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, 1998
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) (IRS 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, 1999 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1998
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of December 31, 1998 and June 30, 1998 .......... 1-2
Statements of Operations for the Three Months
Ended December 31, 1998 and 1997 ............................ 3
Statements of Operations for the Six Months
Ended December 31, 1998 and 1997 ............................ 4
Statements of Cash Flows for the Six Months
Ended December 31, 1998 and 1997 ............................ 5
Notes to Consolidated Condensed 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
December June 30,
31, 1998 1998
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents ..................... $ 342,287 $ 1,416,460
Current portion of notes receivable ........... -- 12,105
Current portion of notes receivable-affiliate . 50,000 50,000
Other receivables ............................. 148,291 166,427
Inventories ................................... 386,481 302,595
Prepaid expenses .............................. 201,666 246,135
----------- -----------
Total current assets ....................... 1,128,725 2,193,722
----------- -----------
Receivables due after one year:
Note receivable- Affiliate .................... 525,436 523,408
Note receivable- Other ........................ -- 12,105
----------- -----------
525,436 535,513
Less current portion .......................... (50,000) (62,105)
----------- -----------
475,436 473,408
----------- -----------
Property and equipment, at cost:
Land .......................................... 678,000 678,000
Buildings ..................................... 2,461,327 2,461,327
Equipment and leasehold and tenant improvements 2,056,461 1,997,192
----------- -----------
5,195,788 5,136,519
Less accumulated depreciation and amortization (1,808,497) (1,654,521)
----------- -----------
Net property and equipment ................ 3,387,291 3,481,998
----------- -----------
Other assets:
Undeveloped land, at cost ..................... 1,665,643 1,665,643
Intangible assets, net ........................ 288,901 315,015
Investments ................................... 543,773 1,209,944
Other ......................................... 109,528 108,923
----------- -----------
2,607,845 3,299,525
----------- -----------
$ 7,599,297 $ 9,448,653
=========== ===========
1
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
December June 30,
31, 1998 1998
----------- -----------
(Unaudited)
Current liabilities:
Assessment district obligation-in default ..... $ 2,442,502 $ 2,319,826
Current portion of long-term debt ............. 260,000 347,000
Accounts payable .............................. 449,948 577,847
Accrued payroll and related expenses .......... 53,721 108,497
Accrued property taxes-in default ............. 535,293 487,728
Accrued interest .............................. 22,831 28,581
Other liabilities ............................. 174,288 143,631
----------- -----------
Total current liabilities .................. 3,938,583 4,013,110
----------- -----------
Long-term debt, excluding current portion ........ 3,245,421 3,287,783
----------- -----------
Distributions received in excess of basis
in investment ................................. 12,400,462 12,280,101
----------- -----------
Tenant security deposits ......................... 26,523 25,951
----------- -----------
Minority interest in consolidated subsidiary ..... 1,762,677 1,762,677
----------- -----------
Commitments and contingencies (Note 4)
Shareholders' 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 ........................... (13,485,426) (11,736,312)
----------- -----------
(11,482,877) (9,733,763)
Less note receivable from shareholder ......... (2,291,492) (2,187,206)
----------- -----------
Total shareholders' deficit ................ (13,774,369) (11,920,969)
----------- -----------
$ 7,599,297 $ 9,448,653
=========== ===========
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, 1998 AND 1997
(Unaudited)
1998 1997
------------ ------------
Revenues:
Bowling ..................................... $ 686,264 $ 694,538
Rental ...................................... 139,040 122,164
Golf ........................................ 71,941 33,202
Other ....................................... 26,626 23,763
Other-related party ......................... 77,047 28,284
------------ ------------
1,000,918 901,951
------------ ------------
Costs and expenses:
Bowling ..................................... 478,297 499,834
Rental ...................................... 58,993 60,558
Golf ........................................ 219,612 162,835
Development ................................. 43,171 40,770
Selling, general, and administrative ........ 819,102 686,704
Depreciation and amortization ............... 93,746 84,553
------------ ------------
1,712,921 1,535,254
------------ ------------
Loss from operations ........................... (712,003) (633,303)
