UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
-------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
7415 Carroll Road, Suite C, San Diego, California 92121
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 408-0364
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The number of shares outstanding of the issuer's only class of common stock
($.01 par value) as of April 30, 2003 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Unaudited Balance Sheets as of March 31, 2003
and June 30, 2002 ........................................ 1-2
Unaudited Statements of Operations for the Three Months Ended
March 31, 2003 and 2002 .................................. 3
Unaudited Statements of Operations for the Nine Months Ended
March 31, 2003 and 2002 .................................. 4
Unaudited Statements of Cash Flows for the Nine Months Ended
March 31, 2003 and 2002 .................................. 5
Notes to Financial Statements ................................... 6-8
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 9-12
Item 3.- Quantitative and Qualitative Disclosures about Market Risk ... 13
Item 4.- Controls and Procedures ..................................... 13
Part II - Other Information........................................... 14
Signatures............................................................ 15
Officer Certifications ............................................... 16-17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, June 30,
2003 2002
----------- -----------
Current assets:
Cash and cash equivalents ........................$ 185,349 $ 39,345
Receivables ...................................... 449,727 444,996
Inventories ...................................... 633,086 792,690
Prepaid expenses ................................. 61,830 38,706
----------- -----------
Total current assets .......................... 1,329,992 1,315,737
----------- -----------
Receivables due after one year:
Note receivable- affiliate, net .................. -- --
----------- -----------
Property and equipment, at cost:
Equipment and leasehold improvements ............. 2,349,716 2,345,406
Less accumulated depreciation and amortization .. (1,472,072) (1,314,680)
----------- -----------
Net property and equipment ................... 877,644 1,030,726
----------- -----------
Other assets:
Intangible assets, net ........................... 9,321 37,284
Investments ...................................... 67,000 423,657
Other ............................................ 95,999 95,999
----------- -----------
172,320 556,940
----------- -----------
$ 2,379,956 $ 2,903,403
=========== ===========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
(Unaudited)
March 31, June 30,
2003 2002
----------- -----------
Current liabilities:
Notes payable-short term .........................$ 340,587 $ 445,000
Current portion of long-term debt ................ 7,553 8,000
Accounts payable ................................. 594,850 963,402
Accrued payroll and related expenses ............. 310,130 215,093
Accrued interest ................................. 6,837 276,735
Other liabilities ................................ 146,537 92,803
----------- -----------
Total current liabilities ..................... 1,406,494 2,001,033
----------- -----------
Long-term debt, excluding current portion ........... -- 5,456
----------- -----------
Distributions received in excess of basis
in investment ..................................... 19,469,090 18,008,401
----------- -----------
Other liabilities ................................... 228,000 192,000
----------- -----------
Minority interest in consolidated subsidiary ........ 431,839 802,677
----------- -----------
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 ..............................(18,866,524) (17,817,221)
----------- -----------
(16,863,975) (15,814,672)
Less note receivable from shareholder ............ (2,291,492) (2,291,492)
----------- -----------
Total shareholders' deficit ....................(19,155,467) (18,106,164)
----------- -----------
Commitments and contingencies (Note 4)
$ 2,379,956 $ 2,903,403
=========== ===========
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Revenues:
Bowling $ 444,556 $ 516,454
Rental 19,335 54,860
Golf 841,552 741,226
Other 8,103 139,059
Other-related party 49,360 46,659
----------- -----------
1,362,906 1,498,258
----------- -----------
Costs and expenses:
Bowling 318,451 362,329
Rental 18,800 54,841
Golf 654,047 722,769
Selling, general, and administrative 662,307 680,971
Depreciation and amortization 65,819 71,189
