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, 1997
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 (619) 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 May 31, 1997 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1997
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of March 31, 1997 and June 30, 1996 1-2
Statements of Operations for the Three Months Ended
March 31, 1997 and 1996 3
Statements of Operations for the Nine Months Ended
March 31, 1997 and 1996 4
Statements of Cash Flows for the Nine Months Ended
March 31, 1997 and 1996 5-6
Notes to Financial Statements 7-10
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Part II - Other Information 15
Signature 16
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31, June 30,
1997 1996
------------ ------------
(Unaudited)
Current assets:
Cash and equivalents ............................................. $ 1,930,952 $ 1,093,465
Current portion of notes receivable .............................. 25,000 25,000
Current portion of notes receivable-affiliate .................... 100,000 100,000
Construction contract receivables ................................ 618,153 623,877
Other receivables ................................................ 38,139 134,843
Inventories ...................................................... 121,169 --
Prepaid expenses ................................................. 173,504 182,823
Property and equipment sold on August 7, 1996 .................... -- 2,745,978
------------ ------------
Total current assets ........................................... 3,006,917 4,905,986
------------ ------------
Receivables due after one year:
Note receivable .................................................. 728,838 731,993
Less deferred gain ............................................. (716,025) (716,025)
Affiliate ........................................................ 504,740 552,567
Other ............................................................ 97,445 81,696
------------ ------------
614,998 650,231
Less current portion ........................................... (125,000) (125,000)
------------ ------------
489,998 525,231
------------ ------------
Property and equipment, at cost:
Land ............................................................. 678,000 678,000
Buildings ........................................................ 2,461,327 2,461,327
Equipment and leasehold and tenant improvements .................. 1,380,334 1,234,170
------------ ------------
4,519,661 4,373,497
Less accumulated depreciation and amortization ................... (1,266,427) (1,175,332)
------------ ------------
Net property and equipment ..................................... 3,253,234 3,198,165
------------ ------------
Other assets:
Undeveloped land, at cost ........................................ 4,074,643 4,737,353
Capitalized carrying costs on leased land ........................ 84,147 85,569
Goodwill, net .................................................... 336,337 538,144
Deferred loan costs, net ......................................... 76,199 97,161
Investments ...................................................... 2,142,629 2,232,119
Other ............................................................ 341,666 125,353
------------ ------------
7,055,621 7,815,699
------------ ------------
$ 13,805,770 $ 16,445,081
============ ============
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
March 31, June 30,
1997 1996
------------ ------------
(Unaudited)
Current liabilities:
Long-term debt subject to extinguishment ........................ $ -- $ 1,808,282
Assessment district obligation - in default ..................... 2,044,343 2,061,090
Long-term debt due within one year .............................. 912,000 1,061,000
Long-term debt due within one year - related party .............. -- 100,000
Note payable- short term ........................................ 250,000 --
Accounts payable ................................................ 1,053,769 908,530
Accrued payroll and related expenses ............................ 48,639 308,619
Accrued property taxes .......................................... 405,125 385,591
Accrued interest ................................................ 53,490 33,794
Accrued frequent bowler program expense ......................... 199,836 250,506
League bowler prize funds ....................................... 174,644 113,458
Other accrued liabilities ....................................... 98,310 183,903
------------ ------------
Total current liabilities ..................................... 5,240,156 7,214,773
------------ ------------
Long-term debt, excluding current portion .......................... 3,771,880 4,167,515
------------ ------------
Long-term debt, related party ...................................... -- 219,744
------------ ------------
Distributions received in excess of basis in
investment ....................................................... 10,051,685 9,828,360
------------ ------------
Tenant security deposits ........................................... 27,703 25,894
------------ ------------
Minority interests in consolidated subsidiaries .................... 2,212,677 2,212,677
------------ ------------
Commitments and contingencies
Shareholders' equity (deficiency):
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 ............................................. (7,581,744) (7,448,409)
------------ ------------
(5,579,195) (5,445,860)
Less note receivable from shareholder ........................... (1,919,136) (1,778,022)
------------ ------------
Total shareholders' equity (deficiency) ....................... (7,498,331) (7,223,882)
------------ ------------
$ 13,805,770 $ 16,445,081
============ ============
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
Revenues:
Bowling ..................................................... $ 761,338 $ 2,226,787
Rental ...................................................... 130,408 120,537
Construction ................................................ 240,212 294,811
Golf ........................................................ 22,425 --
Other ....................................................... 32,786 19,597
Other-related party ......................................... 28,005 27,051
----------- -----------
1,215,174 2,688,783
----------- -----------
Costs and expenses:
Bowling ..................................................... 457,751 1,229,911
Rental ...................................................... 57,272 69,005
Construction ................................................ 205,858 285,276
Golf ........................................................ 45,609 --
Development ................................................. 53,546 44,676
Selling, general and administrative ......................... 476,095 684,649
