UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
-------- ----------
(State of Incorporation) (I.R.S. Employer I.D. No.)
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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 January 31, 2000 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2000
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Balance Sheets as of December 31, 2000 (unaudited) and June 30, 1-2
2000
Unaudited Statements of Operations for the Three Months Ended
December 31, 2000 and 1999 3
Unaudited Statements of Operations for the Six Months Ended
December 31, 2000 and 1999 4
Unaudited Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 1999 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
December 31 June 30,
2000 2000
------------ ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 702,609 $ 13,961
Current portion of notes receivable- affiliate - 50,000
Other receivables 185,679 193,510
Inventories 283,846 304,906
Prepaid expenses 126,008 238,719
------------ ----------
Total current assets 1,298,142 801,096
------------ ----------
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 2,079,029 2,347,767
------------ ----------
2,079,029 5,487,094
Less accumulated depreciation and amortization (979,145) (2,160,132)
------------ ----------
Net property and equipment 1,099,884 3,326,962
------------ ----------
Other assets:
Undeveloped land, at cost 1,513,845 1,501,318
Intangible assets, net 170,247 246,123
Investments 534,446 564,446
Other 120,999 137,425
------------ ----------
2,339,537 2,449,312
------------ ----------
$4,737,563 $6,601,236
============ ==========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
December 31, June 30,
2000 2000
------------ ----------
(Unaudited)
Current liabilities:
Assessment district obligation- in default $2,961,459 $2,831,180
Notes payable-short term 2,050,000 1,350,000
Current portion of long-term debt 98,000 1,874,000
Accounts payable 683,942 796,483
Accrued payroll and related expenses 218,153 164,170
Accrued property taxes- in default 408,917 356,178
Accrued interest 125,955 41,079
Other liabilities 222,787 216,009
------------ ----------
Total current liabilities 6,769,213 7,629,099
------------ ----------
Long-term debt, excluding current portion 10,734 1,967,169
------------ ----------
Distributions received in excess of basis
in investment 14,403,473 14,498,208
------------ ----------
Other liabilities 120,000 123,831
------------ ----------
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 (17,989,591) (19,040,805)
------------ ----------
(15,987,042) (17,038,256)
Less note receivable from shareholder (2,291,492) (2,291,492)
------------ ----------
Total shareholders' deficit (18,278,534) (19,329,748)
------------ ----------
Commitments and contingencies (Note 6)
$4,737,563 $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 DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
---------- ----------
Revenues:
Bowling $ 668,135 $ 625,382
Rental 142,314 160,113
Golf 243,620 157,601
Other 44,152 32,290
Other-related party 44,441 42,635
---------- ----------
1,142,662 1,018,021
---------- ----------
Costs and expenses:
Bowling 509,679 501,494
Rental 63,168 61,638
Golf 492,546 331,941
Development 43,712 28,980
Selling, general, and administrative 954,868 924,282
Depreciation and amortization 65,695 96,383
----------- ----------
2,129,668 1,944,718
----------- ----------
Loss from operations (987,006) (926,697)
----------- ----------
Other income (charges):
Investment income:
Related party 7,263 10,053
Other - 8,773
Interest expense:
Development activities (46,885) (69,625)
Other and amortization of finance costs (160,684) (90,717)
Gain on sale of office building 2,764,483 -
Gain on sale of bowling center building 482,487 -
Equity in income of investees 50,283 102,210
----------- ----------
3,096,947 (39,306)
----------- ----------
Net income (loss) $2,109,941 $ (966,003)
=========== ==========
Basic and diluted net income (loss) per
common share (based on 27,250,000
weighted average common shares outstanding) $0.08 ($0.04)
====== =======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
---------- ----------
Revenues:
Bowling $1,329,732 $1,249,954
Rental 311,147 316,390
Golf 530,629 281,531
Other 78,434 60,747
Other-related party 88,792 85,334
---------- ----------
2,338,734 1,993,956
---------- ----------
Costs and expenses:
Bowling 1,043,056 1,036,264
Rental 132,451 124,380
Golf 1,018,722 604,813
Development 84,992 90,313
Selling, general, and administrative 1,782,213 1,772,673
Depreciation and amortization 164,811 191,952
---------- ----------
4,226,245 3,820,395
---------- ----------
Loss from operations (1,887,511) (1,826,439)
---------- ----------
Other income (charges):
Investment income:
Related party 7,263 19,973
Other - 9,089
Interest expense:
Development activities (130,279) (133,001)
Other and amortization of finance costs (290,674) (179,485)
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 105,445 243,299
---------- ----------
2,938,725 (40,763)
---------- ----------
Net income (loss) $1,051,214 $(1,867,202)
========== ==========
Basic and diluted net income (loss) per
common share (based on 27,250,000
weighted average common shares outstanding) $0.04 ($0.07)
====== =======
See accompanying notes to consolidated condensed financial statements.
