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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File Number: 0-17436
SPORTS ENTERTAINMENT ENTERPRISES, INC.
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(Exact name of small business issuer as specified in its charter)
Colorado 84-1034868
- ------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6730 South Las Vegas Boulevard, Las Vegas, Nevada 89119
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(Address of principal executive offices including zip code)
(702) 798-7777
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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___
As of November 15, 1999, 8,135,097 shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes___ No X
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page Number
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Operations -
Nine Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or
Plan of Operation 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security
Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 116,738 $2,584,900
Accounts receivable 822,318 1,028,800
Inventory 634,120 569,900
Due from Affiliated Store 98,526 19,000
Prepaid expenses and other 196,923 61,900
----------- -----------
Total current assets 1,868,625 4,264,500
Leasehold improvements and equipment, net 24,478,920 24,675,100
Note receivable - related party 20,000 20,000
Deposit for land lease 37,821 225,600
Debt issuance costs, net 347,195 393,300
Other assets 57,205 121,600
Minority interest 220,964 -
----------- -----------
Total assets $27,030,730 $29,700,100
=========== ===========
See accompanying notes to condensed consolidated financial statements.
(Continued)
3
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1999 1998
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt 523,422 559,300
Current portion of obligations under
capital leases 164,322 121,400
Accounts payable and accrued expenses 2,111,541 1,513,000
----------- -----------
Total current liabilities 2,799,285 2,193,700
----------- -----------
Due to Shareholder and Affiliated Store 1,506,363 1,191,900
Note payable to shareholder 1,480,000 1,705,300
Long-term debt, net of current portion 13,126,639 13,408,100
Obligations under capital leases, net
of current portion 435,675 530,400
Deferred income 499,025 877,100
Deferred tax liability 743,000 743,000
Preferred stock of subsidiary 5,000,000 5,000,000
Minority interest - 607,100
SHAREHOLDERS' EQUITY:
Common stock, no par value; 15,000,000 shares
authorized; 8,135,097 shares issued
and outstanding at September 30, 1999 and
December 31, 1998 6,107,700 6,107,700
Stock options issued 268,300 268,300
Accumulated deficit (4,935,257) (2,932,500)
----------- -----------
Total shareholders' equity 1,440,743 3,443,500
----------- -----------
Total Liabilities and Shareholders' Equity $27,030,730 $29,700,100
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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REVENUES:
SportPark Las Vegas $ 1,723,318 $ -
Retail Operations 687,282 555,700
Callaway Golf Center[TM] 548,724 -
Other 7,281 6,400
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Total revenues 2,966,605 562,100
COST OF REVENUES:
SportPark Las Vegas 801,435 -
Retail Operations 526,274 433,700
Callaway Golf Center[TM] 114,618 -
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Total cost of revenues 1,442,327 433,700
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GROSS PROFIT 1,524,278 128,400
OPERATING EXPENSES:
Selling, general and administrative 1,769,239 912,900
Depreciation and amortization 429,845 13,500
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Total operating expenses 2,199,084 926,400
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OPERATING LOSS (674,806) (798,000)
OTHER INCOME (EXPENSE):
Interest income (expense), net (397,285) (16,800)
----------- -----------
Loss before income taxes
and minority interest (1,072,091) (814,800)
Provision (benefit) for income taxes (156,832) -
----------- -----------
Loss before minority interest (915,259) (814,800)
Minority interest 269,262 77,500
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NET LOSS (645,997) (737,300)
=========== ===========
NET LOSS PER SHARE:
Basic and Diluted:
Net loss per share $ (.08) $ (.13)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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REVENUES:
SportPark Las Vegas $ 4,188,196 $ -
Retail Operations 1,938,824 2,187,700
Callaway Golf Center[TM] 1,557,494 724,900
Other 19,781 65,400
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Total revenues 7,704,295 2,978,000
COST OF REVENUES:
SportPark Las Vegas 1,530,275 -
Retail Operations 1,569,917 1,686,700
Callaway Golf Center[TM] 284,071 112,000
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Total cost of revenues 3,384,263 1,798,700
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GROSS PROFIT 4,320,032 1,179,300
OPERATING EXPENSES:
Selling, general and administrative 5,010,454 3,524,075
Depreciation and amortization 1,259,632 201,900
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Total operating expenses 6,270,086 3,725,975
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OPERATING LOSS (1,950,054) (2,546,675)
OTHER INCOME (EXPENSE):
Interest income (expense), net (1,112,486) (203,000)
Gain on sale of investment in
All-American Golf, LLC - 1,638,900
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Loss before income taxes
and minority interest (3,062,540) (1,110,775)
Provision (benefit) for income taxes (231,719) -
----------- -----------
Loss before minority interest (2,830,821) (1,110,775)
Minority interest 828,064 346,775
----------- -----------
NET LOSS (2,002,757) (764,000)
=========== ===========
NET LOSS PER SHARE:
Basic and Diluted:
Net loss per share $ (.25) $ (.13)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,002,757) $ (764,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest (828,064) (346,775)
Depreciation and amortization 1,447,522 201,900
Gain on sale of investment in
All-American Golf, LLC - (1,638,900)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 206,482 (2,449,400)
Increase in inventory (64,220) (236,800)
Increase in prepaid expenses and other (111,520) (125,400)
Increase in accounts payable
and accrued expenses 598,541 921,175
Increase (decrease) in deferred income (378,075) 2,200
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Net cash used in operating activities (1,132,091) (4,436,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Project development costs - (15,036,800)
Leasehold improvement expenditures (884,149) 76,700
Proceeds from sale of interest in
All-American Golf, LLC - 1,250,000
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Net cash used in investing activities (884,149) (13,710,100)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit - (668,000)
Proceeds from notes payable - 16,500,000
Increase in payable to Affiliated Store 234,937 1,890,900
Proceeds from note payable to shareholder - 1,050,000
Payments on notes payable and notes payable
to shareholder (582,486) (900,000)
Principal payments on capital lease
obligations (104,373) (18,600)
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Net cash provided by (used in)
financing activities $ (451,922) $17,854,300
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See accompanying notes to condensed consolidated financial statements.
