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, 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 Road, Suite C, San Diego, California 92121
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 408-0364
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's only class of common stock
($.01 par value) as of January 31, 2002 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2001
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Unaudited Balance Sheets as of December 31, 2001
and June 30, 2001 ........................................ 1-2
Unaudited Statements of Operations for the Three Months Ended
December 31, 2001 and 2000 ............................... 3
Unaudited Statements of Operations for the Six Months Ended
December 31, 2001 and 2000 ............................... 4
Unaudited Statements of Cash Flows for the Six Months Ended
December 31, 2001 and 2000 ............................... 5
Notes to Financial Statements ................................... 6-9
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 10-15
Item 3.- Quantitative and Qualitative Disclosures about Market Risk ... 15
Part II - Other Information ........................................... 16
Signatures ........................................................... 17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
December 31, June 30,
2001 2001
------------ ----------
Current assets:
Cash and cash equivalents $ 17,444 $ 515,204
Receivables 179,466 324,912
Inventories 521,704 585,111
Prepaid expenses 87,099 61,365
------------ ----------
Total current assets 805,713 1,486,592
------------ ----------
Receivables due after one year:
Note receivable- affiliate, net -- --
------------ ----------
Property and equipment, at cost:
Equipment and leasehold improvements 2,345,406 2,345,406
Less accumulated depreciation and
amortization (1,176,294) (1,060,626)
------------ ----------
Net property and equipment 1,169,112 1,284,780
------------ ----------
Other assets:
Intangible assets, net 89,626 150,657
Investments 332,446 405,446
Other 120,999 120,999
------------ ----------
543,071 677,102
------------ ----------
$2,517,896 $3,448,474
============ ==========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
(Unaudited)
December 31, June 30,
2001 2001
------------ ----------
Current liabilities:
Notes payable-short term $ 1,400,000 $1,250,000
Current portion of long-term debt 16,000 32,000
Accounts payable 667,418 708,307
Accrued payroll and related expenses 188,920 195,367
Accrued interest 249,640 203,578
Other liabilities 249,397 183,466
------------ ----------
Total current liabilities 2,771,375 2,572,718
------------ ----------
Long-term debt, excluding current portion 10,721 13,942
------------ ----------
Distributions received in excess of
basis in investment 15,925,184 15,792,373
------------ ----------
Other liabilities 168,000 144,000
------------ ----------
Minority interest in consolidated subsidiary 827,677 852,677
------------ ----------
Shareholders' deficit:
Common stock, $.01 par value, 50,000,000
shares authorized, 27,250,000 shares
issued and outstanding 272,500 272,500
Additional paid-in capital 1,730,049 1,730,049
Accumulated deficit (16,896,118) (15,638,293)
------------ ----------
(14,893,569) (13,635,744)
Less note receivable from shareholder (2,291,492) (2,291,492)
------------ ----------
Total shareholders' deficit (17,185,061) (15,927,236)
------------ ----------
Commitments and contingencies (Note 5)
$2,517,896 $3,448,474
============ ==========
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(Unaudited)
2001 2000
----------- ----------
Revenues:
Bowling $ 445,947 $ 637,352
Rental 58,539 153,914
Golf 343,276 243,620
Other 117,636 44,152
Other-related party 46,315 44,441
----------- ----------
1,011,713 1,123,479
----------- ----------
Costs and expenses:
Bowling 319,376 509,679
Rental 57,207 74,868
Golf 407,133 512,418
Development -- 43,712
Selling, general, and administrative 656,374 904,113
Depreciation and amortization 71,189 65,695
Impairment loss on deferred lease costs 41,915 --
----------- ----------
1,553,194 2,110,485
----------- ----------
Loss from operations (541,481) (987,006)
----------- ----------
Other income (charges):
Investment income-related party 9,457 7,263
Interest expense:
Development activities -- (46,885)
