UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
(State of Incorporation) (I.R.S. Employer I.D. No.)
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 587-1060
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the issuer's only class of common stock
($.01 par value) as of December 31, 1995 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1995
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of December 31, 1995 and June 30, 1995 1-2
Statements of Operations for the Three Months Ended 3
December 31, 1995 and 1994
Statements of Operations for the Six Months Ended 4
December 31, 1995 and 1994
Statements of Cash Flows for the Six Months Ended 5-6
December 31, 1995 and 1994
Notes to Financial Statements 7-9
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
Part II - Other Information 13
Signature 14
<PAGE>
15
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
---------- ---------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and equivalents ............................................ $ 447,221 $ 120,027
Current portion of notes receivable ............................. 25,000 25,000
Current portion of notes receivable-affiliate ................... 100,000 100,000
Construction contract receivables ............................... 354,120 273,912
Other receivables ............................................... 53,792 41,346
Costs in excess of billings on uncompleted contracts............. 86,800 14,471
Prepaid expenses ................................................ 279,302 148,225
------------ ------------
Total current assets .......................................... 1,346,235 722,981
------------ ------------
Receivables due after one year:
Note receivable ................................................. 731,702 743,144
Less deferred gain ........................................... (726,005) (737,447)
Affiliate ....................................................... 610,119 595,224
Other ........................................................... 99,761 115,100
------------ ------------
715,577 716,021
Less current portion .......................................... (125,000) (125,000)
------------ ------------
590,577 591,021
------------ ------------
Property and equipment, at cost:
Land ............................................................ 1,879,000 1,529,000
Buildings ....................................................... 5,665,528 4,477,544
Equipment and leasehold and tenant improvements ................. 5,711,012 5,702,034
------------ ------------
13,255,540 11,708,578
Less accumulated depreciation and amortization .................. (5,772,791) (5,088,774)
------------ ------------
Net property and equipment .................................... 7,482,749 6,619,804
------------ ------------
Other assets:
Undeveloped land, at cost ....................................... 4,804,496 4,804,496
Capitalized carrying costs on leased land ....................... 86,517 87,465
Goodwill, net ................................................... 672,678 807,216
Deferred loan costs, net ........................................ 108,953 127,002
Investments ..................................................... 1,270,865 1,416,147
Other ........................................................... 129,898 132,309
------------ ------------
7,073,407 7,374,635
------------ ------------
$ 16,492,968 $ 15,308,441
============ ============
</TABLE>
1
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Assessment district obligation - in default ..................... $ 2,040,721 $ 1,928,403
Long-term debt due within one year .............................. 1,501,000 705,000
Note payable, line of credit .................................... 268,742 88,742
Accounts payable ................................................ 1,096,593 663,814
Accrued payroll and related expenses ............................ 188,501 130,890
Accrued property taxes .......................................... 231,090 249,146
Accrued interest ................................................ 123,663 93,350
Accrued frequent bowler program expense ......................... 211,637 200,292
League bowler prize funds ....................................... 323,579 --
Other accrued liabilities ....................................... 142,833 264,488
------------ ------------
Total current liabilities ..................................... 6,128,359 4,324,125
------------ ------------
Long-term debt, excluding current portion .......................... 6,484,249 6,803,635
------------ ------------
Long-term debt, related party ...................................... 346,000 --
------------ ------------
Distributions received in excess of basis
in investment ................................................... 9,734,634 9,559,390
------------ ------------
Tenant security deposits 24,719 24,616
------------ ------------
Minority interests in consolidated subsidiaries .................... 2,119,402 2,212,677
------------ ------------
Commitments and contingencies
Shareholders' equity (deficiency):
Common stock, $.01 par value, 50,000,000 shares
authorized, 27,250,000 shares issued and ...................... 272,500 272,500
outstanding
Additional paid-in capital ...................................... 1,730,049 1,730,049
Accumulated deficit ............................................. (8,659,720) (8,017,273)
------------ ------------
(6,657,171) (6,014,724)
Less note receivable from shareholder ........................... (1,687,224) (1,601,278)
------------ ------------
Total shareholders' equity (deficiency) ....................... (8,344,395) (7,616,002)
------------ ------------
$ 16,492,968 $ 15,308,441
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Bowling .................................... $ 1,930,647 $ 2,038,366
Rental ..................................... 134,939 124,035
Construction ............................... 821,130 278,274
Other ...................................... 31,544 41,496
Other-related party ........................ 26,845 26,547
----------- -----------
2,945,105 2,508,718
----------- -----------
Costs and expenses:
Bowling .................................... 1,220,607 1,219,064
Rental ..................................... 61,851 56,218
Construction ............................... 684,748 233,694
Development ................................ 48,028 51,501
Selling, general and administrative ........ 680,215 682,810
Depreciation and amortization .............. 260,709 247,543
----------- -----------
2,956,158 2,490,830
----------- -----------
Income (loss) from operations ................. (11,053) 17,888
----------- -----------
Other income (charges):
Investment income:
Related party ............................ 54,093 35,514
Other .................................... 17,424 34,032
Interest expense and amortization of finance
costs .................................... (219,889) (176,658)
Interest expense related to development ....