------------ ------------
Other income (charges):
Investment income:
Related party ............................. 60,234 61,830
Other ..................................... 7,735 683
Interest expense:
Development activities .................... (64,926) (59,024)
Other and amortization of finance costs ... (76,549) (120,517)
Equity in income of investees ............... 112,161 86,029
------------ ------------
38,655 (30,999)
------------ ------------
Loss from continuing operations ................ (673,348) (664,302)
Loss from discontinued operations .............. -- 5,472
------------ ------------
Net loss ....................................... $ (673,348) $ (658,830)
============ ============
Basic and diluted net loss per common share from
continuing operations (based on 27,250,000
weighted average common shares outstanding) . ($ 0.02) ($ 0.02)
======== ========
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, 1998 AND 1997
(Unaudited)
1998 1997
------------ ------------
Revenues:
Bowling ..................................... $ 1,327,334 $ 1,315,642
Rental ...................................... 276,269 247,843
Golf ........................................ 145,774 83,903
Other ....................................... 79,872 51,584
Other-related party ......................... 106,124 56,883
------------ ------------
1,935,373 1,755,855
------------ ------------
Costs and expenses:
Bowling ..................................... 1,004,522 998,294
Rental ...................................... 123,464 121,363
Golf ........................................ 494,632 326,008
Development ................................. 84,432 73,698
Selling, general, and administrative ........ 1,772,276 1,396,752
Depreciation and amortization ............... 187,180 267,478
------------ ------------
3,666,506 3,183,593
------------ ------------
Loss from operations ........................... (1,731,133) (1,427,738)
------------ ------------
Other income (charges):
Investment income:
Related party ............................. 125,950 123,803
Other ..................................... 19,620 34,006
Interest expense:
Development activities .................... (122,676) (110,922)
Other and amortization of finance costs ... (167,224) (241,372)
Equity in income of investees ............... 126,349 178,500
------------ ------------
(17,981) (15,985)
------------ ------------
Loss from continuing operations ................ (1,749,114) (1,443,723)
Loss from discontinued operations .............. -- (21,970)
------------ ------------
Net loss ....................................... $(1,749,114) $(1,465,693)
============ ============
Basic and diluted net loss per common share from
continuing operations (based on 27,250,000
weighted average common shares outstanding .. ($ 0.06) ($ 0.05)
======== ========
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, 1998 AND 1997
(Unaudited)
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss ..................................... ($1,749,114) ($1,465,693)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs . 9,099 11,728
Depreciation and amortization ............ 187,180 271,671
Equity in income of investees ............ (126,349) (178,500)
Interest income accrued on note receivable
from shareholder ...................... (104,286) (102,000)
Interest accrued on assessment
district obligations .................. 122,676 110,922
Changes in assets and liabilities:
Decrease in receivables .................. 18,136 35,721
Increase in inventories .................. (83,886) (14,959)
(Increase) decrease in prepaid expenses .. 44,469 (104,850)
Decrease in assets of discontinued operation -- 130,607
Increase (decrease) in accounts payable .. (127,899) 164,340
Increase (decrease) in accrued expenses
and other liabilities .................. 17,696 (3,148)
Decrease in liabilities of discontinued
operation ............................... -- (76,105)
Other .................................... 10,488 5,962
------------ ------------
Net cash used by operating activities ... (1,781,790) (1,214,304)
------------ ------------
Cash flows from investing activities:
Decrease in notes receivable ................ 10,077 66,601
Capital expenditures ........................ (59,269) (200,151)
Proceeds from sale of other assets .......... -- 15,000
Distributions from investees ................ 886,171 494,228
------------ ------------
Net cash provided by investing activities 836,979 375,678
------------ ------------
Cash flows from financing activities-
Scheduled principal payments on long-term debt (129,362) (244,752)
Proceeds from short term loan ............... -- 400,000
------------ ------------
Net cash provided (used) by financing
activities ............................ (129,362) 155,248
------------ ------------
Net decrease in cash and cash equivalents ...... (1,074,173) (683,378)
Cash and cash equivalents, beginning of year ... 1,416,460 821,513
------------ ------------
Cash and cash equivalents, end of year ......... $ 342,287 $ 138,135
============ ============
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.
