10QSB/A 1 spen-10k.txt SPEN 10-KSB/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A AMENDMENT NO. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended: December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: _____ to ____ Commission File No. 0-17436 SPORTS ENTERTAINMENT ENTERPRISES, INC. ---------------------------------------------- (Name of Small Business Issuer in its Charter) COLORADO 84-1034868 ------------------------------- ------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identi- Incorporation or Organization) fication No.) 6730 South Las Vegas Boulevard, Las Vegas, NV 89119 ------------------------------------------------------------ (Address of Principal Executive Offices, Including Zip Code) Issuer's Telephone Number: (702) 798-7777 Securities Registered Pursuant to Section 12(b) of the Act: None. Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE ----------------------------- (Title of class) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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. [ ] State issuer's revenues for its most recent fiscal year: $8,862,037 As of March 26, 2001, 8,135,097 shares of common stock were outstanding, and the aggregate market value of the common stock of the Registrant held by non-affiliates was approximately $195,242. Transitional Small Business Disclosure Format (check one): Yes __ No X ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following information should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included in this report. OVERVIEW The Company's continuing operations consist of a single retail store and the management and operation of a golf course and driving range property called the Callaway Golf Center. The Callaway Golf Center commenced operations on October 1, 1997, the Company sold its 80% interest in the Callaway Golf Center on May 5, 1998 and then reacquired 100% of the Callaway Golf Center on December 31, 1998. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999 DISCONTINUED OPERATIONS. On December 31, 2000, AASP formalized a plan to dispose of the SportPark facility because (1) the property continues to sustain substantial losses, and (2) it is not expected that future results would improve without substantial capital investment; AASP does not have the resources to make such an investment. As part of this plan, effective January 2, 2001, the SportPark was closed to the general public, although it continues to operate on a limited basis for group parties and special events until a suitable buyer/operator is found. AASP is in discussions with several prospective buyers/operators and expects to complete a transaction to dispose of the Sportpark sometime in 2001. As a result of the foregoing, AASP recorded a write down of $6,510,181 to adjust the SportPark assets' carrying amount to estimated net realizable value. Also, loss from operations of the SportPark was $4,521,227 and $3,417,079 in 2000 and 1999, respectively. The larger loss in 2000 is primarily the result of interest and fees incurred related to the Bank Note in default. The Bank charged interest at the default rate of 15% beginning in September 1999 through November 2000; in addition, all fees (i.e. legal, etc.) associated with the Bank's efforts to resolve this default issue were added to the balance due on the SportPark loan. CONTINUING OPERATIONS. REVENUES. Revenues increased 8.8% to $5,415,829 in 2000 compared to $4,980,025 in 1999. Revenues from retail operations increased 5.4% to $2,932,037 in 2000 compared to $2,782,993 in 1999. The increase in retail operations is due mainly to (a) a 2.3% increase in customers purchasing merchandise in 2000 versus 1999, and (b) a 3.0% increase in the dollar amount of the average customer purchase in 2000 versus 1999. Revenues from the CGC increased 13% to $2,433,885 in 2000 compared to $2,154,222 in 1999. The increase for CGC is due mainly to higher visitation and per capita spending in 2000 versus 1999. COST OF REVENUES. Cost of revenues decreased slightly less than 1% to $2,598,249 in 2000 compared to $2,617,224 in 1999. Cost of Revenues as a percentage of Revenues was 47.9% in 2000 compared to 52.6% in 1999. The cost of revenue decrease is due mainly to implementation of slightly different pricing models for the Rainbow retail store in 2000 in an attempt to achieve a target gross margin of 27%. Gross margin (gross profit divided by revenues) for the retail operations was 26.3% in 2000 compared to 21.2% in 1999. Better inventory management processes also contributed to this change. This was only slightly offset by a modest increase in cost of revenue for the CGC primarily due to support of the CGC increased revenues described above. 2 SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses consist principally of payroll, rent, professional fees and other corporate costs. The decrease of 11.6% to $2,737,088 in 2000 from $3,092,666 in 1999 is the result of aggressive cost containment strategies that began in the latter half of 1999 due to the problems associated with the discontinued SportPark business segment. Payroll costs decreased approximately $160,000 in 2000 compared to 1999 primarily due to AASP corporate staff reductions in Finance, Human Resources, and Creative Services. Advertising costs for AASP decreased by nearly $100,000 for the Callaway Golf Center property. The remaining decrease in 2000 compared to 1999 is due mainly to lower legal fees. DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to $120,286 in 2000 compared to $138,226 in 1999 due mainly to the disposition of certain assets of the CGC in early 2000. INTEREST EXPENSE, NET. Net interest expense decreased 8.5% to $302,063 in 2000 compared to $330,275 in 1999. This decrease is due primarily to the reduction in capital lease obligations in early 2000 in connection with the disposition of certain assets of the CGC. INCOME TAXES. Due to net losses in 2000 and 1999, the Company has recorded no tax provision. However, the benefit of $516,819 in 1999 relates to (1) a tax refund of $156,832 which arose from the carryback of the 1998 net loss for income tax purposes to 1997 where the Company had net taxable income; this had resulted from the Company's 1997 sale of its franchised retail stores, and (2) $212,387 related to overpayment of taxes from 1997, and (3) a $147,600 decrease in the deferred tax liability. MINORITY INTEREST. Minority interest was $116,730 in 2000 compared to $607,100 in 1999. This caption reflects the portion of operating losses that are allocated to the minority shareholders of AASP. LOSS FROM CONTINUING OPERATIONS. The Company incurred a net loss from continuing operations of $225,127 in 2000 compared to $74,447 in 1999. Excluding the adjustments for minority interest described above, net loss from continuing operations was $341,857 in 2000 and $681,547 in 1999. The decreased net loss in 2000 is due primarily to increased revenue in 2000 at the CGC along with lower overall costs in 2000 resulting from the Company's aggressive cost containment strategies that began in September 1999. The Company intends to continue this strategy in order to maintain efficiency in the Company's operations and to ultimately achieve profitability. