UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1944249
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(State of Incorporation) (I.R.S. Employer I.D. No.)
7415 Carroll Road, Suite C, San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 408-0364
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
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(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates (5,441,733
shares) of the Registrant as of September 28, 2001 was $190,000 (based on
average of bid and asked prices). The number of shares of common stock
outstanding as of September 28, 2001 was 27,250,000.
Documents Incorporated by Reference - None.
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1
PART I
ITEM I. Business
General Development and Narrative Description of Business
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Sports Arenas, Inc. (the "Company") was incorporated as a Delaware
corporation in 1957. The Company, primarily through its subsidiaries, owns and
operates one bowling center, an apartment project (50% owned), and a graphite
golf club shaft manufacturer. The Company also performs a minor amount of
services in property management and real estate brokerage related to commercial
leasing. The Company has its principal executive office at 7415 Carroll Road,
Suite C, San Diego, California. Overall, the Company and its consolidated
subsidiaries have approximately 70 employees. The following is a summary of the
revenues of each segment, excluding construction, stated as a percentage of
total revenues for each of the last three years:
2001 2000 1999
---- ---- ----
Bowling 49 54 67
Real estate operations 10 14 14
Real estate development - - -
Golf 34 24 10
Other 7 8 9
(1) Bowling Centers - The Company's wholly owned subsidiary, Cabrillo Lanes,
Inc. (the "Bowls"), operated two bowling centers during the year ended June 30,
2001 containing 110 lanes in San Diego, California. These two centers were
purchased in August 1993. One of the centers, which contained 50 lanes, was
closed on December 21, 2001 in conjunction with the sale by the Company of the
land and building.
The remaining bowling center's operations include food and beverage facilities
and coin operated video and other games. The revenues from these activities have
averaged 32 percent of total bowling related revenues for the last three fiscal
years. The bowling center operates the food and beverage operations, which
includes sale of beer, wine and mixed drinks. The Company receives a negotiated
percentage of the gross revenues from the coin operated video games. The bowling
center includes a pro shop, which is leased to an independent operator for a
nominal amount. The center also has a day care facility, which is provided free
of charge to the bowlers. The bowling center has automatic score-keeping and a
computerized cash control system.
On average, 36 percent of the games bowled are by bowling leagues that enter
into league reservation agreements to use a specified number of lanes at a
specified time and day for a specified period of weeks. On average, the league
reservation agreements are for 35 weeks for the winter season (September through
April) and 15 weeks for the summer season (May through August). League revenues
for September through April average 78 percent of league revenues annually.
Approximately 71 percent of all bowling related revenues are generated in the
months of September through April.
The bowling industry faces substantial competition for the sports and recreation
dollar. The Bowl competes with other bowling centers in its market area, as well
as other sports and recreational activities. Further competition is likely at
any time a new center is constructed in the same market area. The Company
continuously markets its league and open play through a combination of
advertising, phone solicitation, direct mail, and a personal sales program.
At June 30, 2001, the bowling center was licensed to sell alcoholic beverages.
Licenses are generally renewable annually provided there are no violations of
government regulations. The bowling center was cited with two violations in the
last 12 months and has a 15 day suspension of its liquor license to serve
pending an appeal. If the bowling center receives another citation in the next
12 months, the bowling center may lose its license permanently. The bowling
center employs approximately 30 people.
(2) REAL ESTATE DEVELOPMENT - The Company, through its subsidiaries (see
Item 2. Properties (b) Real Estate Development for ownership), had ownership
interests in a 33 acre parcel and a 13 acre parcel of partially developed land
in Temecula, California (Riverside County). The 33 acre parcel was sold on June
1, 2001.
In September 1994, Vail Ranch Limited Partnership (VRLP) was formed as a
partnership between Old Vail Partners, L.P., a California limited partnership,
(OVP), a subsidiary of the Company, and Landgrant Corporation (Landgrant) to
develop a 32 acre parcel of land of which 27 acres was developable. Landgrant is
not affiliated with the Company. VRLP completed construction of a community
shopping center on 10 acres of land in May 1997 and sold approximately 3.6
partially improved acres in the year ended June 30, 1997 and .59 partially
improved acres during the year ended June 30, 1998 to unaffiliated purchasers
for cash of $2,365,000 and $400,000, respectively. The cash proceeds from these
sales were applied to reduce the construction loan balance. On January 2, 1998,
VRLP sold the shopping center to New Plan Excel Realty Trust, Inc. (Excel) for
2
$9,500,000 cash. On August 7, 1998, VRLP entered into a an operating agreement
(Agreement) with ERT Development Corporation (ERT), an affiliate of Excel, to
form Temecula Creek, LLC, a California limited liability company (TC). TC was
formed for the purpose of developing, constructing and operating the remaining
13 acres of land as part of the community shopping center in Temecula,
California. VRLP contributed the 13 acres of land to TC and TC assumed the
balance of the assessment district obligation payable. For purposes of
maintaining capital account balances in calculating distributions, VRLP's
contribution, net of the liability assumed by TC, was valued at $2,000,000. ERT
contributed $1,000,000 cash which was immediately distributed by TC to VRLP.
VRLP, which is the managing member, and ERT are each 50 percent members. ERT
also advanced approximately $220,000 to TC to reimburse VRLP for certain
predevelopment costs incurred by VRLP for the 13 acres. The Agreement provides
that ERT will advance funds to fund predevelopment costs, other than property
taxes and assessment district costs. Each member is required to advance 50
percent of the property taxes and assessment district costs as they become due
(approximately $163,000 annually). The development plan is for 109,910 square
foot shopping center on approximately 13 acres of land. In July 2000, TC
completed development of 54,107 square feet of the shopping. As of August 31,
2001 a total of 75,692 square feet had been constructed of which 100% is
currently leased. The balance of the build out is expected to be completed by
February 2002.
Old Vail Partners, a California general partnership, (OVPGP), a subsidiary of
the Company, owned a 33 acre parcel which was originally designated as
commercially-zoned, however, the City of Temecula adopted a general development
plan as a means of down-zoning the property to a lower use, which if the Company
was not successful in having a development planned approved, might have
significantly impaired the value of the property. The Company contested this
action, and as described below, was successful in having a development plan
approved in October 2000 that enabled the Company to sell the property in June
2001.
(3) Commercial Real Estate Rental - Real estate rental operations consist of
one office building in the Sorrento Mesa area of San Diego, California, a
sublessor interest in land leased to condominium owners in Palm Springs,
California, and a 50 percent ownership interest in a 542 unit apartment project
in San Diego, California.
Downtown Properties Development Corporation (DPDC), a wholly-owned subsidiary of
the Company, owned a 36,000 square foot office building in the Sorrento Mesa
area of San Diego, California. The building was originally acquired in 1984 by
5230, Ltd., which was 75 percent owned as a limited and general partner by
Sports Arenas Properties, Inc. (SAPI), a wholly-owned subsidiary of the Company.
The Company occupied approximately 14 percent of the office building. On
December 28, 2000 the Company sold its office building for $3,725,000 and
recorded a gain of $2,764,483. The Company has been released from liability
under the existing loan except for those acts, events or omissions that occurred
prior to the loan assumption. The Company had occupied approximately 5,000
square feet of space in the building since 1984. The existing lease expires in
September 2011. In conjunction with a lease modification with the new owner to
the office building, the Company vacated the premises on April 6, 2001 and moved
into the factory space occupied by its subsidiary, Penley Sports, LLC. However,
because the lease commitment was a condition to the original loan agreement, the
lender will only allow the Company to be conditionally released from its
remaining lease obligation. In the event there is an uncured event of default by
the new owner of the office building under the existing loan agreement, the
Company's obligations under its lease will be reinstated to the extent there is
not an enforceable lease on the Company's former space.
The following is a schedule of selected operating information over the last five
years:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Occupancy 93% 99% 99% 97% 98%
Average monthly rent
per square foot $1.18 $1.11 $.98 $.86 $.87
Real property tax $9,000 $19,000 $19,000 $18,000 $17,000
Real Property tax rate 1.12% 1.12% 1.12% 1.12% 1.12%
DPDC is also the lessee of 15 acres of land in the Palm Springs, California area
under a ground lease expiring in September 2043. The land is subleased to owners
of condominium units which were constructed on the property in 1982. The
development was originally planned by DPDC and then sold to another developer,
but DPDC retained the rights to the subleases. The subleases also expire in
September 2043. The master lease provides for the payment of rent equal to the
greater of a minimum rent, which is adjusted for increases in the consumer price
index every five years, or 85 percent of the rents collected on the subleases,
which are also adjusted for increases in the consumer price index every five
years.
3
UCVGP, Inc. and Sports Arenas Properties, Inc. (SAPI), wholly-owned subsidiaries
of the Company, are a one percent managing general partner and a 49 percent
limited partner, respectively, in UCV, L.P. (UCV), which owns an apartment
project (University City Village) located in San Diego, California. University
City Village contains 542 rental units and was acquired in August 1974. UCV
employs approximately 30 persons. The following is a schedule of selected
operating information over the last five years:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Occupancy 98% 99% 99% 99% 98%
Average monthly rent/unit $772 $728 $694 $675 $662
Real property tax $114,000 $112,000 $110,000 $108,000 $107,000
Real Property tax rate 1.12% 1.12% 1.12% 1.12% 1.12%
(4) Golf club shaft Manufacturer - On January 22, 1997, the Company
purchased the assets of the Power Sports Group doing business as Penley Power
Shaft (PPS) and formed Penley Sports, LLC (Penley) with the Company as a 90
percent managing member and Carter Penley as a 10 percent member. PPS was a
manufacturer of graphite golf club shafts that primarily sold its shafts to
custom golf shops. PPS's sales had averaged approximately $375,000 in calendar
1995 and 1996. PPS marketed its shafts in limited quantities through phone
contact and trade magazine advertisements directed at golf shops. Although PPS's
manufacturing process was not automated, it had developed a good reputation in
the golf industry as a manufacturer of high performance golf club shafts, in
addition to maintaining relationships with the custom golf shops. Penley's plans
are to market its products to golf club manufacturers and golf club component
distributors. To compliment the program of marketing to higher volume
purchasers, Penley purchased over $1,100,000 of equipment since January 22, 1997
to automate some of the production processes. Additionally, in June 2000 Penley
moved from its 8,559 square foot facility into a 38,025 square foot facility, of
which approximately 10,000 square feet are subleased to another tenant through
October 2002.
Until January 2000, Penley's sales were principally to custom golf shops where
the orders are for 2 to 10 shafts per order at prices averaging $18 per shaft.
In January 2000, Penley commenced sales to two of the largest golf component
distributors. As a result of the sales to these two distributors and other small
golf club manufacturers, golf club shaft sales increased by $735,654 in the year
ended June 30, 2000 and $407,660 in the year ended June 30, 2001. Penley
currently has products in testing by several large golf club manufacturers.
However, there can be no assurances that the Penley will be able to enter into
any significant sales contracts or that, if it does, the contracts will be
profitable to Penley.
Penley has implemented an extensive program to market directly to golf club
manufacturers through the distribution of direct mail materials and videos and
participation in several large golf shows during the year. Penley is principally
using its internal sales staff in the marketing and sale of its shafts to
manufacturers, distributors and golf shops. Penley is also promoting its shafts
to professional golfers as a means of achieving acceptance with the club
manufacturers as the golfers endorse the shafts.
Management believes Penley has been successful in building a reputation as a
leader in new shaft design and concepts. Penley has applied for several patents
on shaft designs, of which one was issued and the others are pending. Although
Penley has developed several new products, no assurance can be given that they
will meet with market acceptance or that Penley will be able to continue to
design and manufacture additional new products.
The primary raw material used in all of Penley's graphite shafts is carbon
fiber, which is combined with epoxy resin to produce sheets of graphite prepreg.
Due to low production levels, Penley currently purchases most of its graphite
prepreg from two suppliers. There are numerous alternative suppliers of graphite
prepreg. Although Management believes that it will be able to establish
relationships with other graphite prepreg suppliers to ensure sufficient
supplies of the material at competitive pricing as production increases, there
can be no assurances the unforeseen difficulties will not occur that could lead
to interruptions and delays to Penley's production process.
Penley uses hazardous substances and generates hazardous waste in the ordinary
course of its manufacturing of graphite golf club shafts and other related
products. Penley is subject to various federal, state, and local environmental
laws and regulations, including those governing the use, discharge and disposal
of hazardous materials. Management believes it is in substantial compliance with
the applicable laws and regulations and to date has not incurred any liabilities
under environmental laws and regulations nor has it received any notices of
violations. However, there can be no assurance that environmental liabilities
will not arise in the future which may affect Penley's business.
Penley is trying to enter a highly competitive environment among established
golf club shaft manufacturers. Although Penley has made significant progress in
establishing its reputation for technology, the unproven production capability
of Penley is making it difficult to attract the golf club manufacturers as
customers.
4
Penley currently has one patent and two other patents pending and several
copyrighted trademarks and logos. Although Management believes these items are
of value to the business and Penley will protect them to the fullest extent
possible, Management does not believe these items are critical to Penley's
ability to develop business with the golf club manufacturers.
Penley currently has approximately 35 full and part-time employees.
Due to Penley's low sales volume, there is currently no impact from the
seasonality of sales (expected to be from April through September), no
significant backlog of sales orders, or customer concentration (based on
consolidated revenues).
(b) INDUSTRY SEGMENT INFORMATION:
----------------------------------
See Note 11 of Notes to Consolidated Financial Statements for
required industry segment financial information.
ITEM 2. PROPERTIES
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(a) Bowling Centers:
---------------------
The Company's remaining bowling center occupies the following facility:
Name Location Size Expiration Date of Lease
---- -------- ---- ------------------------
Grove Bowl San Diego, California 60 lanes June 2003- options to 2018
The Grove Bowl occupies its facility pursuant to a long-term operating lease
described in Note 8(a) of the Notes to Consolidated Financial Statements.
(b) Real Estate Development:
----------------------------
As of June 30, 1999, Downtown Properties Inc. (DPI), a wholly-owned subsidiary
of the Company, owned 507 acres of undeveloped land in Lake of the Ozarks,
Missouri. The land was collateral for a $75,927 bank loan (first deed of trust).
On September 7, 1999 the property was sold to a third party for $215,000 cash,
less selling expenses of $24,638, and the loan was paid from the proceeds.
RCSA Holdings, Inc. (RCSA) and OVGP, Inc., wholly-owned subsidiaries of the
Company, own a combined 50 percent general and limited partnership interest in
Old Vail Partners, L.P., a California limited partnership (OVP), which owns a 60
percent limited partnership interest in Vail Ranch Limited Partnership (VRLP).
As described in Note 6(c) of Notes to Consolidated Financial Statements, there
are four other partners in OVP in the form of liquidating limited partnership
interests. Three of the four partners had received the limit of their
distributions through June 30, 2001 and their partnership interests were
liquidated. The remaining partner in OVP is entitled to 50 percent of the cash
distributions from OVP, not to exceed $2,450,000, of which $1,410,000 has been
paid as of June 30, 2001.
