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, 2004
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The number of shares outstanding of the issuer's only class of common stock
($.01 par value) as of April 30, 2004 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Unaudited Balance Sheets as of March 31, 2004
and June 30, 2003 .......................................... 1-2
Unaudited Statements of Operations for the Three Months Ended
March 31, 2004 and 2003 ............................... 3
Unaudited Statements of Operations for the Nine Months Ended
March 31, 2004 and 2003 ............................... 4
Unaudited Statements of Cash Flows for the Nine Months Ended
March 31, 2004 and 2003 ............................... 5
Notes to Financial Statements................................... 6-9
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 10-15
Item 3.- Quantitative and Qualitative Disclosures about Market Risk... 15
Item 4.- Controls and Procedures ..................................... 15
Part II - Other Information........................................... 16
Exhibits and reports on Form 8-K ..................................... 16
Signatures............................................................ 17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, June 30,
2004 2003
----------- -----------
Current assets:
Cash and cash equivalents ........................$ 132,200 $ 365,674
Other receivable-affiliate ....................... -- 350,000
Receivables ...................................... 388,457 402,875
Inventories ...................................... 672,824 641,127
Prepaid expenses ................................. 33,436 34,958
----------- -----------
Total current assets .......................... 1,226,917 1,794,634
----------- -----------
Property and equipment, at cost:
Equipment......................................... 1,997,600 1,889,395
Less accumulated depreciation and amortization (1,118,509) (1,052,740)
----------- -----------
Net property and equipment ................... 879,091 836,655
----------- -----------
Other assets:
Investments ...................................... 4,068,668 5,344,007
Deferred tax assets .............................. 5,177,000 4,661,000
Other ............................................ 77,371 95,671
----------- -----------
9,323,039 10,100,678
----------- -----------
$11,429,047 $12,731,967
=========== ===========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
March 31, June 30,
2004 2003
----------- -----------
Current liabilities:
Current portion of long-term debt ................$ 17,691 $ 5,771
Accounts payable ................................. 437,336 441,434
Accrued payroll and related expenses ............. 329,117 282,080
Deferred income taxes ............................ 926,000 --
Other liabilities ................................ 6,576 3,796
----------- -----------
Total current liabilities ..................... 1,716,720 733,081
----------- -----------
Long-term debt, excluding current portion ........... 72,030 --
----------- -----------
Deferred income taxes ............................... 9,390,000 10,514,000
----------- -----------
Minority interest in consolidated subsidiary ........ 373,839 431,839
----------- -----------
Shareholders' equity (deficiency):
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
Retained earnings ................................ 165,401 1,341,990
----------- -----------
2,167,950 3,344,539
Less note receivable from shareholder ............ (2,291,492) (2,291,492)
----------- -----------
Total shareholders' equity (deficiency) ........ (123,542) 1,053,047
----------- -----------
Commitments and contingencies (Note 6)
$11,429,047 $12,731,967
=========== ===========
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Revenues:
Golf .............................................$ 822,499 $ 841,552
Rental ........................................... 20,022 19,335
Other ............................................ 24,468 8,103
Other-related party .............................. 14,482 49,360
----------- -----------
881,471 918,350
----------- -----------
Costs and expenses:
Golf ............................................. 847,306 654,047
Rental ........................................... 19,500 18,800
Selling, general, and administrative ............. 687,571 564,274
Depreciation and amortization .................... 52,938 59,720
----------- -----------
1,607,315 1,296,841
----------- -----------
Loss from operations ................................ (725,844) (378,491)
----------- -----------
Other income (charges):
Investment income- related party ................. 9,072 7,946
Investment income- other ......................... 2 --
Interest expense and amortization of finance costs (1,105) (10,659)
Equity in income (loss) of investees ............. 62,335 (75,987)
----------- -----------
70,304 (78,700)
----------- -----------
Loss from continuing operations before income taxes.. (655,540) (457,191)
Income tax benefit .................................. 198,000 --
----------- -----------
Loss from continuing operations ..................... (457,540) (457,191)
Gain from discontinued operations ................... 88,009 258,092
----------- -----------
Net loss ............................................$ (369,531) $ (199,099)
=========== ===========
Per common share (based on weighted average shares
outstanding) basic and diluted:
Loss from continuing operations ................... ($0.01) ($0.02)
Discontinued operations ........................... -- 0.01
------ ------
Net loss ......................................... ($0.01) ($0.01)
====== ======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Revenues:
Golf .............................................$ 1,804,024 $ 1,973,303
Rental ........................................... 62,513 59,622
Other ............................................ 45,797 164,155
Other-related party .............................. 32,817 146,229
----------- -----------
1,945,151 2,343,309
----------- -----------
Costs and expenses:
Golf ............................................. 2,103,996 1,799,188
Rental ........................................... 57,900 56,200
Selling, general, and administrative ............. 1,868,362 1,580,812
Depreciation and amortization .................... 151,145 179,160
----------- -----------
4,181,403 3,615,360
----------- -----------
Loss from operations ................................ (2,236,252) (1,272,051)
----------- -----------
Other income (charges):
Investment income:
Related party .................................. 24,072 24,230
Other .......................................... 299 --
Interest expense and amortization of finance costs (1,811) (56,181)
Gain on sale ..................................... 78,533 --
Equity in income (loss) of investees ............. 156,561 (8,786)
----------- -----------
257,654 (40,737)
----------- -----------
Loss from continuing operations before income taxes
and change in accounting principle ................ (1,978,598) (1,312,788)
Income tax benefit .................................. 714,000 --
----------- -----------
Loss from continuing operations ..................... (1,264,598) (1,312,788)
Gain from discontinued operations ................... 88,009 149,823
Cumulative effect of change in accounting principle . -- 37,675
----------- -----------
Net loss ............................................$(1,176,589) $(1,125,290)
=========== ===========
Per common share (based on weighted average shares
outstanding) basic and diluted:
Loss from continuing operations ................... ($0.04) ($0.05)
Discontinued operations ........................... -- 0.01
Cumulative effect of change in accounting principle -- --
------ ------
Net loss ......................................... ($0.04) ($0.04)
====== ======
See accompanying notes to consolidated condensed financial statements.
4
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss ..........................................$(1,176,589) $(1,125,290)
Less gain from discontinued operations .......... (88,009) (149,823)
----------- -----------
Loss from continuing operations ................. (1,264,598) (1,275,113)
Adjustments to reconcile net loss to the net
cash used by operating activities:
Depreciation and amortization ................. 151,145 179,160
Equity in income of investees ................. (156,561) 8,786
Gain on sales ................................. (78,533) --
Deferred income ............................... -- 36,000
Provision for deferred income taxes ........... (714,000) --
Change in accounting principle ................ -- (37,675)
Changes in assets and liabilities:
(Increase) decrease in receivables ............ 364,418 (9,600)
(Increase) decrease in inventories ............ (31,697) 159,604
Decrease in prepaid expenses .................. 1,522 32,804
Decrease in accounts payable .................. (4,098) (346,500)
Increase in accrued expenses .................. 49,817 107,591
Other ......................................... 18,300 27,963
----------- -----------
Net cash used by continuing operations ............ (1,664,285) (1,116,980)
Net cash used by discontinued operations .......... -- (89,197)
----------- -----------
Net cash used by operating activities ............. (1,664,285) (1,206,177)
----------- -----------
Cash flows from investing activities:
Capital expenditures ............................. (193,581) (4,310)
Distribution to holder of minority interest ...... (58,000) (370,838)
Proceeds from sale of assets ..................... 78,533 --
Distributions from investees ..................... 1,519,909 2,118,276
----------- -----------
Net cash provided by investing activities .......... 1,346,861 1,743,128
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt ... (12,528) (5,903)
Proceeds from short-term debt .................... -- 75,000
Payments on short-term debt ...................... -- (460,044)
Proceeds from long-term debt ..................... 96,478 --
----------- -----------
Net cash provided (used) by financing activities ... 83,950 (390,947)
----------- -----------
Net increase (decrease) in cash and cash equivalents. (233,474) 146,004
Cash and cash equivalents, beginning of period ...... 365,674 39,345
----------- -----------
Cash and cash equivalents, end of period ............$ 132,200 $ 185,349
=========== ===========
Supplemental Disclosure of Non-Cash Financing Activities:
Interest paid .....................................$ 1,811 $ 41,153
=========== ===========
Reclassification of principal payments on
short-term debt to accrued interest .............$ -- $ 280,631
=========== ===========
Reclassification of non-current deferred tax
liability to current portion ....................$ 926,000 $ --
=========== ===========
In December 2003, the Company sold an auto for $18,000 with a cost and
accumulated depreciation of $85,376.
