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, 2002
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.)
7415 Carroll Road, Suite C, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 408-0364
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, 2002 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Unaudited Balance Sheets as of March 31, 2002
and June 30, 2001 ......................................... 1-2
Unaudited Statements of Operations for the Three
Months Ended March 31, 2002 and 2001 ...................... 3
Unaudited Statements of Operations for the Nine Months Ended
March 31, 2002 and 2001 ............................ 4
Unaudited Statements of Cash Flows for the Nine Months Ended
March 31, 2002 and 2001 ........................... 5
Notes to Financial Statements ............................... 6-10
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................... 11-16
Item 3.- Quantitative and Qualitative Disclosures about Market Risk .. 16
Part II - Other Information .......................................... 17
Signatures .......................................................... 18
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, June 30,
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents ............... $ 132,984 $ 515,204
Receivables ............................. 416,388 324,912
Inventories ............................. 681,398 585,111
Prepaid expenses ........................ 35,614 61,365
------------ ------------
Total current assets ................. 1,266,384 1,486,592
------------ ------------
Receivables due after one year:
Note receivable- affiliate, net ......... -- --
------------ ------------
Property and equipment, at cost:
Equipment and leasehold improvements .... 2,345,406 2,345,406
Less accumulated depreciation
and amortization .................... (1,234,128) (1,060,626)
------------ ------------
Net property and equipment .......... 1,111,278 1,284,780
------------ ------------
Other assets:
Intangible assets, net .................. 46,605 150,657
Investments ............................. 312,446 405,446
Other ................................... 90,699 120,999
------------ ------------
449,750 677,102
------------ ------------
$ 2,827,412 $ 3,448,474
============ ============
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
(Unaudited)
March 31, June 30,
2002 2001
------------ ------------
Current liabilities:
Notes payable-short term, related party . $ 445,000 $ 1,250,000
Current portion of long-term debt ....... 13,000 32,000
Accounts payable ........................ 719,313 708,307
Accrued payroll and related expenses .... 246,246 195,367
Accrued interest ........................ 267,032 203,578
Other liabilities ....................... 156,998 183,466
------------ ------------
Total current liabilities ............ 1,847,589 2,572,718
------------ ------------
Long-term debt, excluding current portion .. 7,091 13,942
------------ ------------
Distributions received in excess of
basis in investment ..................... 17,558,810 15,792,373
------------ ------------
Other liabilities .......................... 180,000 144,000
------------ ------------
Minority interest in consolidated subsidiary 827,677 852,677
------------ ------------
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 ..................... (17,304,812) (15,638,293)
------------ ------------
(15,302,263) (13,635,744)
Less note receivable from shareholder ... (2,291,492) (2,291,492)
------------ ------------
Total shareholders' deficit ........... (17,593,755) (15,927,236)
------------ ------------
Commitments and contingencies (Note 5)
$ 2,827,412 $ 3,448,474
============ ============
See accompanying notes to consolidated condensed
financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
Revenues:
Bowling ................................. $ 516,454 $ 534,812
Rental .................................. 54,860 65,331
Golf .................................... 741,226 419,576
Other ................................... 139,059 34,618
Other-related party ..................... 46,659 44,763
------------ ------------
1,498,258 1,099,100
------------ ------------
Costs and expenses:
Bowling ................................. 362,329 429,419
Rental .................................. 54,841 59,383
Golf .................................... 722,769 661,116
Development ............................. -- 42,021
Selling, general, and administrative .... 680,971 832,247
Depreciation and amortization ........... 71,189 63,254
Impairment loss on deferred lease costs . 3,000 --
------------ ------------
1,895,099 2,087,440
------------ ------------
Loss from operations ....................... (396,841) (988,340)
------------ ------------
Other income (charges):
Investment income-related party ......... (257) 8,529
Investment income-other ................. -- 1,609
Interest expense:
Development activities ................. -- (77,159)
Other and amortization of finance costs (26,325) (50,483)
Equity in income of investees ........... 14,729 74,929
------------ ------------
(11,853) (42,575)
------------ ------------
Net loss ................................... $ (408,694) $ (1,030,915)