Depreciation and amortization ............................... 162,525 259,130
----------- -----------
1,458,656 2,572,647
----------- -----------
Income (loss) from operations .................................. (243,482) 116,136
----------- -----------
Other income (charges):
Investment income:
Related party ............................................. 59,560 56,557
Other ..................................................... 43,862 17,276
Interest expense and amortization of
finance costs ............................................. (111,728) (201,682)
Interest expense related to development
activities ................................................ (55,033) (54,551)
Gain (loss) on disposition of undeveloped land .............. (468,268) 120,401
Equity in income of investees ............................... 82,793 54,903
----------- -----------
(448,814) (7,096)
----------- -----------
Net income (loss) .............................................. $ (692,296) $ 109,040
=========== ===========
Per common share (based on weighted average shares outstanding):
Net income (loss) ......................................... $ (.02) $ .00
=========== ===========
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
Revenues:
Bowling ..................................................... $ 2,429,146 $ 5,937,455
Rental ...................................................... 382,552 379,495
Construction ................................................ 2,000,916 1,644,645
Golf ........................................................ 22,425 --
Other ....................................................... 94,618 45,153
Other-related party ......................................... 83,435 80,936
----------- -----------
5,013,092 8,087,684
----------- -----------
Costs and expenses:
Bowling ..................................................... 1,715,359 3,706,626
Rental ...................................................... 176,235 185,783
Construction ................................................ 1,765,683 1,431,415
Golf ........................................................ 45,609 --
Development ................................................. 121,005 139,080
Selling, general and administrative ......................... 1,448,748 2,072,741
Depreciation and amortization ............................... 502,250 781,192
----------- -----------
5,774,889 8,316,837
----------- -----------
Loss from operations ........................................... (761,797) (229,153)
----------- -----------
Other income (charges):
Investment income:
Related party ............................................. 173,410 166,543
Other ..................................................... 109,658 52,269
Interest expense and amortization of
finance costs ............................................. (358,747) (642,371)
Interest expense related to development
activities ................................................ (192,345) (163,906)
Recognize deferred gain ..................................... -- 11,442
Gain on sale of bowling centers ............................. 1,099,514 --
Gain (loss) on disposition of undeveloped land .............. (468,268) 120,401
Gain on sale, other ......................................... 55,000 --
Equity in income of investees ............................... 210,240 151,368
----------- -----------
628,462 (304,254)
----------- -----------
Net loss ....................................................... $ (133,335) $ (533,407)
=========== ===========
Per common share (based on weighted average shares outstanding):
Net loss .................................................. $ .00 $ (.02)
=========== ===========
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, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss ............................................ $ ( 133,335) $ ( 533,407)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Amortization of deferred financing costs .......... 22,879 29,957
Depreciation and amortization ..................... 502,250 781,192
Undistributed income of investees ................. (210,240) (151,368)
Gain on sale of bowling centers and other ......... (1,154,514) --
(Gain) loss on disposition of undeveloped land .... 468,268 (120,401)
Interest accrued on assessment district obligation 154,925 164,529
Interest accrued on receivable from shareholder ... (141,114) (131,524)
Recognize deferred gain ........................... -- (11,442)
Changes in assets and liabilities:
(Increase) decrease in receivables ................ 109,455 (133,210)
Increase in inventories ........................... (1,567) --
Increase in prepaid expenses ...................... (9,114) (107,119)
Increase (decrease) in accounts payable
and accrued expenses .......................... (136,893) 641,280
Increase (decrease) in billings in excess of costs 9,075 3,823
Other ............................................. 26,955 (3,640)
----------- -----------
Net cash provided (used) by operating activities (492,970) 428,670
----------- -----------
Cash flows from investing activities:
(Increase) decrease in notes receivable ............. 80,233 107,787
Capital expenditures ................................ (243,121) (15,479)
Distributions from investees ........................ 512,990 244,999
Contributions to investees .......................... (30,000) (17,800)
Proceeds from sale of bowling centers ............... 2,052,185 --
Proceeds from sale of video games ................... 10,000 --
Proceeds from sale of undeveloped land .............. -- 160,401
Acquire additional interest in Redbird Properties ... -- (5,244)
Acquisition of Penley Golf .......................... (172,071) --
----------- -----------
Net cash provided by investing activities ......... 2,210,216 474,664
----------- -----------
Cash flows from financing activities:
Scheduled principal payments ........................ (871,489) (602,584)
Proceeds from line of credit ........................ -- 210,000
Payments on line of credit .......................... -- (298,742)
Other ............................................... (8,270) --
----------- -----------
Net cash used by financing activities .......... (879,759) (691,326)
----------- -----------
Net increase in cash and equivalents ................... 837,487 212,008
Cash and equivalents, beginning of period .............. 1,093,465 120,027
----------- -----------
Cash and equivalents, end of period .................... $ 1,930,952 $ 332,035
=========== ===========
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The sale of three bowling centers on August 7, 1996 resulted in the following
increases (decreases) to the following assets and liabilities: property and
equipment- ($6,741,237); accumulated depreciation- ($4,013,747); deferred
loan costs-($6,353); prepaid expenses ($20,000); and notes payable-
($1,801,172).
