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, 2001
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, Suite C, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 587-1060
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's only class of common stock
($.01 par value) as of April 30, 2001 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of March 31, 2001 (unaudited) and
June 30, 2000 1-2
Unaudited Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 3
Unaudited Statements of Operations for the Nine Months Ended
March 31, 2001 and 2000 4
Unaudited Statements of Cash Flows for the Nine Months Ended
March 31, 2001 and 2000 5
Notes to Financial Statements 6-10
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-15
Item 3.- Quantitative and Qualitative Disclosures about Market Risk 15
Part II - Other Information 16
Signatures 17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31, June 30,
2001 2000
------------ ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 263,078 $ 13,961
Current portion of notes receivable- affiliate -- 50,000
Other receivables 220,503 193,510
Inventories 354,961 304,906
Prepaid expenses 91,784 238,719
------------ ----------
Total current assets 930,326 801,096
------------ ----------
Receivables due after one year:
Note receivable- affiliate, net -- 73,866
Less current portion -- (50,000)
------------ ----------
-- 23,866
------------ ----------
Property and equipment, at cost:
Land -- 678,000
Buildings -- 2,461,327
Equipment and leasehold and tenant improvements 2,255,895 2,347,767
------------ ----------
2,255,895 5,487,094
Less accumulated depreciation and amortization (1,028,570) (2,160,132)
------------ ----------
Net property and equipment 1,227,325 3,326,962
------------ ----------
Other assets:
Undeveloped land, at cost 1,532,073 1,501,318
Intangible assets, net 160,452 246,123
Investments 519,446 564,446
Other 120,999 137,425
------------ ----------
2,332,970 2,449,312
------------ ----------
$4,490,621 $6,601,236
============ ==========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31, June 30,
2001 2000
------------ ----------
(Unaudited)
Current liabilities:
Assessment district obligation- in default $3,038,618 $2,831,180
Notes payable-short term 1,600,000 1,350,000
Current portion of long-term debt 54,000 1,874,000
Accounts payable 756,805 796,483
Accrued payroll and related expenses 253,577 164,170
Accrued property taxes- in default 410,445 356,178
Accrued interest 173,779 41,079
Other liabilities 489,585 216,009
------------ ----------
Total current liabilities 6,776,809 7,629,099
------------ ----------
Long-term debt, excluding current portion 6,685 1,967,169
------------ ----------
Distributions received in excess of basis
in investment 15,171,899 14,498,208
------------ ----------
Other liabilities 132,000 123,831
------------ ----------
Minority interest in consolidated subsidiary 1,712,677 1,712,677
------------ ----------
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 (19,020,506) (19,040,805)
------------ ----------
(17,017,957) (17,038,256)
Less note receivable from shareholder (2,291,492) (2,291,492)
------------ ----------
Total shareholders' deficit (19,309,449) (19,329,748)
------------ ----------
Commitments and contingencies (Note 6)
$4,490,621 $6,601,236
============ ==========
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
---------- ----------
Revenues:
Bowling $ 552,596 $ 793,718
Rental 42,131 163,203
Golf 419,576 318,987
Other 34,618 119,256
Other-related party 44,763 43,085
----------- -----------
1,093,684 1,438,249
----------- -----------
Costs and expenses:
Bowling 429,419 521,409
Rental 41,783 62,299
Golf 628,263 422,101
Development 42,021 92,503
Selling, general, and administrative 877,284 989,651
Depreciation and amortization 63,254 96,952
----------- ----------
2,082,024 2,184,915
----------- ----------
Loss from operations (988,340) (746,666)
----------- ----------
Other income (charges):
Investment income:
Related party 8,529 9,157
Other 1,609 1,954
Interest expense:
Development activities (77,159) (62,950)
Other and amortization of finance costs (50,483) (84,083)
Equity in income of investees 74,929 45,569
----------- ----------
(42,575) (90,353)
----------- ----------
Net loss $(1,030,915) $ (837,019)
=========== ==========
Basic and diluted net loss per common share
(based on 27,250,000 weighted average
common shares outstanding) ($0.04) ($0.03)
====== ======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
---------- ----------
Revenues:
Bowling $1,882,328 $2,043,672
Rental 353,278 479,593
Golf 950,205 600,518
Other 113,052 180,003
Other-related party 133,555 128,419
---------- -----------
3,432,418 3,432,205
----------- ----------
Costs and expenses:
Bowling 1,472,475 1,557,673
Rental 174,234 186,679
Golf 1,646,985 1,026,914
Development 127,013 182,816
Selling, general, and administrative 2,659,497 2,762,324
Depreciation and amortization 228,065 288,904
----------- ----------
6,308,269 6,005,310
----------- ----------
Loss from operations (2,875,851) (2,573,105)
----------- ----------
Other income (charges):
Investment income:
Related party 15,792 29,130
Other 1,609 11,043
Interest expense:
Development activities (207,438) (195,951)
Other and amortization of finance costs (341,157) (263,568)
Loss on sale of undeveloped land -- (638)
Gain on sale of office building 2,764,483 --
Gain on sale of bowling center building 482,487 --
Equity in income of investees 180,374 288,868
----------- ----------
2,896,150 (131,116)
----------- ----------
Net income (loss) $ 20,299 $(2,704,221)
=========== ==========
Basic and diluted net income (loss) per