============ ============
Basic and diluted net loss per common share
(based on 27,250,000 weighted average
common shares outstanding) ................ $(0.01) $(0.04)
======= =======
See accompanying notes to consolidated condensed
financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
Revenues:
Bowling ................................. $ 1,346,222 $ 1,781,075
Rental .................................. 172,258 388,078
Golf .................................... 1,528,725 950,205
Other ................................... 294,834 113,052
Other-related party ..................... 139,043 133,555
------------ ------------
3,481,082 3,365,965
------------ ------------
Costs and expenses:
Bowling ................................. 1,028,624 1,472,475
Rental .................................. 170,758 203,534
Golf .................................... 1,628,971 1,726,131
Development ............................. -- 127,013
Selling, general, and administrative .... 1,990,108 2,484,598
Depreciation and amortization ........... 214,041 228,065
Impairment loss on deferred lease costs . 44,915 --
------------ ------------
5,077,417 6,241,816
------------ ------------
Loss from operations ....................... (1,596,335) (2,875,851)
------------ ------------
Other income (charges):
Investment income:
Related party ......................... 15,971 15,792
Other ................................. 1,807 1,609
Interest expense:
Development activities ................ -- (207,438)
Other and amortization of finance costs (74,410) (341,157)
Gain on sale of office building ......... -- 2,764,483
Gain on sale of bowling center building . -- 482,487
Equity in income (loss) of investees .... (13,552) 180,374
------------ ------------
(70,184) 2,896,150
------------ ------------
Net income (loss) .......................... $ (1,666,519) $ 20,299
============ ============
Basic and diluted net income (loss) per common
share (based on 27,250,000 weighted
average common shares outstanding) ..... $(0.06) $0.00
======= =====
See accompanying notes to consolidated condensed
financial statements.
4
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) ........................ $ (1,666,519) $ 20,299
Adjustments to reconcile net income (loss)
to the net cash used by operating
activities:
Amortization of deferred financing costs -- 18,846
Depreciation and amortization ........ 214,041 228,065
Equity in (income) loss of investees . 13,552 (180,374)
Deferred income ...................... 36,000 36,000
Impairment loss on deferred lease costs 44,915 --
Gain on sale of assets ............... -- (3,246,970)
Interest accrued on assessment district
obligations ........................ -- 207,438
Changes in assets and liabilities:
Increase in receivables .............. (91,476) (20,792)
Increase in inventories .............. (96,287) (50,055)
Decrease in prepaid expenses .......... 25,751 63,259
Increase (decrease) in accounts payable 11,006 (39,678)
Increase in accrued expenses ......... 87,865 549,950
Other ................................ 58,263 28,996
------------ ------------
Net cash used by operating activities (1,362,889) (2,385,016)
------------ ------------
Cash flows from investing activities:
Decrease in notes receivable ............ -- 73,866
Capital expenditures .................... -- (375,039)
Increase in development costs on
undeveloped land ...................... -- (30,755)
Proceeds from sale of office building ... -- 1,662,337
Proceeds from bowling center building ... -- 2,047,328
Distribution to holder of minority interest (25,000) --
Distributions from investees ............ 1,805,820 1,059,000
Proceeds from assignment of subleasehold
interest .............................. 30,700 --
Contributions to investees .............. -- (200,000)
------------ ------------
Net cash provided by investing
activities ....................... 1,811,520 4,236,737
------------ ------------
Cash flows from financing activities:
Scheduled principal payments on
long-term debt ........................ (25,851) (179,029)
Extinguishment of long-term debt ........ -- (1,650,977)
Proceeds from short-term notes payable .. 450,000 1,200,000
Payments on short-term notes payable .... (1,255,000) (950,000)
Other ................................... -- (22,598)
------------ ------------
Net cash used by financing activities (830,851) (1,602,604)
------------ ------------
Net increase (decrease) in cash and
cash equivalents ........................ (382,220) 249,117
Cash and cash equivalents, beginning of year 515,204 13,961
------------ ------------
Cash and cash equivalents, end of year ..... $ 132,984 $ 263,078
============ ============
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
(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. All
adjustments were of a normal recurring nature.
2. Certain prior period amounts have been reclassified to conform to the
presentation used in the current period.
3. Due to the seasonal fluctuations of the bowling and golf club shaft
manufacturing operations, the financial results for the interim periods
ended March 31, 2002 and 2001, are not necessarily indicative of operations
for the entire year.
