UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-2380
SPORTS ARENAS, INC.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
-------- ----------
(State of Incorporation) (I.R.S. Employer I.D. No.)
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 587-1060
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 issuer's only class of common stock
($.01 par value) as of April 30, 2000 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of March 31, 2000 (unaudited)
and June 30, 1999 .......................................... 1-2
Unaudited Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 ................................. 3
Unaudited Statements of Operations for the Nine Months Ended
March 31, 2000 and 1999 ..................................... 4
Unaudited Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 ................................. 5
Notes to Financial Statements ................................. 6-10
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................... 11-15
Item 3.- Quantitative and Qualitative Disclosures about Market Risk.. 15
Part II - Other Information ......................................... 16
Signatures ......................................................... 17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31, June 30,
2000 1999
----------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents ................... $ 195,052 $ 357,906
Current portion of note receivable- affiliate 50,000 50,000
Other receivables ........................... 197,291 116,404
Inventories ................................. 224,810 310,160
Prepaid expenses ............................ 295,401 199,668
----------- -----------
Total current assets ..................... 962,554 1,034,138
----------- -----------
Receivables due after one year:
Note receivable- affiliate, net ............. 73,372 104,829
Less current portion ........................ (50,000) (50,000)
----------- -----------
23,372 54,829
----------- -----------
Property and equipment, at cost:
Land ........................................ 678,000 678,000
Buildings ................................... 2,461,327 2,461,327
Equipment and leasehold and tenant
improvements .............................. 2,251,869 2,137,993
----------- -----------
5,391,196 5,277,320
Less accumulated depreciation and
amortization .......................... (2,187,051) (1,968,191)
----------- -----------
Net property and equipment .............. 3,204,145 3,309,129
----------- -----------
Other assets:
Undeveloped land, at cost ................... 1,458,185 1,582,468
Intangible assets, net ...................... 258,198 294,423
Investments ................................. 604,172 618,853
Other ....................................... 139,300 104,980
----------- -----------
2,459,855 2,600,724
----------- -----------
$ 6,649,926 $ 6,998,820
=========== ===========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31, June 30,
2000 1999
----------- ----------
(Unaudited)
Current liabilities:
Assessment district obligation- in default .. $ 2,761,130 $ 2,565,179
Note payable, short-term .................... 200,000 --
Current portion of long-term debt ........... 1,905,000 289,000
Accounts payable ............................ 674,547 453,203
Accrued payroll and related expenses ........ 240,917 164,877
Accrued property taxes- in default .......... 659,343 582,859
Accrued interest ............................ 25,735 14,395
Other liabilities ........................... 253,140 246,211
----------- -----------
Total current liabilities ................ 6,719,812 4,315,724
----------- -----------
Long-term debt, excluding current portion ...... 2,009,055 3,911,694
----------- -----------
Distributions received in excess of basis
in investment ............................... 14,504,505 12,688,808
----------- -----------
Other liabilities .............................. 112,783 74,602
----------- -----------
Minority interest in consolidated subsidiary ... 1,712,677 1,712,677
----------- -----------
Commitments and contingencies (Note 5)
Shareholders' deficit:
Common stock, $.01 par value, 50,000,000
shares authorized, 27,250,000 shares
issued and outstanding .................... 272,500 272,500
Additional paid-in capital .................. 1,730,049 1,730,049
Accumulated deficit ......................... (18,119,963) (15,415,742)
----------- -----------
(16,117,414) (13,413,193)
Less note receivable from shareholder ....... (2,291,492) (2,291,492)
----------- -----------
Total shareholders' deficit ............... (18,408,906) (15,704,685)
----------- -----------
$ 6,649,926 $ 6,998,820
=========== ===========
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
----------- -----------
Revenues:
Bowling ..................................... $ 793,718 $ 784,665
Rental ...................................... 163,203 139,845
Golf ........................................ 318,987 86,468
Other ....................................... 119,256 30,520
Other-related party ......................... 43,085 53,354
----------- -----------
1,438,249 1,094,852
----------- -----------
Costs and expenses:
Bowling ..................................... 521,409 480,788
Rental ...................................... 62,299 59,583
Golf ........................................ 422,101 299,298
Development ................................. 92,503 30,423
Selling, general, and administrative ........ 989,651 849,591
Depreciation and amortization ............... 96,952 95,990
----------- -----------
2,184,915 1,815,673
----------- -----------
Loss from operations ........................... (746,666) (720,821)
----------- -----------
Other income (charges):
Investment income:
Related party ............................. 9,157 9,417
Other ..................................... 1,954 631
