UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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) (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 April 30, 1999 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
Part I - Financial Information:
Item 1.- Unaudited Consolidated Condensed Financial Statements:
Balance Sheets as of March 31, 1999 and June 30, 1998 ............. 1-2
Statements of Operations for the Three Months Ended March 31,
1999 and 1998 ............................................... 3
Statements of Operations for the Nine Months Ended March 31, 1999
and 1998 .................................................... 4
Statements of Cash Flows for the Nine Months Ended March 31, 1999
and 1998 .................................................... 5-6
Notes to Consolidated Condensed Financial Statements .............. 7-9
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 10-14
Item 3.- Quantitative and Qualitative Disclosures About Market Risks .... 14
Part II - Other Information ............................................. 15
Signature ............................................................... 16
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31, June 30,
1999 1998
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents ......................... $ 169,953 $ 1,416,460
Notes receivable- Other ........................... -- 12,105
Current portion of note receivable-affiliate ...... 50,000 50,000
Other receivables ................................. 96,238 166,427
Inventories ....................................... 338,472 302,595
Prepaid expenses .................................. 152,702 246,135
----------- -----------
Total current assets ........................... 807,365 2,193,722
----------- -----------
Receivables due after one year:
Note receivable- Affiliate, excluding
current portion ............................... 443,904 473,408
----------- -----------
Property and equipment, at cost:
Land .............................................. 678,000 678,000
Buildings ......................................... 2,461,327 2,461,327
Equipment and leasehold and tenant improvements.... 2,121,012 1,997,192
----------- -----------
5,260,339 5,136,519
Less accumulated depreciation and
amortization ................................. (1,887,605) (1,654,521)
----------- -----------
Net property and equipment .................... 3,372,734 3,481,998
----------- -----------
Other assets:
Undeveloped land, at cost ......................... 1,665,643 1,665,643
Intangible assets, net ............................ 288,023 315,015
Investments ....................................... 533,773 1,209,944
Other ............................................. 105,328 108,923
----------- -----------
2,592,767 3,299,525
----------- -----------
$ 7,216,770 $ 9,448,653
=========== ===========
1
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SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31, June 30,
1999 1998
------------ -----------
(Unaudited)
Current liabilities:
Assessment district obligation-in default ....... $ 2,500,251 $ 2,319,826
Current portion of long-term debt ............... 253,000 347,000
Accounts payable ................................ 495,540 577,847
Accrued payroll and related expenses ............ 118,131 108,497
Accrued property taxes-in default ............... 558,095 487,728
Accrued interest ................................ 25,736 28,581
Other liabilities ............................... 276,568 143,631
------------ ------------
Total current liabilities .................... 4,227,321 4,013,110
------------ ------------
Long-term debt, excluding current portion .......... 3,185,970 3,287,783
------------ ------------
Distributions received in excess of basis
in investment ................................... 12,589,780 12,280,101
------------ ------------
Tenant security deposits ........................... 25,605 25,951
------------ ------------
Minority interest in consolidated subsidiary ....... 1,712,677 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 ............................. (14,235,640) (11,736,312)
------------ ------------
(12,233,091) (9,733,763)
Less note receivable from shareholder ........... (2,291,492) (2,187,206)
------------ ------------
Total shareholders' deficit ................... (14,524,583) (11,920,969)
------------ ------------
$ 7,216,770 $ 9,448,653
============ ============
See accompanying notes to consolidated condensed financial statements.