4. Investments:
(a) Investments consist of the following:
March 31, June 30,
2002 2001
----------- -----------
Vail Ranch Limited Partnership
(equity method) ..............................$ 312,446 $ 405,446
=========== ===========
Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ..............$17,558,810 $15,792,373
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method for the nine-month periods
ended March 31,:
2002 2001
-------- --------
UCV, L.P. .................... $ 79,448 $225,374
Vail Ranch Limited Partnership (93,000) (45,000)
-------- --------
$(13,552) $180,374
======== ========
The following is a summary of distributions received from investees for the
nine-month periods ended March 31,:
2002 2001
---------- ----------
UCV, L.P. .................... $1,805,820 $1,059,000
Vail Ranch Limited Partnership -- --
---------- ----------
$1,805,820 $1,059,000
========== ==========
(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 nine and three-month
periods ended December 31, 2001 and 2000 are as follows:
Nine Months Three Months
---------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues $4,048,000 $3,792,000 $1,365,000 $1,271,000
Operating and general
and administrative
costs 1,255,000 1,226,000 414,000 377,000
Depreciation 13,000 16,000 6,000 5,000
Interest expense 2,621,000 2,099,000 876,000 709,000
Net income 159,000 451,000 69,000 180,000
As disclosed in the annual financial statements for the year ended June 30,
2001, the Company performs management services and development services for
UCV pursuant to separate agreements with UCV. The Company believes that the
terms of these agreements are no less favorable to the Company or UCV than
could be obtained with an independent third party.
6
In March 2002, UCV refinanced its $33,000,000 note payable with two loans
totaling $38,000,000. Each of the loans matures April 1, 2003 but provides
for a six month extension upon meeting certain financial criteria.
The first deed of trust is $36,000,000 and provides for monthly payments
equal to interest plus principal based on a 30 year amortization schedule.
Interest is based on an annual interest rate of 300 basis points above the
greater of the 30-Day LIBOR rate or 2.4 percent, adjusted monthly. The
current monthly payment of principal and interest is $202,151 based on a
5.4% annual interest rate. The loan may be repaid in full at any time
subject to a fee of one percent if paid within the first six months and .75
percent thereafter. UCV paid a fee to cap the base rate of LIBOR at 4
percent, which effectively caps the maximum interest rate charged at 7
percent over the term. This note is collateralized by UCV's land, buildings
and leases.
The second deed of trust is $2,000,000 and provides for monthly payments of
interest only at an annual rate of 12-1/2 percent. This loan may be repaid
in full at any time subject to a fee equal to the difference between
$185,000 and the amount of interest paid from inception to the loan payoff
date. This loan is collateralized by UCV's land, buildings, and leases and
the ownership interests of UCV's partners.
The proceeds of the new loans, after extinguishing the $33,000,000 note
payable were utilized to: pay loan costs of $1,129,544 and pay
distributions to the partners of $3,400,000 in March 2002.
The refinancing resulted in charges of $335,042 related to the unamortized
portion of deferred loan costs related to the old note payable. These
charges were classified as an extraordinary loss from extinguishment of
debt in the financial statements of UCV in its fourth quarter ending March
31, 2002. The Company's equity in the extraordinary loss of UCV will be
recorded in the Company's fourth quarter ending June 30, 2002.
5. Intangible Assets:
On March 20, 2002, the Company subsidiary, Downtown Properties Development
Corporation (DPDC), transferred ownership of its sublessor interests in a
parcel of land that is subleased to individual owners of a condominium
project based on agreements entered into in October 2001 and approved by
the Bureau of Indian Affairs on March 20, 2002. DPDC received a note
receivable of $37,500 as consideration for the sublessor interest that DPDC
then assigned to the master lessors for a reduction in amounts owed by DPDC
to the master lessors. DPDC still owes the master lessors $66,424 plus
interest from November 1, 2001. Once this amount is paid, the Company will
be released from any further liability under the master lease. As a result
of these agreements, the Company recorded a $44,915 impairment loss for a
portion of the unamortized balance ($75,615) of the deferred lease costs
related to this sublessor interest and discontinued amortizing the deferred
lease costs effective October 2001.