In 1997 the Company sold miscellaneous assets for cash proceeds of $15,000. The
sale resulted in a reduction of property and equipment by $28,750 and
accumulated depreciation by $14,854.
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997(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, 1998 and 1997, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
December June 30,
31, 1998 1998
---------- -----------
Vail Ranch Limited Partnership
(equity method) $ 505,847 $ 1,172,018
All Seasons Inns, La Paz (cost basis) 37,926 37,926
---------- -----------
Total $ 543,773 $ 1,209,944
========== ===========
Investment in UCV, L.P. classified as
a liability- Distributions received
in excess of basis in investment $12,400,462 $12,280,101
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
1998 1997
-------- -------
UCV, L.P. $ 146,349 $ 178,500
Vail Ranch Limited Partnership (20,000) -
---------- ---------
$ 126,349 $ 178,500
========= =========
The following is a summary of distributions received from investees:
1998 1997
--------- ---------
UCV, L.P. $ 240,000 $ 405,000
Vail Ranch Limited Partnership 646,171 89,228
--------- ---------
$ 886,171 $ 494,228
========= =========
(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 unaudited statements of income for the six-month periods ended
September 30, 1998 and 1997 are as follows:
1998 1997
---------- ----------
Revenues .......................... $2,300,000 $2,250,000
Operating and general and
administrative costs ........... 734,000 744,000
Depreciation ...................... 14,000 95,000
Interest expense .................. 1,062,000 1,054,000
Write off of unamortized loan costs 197,000 --
Net income ........................ 293,000 357,000
6
<PAGE>
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 six years. The property is currently subject to default
judgments to the County of Riverside, California totaling approximately
$1,842,819 regarding delinquent assessment district payments ($1,307,526)
and property taxes ($535,293).
The principal balance of the allocated portion of the assessment district
bonds ($1,134,976 at December 31, 1998 and $1,160,500 at June 30, 1998),
and delinquent principal, interest and penalties ($1,307,526 at December
31, 1998 and $1,159,326 at June 30, 1998) are classified as "Assessment
district obligation- in default" in the consolidated condensed balance
sheet. In addition, accrued property taxes in the consolidated condensed
balance sheet include $535,293 at December 31, 1998 and $487,728 at June
30, 1998 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. A stipulation
was entered that dismissed this suit without prejudice and agreed to toll
all applicable statute of limitations while OVP 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.
5. Comprehensive Income- On July 1, 1998, the company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires the reporting of comprehensive income (loss)
in addition to net income (loss). Comprehensive income (loss) is a more
inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in
the calculation on net income (loss). The adoption of this statement did
not have an effect on the consolidated condensed financial statements.
7
<PAGE>
6. Reclassifications- Certain reclassifications have been made to the prior
year financial statements to conform to the classifications used in 1998.
7. Significant Events:
On January 11, 1999 the maturity date on a $80,673 note payable that was due
February 1999 was extended to February 2004. The interest rate was reduced
from 8-1/2 percent to 8 percent.
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.
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 working capital of $167,937 at December 31,
1998, which is a $820,229 decrease from the similarly calculated working capital
of $988,166 at June 30, 1998. The decrease in working capital is primarily
attributable to the cash used by operating activities for the six months ended
December 31, 1998. The following is a schedule of the cash provided (used)
before changes in assets and liabilities, segregated by business segments:
1998 1997 Change
----------- ----------- ---------
Bowling ................... $ (186,000) $ (205,000) $ 19,000
Rental .................... 109,000 84,000 25,000
Golf ...................... (1,345,000) (1,008,000) (337,000)
Development ............... (88,000) (77,000) (11,000)
General corporate expense
and other ................ (151,000) (128,000) (23,000)
----------- ----------- ---------
Cash used by continuing
operations ........... (1,661,000) (1,334,000) (327,000)
Discontinued operations ... -- (18,000) 18,000
Capital expenditures,
net of financing ......... (59,000) (200,000) 141,000
Principal payments on
long-term debt ........... (129,000) (245,000) 116,000
----------- ----------- ---------
Cash used .............. $(1,849,000) $(1,797,000) $ (52,000)
=========== =========== =========
Distributions received from
investees ................ $ 886,000 $ 494,000 $ 392,000
=========== =========== =========
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, 1998 is $1,843,000. 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. As part of this
process, UCV is attempting to obtain local government approval for the
redevelopment. UCV expects a decision prior to the end of calendar 1999.
