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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 June 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
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(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 August 12, 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 -
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Operations -
Six Months Ended June 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or
Plan of Operation 12
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 947,876 $2,584,900
Accounts receivable 643,585 1,028,800
Inventory 566,119 569,900
Due from Affiliated Store 65,120 19,000
Prepaid expenses and other 297,785 61,900
----------- -----------
Total current assets 2,520,485 4,264,500
Leasehold improvements and equipment, net 24,485,063 24,675,100
Note receivable - related party 20,000 20,000
Deposit for land lease 37,821 225,600
Debt issuance costs, net 361,175 393,300
Other assets 65,319 121,600
----------- -----------
Total assets $27,489,863 $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
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt 575,982 559,300
Current portion of obligations under
capital leases 126,750 121,400
Accounts payable and accrued expenses 1,711,960 1,513,000
Due to Shareholder and Affiliated Store 1,393,918 1,191,900
---------- ---------
Total current liabilities 3,808,610 3,385,600
---------- ---------
Note payable to shareholder 1,480,000 1,705,300
Long-term debt, net of current portion 13,194,022 13,408,100
Obligations under capital leases, net
of current portion 458,242 530,400
Deferred income 670,951 877,100
Deferred tax liability 743,000 743,000
Preferred stock of subsidiary 5,000,000 5,000,000
Minority interest 48,297 607,100
SHAREHOLDERS' EQUITY:
Common stock, no par value; 15,000,000 shares
authorized; 8,135,097 shares issued
and outstanding at June 30, 1999 and
December 31, 1998 6,107,700 6,107,700
Stock options issued 268,300 268,300
Accumulated deficit (4,289,259) (2,932,500)
---------- -----------
Total shareholders' equity 2,086,741 3,443,500
---------- -----------
Total Liabilities and Shareholders' Equity $27,489,863 $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 JUNE 30, 1999 AND 1998
1999 1998
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REVENUES:
Sportpark Las Vegas $ 1,415,390 $ -
Retail Operations 721,074 881,000
Callaway Golf Center(tm) 525,767 223,300
Other 6,250 22,000
----------- -----------
Total revenues 2,668,481 1,126,300
COST OF REVENUES:
Sportpark Las Vegas 509,406 -
Retail Operations 613,605 671,000
Callaway Golf Center(tm) 98,324 36,300
----------- -----------
Total cost of revenues 1,221,335 707,300
----------- -----------
GROSS PROFIT 1,447,146 419,000
OPERATING EXPENSES:
Selling, general and administrative 1,757,917 1,393,175
Depreciation and amortization 419,493 80,300
----------- -----------
Total operating expenses 2,177,410 1,473,475
----------- -----------
OPERATING LOSS (730,264) (1,054,475)
OTHER INCOME (EXPENSE):
Interest income (expense), net (371,709) (50,900)
Gain on sale of investment in
All-American Golf, LLC - 1,638,900
----------- -----------
Income (loss) before income taxes
and minority interest (1,101,973) 533,525
Provision for income taxes - -
----------- -----------
Income (loss) before minority interest (1,101,973) 533,525
Minority interest 315,081 (177,625)
----------- -----------
NET INCOME (LOSS) (786,892) 355,900
=========== ===========
NET INCOME (LOSS) PER SHARE:
Basic:
Net income (loss) $ (.10) $ .06
=========== ===========
Diluted:
Net income (loss) $ (.10) $ .06
=========== ===========
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
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REVENUES:
Sportpark Las Vegas $ 2,464,878 $ -
Retail Operations 1,251,542 1,632,000
Callaway Golf Center(tm) 1,008,770 724,900
Other 12,500 59,000
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Total revenues 4,737,690 2,415,900
COST OF REVENUES:
Sportpark Las Vegas 728,840 -
Retail Operations 1,043,643 1,253,000
Callaway Golf Center(tm) 169,453 112,000
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Total cost of revenues 1,941,936 1,365,000
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GROSS PROFIT 2,795,754 1,050,900
OPERATING EXPENSES:
Selling, general and administrative 3,241,215 2,578,275
Depreciation and amortization 829,787 221,100
----------- -----------
Total operating expenses 4,071,002 2,799,375
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OPERATING LOSS (1,275,248) (1,748,475)
OTHER INCOME (EXPENSE):
Interest income (expense), net (715,201) (186,200)
Gain on sale of investment in
All-American Golf, LLC - 1,638,900
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Loss before income taxes