(Continued)
7
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Continued)
1999 1998
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NET DECREASE IN CASH AND CASH EQUIVALENTS $(2,468,162) $ (291,800)
CASH AND CASH EQUIVALENTS,
Beginning of period 2,584,900 384,000
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CASH AND CASH EQUIVALENTS,
End of period $ 116,738 $ 92,200
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest, net of amounts capitalized $ 913,291 $ 262,898
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired through issuance of
note payable $ 92,417 $ -
=========== ===========
Forgiveness of note payable $ - $ 3,000,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements include
the accounts of Sports Entertainment Enterprises, Inc. ("SPEN") a Colorado
corporation, and its subsidiaries, All-American SportPark, Inc. ("AASP"), LVDG
Development Corporation ("Development") and LVDG Rainbow, Inc. ("Rainbow")
(collectively, the "Company"). SPEN owns two-thirds of AASP, a publicly traded
company. All significant inter-company accounts and transactions have been
eliminated.
The accompanying financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission relating to interim financial statements. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all necessary adjustments
have been made to present fairly, in all material respects, the financial
position, results of operations and cash flows of the Company at September 30,
1999 and for all periods presented.
Certain reclassifications have been made to previously reported amounts to
conform them to the current presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998 and the Company's reports on Form 10-QSB for the quarters
ended March 31 and June 30, 1999.
The Company's current operations consist of one Company-owned retail store in
Las Vegas, Nevada and the management and operation of a family and sport-
oriented theme park under the name "All-American SportPark" located in Las
Vegas, Nevada. The first SportPark was completed on October 9, 1998. Included
in this 65 acre SportPark located on the south end of the Las Vegas "Strip"
are major attractions which include: The Callaway Golf Center[TM] including a
110 tee driving range, Divine Nine[R] golf course and 20,000 square foot club
house; All-American SportPark Pavilion, Major League Baseball Slugger Stadium,
NASCAR SpeedPark and All-Sport Arena.
2. CALLAWAY GOLF CENTER[TM]
Through May 5, 1998, AASP operated the Callaway Golf Center as the managing
member of All-American Golf, LLC. AASP owned 80% of the membership units and
Callaway Golf Company ("Callaway Golf") owned the remaining 20% of the
membership units. The Callaway Golf Center occupies approximately forty-two
of the sixty-five acre All-American SportPark. The Callaway Golf Center[TM]
opened to the public on October 1, 1997.
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All-American Golf, LLC was formed by Callaway Golf Company contributing
$750,000 of equity capital and loaning the LLC $5,250,000. AASP contributed
the value of expenses it incurred relating to the design and construction of
the golf center and cash in the combined amount of $3,000,000.
AASP sold its interest in All-American Golf, LLC to Callaway Golf Company on
May 5, 1998 but retained the right to repurchase its 80% interest in the LLC
for a period of two years on essentially the same financial terms under which
it had sold its interest. This sale netted AASP approximately $1.5 million in
cash and relieved AASP of approximately $3 million in debt. The Company
recorded a gain of $1,638,900 on the disposal of its 80% interest in All-
American Golf, LLC.
On December 31, 1998, AASP acquired substantially all of the assets subject to
certain liabilities of All-American Golf, LLC that had been managing and
operating the Callaway Golf Center. Under terms of this asset purchase
agreement, AASP paid Active Media Services, an entity related to Callaway Golf
Company, $1,000,000 in the form of a promissory note payable in quarterly
installments of $25,000 over a 10-year period without interest. In the
accompanying condensed consolidated balance sheets, this promissory note
payable has been discounted to its net present value.