Interest expense:
Development activities ...................... (62,950) (57,749)
Other and amortization of finance costs ... (84,083) (89,229)
Equity in income of investees ............... 45,569 107,537
----------- -----------
(90,353) (29,393)
----------- -----------
Net loss ....................................... $ (837,019) $ (750,214)
=========== ===========
Basic and diluted net loss per common share
(based on 27,250,000 weighted
average common shares outstanding) ........... ($0.03) ($0.03)
======= =======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
----------- -----------
Revenues:
Bowling ..................................... $ 2,043,672 $ 2,111,999
Rental ...................................... 479,593 416,114
Golf ........................................ 600,518 232,242
Other ....................................... 180,003 110,392
Other-related party ......................... 128,419 159,478
----------- -----------
3,432,205 3,030,225
----------- -----------
Costs and expenses:
Bowling ..................................... 1,557,673 1,485,310
Rental ...................................... 186,679 183,047
Golf ........................................ 1,026,914 793,930
Development ................................. 182,816 114,855
Selling, general, and administrative ........ 2,762,324 2,621,867
Depreciation and amortization ............... 288,904 283,170
----------- -----------
6,005,310 5,482,179
----------- -----------
Loss from operations ........................... (2,573,105) (2,451,954)
----------- -----------
Other income (charges):
Investment income:
Related party ............................. 29,130 135,367
Other ..................................... 11,043 20,251
Interest expense:
Development activities .................... (195,951) (180,425)
Other and amortization of finance costs ... (263,568) (256,453)
Loss on sale of undeveloped land ............ (638) --
Equity in income of investees ............... 288,868 332,386
----------- -----------
(131,116) 51,126
----------- -----------
Loss from operations before extraordinary loss . (2,704,221) (2,400,828)
Extraordinary loss from early extinguishment of
investee debt ............................... -- (98,500)
----------- -----------
Net loss ....................................... $(2,704,221) $(2,499,328)
=========== ===========
Basic and diluted net loss per common share
(based on 27,250,000 weighted average
common shares outstanding) from:
Operations before extraordinary loss ... ($ 0.10) ($ 0.09)
Extraordinary loss ..................... -- --
-------- --------
Net loss ............................... ($ 0.10) ($ 0.09)
======== ========
See accompanying notes to consolidated condensed financial statements.
4
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss ..................................... ($2,704,221) ($2,499,328)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs . 6,840 11,337
Depreciation and amortization ............ 288,904 283,170
Equity in income of investees ............ (288,868) (233,886)
Deferred income .......................... 36,000 --
Loss on sale of undeveloped land ......... 638 --
Interest income accrued on note
receivable from shareholder ............. -- (104,286)
Interest accrued on assessment
district obligations .................... 195,951 180,425
Changes in assets and liabilities:
Decrease in receivables .................. (80,887) 70,189
(Increase) decrease in inventories ....... 85,350 (35,877)
(Increase) decrease in prepaid expenses .. (95,733) 93,433
Increase (decrease) in accounts payable .. 221,344 (82,307)
Increase in accrued expenses ............. 170,793 210,093
Other .................................... (15,840) 20,038
----------- -----------
Net cash used by operating activities .. (2,179,729) (2,086,999)
----------- -----------
Cash flows from investing activities:
Decrease in notes receivable ................ 31,457 41,609
Capital expenditures ........................ (130,769) (123,820)
Increase in development costs on
undeveloped land .......................... (66,717) --
Proceeds from sale of undeveloped land ...... 190,362 --
Payments to holder of minority interest ..... -- (50,000)
Contributions to investees .................. (43,319) --
Distributions from investees ................ 2,122,500 1,179,671
----------- -----------
Net cash provided by investing activities 2,103,514 1,047,460
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (210,712) (195,813)
Extinguishment of long-term debt ............ (75,927) --
Proceeds from note payable .................. 750,000 --
Payment of note payable ..................... (550,000) --
Other ....................................... -- (11,155)
----------- -----------
Net cash used by financing activities ... (86,639) (206,968)
----------- -----------
Net decrease in cash and cash equivalents ...... (162,854) (1,246,507)
Cash and cash equivalents, beginning of year ... 357,906 1,416,460
----------- -----------
Cash and cash equivalents, end of year ......... $ 195,052 $ 169,953
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental schedule of non-cash investing and financing activities: In July
1999, the Company discarded fully depreciated equipment with a cost and
accumulated depreciation of $16,893.
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 (Unaudited)
1. The information furnished reflects all adjustments which management
believes are necessary to a fair statement of the Company's financial
position, results of operations and cash flows for the interim periods.
2. Due to the seasonal fluctuations of the bowling and golf shaft
manufacturing operations, the financial results for the interim periods
ended March 31, 2000 and 1999 are not necessarily indicative of operations
for the entire year.