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had a working capital deficit of $101,041. This deficit has been created primarily because of the ongoing financial problems of the discontinued SportPark business segment. The SportPark Bank Note in the original amount of $13.5 million has been in default since September 1999. This default and the related cash flow shortfalls of the SportPark business required AASP to use the positive cash flow of the CGC to fund these shortfalls. At the same time, the land lease payments for the CGC have not been made since September 1999 and have continued to accrue creating all of the working capital deficit. On September 15, 1998 AASP entered into a $13,500,000 loan agreement with Nevada State Bank. The loan was for 15 years with interest at 9.38%. The loan was secured by the SportPark real and personal property as well as corporate guarantees of AASP and SPEN. Also, the Landlord of the Sportpark subordinated its land underlying the SportPark to the Lender to secure repayment of the loan. As consideration for the Landlord providing collateral 3 for the loan, the AASP's President, CEO and its Chairman and a related entity pledged their stock in SPEN to the Landlord as collateral to protect the leased property from foreclosure. Additionally, the Company's Chairman pledged three parcels of land owned by him (the "Chairman's parcels") as additional collateral to secure the loan. AASP defaulted on the loan in September 1999; this default continued until October and November 2000, the Bank forced the Company's Chairman to sell the Chairman's parcels which resulted in the Chairman paying $2.75 million to the Bank to pay down the outstanding loan balance, and the Landlord bought the Bank Note and all rights pertaining thereto from the Bank for $7 million. In connection with these transactions, the corporate guarantees of AASP and SPEN were released. During the period of default with the Bank, management of AASP made several attempts to resolve the SportPark's loan default by investigating several financing alternatives, making significant operational changes resulting in major cost reductions, revising marketing programs, and exploring several sale/joint venture options. Since the Landlord bought the Bank Note, the Landlord and AASP have been actively pursuing a buyer/operator to take over the SportPark from AASP. Effective January 2, 2001, the SportPark closed to the general public although it continues to operate on a limited basis for group parties and special events and will continue to do so until a suitable buyer/operator is found. AASP and the Landlord are in active discussions with several prospects to lease/buy the SportPark. AASP expects to dispose of its interest in the SportPark along with all related obligations sometime in 2001 although there can be no assurance AASP will be successful in doing so. Also, it is uncertain whether AASP will have some form of continuing interest in the SportPark. If AASP is successful in disposing of the SportPark and all of its related obligations, the Company's ability to continue as a going concern will be greatly improved although there can be no assurance AASP will be successful in doing so. While management of AASP is working diligently to achieve this end for the SportPark, AASP is aggressively pursuing several other opportunities. AASP is in various stages of adding new revenue producing elements to its CGC property that do not require significant capital investment by AASP. Also, AASP is aggressively pursuing financing sources with the CGC as collateral to improve the CGC operations and infuse working capital into AASP. Expansion plans into other markets will be facilitated by the ultimate resolution of the SportPark issues. Management of AASP is in discussions with several established companies in its industry that have the necessary capital and human resources that could facilitate AASP's expansion plans; several possible business structures will be evaluated. An important element of the Company's plan will be to increase the Company's exposure in the financial community. There can be no assurance that AASP will be successful in its efforts to raise capital for AASP nor can there be any assurance that AASP will be successful in its efforts to structure a relationship with an established company in its industry to facilitate AASP's expansion plans. There are no planned material capital expenditures in 2001. The Callaway Golf Center has generated positive cash flow in both 1999 and 2000. If required to fund corporate operations, management believes that additional borrowings against the CGC could be arranged although there can be no assurance that AASP would be successful in securing such financing or with terms acceptable to AASP. 4 The Company's Chairman through personal loans and through advances from his personally owned retail store (one of the "Affiliated Stores") has historically loaned funds to the Company as needed. Such lendings were $1,777,328 at December 31, 1999 and have increased to $5,093,072 at December 31, 2000. AASP paid back $225,000 of these amounts in late March 1999; the offsetting increase relates to accrued interest payable on the remaining balances outstanding, and the $2.75 million along with associated costs of approximately $283,000 that the Company's chairman incurred to pay down the SportPark loan in October 2000. The loans are due at various dates beginning in 2001 and bear interest at ten percent per annum. Accrued interest payable of $469,212 at December 31, 2000 has been deferred, a practice which is expected to continue in 2001, if necessary. The Company's accounts payable and accrued expenses increased in 2000 to $1,284,699 from $712,003 in 1999 due mainly to deferred land lease payments on the CGC. OPERATING ACTIVITIES. During 2000, net cash provided by operating activities was $457,312 compared to $418,866 of net cash used in operating activities in 1999. The primary reasons for the difference relate to (1) an approximate $340,000 smaller net loss from continuing operations before minority interest in 2000 compared to 1999, and (2) a larger increase in accounts payable and accrued expense balances of approximately $500,000. INVESTING ACTIVITIES. During 2000, net cash provided by investing activities totaled $18,054 compared to net cash used in investing activities of $244,823 in 1999. The primary difference is more expenditures for leasehold improvements at the CGC in 1999 compared to 2000. FINANCING ACTIVITIES. During 2000, net cash used in financing activities was $71,950 compared to net cash provided by financing activities during 1999 of $630,724. The main reason for the difference is a change in due to affiliated stores and related entities of about $800,000. The Company's current and expected sources of working capital are its cash balances that were $480,126 at December 31, 2000 and its continuing positive operating cash flow of its CGC property and the Rainbow Store. Working capital needs have been helped by deferring payments on the SportPark loan, land lease payments to the Landlord for both the SportPark and CGC, and interest and notes payable balances due to the Company's Chairman and Affiliated Store. As of December 31, 2000, land lease payments owed for the CGC and SportPark are approximately $337,000 and $192,000, respectively. Deferrals of payments to the Company's Chairman and Affiliated Store and Landlord are expected to continue until the Company's Chairman and Affiliated Store and Landlord are expected to continue until the Company has sufficient cash flow to begin making payments. The Company does not currently have the financial resources to make these payments. On June 1, 2001, AASP completed a transaction pursuant to a Restructuring and Settlement Agreement with the Landlord which included a waiver of liabilities of AASP to the Landlord. The Landlord agreed to cancel all back rent obligations of the SportPark, and all back rent obligations of the CGC through April 30, 2001. See the Company's Report on Form 8-K dated June 1, 2001. The Company has raised considerable capital in the past 5 years for development projects. The Callaway Golf Center and Rainbow retail store are generating positive cash flow and their prospects are expected to become even more positive as it the CGC moves into its fourth full year of operation and management's streamlining of operations continues. The Company believes that any working capital deficiency that may occur could be funded from a combination of existing cash balances and, if necessary, additional borrowings 5 from lenders or other sources. Management believes that additional borrowings against the CGC could be arranged to fund corporate operations. However, there can be no assurance that any borrowings would be available or at terms acceptable to the Company. Expansion programs in other locations are not expected to take place until the Company achieves an appropriate level of profitability and positive cash flow. If and when expansion does occur, such expansion is expected to be funded primarily by third parties. SAFE HARBOR PROVISION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Annual Report contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities, as well as other capital spending, financing sources, the effects of regulations and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions (including sensitivity to fluctuations in foreign currencies), changes in federal or state tax laws or the administration of such laws, changes in regulations and application for licenses and approvals under applicable jurisdictional laws and regulations. 