In November 2003, the Company received a $60,533 payment on the sale of All
Season Inns and wrote off the cost of $37,926 and valuation allowance of
$37,926.
In February 2004, the Company sold an asset classified as other for $31,085
which had a cost of $15,000.
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003 (Unaudited)
1. The information furnished reflects all adjustments of a recurring nature
which management believes are necessary to a fair statement of the
Company's financial position, results of operations and cash flows for the
interim periods. Certain information and note disclosures normally included
in consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report filed on Form
10-K on October 14, 2003 for the year ended June 30, 2003.
Revenue recognition- the Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the amount is
fixed or determinable and collectibility is probable. All of these
conditions are typically met at the time the Company ships products to its
customers.
2. Due to the seasonal fluctuations of the golf club shaft manufacturing
operations, the financial results for the interim periods ended March 31,
2004 and 2003, are not necessarily indicative of operations for the entire
year.
3. Investments:
Investments consist of the following:
March 31, June 30,
2004 2003
----------- -----------
UCV, L.P. ......................................$ 4,068,668 $ 5,277,007
Vail Ranch Limited Partnership (VRLP)........... -- 67,000
----------- -----------
Total ....................................$ 4,068,668 $ 5,344,007
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
Nine Months Three Months
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
UCV, L.P. ....... $156,561 $ (8,786) $ 62,335 $(75,987)
======== ======== ======== ========
The equity in the income of VRLP has been presented as income from
discontinued operations (Note 7).
The following is a summary of distributions received from investees:
2004 2003
---------- ----------
UCV, L.P. .................... $1,364,900 $1,525,500
Vail Ranch Limited Partnership 155,009 592,776
---------- ----------
$1,519,909 $2,118,276
========== ==========
As discussed in footnote 5(c) to the Company's June 30, 2003 annual report
on Form 10-K, effective April 1, 2003, the Company began recording its
equity in the income of UCV, L.P. (UCV) on a current basis rather than on a
91 day delayed basis. The Company has treated this as a change in
accounting principle and accordingly has classified its $37,675 of equity
in earnings of UCV for the period of April 1, 2002 through June 30, 2002 as
the cumulative effect of a change in accounting principle in 2003.
Therefore, the equity in income of UCV for the period July 1, 2003 through
December 31, 2003 was $94,226 (see footnote 15 to the Company's June 30,
2003 annual report on Form 10-K).
6
In November 2003 the Company received $60,533 related to amounts due on the
sale of the Company's investment in All Seasons Inns in a prior year. The
Company had recorded a valuation allowance for the entire amount due at the
time of sale. As a result, the amount received was classified as gain from
sale. On April 15, 2004, the Company received an additional $31,708, which
represents the final payment due on the sale of its investment. An
additional gain of $31,708 was recorded at that time.
4. Contingencies:
A lawsuit was filed on January 10, 2003 in the United States District Court
in the Southern District of California by Masterson Marketing, Inc.
(Masterson) against Penley Sports, LLC. Masterson's lawsuit originally
asserted claims for copyright infringement, breach of contract, breach of
fiduciary duty, and sought compensatory damages, punitive damages,
statutory damages, and attorney fees. The Company filed a motion to dismiss
all claims. In response to that motion, Masterson dropped all claims except
for the claims of copyright infringement and breach of contract. Masterson
also dropped all prayers for punitive damages, statutory damages, and
attorney fees. It is not possible at this time to predict the outcome of
this litigation. We intend to vigorously defend against these claims.
5. Business segment information:
The Company operates principally in two business segments: commercial real
estate rental 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.
7
The following is summarized information about the Company's operations by
business segment.
