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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
(State of Incorporation) (I.R.S. Employer I.D. No.)
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 587-1060
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the issuer's only class of common stock
($.01 par value) as of January 31, 1998 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1997
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of December 31, 1997 and June 30, 1997 ......... 1-2
Statements of Operations for the Three Months
Ended December 31, 1997 and 1996............................ 3
Statements of Operations for the Six Months
Ended December 31, 1997 and 1996............................ 4
Statements of Cash Flows for the Six Months
Ended December 31, 1997 and 1996............................ 5
Notes to Financial Statements..................................... 6-8
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9-12
Part II - Other Information............................................. 13
Signature............................................................... 14
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 138,135 $ 821,513
Current portion of notes receivable ............. 25,000 25,000
Current portion of notes receivable-affiliate ... 50,000 50,000
Construction contract receivables ............... 300,175 384,732
Other receivables ............................... 41,370 82,972
Costs in excess of billings on
uncompleted contracts ......................... -- 17,462
Inventories ..................................... 104,077 89,118
Prepaid expenses ................................ 242,709 138,583
----------- -----------
Total current assets ......................... 901,466 1,609,380
----------- -----------
Receivables due after one year:
Note receivable ................................. 710,702 728,838
Less deferred gain .............................. (716,025) (716,025)
Note receivable- Affiliate ...................... 501,797 539,306
Note receivable- Other .......................... 24,521 35,477
----------- -----------
520,995 587,596
Less current portion ............................ (75,000) (75,000)
----------- -----------
445,995 512,596
----------- -----------
Property and equipment, at cost:
Land ............................................ 678,000 678,000
Buildings ....................................... 2,461,327 2,461,327
Equipment and leasehold and tenant improvements . 1,969,131 1,752,244
----------- -----------
5,108,458 4,891,571
Less accumulated depreciation and amortization (1,480,670) (1,291,861)
----------- -----------
Net property and equipment .................. 3,627,788 3,599,710
----------- -----------
Other assets:
Undeveloped land, at cost ....................... 1,665,643 1,665,643
Intangible assets, net .......................... 381,313 447,608
Investments ..................................... 1,922,891 2,012,119
Other ........................................... 91,203 86,699
----------- -----------
4,061,050 4,212,069
----------- -----------
$ 9,036,299 $ 9,933,755
=========== ===========
</TABLE>
1
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Assessment district obligation-in default ..... $ 2,208,904 $ 2,097,982
Current portion of long-term debt ............. 422,000 481,000
Notes payable, short-term ..................... 650,000 250,000
Accounts payable .............................. 837,296 738,185
Accrued payroll and related expenses .......... 49,765 116,249
Accrued property taxes ........................ 438,754 408,784
Accrued interest .............................. 29,396 29,353
Accrued frequent bowler program expense ....... 60,059 60,239
Other liabilities ............................. 191,934 147,324
------------ ------------
Total current liabilities .................. 4,888,108 4,329,116
------------ ------------
Long-term debt, excluding current portion ........ 3,921,721 4,061,987
------------ ------------
Distributions received in excess
of basis in investment ........................ 10,337,012 10,083,802
------------ ------------
Tenant security deposits ......................... 26,148 27,847
------------ ------------
Minority interest in consolidated subsidiary ..... 2,212,677 2,212,677
------------ ------------
Commitments and contingencies (Note 4)
Shareholders' equity (deficiency):
Common stock, $.01 par value, 50,000,000 shares
authorized,
27,250,000 shares issued and outstanding .... 272,500 272,500
Additional paid-in capital .................... 1,730,049 1,730,049
Accumulated deficit ........................... (12,279,511) (10,813,818)
------------ ------------
(10,276,962) (8,811,269)
Less note receivable from shareholder ......... (2,072,405) (1,970,405)
------------ ------------
Total shareholders' equity (deficiency) ..... (12,349,367) (10,781,674)
------------ ------------
$ 9,036,299 $ 9,933,755
============ ============
</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, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Bowling .......................................... $ 694,538 $ 677,310
Rental ........................................... 122,164 127,733
Construction ..................................... 601,365 1,093,999
Golf ............................................. 33,202 --
Other ............................................ 24,867 20,970
Other-related party .............................. 28,284 27,664
----------- -----------
1,504,420 1,947,676
----------- -----------
Costs and expenses:
Bowling .......................................... 499,834 450,862
Rental ........................................... 60,558 64,267
Construction ..................................... 510,799 986,776
Golf ............................................. 127,933 --
Development ...................................... 40,770 37,849