6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Sports Entertainment Enterprises, Inc.: We have audited the accompanying consolidated balance sheets of Sports Entertainment Enterprises, Inc. (a Colorado corporation) and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity (deficit) 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 audit 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 Sports Entertainment Enterprises, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1e to the consolidated financial statements, the Company has had recurring operating losses and has had cash flow constraints since September 1999, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1e. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Piercy Bowler Taylor & Kern PIERCY BOWLER TAYLOR & KERN Las Vegas, Nevada March 27, 2001 F-1 SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Current assets: Cash and cash equivalents $ 480,126 $ 200,501 Marketable securities 97,394 - Accounts receivable 42,435 33,836 Inventory 563,140 590,536 Prepaid expenses and other 66,385 71,338 ------------ ------------ Total current assets 1,249,480 896,211 Leasehold improvements and equipment, net 1,055,688 1,264,368 Due from affiliated stores 138,661 168,779 Note receivable - related party 20,000 20,000 Other assets 33,582 49,750 Net assets of discontinued operations 295,154 7,897,651 ------------ ------------ Total assets $ 2,792,565 $ 10,296,759 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-2 SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Current liabilities: Current portion of long-term debt $ 49,891 $ 45,400 Current portion of obligations under capital leases 15,931 70,085 Accounts payable and accrued expenses 1,284,699 712,003 ------------ ------------ Total current liabilities 1,350,521 827,488 Note payable to shareholder 4,700,561 1,484,616 Due to affiliated stores 1,689,529 1,624,874 Long-term debt, net of current portion 493,428 543,318 Obligation under capital leases, net of current portion 23,153 73,229 Deferred income 178,919 195,860 ------------ ------------ Total liabilities 8,436,111 4,749,385 Minority interest 5,000,000 5,000,000 Shareholders' equity (deficit): Series A Convertible Preferred stock, no par value, 500,000,000 shares authorized; no shares issued and outstanding for 2000 and 1999 - - Common stock, no par value, 15,000,000 shares authorized, 8,135,097 shares issued and outstanding at December 31, 2000 and 1999 6,107,700 6,107,700 Stock options issued 268,300 268,300 Accumulated other comprehensive income 65,615 - Accumulated deficit (17,085,161) (5,828,626) ------------ ------------ Total shareholders' equity (deficit) (10,643,546) 547,374 Total liabilities and shareholders' equity (deficit) $ 2,792,565 $ 10,296,759 The accompanying notes are an integral part of these consolidated financial statements. F-3 SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ------------ ----------- Revenues: Retail operations $ 2,932,037 $ 2,782,993 Callaway Golf Center[TM] 2,433,885 2,154,222 Other 49,907 42,810 ------------ ----------- Total revenues 5,415,829 4,980,025 ------------ ----------- Cost of Revenues: Retail operations 2,161,637 2,193,280 Callaway Golf Center[TM] 436,612 423,944 ------------ ----------- Total cost of revenues 2,598,249 2,617,224 ------------ ----------- Gross profit 2,817,580 2,362,801 ------------ ----------- Operating expenses: Selling, general and administrative 2,737,088 3,092,666 Depreciation and amortization 120,286 138,226 ------------ ----------- Total operating expenses 2,857,374 3,230,892 ------------ ----------- Operating loss (39,794) (868,091) Interest expense, net (302,063) (330,275) ------------ ----------- Loss from continuing operations before income taxes (341,857) (1,198,366) Income tax benefit - (516,819) ------------ ----------- Loss from continuing operations before minority interest (341,857) (681,547) Minority interest in loss of subsidiary 116,730 607,100 ------------ ----------- Loss from continuing operations (225,127) (74,447) DISCONTINUED OPERATIONS: Loss from discontinued operations of SportPark business before writedown of assets (4,521,227) (3,417,079) Writedown of SportPark assets to net realizable value (6,510,181) - ------------ ----------- Loss from discontinued operations (11,031,408) (3,417,079) ------------ ----------- Net loss (11,256,535) (3,491,526) ------------ ----------- Other comprehensive income: Unrealized holding gains on securities 65,615 - ------------ ----------- Comprehensive loss $(11,190,920) $(3,491,526) ============ =========== NET LOSS PER SHARE: Basic and diluted: Loss from continuing operations $ (0.03) $ (0.01) Loss from discontinued operations (1.36) (0.42) ------------ ----------- Net loss per share $ (1.39) $ (0.43) ============ =========== The accompanying notes are an integral part of these consolidated financial statements. F-4 SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
ACCUMULATED STOCK OTHER PREFERRED COMMON OPTIONS COMPREHENSIVE ACCUMULATED STOCK STOCK ISSUED INCOME DEFICIT TOTAL ---------- ---------- -------- ------------- ----------- ------------- Balance, 12/31/1998 $ - $6,107,700 $268,300 $ - $ ( 2,337,100) $ 4,038,900 Net loss - - - - (3,491,526) (3,491,526) ---------- ---------- -------- ------------- ------------- ------------ Balance, 12/31/1999 - 6,107,700 268,300 - (5,828,626) 547,374 Comprehensive loss: Net loss (11,256,535) (11,256,535) Other comprehensive income: Unrealized holding gains on securities 65,615 65,615 ---------- ---------- -------- ------- ------------ ------------ Comprehensive loss - - - 65,615 (11,256,535) (11,190,920) ---------- ---------- -------- ------- ------------ ------------ Balance, 12/31/2000 $ - $6,107,700 $268,300 $65,615 $(17,085,161) $(10,643,546) ========== ========== ======== ======= ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(11,256,535) $(3,491,526) Adjustment to reconcile net loss to net cash provided by (used in) operating activities of continuing operations: Loss from discontinued operations 11,031,408 3,417,079 Common stock of subsidiary issued for services 116,730 - Minority interest (116,730) (607,100) Depreciation and amortization 120,286 138,226 Stock dividend received (31,779) - Amortization of land lease deposit - - Loss on sale of equipment (1,741) - Bad debt expense - 41,844 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (8,599) 341,662 (Increase) decrease in inventories 27,396 (120,157) (Increase) decrease in prepaid expenses and other 21,121 (28,740) Increase in accounts payable and accrued expenses 572,697 62,793 Decrease in deferred tax liability - (147,600) Decrease in deferred income (16,942) (25,347) ------------ ----------- Net cash provided by (used in) operating activities of continuing operations 457,312 (418,866) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Leasehold improvements expenditures (14,446) (244,823) Proceeds from sale of equipment 32,500 - ------------ ----------- Net cash provided by (used in) investing activities of continuing operations 18,054 (244,823) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in due to Affiliated Stores (176,873) 635,047 Increase in notes payable and notes payable to shareholder and related entity 137,072 86,277 Principal payments on capital leases (32,149) (90,600) ------------ ----------- Net cash provided by (used in) financing activities of continuing operations (71,950) 630,724 ------------ ----------- NET CASH USED IN DISCONTINUED OPERATIONS (123,791) (2,351,434) ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 279,625 (2,384,399) CASH AND CASH EQUIVALENTS, beginning