and Supplementary Data. The Report of Independent Accountants appears at page F-1 and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements appear at pages F-2 through F-13 hereof. Item 8. Changes In and Disagreements with Accountants on Accounting & Financial Disclosure. During the two most recent fiscal years, there have been no changes in the Company's independent accountants and there have been no disagreements between the Company and its independent accountants on any matter of accounting principles or practices or financial statement disclosure. -11- Item 9. Directors and Executive Officers. The Executive Officers and Directors of the Company are as follows: NAME POSITION(S) PRESENTLY HELD James M. Martell Chairman, President, Chief Executive Officer, Director James E. McCollam Controller, Chief Accounting Officer, Corporate Secretary Michael M. Tomic Director James M. Martell, age 52, has served as Chairman since November 1991and as President and Chief Executive Officer from May 1990 to June 1992 and from January 1993 to September 1993 and from March 1994 to the present and Director of the Company since its inception on June 4, 1985. Additionally, he served the Company as Vice President from October 1988 to May 1990, as Treasurer from June 1985 to January 1989, and as Secretary from June 1985 to January 1986. Mr. Martell is a director and officer of all of the Company's wholly-owned subsidiaries, except for the Been Corporation. From 1983 to 1987, Mr. Martell was a partner along with Mr. Tomic in Tomar Associates, a consulting company specializing in European-American joint ventures, venture capital financing, technology transfer, and corporate finance. From 1981 to 1983, Mr. Martell was a partner in International Group, a partnership involved in promoting national and international business development. From 1973 to 1981, he served in various administrative positions at the U.S. Department of Energy. Mr. Martell received a Bachelor of Science degree in Chemistry in 1968, and a Master of Science degree in Geochemistry in 1973, from George Washington University. James E. McCollam, age 52, has served as Chief Accounting Officer of the Company since July 1992 and Controller since May 1988. From 1984 to 1987 he was Controller of the Winston Group, Inc., a five unit food service organization in the Washington D.C. metropolitan area. From 1977 to 1983, he was the Controller of Capitol Hill Cabaret, Inc., an organization which owned and operated two restaurants and nightclubs in the Washington D.C. area. From 1973 to 1977, he was employed by Marriott Corporation in various positions in the corporate accounting department. He earned a Bachelor of Science degree in Finance from the University of Maryland 1970. Michael M. Tomic, age 53, has served as a Director of the Company since its inception on June 4, 1985. From June 1985 to January 1986, he also served as Vice President of the Company. -12- From 1983 to 1987, Mr. Tomic was a partner along with Mr. Martell in Tomar Associates, a consulting company specializing in European-American joint ventures, venture capital financing, technology transfer, and corporate finance. He received a Bachelor of Science degree in International Marketing and Economics in 1969 from the University of Maryland. George Naddaff, owner of Business Expansion Capitol Corporation, resigned from the Board of Directors of the Company after the agreement between Business Expansion Capitol Corporation and the Company expired in October, 1998. The term of office of each Director is until the next annual election of Directors and until a successor is elected and qualified or until the Director's earlier death, resignation or removal. Item 10. Executive Compensation. The following table sets forth cash compensation for services rendered during FY 1999, and 1998 which was paid by the Company to, or accrued by the Company for, each of the Company's most highly compensated executive officers whose cash compensation in such year equaled or exceeded $100,000. Name and FY Annual Other Principal Position Year Salary ($) Compensation($) James M. Martell, 1999 87,000 73,000 Chairman, President,& 1998 87,000 61,039 Chief Executive Officer In FY 1999 all officers of the Company as a group (2 in number) received cash compensation of $233,000. The Board of Directors has the right to change and increase the compensation of executive officers at any time. The Company has no arrangement by which any of its directors are compensated for services solely as directors, and these individuals will not receive any additional remuneration for their services as directors. The Company may from time to time pay consulting fees to its officers and directors. Except as described below, the Company has no compensatory plan or arrangement which would result in executive officers receiving compensation as a result of their resignation, retirement or any other termination of employment with the