4
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
---------- ----------
Cash flows from operating activities:
Net income (loss) $1,051,214 ($1,867,202)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs 18,846 4,560
Depreciation and amortization 164,811 191,952
Equity in income of investees (105,445) (243,299)
Deferred income 24,000 24,000
(Gain) loss on sale of property (3,246,970) 638
Interest accrued on assessment
district obligations 130,279 133,001
Changes in assets and liabilities:
Decrease in receivables 14,032 5,474
Decrease in inventories 21,060 92,806
(Increase) decrease in prepaid expenses 29,035 (64,373)
Increase (decrease) in accounts payable (112,541) 77,539
Increase in accrued expenses 198,376 9,573
Other 19,675 (2,286)
----------- ----------
Net cash used by operating activities (1,793,628) (1,637,617)
----------- ----------
Cash flows from investing activities:
Decrease in notes receivable 73,866 36,479
Capital expenditures (198,173) (83,114)
Increase in development costs on
undeveloped land (12,527) (17,278)
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 114,000 2,024,500
Contributions to investees (100,000) (19,460)
----------- ----------
Net cash provided by investing activities 3,586,831 2,131,489
----------- ----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (130,980) (139,032)
Extinguishment of long-term debt (1,650,977) (75,927)
Proceeds from short-term notes payable 1,200,000 550,000
Payments on short-term notes payable (500,000) (550,000)
Other (22,598) (22,455)
----------- ----------
Net cash used by financing activities (1,104,555) (237,414)
----------- ----------
Net increase in cash and cash equivalents 688,648 256,458
Cash and cash equivalents, beginning of year 13,961 357,906
----------- ----------
Cash and cash equivalents, end of year $ 702,609 $614,364
=========== ==========
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 (Unaudited)
1. The information furnished reflects all adjustments which management believes
are necessary to a fair statement of the Company's financial position,
results of operations and cash flows for the interim periods.
2. Due to the seasonal fluctuations of the bowling and golf shaft manufacturing
operations, the financial results for the interim periods ended December 31,
2000 and 1999, are not necessarily indicative of operations for the entire
year.
3. Investments:
(a) Investments consist of the following:
December 31, June 30,
2000 2000
----------- -----------
Vail Ranch Limited Partnership
(equity method) $ 534,446 $ 564,446
========== ===========
Investment in UCV, L.P. classified as
liability - Distributions received
in excess of basis in investment $14,403,473 $14,498,208
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
2000 1999
--------- ---------
UCV, L.P. $135,445 $ 268,299
Vail Ranch Limited Partnership (30,000) (25,000)
--------- ---------
$105,445 $ 243,299
========= =========
The following is a summary of distributions received from investees:
2000 1999
-------- ---------
UCV, L.P. $114,000 $2,024,500
Vail Ranch Limited Partnership -- --
-------- ----------
$114,000 $2,024,500
======== ==========
(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 six and three month
periods ended September 30, 2000 and 1999 are as follows:
Six Months Three Months
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues $2,521,000 $2,365,000 $1,286,000 $1,206,000
Operating and general
and administrative
costs 849,000 837,000 442,000 444,000
Depreciation 11,000 13,000 5,000 7,000
Interest expense 1,390,000 978,000 708,000 501,000
Net income 271,000 537,000 131,000 254,000
On January 9, 2001, UCV signed a commitment letter with a lender to
refinance the existing loan ($28,585,399 balance as of December 31, 2000)
with a $33,000,000 loan. The new loan will be for an initial term of 18
months with two options to extend the maturity date for one year each.