Impairment loss 88,881 3,000
----------- -----------
1,808,305 1,895,099
----------- -----------
Loss from operations (445,399) (396,841)
----------- -----------
Other income (charges):
Investment income-related party 7,946 (257)
Interest expense (10,659) (26,325)
Equity in income of investees 352,007 14,729
----------- -----------
349,294 (11,853)
----------- -----------
Net loss $ (96,105) $ (408,694)
=========== ===========
Basic and diluted net loss per
common share (based on 27,250,000 weighted
average common shares outstanding) $(0.00) $(0.01)
======= =======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
----------- ----------
Revenues:
Bowling $1,197,104 $1,346,222
Rental 59,622 172,258
Golf 1,973,303 1,528,725
Other 164,155 294,834
Other-related party 146,229 139,043
----------- ----------
3,540,413 3,481,082
----------- ----------
Costs and expenses:
Bowling 994,015 1,028,624
Rental 56,200 170,758
Golf 1,799,188 1,628,971
Selling, general, and administrative 1,851,900 1,990,108
Depreciation and amortization 197,457 214,041
Impairment loss 88,881 44,915
----------- ----------
4,987,641 5,077,417
----------- ----------
Loss from operations (1,447,228) (1,596,335)
----------- ----------
Other income (charges):
Investment income:
Related party 24,230 15,971
Other -- 1,807
Interest expense (56,181) (74,410)
Equity in income (loss) of investees 429,876 (13,552)
----------- ----------
397,925 (70,184)
----------- ----------
Net loss $(1,049,303) $(1,666,519)
=========== ==========
Basic and diluted net loss per
common share (based on 27,250,000 weighted
average common shares outstanding) $(0.04) $(0.06)
======= =======
See accompanying notes to consolidated condensed financial statements.
4
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $(1,049,303) $(1,666,519)
Adjustments to reconcile net loss to
the net cash used in operating activities:
Depreciation and amortization 197,457 214,041
Equity in (income) loss of investees (429,876) 13,552
Deferred income 36,000 36,000
Impairment loss 88,881 44,915
Changes in assets and liabilities:
Increase in receivables (4,731) (91,476)
(Increase) decrease in inventories 159,604 (96,287)
(Increase) decrease in prepaid expenses (23,124) 25,751
Increase (decrease) in accounts payable (368,552) 11,006
Increase in accrued expenses 159,504 87,865
Other 27,963 58,263
----------- -----------
Net cash used in operating activities (1,206,177) (1,362,889)
----------- -----------
Cash flows from investing activities:
Capital expenditures (4,310) --
Proceeds from assignments of subleasehold
interest -- 30,700
Distribution to holder of minority interest (370,838) (25,000)
Distributions from investees 2,118,276 1,805,820
----------- -----------
Net cash provided by investing activities 1,743,128 1,811,520
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (5,903) (25,851)
Proceeds from short-term notes payable 75,000 450,000
Payments on short-term notes payable (460,044) (1,255,000)
----------- -----------
Net cash used in financing activities (390,947) (830,851)
----------- -----------
Net increase (decrease) in cash and cash equivalents 146,004 (382,220)
Cash and cash equivalents, beginning of period 39,345 515,204
----------- -----------
Cash and cash equivalents, end of period $ 185,349 $ 132,984
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .......... $ 41,153 $ 10,956
=========== ===========
Supplemental Disclosure of Non-Cash Financing Activities:
Reclassification of principal payments on short-term
debt to accrued interest ........................ $ 280,631 $ --
=========== ===========
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(Unaudited)
1. The information furnished reflects all adjustments of a recurring nature
which management believes are necessary to a fair statement of the
Company's financial position, results of operations and cash flows for the
interim periods. Certain information and note disclosures normally included
in consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report filed on form
10-K on November 14, 2002 for the year ended June 30, 2002.
Revenue recognition:
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the amount is fixed or determinable and
collectibility is probable. All of these conditions are typically met at
the time the Company ships products to its customers.
2. Due to the seasonal fluctuations of the bowling and golf club shaft
manufacturing operations, the financial results for the interim periods ended
March 31, 2003 and 2002, are not necessarily indicative of operations for
the entire year.
