U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended April 30, 2002
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to __________
Commission File Number 333-58492
FANZ ENTERPRISES, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 35-2123462
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5419 Cayman Drive, Suite 100 Carmel, IN 46033
(Address of Principal Executive Offices)
(317) 815-1128
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------------ ------------
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 12, 2002, 10,000,000 shares of the registrant's common stock were
outstanding.
Transitional Small Business Disclosure Format
Yes No X
------------ ------------
TABLE OF CONTENTS
Page
Item 1. Financial Statements
Balance Sheets as of April 30, 2002 (unaudited) and January 31,
2002 ................................................................................. 1
Statements of loss (unaudited) for the three
months ended April 30, 2002, for the three months ended April 30, 2001
and the period from October 20, 2000
(inception) to April 30, 2002......................................................... 2
Statements of Stockholder's
Equity (unaudited) for the period
from October 20, 2000
(inception) to April 30, 2002......................................................... 3
Statement of Cash Flow (unaudited) for the
three months ended April 30, 2002, three months ended April 30, 2001 and
for the period from October 20, 2000
(inception) to April 30, 2002......................................................... 4
Summary of Significant
Accounting Policies (unaudited)....................................................... 5
Notes to Financial Statements (unaudited)............................................. 9
Item 2. Plan of Operation.................................................................... 13
PART II OTHER INFORMATION
Item 5. Other Information.................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
Exhibit Index........................................................................ 22
PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
April 30, January 31,
2002 2002
------------------- -------------------
(unaudited)
Assets
CURRENT:
Cash $ 117 $ (177)
Advance to parent....................................................... - 2,500
Deferred offering costs................................................. 177,746 177,746
Deposit................................................................. 960 960
------------ ------------
TOTAL CURRENT ASSETS....................................................... 178,823 181,029
------------ ------------
WEBSITE DEVELOPMENT COSTS, net of accumulated amortization
of $1,100 in 2002..................................................... 11,900 13,000
------------ ------------
$ 190,723 $ 194,029
============ ============
Liabilities and Stockholder's Equity
CURRENT:
Accrued Expenses........................................................ $ 43,624 $ 43,624
------------ ------------
TOTAL LIABILITIES.......................................................... 43,624 43,624
------------ ------------
COMMITMENTS
STOCKHOLDER'S EQUITY (DEFICIT)
Preferred stock, $.01 par value - 10,000 shares authorized,
10,000 shares issued and outstanding.................................. 100 100
Common stock, $.01 par value - 20,000,000 shares authorized;
10,000,000 issued and outstanding (Note 4)............................ 100,000 100,000
Additional paid-in capital.............................................. 3,812,519 3,644,559
Accumulated deficit during the development stage........................ (3,765,520) (3,594,254)
------------- -------------
TOTAL STOCKHOLDER'S EQUITY ................................................ 147,099 150,405
------------ ------------
$ 190,723 $ 194,029
============ ============
See accompanying summary of accounting polices and notes to unaudited financial
statements.
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
(UNAUDITED)
Period from
Three months Three months October 20, 2000
ended ended (inception) to
April 30, 2002 April 30, 2001 April 30, 2002
-------------- -------------- --------------
Revenues.................................................... $ - $ - $ -
Selling, general and administrative expenses -
(including non-cash compensation expense of 167,960,
2,064,919 and 2,975,019, respectively) .................. 171,266 2,343,130 3,765,520
-------------- --------------- --------------
Net loss.................................................... $ (171,266) $ (2,343,130) $ (3,765,520)
============== =============== ==============
Basic and diluted loss per common share (Note 4)............ $ (0.02) $ (0.23)
=============== ===============
Basic and diluted weighted average common shares
Outstanding (Note 4)..................................... 10,000,000 10,000,000
============== ===============
See accompanying summary of accounting polices and notes to unaudited financial
statements.
2
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDER'S EQUITY
PERIOD FROM OCTOBER 20, 2000 (INCEPTION) TO APRIL 30, 2002
(UNAUDITED)
Accumulated
Deficit
Common Stock Preferred Stock Additional During the
--------------------------- ---------------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage Total
------------- ------------- -------------- ------------- ------------- ------------------ -------------
BALANCE AT
OCTOBER 20, 2000 - $ - - $ - $ - $ - $ -
Net loss - - - - - (64,975) (64,975)
Issuance of common
Stock 100 1 - - 99 - 100
Capital contribution - - - - 50,000 - 50,000
100,000 for 1 stock
split (Note 4) 9,999,900 99,999 - - (99,999) - -
---------- ---------- --------- -------- ---------- ------------ ----------
BALANCE AT
JANUARY 31, 2001 10,000,000 100,000 - - (49,900) (64,975) (14,875)
Net loss - - - - - (3,529,279) (3,529,279)
Stock option grant - - - - 2,807,059 - 2,807,059
Additional capital
Contribution for
Previously issued
common stock - - - - 50,000 - 50,000
Capital Contribution-
(Conversion of
obligation, Note 5) - - - - 437,500 - 437,500
Issuance of preferred
Stock - - 10,000 100 399,900 - 400,000
---------- ---------- --------- -------- ---------- ------------ ----------
BALANCE AT
JANUARY 31, 2002 10,000,000 $ 100,000 10,000 $ 100 $3,644,559 $(3,594,254) $ 150,405
Net loss - - - - - (171,266) (171,266)
Stock option grant - - - - 167,960 - 167,960
---------- ---------- --------- -------- ---------- ------------ ----------
BALANCE AT
APRIL 30, 2002
(UNAUDITED) 10,000,000 $ 100,000 10,000 $ 100 $3,812,519 $ (3,765,520) $ 147,099
========== ========== ========= ======== ========== ============ ==========
See accompanying summary of accounting polices and notes to unaudited financial
statements.
