UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 000-30444
KAHALA CORP.
(fka Sports Group International, Inc.)
(Exact name of registrant as specified in its charter)
Florida 59-3474394
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7730 E. Greenway Rd., Suite 104
Scottsdale, Arizona 85260
(Address of principal executive offices)
(480) 443-0200
(Registrant's telephone number, including area code)
Check whether issuer (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, $.001 per
value per share, as of May 4, 2001 was 14,654,546 shares.
KAHALA CORP.
Quarter Ended March 31, 2001
Form 10-QSB
INDEX
Page Number
-----------
PART I - FINANCIAL INFORMATION 2
ITEM 1. FINANCIAL STATEMENTS (INCLUDING NOTES) 2-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9-15
PART II - OTHER INFORMATION 15
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16-20
SIGNATURES 21
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT OF INFORMATION FURNISHED
The accompanying financial statements have been prepared in accordance with
Form 10-QSB instructions and applicable items of Regulation S-B, and in the
opinion of management, contain all adjustments (consisting of only normal and
recurring accruals) necessary to present fairly the Company's financial position
as of March 31, 2001 and the Company's results of operations and statement of
cash flows for the three months ended March 31, 2001 and 2000. These results
have been determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the preparation of the
Company's 2000 Annual Report on Form 10-KSB.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying financial
statements be read in conjunction with the financial statements and related
notes thereto incorporated by reference in the Company's 2000 Annual Report on
Form 10-KSB.
2
KAHALA CORP.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2001 (unaudited)
ASSETS
CURRENT ASSETS
Cash $ 22,105
Trade and other accounts receivable, net of allowance 1,070,139
Inventories 148,252
Prepaid expenses and other assets 63,597
Deferred income taxes 19,639
Notes receivable - current portion, net of allowance 569,129
------------
Total current assets 1,892,861
PROPERTY AND EQUIPMENT, net 1,075,184
LEASE DEPOSITS 156,942
NOTES RECEIVABLE - less current portion 2,419,112
GOODWILL, net of accumulated amortization 5,070,879
DEFERRED INCOME TAXES 496,315
------------
TOTAL ASSETS $ 11,111,294
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 226,721
Accrued liabilities 842,671
Line of credit 475,522
Notes payable - current portion 517,879
Acquisition notes payable 178,542
Confirmed bankruptcy liabilities - current portion 586,276
------------
Total current liabilities 2,827,610
NOTES PAYABLE - long-term portion 193,883
ACQUISITION NOTES PAYABLE - long-term portion 176,330
CONFIRMED BANKRUPTCY LIABILITIES - long term portion 589,427
DEFERRED FRANCHISE FEE INCOME 420,000
------------
Total liabilities 4,207,250
------------
STOCKHOLDERS' EQUITY:
Series A preferred stock, $10.00 par value, 575,000 shares
designated, 575,000 issued 5,750,000
Series B preferred stock, $10.00 par value, 650,000 shares
designated, 650,000 issued 6,500,000
Series C preferred stock, $10.00 par value, 160,000 shares
designated, 160,000 issued 1,600,000
Common stock, $.001 par value, 100,000,000 shares authorized,
14,654,546 issued and outstanding 14,655
Paid in capital 5,609,701
Accumulated deficit (12,570,312)
------------
Total stockholders' equity 6,904,044
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,111,294
============
3
KAHALA CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, (unaudited)
2001 2000
------------ ------------
REVENUES:
Net product and store sales $ 686,189 $ 2,156,491
Franchise fees 227,750 67,500
Royalties 794,691 429,733
Rental income 48,398 61,800
------------ ------------
Total revenues 1,757,028 2,715,524
------------ ------------
EXPENSES:
Cost of product sales 275,083 760,794
Personnel expenses 594,077 799,455
Rent 289,661 434,710
Depreciation and amortization 100,633 82,655
General and administrative expenses 337,787 864,872
------------ ------------
Total expenses 1,597,241 2,942,486
------------ ------------
OPERATING (LOSS) INCOME 159,787 (226,962)
------------ ------------
OTHER (INCOME) AND EXPENSES
Loss on Sale of Assets 37,861 --
Interest expense 37,677 66,887