SPORTPARK LAS VEGAS LOAN AGREEMENT
On September 15, 1998, AASP entered into a $13,500,000 loan agreement with
Nevada State Bank. The loan is for 15 years with interest measured at a fixed
rate of 4% above the lender's five-year LIBOR rate measured September 1, 1998,
2003 and 2008. The initial interest rate through 2003 is 9.38%. The loan is
secured by substantially all the assets of AASP that existed at the time the
financing was completed. To facilitate this financing transaction, the owner
of the leasehold interest in the land underlying the SportPark executed a
trust deed granting a security interest in the leased property to Nevada State
Bank to secure repayment of the loan. As consideration for the Landlord's
willingness to provide collateral for the loan, the Company's President, CEO
and its Chairman and a related entity pledged their stock in AASP and the
Company as additional collateral.
AASP is not in compliance with certain non-monetary debt covenants related to
this loan as of September 30, 1999. Also, because of cash constraints, AASP
did not make its September loan payment to the Bank and since then has not
made the October or November loan payments. The Bank has notified AASP that
failure to make such monthly payments constitutes a default under the terms of
the loan; however, the Bank has not filed a formal notice of default. AASP is
in continual discussions with the Bank to renegotiate the terms of the loan.
As part of these discussions, the Bank and AASP have agreed that an amusement
park industry management consultant should be retained to evaluate all
operational aspects of the SportPark and provide recommendations to improve
SportPark performance from revenue, utilization, and cost standpoints. The
consultant's report is expected to include complete financial projections and
strategic plans; management of AASP believes this is an important step in
accelerating achievement of the profit potential of the SportPark. AASP is
diligently interviewing several top industry consultants and expects to have
one engaged by the end of November 1999 with the work product available by the
end of January 2000. Management of AASP expects to complete renegotiations
with the Bank once the consultant's work is complete.
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4. EARNINGS PER SHARE AND SHAREHOLDER'S EQUITY
Basic earnings per share is computed by dividing reported earnings by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the additional dilution for all
potentially dilutive securities such as stock options. However, when an
entity has a loss from continuing operations, no potential common shares are
included in the computation of any diluted per share amounts. As such,
potential dilution has not been considered in the calculations for the periods
presented.
The weighted-average number of common and common equivalent shares used in the
calculation of basic and diluted earnings per share were 8,135,097 and
5,831,807 for the three and nine month periods ended September 30, 1999 and
1998, respectively.
On February 16, 1999, the Board of Directors of AASP approved the award to the
President of the Company, Stock Appreciation Rights ("SAR's") as to 125,000
shares independent of any stock option under AASP's 1998 Stock Incentive Plan.
The base value of the SAR's shall be equal to $6 per share, however no SAR may
be exercised unless and until the market price of AASP's Common Stock equals
or exceeds $10 per share. Amounts to be paid under this agreement are solely
in cash and are not to exceed $500,000. The SAR's expire on October 26, 2008.
The award of these SAR's had no impact on results of operations for the
periods presented in this report.
On August 12, 1999, the Board of Directors of the Company approved the grant
of options under the Company's 1991 Stock Option Plan to the President of AASP
and other individuals. Options representing 180,000 shares had expired on
August 7, 1999. The Board of Directors determined that the exercise price of
$1.085 for each new option was more than 110% of the market price of the
Company's common stock as of August 12, 1999. Incentive stock options
representing 92,000 shares were issued to the President of AASP. Non-
qualified stock options representing 189,000 shares and 140,000 shares were
issued to the President of AASP and other individuals, respectively. Each of
these options is exercisable for a period of five years from the grant date.
No other stock options or similar instruments of AASP or the Company were
granted or issued during the nine months ended September 30, 1999.
5. RELATED PARTY TRANSACTIONS
The Company has unsecured, ten percent notes payable to shareholder of
$1,480,000 and $1,705,300 at September 30, 1999 and December 31, 1998,
respectively. The Company paid $225,300 on these notes payable in late March
1999.
The Company normally has extensive transactions and relationships with its
chairman and principal shareholder, a retail store owned by the Company's
chairman (the "Affiliated Store") and AASP. The Affiliated Store operates in
Las Vegas, Nevada. The Affiliated Store and the Company benefit through
volume purchasing together and shared costs of local and national advertising
conducted by AASP. The Affiliated Store and the Company owned store share
advertising costs equally in the Las Vegas market area. These advertising
costs were $99,701 and $86,438 for the nine months ended September 30, 1999
and 1998, respectively. Purchases of merchandise from the Affiliated Store are
recorded at the Company's cost and totaled $573,238 and $87,000 for the nine
months ended September 30, 1999 and 1998, respectively.
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6. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment include the following as of September 30,
1999 and December 31, 1998:
1999 1998
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Building $17,650,077 $17,592,200
Land Improvements 3,445,869 3,139,500
Furniture and equipment 2,064,319 1,754,900
Leased equipment 1,218,272 1,041,300
Signs 745,047 651,100
Leasehold improvements 550,520 372,500
Go-Karts 462,780 479,500
Other 78,769 168,100
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26,215,653 25,199,100
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Accumulated depreciation and
amortization (1,736,733) (524,000)
----------- -----------
$24,478,920 $24,675,100
=========== ===========
7. LEASES
SPEN and AASP share facilities leased from the Chairman of the Board under a
non-cancelable operating lease agreement, which expires January 31, 2005.