Monthly payments will be interest only at a rate based on LIBOR (not less
than 6%) plus 2.50 points. The commitment requires UCV to pay a fee
(currently estimated at $40,000) to cap LIBOR at 7%. UCV estimates the
proceeds from the refinancing will be approximately $2,900,000 after loan
costs and capital replacement reserves. UCV plans to use approximately
$900,000 of the proceeds to fund anticipated redevelopment planning costs
that would be incurred prior to obtaining financing for the redevelopment.
UCV plans to distribute the remaining $2,000,000 to the partners. The
Company is obligated to use fifty percent of its share of distributions
from UCV, up to $500,000, to make payments on its short-term note payable.
6
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. Once the legal matters described below are resolved, OVPGP is
obligated to assign its interest in the 33 acres of land to Old Vail
Partners, L.P. 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 $2,342,270 regarding delinquent assessment district
payments ($1,933,353) and property taxes ($408,917). 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.
The delinquent principal, interest and penalties ($1,933,353) 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 December 31,
2000. In addition, the consolidated balance sheet at December 31, 2000
includes $408,917 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.
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 shall be April 20, 2001. The sale is contingent on
the buyer's due diligence, which must be completed by February 28, 2001.
7
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 six month periods:
Three Months Six Months
------------------ ------------------
2000 1999 2000 1999
------- ------- -------- --------
Development costs 44,000 29,000 85,000 90,000
Allocated SG&A 6,000 - 11,000 12,000
------- ------- -------- --------
Loss from operations (50,000) (29,000) (96,000) (102,000)
Interest expense- development 47,000 70,000 130,000 133,000
------- ------- -------- --------
Loss from continuing
operations (97,000) (99,000) (226,000) (235,000)
======= ======= ======== ========
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 repaid $500,000 of the short term loan
from the proceeds of the office building sale (Note 7a).
The Company has agreed in principle to repay principal on the short term loan
from the proceeds of the following events: up to $500,000 from any
distributions received from proceeds of future refinancing of UCV; up to
$350,000 from distributions received from the sale of the 33 acres owned by
Old Vail Partners, a general partnership; 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
of the office building, the Company is expecting to vacate the premises
about March 31, 2001. 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:
$33,000 for the six 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 six month
periods:
Three Months Six Months
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Rents $117,000 $118,000 $244,000 $231,000
Costs 24,000 27,000 52,000 56,000
Allocated SG&A 9,000 9,000 15,000 15,000
Depreciation - 21,000 16,000 41,000
-------- -------- -------- --------
Income from operations 84,000 61,000 161,000 119,000
Interest expense 40,000 42,000 81,000 83,000
-------- -------- -------- --------
Income from continuing
operations 44,000 19,000 80,000 36,000
======== ======== ======== ========
(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 $160,670. 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 Six Months
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues $222,000 $258,000 $460,000 $536,000
Costs 146,000 165,000 317,000 369,000
Direct SG&A 41,000 57,000 104,000 131,000
Allocated SG&A 14,000 18,000 30,000 39,000
Depreciation 2,000 23,000 26,000 46,000
-------- -------- -------- --------
Income from operations 19,000 (5,000) (17,000) (49,000)
Interest expense 53,000 36,000 91,000 72,000
-------- -------- -------- --------
Income from continuing
operations (34,000) (41,000) (108,000) (121,000)
======== ======== ======== ========
7. 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) -
8. Liquidity
The accompanying consolidated condensed financial statements have been
prepared assuming the Company will continue as a going concern. The Company
has suffered recurring losses, 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
9. 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
------------ ------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED DECEMBER 31, 2000:
--------------------------------------
Revenues ....................... $ 1,329,732 $ 344,132 $ -- $ 530,629 $ 167,226 $ 2,371,719
Depreciation and amortization... 30,585 43,441 -- 70,631 20,154 164,811
Interest expense ............... 91,117 80,993 130,279 3,377 115,187 420,953
Equity in income (loss)