activities ............................... (54,660) (40,493)
Recognize deferred gain .................... 5,792 8,667
Equity in income of investees .............. 55,690 17,781
----------- -----------
(141,550) (121,157)
----------- -----------
Loss before extraordinary gain ................ (152,603) (103,269)
Extraordinary gain from extinguishment of debt -- 1,261,826
----------- -----------
Net income (loss) ............................. $ ( 152,603) $ 1,158,557
=========== ===========
</TABLE>
Per common share (based on weighted average shares outstanding):
<TABLE>
<S> <C> <C>
Loss before extraordinary gain $ (.01) $ (.01)
====== ======
Net income (loss) $ (.01) $ .04
====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Bowling .................................... $ 3,674,447 $ 3,844,838
Rental ..................................... 258,958 275,972
Construction ............................... 1,349,834 701,823
Other ...................................... 61,777 89,566
Other-related party ........................ 53,885 53,286
----------- -----------
5,398,901 4,965,485
----------- -----------
Costs and expenses:
Bowling .................................... 2,439,206 2,499,205
Rental ..................................... 116,778 141,802
Construction ............................... 1,146,139 578,593
Development ................................ 94,404 51,501
Selling, general and administrative ........ 1,425,601 1,463,374
Depreciation and amortization .............. 522,062 552,862
----------- -----------
5,744,190 5,287,337
----------- -----------
Loss from operations .......................... (345,289) (321,852)
----------- -----------
Other income (charges):
Investment income:
Related party ............................ 109,987 77,578
Other .................................... 34,992 40,060
Interest expense and amortization of finance
costs ................................... (440,689) (425,653)
Interest expense related to development ....
