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, 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 January 31, 2000 was 27,250,000 shares.
<PAGE>
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1999
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of December 31, 1999 (unaudited)
and June 30, 1999 1-2
Unaudited Statements of Operations for the Three Months Ended
December 31, 1999 and 1998 3
Unaudited Statements of Operations for the Six Months Ended
December 31, 1999 and 1998 4
Unaudited Statements of Cash Flows for the Six Months Ended
December 31, 1999 and 1998 5
Notes to Financial Statements 6-10
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Item 3.- Quantitative and Qualitative Disclosures about Market Risk 15
Part II - Other Information 16
Signatures 17
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
December 30, June 30,
1999 1999
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $614,364 $357,906
Current portion of note receivable- affiliate 50,000 50,000
Other receivables 110,930 116,404
Inventories 217,354 310,160
Prepaid expenses 264,041 199,668
------------ -----------
Total current assets 1,256,689 1,034,138
------------ -----------
Receivables due after one year:
Note receivable- affiliate, net 68,350 104,829
Less current portion (50,000) (50,000)
------------ -----------
18,350 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 2,204,214 2,137,993
------------ -----------
5,343,541 5,277,320
Less accumulated depreciation and
amortization (2,108,260) (1,968,191)
------------ -----------
Net property and equipment 3,235,281 3,309,129
------------ -----------
Other assets:
Undeveloped land, at cost 1,408,746 1,582,468
Intangible assets, net 270,273 294,423
Investments 613,313 618,853
Other 120,757 104,980
------------ -----------
2,413,089 2,600,724
------------ -----------
$6,923,409 $6,998,820
============ ===========
1
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
December, 31, June 30,
1999 1999
------------ -----------
(Unaudited)
Current liabilities:
Assessment district obligation- in default $2,675,725 $2,565,179
Current portion of long-term debt 1,928,000 289,000
Accounts payable 530,742 453,203
Accrued payroll and related expenses 173,037 164,877
Accrued property taxes- in default 625,579 582,859
Accrued interest 25,692 14,395
Other liabilities 193,607 246,211
------------ -----------
Total current liabilities 6,152,382 4,315,724
------------ -----------
Long-term debt, excluding current portion 2,057,735 3,911,694
------------ -----------
Distributions received in excess of basis in
investment 14,471,719 12,688,808
------------ -----------
Other liabilities 100,783 74,602
------------ -----------
Minority interest in consolidated subsidiary 1,712,677 1,712,677
------------ -----------
Commitments and contingencies (Note 5)
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 (17,282,944) (15,415,742)
------------ -----------
(15,280,395) (13,413,193)
Less note receivable from shareholder (2,291,492) (2,291,492)
------------ -----------
Total shareholders' deficit (17,571,887) (15,704,685)
------------ -----------
$6,923,409 $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 DECEMBER 31, 1999 AND 1998
(Unaudited)
1999 1998
---------- ------------
Revenues:
Bowling $ 625,382 $ 686,264
Rental 160,113 139,040
Golf 157,601 71,941
Other 32,290 26,626
Other-related party 42,635 77,047
----------- -----------
1,018,021 1,000,918
----------- -----------
Costs and expenses:
Bowling 501,494 478,297
Rental 61,638 58,993
Golf 331,941 219,612
Development 28,980 43,171
Selling, general, and administrative 924,282 819,102
Depreciation and amortization 96,383 93,746
----------- -----------
1,944,718 1,712,921
----------- -----------
Loss from operations (926,697) (712,003)
----------- -----------
Other income (charges):
Investment income:
Related party 10,053 60,234
Other 8,773 7,735
Interest expense:
Development activities (69,625) (64,926)
Other and amortization of finance costs (90,717) (76,549)
Equity in income of investees 102,210 112,161
----------- -----------
(39,306) 38,655
----------- -----------