The Company acquired an additional 29 percent interest in Redbird Properties,
effective July, 1, 1995, in exchange for a $446,000 note payable. As a
result of the acquisition, Redbird Properties became a consolidated
subsidiary. The acquisition and consolidation, in addition to eliminating
the Company's investment of $134,975, resulted in an increase in the
following assets and liabilities in 1995: property and equipment-
$1,537,984; accumulated depreciation- $331,500; note payable- $713,538;
note payable, related party- $446,000.
The sale of the video game business on December 15, 1996 for $10,000 cash and
a $45,000 note receivable resulted in a decrease of both property and
equipment, and accumulated depreciation by $140,832.
On March 18, 1997 the County of Riverside foreclosed at public sale on 7 of
the 40 acres of undeveloped land in Temecula, California, which had a
carrying value of $662,710. The sale resulted in the extinguishment of
$22,770 of accrued property taxes and $171,672 of assessment district
obligations.
On January 22, 1997 the Company purchased the receivables ($8,594),
inventories ($119,602) and equipment ($43,875) of the Power Sports Group
(Penley Golf) for $172,071.
On March 28, 1997, the proceeds of a $250,000 loan were used to pay the
lessor of Grove bowling center for a deferred lease inception fee.
See accompanying notes to consolidated condensed financial statements.
6
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(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 changes in cash flow for the interim
periods.
2. Due to the seasonal fluctuations of the bowling operations, the financial
results for the interim periods ended March 31, 1997 and 1996, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
March 31, June 30,
1997 1996
------------- ------------
Accounted for on the equity method:
Investment in UCV, L.P................. $( 10,051,685) $( 9,828,360)
Vail Ranch Limited Partnership ........ 2,104,703 2,182,087
------------- ------------
( 7,946,982) ( 7,646,273)
Less Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ..... 10,051,685 9,828,360
------------- ------------
2,104,703 2,182,087
Accounted for on the cost basis:
All Seasons Inns, La Paz ............... 37,926 50,032
------------- ------------
$ 2,142,629 $ 2,232,119
============= ============
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
1997 1996
---------- ----------
UCV, L.P. ................................ $ 210,240 $ 151,368
Vail Ranch Limited Partnership ........... -- --
---------- ----------
$ 210,240 $ 151,368
========== ==========
During the nine months ended March 31, 1997, the Company received cash
distributions of $393,500 from UCV, L.P. ($244,999 in 1996), $77,384 (net
of $30,000 contribution) from Vail Ranch Limited Partners ($17,800
contribution in 1996), and $12,106 from All Season Inns, La Paz.
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated statements of operations based upon the partnership's fiscal
year (March 31). Summarized information from UCV, L.P.'s unaudited
statements of income for the nine-month periods ended December 31, 1996 and
1995 are as follows:
1997 1996
---------- ----------
Revenues ................ $3,250,000 $3,096,000
Operating and general and
administrative costs . 1,100,000 1,071,000
Depreciation ............ 146,000 145,000
Interest expense ........ 1,584,000 1,577,000
Net income .............. 420,000 303,000
7
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND 1996
(Unaudited)
4. Contingencies:
(a) Old Vail Partners (OVP), a consolidated subsidiary and 50 percent owned
by the Company, owns two contiguous parcels of undeveloped land which total
approximately 40 acres that are located within a special assessment
district of the County of Riverside, California (the County). The special
assessment district was created to fund and develop roadways, sewers, and
other required infrastructure improvements in the area necessary for the
owners to develop their properties. Each parcel of property within the
assessment district is collateral for an allocated portion of the bonded
debt that were issued by the assessment district to fund the improvements.