Selling, general, and administrative ............. 804,592 451,477
Depreciation and amortization .................... 87,108 160,401
----------- -----------
2,131,594 2,151,632
----------- -----------
Loss from operations ................................ (627,174) (203,956)
----------- -----------
Other income (charges):
Investment income:
Related party .................................. 61,830 57,573
Other .......................................... 683 52,193
Interest expense related to development activities (59,024) (68,692)
Interest expense and amortization of finance costs (121,174) (129,657)
Equity in income of investees .................... 86,029 64,616
Gain on sale, other .............................. -- 55,000
Gain on sale of bowling centers .................. -- --
----------- -----------
(31,656) 31,033
----------- -----------
Net loss ............................................ (658,830) (172,923)
=========== ===========
Per common share (based on weighted average shares outstanding):
Net loss ......................................... ($0.02) ($0.01)
====== ======
</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, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Bowling .......................................... $ 1,315,642 $ 1,667,808
Rental ........................................... 247,843 252,144
Construction ..................................... 1,361,485 1,760,704
Golf ............................................. 83,903 --
Other ............................................ 52,688 61,832
Other-related party .............................. 56,883 55,430
----------- -----------
3,118,444 3,797,918
----------- -----------
Costs and expenses:
Bowling .......................................... 998,294 1,257,608
Rental ........................................... 121,363 118,963
Construction ..................................... 1,211,739 1,559,825
Golf ............................................. 258,018 --
Development ...................................... 73,698 67,459
Selling, general, and administrative ............. 1,632,389 972,653
Depreciation and amortization .................... 271,671 339,725
----------- -----------
4,567,172 4,316,233
----------- -----------
Loss from operations ................................ (1,448,728) (518,315)
----------- -----------
Other income (charges):
Investment income:
Related party .................................. 123,803 113,831
Other .......................................... 34,006 65,815
Interest expense related to development activities (110,922) (137,312)
Interest expense and amortization of finance costs (242,352) (247,019)
Equity in income of investees .................... 178,500 127,447
Gain on sale, other .............................. -- 55,000
Gain on sale of bowling centers .................. -- 1,099,514
----------- -----------
(16,965) 1,077,276
----------- -----------
Net income (loss) ................................... (1,465,693) 558,961
=========== ===========
Per common share (based on weighted average shares outstanding):
Net income (loss) ($0.05) $0.02
====== =====
</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, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. ($1,465,693) $ 558,961
Adjustments to reconcile net income (loss) to the
net cash provided (used) by operating activities:
Amortization of deferred financing
costs and discount .......................... 11,728 16,135
Depreciation and amortization ................. 271,671 339,725
Undistributed income of investees ............. (178,500) (127,447)
Interest income accrued on note
receivable from shareholder ................. (102,000) (90,450)
Interest accrued on assessment
district obligations ........................ 110,922 108,476
Gain on sale .................................. -- (1,154,514)
Changes in assets and liabilities:
Decrease in receivables ....................... 126,159 298,174
(Increase) decrease in costs in
excess of billings .......................... 39,445 71,940
Decrease in inventories ....................... (14,959) --
Increase in prepaid expenses .................. (104,126) (48,975)
Increase in accounts payable .................. 99,111 (359,617)
Decrease in accrued expenses .................. (14,024) (350,856)
Other ......................................... 5,962 26,807
----------- -----------
Net cash used by operating activities ....... (1,214,304) (711,641)
----------- -----------
Cash flows from investing activities:
Increase in notes receivable ..................... 66,601 265,289
Other capital expenditures ....................... (200,151) (31,185)
Proceeds from sale of bowling centers ............ -- 2,045,891
Proceeds from sale of other ...................... 15,000 10,000
Other ............................................ -- (648)
Contributions to investees ....................... -- (30,000)
Distributions from investees ..................... 494,228 380,884
----------- -----------
Net cash provided by investing activities ... 375,678 2,640,231
----------- -----------
Cash flows from financing activities:
Scheduled principal payments ..................... (244,752) (690,549)
Proceeds from short term debt .................... 400,000 --
Other ............................................ -- (750)
----------- -----------
Net cash used by financing activities ....... 155,248 (691,299)
----------- -----------
Net increase (decrease) in cash and equivalents ..... (683,378) 1,237,291
Cash and cash equivalents, beginning of year ........ 821,513 1,093,465
----------- -----------
Cash and cash equivalents, end of year .............. $ 138,135 $ 2,330,756
=========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Long-term debt of $45,486 was incurred to finance capital expenditures of
$79,572 in 1997.