common share (based on 27,250,000 weighted
average common shares (outstanding) $0.00 ($0.10)
===== ======
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, 2001 AND 2000
(Unaudited)
2001 2000
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 20,299 ($2,704,221)
Adjustments to reconcile net income (loss) to the
net cash used by operating activities:
Amortization of deferred financing costs 18,846 6,840
Depreciation and amortization 228,065 288,904
Equity in income of investees (180,374) (288,868)
Deferred income 36,000 36,000
(Gain) loss on sale of property (3,246,970) 638
Interest accrued on assessment district
obligations 207,438 195,951
Changes in assets and liabilities:
Increase in receivables (20,792) (80,887)
(Increase) decrease in inventories (50,055) 85,350
(Increase) decrease in prepaid expenses 63,259 (95,733)
Increase (decrease) in accounts payable (39,678) 221,344
Increase in accrued expenses 549,950 170,793
Other 28,996 (15,840)
----------- ----------
Net cash used by operating activities (2,385,016) (2,179,729)
----------- ----------
Cash flows from investing activities:
Decrease in notes receivable 73,866 31,457
Capital expenditures (375,039) (130,769)
Increase in development costs on undeveloped land (30,755) (66,717)
Proceeds from sale of undeveloped land -- 190,362
Proceeds from sale of office building 1,662,337 --
Proceeds from bowling center building 2,047,328 --
Distributions from investees 1,059,000 2,122,500
Contributions to investees (200,000) (43,319)
----------- ----------
Net cash provided by investing activities 4,236,737 2,103,514
----------- ----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (179,029) (210,712)
Extinguishment of long-term debt (1,650,977) (75,927)
Proceeds from short-term notes payable 1,200,000 750,000
Payments on short-term notes payable (950,000) (550,000)
Other (22,598) --
----------- ----------
Net cash used by financing activities (1,602,604) (86,639)
----------- ----------
Net increase (decrease) in cash and cash equivalents 249,117 (162,854)
Cash and cash equivalents, beginning of period 13,961 357,906
---------- ---------
Cash and cash equivalents, end of period $ 263,078 195,052
=========== ==========
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
(Unaudited)
1. The information furnished reflects all adjustments (consisting of normal
recurring adjustments) which management believes are necessary for a fair
presentation of the Company's financial position, results of operations
and cash flows for the interim periods.
2. Due to the seasonal fluctuations of the bowling and golf shaft
manufacturing operations, the financial results for the interim periods
ended March 31, 2001 and 2000, are not necessarily indicative of
operations for the entire year.
3. Investments:
(a) Investments consist of the following:
March 31, June 30,
2001 2000
------------ ------------
Vail Ranch Limited Partnership $ 519,446 $ 564,446
============ ============
Investment in UCV, L.P. classified as
liability- Distributions received
in excess of basis in investment $ 15,171,899 $ 14,498,208
============ ============
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,:
2001 2000
--------- ---------
UCV, L.P. $ 225,374 $ 346,868
Vail Ranch Limited Partnership (45,000) (58,000)
--------- ---------
$ 180,374 $ 288,868
========= =========
The following is a summary of distributions received from investees for the
nine-month periods ended March 31,:
2001 2000
----------- -----------
UCV, L.P. $ 1,059,000 $ 2,122,500
Vail Ranch Limited Partnership -- --
----------- ----------
$ 1,059,000 $ 2,122,500
=========== ==========
(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, 2000 and 1999 are as follows:
Nine Months Three Months
---------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues $3,796,000 $3,593,000 $1,272,000 $1,226,000
Operating and general
and administrative
costs 1,229,000 1,266,000 378,000 427,000
Depreciation 17,000 20,000 5,000 7,000
Interest expense 2,099,000 1,613,000 709,000 635,000
Net income 451,000 694,000 180,000 157,000
On March 8, 2001, UCV paid its existing $28,478,687 note payable with the
proceeds from a $33,000,000 loan. The new loan provides for monthly
payments of interest only at a variable rate of interest equal to LIBOR
(not less than 6 percent) plus 2-1/2 percentage points. UCV paid a fee to
cap LIBOR at 6. The note payable matures August 2002 but may be extended
for two 12-month periods upon entering into an agreement to cap LIBOR at 7
percent. The loan may be prepaid at any time, however, there are prepayment
fees as follows: 3 percent if paid prior to the sixth payment date; 1-1/2
percent if paid prior to the ninth payment date; 1 percent if paid prior to
the twelfth payment date; and none thereafter. UCV is required to make a
monthly payment of approximately $16,290 to a property tax and insurance
impound account. The note payable is collateralized by the land, buildings,
leases and security deposits. The proceeds of the new loan, after
extinguishing the $28,478,687 note payable less a refund of impounds of
$161,907, were utilized to: pay a prepayment penalty of $295,260, pay loan
6
costs of $976,615, pay distributions to the partners of $1,820,000 in March
2001, fund a capital replacement impound maintained by the lender of
$754,040 and provide working capital of $837,305. The refinancing resulted
in charges of $401,444 related to the prepayment penalty of $295,260 and
$106,184 of 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, 2001. The Company's equity in the
extraordinary loss of UCV will be recorded in the Company's quarter ending
June 30, 2001.
