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 September 30, 1999
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 October 31, 1999 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of September 30, 1999 (unaudited)
and June 30, 1999 ......................................... 1-2
Unaudited Statements of Operations for the Three
Months Ended September 30, 1999 and 1998 .................. 3
Unaudited Statements of Cash Flows for the Three
Months Ended September 30, 1999 and 1998 .................. 4
Notes to Financial Statements ................................ 5-8
Item 2.- Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 9-12
Item 3. - Quantitative and Qualitative Disclosures about Market Risk . 12
Part II - Other Information .......................................... 13
Signature ............................................................ 14
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
September 30, June 30,
1999 1999
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents ................. $ 195,420 $ 357,906
Current portion of notes
receivable- affiliate .................. 50,000 50,000
Other receivables ......................... 112,250 116,404
Inventories ............................... 304,491 310,160
Prepaid expenses .......................... 269,019 199,668
------------ ------------
Total current assets ................... 931,180 1,034,138
------------ ------------
Receivables due after one year:
Note receivable- affiliate, net ........... 111,452 104,829
Less current portion ...................... (50,000) (50,000)
------------ ------------
61,452 54,829
------------ ------------
Property and equipment, at cost:
Land ...................................... 678,000 678,000
Buildings ................................. 2,461,327 2,461,327
Equipment and leasehold and
tenant improvements .................... 2,164,676 2,137,993
------------ ------------
5,304,003 5,277,320
Less accumulated depreciation
and amortization .................. (2,029,536) (1,968,191)
------------ ------------
Net property and equipment ............ 3,274,467 3,309,129
------------ ------------
Other assets:
Undeveloped land, at cost ................. 1,408,746 1,582,468
Intangible assets, net .................... 282,348 294,423
Investments ............................... 618,853 618,853
Other ..................................... 118,071 104,980
------------ ------------
2,428,018 2,600,724
------------ ------------
$ 6,695,117 $ 6,998,820
============ ============
1
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
September 30, June 30,
1999 1999
------------ ------------
(Unaudited)
Current liabilities:
Assessment district obligation-in default $ 2,628,556 $ 2,565,179
Current portion of long-term debt ........ 284,000 289,000
Accounts payable ......................... 571,769 453,203
Accrued payroll and related expenses ..... 142,151 164,877
Accrued property taxes, in default ....... 607,624 582,859
Accrued interest ......................... 30,342 14,395
Other liabilities ........................ 196,005 246,211
------------ ------------
Total current liabilities ............. 4,460,447 4,315,724
------------ ------------
Long-term debt, excluding current portion ... 4,321,833 3,911,694
------------ ------------
Distributions received in excess of
basis in investment ...................... 12,718,074 12,688,808
------------ ------------
Tenant security deposits .................... 87,970 74,602
------------ ------------
Minority interest in consolidated subsidiary 1,712,677 1,712,677
------------ ------------
Commitments and contingencies (Note 5)
Shareholders' equity deficit:
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 ...................... (16,316,941) (15,415,742)
------------ ------------
(14,314,392) (13,413,193)
Less note receivable from shareholder .... (2,291,492) (2,291,492)
------------ ------------
Total shareholders' deficit ........... (16,605,884) (15,704,685)
------------ ------------
$ 6,695,117 $ 6,998,820
============ ============
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
Revenues:
Bowling .................................. $ 624,572 $ 641,070
Rental ................................... 156,277 137,229
Golf ..................................... 123,930 73,833
Other .................................... 28,457 29,192