Real Estate Unallocated
Operation Golf And Other Totals
------------ ----------- ----------- ------------
NINE MONTHS ENDED MARCH 31, 2004:
--------------------------------
Revenues ............................. $ 62,513 $ 1,804,024 $ 78,614 $ 1,945,151
Depreciation and amortization ........ -- 127,628 23,517 151,145
Interest expense ..................... -- -- 1,811 1,811
Equity in income of investee ......... 156,561 -- -- 156,561
Gain on sale ......................... -- -- 78,533 78,533
Segment profit (loss) ................ 161,174 (1,914,633) (249,510) (2,002,969)
Investment income .................... 24,371
Loss from continuing
operations before taxes............. (1,978,598)
Significant non-cash items ........... (156,561) -- -- (156,561)
NINE MONTHS ENDED MARCH 31, 2003:
---------------------------------
Revenues ............................. $ 59,622 $ 1,973,303 $ 310,384 $ 2,343,309
Depreciation and amortization ........ 40,065 125,271 13,824 179,160
Interest expense ..................... -- -- 56,181 56,181
Equity in loss of investee ........... (8,786) -- -- (8,786)
Segment profit (loss) ................ (45,429) (1,085,857) (205,732) (1,337,018)
Investment income .................... 24,230
Loss from continuing
operations before taxes............. (1,312,788)
Significant non-cash items ........... (8,786) -- -- (8,786)
THREE MONTHS ENDED MARCH 31, 2004:
---------------------------------
Revenues ............................. $ 20,022 $ 822,499 $ 38,950 $ 881,471
Depreciation and amortization ........ -- 42,729 10,209 52,938
Interest expense ..................... -- -- 1,105 1,105
Equity in income of investee ......... 62,335 -- -- 62,335
Segment profit (loss) ................ 62,857 (677,642) (49,829) (664,614)
Investment income .................... 9,074
Loss from continuing
operations before taxes............. (655,540)
Significant non-cash items ........... (62,335) -- -- (62,335)
THREE MONTHS ENDED MARCH 31, 2003:
---------------------------------
Revenues ............................. $ 19,335 $ 841,552 $ 57,463 $ 918,350
Depreciation and amortization ........ 13,355 41,757 4,608 59,720
Interest expense ..................... -- -- 10,659 10,659
Equity in loss of investee ........... (75,987) -- -- (75,987)
Segment profit (loss) ................ (88,807) (287,944) (88,386) (465,137)
Investment income .................... 7,946
Loss from continuing
operations before taxes............. (457,191)
Significant non-cash items ........... (75,987) -- -- (75,987)
8
6. Liquidity
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
suffered recurring losses, has negative working capital, a shareholders'
deficit, and is forecasting negative cash flows for the next twelve months.
Additionally, the Company estimates that it will have a tax liability of
approximately $926,000 due in September 2004 as a result of reporting the
taxable portion of the sale of the apartment project owned by UCV, LP. The
Company is currently uncertain of where the Company will obtain the funds
to pay these tax liabilities. These items raise substantial doubt about the
Company's ability to continue as a going concern. The Company's ability to
continue as a going concern is dependent on obtaining additional investors
in its subsidiary, Penley Sports, or increasing the sales volume of Penley
Sports. The consolidated financial statements do not contain adjustments,
if any, including diminished recovery of asset carrying amounts, that could
arise from forced dispositions and other insolvency costs.
7. Discontinued Operations:
During the year ended June 30, 2003, the Company ceased operations in two
business segments. The following is a summary of the income (loss) from the
discontinued business segments for the periods ended March 31:
Three Months Nine Months
---------------------- ----------------------
2004 2003 2004 2003
--------- ----------- --------- -----------
Bowling .................$ -- $ (86,296) $ -- $ 21,973
Real estate development . 88,009 236,119 88,009 236,119
--------- ----------- --------- -----------
$ 88,009 $ 149,823 $ 88,009 $ 258,092
========= =========== ========= ===========
8. Note receivable from shareholder:
In December 1990 the Company loaned $1,061,009 to the Company's majority
shareholder, Andrew Bradley, Inc. (ABI), which is 88% owned by Harold S.
Elkan, the Company's President. The loan provided funds to ABI to pay its
obligation related to its purchase of the Company's stock in November 1983.
The loan to ABI provides for interest to accrue at an annual rate of prime
plus 1-1/2 percentage points (5.50 percent at March 31, 2004) and to be
added to the principal balance annually. The loan was due November 7, 2003.
The loan is collateralized by 21,808,267 shares of the Company's stock
owned by ABI. The original loan amount plus accrued interest of $1,230,483
is presented as a reduction of shareholders' equity because ABI's only
asset is the stock of the Company.