3. Investments:
(a) Investments consist of the following:
March 31, June 30,
2000 1999
----------- -----------
Vail Ranch Limited Partnership
(equity method) $ 566,246 $ 580,927
All Seasons Inns, La Paz (cost basis) 37,926 37,926
----------- -----------
Total $ 604,172 $ 618,853
=========== ===========
Investment in UCV, L.P. classified as
liability- Distributions received
in excess of basis in investment $14,504,505 $12,688,808
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method for the nine months ended
March 31, 2000 and 1999, before the extraordinary loss of $98,500 related
to UCV , L.P. in 1999:
2000 1999
--------- ---------
UCV, L.P. $ 346,868 $ 362,386
Vail Ranch Limited Partnership (58,000) (30,000)
--------- ---------
$ 288,868 $ 332,386
========= =========
The following is a summary of distributions received from investees:
2000 1999
----------- ----------
UCV, L.P. $ 2,122,500 $ 533,500
Vail Ranch Limited Partnership -- 646,171
----------- ----------
$ 2,122,500 $1,179,671
=========== ==========
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated condensed statements of operations based upon the
partnership's fiscal year (March 31). Summarized information from UCV,
L.P.'s (UCV) unaudited statements of income for the nine-month periods
ended December 31, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Revenues ....................... $3,589,000 $3,460,000
Operating and general and
administrative costs ......... 1,262,000 1,142,000
Depreciation ................... 20,000 21,000
Interest expense ............... 1,613,000 1,572,000
Income before extraordinary item 694,000 725,000
Extraordinary loss from early .. -- 197,000
extinguishment of debt
Net income ..................... 694,000 528,000
6
On October 14, 1999, UCV increased the loan amount and modified its
existing long-term loan agreement. The loan amount was increased from
$25,000,000 to $29,450,000 of which the lender is holding back $410,510 for
capital replacements. The interest rate on the original loan amount is
unchanged. The interest rate on the additional loan amount, which is based
on the additional loan amount less the hold back for capital replacements,
is the greater of ten percent or a base rate plus 4.75 percent (10-5/8% at
March 31, 2000). Monthly payments of interest only are due until May 2000,
whereupon a monthly payment of principal and interest is due based on a
25-year amortization period. In addition to the monthly payment, UCV will
pay a quarterly principal payment to be applied to the additional loan
amount equal to fifty percent of UCV's cash flow after debt service and
capital replacement expenditures. The loan is due October 15, 2001 but may
be extended to October 15, 2002 upon payment of a 1/4 percent loan fee and
meeting certain financial criteria. The loan may not be prepaid prior to
January 1, 2001. On maturity, a fee of up to $294,500 may be due under
certain circumstances. The proceeds of the additional loan of $4,039,490,
which is net of the capital replacement hold back, were used to pay loan
costs of approximately $125,000 and make distributions to partners of which
the Company received $1,757,000.
4. Notes payable:
On August 24, 1999 and September 25, 1999 the Company borrowed a total of
$550,000 on an unsecured note payable from its partner in UCV. Payments of
interest only were due monthly at a base rate plus 1 percent (9-1/4%). The
loan was paid on October 14, 1999 from the Company's distribution from UCV.
On March 31, 2000 the Company borrowed $200,000 on an unsecured note payable
from its partner in UCV. The Company borrowed an additional $200,000 in April
2000 and $300,000 in May 2000 pursuant to this loan agreement. Payments of
interest only are due monthly at a base rate plus 1 percent (10-1/2% at March
31, 2000).
5. Contingencies:
(a) RCSA Holdings, Inc. (RCSA), a wholly owned subsidiary of the Company,
owns a 50 percent managing general partnership interest in Old Vail
Partners, a general partnership (OVPGP), which owns 33 acres of
undeveloped land in Temecula, California. On September 23, 1999, the
other partner assigned his partnership interest to Downtown Properties,
Inc., a wholly owned subsidiary of the Company. Once the legal matters
described below are resolved, OVPGP is obligated to assign its interest
in the 33 acres of land to Old Vail Partners, L.P. (OVP). RCSA and OVGP,
Inc., wholly owned subsidiaries of the Company, own a combined 50
percent general and limited partnership interest in OVP. The 33 acres of
land owned by OVPGP are located within a special assessment district of
the County of Riverside, California (the County) which was created to
fund and develop roadways, sewers, and other required infrastructure
improvements in the area necessary for the owners to develop their
properties. Property within the assessment district is collateral for an
allocated portion of the bonded debt that was issued by the assessment
district to fund the improvements. The annual payments (required in
semiannual installments) due related to the bonded debt are
approximately $144,000. The payments continue through the year 2014 and
include interest at approximately 7-3/4 percent. OVPGP has been
delinquent in the payment of property taxes and assessments for the last
seven years. The property is currently subject to default judgments to
the County of Riverside, California totaling approximately $2,338,277
regarding delinquent assessment district payments ($1,678,934) and
property taxes ($659,343).