The following is a summary of the results from operations of the Palm
Springs sublease included in the financial statements in the three and nine
month periods:
Three Months Nine Months
------------------- -------------------
2002 2001 2002 2001
-------- ------- -------- --------
Rents $ 36,000 $41,000 $119,000 $124,000
Costs 36,000 40,000 116,000 122,000
Impairment loss 3,000 -- 45,000 --
Depreciation -- -- -- 1,000
-------- ------- -------- --------
Income from operations (3,000) 1,000 (42,000) 1,000
Interest expense -- -- 2,000 --
------- ------- ------- --------
Income from continuing
operations $ (3,000) $ 1,000 $(44,000) 1,000
======== ======= ======== ========
7
6. Contingencies:
The Company is involved in various routine litigation and disputes incident
to its business. In 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.
7. Short-term notes payable:
On November 15, 2001, the Company borrowed an additional $150,000 from the
Company's partner in UCV. In March 2002 the Company paid $955,000 of the
note payable.
As disclosed in the financial statements for the year ended June 30, 2001,
the Company has received other loans from this partner. Although the terms
of these loans are likely to be comparable to the loan terms from an
independent third party, it is unlikely that the Company could obtain a
similar loan from an independent third party.
On January 11, 2002, the Company borrowed $300,000 from Harold S. Elkan,
the Company's President and, indirectly, the Company's majority
shareholder, pursuant to a short term loan agreement that is due on demand
but no later than April 5, 2002. The loan bears interest at ten percent
(10%) per annum and is payable monthly. Although the terms of this note are
likely to be comparable to the loan terms from an independent third party,
it is unlikely that the Company could obtain a similar loan from an
independent third party. The note was paid in March 2002.
7. Other:
On January 1, 2002, the Company agreed to extend the due date of the
unsecured loans to Harold S. Elkan from January 1, 2002 to January 1, 2003.
8. Business segment information:
The Company operates principally in four business segments: bowling
centers, commercial real estate rental, real estate development, and golf
club shaft manufacturing. 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
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED MARCH 31, 2002:
--------------------------------
Revenues ....................... $ 1,346,222 $ 172,258 $ -- $ 1,528,725 $ 433,877 $ 3,481,082
Depreciation and amortization... 7,470 40,539 -- 128,322 37,710 214,041
Interest expense ............... -- 1,662 -- -- 72,748 74,410
Equity in income (loss) of
investees .................... -- 79,448 (93,000) -- -- (13,552)
Impairment loss................. -- 44,915 -- -- -- 44,915
Segment profit (loss) .......... 47,459 (6,168) (97,000) (1,461,302) (167,286) (1,684,297)
Investment income .............. 17,778
Net loss ....................... (1,666,519)
NINE MONTHS ENDED MARCH 31, 2001:
--------------------------------
Revenues ....................... $ 1,781,075 $ 421,063 $ -- $ 950,205 $ 246,607 $ 3,398,950
Depreciation and amortization... 33,075 57,270 -- 107,489 30,231 228,065
Interest expense ............... 91,117 80,993 207,438 4,193 164,854 548,595
Equity in income (loss) of
investees .................... -- 225,374 (45,000) -- -- 180,374
Gain on sale ................... 482,487 2,764,483 -- -- -- 3,246,970
Segment profit (loss) .......... 207,504 3,054,123 (396,451) (2,373,370) (488,908) 2,898
Investment income .............. 17,401
Net income ..................... 20,299
THREE MONTHS ENDED MARCH 31, 2002:
--------------------------------
Revenues ....................... $ 516,454 $ 54,860 $ -- $ 741,226 $ 185,718 $ 1,498,258
Depreciation and amortization... 2,490 13,355 -- 42,774 12,570 71,189
Interest expense ............... -- -- -- -- 26,325 26,325
Equity in income (loss) of
investees ..................... -- 34,729 (20,000) -- -- 14,729
Impairment loss................. -- 3,000 -- -- -- 3,000
Segment profit (loss) .......... 61,845 18,393 (20,000) (485,721) 17,046 (408,437)
Investment income .............. 257
Net loss ....................... (408,694)
THREE MONTHS ENDED MARCH 31, 2001:
--------------------------------
Revenues ....................... $ 534,812 $ 65,331 $ -- $ 419,576 $ 79,381 $ 1,099,100
Depreciation and amortization... 2,490 13,829 -- 36,858 10,077 63,254
Interest expense ............... -- -- 77,159 816 49,667 127,642
Equity in income (loss) of
investees ..................... -- 89,929 (15,000) -- -- 74,929
Segment profit (loss) .......... (14,840) 82,048 (140,180) (845,460) (122,621) (1,041,053)
Investment income .............. 10,138
Net loss ....................... (1,030,915)
Nine Months Three Months
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues per segment .......$3,481,082 $3,398,950 $1,498,258 $1,099,100
Intercompany rent eliminated -- (32,985) -- --
---------- ---------- ---------- ----------
Consolidated revenues ......$3,481,082 $3,365,965 $1,498,258 $1,099,100
========== ========== ========== ==========
9
9. 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, 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 obtaining
additional investors in its subsidiary, Penley Sports, or increases in the
sales volume of 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
Liquidity and Capital Resources
