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, 2002
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
($.01 par value) as of January 31, 2003 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2002
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Unaudited Balance Sheets as of December 31, 2002
and June 30, 2002 ........................................ 1-2
Unaudited Statements of Operations for the Three Months Ended
December 31, 2002 and 2001 ............................... 3
Unaudited Statements of Operations for the Six Months Ended
December 31, 2002 and 2001 ............................... 4
Unaudited Statements of Cash Flows for the Six Months Ended
December 31, 2002 and 2001 ............................... 5
Notes to Financial Statements ................................... 6-8
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 9-12
Item 3.- Quantitative and Qualitative Disclosures about Market Risk ... 13
Item 4.- Controls and Procedures ..................................... 13
Part II - Other Information........................................... 14
Signatures............................................................ 15
Officer Certifications ............................................... 16-17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
December 31, June 30,
2002 2002
----------- -----------
Current assets:
Cash and cash equivalents ........................$ 8,632 $ 39,345
Receivables ...................................... 330,375 444,996
Inventories ...................................... 729,805 792,690
Prepaid expenses ................................. 87,942 38,706
----------- -----------
Total current assets .......................... 1,156,754 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 (1,419,608) (1,314,680)
----------- -----------
Net property and equipment ................... 930,108 1,030,726
----------- -----------
Other assets:
Intangible assets, net ........................... 18,642 37,284
Investments ...................................... 423,657 423,657
Other ............................................ 95,999 95,999
----------- -----------
538,298 556,940
----------- -----------
$ 2,625,160 $ 2,903,403
=========== ===========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
(Unaudited)
December 31, June 30,
2002 2002
----------- -----------
Current liabilities:
Notes payable-short term .........................$ 725,631 $ 445,000
Current portion of long-term debt ................ 7,000 8,000
Accounts payable ................................. 1,152,645 963,402
Accrued payroll and related expenses ............. 264,498 215,093
Accrued interest ................................. 40,730 276,735
Other liabilities ................................ 98,722 92,803
----------- -----------
Total current liabilities ..................... 2,289,226 2,001,033
----------- -----------
Long-term debt, excluding current portion ........... 2,277 5,456
----------- -----------
Distributions received in excess of basis
in investment ..................................... 18,374,342 18,008,401
----------- -----------
Other liabilities ................................... 216,000 192,000
----------- -----------
Minority interest in consolidated subsidiary ........ 802,677 802,677
----------- -----------
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 ..............................(18,770,419) (17,817,221)
----------- -----------
(16,767,870) (15,814,672)
Less note receivable from shareholder ............ (2,291,492) (2,291,492)
----------- -----------
Total shareholders' deficit ....................(19,059,362) (18,106,164)
----------- -----------
Commitments and contingencies (Note 4)
$ 2,625,160 $ 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 DECEMBER 31, 2002 AND 2001
(Unaudited)
2002 2001
----------- -----------
Revenues:
Bowling $ 394,945 $ 445,947
Rental 22,311 58,539
Golf 496,677 343,276
Other 114,224 117,636
Other-related party 48,645 46,315
----------- -----------
1,076,802 1,011,713
----------- -----------
Costs and expenses:
Bowling 332,799 319,376
Rental 18,700 57,207
Golf 498,880 407,133
Selling, general, and administrative 612,840 656,374
Depreciation and amortization 65,819 71,189
Impairment loss on deferred lease costs -- 41,915
----------- -----------
1,529,038 1,553,194
----------- -----------
Loss from operations (452,236) (541,481)
----------- -----------
Other income (charges):
Investment income-related party 7,214 9,457
Interest expense (11,874) (23,103)
Equity in income of investees 31,194 5,020
----------- -----------
26,534 (8,626)
----------- -----------
Net income (loss) $ (425,702) $ (550,107)
=========== ===========
Basic and diluted net income (loss) per
common share (based on 27,250,000 weighted
average common shares outstanding) $(0.02) $(0.02)
======= =======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Unaudited)
2002 2001
----------- ----------
Revenues:
Bowling $ 752,548 $ 829,768
Rental 40,287 117,398
Golf 1,131,751 787,499
Other 156,052 155,775
Other-related party 96,869 92,384
----------- ----------
2,177,507 1,982,824
----------- ----------
Costs and expenses:
Bowling 675,564 666,295
Rental 37,400 115,917
Golf 1,145,141 906,202
Selling, general, and administrative 1,189,593 1,309,137
Depreciation and amortization 131,638 142,852
Impairment loss on deferred lease costs -- 41,915
----------- ----------
3,179,336 3,182,318
----------- ----------