The County had scheduled the 33 acres for public sale for the defaulted
property taxes on September 27, 1999. OVPGP had unsuccessfully attempted
to negotiate a payment plan with the County subject to the successful
resolution of the zoning problems with the property described below. On
September 23, 1999 OVPGP filed a petition for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court. The
primary claim affected by this action is the County's secured claim for
delinquent taxes and assessment district payments. OVPGP's plan was to
use the relief to continue its efforts to negotiate a settlement of the
zoning issues and restore the economic value of the property. The
bankruptcy proceeding was dismissed on February 15, 2000 based on an
agreement with OVPGP. This allows the County of Riverside to proceed
with a public sale of the property within 45 days after giving notice.
On May 12, 2000, OVPGP received a notice that a public sale will take
place on June 26, 2000 if delinquent property taxes of $640,806 are not
7
paid by June 23, 2000. OVPGP is attempting to raise private equity or
debt to satisfy the County's claims prior to the public sale. OVPGP will
continue its efforts to restore the zoning.
The delinquent principal, interest and penalties ($1,678,934) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,082,196) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at March 31,
2000. In addition, the consolidated balance sheet at March 31, 2000
includes $659,343 of delinquent property taxes and late fees related to
the 33-acre parcel.
In November 1993, the City of Temecula adopted a general development
plan that designated the property owned by OVPGP as suitable for
"professional office" use, which is contrary to its zoning as
"commercial" use. As part of the adoption of its general development
plan, the City of Temecula adopted a provision that, until the zoning is
changed on properties affected by the general plan, the general plan
shall prevail when a use designated by the general plan conflicts with
the existing zoning on the property. The result is that the City of
Temecula has effectively down-zoned OVPGP's property from a "commercial"
to "professional office" use. The property is subject to assessment
district obligations that were allocated in 1989 based on a higher
"commercial" use. Since the assessment district obligations are not
subject to reapportionment as a result of re-zoning, a "professional
office" use is not economically feasible due to the disproportionately
high allocation of assessment district costs. OVPGP has filed suit
against the City of Temecula claiming that, if the effective re-zoning
is valid, the action is a taking and damaging of OVPGP's property
without payment of just compensation. OVPGP is seeking to have the
effective re-zoning invalidated and an unspecified amount of damages.
OVPGP has previously suffered adverse outcomes in other suits filed in
relation to this matter. A stipulation was entered that dismissed this
suit without prejudice and agreed to toll all applicable statute of
limitations while OVPGP and the City of Temecula attempted to informally
resolve this litigation. The outcome of this litigation is uncertain. If
the City of Temecula is successful in its attempt to down-zone the
property, the value of the property may be significantly impaired.
(b) The Company is involved in other various routine litigation and disputes
incident to its business. In the management's opinion, based in part on
the advice of legal counsel, none of these matters will have a material
adverse effect on the Company's financial position.
6. Commitments- On February 19, 2000, Penley Sports signed a ten year
operating lease agreement, which commenced April 1, 2000, for a 38,025
square foot space to relocate its manufacturing operations. The lease
provides for fixed annual minimum rentals in addition to taxes, insurance
and maintenance for each of the years ending June 30 as follows: 2000-
$46,000, 2001- $221,000, 2002- $228,000, 2003- $234,000, 2004- $241,000,
2005- $247,000, thereafter- $1,171,000. Commencing April 1, 2005 the lease
provides for adjustments to the rent based on increases in a consumer price
index, not to exceed six percent. The lease also provides for two options
that each extend the lease for an additional five years. The rent for the
first year of the first option will be based on a five percent increase
over the previous years rent. Subsequent years rent will be adjusted based
on increases in the consumer price index.
7. Reclassifications- Certain reclassifications have been made to the prior
year financial statements to conform to the classifications used in 2000.
8. Business segment information:
The Company operates principally in four business segments: bowling centers,
commercial real estate rental, real estate development, and golf shaft
manufacturing. The golf shaft manufacturing segment commenced in January 1997
when the Company acquired a small golf shaft manufacturer. Other revenues,
which are not part of an identified segment, consist of property management
and development fees (earned from both a property 50 percent owned by the
Company and a property in which the Company has no ownership) and commercial
brokerage.
8
The following is summarized information about the Company's operations by
business segment.