Net loss $ (966,003) $ (673,348)
=========== ===========
Basic and diluted net loss per common share
(based on 27,250,000 weighted average
common shares outstanding) ($0.04) ($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, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
Revenues:
Bowling $ 1,249,954 $ 1,327,334
Rental 316,390 276,269
Golf 281,531 145,774
Other 60,747 79,872
Other-related party 85,334 106,124
----------- -----------
1,993,956 1,935,373
----------- -----------
Costs and expenses:
Bowling 1,036,264 1,004,522
Rental 124,380 123,464
Golf 604,813 494,632
Development 90,313 84,432
Selling, general, and administrative 1,772,673 1,772,276
Depreciation and amortization 191,952 187,180
----------- -----------
3,820,395 3,666,506
----------- -----------
Loss from operations (1,826,439) (1,731,133)
----------- -----------
Other income (charges):
Investment income:
Related party 19,973 125,950
Other 9,089 19,620
Interest expense:
Development activities (133,001) (122,676)
Other and amortization of finance costs (179,485) (167,224)
Loss on sale of undeveloped land (638) --
Equity in income of investees 243,299 224,849
----------- -----------
(40,763) 80,519
----------- -----------
Loss from operations before extraordinary loss (1,867,202) (1,650,614)
Extraordinary loss from early
extinguishment of investee debt -- (98,500)
----------- -----------
Net loss $(1,867,202) $(1,749,114)
=========== ===========
Basic and diluted net loss per common
share (based on 27,250,000 weighted
average common shares outstanding) from:
Operations before extraordinary loss ($0.07) ($0.06)
Extraordinary loss -- --
------- -------
Net loss ($0.07) ($0.06)
======= =======
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, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss ($1,867,202) ($1,749,114)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs 4,560 9,099
Depreciation and amortization 191,952 187,180
Equity in income of investees (243,299) (126,349)
Deferred income 24,000 --
Loss on sale of undeveloped land 638 --
Interest income accrued on note
receivable from shareholder -- (104,286)
Interest accrued on assessment
district obligations 133,001 122,676
Changes in assets and liabilities:
Decrease in receivables 5,474 18,136
(Increase) decrease in inventories 92,806 (83,886)
(Increase) decrease in prepaid expenses (64,373) 44,469
Increase (decrease) in accounts payable 77,539 (127,899)
Increase in accrued expenses 9,573 17,696
Other (2,286) 10,488
----------- -----------
Net cash used by operating activities (1,637,617) (1,781,790)
----------- -----------
Cash flows from investing activities:
Decrease in notes receivable 36,479 10,077
Capital expenditures (83,114) (59,269)
Increase in development costs on
undeveloped land (17,278) --
Proceeds from sale of undeveloped land 190,362 --
Contributions to investees (19,460) --
Distributions from investees 2,024,500 886,171
----------- -----------
Net cash provided by investing activities 2,131,489 836,979
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (139,032) (129,362)
Extinguishment of long-term debt (75,927) --
Proceeds from note payable 550,000 --
Payment of note payable (550,000) --
Payment of assessment district obligation (22,455) --
----------- -----------
Net cash used by financing activities (237,414) (129,362)
----------- -----------
Net increase (decrease) in cash and cash equivalents 256,458 (1,074,173)
Cash and cash equivalents, beginning of year 357,906 1,416,460
----------- -----------
Cash and cash equivalents, end of year $ 614,364 $ 342,287
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental schedule of non-cash investing and financing activities:
In July 1999, the Company discarded fully depreciated equipment with a
cost and accumulated depreciation of $16,893.
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 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 cash flows for the interim periods.
2. Due to the seasonal fluctuations of the bowling operations, the financial
results for the interim periods ended December 31, 1999 and 1998, are not
necessarily indicative of operations for the entire year.