Other and amortization of finance costs (23,103) (160,684)
Gain on sale of office building -- 2,764,483
Gain on sale of bowling center building -- 482,487
Equity in income of investees 5,020 50,283
----------- ----------
(8,626) 3,096,947
----------- ----------
Net income (loss) $ (550,107) $2,109,941
=========== ==========
Basic and diluted net income (loss) per
common share (based on 27,250,000 weighted
average common shares outstanding) $(0.02) $0.08
======= =====
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(Unaudited)
2001 2000
----------- ----------
Revenues:
Bowling $ 829,768 $1,246,263
Rental 117,398 322,747
Golf 787,499 530,629
Other 155,775 78,434
Other-related party 92,384 88,792
----------- ----------
1,982,824 2,266,865
----------- ----------
Costs and expenses:
Bowling 666,295 1,043,056
Rental 115,917 144,151
Golf 906,202 1,065,015
Development -- 84,992
Selling, general, and administrative 1,309,137 1,652,351
Depreciation and amortization 142,852 164,811
Impairment loss on deferred lease costs 41,915 --
----------- ----------
3,182,318 4,154,376
----------- ----------
Loss from operations (1,199,494) (1,887,511)
----------- ----------
Other income (charges):
Investment income:
Related party 16,228 7,263
Other 1,807 --
Interest expense:
Development activities -- (130,279)
Other and amortization of finance costs (48,085) (290,674)
Gain on sale of office building -- 2,764,483
Gain on sale of bowling center building -- 482,487
Equity in income (loss) of investees (28,281) 105,445
----------- ----------
(58,331) 2,938,725
----------- ----------
Net income (loss) $(1,257,825) $1,051,214
=========== ==========
Basic and diluted net income (loss) per
common share (based on 27,250,000 weighted
average common shares outstanding) $(0.05) $0.04
======= =====
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, 2001 AND 2000
(Unaudited)
2001 2000
------------ ----------
Cash flows from operating activities:
Net income (loss) $(1,257,825) $1,051,214
Adjustments to reconcile net income (loss) to
the net cash used by operating activities:
Amortization of deferred financing costs -- 18,846
Depreciation and amortization 142,852 164,811
Equity in (income) loss of investees 28,281 (105,445)
Deferred income 24,000 24,000
Impairment loss on deferred lease costs 41,915 --
Gain on sale of assets -- (3,246,970)
Interest accrued on assessment district
obligations -- 130,279
Changes in assets and liabilities:
Decrease in receivables 145,446 14,032
Decrease in inventories 63,407 21,060
(Increase) decrease in prepaid expenses (25,734) 29,035
Decrease in accounts payable (40,889) (112,541)
Increase in accrued expenses 105,546 198,376
Other 18,642 19,675
----------- ----------
Net cash used by operating activities (754,359) (1,793,628)
----------- ----------
Cash flows from investing activities:
Decrease in notes receivable -- 73,866
Capital expenditures -- (198,173)
Increase in development costs on undeveloped land -- (12,527)
Proceeds from sale of office building -- 1,662,337
Proceeds from bowling center building -- 2,047,328
Distribution to holder of minority interest (25,000) --
Distributions from investees 150,820 114,000
Contributions to investees -- (100,000)
----------- ----------
Net cash provided by investing activities 125,820 3,586,831
----------- ----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (19,221) (130,980)
Extinguishment of long-term debt - (1,650,977)
Proceeds from short-term notes payable 150,000 1,200,000
Payments on short-term notes payable - (500,000)
Other - (22,598)
----------- ----------
Net cash provided (used) by financing activities 130,779 (1,104,555)
----------- ----------
Net increase (decrease) in cash and cash equivalents (497,760) 688,648
Cash and cash equivalents, beginning of year 515,204 13,961
----------- ----------
Cash and cash equivalents, end of year $ 17,444 $ 702,609
=========== ==========
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(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. Certain prior period amounts have been reclassified to conform to the
presentation used in the current period.
3. Due to the seasonal fluctuations of the bowling and golf club shaft
manufacturing operations, the financial results for the interim periods ended
December 31, 2001 and 2000, are not necessarily indicative of operations for
the entire year.
