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, 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
($.01 par value) as of January 31, 2004 was 27,250,000 shares.
SPORTS ARENAS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2003
INDEX
Part I - Financial Information:
Item 1.- Consolidated Condensed Financial Statements:
Unaudited Balance Sheets as of December 31, 2003
and June 30, 2003 .......................................... 1-2
Unaudited Statements of Operations for the Three Months Ended
December 31, 2003 and 2002 ............................... 3
Unaudited Statements of Operations for the Six Months Ended
December 31, 2003 and 2002 ............................... 4
Unaudited Statements of Cash Flows for the Six Months Ended
December 31, 2003 and 2002 ............................... 5
Notes to Financial Statements................................... 6-9
Item 2.- Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 10-15
Item 3.- Quantitative and Qualitative Disclosures about Market Risk... 15
Item 4.- Controls and Procedures ..................................... 15
Part II - Other Information........................................... 16
Exhibits and reports on Form 8-K ..................................... 16
Signatures............................................................ 17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
December 31, June 30,
2003 2003
----------- -----------
Current assets:
Cash and cash equivalents ........................$ 34,531 $ 365,674
Other receivable-affiliate ....................... -- 350,000
Receivables ...................................... 188,885 402,875
Inventories ...................................... 843,212 641,127
Prepaid expenses ................................. 62,769 34,958
----------- -----------
Total current assets .......................... 1,129,397 1,794,634
----------- -----------
Property and equipment, at cost:
Equipment......................................... 1,997,600 1,889,395
Less accumulated depreciation and amortization (1,065,571) (1,052,740)
----------- -----------
Net property and equipment ................... 932,029 836,655
----------- -----------
Other assets:
Investments ...................................... 4,574,060 5,344,007
Deferred tax assets .............................. 5,177,000 4,661,000
Other ............................................ 95,671 95,671
----------- -----------
9,846,731 10,100,678
----------- -----------
$11,908,157 $12,731,967
=========== ===========
1
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
December 31, June 30,
2003 2003
----------- -----------
Current liabilities:
Current portion of long-term debt ................$ 19,669 $ 5,771
Accounts payable ................................. 356,242 441,434
Accrued payroll and related expenses ............. 289,403 282,080
Deferred income taxes ............................ 1,026,000 --
Other liabilities ................................ 3,639 3,796
----------- -----------
Total current liabilities ..................... 1,694,953 733,081
----------- -----------
Long-term debt, excluding current portion ........... 76,376 --
----------- -----------
Deferred income taxes ............................... 9,488,000 10,514,000
----------- -----------
Minority interest in consolidated subsidiary ........ 402,839 431,839
----------- -----------
Shareholders' equity:
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
Retained earnings ................................ 534,932 1,341,990
----------- -----------
2,537,481 3,344,539
Less note receivable from shareholder ............ (2,291,492) (2,291,492)
----------- -----------
Total shareholders' equity...................... 245,989 1,053,047
----------- -----------
Commitments and contingencies (Note 6)
$11,908,157 $12,731,967
=========== ===========
See accompanying notes to consolidated condensed financial statements.
2
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Revenues:
Golf .............................................$ 372,000 $ 496,677
Rental ........................................... 23,156 22,311
Other ............................................ 12,698 114,224
Other-related party .............................. 14,931 48,645
----------- -----------
422,785 681,857
----------- -----------
Costs and expenses:
Golf ............................................. 623,429 498,880
Rental ........................................... 19,200 18,700
Selling, general, and administrative ............. 532,214 523,046
Depreciation and amortization .................... 50,915 59,720
----------- -----------
1,225,758 1,100,346
----------- -----------
Loss from operations ................................ (802,973) (418,489)
----------- -----------
Other income (charges):
Investment income- related party ................. 11,529 7,214
Interest expense and amortization of finance costs (372) (11,874)
Gain on sale ..................................... 78,533 --
Equity in income of investees .................... 67,438 27,007
----------- -----------
157,128 22,347
----------- -----------
Loss from continuing operations before income taxes.. (645,845) (396,142)
Income tax benefit .................................. 257,000 --
----------- -----------
Loss from continuing operations ..................... (388,845) (396,142)
Loss from discontinued operations ................... -- (42,747)
----------- -----------
Net loss ............................................$ (388,845) $ (438,889)
=========== ===========
Per common share (based on weighted average shares
outstanding) basic and diluted:
Loss from continuing operations ................... ($0.01) ($0.01)
Discontinued operations ........................... -- --
------ ------
Net loss ......................................... ($0.01) ($0.01)
====== ======
See accompanying notes to consolidated condensed financial statements.