of investees ................. -- 135,445 (30,000) -- -- 105,445
Gain on sale ................... 482,487 2,764,483 -- -- -- 3,246,970
Segment profit (loss) .......... 222,344 2,972,175 (256,271) (1,528,010) (366,287) 1,043,951
Investment income .............. 7,263
Net income ..................... 1,051,214
SIX MONTHS ENDED DECEMBER 31, 1999:
--------------------------------------
Revenues ....................... $ 1,249,954 $ 348,190 $ -- $ 281,531 $ 146,081 $ 2,025,756
Depreciation and amortization... 52,633 69,100 -- 45,570 24,649 191,952
Interest expense ............... 72,136 83,428 134,022 7,906 14,994 312,486
Equity in income (loss)
of investees ................. -- 268,299 (25,000) -- -- 243,299
Loss on sale ................... -- -- (638) -- -- (638)
Segment profit (loss) .......... (350,783) 324,581 (261,973) (1,338,212) (269,877) (1,896,264)
Investment income .............. 29,062
Net loss ....................... (1,867,202)
THREE MONTHS ENDED DECEMBER 31, 2000:
--------------------------------------
Revenues ....................... $ 668,135 $ 159,051 $ -- $ 243,620 $ 88,593 $ 1,159,399
Depreciation and amortization... 4,743 13,829 -- 37,046 10,077 65,695
Interest expense ............... 53,700 39,570 46,885 1,358 66,056 207,569
Equity in income (loss)
of investees ................. -- 65,283 (15,000) -- -- 50,283
Gain on sale ................... 482,487 2,764,483 -- -- -- 3,246,970
Segment profit (loss) .......... 377,724 2,863,250 (111,597) (785,599) (241,100) 2,102,678
Investment income .............. 7,263
Net income ..................... 2,109,941
THREE MONTHS ENDED DECEMBER 31, 1999:
--------------------------------------
Revenues ....................... $ 625,382 $ 176,361 $ -- $ 157,601 $ 74,925 $ 1,034,269
Depreciation and amortization... 25,963 34,696 -- 23,368 12,356 96,383
Interest expense ............... 35,851 41,674 69,625 3,675 9,517 160,342
Equity in income of investees .. -- 127,210 (25,000) -- -- 102,210
Segment profit (loss) .......... (149,158) 156,563 (123,605) (702,092) (166,537) (984,829)
Investment income .............. 18,826
Net loss ....................... (966,003)
Six Months Three Months
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues per segment .......$2,371,719 $2,025,756 $1,159,399 $1,034,269
Intercompany rent eliminated (32,985) (31,800) (16,737) (16,248)
---------- ---------- ---------- ----------
Consolidated revenues ......$2,338,734 $1,993,956 $1,142,662 $1,018,021
========== ========== ========== ==========
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 $2,100,695 at
December 31, 2000, which is a $1,539,950 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 partially offset by the cash used by operating activities for the six
months ended December 31, 2000. The following is a schedule of the cash provided
(used) before changes in assets and liabilities, segregated by business
segments:
2000 1999 Change
---------- ---------- ---------
Bowling $(214,000) $(297,000) $ 83,000
Rental 119,000 129,000 (10,000)
Golf (1,457,000) (1,293,000) (164,000)
Development (96,000) (103,000) 7,000
General corporate expense
and other (315,000) (192,000) (123,000)
---------- ---------- ---------
Cash used by continuing
operations (1,963,000) (1,756,000) (207,000)
Capital expenditures (211,000) (100,000) (111,000)
Principal payments on
long-term debt (131,000) (139,000) 8,000
---------- ---------- ---------
Cash used (2,305,000) (1,995,000) (310,000)
========== ========== =========
Distributions received from
investees, net 14,000 2,005,000 (1,991,000)
========== ========== =========
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 December 31, 2000
was approximately $1,933,000. The principal balance of the allocated portion of
the bonds ($1,384,153 as of December 31, 2000), and delinquent interest and
penalties ($1,577,306 as of December 31, 2000) are classified as "Assessment
district obligation- in default" in the consolidated balance sheet. In addition,
the consolidated balance sheet includes $488,917 of delinquent property taxes
and late fees as of December 31, 2000. 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. The options for additional extensions would require
payments totaling $75,000 to be applied to the amount due. 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
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 December 31, 2000) at the
time of closing, which shall be April 20, 2001. The sale is contingent on the
buyer's due diligence, which must be completed by February 28, 2001. The Company
estimates the proceeds from the sale to the Company will be approximately
$1,300,000 after paying delinquent assessment district obligations and property
taxes ($2,342,000), selling expenses and other costs ($558,000), distribution to
minority interest holder of Old Vail Partners ($1,150,000), and a development
fee to Landgrant Corporation ($1,200,000).