Rent is allocated 50% to SPEN and 50% to AASP. Monthly rent from January to
November 1998 was $4,230. From December 1998 through April 1999, the monthly
rent was $1,830. Effective May 1999, the monthly rent decreased to $1,130.
The land underlying the All-American SportPark is leased to AASP at a base
amount of $52,083 per month allocated $33,173 to the Callaway Golf Center and
$18,910 to the SportPark Las Vegas ("SPLV"). Also, the lease has provisions
for contingent rent to be paid by AASP upon reaching certain levels of gross
revenues at the All-American SportPark. The lease commenced October 1, 1997
for the Callaway Golf Center and February 1, 1998 for SPLV. The terms of both
leases are 15 years with two five-year renewal options. Due to cash
constraints, AASP negotiated an agreement with the landlord to defer the land
lease payments on both the SportPark and Callaway Golf Center beginning
September 1999 with no specified ending date. Management of AASP believes
that the landlord is willing to defer land lease payments until such time as
adequate capital resources are available to AASP to make such payments.
The Company leases retail space for the Company-owned store under a
non-cancelable operating lease agreement which will expire on July 31, 2000
and provides for a base monthly rental payment of $10,300. Under this lease,
the base monthly rental may increase based on increases in the consumer price
index and taxes.
The Company is also obligated under various other capital and non-cancelable
operating leases for equipment that expire at various dates over the next five
years.
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8. COMMITMENTS AND CONTINGENCIES
AASP has employment agreements with its President, as well as other key
employees that will require the payment of fixed and incentive based
compensation.
The Company has purchased a comprehensive general liability insurance policy
to cover possible claims for injury and damages from accidents and similar
activities. There is no assurance that it will be sufficient to cover or be
available for future claims.
The Company is involved in certain litigation as both plaintiff and defendant
related to its business activities. Management, based upon consultation with
legal counsel, does not believe that the resolution of these matters will have
a materially adverse effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the Company's
condensed consolidated financial statements and related footnotes included in
this report.
OVERVIEW
The Company's operations consist of the retail location on Rainbow Boulevard
in Las Vegas, Nevada and the management and operation of a family and
sport-oriented theme park under the name "All-American SportPark". Results of
operations for the three and nine months ended September 30, 1999 include the
results of the Rainbow retail store, and the All-American SportPark in Las
Vegas, Nevada which includes the SportPark Las Vegas and the Callaway Golf
Center. The SportPark Las Vegas commenced operations on October 9, 1998. The
Callaway Golf Center commenced operations in October 1997, the Company sold
its 80% interest in the Callaway Golf Center on May 5, 1998 and then
repurchased 100% of the Callaway Golf Center on December 31, 1998.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Revenues increased to $2,966,605 in 1999 compared to $562,100
in 1998 due to (1) a full three months of operations of the SportPark Las
Vegas which was not operational in the third quarter of 1998 and (2) a full
quarter of operations at the Callaway Golf Center in 1999 compared to no
operations at the Callaway Golf Center in 1998 because the Company did not own
or operate the Golf Center during this period. AASP sold its 80% interest in
the Callaway Golf Center on May 5, 1998 and repurchased 100% of the Callaway
Golf Center on December 31, 1998 as more fully described in footnote 2 to the
condensed consolidated financial statements of the Company included elsewhere
in this Form 10-Q. The SportPark Las Vegas contributed $1,723,318 to 1999 3rd
quarter revenues. The Callaway Golf Center contributed $548,724 to 1999 3rd
quarter revenues. Rainbow store revenues increased approximately $130,000 due
to special promotions and marketing efforts that did not occur in 1998.
COST OF REVENUES. Cost of revenues was $1,442,327 in 1999 compared to
$433,700 in 1998 due mainly to the operations of the SportPark Las Vegas,
Callaway Golf Center, and Rainbow retail store noted above.
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SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). These expenses consist
principally of administrative payroll, rent, professional fees and other
corporate costs. These expenses increased to $1,769,239 in 1999 from $912,900
in 1998. The increase is due mainly to the operations of the SportPark Las
Vegas and the Callaway Golf Center during this period that did not occur in
the comparable period in 1998. The 1998 SG&A costs relate principally to pre-
opening costs for the SportPark Las Vegas which opened in October 1998.
DEPRECIATION AND AMORTIZATION. These costs were $429,845 in 1999
compared to $13,500 in 1998 due primarily to the SportPark Las Vegas being in
service in 1999 as opposed to under development in 1998. Also, the Callaway
Golf Center was owned and operated by the Company during the 3rd quarter of
1999 and not in the 3rd quarter of 1998.
OTHER INCOME (EXPENSE). Net interest expense was $397,285 in 1999
compared to $16,800 in 1998 due primarily to interest costs on debt secured by
the SportPark Las Vegas which commenced operation in October 1998. Interest
costs during the third quarter of 1998 were capitalized due to the SportPark
Las Vegas being under development.
INCOME TAXES. Due to a net loss for the full calendar year of 1998 and a
year to date net loss in 1999, the Company has recorded no tax provision.