Company or its affiliates, or from a change in control of the Company or a change in responsibilities following a change in control of the Company. The Company entered into a five-year employment agreement with Mr. Martell in September 1993, under which Mr. Martell received a base annual salary of $128,000 and options to purchase 200,000 shares of the Company's Common Stock at $1.00 per share at any time prior to -13- September 6, 2001, whether or not Mr.Martell is an employee at such time. If there is a change in the management of the Company and such management acts contrary to the policy of the current Board, or if Mr. Martell's position as Chairman is terminated, Mr. Martell may resign and become entitled to liquidated damages determined pursuant to a formula prescribed in the contract. Since 1994, in order to preserve the Company's cash reserves, Mr. Martell has been receiving an annual base salary of $87,000 plus 20% of all fees received from international locations. This agreement was extended for one year in FY 1999. In FY 1996, the Board of Directors granted to Mr. Martell an option to purchase 1,200,000 restricted shares of the Company's Common Stock at $0.05 per share. This option for 1,200,000 restricted shares was exercised for $60,000 by Mr. Martell. The Board of Directors also granted an option to Mr. McCollam to purchase 100,000 restricted shares of the Company's Common Stock at $0.05 per share exercisable at any time prior to July 24, 2000. The Company has a Stock Option Plan intended to assist the Company in securing and retaining key employees and consultants by allowing them toparticipate in the ownership and growth of the Company through the grant of incentive and non qualified options. Incentive stock options granted under the Plan are intended to be "Incentive Stock Options" as defined by Section 422 of the Internal Revenue Code. An aggregate of 840,000 shares of Common Stock has been reserved for issuance under the Plan. As of April 30, 1999 all 840,000 shares are reserved and available for issuance. Item 11. Security Ownership of Certain Beneficial Owners and Management. As of July 19, 1999, the following were persons known to the Company to own beneficially more than 5% of the Company's outstanding Common Stock, Name and Address of Common Stock Beneficial Owner Beneficially Owned Percentage James M. Martell 1,548,000 18.2% 2420 Wilson, Blvd. Suite 214 Arlington, VA 22201 -14- The stock ownership by officers and directors of the Company and all officers and directors as a group are as follows: Common Stock Beneficially Owned Name Title July 19, 1999 Percent James M. Martell Chairman, President, 1,548,000 18.2% CEO & Director Michael M. Tomic Director 225,000 2.6% James E. McCollam Controller, 2,000 * Chief Accounting Officer & Corporate Secretary All officers & directors as a group 1,775,000 20.8% *Less than 1.0% Item 12. Certain Relationships and Related Transactions. During FY 1999 and FY 1998, there were no related party transactions. -15- Item 13. Exhibits and Reports on Form 8-K. (a) Index to Financial Statements PAGE Independent Auditor's Report F-1 Consolidated Balance Sheets as of April 30, 1999 and 1998 F-2 Consolidated Statements of Operations for the Years Ended April 30, 1999 and 1998 F-3 Consolidated Statements of Stockholder's Equity for the Years ended April 30, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the Years ended April 30, 1999 and 1998 F-5 Notes to the Consolidated Financial Statements F6/F-13 (b) There were no Form 8-K's filed during the last quarter of the period covered by this report. -16- CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Consolidated Financial Statements For The Year Ended April 30, 1999 Table of Contents Page Independent Auditors' Report 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Stockholders' Equity 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 PKF PANNELL worldwide KERR [graphics omitted] FORSTER PC Certified Public Accountants 10304 Eaton Place Suite 440 Fairfax, VA 22030 Telephone (703) 385-8809 Telefax (703) 385-8890 pkfcpa@pfkwash.com Independent Auditors' Report To the Stockholders and Board of Directors Champions Sports, Inc. Arlington, Virginia We have audited the consolidated balance sheets of Champions Sports, Inc. and subsidiaries as of April 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Champions Sports, Inc. and subsidiaries at April 30, 1999 and 1998, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Pannell Kerr Forster PC June 14, 1999