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 occupies approximately 5,000 square feet of
space in the building under a lease that expires in September 2011. The Company
is expecting to vacate the premises about March 31, 2001. 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 January 9, 2001, UCV signed a commitment letter with a lender to refinance
the existing loan ($28,585,399 balance as of December 31, 2000) with a
$33,000,000 loan. The new loan will be for an initial term of 18 months with two
options to extend the maturity date for one year each. Monthly payments will be
interest only at a rate based on LIBOR (not less than 6%) plus 2.50 points. The
commitment requires UCV to pay a fee (currently estimated at $40,000) to cap
LIBOR at 7%. UCV estimates the proceeds from the refinancing will be
approximately $2,900,000 after loan costs and capital replacement reserves. UCV
plans to use approximately $900,000 of the proceeds to fund anticipated
redevelopment planning costs that would be incurred prior to obtaining financing
for the redevelopment. UCV plans to distribute the remaining $2,000,000 to the
partners. The Company is obligated to use fifty percent of its share of
distributions from UCV, up to $500,000, to make payments on its short-term note
payable.
Management estimates negative cash flow of $1,000,000 to $1,300,000 for the
remaining quarters of the year ending June 30, 2001 from operating activities
before adding an estimated $1,000,000 distribution from UCV from the
refinancing, the estimated sales proceeds of $1,300,000 from the sale of the 33
acres of undeveloped land, and deducting $850,000 of principal payments due on
the short term note payable triggered by these 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.
"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
12
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
six-month and three-month periods ended December 31, 2000 to the same periods in
1999 and a discussion of the significant changes:
SIX MONTHS ENDED DECEMBER 31, 2000 VERSUS 1999
----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $ 79,778 $ (4,058) -- $ 249,098 $ 21,145 $ 345,963
Costs .......................... 6,792 8,071 (5,321) 413,909 -- 423,451
SG&A-direct .................... (336) -- -- 6,455 4,606 10,725
SG&A-allocated ................. (14,251) -- (1,000) (2,000) 17,251 --
Depreciation and amortization .. (22,048) (25,659) -- 25,061 (4,495) (27,141)
Interest expense ............... 18,981 (2,435) (3,743) (4,529) 100,193 108,467
Equity in investees ............ -- (132,854) (5,000) -- -- (137,854)
Gain on sale ................... 482,487 2,764,483 638 -- -- 3,247,608
Segment profit (loss) .......... 573,127 2,647,594 5,702 (189,798) (96,410) 2,940,215
Investment income .............. (21,799)
Income from operations .......... 2,918,416
THREE MONTHS ENDED DECEMBER 31, 2000 VERSUS 1999
------------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $ 42,753 $ (17,310) -- $ 86,019 $ 13,668 $ 125,130
Costs .......................... 8,185 1,530 14,732 160,605 -- 185,052
SG&A-direct .................... 2,986 -- -- 3,560 24,529 31,075
SG&A-allocated ................. (9,442) -- 6,000 (6,000) 9,442 --
Depreciation and amortization .. (21,220) (20,867) -- 13,678 (2,279) (30,688)
Interest expense ............... 17,849 (2,104) (22,740) (2,317) 56,539 47,227
Equity in investees ............ -- (61,927) 10,000 -- -- (51,927)
Gain on sale ................... 482,487 2,764,483 -- -- -- 3,246,970
Segment profit (loss) .......... 526,882 2,706,687 12,008 (83,507) (74,563) 3,087,507
Investment income .............. (11,563)
Income from operations ......... 3,075,944
Note: The change in rental revenues and SG&A expenses do not include the
effect of the net change in elimination of intercompany rent of $1,185
and $489 in the six and three month periods, respectively.