RCSA and DPI were the general partners of Old Vail Partners (OVPGP), a
California general partnership, which owned 33 acres of unimproved land in
Temecula, California. OVPGP contributed the land to OVP when the litigation
regarding the zoning was settled (see below). In June 2001, OVP sold the
unimproved land.
The 33 acres of land owned by OVPGP as of June 30, 2000 was located within a
special assessment district of the County of Riverside, California (the County)
which was created to fund and develop roadways, sewers, and other required
infrastructure improvements in the area necessary for the owners to develop
their properties. Property within the assessment district is collateral for an
allocated portion of the bonded debt that was issued by the assessment district
to fund the improvements. The principal balance of the allocated portion of the
bonds was $1,384,153 as of June 30, 2000. The annual payments (due in semiannual
installments) related to the bonded debt are approximately $144,000 for the 33
acres. The payments continue through the year 2014 and include interest at
approximately 7-3/4 percent. OVP was delinquent in the payment of property taxes
and assessments for over the last eight years and the property was subject to
default judgments to the County of Riverside, California totaling approximately
$2,132,421 as of June 30, 2000 regarding delinquents assessment district
payments ($1,776,243) and property taxes ($356,178).
In November 1993, the City of Temecula adopted a general development plan that
designated 33 acres of property owned by Old Vail Partners, a general
partnership (the predecessor to Old Vail Partners, L.P., a California limited
partnership) (OVPGP) as suitable for "professional office" use, which was
contrary to its zoning as "commercial" use. As part of the adoption of its
general development plan, the City of Temecula adopted a provision that, until
the zoning is changed on properties affected by the general plan, the general
plan shall prevail when a use designated by the general plan conflicts with the
existing zoning on the property. The result was that the City of Temecula has
effectively down-zoned the 33 acres from a "commercial" to "professional office"
use. As described above, the parcel was subject to assessment district
obligations, which were allocated in 1989 based on a higher "commercial" use.
Since the assessment district obligations were not subject to reapportionment as
a result of re-zoning, a "professional office" use was not economically feasible
due to the disproportionately high allocation of assessment district costs.
5
The County had scheduled the 33 acres for public sale for the defaulted property
taxes on September 27, 1999. OVPGP had unsuccessfully attempted to negotiate a
payment plan with the County subject to the successful resolution of the zoning
problems with the property. On September 23, 1999, OVPGP filed a petition for
relief under Chapter 11 of the federal bankruptcy laws in the United States
Bankruptcy Court. The primary claim affected by this action was the County's
secured claim for delinquent taxes and assessment district payments. OVPGP's
plan was to use the relief from stay to continue its efforts to negotiate a
settlement of the zoning issues and restore the economic value of the property.
The bankruptcy proceeding was dismissed on February 15, 2000 with the
concurrence of OVPGP. This dismissal allowed the County of Riverside to proceed
with a public sale of the property within 45 days after giving notice. On June
23, 2000, the County of Riverside agreed to remove the property from the planned
public sale originally schedule for June 26, 2000 in exchange for an immediate
payment of $330,000 with the balance of property taxes due on December 29, 2000.
Separately, the County of Riverside stated that a foreclosure sale related to
the default judgement for assessment district payments would not be scheduled
until some time after January 1, 2001. On January 19, 2001, the County of
Riverside agreed to extend the due date to March 30, 2001 with three options to
that would extend the due date to August 1, 2001. Each extension option requires
a payment of $25,000. Payments were made to date to extend the agreement to May
31, 2001.
On May 6, 1998, OVPGP filed suit against the City of Temecula, California in the
California Superior Court for the County of Riverside. OVPGP claimed that, if
the effective re-zoning is valid, the action would be a taking and damaging of
OVPGP's property without payment of just compensation. OVPGP was seeking to have
the effective re-zoning invalidated and an unspecified amount of damages. OVPGP
has previously suffered adverse outcomes in other suits filed in relation to
this matter. A stipulation was entered that dismissed this suit without
prejudice and agreed to toll all applicable statute of limitations while OVPGP
and the City of Temecula attempted to informally resolve this litigation.
On October 23, 2000, the City of Temecula's city council granted preliminary
approval of OVPGP's request for re-zoning and general plan amendment related to
a development plan which includes a combination of multi-family and commercial
uses. On November 28, 2000 the re-zoning and general plan amendment requested by
OVPGP were adopted by the City of Temecula and OVPGP abandoned its legal claims
against the City of Temecula.
On June 1, 2001, the Company sold the 33 acres to an unrelated developer for
$6,375,000 cash plus assumption of the non-delinquent balance of the assessment
district obligation ($1,001,274) and recorded a gain of $5,544,743. The cash
proceeds were used to pay $2,459,477 of delinquent taxes and assessments related
to the property and $299,458 of selling expenses. In addition, payments of
$2,172,410 were made to the limited partners in OVP from the proceeds.
(c) Real Estate Operations:
---------------------------
UCVGP, Inc. and SAPI, wholly owned subsidiaries of the Company, own a one
percent managing general partnership interest and a 49 percent limited
partnership interest, respectively, in UCV, L.P. (UCV). UCV owns a 542-unit
apartment project (University City Village) in the University City area of San
Diego, California. The property is collateral for a $33,000,000 note payable by
the partnership as of June 30, 2001.
DPDC owned an approximate 36,000 square foot office building located in San
Diego, California, which was constructed in 1983. DPDC sold the office building
on December 28, 2000.
DPDC is the lessee of 15 acres of land in the Palm Springs, California area
under a lease expiring in September 2043. The land is subleased to the owners of
the condominium units constructed on the property. The subleases also expire in
September 2043.
(d) Golf Operations:
--------------------
Penley Sports, LLC leases 38,025 square feet of industrial space in San Diego,
California pursuant to a lease that expires in March 31 2010 with options to
March 31, 2020. Penley has subleased approximately 10,000 square feet to a third
party pursuant to a two year lease that expires in October 2002.
ITEM 3. LEGAL PROCEEDINGS
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At June 30, 2001 the Company or its subsidiaries were not parties to any
material legal proceedings other than routine litigation incidental to the
business.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
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6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
(a) There is no recognized market for the Company's common stock except for
limited or sporadic quotations, which may occur from time to time. The
following table sets forth the high and low bid prices per share of the
Company's common stock in the over-the-counter market, as reported on the
OTC Bulletin Board, which is a market quotation service for market makers.
The over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily reflect actual
transactions in shares of the Company's common stock.
2001 2000
-------------- --------------
High Low High Low
----- ----- ----- -----
First Quarter $ .04 $ .04 $ .02 $ .02
Second Quarter $ .04 $ .04 $ .02 $ .02
Third Quarter $ .04 $ .04 $ .05 $ .02
Fourth Quarter $ .06 $ .04 $ .06 $ .02
(b) The number of holders of record of the common stock of the Company as of
September 20, 2001 is approximately 4,300. The Company believes there are a
significant number of beneficial owners of its common stock whose shares are
held in "street name".
(c) The Company has neither declared nor paid dividends on its common stock
during the past ten years, nor does it have any intention of paying
dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (NOT COVERED BY INDEPENDENT
----------------------------------------------------------------
AUDITORS' REPORT)
-----------------
Year Ended June 30,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Revenues ................... $ 4,492,736 $ 4,724,435 $ 3,957,011 $ 3,642,335 $ 3,727,252
Loss from operations ....... (3,443,196) (3,424,495) (3,654,212) (2,603,065) (4,327,225
Income (loss) from
continuing operations .... 3,603,234 (3,625,063) (3,501,933) (895,524) (3,347,008)
Basic and diluted income
(loss) per common share
from continuing operations .13 (.13) (.13) (.03) (.12)
Total assets ............... 3,448,474 6,601,236 6,998,820 9,448,653 9,933,755
Long-term debt, excluding
current portion ......... 13,942 1,967,169 3,911,694 3,287,783 4,061,987
See Notes 4(b), 6(c), and 12 of Notes to Consolidated Financial Statements
regarding disposition of business operations and material uncertainties.
Certain 2000, 1999, 1998 and 1997 amounts have been reclassified to conform
to the presentation used in 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS.
---------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has a working capital deficit of $1,086,126 at June 30, 2001, which
is a $5,741,877 decrease from the working capital deficit of $6,828,003 at June
30, 2000. The working capital deficit decreased primarily due to the sale of the
office building, bowling center real estate and undeveloped land. These sources
of funds were partially offset by $3,422,256 of cash used by operations.
7
The Company has been unable to generate sufficient cash flow from operating
activities to meet scheduled principal payments on long-term debt and capital
replacement needs during the last several years. It has used its share of
distributions from investees and proceeds from real estate and bowling center
sales to fund these deficits.
The cash provided (used) before changes in assets and liabilities segregated by
business segments was as follows:
2001 2000 1999
---------- ---------- ----------
Bowling ............................. (289,000) (356,000) (157,000)
Rental .............................. 105,000 219,000 207,000
Golf ................................ (2,594,000) (2,652,000) (2,587,000)
Development ......................... (177,000) (246,000) (215,000)
General corporate expense and other . (467,000) (217,000) (257,000)
---------- ---------- ----------
Cash provided (used) by continuing
operations ........................ (3,422,000) (3,252,000) (3,009,000)
Capital expenditures, net of
financing ......................... (538,000) (446,000) (148,000)
Principal payments on long-term debt (214,000) (360,000) (262,000)
---------- ---------- ----------
Cash used ........................... (4,174,000) (4,058,000) (3,419,000)
========== ========== ==========
Distributions received from investees 1,559,000 2,193,000 1,420,000
========== ========== ==========
Contributions to investees .......... (200,000) (43,000) --
========== ========== ==========
Proceeds from sale of assets ........ 5,680,000 190,000 --
========== ========== ==========
Payments on minority interests ...... (2,172,000) -- --
========== ========== ==========
Other than distributions of $920,000 received in March 2001 and $1,757,000
received in October 1999 from the proceeds of UCV's long term debt, the cash
distributions the Company received from UCV during the last three years were the
Company's proportionate share of distributions from UCV's results of operations.
The investment in UCV is classified as a liability because the cumulative
distributions received from UCV exceed the sum of the Company's initial
investment and the cumulative equity in income of UCV by $15,792,373 at June 30,
2001. Although this amount is presented in the liability section of the balance
sheet, the Company has no liability to repay the distributions in excess of
basis in UCV. The Company estimates that the current market value of the assets
of UCV (primarily apartments) exceeded its liabilities by
$20,000,000-$27,000,000 as of June 30, 2001. On October 3, 2000, UCV obtained
approval for plans to redevelop the 542 unit apartment project into 1,109 units
plus an 80 unit assisted living facility. UCV is currently evaluating
alternatives for financing the redevelopment.
At June 30, 2001, the Company owned a 60 percent limited partnership interest in
Vail Ranch Limited Partnership (VRLP), which is a 50 percent partner in Temecula
Creek, LLC (TC), a limited liability company, the other member of which is ERT
Development Corporation (an affiliate of Excel). In July 2000, TC completed
development of the first phase of a shopping center consisting of 60,229 square
feet of space (of which 56,307 square feet is currently leased) on approximately
7 acres of land. TC is currently in the process of obtaining construction
financing to construct an additional 50,032 square feet of shopping center space
on the remaining 6 acres of land. The Company estimates that the value of the
Company's 60 percent interest in VRLP at June 30, 2001 is approximately
$1,000,000 to $1,500,000. In July 2000, TC completed development of 54,107
square feet of the shopping center. As of August 31, 2001 a total of 75,692
square feet had been constructed of which 100% is currently leased. The balance
of the build out is expected to be completed by February 2002.
The Company is expecting a $1,500,000 cash flow deficit in the year ending June
30, 2002 from operating activities after estimated distributions from UCV, and
estimated capital expenditures ($20,000) and scheduled principal payments on
short-term and long-term debt. Management expects continuing cash flow deficits
until Penley Sports develops sufficient sales volume to become profitable.
However, there can be no assurances that Penley Sports will ever achieve
profitable operations. Management is currently evaluating other sources of
working capital from obtaining additional investors in Penley Sports to provide
sufficient funds for the expected future cash flow deficits. 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.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets" ", and SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
8
using the purchase method. SFAS No. 142 requires the use of a non-amortization
approach to account for purchased goodwill. Goodwill acquired on or prior to
June 30, 2001 will no longer be amortized effective January 1, 2002. Goodwill
acquired on or after July 1, 2001 will follow the non-amortization approach
under SFAS No. 142. Under the non-amortization approach, goodwill would be
tested for impairment, rather than being amortized to earnings, as originally
proposed. In addition, SFAS No. 142 requires that acquired intangible assets be
separately identified and amortized over their individual useful lives. The
Company will be required to adopt these statements beginning January 1, 2002.
SFAS No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002 and requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company does not expect that SFAS No. 141 and 142 will
have material impact on the Company's financial position or results of
operations. The Company has not yet assessed the impact of SFAS No. 143.
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 scheduled principal payments 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:
2002 2003 2004 Total Fair Value (1)
--------- ------ ------ ---------- -------------
Fixed rate debt.... $26,000 $8,000 $6,000 $40,000 $40,000
Weighted average
interest rate... 11.8% 13.9% 13.9% 12.5% 12.5%
Variable rate debt. $1,256,000 -- -- $1,256,000 $1,250,000
Weighted average
interest rate... 7.8% -- -- 7.8% 7.8%
(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 $1,250,000 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, 2002.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
$33,000,000 as of March 31, 2001 for which the interest rate was 8.5 percent.
However, the combination of a floor established by the lender and a cap
purchased by UCV has resulted in the rate being fixed at 8.5 percent for the
initial term of the loan. The scheduled principal payments for each of UCV's
fiscal years ending March 31 is: 2002- none; 2003- $33,000,000, and in total-
$33,000,000. The estimated fair value of this debt is $33,800,000 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.
"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, the Business Risks described in Item 1 of this Report
on Form 10-K and elsewhere in the Company's filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
---------------------
The discussion of Results of Operations is primarily by the Company's business
segments. The analysis is partially based on a comparison of and should be read
in conjunction with the business segment operating information in Note 11 to the
Consolidated Financial Statements.