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(Unaudited)
1. The information furnished reflects all adjustments which management
believes are necessary to a fair statement of the Company's financial
position, results of operations and changes in cash flow for the interim
periods.
2. Due to the seasonal fluctuations of the bowling operations, the financial
results for the interim periods ended December 31, 1997 and 1996, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
December 31, June 30,
1997 1997
------------ ------------
Accounted for on the equity method:
Investment in UCV, L.P. .................. $(10,337,012) $(10,083,802)
Vail Ranch Limited Partnership ........... 1,884,965 1,974,193
------------ ------------
(8,452,047) (8,109,609)
Less Investment in UCV, L.P. classified
as liability-
Distributions received in excess of
basis in investment ................... 10,337,012 10,083,802
------------ ------------
1,884,965 1,974,193
------------ ------------
Accounted for on the cost basis:
All Seasons Inns, La Paz ................. 37,926 37,926
------------ ------------
Total investments ..................... $ 1,922,891 $ 2,012,119
============ ============
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
1997 1996
-------- --------
UCV, L.P. .................... $178,500 $127,447
Vail Ranch Limited Partnership -- --
-------- --------
$178,500 $127,447
======== ========
The following is a summary of distributions received from investees:
1997 1996
-------- --------
UCV, L.P. .................... $405,000 $273,500
Vail Ranch Limited Partnership 89,228 107,384
-------- --------
$494,228 $380,884
======== ========
(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, 1997 and
1996 are as follows:
1997 1996
---------- ----------
Revenues ................. $2,250,000 $2,160,000
Operating and general and 744,000 752,000
administrative costs
Depreciation ............. 95,000 98,000
Interest expense ......... 1,054,000 1,054,000
Net income ............... 357,000 255,000
6
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31 1997 AND 1996
(Unaudited)
(c) Investment in Vail Ranch Limited Partners:
On January 1, 1998, Vail Ranch Limited Partners (VRLP) sold the developed
portion of the development for $9,500,000 to Excel Realty Trust, Inc.
(Excel). In addition, VRLP entered into a joint venture agreement with
Excel to develop the remaining 13 acres for which VRLP will receive a
$1,000,000 distribution from the new joint venture upon execution of the
joint venture agreement, which is expected in February 1998. VRLP is in the
process of determining the total distributions to be made from the sale
proceeds, however, the Company received a partial distribution of
$1,286,600 in January 1998. VRLP estimates that the Company will receive an
additional $700,000 in February when the final distributions from the sales
proceeds are calculated.
4. Contingencies:
(a) Old Vail Partners (OVP), a consolidated subsidiary and 50 percent owned by
the Company, owns approximately 33 acres of undeveloped land that 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 was issued by the assessment district to fund the improvements.
