ITEM 2. PROPERTIES
(a) BOWLING CENTERS:
The Company's two remaining bowling centers occupy the following facilities:
Name Location Size Expiration Date of Lease Grove Bowl San Diego, California 60 lanes June 2003- options to 2018 Valley Bowl San Diego, California 50 lanes October 2003- options to 2013
The Valley Bowl real estate is owned by Bowling Properties, Inc., a wholly-owned subsidiary of the Company and is collateral for a $1,994,403 note payable. The property was purchased in November 1993 in conjunction with the acquisition of the bowling center in August 1993.
As noted previously the Company sold its three bowling centers and related real estate in Georgia on August 7, 1996. The real estate for two of the three bowling centers were owned by Sports Arenas Properties, Inc. and Marietta Lanes, Inc., both wholly owned subsidiaries of the Company. The real estate for the third center was leased.
(b) REAL ESTATE DEVELOPMENT:
Downtown owns 507 acres of undeveloped land in Lake of the Ozarks, Missouri. The land is collateral for a $90,164 bank loan (first deed of trust) and a $4,368,000 loan (second deed of trust) from Sports Arenas, Inc. (the parent company).
RCSA Holdings, Inc. (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 40 acres of unimproved land in Temecula, California and a 50 percent limited partnership interest in Vail Ranch Limited Partnership (VRLP). Legal title to the 40 acres of undeveloped land is still in the process of being changed from the former general partnership's name into the limited partnership name (OVP).
The 40 acres of land owned by OVP are 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 (made in semiannual installments) due related to the bonded debt are approximately $156,000 for the 40 acres. The payments continue through the year 2014 and include interest at approximately 7-3/4 percent. OVP is delinquent in the payment of property taxes and assessments for the last five years. The County has a judgment for the default under the assessment district obligations but the Company has not yet received notification that the County has commenced proceedings to enforce these judgments by judicial sale. The amount due to cure the judgment at June 30, 1996 was approximately $688,000. The principal balance of the allocated portion of the bonds is $1,513,730.
The 40 acre parcel is subject to an action that essentially down-zones the property to a lower use and, if successful, may significantly impair the value of the property. The Company is contesting this action (see Item 3.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 1996, except as noted below, the Company or its subsidiaries were not parties to any material legal proceedings other than routine litigation incidental to the business.
(a) On August 3, 1994, Old Vail Partners, a general partnership (the predecessor to Old Vail Partners, L.P., a California limited partnership) (OVP) filed suit against the County of Riverside, California and the City of Temecula, California in both the California Superior Court for the County of Riverside and in the U.S. District Court, Central District, California. OVP suffered adverse judgments in both cases. OVP has filed appeals at both the California Court of Appeals and the U.S. Court of Appeals, Ninth Circuit. In November 1993, the City of Temecula adopted a general development plan that designates 40 acres of property owned by OVP 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 is that the City of Temecula has effectively down-zoned the 40 acre parcel from a "commercial" to "professional office" use. As described in Item 2. Properties, the parcel is subject to Assessment District liens which were allocated in 1989 based on a higher "commercial" use. Since the Assessment District liens are not subject to reapportionment as a result of re-zoning, a "professional office" use is not economically feasible due to the disproportionately high allocation of Assessment District costs. In its suit, OVP claims that the City's adoption of a general plan as a means of re-zoning the property is invalid. Additionally, OVP is claiming that, if the effective re-zoning is valid, the action would be a taking and damaging of OVP's property without payment of just compensation. OVP is seeking to have the effective re-zoning invalidated and an unspecified amount of damages. The outcome of this litigation is uncertain.
(b) On August 2, 1995, Old Vail Partners filed suit against the County of Riverside, California, Albert Webb and Associates, and others in California Superior Court for the County of Riverside claiming breach of contract, negligence, and other acts related to the services performed by Albert Webb and Associates as the civil engineer in calculating and allocating the assessment district costs for Special Assessment District 159. Old Vail Partners is seeking in excess of $10,400,000 as damages, which represents the value lost on 40 acre parcel of land as a result of an inappropriate calculation and allocation of assessments to the 40 acre parcel because of work performed by unlicensed engineers without proper supervision. On October 5, 1995, the Superior Court dismissed OVP's suit. OVP is appealing this decision to the California Court of Appeals. This appeal has been consolidated with the state court appeal described in (a) above.
