UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 March 31, 1996 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1996
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of March 31, 1996 and June 30, 1995 1-2
Statements of Operations for the Three Months Ended
March 31, 1996 and 1995 3
Statements of Operations for the Nine Months Ended
March 31, 1996 and 1995 4
Statements of Cash Flows for the Nine Months Ended
March 31, 1996 and 1995 5-6
Notes to Financial Statements 7-10
Item 2.- Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Part II - Other Information 15
Signature 16
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
$
Cash and equivalents 332,035 $ 120,027
Current portion of notes receivable 25,000 25,000
Current portion of notes
receivable-affiliate 100,000 100,000
Construction contract receivables 430,284 273,912
Other receivables 18,184 41,346
Costs in excess of billings on uncompleted
contracts 10,648 14,471
Prepaid expenses 255,344 148,225
------------- -----------
Total current assets 1,171,495 722,981
------------- -----------
Receivables due after one year:
Note receivable 725,764 743,144
Less deferred gain ( 726,005) ( 737,447)
Affiliate 529,293 595,224
Other 90,624 115,100
------------- -----------
619,676 716,021
Less current portion ( 125,000) ( 125,000)
------------- -----------
494,676 591,021
------------- -----------
Property and equipment, at cost:
Land 1,879,000 1,529,000
Buildings 5,665,876 4,477,544
Equipment and leasehold and tenant
improvements 5,717,513 5,702,034
------------- -----------
13,262,389 11,708,578
Less accumulated depreciation and
amortization ( 5,947,951) ( 5,088,774)
------------- -----------
Net property and equipment 7,314,438 6,619,804
------------- -----------
Other assets:
Undeveloped land, at cost 4,764,496 4,804,496
Capitalized carrying costs on leased land 86,043 87,465
Goodwill, net 605,409 807,216
Deferred loan costs, net 106,178 127,002
Investments 1,286,865 1,416,147
Other 128,325 132,309
------------- -----------
6,977,316 7,374,635
------------- -----------
$15,957,925 $15,308,441
============ ==========
</TABLE>
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- --------
(Unaudited)
<S> <C> <C>
Current liabilities:
Assessment district obligation - in default $ 2,092,932 $ 1,928,403
Long-term debt due within one year 770,000 705,000
Note payable, line of credit - 88,742
Accounts payable 854,053 663,814
Accrued payroll and related expenses 95,364 130,890
Accrued property taxes 290,565 249,146
Accrued interest 106,157 93,350
Accrued frequent bowler program expense 236,577 200,292
League bowler prize funds 507,040 -
Other accrued liabilities 153,504 264,488
------------ ------------
Total current liabilities 5,106,192 4,324,125
------------ ------------
Long-term debt, excluding current portion 7,049,589 6,803,635
------------ ------------
Long-term debt, related party, excluding
current portion 246,000 -
------------ ------------
Distributions received in excess of basis
in investment 9,693,086 9,559,390
------------ ------------
Tenant security deposits 24,239 24,616
------------ ------------
Minority interests in consolidated
subsidiaries 2,119,752 2,212,677
------------ ------------
Commitments and contingencies
Shareholders' equity (deficiency):
Common stock, $.01 par value, 50,000,000
shaes authorized, 27,250,000 shares issued
and outstanding 272,500 272,500
Additional paid-in capital 1,730,049 1,730,049
Accumulated deficit (8,550,680) (8,017,273)
------------ ------------
(6,548,131) ( 6,014,724)
Less note receivable from shareholder ( 1,732,802) ( 1,601,278)
------------ ------------
Total shareholders' equity (deficiency) ( 8,280,933) ( 7,616,002)
------------ ------------
$ 15,957,925 $ 15,308,441
============ ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Bowling $ 2,207,468 $ 2,214,821
Rental 120,537 115,751
Construction 294,811 452,844
Other 38,916 69,919
Other-related party 27,051 26,556
----------- -----------
2,688,783 2,879,891
----------- -----------
Costs and expenses:
Bowling 1,213,613 1,257,000
Rental 69,005 58,012
Construction 285,276 380,579
Development 44,676 27,140
Selling, general and administrative 700,947 663,187