activities .............................. (109,355) (40,493)
Recognize deferred gain .................... 11,442 8,667
Equity in income of investees .............. 96,465 94,421
----------- -----------
(297,158) (245,420)
----------- -----------
Loss before extraordinary gain ................ (642,447) (567,272)
Extraordinary gain from extinguishment of debt -- 1,261,826
----------- -----------
Net income (loss) ............................. $ ( 642,447) $ 694,554
=========== ===========
</TABLE>
Per common share (based on weighted average shares outstanding):
<TABLE>
<S> <C> <C>
Loss before extraordinary gain $ (.02) $ (.02)
====== ======
Net income (loss) $ (.02) $ .02
====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................. $(642,447) $ 694,554
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Amortization of deferred financing costs ......... 19,685 22,693
Depreciation and amortization .................... 522,062 552,862
Undistributed income of investees ................ (96,465) (94,421)
Extraordinary gain ............................... -- (1,261,826)
Interest accrued on assessment district obligation 112,318 37,493
Interest accrued on receivable from shareholder .. (85,946) (62,580)
Recognize deferred gain .......................... (11,442) (8,667)
--------- -----------
(182,235) (119,892)
Changes in assets and liabilities:
Increase in other receivables, prepaid
expenses, and costs in excess of billings ..... (296,060) (77,117)
Increase in accounts payable and accrued
expenses ...................................... 715,916 168,987
Other ............................................ (6,473) (32,372)
--------- -----------
Net cash used by operating activities ........... 231,148 (60,394)
--------- -----------
Cash flows from investing activities:
(Increase) decrease in notes receivable ............ 11,886 (21,649)
Capital expenditures ............................... (8,978) (123,973)
Distributions from investees ....................... 244,999 142,500
Contributions to investees ......................... (1,800) (79,960)
Other .............................................. 12,109 --
Purchase of additional interests in investees ...... (5,246) (49,845)
--------- -----------
Net cash provided by investing activities ........ 252,970 (132,927)
--------- -----------
Cash flows from financing activities:
Scheduled principal payments ....................... (336,924 (471,863)
Extinguishment of long-term debt ................... -- (21,658)
Costs associated with refinancing long-term debt ... -- (39,417)
Proceeds from line of credit ....................... 210,000 149,360
Payments on line of credit ......................... (30,000) (15,000)
Other .............................................. -- (11,096)
--------- -----------
Net cash provided (used) by financing activities (156,924) (409,674)
--------- -----------
Net increase (decrease) in cash and equivalents ....... 327,194 (602,995)
Cash and equivalents, beginning of year ............... 120,027 904,744
--------- -----------
Cash and equivalents, end of year ..................... $ 447,221 $ 301,749
========= ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company acquired an additional 29 percent interest in Redbird Properties,
effective July, 1, 1995, in exchange for a $446,000 note payable. See Note
3c regarding resulting effect of consolidating accounts and operations in
the Company's financial statements.
In addition to the initial cash payment of $50,000 to acquire an additional
interest in Old Vail Partners in September 1994, the acquisition resulted
in the following items being included in the Company's consolidated balance
sheet on the date of acquisition: Cash- $155; Prepaid expense- $85;
Undeveloped land- $4,482,867; Investment in Vail Ranch Limited Partners-
$1,122,062; Accounts payable- $4,095; Accrued interest- $50,000; Accrued
property tax- $182,618; Other liabilities- $62,369; Notes payable- $93,819;
Assessment District obligations, in default- $1,760,125; and Minority
interest- $2,262,677. As a result of the consolidation of Old Vail Partners
in the Company's financial statements, the Company's investment of
$1,189,466 in Old Vail Partners was eliminated.
In October 1994, the Company refinanced long term debt of $1,193,800 with a
$1,200,000 note payable. The Company also incurred $45,617 of loan costs
related to the refinancing, of which $39,417 was a cash expenditure.
In October 1994, the Company extinguished debt of $2,461,942 by the transfer
of title to an office building to the lender in complete satisfaction of
the liability. The office building cost and accumulated depreciation were
$1,856,187 and $721,739, respectively. The Company also wrote off the
balance of unamortized loan costs ($19,995), deferred lease commissions
($27,765), and accrued property tax ($3,750) as part of the transactions.
The Company incurred transaction costs of $21,659 to consummate the
transfer.
6
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(Unaudited)
1. The information furnished reflects all adjustments which management
believes are necessary to a fair statement of the Company's financial
position, results of operations and changes in cash flow for the interim
periods.
2. Due to the seasonal fluctuations of the bowling operations, the financial
results for the interim periods ended December 31, 1995 and 1994, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Accounted for on the equity method:
Investment in UCV, L.P. .......................$(9,734,634) $(9,559,390)
Vail Ranch Limited Partnership ................ 1,220,833 1,219,033
Redbird Properties, Ltd. ...................... -- 134,975
----------- -----------
(8,513,801) (8,205,382)
Less Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ............ 9,734,634 9,559,390
----------- -----------
1,220,833 1,354,008
----------- -----------
Accounted for on the cost basis:
All Seasons Inns, La Paz ..................... 50,032 62,139
----------- -----------
$ 1,270,865 $ 1,416,147
=========== ===========
</TABLE>
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
UCV, L.P. .................... $96,465 $134,819
Vail Ranch Limited Partnership -- --
Old Vail Partners ............ -- (39,050)
Redbird Properties, Ltd. ..... -- (1,348)
------- --------
$96,465 $ 94,421
======= ========
</TABLE>
During the six months ended December 31, 1995, the Company received
$244,999 of cash distributions from UCV, L.P. ($102,500 from UCV, L.P. and
$40,000 from Old Vail Partners in 1994).