Other-related party ...................... 42,699 53,131
------------ ------------
975,935 934,455
------------ ------------
Costs and expenses:
Bowling .................................. 534,770 526,225
Rental ................................... 62,742 64,471
Golf ..................................... 272,872 275,020
Development .............................. 61,333 41,261
Selling, general, and administrative ..... 848,391 953,174
Depreciation and amortization ............ 95,569 93,434
------------ ------------
1,875,677 1,953,585
------------ ------------
Loss from operations ........................ (899,742) (1,019,130)
------------ ------------
Other income (charges):
Investment income:
Related party .......................... 9,920 65,716
Other .................................. 316 11,885
Interest expense related to
development activities ................ (63,376) (57,750)
Interest expense and amortization
of finance costs ...................... (88,768) (90,675)
Loss on sale of undeveloped land ......... (638) --
Equity in income of investees ............ 141,089 112,688
------------ ------------
(1,457) 41,864
------------ ------------
Loss from operations before
extraordinary loss ....................... (901,199) (977,266)
Extraordinary loss from early
extinguishment of investee debt .......... -- (98,500)
------------ ------------
Net loss .................................... $ (901,199) $ (1,075,766)
============ ============
Basic and diluted net loss per common
share (based on 27,250,000 weighted
average common shares outstanding) from:
Operations before extraordinary loss ($ 0.03) ($ 0.04)
Extraordinary loss ................. -- --
-------- --------
Net loss ........................... ($ 0.03) ($ 0.04)
======== ========
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss .................................. ($ 901,199) ($ 1,075,766)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred
financing costs ..................... 2,280 5,839
Depreciation and amortization ......... 95,569 93,434
Equity in income of investees ......... (141,089) (14,188)
Deferred income ....................... 12,000 --
Loss on sale of undeveloped land ...... 638 --
Interest income accrued on note
receivable from shareholder ......... -- (55,111)
Interest accrued on assessment
district obligations ................ 63,377 57,750
Changes in assets and liabilities:
Decrease in receivables ............... 4,154 6,284
(Increase) decrease in inventories .... 5,669 (32,555)
Increase in prepaid expenses .......... (69,351) (30,280)
Increase in accounts payable .......... 118,566 71,900
Decrease in accrued expenses .......... (32,220) (13,629)
Other ................................. (5,904) 4,307
------------ ------------
Net cash used by operating activities . (847,510) (982,015)
------------ ------------
Cash flows from investing activities:
Increase in notes receivable ............. (6,623) (15,223)
Capital expenditures ..................... (43,576) (14,013)
Increase in development costs on
undeveloped land ....................... (17,278) --
Proceeds from sale of undeveloped land ... 190,362 --
Distributions from investees ............. 157,000 670,617
------------ ------------
Net cash provided by investing activities 279,885 641,381
------------ ------------
Cash flows from financing activities:
Scheduled principal payments on
long-term debt ......................... (68,934) (57,991)
Payment of long-term debt ................ (75,927) --
Proceeds from note payable ............... 550,000 --
------------ ------------
Net cash provided (used by)
financing activities ................... 405,139 (57,991)
------------ ------------
Net decrease in cash and cash equivalents ... (162,486) (398,625)
Cash and cash equivalents,
beginning of year ........................ 357,906 1,416,460
------------ ------------
Cash and cash equivalents, end of year ...... $ 195,420 $ 1,017,835
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental schedule of non-cash investing and financing activities:
In July 1999, the Company discarded a fully depreciated asset with a cost and
accumulated depreciation of $16,893.
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (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 cash flows for the interim periods.