9
The following is a summary of the changes to the components of the segments in
the years ended June 30, 2001 and 2000:
Real Estate Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
---------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 2001
------------------------
Revenues ................. $(368,870) $ (231,562) $ -- $407,660 $(70,238) $(263,010)
Costs .................... (214,662) (39,907) (68,991) 434,793 -- 111,233
SG&A-direct .............. (103,946) -- -- (59,649) (68,260) (231,855)
SG&A-allocated ........... (53,906) (13,000) -- (7,000) 73,906 --
Depreciation and
amortization ........... (67,103) (64,306) -- 52,106 (6,458) (85,761)
Impairment losses ........ -- -- -- -- (37,926) (37,926)
Interest expense ......... (50,660) (67,778) (31,814) (9,425) 157,220 (2,457)
Equity in income (loss) of
investees .............. -- (118,443) (99,200) -- -- (217,643)
Gain on sale ............. 482,487 2,764,483 5,544,743 -- -- 8,791,713
Segment profit (loss) .... 603,894 2,599,469 5,546,348 (3,165) (188,720) 8,557,826
Investment income ........ (17,119)
Income from continuing
operations ............. 8,540,707
YEAR ENDED JUNE 30, 2000
------------------------
Revenues ................. (85,410) 76,477 -- 735,654 43,388 770,109
Costs .................... 113,520 30,332 44,661 719,119 -- 907,632
SG&A-direct .............. (11,967) -- -- 18,289 (326,384) (320,062)
SG&A-allocated ........... 18,508 5,000 (7,000) 73,000 (89,508) --
Depreciation and
amortization ........... (4,497) 835 -- 11,349 (2,162) 5,525
Impairment losses ........ -- -- (90,629) -- 37,926 (52,703)
Interest expense ......... (6,329) 29,437 15,049 (8,540) 12,090 41,707
Equity in income (loss) of
investees .............. -- (79,293) (114,880) -- -- (194,173)
Segment profit (loss) .... (194,645) (68,420) (76,961) (77,563) 411,426 (6,163)
Investment income ........ (116,967)
Loss from continuing
operations ............. (123,130)
BOWLING OPERATIONS:
-------------------
The segment includes the operations of two bowling centers, Valley Bowl and
Grove Bowl. On December 21, 2000, the Company closed the operations of Valley
Bowl in conjunction with the sale of the real estate on December 29, 2000. The
following is a summary by bowling center of the changes in the results of
operations:
2001 vs. 2000 2000 vs. 1999
-------------------------------- --------------------------------
Grove Valley Combined Grove Valley Combined
-------- -------- -------- -------- -------- --------
Revenues .......................... 256,008 (624,878) (368,870) 5,393 (90,803) (85,410)
Costs ............................. 166,375 (381,037) (214,662) 136,579 (23,059) 113,520
SG&A-direct ....................... 6,808 (110,754) (103,946) (942) (11,025) (11,967)
SG&A-allocated .................... 2,594 (56,500) (53,906) 22,808 (4,300) 18,508
Depreciation and .................. (84) (67,019) (67,103) (5,602) 1,105 (4,497)
amortization
Interest expense .................. -- (50,660) (50,660) -- (6,329) (6,329)
Gain on sale ...................... -- 482,487 482,487 -- -- --
Segment profit (loss) ............. 80,315 523,579 603,894 (147,450) (47,195) (194,645)
2001 vs. 2000
-------------
On December 29, 2000 the Company sold the land and building occupied by the
Valley Bowling Center for $2,215,000 cash and recorded a gain of $482,487. The
proceeds of the sale were used to pay the existing loan of $1,650,977 and
selling expenses of $167,671.
The following is a comparison of the operations of the Grove bowling center to
the prior year. Grove's revenues increased 17 percent in 2001 primarily due to
an 8 percent increase in number of games bowled. The average price of games
bowled also increased by 9 percent. This bowling center is located in a shopping
center that just completed a major renovation and "reopened" in April 2000 with
10
two major retail stores. As a result, the bowling center has experienced a
significant increase in open and league play since the "reopening". Although
management forecasts continued increases in open and league play at the bowling
center, the amount of the increase and how long it will continue is uncertain.
League revenues also increased because of the ability to move league bowlers
from Valley when the bowl was closed in December 2000.
Bowl costs increased $166,000 or 12% primarily due to a $99,000 (106%) increase
in utility costs and a $55,000 (12%) increase in payroll costs. The increase in
utility costs related to the increase in electric rates in San Diego that have
been subsiding since April and May of 2001 but are still substantially higher
than the rates in 2000. Payroll costs increased primarily due to an increase in
staffing related to the increase in customer bowling. There was no significant
change in selling, general and administrative expenses.
2000 vs. 1999
-------------
Bowling revenues decreased by 4 percent. The number of league games bowled
continued to decrease at each of the bowling centers by approximately 15%
(54,000 games in total). This decrease is being partially offset by an increase
in the open-play games bowled at Grove (18,000) related to the April 2000
"reopening" of the shopping.
Bowl costs increased by 6% primarily due to due to a $76,000 increase in
supplies and maintenance expenses. Approximately $46,000 of the increase in
maintenance expenses related to lane resurfacing or painting the exterior of a
building, which are not indicative of a trend of increases in expenses to be
annualized. There was no significant change in selling, general and
administrative expenses.
RENTAL OPERATIONS
-----------------
This segment includes the operations of the office building sold December 28,
2000, the equity in income of the operation of a 542 unit apartment project
(UCV), a subleasehold interest in land underlying a condominium project, the
sublease of a portion of the Penley factory and other miscellaneous rents
received on undeveloped land. The following is a summary of the changes in
operations:
2001 vs. 2000 2000 vs. 1999
------------------------------------ ------------------------------
Office Others Combined Office Others Combined
---------- -------- ---------- ------- -------- -------
Revenues ................ $ (233,259) $ 1,697 $ (231,562) $52,461 $ 24,016 $76,477
Costs ................... (57,938) 18,031 (39,907) (25,584) 55,916 30,332
SG&A-allocated .......... (13,000) -- (13,000) 5,000 -- 5,000
Depreciation and
amortization ......... (64,306) -- (64,306) 835 -- 835
Interest expense ........ (85,535) 17,757 (67,778) 29,437 -- 29,437
Equity in income of UCV . -- (118,443) (118,443) -- (79,293) (79,293)
Gain on sale ............ 2,764,483 -- 2,764,483 -- -- --
Segment profit (loss) ... 2,752,003 (152,534) 2,599,469 42,773 (111,193) (68,420)
A temporary easement granted by the Company for the use of a portion of its
undeveloped land in Temecula, California expired in September 2000. The Company
had been amortizing approximately $17,000 of deferred rent to income each
quarter. Rental revenues decreased by $48,000 in 2001 and increased 24,000 in
2000 related to this easement.
Rental revenues and rental costs increased by $46,000 and $47,000 respectively
related to the sublease for the Penley factory. Approximately 10,000 square feet
of the Penley factory space (38,000 square feet) was subleased commencing in
November 2000 under a lease that expires in October 2002.
Other rental costs also increased in 2000 due to an increase in the rent expense
for the subleasehold interest.
On December 28, 2000 the Company sold its office building for $3,725,000 and
recorded a gain of $2,764,483. The consideration consisted of the assumption of
the existing loan with a principal balance of $1,950,478 and cash of $1,662,337.
The cash proceeds were net of selling expenses of $163,197, credits for lender
impounds of $83,676, deductions for security deposits of $26,463 and prepaid
rents of $6,201. The Company has been released from liability under the existing
loan except for those acts, events or omissions that occurred prior to the loan
assumption. The Company had occupied approximately 5,000 square feet of space in
the building since 1984. The existing lease expires in September 2011. In
conjunction with a lease modification with the new owner of the office building,
the Company vacated the premises on April 6, 2001 and moved into the factory
space occupied by its subsidiary, Penley Sports, LLC. However, because the lease
commitment for the office space was a condition to the original loan agreement,
the lender will only allow the Company to be conditionally released from its
remaining lease obligation. In the event there is an uncured event of default by
the new owner of the office building under the existing loan agreement, the
Company's obligations under its lease will be reinstated to the extent there is
not an enforceable lease on the Company's space.
11
Office building rental revenues of the office building increased in 2000
primarily due to the continued increases in the rental rates at the office
building. The vacancy rate for the office building was 3% and 1% 1999 and 2000,
respectively. The average monthly rent per square foot was $.98 and $1.11 for
1999 and 2000, respectively. Interest expense for the office building increased
in 2000 related to an increase in the long-term debt secured by the building in
May of 1999.
The equity in income of UCV decreased by $118,000 in 2001 and $79,000 in 2000
primarily due to increases in interest expense and other costs of UCV that were
only partially offset by increases in revenues. The following is a summary of
the changes in the operations of UCV, LP in 2001 and 2000 compared to the
previous years:
2001 2000
--------- ---------
Revenues .............................. $ 261,000 $ 202,000
Costs ................................. (47,000) 148,000
Depreciation .......................... (7,000) (3,000)
Interest and amortization of loan costs 532,000 216,000
Other expenses ........................ 20,000 --
Income before extraordinary loss ...... (237,000) (159,000)
Extraordinary loss from debt
extinguishment ..................... 401,000 (197,000)
Net income ............................ (638,000) 38,000
Vacancy rates at UCV have averaged 1.3% 1.7% and 2.3% in 1999, 2000 and 2001,
respectively. Total revenues of UCV increased by 5 and 4 percent in 2001 and
2000, respectively, primarily due to increases in the average rental rate.
UCV costs decreased in 2001 primarily due to a decrease in repairs and
maintenance costs. UCV costs increased in 2000 primarily due to an increase in
water expense ($60,000) related to increased irrigation of the property.
Otherwise, costs increased 6 percent in 2000. UCV's interest expense increased
in 2001 and 2000 primarily due to an increase in long-term debt in October 1999
and March 2001. UCV increased its long-term debt in May of 1998 by $5,166,500,
in October 1999 by $4,039,490, and in March 2001 by $3,960,510. The refinancings
in May 1998 and March 2001 resulted in an extraordinary loss of $197,000 in 1998
and $401,000 in 2001 related to prepayment penalties and write-offs of the
unamortized loan fees of the previous long-term debt.
REAL ESTATE DEVELOPMENT:
------------------------
The real estate development segment consists primarily of OVP's operations
related to 33 acres of undeveloped land in Temecula, California, and an
investment in VRLP.
Development costs consist primarily of legal expenses ($65,000 in 2001, $104,000
in 2000, and $62,000 in 1999) related to the litigation regarding the effective
down-zoning of the 33 acres of land and property taxes ($88,000 in 2001,
$106,000 in 2000, and $95,000 in 1999). Development interest primarily
represents the interest portion of the assessment district payments due each
year and the interest accrued on the delinquent payments.
On June 1, 2001, the OVP sold the 33 acres to an unrelated developer for
$6,375,000 cash plus assumption of the non-delinquent balance of the assessment
district obligation ($1,001,274) and recorded a gain of $5,544,743. The cash
proceeds were used to pay $2,459,477 of delinquent taxes and assessments related
to the property and $299,458 of selling expenses. A partner in OVP holds a
liquidating limited partnership interest which entitles him to 50 percent of
future distributions up to $2,450,000, of which $1,360,000 has been paid through
June 30, 2001 ($860,000 in 2001, $50,000 in 1999 and $450,000 in 1998). This
limited partner's capital account balance is presented as "Minority interest" in
the consolidated balance sheets. Three other parties were granted liquidating
partnership interests related to either their efforts with achieving the zoning
approval for the 33 acres or making a loan to the Company that was used to fund
payments to the County of Riverside for delinquent taxes. These partners
received distributions totaling $1,312,410 from the sale of the undeveloped land
in the year ended June 30, 2001 and their limited partnership interests were
liquidated. The $1,312,410 paid to these partners is presented as "Minority
interest in consolidated subsidiary" in the Statement of Operations for the year
ended June 30, 2001.
The following is a summary of the changes in the operations of VRLP in 2001 and
2000 compared to the previous years:
2001 2000
--------- ---------
Revenues ................. $ (10,000) $(122,000)
Operating expenses ....... (56,000) 78,000
Equity in loss of investee 225,000 (43,000)
Net income (loss) ........ (179,000) (157,000)
12
The operations for 1999 and 2000 reflected the results of negotiating property
tax refunds that were non-recurring. The equity in loss of investee represents
VRLP's share of the results of operations of Temecula Creek LLC which was
developing a shopping center during all of 1999 and 2000 and a portion of 2001.
The equity in the loss of investee represents VRLP's share of the property taxes
expensed by Temecula Creek during 1999 and 2000. The equity in loss of investee
in 2001 primarily represents the share of the operating loss of the shopping
center as various phases were completed.
The Company recorded a $90,629 provision for impairment loss in the year ended
June 30, 1999 to reduce the carrying value of undeveloped land in Missouri to
the value realized when it was sold in September 1999.
GOLF CLUB SHAFT MANUFACTURING:
------------------------------
Prior to January 2000, golf club shaft sales were principally to custom golf
shops. In January 2000, Penley commenced sales to two of the largest golf
equipment distributors. In addition to increases in sales related to these two
customers, direct sales to the after-market also increased, likely due to the
credibility and increased exposure from the Penley products being included in
the catalogs of these two distributors. In the year 2000, approximately 34
percent of the revenues were from sales to six golf equipment distributors, 8
percent from small golf club manufacturers, and the remainder related to sales
directly to golf shops. In the year 2001, approximately 31 percent of the
revenues were from sales to seven golf equipment distributors, 12 percent from
small golf club manufacturers, and the remainder related to sales directly to
golf shops.
Operating expenses of the golf segment consisted of the following in 1999, 1998
and 1997:
2001 2000 1999
---------- ---------- ----------
Costs of sales and manufacturing overhead $1,922,000 $1,502,000 $ 797,000
Research and development ................ 263,000 248,000 234,000
---------- ---------- ----------
Total golf costs ..................... $2,185,000 $1,750,000 $1,031,000
========== ========== ==========
Marketing and promotion ................. $1,407,000 $1,514,000 $1,511,000
Administrative costs- direct ............ 237,000 190,000 174,000
---------- ---------- ----------
Total SG&A-direct ..................... $1,644,000 $1,704,000 $1,685,000
========== ========== ==========
Total golf costs increased in 2001 and 2000 primarily due to an increase in the
amount of cost of goods sold related to increased sales, a $54,000 increase in
rent for the factory that was moved into in June 2000, an increase in the cost
of prototype shafts developed during the periods, and an increase in the payroll
for research and development. Marketing and promotion expenses decreased in 2001
primarily due to decreases in player sponsorship costs and promotional goods.
Administrative costs increased in 2001 primarily due to an increase in
professional fees related to filings for trademark and patent matters.
UNALLOCATED AND OTHER:
----------------------
Revenues decreased by $70,000 in 2001 due to a decrease in brokerage
commissions. Revenues increased by $43,000 in 2000 due to a $37,000 increase in
brokerage commissions.
Unallocated and Other SG&A decreased by $68,000 in 2001 and $326,000 in 2000.
The decrease in 2000 primarily related to $390,000 of expense recorded in 1999
as a provision for the uncertainty of the collectability of the note receivable
from affiliate. The decrease in 2001 primarily related to a $44,000 reduction in
brokerage commission fees.
Interest expense increased in 2001 and 2000 due to interest related to short
term borrowings.
Investment income decreased by $116,967 in 2000 due to the cessation of the
accrual of interest income on the note receivable from shareholder (See Note 3b
of the Notes to Consolidated Financial Statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
(a) The Financial Statements and Supplementary Data of Sports Arenas, Inc.
and Subsidiaries are listed and included under Item 14 of this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
-------------------------------------------------------------------
and Financial Disclosure NONE
-------------------------
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------
(a) - (c) The following were directors and executive officers of the Company
during the year ended June 30, 2001. All present directors will hold office
until the election of their respective successors. All executive officers are to
be elected annually by the Board of Directors.