On November 7, 2003, the Company presented demand to ABI for payment of
$3,351,724, which represents the original principal balance plus accrued
interest, of which $1,060,232 had not been accrued by the Company. The note
provides for a 5 day grace period and negotiations are underway between the
Company and ABI with respect to disposition of the note.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS:
-----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The independent auditors' report dated September 5, 2003 included in our June
30, 2003 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 13 to the consolidated financial statements, the Company has suffered
recurring losses, 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 13. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Management estimates positive cash flow of $50,000 to $100,000 in total for the
remaining quarter for the year ending June 30, 2004 from operating activities
after deducting capital expenditures and principal payments on notes payable and
adding estimated distributions from UCV and VRLP. However, Management estimates
that it will have a tax liability of approximately $926,000 due in September
2004 as a result of reporting the taxable portion of the sale of the apartment
project owned by UCV, LP. Management is currently uncertain of where the Company
will obtain the funds to pay these tax liabilities.
The Company estimates it will receive approximately $240,000 of distributions
from UCV in the fourth quarter of which $100,000 was received on May 10, 2004.
$200,000 of these estimated distributions from UCV represents the remainder of
funds to be distributed by UCV to the Company from the sales proceeds of UCV's
apartment project.
In February 2003 Vail Ranch Limited Partners (VRLP) sold its membership interest
in Temecula Creek LLC to its other partner in Temecula Creek LLC. VRLP was
entitled to receive one-half of the sales proceeds from the sale of a remaining
parcel of undeveloped land as well as the release of $100,000 that was held back
from the sales proceeds in February 2003. In December 2003 VRLP received
$121,955 as its share of the proceeds from the sale of the undeveloped land. In
January 2004, VRLP received $99,959 as the balance of the hold back plus an
additional $66,157 as final settlement for allocation of revenues and expenses.
The Company received distributions from VRLP related to these transactions of
$58,173 in December 2003, $59,975 in January 2004, and $36,861 in March 2004. As
part of the Company's obligation to pay approximately one-half of these proceeds
to its minority partner, payments of $29,000 each were made to the minority
partner in December 2003 and January 2004 and $15,000 in April 2004. The
liability to the minority interest stated in the balance sheet is $373,839 but
is likely to be settled for a lesser amount based on the distributions received
from VRLP.
In December 1990 the Company loaned $1,061,009 to the Company's majority
shareholder, Andrew Bradley, Inc. (ABI), which is 88% owned by Harold S. Elkan,
the Company's President. The loan provided funds to ABI to pay its obligation
related to its purchase of the Company's stock in November 1983. The loan to ABI
provides for interest to accrue at an annual rate of prime plus 1-1/2 percentage
points (5.50 percent at March 31, 2004) and to be added to the principal
balance annually. The loan was due November 7, 2003. The loan is collateralized
by 21,808,267 shares of the Company's stock owned by ABI. The original loan
amount plus accrued interest of $1,230,483 is presented as a reduction of
shareholders' equity because ABI's only asset is the stock of the Company.
On November 7, 2003, the Company presented demand to ABI for payment of
$3,351,724, which represents the original principal balance plus accrued
interest, of which $1,060,232 has not been accrued by the Company. The note
provides for a 5 day grace period and negotiations are underway between the
Company and ABI with respect to disposition of the note.
10
Management expects continuing cash flow deficits until Penley Sports develops
sufficient sales volume to become profitable. There can be no assurances that
Penley Sports will ever achieve profitable operations. In April of 2004,
management implemented a number of cost cutting measures to manufacturing and
marketing and promotion (primarily the tour department). However, unless Penley
can increase its revenues, it is not likely to reach a break even level of
operations without identifying other opportunities to cut costs in manufacturing
expenses.
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 the Company receiving 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.
The Company has working capital deficit of $489,803 at March 31, 2004, which is
a $1,551,356 decrease from the working capital of $1,061,553 at June 30, 2003.
The decrease in working capital is primarily attributable to the
reclassification of $926,000 from a non-current deferred tax liability to a
current deferred tax liability and cash used by operating activities for the
nine months ended March 31, 2004. The cash used by operating activities was
partially offset by distributions received from the Company's investees. The
following is a schedule of the cash used before changes in assets and
liabilities, segregated by business segments:
2004 2003 Change
---------- ---------- ----------
Rental .................... $ 5,000 3,000 2,000
Golf ...................... (1,787,000) (962,000) (825,000)
General corporate expense
and other ............... (280,000) (132,000) (148,000)
---------- ---------- ----------
Cash used by continuing
operations .............. (2,062,000) (1,091,000) (971,000)
Discontinued operations:
Bowling ................. -- (68,000) 68,000
Real estate development . -- -- --
Capital expenditures....... (194,000) (4,000) (190,000)
Principal payments on
long-term debt .......... (13,000) (6,000) (7,000)
---------- ---------- ----------
Cash used ................. (2,269,000) (1,169,000) (1,100,000)
========== ========== ==========
Distributions received from
investees ............... 1,520,000 2,118,000 (598,000)
========== ========== ==========
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 three and
nine month periods ended March 31, 2004 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.