Loss from operations (1,001,829) (1,199,494)
----------- ----------
Other income (charges):
Investment income:
Related party 16,284 16,228
Other -- 1,807
Interest expense (45,522) (48,085)
Equity in income (loss) of investees 77,869 (28,281)
----------- ----------
48,631 (58,331)
----------- ----------
Net income (loss) $ (953,198) $(1,257,825)
=========== ==========
Basic and diluted net income (loss) per
common share (based on 27,250,000 weighted
average common shares outstanding) $(0.03) $(0.05)
======= =======
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, 2002 AND 2001
(Unaudited)
2001 2001
------------ -----------
Cash flows from operating activities:
Net income (loss) $ (953,198) $(1,257,825)
Adjustments to reconcile net income (loss) to
the net cash used by operating activities:
Depreciation and amortization 131,638 142,852
Equity in (income) loss of investees (77,869) 28,281
Deferred income 24,000 24,000
Impairment loss on deferred lease costs -- 41,915
Changes in assets and liabilities:
Decrease in receivables 114,621 145,446
Decrease in inventories 62,885 63,407
(Increase) decrease in prepaid expenses (49,236) (25,734)
Increase (decrease) in accounts payable 189,243 (40,889)
Increase in accrued expenses 99,950 105,546
Other 18,642 18,642
----------- -----------
Net cash used by operating activities (439,324) (754,359)
----------- -----------
Cash flows from investing activities:
Capital expenditures (4,310) --
Distribution to holder of minority interest -- (25,000)
Distributions from investees 417,100 150,820
----------- -----------
Net cash provided by investing activities 412,790 125,820
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt (4,179) (19,221)
Proceeds from short-term notes payable -- 150,000
----------- -----------
Net cash provided by (used) financing activities (4,179) 130,779
----------- -----------
Net increase (decrease) in cash and cash equivalents (30,713) (497,760)
Cash and cash equivalents, beginning of year 39,345 515,204
----------- -----------
Cash and cash equivalents, end of year $ 8,632 $ 17,444
=========== ===========
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
DECEMBER 31, 2002 AND 2001
(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.
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
December 31, 2002 and 2001, are not necessarily indicative of operations for
the entire year.
3. Investments:
(a) Investments consist of the following:
December 31, June 30,
2002 2002
----------- -----------
Vail Ranch Limited Partnership
(equity method) ..............................$ 423,657 $ 423,657
=========== ===========
Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ..............$18,374,342 $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 six-month periods
ended December 31:
2002 2001
-------- --------
UCV, L.P. .................... $ 77,869 $ 44,719
Vail Ranch Limited Partnership -- (73,000)
-------- --------
$ 77,869 $(28,281)
======== ========
The following is a summary of distributions received from investees for the
six-month periods ended December 31,:
2002 2001
-------- --------
UCV, L.P. .................... $417,100 $150,820
Vail Ranch Limited Partnership -- --
-------- --------
$417,100 $150,820
======== ========
(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 six and three-month
periods ended September 30, 2001 and 2000 are as follows:
Six Months Three Months
---------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues $2,818,000 $2,683,000 $1,442,000 $1,354,000
Operating and general
and administrative
costs 978,000 841,000 517,000 423,000
Depreciation 6,000 7,000 3,000 4,000
Interest expense 1,678,000 1,745,000 842,000 877,000
Net income 156,000 90,000 80,000 50,000
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.
6
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
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.
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.
7
Real Estate Real Estate Unallocated
Bowling Rental Development Golf And Other Totals
------------ ------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED DECEMBER 31, 2002:
--------------------------------------
Revenues ....................... $ 752,548 $ 40,287 $ -- $ 1,131,751 $ 252,921 $ 2,177,507
Depreciation and amortization... 12,198 26,710 -- 83,514 9,216 131,638
Interest expense ............... -- -- -- -- 45,522 45,522
Equity in income (loss)
of investees ................. -- 77,869 -- -- -- 77,869
Impairment loss ................ -- -- -- -- -- --
Segment profit (loss) .......... (108,269) 54,046 -- (797,913) (117,346) (969,482)
Investment income .............. 16,284
Net loss.. ..................... (953,198)
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)
THREE MONTHS ENDED DECEMBER 31, 2002:
--------------------------------------
Revenues ....................... $ 394,945 $ 22,311 $ -- $ 496,677 $ 162,869 $ 1,076,802
Depreciation and amortization... 6,099 13,355 -- 41,757 4,608 65,819
Interest expense ............... -- -- -- -- 11,874 11,874
Equity in income (loss)
of investees ................. -- 40,194 (9,000) -- -- 31,194
Impairment loss................. -- -- -- -- -- --
Segment profit (loss) .......... (33,747) 30,450 (9,000) (426,041) 5,422 (432,916)
Investment income .............. 7,214
Net loss........................ (425,702)
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)
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.