3. Investments:
(a) Investments consist of the following:
March 31, June 30,
2003 2002
----------- -----------
Vail Ranch Limited Partnership
(equity method) ..............................$ 67,000 $ 423,657
=========== ===========
Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ..............$19,469,090 $18,008,401
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method for the nine-month periods
ended March 31:
2003 2002
-------- --------
UCV, L.P. .................... $104,876 $ 79,448
Vail Ranch Limited Partnership 325,000 (93,000)
-------- --------
$429,876 $(13,552)
======== ========
The following is a summary of distributions received from investees for the
nine-month periods ended March 31,:
2003 2002
---------- ----------
UCV, L.P. .................... $1,525,500 $1,805,820
Vail Ranch Limited Partnership 592,776 --
---------- ----------
$2,118,276 $1,805,820
========== ==========
(b) Investment in UCV, L.P.
The operating results of this investment are included in the accompanying
consolidated condensed statements of operations based upon the
partnership's fiscal year (March 31). Summarized information from UCV,
L.P.'s (UCV) unaudited statements of income for the nine and three-month
periods ended December 31, 2002 and 2001 are as follows:
Nine Months Three Months
---------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $4,248,000 $4,048,000 $1,430,000 $1,365,000
Operating and general
and administrative
costs 1,509,000 1,255,000 531,000 414,000
Depreciation 9,000 13,000 3,000 6,000
Interest expense 2,520,000 2,621,000 842,000 876,000
Net income 210,000 159,000 54,000 69,000
6
As disclosed in the annual financial statements for the year ended June 30,
2002, 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.
On April 1, 2003, UCV sold the University City Village Apartments for
$58,400,000 in cash. After deducting selling expenses ($2,314,000), paying
mortgage loans ($38,000,000), and the refund of lender impounds
($1,340,000), the net sale proceeds to UCV was approximately $19,156,000
and UCV's gain from sale was approximately $52,737,000. UCV is planning on
distributing a cumulative amount of approximately $4,000,000 to $5,000,000
of such proceeds to the Company in partial liquidation of its partnership
interest in UCV. Of this total, UCV distributed $1,000,000 to the Company
from the proceeds of funds released from escrow on March 17, 2003 and
distributed another $1,500,000 to the Company in April 2003. The remaining
funds are expected to be reinvested by UCV in "like-kind" property to defer
a portion of the income tax consequences of the sale. As part of the sales
transaction, the Company earned a $350,000 sales commission that was
included in UCV' selling expenses.
The Company has been deferring one half of fees it was receiving from UCV
pursuant to a development services agreement. The balance of deferred
income at March 31, 2003 ($228,000) was recognized as revenue on April 1,
2003 upon the sale of the property.
(c) Investment in Vail Ranch Limited Partners
On February 21, 2003 Vail Ranch Limited Partners (VRLP) sold its interest
in Temecula Creek LLC (TC) to its other partner in TC (ERT). The sale price
consisted of $1,318,180 cash and one-half of the sale proceeds from the
remaining parcel of undeveloped land owned by TC when it is sold. $100,000
of the sales proceeds are being held in an escrow until August 21, 2003 to
be applied to any post closing claims ERT may have related to warranties
and normal prorations in the sale contract for the TC interest. The cash
proceeds to VRLP of $1,218,180 were partially offset by $225,000 of fees
paid to one of the VRLP partners. The Company received a distribution of
$592,776 of which $370,838 was paid to the holder of the minority interest
in Old Vail Partners. VRLP recorded a $843,326 gain from the sale of the
partnership interest. This gain was partially offset by VRLP's agreement to
pay its general partner $225,000 of fees related to the sale of the
partnership interest.
VRLP distributed $592,776 to the Company as its share of the proceeds from
the sale of the interest in TC less the fees paid to the general partner.
The Company recorded a $88,881 impairment loss related to reducing the
carrying amount of this investment to its estimated fair value, less
selling costs, as of March 31, 2003.