Depreciation and amortization 259,130 247,864
----------- -----------
2,572,647 2,633,782
----------- -----------
Income from operations 116,136 246,109
----------- -----------
Other income (charges):
Investment income:
Related party 56,557 38,616
Other 17,276 17,785
Interest expense and amortization of
finance costs ( 201,682) ( 193,852)
Interest expense related to development
activities ( 54,551) ( 52,549)
Gain on sale of undeveloped land 120,401 -
Recognize deferred gain - 5,375
Equity in income of investees 54,903 24,272
----------- -----------
7,096) ( 160,353)
----------- -----------
Net income $ 109,040 $ 85,756
=========== ===========
</TABLE>
Per common share (based on weighted average
shares outstanding):
<TABLE>
<S> <C> <C>
Net income $ .00 $ .01
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Bowling $ 5,881,915 $ 6,059,659
Rental 379,495 380,823
Construction 1,644,645 1,154,667
Other 100,693 170,385
Other-related party 80,936 79,842
----------- -----------
8,087,684 7,845,376
----------- -----------
Costs and expenses:
Bowling 3,652,819 3,756,205
Rental 185,783 199,814
Construction 1,431,415 959,172
Development 139,080 78,641
Selling, general and administrative 2,126,548 2,126,561
Depreciation and amortization 781,192 800,726
----------- -----------
8,316,837 7,921,119
----------- -----------
Loss from operations ( 229,153) ( 75,743)
----------- -----------
Other income (charges):
Investment income:
Related party 166,543 120,292
Other 52,269 53,747
Interest expense and amortization of
finance costs ( 642,371) ( 619,505)
Interest expense related to development
activities ( 163,906) ( 93,042)
Gain on sale of undeveloped land 120,401 -
Recognize deferred gain 11,442 14,042
Equity in income of investees 151,368 118,693
----------- -----------
( 304,254) ( 405,773)
----------- -----------
Loss before extraordinary gain ( 533,407) ( 481,516)
Extraordinary gain from extinguishment of
debt - 1,261,826
----------- -----------
Net income (loss) $ ( 533,407) $ 780,310
=========== ===========
</TABLE>
Per common share (based on weighted average shares outstanding):
<TABLE>
<S> <C> <C>
Loss before extraordinary gain $ (.02) $ (.02)
Net income (loss) $ (.02) $ .03
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ ( 533,407) $ 780,310
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Amortization of deferred financing costs 29,957 30,402
Depreciation and amortization 781,192 800,726
Undistributed income of investees ( 151,368) ( 118,693)
Extraordinary gain - ( 1,261,826)
Interest accrued on assessment district
obligation 164,529 63,221
Interest accrued on receivable from
shareholder ( 131,524) ( 93,870)
Recognize deferred gain ( 11,442) ( 14,042)
----------- -----------
147,937 186,228
Changes in assets and liabilities:
Increase in other receivables, prepaid
expenses, and costs in excess of
billings ( 236,506) 60,433
Increase in accounts payable and accrued
expenses 641,280 265,311
Other 36,360 ( 13,487)
----------- -----------
Net cash provided (used) by operating
activities 589,071 498,485
----------- -----------
Cash flows from investing activities:
(Increase) decrease in notes receivable 107,787 ( 46,347)
Capital expenditures ( 15,479) ( 154,986)
Distributions from investees 244,999 142,500
Contributions to investees ( 17,800) ( 79,960)
Purchase of additional interests in
investees ( 5,244) ( 49,845)
----------- -----------
Net cash provided (used) by investing
activities 314,263 ( 188,638)
----------- -----------
Cash flows from financing activities:
Scheduled principal payments ( 602,584) ( 653,139)
Extinguishment of long-term debt - ( 21,658)
Costs associated with refinancing
long-term debt - ( 39,417)
Proceeds from line of credit 210,000 209,360
Payments on line of credit ( 298,742) ( 209,360)
Other - ( 11,096)
----------- -----------
Net cash used by financing activities ( 691,326) ( 725,310)
----------- -----------
Net increase (decrease) in cash and
equivalents 212,008 ( 415,643)
Cash and equivalents, beginning of year 120,027 904,744
----------- -----------
Cash and equivalents, end of year $ 332,035 $ 489,281
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(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.