3. Investments:
(a) Investments consist of the following:
December 31, June 30,
1999 1999
----------- -----------
Vail Ranch Limited Partnership
(equity method) $ 575,387 $ 580,927
All Seasons Inns, La Paz (cost basis) 37,926 37,926
----------- -----------
Total $ 613,313 $ 618,853
=========== ===========
Investment in UCV, L.P. classified as
liability- Distributions received
in excess of basis in investment $14,471,719 $12,688,808
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method for the six months ended
December 31, 1999 and 1998, before the extraordinary loss of $98,500
related to UCV , L.P. in 1998:
1999 1998
--------- ---------
UCV, L.P. $ 268,299 $ 244,849
Vail Ranch Limited Partnership (25,000) (20,000)
--------- ---------
$ 243,299 $ 224,849
========= =========
The following is a summary of distributions received from investees:
1999 1998
----------- ----------
UCV, L.P. $ 2,024,500 $ 240,000
Vail Ranch Limited Partnership -- 646,171
----------- ----------
$ 2,024,500 $ 886,171
=========== ==========
(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 six-month periods ended
September 30, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Revenues $2,365,000 $2,300,000
Operating and general and
administrative costs 837,000 734,000
Depreciation 13,000 14,000
Interest expense 978,000 1,062,000
Income before extraordinary item 537,000 490,000
Extraordinary loss from early
extinguishment of debt -- 197,000
Net income 537,000 293,000
6
<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 replacements. 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 capital replacements,
is the greater of ten percent or a base rate plus 4.75 percent (11-1/4% at
December 31, 1999). 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
meeting certain financial criteria. 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 loan of $4,039,490,
which is net of the capital replacement hold back, 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. (OVP). RCSA and OVGP
own a combined 50 percent general and limited partnership interest in
OVP. 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
$2,219,108 regarding delinquent assessment district payments
($1,593,529) and property taxes ($625,579).
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 was to
use the relief to continue its efforts to negotiate a settlement of the
zoning issues and restore the economic value of the property. On January
28, 2000 OVPGP agreed to the dismissal of the bankruptcy proceeding on
February 15, 2000. This will allow the County of Riverside to proceed
with a public sale of the property within 60 days after giving notice,
which cannot occur prior to February 15, 2000. 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.
7
<PAGE>
The delinquent principal, interest and penalties ($1,593,529) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,082,196) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at December
31, 1999. In addition, the consolidated balance sheet at December 31,
1999 includes $625,579 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 effect 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.
The following is summarized information about the Company's operations by
business segment.
8
<PAGE>
<TABLE>
<CAPTION>
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED:
DECEMBER 31, 1999:
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ....................... $ 1,249,954 $ 348,190 $ -- $ 281,531 $ 146,081 $ 2,025,756
Depreciation and amortization... 52,633 69,100 -- 45,570 24,649 191,952
Interest expense ............... 72,136 83,428 134,022 7,906 14,994 312,486
Equity in income (loss) of
investees .................... -- 268,299 (25,000) -- -- 243,299
Loss on sale ................... -- -- (638) -- -- (638)
Segment profit (loss) .......... (350,783) 324,581 (261,973) (1,338,212) (269,877) (1,896,264)
Investment income .............. 29,062
Loss from operations
before extraordinary loss ..... (1,867,202)
DECEMBER 31, 1998:
- --------------------------------
Revenues ....................... $ 1,327,334 $ 306,776 $ -- $ 145,774 $ 185,996 $ 1,965,880
Depreciation and .amortization.. 53,115 65,587 -- 42,371 26,107 187,180
Interest expense ............... 69,624 66,018 126,126 12,115 16,017 289,900
Equity in income (loss) of
investees...................... -- 244,849 (20,000) -- -- 224,849
Segment profit (loss) .......... (240,651) 285,556 (230,558) (1,387,409) (223,122) (1,796,184)
Investment income .............. 145,570
Loss from operations
before extraordinary loss ..... (1,650,614)
</TABLE>
1999 1998
----------- -----------
Revenues per segment schedule .. $2,025,756 $1,965,880
Intercompany rent eliminated ... (31,800) (30,507)
----------- -----------
Consolidated revenues $1,993,956 $1,935,373
=========== ===========
<TABLE>
<CAPTION>
THREE MONTHS ENDED:
DECEMBER 31, 1999:
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ....................... $ 625,382 $ 176,361 $ -- $ 157,601 $ 74,925 $ 1,034,269
Depreciation and amortization... 25,963 34,696 -- 23,368 12,356 96,383