4. 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.
5. Impact of Adopting SFAS No. 142, Goodwill and Other Intangible Assets
The Company does not have goodwill or intangible assets that have
indefinite useful lives recorded on the accompanying consolidated condensed
balance sheets. The Company only maintains intangible assets that have
finite useful lives which are amortized over their useful lives.
6. Liquidity
As a result of the distributions the Company has received from UCV related
to the sales proceeds from the sale of the apartment project and the
additional distributions it expects to receive from the sale proceeds by
October 1, 2003, the Company believes it will have adequate liquid
resources for at least twelve months.
7
7. 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.
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED MARCH 31, 2003:
--------------------------------------
Revenues ....................... $ 1,197,104 $ 59,622 $ -- $ 1,973,303 $ 310,384 $ 3,540,413
Depreciation and amortization... 18,297 40,065 -- 125,271 13,824 197,457
Interest expense ............... -- -- -- -- 56,181 56,181
Equity in income
of investees ................. -- 104,876 325,000 -- -- 429,876
Impairment loss ................ -- -- 88,881 -- -- 88,881
Segment profit (loss) .......... (86,296) 68,233 236,119 (1,085,857) (205,732) (1,073,533)
Investment income .............. 24,230
Net loss.. ..................... (1,049,303)
NINE MONTHS ENDED MARCH 31, 2002:
--------------------------------
Revenues ....................... $ 1,346,222 $ 172,258 $ -- $ 1,528,725 $ 433,877 $ 3,481,082
Depreciation and amortization... 7,470 40,539 -- 128,322 37,710 214,041
Interest expense ............... -- 1,662 -- -- 72,748 74,410
Equity in income (loss) of
investees .................... -- 79,448 (93,000) -- -- (13,552)
Impairment loss................. -- 44,915 -- -- -- 44,915
Segment profit (loss) .......... 47,459 (6,168) (97,000) (1,461,302) (167,286) (1,684,297)
Investment income .............. 17,778
Net loss ....................... (1,666,519)
THREE MONTHS ENDED MARCH 31, 2003:
--------------------------------
Revenues ....................... $ 444,556 $ 19,335 $ -- $ 841,552 $ 57,463 $ 1,362,906
Depreciation and amortization... 6,099 13,355 -- 41,757 4,608 65,819
Interest expense ............... -- -- -- -- 10,659 10,659
Equity in income of
investees ..................... -- 27,007 325,000 -- -- 352,007
Impairment loss................. -- -- (88,881) -- -- (88,881)
Segment profit (loss) .......... 21,973 14,187 236,119 (287,944) (88,386) (104,051)
Investment income .............. 7,946
Net loss ....................... (96,105)
THREE MONTHS ENDED MARCH 31, 2002:
--------------------------------
Revenues ....................... $ 516,454 $ 54,860 $ -- $ 741,226 $ 185,718 $ 1,498,258
Depreciation and amortization... 2,490 13,355 -- 42,774 12,570 71,189
Interest expense ............... -- -- -- -- 26,325 26,325
Equity in income (loss) of
investees ..................... -- 34,729 (20,000) -- -- 14,729
Impairment loss................. -- 3,000 -- -- -- 3,000
Segment profit (loss) .......... 61,845 18,393 (20,000) (485,721) 17,046 (408,437)
Investment income .............. 257
Net loss ....................... (408,694)
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The independent auditors' report dated September 23, 2002 included in our June
30, 2002 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.
On April 1, 2003 UCV sold the University City Village Apartments for $58,400,000
in cash. After deducting selling expenses ($2,314,000), paying mortgage loans
($38,000,000), and the refund of lender impounds ($1,340,000), the net sale
proceeds to UCV was approximately $19,156,000 and UCV's gain from sale was
approximately $52,737,000. UCV is planning on distributing a cumulative amount
of approximately $4,000,000 to $5,000,000 of such proceeds to the Company in
partial liquidation of its partnership interest. Of this total, UCV distributed
$1,000,000 to the Company from the proceeds of funds released from escrow on
March 17, 2003 and distributed another $1,500,000 to the Company in April 2003.