4. Investments:
(a) Investments consist of the following:
December 31, June 30,
2001 2001
----------- -----------
Vail Ranch Limited Partnership
(equity method) ..............................$ 332,446 $ 405,446
=========== ===========
Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ..............$15,925,184 $15,792,373
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method for the six-month periods
ended December 31,:
2001 2000
-------- --------
UCV, L.P. .................... $ 44,719 $135,445
Vail Ranch Limited Partnership (73,000) (30,000)
-------- --------
$(28,281) $105,445
======== ========
The following is a summary of distributions received from investees for the
six-month periods ended December 31,:
2001 2000
-------- --------
UCV, L.P. .................... $150,820 $114,000
Vail Ranch Limited Partnership -- --
-------- --------
$150,820 $114,000
======== ========
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated condensed statements of operations based upon the
partnership's fiscal year (March 31). Summarized information from UCV,
L.P.'s (UCV) unaudited statements of income for the six and three-month
periods ended September 30, 2001 and 2000 are as follows:
Six Months Three Months
---------------------- ---------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues $2,683,000 $2,521,000 $1,354,000 $1,286,000
Operating and general
and administrative
costs 841,000 849,000 423,000 442,000
Depreciation 7,000 11,000 4,000 5,000
Interest expense 1,745,000 1,390,000 877,000 708,000
Net income 90,000 271,000 50,000 131,000
As disclosed in the annual financial statements for the year ended June
30, 2001, the Company performs management services and development
services for UCV pursuant to separate agreements with UCV. The Company
believes that the terms of these agreements are no less favorable to the
Company or UCV than could be obtained with an independent third party.
6
5. Contingencies:
The Company is involved in various routine litigation and disputes
incident to its business. In management's opinion, based in part on the
advice of legal counsel, none of these matters will have a material
adverse effect on the Company's financial position.
6. Short-term notes payable:
On November 15, 2001, the Company borrowed an additional $150,000 from the
Company's partner in UCV. As disclosed in the financial statements for the
year ended June 30, 2001, the Company has received other loans from this
partner. Although the terms of these loans are likely to be comparable to
the loan terms from an independent third party, it is unlikely that the
Company could obtain a similar loan from an independent third party.
7. Liquidity
The accompanying consolidated condensed financial statements have been
prepared assuming the Company will continue as a going concern. The Company
has suffered recurring losses, has a working capital deficiency, and is
forecasting negative cash flows for the next twelve months. These items
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is dependent
on either refinancing or selling certain real estate assets, obtaining
additional investors in its subsidiary, Penley Sports, or increases in the
sales volume of Penley Sports. The consolidated condensed financial
statements do not contain adjustments, if any, including diminished
recovery of asset carrying amounts, that could arise from forced
dispositions and other insolvency costs.
8. Business segment information:
The Company operates principally in four business segments: bowling
centers, commercial real estate rental, real estate development, and golf
club shaft manufacturing. Other revenues, which are not part of an
identified segment, consist of property management and development fees
(earned from both a property 50 percent owned by the Company and a
property in which the Company has no ownership) and commercial brokerage.
The following is summarized information about the Company's operations by
business segment.
7
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED DECEMBER 31, 2001:
--------------------------------------
Revenues ....................... $ 829,768 $ 117,398 $ -- $ 787,499 $ 248,159 $ 1,982,824
Depreciation and amortization... 4,980 27,184 -- 85,548 25,140 142,852
Interest expense ............... -- 1,662 -- -- 46,423 48,085
Equity in income (loss)
of investees ................. -- 44,719 (73,000) -- -- (28,281)
Impairment loss ................ -- 41,915 -- -- -- 41,915
Segment profit (loss) .......... (14,386) (24,561) (77,000) (975,581) (184,332) (1,275,860)
Investment income .............. 18,035
Net loss.. ..................... (1,257,825)
SIX MONTHS ENDED DECEMBER 31, 2000:
--------------------------------------
Revenues ....................... $ 1,246,263 $ 355,732 $ -- $ 530,629 $ 167,226 $ 2,299,850
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 2,972,075 (256,271) (1,527,910) (366,287) 1,043,951
Investment income .............. 7,263
Net income ..................... 1,051,214
THREE MONTHS ENDED DECEMBER 31, 2001:
--------------------------------------
Revenues ....................... $ 445,947 $ 58,539 $ -- $ 343,276 $ 163,951 $ 1,011,713