3
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Revenues:
Golf .............................................$ 981,525 $ 1,131,751
Rental ........................................... 42,491 40,287
Other ............................................ 21,329 156,052
Other-related party .............................. 18,335 96,869
----------- -----------
1,063,680 1,424,959
----------- -----------
Costs and expenses:
Golf ............................................. 1,256,690 1,145,141
Rental ........................................... 38,400 37,400
Selling, general, and administrative ............. 1,180,791 1,016,538
Depreciation and amortization .................... 98,207 119,440
----------- -----------
2,574,088 2,318,519
----------- -----------
Loss from operations ................................ (1,510,408) (893,560)
----------- -----------
Other income (charges):
Investment income:
Related party .................................. 15,000 16,284
Other .......................................... 297 --
Interest expense and amortization of finance costs (706) (45,522)
Gain on sale ..................................... 78,533 --
Equity in income of investees .................... 94,226 67,201
----------- -----------
187,350 37,963
----------- -----------
Loss from continuing operations before income taxes
and change in accounting principle ................ (1,323,058) (855,597)
Income tax benefit .................................. 516,000 --
----------- -----------
Loss from continuing operations ..................... (807,058) (855,597)
Loss from discontinued operations ................... -- (108,269)
Cumulative effect of change in accounting principle . -- 37,675
----------- -----------
Net loss ............................................$ (807,058) $ (926,191)
=========== ===========
Per common share (based on weighted average shares
outstanding) basic and diluted:
Loss from continuing operations ................... ($0.03) ($0.03)
Discontinued operations ........................... -- --
Cumulative effect of change in accounting principle -- --
------ ------
Net loss ......................................... ($0.03) ($0.03)
====== ======
See accompanying notes to consolidated condensed financial statements.
4
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss ..........................................$ (807,058) $ (926,191)
Less loss from discontinued operations .......... -- 108,269
----------- -----------
Loss from continuing operations ................. (807,058) (817,922)
Adjustments to reconcile net loss to the net
cash used by operating activities:
Depreciation and amortization ................. 98,207 119,440
Equity in income of investees ................. (94,226) (67,201)
Gain on sales ................................. (78,533) --
Deferred income ............................... -- 24,000
Provision for deferred income taxes ........... (516,000) --
Change in accounting principle ................ -- (37,675)
Changes in assets and liabilities:
Decrease in receivables ....................... 563,990 120,564
(Increase) decrease in inventories ............ (202,085) 62,885
(Increase) decrease in prepaid expenses ....... (27,811) 20,003
Increase (decrease) in accounts payable ....... (85,192) 105,096
Increase in accrued expenses .................. 7,166 100,130
Other ......................................... -- 18,642
----------- -----------
Net cash used by continuing operations ............ (1,141,542) (352,038)
Net cash used by discontinued operations .......... -- (87,286)
----------- -----------
Net cash used by operating activities ............. (1,141,542) (439,324)
----------- -----------
Cash flows from investing activities:
Capital expenditures ............................. (193,581) (4,310)
Distribution to holder of minority interest ...... (29,000) --
Proceeds from sale of assets ..................... 78,533 --
Distributions from investees ..................... 864,173 417,100
----------- -----------
Net cash provided by investing activities .......... 720,125 412,790
----------- -----------
Cash flows from financing activities:
Scheduled principal payments on long-term debt ... (6,204) (4,179)
Proceeds from long-term debt ..................... 96,478 --
----------- -----------
Net cash provided (used) by financing activities ... 90,274 (4,179)
----------- -----------
Net decrease in cash and cash equivalents ........... (331,143) (30,713)
Cash and cash equivalents, beginning of period ...... 365,674 39,345
----------- -----------
Cash and cash equivalents, end of period ............$ 34,531 $ 8,632
=========== ===========
Supplemental Disclosure of Non-Cash Financing Activities:
Reclassification of principal payments on
short-term debt to accrued interest .............$ -- $ 280,631
=========== ===========
Reclassification of non-current deferred tax
liability to current portion ....................$ 1,026,000 $ --
=========== ===========
See accompanying notes to consolidated condensed financial statements.