Interest income (25,666) (1,447)
------------ ------------
Total other (income) expense 49,872 65,440
------------ ------------
INCOME BEFORE INCOME TAXES 109,915 (292,402)
INCOME TAX (BENEFIT) PROVISION -- (110,989)
------------ ------------
NET INCOME (LOSS) $ 109,915 $ (181,413)
============ ============
NET (LOSS) PER SHARE:
Basic $ (0.02) $ (0.06)
============ ============
Diluted $ (0.02) $ (0.06)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 13,558,949 8,476,905
============ ============
Diluted 13,558,949 8,476,905
============ ============
4
KAHALA CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, (unaudited)
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 109,915 $(181,413)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 100,633 82,666
Deferred income taxes -- (110,989)
Loss on Sale of Assets 37,861 --
Changes in assets and liabilities:
Trade and other accounts receivable (194,307) (168,620)
Inventories 14,915 4,295
Refund lease deposits -- (2,500)
Prepaids and other current assets (8,733) (50,335)
Other assets -- (12)
Accounts payable 26,918 (7,210)
Accrued liabilities (236,568) (6,513)
Deferred franchise fee income (90,000) 23,928
--------- ---------
Net cash provided by (used in) operating activities (239,366) (416,703)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (138,531) (68,120)
Collections on notes receivable 94,553 72,415
Proceeds from sale of property and equipment 106,507 350,000
--------- ---------
Net cash provided by (used in) investing activities 62,530 354,295
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit 378,522 --
Repayments on line of credit -- (199,555)
Principal repayments on notes payable (222,143) (150,602)
Payments on confirmed bankruptcy liabilities (57,323) (68,450)
--------- ---------
Net cash provided by (used in) financing activities 99,056 (418,607)
--------- ---------
INCREASE (DECREASE) IN CASH (77,780) (481,015)
CASH, BEGINNING OF PERIOD 99,885 644,264
--------- ---------
CASH, END OF PERIOD $ 22,105 $ 163,249
========= =========
5
KAHALA CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS, (continued)
FOR THE THREE MONTHS ENDED MARCH 31, (unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION: 2001 2000
-------- --------
Interest paid $ 35,352 $ 66,887
======== ========
Income taxes paid $ -- $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued as preferred stock dividends $334,250 $289,726
======== ========
Sale of property & equipment under notes receivable $203,176 $610,000
======== ========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements represent the financial
position of Kahala Corp. (the "Company") as of March 31, 2001, including
our results of operations and cash flows for the three months ended March
31, 2001 and 2000. These statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions for Form 10-QSB. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. In the opinion of
management, all adjustments to these unaudited financial statements
necessary for a fair presentation of the results for the interim period
presented have been made. The results for the three months ended March 31,
2001 and 2000 may not necessarily be indicative of the results for the
entire fiscal year. These financial statements should be read in
conjunction with our Form 10-KSB for the year ended December 31, 2000,
including specifically the financial statements and notes to such financial
statements contained therein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our accounting policies, and the methods of applying those policies, which
affect the determination of our financial position, results of operations
or cash flows are summarized below:
CASH: includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less. At times, cash deposits may exceed government insured
limits.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, Surf City
Acquisition Corp. II, Surf City Squeeze, Inc., Surf City Squeeze Franchise
Corp., Kona Coast Provisions, Inc. ("Kona"), Malibu Smoothie Franchise
Corp., Selman Systems, Inc. and its two operating subsidiaries, Frullati
Enterprises, Inc. and Frullati Franchise Systems, Inc., Fru-Cor, Inc.,
Rollerz Franchise Systems, LLC and Tahi Mana, LLC. All significant inter
company accounts and transactions are eliminated.