Directors and Officers Age Position and Tenure with Company
---------------------- --- --------------------------------
Harold S. Elkan 58 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 48 Chief Financial Officer and Treasurer
since May 1987; Director and
Assistant Secretary since
August 1, 1989; Secretary
since January 1995
Patrick D. Reiley 60 Director since August 21, 1986
James E. Crowley 54 Director since January 10, 1989
Robert A. MacNamara 53 Director since January 9, 1989
There are no understandings between any director or executive officer and any
other person pursuant to which any director or executive officer was selected as
a director or executive officer.
(d) Family Relationships - None
(e) Business Experience
1. Harold S. Elkan has been employed as the President and Chief Executive
Officer of the Company since 1983. For the preceding ten years he was a
principal of Elkan Realty and Investment Co., a commercial real estate brokerage
firm, and was also President of Brandy Properties, Inc., an owner and operator
of commercial real estate.
2. Steven R. Whitman has been employed as the Chief Financial Officer and
Treasurer since May 1987. For the preceding five years he was employed by
Laventhol & Horwath, CPAs, the last four of which were as a manager in the audit
department.
3. Patrick D. Reiley was the Chairman of the Board and Chief Executive
Officer of Reico Insurance Brokers, Inc. (Reico) from 1980 until June 1995, when
Reico ceased doing business. Reico was an insurance brokerage firm in San Diego,
California. Mr. Reiley has been a principal of A.R.I.S., Inc., an international
insurance brokerage company, since 1997.
4. James E. Crowley has been an owner and operator of various automobile
dealerships for the last twenty years. Mr. Crowley was President and controlling
shareholder of Coast Nissan from 1992 to August 1996; and has been President of
the Automotive Group since March 1994. The Automotive Group operates North
County Ford, North County Jeep GMC, TAG Collision Repair, and Lake Elsinore
Ford.
5. Robert A. MacNamara had been employed by Daley Corporation, a California
corporation, from 1978 through 1997, the last eleven years of which he served as
Vice President of the Property Division. Daley Corporation is a residential and
commercial real estate developer and a general contractor. Mr. MacNamara is
currently an independent consultant to the real estate development industry.
(f) Involvement in legal proceedings - None
-------------------------------------
Section 16(a) Compliance -Section 16(a) of the Securities Exchange Act of
1934 requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
14
To the Company's knowledge, based solely on written representations that no
other reports were required, during the three fiscal years ended June 30, 1999
through 2001, all Section 16(a) filing requirements applicable to officers,
directors and greater than ten-percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------
(b) The following Summary Compensation Table shows the compensation paid for
each of the last three fiscal years to the Chief Executive Officer of the
Company and to the most highly compensated executive officers of the Company
whose total annual compensation for the fiscal year ended June 30, 2001 exceeded
$100,000.
Long-term All Other
Name and Compen- Compen-
--------- -------- -------
Principal Position Year Salary Bonus Other sation sation
------------------ ---- ------ ----- ----- ------ ------
Harold S. Elkan, 2001 $350,000 $100,000 $ -- $ -- $ --
President 2000 350,000 $100,000 -- -- --
1999 350,000 $100,000 -- -- --
Steven R. Whitman, 2001 100,000 -- -- -- --
Chief Financial 2000 100,000 10,000 -- -- --
Officer 1999 100,000 10,000 -- -- --
The Company has no Long-Term Compensation Plans. Although the Company
provides some miscellaneous perquisites and other personal benefits to its
executives, the amount of this compensation did not exceed the lesser of $50,000
or 10 percent of an executive's annual compensation.
(c)-(f) and (i) The Company hasn't issued any stock options or stock
appreciation rights, nor does the Company maintain any long-term incentive plans
or pension plans.
(g) Compensation of Directors - The Company pays a $500 fee to each outside
director for each director's meeting attended. The Company does not pay any
other fees or compensation to its directors as compensation for their services
as directors.
(h) Employment Contracts, Termination of Employment and Change-in-Control
Arrangements: The employment agreement for Harold S. Elkan (Elkan), the
Company's President, expired in January 1998, however, the Company is continuing
to honor the terms of the agreement until such time as the Compensation
Committee conducts a review and propose a new contract. Pursuant to the expired
employment agreement, Elkan is to receive a sum equal to twice his annual salary
($350,000 as of June 30, 2001) plus $50,000 if he is discharged by the Company
without good cause, or the employment agreement is terminated as a result of a
change in the Company's management or voting control. The agreement also
provides for miscellaneous perquisites, which do not exceed either $50,000 or 10
percent of his annual salary. The Board of Directors has authorized that up to
$625,000 of loans can be made to Harold S. Elkan at interest rates not to exceed
10 percent.
(j) Compensation Committee Interlocks and Insider Participation: Harold S.
Elkan, the Company's President, was appointed by the Company's Board of
Directors as a compensation committee of one to review and set compensation for
all Company employees other than Harold S. Elkan. The Company's outside
Directors set compensation for Harold S. Elkan. None of the executive officers
of the Company had an "interlock" relationship to report for the fiscal year
ended June 30, 2001.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors appointed Harold S. Elkan as a compensation
committee of one to review and set compensation for all Company employees other
than Harold S. Elkan. The Board of Directors, excluding Harold S. Elkan and
Steven R. Whitman, set and approve compensation for Harold S. Elkan.
The objectives of the Company's executive compensation program are to:
attract, retain and motivate highly qualified personnel; and recognize and
reward superior individual performance. These objectives are satisfied through
the use of the combination of base salary and discretionary bonuses. The
following items are considered in determining base salaries: experience,
personal performance, responsibilities, and, when relevant, comparable salary
15
information from outside the Company. Currently, the performance of the Company
is not a factor in setting compensation levels. Annual cash bonus payments are
discretionary and would typically relate to subjective performance criteria.
Bonuses of $100,000 were awarded to Harold Elkan in each of the years ended June
30, 1999 through 2001. Bonuses of $10,000 were awarded to Steven R. Whitman in
each of the years ended June 30, 1999 and 2000.
In the fiscal year ended June 30, 1993 the outside members of the Board of
Directors approved a new employment agreement for Harold S. Elkan (Elkan)
effective from January 1, 1993 until December 31, 1997. This agreement provided
for annual base salary of $250,000 plus discretionary bonuses as the Board of
Directors may determine and approve. In setting the compensation levels in this
agreement, the Board of Directors, in addition to utilizing their personal
knowledge of executive compensation levels in San Diego, California, referred to
a special compensation study performed in 1987 for the Board of Directors by an
independent outside consultant. The Board of Directors are currently reviewing
information for purposes of entering into a new employment agreement with Elkan.
In the meantime, the Board of Directors approved an increase in Elkan's base pay
to $350,000 annually effective July 1, 1998.
Outside members of Board of Directors approving the Compensation
for Harold S. Elkan:
Patrick D. Reiley
James E. Crowley
Robert A. MacNamara
Directors' Compensation Committee for Other Employees:
Harold S. Elkan
(l) Performance Graph: The following schedule and graph compares the
performance of $100 if invested in the Company's common stock (SAI) with the
performance of $100 if invested in each of the Standard & Poors 500 Index (S&P
500), and the Standard & Poors Leisure Time Index (S&P LT).
The performance graph and schedule provide information required by regulations
of the Securities and Exchange Commission. However, the Company believes that
this performance graph and schedule could be misleading if it is not understood
that there is limited trading of the Company's stock. The Company's common stock
has traded in the range of $.01 to $.02 for most of the past five years. As a
result, a small increase in the per share price results in large percentage
changes in the value of an investment.
The performance is calculated by assuming $100 is invested at the beginning of
the period (July 1993) in the Company's common stock at a price equal to its
market value (the bid price). At the end of each fiscal year, the total value of
the investment is computed by taking the number of shares owned multiplied by
the market price of the shares at the end of each fiscal year.
SCHEDULE OF COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
-----------------------------------------------------------
Sports S&P Leisure
Year Ended Arenas, Inc. S&P 500 Time
---------- ----------- ------- -----------
6/1996 100 100 100
6/1997 100 200 160
6/1998 300 255 128
6/1999 200 309 116
6/2000 200 327 95
6/2001 200 275 118
16
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) - (c):
Shares Nature of
Beneficially Beneficial Percent
Name and Address Owned Ownership of Class
---------------- -------------- ----------------- --------
Harold S. Elkan 21,808,267 (a) Sole investment 80.0%
5230 Carroll Canyon Road and voting power
San Diego, California
All directors and 21,808,267 Sole investment 80.0%
officer as a group and voting power
(a) These shares of stock are owned by Andrew Bradley, Inc., which is owned by
Harold S. Elkan- 88%, Andrew S. Elkan- 6%, and Bradley J. Elkan- 6%. Andrew
Bradley, Inc. has pledged 10,900,000 of its shares of Sports Arenas, Inc.
stock as collateral for its loan from Sports Arenas, Inc. See Note 3(c) of
Notes to Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
(a) - (c):
1. The Company has $394,339 of unsecured loans outstanding to Harold S.
Elkan, (President, Chief Executive Officer, Director and, through his 88% owned
corporation, Andrew Bradley, Inc., the majority shareholder of the Company) as
of June 30, 2001 ($463,866 as of June 30, 2000). The balance at June 30, 2001
bears interest at 8 percent per annum and is due in monthly installments of
interest only plus annual principal payments of $50,000 due on December 31 of
each year. The balance is due January 1, 2002. The largest amount outstanding
during the year was $463,866 in July 2000.
Elkan's primary source of repayment of unsecured loans from the Company is
withholding from compensation received from the Company. Due to the Company's
financial condition, there is uncertainty about the Company's ability to
continue funding the additional compensation necessary to repay the unsecured
loans. Therefore, during the year ended June 30, 1999, the Company recorded a
$390,000 charge to reflect the uncertainty of the collectability of the
unsecured loans. This charge was included in selling, general and administrative
expense. The Company also discontinued recording the interest income on the
loans except to the extent that balance of the loans remained below $390,000. As
of June 30, 2001, $4,339 of interest accrued on the loans was unrecorded.
2. 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 (8.25 percent at June 30, 2001) and to be added to the principal balance
annually. As of June 30, 2001 and 2000, $1,230,483 of interest had been accrued
and added to the loan balance in the financial statements. The loan is due in
November 2003. The loan is collateralized by 10,900,000 shares of the Company's
stock.
Effective January 1, 1999, the Company discontinued recognizing the accrual of
interest income on the note receivable from shareholder. This policy was adopted
in recognition that the shareholder's most likely source of funds for repayment
of the loan is from sale of the Company's stock or dividends from the Company
and that the Company has unresolved liquidity problems. The cumulative amount of
interest that accrued but was not recorded was $620,007 as of June 30, 2001
($359,797 as of June 30, 2000).
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements of Registrant
Independent Auditors' Report 19
Sports Arenas, Inc. and subsidiaries consolidated
financial statements:
Balance sheets as of June 30, 2001 and 2000 20-21
Statements of operations for each of the years in the
three-year period ended June 30, 2001 22
Statements of shareholders' deficit for each of the years
in the three-year period ended June 30, 2001 23
Statements of cash flows for each of the years in the
three-year period ended June 30, 2001 24-25
Notes to financial statements 26-39
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 50 percent
owned investee:
Independent Auditors' Report 40
Balance sheets as of March 31, 2001 and 2000 41
Statements of income and partners' deficit for
each of the years in the three-year period
ended March 31, 2001 42
Statements of cash flows for each of years in the
three-year period ended March 31, 2001 43
Notes to financial statements 44-46
3. Financial Statement Schedules
There are no financial statement schedules because they are either not
applicable or the required information is shown in the financial
statement or notes thereto.
4. Exhibits
22.1 Subsidiaries of the Registrant 48
B. REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
18
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders
Sports Arenas, Inc.:
We have audited the accompanying consolidated balance sheets of Sports Arenas,
Inc. and subsidiaries (the "Company") as of June 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for each of the years in the three-year period ended June 30, 2001. These
consolidated financial statements are the responsibility of Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sports Arenas, Inc.
and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States of America.
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.
KPMG LLP
San Diego, California
September 7, 2001
19
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-JUNE 30, 2001 AND 2000
ASSETS
2001 2000
----------- -----------
Current assets:
Cash and cash equivalents ............................. $ 515,204 $ 13,961
Current portion of notes receivable-affiliate (Note 3a) -- 50,000
Other receivables ..................................... 324,912 193,510
Inventories (Note 2) .................................. 585,111 304,906
Prepaid expenses ...................................... 61,365 238,719
----------- -----------
Total current assets ............................... 1,486,592 801,096
----------- -----------
Receivables due after one year:
Note receivable- Affiliate, net (Note 3a) ............. -- 73,866
Less current portion ................................ -- (50,000)
----------- -----------
-- 23,866
----------- -----------
Property and equipment, at cost (Notes 7 and 10):
Land .................................................. -- 678,000
Buildings ............................................. -- 2,461,327
Equipment and leasehold and tenant improvements ....... 2,345,406 2,347,767
----------- -----------
2,345,406 5,487,094
Less accumulated depreciation and amortization ..... (1,060,626) (2,160,132)
----------- -----------
Net property and equipment ........................ 1,284,780 3,326,962
----------- -----------
Other assets:
Undeveloped land, at cost (Note 4) .................... -- 1,501,318
Intangible assets, net (Note 5) ....................... 150,657 246,123
Investments (Note 6) .................................. 405,446 564,446
Other assets .......................................... 120,999 137,425
----------- -----------
677,102 2,449,312
----------- -----------
$ 3,448,474 $ 6,601,236
=========== ===========
See accompanying notes to consolidated financial statements.
20
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2001 AND 2000 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
2001 2000
------------ ------------
Current liabilities:
Assessment district obligation-in default (Note 4b) ..... $ -- $ 2,831,180
Notes payable-short term (Note 7d) ...................... 1,250,000 1,350,000
Current portion of long-term debt (Note 7a) ............. 32,000 1,874,000
Accounts payable ........................................ 708,307 796,483
Accrued payroll and related expenses .................... 195,367 164,170
Accrued property taxes, in default (Note 4b) ............ -- 356,178
Accrued interest ........................................ 203,578 41,079
Other liabilities ....................................... 183,466 216,009
------------ ------------
Total current liabilities ............................ 2,572,718 7,629,099
------------ ------------
Long-term debt, excluding current portion (Note 7a) ........ 13,942 1,967,169
------------ ------------
Distributions received in excess of basis
in investment (Notes 6a and 6b) ........................ 15,792,373 14,498,208
------------ ------------
Other liabilities .......................................... 144,000 123,831
------------ ------------
Minority interest in consolidated subsidiary (Note 6c) ..... 852,677 1,712,677
------------ ------------
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 ..................................... (15,638,293) (19,040,805)
------------ ------------
(13,635,744) (17,038,256)
Less note receivable from shareholder (Note 3b) ......... (2,291,492) (2,291,492)
------------ ------------
Total shareholders' deficit ........................... (15,927,236) (19,329,748)
------------ ------------
Commitments and contingencies (Notes 4b, 5a, 6c, 8 and 10)
$ 3,448,474 $ 6,601,236
============ ============
See accompanying notes to consolidated financial statements.