The annual payments (made in semiannual installments) due related to the
bonded debt are approximately $144,000 for the 33 acres. The payments
continue through the year 2014 and include interest at approximately 7-3/4
percent. OVP is delinquent in the payment of property taxes and assessments
for the last five years. The property is currently subject to default
judgments to the County of Riverside, California totaling approximately
$1,467,976 regarding delinquent assessment district payments ($1,024,542)
and property taxes ($443,434).
The principal balance of the allocated portion of the assessment district
bonds ($1,184,362 at December 31, 1997 and $1,208,224 at June 30, 1997),
and delinquent principal, interest and penalties ($1,024,542 at December
31, 1997 and $889,758 at June 30, 1997) are classified as "Assessment
district obligation- in default" in the consolidated balance sheet. In
addition, accrued property taxes in the balance sheet include $443,434 at
December 31, 1997 and $399,140 at June 30, 1997 of delinquent property
taxes and late fees related to the 33-acre parcel.
In November 1993, the City of Temecula adopted a general development plan
that designated the 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 OVP's property from a "commercial" to "professional office" use.
The property is subject to Assessment District liens that 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.
7
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31 1997 AND 1996
(Unaudited)
5. Significant Events:
(a) Short term debt: The Company's $300,000 line of credit expired on November
1, 1997 and was not renewed. In November 1997, the Company entered into a
short-term loan agreement with Loma Palisades, Ltd. (Loma), an affiliate of
the Company's partner in UCV, whereby Loma will lend the Company up to
$800,000. The loan bears interest at "Wall Street" prime rate plus 1
percent on the amounts drawn. Interest is payable monthly , the principal
is due within 30 days of demand and the agreement will expire upon
consummation of new financing for UCV. As of December 31, 1997, the Company
had borrowed $450,000 of which $250,000 was repaid in January 1998.
(b) Effective January 1, 1998, the Company sold its wholly owned subsidiary,
Ocean West Builders, Inc. (OWB), to Michael Assof, OWB's president, for
approximately $70,000 cash. The sale price is subject to adjustment based
on the profits realized on jobs in progress at December 31, 1997. The
following is a summary of the results of OWB's operations for the three and
six month periods ended December 31, 1997 and 1996:
Three Months Six Months
------------ ----------
1997 1996 1997 1996
---- ---- ---- ----
Revenues ......... 601,365 1,093,999 1,361,485 1,760,704
Construction costs 510,799 986,776 1,211,739 1,559,825
Selling, general &
administrative:
Direct ........ 65,986 100,393 123,647 145,111
Allocated ..... 17,000 43,000 44,000 63,000
Depreciation ..... 2,555 1,614 4,193 3,228
Interest ......... 657 397 980 817
Net income (loss) 4,368 (38,181) (23,074) (11,277)
The following is a summary of the assets and liabilities of OWB included in
the consolidated financial statements at June 30, 1997 and December 31,
1997:
June 30 December 31
------- -----------
Cash ................................. 84,995 37,471
Accounts receivable .................. 399,460 309,022
Costs in excess of billings .......... 17,462 (21,983)
Prepaid expense ...................... 14,277 13,553
Equipment ............................ 35,117 44,041
Accumulated depreciation ........... (17,348) (6,687)
Accounts payable ..................... 325,675 260,446
Accrued expenses ..................... 40,162 29,286
Note payable ......................... 11,052 19,007
Advances from parent ................. 134,829 68,829
Accumulated deficit .................. 22,245 (2,151)
The Company will continue to provide administrative services to OWB and
receive a fee based on an allocation of its corporate overhead.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Liquidity and Capital Resources
-------------------------------
Excluding the balance of the assessment-district-obligation-in-default and
property taxes in default related to the same property which are included in
current liabilities, the Company has a working capital deficit of $1,334,304 at
December 31, 1997, which is a $1,111,690 increase from the similarly calculated