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated statements of operations based upon the partnership's fiscal
year (March 31). Summarized information from UCV, L.P.'s unaudited
statements of income for the six-month periods ended September 30, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Revenues $ 2,057,000 $ 1,978,000
Operating and general and
administrative costs 718,000 726,000
Depreciation 152,000 118,000
Interest expense 994,000 865,000
Net income 193,000 269,000
</TABLE>
7
<PAGE>
(c) Investment in Redbird Properties, Ltd.
At June 30, 1995, the Company owned a 40 percent limited partnership
interest in Redbird Properties, Ltd. which owns the land and building in
which one of the Company's bowling centers (Red Bird Lanes) is located. The
other 60 percent interest was owned by Harold S. Elkan as a 30 percent
limited partner, and by his brother, directly and indirectly, as a one
percent general partner and 29 percent limited partner. Effective July 1,
1995, the Company purchased an additional 29 percent partnership interest
in Redbird Properties, Ltd. from Harold S. Elkan for $446,000. The purchase
price is payable in monthly installments of interest at 8 percent per annum
plus annual principal payments of $100,000 on January 1, 1996-1999 and
$46,000 on January 1, 2000. The agreement provides for an adjustment to the
purchase price if the partnership subsequently sells the real estate prior
to June 30, 1996. The Company's partnership interest is entitled to a
priority return over the other limited partners. The Company and the other
partners are co-guarantors of a loan to the partnership which is
collateralized by the partnership's land and building. See Note 5 (c)
regarding subsequent event.
The Company had accounted for its investment in Redbird Properties using
the equity method of accounting through June 30, 1995. As a result of
acquiring the additional 29 percent interest, Redbird Properties became a
consolidated subsidiary, effective July 1, 1995. This transaction resulted
in an increase in the following assets and liabilities: Property and
equipment- $1,537,984, Accumulated depreciation- $331,500; Note payable-
$713,538; Note payable, related party- $446,000. The effect of this
transaction was also to eliminate the Company's $134,975 investment in
Redbird Properties and to reduce Minority interests by $93,275, which
relates to advances to the other partners in excess of their basis. The
following is summarized financial information of Redbird Properties, Ltd.
as of and for the six months ended December 31, 1995 (included in the
consolidated condensed financial statements) and 1994 (accounted for using
the equity method).
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Assets $ 679,000 $ 722,000
Liabilities 705,000 741,000
Rent from Red Bird Lanes 55,000 55,000
Interest expense ( 36,000) ( 37,000)
Depreciation ( 21,000) ( 21,000)
Net loss ( 2,000) ( 3,000)
</TABLE>
The note payable was originally scheduled to mature in January 1996 but the
due date was extended to February 7, 1997. The loan is otherwise due in
$9,060 monthly payments including principal and a variable rate of interest
at the banks prime rate (8-3/4% at December 31, 1995). The loan is
collateralized by the land, building and bowling equipment of the Redbird
Lanes bowling center.
4. Contingencies:
(a) Old Vail Partners (OVP), a consolidated subsidiary and 50 percent owned
by the Company, owns approximately 40 acres of undeveloped land and a 50
percent limited partnership interest in Vail Ranch Limited Partnership
(VRLP). VRLP is a partnership formed in September 1994 between OVP and a
third party (Developer) to develop 32 acres of the land that was
contributed by OVP to VRLP. The 40 acres of land owned by OVP and the 32
acres of land owned by VRLP are located within a special assessment
district of the County of Riverside, California (the County) which was
created to fund and develop roadways, sewers, and other required
infrastructure improvements in the area necessary for the owners to
develop their properties. Property within the assessment district is
collateral for an allocated portion of the bonded debt that were issued
by the assessment district to fund the improvements. The annual payments
(made in semiannual installments) due related to the bonded debt are
approximately $156,000 for the 40 acres and $340,000 for the 32 acres.