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED MARCH 31, 2000:
- --------------------------------
Revenues ....................... $ 2,043,672 $ 527,593 $ -- $ 600,518 $ 308,422 $ 3,480,205
Depreciation and amortization... 78,561 104,226 -- 69,204 36,913 288,904
Interest expense ............... 107,181 125,020 196,972 10,979 19,367 459,519
Equity in income (loss) of
investees .................... -- 346,868 (58,000) -- -- 288,868
Loss on sale ................... -- -- (638) -- -- (638)
Segment profit (loss) .......... (350,208) 436,536 (455,426) (2,078,018) (297,278) (2,744,394)
Investment income .............. 40,173
Loss from operations
before extraordinary loss ..... (2,704,221)
NINE MONTHS ENDED MARCH 31, 1999:
- --------------------------------
Revenues ....................... $ 2,111,999 $ 462,173 $ -- $ 232,242 $ 269,870 $ 3,076,284
Depreciation and .amortization.. 80,177 99,674 -- 64,037 39,282 283,170
Interest expense ............... 111,795 98,880 185,655 17,296 23,252 436,878
Equity in income (loss) of
investees...................... -- 362,386 (30,000) -- -- 332,386
Segment profit (loss) .......... (203,627) 426,958 (330,510) (2,122,464) (326,803) (2,556,446)
Investment income .............. 155,618
Loss from operations
before extraordinary loss ..... (2,400,828)
1999 1998
----------- -----------
Revenues per segment schedule .. $3,480,205 $3,076,284
Intercompany rent eliminated ... (48,000) (46,059)
----------- -----------
Consolidated revenues $3,432,205 $3,030,225
=========== ===========
THREE MONTHS ENDED MARCH 31, 2000:
- --------------------------------
Revenues ....................... $ 793,718 $ 179,403 $ -- $ 318,987 $ 162,341 $ 1,454,449
Depreciation and amortization... 25,928 35,126 -- 23,634 12,264 96,952
Interest expense ............... 35,045 41,592 62,950 3,073 4,373 147,033
Equity in income (loss) of
investees ..................... -- 78,569 (33,000) -- -- 45,569
Segment profit (loss) .......... (2,892) 111,955 (193,453) (739,806) (23,934) (848,130)
Investment income .............. 11,111
Loss from operations
before extraordinary loss ..... (837,019)
THREE MONTHS ENDED MARCH 31, 1999:
- --------------------------------
Revenues ....................... $ 784,665 $ 155,397 $ -- $ 86 468 $ 83,874 $ 1,110,404
Depreciation and amortization... 27,062 34,087 -- 21,666 13,175 95,990
Interest expense ............... 42,171 32,862 59,529 5,181 7,235 146,978
Equity in income (loss) of
investees ..................... -- 117,537 (10,000) -- -- 107,537
Segment profit (loss) .......... 33,126 141,402 (99,952) (735,055) (99,783) (760,262)
Investment income .............. 10,048
Loss from operations
before extraordinary loss ..... (750,214)
2000 1999
----------- -----------
Revenues per segment schedule .. $1,454,449 $1,110,404
Intercompany rent eliminated ... (16,200) (15,552)
----------- -----------
Consolidated revenues .......... $1,438,249 $1,094,852
=========== ===========
9
9. Liquidity
The accompanying consolidated condensed financial statements have been
prepared assuming the Company will continue as a going concern. The Company
has suffered recurring losses from operations, has a working capital
deficiency, and is forecasting negative cash flows for the next twelve
months. These items raise substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a going
concern is dependent on either refinancing or selling certain real estate
assets or increases in the sales volume and profitability of its subsidiary,
Penley Sports. The consolidated condensed financial statements do not contain
adjustments, if any, including diminished recovery of asset carrying amounts,
that could arise from forced dispositions and other insolvency costs.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
Liquidity and Capital Resources
-------------------------------
Excluding the balance of the assessment-district-obligation-in-default and
property taxes in default related to the same property which are included in
current liabilities, the Company has a working capital deficit of $2,336,785 at
March 31, 2000, which is a $2,203,237 increase from the similarly calculated
working capital deficit of $133,548 at June 30, 1999. The decrease in working
capital is primarily attributable to an increase in the current portion of
long-term debt related to a $1,725,999 note payable that matures in August 2000.
Cash used by operating activities for the nine months ended March 31, 2000 also
reduced working capital, however this was partially offset by distributions
received from investees. The following is a schedule of the cash provided (used)
before changes in assets and liabilities, segregated by business segments:
2000 1999 Change
---------- ---------- ----------
Bowling ................. $ (270,000) $ (121,000) $ (149,000)
Rental .................. 199,000 169,000 30,000
Golf .................... (2,009,000) (2,058,000) 49,000
Development ............. (201,000) (120,000) (81,000)
General corporate expense
and other ............. (184,000) (232,000) 48,000
---------- ---------- ----------
Cash used by continuing
operations ............ (2,465,000) (2,362,000) (103,000)
Capital expenditures, net
of financing ......... (131,000) (124,000) (7,000)
Principal payments on
long-term debt ........ (211,000) (196,000) (15,000)
---------- ---------- ----------
Cash used ............... (2,807,000) (2,682,000) (125,000)
========== ========== ==========
Distributions received
from investees ......... 2,122,000 1,180,000 942,000
========== ========== ==========
The Company has been unable to generate sufficient cash flow from operating
activities to meet scheduled principal payments on long-term debt and capital
replacement needs during the last three years. It has used its share of
distributions from investees and proceeds from refinancings and sales of assets
to fund these deficits.