Interest expense ............... 35,851 41,674 69,625 3,675 9,517 160,342
Equity in income (loss) of
investees ..................... -- 127,210 (25,000) -- -- 102,210
Segment profit (loss) .......... (149,158) 156,563 (130,605) (702,092) (159,537) (984,829)
Investment income .............. 18,826
Loss from operations
before extraordinary loss ..... (966,003)
DECEMBER 31, 1998:
- --------------------------------
Revenues ....................... $ 686,264 $ 154,592 $ -- $ 71,941 $ 103,673 $ 1,016,470
Depreciation and amortization... 26,586 33,119 -- 20,903 13,138 93,746
Interest expense ............... 31,691 32,961 66,651 5,807 4,365 141,475
Equity in income (loss) of
investees ..................... -- 122,161 (10,000) -- -- 112,161
Segment profit (loss) .......... (57,137) 145,680 (119,822) (585,989) (124,049) (741,317)
Investment income .............. 67,969
Loss from operations
before extraordinary loss ..... (673,348)
</TABLE>
1999 1998
----------- -----------
Revenues per segment schedule .. $1,034,269 $1,016,470
Intercompany rent eliminated ... (16,248) (15,552)
----------- -----------
Consolidated revenues .......... $1,018,021 $1,000,918
=========== ===========
9
<PAGE>
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Liquidity and Capital Resources
-------------------------------
Excluding the balance of the assessment-district-obligation-in-default and
property taxes in default related to the same property which are included in
current liabilities, the Company has a working capital deficit of $1,594,389 at
December 31, 1999, which is a $1,460,841 increase from the similarly calculated
working capital deficit of $133,548 at June 30, 1999. The decrease in working
capital is primarily attributable to an increase in the current portion of
long-term debt related to a $1,725,999 note payable that matures in August 2000.
Cash used by operating activities for the six months ended December 31, 1999
also reduced working capital, however this was offset by distributions received
from investees. The following is a schedule of the cash provided (used) before
changes in assets and liabilities, segregated by business segments:
1999 1998 Change
----------- ---------- ---------
Bowling ........................$ (297,000) $ (186,000) $(111,000)
Rental ......................... 129,000 109,000 20,000
Golf ...........................(1,293,000) (1,345,000) 52,000
Development .................... (103,000) (88,000) (15,000)
General corporate expense
and other .................... (192,000) (151,000) (41,000)
----------- ---------- ----------
Cash used by continuing
operations .................. (1,756,000) (1,661,000) (95,000)
Capital expenditures, net
of financing ................ (83,000) (59,000) (24,000)
financing
Principal payments on
long-term debt .............. (139,000) (129,000) (10,000)
----------- ---------- ----------
Cash used ................... (1,978,000) (1,849,000) (129,000)
=========== ========== ==========
Distributions received from
investees ..................... 2,025,000 886,000 1,139,000
=========== ========== ==========
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 December 31, 1999 was approximately
$1,593,000. The principal balance of the allocated portion of the bonds
($1,384,153 as of December 31, 1999), and delinquent interest and penalties
($1,291,572 as of December 31, 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 $625,579 of delinquent
property taxes and late fees as of December 31, 1999. The Company estimates the
value of this land is approximately $4,000,000 to $5,000,000 if the property was
zoned "commercial". This value is in addition to the non-delinquent portion of
the assessment district obligation ($1,082,195 at December 31, 1999) that a
buyer would assume. 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 was to use the relief to continue its efforts to
negotiate a settlement of the zoning issues and restore the economic value of
the property. On January 28, 2000 OVPGP agreed to the dismissal of the
bankruptcy proceeding on February 15, 2000. This will allow the County of
Riverside to proceed with a public sale of the property within 60 days after
giving notice, which cannot occur prior to February 15, 2000. OVPGP's plan is to
continue its efforts to restore an economically feasible zoning prior to any
date of public sale. 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, the recoverability of the
remaining $1,408,746 carrying value of this property is uncertain.
11
<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.
A $1,725,999 note payable collateralized by the real property underlying one of
the bowling centers matures in August 2000 and the lender has notified the
Company that it will not extend the due date. The Company is uncertain whether
it will be successful in obtaining financing to refinance the property. The
Company is currently evaluating alternatives for selling the property for the
purpose of paying the note payable. The carrying value of the property at
December 31, 1999 was approximately $1,587,000.
