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Form 10QSB for ALL AMERICAN SPORTPARK INC
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15-Nov-2004
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the Company's consolidated financial statements and related notes included in this report.
OVERVIEW
The Company's operations consist of the management and operation of a golf course and driving range property called the Callaway Golf Center. The Callaway Golf Center includes the Divine Nine par 3 golf course fully lighted for night golf, a 110-tee two-tiered driving range which has been ranked the Number 2 golf practice facility in the United States since it opened in October 1997, a 20,000 square foot clubhouse which includes the Callaway Golf fitting center and two tenants: the Saint Andrews Golf Shop retail store and the Bistro 10 restaurant and bar. As discussed below it is currently seeking other business opportunities.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES. Revenues of the Callaway Golf Center ("CGC") for the three months ended September 30, 2004 increased $20,456 or 4.1% to $525,339 from $504,883 reported for the same period in 2003. Golf lesson revenue was $45,154 in 2004 compared to zero golf lesson revenue in 2003 as a result of the CGC paying golf pros directly instead of contracting with Giant Golf to provide lessons. As a result of the termination of this relationship, rental revenue from Giant Golf decreased by $19,280. Green fees increased by $12,608 and driving range revenue increased by $14,069. Sponsorship income decreased by $25,000 due to termination of a sponsorship agreement with a soft drink bottler in October 2003.
COST OF REVENUES. Costs of revenues increased by $58,236 or 64.1% to $149,146 in 2004 as compared to $90,910 in 2003. Cost of revenue as a percentage of revenues was 28.4% in 2004 as compared to 18.0% in 2003. The increase is due
mainly to the following items: golf pros were paid $29,590 in 2004 compared to zero cost in 2003 due to the fact that during 2003 this service was outsourced to Giant Golf. This arrangement ended in March 2004. The net effect of terminating the Giant Golf relationship was a decrease of $5,122 in gross margin for the three months ended September 30, 2004. Wages and benefits also increased $13,818, and operating supplies increased $13,962 as a result of purchasing range balls which did not occur in the year ago quarter.
SELLING, GENERAL AND ADMINISTRATIVE. These expenses consist principally of administrative payroll, rent, professional fees and other corporate costs. These expenses increased by $50,208, or 10.6%, to $519,582 in 2004, compared to $469,374 in 2003. Computer expenses in 2004 include a $10,699 write off of obsolescent point of sale software. Advertising expense increased $13,196 in 2004 as a result of the increased revenues detailed above. Repairs and maintenance expenses increased by $7,572 due to aging range equipment. Investor relations expense increased $22,068 in 2004 due to receipt of a $22,500 credit from the Company's investor relations firm in 2003.
OTHER INCOME AND EXPENSE. Other income and expense consists principally of interest income and expense and non-operating income. For the three months ended September 2004, other income improved $80,598 compared to the same period in 2003, primarily due to the water authority paying CGC an incentive for completion of the conversion of a portion of the golf course to drought tolerant (xeriscape) vegetation. The amount of the payment net of disposition of capitalized landscaping was $78,052.
NET LOSS. The net loss decreased by $18,064 to $119,766 in 2004, compared to a net loss of $137,830 in 2003. The primary reason for the decreased net loss in 2004 was that other income improved $80,598 due primarily to receipt of a $78,052 turf conversion incentive payment from the water authority. In addition, the minority interest in the net profit of the CGC decreased by $37,546 to $$87,211 as compared to $49,665 in 2003 as a result of CGC's increased net loss for the three months ended September 30, 2004.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003.
REVENUES. Revenues of the CGC decreased $28,670 or 1.6% to $1,754,949 as compared to $1,783,619 in 2003. This decrease is due primarily to a reduction in league play revenue of $13,160; the termination of a sponsorship agreement with a soft drink bottler resulting in loss of $75,000 in sponsorship revenue; a decrease in rental income of $46,980 from Giant Golf and Saint Andrews Golf:
and the fact that $16,974 in insurance recoveries and miscellaneous income were received in 2003. The revenue reductions were offset by increased driving range revenue of $29,616 and golf lesson revenue of $95,757.
COST OF REVENUES. Cost of revenues increased by $141,126 or 52.9% to $407,856 compared to $266,730 in 2003. This increase is due primarily to GCG paying golf pros $59,014 directly in 2004 to teach lessons which were taught by Giant Golf in 2003. In addition, there was an increase in direct wages of $36,075 as a result of staff increases in 2004 required to provide a higher level of guest service, and an increase of $47,775 in cost of range supplies due to higher volume purchases of range balls compared to 2003 to take advantage of favorable pricing.