The balance of any distributions to the Company from the sales proceeds is
expected to be made by October 1, 2003. The remaining funds of UCV are expected
to be reinvested by UCV in "like-kind" property to defer a portion of the income
tax consequences of the sale.
In February 2003 Vail Ranch Limited Partners (VRLP) sold its interest in
Temecula Creek LLC (TC) to its other partner in TC (ERT). The sale price
consisted of $1,318,180 cash and one-half of the sale proceeds from the
remaining parcel of undeveloped land owned by TC when it is sold. $100,000 of
the sales proceeds are being held in an escrow until August 21, 2003 to be
applied to any post closing claims ERT may have related to warranties and normal
prorations in the sale contract for the TC interest. The cash proceeds to VRLP
of $1,218,180 were partially offset by $225,000 of fees paid to one of the VRLP
partners. The Company received a distribution of $592,776 of which $370,838 was
paid to the holder of the minority interest in Old Vail Partners.
The lease for the Company's sole remaining bowling center expires June 30, 2003.
The Company plans to close the bowling center operations by May 31, 2003 and use
the remaining lease term to remove equipment and sell any items of value. The
Company estimates that the liquidation value of the remaining assets of the
bowling center will offset any of the costs related to the closing.
The short-term loan from the Company's partner was paid in April 2003.
Management estimates negative cash flow of $175,000 to $250,000 in total for the
last quarter of the year ending June 30, 2003 from operating activities after
deducting capital expenditures and principal payments on notes payable but
before distributions from UCV ($1,500,000 received in April 2003).
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 within the next twelve
months. The Company believes that the $1,500,000 distribution from UCV it
received in April 2003 and the additional distribution from UCV it is expecting
to receive by October 1, 2003 (between $1,500,000 and $2,500,000) will provide
sufficient working capital to fund operations until Penley Sports and the
Company achieve a breakeven level of operations.
The Company has a working capital deficit of $76,502 at March 31, 2003, which is
a $608,794 decrease from the working capital deficit of $685,296 at June 30,
2002. The decrease in working capital deficit is primarily attributable to
distributions the Company received from UCV ($1,525,500) and Vail Ranch Limited
Partners ($592,776). These distributions were partially offset by the cash used
by operating activities for the nine months ended March 31, 2003, payments to
the holder of the minority interest ($370,838) and on short term notes payable
($460,044).
9
The following is a schedule of the cash provided (used) before
changes in assets and liabilities, segregated by business segments:
2003 2002 Change
---------- ---------- ----------
Bowling ................... $ (68,000) $ 55,000 $ (123,000)
Rental .................... 3,000 -- 3,000
Golf ...................... (962,000) (1,334,000) 372,000
Development ............... -- (4,000) 4,000
General corporate expense
and other ............... (132,000) (76,000) (56,000)
---------- ---------- ----------
Cash used by continuing
operations .............. (1,159,000) (1,359,000) 200,000
Capital expenditures, net
of financing ............ (4,000) -- (4,000)
Principal payments on
long-term debt .......... (6,000) (26,000) 20,000
---------- ---------- ----------
Cash used ................. (1,169,000) (1,385,000) 216,000
========== ========== ==========
Distributions received from
investees ............... 2,118,000 1,806,000 312,000
========== ========== ==========
CRITICAL ACCOUNTING POLICIES
----------------------------
In response to the SEC's release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies", the Company has identified its
most critical accounting policy as that related to the carrying value of its
long-lived assets. Any event or circumstance that indicates to the Company an
impairment of the carrying value of any asset is recorded in the period in which
such event or circumstance becomes known to the Company. During the three and
nine month periods ended March 31, 2003 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, other than the
adjustment described in Note 3c of Notes to the Consolidated Condensed Financial
Statements.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June of 2002, the FASB issued SFAS No. 146; Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. This
statement will only have an effect on the Company's financial statements to the
extent future exit or disposal activities relevant to SFAS No. 146 occur.