Management estimates negative cash flow of $1,300,000 to $1,500,000 for the
remaining quarters of the year ending June 30, 2000 from operating activities
after adding estimated distributions from UCV operations ($100,000) 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 had a program to identify, evaluate and implement changes to its
computer systems as necessary to address the Year 2000 issue. The Company
developed the plan for converting impacted items, and completed the conversion
at a cost less than $5,000. Through the date of this report, there have been no
adverse effects on the Company's business, results of operations or financial
condition as a result of Year 2000 problems with its computer systems and
operations. In addition, the Company has not encountered any Year 2000 problems
with any of its vendors or customers. Although the Company has made reasonable
efforts to identify and protect itself with respect to external Year 2000
problems, there can be no assurance that the Company will not be affected by
such problems. The Company will consider the necessity of implementing a
contingency plan to mitigate any adverse effects associated with the Year 2000
issue, should one arise.
"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.
12
<PAGE>
RESULTS OF OPERATIONS
---------------------
The following is a summary of the changes in the results of operations of the
six and three-month periods ended December 31, 1999 to the same period in 1998
and a discussion of the significant changes:
Six months ended December 31, 1999 versus 1998:
- -----------------------------------------------
<TABLE>
<CAPTION>
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues ....................... $ (77,380) $ 41,414 $ -- $ 135,757 $ (39,915) $ 59,876
Costs .......................... 31,742 916 5,881 110,181 -- 148,720
SG&A-direct .................... (8,299) -- -- (38,611) 48,600 1,690
SG&A-allocated ................. 7,279 4,000 12,000 16,000 (39,279) --
Depreciation and amortization .. (482) 3,513 -- 3,199 (1,458) 4,772
Interest expense ............... 2,512 17,410 7,896 (4,209) (1,023) 22,586
Equity in investees ............ -- 23,450 (5,000) -- -- 18,450
Loss on sale ................... -- -- (638) -- -- (638)
Segment profit (loss) .......... (110,132) 39,025 (31,415) 49,197 (46,755) (100,080)
Investment income .............. (116,508)
Loss from operations before
extraordinary loss .......... (216,588)
</TABLE>
Three months ended December 31, 1999 versus 1998:
- -----------------------------------------------
<TABLE>
<CAPTION>
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ....................... $ (60,882) $ 21,769 -- $ 85,660 $ (28,748) $ 17,799
Costs .......................... 23,197 2,645 (14,191) 112,329 -- 123,980
SG&A-direct .................... (3,466) -- -- 83,101 26,241 105,876
SG&A-allocated ................. 7,871 3,000 7,000 6,000 (23,871) --
Depreciation and amortization .. (623) 1,577 -- 2,465 (782) 2,637
Interest expense ............... 4,160 8,713 2,974 (2,132) 5,152 18,867
Equity in investees ............ -- 5,049 (15,000) -- -- (9,951)
Segment profit (loss) .......... (92,021) 10,883 (10,783) (116,103) (35,488) (243,512)
Investment income .............. (49,143)
Loss from operations before
extraordinary loss .......... (292,655)
</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 $1,293
and $696 for the six and three month periods respectively.
BOWLING OPERATIONS:
- -------------------
Bowling revenues decreased by 6% and 9% in the six and three month periods,
respectively, which is approximately the same percentage decrease in the number
of games bowled in each period. All of the decrease is attributable to decreases
in the number of league games bowled, which have not been offset by increases in
open play games. In each period the number of league games bowled decreased by
approximately 17%.
Bowl costs increased by 3% and 5% in the six and three month periods,
respectively, 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% and 2% in the six and three month
periods, respectively, primarily due to a decrease in free-bowling expense.
13
<PAGE>
RENTAL OPERATIONS:
- ------------------
Rental revenues increased 14% in the six and three month period primarily due to
a 14% increase in the average rental rate at the Company's office building.
Interest expense increased due to a refinancing in May 1999 which increased
long-term debt associated with the rental segment by approximately $827,000.