3
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOW
(UNAUDITED)
Period from
October 20,
Three months Three months 2000
ended ended (inception) to
April 30, 2002 April 30, 2001 April 30, 2002
-------------- -------------- --------------
OPERATING ACTIVITIES
Net loss...................................................... $ (171,266) $ (2,343,130) $ (3,765,520)
Adjustment to reconcile net loss to cash used in
Operating activities:
Non-cash compensation expense............................... 167,960 2,064,919 2,975,019
Amortization expense........................................ 1,100 - 1,100
Other non-cash expense...................................... - - 437,500
Change in current assets and liabilities:
Deposit................................................. - - (960)
Advance to parent....................................... 2,500 (2,500) -
Deferred offering costs................................. - (77,400) (177,745)
Accrued expenses........................................ - 112,083 43,623
------------ ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES 294 (246,028) (486,983)
------------ ------------ -------------
INVESTING ACTIVITY
Web site development costs.................................... - (13,000) (13,000)
------------ ------------ -------------
FINANCING ACTIVITY
Proceeds from the issuance of stock.............................. - 300,000 500,100
------------ ------------ -------------
NET INCREASE IN CASH............................................. 294 40,972 117
CASH, BEGINNING OF PERIOD........................................ (177) 50,100 -
------------ ------------ -------------
CASH, END OF PERIOD.............................................. $ 117 $ 91,072 $ 117
============ ============ =============
See accompanying summary of accounting polices and notes to unaudited financial
statements.
4
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). The
balance sheet as of April 30, 2002; the statements of loss for the three months
ended April 30, 2002 and April 30, 2001 and for the period from October 20, 2000
(inception) to April 30, 2002; the statements of stockholder's equity for the
period from October 20, 2000 (inception) to April 30, 2002 and the statements of
cash flows for the three months ended April 30, 2002 and April 30, 2001 and for
the period from October 20, 2000 (inception) to April 30, 2002, have been
prepared without audit. The balance sheet as of January 31, 2002 has been
audited by independent certified public accountants. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although FanZ Enterprises, Inc.
(the "Company") believes that the disclosures herein are adequate to make the
information presented not misleading. It is suggested that these financial
statements and related notes be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-KSB, for the fiscal year ended January 31, 2002, File No. 333-58492.
In the opinion of the Company, the statements for the unaudited interim periods
presented included all adjustments that were of a normal recurring nature
necessary to present a fair statement of the financial condition and results of
operations for such interim periods. The results of operations for the interim
periods presented are not necessarily indicative of the results of operations
for the entire year.
5
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
FanZ Enterprises, Inc. (a development stage company) is a Delaware corporation
which was formed on October 20, 2000 for the purpose of controlling and managing
a multi-car professional motorsports operation that will participate in NASCAR
sanctioned events. The Company has selected a January 31st year-end. The Company
has two wholly-owned subsidiaries, also development stage companies. Fanz
Racing, Inc. will own and manage the racing operations while Fanz Merchandising,
Inc. will own, manage, market and distribute all of the related merchandise for
the racing operations. As of April 30, 2002, all material intercompany accounts
were eliminated.
The Company is in the development stage and its activities to date have been
limited to organizational activities including developing and implementing its
business plan, hiring personnel, establishing business strategies and
formulating a strategy to raise equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and notes receivable approximate fair value because
of the short-term nature of these items.
REVENUE RECOGNITION
Revenues are expected to be generated from a number of sources including
sponsorships, race purse winnings, race bonus opportunities and merchandise
sales. It is expected that sponsorship revenue will be recognized over the
period of the sponsorship agreement; race purse winnings and bonuses will be
recognized when receipt is assured; and merchandise sales will be recognized
upon shipment, less returns and allowances.
STOCK-BASED COMPENSATION
The Company plans to account for its stock option awards to employees and
directors under the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company plans to adopt the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and disclose the pro
forma amounts of net income (loss) as if the fair value based method of
accounting had been applied.
For options awarded to all others, compensation is recognized for the fair value
of options granted in accordance with SFAS 123 and related interpretations.
6
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of temporary differences between the tax basis of assets and
liabilities. Deferred tax assets of approximately $1,472,000 relating primarily
to net operating losses and non-deductible accruals have been offset by a
valuation reserve since the utilization of this asset cannot be assured.
LOSS PER SHARE
Basic and diluted loss per common share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic
loss per common share is computed by dividing the net loss available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the effects of
potentially dilutive common shares. Diluted net loss per common share gives
effect to all potentially dilutive common shares outstanding during a period.
There were no potentially dilutive common shares outstanding on April 30, 2002,
thus basic and dilutive loss per common share are the same for the periods
presented.