2
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SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------- -----------
Revenues:
Bowling .......................................... $ 784,665 $ 790,850
Rental ........................................... 139,845 119,763
Golf ............................................. 86,468 49,359
Other ............................................ 30,520 49,176
Other-related party .............................. 53,354 28,262
----------- -----------
1,094,852 1,037,410
----------- -----------
Costs and expenses:
Bowling .......................................... 480,788 499,111
Rental ........................................... 59,583 63,467
Golf ............................................. 299,298 287,844
Development ...................................... 30,423 41,709
Selling, general, and administrative ............. 849,591 738,822
Depreciation and amortization .................... 95,990 134,245
----------- -----------
1,815,673 1,765,198
----------- -----------
Loss from operations ................................ (720,821) (727,788)
----------- -----------
Other income (expenses):
Investment income:
Related party .................................. 9,417 61,243
Other .......................................... 631 39,687
Interest expense related to development activities (57,749) (51,898)
Interest expense and amortization of finance costs (89,229) (114,085)
Equity in income of investees .................... 107,537 1,624,359
Gain on sale, other .............................. -- 9,175
Recognize deferred gain .......................... -- 43,380
----------- -----------
(29,393) 1,611,861
----------- -----------
Net income (loss) ................................... $ (750,214) $ 884,073
=========== ===========
Basic and diluted net income (loss) per common share
from continuing operations (based on 27,250,000
weighted average common shares outstanding)....... $(0.03) $0.03
====== =====
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------- -----------
Revenues:
Bowling ......................................... $ 2,111,999 $ 2,106,492
Rental .......................................... 416,114 367,606
Golf ............................................ 232,242 133,262
Other ........................................... 110,392 100,760
Other-related party ............................. 159,478 85,145
----------- -----------
3,030,225 2,793,265
----------- -----------
Costs and expenses:
Bowling ......................................... 1,485,310 1,497,405
Rental .......................................... 183,047 184,830
Golf ............................................ 793,930 613,852
Development ..................................... 114,855 115,407
Selling, general, and administrative ............ 2,621,867 2,135,574
Depreciation and amortization ................... 283,170 401,723
----------- -----------
5,482,179 4,948,791
----------- -----------
Loss from operations ............................... (2,451,954) (2,155,526)
----------- -----------
Other income (expenses):
Investment income:
Related party ................................. 135,367 185,046
Other ......................................... 20,251 73,693
Interest expense related to development activities (180,425) (162,820)
Interest expense and amortization of finance costs (256,453) (355,457)
Equity in income of investees ................... 233,886 1,802,859
Gain on sale, other ............................. -- 9,175
Recognize deferred gain ......................... -- 43,380
----------- -----------
(47,374) 1,595,876
----------- -----------
Loss from continuing operations .................... (2,499,328) (559,650)
Loss from discontinued operations .................. -- (21,970)
----------- -----------
Net loss ........................................... $(2,499,328) $ (581,620)
=========== ===========
Basic and diluted net loss per common share from
continuing operations (based on 27,250,000
weighted average common shares outstanding) ..... ($0.09) ($0.02)
====== ======
See accompanying notes to consolidated condensed financial statements.
4
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SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss ......................................... $(2,499,328) $ (581,620)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs ..... 11,337 17,595
Depreciation and amortization ................ 283,170 405,916
Equity in income of investees ................ (233,886) (1,802,859)
Interest income accrued on note receivable
from shareholder ........................... (104,286) (153,000)
Interest accrued on assessment district
obligations ................................ 180,425 162,820
Recognition of deferred gain ................. -- (43,380)
Gain on sale of assets ....................... -- (10,279)
Changes in assets and liabilities:
(Increase) decrease in other receivables ..... 70,189 (78,198)
Increase in inventories ...................... (35,877) (53,274)
(Increase) decrease in prepaid expenses ...... 93,433 (46,943)
Decrease in assets of discontinued operation . -- 130,607
Increase (decrease) in accounts payable ...... (82,307) 216,584
Increase in accrued expenses and other
liabilities ................................ 210,093 144,761
Decrease in liabilities of discontinued
operation .................................. -- (76,105)
Other ........................................ 20,038 4,743
----------- -----------
Net cash used by operating activities ...... (2,086,999) (1,762,632)
----------- -----------
Cash flows from investing activities:
Decrease in notes receivable .................... 41,609 62,248
Capital expenditures ............................ (123,820) (280,956)
Sale of discontinued operation .................. -- 30,207
Proceeds from sale of other assets .............. -- 26,950
Distributions from investees .................... 1,179,671 2,084,511
Payments to holder of minority interest ......... (50,000) (400,000)
----------- -----------
Net cash provided by investing activities .. 1,047,460 1,522,960
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt .. (195,813) (369,757)
Proceeds from short term borrowings ............. -- 400,000
Payments of short-term borrowings ............... -- (250,000)
Other ........................................... (11,155) --
----------- -----------
Net cash used by financing activities ...... (206,968) (219,757)
----------- -----------
Net decrease in cash and cash equivalents .......... (1,246,507) (459,429)
Cash and cash equivalents, beginning of year ....... 1,416,460 821,513
----------- -----------
Cash and cash equivalents, end of year ............. $ 169,953 $ 362,084
=========== ===========
5
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
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 $26,950. The
sale resulted in a reduction of property and equipment by $54,980 and
accumulated depreciation by $38,309.
The sale of the stock of Ocean West Builders on January 1, 1998 for $67,678
resulted in the following decreases in assets and liabilities: Cash-$37,471,
contract and other receivables-$309,022, prepaid expenses-$13,553,
equipment-$44,041, accumulated depreciation-$6,687, accounts
payable-$260,446, accrued expenses-$28,236, billings in excess of
costs-$21,983, and notes payable-$19,007.