Management does not expect the redevelopment planning process to affect the
distributions to partners from operating activities because $500,000 of the
refinancing proceeds (May 1998) were allocated for the planning costs.
Old Vail Partners (OVP) received a $576,000 distribution from Vail Ranch Limited
Partnership in August 1998 as its share of the distribution from the new
partnership with an affiliate of New Plan Realty Trust (formerly Excel Realty).
OVP also received additional distributions of $70,554 in the quarter ended
December 31, 1998. However, it is unlikely that there will be significant
distributions in the future until the remaining undeveloped land in the new
partnership is developed and sold.
Management estimates negative cash flow of $1,100,000 to $1,200,000 for the
remaining quarters of the year ending June 30, 1999 from operating activities
after adding estimated distributions from UCV ($390,000) and deducting capital
expenditures and scheduled principal payments on long-term debt. Management is
currently evaluating other sources of working capital from refinancing its
office building or the sale of undeveloped land in Temecula to provide
sufficient funds for this cash flow deficit. 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.
9
<PAGE>
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 in the calendar year 1999.
If the steps taken by the Company and its vendors to be Year 2000 compliant are
not successful, 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 its critical vendors 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.
"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.
10
<PAGE>
RESULTS OF OPERATIONS
---------------------
The following are summaries of the changes in the results of operations for
year-to-date and the current quarter:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1998 VERSUS 1997:
-----------------------------------------------
Real
Rental Estate Unallocated
Bowling Operation Development Golf And Other Totals
------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues .......................... $ 11,692 $ 29,599 $ -- $ 61,871 $ 77,529 $ 180,691
Costs ............................. 6,228 2,101 10,734 168,624 -- 187,687
SG&A-direct ....................... 1,891 -- -- 191,051 139,755 332,697
SG&A-allocated .................... 16,650 3,000 -- 43,000 (18,650) 44,000
Depreciation and
amortization..................... (91,290) 4,228 -- 5,050 1,714 (80,298)
Interest expense .................. (37,502) (727) 11,556 (3,786) (31,935) (62,394)
Equity in investees ............... -- (32,151) (20,000) -- -- (52,151)
Segment profit (loss) ............. 115,715 (11,154) (42,290) (342,068) (13,355) (293,152)
Investment income ................. (12,239)
Net loss from continuing operations (305,391)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS 1997:
-------------------------------------------------
Real
Rental Estate Unallocated
Bowling Operation Development Golf And Other Totals
------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues .......................... $ (8,274) $ 17,473 $ -- $ 38,739 $ 51,626 $ 99,564
Costs ............................. (21,537) (1,565) 2,401 56,777 -- 36,076
SG&A-direct ....................... (2,921) -- -- (5,742) 124,658 115,995
SG&A-allocated .................... 11,480 2,000 -- 27,000 (23,480) 17,000
Depreciation and
amortization..................... 4,391 3,601 -- 531 670 9,193
Interest expense .................. (21,144) (368) 5,803 (1,919) (20,438) (38,066)
Equity in investees ............... -- 36,132 (10,000) -- -- 26,132
Segment profit (loss) ............. 21,457 49,937 (18,204) (37,908) (29,784) (14,502)
Investment income ................. 5,456
Net loss from continuing operations (9,046)
</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 $1,173 and
$597 for the six and three month periods respectively.
BOWLING OPERATIONS:
- -------------------
Bowling revenues remained relatively flat in the three and six month periods. In
each period the number of games bowled decreased by 6%, which was primarily
attributable to a decline in league play. These decreases were partially offset
by a 12% increase in the average price of open-play in each period. Management
feels that there will continue to be a decline in league bowling but this is
likely to continue to be offset by increases in the number of open-play games
bowled and the price per game of open-play.
Bowl costs remained relatively flat for the six month period and declined by 4%
for the three month period. The decrease in bowl costs in the three-month period
was primarily due to the timing of annual pin purchases in the first quarter of
1998 ($16,000) that occurred during the second quarter of 1997.