In October 2002, the FASB issued SFAS No. 147; Acquisitions of Certain Financial
Institutions. This Statement is not relevant to the Company's operations and
will not have an impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148; Accounting for Stock-Based
Compensation- Transition and Disclosure. This statement amends SFAS No. 123;
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for fiscal years
ending after December 15, 2002. The Company does not have stock-based
compensation and this statement will not currently have an impact on the
Company's financial statements.
In December 2002, the FASB issued Financial Interpretation No. 45 (FIN 45);
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires guarantors to
determine and recognize the fair value of a guarantee at the issuance date. In
addition, FIN 45 contains detailed disclosure requirements. The initial
recognition and measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company does not guarantee
debt of others and does not expect FIN 45 to have an impact on the Company's
financial statements.
10
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46);
Consolidation of Variable Interest Entities (VIE). The FASB has transformed its
exposure draft on accounting for special purpose entities into this
interpretation on variable interest entities. FIN 46 provides new guidance on
consolidation of controlled entities, irrespective of voting interests. Most of
the requirements under FIN 46 are effective for new VIE's created after January
30, 2003. The Company is still in the process of determining the accounting and
financial statement impact of FIN 46.
"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 for the
nine and three-month periods ended March 31, 2003 compared to the same period
in 2002 and a discussion of the significant changes:
NINE MONTHS ENDED MARCH 31, 2003 VERSUS 2002
----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- ---------- --------- ---------
Revenues ....................... $(149,118) $ (112,636) $ -- $ 444,578 $(123,493) $ 59,331
Costs .......................... (34,609) (114,558) -- 170,217 -- 21,050
SG&A-direct .................... 3,493 -- -- (110,033) (31,668) (138,208)
SG&A-allocated ................. 4,926 -- (4,000) 12,000 (12,926) --
Depreciation and amortization .. 10,827 (474) -- (3,051) (23,886) (16,584)
Impairment loss ................ -- (44,915) 88,881 -- -- 43,966
Interest expense ............... -- (1,662) -- -- (16,567) (18,229)
Equity in investees ............ -- 25,428 418,000 -- -- 443,428
Segment profit (loss) .......... (133,755) 74,401 333,119 375,445 (38,446) 610,764
Investment income .............. 6,452
Income from operations .......... 617,216
THREE MONTHS ENDED MARCH 31, 2003 VERSUS 2002
------------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $ (71,898) $ (35,525) $ -- $ 100,326 $ (128,255) $ (135,352)
Costs .......................... (43,878) (36,041) -- (68,722) -- (148,641)
SG&A-direct .................... 4,177 -- -- (33,712) 10,871 (18,664)
SG&A-allocated ................. 4,066 -- -- 6,000 (10,066) --
Depreciation and amortization .. 3,609 -- -- (1,017) (7,962) (5,370)
Impairment loss ................ -- (3,000) 88,881 -- -- 85,881
Interest expense ............... -- -- -- -- (15,666) (15,666)
Equity in investees ............ -- (7,722) 345,000 -- -- 337,278
Gain on sale ................... -- -- -- -- -- --
Segment profit (loss) .......... (39,872) (4,206) 256,119 197,777 (105,432) 304,386
Investment income .............. 8,203
Income from operations ......... 312,589
11
BOWLING OPERATIONS:
-------------------
Bowl revenues decreased by 11% and 14% in the nine and three month periods,
respectively, primarily due to related declines in the number of games bowled.
Open play declined 15% and 21% and league play declined 10% and 6% in the nine
and three month periods, respectively. These declines are likely to continue
until the bowl closes its operations on May 31, 2003. Bowl costs decreased in
each period primarily due to a decrease in maintenance costs on the lanes that
no longer need to be performed with the bowling center closing its operations on
May 31, 2003. There were no material changes in selling, general and
administrative costs related to the bowling center.