As described in Note 5 of the Notes to Consolidated Financial Statements, OVPGP
is delinquent in the payment of special assessment district obligations and
property taxes on 33 acres of undeveloped land. The annual obligation for the
assessment district is approximately $144,000. The County of Riverside obtained
judgments for the default in the delinquent assessment district payments. The
amounts due to cure the judgment for the default under the assessment district
obligation on the 33 acre parcel at March 31, 2000 was approximately $1,679,000.
The principal balance of the allocated portion of the bonds ($1,384,153 as of
March 31, 2000), and delinquent interest and penalties ($1,376,977 as of March
31, 2000) are classified as "Assessment district obligation- in default" in the
consolidated balance sheet. In addition, accrued property taxes in the
consolidated balance sheet include $659,343 of delinquent property taxes and
late fees as of March 31, 2000. The Company estimates the value of this land is
approximately $4,000,000 to $5,000,000 if the property was zoned "commercial".
This value is in addition to the non-delinquent portion of the assessment
district obligation ($1,082,196 at March 31, 2000) that a buyer would assume.
However, the City of Temecula has adopted a general development plan as a means
of down-zoning the property to a lower use and, if successful, may significantly
impair the value of the property. The Company is contesting this action. The
County had scheduled the 33 acres for public sale for the defaulted property
taxes on September 27, 1999. OVPGP had unsuccessfully attempted to negotiate a
payment plan with the County subject to the successful resolution of the zoning
problems with the property. On September 23, 1999 OVPGP filed a petition for
relief under Chapter 11 of the federal bankruptcy laws in the United States
Bankruptcy Court. The primary claim affected by this action is the County's
secured claim for delinquent taxes and assessment district payments. OVPGP's
plan was to use the relief to continue its efforts to negotiate a settlement of
the zoning issues and restore the economic value of the property. The bankruptcy
proceeding was dismissed on February 15, 2000 based on an agreement with OVPGP.
This allows the County of Riverside to proceed with a public sale of the
property within 45 days after giving notice. On May 12, 2000, OVPGP received a
notice that a public sale will take place on June 26, 2000 if delinquent
11
property taxes of $640,806 are not paid by June 23, 2000. OVPGP is attempting to
raise private equity or debt to satisfy the County's claims prior to the public
sale. OVPGP will continue its efforts to restore the zoning. As a result of the
judgment and the down-zoning of the property, the recoverability of the
remaining $1,458,185 carrying value of this property is uncertain.
As described in Note 3 of the Notes to Consolidated Financial Statements, on
October 14, 1999, UCV borrowed additional funds from its existing lender
pursuant to a modification of its long-term note payable. The proceeds of the
additional financing, after loan costs, were used to make approximately
$3,700,000 of distributions to the partners in UCV, of which the Company
received $1,757,000, and establish working capital for UCV's additional
redevelopment planning costs. Management estimates that the debt service
(principal and interest) for UCV's additional borrowing will be approximately
$800,000 annually.
A $1,725,999 note payable collateralized by the real property underlying one of
the bowling centers matures in August 2000 and the lender has notified the
Company that it will not extend the due date. The Company is uncertain whether
it will be successful in obtaining financing to refinance the property. The
Company is currently evaluating alternatives, including selling the property for
the purpose of paying the note payable. The carrying value of the property at
March 31, 2000 was approximately $1,566,000.
Excluding the amounts due for the delinquent property taxes ($641,000) on the
undeveloped land in Temecula, and the estimated costs to construct tenant
improvements and purchase additional equipment at the new factory for Penley
Sports ($350,000 to $450,000), management estimates negative cash flow of
$200,000 to $400,000 for the remaining quarter of the year ending June 30, 2000
from operating activities after adding the proceeds of additional advances from
short term borrowings in April and May 2000 and deducting normal capital
expenditures and principal payments on notes payable. Management expects
continuing cash flow deficits until Penley Sports develops sufficient sales
volume to become profitable. However, there can be no assurances that Penley
Sports will ever achieve profitable operations. Management is currently
evaluating other sources of working capital from private equity or loans, the
sale of undeveloped land in Temecula, the sale of its office building, or
obtaining additional investors in Penley Sports to provide sufficient funds for
the expected future cash flow deficits. If the Company is not successful in
obtaining other sources of working capital this could have a material adverse
effect on the Company's ability to continue as a going concern.
"SAFEHARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
---------------------------------------------------
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements are
based on management's expectations as of the date hereof, and the Company does
not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in the Company's filings with the
Securities and Exchange Commission.
12
RESULTS OF OPERATIONS
---------------------
The following is a summary of the changes in the results of operations of the
nine and three-month periods ended March 31, 2000 to the same period in 1999 and
a discussion of the significant changes:
Nine months ended March 31, 2000 versus 1999:
- -----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $ (68,327) $ 65,420 $ -- $ 368,276 $ 38,552 $ 403,921
Costs .......................... 72,363 3,632 67,961 232,984 -- 376,940
SG&A-direct .................... 3,269 -- -- 76,996 62,133 142,398
SG&A-allocated ................. 8,852 6,000 17,000 15,000 (46,852) --
Depreciation and amortization .. (1,616) 4,552 -- 5,167 (2,369) 5,734
Interest expense ............... (4,614) 26,140 11,317 (6,317) (3,885) 22,641
Equity in investees ............ -- (15,518) (28,000) -- -- (43,518)
Loss on sale ................... -- -- (638) -- -- (638)
Segment profit (loss) .......... (146,581) 9,578 (124,916) 44,446 29,525 (187,948)
Investment income .............. (115,445)
Loss from operations before
extraordinary loss .......... (303,393)
Three months ended March 31, 2000 versus 1999:
- -----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $ 9,053 $ 24,006 -- $ 232,519 $ 78,467 $ 344,045
Costs .......................... 40,621 2,716 62,080 122,803 -- 228,220
SG&A-direct .................... 11,568 -- -- 115,607 13,533 140,708
SG&A-allocated ................. 1,142 2,000 5,000 (1,000) (7,142) --
Depreciation and amortization .. (1,134) 1,039 -- 1,968 (911) 962
Interest expense ............... (7,126) 8,730 3,421 (2,108) (2,862) 55
Equity in investees ............ -- (38,968) (23,000) -- -- (61,968)
Segment profit (loss) .......... (36,018) (29,447) (93,501) (4,751) 75,849 (87,868)
Investment income .............. 1,063
Loss from operations before
extraordinary loss .......... (86,805)
Note: The change in rental revenues and SG&A expenses do not include the
effect of the net change in elimination of intercompany rent of $1,941 and
$648 for the nine and three month periods respectively.
BOWLING OPERATIONS:
- -------------------
Bowling revenues decreased by 3% in the nine month period and increased 1% in
the three month period. The number of league games bowled continued to decrease
at each of the bowling centers by approximately 20% for each of the periods.
This decrease is being partially offset by an increase in open-play games
bowled. In the three month period ended March 31, 2000 the increase in open play
and food and beverage income at one of the bowling centers exceeded the decrease
of revenue from league play. This bowling center is located in a shopping center
that just completed a major renovation and "reopened" with two major retail
stores. As a result, the bowling center has experienced a significant increase
in open play since the "reopening". Although management forecasts continued
increases in open play at the bowling center, the amount of the increase and how
long it will continue is uncertain.
13
Bowl costs increased by 5% and 8% in the nine and three month periods,
respectively, primarily due to due to increases in supplies and maintenance
expenses. Most of the increase in maintenance expenses related to lane
resurfacing or painting the exterior of a building, which are not indicative of
a trend of increases in expenses to be annualized. Direct selling, general and
administrative expense increased by 8% in the three month period primarily due
to increased advertising expense related to one of the bowling centers
participating in a joint cable television advertising program. There was no
significant change in this category of expense for the nine month period.
RENTAL OPERATIONS:
- ------------------
Rental revenues increased approximately 15% and 17% in the nine and three month
periods, respectively, primarily due to a 14% increase in the average rental
rate at the Company's office building. Interest expense increased due to a
refinancing in May 1999 which increased long-term debt associated with the
rental segment by approximately $827,000.
The equity in income of UCV decreased in the three and nine month periods
primarily due to an increase in UCV's interest expense ($41,000 and $126,000 in
the nine and three month periods, respectively). The increase related to the
$4,039,490 additional advance UCV borrowed from its lender on October 14, 1999.
The increased interest expense from that date to December 31, 1999 was partially
offset by the decreased interest expense from April 1, 1999 to October 14, 1999
because of a decrease in the interest rate from a prior financing in May 1998.
Otherwise, UCV's rents increased by 4% and 6% in the nine and three month
periods, respectively and expenses increased 10% and 4% in the nine and three
month periods, respectively. The increase in expenses related primarily to
increases in water and maintenance expenses. Management believes the increases
in revenues and expenses are indicative of a trend for the remainder of the
fiscal year.