Depreciation and amortization... 2,490 13,355 -- 42,774 12,570 71,189
Interest expense ............... -- 1,662 -- -- 21,441 23,103
Equity in income (loss)
of investees ................. -- 25,020 (20,000) -- -- 5,020
Impairment loss................. -- 41,915 -- -- -- 41,915
Segment profit (loss) .......... 39,187 (30,580) (19,000) (510,327) (38,844) (559,564)
Investment income .............. 9,457
Net loss........................ (550,107)
THREE MONTHS ENDED DECEMBER 31, 2000:
--------------------------------------
Revenues ....................... $ 637,352 $ 170,651 $ -- $ 243,620 $ 88,593 $ 1,140,216
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 2,863,150 (111,597) (785,499) (241,100) 2,102,678
Investment income .............. 7,263
Net income ..................... 2,109,941
Six Months Three Months
------------------------ -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues per segment .......$1,982,824 $2,299,850 $1,011,713 $1,140,216
Intercompany rent eliminated -- (32,985) -- (16,737)
---------- ---------- ---------- ----------
Consolidated revenues ......$1,982,824 $2,266,865 $1,011,713 $1,123,479
========== ========== ========== ==========
8
9. Subsequent events:
(a)The Company has signed agreements to transfer its sublessor interests in a
parcel of land that is subleased to individual owners of a condominium
project. The agreements are subject to the approval of the Secretary of
the Interior of the United States. Upon approval of the agreements, the
Company is to receive a note receivable of $37,500 as consideration for
the sublessor interest that the Company will then assign to the master
lessors for a reduction in amounts owed by the Company to the master
lessors. On April 1, 2002 the Company will also pay the master lessors
$66,424 plus interest from November 1, 2001. Once this amount is paid, the
Company will be released from any further liability under the master
lease. As a result of these agreements, the Company has recorded a $41,915
impairment loss for a portion of the unamortized balance ($75,615) of the
deferred lease costs related to this sublessor interest and has
discontinued amortizing the deferred lease costs during the three month
period ended December 31, 2001 as the asset is considered for sale.
The following is a summary of the results from operations of the Palm
Springs sublease included in the financial statements in the three and six
month periods:
Three Months Six Months
------------------- ------------------
2001 2000 2001 2000
-------- ------- -------- -------
Rents $41,000 $41,000 $ 83,000 $82,000
Costs 39,000 40,000 80,000 81,000
Impairment loss 42,000 -- 42,000 --
Depreciation -- -- -- 1,000
-------- ------- -------- -------
Income from operations (40,000) 1,000 (39,000) --
Interest expense 2,000 -- 2,000 --
------- ------- ------- -------
Income from continuing
operations $(42,000) $ 1,000 $(41,000) --
======== ======= ======== =======
(b)On January 11, 2002, the Company borrowed $300,000 from Harold S. Elkan,
the Company's President and, indirectly, the Company's majority
shareholder, pursuant to a short-term loan agreement that is due on demand
but no later than April 5, 2002. The loan bears interest at ten percent
(10%) per annum and is payable monthly. Although the terms of this note
are likely to be comparable to the loan terms from an independent third
party, it is unlikely that the Company could obtain a similar loan from an
independent third party.
(c)On January 18, 2002, UCV signed a commitment letter with a lender to
refinance the existing loan ($33,000,000 balance as of December 31, 2001)
with a $36,000,000 or $37,000,000 loan, the amount of which is to be
determined by UCV at closing. The new loan is to be for a term of 12
months. Monthly payments will be based on an interest rate equal to LIBOR
(not less than 2.5%) plus 3.40 points plus principal related to a 30 year
amortization schedule. The commitment requires UCV to pay a fee (currently
estimated to be $30,000) to cap LIBOR at 5% during the term of the loan.
In addition to a 1% origination fee due to the lender at loan closing, an
additional fee is due at repayment based on 1% of the loan balance if the
loan is paid in months 1-6 and .75% of the loan balance if paid in months
7-12. UCV estimates the cash proceeds from the refinance will be either
$1,950,000 or $2,950,000 depending on whether the loan is $36,000,000 or
$37,000,000, respectively. UCV plans to distribute the proceeds to the
partners. The Company has agreed to use $750,000 of its share of the
proceeds to pay a portion of the loan made to the Company by its partner
in UCV.
(d)On January 1, 2002, the Company agreed to extend the due date of the
unsecured loans to Harold S. Elkan from January 1, 2002 to January 1,
2003.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
This discussion and analysis should be read in conjunction with the consolidated
condensed financial statements (unaudited) and the related notes thereto in this
Form 10-Q, and with the Company's most recent annual report on Form 10-K for the
fiscal year ended June 30, 2001.