ITEM 4.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None -------
PART II
ITEM 5.
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, are reported by NASDAQ (National Association of Securities Dealers' Automated Quotation System): 1996 1995 ----------- ----------- High Low High Low ---- ---- ---- ----- First Quarter ....... (a) (a) $.01 $.01 Second Quarter ...... $.01 $.01 $.25 $.01 Third Quarter ....... $.01 $.01 $.01 $.01 Fourth Quarter ...... (a) (a) (a) (a)
(a) No trades reported.
(b) The number of holders of record of the common stock of the Company as of September 15, 1996 is 4,345. 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.
ITEM 6. SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
See Notes 4c, 6d and 12 of Notes to Consolidated Financial Statements regarding disposition of business operations and material uncertainties.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Excluding the balance of the assessment-district-obligation-in-default included in current liabilities, the Company has a working capital deficit of $247,697 at June 30, 1996, which is a $1,425,044 decrease from the similarly calculated deficit at June 30, 1995. The primary cause of the change in working capital was the cash provided from the sale of the Redbird Properties real estate ($1,675,142) and the cash provided from the sale of undeveloped land ($160,401).
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 three years. It has used its share of distributions from UCV and proceeds from real estate sales to fund these deficits. The cash provided (used) before changes in assets and liabilities segregated by business segments was as follows:
1996 1995 1994 ------ ------ ------ Bowling ........................... $ ( 45,000) $ 275,000 $ 70,000 Rental ............................ 170,000 155,000 21,000 Construction ...................... 58,000 29,000 23,000 Development ....................... (300,000) (113,000) -- General corporate expense and other (430,000) (236,000) (176,000) -------- -------- --------
Cash provided (used) by operations (547,000) 110,000 (62,000) Capital expenditures, net of financing ....................... (49,000) (142,000) (163,000) Acquisition of bowling centers and real estate .................... -- -- (196,000) Principal payments on long-term debt (755,000) (865,000) (1,267,000) -------- -------- --------- Cash used ......................... (1,351,000) (897,000) (1,688,000) ========== ======== =========
Distributions received from UCV ... 320,000 263,000 1,755,000 ======== ======== ========= Proceeds from real estate sales ... 1,835,543 -- -- ========= ======== =========
As described in Note 6d of Notes to the Consolidated Financial Statements, Redbird Properties sold the land and building underlying the Redbird Lanes bowling center in May 1996. The proceeds to the Company after extinguishing long-term debt and distributions to partners was $1,675,142. As a result of the sale, the bowling center ceased operations and the equipment was sold at a nominal gain. The cash flow provided by the operations of Redbird Lanes was $25,711, $67,236, and $46,653 in 1996, 1995, and 1994, respectively. The principal payments on long-term debt for Redbird Lanes was $14,641, $15,056, and $12,690 in 1996, 1995, and 1994, respectively.
As described in Note 12 of Notes to the Consolidated Financial Statements, on August 7, 1996, the Company sold its three bowling centers and related real estate located in Georgia for $3,950,000. The proceeds from sale after expenses and extinguishing long-term debt of $1,817,361 was approximately $2,050,000. The cash flow provided by the operations of the three bowling centers was $134,749, $307,891, and $263,559 in 1996, 1995, and 1994, respectively. The principal payments on long-term debt for these bowls were $147,171, $359,175, and $468,259 in 1996, 1995, and 1994, respectively.
The Company received $1,250,000 from UCV as a distribution from the proceeds of a refinancing in June 1994. Otherwise, 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 Company's share of distributions from UCV declined in 1995 due to UCV's additional debt service related to the June 1994 refinancing.