Depreciation and amortization expense decreased in the six-month period due to
equipment and goodwill acquired in 1983 (when the bowls were purchased) becoming
fully depreciated and amortized in the year ended June 30, 1998.
Interest expense related to the bowling segment decreased because of the
extinguishment of all bowl related financing during the year ended June 30,
1998.
11
<PAGE>
RENTAL OPERATIONS:
- ------------------
Rental revenues increased by 11% and 13% in the six and three month periods,
respectively. This is primarily due to a 10% increase in the rental rates over
the previous year. There were no other significant changes to the components of
the rental segment in the three and six-month periods except for the equity in
income of investees, which is primarily UCV.
The equity in income of UCV decreased in the six-month period primarily due to a
$197,000 write-off of unamortized loan fees in the current year related to a
refinancing of long-term debt. This increase in UCV's expense was partially
offset by an $81,000 reduction in UCV's depreciation expense, which relates to
the acquisition cost of the building becoming fully depreciated in the prior
year. Depreciation expense also decreased by $40,000 during the three-month
period for the same reason. Rental revenues of UCV increased by $49,000 (2%) and
$32,000 (3%) during the six and three month periods, respectively, primarily due
to increases in the average rental rate. Operating expenses remained essentially
the same as the prior periods.
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 three and six month periods ended December 31, 1998 continued
to be insignificant because the Company has not yet generated sales to golf club
manufacturers or distributors. The Company expects that it will be at least six
to nine months before the Company is able to generate sales with these types of
customers. Sales during the three and six month periods were principally to
custom golf shops. The following is a breakdown of the costs associated with the
golf operation:
Three Months Six Months
------------ ----------
1998 1997 1998 1997
------- ------- ------- -------
Costs of goods sold ................ $ 38,000 $ 8,000 $73,000 $18,000
Underutilized manufacturing overhead 127,000 113,000 325,000 261,000
Research & development ............. 54,000 42,000 96,000 47,000
------- ------- ------- -------
Total golf costs .............. 219,000 163,000 494,000 326,000
------- ------- ------- -------
Marketing & promotion .............. 280,000 292,000 769,000 567,000
Administrative-direct .............. 49,000 42,000 84,000 95,000
------- ------- ------- -------
Total SG&A-direct ............. 329,000 334,000 853,000 662,000
------- ------- ------- -------
Allocated corporate costs .......... 83,000 56,000 131,000 88,000
------- ------- ------- -------
UNALLOCATED AND OTHER
---------------------
Other revenues increased in the three and six month periods primarily due to
development planning fees collected from UCV starting in July 1998 and
administrative fees collected from Ocean West Builders, Inc. which had
previously been a wholly owned and consolidated subsidiary of the Company.
Selling, general and administrative expense increased in the three and six month
periods because of bonuses awarded in December 1998.
Interest expense decreased in the three and six month periods due to a reduction
in long-term debt in June of 1998.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of December 31, 1998, 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, 1998.
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, 1998 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 ............ 23,289,103 0 272,072
Steven R. Whitman .......... 23,289,603 0 271,572
Patrick D. Reiley .......... 23,290,103 0 271,072
James E. Crowley ........... 23,290,603 0 270,572
Robert A. MacNamara ........ 23,290,703 0 270,572
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 13, 1999
------------------
By:/s/ Steven R. Whitman
-----------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 13, 1999
------------------
14
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 342,287
<SECURITIES> 0
<RECEIVABLES> 198,291
<ALLOWANCES> 0
<INVENTORY> 386,481
<CURRENT-ASSETS> 1,128,725
<PP&E> 5,195,788
<DEPRECIATION> 1,808,497
<TOTAL-ASSETS> 7,599,297
<CURRENT-LIABILITIES> 3,938,583
<BONDS> 0
0
0
<COMMON> 272,500
<OTHER-SE> 1,730,049
<TOTAL-LIABILITY-AND-EQUITY> 7,599,297
<SALES> 145,774
<TOTAL-REVENUES> 1,935,373
<CGS> 0
<TOTAL-COSTS> 3,666,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289,900
<INCOME-PRETAX> (1,749,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,749,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,749,114)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