RENTAL OPERATIONS:
------------------
This segment includes the equity in income of the operation of a 542 unit
apartment project (UCV), a subleasehold interest in land underlying a
condominium project (PS Sublease) (which was sold in March 2002), and the
sublease of a portion of the Penley factory. The following is a summary of the
changes in operations:
Nine Month Period Three Month Period
----------------------------- ------------------------------
PS Sublease Other Combined PS Sublease Other Combined
----------- ------- ---------- ---------- ------- ----------
Revenues (119,098) 6,462 (112,636) (36,500) 975 (35,525)
Costs (116,458) 1,900 (114,558) (36,541) 500 (36,041)
SG&A-allocated -- -- -- -- -- --
Depreciation and
amortization (474) -- (474) -- -- --
Impairment loss (44,915) -- (44,915) (3,000) -- (3,000)
Interest expense (1,662) -- (1,662) -- -- --
Equity in income
of UCV -- 25,428 25,428 -- (7,722) (7,722)
Segment profit
(loss) 44,411 29,990 74,401 3,041 (7,247) (4,206)
The primary reason for the decline in rental revenues and costs related to the
sale of the PS Sublease in March 2002.
The equity in income of UCV increased in the nine month period primarily due to
decreases in interest expense related to the lower interest rate obtained in the
refinancing in March 2002. The equity in income of UCV declined in the three
month period primarily due to an increase in the rental costs that exceeded the
increase in rental revenues. Rental revenues increased in each period primarily
due to a 7% increase in the average rental rate for each period, which was
partially offset by increases in the vacancy rate from 1.5% to 2.5% for the nine
month period and from 2.0% to 3.2% for the three month period. Costs increased
in each period primarily due to increases in insurance costs and maintenance and
repairs. The following is a summary of the changes in the operations of UCV, LP
in the nine and three months periods of 2002 compared to the prior period:
Nine Months Three Months
---------- ------------
Revenues $ 200,000 $ 65,000
Costs 254,000 117,000
Depreciation (4,000) ( 3,000)
Interest and amortization
of loan costs (101,000) (34,000)
Net income 51,000 (15,000)
REAL ESTATE DEVELOPMENT OPERATIONS:
----------------------------------
The following is a summary of changes to the operations of Vail Ranch Limited
Partnership:
Nine Months Three Months
---------- ------------
Equity in operations of TC $ 79,000 $ (43,000)
Gain on sale of interest in TC 843,000 843,000
Fees related to sale of interest (225,000) (225,000)
Net income 697,000 575,000
On February 21, 2003, VRLP sold its interest in Temecula Creek LLC. As a result
of the sale the Company recorded a $88,881 impairment loss related to reducing
the carrying amount of this investment to the estimated fair value less selling
costs as of March 31, 2003
12
GOLF OPERATIONS:
----------------
Golf revenues increased in 2003 due to increases in sales to small golf club
manufacturers and golf equipment distributors. The following is a breakdown of
the percentage of increases in sales by customer category:
Nine Three
Months Months
---- ----
Golf equipment distributors . 81% 48%
Golf club manufacturers ..... 32% ( 15%)
Golf shops .................. ( 8%) 3%
Other ....................... ( 30%) 109%
The decrease in sale to the manufacturers in the three month period relates to
two customers in that placed significant start up orders with the Company in
2002 ($150,000) that are no longer doing business with the Company. This
decrease was partially offset with orders from new customers that offset all but
$37,000 of this decrease.