WEB SITE DEVELOPMENT COSTS
During the year ended January 31, 2002, the Company began development of its web
site which will be utilized to promote the Company's racing and merchandising
operations. During 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-2, Accounting for Web Site Development Costs. This EITF specifies how an
entity should account for costs incurred to develop a web site.
Costs incurred in the planning stage, regardless of whether the web site
planning activities specifically relate to software, are expensed as incurred.
Costs incurred in the planning stage include such activities as identification
of the specific goals of the web site, identification of the target audience,
determination of the functionalities, identification of necessary hardware,
identification of necessary web application and conceptualization of graphics
and content, among other things.
Costs incurred in the web site application and infrastructure development stage
and costs incurred to develop graphics are accounted for in accordance with
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use if the web site is expected to
be utilized for internal use. Since this is the Company's intent, the
application of SOP 98-1 is appropriate. This statement, in general, requires the
capitalization of costs of developing software for internal use once the
preliminary project stage is completed and prior to the point at which the
project is substantially complete and ready for its intended use. Fees incurred
for web site hosting, which involves the payment of a specific, periodic fee to
an internet service provider in return for hosting the web site, generally are
expensed over the period of benefit.
Costs incurred during the operating stage including training, administration,
maintenance and other costs to operate an existing web site are expensed as
incurred. However, costs that provide additional functions or features to the
web site are accounted for in accordance with SOP 98-1 which requires that
certain costs relating to such upgrades be capitalized if it is probable that
they will result in added functionality.
7
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with the above policy, the Company has capitalized $13,000 in web
site development costs. The Company is amortizing these costs using the
straight-line method over the estimated useful life of the asset (3 years).
Amortization expense amounted to $1,100 for the three months ended April 30,
2002. There was no amortization expense for the three months ended April 30,
2001.
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.
8
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. This basis of accounting contemplates the
recovery of the Company's assets and the satisfaction of liabilities in the
normal course of business. Since its inception on October 20, 2000, the Company
has been involved in organizational activities. The Company's ultimate ability
to attain profitable operations is dependent upon its obtaining adequate
capitalization to complete its development activities and implementation of its
business plan. The Company filed a registration statement on Form SB-2 (the
"Registration Statement") with the SEC which offers outside investors up to
2,500,000 common shares in a direct participation offering (the "Offering"). The
SEC declared the Registration Statement effective on August 31, 2001. Monies
raised from the Offering will be held in escrow until a minimum of 1,000,000
shares are sold. There can be no assurances as to what the ultimate net proceeds
from the Offering might be. The Offering, by its original terms, expired on May
31, 2002 and the Company filed two amendments to the Registration Statement to
extend the Offering for an additional three months subject to federal and state
approvals. In conjunction with the extension, the Company notified investors of
such election and advised them that they have the choice of (i) leaving their
investment in the escrow account, or (ii) having their investment returned to
them with interest.
As a result of the foregoing, these circumstances raise substantial doubt about
the Company's ability to continue as a going concern. These financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
2. DEFERRED OFFERING COSTS
Deferred offering costs consist of professional, registration and filing fees
incurred through April 30, 2002 that are directly related to the Offering
described more fully in Note 4. If the Offering is successful, these costs will
be offset against the proceeds in stockholders' equity. If the Offering is not
successful, these costs will be expensed in full upon that determination.
3. ACCRUED EXPENSES
Accrued expenses for all periods presented primarily consist of professional
fees.
4. STOCKHOLDER'S EQUITY
ISSUANCE OF COMMON STOCK
On October 20, 2000, the Company issued 100 shares of its $.01 par value stock
to Jackson Roscoe Motorsports, LLC (the "sole stockholder" or the "parent"). The
sole stockholder is controlled by two officers and directors of the Company. As
consideration for the shares issued, the Company received $1 per share. On
December 18, 2000, the Company received additional consideration for these
shares in the amount of $50,000. During the three months ended April 30, 2001,
the Company received another $50,000 capital contribution from its sole
stockholder in the form of a $450,000 note receivable, $50,000 of which related
to this capital contribution and the remainder of which related to issuance of
preferred stock. This portion of the Note was satisfied in cash on February 16,
2001.
The Company increased its authorization of common stock to 20,000,000 shares and
affected a 100,000 to 1 split on May 15, 2001. All share and per share data have
been retroactively adjusted to reflect this split.
9
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
PREFERRED STOCK
During the year ended January 31, 2002, the Company authorized and issued to its
sole stockholder ten thousand (10,000) shares of 10% Cumulative Preferred Stock
(the "Preferred Stock") at $40.00 per share. The par value was $0.01 per share.
The parent, as holder of the shares, is entitled to receive, at the discretion
of the independent Board of Directors, cumulative dividends at the annual rate
of 10% ($4.00 maximum) per share, in priority over any dividends payable upon
any of the Common Stock. As consideration, the Company received a $450,000 note
receivable from the sole stockholder, $400,000 of which served as consideration
for the Preferred Stock while the remainder related to an additional capital
contribution in regards to common stock previously issued. This note was
satisfied in cash in a series of payments beginning on February 16, 2001 and
ending June 14, 2001.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, the holders of Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Company that
are available for distribution, an amount in cash equal to $60 per share
outstanding, plus an amount in cash equal to all accrued but unpaid dividends
thereon to the date fixed for liquidation. If the assets of the Company are not
sufficient for this, then the holders of the Preferred Stock shall share ratably
in the distribution of assets.