21
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
2001 2000 1999
----------- ----------- -----------
Revenues:
Bowling ............................................... $ 2,209,585 $ 2,578,455 $ 2,663,865
Rental ................................................ 444,635 644,886 571,094
Golf .................................................. 1,527,117 1,119,457 383,803
Other ................................................. 132,442 209,671 172,996
Other-related party (Note 6b) ......................... 178,957 171,966 165,253
----------- ----------- -----------
4,492,736 4,724,435 3,957,011
----------- ----------- -----------
Costs and expenses:
Bowling ............................................... 1,851,210 2,065,872 1,952,352
Rental ................................................ 264,435 304,342 274,010
Golf .................................................. 2,185,213 1,750,420 1,031,301
Development ........................................... 156,688 225,679 181,018
Selling, general, and administrative (Note 3a) ........ 3,177,126 3,377,670 3,700,417
Depreciation and amortization ......................... 301,260 387,021 381,496
Provision for impairment losses (Notes 4a, and 6d) .... -- 37,926 90,629
----------- ----------- -----------
7,935,932 8,148,930 7,611,223
----------- ----------- -----------
Loss from operations ..................................... (3,443,196) (3,424,495) (3,654,212)
----------- ----------- -----------
Other income (expenses):
Investment income:
Related party (Notes 3a and 3b) ..................... 28,926 38,450 145,276
Other ............................................... 3,697 11,292 21,433
Interest expense related to development activities .... (235,208) (266,001) (245,353)
Interest expense and amortization of finance costs .... (390,265) (361,929) (340,870)
Equity in income of investees (Note 6a) ............... 159,977 377,620 571,793
Gain on sale of office building (Note 10) ............. 2,764,483 -- --
Gain on sale of bowling center building (Note 12) ..... 482,487 -- --
Gain on sale of undeveloped land (Note 4b) ............ 5,544,743 -- --
----------- ----------- -----------
8,358,840 (200,568) 152,279
----------- ----------- -----------
Income (loss) from continuing operations before
minority interest ...................................... 4,915,644 (3,625,063) (3,501,933)
Minority interest in consolidated subsidiary (Note 6c) ... (1,312,410) -- --
----------- ----------- -----------
3,603,234 (3,625,063) (3,501,933)
Extraordinary losses from:
Early extinguishment of debt (Note 7a) ................ -- -- (78,997)
Early extinguishment of investee debt (Note 6a) ....... (200,722) -- (98,500)
----------- ----------- -----------
Net income (loss) ........................................ $ 3,402,512 ($3,625,063) ($3,679,430)
=========== =========== ===========
Basic and diluted net income (loss) per common share from:
Continuing operations ................................. $ 0.13 ($ 0.13) ($ 0.13)
Extraordinary items ................................... (0.01) -- (0.01)
------ ------ ------
$ 0.12 ($ 0.13) ($ 0.14)
====== ====== =======
See accompanying notes to consolidated financial statements.
22
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
Common Stock Note
--------------------- Additional Receivable
Number of paid-in Accumulated From
Shares Amount Capital Deficit Shareholder Total
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 1998 .......... 27,250,000 $272,500 $1,730,049 ($11,736,312) ($2,187,206) ($11,920,969)
Interest accrued .................. -- -- -- -- (104,286) (104,286)
Net loss .......................... -- -- -- (3,679,430) -- (3,679,430)
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 1999 .......... 27,250,000 272,500 1,730,049 (15,415,742) (2,291,492) (15,704,685)
Net loss .......................... -- -- -- (3,625,063) -- (3,625,063)
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 2000 .......... 27,250,000 272,500 1,730,049 (19,040,805) (2,291,492) (19,329,748)
Net income ........................ -- -- -- 3,402,512 -- 3,402,512
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 2001 .......... 27,250,000 $272,500 $1,730,049 ($15,638,293) ($2,291,492) ($15,927,236)
========== ======== ========== ============ =========== ============
See accompanying notes to consolidated financial statements.
23
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) ....................................... $ 3,402,512 ($3,625,063) ($3,679,430)
Adjustments to reconcile net loss to the net cash used
by operating activities:
Amortization of deferred financing costs .......... 18,846 9,120 13,565
Depreciation and amortization ..................... 301,260 387,021 381,496
Equity in income of investees ..................... (159,977) (377,620) (473,293)
Deferred income ................................... 48,000 48,000 48,000
Interest income accrued on note receivable from
shareholder ..................................... -- -- (104,286)
Interest accrued on assessment district obligations 235,208 266,001 245,353
Provision for note receivable- affiliate .......... -- -- 390,000
Provision for impairment losses ................... -- 37,926 90,629
(Gain) loss on sale of assets ..................... (8,781,237) 1,793 --
Minority interest in consolidated subsidiary ...... 1,312,410 -- --
Extraordinary loss on debt extinguishment ......... 200,722 -- 78,997
Changes in assets and liabilities:
(Increase) decrease in other receivables .......... (125,201) (77,106) 50,023
(Increase) decrease in inventories ................. (280,205) 5,254 (7,565)
(Increase) decrease in prepaid expenses ............ 93,678 (39,051) 46,467
Increase (decrease) in accounts payable ........... (88,176) 343,280 (124,644)
Increase (decrease) in accrued expenses and other
liabilities ..................................... 199,337 (230,906) 239,905
Other ............................................. 38,317 (8,705) 26,793
----------- ----------- -----------
Net cash used by operating activities ........... (3,584,506) (3,260,056) (2,777,990)
----------- ----------- -----------
Cash flows from investing activities:
Decrease in notes receivable ......................... 73,866 30,963 40,684
Additions to property and equipment .................. (507,336) (335,920) (140,801)
Proceeds from sale of office building ................ 1,662,337 -- --
Proceeds from sale of bowling center building ........ 2,047,328 -- --
Proceeds from sale of undeveloped land ............... 3,616,066 190,362 --
Proceeds from sale of other assets ................... 5,000 -- --
Increase in development costs on undeveloped land .... (30,755) (109,850) (7,454)
Distributions received from investees ................ 1,559,000 2,193,400 1,419,671
Contributions to investees ........................... (200,000) (43,319) --
Distribution to holders of minority interest ......... (2,172,410) -- (50,000)
----------- ----------- -----------
Net cash provided by investing activities ....... 6,053,096 1,925,636 1,262,100
----------- ----------- -----------
Cash flows from financing activities:
Scheduled principal payments ......................... (213,772) (283,598) (261,528)
Proceeds from short-term borrowings .................. 1,200,000 1,900,000 --
Payments of short-term borrowings .................... (1,300,000) (550,000) --
Proceeds from refinancing of long-term debt .......... -- -- 1,975,000
Loan costs ........................................... (22,598) -- (62,598)
Extinguishment of long-term debt ..................... (1,650,977) (75,927) (1,147,561)
Costs to extinguish long-term debt ................... -- -- (45,977)
Other ................................................ 20,000 -- --
----------- ----------- -----------
Net cash provided (used) by financing activities (1,967,347) 990,475 457,336
----------- ----------- -----------
Net increase (decrease) in cash and equivalents ......... 501,243 (343,945) (1,058,554)
Cash and cash equivalents, beginning of year ............ 13,961 357,906 1,416,460
----------- ----------- -----------
Cash and cash equivalents, end of year .................. $ 515,204 $ 13,961 $ 357,906
=========== =========== ===========
See accompanying notes to consolidated financial statements
24
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
SUPPLEMENTAL CASH FLOW INFORMATION:
2001 2000 1999
--------- --------- ---------
Interest paid $ 196,000 $ 326,000 $ 341,000
------------- ========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
During the year ended June 30, 2001 the Company sold equipment for $5,000 which
had a cost of $24,250 and accumulated depreciation of $9,240.
During the year ended June 30, 2001, the Company abandoned leasehold
improvements with a cost of $18,536 and accumulated depreciation of $18,070.
During the year ended June 30, 2000, the Company discarded fully depreciated
equipment with a cost and accumulated depreciation of $112,829.
During the year ended June 30, 2000, the Company abandoned leasehold
improvements with a cost of $13,317 and accumulated depreciation of $12,162.
See accompanying notes to consolidated financial statements.
25
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
1. Summary of significant accounting policies and practices:
Description of business- The Company, primarily through its subsidiaries,
owns and operates two bowling centers (one of which was closed in
December 2000), an apartment project (50% owned), one office building
(sold in December 2000), a graphite golf club shaft manufacturer, and
undeveloped land (sold in June 2001). The Company also performs a minor
amount of services in property management and real estate brokerage
related to commercial leasing.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of Sports Arenas, Inc. and all
subsidiaries and partnerships more than 50 percent owned or in which
there is a controlling financial interest (the Company). All material
inter-company balances and transactions have been eliminated. The
minority interests' share of the net loss of partially owned
consolidated subsidiaries have been recorded to the extent of the
minority interests' contributed capital. The Company uses the equity
method of accounting for investments in entities in which its ownership
interest gives the Company the ability to exercise significant influence
over operating and financial policies of the investee. The Company uses
the cost method of accounting for investments in which it has virtually
no influence over operating and financial policies.
Cash and cash equivalents - Cash and cash equivalents only include highly
liquid investments with original maturities of less than 3 months. There
were no cash equivalents at June 30, 2001 and 2000.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market and relate to golf club shaft manufacturing.
Property and equipment - Depreciation and amortization are provided on the
straight-line method based on the estimated useful lives of the related
assets, which are 20 years for the buildings and range from 3 to 15
years for the other assets.
Investments - The Company's purchase price in March 1975 of the one-half
interest in UCV, L.P. exceeded the equity in the book value of net
assets of the project at that time by approximately $1,300,000. The
excess was allocated to land and buildings based on their relative fair
values. The amount allocated to buildings is being amortized over the
remaining useful lives of the buildings and the amortization is included
in the Company's depreciation and amortization expense.
Income taxes - The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the period that includes the enactment
date.
Amortization of intangible assets - Deferred loan costs are being amortized
over the terms of the loans on the straight-line method, which
approximates the effective interest method. Unamortized loan costs
related to loans refinanced or paid prior to their contractual maturity
are written off.
Valuation impairment - SFAS No. 121,"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" requires
that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows (undiscounted and
without interest) expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the fair values of the assets.
Concentrations of credit risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are the notes
receivable described in Note 3.
26
Fair value of financial instruments - The following methods and assumptions
were used to estimate the fair value of each class of financial
instruments where it is practical to estimate that value:
Cash, cash equivalents, other receivables, accounts payable, and notes
payable-short term - the carrying amount reported in the balance
sheet approximates the fair value due to their short-term
maturities.
Note receivable-affiliate - It is impractical to estimate the fair value
of the note receivable-affiliate due to the related party nature of
the instrument.
Long-term debt - the fair value was determined by discounting future
cash flows using the Company's current incremental borrowing rate
for similar types of borrowing arrangements. The carrying value of
long-term debt reported in the balance sheet approximates the fair
value.
Use of estimates - Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and reported amounts of revenue and
expenses during the reporting period to prepare these consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ
from these estimates.
Loss per share- Basic earnings per share is computed by dividing earnings
(loss) by the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed by dividing
the amount of income (loss) for the period by each share that would have
been outstanding assuming the issuance of common shares for all
potentially dilutive securities outstanding during the reporting period.
The Company currently has no potentially dilutive securities
outstanding. The weighted average shares used for basic and diluted
earnings per share computation was 27,250,000 for each of the years in
the three-year period ended June 30, 2001.
Reclassification- Certain 2000 and 1999 amounts have been reclassified to
conform to the presentation used in 2001.
2. Inventories:
Inventories consist of the following:
2001 2000
--------- ---------
Raw materials ............ $ 145,013 $ 105,552
Work in process .......... 200,192 107,317
Finished goods ........... 297,906 118,437
--------- ---------
643,111 331,306
Less valuation allowance (58,000) (26,400)
--------- ---------
$ 585,111 $ 304,906
========= =========
3. Notes receivable:
(a)Affiliate - The Company made unsecured loans to Harold S. Elkan, the
Company's President and, indirectly, the Company's majority shareholder,
and recorded interest income of $28,926, $38,450, and $40,990 in 2001,
2000, and 1999, respectively. The loans bear interest at 8 percent per
annum and are due in annual installments of interest plus principal
payments of $50,000 due on December 31 of each year until maturity. The
balance is due on January 1, 2002.
Elkan's primary source of repayment of unsecured loans from the Company
is withholding from compensation received from the Company. Due to the
Company's financial condition, there is uncertainty about the Company's
ability to continue funding the additional compensation necessary to
repay the unsecured loans. Therefore, during the year ended June 30,
1999, the Company recorded a $390,000 charge to reflect the uncertainty
of the collectability of the unsecured loans. This charge was included
in selling, general and administrative expense. The Company also
discontinued recording the interest income on the loans except to the
extent that balance of the loans remained below $390,000. As of June 30,
2001, $4,339 of interest accrued on the loans was unrecorded.
27
(b) 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 (8.25
percent at June 30, 2001) and to be added to the principal balance
annually. The loan is due in November 2003. The loan is collateralized
by 10,900,000 shares of the Company's stock. 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. The Company recorded interest income from this note of $104,286
in 1999.
Effective January 1, 1999, the Company discontinued recognizing the
accrual of interest income on the note receivable from shareholder. This
policy was adopted in recognition that the shareholder's most likely
source of funds for repayment of the loan is from sale of the Company's
stock or dividends from the Company and that the Company has unresolved
liquidity problems. The cumulative amount of interest that accrued but
was not recorded was $620,007 as of June 30, 2001 ($359,797 as of June
30, 2000).
4. Undeveloped land:
(a) In August 1984, the Company acquired approximately 500 acres of
undeveloped land in Lake of Ozarks, Missouri from an entity controlled
by Harold S. Elkan (Elkan). The purchase price approximated the
affiliate's original purchase price. On September 7, 1999, the Company
sold the land for cash of $215,000, less selling expenses of $24,638. As
a result of the sale, the Company recorded a provision for impairment
loss as of June 30, 1999 of $90,629 to reduce the carrying value to the
net sales proceeds realized.
(b) RCSA Holdings, Inc. (RCSA), a wholly owned subsidiary of the Company,
owns a 50 percent managing general partnership interest in Old Vail
Partners, a general partnership (OVPGP), which owned 33 acres of
undeveloped land in Temecula, California. On September 23, 1999, the
other partner assigned his partnership interest to Downtown Properties,
Inc., a wholly owned subsidiary of the Company (see Note 6c). This land
was sold on June 1, 2001.
The carrying value of the property consisted of the following as of June
30, 2000:
Acres ............................... 33
Acquisition cost .................... $ 2,142,789
Capitalized assessment district costs 1,434,315
Other development planning costs .... 333,214
-----------
3,910,318
Provision for impairment loss ....... (2,409,000)
-----------
$ 1,501,318
===========
The 33 acres of land owned by OVPGP was located within a special
assessment district of the County of Riverside, California (the County)
which was created to fund and develop roadways, sewers, and other
required infrastructure improvements in the area necessary for the
owners to develop their properties. Property within the assessment
district is collateral for an allocated portion of the bonded debt that
was issued by the assessment district to fund the improvements. The
annual payments (required in semiannual installments) due related to the
bonded debt are approximately $144,000. The payments continue through
the year 2014 and include interest at approximately 7-3/4 percent. OVPGP
had been delinquent in the payment of property taxes and assessments for
over the last eight years. As of June 30, 2000 the property had been
subject to default judgments to the County of Riverside, California
totaling approximately $2,132,421 regarding delinquent assessment
district payments ($1,776,243) and property taxes ($356,178).