However, the benefit recorded in 1999 relates to a tax refund receivable which
arose from the carryback of the 1998 net loss for income tax purposes to 1997
where AASP had net income for income tax purposes; this had resulted from
AASP's sale of its franchised retail stores.
MINORITY INTEREST. For 1998, minority interest includes (1) one-third of
AASP's net income for the period and (2) Callaway Golf Company's 20% share of
the net loss in All-American Golf, LLC. For 1999, minority interest only
includes one-third of AASP's net loss for the period.
NET INCOME (LOSS). Net loss for 1999 was $645,997 compared to $737,300
in 1998. The loss for 1998 is mainly attributed to the pre-opening costs of
the SportPark Las Vegas. The loss for 1999 is due to continued first year
start-up, sales and marketing, and other fixed costs of the SportPark Las
Vegas which opened in October 1998. Approximately 75% of the 1999 third
quarter net loss is attributable to the SportPark Las Vegas. Even though the
Company achieved its highest quarterly revenue total since the SportPark
opened in October 1998, direct costs to achieve this revenue level increased
in the same proportion. This is mainly due to the AASP's efforts to lure
large groups to the SportPark to increase awareness and provide an opportunity
for return visits by these groups and their employees. This strategy has
proven effective in that substantially all of the large groups that staged
functions at the SportPark this summer have either contracted for future
events or are in discussions with AASP for future events. This strategy has
also allowed AASP, particularly with the Hotel/Casino companies, to penetrate
the employee bases by offering special promotional admission programs to the
SportPark through these company's human resource departments. The Rainbow
retail store accounted for approximately 18% of the net loss due to continued
extreme competitive conditions in the golf retail business including lower
price points. Corporate overhead and operations of the Callaway Golf Center
accounted for the remainder of the net loss for reasons described above and
due to overseeding for two weeks in September which requires the AASP to shut
down the golf course during that period.
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RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Revenues increased to $7,704,295 in 1999 compared to
$2,978,000 in 1998 due to (1) a full nine months of operation of the SportPark
Las Vegas which was not operational in the first nine months of 1998 and (2) a
full nine months of operations at the Callaway Golf Center in 1999 compared to
just slightly over four months of operations in the comparable 1998 period.
Only approximately four months is included in the 1998 period because AASP
sold its 80% interest in the Callaway Golf Center on May 5, 1998 and
repurchased 100% of the Callaway Golf Center on December 31, 1998 as more
fully described in footnote 2 to the condensed consolidated financial
statements of the Company included elsewhere in this Form 10-Q. The SportPark
Las Vegas contributed $4,188,196 to the 1999 period. The Callaway Golf Center
contributed $1,557,494 to 1999 and $724,900 to 1998. Rainbow store revenues
declined approximately $250,000 reflecting extremely competitive conditions in
the golf retail business including lower pricing.
COST OF REVENUES. Cost of revenues was $3,384,263 in 1999 compared to
$1,798,700 in 1998 due mainly to the operations of the SportPark Las Vegas,
Callaway Golf Center, and Rainbow retail store noted above.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). These expenses consist
principally of administrative payroll, rent, professional fees and other
corporate costs. These expenses increased to $5,010,454 in 1999 from
$3,524,075 in 1998. The increase is due mainly to the operations of the
SportPark Las Vegas, which has necessitated increased staffing and increased
sales and marketing costs. A number of different marketing programs and
advertising strategies have been developed and implemented to increase
awareness and traffic at the All-American SportPark. The 1998 costs relate
principally to pre-opening costs for the SportPark Las Vegas and sales,
marketing, and start-up costs for the Callaway Golf Center that opened in
October 1997.
DEPRECIATION AND AMORTIZATION. These costs were $1,259,632 in 1999
compared to $201,900 in 1998 due primarily to the SportPark Las Vegas being in
service in 1999 as opposed to under development in 1998.
OTHER INCOME (EXPENSE). Net interest expense was $1,112,486 in 1999
compared to $203,000 in 1998 due primarily to interest costs on debt secured
by the SportPark Las Vegas which commenced operation in October 1998.
Interest costs during the first six months of 1998 were capitalized due to the
SportPark Las Vegas being under development. The Company recorded a gain of
$1,638,900 in 1998 related to AASP's sale of its 80% in the Callaway Golf
Center on May 5, 1998 referred to in the discussion of "REVENUES" above.
INCOME TAXES. Due to a net loss for the full calendar year of 1998 and a
year to date net loss in 1999, the Company has recorded no tax provision.
However, the benefit recorded in 1999 relates to (1) a $156,832 tax refund
receivable which arose from the carryback of the 1998 net loss for income tax
purposes to 1997 where the Company had net income for income tax purposes;
this had resulted from the Company's sale of its franchised retail stores; and
(2) a $74,887 tax refund received related to a prior year overpayment of tax.
MINORITY INTEREST. For 1998, minority interest includes (1) one-third
of AASP's net income for the period and (2) Callaway Golf Company's 20% share
of the net loss in All-American Golf, LLC. For 1999, minority interest only
includes one-third of AASP's net loss for the period.