Management estimates negative cash flow of $200,000 to $400,000 in total for the
remaining two quarters of the year ending June 30, 2003 from operating
activities after deducting capital expenditures and principal payments on notes
payable and adding estimated distributions from UCV.
The short-term loan from the Company's partner in UCV is due on demand. 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.
Vail Ranch Limited Partners is negotiating the sale of its partnership interest
in Temecula Creek Partners to its other partner in Temecula Creek. The Company
estimates that its share of the proceeds from this sale to be approximately
$550,0000 to $650,000. The Company is obligated to pay approximately one-half of
these proceeds to its minority partner.
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.
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 $1,132,472 at December 30, 2002,
which is a $447,176 increase from the working capital deficit of $685,296 at
June 30, 2002. The increase in working capital deficit is primarily attributable
to the cash used by operating activities for the six months ended December 31,
2002. The following is a schedule of the cash provided (used) before changes in
assets and liabilities, segregated by business segments:
2002 2001 Change
---------- ---------- ----------
Bowling ................... $ (96,000) $ (9,000) $ (87,000)
Rental .................... 3,000 -- 3,000
Golf ...................... (715,000) (891,000) 176,000
Development ............... -- (4,000) 4,000
General corporate expense
and other ............... (68,000) (117,000) 49,000
---------- ---------- ----------
Cash used by continuing
operations .............. (876,000) (1,021,000) 145,000
Capital expenditures, net
of financing ............ (4,000) -- (4,000)
Principal payments on
long-term debt .......... (4,000) (19,000) 15,000
---------- ---------- ----------
Cash used ................. (884,000) (1,040,000) 156,000
========== ========== ==========
Distributions received from
investees ............... 417,000 151,000 266,000
========== ========== ==========
9
CRITICAL ACCOUNTING POLICIES
----------------------------
In response to the SEC's release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies", the Company has identified its
most critical accounting policy as that related to the carrying value of its
long-lived assets. Any event or circumstance that indicates to the Company an
impairment of the fair value of any asset is recorded in the period in which
such event or circumstance becomes known to the Company. During the three and
six month periods ended December 31, 2002 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.
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 Companys 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.
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.
10
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, 2002 compared to the same period
in 2001 and a discussion of the significant changes:
SIX MONTHS ENDED DECEMBER 31, 2002 VERSUS 2001
----------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- ---------- --------- ---------
Revenues ....................... $ (77,220) $ (77,111) $ -- $ 344,252 $ 4,762 $ 194,683
Costs .......................... 9,269 (78,517) -- 238,939 -- 169,691
SG&A-direct .................... (684) -- -- (76,321) (42,539) (119,544)
SG&A-allocated ................. 860 -- (4,000) 6,000 (2,860) --
Depreciation and amortization .. 7,218 (474) -- (2,034) (15,924) (11,214)
Impairment loss ................ -- (41,915) -- -- -- (41,915)
Interest expense ............... -- (1,662) -- -- (901) (2,563)
Equity in investees ............ -- 33,150 73,000 -- -- 106,150
Segment profit (loss) .......... (93,883) 78,607 77,000 177,668 66,986 306,378
Investment income .............. (1,751)
Income from operations .......... 304,627
THREE MONTHS ENDED DECEMBER 31, 2002 VERSUS 2001
------------------------------------------------
Rental Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
--------- --------- --------- --------- --------- ---------
Revenues ....................... $ (51,002) $ (36,228) $ -- $ 153,401 $ (1,082) $ 65,089
Costs .......................... 13,423 (38,507) -- 91,747 -- 66,663
SG&A-direct .................... 2,831 -- -- (26,615) (19,750) (43,534)
SG&A-allocated ................. 2,069 -- 1,000 5,000 (8,069) --
Depreciation and amortization .. 3,609 -- -- (1,017) (7,962) (5,370)
Impairment loss ................ -- (41,915) -- -- -- (41,915)
Interest expense ............... -- (1,662) -- -- (9,567) (11,229)
Equity in investees ............ -- 15,174 11,000 -- -- 26,174
Gain on sale ................... -- -- -- -- -- --
Segment profit (loss) .......... (72,934) 61,030 10,000 84,286 44,266 126,648
Investment income .............. (2,243)
Income from operations ......... 124,405
BOWLING OPERATIONS:
-------------------
Bowl revenues decreased by 9% and 11% in the six and three month periods,
respectively, primarily due related declines in the number of games bowled. Both
open play and league play decreased by the same percentages. There were no
material changes in bowl costs or 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:
Six Month Period Three Month Period
----------------------------- ------------------------------
PS Sublease Other Combined PS Sublease Other Combined