INVENTORIES: consist primarily of food products, drink mixes, supplements
and supplies. Inventories are recorded at the lower of cost or market on a
first-in, first-out basis.
REVENUE RECOGNITION: Initial franchise fees are deferred until
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied. The Company will occasionally
finance the initial franchise fee by taking a note receivable from the
franchisee. The notes receivable are typically payable by the franchisees
over three to five years.
7
Fees from Area Development Agreements or similar development arrangements
("ADA") are recognized as revenue on a pro rata basis based on the number
of stores opened to-date to total stores to be developed as stipulated in
the ADA. If the total number of stores stipulated in the ADA are not opened
at the expiration of the ADA, the balance of such fees is recognized.
Kona sells mixes, supplements and related supplies to franchisees. Revenue
on such sales is recognized when the product is shipped. Sales from the
corporate-owned stores are recognized at the point of sale.
The Company is entitled to marketing program income (the "Program Income")
from suppliers on the basis of product volume shipped by those suppliers to
franchised and corporate-owned stores. Program Income is recognized when
suppliers have shipped, and stores have received, products for which
Program Income apply.
The Company also receives sublease rental income. The Company is the
primary lessee on certain franchised stores. Rental income is recognized
ratably over the term of the subleases.
INCOME TAXES: The Company provides for income taxes based on the provisions
of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR
INCOME TAXES, which, among other things, requires that recognition of
deferred income taxes be measured by the provisions of enacted tax laws in
effect at the date of the financial statements.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
GOODWILL: is recorded for the difference between the purchase price of the
acquired business and the fair value of the identifiable net assets.
Goodwill is amortized on a straight-line basis over 20 years. The 20-year
period is based on the initial and renewable franchise periods in most
franchise agreements.
3. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the periods ended March 31, 2001 an 2000 consisted of the following:
2001 2000
--------- ---------
Current tax (benefit) provision $ 41,402 $ (63,156)
Deferred tax (benefit) provision (41,402) (47,833)
--------- ---------
Total income tax provision $ -0- $(110,989)
========= =========
8
4. NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. Preferred stock
dividends are subtracted from the net income to determine the amount
available to common shareholders. Preferred stock convertible to 15,766,667
and 14,166,667 common shares and warrants to purchase one million common
shares were not considered in the calculation for diluted earnings per
share for the periods ended March 31, 2001 and 2000, respectively, because
the effect of their inclusion would be anti-dilutive.
2001 2000
------------------------------------- ------------------------------
Income Per Income Per
(Loss) Shares share (Loss) Shares share
------------- ------ ----- ------ ------ -----
Net (Loss) Income $ 109,915 $(181,413)
Preferred stock dividends (334,250) (306,250)
BASIC EARNINGS PER SHARE
Loss available to common
stockholders $(224,335) 13,558,949 $(0.02) $(487,663) 8,476,905 $(0.06)
Effect of dilutive securities N/A N/A
DILUTED EARNINGS PER SHARE $ (0.02) $(0.06)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Certain of the information discussed in this quarterly report, and in
particular in this section entitled "Management's Discussion and Analysis or
Plan of Operation," contain forward-looking statements that involve risks and
uncertainties that might adversely affect the Company's operating results in the
future in a material way. The words "believes," "may," "likely," "expects,"
"anticipates," and similar expressions identify forward-looking statements,
which speak only as of the date the statement was made. Such forward-looking
statements are within the meaning of that term in Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
9
as amended. Such statements may include, but are not limited to, projections of
revenues, including sales of franchises and corporate-owned locations, income or
loss, plans for future operations, and financing needs or plans. Statements in
the Company's Annual Report on Form 10-KSB, including the Notes to the Company's
Consolidated Financial Statements and "Management Discussion and Analysis or
Plan of Operation", describe factors, among others, that could contribute to
such differences. Such factors include, without limitation, the effect of
national and regional economic and market conditions in the U.S. where the
Company franchises and operates store locations, costs of labor and employee
benefits, costs of marketing, the success or failure of marketing efforts, costs
of food and non-food items used in the operation of the Company's stores,
intensity of competition for locations and franchisees as well as customers,
perception of food safety, spending patterns and demographic trends, legal
claims and litigation, the availability of financing for the Company and its
franchisees at reasonable interest rates, and legislation and governmental
regulations affecting the Company's business. Many of these factors are beyond
the Company's control.