4. Undeveloped land:
RCSA Holdings, Inc. (RCSA), a wholly owned subsidiary of the Company, owns a
50 percent managing general partnership interest in Old Vail Partners, a
general partnership (OVPGP), which owns 33 acres of undeveloped land in
Temecula, California. On September 23, 1999, the other partner assigned his
partnership interest to Downtown Properties, Inc., a wholly owned subsidiary
of the Company. OVPGP is obligated to assign its interest in the 33 acres of
land to Old Vail Partners, L.P. The 33 acres of land owned by OVPGP are
located within a special assessment district of the County of Riverside,
California (the County) which was created to fund and develop roadways,
sewers, and other required infrastructure improvements in the area necessary
for the owners to develop their properties. Property within the assessment
district is collateral for an allocated portion of the bonded debt that was
issued by the assessment district to fund the improvements. The annual
payments (required in semiannual installments) due related to the bonded debt
are approximately $144,000. The payments continue through the year 2014 and
include interest at approximately 7-3/4 percent. OVPGP has been delinquent in
the payment of property taxes and assessments for over the last eight years.
The property is currently subject to default judgments to the County of
Riverside, California totaling approximately $2,420,957 regarding delinquent
assessment district payments ($2,010,512) and property taxes ($410,445). On
June 23, 2000, the County of Riverside agreed to remove the property from the
planned public sale originally scheduled for June 26, 2000 in exchange for an
immediate payment of $330,000 with the balance of property taxes due on
December 29, 2000. Separately, the County of Riverside stated that a
foreclosure sale related to the default judgement for assessment district
payments would not be scheduled until some time after January 1, 2001. On
January 19, 2001, the County of Riverside agreed to extend the due date to
March 30, 2001 with options for three additional extensions to August 1,
2001. The options for additional extensions would require payments totaling
$75,000 to be applied to the amount due. Payments have been made to extend
the agreement through May 31, 2001.
The delinquent principal, interest and penalties ($2,010,512) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,028,106) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at March 31, 2001.
In addition, the consolidated balance sheet at March 31, 2001 includes
$410,445 of delinquent property taxes and late fees related to the 33-acre
parcel.
In November 1993, the City of Temecula adopted a general development plan
that designated the property owned by OVPGP as suitable for "professional
office" use, which is contrary to its zoning as "commercial" use. As part of
the adoption of its general development plan, the City of Temecula adopted a
provision that, until the zoning is changed on properties affected by the
general plan, the general plan shall prevail when a use designated by the
general plan conflicts with the existing zoning on the property. The result
is that the City of Temecula has effectively down-zoned OVPGP's property from
a "commercial" to "professional office" use. The property is subject to
assessment district obligations that were allocated in 1989 based on a higher
"commercial" use. Since the assessment district obligations are not subject
to reapportionment as a result of re-zoning, a "professional office" use is
not economically feasible due to the disproportionately high allocation of
assessment district costs. OVPGP filed suit against the City of Temecula
claiming that, if the effective re-zoning is valid, the action is a taking
and damaging of OVPGP's property without payment of just compensation. OVPGP
sought to have the effective re-zoning invalidated and an unspecified amount
of damages. OVPGP previously suffered adverse outcomes in other suits filed
in relation to this matter. A stipulation was entered that dismissed this
suit without prejudice and agreed to toll all applicable statute of
limitations while OVPGP and the City of Temecula attempted to informally
resolve this litigation. On October 23, 2000, the City of Temecula's city
council granted preliminary approval of OVPGP's request for re-zoning and
general plan amendment related to a development plan which includes a
combination of multi-family and commercial uses. On November 28, 2000 the
re-zoning and general plan amendment requested by OVPGP were adopted by the
City of Temecula and OVPGP abandoned its legal claims against the City of
Temecula.
7
On January 11, 2001, the Company agreed to sell the 33 acres to an unrelated
developer for $6,550,000 cash plus assumption of the non-delinquent balance
of the assessment district obligation ($1,028,106 as of December 31, 2000)
at the time of closing, which was to be April 20, 2001. The buyer had
deposited $260,000 into escrow which became non-refundable and the funds
were paid to OVPGP when the buyer waived all contingencies in March 2001. On
May 4, 2001, the Company signed an agreement to extend the closing date to
May 31, 2001 and reduce the cash sale price to $6,375,000. The buyer has
deposited an additional $740,000 as a non-refundable deposit to escrow. If
the sale closes, the Company estimates that it will recognize a gain in the
fourth quarter.