-------------------------------
The independent auditors' report dated September 7, 2001 included in our June
30, 2001 Annual Report on Form 10-K contained the following explanatory
paragraph:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 14 to the consolidated financial statements, the Company has suffered
recurring losses, has a working capital deficiency and shareholders'
deficit, and is forecasting negative cash flows from operating activities
for the next twelve months. These items raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 14. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Management estimates negative cash flow of $100,000 to $300,000 in total for the
remaining quarter of the year ending June 30, 2002 from operating activities
after deducting capital expenditures and principal payments on notes payable and
adding estimated distributions from UCV.
The short-term loan from the Company's partner in UCV is due on demand. The
Company is exploring selling its partner a portion of the Company's interest in
UCV in satisfaction of the remaining loan obligations. At this point management
is unable to assess the likelihood a transaction will be consummated.
Management expects continuing cash flow deficits until Penley Sports develops
sufficient sales volume to become profitable. Although, there can be no
assurances that Penley Sports will ever achieve profitable operations,
management estimates that a combination of continued increases in the sales of
Penley Sports and reduction of its operating costs will result in Penley Sports
and the Company achieving a breakeven level of operations at the end of the next
two quarters.
Management is currently evaluating other sources of working capital including
the sale of assets or obtaining additional investors in Penley Sports.
Management has not assessed the likelihood of any other sources of long-term or
short-term liquidity. 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. However, management believes
it will be able to meet its financial obligations for the next twelve months.
The Company has a working capital deficit of $581,205 at March 31, 2002, which
is a $504,921 decrease from the working capital deficit of $1,086,126 at June
30, 2001. The decrease in working capital deficit is primarily attributable to
the distributions the Company received from UCV which were partially offset by
the cash used by operating activities for the nine months ended March 31, 2002
and repayments of short term debt. The following is a schedule of the cash
provided (used) before changes in assets and liabilities, segregated by business
segments:
2002 2001 Change
----------- ----------- -----------
Bowling ............................ $ 55,000 $ (226,000) $ 281,000
Rental ............................. -- 119,000 (119,000)
Golf ............................... (1,334,000) (2,260,000) 926,000
Development ........................ (4,000) (144,000) 140,000
General corporate expense and other (76,000) (405,000) 329,000
----------- ----------- -----------
Cash used by continuing operations . (1,359,000) (2,916,000) 1,557,000
Capital expenditures, net of financing -- (406,000) 406,000
Principal payments on long-term debt (26,000) (179,000) 153,000
----------- ----------- -----------
Cash used .......................... (1,385,000) (3,501,000) 2,116,000
=========== =========== ===========
Distributions received from investees 1,806,000 1,059,000 747,000
=========== =========== ===========
11
Critical Accounting Policies
----------------------------
In response to the SEC's release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies", the Company has identified its
most critical accounting policy as that related to the carrying value of its
long-lived assets. Any event or circumstance that indicates to the Company an
impairment of the fair value of any asset is recorded in the period in which
such event or circumstance becomes known to the Company. During the nine months
ended March 31, 2002 no such event or circumstance occurred that would, in the
opinion of management, signify the need for a material reduction in the carrying
value of any of the Company's assets, except as it relates to the impairment of
the deferred lease costs.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The Company is required to adopt the
provisions of SFAS No. 141 immediately. The adoption of SFAS No. 141 will not
have a material effect on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The Company is required to adopt Statement No. 142 effective
July 1, 2002. As of March 31, 2002, the Company does not have any goodwill,
intangible assets or unamortized negative goodwill. The Company does not believe
SFAS No. 142 will have a material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 and requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The Company does not believe SFAS No. 143 will have a
material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental provisions
in SFAS 121 for recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS 121. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121. The provisions of the Statement for assets held for sale or other
disposal generally are required to be applied prospectively after the adoption
date to newly initiated disposal activities. Therefore, management cannot
determine the potential effects that adoption of SFAS 144 will have on the
Company's financial statements.