The payments continue through the year 2014 and include interest at
approximately 7-3/4 percent. OVP and VRLP are delinquent in the payment
of property taxes and assessments for the last two to four years. The
County has judgments for the defaults under the assessment district
obligations on both properties. Other than a notice of levy for the
judgment affecting 33 acres of the 40 acre property, the County has not
yet commenced foreclosure proceedings on these judgments.
8
<PAGE>
The amount due to cure the judgments at December 31, 1995 was
approximately $980,000 for the 32 acres owned by VRLP and $590,000 for
the 40 acres owned by OVP. The principal balance of the allocated
portion of the bonds ($1,513,730) related to the 40 acres, and
delinquent interest and penalties ($526,991) are classified as
"Assessment district obligation- in default" in the consolidated balance
sheet. In addition, accrued property taxes in the balance sheet includes
$221,799 of delinquent property taxes and late fees related to the 40
acre parcel. The judgment related to VRLP's 32 acres will be cured once
construction financing is obtained by VRLP.
In November 1993, the City of Temecula adopted a general development
plan that designates the 40 acres of property owned by OVP as suitable
for "professional office" use, which is contrary to its zoning as
"commercial" use. As part of the adoption of its general development
plan, the City of Temecula adopted a provision that, until the zoning is
changed on properties affected by the general plan, the general plan
shall prevail when a use designated by the general plan conflicts with
the existing zoning on the property. The result is that the City of
Temecula has effectively down-zoned the 40 acre parcel from a
"commercial" to "professional office" use. The parcel is subject to
Assessment District liens which were allocated in 1989 based on a higher
"commercial" use. Since the Assessment District liens are not subject to
reapportionment as a result of re-zoning, a "professional office" use is
not economically feasible due to the disproportionately high allocation
of Assessment District costs. OVP has filed suit against the City of
Temecula claiming that the City's adoption of a general plan as a means
of effectively re-zoning the property is invalid. Additionally, OVP is
claiming that, if the effective re-zoning is valid, the action is a
taking and damaging of OVP's property without payment of just
compensation. OVP is seeking to have the effective re-zoning invalidated
and an unspecified amount of damages. The outcome of this litigation is
uncertain. If the City of Temecula is successful in its attempt to
down-zone the property, the value of the property may be significantly
impaired.
(b)The Company is involved in other various routine litigation and disputes
incident to its business. In the management's opinion, based in part on
the advice of legal counsel, none of these matters will have a material
adverse affect on the Company's financial position.
5. Subsequent Events:
(a)The Company's revolving line of credit limit was increased from $300,000
to $450,000 in January 1996 for the period of January 1996 until May 1,
1996. The line of credit expires in September 1996.
(b)On January 18, 1996, the Company received payment of $160,401 as payment
due in full on the contract for sale of 55 acres of land in Sierra County,
New Mexico. The Company had previously adjusted the carrying value of this
land to $40,000 and deferred recognition of gain on the sale until the
contract was paid. As a result of this payment, the Company will record a
gain on this transaction of $120,401 in the quarter ended March 31, 1996.
(c)Redbird Properties, Ltd. (Redbird Properties) has agreed to sell the real
estate in which Redbird Lanes is located for $2,800,000 cash. The
agreement is subject to several contingencies including government
approvals and soils and engineering studies. The scheduled closing date is
tentatively set for no latter than May 25, 1996. The Company is looking
alternate locations for the Redbird Lanes bowling center.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Liquidity and Capital Resources
The Company's working capital deficit of $4,051,124 as of December 31, 1995 is a
$449,980 increase from the $3,601,144 working capital deficit as of June 30,
1995. The increase in the deficit is primarily attributable to the negative cash
flow from operations after debt service for the six months ended December 31,
1995. This increase is comparable to the same period in 1994 and is reflective
of the seasonality of the bowling industry.