GENERAL
The Company was incorporated in the state of Florida in September 1997, as
Secretarial Services of Orlando, Inc. and in March 1999 changed its name to
Sports Group International, Inc. In January, 2001, the Company changed its name
to Kahala Corp. Prior to March 1999, the Company had no significant operations.
The term "Company" refers to Kahala Corp. and its subsidiaries. The Company's
common stock trades over-the-counter on the Electronic Bulletin Board under the
symbol "KAHA". From March, 1999 until January 31, 2001, the Company's common
stock traded on the over-the-counter Electronic Bulletin Board under the symbol
"SPGK."
The Company has developed its business through the following acquisitions:
(i) the Surf City Squeeze concept was acquired by the Company on March 15, 1999
through a reverse merger with Surf City Acquisition Corp. II ("SCAC"), with the
transaction being accounted for as a recapitalization of SCAC, with SCAC as the
acquirer; (ii) the Frullati Cafe and Bakery concept was acquired by the Company
on May 21, 1999 through its acquisition of 100% of Selman Systems, Inc.
("Selman") (the Company also acquired eight individual Frullati Cafe & Bakery
units through its purchase of 100% of Fru-Cor, Inc. ("Fru-Cor") on July 7,
1999); and (iii) the Rollerz concept was acquired during the second quarter of
2000 from a corporation owned and controlled by the Company's President and CEO
(the "Rollerz Transaction"). In addition to the above-mentioned acquisitions,
the Company developed the Tahi Mana concept internally during 2000.
COMPANY OVERVIEW
The Company currently operates and franchises, under the Frullati Cafe and
Bakery, Surf City Squeeze, Rollerz, and Tahi Mana brand names (collectively, the
"Concepts"), juice bars and health food cafes that serve blended fruit drinks,
sandwiches, salads, soups, baked goods, healthy snacks, and nutritional
supplements in shopping malls, airports, medical centers, office buildings and
health clubs throughout the United States, Canada, and select Middle Eastern
10
countries. As of March 31, 2001, the Company, through its subsidiaries, has
approximately 215 total locations of the Concepts, of which 201 are either
franchised or licensed by third parties and 14 are directly owned and operated
by the Company or its subsidiaries. Of the 215 total locations of the Concepts,
112 operate as Surf City Squeeze outlets, 95 operate as Frullati Cafe & Bakery
outlets, and there are four outlets each of Rollerz and Tahi Mana. The Company's
corporate stores operate under the Frullati Cafe and Bakery, Surf City Squeeze,
Rollerz, and Tahi Mana brand names. The Company also sells proprietary smoothie
mixes and other nutrients and supplements to its franchisees and licensees
through its wholly owned subsidiaries.
The stores operating under the Frullati Cafe and Bakery brand name are
located primarily in shopping malls, airports and hospitals in the midwest,
southwest, and southeastern United States. The average Frullati Cafe and Bakery
store derives approximately 60% of its total revenue from blended fruit drinks
and other beverage sales and approximately 40% from the sale of sandwiches,
baked goods, soups, salads and other healthy food items. The stores operating
under the Surf City Squeeze brand name are located in shopping malls and health
clubs primarily in California, Arizona and Canada. The average Surf City store
derives the majority of its revenue from the sale of blended fruit drinks and
other beverages, and nutrients and supplements that are added to the drinks. The
stores operating under the Rollerz brand name are located in office buildings
and shopping malls in Arizona, Texas, and California. The average Rollerz store
derives approximately 75% of its total revenues from gourmet rolled sandwiches,
soups, salads, baked goods, and other healthy snacks and approximately 25% from
the sale of blended fruit drinks and other beverage items. The stores operating
under the Tahi Mana brand name are located in health clubs and an office
building in California, Arizona and Texas. The average Tahi Mana store derives
the majority of its revenue from the sale of blended fruit drinks and other
beverages, nutrients and supplements that are added to the drinks or can be
taken home, and healthy snacks.