2. Due to the seasonal fluctuations of the bowling operations, the
financial results for the interim periods ended September 30, 1999 and
1998, are not necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
September 30, June 30,
1999 1999
------------ ------------
Vail Ranch Limited Partnership
(equity method) ................. $ 580,927 $ 580,927
All Seasons Inns, La Paz
(cost basis) .................... 37,926 37,926
------------ ------------
Total ......................... $ 618,853 $ 618,853
============ ============
Investment in UCV, L.P. classified
as liability- Distributions
received in excess of basis in
investment ...................... $ 12,718,074 $ 12,688,808
============ ============
The following is a summary of the equity in income (loss) before
extraordinary loss of $98,500 related to UCV, L.P. of the investments
accounted for by the equity method:
1999 1998
------------ ------------
UCV, L.P. ......................... $ 141,089 $ 122,688
Vail Ranch Limited Partnership .... -- (10,000)
------------ ------------
$ 141,089 $ 112,688
============ ============
The following is a summary of distributions received from investees:
1999 1998
------------ ------------
UCV, L.P. ......................... $ 157,000 $ 95,000
Vail Ranch Limited Partnership .... -- 575,617
------------ ------------
$ 157,000 $ 670,617
============ ============
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated condensed statements of operations based upon the
partnership's fiscal year (March 31). Summarized information from UCV,
L.P.'s (UCV) unaudited statements of income for the three-month periods
ended June 30, 1999 and 1998 are as follows:
1999 1998
------------ ------------
Revenues .......................... $ 1,158,000 $ 1,134,000
Operating and general and
administrative costs ........... 392,000 343,000
Depreciation ...................... 7,000 7,000
Interest expense .................. 477,000 534,000
Income before extraordinary item .. 282,000 250,000
Extraordinary loss from early
extinguishment of debt .......... -- 197,000
Net income ........................ 282,000 53,000
5
<PAGE>
On October 14, 1999, UCV increased the loan amount and modified its
existing long-term loan agreement. The loan amount was increased from
$25,000,000 to $29,450,000 of which the lender is holding back $410,510
for capital replacement reserves. The interest rate on the original loan
amount is unchanged. The interest rate on the additional loan amount,
which is based on the additional loan amount less the hold back for
reserves, is the greater of ten percent or a base rate plus 4.75 percent.
Monthly payments of interest only are due until May 2000, whereupon a
monthly payment of principal and interest is due based on a 25-year
amortization period. In addition to the monthly payment, UCV will pay a
quarterly principal payment to be applied to the additional loan amount
equal to fifty percent of UCV's cash flow after debt service and capital
replacement expenditures. The loan is due October 15, 2001 but may be
extended to October 15, 2002 upon payment of a 1/4 percent loan fee and if
certain financial criteria are met. The loan may not be prepaid prior to
January 1, 2001. On maturity, a fee of up to $294,500 may be due under
certain circumstances. The proceeds of the additional advances of
$4,039,490 were used to pay loan costs of approximately $125,000 and make
distributions to partners of which the Company received $1,757,000.
4. Notes payable:
On August 24, 1999 and September 25, 1999 the Company borrowed a total of
$550,000 on an unsecured note payable from its partner in UCV. Payments of
interest only were due monthly at a base rate plus 1 percent (9-1/4%). The
loan was paid on October 14, 1999 from the Company's distribution from UCV.
5. Contingencies:
(a) RCSA Holdings, Inc. (RCSA), a wholly owned subsidiary of the Company,
owns a 50 percent managing general partnership interest in Old Vail
Partners, a general partnership (OVPGP), which owns 33 acres of
undeveloped land in Temecula, California. On September 23, 1999, the
other partner assigned his partnership interest to Downtown Properties,
Inc., a wholly owned subsidiary of the Company. Once the legal matters
described below are resolved, OVPGP is obligated to assign its interest
in the 33 acres of land to Old Vail Partners, L.P. The 33 acres of land
owned by OVPGP 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
(required in semiannual installments) due related to the bonded debt
are approximately $144,000. The payments continue through the year 2014
and include interest at approximately 7-3/4 percent. OVPGP has been
delinquent in the payment of property taxes and assessments for the
last seven years. The property is currently subject to default
judgments to the County of Riverside, California totaling approximately
$2,126,727 regarding delinquent assessment district payments
($1,519,103) and property taxes ($607,624).
The County had scheduled the 33 acres for public sale for the defaulted
property taxes on September 27, 1999. OVPGP had unsuccessfully
attempted to negotiate a payment plan with the County subject to the
successful resolution of the zoning problems with the property
described below. On September 23, 1999 OVPGP filed a petition for
relief under Chapter 11 of the federal bankruptcy laws in the United
States Bankruptcy Court. The primary claim affected by this action is
the County's secured claim for delinquent taxes and assessment district
payments. OVPGP's plan is to use the relief from stay to continue its
efforts to negotiate a settlement of the zoning issues described below
and restore the economic value of the property. If the zoning is
restored, OVPGP expects that it would either be able to develop or sell
the property, using the proceeds from development loans or sale to
satisfy the County's claims.