of period 200,501 2,584,900 ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 480,126 $ 200,501 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 58,361 $ 71,347 ============ =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock of subsidiary issued in exchange for consulting services $ 116,730 $ - ============ =========== Capital lease obligation transferred in connection with sale of equipment $ 72,081 $ - ============ =========== Costs incurred by the Company's Chairman to reduce the Company's long term debt $ 3,033,473 $ - ============ =========== The accompanying notes are an integral part of these consolidated financial statements. F-6 SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATIONAL STRUCTURE AND BASIS OF PRESENTATION a. PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Sports Entertainment Enterprises, Inc. ("SPEN"), a Colorado corporation, include the accounts of SPEN and its subsidiaries, All-American SportPark, Inc. ("AASP"), LVDG Development Corporation ("Development") and LVDG Rainbow, Inc. ("Rainbow"). SPEN and its subsidiaries are collectively referred to as "the Company". All significant inter-company accounts and transactions have been eliminated. b. COMPANY BACKGROUND AND PRIMARY CONTINUING BUSINESS ACTIVITIES In 1974, the Company's chairman opened a retail store in Las Vegas, Nevada under the name Las Vegas Discount Golf & Tennis ("LVDG"). This store is still owned and operated by the Company's chairman and is referred to herein as the "Paradise Store." (See Note 4). Prior to 1997, SPEN's primary business segments included: (1) the wholesale sales of golf and tennis related merchandise to franchisees and to other golf retailers, (2) the operation of Company-owned Las Vegas Discount Golf & Tennis retail stores and (3) franchising LVDG retail stores and collecting royalty revenue through its subsidiary AASP. On February 26, 1997, the Company and AASP completed the sale of certain of their franchised store and golf distribution system assets and transferred certain related liabilities to an unrelated buyer who has incorporated under the name Las Vegas Golf & Tennis, Inc. as described below in subpart "c" of this section. After this transaction, the Company continues to operate a single retail store (the "Rainbow Store") located in Las Vegas, Nevada. On June 13, 1997, AASP and Callaway Golf Company ("Callaway") formed All-American Golf, LLC (the "LLC") to construct, manage and operate the Callaway Golf Center , a premier golf facility on 42 acres located at the south end of the world famous Las Vegas "Strip" at Las Vegas Boulevard and Sunset Road. AASP contributed $3 million for 80 percent of the members' units of the LLC while Callaway purchased the remaining 20 percent for $750,000. The Callaway Golf Center opened for business in October 1997. On May 5, 1998, AASP sold its 80% membership interest in the LLC to Callaway for $1.5 million in cash and the forgiveness of $3 million of debt, including accrued interest thereon, owed to Callaway by AASP. This transaction resulted in a gain to AASP of $1,638,000. AASP retained the option to repurchase the 80% membership interest for a period of two years. On December 31, 1998 AASP acquired substantially all the assets of the LLC subject to certain liabilities from Callaway. This acquisition resulted in AASP owning 100% of the Callaway Golf Center. F-7 The Callaway Golf Center includes the Divine Nine par 3 golf course fully lighted for night golf, a 110-tee two-tiered driving range which has been ranked the Number 2 golf practice facility in the United States since it opened in October 1997, a 20,000 square foot clubhouse which includes the St. Andrews Golf Shop, Callaway Performance Center, Giant Golf teaching academy, and the Bistro 10 restaurant and bar. As of December 31, 2000, SPEN owns approximately two-thirds of the outstanding common stock of AASP and one-third of its Convertible Preferred Stock. The Company's President and Chairman of the Board, is also Chairman of the Board of AASP. c. DISCONTINUED OPERATIONS AASP developed a concept for family-oriented sports-themed amusement venues named "All-American SportPark" ("SportPark" or "SPLV"). The first SportPark, comprising 23 acres adjacent to the Callaway Golf Center, opened for business on October 9, 1998. The SportPark includes NASCAR SpeedPark, Major League Baseball Slugger Stadium, the 100,000 square foot Arena Pavilion which houses the Pepsi AllSport Arena, "The Rock" 47-foot rock climbing wall, an 8,000 square foot arcade, Indoor putting challenge, Boston Garden restaurant and bar, Skybox suites and several other interactive experiences and retail shops. As of December 31, 2000, management of AASP formalized a plan to dispose of the SportPark facility because (1) the property continues to sustain substantial losses, and (2) it is not expected that future results would improve without substantial capital investment; AASP does not have the resources to make such an investment. As part of this plan, effective January 2, 2001, the SportPark was closed to the general public, although it continues to operate on a limited basis for group parties and special events until a suitable buyer/operator is found. AASP is in discussions with several prospective buyers and expects to complete a transaction to dispose of the SportPark sometime in 2001. Accordingly, the Company has accounted for AASP's SportPark business segment as "Discontinued Operations" in the accompanying consolidated financial statements as of and for the years ended December 31, 2000 and 1999. In connection with the foregoing, AASP evaluated the net realizable value of the SportPark assets in the context of its current situation and negotiations with prospective buyers. In that regard, in the fourth quarter of 2000, management of AASP determined that a write down of $6,510,181 was necessary to reflect the estimated net realizable value of the SportPark upon disposition. Net assets of the Company's discontinued Sportpark business included in the accompanying consolidated balance sheets consisted of the following at December 31, 2000 and 1999: F-8 2000 1999 ----------- ----------- Current assets $ 171,182 $ 367,566 Property and equipment, net 14,879,510 22,926,672 Other assets 378,446 355,467 ----------- ----------- 15,429,138 23,649,705 ----------- ----------- Notes payable (See Note 6) 13,080,776 13,084,118 Capital lease obligations 290,773 417,335 Accounts payable and accrued liabilities 1,455,283 1,752,065 Deferred income 307,152 498,536 ----------- ----------- 15,133,984 15,752,054 ----------- ----------- Net assets to be disposed of $ 295,154 $ 7,897,651 =========== =========== Revenues related to discontinued operations totaled $3,447,949 and 4,814,575 for 2000 and 1999, respectively. AASP Management has been working with the Landlord in negotiating with several prospects to either purchase or lease the SportPark. It remains uncertain whether AASP will retain any ownership interest in the SportPark. d. CONCENTRATIONS OF RISK In addition to its single retail outlet, the Company, through AASP, operates one Callaway Golf Center and one All-American SportPark in Las Vegas, Nevada. As described above, since December 31, 2000, the All-American SportPark is operating on a limited basis and is being marketed for sale. The level of sustained customer demand for these types of recreational facilities is undetermined. AASP has implemented various strategies to market the Callaway Golf Center to both tourists and local residents. Should attendance levels at the Golf Center not meet expectations in the short-term, management believes existing cash balances would not be sufficient to fund operating expenses and debt service requirements for at least the next twelve months. The inability to build attendance to profitable levels beyond a twelve-month period may require AASP to seek additional debt or equity financing to meet its obligations as they come due. There is no assurance that AASP would be successful in securing such debt or equity financing in amounts or with terms acceptable to AASP. e. GOING CONCERN MATTERS The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, during