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 $9,828,360 at June 30, 1996. The Company estimates that the current market value of the assets of UCV (primarily apartments) exceeds its liabilities by $10,000,000-$14,000,000.
As discussed in Results of Operations and in Footnote 7b of Notes to the Consolidated Financial Statements, in October 1994 the Company transferred title in an office building to the lender in exchange for the lender extinguishing the Company's obligations for a $2,461,942 note payable which was collateralized by the office building. This portion of the rental operations provided (used) cash flow after debt service and capital replacements of $15,000 in 1995 and ($169,000) in 1994.
At June 30, 1996, the Company owned a 50 percent limited partnership interest in Vail Ranch Limited Partnership (VRLP), which is developing 32 acres of land (of which 27 is developable) into a commercial shopping center. VRLP obtained construction financing in July 1996 to develop the first phase (14 acres) of the shopping center and construction is projected to be completed in March 1997. The Company estimates that the value of the Company's 50 percent interest, based on development of the 14 acre phase of the shopping center and sale of the remaining acreage, is approximately $2,000,000 to $4,000,000. The amount and timing of distributions that the Company may receive from VRLP are uncertain. The most likely source of funds for distributions from VRLP is either the sale of the 14 acre phase and/or sale of the remaining undeveloped land.
At June 30, 1996, the County of Riverside, California had judgments totaling approximately $688,000 for delinquent assessment district payments related to 40 acres of undeveloped land. The annual obligation for the assessment district is approximately $156,000. The Company estimates the value of this land is approximately $3,000,000 to $5,000,000 if the property was zoned "commercial". However, the City of Temecula has adopted a general development plan as a means of down-zoning the property to a lower use and, if successful, may significantly impair the value of the property. The Company is contesting this action (see Item 3. Legal Proceedings (a) for description). As a result of the judgment and the down-zoning of the property, the recoverability of the carrying value of this property is uncertain. If the County of Riverside commences foreclosure proceedings and the Company does not satisfy the judgments prior to foreclosure sale, the Company would lose title to the property and the property would not be subject to redemption.
The Company is expecting a $500,000 cash flow deficit in 1997 from operating activities after adding estimated distributions from UCV ($340,000) and deducting capital expenditures and scheduled principal payments on long-term debt. The Company believes its cash at June 30, 1996 and the proceeds from the sale of the bowling centers in August 1996 will be sufficient to fund the cash flow deficit. This analysis does not include consideration of the following due to their uncertainty: any distributions the Company may receive from its investment in Vail Ranch Limited Partners, or any payments due for delinquent or current property taxes and assessments on undeveloped land because these amounts may not be paid unless the Company is able to obtain an alternative source of funds or sell the property.
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.
BOWLING OPERATIONS: 1996 vs. 1995 -------------
The operating loss from bowling operations increased by $252,000 in 1996 primarily as a result of a $253,000 decrease in same-center bowling revenues. The closing of the operations of Redbird Lanes on May 7, 1996 and the sale of the related real estate caused decreases in the following items related to the bowling segment: revenues - $94,000; bowl costs - $54,000; selling, general and administrative expense $9,000; depreciation - $8,000, income from operations - $23,000 and interest expense - $9,000. The acquisition of a controlling interest in Redbird Properties, which owned the real estate occupied by Redbird Lanes, caused the following changes in the bowling segment operation until the property was sold in May 1996: bowl costs - $92,000 decrease related to elimination of intercompany rent; selling, general and administrative expense - $18,000 increase; and depreciation - $53,000 increase; income from operations - $21,000 increase; and interest expense - $93,000 increase. Future revenues and expenses will be lower as a result of the sale of the Redbird Lanes facilities.
