Malibu Grand Prix: Thrills and Chills : Amusement Center Chain Rolls Up Profits but Still Lingers on Winding Road
If you’re a shareholder of Malibu Grand Prix, the Woodland Hills-based chain of amusement centers, there’s some good news and some bad news.
The good news is that, thanks to an elaborate debt restructuring and a rectified accounting mistake of major proportions, Malibu finished 1986 with a $15-million profit, compared to a loss of $16.2 million in 1985.
The bad news is that Malibu’s senior vice president for operations, Gary Rudolph, has some legal troubles.
Rudolph settled one problem on Oct. 6, when he agreed to an injunction stemming from a Securities and Exchange Commission complaint relating to Castle Entertainment Inc., a bankrupt amusement company that was based in Westlake Village until Malibu bought it 1984.
Accused by SEC
Rudolph is a former Castle board member. Last September the SEC accused him and three other Castle directors of causing the firm to misrepresent its line of credit and some other facts about its borrowing in the firm’s prospectus for a December, 1982, public offering.
Malibu’s annual report also says Rudolph is a defendant in a shareholder suit charging that he and other Castle directors lied about Castle’s financial condition to artificially inflate its stock price while they allegedly were unloading their own Castle shares on the open market.
That suit, a class action brought on behalf of Castle shareholders, was filed in May, 1983, in U.S. District Court in Los Angeles.
Rudolph, 42, couldn’t be reached for comment about the allegations.
Actually, there is more bad news. Despite Malibu’s big profit, its stock continues to languish. Trading over the counter, it closed at 50 cents bid Monday.
Nevertheless, the debt restructuring gave the company an extraordinary gain of $13.6 million, which, coupled with its modest operating earnings and other income, brought total earnings to $15 million for the year.
That’s where the accounting error comes in. Malibu thought it had to take that huge extraordinary gain into income over five years.
But Coopers & Lybrand, the company’s auditors, wouldn’t allow it. They said that under the circumstances, “generally accepted accounting principles” require the gain to be booked as income all at once.
“Frankly, it’s embarrassing,” acknowledged Hamish J.E. Malkin, Malibu’s chief financial officer.
But company officials say it’s also a blessing, and the course they would have chosen had they not misunderstood the accounting rules.
Malibu Grand Prix runs a chain of amusement centers featuring miniature racing and golf. But for some time now it has been the kind of company given to thrills, chills, and spills away from the racecourse as well.
It still has a negative net worth ($2 million against a negative $21.5 million a year ago), and has relied on cash infusions from chairman and majority shareholder Ira L. Young to avoid being dragged under by its heavy debt burden.
Was on the Brink
At one point more than a year ago, after Malibu had officially defaulted on some debt and missed payments on other debt, the company said there was no assurance it could stay in business.
Malibu’s annual report discloses Rudolph’s consent order, in which he neither admitted nor denied guilt, but agreed to be enjoined from violating certain securities laws. Rudolph has been with Malibu since it acquired Castle.
The annual report says Rudolph is also a defendant in another Castle shareholder suit filed in December, 1983, in U.S. District Court in Philadelphia, but the annual report gives no details.
Last year Malibu worked out a complex restructuring of the more than $37 million it owed. Basically the arrangement let the company settle a $15.4-million note left over from Castle for $1.2-million cash and 4.9 million preferred shares. Last February, using borrowed money, Malibu recovered those preferred shares by paying off $9 million in debt to the same creditor, Bracton Corp., a spinoff of the former Crocker National Bank.
Malibu also wiped out $4 million in debt owed to a corporate affiliate of its chairman in exchange for four million preferred shares.
The arrangement basically meant that Malibu was forgiven $15.5 million in debts, of which $13.6 million, according to accounting rules, instantly became profit. On Dec. 31, Malibu’s debt was about $18 million.
Cost-Cutting Credited
But Malibu also made $869,000 on operations in 1986, a sharp improvement over operating losses of more than $2.2 million in both 1984 and 1985. The improved showing was largely due to cost-cutting, the company said.
Net income per share was 92 cents for 1986, of which 83 cents was the extraordinary gain. In 1985 the company lost $1.28 per share. Revenue for 1986 fell 2.6%, to $28.8 million, because Malibu closed four of its amusement centers in 1985 and 1986, the company said.
Malibu didn’t even have to pay tax on the gain from restructuring, because, Malkin said, when a company is technically insolvent, such a gain is tax-exempt. What would otherwise be a taxable gain merely reduces the tax basis of the company’s assets. Thus, the gain reduces the depreciation deduction in future years.
Taxes are a kind of silver lining for Malibu anyway. It has lost so much money in previous years that it has $49 million in tax-loss carryforwards to offset future profits for years to come.
Not Interested in Selling
Despite those juicy tax losses, Malibu is basically too poor to buy another company, and Rudolph says it is not interested in being sold to a profitable concern that could use Malibu’s tax benefits.
Instead, he said, the plan is to keep Malibu profitable on operations, eliminate further debt, and explore joint ventures to open new centers in the United States and possibly Europe. Rudolph said Malibu has already had great success with a new form of miniature racing involving small cars going around a slippery track.
The new game allows many more cars to be used at once. Rudolph says it only costs about $125,000 to install and grossed $10,400 in its first week at the company’s Northridge facility.
Besides the tax benefits, Malibu has some real estate value. It leases all its properties, but most of those leases are long-term, and altogether their value easily exceeds the company’s negative book value, Malkin said.
Even if the company is only moderately successful on an operating basis, it may have more gains ahead: if the company meets certain conditions, chairman Young is required to forgive another $5.7 million that Malibu owes him. MALIBU GRAND PRIX AT A GLANCE Founded in 1974, Malibu owns and operates 40 amusement centers nationwide featuring miniature racing and golf. The company is based in Woodland Hills and has 130 full-time employees, plus 600 to 1,000 part-time employees. There are 12.66 million common shares, 4 million preferrred shares, and 1.1 million warrants outstanding. For fiscal years ended Dec. 31; in millions Revenue: 1984 28.1 1985 29.6 1986 $28.8 Net income (loss): 1984 (6.3) 1985 (16.2) 1986 $15.0