The Company derives its revenues primarily from initial franchise and
license fees, ongoing royalty payments, sales from its company-owned stores, and
sales of nutritional and health food products to its franchisees and licensees.
The Company's long-term strategy is to operate primarily as a franchisor, and
through strategic acquisitions and internal growth, to become one of the larger
franchisors of juice bars, healthy food cafes, and other retail food concepts in
the United States and select international markets that include Canada, Europe,
the Middle East, Australia, and certain Pacific Rim countries. The Company also
plans to operate a limited number of company-owned stores in certain key markets
where the stores can be geographically concentrated. Currently, the majority of
the company-owned stores are located in the Dallas-Ft. Worth, Texas and Phoenix,
Arizona metropolitan areas. The Company has not yet identified other areas where
it may wish to operate company-owned stores.
RESULTS OF OPERATIONS
Total operating revenues for the three months ended March 31, 2001,
decreased by $958,496 to $1,757,028 from $2,715,524 during the same period in
2000. This decrease in operating revenues is the result of the Company selling
11
fifteen company-owned Frullati Cafe & Bakery locations during the last eight
months of 2000 to third party franchisees and four additional company-owned
outlets of the Concepts during the three months ending March 31, 2001 to third
party franchisees (collectively, the "Store Sales"). The decline in store
revenues resulting from these Store Sales is partially offset by a corresponding
increase in royalties and franchise fee income from the stores sold and new
franchises sold. Royalties for the three months ended March 31, 2001 include a
non-recurring $300,000 purchase of the Company's future royalties from the
franchisees of its Concepts in the state of Illinois by Rilwala Foods, Inc., an
area representative of the Company whose principals include Haresh Shah, a
current director of the Company.
Cost of product sales decreased to $275,083 for the three months ended
March 31, 2001, compared to $760,794 for the same period in 2000. This decrease
is primarily the result of the Store Sales whereby the Company reduced the
number of its corporate-owned locations of the Concepts by a total of nineteen
units during the period May 1, 2000 to March 31, 2001 as discussed in the
preceding paragraph. However, the gross margin of store and product revenues
decreased to 60% for the three months ended March 31, 2001, compared to 65% for
the three months ended March 31, 2000. This decrease is attributable to the
Company's revenues for the three months ending March 31, 2001 including a
greater proportion of sales from lower margin raw materials and related supplies
sold by its Kona subsidiary to its franchisees and licensees as the number of
its corporate-owned units decreases, and that the remaining corporate-owned
stores are generally poorer performing units of the Concepts.
Personnel costs decreased by $205,378 to $594,077 for the three months
ended March 31, 2001, compared to $799,455 for the same period in 2000. This
decrease in personnel costs is primarily attributable to the reduction in staff
associated with the Store Sales detailed above, partially offset by an increase
in the Company's corporate administrative staff to support the additional
franchisees who purchased the former corporate-owned locations of the Concepts.
Rent expense decreased by $145,049 to $289,661 for the three months ended
March 31, 2001, compared to $434,710 for the same period of 2000. This decrease
in rent expense is primarily the result of the Company selling a total of
nineteen of its corporate-owned locations of the Concepts during the period from
May 1, 2000 through March 31, 2001.
General and administrative expenses decreased by $527,085 to $337,787 for
the three months ended March 31, 2001, compared to $864,872 for the same period
of 2000. This decrease is primarily attributable to a decrease in legal fees
during the first three months of 2001, compared to the same period of 2000 when
the Company was involved in a significant lawsuit with Sports Group
International, Inc., a Delaware corporation, over a failed merger that was
resolved in April, 2000 in favor of the Company.