Same-center bowling revenues decreased by 3.5% percent ($253,000) in 1996 primarily due to a 2.8 percent decline in games bowled, of which most of the decrease was in league games bowled (4%). Bowling revenues also declined due to a decrease in the amount of alcoholic beverage sales per game bowled (6%), reflecting a nationwide trend towards less alcohol consumption. Same center bowling costs increased by $15,000, primarily related to some lane maintenance expense deferred from the prior year. Same-center selling, general and administrative expense increased by $51,000 primarily due to increases in marketing and promotion expense ($51,000) and an increase in legal expenses ($30,000) related to litigation that was settled for an immaterial amount in April 1996. Same-center depreciation and amortization expense related to the bowling segment decreased by $69,000 primarily due to the expiration of the amortization periods for leasehold improvements related to a bowling center that was acquired in September 1988 and the video game equipment acquired in January 1994. Same center interest expense declined by $55,000 primarily due to the continued decline of the outstanding principal balances of long-term debt related to the bowling segment.
1995 vs. 1994 -------------
The operating loss from bowling operations decreased by $305,000 in 1995 as a result of decreases in bowl costs and depreciation that exceeded the decrease in bowling revenues. Bowling revenues decreased by 1.9 percent ($149,000) in 1995 primarily due to a 1.4 percent decline in games bowled, of which most of the decrease was in open games bowled. Bowling revenues also declined due to a decrease in the amount of alcoholic beverage sales per game bowled, reflecting a nationwide trend towards less alcohol consumption. Bowling costs decreased by 4.3 percent ($226,000) primarily due reductions in payroll and related costs ($73,000 or 3 percent of payroll and related costs) and maintenance expense ($171,000 or 27 percent of maintenance expense). Payroll reductions were made to reflect the decline in business. Approximately $80,000 of the decrease in maintenance expense related to higher expenses in the prior year for deferred maintenance on the two bowls acquired in August 1993. Maintenance expense also decreased related to a decrease in resurfacing expense ($60,000). Depreciation and amortization expense related to the bowling segment ($850,000) decreased by $98,000 primarily due to the expiration of the amortization periods for leasehold improvements, goodwill and covenant-not-to-compete related to a bowling center that was acquired in September 1988.
CONSTRUCTION OPERATIONS
Construction costs were 86%, 84%, and 85% of construction revenues in 1996, 1995 and 1994, respectively. Selling, general and administrative expenses directly related to the construction segment were $168,000, $218,000, and $195,000 in 1996, 1995 and 1994, respectively. The $50,000 decrease in the construction segment selling, general and administrative expense in 1996 was primarily due to a $27,000 increase in general overhead being charged to construction in progress due to the larger volume of jobs uncompleted at June 30, 1996. Incentive compensation also decreased in 1996 related to reduced profitability of jobs. There have been no significant changes to the operations of the construction segment for the last three years.
RENTAL OPERATIONS
The Company's rental operations in the years ended June 30, 1996 and 1995 principally consisted of ownership and leasing one office building (36,000 square feet of leasable space), a sub-lessor's interest in a land leases to condominium owners, and a small fruit-market on undeveloped land (starting in October 1994). Other than the effect of the disposal of an office building in October 1994, which is noted below, rental revenues and costs increased by $35,000 and $18,000, respectively. There was no significant change to rental revenues and costs or operating income in 1996. The market area for the remaining office building has been stable in terms of occupancy for the past three years and rent rates have gradually been increasing by 7-8 percent per year. However, current rent rates are approximately 60 percent of rates that existed in 1990.
In October 1994, the Company disposed of a 24,000 square foot office building that it had owned since December 1986. The disposal of the office building resulted in the following decreases in 1996 and 1995 from prior years: 1996 1995 -------- --------- Rental revenues ....... $50,000 151,000 Rental costs .......... 18,000 73,000 Depreciation .......... 27,000 80,000 Provision for impairment loss ...... -- 1,578,000 Operating (income) loss (5,000) 1,580,000 Interest .............. 12,000 144,000
Other than the changes related to the disposal of the office building, rent revenues in 1995 only changed slightly due to the addition of the rent from the fruit-market in October 1994 ($28,000) and the indexed increases in the rent rates of the ground subleases ($14,000) in 1994. Rental costs did not change significantly in 1995 other than from the disposal of the office building.