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 six-month and three-month periods ended December 31, 2000 to
the same periods in 1999:
Six-Month Period Three-Month Period
-------------------------- --------------------------
Grove Valley Combined Grove Valley Combined
------- -------- -------- ------- -------- --------
Revenues $155,753 $(75,975) $ 79,778 $78,497 $(35,744) $ 42,753
Costs 58,941 (52,149) 6,792 26,910 (18,725) 8,185
SG&A-direct 25,971 (26,307) (336) 19,279 (16,293) 2,986
SG&A-allocated (5,151) (9,100) (14,251) (5,542) (3,900) (9,442)
Depreciation and
amortization (1,895) (20,153) (22,048) (465) (20,755) (21,220)
Interest expense -- 18,981 18,981 -- 17,849 17,849
Gain on sale -- 482,487 482,487 -- 482,487 482,487
Segment profit (loss) 77,887 495,240 573,127 38,315 488,567 526,882
13
The declines in revenues and expenses at Valley Bowl are consistent with the
changes in prior periods and indicative of the changes to operations once the
Company decided to sell the real estate and close the bowling center.
Bowl revenues of Grove Bowl (Grove) increased by 21% in the three and six month
periods primarily due to 12% and 14% increases in the number of games bowled in
the three and six 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 7% and 6% increases in the average price
of games bowled in the three and six month periods respectively.
Bowl costs of Grove increased primarily due to increases in utility costs of
$20,223 (94%) and $56,159 (116%) in the three and six month periods,
respectively. These increases were due to the increase in electric rates in San
Diego. The Company is currently evaluating alternatives for a supplier of
electricity that will significantly reduce the volatility in utility rates.
SG&A direct expenses increased at Grove primarily due to increases in promotion
and advertising expenses of $11,687 (34%) and 24,448 (29%) in the three and six
month periods, respectively.
RENTAL OPERATIONS:
------------------
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. This decrease was partially offset in the six month period by a $12,389
(5%) increase in the rental income from the office building attributable to a
12% increase in rental rates. The increase in rental rates in the three month
period was offset by a 8% increase in office vacancies. Depreciation decreased
in the six and three month periods due to the cessation of recording
depreciation on the office building effective October 1, 2000, when the Company
became committed to a plan to sell the office building. Rental costs increased
due to an increase in the rent expense for the subleasehold interest.
The equity in income of UCV decreased primarily due to a decrease in UCV's net
income of $266,000 and $124,000 in the six and three month periods,
respectively. Rental income increased 7% in both the six and three month periods
primarily due to an increase in the average rental rates. This increase was
offset by increases in interest expense of $412,000 and $207,000 in the six and
three month periods respectively. This increase related to the increase in
financing in October 1999.
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 increased in the
three month period due to an increase 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 2000, and
1999:
Three Months Six Months
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Costs of goods sold and
manufacturing overhead $ 431,000 $ 268,000 $ 889,000 $ 473,000
Research & development 62,000 64,000 130,000 132,000
--------- --------- --------- ---------
Total golf costs 493,000 332,000 1,019,000 605,000
========= ========= ========= =========
Marketing & promotion 362,000 383,000 707,000 753,000
Administrative-direct 53,000 29,000 114,000 62,000
--------- ---------- --------- ---------
Total SG&A-direct 415,000 412,000 821,000 815,000
========= ========= ========= =========
Allocated corporate costs 83,000 89,000 145,000 147,000
========= ========== ========= =========
14
Total golf costs increased in 2000 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 $43,000 $20,000 $63,000
Weighted average interest rate 9.5% 8.7% 9.2%
rate
Variable rate debt $2,089,000 $6,000 $2,095,000
Weighted average interest rate 10.5% 10.5% 10.5%
The amounts for 2001 relate to the six 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
$28,685,000 as of September 30, 2000 for which the interest rate was 9.0
percent. The principal cash flows for each of UCV's fiscal years ending March 31
is: 2001- $339,000; 2002- $28,346,000; and $28,685,000 in total.
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 December 31, 2000, 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) Exhibits: Financial Data Schedule
(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: February 14, 2001
By:/s/ Steven R. Whitman
---------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 14, 2001
17