Liquidity and Capital Resources
-------------------------------
The independent auditors' report dated September 7, 2001 included in our June
30, 2001 Annual Report on Form 10-K contained the following explanatory
paragraph:
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 14 to the consolidated financial
statements, the Company has suffered recurring losses, has a
working capital deficiency and shareholders' deficit, and is
forecasting negative cash flows from operating activities for the
next twelve months. These items raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 14.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Management estimates negative cash flow from operating activities after
deducting capital expenditures and principal payments on notes payable of
$500,000 to $600,000 in total for the remaining quarters of the year ending June
30, 2002. This estimate does not included any distributions that the Company may
receive from the proceeds of the UCV refinance discussed below or use of the
proceeds for the partial repayment of the short-term loans from its partner in
UCV.
The short-term loan from the Company's partner in UCV is due on demand. After
any partial repayment as a result of the UCV refinancing, the Company will still
owe its partner in excess of $700,000, including accrued interest. The Company
is exploring selling its partner a portion of the Company's interest in UCV in
satisfaction of the remaining loan obligations. At this point management is
unable to assess the likelihood a transaction will be consummated.
Management expects continuing cash flow deficits until Penley Sports develops
sufficient sales volume to become profitable. Although, there can be no
assurances that Penley Sports will ever achieve profitable operations,
management estimates that a combination of continued increases in the sales of
Penley Sports and reduction of its operating costs will result in Penley Sports
and the Company achieving a breakeven level of operations at the end of the next
two quarters.
Management is currently evaluating other sources of working capital including
the sale of assets or obtaining additional investors in Penley Sports. Other
than the distribution proceeds estimated from the refinance of UCV's debt
discussed below, management has not assessed the likelihood of any other sources
of long-term or short-term liquidity. If the Company is not successful in
obtaining other sources of working capital this could have a material adverse
effect on the Company's ability to continue as a going concern. However,
management believes it will be able to meet its financial obligations for the
next twelve months.
The Company has a working capital deficit of $1,965,662 at December 31, 2001,
which is a $879,536 increase from the working capital deficit of $1,086,126 at
June 30, 2001. The increase in working capital deficit is primarily attributable
to the cash used by operating activities for the six months ended December 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 $ (9,000) $ (214,000) $ 205,000
Rental - 119,000 (119,000)
Golf (891,000) (1,457,000) 566,000
Development (4,000) (96,000) 92,000
General corporate expense
and other (117,000) (315,000) 198,000
----------- ---------- ---------
Cash used by continuing
operations (1,021,000) (1,963,000) 942,000
Capital expenditures, net of
financing - (211,000) 211,000
Principal payments on
long-term debt (19,000) (131,000) 112,000
----------- ---------- ---------
Cash used (1,040,000) (2,305,000) 1,265,000
=========== ========== =========
Distributions received from
investees 151,000 114,000 37,000
=========== ========== =========
10
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.
On January 18, 2002, UCV signed a commitment letter with a lender to refinance
the existing loan ($33,000,000 balance as of December 31, 2001) with a
$36,000,000 or $37,000,000 loan, the amount of which is to be determined by UCV
at closing. The new loan is to be for a term of 12 months. Monthly payments will
be based on an interest rate equal to LIBOR (not less than 2.5%) plus 3.40
points plus principal related to a 30 year amortization schedule. The commitment
requires UCV to pay a fee (currently estimated to be $30,000) to cap LIBOR at 5%
during the term of the loan. In addition to a 1% origination fee due to the
lender at loan closing, an additional fee is due at repayment based on 1% of the
loan balance if the loan is paid in months 1-6 and .75% of the loan balance if
paid in months 7-12. UCV estimates the cash proceeds from the refinance will be
either $1,950,000 or $2,950,000 depending on whether the loan is $36,000,000 or
$37,000,000, respectively. UCV plans to distribute the proceeds to the partners,
of which the Company is entitled to one-half. The Company has agreed to use up
to $750,000 of its share of the proceeds to pay a portion of the loan made to
the Company by its partner in UCV.
Critical Accounting Policies
----------------------------
In response to the SEC's release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies", the Company has identified its
most critical accounting policy as that related to the carrying value of its
long-lived assets. Any event or circumstance that indicates to the Company an
impairment of the fair value of any asset is recorded in the period in which
such event or circumstance becomes known to the Company. During the six months
ended December 31, 2001 no such event or circumstance occurred that would, in
the opinion of management, signify the need for a material reduction in the
carrying value of any of the Company's assets, except as it relates to the
impairment of the deferred lease costs.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") SFAS No. 143, Accounting
for Asset Retirement Obligations. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 and requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company has not yet
assessed the impact of SFAS No. 143.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of
a segment of a business (as previously defined in that Opinion). SFAS 144
retains the fundamental provisions in SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS 121. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121. The provisions of the Statement for assets held for sale or other
disposal generally are required to be applied prospectively after the adoption
date to newly initiated disposal activities. Therefore, management cannot
determine the potential effects that adoption of SFAS 144 will have on the
Company's financial statements.