working capital deficit of $222,614 at June 30, 1997. The increase in the
working capital deficit is attributable to the cash used by operating activities
for the six months ended December 31, 1997. The following is a schedule of the
cash provided (used) before changes in assets and liabilities segregated by
business segments:
1997 1996 Change
---------- ---------- ----------
Bowling .................... (209,000) (207,000) (2,000)
Rental ..................... 84,000 82,000 2,000
Construction ............... (19,000) (8,000) (11,000)
Golf ....................... (981,000) -- (981,000)
Development ................ (78,000) (100,000) 22,000
General corporate expense
and other ................ (149,000) (116,000) (33,000)
---------- ---------- ----------
Cash provided (used) by
operations ............... (1,352,000) (349,000) (1,003,000)
Capital expenditures, net
of financing ............. (200,000) (31,000) (169,000)
Principal payments on
long-term debt .......... (245,000) (691,000) 446,000
---------- ---------- ----------
Cash used .................. (1,797,000) (1,071,000) (726,000)
---------- ---------- ----------
Distributions received
from investees .......... 494,000 381,000 113,000
Proceeds from sale of assets 15,000 2,056,000 (2,041,000)
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 33 acres of undeveloped land. The
County of Riverside has obtained judgments for the defaults in assessment
district payments and property taxes. The amount due to cure the judgments as of
December 31, 1997 is $1,467,000. 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 Temecula to effectively down-zone the property. As a result of the
judgments and the attempts to down-zone the property, the recoverability of the
carrying value of this property is uncertain.
UCV, L.P. (UCV) is currently evaluating the feasibility of redeveloping the
apartment project from 542 units to approximately 1,100 units. UCV has commenced
seeking new short-term financing for the property in an amount up to
$25,000,000, which if obtained would provide sufficient funds for funding
redevelopment planning costs over the next 18 months and for funding
distributions to the partners of approximately $2,000,000 each. UCV estimates
the annual debt service on the new financing will not exceed its current level
of debt service as a result of a reduction in the annual interest rate from 10
percent to current rates of approximately 7-1/2 percent.
The Company entered into a short-term loan agreement with Loma Palisades, Ltd.
(Loma), an affiliate of the Company's partner in UCV, whereby Loma will lend the
Company up to $800,000. The loan bears interest at "Wall Street" prime rate plus
1 percent on the amounts drawn. Interest is payable monthly and the principal is
due within 30 days of demand and the agreement will expire upon consummation of
new financing for UCV.
On January 1, 1998, Vail Ranch Limited Partners (VRLP) sold the developed
portion of the development for $9,500,000 to Excel Realty Trust, Inc. (Excel).
In addition, VRLP entered into a joint venture agreement with Excel to develop
the remaining 13 acres for which VRLP will receive a $1,000,000 distribution
from the new joint venture upon execution of the joint venture agreement, which
is expected in February 1998. VRLP is in the process of determining the total
distributions to be made from the sale proceeds, however, the Company received a
partial distribution of $1,286,600 in January 1998. The Company estimates that
it will receive an additional $700,000 from the sales proceeds. In accordance
with the partnership agreement for Old Vail Partners (OVP), the Company paid
$400,000 to OVP's limited partner in February 1998. The limited partner will be
entitled up to an additional $120,000 when the Company receives the remainder of
the distribution from VRLP.
9
<PAGE>
Management estimates negative cash flow of $50,000 to $100,000 for the remaining
two quarters in the year ending June 30, 1998 from operating activities after
adding estimated distributions from UCV ($99,000) and Vail Ranch Limited
Partners ($1,466,000 net of distribution to OVP limited partner) and deducting
capital expenditures and scheduled principal payments on long-term debt and
short-term debt. The Company believes the cash at December 31, 1997 plus the
proceeds from the short-term loan and the refinancing of UCV will be sufficient
to fund the cash flow deficit for the remaining year.