2 -- CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets Assets April 30 --------------------------------- 1999 1998 --------------- --------------- Current assets Cash and cash equivalents $726,241 $631,230 Accounts receivable - trade 800 612 Inventories 20,176 69,594 Prepaid expenses 3,232 3,850 Deferred tax asset (note 2) 207,952 207,952 --------------- --------------- Total current assets 958,401 913,238 --------------- --------------- Property and equipment Furniture and equipment 539,139 530,531 Leasehold improvements 570,962 570,962 --------------- --------------- 1,110,101 1,101,493 Accumulated depreciation and amortization (729,420) (700,356) --------------- --------------- 380,681 401,137 --------------- --------------- Other assets Deposits 11,052 13,065 --------------- --------------- Total assets $1,350,134 $1,327,440 =============== =============== Liabilities and Stockholders' Equity Current liabilities Accounts payable $36,817 $42,672 Dividend payable on preferred stock (note 6) 336,450 269,160 Other accrued expenses 38,023 48,038 Current portion of deferred lease concession 4,363 4,363 Current portion of capital lease obligation (note 4) 6,885 - --------------- --------------- Total current liabilities 422,538 364,233 --------------- --------------- Capital lease obligation, net of current portion (note 4) 19,645 - Deferred lease concession, net of current portion 20,281 24,644 --------------- --------------- --------------- --------------- Total liabilities 462,464 388,877 --------------- --------------- Commitments and contingencies (notes 3, 4, and 5) Stockholders' equity (notes 6 and 7) Preferred stock Series A, 12% Convertible Cumulative; $10 par value; preferred as to dividends and liquidation; 56,075 shares authorized; 55,775 and 56,075 shares issued and outstanding for 1999 and 1998, respectively 557,752 560,752 Common stock, par value $.001 per share, 50,000,000 shares authorized; 8,501,977 and 8,500,564 shares issued and outstanding for 1999 and 1998, respectively 8,502 8,501 Additional paid-in capital 5,311,111 5,308,112 Accumulated deficit (4,989,695) (4,938,802) --------------- --------------- Total stockholders' equity 887,670 938,563 --------------- --------------- Total liabilities and stockholders' equity $1,350,134 $1,327,440 =============== =============== See notes to consolidated financial statements
3 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended April 30 ----------------------------------- 1999 1998 ---------------- ---------------- Revenue Food and beverage $1,714,237 $1,869,646 Merchandise, memorabilia and continuing license fees 435,843 421,442 Interest income 24,601 11,856 Other income 22,986 24,834 ---------------- ---------------- 2,197,667 2,327,778 ---------------- ---------------- Costs and expenses Cost of food and beverage sales 457,455 515,775 Cost of merchandise, memorabilia and continuing license fees 136,753 88,315 Restaurant payroll and related costs 600,516 652,901 Restaurant occupancy costs 206,888 191,644 Other restaurant costs 364,911 409,479 General and administrative 346,176 341,734 Depreciation and amortization 63,474 55,994 Interest 5,097 455 ---------------- ---------------- 2,181,270 2,256,297 ---------------- ---------------- Operating income 16,397 71,481 Gain on sale of name and trademarks (note 5) - 290,641 ---------------- ---------------- Income before income tax expense 16,397 362,122 Income tax expense (note 2) - 7,940 ---------------- ---------------- Net income 16,397 354,182 Less preferred stock dividends (67,290) (67,290) ---------------- ---------------- Net income (loss) available to common stockholders $(50,893) $286,892 ================ ================ Basic earnings (loss) per share $(.00) $.03 ================ ================ Earnings (loss) per common share - assuming dilution $(.00) $.03 ================ ================ See notes to consolidated financial statements
4 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For The Years Ended April 30, 1999 and 1998 Series A, 12% Convertible Cumulative Common Stock Preferred Stock Additional Amount Amount Paid-in Accumulated Shares at Par Shares at Par Capital Deficit Total ----------------------------------------------------------------------------------------- Balance, April 30, 1997 8,500,564 $8,501 56,075 $560,752 $5,308,112 $(5,225,694) $651,671 For the year ended April 30, 1998 Dividend on preferred stock accrued and unpaid - - - - - (67,290) (67,290) Net income - - - - - 354,182 354,182 ------------------------------------------------------------------------------------------- Balance, April 30, 1998 8,500,564 8,501 56,075 560,752 5,308,112 (4,938,802) 938,563 For the year ended April 30, 1999 Dividend on preferred stock accrued and unpaid - - - - - (67,290) (67,290) Preferred stock converted to common (note 6) 1,413 1 (300) (3,000) 2,999 - - Net income - - - - - 16,397 16,397 ------------------------------------------------------------------------------------------ Balance, April 30, 1999 8,501,977 $8,502 55,775 $557,752 $5,311,111 $(4,989,695) $887,670 ========= ====== ====== ======== ========== =========== ======== See notes to consolidated financial statements