5
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 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 October 14, 2003 for the year ended June 30, 2003.
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 golf club shaft manufacturing
operations, the financial results for the interim periods ended December
31, 2003 and 2002, are not necessarily indicative of operations for the
entire year.
3. Investments:
Investments consist of the following:
December 31, June 30,
2003 2003
----------- -----------
UCV, L.P. ......................................$ 4,565,233 $ 5,277,007
Vail Ranch Limited Partnership ................. 8,827 67,000
----------- -----------
Total ....................................$ 4,574,060 $ 5,344,007
=========== ===========
The following is a summary of the equity in income of the investments
accounted for by the equity method:
Six Months Three Months
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
UCV, L.P. ....... $ 94,226 $ 67,201 $ 67,438 $ 27,007
======== ======== ======== ========
The following is a summary of distributions received from investees:
2003 2002
-------- --------
UCV, L.P. .................... $806,000 $417,100
Vail Ranch Limited Partnership 58,173 --
-------- --------
$864,173 $417,100
======== ========
As discussed in footnote 5(c) to the Company's June 30, 2003 annual report
on Form 10-K, effective April 1, 2003, the Company began recording its
equity in the income of UCV, L.P. (UCV) on a current basis rather than on a
91 day delayed basis. The Company has treated this as a change in
accounting principle and accordingly has classified its $37,675 of equity
in earnings of UCV for the period of April 1, 2002 through June 30, 2002 as
the cumulative effect of a change in accounting principle in 2003.
Therefore, the equity in income of UCV for the period July 1, 2003 through
December 31, 2003 was $94,226 (see footnote 15 to the Company's June 30,
2003 annual report on Form 10-K).
6
In November 2003 the Company received $60,532 related to amounts due on the
the sale of the Company's investment in All Seasons Inns in a prior year.
The Company had recorded a valuation allowance for the entire amount due at
the time of sale. As a result, the amount received was classified as gain
from sale.
4. Contingencies:
A lawsuit was 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 originally
asserted claims for copyright infringement, breach of contract, breach of
fiduciary duty, and sought compensatory damages, punitive damages,
statutory damages, and attorney fees. The Company filed a motion to dismiss
all claims. In response to that motion, Masterson dropped all claims except
for the claims of copyright infringement and breach of contract. Masterson
also dropped all prayers for punitive damages, statutory damages, and
attorney fees. It is not possible at this time to predict the outcome of
this litigation. We intend to vigorously defend against these claims.
5. Business segment information:
The Company operates principally in two business segments: commercial real
estate rental 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
The following is summarized information about the Company's operations by
business segment.