As described in Note 4 of the Notes to Consolidated Condensed Financial
Statements, Old Vail Partners is delinquent in the payment of special assessment
district obligations and property taxes on 40 acres of undeveloped land. The
County of Riverside has obtained judgments for the default in assessment
district payments. The amount due to cure the judgment as of December 31, 1995
is $590,000. This amount will increase by approximately $80,000 related to the
billings due in April 1996. Other than a notice of levy received in November
1995 on a 33 acre portion of the 40 acres of land, the County has not yet
commenced foreclosure proceedings on the judgments. If the County of Riverside
takes the property to public sale and the judgments are not satisfied prior to
the sale, Old Vail Partners could lose title to the property and the property
would not be subject to redemption. Also as described in Note 4 of the Notes to
Consolidated Condensed Financial Statements, Old Vail Partners is contesting an
attempt by the City of Temeculah to effectively down-zone the property. As a
results of the judgments and the attempts to down-zone the property, the
recoverability of the carrying value of this property is uncertain.
Redbird Properties, Ltd. (Redbird Properties) has agreed to sell the real estate
in which Red Bird Lanes is located for $2,800,000 cash. The agreement is subject
to several contingencies including government approvals and soils and
engineering studies. The scheduled closing date is tentatively set for no latter
than May 25, 1996. The net proceeds to the Company from this transaction after
payment of expenses of sale, payment of partnership loans, and distributions to
partners is estimated at $1,700,000. The Company is currently looking for
alternative locations for the Redbird Lanes Bowling Center.
Excluding the proceeds from the potential sale of Redbird Properties' real
estate, management estimates a $150,000 cash flow deficit for the remaining two
quarters in the year ending June 30, 1996 from operating activities after adding
estimated distributions from UCV ($300,000) and deducting capital expenditures
and scheduled principal payments on long-term debt. The Company believes its
cash at December 31, 1995 and the Company's line of credit will be sufficient to
fund the expected cash flow deficit. This analysis does not include
consideration of the following due to their uncertainty: any distributions the
Company may receive from its investment in Vail Ranch Limited Partners; or, any
payments due for delinquent or current property taxes and assessments on
undeveloped land because these amounts may not be paid unless the Company is
able to obtain an alternative source of funds.
Results of Operations
The following is a recap of the circumstances related to the significant
differences between the loss before extraordinary gain for the six and three
month periods ended December 31, 1995 and the same periods in 1994 (increases in
loss are in brackets):
<TABLE>
<CAPTION>
Six Months Three Months
--------- ---------
<S> <C> <C>
Sale of office building in October 1994 10,000 -
Acquisition of controlling interest in
Old Vail Partners in September 1994 ( 101,000) ( 11,000)
Acquisition of controlling interest in
Redbird Properties on July 1, 1995 ( 35,000) ( 20,000)
Changes in construction segment 27,000 23,000
Reduction in corporate expenses 31,000 -
Other changes in the rental segment 41,000 6,000
Other changes in bowling segment ( 61,000) ( 57,000)
Increase in equity in income of investees - 38,000
Other changes 13,000 ( 28,000)
---------- ----------
Net change for period ( 75,000) ( 49,000
========== ==========
</TABLE>
10
<PAGE>
BOWLING OPERATIONS:
The following is a recap of the changes to the components related to the loss
from operations of the bowling segment during the six and three month periods
ended December 31, 1995 compared to the same periods in 1994:
<TABLE>
<CAPTION>
Six Months Three Months
--------- ---------
<S> <C> <C>
Bowling revenues:
Bowling shoe rental revenues ( 97,000) ( 72,000)
Food and beverage revenues ( 71,000) ( 39,000)
Other revenues ( 3,000) 3,000
---------- ----------
Net changes ( 171,000) ( 108,000)
---------- ----------
Bowling costs:
Increase(decrease)in payroll & related expense ( 17,000) 13,000
Decrease in rent- Redbird Properties ( 55,000) ( 28,000)
Increase in-rent other 29,000 14,000
Other changes to bowling costs (17,000) 3,000
---------- ----------
Net changes ( 60,000) 2,000
---------- ----------