The following is a summary of the results from operations of the development
activities related to this undeveloped land included in the financial
statements in the three and nine month periods:
Three Months Nine Months
------------------- ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Development costs 42,000 93,000 127,000 183,000
Allocated SG&A 6,000 -- 17,000 17,000
-------- -------- -------- --------
Loss from operations (48,000) (93,000) (144,000) (200,000)
Interest expense- development 77,000 63,000 207,000 196,000
-------- -------- -------- --------
Loss from continuing
operations (125,000) (156,000) (351,000) (396,000)
======== ======== ======== ========
5. Notes payable:
Pursuant to a short term loan agreement with the Company's partner in UCV,
the Company borrowed an additional $700,000 in the three months ended
September 30, 2000, $350,000 on October 17, 2000 and $150,000 on November 10,
2000. On December 28, 2000 the Company paid $500,000 of the short term note
payable from the proceeds of the office building sale (Note 7a) and on March
8, 2001 paid $450,000 from the proceeds of distributions received from UCV.
The Company has agreed in principle to repay principal on the short term loan
from the proceeds of the following events: up to $350,000 from distributions
received from the sale of the 33 acres owned by Old Vail Partners, a general
partnership and up to $350,000 from 50% of the distributions received from
the sale of the shopping center in which Old Vail Partners, Ltd. is a
partner. The remaining balance will become due on July 31, 2001, however, the
Company will have the ability to extend the due date for up to one additional
year.
6. Contingencies:
The Company is involved in other 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. Significant events: (a) Sale of Office Building:
On December 28, 2000 the Company sold its office building for $3,725,000
and recorded a gain of $2,764,483. The consideration consisted of the
assumption of the existing loan with a principal balance of $1,950,478 and
cash of $1,662,337. The cash proceeds were net of selling expenses of
$163,197, credits for lender impounds of $83,676, deductions for security
deposits of $26,463 and prepaid rents of $6,201. The Company has been
released from liability under the existing loan except for those acts,
events or omissions that occurred prior to the loan assumption. The Company
has occupied approximately 5,000 square feet of space in the building since
1984. The existing lease expires in September 2011. In conjunction with a
lease modification with the new owner to the office building, the Company
vacated the premises on April 6, 2001 and moved into the factory space
occupied by its subsidiary, Penley Sports, LLC. However, because the lease
commitment was a condition to the original loan agreement, the lender will
only allow the Company to be conditionally released from its remaining
lease obligation. In the event there is an uncured event of default by the
new owner of the office building under the existing loan agreement, the
Company's obligations under its lease will be reinstated to the extent
there is not an enforceable lease on the Company's space. The future
minimum rent payments under the lease agreement are as follows for the
period and years ending June 30: $16,000 for the three month period ending
June 30, 2001; $68,000- 2002; $70,000- 2003; $72,000- 2004; $75,000- 2005;
$77,000- 2006; $443,000 thereafter and $839,000 in the aggregate.
8
The following is a summary of the results from operations of the office
building included in the financial statements in the three and nine month
periods:
Three Months Nine Months
-------------------- ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Rents -- $122,000 $244,000 $353,000
Costs -- 28,000 52,000 84,000
Allocated SG&A -- 7,000 15,000 22,000
Depreciation -- 21,000 16,000 63,000
-------- -------- -------- --------
Income from operations -- 66,000 161,000 184,000
Interest expense -- 42,000 81,000 125,000
-------- -------- -------- --------
Income from continuing
operations -- 24,000 80,000 59,000
======== ======== ======== ========
(b) Sale of Valley Bowl real estate:
On December 29, 2000 the Company sold the land and building occupied by the
Valley Bowling Center for $2,215,000 cash and recorded a gain of $482,487.
The proceeds of the sale were used to pay the existing loan of $1,650,977
and selling expenses of $167,671. The bowling center discontinued its
operations on December 21, 2000. The following is a summary of the results
of operations of the bowling center included in the financial statements:
Three Months Nine Months
-------------------- -------------------
2001 2000 2001 2000
---------- --------- --------- --------
Revenues $1,000 $336,000 $460,000 $872,000
Costs 2,000 171,000 319,000 540,000
Direct SG&A - 58,000 103,000 188,000
Allocated SG&A - 24,000 30,000 63,000
Depreciation - 21,000 26,000 69,000
---------- --------- --------- --------
Income from operations (1,000) 62,000 (18,000) 12,000
Interest expense - 35,000 91,000 107,000
---------- --------- --------- --------
Income from continuing
operations (1,000) 27,000 (109,000) (95,000)
========== ========= ========= ========
8. Supplementary Non-Cash information:
The following is a summary of the changes to the balance sheet related to the
non-cash portion of the sale of the office building and Valley Bowl real
estate:
Office Valley Bowl
Building Real Estate
-------- -----------
Receivables $6,201 $ --
Prepaid expenses (83,676) --
Property and equipment (1,171,699) (2,434,539)
Accumulated depreciation (438,096) (877,536)
Deferred loan costs (52,200) (7,838)
Other assets (11,516) --
Long-term debt (1,950,478) --
Other liabilities (26,462) --
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 or increases in the sales
volume of its subsidiary, Penley Sports. The consolidated condensed financial
statements do not contain adjustments, if any, including diminished recovery
of asset carrying amounts, that could arise from forced dispositions and
other insolvency costs.