The Company may redeem the Preferred Stock, in whole, upon the fourth
anniversary of the completion of a Qualified Public Offering ("public
offering"). However, a small percentage of these shares may be redeemed on a
quarterly basis beginning on the second anniversary of the completion of the
public offering. The redemption price is $60 per share (the "redemption
amount"). A "Qualified Public Offering" in this case is defined as a public
offering registered under the Securities Act of 1933 which ultimately results in
gross proceeds to the Company of at least $10,000,000. The holders of the
Preferred Stock will only be entitled to receive the redemption amount, and not
the amount of any accrued and unpaid dividends.
5. RELATED PARTY TRANSACTION
Effective January 1, 2001, the Company entered into a 12-month agreement for
consulting services with Stillwater Capital Advisors, LLC, a company
wholly-owned by the members of the parent. The amount accrued at July 31, 2001
under this agreement was $437,500 and the Company believed the terms of this
agreement to be at arm's length. This agreement was decreased from $750,000 to
$500,000 in July, 2001 and ultimately was cancelled in its entirety on August
20, 2001. The unpaid accrual as of this date of $437,500 was reversed and
contributed to capital during the three months ending October 31, 2001. See
Notes 4, 6 and 7 for description of additional related party transactions.
6. COMMITMENTS
During the year ended January 31, 2002, the Company entered into a letter of
intent to lease land and property to be used as its principal place of business
for annual rent of approximately $60,000 under a lease term of one year with an
option to renew at the same rate for three consecutive periods of one year each.
The commencement of this lease is contingent upon the Company's closing of the
Offering.
The Company has oral agreements with third party service providers such that if
the Offering is successful, additional fees of $170,000 will be remitted. Of
these additional fees, $120,000 would be due to the Company's legal counsel. It
is possible that additional fees beyond this amount will be negotiated upon the
close of a successful offering, but such fees cannot be estimated at this time.
10
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS
During the year ended January 31, 2002, the Company adopted two stock option
plans: the 2001 Stock Option Plan (the "Plan") and the 2001 Non-Employee
Director Stock Option Plan (the "Non-Employee Plan"). Under the terms of the
Plan, a maximum of 9% of the number of outstanding shares of the Company's
Common Stock, after giving effect to the close of the Offering, may be granted
to its officers, key employees and consultants. Options granted under this Plan
may be (a) Incentive Stock Options, (b) Non-Qualified Stock Options or (c) a
combination of the foregoing. No Incentive Stock Options may be granted to a
person who is not an employee. The option price per share of any stock option
granted under the Plan shall not be less than the fair market value of the
Common Stock at the date of the grant. In the case of an Incentive Stock Option
grant, the option price per share shall not be less than 110% of the fair market
value of the shares at the date of grant should that employee hold more than 10%
of the total combined voting power of all classes of stock of the Company, its
parent or subsidiaries at the grant date. The options shall be exercisable for a
term of not more than five years.
Under the terms of the Non-Employee Plan, options may be granted equal to a
maximum of 1% of the number of outstanding shares of the Company's Common Stock,
after giving effect to the close of the Offering. The option price shall be the
fair market value at the date of grant, and shall be exercisable for a term of
not more than five years.
During the year ended January 31, 2002, the Company granted 500,000 options to a
consultant, expected to become the Company's Chief Financial Officer, at an
exercise price of $3.00 per share of which 250,000 vest on the grant date and
the remaining vest over a four year period commencing on the first anniversary
of the grant date. In accordance with FAS 123 and related interpretations,
compensation expense for the fair value of these options will be recognized over
the period in which these options are earned. The fair value approach for
valuing stock options was determined using the Black-Scholes option pricing
model given the following assumptions: risk free interest rate of 5.53%;
expected option life of 4 years; and no dividend yield or volatility. Assuming a
fair market value of $10 per share (the selling price of shares in the
Offering), the Company, therefore, incurred $167,960 and $2,064,919 of non-cash
compensation expense during the three months ended April 30, 2002 and 2001,
respectively, $2,975,019 for the period from October 20, 2000 (inception) to
April 30, 2002 and is expected to incur approximately $824,900 in future
periods. It is expected that future amounts will be recognized over the
four-year period from the grant date. The fair value approach to the valuation
of these options requires that the unvested shares be "marked to market" at the
end of each reporting period. As such, if the fair value of the options change
in the future, then related current and future non-cash compensation expense
will change accordingly. When and if the consultant becomes an employee, a new
measurement date will be required resulting in a remeasurement of the value of
the unearned options using the intrinsic value method. This grant is separate
and distinct from either of the stock option plans described above.
8. EMPLOYMENT AGREEMENTS
The Company and its parent are committed to an employment agreement and certain
consulting contracts to multiple key individuals. All were executed during the
year ended January 31, 2002 and the employment agreement requires the close of
the Offering to become effective.
11
FANZ ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
9. SEGMENT INFORMATION
The Company plans to adopt SFAS 131, which establishes standards for the way
that public business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The Company expects that it will have two reportable segments: the racing
segment which will operate the race teams and the merchandising segment, when
established, will own, manage, market and distribute related merchandise.
10. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of cash and notes receivable. The Company's cash
is deposited in a high quality FDIC insured financial institution, limiting the
Company's exposure to credit risk. The notes receivable are with the Company's
parent and have been substantially satisfied in due course.
12
ITEM 2. PLAN OF OPERATION
Results of Operations
For the three month period ending April 30, 2002, the Company recorded an
operating loss of $171,266 compared to an operating loss of $2,343,130 for the
three month period ending April 30, 2001. For the period from October 20, 2000
(date of inception) through April 30, 2002, cumulative losses totaled
$3,765,520. These deficits were largely attributable to non-cash charges for
stock options granted of $167,960 and $2,064,919 during the three month periods
ending April 30, 2002 and 2001, respectively, and $2,975,019 from October 20,
2000 (inception). The remainder of the deficits was attributed to start-up
expenses and costs related to the development and implementation of the
Company's business plan. As a result of the options granted, the Company expects
to incur approximately $824,900 of non-cash compensation expenses in future
periods. It is expected that future amounts will be recognized over the four
year period from the grant date. The fair value approach to the valuation of
these options requires that the unvested shares be "marked to market" at the end
of each reporting period. As such, if the fair value of the options changes in
the future, then related current and future non-cash compensation expenses will
change accordingly. These options were issued to a consultant. When and if the
consultant becomes an employee, a new measurement date will be required
resulting in a remeasurement of the value of the unearned options using the
intrinsic value method. The Company did not generate any revenues during this
period. The Company's business plan projects that it will continue to operate at
a loss through the fiscal year ending January 31, 2003. Further, there can be no
assurance that the Company will ever achieve profitability or that a stream of
revenue can be generated and sustained in the future.
For the current fiscal year, the Company anticipates incurring a loss as a
result of organizational expenses, non-cash charges associated with stock
options granted, expenses incurred as a result of establishing the race teams
and expenses associated with setting up the Company's infrastructure to begin
implementing its business plan. The Company anticipates that until these
procedures are completed, it will not generate revenues, and may continue to
operate at a loss thereafter, depending upon the performance of the business.
Capital Expenditures
From January 31, 2001 (the Company's fiscal year end) through April 30, 2002,
the Company expended $13,000 on capital expenditures related to web site
development costs. As part of the business plan, the Company plans on starting
with one Winston Cup team and intends to have two professional motorsports race
teams competing in NASCAR sanctioned events within one year of the closing of
the Offering. A minimum of $4.5 million in capital expenditures will be required
for tools, racing equipment, motors, race cars and other equipment and the
personnel costs to recruit and employ the necessary racing personnel to
effectively establish these teams. These costs will be incurred in the first
three months after the proceeds from the Offering are received. The anticipated
capital expenditure budget may be reduced if the Company is successful in
attracting sponsorship monies for the teams.
Expenditures Related to Facilities
The Company expended no amounts on facilities for the period ended April 30,
2002. The Company's overall strategy in regards to real estate and facilities is
controlled growth with flexibility to expand as its operations develop in order
to address sponsor goals, maintain control over its operations and foster the
sharing of information amongst its organizations.
13
BASE RENT
ENTITY TYPE OF SPACE PER SQ. FT. (USABLE)
- ----------------------------------------------------------------------------------------------------
Racing Industrial; sprinkled w/ loading docks (10-15% office) $3.00-$5.00
Merchandising Warehouse; sprinkled w/ loading docks (10% office) $3.00-$5.00
Management/
Administration Office (combined w/ above or free-standing) $5.00-$20.00
The Company's space requirements will also depend upon the goals of its primary
sponsors. Sponsors often desire to use racing facilities to hold business
meetings, team-building seminars and conferences. Sponsor goals and funding
commitments to provide such facilities will impact the timing of the Company's
decision to construct a new facility.
As a start-up organization, the Company's initial goals are to attempt to lease
space with maximum flexibility until such time that constructing its own
facilities can be strategically and financially justified. This strategy will
allow the Company to commence its racing operations, procure sponsorship and
begin racing. Jackson Roscoe Motorsports, LLC currently has a letter of intent
for a 6,000-square foot racing facility and racing equipment in order to house
the initial start-up phase of its racing operations. The Company's strategy is
to procure additional leased space as teams are formed, with space requirements
ranging from a minimum of 60,000 square feet in the event the Company forms one
to two teams, up to approximately 200,000 square feet in the event the Company
forms five race teams. Likewise, merchandising facilities will be dependent upon
the number of teams that the Company ultimately fields. With limited
merchandising projected in the Company's first year of operation, it is
anticipated that space can be shared or subleased. Merchandising space
requirements are general purpose warehouse/distribution space and are estimated
to range from 5,000 to 50,000 square feet of space depending upon the number of
racing teams the Company's merchandising operations will be servicing. As the
Company procures sponsorships and forms and stabilizes its operations, it will
consider designing and building its own facilities. The assumptions for space
are as follows:
-------------------------------------------------
APPROXIMATE PER TEAM
SPACE REQUIREMENTS
(SQUARE FEET)
-------------------------------------------------
Winston Cup 30,000-40,000
Busch Grand National 20,000-30,000
Craftsman Truck 20,000-25,000
-------------------------------------------------
The Company's ultimate goal is to develop a "campus" or a development of
multiple facilities in close proximity to one another that will house its racing
and merchandising operations, corporate headquarters as well as to house
corporate retreats for the sponsors. The Company envisions that its facilities
will contain, among other things, an observation deck overseeing the shop floor
of its racing operations, a theater area which can be utilized by its racing
teams and for presentations by its sponsors, a dining area that can be utilized
to entertain existing and prospective sponsors and their customers and
employees, a gift shop offering the latest merchandising products and souvenirs,
a company-wide health and fitness facility for the drivers, crew and other
employees, and eventually a racing museum housing the Company's key assets.