Total other loss decreased by $15,568 to $49,872 for the three months ended
March 31, 2001, compared to a loss of $65,440 for the same period of 2000. This
decrease in other loss for the three months ended March 31, 2001 is due to the
combination of the following: (i) a $37,861 loss recognized on the sale of four
12
of the Company's corporate-owned locations of the Concepts and the closing of
one location during the first three months of 2001; (ii) a decrease in interest
expense of $29,210 in the three months ended March 31, 2001 compared to the same
period of 2000 resulting from an overall decrease in the Company's outstanding
debt as of March 31, 2001 compared to March 30, 2000; and (iii) an increase in
interest income of $24,219 during the three months ended March 31, 2001 compared
to the same period of 2000 arising from an increase in the Company's outstanding
notes receivables due from third party franchisees generated from the Store
Sales.
The Company's future operating profitability has become more dependent upon
franchise and royalty revenue. Gross revenues will decrease as the transition is
made from corporate-owned locations to franchised locations. However, the
Company will continue to attempt to grow its existing Concepts through the
franchising of new locations and assisting franchisees in increasing volumes at
existing locations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company's liquidity improved slightly versus
December 31, 2000 and substantially improved compared to the first quarter of
2000. The Company's current ratio is 0.67 as of March 31, 2001, 0.58 as of
December 31, 2000, and 0.27 as of March 31, 2000.
The Company anticipates that it will have sufficient liquidity to sustain
its operations over the next 12 months. In late December 1999, the Company
obtained a $1,000,000 credit facility from a national banking institution
comprised of an $800,000 term note (the "Term Note") and a $200,000 revolving
line of credit. During the first quarter of 2001, the Company entered into an
agreement with the same national banking institution to increase the amount of
its revolving line of credit from $200,000 to $500,000. As of March 31, 2001,
the balance outstanding under the Term Note is approximately $494,000 and
approximately $378,000 is outstanding under the revolving line of credit.
The Company does not anticipate the need for significant capital
expenditures in the near future. However, if certain prospective store locations
would be better as company-owned stores rather than franchised locations, the
Company may require significant capital to build-out and open those prospective
stores. The Company did incur $138,531 in capital expenditures during the three
months ended March 31, 2001.
The Company continues to finance the sale of its corporate-owned locations
by taking notes receivable from the buyers. Most of the notes are payable over
three to five years. Notes receivable balances totaled $2,988,000 at March 31,
2001. This practice of taking notes receivable has caused the Company to
carefully manage its cash flows in order to maintain relationships with vendors
and meet payments on its debt obligations. The Company has sold the majority of
its corporate-owned locations and does not anticipate an increase in notes
receivable at levels commensurate with that of the past twelve to eighteen
months.
13
Net cash used in operating activities was approximately $239,366 for the
first three months of 2001, compared to net cash used in operating activities of
$416,703 for the corresponding period of 2000. The primary reasons for this
change is a decrease in accrued liabilities of approximately $236,568 during the
three months ended March 31, 2001 as the Company continues to reduce its overall
level of outstanding obligations; a decrease in deferred franchise fee income of
$90,000 as three franchisees of the Concepts opened their respective locations
during the first quarter of 2001; and the Company not recording any deferred tax
asset during the first quarter of 2001, compared to a $110,989 deferred tax
asset recorded in the first quarter of 2000. The uses of cash detailed above is
partially offset by an increase in net income, depreciation and amortization,
and accounts payable during the first three months of 2001, compared to the
first three months of 2000.
Net cash provided by investing activities was approximately $62,530 for the
first three months of 2001, compared to net cash provided by investing
activities of $354,295 during the comparable period of 2000. The primary reason
for this decrease is proceeds from the sale of property and equipment is only
$106,507 during the first three months of 2001, compared to proceeds of $350,000
during the same period of 2000. This decrease in proceeds during the first
quarter of 2001 is the result of the Company receiving a greater percentage of
the purchase price of the corporate-owned locations of the Concepts sold to
third party franchisees during the first quarter of 2001 in promissory notes and
other deferred arrangements rather than cash. The Company also purchased
$138,531 of property and equipment to construct new Rollerz and Tahi Mana
outlets during the first three months of 2001, compared to $68,120 of such
purchases during the comparable period of 2000.