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 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 March 31, 1999 and 1998, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
March 31, June 30,
1999 1998
-------- ----------
Vail Ranch Limited Partnership
(equity method) .................... $495,847 $1,172,018
All Seasons Inns, La Paz (cost basis) 37,926 37,926
-------- ----------
Total ............................ $533,773 $1,209,944
======== ==========
Investment in UCV, L.P. classified
as liability-
Distributions received in excess
of basis in investment......... $12,589,780 $12,280,101
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
1999 1998
-------- ----------
UCV, L.P. ........................... $263,886 $ 258,859
Vail Ranch Limited Partnership ...... (30,000) 1,544,000
-------- ----------
$233,886 $1,802,859
======== ==========
The following is a summary of distributions received from investees:
1999 1998
------------ ------------
UCV, L.P. ........................... $ 533,500 $ 312,000
Vail Ranch Limited Partnership ...... 646,171 1,772,511
------------ ------------
................................. $ 1,179,671 $ 2,084,511
============ ============
(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 nine-month periods ended
December 31, 1998 and 1997 are as follows:
1999 1998
-------- ----------
Revenues ............................ $3,460,000 $3,368,000
Operating and general and
administrative costs .......... 1,142,000 1,122,000
Depreciation ........................ 21,000 143,000
Interest expense .................... 1,572,000 1,584,000
Write off of unamortized loan costs . 197,000 --
Net income .......................... 528,000 519,000
7
<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
$1,923,370 regarding delinquent assessment district payments ($1,365,275)
and property taxes ($558,095).
The principal balance of the allocated portion of the assessment district
bonds ($1,134,976 at March 31, 1999 and $1,160,500 at June 30, 1998), and
delinquent principal, interest and penalties ($1,365,275 at March 31, 1999
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 $558,095 at March 31, 1999 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.
8
<PAGE>
6. Reclassifications- Certain reclassifications have been made to the prior
year financial statements to conform to the classifications used in 1999.
7. Significant Events:
(a) 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.
(b) On May 11, 1999 the Company used the proceeds of a $1,975,000 loan to
payoff an existing note payable of $1,147,560. The new loan bears
interest at an annual fixed rate of 8.15 percent and is paid in monthly
installments of $14,699 including principal and interest. The new loan
is collateralized by $1,170,000 of land and office building. The loan is
due on June 1, 2009. The prepayment of the existing note resulted in a
prepayment penalty of $45,902 and the write-off of unamortized loan fees
of $33,020, both of which were charged to expense in May 1999.
(c) Effective January 1, 1999, the Company discontinued recognizing the
accrual of interest income on the note receivable from shareholder. This
policy was adopted in recognition that the shareholder's most likely
source of funds for repayment of the loan is from sale of the Company's
stock or dividends from the Company and that the Company has unresolved
liquidity problems.
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.
9
<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 $361,610 at
March 31, 1999, which is a $1,349,776 change from the similarly calculated
working capital of $988,166 at June 30, 1998. The change in working capital is
primarily attributable to the cash used by operating activities for the nine
months ended March 31, 1999. The following is a schedule of the cash provided
(used) before changes in assets and liabilities, segregated by business
segments:
1999 1998 Change
----------- ----------- -----------
Bowling ..................... $ (121,000) $ (174,000) $ 53,000
Rental ...................... 169,000 120,000 49,000
Golf ........................ (2,058,000) (1,653,000) (405,000)
Development ................. (120,000) (121,000) 1,000
General corporate expense and
other...................... (232,000) (158,000) (74,000)
----------- ----------- -----------
Cash used by continuing
operations ............... (2,362,000) (1,986,000) (376,000)
Discontinued operations ..... -- (19,000) 19,000
Capital expenditures, net of
financing.................. (124,000) (281,000) 157,000
Principal payments on
long-term debt............. (196,000) (370,000) 174,000
----------- ----------- -----------
Cash used ................ (2,682,000) (2,656,000) (26,000)
=========== =========== ===========
Distributions received from
investees, net of payments
to holders of minority
interests ................ 1,130,000 1,685,000 (555,000)
=========== =========== ===========
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
March 31, 1999 is $1,923,000. 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 $575,617 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.
On May 11, 1999 the Company refinanced the existing $1,147,560 loan on its
office building with a new $1,975,000 loan. The net proceeds of the loan after
payoff of the existing debt, prepayment penalties of $45,902 and other closing
costs, was approximately $675,000. The new loan bears interest at an annual
fixed rate of 8.15 percent and is paid in monthly installments of $14,699
including principal and interest. The loan is due on June 1, 2009.