the years ended December 31, 2000 and 1999, the Company had a net loss of $11,256,535 and 3,491,526, respectively, and has experienced cash flow constraints since September 1999. F-9 As of December 31, 2000, the Company had a working capital deficit of $101,041. Additionally, the $13 million note payable secured by a first deed of trust on the discontinued SportPark segment (Note 6) has been in default since September 1999. The Landlord for the SportPark bought this note payable from the Lender in November 2000, and the note remains in default. In addition to not making payments on the SportPark loan since September 1999, AASP has not made any land lease payments to the Landlord since that time. AASP negotiated an agreement with the landlord to defer the land lease payments, totaling $624,996 annually, on both the SportPark and Callaway Golf Center beginning September 1999 with no specified ending date. Management of AASP believes that the landlord is willing to defer land lease payments until such time as adequate capital resources are available to AASP to make such payments. As discussed in subpart c. above, AASP Management and the Landlord are negotiating with several prospects to either purchase or lease the SportPark. AASP Management believes that, in order to sufficiently fund operating cash needs and debt service requirements over at least the next twelve months, a transaction with an unrelated party for the SportPark would need to be structured so that AASP would no longer fund cash shortfalls at the SportPark and AASP would be released from significant continuing liability for SportPark obligations. If required to fund continuing operations, management believes that additional borrowings against the Callaway Golf Center could be arranged. Should additional financing to fund operations be required, the Company will explore all funding options. There can be no assurance such lending sources would be willing, on terms acceptable to the Company, to provide additional financing. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. f. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may require revision in future periods. Management's estimates of net realizable value of assets of the discontinued segment and net loss on disposal thereof, could be subject to material change in the next year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. b. MARKETABLE SECURITIES In 2000, the Company received a stock dividend of 3,658 shares of Sun Life of Canada upon the demutualization of Sun Life Insurance Company. This stock dividend was received because the Company owns a life insurance policy in the name of the Company's Chairman. F-10 c. ACCOUNTS RECEIVABLE Accounts receivable consists of amounts due from tenants at the Callaway Golf Center[TM], and from the sale of merchandise and/or services. d. INVENTORIES Inventories, which consist primarily of sporting goods merchandise, are stated at the lower of cost (retail average cost method) or market. e. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment are stated at cost. Depreciation and amortization is provided for on a straight-line basis over the lesser of the lease term or the following estimated useful lives of the assets: Furniture and equipment 3-10 years Leasehold improvements 15 years f. DEFERRED INCOME Deferred income consists primarily of advance fees received from tenants and corporate sponsors. Deferred income is amortized to income over the life of the applicable agreement. g. ADVERTISING The Company expenses advertising costs as incurred. Advertising costs charged to continuing operations amounted to $223,299 and $304,334 in 2000 and 1999, respectively. h. RECLASSIFICATIONS In addition to accounts of the discontinued segment, certain items previously reported in specific financial statement captions have been reclassified to conform to the 2000 presentation. i. RECOVERABILITY OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or changes in the circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. The Company deems an asset to be impaired if a forecast of undiscounted future operating cash flows directly related to the asset, including disposal value if any, is less than its carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds fair value. The Company generally measures fair value by discounting estimated cash flows. Considerable management judgment is necessary to estimate discounted cash flows. Accordingly, actual results could vary significantly from such estimates. F-11 j. LOSS PER SHARE Basic and diluted loss per share is computed by dividing reported net loss from continuing operations and discontinued operations by the weighted-average number of common shares outstanding during the period. The weighted-average number of common and common equivalent shares used in the calculation of basic and diluted earnings per share was 8,135,097 for both 2000 and 1999. 3. SEGMENT INFORMATION The Company's two operating segments are determined based on the nature of their activities. The retail operations segment consists of a Company-owned store located in Las Vegas, Nevada that sells sporting good merchandise. The Company's sport-oriented theme park segment which includes the All-American SportPark and Callaway Golf Center. As described in Note 1.c. above, the All-American SportPark has been classified as discontinued operations; as such, segment information for the SportPark is not included herein. The accounting policies of the reported segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. The financial information pertaining to the Company's retail operations and the Callaway Golf Center operations for each of the two years in the period ended December 31, 2000, is as follows: 2000 Retail Callaway Operations Golf Center Adjustments Total ---------- ----------- ----------- ---------- Revenues from External Customers $2,932,037 $ 2,433,885 $ - $5,365,922 Interest Income 251 12,079 - 12,330 Interest Expense 122,451 223,721 - 346,172 Depreciation & Amortization 21,406 98,880 - 120,286 Minority Interest - - 116,730 116,730 Segment Assets 4,595,520 2,374,634 (4,352,589) 2,617,565 Capital Expenditures 8,286 31,297 - 39,583 1999 Retail Callaway Operations Golf Center Adjustments Total ---------- ----------- ----------- ---------- Revenues from External Customers $2,782,993 $ 2,154,222 $ - $4,937,215 Interest Income 652 4,520 - 5,172 Interest Expense 107,009 228,438 - 335,447 Depreciation & Amortization 21,081 146,139 - 167,220 Minority Interest - - 607,100 607,100 Segment Assets 5,021,000 2,466,837 (4,943,723) 2,544,114 Capital Expenditures 9,789 235,034 - 244,823 F-12 4. RELATED PARTY TRANSACTIONS The Company has extensive transactions and relationships with its Chairman, the Paradise Store, AASP, and the golf retail store located inside the Callaway Golf Center[TM] Saint Andrews Golf Shop ("SAGS"). SAGS is owned by AASP's President and his brother. The Paradise Store and SAGS are collectively referred to as the "Affiliated Stores." The types of activities that are shared between these entities are inventory purchases, advertising, payroll and employee benefits, warehouse rent, equipment leases, and miscellaneous office expenses. Costs are allocated to the respective companies based on relative benefit received. The Affiliated Stores purchased merchandise at the same cost as the Company. The Paradise Store and the Company owned store share advertising costs equally. The Company owned store's share of these advertising costs were $145,909 and $148,376 in 2000 and 1999, respectively. Sales of merchandise made by the Paradise Store to the Company totaled $414,417 and $584,001 for the years ended December 31, 2000 and 1999, respectively. The Paradise store purchased $104,777 and $105,999, respectively, in sporting goods merchandise from the Company. AASP has unsecured, ten- percent notes payable of $264,967 and $230,000 at December 31, 2000 and 1999 with the Paradise Store. A payment of $225,300 was made on these notes in late March 1999. These notes are due at various dates in 2001. The principal amount, interest rate, and payment terms are substantially similar to borrowings that the