14
Capital Resources and Liquidity
On April 30, 2002, the Company had total assets of $190,723 and stockholder's
equity of $147,099, in comparison to total assets of $194,029 and a
stockholder's equity of $150,405 on January 31, 2002. On November 15, 2000, the
Company issued 100 shares of its common stock to Jackson Roscoe Motorsports, LLC
for total consideration of $100. On December 18, 2000, Jackson Roscoe
Motorsports, LLC contributed an additional $50,000 to the capital of the Company
for its shares of common stock. On February 12, 2001, Jackson Roscoe
Motorsports, LLC contributed an additional $50,000 to the capital of the
Company, in the form of a $450,000 Demand Note dated February 12, 2001, for its
shares of common stock. On February 23, 2001, in exchange for $400,000 in
consideration in the form of the remainder of the Demand Note, the Company
issued 10,000 shares of our preferred stock to Jackson Roscoe Motorsports, LLC.
As of June 14, 2001, the entire amount of the Demand Note has been paid in full
in cash.
To develop its business plan, the Company intends to recruit and employ a
variety of racing personnel including drivers, crewmembers, crew chiefs, engine
builders, fabricators, engineers, etc. to operate and manage its racing
operations. The recruiting and hiring of the racing personnel will begin
immediately upon raising the minimum subscription amount of $10,000,000.
Currently the Company has a consulting agreement with Michael J. Wurtsbaugh. In
exchange for the provision of consulting services, Mr. Wurtsbaugh was granted
options to purchase shares of the Company's common stock. This grant, as set
forth earlier, appears as a deficit on our books.
On January 1, 2001, the Company entered into an agreement with Stillwater
Capital Advisors, LLC, a Delaware limited liability company, for consulting
services including, among other things, preparation and development of the
Company's business plan, development of a sophisticated financial model,
identifying key personnel and negotiating with a broker/dealer, accountants and
attorneys. J. Roe Hitchcock, the Company's Chief Executive Officer, Treasurer
and a director of the Company, and Frederick L. McDonald, II, the Company's
President and also a director of the Company, are the sole members of Stillwater
Capital Advisors, LLC. Under the agreement, consulting services were to be
provided to the Company for a period of twelve (12) months at a flat fee of
$500,000 to be paid in one lump sum payment. The $500,000 consulting fee was not
due and payable until the Company had achieved profitability as demonstrated by
an annual audited financial statement reflecting net profit for that fiscal
year. The Company believed that the terms of the consulting agreement were as
favorable to it as those generally available from unaffiliated third parties.
However, in an effort to expedite the registration process with the SEC and
various state security agencies, the Company decided to rescind the agreement
and on August 20, 2001 it entered into a Rescission and Mutual Release Agreement
with Stillwater Capital Advisors, LLC pursuant to which the consulting agreement
was rescinded and the Company is not obligated to pay any portion of the
consulting fee. As a result, the amount accrued as of that date, $437,500, was
reversed and contributed to capital in the third quarter ending October 31,
2001.
FANZ RACING-TEAM START-UP COSTS
The racing operations will require an initial start-up budget of approximately
$3.5 million to form each Winston Cup team and approximately $1.2 million to
form each Busch Series team. The initial start-up budgets reflect costs
estimated to assemble the required personnel and equipment in order to be "race
ready," and be in a position to attempt to qualify for a race. The detail of the
budgets for each respective team is set forth below.
15
ESTIMATED WINSTON CUP START-UP BUDGET (PER TEAM)
EXPENSE CATEGORY AMOUNT
Personnel Payroll (1) $775,000
Motor Program (2) 750,000
Parts (3) 225,000
Facility Rent (Race/Fab Shop) (4) 150,000
10 Winston Cup Cars (5) 1,000,000
NASCAR Fees (6) 35,000
Insurance (7) 50,000
Utilities (8) 50,000
Shop Equipment (9) 250,000
Research & Development (10) 200,000
Miscellaneous (Supplies/Maintenance) (11) 50,000
----------
Total Cash Outlays Start-Up $3,535,000
==========
NOTES
- -----
(1) The Personnel Payroll includes the annual salary and bonus for the Crew
Chief, Car Chief, Shop Foreman, Paint & Body Specialists, Tire Specialist,
Gear & Transmission Specialist and Fabricators.
(2) Motor program expenditures are between $1.1 million and $2.5 million per
annum. This reflects a down payment so that the team can start utilizing
the motors in the testing program at various tracks.
(3) Includes initial Tires & Wheels, Suspension & Brakes, Paint & Decals and
Gears & Transmissions and other components necessary to get the team
started.
(4) Assumes 40,000 sq. ft. facility. This amount will cover up front rental
expenses, some tenant expenses and the first several months of occupancy
expenses.
(5) Generally, a Winston Cup Team has anywhere from 10 - 15 cars at a time.