The equity in income of UCV increased primarily due to a decrease in UCV's
interest expense ($84,000 and $27,000 in the six and three month periods,
respectively). The decrease related to a decrease in the interest rate from 10%
to approximately 7.1%, which was partially offset by an increase in the
long-term debt of approximately $5,166,000. Otherwise, UCV's rents increased by
3% in the six and three month period and expenses increased 14% and 11% in the
six and three month periods, respectively. 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.
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 OVPGP. Interest expense related to development activities primarily relates
to interest accrued on the past due and current assessment district obligations
of OVPGP.
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
three to six 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 1999 1998
-------- -------- -------- --------
Costs of goods sold and
manufacturing overhead $268,000 $165,000 $473,000 $399,000
Research & development ... 64,000 55,000 132,000 96,000
-------- -------- -------- --------
Total golf costs .... 332,000 220,000 605,000 495,000
======== ======== ======== ========
Marketing & promotion .... 383,000 280,000 753,000 769,000
Administrative-direct .... 29,000 49,000 62,000 84,000
-------- -------- -------- --------
Total SG&A-direct ... 412,000 329,000 815,000 853,000
======== ======== ======== ========
Allocated corporate costs 89,000 83,000 147,000 131,000
======== ======== ======== ========
Total golf costs increased primarily due to an increase in the amount of cost of
goods sold related to increased sales, an increase in the cost of prototype
shafts developed during the periods, and an increase in the payroll for research
and development. Marketing and promotion expenses increased during the three
month period ended December 31, 1999 primarily due the sponsorship costs of the
National Long-Drive Championships in October 1999.
UNALLOCATED AND OTHER
- ---------------------
Other revenues decreased in the six and three month periods primarily due to a
decrease in leasing commission income.
Selling, general and administrative expense increased in the six and three month
periods because of increased payroll costs in 1999. This increase in the
corporate segment expenses resulted in an increase in the costs allocated to the
business segments.
Investment income decreased in the six and three month periods ended December
31, 1999 primarily due to discontinuing the accrual of interest income on the
note receivable from shareholder (decrease of $104,000 and $49,000 in the six
and three month periods, respectively).
14
<PAGE>
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 .. $ 106,000 $ 1,796,000 $ 39,000 $ 21,000 $ 22,000 $ 1,879,000 $ 3,863,000
Weighted average
interest rate . 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Variable rate debt $ 39,000 $ 78,000 $ 6,000 -- -- -- $ 123,000
Weighted average
interest rate . 11.2% 11.2% 11.2% -- -- -- 11.2%
</TABLE>
The amounts for 2000 relate to the six months ending June 30, 2000.
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.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of December 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, 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
On December 23, 1999 the Company held its annual shareholder meeting in
which the following item was voted upon:
Tabulation of Votes
--------------------------------
Election of Directors: For Against Abstain
---------------------- ---------- ------- -------
Harold S. Elkan 24,118,926 0 13,849
Steven R. Whitman 24,122,231 0 10,544
Patrick D. Reiley 24,122,706 0 10,069
James E. Crowley 24,122,756 0 10,019
Robert A. MacNamara 24,122,781 0 9,994
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
16
<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 11, 2000
-----------------
BY:/S/ STEVEN R. WHITMAN
---------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
DATE: FEBRUARY 11, 2000
-----------------
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 614,364
<SECURITIES> 0
<RECEIVABLES> 160,930
<ALLOWANCES> 0
<INVENTORY> 217,354
<CURRENT-ASSETS> 1,256,689
<PP&E> 5,343,541
<DEPRECIATION> 2,108,260
<TOTAL-ASSETS> 6,923,409
<CURRENT-LIABILITIES> 6,152,382
<BONDS> 0
0
0
<COMMON> 272,500
<OTHER-SE> 1,730,049
<TOTAL-LIABILITY-AND-EQUITY> 6,923,409
<SALES> 281,531
<TOTAL-REVENUES> 1,993,956
<CGS> 0
<TOTAL-COSTS> 3,820,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 312,486
<INCOME-PRETAX> (1,867,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,867,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,867,202)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