The County had scheduled the 33 acres for public sale for the defaulted
property taxes on September 27, 1999. OVPGP had unsuccessfully attempted
to negotiate a payment plan with the County subject to the successful
28
resolution of the zoning problems with the property described below. On
September 23, 1999 OVPGP filed a petition for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court. The
primary claim affected by this action was the County's secured claim for
delinquent taxes and assessment district payments. OVPGP's plan was to
use the relief from stay to continue its efforts to negotiate a
settlement of the zoning issues described below, and restore the
economic value of the property. The bankruptcy proceeding was dismissed
on February 15, 2000 with the concurrence of OVPGP. This dismissal
allowed the County of Riverside to proceed with a public sale of the
property within 45 days after giving notice. On June 23, 2000, the
County of Riverside agreed to remove the property from the planned
public sale originally scheduled for June 26, 2000 in exchange for an
immediate payment of $330,000 with the balance of property taxes due on
December 29, 2000. Separately, the County of Riverside stated that a
foreclosure sale related to the default judgement for assessment
district payments would not be scheduled until some time after January
1, 2001. On January 19, 2001, the County of Riverside agreed to extend
the due date to March 30, 2001 with three options to extend the due date
to August 1, 2001. Each extension option requires a payment of $25,000.
Payments were made to extend the agreement to May 31, 2001.
As a result of the County's judgements for defaulted taxes the Company
recorded a $2,409,000 provision for impairment loss during the year
ended June 30, 1997 to reduce the carrying value on the 33-acre parcel
to its estimated fair market value related to the City of Temecula's
effective down-zoning of the property. The estimated fair market value
was determined based on cash flow projections and comparable sales.
The following is summarized balance sheet information of OVPGP included
in the Company's consolidated balance sheet as of June 30, 2001 and
2000:
2001 2000
---- ---------
Assets:
Undeveloped land......................... -- $1,501,318
Liabilities:
Assessment district obligation-in default -- 2,831,180
Accrued property taxes .................. -- 356,178
The delinquent principal, interest and penalties ($1,776,243) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,054,937) were classified as "Assessment district
obligation- in default" in the consolidated balance sheet at June 30,
2000. In addition, accrued property taxes in the balance sheet at June
30, 2000 includes $356,178 of delinquent property taxes and late fees
related to the 33-acre parcel.
In November 1993, the City of Temecula adopted a general development
plan that designated the property owned by OVPGP as suitable for
"professional office" use, which is contrary to its zoning as
"commercial" use. As part of the adoption of its general development
plan, the City of Temecula adopted a provision that, until the zoning is
changed on properties affected by the general plan, the general plan
shall prevail when a use designated by the general plan conflicts with
the existing zoning on the property. The result was that the City of
Temecula had effectively down-zoned OVPGP's property from a "commercial"
to "professional office" use. The property was subject to assessment
district obligations that were allocated in 1989 based on a higher
"commercial" use. Since the assessment district obligations were not
subject to reapportionment as a result of re-zoning, a "professional
office" use was not economically feasible due to the disproportionately
high allocation of assessment district costs. OVPGP filed suit against
the City of Temecula claiming that, if the effective re-zoning was
valid, the action was a taking and damaging of OVPGP's property without
payment of just compensation. OVPGP was seeking to have the effective
re-zoning invalidated and an unspecified amount of damages. A
stipulation was entered that dismissed this suit without prejudice and
agreed to toll all applicable statute of limitations while OVPGP and the
City of Temecula attempted to informally resolve this litigation. On
October 23, 2000, the City of Temecula's city council granted
preliminary approval of OVPGP's request for re-zoning and general plan
amendment related to a development plan which includes a combination of
multi-family and commercial uses. On November 28, 2000 the re-zoning and
general plan amendment requested by OVPGP were adopted by the City of
Temecula and OVPGP abandoned its legal claims against the City of
Temecula.
29
On June 1, 2001, the Company sold the 33 acres to an unrelated developer
for $6,375,000 cash plus assumption of the non-delinquent balance of the
assessment district obligation ($1,001,274) and recorded a gain of
$5,544,743. The cash proceeds were used to pay $2,459,477 of delinquent
taxes and assessments related to the property and $299,458 of selling
expenses.
The following is a summary of the results from operations of the
development activities related to this undeveloped land included in the
financial statements:
2001 2000
-------- --------
Development costs ............. 157,000 226,000
Allocated SG&A ................ 20,000 20,000
-------- --------
Loss from operations .......... (177,000) (246,000)
Interest expense- development . 235,000 266,000
-------- --------
Loss from continuing operations (412,000) (512,000)
======== ========
5. Intangible assets:
Intangible assets consisted of the following as of June 30, 2001 and 2000:
2001 2000
--------- ---------
Deferred lease costs:
Subleasehold interest ......... $ 111,674 $ 111,674
Less accumulated amortization (35,585) (33,689)
Lease inception fee ........... 232,995 232,995
Less accumulated amortization (158,427) (121,143)
--------- ---------
150,657 189,837
--------- ---------
Deferred loan costs ............. -- 82,598
Less accumulated amortization -- (26,312)
--------- ---------
-- 56,286
--------- ---------
$ 150,657 $ 246,123
========= =========
(a) The Company is a sublessor of a parcel of land that is subleased to
individual owners of a condominium project. The Company capitalized
$111,674 of carrying costs prior to subleasing the land in 1980. The
Company is amortizing the capitalized carrying costs over the period of
the subleases on the straight-line method. The future minimum rental
payments payable by the Company to the lessor on the lease are
approximately $162,000 per year for the remaining term of 42 years
(aggregate of $6,804,000). The Company is obligated to pay the greater
of a base rent (currently $162,000), adjusted every five years based on
an increase in a consumer price index, or 85 percent of the minimum rent
due from the sublessees. The minimum rent had been $81,000 annually
until October 1, 1998. The future minimum rents due to the Company from
the sublessees are approximately $164,000 per year for the remaining
term of 42 years (aggregate of approximately $6,888,000). The subleases
provide for increases every five years based on increases in a consumer
price index.
(b) In March 1997 the Company paid $232,995 to the lessor of the real estate
in which the Grove bowling center is located. The payment represented
the balance due for a deferred lease inception fee. The fee is being
amortized over the then remaining lease term of 75 months.
30
6. Investments:
(a) Investments consist of the following:
2001 2000
------------ ------------
Accounted for on the equity method:
Investment in UCV, L.P. ............ $(15,792,373) $(14,498,208)
Vail Ranch Limited Partnership ..... 405,446 564,446
------------ ------------
(15,386,927) (13,933,762)
Less Investment in UCV, L.P. .......
classified as liability-
Distributions received in excess
of basis in investment ........ 15,792,373 14,498,208
------------ ------------
405,446 564,446
------------ ------------
Accounted for on the cost basis:
All Seasons Inns, La Paz ........... 37,926 37,926
Less provision for impairment loss (37,926) (37,926)
------------ ------------
Total investments ............... $ 405,446 $ 564,446
============ ============
The following is a summary of the equity in income (loss) (before
extraordinary losses of $200,722 and $98,500 related to UCV, L.P. during the
years ended June 30, 2001 and 1999, respectively):
2001 2000 1999
--------- --------- --------
UCV, L.P. .................... $ 318,977 $ 437,420 $516,713
Vail Ranch Limited Partnership (159,000) (59,800) 55,080
--------- --------- --------
$ 159,977 $ 377,620 $571,793
========= ========= ========
(b) Investment in UCV, L.P. (real estate operation segment):
The Company is a one percent managing general partner and 49 percent
limited partner in UCV, L.P. (UCV) which owns University City Village, a
542 unit apartment project in San Diego, California. The following is
summarized financial information of UCV as of and for the years ended
March 31 (UCV's fiscal year end):
2001 2000 1999
---------- ----------- -----------
Total assets ............... 5,109,000 $ 3,013,000 $ 2,556,000
Total liabilities .......... 33,480,000 29,630,000 25,511,000
Revenues ................... 5,085,000 4,824,000 4,622,000
Operating and general and
administrative costs ..... 1,611,000 1,658,000 1,510,000
Depreciation ............... 19,000 26,000 29,000
Interest and amortization of
loan costs ............... 2,797,000 2,265,000 2,049,000
Other expenses ............. 20,000 -- --
Extraordinary loss from
early debt extinguishment 401,000 -- 197,000
Net income ................. 237,000 875,000 837,000
The apartment project is managed by the Company, which recognized management
fee income of $130,957, $123,966, and $117,253 in the twelve-month periods
ended June 30, 2001, 2000, and 1999, respectively. In addition, pursuant to
a development fee agreement with UCV dated July 1, 1998, the Company
received development fees totaling $96,000 each in the years ended June 30,
2001, 2000 and 1999, of which $48,000 in each year was recorded as deferred
income.
A reconciliation of distributions received in excess of basis in UCV as of
June 30 is as follows:
2001 2000
------------ ------------
Balance, beginning ...... $ 14,498,208 $ 12,688,808
Equity in income, net ... (118,255) (437,420)
Cash distributions ...... 1,559,000 2,193,400
Cash contributions ...... (200,000) --
Amortization of purchase
price in excess
of equity in net assets 53,420 53,420
------------ ------------
Balance, ending ......... $ 15,792,373 $ 14,498,208
============ ============
31
(c)Investment in Old Vail Partners and Vail Ranch Limited Partnership (real
estate development segment):
RCSA and OVGP, Inc. (OVGP), wholly-owned subsidiaries of the Company, own
a combined 50 percent general and limited partnership interest in Old Vail
Partners, L.P. , a California limited partnership (OVP). OVP owns a 60
percent limited partnership interest in Vail Ranch Limited Partnership
(VRLP). The other partner in OVP holds a liquidating limited partnership
interest which entitles him to 50 percent of future distributions up to
$2,450,000, of which $1,360,000 has been paid through June 30, 2001
($860,000 in 2001, $50,000 in 1999 and $450,000 in 1998). This limited
partner's capital account balance is presented as "Minority interest" in
the consolidated balance sheets. Three other parties were granted
liquidating partnership interests related to either their efforts with
achieving the zoning approval for the 33 acres described in Note 4b or
making a loan to the Company that was used to fund payments to the County
of Riverside for delinquent taxes. These partners received distributions
totaling $1,312,410 from the sale of the undeveloped land in the year
ended June 30, 2001 and their limited partnership interests were
liquidated.
VRLP is a partnership formed in September 1994 between OVP and a third
party (Developer) to develop 32 acres of the land that was contributed by
OVP to VRLP. During the fiscal year ended June 30, 1997, VRLP constructed
a 107,749 square foot retail complex which utilized approximately 14 of
the 27 developable acres. On January 1, 1998, VRLP sold the retail complex
for $9,500,000. On August 7, 1998, VRLP executed a limited liability
company operating agreement for Temecula Creek, LLC (Temecula Creek) with
the buyer of the retail center to develop the remaining 13 acres. VRLP, as
a 50 percent member and the manager, contributed the remaining 13 acres of
developable land at an agreed upon value of $2,000,000 and the other
member contributed cash of $1,000,000, which was distributed to VRLP as a
capital distribution.
The Company recorded a provision for impairment loss of $480,000 in June
1998 to reduce the carrying value of its investment in VRLP to reflect an
amount equal to the estimated distributions the Company would receive
based on the estimated fair market value of VRLP's assets and liabilities
as of June 30, 1998.
As a result of the sale of the property in January 1998, OVP received
distributions totaling $1,772,511 in the year ended June 30, 1998. OVP
received additional distributions totaling $646,171 in 1999 related to the
distribution VRLP received from the limited liability company and
miscellaneous property tax refunds. Hereafter, VRLP's partnership
agreement provides for OVP to receive 60 percent of future distributions,
income and loss.
The following is summarized financial information of VRLP as of June 30,
2001 and 2000 and for the years then ended:
2001 2000
--------- ---------
Assets:
Investment in Temecula Creek . $ 558,000 $ 822,000
Other assets ................. 10,000 14,000
Total assets ............. 568,000 836,000
Total liabilities .............. 14,000 17,000
Partners' capital .............. 554,000 819,000
Revenues ....................... -- 10,000
Equity in loss of Temecula Creek (264,000) (39,000)
Net income (loss) .............. (265,000) (86,000)
The following is a reconciliation of the investment in Vail Ranch Limited
Partnership:
2000 2000
--------- ---------
Balance, beginning ........ $ 564,446 $ 580,927
Contributions ............. -- 43,319
Equity in net income (loss) (159,000) (59,800)
--------- ---------
Balance, ending ........... $ 405,446 $ 564,446
========= =========
32
(d) Other investment:
The Company owns 6 percent limited partnership interests in two partnerships
that own and operate a 109-room hotel (the Hotel) in La Paz, Mexico (All
Seasons Inns, La Paz). The cost basis of this investment ($162,629) has been
reduced by provisions for impairment loss of $37,926 recorded in the year
ended June 30, 2000 and $125,000 recorded in the year ended June 30, 1991.
On August 13, 1994, the partners owning the Hotel agreed to sell their
partnership interests to one of the general partners. The total
consideration to the Company ($123,926) was $2,861 cash at closing (December
31, 1994) plus a $121,065 note receivable bearing interest at 10 percent
with installments of $60,532 plus interest due on January 1, 1996 and 1997.
Due to financial problems, the note receivable was initially restructured so
that all principal was due on January 1, 1997, however, only an interest
payment of $12,106 was received on that date. Because the cash consideration
received at closing was minimal, the Company has not recorded the sale of
its investment. The cash payments of $27,074 received to date (representing
accrued interest through December 1996) were applied to reduce the cost of
the investment.
7. Long-term and short-term debt:
(a) Long-term debt consists of the following:
2001 2000
--------- ----------
8.15% note payable collateralized by first
trust deed on land and office building.
Loan assumed by buyer of office
building in December 2000...................... $ -- $1,957,592
10-3/4% note payable collateralized by
partnership interest in Old Vail Partners (OVP),
principal is due in monthly payments of $6,458
plus interest at a variable rate (prime plus
1-1/2 points) adjusted monthly. The loan is
guaranteed by Harold S. Elkan. The balance
is due July 2001............................... 6,458 83,960
8% note payable collateralized by real estate
and equipment at Valley Bowling Center.
Paid in December 2000 upon sale of
bowling center building........................ -- 1,680,920
10-1/2% note payable collateralized by of
manufacturing equipment, due in monthly
installments of $8,225, including principal
and interest. Balance paid May 2001........... -- 79,138
Other............................................. 39,484 39,559
-------- ----------
45,942 3,841,169
Less current maturities (32,000) (1,874,000)
-------- ----------
$ 13,942 $1,967,169
======== ==========
Property and equipment held as collateral for the notes are carried at
historical cost less valuation adjustments.