11
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Statement of Financial Accounting Standards, No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities, or SFAS No. 149, amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract within an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003, and is not
expected to have a material impact on the Company's consolidated financial
statements.
Statement of Financial Accounting Standards, No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, or
SFAS No. 150, establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. At the October 29, 2003 FASB Board meeting, the
Board decided to indefinitely defer the effective date of SFAS No. 150 related
to the classification and measurement requirements for mandatorily redeemable
financial instruments that become subject to SFAS No. 150 solely as a result of
consolidation, such as the minority interest in the accompanying financial
statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The Company currently does not have any
VIEs in which it has variable interests.
"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
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, 2004 to the same period in 2003 and
a discussion of the significant changes:
NINE MONTHS ENDED MARCH 31, 2004 VERSUS 2003
----------------------------------------------
Real Estate Unallocated
Operations Golf And Other Total
----------- ----------- --------- ------------
Revenues ..................... $ 2,891 $ (169,279) $(231,770) $ (398,158)
Costs ........................ 1,700 304,808 -- 306,508
SG&A-direct .................. -- 97,332 98,022 195,354
SG&A-allocated ............... -- 255,000 (162,804) 92,196
Depreciation and amortization (40,065) 2,357 9,693 (28,015)
Interest expense ............. -- -- (54,370) (54,370)
Gain from sale ............... -- -- 78,533 78,533
Equity in investees .......... 165,347 -- -- 165,347
Segment profit (loss) ........ 206,603 (828,776) (43,778) (665,951)
Investment income ............ 141
Income tax benefit ........... 714,000
Loss from continuing
operations ................. 48,190
Discontinued operations ...... (61,814)
Change in accounting principle (37,675)
Net income (loss) ............ (51,299)
THREE MONTHS ENDED MARCH 31, 2004 VERSUS 2003
---------------------------------------------
Real Estate Unallocated
Operations Golf And Other Total
----------- ----------- --------- ------------
Revenues ..................... $ 687 $ (19,053) $ (18,513) $ (36,879)
Costs ........................ 700 193,259 -- 193,959
SG&A-direct .................. -- 98,414 (11,244) 87,170
SG&A-allocated ............... -- 78,000 (41,873) 36,127
Depreciation and amortization (13,355) 972 5,601 (6,782)
Interest expense ............. -- -- (9,554) (9,554)
Equity in investees .......... 138,322 -- -- 138,322
Segment profit (loss) ........ 151,664 (389,698) 38,557 (199,477)
Investment income ............ 1,128
Income tax benefit ........... 198,000
Loss from continuing
operations ................. (349)
Discontinued operations ...... (170,083)
Change in accounting principle --
Net loss ..................... (170,432)
REAL ESTATE OPERATIONS:
------------------
This segment includes the equity in income UCV, L.P. (UCV) and the sublease of a
portion of the Penley factory. The operations of UCV consisted of the operation
of a 542 unit apartment project until UCV sold the property on April 1, 2003.
UCV acquired replacement properties on August 28, 2003, September 25, 2003 and
September 26, 2003. The operations of UCV for the three and nine months ended
March 31, 2004 included the operations of these properties since their
acquisition.
13
GOLF OPERATIONS:
----------------
Golf revenues declined in the nine month period primarily due to a decline in
sales to golf club manufacturers. In one circumstance there was an order shipped
in July 2002 for which there was no comparable sales activity in fiscal 2004.
There were also two manufacturers that are no longer in business in 2004. Golf
revenues declined in the third quarter primarily due to slight declines in sales
to distributors and golf shops.