Real Estate Unallocated
Operation Golf And Other Totals
------------ ----------- ----------- ------------
SIX MONTHS ENDED DECEMBER 31, 2003
- -------------------------------------
Revenues ............................. $ 42,491 $ 981,525 $ 39,664 $ 1,063,680
Depreciation and amortization ........ -- 84,899 13,308 98,207
Interest expense ..................... -- -- 706 706
Equity in income of investee ......... 94,226 -- -- 94,226
Gain on sale ......................... -- -- 78,533 78,533
Segment profit (loss) ................ 98,317 (1,236,991) (199,681) (1,338,355)
Investment income .................... 15,297
Loss from continuing
operations before taxes............. (1,323,058)
Significant non-cash items ........... (94,226) -- -- (94,226)
SIX MONTHS ENDED DECEMBER 31, 2002
- -------------------------------------
Revenues ............................. $ 40,287 $ 1,131,751 $ 252,921 $ 1,424,959
Depreciation and amortization ........ 26,710 83,514 9,216 119,440
Interest expense ..................... -- -- 45,522 45,522
Equity in income of investee ......... 67,201 -- -- 67,201
Segment profit (loss) ................ 43,378 (797,913) (117,346) (871,881)
Investment income .................... 16,284
Loss from continuing
operations before taxes............. (855,597)
Significant non-cash items ........... (67,201) -- -- (67,201)
THREE MONTHS ENDED DECEMBER 31, 2003
- -------------------------------------
Revenues ............................. $ 23,156 $ 372,000 $ 27,629 $ 422,785
Depreciation and amortization ........ -- 43,508 7,407 50,915
Interest expense ..................... -- -- 372 372
Gain on sale ......................... -- -- 78,533 78,533
Equity in income of investee ......... 67,438 -- -- 67,438
Segment profit (loss) ................ 71,394 (706,860) (21,908) (657,374)
Investment income .................... 11,529
Loss from continuing
operations before taxes............. (645,845)
Significant non-cash items ........... (67,438) -- -- (67,438)
THREE MONTHS ENDED DECEMBER 31, 2002
- -------------------------------------
Revenues ............................. $ 22,311 $ 496,677 $ 162,869 $ 681,857
Depreciation and amortization ........ 13,355 41,757 4,608 59,720
Interest expense ..................... -- -- 11,874 11,874
Equity in income of investee ......... 27,007 -- -- 27,007
Segment profit (loss) ................ 17,263 (426,041) 5,422 (403,356)
Investment income .................... 7,214
Loss from continuing
operations before taxes............. (396,142)
Significant non-cash items ........... (27,007) -- -- (27,007)
8
6. Liquidity
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
suffered recurring losses, has negative working capital 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 obtaining additional investors in its subsidiary, Penley Sports, or
increases in the sales volume of Penley Sports. The consolidated 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. Discontinued Operations:
During the year ended June 30, 2003, the Company ceased operations in two
business segments. The following is a summary of the loss from the
discontinued business segments for the periods ended December 31:
Three Months Six Months
---------------------- ----------------------
2003 2002 2003 2002
--------- ----------- --------- -----------
Bowling .................$ -- $ (33,747) $ -- $ (108,269)
Real estate development . -- (9,000) -- --
--------- ----------- --------- -----------
$ -- $ (42,747) $ -- $ (108,269)
========= =========== ========= ===========
8. Note receivable from shareholder:
In December 1990 the Company loaned $1,061,009 to the Company's majority
shareholder, Andrew Bradley, Inc. (ABI), which is 88% owned by Harold S.
Elkan, the Company's President. The loan provided funds to ABI to pay its
obligation related to its purchase of the Company's stock in November 1983.
The loan to ABI provides for interest to accrue at an annual rate of prime
plus 1-1/2 percentage points (5.50 percent at December 31, 2003) and to be
added to the principal balance annually. The loan was due November 7, 2003.
The loan is collateralized by 21,808,267 shares of the Company's stock
owned by ABI. The original loan amount plus accrued interest of $1,230,483
is presented as a reduction of shareholders' equity because ABI's only
asset is the stock of the Company.
On November 7, 2003, the Company presented demand to ABI for payment of
$3,351,724, which represents the original principal balance plus accrued
interest, of which $1,060,232 has not been accrued by the Company. The note
provides for a 5 day grace period and negotiations are underway between the
Company and ABI with respect to disposition of the note.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS:
-----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The independent auditors' report dated September 5, 2003 included in our June
30, 2003 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 13 to the consolidated financial statements, the Company has suffered
recurring losses, 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 13. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Management estimates positive cash flow of $100,000 to $200,000 in total for the
remaining two quarters of the year ending June 30, 2004 from operating
activities after deducting capital expenditures and principal payments on notes
payable and adding estimated distributions from UCV and VRLP. However,
Management estimates that it will have a tax liability of approximately
$1,026,000 due in September 2004 as a result of reporting the taxable portion of
the sale of the apartment project owned by UCV, LP. Management is currently
uncertain of where the Company will obtain the funds to pay these tax
liabilities.