11
"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
six and three-month periods ended December 31, 2001 compared to the same period
in 2000 and a discussion of the significant changes:
SIX MONTHS ENDED DECEMBER 31, 2001 VERSUS 2000
----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $(416,495) $ (238,334) $ -- $ 256,870 $ 80,933 $ (317,026)
Costs .......................... (376,761) (28,234) (84,992) (158,813) -- (648,800)
SG&A-direct .................... (114,802) -- -- (121,186) (140,211) (376,199)
SG&A-allocated ................. (53,967) (15,000) (7,000) (27,000) 102,967 --
Depreciation and amortization .. (25,605) (16,257) -- 14,917 4,986 (21,959)
Impairment loss ................ -- 41,915 -- -- -- 41,915
Interest expense ............... (91,117) (79,331) (130,279) (3,377) (68,764) (372,868)
Equity in investees ............ -- (90,726) (43,000) -- -- (133,726)
Gain on sale ................... (482,487) (2,764,483) -- -- -- (3,246,970)
Segment profit (loss) .......... (236,730) (2,996,636) 179,271 552,329 181,955 (2,319,811)
Investment income .............. 10,772
Income from operations .......... (2,309,039)
THREE MONTHS ENDED DECEMBER 31, 2001 VERSUS 2000
------------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $(191,405) $ (112,112) $ -- $ 99,656 $ 75,358 $ (128,503)
Costs .......................... (190,303) (17,661) (43,712) (105,285) -- (356,961)
SG&A-direct .................... (57,762) -- -- (48,601) (158,113) (264,476)
SG&A-allocated ................. (31,337) (9,000) (7,000) (26,000) 73,337 --
Depreciation and amortization .. (2,253) (474) -- 5,728 2,493 5,494
Impairment loss ................ -- 41,915 -- -- -- 41,915
Interest expense ............... (53,700) (37,908) (46,885) (1,358) (44,615) (184,466)
Equity in investees ............ -- (40,263) (5,000) -- -- (45,263)
Gain on sale ................... (482,487) (2,764,483) -- -- -- (3,246,970)
Segment profit (loss) .......... (338,537) (2,893,730) 92,597 275,172 202,256 (2,662,242)
Investment income .............. 2,194
Income from operations ......... (2,660,048)
Note: The change in rental revenues and SG&A expenses do not include the
effect of the net change in elimination of intercompany rent of $32,985
and $16,737 in the six and three month periods, respectively.
12
BOWLING OPERATIONS:
-------------------
The segment includes the operations of two bowling centers, Valley Bowl and
Grove Bowl. On December 21, 2000, the Company closed the operations of Valley
Bowl in conjunction with the sale of the real estate on December 29, 2000. The
following is a summary by bowling center of the changes in the results of
operations for the six and three-month periods ended December 31, 2001 compared
to the same periods in 2000:
Six-Month Period Three-Month Period
----------------------------- -----------------------------
Grove Valley Combined Grove Valley Combined
------- -------- -------- ------- -------- --------
Revenues 14,378 (430,873) (416,495) 19,178 (210,583) (191,405)
Costs (59,571) (317,190) (376,761) (44,038) (146,265) (190,303)
SG&A-direct (39,232) (75,570) (114,802) (27,608) (30,154) (57,762)
SG&A-allocated (23,667) (30,300) (53,967) (17,737) (13,600) (31,337)
Depreciation and
amortization -- (25,605) (25,605) -- (2,253) (2,253)
Interest expense -- (91,117) (91,117) -- (53,700) (53,700)
Gain on sale -- (482,487) (482,487) -- (482,487) (482,487)
Segment profit (loss) 136,848 (373,578) (236,730) 108,561 (447,098) (338,537)
The following is a comparison of the operations of the Grove Bowl to the prior
year. Bowl revenues increased by 2% and 4% in the six and three month periods,
respectively, primarily due to a 12-15% increase in the average price of games
bowled. These increases were offset by an overall decrease in the number of
games bowled of 14% and 12% in the six and three month periods, respectively.