The operating loss reported by the rental segment of $1,408,316 in 1994 included a provision for impairment loss of $1,578,000 in 1994, which related to the 24,000 square foot office building that the Company transferred to the lender in 1995 in exchange for the lender extinguishing the Company's obligations for a $2,461,942 note payable (See Note 7b of Notes to Consolidated Financial Statements). The provision for the impairment loss represents the amount by which the carrying value of the property exceeded its estimated fair value of $1,200,000. The Company recorded a $1,261,826 extraordinary gain on extinguishment of debt in 1995 from this transaction.
REAL ESTATE DEVELOPMENT:
The real estate development segment consists primarily of operations related to undeveloped land in Temecula, California, which is owned by Old Vail Partners. As a result of a restructuring of the ownership, the activities of this entity were consolidated effective September 23, 1994. The development costs consist primarily of legal expenses ($120,000 in 1996 and $85,000 in 1995) related to the litigation regarding the effective down-zoning of the 40 acre parcel and property taxes of $62,000 in 1996 and $52,000 in 1995.
OTHER
In addition to the changes in selling, general and administrative expense related to the bowling, construction, and rental segments noted previously, the corporate segment, before allocation to the other segments, increased by $148,000 in 1996 and decreased by $61,000 in 1995 . The increase in 1996 primarily related to discretionary bonuses of $140,000 awarded in 1996. The decrease in 1995 was primarily due to decreases in payroll and professional fees.
The following is a schedule of the increases (decreases) to interest expense in 1996 and 1995, compared to the prior year: 1996 1995 -------- --------- Increase related to acquisition of controlling interest in Redbird Properties ............. $93,000 $ -- Increase in Redbird Lanes ..................... 9,000 -- Increase related to purchase of Valley Bowl real estate ................................ -- 50,000 Other decreases to bowl segment ............... (55,000) (50,000) Decrease related to sale of office building ... (12,000) (144,000) Other decreases to rental segment ............. (18,000) (74,000) Other increases ............................... 13,000 12,000 -------- --------- Net increase in interest expense .............. $30,000 $(206,000) ======== =========
Other decreases of bowling segment interest expense in 1996 and 1995 both relate to decreases in the outstanding principal balances of long-term debt related to the bowling segment. The Company purchased the real estate occupied by Valley Bowl in November 1993, which resulted in an increase in interest expense in 1995 due to the partial year's interest in 1994. Interest expense of the rental segment decreased in 1995 primarily due to a refinancing of the Company's remaining office building in October 1994, which resulted in a $74,000 decrease in interest paid and amortization of finance costs. Interest expense of the rental segment also decreased in 1996 and 1995 as a result of the disposition of an office building in October 1995.
The equity in income of investees decreased in 1996 and 1995 due to a decline in the Company's share of income of UCV ($110,000 in 1996 and $236,000 in 1995) which was partially offset by a decline in the equity in net loss of OVP. Net income of UCV declined in 1996 because of the write-off of $186,000 of redevelopment planning costs incurred in 1996 and 1995. Net income from UCV declined in 1995 because of higher interest expense related to the refinancing of its debt in June 1994. The equity in net loss of Old Vail declined because the Company commenced consolidating its results of operations in September 1994.
A subsidiary of the Company accrued amounts in prior years related to a a loss contingency which were reversed in 1996 as the loss contingency was no longer probable.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None
PART III
ITEM 10.
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, 1995. 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 53 Director since November 7, 1983; President since November 11, 1983
Steven R. Whitman 43 Chief Financial Officer and Treasurer since May 1987; Director and Assistant Secretary since August 1, 1989 Secretary since January 1995
Patrick D. Reiley 55 Director since August 21, 1986
James E. Crowley 49 Director since January 10, 1989
Robert A. MacNamara 48 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.
4. James E. Crowley has been an owner and operator of various automobile dealerships for the last eighteen years. Mr. Crowley is vice president of Jamar Holdings, Ltd., doing business as San Diego Mitsubishi (he was the President and controlling shareholder from 1988 to 1994), President of Coast Nissan since 1992; and President of Escondido Jeep Eagle/GMC Truck since March 1994.