15
<PAGE>
NET LOSS. Net loss for 1999 was $2,002,757 compared to $764,000 in
1998. Excluding the 1998 gain on the sale of the AASP's interest in the
Callaway Golf Center of $1,638,900, the 1998 net loss was $2,402,900. Hence,
the loss for 1998 is mainly attributed to the start-up and fixed costs of the
Callaway Golf Center[TM] and administrative costs related to development of
the SportPark Las Vegas. The Callaway Golf Center was opened in October 1997.
The loss for 1999 is mainly due to continued first year start-up, sales and
marketing, and other fixed costs of the SportPark Las Vegas which opened in
October 1998 and similar reasons for the Callaway Golf Center due to the
reacquisition of this facility on December 31, 1998. The SportPark accounted
for approximately 72% of the 1999 net loss, the Rainbow retail store accounted
for approximately 6% of the 199 net loss, the Golf Center accounted for
approximately 1% of the net loss, and the remainder relates to corporate
overhead. The SportPark has spent the majority of 1999 aggressively marketing
the SportPark to increase traffic flow and per caps. Included in this program
are aggressive sales strategies to lure large groups and special events to the
Park which are expected to create the basis for recurring special events and
groups returning year after year for company parties. Management of the
Company believes the aggressive sales and marketing strategies are working
well and will continue to focus on methods to attract and retain customer
loyalty. Also, management is continually evaluating new revenue opportunities
that provide for a broader and more exciting customer experience as well as
better utilize the facility. At the same time, management of the Company has
instituted aggressive cost containment strategies that began in September 1999
and will continue until the Company is operating as efficiently as possible.
In this regard, the Company is in the process of hiring a well-respected
industry consultant to help in evaluating all operational aspects of the
SportPark and providing recommendations to improve SportPark performance from
revenue, utilization, and cost standpoints. The consultant's report is
expected to include complete financial projections and refined strategic
plans; management of the Company believes this is an important step in
realizing the true potential of the Company's SportPark program. This true
potential not only lies in the Las Vegas facility but in accelerating the roll
out of the SportPark concept into other markets. Once this consultant
finishes this project and at the same time the Company completes its long-term
business plan, the Company plans on seeking to raise capital sufficient to
build at least one more SportPark and have adequate working capital to
continue the expansion process. The Company is diligently interviewing
several top industry consultants and expects to have one engaged by the end of
November 1999 with the work product completed by the end of January 2000. The
Callaway Golf Center has incurred a small year to date loss only because the
third quarter is typically not a strong one for the golf business in Las Vegas
because of the extreme heat. The Company expects the Golf Center will be
profitable in the fourth quarter and generate net income for the full year
1999. Corporate overhead has decreased each quarter in 1999; this trend is
expected to continue into the fourth quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had negative working capital of $930,660 as
compared to positive working capital of $2,070,800 at December 31, 1998. This
decrease in working capital resulted mainly to heavy first year start-up type
costs incurred in the first nine months of 1999 to operate, promote and market
the SportPark Las Vegas. In addition, working capital was used to acquire
certain equipment and leasehold improvements totaling approximately $885,000.
16
<PAGE>
The Company in the normal course of its business receives sponsorship fees and
various advance payments of different kinds, which are recorded as deferred
income until earned. Such amounts are typically earned over the term of the
contract with the applicable sponsor. Deferred income was $499,025 at
September 30, 1999 compared to $877,100 at December 31, 1998. A sponsorship
fee from Pepsi of $250,000 was received in the first quarter of 1999. Another
$250,000 sponsorship fee is due from Pepsi in January 2000. It is
anticipated, but cannot be guaranteed, that sponsorship fees and advances will
be a source of cash flow for the remainder of 1999 or 2000.
On September 15, 1998 AASP entered into a $13,500,000 loan agreement with
Nevada State Bank. The loan is for 15 years with interest measured at a fixed
rate of 4% above the lender's five-year LIBOR rate measured September 1, 1998,
2003 and 2008. For 1998 through August 31, 2003 the loan bears interest of
9.38%. The loan is secured by substantially all the assets of AASP that
existed at the time the financing was completed. Debt service for this loan
approximates $140,000 per month.
AASP is not in compliance with certain non-monetary debt covenants related to
this loan as of September 30, 1999. Also, because of cash constraints, AASP
did not make its September loan payment to the Bank and since then has not
made the October or November loan payments. The Bank has notified AASP that
failure to make such monthly payments constitutes a default under the terms of
the loan; however, the Bank has not filed a formal notice of default. AASP
has had discussions with the Bank in an attempt to renegotiate the terms of
the loan. As part of these discussions, the Bank and AASP have agreed that an
amusement park industry management consultant should be retained to evaluate
all operational aspects of the SportPark and provide recommendations to
improve SportPark performance from revenue, utilization, and cost standpoints.