12
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements are
based on management's expectations as of the date hereof, and the Company does
not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in the Company's filings with the
Securities and Exchange Commission.
Results of Operations
---------------------
The following is a summary of the changes in the results of operations of the
nine and three-month periods ended March 31, 2002 compared to the same period in
2001 and a discussion of the significant changes:
Nine Months Ended March 31, 2002 versus 2001
----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ----------- ----------- ----------- ----------- -----------
Revenues ..................... $ (434,853) $ (248,805) -- $ 578,520 $ 187,270 $ 82,132
Costs ........................ (443,851) (32,776) (127,013) (97,160) -- (700,800)
SG&A-direct .................. (134,658) -- -- (227,028) (165,789) (527,475)
SG&A-allocated ............... (62,064) (15,000) (13,000) (26,000) 116,064 --
Depreciation and amortization (25,605) (16,731) -- 20,833 7,479 (14,024)
Impairment loss .............. -- 44,915 -- -- -- 44,915
Interest expense ............. (91,117) (79,331) (207,438) (4,193) (92,106) (474,185)
Equity in investees .......... -- (145,926) (48,000) -- -- (193,926)
Gain on sale ................. (482,487) (2,764,483) -- -- -- (3,246,970)
Segment profit (loss) ........ (160,045) (3,060,291) 299,451 912,068 321,622 (1,687,195)
Investment income ............ 377
Loss from operations ......... (1,686,818)
Three Months Ended March 31, 2002 versus 2001
---------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ----------- ----------- ----------- ----------- -----------
Revenues ..................... $ (18,358) $ (10,471) -- $ 321,650 $ 106,337 $ 399,158
Costs ........................ (67,090) (4,542) (42,021) 61,653 -- (52,000)
SG&A-direct .................. (19,856) -- -- (105,842) (25,578) (151,276)
SG&A-allocated ............... (8,097) -- (6,000) 1,000 13,097 --
Depreciation and amortization -- (474) -- 5,916 2,493 7,935
Impairment loss .............. -- 3,000 -- -- -- 3,000
Interest expense ............. -- -- (77,159) (816) (23,342) (101,317)
Equity in investees .......... -- (55,200) (5,000) -- -- (60,200)
Segment profit (loss) ........ 76,685 (63,655) 120,180 359,739 139,667 632,616
Investment income ............ (10,395)
Income from operations ....... 622,221
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
$32,985 in the nine month period.
13
BOWLING OPERATIONS:
-------------------
The segment includes the operations of two bowling centers, Valley Bowl and
Grove Bowl. On December 21, 2000, the Company closed the operations of Valley
Bowl in conjunction with the sale of the real estate on December 29, 2000. The
following is a summary by bowling center of the changes in the results of
operations for the nine and three-month periods ended March 31, 2002 compared to
the same periods in 2001:
Nine-Month Period Three-Month Period
----------------------------------- -----------------------------------
Grove Valley Combined Grove Valley Combined
--------- --------- --------- --------- --------- ---------
Revenues ................................. $ (3,379) $(431,474) (434,853) $ (17,757) $ (601) $ (18,358)
Costs .................................... (124,016) (319,835) (443,851) (64,366) (2,724) (67,090)
SG&A-direct .............................. (59,406) (75,252) (134,658) (20,253) 397 (19,856)
SG&A-allocated ........................... (32,364) (29,700) (62,064) (8,697) 600 (8,097)
Depreciation and amortization ............ -- (25,605) (25,605) -- -- --
Interest expense ......................... -- (91,117) (91,117) -- -- --
Gain on sale ............................. -- (482,487) (482,487) -- -- --
Segment profit (loss) .................... 212,407 (372,452) (160,045) 75,559 1,126 76,685
The following is a comparison of the operations of the Grove Bowl to the prior
year. The number of games bowled decreased by 14% in each of the nine and three
month periods in 2002. This decrease was partially offset by an increase in the
average price received for games bowled of 12% in each of the nine and three
month periods in 2002. Bowl costs decreased in the nine and three month periods
in 2002 primarily due to decreases in utility rates of $95,000 and $32,000 in
the nine and three month periods of 2002, respectively. SG&A costs decreased
primarily due to decreases in payroll ($34,000 and $23,000 in the nine and three
month periods, respectively) and promotion costs ($19,000 in the nine month
period).