Assumes 10 cars will allow the team to start testing at various tracks and
racing the full season.
(6) Entry fees for at least 75% of the first year NASCAR season.
(7) Insurance for the first six months.
(8) Utilities for the first six months.
(9) The Shop Equipment that will be purchased will start the operation.
(10) Includes the initial testing at various tracks, Wind Tunnel Testing and
engine and set up development.
(11) Miscellaneous includes the initial supplies and any maintenance that would
be required.
16
ESTIMATED BUSCH SERIES START-UP BUDGET (PER TEAM)
EXPENSE CATEGORY AMOUNT
Personnel Payroll (1) $315,000
Motor Program (2) 225,000
Parts (3) 85,000
Facility Rent (Race/Fab Shop) (4) 65,000
6 Busch Grand National Cars (5) 300,000
NASCAR Fees (6) 20,000
Insurance (7) 25,000
Utilities (8) 25,000
Shop Equipment (9) 60,000
Research & Development (10) 75,000
Miscellaneous (Supplies/Maint) (11) 25,000
------
Total Cash Outlays Start-Up $1,220,000
==========
NOTES
- -----
(1) The Personnel Payroll includes the annual salary and bonus for the Crew
Chief, Paint & Body Specialists, Tire Specialist, Gear & Transmission
Specialist and Fabricators. It should be noted that once the fabrication
department is established for the Winston Cup Team, the fabrication
department can handle the Busch team without additional personnel.
(2) Motor Program expenditures are between $500,000 and $1.0 million per annum.
This reflects a down payment in order that the team can start utilizing the
motor in the testing program at various tracks.
(3) Parts include initial tires & wheels, suspension & brakes, paint & decals
and gears & transmissions and other components necessary to get the team
started.
(4) The space requirement is assumed to be 30,000 sq. ft. This amount will
cover up front rental expenses, some tenant improvements and the first
several months of occupancy expenses.
(5) Generally a Busch Series team has anywhere from 6 - 8 cars at a time.
Assumes 6 cars will allow the team to start testing at various tracks and
racing the full season.
(6) Entry fees for most of the first year NASCAR season with credentials for
the sponsors for the races.
(7) Insurance for the first six months.
(8) Utilities for the first six months.
(9) The Shop Equipment that will be purchased will start the operation. If an
existing team is already completed, this number will go down dramatically
as there will be one Shop for all of the teams.
(10) The Research & Development includes the initial testing at various tracks,
Wind Tunnel Testing and engine and set up development.
(11) Miscellaneous includes the initial supplies and any maintenance that would
be required.
While the Company believes that the minimum proceeds from the Offering, together
with sponsorship funds of at least $2.5 million per team, will be sufficient to
satisfy its cash requirements during the twelve (12) months following the
consummation of the Offering, the foregoing budgets could be scaled back
somewhat by reducing the number of cars purchased per team, among other things,
in the event that only the minimum ($10,000,000) is raised in the Offering and
sponsorship funds are unavailable. Upon closing of the Offering, it is the
Company's intention to start with at least one team competing in the Winston Cup
series for which the Company will seek sponsors to defray the costs of starting
and operating this team. Initially, it may be difficult for the Company to
attract sponsors in light of the fact
17
that it has no racing or merchandising operations. This team could begin racing
on a limited schedule at select venues with or without a primary sponsor as a
means of attracting a sponsor. The Company will phase in additional teams as its
budget and sponsorships will allow with an aggressive campaign for sponsorship
of the 2002 racing season with the intention of having at least two teams racing
in NASCAR sanctioned events within one year of the closing of the Offering.
FANZ FIRST-YEAR EXPENSES
In addition to racing start-up costs, the Company will need to hire corporate
staff to provide centralized human resources, accounting, bookkeeping, travel,
administrative assistance and other general corporate services. The Company
expects to have a Chief Executive Officer, President, Chief Financial Officer,
Director of Finance and a number of assistants ranging from zero in the first
month to three in the twelfth month. The Company's first year expenses include
the start-up of a Winston Cup and Busch Series team (previously presented in the
estimated Winston Cup and Busch Series start-up budgets set forth above) and
overhead expenses in the amounts set forth below:
Employment Expense (1) $2,626,000
Motor Programs 2,872,000
Lease Expense/Depreciation (2) 1,100,000
Parts (3) 1,188,500
Research & Development 265,000
Travel Expenses 1,246,500
NASCAR Fees & Insurance 76,000
Repairs & Maintenance (4) 470,000
Utilities (5) 37,000
Tooling & Supplies 282,000
Miscellaneous 66,000
-----------
$10,229,000
NOTES:
- -----
(1) The Employment Expense is for the entire racing staff of the Busch Series
and Winston Cup teams (at the end of the first year that represents 20
people and two drivers). The driver compensation assumes a share of the
race purse winnings. The race purse winnings assume that we will
participate and qualify in most of the races in each schedule.
(2) Represents the amortization of the capital expenditures. The engines and
cars are assumed to have relatively short valuable lives (2 years) while
the shock dynometers have relatively long lives (15 years). No distinction
is made for whether an item is leased or capitalized.
(3) Parts includes: Tires & Wheels, Gears & Transmissions, and Raw Materials &
Sheet Metal.