Results of Operations
---------------------
The following is a summary of the comparison of the results of operations of the
six and three-month periods ended December 31, 1997 to the same period in 1996:
<TABLE>
<CAPTION>
Real Real Unallocated
Estate Estate Constr- And
Bowling Operation Development uction Golf Other Totals
------- --------- ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
- ----------------
Revenues .......... (352,166) (4,301) -- (399,219) 83,903 $ (7,691) (679,474)
Costs ............. (259,314) 2,400 6,239 (348,086) 258,018 -- (340,743)
SG&A-direct ....... (32,039) -- -- (21,464) 730,004 (16,765) 659,736
SG&A-allocated .... (41,127) (5,000) -- (19,000) 61,000 4,127 --
Depreciation and
amortization .... (117,857) 4,763 -- 965 37,321 6,754 (68,054)
Interest expense .. (20,988) (654) (26,442) 163 15,901 963 (31,057)
Equity in investees -- 51,053 -- -- -- -- 51,053
Gain (loss) on
disposition ..... (1,154,514) -- -- -- -- -- (1,154,514)
Segment profit
(loss) .......... (1,035,355) 45,243 20,203 (11,797) (1,018,341) (2,770) (2,002,817)
Investment income . (21,837)
Net loss .......... (2,024,654)
Three Months Ended
- ------------------
Revenues .......... 17,228 (5,569) -- (492,634) 33,202 4,517 (443,256)
Costs ............. 48,972 (3,709) 2,921 (475,977) 127,933 -- (299,860)
SG&A-direct ....... 31,333 -- -- (34,407) 369,252 (13,063) 353,115
SG&A-allocated .... (14,572) (4,000) -- (26,000) 29,000 15,572 --
Depreciation and
amortization .... (99,759) 1,303 -- 941 20,372 3,850 (73,293)
Interest expense .. (18,040) (332) (9,794) 260 7,726 2,029 (18,151)
Equity in investees -- 21,413 -- -- -- -- 21,413
Gain (loss) on
disposition ..... (55,000) -- -- -- -- -- (55,000)
Segment profit
(loss) .......... 14,294 22,582 6,873 42,549 (521,081) (3,871) (438,654)
Investment income . (47,253)
Net loss .......... (485,907)
</TABLE>
BOWLING OPERATIONS:
- -------------------
On August 7, 1996, the Company sold its three bowling centers located in Georgia
and then on December 15, 1996, the Company sold the video game operations that
were located in the two San Diego bowling centers. The Company has no plans to
sell the two remaining bowling centers located in San Diego.
10
<PAGE>
The following is a summary of the changes to the components of the loss from
operations of the bowling segment during the six and three-month periods ended
December 31, 1997 compared to 1996:
Georgia Video California
Bowls Games Bowls Combined
----- ----- ----- --------
Six Months:
-----------
Revenues ............ (332,787) (25,603) 6,224 (352,166)
Bowl costs .......... (253,846) (16,985) 11,517 (259,314)
Selling, general & administrative:
Direct ............ (87,679) -- 55,640 (32,039)
Allocated ......... (33,296) -- (7,831) (41,127)
Depreciation ........ (18,488) -- (99,369) (117,857)
Interest expense .... (20,301) (2,355) 1,668 (20,988)
Segment profit before
gain on sale ..... 80,823 (6,263) 44,599 119,159
Three Months:
-------------
Revenues ............ (826) (10,409) 28,463 17,228
Bowl costs .......... 6,337 (8,381) 51,016 48,972
Selling, general & administrative:
Direct ............ 3,116 -- 28,217 31,333
Allocated ......... -- -- (14,572) (14,572)
Depreciation ........ -- -- (99,759) (99,759)
Interest expense .... (12,790) (1,193) (4,057) (18,040)
Segment profit before
gain on sale ..... 2,511 (835) 67,618 69,294
The following is a comparison of operations of the two remaining bowling centers
in California:
Although bowling revenues remained relatively flat in the six-month period, they
increased 4% in the three-month period due to a 20% increase in revenues from
open play. This increase was partially offset by a 4% decline in league play.
Revenues from open play for the six-month period were 10% higher than the prior
year, but declines in league play (4%) offset most of this increase in the
six-month period.