5 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents Years Ended April 30 ---------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net income $16,397 $354,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 63,474 55,994 Gain on disposal of asset (4,000) - Changes in assets and liabilities: Accounts receivable (188) 14,987 Inventories 49,418 (11,675) Prepaid expenses 618 15,324 Deferred income taxes - 7,940 Accounts payable (5,855) (6,986) Other accrued expenses (10,015) (2,695) Deferred lease concessions (4,363) (4,363) ---------------- ---------- Net cash provided by operating activities 105,486 422,708 ---------------- ---------- Cash flows from investing activities: Purchases of property and equipment(net of deposits applied) (4,719) (17,225) Deposits - (2,013) ---------------- ---------- Net cash (used) by investing activities (4,719) (19,238) ---------------- ---------- Cash flows from financing activities: Principal payments on capital lease (5,756) (17,201) ---------------- ---------- Net increase in cash and cash equivalents 95,011 386,269 Cash and cash equivalents at beginning of year 631,230 244,961 ---------------- ---------- Cash and cash equivalents at end of year $726,241 $631,230 ================ ========== Supplemental disclosures of cash flow information: Cash paid during the year for interest $5,097 $455 ================ ========== See notes to consolidated financial statements 6 CHAMPIONS SPORTS , INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements April 30, 1999 Note 1 - Organization and summary of significant accounting policies Organization Champions Sports, Inc., (Company) a Delaware corporation, promotes a sports theme restaurant bar concept through Company owned and licensed operations. Effective November 1997, the Company sold the rights to the Champions brand to Marriott International, Inc. (Marriott) and became a licensee of Champions Sports Bar Restaurants (note 5). The Company is an exclusive supplier of sports memorabilia and a consultant to all new Champions Sports Bars located in Marriott and Renaissance Hotels worldwide. At April 30, 1999, the Company owns and licenses, without any royalty fee, one Champions Sports Bar Restaurant. C.S.B.R., Inc., (CSBR) and The Been Corporation (Been) were organized on June 16, 1989 and October 11, 1989, respectively, for the purpose of owning and operating a Champions Sports Bar in San Antonio, Texas. Basis of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All material inter-company transactions have been eliminated in consolidation. Property and equipment Property and equipment are stated at cost. Depreciation is computed from the date property is placed in service using the straight-line method over estimated useful lives as follows: Life Furniture and equipment 5-15 years Leasehold improvements Remaining term of the lease Depreciation and amortization expense for the years ended April 30, 1999 and 1998, was $63,474 and $55,994, respectively. License fee revenue Initial license fees were recognized as revenue when all material services provided for in the license agreement had been substantially performed by the Company. Continuing license fees were recognized over the period of time to which they related. 7 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 1 - Organization and summary of significant accounting policies (continued) Inventories Inventories consist of goods and supplies held for sale in the ordinary course of business and are stated at the lower of cost, determined on the first-in first-out basis, or market. The components of inventories at April 30, 1999 and 1998, were as follows: 1999 1998 ---------- ---------- Restaurant food and beverage $13,561 $28,603 Promotional merchandise for sale to restaurant customers 6,615 8,786 Memorabilia for sale - 32,205 ------------- -------- $20,176 $69,594 ======= ======= Net income (loss) per share Basic earnings per common share is computed by dividing the net income reduced by preferred stock dividends by the weighted average number of common shares outstanding during the period. The weighted average number of common shares used to compute earnings per share is: At April 30, 1999 (Loss) available to Common Per Common Stockholders Shares Share Basic (loss) per Common Share $(50,893) 8,501,977 $ (.00) ======== ========= The stock options (note 7) and convertible preferred shares are antidilutive and, therefore, are excluded from the computation of basic earnings per share. 8 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 1 - Organization and summary of significant accounting policies (continued) Net income (loss) per share (continued) At April 30, 1998 (Loss) available to Common Per Common Stockholders Shares Share Basic earnings per Common Share $286,892 8,500,564 $ .034 Dilutive Options - 88,889 --------- --------- Assuming dilution 286,892 8,589,453 .033 Dilutive Convertible preferred stock 67,290 264,113 -------- --------- Assuming full conversion which results in anti-dilution $354,182 8,853,566 .040 Anti-dilutive ======== ========= The convertible preferred shares are anti-dilutive and, therefore, are excluded from the computation of diluted earnings per share. Cash and cash equivalents The statements of cash flows are prepared on the basis of cash and cash equivalents. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less, unless restricted as to use, to be cash equivalents. At April 30, 1999, the Company had amounts on deposit at financial institutions in excess of federally insured limits. Income taxes To the extent that taxable income differs from financial reporting net income due to temporary differences, deferred taxes are recognized. Financial statement 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, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 9 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 1 - Organization and summary of significant accounting policies (continued) Fair value of financial instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, approximate fair values because of the short maturities of these instruments. Note 2 - Income taxes Income tax (benefit) expense consists of the following for the years ended April 30, 1999 and 1998: 1999 1998 -------- -------- Current $ - $ - Deferred 2,669 137,810 (Increase) decrease in valuation allowance (2,669) (129,870) ------------ ---------- Total income tax expense $ - $ 7,940 ============ ========== Temporary differences which give rise to deferred tax assets and liabilities are as follows: 1999 1998 -------------- ------------- Deferred tax assets and (liabilities) Deferred rent concessions $ 10,071 $ 11,011 Net operating losses available for carryforward 1,393,451 1,382,188 Depreciation 16,076 16,119 Tax credits available for carryforward - 7,611 ------------- -------------- Total deferred tax assets 1,419,598 1,416,929 Valuation allowance (1,211,646) (1,208,977) ----------- ----------- Net deferred tax assets $ 207,952 $ 207,952 =========== =========== A reconciliation of income taxes computed at Federal statutory rates to income taxes recorded by the Company is as follows: Years Ended April 30 1999 1998 Federal income taxes at statutory rate $ 1,810 $ 123,121 State income taxes net of Federal income tax benefit 477 14,341 Effect of non-deductible expenses 382 348 Change in valuation allowance (2,669) (129,870) ------------- ----------- Total income tax expense $ - $ 7,940 ============ ========== 10 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 2 - Income taxes (continued) At April 30, 1999, the Company has net operating loss carryforwards of approximately $3,873,000 for tax reporting purposes. The net operating loss carryforwards for income tax purposes expire approximately as follows: 2005 $ 143,000 2006 9,000 2007 561,000 2008 1,004,000 2009 1,915,000 2011 11,000 2012 28,000 ------------- $3,671,000 During the years ended 1999 and 1998, the Company used net operating losses of approximately $46,000 and $399,000, respectively, to offset taxable income. Note 3 - Commitments and contingencies Operating leases The Company leases, as lessee, restaurant space under an operating lease which has renewal options. The lease escalates for increases in the landlord's expenses or for increases in the Consumer Price Index, and requires additional rentals based on a percentage of restaurant sales over a defined amount. The lease grants the Company certain concessions which are amortized to lease expense over the term of the lease. The Company now leases office space on a month-to-month basis. Rental expense charged during the years ended 1999 and 1998 was $174,279 and $174,217, respectively. There were no contingent rentals in 1999 or 1998. Future minimum payments under the noncancellable restaurant lease as of April 30, 1999, are as follows: 2000 $140,158 2001 140,158 2002 140,158 2003 140,158 2004 140,158 --------- Total $700,790 ======== Note 4 - Capital lease obligation The Company is the lessee of equipment under a capital lease effective July 1998. The equipment cost of $32,286 is depreciated over its useful life, and such depreciation is included in the depreciation expense for 1999. 11 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 4 - Capital lease obligation (continued) Minimum future lease payments under the capital lease as of April 30, 1999 are as follows: 2000 $11,841 2001 11,841 2002 11,841 2003 1,974 --------- Total future minimum lease payments 37,497 Less interest (10,967) -------- Principal payments due 26,530 Less current portion (6,885) $19,645 Note 5 - Marriott license The Company had a trademark license agreement with Marriott International, Inc., which granted Marriott a non-exclusive license to use the proprietary Champions trademark at Marriott's primary market areas within the United States. Marriott was required to pay an annual royalty of $6,250 within the United States and $9,261 for locations outside the United States, to be adjusted annually for increases in the Consumer Price Index, for each Champions Sports Bar operated by Marriott. The