On May 11, 1999 the Company used the proceeds of a $1,975,000 loan to payoff
an existing note payable of $1,147,560. The prepayment of the existing note
resulted in a prepayment penalty of $45,977 and the write-off of unamortized
loan fees of $33,020, both of which were charged to extraordinary loss from
early extinguishment of debt.
The principal payments due on notes payable during the next five fiscal
years are as follows: $32,000 in 2002, $8,000 in 2003, and $6,000 in 2004.
33
(b)In November 1997, the Company entered into a short-term loan agreement
with Loma Palisades, Ltd. (Loma), an affiliate of the Company's partner
in UCV, whereby Loma would lend the Company up to $800,000. The loan
bore interest at "Wall Street" prime rate plus 1 percent on the amounts
drawn. Interest was payable monthly, the principal was due within 30
days of demand and the agreement expired in May 1998. During the year
ended June 30, 1998, the Company borrowed $400,000, which was paid in
January and May 1998. The Company's borrowings from this short term loan
averaged $115,000 during the year ended June 30, 1998.
(c) On August 24, 1999 and September 25, 1999 the Company borrowed a total
of $550,000 from the Company's partner in UCV on an unsecured note
payable. Payments of interest only were due monthly at a base rate plus
1 percent (9-1/4% at September 25, 1999). The loan plus interest of
$4,562 was paid on October 14, 1999.
(d) The Company borrowed a total of $2,550,000 ($1,350,000 and $1,200,000 in
the years ended June 30, 2000 and 2001, respectively) from the Company's
partner in UCV (Lender) of which $1,300,000 was paid during 2001. The
loans are unsecured, due on demand and bear interest at monthly at a
base rate plus 1 percent (7.75% at June 30, 2001). The Company admitted
the Lender and an affiliate of the Lender as partners in Old Vail
Partners with a liquidating partnership interest for which they received
combined distributions of $112,410 in the year ended June 30, 2001 and
their partnership interests were liquidated. The Company's also agreed
to provide the Lender with an ownership interest in Penley Sports that
would provide the Lender with a 10 percent interest in profits and
distributions.
8. Commitments and contingencies:
(a) The Company leases its bowling center (Grove) under an operating lease.
The lease agreement for the Grove bowling center provides for
approximate annual minimum rentals in addition to taxes, insurance, and
maintenance as follows: $360,000 for each of the years 2002 through 2003
and $720,000 in the aggregate. This lease expires in June 2003 and
contains three 5-year options at rates increased by 10-15 percent over
the last rate in the expiring term of the lease. This lease also
provides for additional rent based on a percentage of gross revenues,
however, Grove has not yet exceeded the minimum amount of gross revenue.
Rental expense for Grove bowling center was $360,000 in 2001, 2000 and
1999.
The Company also leases its golf club shaft manufacturing plant under a
ten year operating lease agreement, which commenced April 1, 2000. The
lease provides for fixed annual minimum rentals in addition to taxes,
insurance and maintenance for each of the years ending June 30 as
follows: 2002- $227,000, 2003- $234,000, 2004- $241,000, 2005- $247,000,
2006- $247,000, thereafter- $924,000. Commencing April 1, 2005 the lease
provides for adjustments to the rent based on increases in a consumer
price index, not to exceed six percent per annum. The lease also
provides for two options that each extend the lease for an additional
five years. The rent for the first year of the first option will be
based on a five percent increase over the previous year's rent.
Subsequent year's rent will be adjusted based on increases in the
consumer price index. The Company had previously leased facilities for
its golf club shaft manufacturing plant pursuant to an operating lease
that expired June 30, 2000. Rental expense for the manufacturing
facilities was $220,688 in 2001, $112,252 in 2000, of which $66,760
related to the old plant, and $53,834 in 1999.
The Company has subleased a portion of the golf club shaft manufacturing
plant. The sublease commenced November 1, 2000 and continues through
October 31, 2002. Rental income from this sublease was $46,400 in the
year ended June 30, 2001. The sublease calls for fixed annual minimum
rentals in addition to taxes, insurance and maintenance for each of the
years ending June 30 as follows: 2002- $59,000 and 2003- $20,000.
(b) The Company's employment agreement with Harold S. Elkan expired on
January 1, 1998, however the Company is continuing to honor the terms of
the agreement until such time as it is able to negotiate a new contract.
The agreement provides that if he is discharged without good cause, or
discharged following a change in management or control of the Company,
he will be entitled to liquidation damages equal to twice his salary at
time of termination plus $50,000. As of June 30, 2001, his annual salary
was $350,000.
34
(c) The Company is involved in other 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 affect on the Company's financial position.
9. Income taxes
During the years ended June 30, 2001, 2000 and 1999, the Company has not
recorded any income tax expense or benefit due to its utilization of prior
loss carryforward and the uncertainty of the future realizability of
deferred tax assets.
At June 30, 2001, the Company had net operating loss carry-forwards of
$10,866,000 for federal income tax purposes. The carryforwards expire from
years 2002 to 2020. Deferred tax assets are primarily related to these net
operating loss carryforwards and certain other temporary differences. Due to
the uncertainty of the future realizability of deferred tax assets, a
valuation allowance has been recorded for deferred tax assets to the extent
they will not be offset by the reversal of future taxable differences.
Accordingly, there are no net deferred taxes at June 30, 2001 and 2000.
The following is a reconciliation of the normal expected federal income tax
rate of 34 percent to the income (loss) in the financial statements:
2001 2000 1999
----------- ----------- -----------
Expected federal income tax
expense (benefit) .............. $ 1,157,000 $(1,233,000) $(1,251,000)
Increase (decrease) in valuation
allowance ...................... (1,312,000) (121,000) 1,199,000
Expiration of net operating
loss carryforward .............. 150,000 1,340,000 --
Other ............................ 5,000 14,000 52,000
----------- ----------- -----------
Provision for income tax expense $ -- $ -- $ --
=========== =========== ===========
The following is a schedule of the significant components of the Company's
deferred tax assets and deferred tax liabilities as of June 30, 2001 and
2000:
2001 2000
----------- -----------
Federal deferred tax assets (liabilities):
Net operating loss carryforwards ........ $ 3,694,000 $ 3,653,000
Accumulated depreciation and amortization 222,000 468,000
Valuation allowance for impairment losses 683,000 1,366,000
Other ................................... 31,000 455,000
----------- -----------
Total net federal deferred tax assets 4,630,000 5,942,000
Less valuation allowance ............. (4,630,000) (5,942,000)
----------- -----------
Net federal deferred tax assets ............ $ -- $ --
=========== ===========
10. Leasing activities:
The Company, as lessor, leased office space in an office building under
operating leases that were primarily for periods ranging from one to five
years, occasionally with options to renew. This office building was sold in
December 2000. The Company is also a sublessor of land to condominium owners
under operating leases with an approximate remaining term of 44 years which
commenced in 1981 and 1982 (see Note 5).
The following is a schedule of the Company's rental property included in
property and equipment as of June 30, 2000:
Land ................... $ 258,000
Building ............... 773,393
Tenant improvements .... 140,306
-----------
1,171,699
Accumulated depreciation (424,821)
-----------
$ 746,878
===========
35
On December 28, 2000 the Company sold its office building for $3,725,000 and
recorded a gain of $2,764,483. The consideration consisted of the assumption
of the existing loan with a principal balance of $1,950,478 and cash of
$1,662,337. The cash proceeds were net of selling expenses of $163,197,
credits for lender impounds of $83,676, deductions for security deposits of
$26,463 and prepaid rents of $6,201. The Company has been released from
liability under the existing loan except for those acts, events or omissions
that occurred prior to the loan assumption. The Company has occupied
approximately 5,000 square feet of space in the building since 1984. The
existing lease expires in September 2011. In conjunction with a lease
modification with the new owner of the office building, the Company vacated
the premises on April 6, 2001 and moved into the factory space occupied by
its subsidiary, Penley Sports, LLC. However, because the lease commitment
was a condition to the original loan agreement, the lender will only allow
the Company to be conditionally released from its remaining lease
obligation. In the event there is an uncured event of default by the new
owner of the office building under the existing loan agreement, the
Company's obligations under its lease will be reinstated to the extent there
is not an enforceable lease on the Company's space. The future minimum rent
payments under the lease agreement are as follows for the years ending June
30: $68,000- 2002; $70,000- 2003; $72,000- 2004; $75,000- 2005; $77,000-
2006; $443,000 thereafter and $805,000 in the aggregate.
The following is a summary of the results from operations of the office
building included in the financial statements:
2001 2000 1999
-------- -------- --------
Rents ........................... $243,000 $477,000 $424,000
Costs ........................... 54,000 112,000 138,000
Allocated SG&A .................. 13,000 26,000 21,000
Depreciation .................... 16,000 80,000 79,000
-------- -------- --------
Income from operations .......... 160,000 259,000 186,000
Interest expense ................ 81,000 167,000 137,000
-------- -------- --------
Income from continuing operations 79,000 92,000 49,000
======== ======== ========
11. 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. The golf club shaft manufacturing segment commenced in
January 1997 when the Company acquired a small golf club shaft manufacturer.
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.
36
The following is summarized information about the Company's operations by
business segment.
Real Real
Estate Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ---------- ----------- ----------- ----------- -----------
YEAR ENDED JUNE 30, 2001
------------------------
Revenues .............................. $ 2,209,585 $ 477,620 $ -- $ 1,527,117 $ 311,399 $ 4,525,721
Depreciation and amortization ......... 37,108 71,099 -- 149,558 43,495 301,260
Interest expense ...................... 91,117 98,750 235,208 4,048 196,350 625,473
Equity in income of investees ......... -- 318,977 (159,000) -- -- 159,977
Gain on sale of assets ................ 482,487 2,764,483 5,544,743 -- -- 8,791,713
Segment profit (loss) ................. 140,519 3,113,796 4,973,847 (2,753,777) (591,364) 4,883,021
Investment income ..................... -- -- -- -- -- 32,623
Income (loss) -continuing ............. -- -- -- -- -- 4,915,644
operations
Segment assets ........................ 217,610 118,785 840,867 2,106,825 164,387 3,448,474
Expenditures for segment
assets .............................. 30,839 -- 30,755 433,043 43,454 538,091
YEAR ENDED JUNE 30, 2000
------------------------
Revenues .............................. $ 2,578,455 $ 709,182 $ -- $ 1,119,457 $ 381,637 $ 4,788,731
Depreciation and amortization ......... 104,211 135,405 -- 97,452 49,953 387,021
Impairment losses ..................... -- -- -- -- 37,926 37,926
Interest expense ...................... 141,777 166,528 267,022 13,473 39,130 627,930
Equity in income of investees ......... -- 437,420 (59,800) -- -- 377,620
Segment profit (loss) ................. (463,375) 514,327 (572,501) (2,750,612) (402,644) (3,674,805)
Investment income ..................... -- -- -- -- -- 49,742
Loss from continuing
operations .......................... -- -- -- -- -- (3,625,063)
Segment assets ........................ 1,846,575 986,767 2,066,888 1,448,947 252,059 6,601,236
Expenditures for segment
assets .............................. 20,146 1,948 109,850 294,386 19,440 445,770
YEAR ENDED JUNE 30, 1999
------------------------
Revenues .............................. $2,663,865 $ 632,705 $ -- $ 383,803 $ 338,249 $ 4,018,622
Depreciation and amortization ......... 108,708 134,570 -- 86,103 52,115 381,496
Impairment losses ..................... -- -- 90,629 -- -- 90,629
Interest expense ...................... 148,106 137,091 251,973 22,013 27,040 586,223
Equity in income of investees ......... -- 516,713 55,080 -- -- 571,793
Segment profit (loss) ................. (268,730) 582,747 (495,540) (2,673,049) (814,070) (3,668,642)
Investment income ..................... -- -- -- -- -- 166,709
Loss from continuing
operations .......................... -- -- -- -- -- (3,501,933)
Segment assets ........................ 1,997,376 1,054,729 2,644,111 1,157,089 145,515 6,998,820
Expenditures for segment
assets .............................. 38,960 2,383 7,454 96,271 3,187 148,255
2001 2000 1999
----------- ----------- -----------
Revenues per segment schedule $ 4,525,721 $ 4,788,731 $ 4,018,622
Intercompany rent eliminated (32,985) (64,296) (61,611)
----------- ----------- -----------
Consolidated revenues ....... $ 4,492,736 $ 4,724,435 $ 3,957,011
=========== =========== ===========
37
12. Significant Event:
On December 29, 2000 the Company sold the land and building occupied by the
Valley Bowling Center for $2,215,000 cash and recorded a gain of $482,487.
The proceeds of the sale were used to pay the existing loan of $1,650,977
and selling expenses of $167,672. The bowling center discontinued its
operations on December 21, 2000. The following is a summary of the results
of operations of the bowling center included in the financial statements:
2001 2000 1999
--------- ----------- -----------
Revenues .............. $ 439,000 $ 1,064,000 $ 1,155,000
Costs ................. 320,000 701,000 724,000
Direct SG&A ........... 77,000 188,000 199,000
Allocated SG&A ........ 33,000 89,000 94,000
Depreciation .......... 26,000 93,000 92,000
--------- ----------- -----------
(17,000) (7,000) 46,000
Interest expense ...... 91,000 142,000 148,000
--------- ----------- -----------
Income (loss) from
continuing operations (108,000) (149,000) (102,000)
========= =========== ===========
13. Supplementary Non-Cash information:
The following is a summary of the changes to the balance sheet related to
the non-cash portions of the sale of the office building, Valley Bowl real
estate and undeveloped land:
Office Valley Bowl Undeveloped
Building Real estate Land
----------- ----------- -----------
Receivables .................... $ 6,201 $ -- $ --
Prepaid expenses ............... (83,676) -- --
Property and equipment ......... (1,171,699) (2,434,539) --
Accumulated depreciation ....... (438,096) (877,536) --
Undeveloped land ............... -- -- (1,532,073)
Deferred loan costs ............ (52,200) (7,838) --
Other assets ................... (11,516) -- --
Assessment district obligation . -- -- (3,066,388)
Property taxes in default ...... -- -- (394,392)
Long-term debt ................. (1,950,478) -- --
Other liabilities .............. (26,462) -- --
14. 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 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 or increases in
the sales volume of Penley.