In November 1993, the City of Temecula adopted a general development plan
that designates the 40 acres of property owned by OVP 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 the 40 acres from a "commercial" to "professional
office" use. The parcels are subject to Assessment District liens which
were allocated in 1989 based on a higher "commercial" use. Since the
Assessment District liens 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. OVP
has filed suit against the City of Temecula claiming that the City's
adoption of a general plan as a means of effectively re-zoning the property
is invalid. Additionally, OVP is claiming that, if the effective re-zoning
is valid, the action is a taking and damaging of OVP's property without
payment of just compensation. OVP is seeking to have the effective
re-zoning invalidated and an unspecified amount of damages. 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.
OVP is delinquent in the payment of property taxes and assessments related
to the two parcels for the last five years. On March 18, 1997, the County
sold the 7 acre parcel at public-sale for delinquent property taxes
totaling $22,770 and the buyer assumed the Assessment District obligation
of $171,672. OVP recorded a loss from the disposition of the undeveloped
land of $468,268 representing the carrying value of the 7 acre parcel
($662,710) less the property tax and assessment district obligations
extinguished. The County attempted to sell the 33 acre parcel at public
sale on March 18, 1997 for the defaulted property taxes and again on April
22, 1997 for the default under the assessment district obligation, however,
the County was not able to obtain any bids to satisfy the obligations and
the sale was not completed.
The amount due to cure the judgment for the default under the Assessment
District obligation on the remaining 33 acre parcel at March 31, 1997 was
approximately $813,000 ($688,000 for both parcels at June 30, 1996). The
principal balance of the allocated portion of the bonds ($1,230,699), and
delinquent interest and penalties ($660,190 for the 33 acre parcel and
$547,360 for both parcels at March 31, 1997 and June 30, 1996,
respectively) are classified as "Assessment district obligation- in
default" in the consolidated balance sheet. In addition, accrued property
taxes in the balance sheet includes $377,829 of delinquent property taxes
and late fees related to the 33 acre parcel ($337,016 for both parcels at
June 30, 1996). The annual payments due related to the bonded debt on the
33 acre parcel are approximately $185,000. The payments continue through
the year 2014 and include interest at approximately 7-3/4 percent.
(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
affect on the Company's financial position.
8
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND 1996
(Unaudited)
5. Significant Events:
(a) The Company's revolving line of credit limit was renewed on November 1,
1996 and increased from $300,000 to $500,000. The line of credit expires
on November 1, 1997. On April 8, 1997, the line of credit limit was
reduced to $200,000 in conjunction with the bank providing an equipment
loan of $320,000 as described in Note 5c.
(b) On August 7, 1996 the Company sold the Village, Marietta and American
Bowling Centers (all located in Georgia) and related real estate for
$3,950,000 cash, which resulted in a gain of $1,099,514. The property and
equipment and the long-term debt extinguished from the sale proceeds were
presented as current assets and liabilities at June 30, 1996,
respectively. The following are the results of operations of these bowling
centers included in the Company's statements of operations for the three
and nine month periods ended March 31, 1997 and 1995:
Three Months Nine Months
-------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues ........... $ -- $1,021,000 $ 333,000 $2,720,000
Bowl costs ......... -- 536,000 255,000 1,633,000
Selling, general and
administrative:
Direct ........... 17,000 191,000 117,000 558,000
Allocated ........ -- 63,000 20,000 167,000
Depreciation ....... -- 56,000 18,000 167,000
Interest expense ... -- 40,000 8,000 133,000
Income (loss) ...... (17,000) 135,000 (85,000) 62,000
(c) On December 15, 1996, the Company sold the video game operations located
at the two San Diego bowling centers for $55,000 ($10,000 cash and $45,000
note receivable) resulting in a $55,000 gain. The note receivable is due
in 24 monthly installments of $2,076, including principal and interest at
10 percent. The following are the results of the video game operations
which were included in the Company's bowling segment for the three and
nine months ended March 31, 1997 and 1995:
Three Months Nine Months
------------------ --------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues ....... $ -- $ 19,000 $ 25,000 $ 55,000
Bowl costs ..... 1,000 16,000 18,000 54,000
Depreciation ... -- 19,000 -- 56,000
Interest expense 2,000 3,000 6,000 9,000
Income (loss) .. (3,000) (19,000) 1,000 (64,000)
(c) On January 22, 1997, Penley Sports, LLC (Penley), a limited liability
company for which the Company is the managing member and owner of ninety
percent of the units, purchased the assets of Power Sports Group, Inc.,
which was a manufacturer of graphite golf shafts and ski poles. The
purchase price was $172,071 for the accounts receivable ($8,594),
inventories ($119,602), and equipment ($43,875). The following are the
results of operations of Penley included in the consolidated condensed
financial for the period of January 22, 1997 through March 31, 1997:
Revenues ........... $ 22,000
Golf cost .......... 46,000
Selling, general and
administrative .... 105,000
Net loss ........... (129,000)
On April 28, 1997, the Company obtained a $320,000 loan to finance the
acquisition of approximately $471,000 of manufacturing equipment, of which
$171,000 had been purchased as of March 31, 1997. The loan is payable in
monthly installments of $8,225, including interest at 10-1/2 percent per
annum, with the balance due May 1, 2001. The loan is collateralized by the
$471,000 of equipment.