10
<PAGE>
Management estimates negative cash flow of $600,000 to $700,000 for the
remaining quarter of the year ending June 30, 1999 from operating activities
after adding estimated distributions from UCV ($164,000) and deducting capital
expenditures and scheduled principal payments on long-term debt. Management
estimates that the existing cash balance plus the proceeds from the refinancing
of the office building loan will be sufficient to fund the cash flow deficit
through June 30, 1999. Management expects continuing cash flow deficits after
June 30, 1999 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 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 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.
11
<PAGE>
RESULTS OF OPERATIONS
The following are summaries of the changes in the results of operations for
year-to-date and the current quarter:
Nine Months Ended March 31, 1999 versus 1998:
---------------------------------------------
<TABLE>
<CAPTION>
Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
--------- -------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 5,507 $ 50,278 -- $ 98,980 $ 83,965 $ 238,730
Costs ........................... (12,095) (1,783) (552) 180,078 -- 165,648
SG&A-direct ..................... (10,269) -- -- 258,366 195,966 444,063
SG&A-allocated .................. 13,139 4,000 -- 72,000 (45,139) 44,000
Depreciation and amortization ... (136,197) 9,852 -- 5,445 2,347 (118,553)
Interest expense ................ (45,682) (1,107) 17,276 (5,713) (46,173) (81,399)
Equity in investees ............. -- 5,027 (1,574,000) -- -- (1,568,973)
Gain on disposition ............. -- -- -- (1,225) (51,330) (52,555)
Segment profit (loss) ........... 196,611 44,343 (1,590,724) (412,421) (74,366) (1,836,557)
Investment income ............... -- -- -- -- -- (103,121)
Net loss from continuing
operations ................... -- -- -- -- -- (1,939,678)
</TABLE>
Three Months Ended March 31, 1999 versus 1998:
----------------------------------------------
<TABLE>
<CAPTION>
Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------- --------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ (6,185) $ 20,679 -- $ 37,109 $ 6,436 $ 58,039
Costs ........................... (18,323) (3,884) (11,286) 11,454 -- (22,039)
SG&A-direct ..................... (12,160) -- -- 67,315 56,211 111,366
SG&A-allocated .................. 6,969 2,000 -- 29,000 (37,969) --
Depreciation and ................ (44,907) 5,624 -- 395 633 (38,255)
amortization
Interest expense ................ (8,180) (380) 5,720 (1,927) (14,238) (19,005)
Equity in investees ............. -- 37,178 (1,554,000) -- -- (1,516,822)
Gain on disposition ............. -- -- -- (1,225) (51,330) (52,555)
Segment profit (loss) ........... 70,416 54,497 (1,548,434) (70,353) (49,531) (1,543,405)
Investment income ............... -- -- -- -- -- (90,882)
Net loss from continuing
operations ................... -- -- -- -- -- (1,634,287)
</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 $1,770 and
$597 for the nine and three month periods respectively.
BOWLING OPERATIONS:
Bowling revenues remained relatively consistent in the three and nine month
periods. The number of games bowled decreased by 4% in the nine month period and
3% in the three month period. The declines in games bowled primarily related to
declines in league play. These decreases were partially offset by increases of
3% in the nine month period and 2% in the three month period in the average
price of all games bowled. 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 consistent for the nine month period and declined
by 3% for the three month period. The decrease in bowl costs in the three-month
period were primarily attributable to a 4% decrease in payroll and related costs
($9,000).
Selling, general and administrative expenses directly attributable to the
bowling segment decreased by 8% and 2% in the three and nine-month periods,
respectively. The decrease in the three month period primarily related to
decreases of 12% ($5,000) in payroll and related expenses and 7% ($4,000) in
promotional expenses. The decrease in the nine month period primarily related to
a decrease of 4% ($9,000) in promotional expenses.
12
<PAGE>
Depreciation and amortization expense decreased in the three and nine-month
periods 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.
RENTAL OPERATIONS:
Rental revenues increased by 17% and 13% in the three and nine month periods,
respectively. This is primarily due to increases in the average rental rate of
22% for the three month period and 14% for the nine month period. There were no
other significant changes to the components of the rental segment in the three
and nine-month periods except for the equity in income of investees, which is
primarily UCV.