RENTAL OPERATIONS:
------------------
This segment includes the operations of the office building sold December 28,
2000, the equity in income of the operation of a 542 unit apartment project
(UCV), a subleasehold interest in land underlying a condominium project, which
was assigned to a third party effective March 20, 2002, the sublease of a
portion of the Penley factory and other miscellaneous rents received on
undeveloped land, which was sold in May 2001.
The following is a summary of the changes in operations:
Nine Month Period Three Month Period
----------------------------------------- -----------------------------------------
Office Other Combined Office Other Combined
----------- ----------- ----------- ----------- ----------- -----------
Revenues ................................ $ (243,521) $ (5,284) $ (248,805) -- $ (10,471) (10,471)
Costs ................................... (52,734) 19,958 (32,776) (1,283) (3,259) (4,542)
SG&A-allocated .......................... (15,000) -- (15,000) -- -- --
Depreciation and amortization ........... (15,783) (948) (16,731) -- (474) (474)
Impairment loss ......................... -- 44,915 44,915 -- 3,000 3,000
Interest expense ........................ (80,993) 1,662 (79,331) -- -- --
Equity in income of UCV ................. -- (145,926) (145,926) -- (55,200) (55,200)
Gain on sale ............................ (2,764,483) -- (2,764,483) -- -- --
Segment profit (loss) ................... (2,843,494) (216,797) (3,060,291) 1,283 (64,938) (63,655)
A temporary easement granted by the Company for the use of a portion of its
undeveloped land in Temecula, California expired in September 2000. The Company
had been amortizing approximately $17,000 of deferred rent to income each
quarter. Other rental revenues decreased by $17,000 in the nine month period of
2002 related to this easement. Other than this change, other rental revenues
increased by $18,000 and decreased by $4,000 in the nine and three month
periods, respectively, and other rental costs increased in $25,000 and $1,000 in
the nine and three month periods, respectively, related to the sublease for the
Penley factory. Approximately 10,000 square feet of the Penley factory space
(38,000 square feet) was subleased commencing in November 2000 under a lease
that expires in October 2002.
14
The equity in income of UCV decreased in the nine and three month periods
primarily due to increases in interest expense and other costs of UCV that were
only partially offset by increases in revenues. The following is a summary of
the changes in the operations of UCV, LP in the nine and three months periods of
2002 compared to the prior period:
Nine Months Three Months
------------ ------------
Revenues ................................... $ 256,000 $ 94,000
Costs ...................................... 29,000 37,000
Depreciation ............................... (3,000) 1,000
Interest and amortization
of loan costs ............................ 522,000 167,000
Net income ................................. (292,000) (111,000)
Rental income of UCV increased in both periods primarily due to a 6% increase in
the average rental rate plus a decrease in the vacancy rate from 2.4% to 1.5% in
the nine month period and from 2.5% to 2.0% in the three month period. UCV's
interest expense increased primarily due to an increase in long-term debt in
March 2001. UCV increased its long-term debt in March 2001 by $3,960,510.
In March 2002, UCV refinanced its $33,000,000 of notes payable with loans
totaling $38,000,000. The average interest rate of the two new loans is
approximately 5.8% compared to a 8.5% rate for the old loan. As a result of the
reduced interest, the interest expense and amortization of the loans fees of the
new $38,000,000 of loans will be approximately the same as the old $33,000,000
loan.
REAL ESTATE DEVELOPMENT OPERATIONS:
-----------------------------------
Development costs primarily consisted of legal costs incurred to contest the
City of Temecula's attempts to down-zone the undeveloped land owned by Old Vail
Partners and property taxes on the undeveloped land. Interest expense related to
development activities primarily related to interest accrued on assessment
district obligations of Old Vail Partners. The undeveloped land was sold in June
2001.
The increase in the equity in loss of Vail Ranch Limited Partners (VRLP),
relates to the increase in the loss from the operation of the partially
completed shopping center for which the first store commenced operations in July
2000.