(4) Repairs & Maintenance represent the operating expenses related to
maintaining the equipment and the cars and motors.
(5) Utilities includes waste & garbage disposal.
18
MERCHANDISING OPERATIONS (START-UP)
In order to pursue the Company's merchandising operations it will need to hire
management as well as a merchandising, marketing and operations staff. The
Company's merchandising operations will initially be dependent on its race teams
becoming operational and obtaining sponsorship for each of the teams. Upon the
successful launch of its race teams, the Company will need to engage a
merchandising staff to develop and market products supporting its race teams and
related sponsors. This includes product development and sourcing, marketing the
products and race teams through various distribution channels including
trackside promotional merchandise trailers and promotional events such as "Show
Cars," which are replicas of race cars in order to draw fans to a sponsor's
place of business. The Company expects to engage in each of these activities on
a limited basis until it is fully operational at an estimated expense of
approximately $600,000. The Company expects to fully develop its merchandising
operations during the first full racing season.
SUMMARY
The Company believes that the proceeds from the minimum subscription of the
Offering, together with projected cash flows from operations (including
sponsorship monies of $5 million for two teams) will be sufficient to satisfy
contemplated cash requirements for its initial racing and merchandising
operations for at least twelve (12) months from the closing of the Offering. If
it is unable to obtain sponsorship funds, the Company will scale back its
operations so that the proceeds from the Offering are sufficient to satisfy the
Company's cash requirements during the first twelve (12) months of operation. In
the event that plans change, assumptions prove to be inaccurate, or if the
proceeds of the Offering prove to be insufficient to fund operations and fully
implement the Company's business plan, it could be required to seek additional
financing from sources not currently anticipated. The Company has no current
commitments or arrangements with respect to, or immediate sources of, additional
financing and it is not anticipated that any existing stockholders or lenders
will provide any portion of future financing. Additionally, no assurances can be
given that any additional financing, when needed, will be available or available
on acceptable terms. Any inability to obtain additional financing when required
could have a material adverse effect on the Company's operations, including
requiring it to curtail some of its business initiatives.
19
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company has 10,000,000 shares of its common stock issued and outstanding.
All of these shares are owned by one stockholder, Jackson Roscoe Motorsports,
LLC.
The Company has a Registration Statement effective under the Securities Act of
1933, as amended. The Registration Statement went effective shortly before the
events of September 11, 2001. As a result, the Company's sales efforts with
respect to the shares registered were put on hold. The Company has renewed its
sales efforts on the terms specified in the Registration Statement.
All of the proceeds received from the sale of the Company's common stock in the
Offering have been deposited into an Escrow Account with Firstar Bank, N.A.
("Firstar"). Pursuant to the terms of the Escrow Agreement with Firstar, as
amended, all of the proceeds received from the sale of common stock in the
Offering will remain in the Escrow Account until the Company raises a minimum of
$10,000,000 in the Offering. In the event that it fails to raise a minimum of
$10,000,000, all of the proceeds will be returned to the investors with
interest.
The Offering, by its original terms, expired on May 31, 2002 and the Company
filed two amendments to the Registration Statement to extend the Offering for an
additional three months subject to federal and state approvals. In conjunction
with the extension, the Company notified investors of such election and advised
them that they have the choice of (i) leaving their investment in the escrow
account, or (ii) having their investment returned to them with interest.
As discussed in the Post Effective Amendments to the Registration Statement
filed by the Company with the SEC on May 21, 2002, and June 10, 2002, due to the
amount of time required for his current business commitments, Mr. Walter B.
Bowden has informed the Company that he will not be able to serve as a director
of the Company upon completion of the Offering. Mr. Bowden had previously agreed
to be named as a proposed nominee to the Company's Board of Directors upon
completion of the Offering and was named as such in the Company's Prospectus
dated August 31, 2001, and the Company's 10-KSB for the fiscal year ended
January 31, 2002. The Company is currently looking for another nominee to
replace Mr. Bowden and serve as an independent director upon completion of the
Offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits to this report are listed in the Exhibit Index which appears
immediately after the signature page.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended April
30, 2002.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FANZ ENTERPRISES, INC.
Date: June 14, 2002 By: /s/ J. Roe Hitchcock
------------------------------------
J. Roe Hitchcock
Chief Executive Officer (in the capacity
of Chief Financial Officer and Chief
Accounting Officer),
Treasurer and Director
21
EXHIBIT INDEX TO FORM 10-QSB
Exhibit No.
3(i) Restated Certificate of Incorporation of FanZ Enterprises, Inc.
filed with the Secretary of State of the State of Delaware on
February 23, 2001 (1)
3(i)(a) Certificate of Amendment to Restated Certificate of Incorporation of
FanZ Enterprises, Inc. filed with the Secretary of State of the
State of Delaware on June 14, 2001 (2)
3(ii) By-laws of FanZ Enterprises, Inc. adopted on November 15, 2000 (1)
4 Specimen Stock Certificate (1)
- --------------------------------------------------------------------------------
(1) Incorporated by reference from the like numbered exhibit to the Company's
Registration Statement on Form SB-2 filed with the Commission on April 6, 2001.
(2) Incorporated by reference from the like numbered exhibit to the Company's
Registration Statement on Form SB-2/A filed with the Commission on June 18,
2001.
22