38
15. Quarterly financial data (unaudited):
The following summarizes the condensed quarterly financial information for
the Company:
QUARTERS ENDED 2001
----------------------------------------------------
September 30 December 31 March 31 June 30
---------- ---------- ---------- ----------
Revenue .................................... $1,143,386 $1,111,879 $1,075,900 $1,161,571
Total costs and expenses ................... 2,043,891 2,098,885 2,064,240 1,728,916
Gain on sale ............................... -- 3,246,970 -- 5,544,743
Other income & expense, net ................ (158,222) (150,023) (42,575) (82,053)
Minority interest .......................... -- -- -- (1,312,410)
Income (loss) before extraordinary items ... (1,058,727) 2,109,941 (1,030,915) 3,582,935
Basic and diluted net income (loss) per
common share from:
Continuing operations ................ (.04) .08 (.04) .13
Net income (loss) .................... (.04) .08 (.04) .12
QUARTERS ENDED 2000
-----------------------------------------------------
September 30 December 31 March 31 June 30
---------- ---------- ---------- ----------
Revenue .................................... $ 931,613 $1,000,490 $1,418,100 $1,374,232
Total costs and expenses ................... 1,831,993 1,927,187 2,164,766 2,224,984
Other income & expense, net ................ (819) (39,306) (90,353) (70,090)
Income (loss) before extraordinary items ... (901,199) (966,003) (837,019) (920,842)
Basic and diluted net income (loss) per
common share from:
Continuing operations ................ (.03) (.04) (.03) (.03)
Net income (loss) .................... (.03) (.04) (.03) (.03)
Certain 2001 and 2000 amounts have been reclassified to conform to the
presentation used in these financial statements.
39
INDEPENDENT AUDITORS' REPORT
General Partners
UCV, L.P., a California limited partnership:
We have audited the accompanying balance sheets of UCV, L.P., a California
limited partnership, as of March 31, 2001 and 2000, and the related statements
of income and partners' deficit and cash flows for each of the years in the
three-year period ended March 31, 2001. These financial statements are the
responsibility of UCV, L.P.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UCV, L.P., a California limited
partnership, as of March 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the years in the three-year period ended March
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
San Diego, California
June 27, 2001
40
UCV, L.P.
(a California Limited Partnership)
BALANCE SHEETS - MARCH 31, 2001 and 2000
ASSETS
2001 2000
------------ ------------
Property and equipment (Note 3):
Land ................................. $ 1,289,565 $ 1,289,565
Buildings ............................ 5,189,188 5,189,188
Equipment ............................ 533,585 529,825
------------ ------------
7,012,338 7,008,578
Less accumulated depreciation ........ (5,689,221) (5,670,346)
------------ ------------
1,323,117 1,338,232
Cash ...................................... 726,041 293,684
Restricted cash (Note 3) .................. 807,031 157,420
Accounts receivable ....................... 12,110 12,167
Prepaid expenses .......................... 97,323 109,199
Redevelopment planning costs .............. 1,237,621 831,154
Deferred loan costs, less accumulated
amortization of $60,254 in 2001 and
$295,196 in 2000 ........................ 905,511 270,767
------------ ------------
$ 5,108,754 $ 3,012,623
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt (Note 3) ................... $ 33,000,000 $ 29,039,490
Accounts payable .......................... 91,804 156,529
Accrued interest .......................... 155,533 208,053
Other accrued expenses .................... 23,817 30,559
Tenants' security deposits ................ 208,533 195,534
------------ ------------
33,479,687 29,630,165
Partners' deficit ......................... (28,370,933) (26,617,542)
------------ ------------
$ 5,108,754 $ 3,012,623
============ ============
See accompanying notes to financial statements.
41
UCV, L.P.
(a California Limited Partnership)
STATEMENTS OF INCOME AND PARTNERS' DEFICIT
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Revenues:
Apartment rentals ..................... $ 4,903,939 $ 4,650,709 $ 4,455,235
Other rental related .................. 180,718 173,092 166,529
------------ ------------ ------------
5,084,657 4,823,801 4,621,764
------------ ------------ ------------
Costs and expenses:
Operating ............................. 1,243,651 1,299,381 1,186,348
General and administrative ............ 238,152 236,045 207,828
Management fees, related party (Note 2) 129,102 122,194 116,088
------------ ------------ ------------
1,610,905 1,657,620 1,510,264
------------ ------------ ------------
Income before depreciation, interest
and other expense ..................... 3,473,752 3,166,181 3,111,500
Depreciation .......................... (18,875) (26,336) (28,563)
Other expense ......................... (20,000) -- --
Interest and amortization of loan costs (2,796,924) (2,264,888) (2,049,110)
------------ ------------ ------------
Income before extraordinary loss ......... 637,953 874,957 1,033,827
Extraordinary loss from the early
extinguishment of debt ................. (401,444) -- (197,401)
------------ ------------ ------------
Net income ............................... 236,509 874,957 836,426
Partners' deficit, beginning of year ..... (26,617,542) (22,954,999) (18,344,925)
Cash distributed to partners ............. (1,989,900) (4,537,500) (5,446,500)
------------ ------------ ------------
Partners' deficit, end of year ........... $(28,370,933) $(26,617,542) $(22,954,999)
============ ============ ============
See accompanying notes to financial statements.
42
UCV, L.P.
(a California Limited Partnership)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ----------- ------------
Cash flows from operating activities:
Net income ....................................... $ 236,509 $ 874,957 $ 836,426
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................. 18,875 26,336 28,563
Amortization of deferred loan costs ........... 204,837 159,819 145,343
Extraordinary loss from extinguishment of debt 401,444 -- 197,401
Other ......................................... 20,000 -- --
Changes in assets and liabilities:
(Increase) decrease in restricted cash ........ (57,478) (46,861) 5,808
Decrease in accounts receivable ............... 57 1,810 14,671
(Increase) decrease in prepaid expenses ....... 11,876 (4,533) (4,126)
Increase (decrease) in accounts payable and
other accrued expenses ...................... (71,467) 6,035 80,112
Increase (decrease) in accrued interest ....... (52,520) 57,359 150,694
Other ......................................... 12,999 15,825 3,951
------------ ----------- ------------
Net cash provided by operating activities ........ 725,132 1,090,747 1,458,843
------------ ----------- ------------
Net cash from investing activities:
Additions to redevelopment planning costs ........ (406,467) (498,041) (303,649)
Additions to property and equipment .............. (3,760) (16,965) (37,433)
------------ ----------- ------------
Net cash used by investing activities ............ (410,227) (515,006) (341,082)
------------ ----------- ------------
Cash flows from financing activities:
Principal payments on long-term debt ............. (560,803) -- --
Extinguishment of long-term debt ................. (28,478,687) -- (19,833,500)
Costs related to early extinguishment of long-term
debt .......................................... (295,260) -- (157,521)
Proceeds from long term debt ..................... 33,000,000 4,039,490 25,000,000
Refund of restricted cash held by lender ......... 161,907 -- --
Funding of restricted cash from loan proceeds .... (754,040) -- --
Loan costs ....................................... (965,765) (122,914) (383,049)
Cash distributed to partners ..................... (1,989,900) (4,537,500) (5,446,500)
------------ ----------- ------------
Net cash provided (used) by financing activities . 117,452 (620,924) (820,570)
------------ ----------- ------------
Net increase (decrease) in cash ..................... 432,357 (45,183) 297,191
Cash, beginning of year ............................. 293,684 338,867 41,676
------------ ----------- ------------
Cash, end of year ................................... $ 726,041 $ 293,684 $ 338,867
============ =========== ============
Supplemental cash flow information:
Interest paid .................................... $ 2,644,607 $ 2,047,710 $ 1,753,073
============ =========== ============
Non-cash investing activities:
In the year ended March 31, 1999 the Partnership disposed of fully
depreciated assets with a cost and accumulated depreciation of $22,213.
See accompanying notes to financial statements.
43
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
1. Organization and Summary of Significant Accounting Policies:
(a)Organization- Effective June 1, 1994 the form of organization was changed
from a joint venture to a limited partnership and the name of the entity
was changed from University City Village to UCV, L.P., a California
limited partnership (the Partnership). The Partnership conducts business
as University City Village.
(b) Leasing arrangements- The Partnership leases apartments under operating
leases that are substantially all on a month-to-month basis. The
apartment operations are the Partnership's only business segment.
(c) Property and equipment and depreciation- Property and equipment are
stated at cost. Depreciation is provided using the straight-line method
based on the estimated useful lives of the property and equipment (33
years for real property and 3-10 years for equipment). The depreciable
basis of the property and equipment for tax purposes is essentially the
same as the financial statement basis.
(d) Income taxes- For income tax purposes, any profit or loss from
operations is includable in the income tax returns of the partners and,
therefore, a provision for income taxes is not required in the
accompanying financial statements.
(e) Redevelopment planning costs- The Partnership capitalizes engineering,
architectural and other costs incurred related to the planning of the
possible redevelopment of the apartment project.
(f) Deferred loan costs- Costs incurred in obtaining financing are amortized
using the straight-line method over the term of the related loan.
(g) Fair value of financial instruments - The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments for which it is practical to estimate that value:
Cash, restricted cash, accounts receivable, accounts payable, accrued
interest and other accrued expenses- the carrying amount reported in
the balance sheet approximates the fair value due to their
short-term maturities.
Long-term debt - The carrying value of long-term debt reported in the
balance sheet approximates the fair value based on management's
belief that the interest rates and terms of the debt are comparable
to those commercially available to the Partnership in the
marketplace for similar instruments.
(h) Derivative Financial Instruments- The Partnership adopted Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) on January 1, 2001. As a
result of refinancing the Partnership's long-term debt, the new loan
agreement requires the Partnership to maintain an interest rate cap (the
Cap) on the notional principal amount of the debt. The Partnership uses
this derivative financial instrument to effectively manage the interest
rate risk of its variable rate note payable. Accounting for any gains or
losses resulting from changes in the market value of the derivative
depend upon the use of the derivative and whether it qualifies for hedge
accounting.
The instrument was negotiated with a high credit quality counterparty,
therefore, the risk of nonperformance by the counterparty is considered
to be negligible. See additional information regarding financial
instruments in Note 4.
(i) Use of estimates - Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenue and
expenses during the reporting period to prepare these financial
statements in conformity with accounting principles general accepted in
the United States of America. Actual results could differ from these
estimates.
44
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(j) Valuation impairment-Long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
(undiscounted and without interest) expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amounts of
the assets exceed the fair values of the assets.
2. Related party transactions:
An affiliate of a partner provides management services for an unspecified
term to the Partnership and is paid a fee equal to 2-1/2 percent of gross
revenues, as defined.
In July 1998 the Partnership entered into development services agreements
with two affiliates of a partner. The agreements are cancelable on 30 days
notice and relate to planning for redevelopment of the apartments. During
the years ended March 31, 2001, 2000 and 1999, the affiliate was paid
$96,000, $96,000 and $72,000, respectively, for these development services.
3. Long-term debt:
On March 8, 2001, the Partnership paid its existing $28,478,687 note payable
with the proceeds from a $33,000,000 loan. The new loan provides for monthly
payments of interest only at a variable rate of interest equal to LIBOR (not
less than 6 percent) plus 2-1/2 percentage points. UCV paid a fee to cap
LIBOR at 6 percent. The note payable matures August 2002 but may be extended
for two 12-month periods upon entering into an agreement to cap LIBOR at 7
percent. The loan may be prepaid at any time, however, there are prepayment
fees as follows: 3 percent if paid prior to the sixth payment date; 1-1/2
percent if paid prior to the ninth payment date; 1 percent if paid prior to
the twelfth payment date; and none thereafter. The note payable is
collateralized by the land, buildings, leases and security deposits. The
refinancing resulted in charges of $401,444 related to the prepayment
penalty of $295,260 and $106,184 of the unamortized portion of deferred loan
costs related to the old note payable. These charges were classified as an
extraordinary loss from extinguishment of debt in the financial statements.
2001 2000
----------- -----------
Payable in monthly installments of interest
only based on a rate of 8-1/2% per annum. $33,000,000 $ --
Payable through April 2000 in monthly
installments of interest only (7.94%
as of March 31, 2000) based on a variable
rate of interest equal to LIBOR plus 2
percentage points, thereafter payable in
monthly installments of interest plus principal
based on a 25 year amortization schedule -- 25,000,000
Payable through April 2000 in monthly
installments of interest only (10.69%
as of March 31, 2000) based on a variable
rate of interest equal to the greater of 10%
or LIBOR plus 4.75 percentage points,
thereafter payable in monthly installments
of interest plus principal based on a 25 year
amortization schedule. Additional principal
payments are due quarterly equal to 50% of
the quarterly cash flow. -- 4,039,490
----------- -----------
Total $33,000,000 $29,039,490
=========== ===========
45
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
The Partnership is required to make monthly payments of approximately
$16,290 to a property tax and insurance impound account maintained by the
lender. Additionally, $754,040 was deducted from the loan proceeds and is
being held by the lender as a "capital" replacement reserve. The Partnership
is also required to keep an amount equal to fifty percent of the tenant
security deposits in a separate account at a bank designated by the lender.
This account was established and funded with $110,000 on June 18, 2001.
Restricted cash represents the balance of the tax impound and replacement
reserve accounts and the bank accounts used for security deposits.
4. Interest Rate Cap:
The Partnership adopted SFAS 133 on January 1, 2001. Due to the extensive
documentation and administration requirements of SFAS 133, the Partnership's
derivative instrument does not currently qualify for hedge accounting
treatment. Although the Partnership's Cap is designed as a cash flow hedge,
the Partnership cannot adopt hedge accounting treatment, until all required
documentation is completed and hedging criteria is met. Since SFAS 133
requires that all unrealized gains and losses on derivatives not qualifying
for hedge accounting be recognized currently through earnings, the
Partnership accounted for the Cap in this manner. As of March 31, 2001 the
Partnership recorded a loss of $20,000 in other expense in the income
statement for the change in the value of the Cap since inception of the
transaction on March 8, 2001.
46
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) 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.
(Registrant) SPORTS ARENAS, INC.
By (Signature and Title) /s/ Harold S. Elkan
---------------------------------------
Harold S. Elkan, President & Director
DATE: OCTOBER 12, 2001
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
----------------------- -------------------------------- --------
/s/ Steven R. Whitman Chief Financial Officer, Director, October 12, 2001
---------------------- and Principal Accounting Officer ----------------
Steven R. Whitman
/s/ Robert A. MacNamara Director October 12, 2001
----------------------- ----------------
Robert A. MacNamara
/s/ Patrick D. Reiley Director October 12, 2001
----------------------- ----------------
Patrick D. Reiley
47
EXHIBIT 22
SPORTS ARENAS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
State of
Incorporation Subsidiary
------------- -------------------------------------------
New York Cabrillo Lanes, Inc.
Delaware Downtown Properties, Inc.
California Old Vail Partners, a California general
partnership (50% general partner)
California Downtown Properties Development Corp.
California UCVGP, Inc.
California UCV, L.P. (1% general partner)
California Sports Arenas Properties, Inc.
California UCV, L.P. (49% limited partner)
California Ocean West, Inc.
California RCSA Holdings, Inc.
California Old Vail Partners, a California general
partnership (50% general partner)
California Old Vail Partners, L.P. (49% limited partner)
California Vail Ranch Limited Partnership
(50% limited partner)
California OVGP, Inc.
California Old Vail Partners, L.P. (1% general partner)
California Ocean Disbursements, Inc.
California Bowling Properties, Inc.
California Penley Sports, LLC (90% managing member)
All subsidiaries are 100% owned, unless otherwise indicated, and are
included in the Registrant's consolidated financial statements, except for
Vail Ranch Limited Partnership and UCV, L.P.
48