The following is a breakdown of the percentage of sales by customer category:
Nine Months Three Months
---------- ------------
2004 2003 2004 2003
---- ---- ---- ----
Golf equipment distributors . 50% 42% 46% 48%
Small golf club manufacturers 24% 30% 32% 28%
Golf shops .................. 23% 23% 19% 20%
Other ....................... 3% 5% 3% 4%
Operating expenses of the golf segment consisted of the following in 2004 and
2003:
Nine Months Three Months
--------------------- --------------------
2004 2003 2004 2003
---------- ---------- --------- ---------
Costs of goods sold and
manufacturing overhead $1,887,000 $1,654,000 $ 787,000 $ 606,000
Research & development 217,000 145,000 60,000 48,000
---------- ---------- --------- ---------
Total golf costs 2,104,000 1,799,000 847,000 654,000
========== ========== ========= =========
Marketing & promotion 824,000 741,000 378,000 299,000
Administrative-direct 217,000 203,000 87,000 68,000
---------- ---------- --------- ---------
Total SG&A-direct 1,041,000 944,000 465,000 367,000
========== ========== ========= =========
Allocated corporate costs 446,000 191,000 145,000 67,000
========== ========== ========= =========
Total golf costs increased in the three and nine-month periods due to increases
in costs to correct manufacturing problems caused by changes in the
specifications of materials purchased from one of its "prepreg" vendors as well
as an increase in the valuation reserve.
Marketing and promotion expenses increased in the three and nine-month periods
due to an in advertising costs.
OTHER
-----
Other revenues-related party decreased due to UCV's sale of its apartment
project on April 1, 2003. The Company had received management fees and
development fees from UCV totaling $49,000 and $146,000 during the three month
and nine month periods ended March 31, 2003, respectively. In the same periods
in 2004, the Company only received management fees from the replacement
properties totalling $15,000 and $33,000 respectively.
Other revenues, which primarily consisted of management fees earned from a third
party, decreased $118,000 in the nine month period due to the sale of the
property being managed in October 2002. This was partially offset by a
non-recurring increase in miscellaneous income in the three months ended March
31, 2004 of $17,000.
Unallocated selling, general and administrative expenses increased by $98,000 in
the nine-month period primarily due to increases in audit fees and legal
expenses. There was not a meaningful change to this expense category in the
third quarter.
The amount of corporate expenses allocated to the Golf segment primarily
increased due to an increase in the percentage of expenses allocable to golf.
This is the result of the discontinuance of the bowling segment in May 2003 and
the reduction in property management services performed for UCV and others
during the three months ended September 30, 2003.
14
Interest expense decreased primarily due to repayment of the short term debt in
April 2003.
The increase in gain on sale primarily relates to the $60,532 received in
November 2003 related to amounts due on the sale of the Company's investment in
All Seasons Inns in a prior year. The Company had recorded a valuation allowance
for the amount due at the time of sale.
Discontinued Operations:
------------------------
As discussed in Footnote 7 of Notes to Consolidated Condensed Financial
Statements, the Company has classified its operations in the bowling and real
estate development segments as discontinued operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The Company is exposed to market risk primarily due to fluctuations in interest
rates. However, the Company does not consider this interest rate market risk
exposure to be material to its financial condition or results of operations.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
An evaluation was carried out under the supervision and with the participation
of the Company's management, including its Chief Executive Officer and its Chief
Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities and Exchange Act
of 1934 (the "Exchange Act") as of March 31, 2004. Based on this evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There have been no changes in the Company's internal control over financial
reporting (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
15
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 2004, 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, 2003, except the following:
A lawsuit was filed on January 10, 2003 in the United States District
Court in the Southern District of California by Masterson Marketing,
Inc. (Masterson) against Penley Sports, LLC. Masterson's lawsuit
originally asserted claims for copyright infringement, breach of
contract, breach of fiduciary duty, and sought compensatory damages,
punitive damages, statutory damages, and attorney fees. The Company
filed a motion to dismiss all claims. In response to that motion,
Masterson dropped all claims except for the claims of copyright
infringement and breach of contract. Masterson also dropped all
prayers for punitive damages, statutory damages, and attorney fees. It
is not possible at this time to predict the outcome of this
litigation. We intend to vigorously defend against these claims.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults upon Senior Securities
N/A
ITEM 4. Submission of Matters to a Vote of Security Holder
--------------------------------------------------
NONE
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to Sec. 906
32.2 Certification of Chief Financial Officer pursuant to Sec. 906
(b) Reports on Form 8-K: NONE
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORTS ARENAS, INC.
By: /s/ Harold S. Elkan
----------------------
Harold S. Elkan, President and Director
Date: May 17, 2004
--------------------
By:/s/ Steven R. Whitman
---------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 17, 2004
------------------
17