9
10. Business segment information:
The Company operates principally in four business segments: bowling centers,
commercial real estate rental, real estate development, and golf 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.
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED MARCH 31, 2001:
--------------------------------
Revenues ....................... $ 1,882,328 $ 386,263 $ -- $ 950,205 $ 246,607 $ 3,465,403
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 3,048,623 (396,451) (2,367,870) (488,908) 2,898
Investment income .............. 17,401
Net income ..................... 20,299
NINE MONTHS ENDED MARCH 31, 2000:
--------------------------------
Revenues ....................... $ 2,043,672 $ 527,593 $ -- $ 600,518 $ 308,422 $ 3,480,205
Depreciation and amortization... 78,561 104,226 -- 69,204 36,913 288,904
Interest expense ............... 107,181 125,020 196,972 10,979 19,367 459,519
Equity in income (loss) of
investees .................... -- 346,868 (58,000) -- -- 288,868
Loss on sale ................... -- -- (638) -- -- (638)
Segment profit (loss) .......... (350,208) 436,536 (455,426) (2,078,018) (297,278) (2,744,394)
Investment income .............. 40,173
Net loss ....................... (2,704,221)
THREE MONTHS ENDED MARCH 31, 2001:
--------------------------------
Revenues ....................... $ 552,596 $ 42,131 $ -- $ 419,576 $ 79,381 $ 1,093,684
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) .......... (26,177) 76,448 (140,180) (839,860) (111,284) (1,041,053)
Investment income .............. 10,138
Net loss ....................... (1,030,915)
THREE MONTHS ENDED MARCH 31, 2000:
--------------------------------
Revenues ....................... $ 793,718 $ 179,403 $ -- $ 318,987 $ 162,341 $ 1,454,449
Depreciation and amortization... 25,928 35,126 -- 23,634 12,264 96,952
Interest expense ............... 35,045 41,592 62,950 3,073 4,373 147,033
Equity in income (loss) of
investees ..................... -- 78,569 (33,000) -- -- 45,569
Segment profit (loss) .......... (2,892) 111,955 (188,453) (739,806) (28,934) (848,130)
Investment income .............. 11,111
Net loss ....................... (837,019)
Nine Months Three Months
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues per segment .......$3,465,403 $3,480,205 $1,093,684 $1,454,449
Intercompany rent eliminated (32,985) (48,000) -- (16,200)
---------- ---------- ---------- ----------
Consolidated revenues ......$3,432,418 $3,432,205 $1,093,684 $1,438,249
========== ========== ========== ==========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
Liquidity and Capital Resources
Excluding the balance of the assessment-district-obligation-in-default and
property taxes in default related to the same property which are included in
current liabilities, the Company has a working capital deficit of $2,397,420 at
March 31, 2001, which is a $1,243,225 decrease from the similarly calculated
working capital deficit of $3,640,645 at June 30, 2000. The increase in working
capital is primarily attributable to the cash proceeds from the sale of two
properties and the distributions received from UCV, which were partially offset
by the cash used by operating activities for the nine months ended March 31,
2001. The following is a schedule of the cash provided (used) before changes in
assets and liabilities, segregated by business segments:
2001 2000 Change
---------- ---------- -----------
Bowling $ (226,000) $(270,000) $ 44,000
Rental 119,000 199,000 (80,000)
Golf (2,260,000) (2,009,000) (251,000)
Development (144,000) (201,000) 57,000
General corporate expense and
other (405,000) (184,000) (221,000)
---------- ---------- ----------
Cash used by continuing
operations (2,916,000) (2,465,000) (451,000)
Capital expenditures (406,000) (197,000) (209,000)
Principal payments on long-term
debt (179,000) (211,000) 32,000
---------- ---------- ----------
Cash used (3,501,000) (2,873,000) (628,000)
========== ========== ==========
Distributions received from
investees, net 859,000 2,079,000 (1,220,000)
========== ========== ==========
Proceeds from sale of
properties, net of
extinguishment of debt 2,059,000 114,000 1,945,000
========== ========== ==========
The Company has been unable to generate sufficient cash flow from operating
activities to meet scheduled principal payments on long-term debt and capital
replacement needs during the last several years. It has used its share of
distributions from investees and proceeds from refinancings and sales of assets
to fund these deficits.