Bowl costs increased by $12,000 (1%) and $51,000 (12%) in the six and three
month periods, respectively. The increase in the three-month period primarily
related to: a $16,000 increase in payroll and $28,000 of pin purchases and lane
maintenance that occurred in a different quarter in 1996
Selling, general and administrative expense directly related to the bowling
segment increased by $56,000 (21%) and $28,000 (21%) in the six and three month
periods respectively. The increases are primarily related to increases of
$36,000 and $18,000 in promotion expense in the six and three month periods
respectively. The increase in the six-month period primarily relates to a
$17,000 credit recorded in first quarter of 1996 when the Company discontinued
its frequent bowler program. These costs otherwise increased primarily due to
the Company hiring a full time outside marketer to serve both bowling centers.
Depreciation expense decreased by $99,000 in the three and six month periods due
to equipment and goodwill acquired in 1983, when the bowls were purchased,
becoming fully depreciated during the periods.
RENTAL OPERATIONS:
- ------------------
There were no significant changes to the components of the rental segment in the
six and three-month periods ended December 31, 1997 except for the $51,053 and
$21,413 increases in the equity in income of UCV for the six and three month
periods, respectively. The income of UCV increased primarily due to a $91,000
and $40,000 increase in revenues in the six and three-month periods,
respectively, which were attributable to a 2% increase in rent rates and a
decrease in the vacancy rate from 2.7% to 1.4%.
11
<PAGE>
CONSTRUCTION OPERATIONS:
- ------------------------
Construction revenues decreased by $399,219 and $492,634 in the six and
three-month periods, respectively, because of an unusually large amount of
contracts completed in the previous year. Construction costs also decreased by
$348,086 and $475,977 in the six and three-month periods, respectively, due to
the decrease in contract revenues. Costs as a percentage of construction
revenues were 89% in the six-month periods ended in 1997 and 1996. Costs as a
percentage of construction revenues decreased from 90% to 85% in the three-month
periods ended in 1997 and 1996. Selling, general and administrative costs
related to the construction segment decreased by $21,000 and $34,000 in the six
and three-month periods ended in 1997 primarily related to reduced incentive
compensation.
REAL ESTATE DEVELOPMENT OPERATIONS:
- -----------------------------------
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. This interest expense decreased by
$26,390 and 9,668 in the six and three-month periods, respectively, due to the
payment of a $340,000 note payable in April 1997.
GOLF OPERATIONS:
- ----------------
Sales during the six and three-month periods ended December 31, 1997 continued
to be insignificant because the Company has not yet developed sales with golf
club manufacturers or distributors. The Company expects that it will be another
three to six months before the Company is able to develop sales with these types
of customers. Sales during the six and three-month periods were principally to
custom golf shops. The following is a breakdown of the character of the costs
associated with the golf operation:
Six Three
Months Months
------ ------
Costs of goods sold &
manufacturing overhead 151,000 56,000
Research & development ... 106,000 71,000
------- -------
Total golf costs ..... 257,000 127,000
------- -------
Marketing & promotion .... 505,000 260,000
Administrative-direct .... 225,000 109,000
------- -------
Total SG&A-direct .... 730,000 369,000
------- -------
Allocated corporate costs 61,000 29,000
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of December 31, 1997, there were no changes in legal proceedings from those
set forth in Item 3 of the Form 10-K filed for the year ended June 30, 1997.
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 23, 1997 the Company held its annual shareholder meeting in which
the following item was voted upon:
Tabulation of Votes
-----------------------------------
For Against Abstain
-------- ------- -------
Election of Directors:
- ----------------------
Harold S. Elkan ... 22,932,896 105,399 105,054
Steven R. Whitman . 22,932,296 105,699 105,354
Patrick D. Reiley . 22,932,496 105,574 105,279
James E. Crowley .. 22,932,496 105,599 105,254
Robert A. MacNamara 22,932,496 105,574 105,279
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 17, 1998
-------------------------
By:/s/ Steven R. Whitman
------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 17, 1998
-----------------------
14
<PAGE>
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SPORTS ARENAS, INC. AND SUBSIDIARIES
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<NAME> SPORTS ARENAS, INC. AND SUBSIDIARIES
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