6
<PAGE>
The delinquent principal, interest and penalties ($1,519,103) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,109,453) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at September
30, 1999. In addition, the consolidated balance sheet at September 30,
1999 includes $607,624 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 OVPGP 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 OVPGP's property from a
"commercial" to "professional office" use. The property is subject to
assessment district obligations that were allocated in 1989 based on a
higher "commercial" use. Since the assessment district obligations 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. OVPGP
has filed suit against the City of Temecula claiming that, if the
effective re-zoning is valid, the action is a taking and damaging of
OVPGP's property without payment of just compensation. OVPGP is seeking
to have the effective re-zoning invalidated and an unspecified amount
of damages. OVPGP has previously suffered adverse outcomes in other
suits filed in relation to this matter. A stipulation was entered that
dismissed this suit without prejudice and agreed to toll all applicable
statute of limitations while OVPGP and the City of Temecula attempted
to informally resolve this litigation. 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.
6. Reclassifications- Certain reclassifications have been made to the prior
year financial statements to conform to the classifications used in 1999.
7. Business segment information:
The Company operates principally in four business segments: bowling centers,
commercial real estate rental, real estate development, and golf shaft
manufacturing. The golf shaft manufacturing segment commenced in January 1997
when the Company acquired a small golf shaft manufacturer. Other revenues,
which are not part of an identified segment, consist of property management
and development fees (earned from both a property 50 percent owned by the
Company and a property in which the Company has no ownership) and commercial
brokerage.
7
<PAGE>
The following is summarized information about the Company's operations by
business segment.
<TABLE>
<CAPTION>
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
----------- ----------- ------------- ----------- ----------- -------------
SEPTEMBER 30, 1999
- ------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................... $ 624,572 $ 171,829 $ -- $ 123,930 $ 71,156 $ 991,487
Depreciation and amortization .......... 26,670 34,404 -- 22,202 12,293 95,569
Interest expense ....................... 36,285 41,754 64,397 4,231 5,477 152,144
Equity in income of investees .......... -- 141,089 -- -- -- 141,089
Loss on sale ........................... -- -- (638) -- -- (638)
Segment profit (loss) .................. (201,625) 168,018 (131,368) (636,120) (110,340) (911,435)
Investment income ...................... 10,236
Loss from operations before
extraordinary loss ................... (901,199)
SEPTEMBER 30, 1998:
- -------------------
Revenues ............................... $ 641,070 $ 152,184 $ -- $ 73,833 $ 82,323 $ 949,410
Depreciation and amortization .......... 26,529 32,468 -- 21,468 12,969 93,434
Interest expense ....................... 37,933 33,057 59,475 6,308 11,652 148,425
Equity in income of investees .......... -- 122,688 (10,000) -- -- 112,688
Segment profit (loss) .................. (183,514) 139,876 (110,736) (801,420) (99,073) (1,054,867)
Investment income ...................... 77,601
Loss from operations before
extraordinary loss ................... (977,266)
1999 1998
----------- -----------
Revenues per segment schedule .......... $ 991,487 $ 949,410
Intercompany rent eliminated ........... (15,552) (14,955)
----------- -----------
Consolidated revenues .................. $ 975,935 $ 934,455
=========== ===========
</TABLE>
8. Liquidity
The accompanying consolidated condensed financial statements have been
prepared assuming the Company will continue as a going concern. The Company
has suffered recurring losses from operations, has a working capital
deficiency, and is forecasting negative cash flows for the next twelve
months. These items raise substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a going
concern is dependent on either refinancing or selling certain real estate
assets or increases in the sales volume of its subsidiary, Penley Sports. The
consolidated condensed financial statements do not contain adjustments, if
any, including diminished recovery of asset carrying amounts, that could
arise from forced dispositions and other insolvency costs.