9
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND 1996
(Unaudited)
5. Significant Events (continued):
(d) On March 28, 1997, the proceeds from a $250,000 bank loan were used to
pre-pay the balance of payments due on the lease inception fee for the
Grove bowling center. The loan is payable in monthly installments of
interest only at 11 percent per annum and the principal balance is due
on April 5, 1998.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Securities Act of 1933 and the Securities Exchange Act
of 1934. Such statements are subject to certain risks and uncertainties which
could cause the actual results to be materially different from those forecasted.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company which attempt to advise interested
parties of the factors which affect the Company's business, including the
disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as the Company's other
periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
The following is a recap of the circumstances related to the significant
differences between the results of operations for the three and nine month
periods ended March 31, 1997 and the same periods in 1996 (decreases in items
are in brackets except for interest expense, for which increases are in
brackets):
Three Month Period Ended March 31, 1997 versus March 31, 1996
-------------------------------------------------------------
Constr- Develop- Corporate &
Bowling Rental uction Golf ment Unallocated
---------- ---------- ---------- ---------- ---------- ----------
Revenues ................... (1,465,000) 11,000 (55,000) 22,000 -- 14,000
---------- ---------- ---------- ---------- ---------- ----------
Costs ...................... (772,000) (12,000) (79,000) 46,000 9,000 --
SG&A:
Direct ................... (263,000) -- (22,000) 105,000 -- (29,000)
Allocated ................ (88,000) -- 4,000 -- -- 84,000
Depreciation ............... (98,000) 1,000 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
(1,221,000) (11,000) (97,000) 151,000 9,000 55,000
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) .... (244,000) 22,000 42,000 (129,000) (9,000) (41,000)
---------- ---------- ---------- ---------- ---------- ----------
Other income (charges)
Interest income .......... -- -- -- -- -- 30,000
Interest expense ......... 78,000 -- -- -- -- 11,000
Gain ..................... -- -- -- -- -- (589,000)
Equity in investees ...... -- -- -- -- -- 28,000
---------- ---------- ---------- ---------- ---------- ----------
78,000 -- -- -- -- (520,000)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .......... (166,000) 22,000 42,000 (129,000) (9,000) (561,000)
========== ========== ========== ========== ========== ==========
Nine-Month Period March 31, 1997 versus March 31, 1996
------------------------------------------------------
Constr- Develop- Corporate &
Bowling Rental uction Golf ment Unallocated
---------- ---------- ---------- ---------- ---------- ----------
Revenues ................... (3,508,000) 4,000 356,000 22,000 -- 52,000
---------- ---------- ---------- ---------- ---------- ----------
Costs ...................... (1,991,000) (9,000) 334,000 46,000 (18,000) --
SG&A:
Direct ................... (726,000) -- (4,000) 105,000 -- 1,000
Allocated ................ (216,000) -- 8,000 -- -- 208,000
Depreciation ............... (275,000) (4,000) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
(3,208,000) (13,000) 338,000 151,000 (18,000) 209,000
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) .... (300,000) 17,000 18,000 (129,000) 18,000 (157,000)
---------- ---------- ---------- ---------- ---------- ----------
Other income (charges)
Interest income .......... -- -- -- -- -- 64,000
Interest expense ......... 244,000 1,000 -- -- (28,000) 39,000
Gain ..................... -- -- -- -- -- 554,000
Equity in investees ...... -- -- -- -- -- 59,000
---------- ---------- ---------- ---------- ---------- ----------
244,000 1,000 -- -- (28,000) 716,000
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .......... (56,000) 18,000 18,000 (129,000) (10,000) 559,000
========== ========== ========== ========== ========== ==========
11
BOWLING OPERATIONS:
On August 7, 1996, the Company sold its three bowling centers located in Georgia
for $3,950,000, which resulted in a $1,099,514 gain. In May 1996 the Company
also sold the Redbird Lanes real estate and ceased operations of the bowling
center. The Company has two bowling centers remaining that are located in San
Diego, California. On December 15, 1996, the Company sold the video game
operations that were located in the two San Diego bowling centers, which
resulted in a $55,000 gain. The Company has no plans to sell the two remaining
bowling centers.