As described in Note 4 of the Notes to Consolidated Condensed Financial
Statements, OVPGP is delinquent in the payment of special assessment district
obligations and property taxes on 33 acres of undeveloped land. The annual
obligation for the assessment district is approximately $144,000. The County of
Riverside obtained judgments for the default in the delinquent assessment
district payments. The amounts due to cure the judgment for the default under
the assessment district obligation on the 33 acre parcel as of March 31, 2001
was approximately $2,011,000. The delinquent principal, interest and penalties
($2,010,512) and the remaining principal balance of the allocated portion of the
assessment district bonds ($1,028,106) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at March 31, 2001. In
addition, the consolidated balance sheet at March 31, 2001 includes $410,445 of
delinquent property taxes and late fees related to the 33-acre parcel. On June
23, 2000, the County of Riverside agreed to remove the property from the planned
public sale originally scheduled for June 26, 2000 in exchange for an immediate
payment of $330,000 with the balance of property taxes due on December 29, 2000.
Separately, the County of Riverside stated that a foreclosure sale related to
the default judgement for assessment district payments would not be scheduled
until some time after January 1, 2001. On January 19, 2001, the County of
Riverside agreed to extend the due date to March 30, 2001 with three options to
that would extend the due date to August 1, 2001. Each extension option requires
a payment of $25,000. Payments have been made to date to extend the agreement to
May 31, 2001. In 1993 the City of Temecula adopted a general development plan as
a means of down-zoning the property to a lower use and, if uncontested, might
have significantly impaired the value of the property. As described in Note 4 of
the Notes to Consolidated Condensed Financial Statements, the Company contested
this action. On October 23, 2000, the City of Temecula's city council granted
preliminary approval of OVPGP's request for re-zoning and general plan amendment
related to a development plan which includes a combination of multi-family and
commercial uses. On November 28, 2000 the re-zoning and general plan amendment
requested by OVPGP were adopted by the City of Temecula and OVPGP abandoned its
legal claims against the City of Temecula.
11
On January 11, 2001, the Company agreed to sell the 33 acres to an unrelated
developer for $6,550,000 cash plus assumption of the non-delinquent balance of
the assessment district obligation ($1,028,106 as of March 31, 2001) at the time
of closing. Closing was to take place on April 20, 2001. The buyer had waived
all contingencies but was unable to meet its obligations on the closing date. On
May 4, 2001, the Company signed an agreement to extend the closing date to May
31, 2001 and reduce the cash sale price to $6,375,000. The buyer has deposited
an additional $740,000 as a non-refundable deposit to escrow. The Company
estimates the proceeds from the sale to the Company will be approximately
$1,374,000 after paying delinquent assessment district obligations and property
taxes ($2,491,000), selling expenses and other costs ($379,000), distribution to
minority interest holder of Old Vail Partners ($1,156,000), and a development
fee to Landgrant Corporation ($975,000).
On December 28, 2000 the Company sold its office building for $3,725,000 and
recorded a gain of $2,764,483. The proceeds consisted of the assumption of the
existing loan with a principal balance of $1,950,478 and cash proceeds of
$1,662,337. The cash proceeds were net of selling expenses of $163,197, credits
for lender impounds of $83,676, deductions for security deposits of $26,463 and
prepaid rents of $6,201. The Company has been released from liability under the
existing loan except for those acts, events or omissions that occurred prior to
the loan assumption. The Company occupied approximately 5,000 square feet of
space in the building under a lease that expires in September 2011. The Company
vacated these premises on April 6, 2001 and relocated to the factory space
occupied by its subsidiary, Penley Sports, LLC. However, because the lease
commitment was a condition to the original loan agreement, the lender will only
allow the Company to be conditionally released from its remaining lease
obligation. In the event there is an uncured event of default by the new office
building owner under the existing loan agreement, the Company obligations under
its lease will be reinstated to the extent there is not an enforceable lease on
the Company's space.
On December 29, 2000 the Company sold the land and building occupied by the
Valley Bowling Center for $2,215,000 cash and recorded a gain of $482,487. The
proceeds of the sale were used to pay the existing loan of $1,650,977 and
selling expenses of $160,670. The bowling center discontinued its operations on
December 21, 2000.
On October 3, 2000, UCV obtained approval for the plans to redevelop the 542
unit apartment project into 1,109 units plus an 80 unit assisted living
facility. UCV is currently evaluating alternatives for financing the
redevelopment.
On March 8, 2001, UCV paid its existing $28,478,687 note payable with the
proceeds from a $33,000,000 loan. The new loan provides for monthly payments of
interest only at a variable rate of interest equal to LIBOR (not less than 6
percent) plus 2-1/2 percentage points. UCV paid a fee to cap LIBOR at 6 percent.