GOLF OPERATIONS:
----------------
Prior to January 2000, golf club shaft sales were principally to custom golf
shops. In January 2000, Penley commenced sales to two of the largest golf
equipment distributors. In addition to increases in sales related to these two
customers, direct sales to the after market also increased, likely due to the
credibility and increased exposure from the Penley products being included in
the catalogs of these two distributors.
Operating expenses of the golf segment consisted of the following in 2002 and
2001:
Three Months Nine Months
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ----------
Costs of goods sold and
manufacturing overhead $ 668,000 $ 583,000 $1,460,000 $1,518,000
Research & development 55,000 78,000 169,000 208,000
--------- --------- ---------- ----------
Total golf costs 723,000 661,000 1,629,000 1,726,000
========= ========= ========== ==========
Marketing & promotion 365,000 451,000 947,000 1,113,000
Administrative-direct 35,000 55,000 107,000 168,000
--------- --------- ---------- ----------
Total SG&A-direct 400,000 506,000 1,054,000 1,281,000
========= ========= ========== ==========
Allocated corporate costs 61,000 60,000 179,000 205,000
========= ========= ========== ==========
Total golf costs increased in the three month period of 2002 primarily due to an
increase in sales volume. Total golf costs for the nine month period of 2002
decreased due to cost cutting measures implemented in the second quarter to
reduce manufacturing overhead.
Marketing and promotion expenses decreased by $166,000 in the nine month period
primarily due to decreases in trade show expenses ($8,000), advertising
($84,000) and the tour program ($40,000). Marketing and promotion expenses
decreased by $86,000 in the three month period primarily due to a reductions in
advertising related expenses ($47,000), brochure development and printing
($25,000) and tour program expenses ($25,000).
Administrative expenses decreased in the three and nine month periods due to
general reductions in all administrative costs.
15
OTHER:
------
Selling, general and administrative expenses decreased primarily due to a
reduction of corporate office wages. In December 2000, the Company awarded a
$100,000 bonus to Harold Elkan. There was no bonus in 2001.
Interest expense has decreased primarily due to a reduction in short term debt
outstanding during the three and nine month periods of 2002 compared to 2001,
and also a reduction in the average interest rate of the outstanding debt.
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.
2002 2003 2004 Total Fair Value
---------- ------ ------ ---------- -----------
(1)
Fixed rate debt $13,000 $6,000 $1,000 $20,000 $20,000
Weighted average
interest rate 12.6% 13.4% 13.6% 13.26%
Variable rate debt $445,000 -- -- $445,000 $445,000
Weighted average
interest rate 5.8% --% --% 5.8%
The amounts for 2002 relate to the three-months ending June 30, 2002.
(1) The fair value of fixed-rate debt and variable-rate debt were estimated
based on the current rates offered for fixed-rate debt and variable-rate
debt with similar risks and maturities.
The variable rate debt includes a $445,000 short term note payable that is due
on demand, which for purposes of this calculation has been treated as though
paid during the year ending June 30, 2002.
The Company's unconsolidated subsidiary, UCV, has two notes payable which mature
April 1, 2003 as a result of a refinancing in March 2002. The first loan is
variable rate debt of $36,000,000 for which the interest rate was 5.4 percent as
of March 31, 2002. However, the combination of a floor established by the lender
and a cap purchased by UCV which effectively caps the maximum rate on this loan
at 7%. The scheduled principal payments for UCV's fiscal years ending March 31
2003 is $36,000,000. The estimated fair value of this debt is $36,000,000 based
on the current rates offered for this type of loan with similar risks and
maturities. The second loan of $2,000,000 is fixed rate debt at 12.5%. The
scheduled principal payments for UCV's fiscal years ending March 31 2003 is
$2,000,000. The estimated fair value of this debt is $2,000,000 based on the
current rates offered for this type of loan with similar risks and maturities.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
16
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 2002, 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,
2001.
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 21, 2001 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 23,632,586 0 249,698
Steven R. Whitman 23,632,486 0 249,798
Patrick D. Reiley 23,632,635 0 249,649
James E. Crowley 23,632,935 0 249,349
Robert A. MacNamara 23,632,835 0 249,449
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
17
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 14, 2002
-----------------
By:/s/ Steven R. Whitman
--------------------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 14, 2002
-----------------
18