SELLING, GENERAL AND ADMINISTRATIVE. These expenses consist principally of administrative payroll, rent, professional fees and other corporate costs. These expenses decreased by $81,166 or 5.0% to $1,523,874 in 2004 compared to $1,605,040 in 2003. The reduction is primarily due to a $179,442 decrease in legal fees resulting primarily from a settlement of the Company's lawsuit
against the general contractor in 2003 who built the CGC facility. This reduction was offset by the following expense increases: $7,580 in repairs and maintenance due to aging range equipment; $21,059 in computer related expenses due primarily to a write off of obsolescent software; $21,537 in landscaping expenses; $26,110 in advertising expenses and $18,875 in bad debt expense.
OTHER INCOME. Other income in 2004 of $254,396 resulted primarily from the receipt of a $272,350 incentive payment from the water authority net of disposition of related assets with a depreciated cost of $26,950 based on CGC's conversion of 487,107 square feet of its driving range and golf course to "xeriscape" landscaping with the expectation of a significant reduction in water usage. The $880,000 of other income in 2003 resulted from the Company's settlement of its lawsuit against the general contractor who built the CGC facility.
NET INCOME (LOSS). The Company had a net loss in 2004 of $288,844 compared to net income of $183,532 in 2003. The drop was primarily a result of the fact that during 2003 the Company received other income of $880,000 from the settlement of a construction defect claim. This was partially offset by other income in 2004 of $254,396 which resulted primarily from receipt of an incentive payment from the water authority for CGC's conversion of a portion of its golf course and driving range to "xeriscape." In addition, minority interest in the earnings of the CGC decreased $251,521 in 2004 as a result of the CGC's 2004 net loss.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had a working capital deficit of $978,794, as compared to a working capital deficit of $1,051,418 at December 31, 2003. The CGC has generated positive cash flow since 1998. However, this positive cash flow has been used to fund corporate overhead that is in place in support of the CGC and public company operations. There is no assurance that it will continue to provide positive cash flow.
Management believes that the CGC operations and existing cash balances as of September 30, 2004, may not be sufficient to fund operating cash needs and debt service requirements over the next 12 months. In its report on the Company's annual financial statements for 2003, the Company's auditors expressed substantial doubt about the Company's ability to continue as a going concern.
In the first and third quarters of 2004, the CGC converted a portion of its driving range and golf course to a water saving desert landscape known as "xeriscape." The costs of this conversion were funded by an incentive from the Southern Nevada Water Authority. Additionally, the amount of the incentives exceeded the costs of the conversions. The turf conversion projects are expected to significantly reduce the future costs of landscape maintenance. Water usage is also expected to be significantly lower, however, due to water rate increases, the usage reductions are not expected to generate cost savings compared to historical cost.
Management continues to seek other sources of funding, which may include Company officers or directors or other related parties. In addition, management continues to analyze all operational and administrative costs of the Company and has made and will continue to make the necessary cost reductions as appropriate.
Among its alternative courses of action, management of the Company may seek out and pursue a business combination transaction with an existing private business enterprise that might have a desire to take advantage of the Company's status as a public corporation. At this time, management does not
intend to target any particular industry but, rather, intends to judge any opportunity on its individual merits. Any such transaction would likely have a dilutive effect on the interests of the Company's stockholders that would, in turn, reduce each shareholders proportionate ownership and voting power in the Company. There is no assurance that the Company will acquire a favorable business opportunity through a business combination. In addition, even if the Company becomes involved in such a business opportunity, there is no assurance that it would generate revenues or profits, or that the market price of the Company's common stock would be increased thereby.
The Company has no commitments to enter into or acquire a specific business opportunity and, therefore, is able to disclose the risks of a business or opportunity that it may enter into only in a general manner, and unable to disclose the risks of any specific business or opportunity that it may enter into. An investor can expect a potential business opportunity to be quite risky. Any business opportunity acquired may be currently unprofitable or present other negative factors.
Working capital needs have been helped by deferring payments of interest and notes payable balances due to an Affiliate. Management believes that additional deferrals or such payments can be negotiated, if necessary.
Management continues to seek out financing to help fund working capital needs of the Company. In this regard, management believes that additional borrowings against the CGC could be arranged although there can be no assurance that the Company would be successful in securing such financing or with terms acceptable to the Company.
The Company has raised considerable capital in the past for development projects. Expansion programs in other locations are not expected to take place until the Company achieves an appropriate level of profitability and positive cash flow. If and when expansion does occur, such expansion is expected to be funded primarily by third parties.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included in this quarterly report contains statements that are forward-looking such as statements relating to plans for future expansion and other business development activities, as well as other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws, and changes in regulations and application for licenses and approvals under applicable jurisdictional laws and regulations.