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 $293,087 at
September 30, 1999, which is a $159,539 increase from the similarly calculated
working capital deficit of $133,548 at June 30, 1999. The decrease in working
capital is primarily attributable to the cash used by operating activities for
the three months ended September 30, 1999. The cash used by operating activities
was partially offset by the proceeds from the sale of undeveloped land in
September 1999 and the $550,000 proceeds from a note payable. The following is a
schedule of the cash provided (used) before changes in assets and liabilities,
segregated by business segments:
1999 1998 Change
---------- ----------- ---------
Bowling ................................ $ (174,000) $ (156,000) $ (18,000)
Rental ................................. 63,000 51,000 12,000
Golf ................................... (614,000) (780,000) 166,000
Development ............................ (67,000) (43,000) (24,000)
General corporate expense and other .... (76,000) (60,000) (16,000)
---------- ----------- ---------
Cash used by continuing operations ..... (868,000) (988,000) 120,000
Capital expenditures, net of
financing ........................... (44,000) (14,000) (30,000)
Principal payments on long-term debt ... (69,000) (58,000) (11,000)
---------- ----------- ---------
Cash used .............................. (981,000) (1,060,000) 79,000
========== =========== =========
Distributions received from investees .. 157,000 671,000 (514,000)
========== =========== =========
The Company has been unable to generate sufficient cash flow from operating
activities to meet scheduled principal payments on long-term debt and capital
replacement needs during the last three years. It has used its share of
distributions from investees and proceeds from refinancings and sales of assets
to fund these deficits.
As described in Note 5 of the Notes to Consolidated Financial Statements, OVPGP
is delinquent in the payment of special assessment district obligations and
property taxes on 33 acres of undeveloped land. The annual obligation for the
assessment district is approximately $144,000. The County of Riverside obtained
judgments for the default in the delinquent assessment district payments. The
amounts due to cure the judgment for the default under the assessment district
obligation on the 33 acre parcel at September 30, 1999 was approximately
$1,519,000. The principal balance of the allocated portion of the bonds
($1,384,153 as of September 30, 1999), and delinquent interest and penalties
($1,244,403 as of September 30, 1999) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet. In addition, accrued
property taxes in the consolidated balance sheet include $607,624 of delinquent
property taxes and late fees as of September 30, 1999. The Company estimates the
value of this land is approximately $4,000,000 to $5,000,000 if the property was
zoned "commercial". However, the City of Temecula has adopted a general
development plan as a means of down-zoning the property to a lower use and, if
successful, may significantly impair the value of the property. The Company is
contesting this action. The County had scheduled the 33 acres for public sale
for the defaulted property taxes on September 27, 1999. OVPGP had unsuccessfully
attempted to negotiate a payment plan with the County subject to the successful
resolution of the zoning problems with the property. On September 23, 1999 OVPGP
filed a petition for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court. The primary claim affected by this action is
the County's secured claim for delinquent taxes and assessment district
payments. OVPGP's plan is to use the relief to continue its efforts to negotiate
a settlement of the zoning issues and restore the economic value of the
property. If the zoning is restored, OVPGP expects that it would either be able
to develop or sell the property, using the proceeds from development loans or
sale to satisfy the County's claims. As a result of the judgment and the
down-zoning of the property, it is uncertain that the Company could generate
enough cash to recover the remaining $1,408,746 carrying value of the property
and satisfy the related delinquent assessment district obligation of $$1,519,103
and delinquent property taxes of $607,624.
9
<PAGE>
As described in Note 3 of the Notes to Consolidated Financial Statements, on
October 14, 1999, UCV borrowed additional funds from its existing lender
pursuant to a modification of its long-term note payable. The proceeds of the
additional financing, after loan costs, were used to make approximately
$3,700,000 of distributions to the partners in UCV, of which the Company
received $1,757,000, and establish working capital for UCV's additional
redevelopment planning costs. Management estimates that the debt service
(principal and interest) for the additional borrowing will be approximately
$800,000 annually.
Excluding the distribution the Company received from UCV from the loan proceeds,
Management estimates negative cash flow of $1,400,000 to $1,700,000 for the
remaining quarters of the year ending June 30, 2000 from operating activities
after adding estimated distributions from UCV operations ($150,000) and
deducting capital expenditures and principal payments on notes payable.
Management expects continuing cash flow deficits until Penley Sports develops
sufficient sales volume to become profitable. However, there can be no
assurances that Penley Sports will ever achieve profitable operations.