Paradise Store obtained from a bank to fund these loans to AASP. Accrued interest payable of $61,826 and $62,712 at December 31, 2000 and 1999, respectively, is included with the note payable balance under the caption "Due to Affiliated Stores" in the accompanying consolidated balance sheets. Interest payments of $26,508 and $27,212 have been deferred in 2000 and 1999, respectively, a practice which is expected to continue in 2001, if necessary. AASP has unsecured, ten- percent notes payable of $1,259,702 and $1,250,000 as of December 31, 2000 and 1999 with the Company's chairman. These notes are due at various dates in 2001. The principal amount, interest rate, and payment terms are substantially similar to borrowings that the Company's chairman obtained from a bank to fund these loans to AASP. Accrued interest payable of $346,836 and $234,616 at December 31, 2000 and 1999, respectively, is included with the note payable balance under the caption "Note payable to Shareholder" in the accompanying consolidated balance sheets. Interest payments of $125,964 and $127,397 have been deferred in 2000 and 1999, respectively, a practice which is expected to continue in 2001, if necessary. In connection with the discontinued SportPark segment loan resolution (see Note 6), the Company's chairman paid $2,750,000 to the Lender to release collateral he had pledged to secure the SportPark loan; this $2.75 million was used by the Lender to pay down the loan balance owed by the SportPark. In connection therewith, the Company's Chairman incurred costs and fees totaling $283,473 to consummate the transaction with the Lender. This transaction required the Company's chairman to sell the collateral so that cash could be paid to the Lender in exchange for releasing the Lender's lien on the collateral. The total amount of $3,033,473 incurred by the Company's chairman along with accrued interest payable of $60,550 is included under the caption "Note payable to Shareholder" in the accompanying consolidated balance sheet at December 31, 2000. Payment of the accrued interest payable has been deferred and the Company's chairman has agreed to continue deferring the payment of accrued interest until such time as AASP has adequate capital resources to service this obligation. F-13 5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment included the following as of December 31: 2000 1999 ------------- ----------- Building $ 252,866 $ 252,866 Land Improvement 325,937 303,572 Signs 67,590 67,590 Furniture and equipment 349,332 342,128 Leasehold improvements 387,495 497,801 Equipment under capital leases 62,648 213,682 Other 13,789 8,889 ------------- ----------- 1,459,657 1,686,528 Less accumulated depreciation and amortization (403,969) (422,160) ------------- ----------- $ 1,055,688 $ 1,264,368 ============= =========== 6. LONG-TERM DEBT On September 15, 1998, AASP consummated a $13,500,000 secured loan with Nevada State Bank. The original term of the loan was for 15 years with the interest measured at a fixed rate of 4% above the Bank's five-year LIBOR rate measured September 1, 1998, 2003 and 2008. Through August 31, 2003, the interest rate on the loan was 9.38%. The loan is secured by substantially all the assets of AASP that existed at the time the financing was completed as well as corporate guarantees of AASP and SPEN. The Callaway Golf Center was not owned by AASP at the time this financing was completed and therefore is not security for this loan. To facilitate this financing transaction, the owner of the leasehold interest in the land underlying the SportPark ("Landlord") executed a trust deed granting a security interest in the leased property to the Lender to secure repayment of the loan. As consideration for the Landlord's willingness to provide collateral for the loan, the AASP's President and CEO, its Chairman, and a related entity pledged their stock in SPEN (the "Boreta Stock") to the Landlord. Additionally, the landlord was issued 75,000 stock options in AASP exercisable at $4.00 per share through the year 2005. Also, the Company's Chairman pledged three parcels of land owned by him (the "Chairman's parcels") as additional collateral to secure the loan. Provisions in the loan agreement allowed for the reconveyance of these three parcels to the Company's Chairman upon the SportPark achieving certain debt service coverage milestones. AASP has been in default on this loan since September 1999 because it did not make the September 1999 loan payment and has not made any of its scheduled loan payments since. The Bank filed a formal notice of default on December 22, 1999. In an attempt to resolve the default issue, AASP, with the Bank's agreement, hired an amusement park industry consultant to evaluate all operational aspects of the SportPark and provide recommendations to improve its performance. This consultant began its work in December 1999 and completed it in February 2000. The product of their evaluation included a F-14 detailed plan to help the SportPark eventually achieve profitability and commence servicing the Bank's debt. The Bank hired a different industry consultant which, after a limited review, concluded that AASP's plan as prepared by its consultant could not be achieved. AASP met and discussed possible resolutions several times with the Bank's representatives to no avail. In July 2000, the Lender filed a notice of sale and foreclosure on the Chairman's parcels. In October 2000, the Company's Chairman sold the property within which the Chairman's parcels were located and paid the Lender $2,750,000 to fully release the obligations associated with this collateral. The Lender applied the $2.75 million as a reduction to the outstanding SportPark loan obligation. On November 13, 2000, AASP reached an agreement with the Lender whereby the Lender agreed to release AASP and SPEN from their guarantees on the SportPark Note Payable, a note payable on certain SportPark equipment ("Equipment Note"), and an operating lease agreement for certain SportPark equipment ("Equipment Lease"). In exchange, AASP, SPEN, and certain other related parties agreed to fully release the Lender and its affiliates from any claims related to the SportPark Note Payable, Equipment Note, and Equipment Lease. Concurrent with the foregoing, the Landlord bought these three obligations from the Lender for $7 million. As a result, the Landlord became the first lien holder on the SportPark property, and also became the lender on the Equipment Note and Equipment Lease, with exactly the same rights that the previous Lender had except that the guarantees of AASP and SPEN no longer exist on any of these three obligations. The Landlord and AASP are negotiating with several prospects to either purchase or lease the Sportpark property from the Landlord. Although management of AASP believes that a favorable resolution may be achieved with regard to this SportPark issue, there can be no assurance that AASP will be successful in doing so. Also, see Note 4. The SportPark Note Payable principal balance and related accrued interest payable due as of December 31, 2000 is $13,049,922 and $310,991, respectively. The Equipment Note original amount was $39,055. Payments are $808 per month with interest at 8.75% per annum. Payments on this note have not been made since the Landlord bought the Equipment Note from the Lender. The note's scheduled maturity is March 18, 2004. The balance owing at December 31, 2000 and 1999 was $30,854 and $34,196, respectively. The SportPark Note Payable and Equipment Note are included as part of Net Assets of Discontinued Operations as described in Note 1.c above. On December 31, 1998, the Company acquired substantially all the assets of the Callaway Golf Center subject to certain liabilities for $1 million in the form of a promissory note payable due in quarterly installments of $25,000 over 10 years without interest. This note has been discounted to reflect the notes' present value. As of December 31, 2000 and 1999, the note is recorded at $543,319 and $588,719, respectively, in the accompanying consolidated balance sheets. Aggregate maturities of long-term debt of continuing operations for the