REAL ESTATE DEVELOPMENT OPERATIONS:
- -----------------------------------
Development costs and expenses primarily consists of legal costs incurred to
contest the City of Temecula's attempts to down-zone the undeveloped land owned
by OVPGP. Interest expense related to development activities primarily relates
to interest accrued on the past due and current assessment district obligations
of OVPGP.
GOLF OPERATIONS:
- ----------------
Sales during the periods ended March 31, 2000 and 1999 were small because Penley
has not yet developed significant sales with golf club manufacturers or
distributors. The sales were principally to custom golf shops during the first
two quarters of the year. During the third quarter ended March 31, 2000, Penley
commenced sales to two of the largest golf component distributors. Most of the
increase in sales in the three month and nine month periods ended March 31, 2000
related to sales to these distributors.
Operating expenses of the golf segment consisted of the following in 2000 and
1999:
Three Months Nine Months
------------------- -------------------
2000 1999 2000 1999
-------- -------- --------- --------
Costs of goods sold and
manufacturing overhead $367,000 $234,000 $ 841,000 $ 633,000
Research & development ... 55,000 65,000 186,000 161,000
-------- -------- --------- ---------
Total golf costs .... 422,000 299,000 1,027,000 794,000
======== ======== ========= =========
Marketing & promotion .... 493,000 404,000 1,245,000 1,173,000
Administrative-direct .... 53,000 26,000 115,000 110,000
-------- -------- --------- ---------
Total SG&A-direct ... 546,000 430,000 1,360,000 1,283,000
======== ======== ========= =========
Allocated corporate costs 64,000 65,000 211,000 196,000
======== ======== ========= =========
Total golf costs increased primarily due to an increase in the amount of cost of
goods sold related to increased sales, an increase in the cost of prototype
shafts developed during the periods, and an increase in the payroll for research
and development. Marketing and promotion expenses increased during the three and
nine month periods ended March 31, 2000 primarily due increases in player
sponsorship costs and promotional goods.
14
UNALLOCATED AND OTHER:
- ----------------------
Other revenues decreased in the nine and three month periods primarily due to an
increase in leasing commission income. The increase in leasing commission income
is not indicative of a trend for the year.
Selling, general and administrative expense increased in the nine and three
month periods because of increased payroll costs in 2000. This increase in the
corporate segment expenses resulted in an increase in the costs allocated to the
business segments.
Investment income decreased in the nine month period ended March 31, 2000
primarily due to discontinuing the accrual of interest income on the note
receivable from shareholder effective December 31, 1998 (decrease of $104,000).
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company utilizes both fixed rate and variable rate debt. The
following table presents principal maturities and related weighted average
interest rates of the Company's fixed rate and variable rate debt for the fiscal
years ended June 30.
2000 2001 2002 2003 2004 Thereafter Total
--------- ----------- -------- -------- -------- ----------- -----------
Fixed rate debt .. $ 54,000 $ 1,796,000 $ 39,000 $ 21,000 $ 22,000 $ 1,879,000 $ 3,811,000
Weighted average
interest rate . 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Variable rate debt $ 219,000 $ 78,000 $ 6,000 -- -- -- $ 303,000
Weighted average
interest rate . 11.1% 11.8% 11.8% -- -- -- 11.8%
The amounts for 2000 relate to the three months ending June 30, 2000.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
approximately $29,040,000 after the additional advances under the loan agreement
on October 14, 1999 for which the weighted average interest rate was 7.2
percent. The principal maturities for each of UCV's fiscal years ending March 31
is: 2000- $230,000; 2001- $609,000; 2002- $28,201,000; and $29,040,000 in total.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
15
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 2000, there were no changes in legal proceedings from
those set forth in Item 3 of the Form 10-K filed for the year ended June
30, 1999.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults upon Senior Securities
N/A
ITEM 4. Submission of Matters to a Vote of Security Holder
On December 23, 1999 the Company held its annual shareholder meeting in
which the following item was voted upon:
Tabulation of Votes
--------------------------------
Election of Directors: For Against Abstain
---------------------- ---------- ------- -------
Harold S. Elkan 24,118,926 0 13,849
Steven R. Whitman 24,122,231 0 10,544
Patrick D. Reiley 24,122,706 0 10,069
James E. Crowley 24,122,756 0 10,019
Robert A. MacNamara 24,122,781 0 9,994
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits: Financial Date Schedule
(b) Reports on Form 8-K: NONE
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORTS ARENAS, INC.
By: /s/ Harold S. Elkan
----------------------
Harold S. Elkan, President and Director
Date: May 19, 2000
---------------
By:/s/ Steven R. Whitman
---------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 19, 2000
------------
17