Management is currently evaluating other sources of working capital from the
sale of undeveloped land in Temecula or obtaining additional investors in Penley
Sports to provide sufficient funds for the expected future cash flow deficits.
If the Company is not successful in obtaining other sources of working capital
this could have a material adverse effect on the Company's ability to continue
as a going concern.
Year 2000 Compliance
--------------------
The Company has a program to identify, evaluate and implement changes to its
computer systems as necessary to address the Year 2000 issue. The program is
broken down into three separate categories: computer systems, embedded
technologies, and third party relationships.
Computer systems- This category consists primarily of the Company's software
and hardware for its accounting system. The Company is in the process of
evaluating its existing desktop computers and software systems. Based upon
an initial evaluation as well as representations from some of the software
suppliers, the management's best estimate is that, other than software and
equipment upgrades made in the normal course of business, it will not
incur any significant expenses to become fully Year 2000 compliant.
Embedded Technologies- This category includes company owned or leased
equipment with microprocessors or microcontrollers. This type of equipment
principally consists of phone equipment, automatic scorekeepers and cash
registers at the bowling centers, and manufacturing equipment at the golf
shaft manufacturer. Based upon an initial evaluation as well as
representations from some of the equipment suppliers, the management's
best estimate is that, other than acquiring a software upgrade for the
automatic scorekeeping equipment, the price of which has not yet been
determined, it will not incur any significant expenses to become fully
Year 2000 compliant.
Third Party Relationships- This category includes critical relationships with
vendors such as graphite manufacturers in the golf shaft segment, and
providers of local utilities (water and electricity). The Company will
implement a program conducting discussions with these types of suppliers
in calendar year 1999. There can be no guarantee that the systems of other
companies that support the Company's operations will be timely converted
or that a failure by these companies to correct their Year 2000 problems
would not have a material adverse effect on the Company. At the present
time, the Company does not have a contingency plan in place in the event
of a Year 2000 failure at one of the Company's significant suppliers.
However, the Company plans to create a contingency plan during the
fourth quarter of calendar year 1999.
If the steps taken by the Company and its vendors to be Year 2000 compliant are
not successful, the most likely worst-case scenario is that the Company could
experience various operational difficulties. These could include, among other
things, processing transactions to an incorrect accounting period, difficulties
in posting general ledger interfaces and lapse of certain services by vendors to
the Company's operations. If the Company's plan to install new systems which
effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed by the Company and does not expect the Year
2000 issue to have a material adverse impact on the financial position, results
of operations or cash flows of the Company in future periods. However, should
the remaining review of the Company's Year 2000 risks reveal potentially
non-compliant computer systems or material third parties, contingency plans will
be developed at that time.
10
<PAGE>
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements are
based on management's expectations as of the date hereof, and the Company does
not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in the Company's filings with the
Securities and Exchange Commission.
Results of Operations
---------------------
The following is a summary of the changes in the results of operations of the
three-month period ended September 30, 1999 to the same period in 1998 and a
discussion of the significant changes:
<TABLE>
<CAPTION>
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------- --------- ----------- ---- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................... $ (16,498) $ 19,645 $ -- $ 50,097 $ (11,167) $ 42,077
Costs .................................. 8,545 (1,729) 20,072 (2,148) -- 24,740
SG&A-direct ............................ (4,833) -- -- (121,712) 22,359 (104,186)
SG&A-allocated ......................... (592) 1,000 5,000 10,000 (15,408) --
Depreciation and amortization .......... 141 1,936 -- 734 (676) 2,135
Interest expense ....................... (1,648) 8,697 4,922 (2,077) (6,175) 3,719
Equity in investees .................... -- 18,401 10,000 -- -- 28,401
Gain (loss) on sale .................... -- -- (638) -- -- (638)
Segment profit (loss) .................. (18,111) 28,142 (20,632) 165,300 (11,267) 143,432
Investment income ...................... (67,365)
Loss from operations before
extraordinary loss .................... 76,067
</TABLE>
Note:The change in rental revenues and SG&A expenses do not include the
effect of the net change in elimination of intercompany rent of $597.