five years subsequent to December 31, 2000, are as follows: F-15 Year ending: 2001 $ 49,891 2002 54,827 2003 60,250 2004 66,210 2005 72,760 Thereafter 239,381 ----------- $ 543,319 =========== 7. LEASES SPEN and AASP share office and warehouse facilities leased from the Company's Chairman under a non-cancelable operating lease agreement, which expires on January 31, 2005. Rent is allocated 50% to SPEN and 50% to AASP. Rent expense for the Company's allocated share of this lease was $5,100 and $7,924 for 2000 and 1999, respectively. The land underlying the All-American SportPark and Callaway Golf Center is leased to AASP at an aggregate amount of $52,083 per month allocated $18,910 and $33,173, respectively. Also, the leases have provisions for contingent rent to be paid by AASP upon reaching certain levels of gross revenues. The leases commenced October 1, 1997 for the Callaway Golf Center and February 1, 1998 for the SportPark. The terms of both leases are 15 years with two five-year renewal options. The minimum rent shall be increased at the end of the fifth year of the term and every five years thereafter by an amount equal to ten percent of the minimum monthly installment immediately preceding the adjustment date. As a condition to the lease, AASP entered into a Deposit Agreement, which required AASP to post a refundable deposit to the lessor of $500,000. The deposit has been applied as prepaid rent to be amortized resulting in a balance of $0 and $37,821 as of December 31, 2000 and 1999, respectively. Due to cash constraints, AASP negotiated an agreement with the landlord to defer the land lease payments on both the SportPark and Callaway Golf Center beginning September 1999 with no specified ending date. Management of AASP believes that the landlord is willing to defer land lease payments until such time as adequate capital resources are available to AASP to make such payments. The Company also leases retail space for the Company-owned store under a non-cancelable operating lease agreement which expires on June 30, 2005 and provides for a base monthly rental payment of $9,220. Under this lease, the base monthly rental may increase based on the consumer price index and taxes. Rent expense under this lease totaled $121,618 and $124,525 in 2000 and 1999, respectively. The Company is also obligated under various other capital and non-cancelable operating leases for equipment that expire at various dates over the next five years. Total rent expense for operating leases was $630,450 and $757,449 for 2000 and 1999, respectively. At December 31, 2000, minimum future lease payments of continuing operations are as follows: F-16 Capital Operating Year Leases Leases Total ---- -------- ---------- ---------- 2001 $ 29,520 $ 566,419 $ 595,939 2002 21,267 549,706 570,973 2003 - 562,280 562,280 2004 - 558,725 558,725 2005 - 494,055 494,055 Thereafter - 3,323,943 3,323,943 -------- ---------- ---------- Total $ 50,787 $6,055,128 $6,105,915 ========== ========== Less amount representing interest (11,702) -------- Present value of net minimum capital leases payments 39,084 Current portion (15,931) -------- Obligations under capital leases net of current portion $ 23,153 ======== 8. INCOME TAXES The federal income tax provision (benefit) from continuing operations consisted of the following for the years ended December 31: 2000 1999 ----------- ----------- Current $(3,380,536) $(3,310,739) Deferred (1,071,680) 1,470,759 Less valuation allowance 4,452,216 1,323,161 ----------- ----------- Total $ - $( 516,819) =========== =========== The components of the deferred tax asset (liability) consisted of the following at December 31: 2000 1999 ----------- ----------- Deferred Tax Liabilities: Temporary differences related to Property and Equipment $(3,076,467) $(1,894,158) Deferred Tax Assets: Deferred Income 165,264 236,094 Other 291,498 125,498 Writedown of assets 2,213,462 - Net Operating Loss Carryforward 6,795,320 3,469,427 ----------- ----------- Net Deferred Tax Asset Before Valuation Allowance 6,389,077 1,936,861 Valuation allowance (6,389,077) (1,936,861) ----------- ----------- Net Deferred Tax asset (liability) $ - $ - =========== =========== F-17 As of December 31, 2000, the Company has available for income tax purposes approximately $19.9 million in federal net operating loss carryforwards, which may offset future taxable income. These loss carryforwards begin to expire in fiscal year 2003. A valuation allowance has been established to reserve the net deferred tax asset since management does not believe it is more likely than not that they will be realized. The provision (benefit) for income taxes attributable to income (loss) from continuing operations, does not differ materially from the amount computed at the federal income tax statutory rate. 9. CAPITAL STOCK, STOCK OPTIONS, AND INCENTIVES a. CAPITAL STOCK On October 19, 1998, SPEN issued 2,303,290 shares of its common stock for $2,500,000 in a private transaction to ASI Group, L.L.C. ("ASI"). ASI also received 347,975 options for common stock of the Company at an exercise price of $1.8392 per share through October 19, 2008. b. STOCK OPTION PLANS In June 1991, the Company's Board of Directors adopted an Incentive Stock Option Plan (the "1991 Plan"). All options granted under the 1991 Plan except for 4,000 options which were granted in 1992 and 1993 have either expired or were replaced under an amendment to the plan effective July, 1994. The 1991 Plan allows the Board to grant stock options from time to time to employees, officers, directors of the Company and consultants to the Company. The Board of Directors has the power to determine at the time the option is granted whether the option will be an Incentive Stock Option or an option which is not an Incentive Stock Option as well as determining the vesting schedule and expiration date. Incentive Stock Options will only be granted to persons who are employees or officers of the Company. Vesting provisions are determined by the Board of Directors at the time options are granted. The total number of shares of Common Stock subject to options under the 1991 Plan may not exceed 500,000, subject to adjustment in the event of certain recapitalizations and reorganizations. Total options granted under the 1991 Plan in 1994 were 481,000 at an exercise price of $.80 per share. Of these shares, 60,000 had expired prior to 1999 while the remaining 421,000 shares expired in July 1999. New options representing 421,000 shares were granted in 1999 at an exercise price of $1.085 and vested immediately; these options expire in August 2004. An option for 50,000 shares was granted in 2000 at an exercise price of $1.085 with half of the shares vesting immediately and the remaining half vesting April 24, 2001; these options expire in April 2005. Total options outstanding under the 1991 Plan were 471,000 and 421,000 at December 31, 2000 and 1999, respectively. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-18 Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 2000: risk-free interest rates of 4.20%; dividend yields of 0.0%; volatility factors of the expected market price of the Company's common stock of 3.43; and a weighted-average expected life of the options of 5.48 years. The assumptions for 1999 were the same except for the volatility factor of 1.88 and the weighted average expected life of the options of 6.51 years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: Year ended December 31, 2000 1999 ------------- ------------ Net loss As reported $(11,256,535) $(3,491,526) Pro forma (11,256,535) (3,491,526) Basic and diluted net loss per share As reported (1.39) (.43) Pro forma $ (1.39) $ (.43) A summary of changes in the status of the Company's outstanding stock options for the years ended December 31, 2000 and 1999 is presented below: F-19 2000 1999 ---------------------- ---------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ---------------------- ---------------------- Outstanding at beginning of year 768,975 $1.43 768,975 $1.27 Granted 50,000 1.09 421,000 1.09 Exercised - - - - Forfeited - - - - Expired - - (421,000) 0.80 ---------------------- ---------------------- Outstanding