The following is a summary of the changes to the components of the loss from
operations of the bowling segment during the three and nine month periods ended
March 31, 1997 compared to the same period in 1996:
Three-Month Period Ended March 31, 1997 versus March 31, 1996
-------------------------------------------------------------
Georgia Redbird Video Other Combined
Bowls Lanes Games Changes Incr.(Decr.)
---------- --------- -------- -------- ----------
Revenues (1,021,000) ( 387,000) ( 19,000) ( 38,000) (1,465,000)
Bowl costs ( 536,000) ( 195,000) ( 15,000) ( 26,000) ( 772,000)
Selling, general &
administrative:
Direct ( 174,000) ( 58,000) - ( 31,000) ( 263,000)
Allocated ( 63,000) ( 20,000) - ( 5,000) ( 88,000)
Depreciation ( 56,000) ( 24,000) ( 19,000) 1,000 ( 98,000)
Income from operations ( 192,000) ( 90,000) 15,000 23,000 ( 244,000)
Interest expense ( 40,000) ( 28,000) ( 1,000) ( 9,000) ( 78,000)
Net income ( 152,000) ( 62,000) 16,000 32,000 ( 166,000)
Nine-Month Period Ended March 31, 1997 versus March 31, 1996:
------------------------------------------------------------
Georgia Redbird Video Other Combined
Bowls Lanes Games Changes Incr.(Decr.)
---------- ---------- -------- -------- ----------
Revenues (2,387,000) (1,024,000) ( 30,000) ( 67,000) (3,508,000)
Bowl costs (1,378,000) ( 587,000) ( 36,000) 10,000 (1,991,000)
Selling, general & administrative:
Direct ( 440,000) ( 202,000) - ( 84,000) ( 726,000)
Allocated ( 147,000) ( 52,000) - ( 17,000) ( 216,000)
Depreciation ( 148,000) ( 74,000) ( 56,000) 3,000 ( 275,000)
Income from operations ( 274,000) ( 109,000) 62,000 ( 21,000) ( 300,000)
Interest expense ( 126,000) ( 80,000) ( 3,000) ( 35,000) ( 244,000)
Net income ( 148,000) ( 29,000) 65,000 56,000 ( 56,000)
The following is a comparison of operations of the two remaining bowling centers
which are located in San Diego:
Bowling revenues decreased 4.9 and 3.1 percent in the three and nine month
periods ended March 31, 1997, respectively. The decrease is primarily due to a
decrease in the number of league games bowled (13%) at both bowling centers.
This decrease has been partially offset by an increase in the revenues from open
bowling (2%) and shoe rentals (25%).
Bowl costs did not significantly change in the nine month period, but decreased
by 5 percent ($26,000) during the three month period primarily related to
decreases in payroll and related expenses ($16,000). Bowl costs during prior
quarters had increased by $15,000 primarily due to the timing of bowling pin
purchases and lane resurfacing in the first quarter that either occurred in a
different period in the prior year or had been deferred. In prior quarters, the
increases in these expenses had been partially offset by approximately $39,000
of reductions in payroll and related costs (11%) in the second quarter.
Selling, general and administrative expense directly related to the bowling
segment decreased by $84,000 and $31,000 in the nine and three month periods,
respectively. Promotions expense decreased by $55,000 and $13,000 in the nine
and three month periods, respectively, primarily due to discontinuing the
awarding of points for the Company's frequent bowler program. Management has
concluded that the frequent bowler program was not achieving the goals of
increasing the frequency of bowling or the loyalty of our customers. The $31,000
decrease (4%) in expense in the three month period was primarily attributable to
a continuing decrease in promotions expense and also a decrease in insurance
expense.