Company was required to provide the sports memorabilia for each new Champions Sports Bar opened by Marriott. The agreement was terminated in November 1997 and replaced by Consulting Services and a Sports Memorabilia Supply Agreement for an initial term of two years and a renewal at Marriott's option of an additional two years. Also, the Company sold the rights to the Champions brand to Marriott International, Inc., and became a licensee of Champions Sports Bar Restaurants. Currently, the Company is an exclusive supplier of sports memorabilia and a consultant to all new Champions Sports Bars located in Marriott and Renaissance Hotels worldwide. Total annual license and memorabilia fees under this agreement were $403,244 and $380,988 for 1999 and 1998, respectively. Note 6 - Preferred stock The Series A preferred stock pays a dividend of 12 percent per annum, and the dividends are cumulative and are to be accrued on the Company's books if not paid. The dividend may be paid in common stock of the Company at the Company's discretion. The number of shares comprising the dividend paid in common stock shall be determined by dividing $1.20 by the closing bid price for the common stock on the payment date. The Series A preferred stock is preferred in liquidation or dissolution up to the amount of their par value ($10 per share). The Series A preferred stock is convertible into 4.71 shares of the Company's common stock. There were conversions of 300 shares of Series A preferred stock in 1999 and no conversions in 1998. 12 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 6 - Preferred stock (continued) For each of the five fiscal years ended April 30, 1999, the Company's Board of Directors voted to defer payment of the annual dividend on the Series A preferred stock in the amount of $67,290 for each year. Preferred stock dividends in arrears at April 30, 1999 aggregated $336,450 ($6.03 per share). Note 7 - Common stock Options to purchase a total of 450,000 shares at $1.00 per share were granted to two executive officers during fiscal 1994. The options expire if not exercised by September 2001. No options were exercised as of April 30, 1999. Options to purchase a total of 1,300,000 shares of common stock at an exercise price of $.05 were granted to two executive officers in July 1995. An officer exercised an option to purchase 1,200,000 of these shares in December 1995 for $60,000 cash. The remaining options of 100,000 shares of common stock expire if not exercised by July 2000. The effect of valuing the stock options as required by the Statement of Financial Accounting Standards Number 123, "Accounting for Stock Based Compensation", at April 30, 1999, is not material to the Company's consolidated financial statements. During fiscal 1993, the Company adopted a compensatory stock option plan for key employees or consultants of the Company and its subsidiaries. The total number of shares of the Company's common stock, which may be issued under the plan, is 840,000. The plan expires on August 2, 2002. No options have been granted under the plan as of April 30, 1999. Stock option activity is summarized as follows: Weighted average Number of shares exercise price Outstanding, April 30, 1997 550,000 $ 0.83 Granted - - Exercised - - ------------- --------- Outstanding, April 30, 1998 550,000 0.83 Granted - - Exercised - - ------------- --------- Outstanding, April 30, 1999 550,000 $ 0.83 ======= ====== 13 CHAMPIONS SPORTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) April 30, 1999 Note 7 - Common stock (continued) The following table summarizes information about stock options outstanding and exercisable at April 30, 1999. Outstanding Exercisable Weighted Weighted Option Number Weighted Average Number Average Price of Average Exercise of Exercise Range Shares Life Price Shares Price $.05 - $1.00 550,000 1.8 years $0.83 550,000 $0.83 Note 8 - Non-cash investing and financing activities A summary of non-cash investing and financing activities for the years ended April 30, 1999 and 1998, is as follows: 1999 1998 --------- ---------- Cumulative dividend on preferred stock not yet paid $67,290 $67,290 Equipment acquired through capital lease $32,286 $ - SIGNATURES In accordance with 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. CHAMPIONS SPORTS, INC By: /s/ James E. McCollam James E. McCollam Chief Accounting Officer and Controller Date: July 29, 1999 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. By: /s/ James M. Martell James M. Martell Chairman and President Date: July 29, 1999 By: /s/ Michael M. Tomic Michael M. Tomic Director Date: July 29, 1999 -29- EX-27 2 FOR THE TWELVE MONTHS ENDED ARPIL 30, 1999
5 YEAR APR-30-1999 APR-30-1999 726,241 0 800 0 20,176 958,401 1,101,101 729,420 1,350,134 422,538 0 557,752 0 8,502 321,416 1,350,134 2,150,080 2,197,667 594,208 1,301,612 409,650 0 5,097 16,397 0 16,397 0 0 0 16,397 .00 .00
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