BOWLING OPERATIONS:
The 3% decrease in bowling revenues was primarily attributable to a decrease in
revenue from snack bar revenues. A 16% decrease in league games bowled was
offset by a 16% increase in open games bowled. Although results of the quarter
ended September 30 typically relate only to the summer league season, management
feels that there will continue to be a decline in league bowling that is likely
to be offset by increases in open play and the price per game of open play.
Bowl costs increased by 2% primarily due to due to an increase in the lane
resurfacing expense, which occurs every two years. Direct selling, general and
administrative expense decreased by 3% primarily due to a decrease in
free-bowling expense.
REAL ESTATE RENTAL:
Rental revenues increased primarily due to a 14% increase in the average rental
rate at the Company's office building. Interest expense increased due to the
refinancing in May 1999. The equity in income of UCV increased primarily due to
a decrease in the interest rate of UCV's long-term debt. Otherwise, UCV's rents
increased by 2% and the expenses increased 14%. The increase in expenses related
primarily to increases in water and maintenance expenses. Management believes
these increases in expenses are indicative of a trend for the remainder of the
fiscal year.
11
<PAGE>
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.
GOLF OPERATIONS:
Sales during the years 1999 and 1998 were small because Penley has not yet
developed sales with golf club manufacturers or distributors. The sales were
principally to custom golf shops. The Company expects that it will be another
six to twelve months before Penley is able to develop significant sales with
manufacturers or distributors.
Operating expenses of the golf segment consisted of the following in 1999, and
1998:
1999 1998
----------- -----------
Costs of sales and manufacturing
overhead ....................... $ 205,000 $ 233,000
Research and development .......... 68,000 42,000
----------- -----------
Total golf costs ............... 273,000 275,000
=========== ===========
Marketing and promotion ........... 370,000 489,000
Administrative costs- direct ...... 33,000 35,000
----------- -----------
Total SG&A-direct ............... 403,000 524,000
=========== ===========
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company utilizes both fixed rate and variable rate debt. The
following table presents principal maturities and related weighted average
interest rates of the Company's long-term fixed rate and variable rate debt for
the fiscal years ended June 30.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt ...... $ 158,000 $ 1,796,000 $ 39,000 $ 21,000 $ 22,000 $ 1,878,000 $ 3,914,000
Weighted average
interest rate ...... 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Variable rate debt ... $ 58,000 $ 78,000 $ 6,000 -- -- -- $ 142,000
Weighted average
interest rate ...... 10.8% 10.8% 10.8% -- -- -- 10.8%
</TABLE>
The amounts for 2000 relate to the nine months ended June 30, 2000. The $550,000
short-term note payable paid on October 14, 1999 was excluded from this analysis
because it no longer presents a significant market risk.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
approximately $29,040,000 after the additional advances under the loan agreement
on October 14, 1999 for which the weighted average interest rate was 7.7
percent. The principal maturities for each of UCV's fiscal years ending March 31
is: 2000- $230,000; 2001- $609,000; 2002- $28,201,000; and $29,040,000 in total.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of September 30, 1999, 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, 1999.
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
NONE
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits: Financial Date Schedule
(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: November 13, 1999
By:/s/ Steven R. Whitman
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: November 13, 1999
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 195,420
<SECURITIES> 0
<RECEIVABLES> 162,250
<ALLOWANCES> 0
<INVENTORY> 304,491
<CURRENT-ASSETS> 931,180
<PP&E> 5,304,003
<DEPRECIATION> 2,029,536
<TOTAL-ASSETS> 6,695,117
<CURRENT-LIABILITIES> 4,460,447
<BONDS> 0
0
0
<COMMON> 272,500
<OTHER-SE> 1,730,049
<TOTAL-LIABILITY-AND-EQUITY> 6,695,117
<SALES> 123,930
<TOTAL-REVENUES> 975,935
<CGS> 0
<TOTAL-COSTS> 1,875,677
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,144
<INCOME-PRETAX> (901,199)
<INCOME-TAX> 0
<INCOME-CONTINUING> (901,199)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (901,199)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