Selling, general and administrative expenses:
Reduction in payroll and related expenses ( 39,000) ( 29,000)
Reduction in frequent bowler program expense ( 42,000) ( 36,000)
Increase in other promotional expenses 44,000 6,000
Reduction in insurance expense ( 13,000) ( 11,000)
Other changes 5,000 6,000
---------- ----------
Net changes ( 45,000) ( 64,000)
---------- ----------
Depreciation and amortization
Increase related to Redbird Properties 34,000 17,000
Depreciation of assets acquired in 1988 ( 34,000) -
Other changes ( 1,000) ( 2,000)
---------- ----------
Net changes ( 1,000) 15,000
----------- ----------
Interest expense:
Increase related to Redbird Properties 56,000 28,000
Other decreases ( 25,000) ( 12,000)
---------- ----------
31,000 16,000
---------- ----------
Net change for period ( 96,000) ( 77,000)
========== ==========
</TABLE>
Bowling revenues decreased by 4% and 5% in the six and three month periods,
respectively, primarily due to the decreases in open and league play at two of
the bowling centers in Georgia and one of the centers in California. Overall,
games played have decreased by 3% in both the six and three month periods. The
average rate paid has also decreased due to special pricing related to open
play. Food and beverage revenues have also decreased, partially because of the
decreased bowling, but also because of a trend towards reduced alcohol
consumption. The ratio of alcoholic beverage sales to bowling sales is down 11%
and 6% for the six and three month periods, respectively.
On July 1, 1995, the Company acquired a controlling interest in Redbird
Properties, Ltd., which owns the land and building in which Redbird Lanes
bowling center is located and had previously been an unconsolidated subsidiary.
The consolidation of Redbird Properties, Ltd., effective July 1, 1995, resulted
in reductions in rent expense in the six and three month periods as a result of
its elimination in consolidation and a corresponding increase in depreciation
and interest expense related to ownership of the property. This decrease in rent
expense was partially offset by scheduled rent increases at one of the other
bowling centers.
Bowling costs and selling, general and administrative costs both decreased due
to decreases in payroll and related expenses as a result of staffing changes
implemented in December 1994. The payroll reductions will not likely be
significant in the future now that they have been in place over one year.
11
<PAGE>
The reduction of selling, general and administrative expense attributable to the
frequent bowler program was the result of the actual points awarded at the end
of the year being less than the rate used for accrual purposes. The Company has
adjusted its accrual rate for future months so this decrease is not likely to
recur. Promotional expenses otherwise increased primarily due the use of free
promotional bowling and other special pricing used in programs during the first
quarter. The decrease in insurance expense was attributable to lower insurance
rates at all six bowling centers on the policies that renewed in September 1995.
Other than the change related to acquiring a controlling interest in Redbird
Properties, depreciation expense decreased primarily due to the expiration of
the useful life used to depreciate assets for a bowling center acquired in
1988.
Other than the change related to acquiring a controlling interest in Redbird
Properties, interest expense decreased generally due to a reduction of the
outstanding balances of notes payable and decreases in the interest rates of
some loans.
RENTAL OPERATIONS:
In October 1994, the Company transferred title in an office building to the
lender in complete satisfaction of a related note payable. As a result of the
disposition of this office building, the following items increased (decreased):
<TABLE>
<CAPTION>
Six Three
Months Months
------- ------
<S> <C> <C>
Bowling revenues:
Rental revenues ................... (50,000) --
Rental costs ...................... (22,000) 3,000
Depreciation ...................... (27,000) --
Interest expense .................. (12,000) 17,000
Loss from rental operations ....... (11,000) 20,000
</TABLE>
Rental revenues otherwise increased by $33,000 and $11,000 in the six and three
month periods due to improved occupancy at the remaining office building during
each of those periods and due to the inclusion in last year's first quarter of
$11,000 of rental revenues from Old Vail Partners, which became a consolidated
subsidiary on October 1, 1994.