12
Interest expense decreased by $9,000 and $35,000 in the three and nine month
periods, respectively, due to the reduction in the balances of notes payable.
RENTAL OPERATIONS:
There were no significant changes to the components of the consolidated rental
segment in the three and nine month periods ended March 31, 1997.
The equity in income of investees increased by $28,000 and $59,000 in the three
and nine month periods, respectively, due to improved occupancy of University
City Village (UCV). This "seniors" apartment project has been operating at 97
percent occupancy or better since July 1995. Rental income of the apartments
increased by 5 percent during both the three and nine month periods ended
December 31, 1996 ($52,000 and $154,000, respectively) partially due to a 2
percent increase in rates implemented in June of 1996 and also due to the high
rate of occupancy since July 1995. Rental costs decreased by 2 percent ($6,000)
and increased by 3 percent ($29,000) in the three and nine month periods ended
December 31, 1996. A portion of the increase in the nine month period was due to
an $18,000 increase in roof repairs that were performed in May of 1996.
OTHER ACTIVITIES:
Construction costs as a percentage of construction revenues were 86 percent and
88 percent in the three and nine month periods ended March 31, 1997,
respectively, versus 97 percent and 87 percent in the comparable periods of the
prior year. The higher cost of sales percentage in the three month period ended
March 31, 1996 was due to some unexpected completion costs incurred in that
quarter ($15,000) related to jobs closed in the quarter ended December 1995..
Direct selling, general and administrative costs related to the construction
segment decreased by $22,000 in the three month period primarily due to the
decrease in incentive compensation, which is based on profitability.
Development costs and expenses primarily consist of legal costs incurred to
contest the City of Temecula's attempts to down-zone the undeveloped land owned
by Old Vail Partners. The amount of legal expense varies from quarter to
quarter. Interest expense related to development activities primarily relates to
interest accrued on the past due and current assessment district obligations of
Old Vail Partners. On March 18, 1997, the County sold one of the two parcels (7
acres) at public-sale for delinquent property taxes totaling $22,770 and the
buyer assumed the Assessment District obligation of $171,672. OVP recorded a
loss from the disposition of the undeveloped land of $468,268 representing the
carrying value of the 7 acre parcel ($662,710) less the property tax and
assessment district obligations extinguished.
On January 22, 1997, Penley Sports, LLC (Penley), a limited liability company
for which the Company is the managing member and owner of ninety percent of the
units, purchased the assets of Power Sports Group, Inc., which was a
manufacturer of graphite golf shafts and ski poles. The Power Sports Group had
been a small producer of premium golf shafts that sold to a limited number of
golf shops. The Company is in the process of purchasing equipment to automate
the production line and hiring sales and marketing personnel to expand the sales
to golf shops and create business with the large golf club manufacturers. The
Company is also in the process of developing additional golf shaft products. As
a result, the golf costs and selling, general and administrative expenses
related to golf operations exceeded the golf revenues. The Company estimates
that it will continue to incur operating losses for the next twelve to eighteen
months before sales increase sufficiently to exceed costs.
Other than changes associated with the bowling and construction segments,
selling, general and administrative expense did not change significantly in the
three and nine month periods ended March 31, 1997. However, as a result of the
disposition of the four bowling centers in May and August 1996, there was an
increase in the unallocated portion of corporate overhead of $84,000 and
$208,000 in the three and nine month periods, respectively. This essentially
represents the inability to reduce fixed corporate overhead equal to that amount
which had previously been allocated to the administration of the disposed
bowling centers.
13
Other investment income increased by $30,000 and $64,000 in the three and nine
month periods, respectively, due to the increase in cash that was available for
short term investment during those periods as a result of the sales of the
bowling centers in May and August of 1996.
Liquidity and Capital Resources
The working capital deficit at March 31, 1997 was $2,223,239 and $2,308,787 at
June 30, 1996. Excluding the balance of the
assessment-district-obligation-in-default and delinquent property taxes
described below, which are included in current liabilities, the Company's
adjusted working capital of $188,933 as of March 31, 1997 is a $99,614 increase
from the $89,319 of adjusted working capital as of June 30, 1996. As discussed
below, the sale of three bowling centers in August 1996 provided cash proceeds
of $2,052,185, however cash used by operations ($492,970), reduction of
long-term debt ($871,489) and capital expenditures ($71,921) less distributions
received from investees ($512,990) utilized $923,390. The acquisition of Power
Sports Group ($172,071) and the subsequent purchase of additional equipment
($172,200) utilized an additional $344,271 of cash.