Inaddition 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.
InOctober 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.
InOctober 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.
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(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. The prior period financial statements have been restated to
reflect adjustments recorded by Vail Ranch Limited Partnership (VRLP) to
capitalize construction period interest and taxes. These adjustments
resulted in the elimination of the $112,222 equity in loss of investee
previously reported for the Company's investment in VRLP.
2. Due to the seasonal fluctuations of the bowling operations, the financial
results for the interim periods ended March 31, 1996 and 1995, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Accounted for on the equity method
Investment in UCV, L.P. $( 9,693,086) $( 9,559,390)
Vail Ranch Limited Partnership 1,236,833 1,219,033
Redbird Properties, Ltd. - 134,975
----------- -----------
( 8,456,253) ( 8,205,382)
Less Investment in UCV, L.P.
classified as liability-
Distributions received in excess
of basis in investment 9,693,086 9,559,390
----------- -----------
1,236,833 1,354,008
Accounted for on the cost basis:
All Seasons Inns, La Paz 50,032 62,139
----------- -----------
$ 1,286,865 $ 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>
1996 1995
----------- ----------
<S> <C> <C>
UCV, L.P. $ 151,368 $ 170,566
Vail Ranch Limited
Partnership - -
Old Vail Partners - ( 50,256)
Redbird Properties, Ltd. - ( 1,617)
---------- ----------
$ 151,368 $ 118,693
========== ==========
</TABLE>
During the nine months ended March 31, 1996, 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 1995).
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated statements of operations based upon the partnership's fiscal
year (March 31). Summarized information from UCV, L.P.'s unaudited
statements of income for the nine-month periods ended December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Revenues $ 3,096,000 $ 2,971,000
Operating and general and
administrative costs 1,068,000 1,083,000
Depreciation 228,000 190,000
Interest expense 1,494,000 1,357,000
Net income 301,000 341,000
</TABLE>
(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 nine months ended March 31, 1996 (included in the
consolidated condensed financial statements) and 1995 (accounted for using
the equity method).
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<C> <C>
Assets $ 668,000 $ 712,000
Liabilities 692,000 732,000
Rent from Red Bird Lanes 83,000 83,000
Interest expense ( 51,000) ( 55,000)
Depreciation ( 33,000) ( 32,000)
Net loss ( 3,000) ( 4,000)
</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 March 31, 1996). 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.
The amount due to cure the judgments at March 31, 1996 was approximately
$1,117,000 for the 32 acres owned by VRLP and $614,000 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 ($579,203) are classified as "Assessment district obligation-
in default" in the consolidated balance sheet. In addition, accrued
property taxes in the balance sheet includes $232,370 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 recorded 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 the Redbird Lanes bowling center is located for $2,800,000
cash. There are no contingencies remaining to the contract and the closing
is scheduled for May 28, 1996. On May 7, 1996, Redbird Lanes ceased
business operations. The Company is looking for alternative locations for
the Redbird Lanes bowling center, however, since no likely location has
been determined, the Company has commenced the process of selling the
assets of Redbird Lanes. The following is a summary of the financial
information of Redbird Lanes and Redbird Properties which are included in
the financial statements:
<TABLE>
<CAPTION>
Redbird
Redbird Lanes Properties
------------------- -----------
1996 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues 1,024,000 998,000 83,000
Bowling costs 587,000 584,000 -
Rent paid to Redbird
Properties 83,000 83,000 -
Selling, general and
administrative 193,000 189,000 3,000
Allocated corporate
overhead 52,000 50,000 -
Depreciation 24,000 26,000 32,000
Interest expense 14,000 16,000 51,000
Net income (loss) 72,000 50,000 ( 3,000)
Property and equipment,
net 133,000 668,000
Total assets 400,000 668,000
Notes payable 100,000 683,000
Total liabilities 261,000 692,000
</TABLE>
In addition to the amount listed for Redbird Properties property and
equipment, the Company has a step-up in basis of $488,000 related to its
purchase of an additional partnership interest in Redbird Properties on
July 1, 1996.