Interest expense related to the rental segment otherwise decreased by $18,000
during the six month period as a result of refinancing the loan collateralized
by the remaining office building in October 1994 with a loan at a lower interest
rate.
OTHER ACTIVITIES:
Construction revenues and costs increased in the six and three month periods due
to several large tenant improvement contracts that were completed during the
second quarter. Construction costs as a percentage of construction revenues
stayed relatively consistent in the range of 82%-84% during the six and three
month periods. Selling, general and administrative costs related to the
construction segment increased by $53,000 and $68,000 during the six and three
month periods, respectively, primarily due to increased incentive compensation
as a result of the increased profitability in the second quarter.
Development costs and expenses primarily consists of legal costs incurred to
contest the City of Temecula's attempts to down-zone the undeveloped land owned
by Old Vail Partners. Interest expense related to development activities
primarily relates to interest accrued on the past due and current assessment
district obligations of Old Vail Partners. Old Vail Partners became a
consolidated subsidiary on October 1, 1994.
Other than changes associated with the bowling and construction segments,
selling, general and administrative expense decreased by $38,000 (14%) in 1995.
This reduction is primarily due to reductions in corporate office payroll
($26,000) and travel expenses. The reduction in payroll expense is the result of
some restructuring that was implemented in January 1995.
The equity in income of investees increased by $38,000 in the three month period
due to improved occupancy of University City Village (UCV). This increase in the
second quarter offset a $76,000 decrease in the equity of income of UCV in the
first quarter due to the increased interest expense resulting from refinancing
the long term debt in June 1994. The first quarter decrease in equity in income
of investees was partially offset by a $40,000 decrease in the equity in loss of
Old Vail Partners in the first quarter because Old Vail Partners became a
consolidated subsidiary in October 1995.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of December 31, 1995, there were no changes in legal proceedings from
those set forth in Item 3 of the Form 10-K filed for the year ended June
30, 1995.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults upon Senior Securities
N/A
ITEM 4. Submission of Matters to a Vote of Security Holder
On December 27, 1995 the Company held its annual shareholder meeting in
which the following items were voted upon:
<TABLE>
<CAPTION>
Tabulation of Votes
For Against Abstain
------- ------- --------
<S> <C> <C> <C>
Bowling revenues:
Election of Directors:
Harold S. Elkan 21,904,457 - 47,174
Steven R. Whitman 21,905,357 - 46,274
Patrick D. Reiley 21,904,882 - 46,749
James E. Crowley 21,905,382 - 46,249
Robert A. MacNamara 21,905,382 - 46,249
Selection of KPMG Peat Marwick LLP as
certified public accountants for
the year ending June 30, 1996 21,916,420 10,057 25,154
</TABLE>
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
13
<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 ARENAS, INC.
By: /s/ Harold S. Elkan
--------------------------
Harold S. Elkan, President and Director
Date: February 12, 1996
------------------
By:/s/ Steven R. Whitman
--------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 12, 1996
-------------------
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 447,221
<SECURITIES> 0
<RECEIVABLES> 532,912
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,346,235
<PP&E> 13,255,540
<DEPRECIATION> 5,772,791
<TOTAL-ASSETS> 16,492,968
<CURRENT-LIABILITIES> 6,128,359
<BONDS> 6,484,249
0
0
<COMMON> 272,500
<OTHER-SE> (6,929,671)
<TOTAL-LIABILITY-AND-EQUITY> 16,492,968
<SALES> 0
<TOTAL-REVENUES> 5,398,901
<CGS> 0
<TOTAL-COSTS> 3,796,527
<OTHER-EXPENSES> 1,947,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 550,044
<INCOME-PRETAX> (642,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (642,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (642,447)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