The Company estimates it will receive approximately $700,000 of distributions
from UCV in the third quarter of which $129,000 was received in January and
February 2004. The $700,000 of distributions from UCV represents the remainder
of funds to be distributed by UCV to the Company from the sales proceeds of
UCV's apartment project.
In February 2003 Vail Ranch Limited Partners (VRLP) sold its membership interest
in Temecula Creek LLC to its other partner in Temecula Creek LLC. VRLP was
entitled to receive one-half of the sales proceeds from the sale of a remaining
parcel of undeveloped land as well as the release of $100,000 that was held back
from the sales proceeds in February 2003. In December 2003 VRLP received
$121,955 as its share of the proceeds from the sale of the undeveloped land. In
January 2004, VRLP received $99,959 as the balance of the hold back. The Company
received distributions from VRLP related to these transactions of $58,173 in
December 2003 and $59,975 in January 2004. As part of the Company's obligation
to pay approximately one-half of these proceeds to its minority partner,
payments of $29,000 each were made to the minority partner in December 2003 and
January 2004. The liability to the minority interest stated in the balance sheet
is $402,839 but is likley to be settled for a lesser amount based on the
distributions received from VRLP.
In December 1990 the Company loaned $1,061,009 to the Company's majority
shareholder, Andrew Bradley, Inc. (ABI), which is 88% owned by Harold S. Elkan,
the Company's President. The loan provided funds to ABI to pay its obligation
related to its purchase of the Company's stock in November 1983. The loan to ABI
provides for interest to accrue at an annual rate of prime plus 1-1/2 percentage
points (5.50 percent at December 31, 2003) and to be added to the principal
balance annually. The loan was due November 7, 2003. The loan is collateralized
by 21,808,267 shares of the Company's stock owned by ABI. The original loan
amount plus accrued interest of $1,230,483 is presented as a reduction of
shareholders' equity because ABI's only asset is the stock of the Company.
On November 7, 2003, the Company presented demand to ABI for payment of
$3,351,724, which represents the original principal balance plus accrued
interest, of which $1,060,232 has not been accrued by the Company. The note
provides for a 5 day grace period and negotiations are underway between the
Company and ABI with respect to disposition of the note.
10
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 the Company receiving 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 working capital deficit of $565,556 at December 31, 2003, which
is a $1,627,109 decrease from the working capital of $1,061,553 at June 30,
2003. The decrease in working capital is primarily attributable to the
reclassification of $1,026,000 from a non-current deferred tax liability to a
current deferred tax liability and cash used by operating activities for the six
months ended December 31, 2003. The cash used by operating activities was
partially offset by distributions received from the Company's investees. The
following is a schedule of the cash provided (used) before changes in assets and
liabilities, segregated by business segments:
2003 2002 Change
---------- ---------- ----------
Rental .................... $ 4,000 3,000 1,000
Golf ...................... (1,152,000) (714,000) (438,000)
General corporate expense
and other ............... (250,000) (68,000) (182,000)
---------- ---------- ----------
Cash used by continuing
operations .............. (1,398,000) (779,000) (619,000)
Discontinued operations:
Bowling ................. -- (96,000) 96,000
Real estate development . -- -- --
Capital expenditures....... (194,000) (4,000) (190,000)
Principal payments on
long-term debt .......... (6,000) (4,000) (2,000)
---------- ---------- ----------
Cash used ................. (1,598,000) (883,000) (715,000)
========== ========== ==========
Distributions received from
investees ............... 864,000 417,000 447,000
========== ========== ==========
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 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, 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.