The consultant's report is expected to include complete financial projections
and strategic plans; management of AASP believes this is an important step in
realizing the true potential of the SportPark. AASP is diligently
interviewing several top industry consultants and expects to have one engaged
by the end of November 1999 with the work product complete by the end of
January 2000. It is Management's intention to use the consultant's evaluation
as a basis for renegotiating the loan. However, there can be no assurance
that AASP will be successful in doing so. Further, the Bank has advised AASP
that if the September and October payments and certain late charges and costs
are not received by November 22, 1999, that the Bank will proceed to
immediately exercise its rights under the loan. AASP is not in a position to
make such payments by that date. Management will continue to attempt to work
with the Bank to delay any legal proceedings until the loan can be
renegotiated. However, there can be no assurance that AASP will be successful
in doing so.
In addition to engaging this consultant to evaluate the SportPark Las Vegas
and provide recommendations for improving its performance, management of AASP
is aggressively pursuing several other opportunities. The Company and AASP
are developing, with the assistance of independent qualified professionals, a
comprehensive business plan that will be used as the basis for seeking
financing to accelerate expansion plans into other markets. Several options
are being evaluated to raise capital for the Company. Also, management is in
discussions with several established companies in its industry that have the
necessary capital and human resources that could facilitate the Company's
expansion plans; several possible business structures will be evaluated. An
important element of the plan will be to increase the Company's exposure in
the financial community. Towards that end, management expects to engage a
specialist in that field by early December 1999. There can be no assurance
17
<PAGE>
that the Company will be successful in its efforts to raise capital for the
Company nor can there be any assurance that the Company will be successful in
its efforts to structure a relationship with a well-known, established company
in its industry to facilitate the Company's expansion plans.
On December 31, 1998 AASP purchased substantially all the assets and assumed
certain liabilities of the Callaway Golf Center[TM] for $1,000,000 payable in
quarterly installments of $25,000 for a 10 year period with no interest. The
Callaway Golf Center generated positive cash flow in the first nine months of
1999. If required to fund corporate operations, management believes that
additional borrowings against the Callaway Golf Center could probably be
arranged although there can be no assurance that the Company would be
successful in securing such financing.
The Company's Chairman has historically loaned funds to the Company as needed.
Such lendings were $1,705,300 at December 31, 1998 and have decreased to
$1,480,000 at September 30, 1999. This decrease is due to the Company
repaying $225,300 of these loans in late March 1999. The remaining loans are
due in the year 2001 and bear interest at ten percent per annum. Interest
payments of $259,619 through September 30, 1999 have been deferred, a practice
which could continue throughout 1999 and 2000, if necessary.
Operating Activities. Net cash used in operating activities was $1,132,091
for the nine months ended September 30, 1999 compared to $4,436,000 for the
nine months ended September 30, 1998. The primary reasons for the difference
relates to (1) a $1,638,900 gain on the sale of the Company's investment in
All-American Golf, LLC in 1998; no such transaction occurred in 1999; (2)
higher SG&A costs in 1999 due to full operations of the SportPark Las Vegas
and the Callaway Golf Center which was not the case in 1998; (3) an
approximate $2.5 million increase in receivables in 1998 compared to a
$210,000 decrease in 1999; and (4) higher depreciation and amortization of
approximately $1.4 million in 1999 compared to $202,000 in 1998.
Investing Activities. Net cash used in investing activities was $884,149 and
$13,710,100 for the nine months ended September 30, 1999 and 1998,
respectively. Uses in 1998 relate to development costs to build the SportPark
Las Vegas whereas 1999 relates to normal leasehold improvement and equipment
expenditures.
Financing Activities. Net cash used in financing activities was $451,922 for
the nine months ended September 30, 1999 compared to net cash provided by
financing activities of $17,854,300 for the nine months ended September 30,
1998. The primary difference between the two periods is in 1998 when the
Company received approximately $17.5 million in financing from third parties
and a principal shareholder to finance the SportPark Las Vegas.
The Company's current and expected sources of working capital are its cash
balances, which were $116,738 at September 30, 1999, and cash flow from
operations including sponsorship fees and advance deposits of various kinds.
Working capital needs have been helped by deferring payments to the lender on
the SportPark, land lease payments to the landlord for both the SportPark and
Golf Center, interest and notes payable balances due to the Company's Chairman
and the Affiliated Store. These deferrals are expected to continue until the
Company is able to raise sufficient capital through the means described
previously. The Company has raised considerable capital in the past 2 years
for development projects. The Company believes that any working capital
deficiency other than debt service that may occur could be funded from a
combination of existing cash balances and, if necessary, additional borrowings
18
<PAGE>
from lenders or other sources. However, there can be no assurance that such
borrowings would be available or at terms acceptable to the Company.
Expansion programs in other locations are not yet definitively planned
although expansion is a strategic objective of the Company. If and when
expansion does occur, such expansion is expected to be funded primarily by
third parties.