The note payable matures August 2002 but may be extended for two 12-month
periods upon entering into an agreement to cap LIBOR at 7 percent. The loan may
be prepaid at any time, however, there are prepayment fees as follows: 3 percent
if paid prior to the sixth payment date; 1-1/2 percent if paid prior to the
ninth payment date; 1 percent if paid prior to the twelfth payment date; and
none thereafter. UCV is required to make a monthly payment of approximately
$16,290 to a property tax and insurance impound account. The note payable is
collateralized by the land, buildings, leases and security deposits. The
proceeds of the new loan, after extinguishing the $28,478,687 note payable less
a refund of impounds of $161,907, were utilized to: pay a prepayment penalty of
$295,260, pay loan costs of $976,615, pay distributions to the partners of
$1,820,000, fund a capital replacement impound maintained by the lender of
$754,040 and provide working capital of $837,305. The refinancing resulted in
charges of $401,444 related to the prepayment penalty of $295,260 and $106,184
of the unamortized portion of deferred loan costs related to the old note
payable. These charges were classified in UCV's financial statement as an
extraordinary loss from extinguishment of debt in the year ended March 31, 2001.
Management estimates negative cash flow of $700,000 to $900,000 for the
remaining quarter of the year ending June 30, 2001 from operating activities
before adding an estimated $300,000 distribution from UCV from its operating
activities, the estimated sales proceeds of $1,300,000 from the sale of the 33
acres of undeveloped land, and deducting $350,000 of principal payments due on
the short term note payable triggered by this events. Management expects
continuing cash flow deficits until Penley Sports develops sufficient sales
volume to become profitable. However, there can be no assurances that Penley
Sports will ever achieve profitable operations. Management is currently
evaluating obtaining additional investors in Penley Sports to provide sufficient
funds for the expected future cash flow deficits. If the Company is not
successful in obtaining other sources of working capital this could have a
material adverse effect on the Company's ability to continue as a going concern.
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-month and three-month periods ended March 31, 2001 to the same periods in
2000 and a discussion of the significant changes:
NINE MONTHS ENDED MARCH 31, 2001 VERSUS 2000
----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $(161,344) $ (141,330) -- $ 349,687 $ (61,815) $ (14,802)
Costs .......................... (85,198) (12,445) (55,803) 620,071 -- 466,625
SG&A-direct .................... (53,143) -- -- (6,031) (58,668) (117,842)
SG&A-allocated ................. (36,678) (7,000) -- (6,000) 49,678 --
Depreciation and amortization .. (45,486) (46,956) -- 38,285 (6,682) (60,839)
Interest expense ............... (16,064) (44,027) 10,466 (6,786) 145,487 89,076
Equity in investees ............ -- (121,494) 13,000 -- -- (108,494)
Gain on sale ................... 482,487 2,764,483 638 -- -- 3,247,608
Segment profit (loss) .......... 557,712 2,612,087 58,975 (289,852) (191,630) 2,747,292
Investment income .............. (22,772)
Income from operations .......... 2,724,520
THREE MONTHS ENDED MARCH 31, 2001 VERSUS 2000
------------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $(241,122) $ (137,272) -- $ 100,589 $ (82,960) $ (360,765)
Costs .......................... (91,990) (20,516) (50,482) 206,162 -- 43,174
SG&A-direct .................... (52,807) -- -- (12,486) (63,274) (128,567)
SG&A-allocated ................. (14,557) (7,000) 6,000 (4,000) 19,557 --
Depreciation and amortization .. (23,438) (21,297) -- 13,224 (2,187) (33,698)
Interest expense ............... (35,045) (41,592) 14,209 (2,257) 45,294 (19,391)
Equity in investees ............ -- 11,360 18,000 -- -- 29,360
Segment profit (loss) .......... (23,285) (35,507) 48,273 (100,054) (82,350) (192,923)
Investment income .............. (973)
Income from operations ......... (193,896)
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 $15,015 and
$16,200 in the nine and three month periods, respectively.
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 of the nine-month and three-month periods ended March 31, 2001 to the
same periods in 2000:
Six-Month Period Three-Month Period
-------------------------- --------------------------
Grove Valley Combined Grove Valley Combined
------- -------- -------- ------- -------- --------
Revenues 249,661 (411,005) (161,344) 93,908 (335,030) (241,122)
Costs 134,692 (219,890) (85,198) 75,672 (167,662) (91,990)
SG&A-direct 31,120 (84,263) (53,143) 5,228 (58,035) (52,807)
SG&A-allocated (2,978) (33,700) (36,678) 10,043 (24,600) (14,557)
Depreciation and (1,855) (43,631) (45,486) (2,339) (21,099) (23,438)
amortization
Interest expense -- (16,064) (16,064) -- (35,045) (35,045)
Gain on sale -- 482,487 482,487 -- -- --
Segment profit (loss) 88,682 469,030 557,712 5,304 (28,589) (23,285)
Bowl revenues of Grove Bowl (Grove) increased by 21% in the three and nine month
periods primarily due to 8% and 12% increases in the number of games bowled in
the three and nine month periods, respectively. The Grove Bowl's revenues have
consistently increased since the surrounding shopping center was redeveloped and
reopened in March 2000. Grove also had 12% and 8% increases in the average price
of games bowled in the three and nine month periods respectively.