The equity in income of UCV increased in the three and nine-month period by
$37,178 and $5,027, respectively related to the results of operations of UCV for
the periods ended December 31, 1998 and 1997. The following is a summary of the
changes in UCV's operations for the three and nine month periods:
Three Months Nine Months
------------ -----------
Revenues ..................... $ 43,000 $ 92,000
Costs ........................ 29,000 20,000
Interest ..................... (21,000) (12,000)
Depreciation ................. (40,000) (122,000)
Write off unamortized
loan fees .................. -- 197,000
Net income ................... 75,000 9,000
UCV's vacancy for each year has averaged approximately 1 percent. The rental
rate for the three and nine month periods increased by approximately 3 percent.
Costs increased in both periods primarily due to increases in the three month
period of $10,000 in payroll and $13,000 in miscellaneous maintenance expenses.
Although a $20,000,000 note was refinanced with a $25,000,000 note payable in
May 1998, interest expense decreased during the three and nine month periods
because the effective interest rate decreased from 10% to 7-1/2%. Depreciation
expense decreased in both periods because the original acquisition cost of the
buildings became fully depreciated in the prior periods. In conjunction with the
refinancing of the note payable in May 1998, the balance of unamortized loan
fees was charged to expense.
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.
The equity in income of Vail Ranch Limited Partners decreased from 1998 because
of the gain from the sale of the shopping center recognized in January 1998.
13
<PAGE>
GOLF OPERATIONS:
Sales during the three and nine month periods ended March 31, 1999 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
three to nine months before the Company is able to generate sales with these
types of customers. Sales during the three and nine month periods were
principally to custom golf shops.
The following is a breakdown of the costs associated with the golf operation:
1999 1998 1999 1998
---------- ---------- ---------- ----------
Costs of goods sold ....... $ 57,000 $ 30,000 $ 130,000 $ 48,000
Underutilized manufacturing
overhead ................ 178,000 235,000 503,000 496,000
Research & development .... 65,000 23,000 161,000 70,000
--------- --------- --------- ---------
Total golf costs ..... 300,000 288,000 794,000 614,000
========= ========= ========= =========
Marketing & promotion ..... 404,000 297,000 1,173,000 864,000
Administrative-direct ..... 26,000 66,000 110,000 161,000
--------- --------- --------- ---------
Total SG&A-direct .... 430,000 363,000 1,283,000 1,025,000
========= ========= ========= =========
Allocated corporate costs . 65,000 36,000 196,000 124,000
========= ========= ========= =========
UNALLOCATED AND OTHER
Other revenues increased in the three and nine 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 until
January 1, 1998.
Selling, general and administrative expense increased in the three and nine
month periods because of bonuses awarded in December 1998.
Investment income decreased in the nine and three month periods ended March 31,
1999 primarily due to discontinuing the accrual of interest income on the note
receivable from shareholder (decrease of $49,000) and the payoff of a $670,000
note receivable in June 1998 (decrease of $60,000).
Interest expense decreased in the three and nine month periods due to a
reduction in long-term debt in June of 1998.
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 cash flows 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>
1999 2000 2001 2002 2003 Thereafter Total
--------- ---------- ---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt .......... $ 51,000 $ 211,000 $ 1,801,000 $ 44,000 $ 26,000 $1,953,000 $4,086,000
Weighted average interest
rate ................. 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Variable rate debt ....... $ 19,000 $ 78,000 $ 78,000 $ 6,000 -- -- $ 181,000
Weighted average interest
rate ................. 10.5% 10.5% 10.5% 10.5% -- -- 10.5%
</TABLE>
The amounts for 1999 relate to the three months ended June 30, 1999. The fixed
rate debt information has been adjusted to reflect the effects of the
refinancing completed on May 11, 1999.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
$25,000,000 for which the current interest rate is 7 percent and all of the
principal is due May 2001.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 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, 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
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORTS ARENAS, INC.
By: /s/ Harold S. Elkan
----------------
Harold S. Elkan, President and Director
Date: May 17, 1999
-------------
By:/s/ Steven R. Whitman
-----------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 17, 1999
-------------
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 169,953
<SECURITIES> 0
<RECEIVABLES> 146,238
<ALLOWANCES> 0
<INVENTORY> 338,472
<CURRENT-ASSETS> 807,365
<PP&E> 5,260,339
<DEPRECIATION> 1,887,605
<TOTAL-ASSETS> 7,216,770
<CURRENT-LIABILITIES> 4,227,321
<BONDS> 0
0
0
<COMMON> 272,500
<OTHER-SE> 1,730,049
<TOTAL-LIABILITY-AND-EQUITY> 7,216,770
<SALES> 232,242
<TOTAL-REVENUES> 3,030,225
<CGS> 0
<TOTAL-COSTS> 5,482,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,878
<INCOME-PRETAX> (2,499,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,499,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,499,328)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