Open play games bowled decreased by 15% and 13% in the six and three month
periods, respectively, and league games bowled decreased by 3% and 8%
respectively. Bowl costs decreased primarily due to decreases in utility rates.
SG&A costs decreased primarily due to decreases in payroll and promotion costs.
RENTAL OPERATIONS:
------------------
This segment includes the operations of the office building sold December 28,
2000, the equity in income of the operation of a 542 unit apartment project
(UCV), a subleasehold interest in land underlying a condominium project, the
sublease of a portion of the Penley factory and other miscellaneous rents
received on undeveloped land.
The following is a summary of the changes in operations:
Six Month Period Three Month Period
----------------------------- ------------------------------
Office Other Combined Office Other Combined
----------- ------- ---------- ---------- ------- ----------
Revenues (243,521) 5,187 (238,334) (116,813) 4,701 (112,112)
Costs (51,451) 23,217 (28,234) (23,478) 5,817 (17,661)
SG&A-allocated (15,000) -- (15,000) (9,000) -- (9,000)
Depreciation and
amortization (15,783) (474) (16,257) -- (474) (474)
Impairment loss -- 41,915 41,915 -- 41,915 41,915
Interest expense (80,993) 1,662 (79,331) (39,570) 1,662 (37,908)
Equity in income
of UCV -- (90,726) (90,726) -- (40,263) (40,263)
Gain on sale (2,764,483) -- (2,764,483) (2,764,483) -- (2,764,483)
Segment profit
(loss) (2,844,777) (151,859) (2,996,636) (2,809,248) (84,482) (2,893,730)
A temporary easement granted by the Company for the use of a portion of its
undeveloped land in Temecula, California expired in September 2000. The Company
had been amortizing approximately $17,000 of deferred rent to income each
quarter. Other rental revenues decreased by $17,000 in the six month period of
2001 related to this easement. Other than this change, other rental revenues
increased by $23,000 and $6,000 in the six and three month periods,
respectively, and other rental costs increased in $24,000 and $6,000 in the six
and three month periods, respectively, related to the sublease for the Penley
factory. Approximately 10,000 square feet of the Penley factory space (38,000
square feet) was subleased commencing in November 2000 under a lease that
expires in October 2002.
13
The equity in income of UCV decreased in the six and three month periods
primarily due to increases in interest expense and other costs of UCV that were
only partially offset by increases in revenues. The following is a summary of
the changes in the operations of UCV, LP in the six and three months periods of
2001 compared to the prior period:
Six Months Three Months
---------- ------------
Revenues $ 162,000 $ 68,000
Costs (8,000) (19,000)
Depreciation (4,000) ( 1,000)
Interest and amortization
of loan costs 355,000 169,000
Net income (181,000) (81,000)
Rental income of UCV increased in both periods primarily due to a 6% increase in
the average rental rate plus a decrease in the vacancy rate from 2.4% to 1.1% in
the six month period. UCV's interest expense increased primarily due to an
increase in long-term debt in March 2001. UCV increased its long-term debt in
March 2001 by $3,960,510.
REAL ESTATE DEVELOPMENT OPERATIONS:
----------------------------------
Development costs primarily consisted of legal costs incurred to contest the
City of Temecula's attempts to down-zone the undeveloped land owned by Old Vail
Partners and property taxes on the undeveloped land. Interest expense related to
development activities primarily related to interest accrued on assessment
district obligations of Old Vail Partners. The undeveloped land was sold in June
2001.
The increase in the equity in loss of Vail Ranch Limited Partners (VRLP),
relates to the increase in the loss from the operation of the partially
completed shopping center for which the first store commenced operations in July
2000.
GOLF OPERATIONS:
----------------
Prior to January 2000, golf club shaft sales were principally to custom golf
shops. In January 2000, Penley commenced sales to two of the largest golf
equipment distributors. In addition to increases in sales related to these two
customers, direct sales to the after market also increased, likely due to the
credibility and increased exposure from the Penley products being included in
the catalogs of these two distributors.