and minority interest (1,990,449) (295,775)
Provision (benefit) for income taxes (74,887) -
----------- -----------
Loss before minority interest (1,915,562) (295,775)
Minority interest 558,803 114,475
----------- -----------
NET LOSS (1,356,759) (181,300)
=========== ===========
NET LOSS PER SHARE:
Basic and Diluted:
Net loss per share $ (.17) $ (.03)
=========== ===========
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,356,759) $ (181,300)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Minority interest (558,803) (114,475)
Depreciation and amortization 1,017,566 221,100
Gain on sale of investment in
All-American Golf, LLC - (1,638,900)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 385,215 (380,000)
(Increase) decrease in inventory 3,781 (108,000)
Increase in prepaid expenses and other (206,857) (328,725)
Increase in accounts payable
and accrued expenses 198,960 3,999,250
Increase (decrease) in deferred income (206,149) 47,000
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Net cash provided by (used in) operating
activities (723,046) 1,515,950
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CASH FLOWS FROM INVESTING ACTIVITIES:
Project development costs - (11,987,700)
Leasehold improvement expenditures (540,525) (5,000)
Proceeds from sale of interest in
All-American Golf, LLC - 1,250,000
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Net cash used in investing activities (540,525) (10,742,700)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit - (668,000)
Proceeds from notes payable - 7,500,000
Increase in payable to Affiliated Store 155,898 1,495,000
Proceeds from note payable to shareholder - 1,050,000
Payments on notes payable and notes payable
to shareholder (462,543) (400,000)
Principal payments on capital lease
obligations (66,808) (42,250)
----------- -----------
Net cash provided by (used in)
financing activities $ (373,453) $ 8,934,750
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See accompanying notes to condensed consolidated financial statements.
(Continued)
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SPORTS ENTERTAINMENT ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Continued)
1999 1998
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NET DECREASE IN CASH AND CASH EQUIVALENTS $(1,637,024) $ (292,000)
CASH AND CASH EQUIVALENTS,
Beginning of period 2,584,900 384,000
----------- -----------
CASH AND CASH EQUIVALENTS,
End of period $ 947,876 $ 92,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest, net of amounts capitalized $ 677,923 $ 87,715
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired through issuance of
note payable $ 39,847 $ -
=========== ===========
Forgiveness of note payable $ - $ 3,000,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
8
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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") (formerly
known as Las Vegas Discount Golf & Tennis, Inc.) 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 June 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 report on Form 10-QSB for the quarter
ended March 31, 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.
3. 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. While AASP is in noncompliance with certain
debt covenants related to this loan as of June 30, 1999, the lender has
indicated in discussions with AASP that the probability of obtaining waivers
is very good for these conditions of noncompliance.
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 except for the three months ended June 30, 1998.
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 six month periods ended June 30, 1999 and 1998,
respectively. For the three months ended June 30, 1998, the numerator in the
calculation of earnings per share is net income of $355,900; the denominator
includes the weighted average common shares of $5,831,807 and incremental
common shares of 240,000 assuming the conversion of 421,000 stock options at
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an exercise price of $.80 per share. These stock options were considered
dilutive because the average market price during the period of $1.865 exceeded
the exercise price.
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.
No other stock options or similar instruments of AASP or the Company were
granted or issued during the six months ended June 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 June 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 $54,418 and $86,438 for the six months ended June 30, 1999 and
1998, respectively. Purchases of merchandise from the Affiliated Store are
recorded at the Company's cost and totaled $376,800 and $76,000 for the six
months ended June 30, 1999 and 1998, respectively.
6. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment include the following as of June 30, 1999
and December 31, 1998:
1999 1998
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Building $17,650,077 $17,592,200
Land Improvements 3,194,400 3,139,500
Furniture and equipment 2,024,097 1,754,900
Leased equipment 1,120,640 1,041,300
Signs 729,740 651,100
Leasehold improvements 510,097 372,500
Go-Karts 462,780 479,500
Other 113,992 168,100
----------- -----------
25,805,823 25,199,100
----------- -----------
Accumulated depreciation and
amortization (1,320,760) (524,000)
----------- -----------
$24,485,063 $24,675,100
=========== ===========
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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.
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.
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 six months ended June 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
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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 JUNE 30, 1999 AS COMPARED TO THREE
MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased to $2,668,481 in 1999 compared to $1,126,300 in
1998 due to (1) a full three months of operations of the SportPark Las Vegas
which was not operational in the second quarter of 1998 and (2) a full quarter
of operations at the Callaway Golf Center in 1999 compared to just slightly
over one month of operations in the comparable 1998 quarter. Only
approximately one month is included in the 1998 second quarter 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 $1,415,390 to 1999 2nd quarter revenues. The Callaway
Golf Center contributed $525,767 to 1999 2nd quarter revenues and $223,300 to
1998 2nd quarter revenues. Rainbow store revenues declined approximately
$160,000 reflecting extremely competitive conditions in the golf retail
business including lower pricing. Other income declined to $6,250 in 1999
from $22,000 in 1998 due primarily to management fees earned by the Company in
1998 to manage the Callaway Golf Center; no management fees were earned in
1999 since the Company now owns 100% of the Callaway Golf Center.
COST OF REVENUES. Cost of revenues was $1,221,335 in 1999 compared to
$707,300 in 1998 due mainly to the operations of the SportPark Las Vegas and
the Callaway Golf Center 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 $1,757,917 in 1999 from
$1,393,175 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.
DEPRECIATION AND AMORTIZATION. These costs were $419,493 in 1999 compared to
$80,300 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 $371,709 in 1999 compared to
$50,900 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 second quarter 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 nor has it
recorded any tax benefits.
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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 $786,892 compared to net income of
$355,900 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 $1,283,000.
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 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO SIX
MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased to $4,737,690 in 1999 compared to $2,415,900 in
1998 due to (1) a full six months of operations of the SportPark Las Vegas
which was not operational in the first six months of 1998 and (2) a full six
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
$2,464,878 to the 1999 period. The Callaway Golf Center contributed
$1,008,770 to 1999 and $724,900 to 1998. Rainbow store revenues declined
approximately $380,000 reflecting extremely competitive conditions in the golf
retail business including lower pricing. Other income declined to $12,500 in
1999 from $59,000 in 1998 due primarily to management fees earned by the
Company in 1998 to manage the Callaway Golf Center; no management fees were
earned in 1999 since the Company now owns 100% of the Callaway Golf Center.
COST OF REVENUES. Cost of revenues was $1,941,936 in 1999 compared to
$1,365,000 in 1998 due mainly to the operations of the SportPark Las Vegas and
the Callaway Golf Center 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 $3,241,215 in 1999 from
$2,578,275 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.
DEPRECIATION AND AMORTIZATION. These costs were $829,787 in 1999 compared to
$221,100 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 $715,201 in 1999 compared to
$186,200 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
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<PAGE>
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 nor has it
recorded any tax benefits.
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 LOSS. Net loss for 1999 was $1,356,759 compared to $181,300 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 $1,820,200. 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 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had negative working capital of $1,288,125 as
compared to positive working capital of $878,900 at December 31, 1998.
Excluding amounts due to/from related parties, the Company had positive
working capital of $40,673 at June 30, 1999 compared to positive working
capital of $2,051,800 at December 31, 1998 for a decrease of $2,011,127. This
decrease in working capital resulted mainly to heavy start up type costs
incurred in the first six 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 $540,000.