Operating expenses of the golf segment consisted of the following in 2003
and 2002:
Nine Months Three Months
--------------------- --------------------
2003 2002 2003 2002
---------- --------- --------- ---------
Costs of goods sold and
manufacturing overhead $1,654,000 $1,460,000 $ 606,000 $ 668,000
Research & development 145,000 169,000 48,000 55,000
---------- ---------- --------- ---------
Total golf costs 1,799,000 1,629,000 654,000 723,000
========== ========== ========= =========
Marketing & promotion 741,000 946,000 299,000 366,000
Administrative-direct 203,000 107,000 68,000 34,000
---------- ---------- --------- ---------
Total SG&A-direct 944,000 1,053,000 367,000 400,000
========== ========== ========= =========
Allocated corporate costs 191,000 179,000 67,000 61,000
========== ========== ========= =========
Total golf costs increased in the nine month period in 2003 primarily due to the
cost of goods sold due to increased sales in increased production during the
first six months. However, although sales were higher in the three month period
in 2003, production levels were lower. This resulted in lower golf costs in the
three month period in 2003. Marketing and promotion expenses decreased primarily
due to the Company not renewing the contract with its marketing consultant in
May 2002. Marketing and promotion otherwise decreased due to a decrease in the
tour program expenses that resulted from staffing the program with one person
instead of two. Administrative expenses increased primarily due to increases in
bad debt expense of $64,000 and $19,000 in the nine and three month periods,
respectively.
13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Due to the sale of the property owned by UCV on April 1, 2003 and the payment of
all of the Company's short term debt in April 2003, the Company currently does
not have any material market risk related to fluctuations in interest rates on
fixed or variable rate debt.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
We maintain disclosure controls and procedures (as defined in Securities
Exchange Act 1934 Rules 13a-14(c) and 15d-4(c)) that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures,
Within 90 days prior to the date of this quarterly report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
Changes in Internal Controls:
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weaknesses,
and therefore no corrective actions were taken.
14
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
-------------------------
As of March 31, 2003, 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, 2002
except for a lawsuit filed on January 10, 2003 in the United States
District Court in the Southern District of California by Masterson
Marketing, Inc. (Masterson) against Penley Sports, LLC. Masterson's lawsuit
claims copyright infringement, breach of contract breach of fiduciary duty,
constructive fraud and conversion. Masterson is seeking damages in excess
of $450,000. The Company is in the process of filing an answer to these
claims. It is not possible at this time to predict the outcome of this
litigation. We intend to vigorously defend against these claims.
ITEM 2. Changes in Securities
-----------------------------
NONE
ITEM 3. Defaults upon Senior Securities
---------------------------------------
N/A
ITEM 4. Submission of Matters to a Vote of Security Holder
----------------------------------------------------------
On December 23, 2002 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 23,668,148 0 48,761
Steven R. Whitman 23,692,091 0 24,818
Patrick D. Reiley 23,690,893 0 26,016
James E. Crowley 23,692,643 0 24,266
Robert A. MacNamara 23,690,643 0 26,266
ITEM 5. Other Information
-------------------------
NONE
ITEM 6. Exhibits & Reports on Form 8-K
--------------------------------------
(a) Exhibits:
99.1 Pro Forma financial information related to the sale of University
City Village apartments by UCV, L.P., an unconsolidated
subsidiary.
(b) Reports on Form 8-K:
On April 15, 2003, the Company filed a Current Report on Form 8-K
reporting, under Item 5 - Other Events, certain information relating
to the sale of University City Village apartments by UCV, L.P., an
unconsolidated subsidiary, on April 1, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORTS ARENAS, INC.
By: /s/ Harold S. Elkan
-------------------
Harold S. Elkan, President and Director
Date: May 15, 2003
-----------------
By:/s/ Steven R. Whitman
--------------------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: May 15, 2003
-----------------
16
CERTIFICATIONS
I, Harold S. Elkan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sports Arenas, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003 By:/s/ Harold S. Elkan
----------------- ---------------------
Harold S. Elkan
President and Chief Executive Officer
17
I, Steven R. Whitman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sports Arenas, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003 By:/s/ Steven R. Whitman
---------------------
Steven R. Whitman
Chief Financial Officer
18