Operating expenses of the golf segment consisted of the following in 2001
and 2000:
Three Months Six Months
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ----------
Costs of goods sold and
manufacturing overhead $ 352,000 $ 451,000 $ 792,000 $ 935,000
Research & development 55,000 61,000 114,000 130,000
--------- --------- --------- ----------
Total golf costs 407,000 512,000 906,000 1,065,000
========= ========= ========= ==========
Marketing & promotion 315,000 342,000 581,000 661,000
Administrative-direct 32,000 53,000 72,000 114,000
--------- --------- --------- ----------
Total SG&A-direct 347,000 395,000 653,000 775,000
========= ========= ========= ==========
Allocated corporate costs 57,000 83,000 118,000 145,000
========= ========= ========= ==========
Total golf costs decreased in the three and six month periods of 2001 primarily
due to cost cutting measures to reduce manufacturing overhead.
Marketing and promotion expenses decreased by $80,000 in the six month period
primarily due to decreases in, trade show expenses ($26,000), trade advertising
($19,000). The decrease in trade show expenses related to the Company not
presenting a trade booth at the Las Vegas golf industry trade show in September
2001, which was cancelled. Marketing and promotion expenses decreased by $27,000
in the three month period primarily due to a reduction in trade advertising
($19,000).
Administrative expenses decreased in the three and six month periods due to
general reductions in all administrative costs.
OTHER:
------
Other income increased in the three and six month periods in 2001 related to
funds received from its insurance company as reimbursement for the Company's
legal costs to settle a lawsuit.
14
Selling, general and administrative expenses decreased primarily due to a
reduction of corporate office wages. In December 2000, the Company awarded a
$100,000 bonus to Harold Elkan. There was no bonus in 2001.
Interest expense has decreased primarily due to a reduction in short-term debt
outstanding during the three and six month periods of 2001 compared to 2000, and
also a reduction in the average interest rate of the outstanding debt.
OTHER
------
The Company is not a party to off-balance sheet arrangements, does not engage in
trading activities involving non-exchange traded contracts, and, except as
disclosed herein, is not a party to any transactions with persons or entities
that derive benefits from their non-independent relationships with the Company.
Other than as described herein, the Company has no financial guarantees, debt or
lease agreements or other arrangements that could trigger a requirement for an
early payment or that could change the value of the Company's assets.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company utilizes both fixed rate and variable rate debt. The
following table presents principal maturities and related weighted average
interest rates of the Company's long-term fixed rate and variable rate debt for
the fiscal years ended June 30.
2002 2003 2004 Total Fair Value
---------- ------ ------ ---------- -----------
(1)
Fixed rate debt $16,000 $7,000 $4,000 $27,000 $27,000
Weighted average
interest rate 12.1% 13.4% 13.6% 12.9%
Variable rate debt $1,400,000 -- -- $1,400,000 $1,400,000
Weighted average
interest rate 5.8% --% --% 5.8%
The amounts for 2002 relate to the six-months ending June 30, 2002.
(1)The fair value of fixed-rate debt and variable-rate debt were estimated
based on the current rates offered for fixed-rate debt and variable-rate
debt with similar risks and maturities.
The variable rate debt includes a $1,400,000 short term note payable that is due
on demand, which for purposes of this calculation has been treated as though
paid during the year ending June 30, 2002.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
$33,000,000 as of December 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 scheduled principal payments for each of UCV's
fiscal years ending March 31 is: 2002- none; 2003- $33,000,000, and in total-
$33,000,000. The estimated fair value of this debt is $33,700,000 based on the
current rates offered for this type of loan with similar risks and maturities.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
15
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
-------------------------
As of December 31, 2001, there were no changes in legal proceedings from
those set forth in Item 3 of the Form 10-K filed for the year ended June
30, 2001.
ITEM 2. Changes in Securities
-----------------------------
NONE
ITEM 3. Defaults upon Senior Securities
---------------------------------------
N/A
ITEM 4. Submission of Matters to a Vote of Security Holder
----------------------------------------------------------
On December 21, 2001 the Company held its annual shareholder meeting in
which the following item was voted upon:
Tabulation of Votes
---------------------------------
For Against Abstain
---------- ------- --------
Election of Directors:
Harold S. Elkan 23,632,586 0 249,698
Steven R. Whitman 23,632,486 0 249,798
Patrick D. Reiley 23,632,635 0 249,649
James E. Crowley 23,632,935 0 249,349
Robert A. MacNamara 23,632,835 0 249,449
ITEM 5. Other Information
-------------------------
NONE
ITEM 6. Exhibits & Reports on Form 8-K
--------------------------------------
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
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 18, 2002
-----------------
By:/s/ Steven R. Whitman
--------------------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 18, 2002
-----------------
17