at end of year 818,975 $1.41 768,975 $1.43 ====================== ====================== Exercisable at end of year 793,975 $1.42 768,975 $1.43 ====================== ====================== Weighted average fair value of options granted $0.15 $0.45 ====================== ====================== The following table summarizes information about stock options outstanding at December 31, 2000: Options Outstanding Options Exercisable ---------------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Outstanding Life (Years) Price Exercisable Price ----------- ------------ -------- ----------- -------- Range of exercise prices $1.085-$1.84 818,975 5.48 $1.41 793,975 $1.42 ========== ============ ======= ========== ====== c. PREFERRED STOCK The Company is authorized to issue up to 5,000,000 shares of preferred stock. On October 21, 1992, the Board of Directors authorized the creation of Series A convertible preferred stock with no par value. d. AASP PREFERRED STOCK SERIES A On July 11, 1996 the AASP Board of Directors authorized the creation of 500,000 shares of Series A Convertible Preferred Stock with a $.001 par value. On July 29, 1996, AASP entered into an agreement to sell 500,000 shares of the Series A Convertible Preferred Stock at $10.00 per share for a total of $5,000,000. The agreement also resulted in the assignment of certain rights. All proceeds related to the agreement were received in accordance with its terms in 1996. The preferred stock issued by AASP and accompanying options to purchase 250,000 shares of AASP common stock is included as a component of minority interest in the accompanying consolidated balance sheets. F-20 Each share of the Series A Convertible Preferred Stock is convertible into one share of AASP's common stock. Pursuant to the agreement, AASP also granted the holder an option to purchase up to 250,000 shares of AASP's common stock at $5.00 per share for a period of 5 years from the date of the agreement. The agreement also provides for certain demand and piggyback registration rights with respect to the shares of common stock issuable upon the conversion of the Series A Convertible Preferred Stock and the exercise of the option. As discussed in Note 13 below, in March 2001, AASP acquired all 500,000 shares of Series A convertible preferred stock from the holder and retired the shares. e. AASP SERIES B CONVERTIBLE PREFERRED STOCK On September 22, 1998, the AASP Board of Directors authorized the creation of 250,000 shares of Series B Convertible Preferred Stock with a $.001 par value. On October 19, 1998, AASP issued 250,000 shares of Series B Convertible Preferred Stock to its majority shareholder, SPEN for $2,500,000 in cash. Each share of the Series B Convertible Preferred Stock issued to SPEN is convertible at the option of SPEN into one share of AASP's common stock. In the event of liquidation or dissolution of AASP, each share of Series B Convertible Preferred Stock will have a $10.00 liquidation preference over all other shareholders. In addition, holders of the Series B Convertible Preferred Stock shall be entitled to receive dividends at a rate equal to the rate per share payable to common stock holders, assuming conversion of the Preferred shares. The Preferred shares can be redeemed by AASP upon meeting certain conditions. f. AASP COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS In 1994, AASP completed a public offering of 1,000,000 Units, each Unit consisting of one share of Common Stock and one Class A Common Stock Purchase Warrant. As a result, 1,000,000 shares of Common Stock and 1,000,000 Class A Warrants were issued. Net proceeds from the offering were $3,684,000. Two Class A Warrants entitled the holder to purchase one share of AASP common stock for $6.50, $2 above the initial public offering price. The Class A Warrants expired unexercised March 15, 1999. In connection with the initial public offering, AASP issued to the Representative of the Underwriters, Representative's Warrants to purchase 100,000 shares (10 percent of the units purchased by the underwriters), with an exercise price of $5.40 for a four-year period beginning on December 13, 1995. AASP also issued to the Representative 100,000 Class A Warrants which entitle the Underwriter to purchase 50,000 shares of Common Stock (5 percent of the units purchased by the underwriters), with an exercise price of $7.80 per share exercisable beginning on December 13, 1995. These warrants expired unexercised December 12, 1999. 10. EMPLOYEES' 401(k) PROFIT SHARING PLAN The Company offered all its eligible employees participation in the Employees' 401(k) LVDG Profit Sharing Plan ("the Plan"). The Plan provided for purchases of certain investment vehicles by eligible employees through payroll deductions of up to 15% of base compensation. For 2000 and 1999, the Company F-21 matched 50% of employees' contributions up to a maximum of 6% of an employee's base compensation. The Company had expenses related to the Plan charged to continuing operations of $2,114 and $6,770 for 2000 and 1999, respectively. Effective December 6, 2000, the Company terminated this plan due to lack of employee participation. 11. SUPPLEMENTAL NON-QUALIFIED RETIREMENT PLAN In 1995, the Company entered into a Supplemental Retirement Plan for certain key employees of which the President of the Company and AASP is included. This plan became effective on January 1, 1996. The Company made contributions to the plan charged to continuing operations of $33,247 and $30,250 for 2000 and 1999, respectively. 12. COMMITMENTS AND CONTINGENCIES The Company has employment agreements with its President, as well as other key employees who require the payment of fixed and incentive based compensation. In 1997, AASP entered into an agreement with the Pepsi-Cola Company ("Pepsi") concerning an exclusive sponsorship agreement. Under the agreement, Pepsi receives certain exclusive rights to product display and dispensing of only its products at the discontinued SportPark segment and Callaway Golf Center in exchange for a series of payments beginning when the SportPark opened. In addition, Pepsi was granted the naming rights to the multipurpose arena in the SportPark as the AllSport Arena. In addition, Pepsi provided the equipment needed to dispense its products at the SportPark and Callaway Golf Center. Also, the agreement provides that AASP and Pepsi will participate in joint marketing programs such as promotions on Pepsi's products and local radio advertising as well as Pepsi has the right to provide three marketing events per year. These events are to be used to promote the business of the SportPark and Pepsi. The sponsorship agreement terminates in October 2003, unless earlier terminated as provided in the agreement. In 1997, AASP entered into a lease and concession agreement with Sportservice Corporation ("Sportservice") which provides SportService with the exclusive right to prepare and sell all food, beverages (alcoholic and non-alcoholic), candy and other refreshments throughout the discontinued SportPark segment and the Callaway Golf Center , during the ten year term of the agreement. Sportservice pays rent based on a percentage of gross sales. The agreement also provides Sportservice with a right of first refusal for future parks to be built by AASP in consideration for a fixed payment. The Company is involved in certain litigation as both plaintiff and defendant related to its business activities. Management, based upon consultation with legal counsel, does not believe that the resolution of these matters will have a materially adverse effect upon the Company. 13. SUBSEQUENT EVENT In March 2001, AASP acquired all of its Series A Convertible Preferred Stock from Three Oceans, Inc. ("TOI", an affiliate of Sanyo North America) for $5,000. In connection therewith, TOI's representative on the Board of Directors resigned. Also, all agreements and contractual obligations between AASP and TOI were terminated. F-22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned thereunder duly authorized. SPORTS ENTERTAINMENT ENTERPRISES, INC. Dated: June 26, 2001 By:/s/ Kirk Hartle Kirk Hartle, Chief Financial Officer