<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 $3,934,697 as of March 31, 1996 is a
$333,553 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 nine months ended March 31,
1996.
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 March
31, 1996 is $614,000. This amount increased 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. There are no
contingencies remaining to the contract and the closing is scheduled for May 28,
1996. On May 7, 1996, Redbird Lanes ceased business operations in preparation
for vacating the premises. The Company is looking for alternative locations for
the Redbird Lanes bowling center, however, since no likely location has been
determined, the Company has commenced the process of selling the assets of
Redbird Lanes. 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 $1,600,000.
Excluding the $1,600,000 proceeds to the Company from the scheduled sale of
Redbird Properties' real estate, management estimates a $450,000 cash flow
deficit for the remaining quarter in the year ending June 30, 1996 from
operating activities after adding estimated distributions from UCV ($200,000)
and deducting capital expenditures and scheduled principal payments on long-term
debt. The Company believes its cash at March 31, 1996 and the Company's line of
credit will be sufficient to fund the expected cash flow deficit. This analysis
also 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.
<PAGE>
Results of Operations
The following is a recap of the circumstances related to the significant
differences between the loss before extraordinary gain for the nine and three
month periods ended March 31, 1996 and the same periods in 1995 (increases in
loss are in brackets):
<TABLE>
<CAPTION>
Nine Three
Months Months
------- ------
<S> <C> <C>
Acquisition of controlling interest
in Redbird Properties on July 1, 1995 ( 49,000) ( 12,000)
Other changes in bowling segment ( 68,000) ( 10,000)
Sale of office building in October
1994 11,000 -
Other changes in the rental segment 37,000 ( 16,000)
Acquisition of controlling interest
in Old Vail Partners in September 1994( 131,000) ( 23,000)
Changes in construction segment ( 10,000) ( 38,000)
Increase in corporate expenses - ( 25,000)
Increase in equity in income of
investees 33,000 30,000
Sale of undeveloped land 120,000 120,000
Other changes 5,000 ( 3,000)
-------- --------
Net change for period ( 52,000) 23,000
======== ========
</TABLE>
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 nine and three month periods
ended March 31, 1996 compared to the same periods in 1994:
<TABLE>
<CAPTION>
Nine
Months Three Months
--------- --------
<S> <C> <C>
Bowling revenues:
Bowling and shoe rental revenues ( 132,000) ( 35,000)
Food and beverage revenues ( 68,000) 3,000
Other revenues 22,000 25,000
---------- ---------
Net changes ( 178,000) ( 7,000)
---------- ---------
Bowling costs:
Increase (decrease) in payroll &
related expense ( 10,000) 5,000
Decrease in rent- Redbird Properties ( 83,000) ( 28,000)
Increase (decrease) in-rent other 20,000 ( 8,000)
Decrease in property taxes (28,000) ( 11,000)
Other changes to bowling costs (2,000) ( 1,000)
---------- ---------
Net changes ( 103,000) (43,000
---------- ---------
Selling, general and administrative expenses:
Increase (decrease) in payroll and
related expenses 12,000) 15,000
Reduction in frequent bowler program
expense 42,000) -
Increase in other promotional
expenses 45,000 -
Expenses related to settlement of
employee lawsuit 21,000 15,000
Reduction in insurance expense ( 21,000) ( 8,000)
Other changes ( 3,000) 12,000
---------- ---------
Net changes ( 12,000) 34,000
---------- ---------
Depreciation and amortization:
Increase related to Redbird
Properties 50,000 17,000
Depreciation of assets acquired in
1988 ( 34,000) -
Other changes ( 2,000) ( 1,000)
---------- ---------
Net changes 14,000 16,000
---------- ---------
Interest expense:
Increase related to Redbird
Properties 79,000 23,000
Other decreases ( 39,000) ( 15,000)
---------- ---------
40,000 8,000
---------- ---------
Net change for period ( 117,000) ( 22,000)
========== =========
</TABLE>
Total bowling revenues decreased by 3% in the nine month period, 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 during the first quarter of the
year. Overall, games played remained flat for the nine and three month periods,
however, the average price per game decreased by 4% in both periods due to
special pricing of 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 8% and 2% for the nine and three month periods, respectively. The
decrease in bowling and shoe rental revenue in the three month period was
partially offset by an increase in lottery commissions earned in the Georgia
bowling centers.