Net cash provided by financing activities for the first three months of
2001 was approximately $99,056, compared to net cash used in financing
activities of $418,607 during the same period of 2000. The primary reason for
this increase is the Company received $378,522 in net proceeds from borrowing on
its newly expanded $500,000 revolving line of credit discussed above during the
first three months of 2001, compared to net repayments against the outstanding
balance of its line of credit of $199,555 during the same period of 2000.
The Company believes that it can effectively implement its growth plans for
the current fiscal year's operations with the $1,000,000 credit facility,
including the newly increased $500,000 revolving line of credit, discussed
above. Nevertheless, the Company is seeking additional debt or equity financing
from various sources, including investment banks and private investors, to fund
future expansion and for potential future acquisitions.
The Company has never paid cash dividends on its common stock and does not
anticipate a change in this policy in the foreseeable future.
14
FACTORS THAT MAY AFFECT FUTURE RESULTS
Factors that may affect the Company's future results are described in
detail at pages 31-32 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2000. These factors include, without limitation, the effect
of national and regional economic and market conditions in the U.S. where the
Company franchises and operates store locations, costs of labor and employee
benefits, costs of marketing, the success or failure of marketing efforts, costs
of food and non-food items used in the operation of the Company's stores,
intensity of competition for locations and franchisees as well as customers,
perception of food safety, spending patterns and demographic trends, legal
claims and litigation, the availability of financing for the Company and its
franchisees at reasonable interest rates, and legislation and governmental
regulations affecting the Company's business. Many of these factors are beyond
the Company's control. Due to the factors note above and in the Company's Form
10-KSB for the year ended December 31, 2000, the Company's future earnings and
stock price may be subject to significant volatility. Any shortfall in revenues
or earnings from levels expected by the investing public or securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE - The Company is currently only party to routine litigation that is
incidental to its principal business of franchising and operating retail juice
bars and healthy food cafes.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 Order Confirming First Modified Joint Plan of
Reorganization Proposed by the Debtor and the Official
Committee of Unsecured Creditors, incorporated by
reference to the Company's Registration Statement on
Form 10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
2.2 First Modified Joint Plan of Reorganization Proposed by
the Debtor and the Official Committee of Unsecured
Creditors dated May 13, 1997, as amended July 22, 1997,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
2.3 Amended Disclosure Statement accompanying First
Modified Joint Plan of Reorganization Proposed by the
Debtor and the Official Committee of Unsecured
Creditors dated May 13, 1997, as amended July 22, 1997,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
2.4 Share Purchase Agreement between Sports Group
International, Inc. and Surf City Acquisition
Corporation II dated March 15, 1999, incorporated by
reference to the Company's Registration Statement on
Form 10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
2.5 Membership Interest Purchase Agreement between Sports
Group International, Inc. and Apache Peak Capital,
L.LC., dated March 12, 1999, incorporated by reference
to the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on
December 20, 1999, File No. 0-30444.
16
2.6 Share Purchase Agreement between Sports Group
International, Inc., Ziad S. Dalal and Selman Systems,
Inc. dated May 21, 1999, incorporated by reference to
the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on
December 20, 1999, File No. 0-30444.
2.7 Stock Purchase Agreement between Selman Systems, Inc.,
Kenneth L. Musgrave, Ltd., Tony Condor and Larry Pearce
dated May 21, 1999, incorporated by reference to the
Company's Registration Statement on Form 10-SB filed
with the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
3.1 Amended and Restated Articles of Incorporation of
Sports Group International, Inc., incorporated by
reference to the Company's Registration Statement on
Form 10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
3.2 Bylaws of Sports Group International, Inc.,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
4.1 Promissory Note with United Texas Bank, incorporated by
reference to the Company's Registration Statement on
Form 10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
4.2 Bank One Promissory Note, incorporated by reference to
the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on
December 20, 1999, File No. 0-30444.