Bowl costs of Grove increased primarily due to increases in utility costs of
$38,152 (224%) and $94,311 (144%) in the three and nine month periods,
respectively. These increases were due to the increase in electric rates in San
Diego. Payroll and related costs also increased by $32,842 (30%) and $40,440
(12%) in the three and nine month periods respectively.
Grove's SG&A direct expenses increased during the nine month period primarily
due to increases in promotion and advertising expenses of $19,851 (16%), which
primarily occurred in the first six months.
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 , a
subleasehold interest in land underlying a condominium project and other
miscellaneous rents received on undeveloped land. The following is a summary of
the changes in operations in the nine and three month periods ending March 31,
2001:
Nine-Month Period Three-Month Period
--------------------------- ---------------------------
Office Others Combined Office Others Combined
-------- -------- -------- -------- ------- --------
Revenues (109,471) (31,859) (141,330) (121,860) (15,412) (137,272)
Costs (30,907) 18,462 (12,445) (26,949) 6,433 (20,516)
SG&A-allocated (7,000) -- (7,000) (7,000) -- (7,000)
Depreciation and (46,956) -- (46,956) (21,297) -- (21,297)
amortization
Interest expense (44,027) -- (44,027) (41,592) -- (41,592)
Equity in income of
UCV -- (121,494) (121,494) -- 11,360 11,360
Gain on sale 2,764,483 -- 2,764,483 -- -- --
Segment profit (loss) 2,783,902 (171,815) 2,612,087 (25,022) (10,485) (35,507)
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 costs increased due to an increase in the rent expense for
the subleasehold interest.
14
The equity in income of UCV decreased in the nine month period primarily due to
a decrease in UCV's net income of $243,000. The primary reason for the decrease
was a $486,000 increase in interest expense in the period related to additional
financing UCV obtained in October 1999. This increase in expense was partially
offset by an increase of $203,000 in rental income. Rental income of UCV
increased 6% in the nine and 4% in the three month periods primarily due to an
increase in the average rental rates.
REAL ESTATE DEVELOPMENT OPERATIONS:
Development costs and expenses primarily consists of property taxes and legal
costs incurred to contest the City of Temecula's attempts to down-zone the
undeveloped land owned by Old Vail Partners. Development costs decreased in the
nine and three month periods due to a decrease in legal costs related to the
development plan approval received in November 2000. Interest expense related to
development activities primarily relates to interest accrued on the past due and
current assessment district obligations of Old Vail Partners.
GOLF OPERATIONS:
Prior to January 2000, golf 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 and small golf-club manufacturers 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 2001, and
2000:
Three Months Nine Months
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Costs of goods sold and
manufacturing overhead $ 550,000 $ 367,000 $1,439,000 $ 841,000
Research & development 78,000 55,000 208,000 186,000
--------- --------- ---------- ----------
Total golf costs 628,000 422,000 1,647,000 1,027,000
========= ========= ========== ==========
Marketing & promotion 479,000 493,000 1,186,000 1,246,000
Administrative-direct 55,000 53,000 168,000 114,000
--------- ---------- ---------- ----------
Total SG&A-direct 534,000 546,000 1,354,000 1,360,000
========= ========= ========== ==========
Allocated corporate costs 60,000 64,000 205,000 211,000
========= ========== ========== ==========
Total golf costs increased in 2001 primarily due to an increase in the amount of
cost of goods sold related to increased sales, and an increase in manufacturing
overhead related to the plant facilities into which Penley relocated in June
2000.
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.
2001 2002 Total
------- ---------- ----------
Fixed rate debt $14,000 $21,000 $35,000
Weighted average interest rate 9.0% 8.7% 8.8%
rate
Variable rate debt $19,000 $1,607,000 $1,626,000
Weighted average interest rate 10.0% 10.0% 10.0%
The amounts for 2001 relate to the three months ending June 30, 2001. This table
does not include the principal maturities related to the Assessment District
Obligation-In Default.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
$33,000,000 as of March 31, 2001 for which the interest rate was 8.5 percent.
However, the combination of a floor established by the lender and a cap
purchased by UCV has resulted in the rate being fixed at 8.5 percent for the
initial term of the loan. The principal cash flows for each of UCV's fiscal
years ending March 31 is: 2002- none; 2002 and in total- $33,000,000.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
15
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of March 31, 2001, other than as described in Note 4 of Notes to the
Consolidated Condensed Financial Statements 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, 2000.
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 22, 2000 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 23,529,984 0 54,166
Steven R. Whitman 23,529,888 0 54,262
Patrick D. Reiley 23,530,388 0 53,762
James E. Crowley 23,530,550 0 53,600
Robert A. MacNamara 23,530,450 0 53,700
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) 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 14, 2001
------------
By:/s/ Steven R. Whitman
-----------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 14, 2001
------------
17