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 nine 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 in
the nine month period due to decreases in payroll and related expenses as a
result of staffing changes implemented in December 1994. However, these changes
were partially offset in the third quarter by some staffing increases that took
place at the two California bowling centers.
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.
The expenses incurred in the third quarter were to completely settle an employee
lawsuit and there should be no further significant expense related to this
matter.
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.
<PAGE>
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 decreased:
<TABLE>
<CAPTION>
Nine Three
Months Months
-------- --------
<S> <C> <C>
Rental revenues ( 50,000) -
Rental costs ( 22,000) -
Depreciation ( 27,000) -
Interest expense ( 12,000) -
Loss from rental operations ( 11,000) -
</TABLE>
Rental revenues otherwise increased by $28,000 in the nine month period and
decreased by $9,000 in the three month period. Rental revenues decreased in the
third quarter due to a 7% drop in occupancy during the quarter as a result of
tenant move-outs. As of March 31, 1996, the spaces had been re-leased. Rental
revenues increased in the nine month period due to improved occupancy at the
remaining office building during each of the first two quarters and due to the
inclusion in this 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 nine 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 nine month period due to a
$542,000 increase in second quarter revenue related to several large tenant
improvement contracts that were completed during the second quarter.
Consequently there was a lag in the commencement of new work in the third
quarter which resulted in a $158,000 decrease in construction revenues in the
third quarter. Construction costs as a percentage of construction revenues
stayed relatively consistent in the range of 83%-87% during the nine month
period. Construction costs rose to 95% of revenues in the third quarter due to
some unexpected completion costs incurred related to jobs closed in the second
quarter. Selling, general and administrative costs related to the construction
segment increased by $28,000 during the nine month period and decreased by
$25,000 primarily due to increased or decreased incentive compensation as a
result of the changes in profitability in the related period.
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. These amounts increased by $60,000 and $18,000 in the nine
and three month periods, respectively. Interest expense related to development
activities primarily relates to interest accrued on the past due
assessment-district-obligations of Old Vail Partners. These amounts increased by
$71,000 and $2,000 in the nine and three month periods, respectively. 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 $16,000 in the nine
month period and increased by $25,000 in the three month period. The reduction
in the nine month period is primarily due to reductions in corporate office
payroll ($26,000) and travel expenses that took place in the first and second
quarters of this fiscal year. The reduction in payroll expense is the result of
some restructuring that was implemented in January 1995. The reductions in
corporate expenses in the first two quarters of the year were offset by
increases in several areas that related to expenditures that had previously been
deferred and should not be a recurring trend.
The equity in income of investees increased by $33,000 and $30,000 in the nine
and three month periods due to improved occupancy of University City Village
(UCV). Increases in occupancy of UCV in the second and third quarters 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.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 1996, 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> <C> <C> <C>
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
<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: May 14, 1996
--------------------
By:/s/ Steven R. Whitman
--------------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 14, 1996
------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 332,035
<SECURITIES> 0
<RECEIVABLES> 573,468
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,171,495
<PP&E> 13,262,389
<DEPRECIATION> 5,947,951
<TOTAL-ASSETS> 15,957,925
<CURRENT-LIABILITIES> 5,106,192
<BONDS> 0
0
0
<COMMON> 272,500
<OTHER-SE> (6,820,631)
<TOTAL-LIABILITY-AND-EQUITY> 15,957,925
<SALES> 0
<TOTAL-REVENUES> 8,087,684
<CGS> 0
<TOTAL-COSTS> 5,409,097
<OTHER-EXPENSES> 2,907,740
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 806,277
<INCOME-PRETAX> (533,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (533,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533,407)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