11
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Statement of Financial Accounting Standards, No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities, or SFAS No. 149, amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract within an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003, and is not
expected to have a material impact on the Company's consolidated financial
statements.
Statement of Financial Accounting Standards, No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, or
SFAS No. 150, establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. At the October 29, 2003 FASB Board meeting, the
Board decided to indefinitely defer the effective date of SFAS No. 150 related
to the classification and measurement requirements for mandatorily redeemable
financial instruments that become subject to SFAS No. 150 solely as a result of
consolidation, such as the minority interest in the accompanying financial
statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The Company currently does not have any
VIEs in which it has variable interests.
"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.
12
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, 2003 to the same period in 2002
and a discussion of the significant changes:
SIX MONTHS ENDED DECEMBER 31, 2003 VERSUS 2002
----------------------------------------------
Real Estate Unallocated
Operation Golf And Other Total
----------- ----------- --------- ------------
Revenues ..................... $ 2,204 $ (150,226) $(213,257) $ (361,279)
Costs ........................ 1,000 111,549 -- 112,549
SG&A-direct .................. -- (1,082) 109,266 108,184
SG&A-allocated ............... -- 177,000 (120,931) 56,069
Depreciation and amortization (26,710) 1,385 4,092 (21,233)
Interest expense ............. -- -- (44,816) (44,816)
Gain from sale ............... -- -- 78,533 78,533
Equity in investees .......... 27,025 -- -- 27,025
Segment profit (loss) ........ 54,939 (439,078) (82,335) (466,474)
Investment income ............ (987)
Income tax benefit ........... 516,000
Income from continuing
operations ................. 48,539
Discontinued operations ...... 108,269
Change in accounting principle (37,675)
Net income (loss) ............ 119,133
THREE MONTHS ENDED DECEMBER 31, 2003 VERSUS 2002
------------------------------------------------
Real Estate Unallocated
Operation Golf And Other Total
----------- ----------- --------- ------------
Revenues ..................... $ 845 $ (124,677) $(135,240) $ (259,072)
Costs ........................ 500 124,549 -- 125,049
SG&A-direct .................. -- (62,158) 40,257 (21,901)
SG&A-allocated ............... -- 92,000 (60,931) 31,069
Depreciation and amortization (13,355) 1,751 2,799 (8,805)
Interest expense ............. -- -- (11,502) (11,502)
Gain from sale ............... -- -- 78,533 78,533
Equity in investees .......... 40,431 -- -- 40,431
Segment profit (loss) ........ 54,131 (280,819) (27,330) (254,018)
Investment income ............ 4,315
Income tax benefit ........... 257,000
Income from continuing
operations ................. 7,297
Discontinued operations ...... 42,747
Change in accounting principle --
Net income (loss) ............ 50,044
REAL ESTATE OPERATIONS:
- ------------------
This segment includes the equity in income UCV, L.P. (UCV) and the sublease of a
portion of the Penley factory. The operations of UCV consisted of the operation
of a 542 unit apartment project until UCV sold the property on April 1, 2003.
UCV acquired replacement properties on August 28, 2003, September 25, 2003 and
September 26, 2003. The operations of UCV for the three and six months ended
December 31, 2003 included the operations of these properties since their
acquisition.
13
GOLF OPERATIONS:
- ----------------
Golf revenues declined in the three and six month periods primarily due to
declines in sales to golf club manufacturers. In one circumstance there was an
order shipped in July 2002 for which there was no comparable sales activity in
2003. There were also two manufacturers that were no longer in business in 2003.
The following is a breakdown of the percentage of sales by customer category:
Six Months Three Months
---------- ------------
2003 2002 2003 2002
---- ---- ---- ----
Golf equipment distributors . 53% 34% 54% 34%
Small golf club manufacturers 17% 30% 19% 32%
Golf shops .................. 26% 29% 22% 30%
Other ....................... 4% 7% 5% 4%
Operating expenses of the golf segment consisted of the following in 2003 and
2002:
Six Months Three Months
--------------------- --------------------
2003 2002 2003 2002
---------- ---------- --------- ---------
Costs of goods sold and
manufacturing overhead $1,100,000 $1,048,000 $ 519,000 $ 450,000
Research & development 157,000 97,000 105,000 49,000
---------- ---------- --------- ---------
Total golf costs 1,257,000 1,145,000 624,000 499,000
========== ========== ========= =========
Marketing & promotion 447,000 442,000 204,000 264,000
Administrative-direct 129,000 135,000 54,000 56,000
---------- ---------- --------- ---------
Total SG&A-direct 576,000 577,000 258,000 320,000
========== ========== ========= =========
Allocated corporate costs 301,000 124,000 154,000 62,000
========== ========== ========= =========
Total golf costs increased in the three and six month periods due to increases
in costs to correct manufacturing problems caused by changes in the
specifications of materials purchased from one of its "prepreg" vendors.
Marketing and promotion expenses decreased in the three month period due to a
decrease in player sponsorship costs. This decrease was offset in the six month
period by an increase in advertising costs in the first quarter.
OTHER
- -----
Other revenues-related party decreased due to UCV's sale of its apartment
project on April 1, 2003. The Company had received management fees and
development fees from UCV totaling $48,000 and $97,000 during the three month
and six month periods ended December 31, 2002, respectively. In the same periods
in 2003, the Company only recieved management fees from the replacement
properties totalling $15,000 and $18,000 respectively.
Other revenues, which primarily consisted of management fees earned from a third
party, decreased $102,000 and $113,000 in the three and six month periods,
respectivley, due to the sale of the property being managed in October 2002.
Unallocated selling, general and administrative expenses increased by $40,000
and $109,000 in the three and six month periods, respectively, primarily due to
increases in audit fees and legal expenses.
The amount of corporate expenses allocated to the Golf segment primarily
increased due to an increase in the percentage of expenses allocable to golf.
This is the result of the discontinuance of the bowling segment in May 2003 and
the reduction in property management services performed for UCV and others
during the three months ended September 30, 2003.
14
Interest expense decreased primarily due to repayment of the short term debt in
April 2003.
The increase in gain on sale primarily relates to the $60,532 received in
November 2003 related to amounts due on the the sale of the Company's investment
in All Seasons Inns in a prior year. The Company had recorded a valuation
allowance for the amount due at the time of sale.
Discontinued Operations:
- ------------------------
As discussed in Footnote 7 of Notes to Consolidated Condensed Financial
Statements, the Company has classified its operations in the bowling and real
estate development segments as discontinued operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is exposed to market risk primarily due to fluctuations in interest
rates. However, the Company does not consider this interest rate market risk
exposure to be material to its financial condition or results of operations.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
An evaluation was carried out under the supervision and with the participation
of the Company's management, including its Chief Executive Officer and its Chief
Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities and Exchange Act
of 1934 (the "Exchange Act") as of December 31, 2003. Based on this evaluation,
the Chief Executive Officer and the Chief Financial Officer have concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
15
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As of December 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, 2003, except the following:
A lawsuit was 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
originally asserted claims for copyright infringement, breach of
contract, breach of fiduciary duty, and sought compensatory damages,
punitive damages, statutory damages, and attorney fees. The Company
filed a motion to dismiss all claims. In response to that motion,
Masterson dropped all claims except for the claims of copyright
infringement and breach of contract. Masterson also dropped all
prayers for punitive damages, statutory damages, and attorney fees. 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
--------------------------------------------------
NONE
ITEM 5. Other Information
NONE
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to Sec. 906
32.2 Certification of Chief Financial Officer pursuant to Sec. 906
(b) Reports on Form 8-K: NONE
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORTS ARENAS, INC.
By: /s/ Harold S. Elkan
----------------------
Harold S. Elkan, President and Director
Date: February 17, 2004
--------------------
By:/s/ Steven R. Whitman
---------------------
Steven R. Whitman, Treasurer,
Principal Accounting Officer and Director
Date: February 17, 2004
------------------
17