AASP is incurring approximately $280,000 in July and August 1999 to complete
the development of the SportPark Las Vegas "Sports Fields" area. This area is
located directly behind the SportPark's Allsport Arena and is to be used
primarily as a staging area for group and special events. Group and special
events have been and are expected to continue to be a significant source of
revenue for the Company. Plans for the "Sports Fields" include a full court
regulation size basketball court, regulation sand volleyball court, a 70-yard
grass playing field, horseshoe pits and large tented areas for seating and
other activities.
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 $670,951 at June
30, 1999 compared to $877,100 at December 31, 1998. A sponsorship fee of
$250,000 was received in the first quarter of 1999. It is anticipated, but
cannot be guaranteed, that sponsorship fees and advances will be a source of
cash flow for the remainder of 1999.
15
<PAGE>
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.
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 six 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 June 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 $221,910 through June 30, 1999 have been deferred, a practice which could
continue throughout 1999 if necessary.
OPERATING ACTIVITIES. Net cash used in operating activities was $723,046 for
the six months ended June 30, 1999 compared to net cash provided by operating
activities of $1,515,950 for the six months ended June 30, 1998. The primary
reasons for the difference relates to (1) changes in accounts payable and
accrued expenses which increased $3,999,250 in the first six months of 1998
compared to only $198,960 in the comparable period in 1999; (2) 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; (3) 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; and (4) offset by higher depreciation of
approximately $.9 million in 1999 compared to 1998 and decreases in
receivables balances of about $385,000 in 1999 compared to increases in
receivables balances in 1998 of approximately $380,000.
INVESTING ACTIVITIES. Net cash used in investing activities was $540,529 and
$10,742,700 for the six months ended June 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 $373,453 for
the six months ended June 30, 1999 compared to net cash provided by financing
activities of $8,934,750 for the six months ended June 30, 1998. The primary
difference between the two periods is in 1998 when the Company received
approximately $10 million in financing from third parties and a principal
shareholder.
The Company's current and expected sources of working capital are its cash
balances, which were $947,876 at June 30, 1999, and cash flow from operations
including sponsorship fees and advance deposits of various kinds. The Company
has raised considerable capital in the past 2 years for development projects.
The SportPark Las Vegas is now operational. The Company believes that any
working capital deficiency that may occur could be funded from a combination
16
<PAGE>
of existing cash balances and, if necessary, additional borrowings 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 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.
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.
17
<PAGE>
A reasonably likely worst case scenario would be for a segment of the
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 not yet initiated formal contingency planning processes to
mitigate the risk to the Company if any vendors or suppliers are not prepared
for the year 2000, but the Company intends to complete this process by
September 30, 1999. With respect to the overall status of the Company's Year
2000 readiness efforts, the Company estimates that it is approximately 60-70%
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. None.
18
<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: August 12, 1999 By: /s/ Voss Boreta
------------------------------------
Voss Boreta, President and
Chief Executive Officer
Date: August 12, 1999 By: /s/ Kirk Hartle
------------------------------------
Kirk Hartle, Chief Financial Officer
19
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 947,876
<SECURITIES> 0
<RECEIVABLES> 643,585
<ALLOWANCES> 0
<INVENTORY> 566,119
<CURRENT-ASSETS> 2,520,485
<PP&E> 24,485,063
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,489,863
<CURRENT-LIABILITIES> 3,808,610
<BONDS> 0
<COMMON> 6,107,700
0
0
<OTHER-SE> (4,020,959)
<TOTAL-LIABILITY-AND-EQUITY> 27,489,863
<SALES> 4,737,690
<TOTAL-REVENUES> 4,737,690
<CGS> 1,941,936
<TOTAL-COSTS> 1,941,936
<OTHER-EXPENSES> 4,071,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (715,201)
<INCOME-PRETAX> (1,356,759)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,356,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,356,759)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