17
4.3 Promissory Note between SCAC and the Petersen Trust,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
4.4 Consent and Waiver of Terms of Series A Preferred
Stock, incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with the
Securities and Exchange Commission on December 20,
1999, File No. 0-30444.
10.1 Sports Group International, Inc.'s 1999 Stock Option
Plan, incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with the
Securities and Exchange Commission on December 20,
1999, File No. 0-30444.
10.2 Employment Agreement between Mr. Kevin A. Blackwell and
Sports Group International, Inc. dated October 1, 1999,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.3 Employment Agreement between Mr. David A. Guarino and
Sports Group International, Inc. dated October 1, 1999,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.4 Series B Preferred Stock and Warrant Purchase Agreement
between Sports Group International, Inc., Robert E.
Petersen and Margaret Petersen dated May 20, 1999,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.5 Warrant to purchase 1,000,000 shares of the Company's
Common Stock, incorporated by reference to the
Company's Registration Statement on Form 10-SB filed
with the Securities and Exchange Commission on December
20, 1999, File No. 0-30444.
18
10.6 Master Franchise Agreement between Surf City Squeeze
Franchise Corp. and 1238176 Ontario, Inc. dated July 7,
1998, incorporated by reference to the Company's
Registration Statement on Form 10-SB filed with the
Securities and Exchange Commission on December 20,
1999, File No. 0-30444.
10.7 Indemnification Agreement for Kathryn Blackwell,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.8 Indemnification Agreement for Kevin Blackwell,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.9 Indemnification Agreement for David Guarino,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.10 Indemnification Agreement for Robert Corliss,
incorporated by reference to the Company's Registration
Statement on Form 10-SB filed with the Securities and
Exchange Commission on December 20, 1999, File No.
0-30444.
10.11 Indemnification Agreement for Don Plato, incorporated
by reference to the Company's Registration Statement on
Form 10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
10.12 Compromise Settlement and Non-Modification Agreement
between Sports Group International, Inc., Selman
Systems, Inc., and Ziad S. Dalal, dated February 1,
2000, incorporated by reference to the Company's
Amendment No. 1 to its Form 10-SB/A Registration
Statement filed with the Securities and Exchange
Commission on February 16, 2000.
19
10.13 Series C Preferred Stock Agreement between Sports Group
International, Inc. and Rilwala Group, Inc. dated
December 28, 2000, incorporated by reference to Exhibit
10.13 of the Company's 2000 Annual Report on Form
10-KSB filed with the Securities and Exchange
Commission on April 2, 2001, File No. 000-30444.
10.14 Exclusive Master Development Agreement and Investment
Agreement between Sports Group International, Inc. and
Rilwala Group, Inc. dated November 1, 2000,
incorporated by reference to Exhibit 10.14 of the
Company's 2000 Annual Report on Form 10-KSB filed with
the Securities and Exchange Commission on April 2,
2001, File No. 000-30444.
11* Computation of Per Share Earnings - Located in the
March 31, 2001 Statement of Operations and footnote
four to such financial statement filed herewith on page
four and nine, respectively.
21 Subsidiary Information. (See Chart), incorporated by
reference to the Company's Registration Statement on
Form 10-SB filed with the Securities and Exchange
Commission on December 20, 1999, File No. 0-30444.
- ----------
* Filed herewith.
(b) Reports on Form 8-K
NONE
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KAHALA CORP.
(Registrant)
By: /s/ Kevin Blackwell Date: May 9, 2001
---------------------------------
Kevin Blackwell
President, CEO, and Director
By: /s/ David Guarino Date: May 9, 2001
---------------------------------
David Guarino
Vice President, Chief Financial
Officer, and Director (Principal
Financial and Accounting Officer)
21