GAIN ON SALE OF INVESTMENT IN ALL-AMERICAN GOLF, LLC
On May 5, 1998, AASP sold its 80% interest in All-American Golf, LLC to
Callaway Golf Company in exchange for $1.5 million in cash and the
cancellation of a $3 million collateralized note evidencing amounts loaned to
AASP in March 1998 by Callaway, and related accrued interest thereon. In
connection with the sale of its membership units, AASP resigned as manager of
the LLC and agreed not to compete with the Callaway Golf Center in Clark
County, Nevada for a period of two years. The agreement also provided for a
buy back option to AASP which enabled it to repurchase its 80% equity
ownership for a period of 2 years on essentially the same financial terms that
it sold its interest to the Callaway Golf Company. The Company recorded a gain
of $1,638,900 on the disposal of its 80% interest in All-American Golf, LLC.
On December 31, 1998, AASP acquired substantially all of the assets subject to
certain liabilities of All-American Golf, LLC that had been managing and
operating the Callaway Golf Center. Under terms of this asset purchase
agreement, AASP paid Active Media Services, an entity related to Callaway Golf
Company, $1,000,000 in the form of a promissory note payable in quarterly
installments of $25,000 over a 10-year period without interest.
YEAR 2000
The Company's accounting system was updated during the first quarter of 1999
and is year 2000 compliant. The Company's All-American SportPark has a number
of computerized systems including a point of sale system. The vendors of the
various systems have advised management that they are all year 2000 compliant.
During the first quarter of 1999, the Company hired a consultant to upgrade
all of the Company's other computers and workstations so that they were all
year 2000 compliant. The Company will likely incur additional costs in 1999
which are not expected to exceed $10,000.
The Company may be vulnerable to the failure of other companies to be year
2000 compliant. During the fourth quarter of 1998, the Company commenced its
assessment of whether third parties with which the Company has material
relationships are year 2000 compliant. The Company is continuing to evaluate
its vendors and suppliers to determine if there would be a material effect on
the Company's business if they do not timely become year 2000 compliant. The
Company does not have any significant year 2000 issues related to its
customers. The Company has initiated formal communications with all of its
significant vendors and suppliers with respect to their year 2000 compliance
programs and status during the second quarter of 1999. In late November, 1999
follow-up letters are being sent to vendors and suppliers that have not yet
replied or those that have not provided an acceptable reply.
Although the Company expects its internal systems to be year 2000 compliant,
the failure of any of its significant vendors or suppliers to correct a
material year 2000 problem could result in an interruption in certain normal
business activities and operations.
A reasonably likely worst case scenario would be for a segment of the
19
<PAGE>
Company's SportPark to shut down, and depending on which segment(s) was shut
down and for how long, the Company's results of operations could be adversely
affected. Daytime operations of the Callaway Golf Center[TM] should not be
affected at all. A shutdown of operations at the Rainbow retail store could
also adversely affect the Company.
The Company has initiated a formal contingency planning processes to mitigate
the risk to the Company if any vendors or suppliers are not prepared for the
year 2000; the Company expects to complete this process by November 30, 1999.
With respect to the overall status of the Company's Year 2000 readiness
efforts, the Company estimates that it is approximately 85% of the way towards
completion of these efforts.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this
Quarterly Report contains statements that are forward-looking such as
statements relating to plans for future expansion and other business
development activities, as well as other capital spending and financing
sources. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, those relating to
development and construction activities, dependence on existing management,
leverage and debt service (including sensitivity to fluctuations in interest
rates), domestic or global economic conditions, changes in federal or state
tax laws or the administration of such laws, changes in regulations and
application for licenses and approvals under applicable jurisdictional laws
and regulations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description Location
27 Financial Data Schedule Filed herewith
electronically
(b) Reports on Form 8-K. None.
20
<PAGE>
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 ENTERTAINMENT ENTERPRISES, INC.
Date: November 19, 1999 By:/s/ Voss Boreta
Voss Boreta, President and
Chief Executive Officer
Date: November 19, 1999 By:/s/ Kirk Hartle
Kirk Hartle, Chief Financial Officer
21
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- ----------------
27. FINANCIAL DATA SCHEDULE Filed herewith
electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed balance sheets and unaudited condensed statements of
income found on pages 3 and 4 of the Company's Form 10-QSB for the year to
date, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 116,738
<SECURITIES> 0
<RECEIVABLES> 920,844
<ALLOWANCES> 0
<INVENTORY> 634,120
<CURRENT-ASSETS> 1,868,625
<PP&E> 24,478,920
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,030,730
<CURRENT-LIABILITIES> 2,799,285
<BONDS> 0
<COMMON> 6,107,700
0
0
<OTHER-SE> (4,666,957)
<TOTAL-LIABILITY-AND-EQUITY> 27,030,730
<SALES> 7,704,295
<TOTAL-REVENUES> 7,704,295
<CGS> 3,384,263
<TOTAL-COSTS> 3,384,263
<OTHER-EXPENSES> 6,270,086
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,112,486
<INCOME-PRETAX> (2,234,476)
<INCOME-TAX> (231,719)
<INCOME-CONTINUING> (2,002,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,002,757)
<EPS-BASIC> (.25)
<EPS-DILUTED> (.25)
</TABLE>