----------- ------- ---------- ---------- ------- ----------
Revenues (82,598) 5,487 (77,111) (41,139) 4,911 (36,228)
Costs (79,917) 1,400 (78,517) (39,207) 700 (38,507)
SG&A-allocated -- -- -- -- -- --
Depreciation and
amortization (474) -- (474) -- -- --
Impairment loss (41,915) -- (41,915) (41,915) -- (41,915)
Interest expense (1,662) -- (1,662) (1,662) -- (1,662)
Equity in income
of UCV -- 33,150 33,150 -- 15,174 15,174
Segment profit
(loss) 41,370 37,237 78,607 41,645 19,385 61,030
11
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 six and three month periods
primarily due to decreases in interest expense related to the lower interest
rate obtained in the refincing in March 2002. Rental revenues increased in each
period primarily due to an 6% increase in the average rental rate for each
period, which was partially offset by increases in the vacancy rate from 1.2% to
2.1% for the six month period and from 1.07% to 1.32% 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 six and three months periods of 2001 compared
to the prior period:
Six Months Three Months
---------- ------------
Revenues $ 135,000 $ 88,000
Costs 137,000 94,000
Depreciation (1,000) ( 1,000)
Interest and amortization
of loan costs (67,000) (35,000)
Net income 66,000 30,000
REAL ESTATE DEVELOPMENT OPERATIONS:
----------------------------------
The increase in the equity in income of Vail Ranch Limited Partners (VRLP),
relates to the increase in the income from the operation of the partially
completed shopping center for which the first store commenced operations in July
2000 and is now reaching a level of stabilzed operations after being leased up.
GOLF OPERATIONS:
----------------
Golf revenues increased in 2002 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:
Six Three
Months Months
---- ----
Golf equipment distributors . 133% 158%
Golf club manufacturers ..... 102% 63%
Golf shops .................. ( 14%) ( 13%)
Other ....................... ( 46%) 348%
Operating expenses of the golf segment consisted of the following in 2002
and 2001:
Six Months Three Months
--------------------- --------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Costs of goods sold and
manufacturing overhead $1,048,000 $ 792,000 $ 450,000 $ 352,000
Research & development 97,000 114,000 49,000 55,000
---------- --------- --------- ---------
Total golf costs 1,145,000 906,000 499,000 407,000
========== ========= ========= =========
Marketing & promotion 442,000 581,000 264,000 315,000
Administrative-direct 135,000 72,000 56,000 32,000
---------- --------- --------- ---------
Total SG&A-direct 577,000 653,000 320,000 347,000
========== ========= ========= =========
Allocated corporate costs 124,000 118,000 62,000 57,000
========== ========= ========= =========
Total golf costs increased in 2002 primarily due to the cost of goods sold and
other manufacturing overhead (primarily payroll) associated with increased
sales. 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 $45,000 and $22,000 in the six and three month periods, respectively.
12
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.
2003 2004 Total Fair Value
---------- ------- ---------- ----------
(1)
Fixed rate debt .. $ 6,000 $ 3,000 $ 9,000 $ 9,000
Weighted average
interest rate . 13.6% 13.6% 13.6%
Variable rate debt $ 726,000 -- $ 726,000 $ 726,000
Weighted average
interest rate . 5.3% -- 5.3%
The amounts for 2003 relate to the six months ending June 30, 2003.
(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 $726,000 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, 2003.
The Company's unconsolidated subsidiary, UCV, has two notes payable which mature
April 1, 2003 as a result of a refinancing in March 2002. The first loan is
variable rate debt of $36,000,000 for which the interest rate was 5.4 percent as
of December 31, 2002. However, there is a floor of 5.4% established by the
lender and a cap purchased by UCV which effectively caps the maximum rate on
this loan at 7%. The scheduled principal payments for UCV's fiscal years ending
March 31 2003 is $36,000,000. The estimated fair value of this debt is
$36,000,000 based on the current rates offered for this type of loan with
similar risks and maturities. The second loan of $2,000,000 is fixed rate debt
at 12.5%. The scheduled principal payments for UCV's fiscal years ending March
31 2003 is $2,000,000. The estimated fair value of this debt is $2,000,000 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.
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.
13
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
-------------------------
As of December 31, 2002, 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.
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: NONE
(b) Reports on Form 8-K: NONE
14
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 12, 2003
-----------------
By:/s/ Steven R. Whitman
--------------------------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 12, 2003
-----------------
15
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: February 12, 2003 By:/s/ Harold S. Elkan
----------------- ---------------------
Harold S. Elkan
President and Chief Executive Officer
16
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: February 12, 2003 By:/s/ Steven R. Whitman
---------------------
Steven R. Whitman
Chief Financial Officer
17