On August 7, 1996, the Company sold its three bowling centers in Georgia for
$3,950,000 cash. The cash proceeds from the sale were $2,052,000 after deducting
selling expenses and extinguishing related long-term debt. The Company has no
plans to sell the two remaining bowling centers.
As described in Note 4 of the Notes to Consolidated Condensed Financial
Statements, Old Vail Partners is delinquent in the payment of special assessment
district obligations and property taxes on 40 acres of undeveloped land. The
County of Riverside obtained judgments for the default in assessment district
payments. On March 18, 1997, the County sold the 7 acre parcel at public-sale
for delinquent property taxes totaling $22,770 and the buyer assumed the
Assessment District obligation of $171,672.. The County attempted to sell the 33
acre parcel at public sale on March 18, 1997 for the defaulted property taxes
and again on April 22, 1997 for the default under the assessment district
obligation, however, the County was not able to obtain any bids to satisfy the
obligations and the sale was not completed. The amount due to cure the judgment
for the default under the Assessment District obligation on the 33 acre parcel
at March 31, 1997 was approximately $813,000 ($688,000 for both parcels at June
30, 1996). The principal balance of the allocated portion of the bonds
($1,230,699), and delinquent interest and penalties ($660,190 for the 33 acre
parcel and $547,360 for both parcels at March 31, 1997 and June 30, 1996,
respectively) are classified as "Assessment district obligation- in default" in
the consolidated balance sheet. In addition, accrued property taxes in the
balance sheet includes $377,829 of delinquent property taxes and late fees
related to the 33 acre parcel ($337,016 for both parcels at June 30, 1996). If
the County of Riverside again attempts a public sale of the 33 acre parcel and
the judgments are not satisfied prior to the sale, Old Vail Partners could lose
title to the property and the property would not be subject to redemption. Also
as described in Note 4 of the Notes to Consolidated Condensed Financial
Statements, Old Vail Partners is contesting an attempt by the City of Temeculah
to effectively down-zone the property. As a results of the judgments and the
attempts to down-zone the property, the recoverability of the carrying value of
this property is uncertain.
On January 22, 1997, the Company, purchased the assets of Power Sports Group,
Inc. (PSG) for $172,071 cash. PSG manufactured premium graphite golf shafts and
ski poles and had averaged approximately $400,000 in sales in each of the past
two years. On April 28, 1997, the Company obtained a $320,000 loan to finance
the acquisition of approximately $471,000 of manufacturing equipment, of which
$171,000 had been purchased as of March 31, 1997. The loan is payable in monthly
installments of $8,225, including interest at 10-1/2 percent per annum, with the
balance due May 1, 2001. The loan is collateralized by the $471,000 of
equipment. The Company plan is to automate the manufacturing process and develop
a sales and marketing staff and program to expand the sales. The Company expects
to incur losses totaling $800,000 over the next 18 months before forecasting a
profit. The Company believes that it has sufficient cash to fund these costs.
During the fourth quarter of 1997, the Company expects to utilize an additional
$1,000,000 of cash for operations after reduction of long term debt ($664,000),
capital expenditures ($50,000) and distributions received from
investees($60,000). In addition to the normal utilization of cash during the
fourth quarter of each year due to the seasonality of the bowling segment, the
estimate for the fourth quarter includes paying $502,000 to extinguish the
balances of three notes that come due during the third quarter and negative cash
flow of $160,000 from the golf segment.
14
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 1997, 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, 1996.
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 20, 1996 the Company held its annual shareholder meeting in
which the following items were voted upon:
Tabulation of Votes
------------------------------------
For Against Abstain
---------- ------- -------
Election of Directors:
Harold S. Elkan ..................... 22,161,716 -- 31,056
Steven R. Whitman ................... 22,165,066 -- 27,706
Patrick D. Reiley ................... 22,162,116 -- 30,656
James E. Crowley .................... 22,165,016 -- 27,756
Robert A. MacNamara ................. 22,165,066 -- 27,706
Selection of KPMG Peat Marwick
LLP as certified public accountants
for the year ending June 30, 1998 .... 22,102,258 38,548 51,966
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
15
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: June 9, 1997
By:/s/ Steven R. Whitman
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: June 9, 1997
16