5. Robert A. MacNamara has been employed by Daley Corporation, a California corporation, since 1978, the last eleven years of which he has served as Vice President of the Property Division. Daley Corporation is a residential and commercial real estate developer and a general contractor.
(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.
To the Company's knowledge, based solely on written representations that no other reports were required, during the three fiscal years ended June 30, 1994 through 1996 all Section 16(a) filing requirements applicable to officers, directors and greater than ten-percent beneficial owners were complied with.
ITEM 11.
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, 1996 exceeded $100,000. Long-term All Other Name and Compen- Compen- Principal Position Year Salary Bonus Other sation sation - ----------------- --- ------ ----- ----- --------- ---------
Harold S. Elkan, 1996 $250,000 $100,000 $ - $ - $ - President 1995 250,000 - - - - 1994 250,000 - - - -
Steven R. Whitman, 1996 100,000 40,000 - - - Chief Financial 1995 100,000 - - - - Officer 1994 100,000 - - - -
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: Pursuant to an employment agreement, which expires January 1998, Harold S. Elkan, the Company's President, is to receive a sum equal to twice his annual salary ($250,000 as of June 30, 1996) 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, 1996.
(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 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 and $40,000 were awarded to Harold Elkan and Steven Whitman, respectively, in the year ended June 30, 1996.
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 effective from January 1, 1993 until December 31, 1997. This agreement provides 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.
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), the Standard & Poors Leisure Time Index (S&P LT), and American Recreation Centers, Inc. (ARC), a company primarily operating in the bowling industry.
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 performance is calculated by assuming $100 is invested at the beginning of the period (July 1990) 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 American Arenas, Leisure Recreation Year Ended Inc. S&P 500 Time Centers --------- ------- ------- -------- ---------- 6/91 100 100 100 100 6/92 100 114 96 97 6/93 100 126 96 97 6/94 100 124 128 112 6/95 100 153 115 134 6/96 100 188 148 111
[GRAPHIC OMITTED]
ITEM 12.
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 (1) 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
(1) These shares of stock are owned by Andrew Bradley, Inc. which is wholly-owned by Harold S. Elkan. 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 3c of Notes to Consolidated Financial Statements.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) - (c):
1. The Company has $552,657 of unsecured loans outstanding to Harold S. Elkan, (President, Chief Executive Officer, Director and, through his wholly-owned corporation, Andrew Bradley, Inc., the majority shareholder of the Company) as of June 30, 1996. The balance at June 30, 1996 bears interest at 8 percent per annum and is due in monthly installments of interest only plus annual principal payments of $100,000 due on January 1, 1997-1999. The balance is due January 1, 2001.
2. The Company was a partner in several partnerships with Harold S. Elkan (including his children) and S. Robert Elkan (the brother of Harold S. Elkan) or a company controlled by him. In each of these partnerships, the Company's limited partnership interest was entitled to a priority return over the other limited partners.
Redbird Lanes, Ltd., which owned a bowling center acquired December 31, 1986, was owned by the Company as a 60-percent combined general and limited partner, S. Robert Elkan as a 20-percent limited partner, and Harold S. Elkan as a 20-percent limited partner.
Redbird Properties, Ltd., was 30-percent owned as general and limited partners in combination by S. Robert Elkan and an entity wholly-owned by him. As of June 30, 1995, Harold S. Elkan owned a 30-percent limited partnership interest and the remaining 40-percent interest was owned by the SAPI as a limited partner. Redbird Properties, Ltd. owns the land and building in which the Red Bird Lanes bowling center is located. During the year ended June 30, 1995, Red Bird Lanes paid approximately $111,000 of rent to Redbird Properties, Ltd. S. Robert Elkan and his wife, Harold S. Elkan, and the Company are guarantors of the $750,000 loan used to purchase the property. Effective July 1, 1995, the Company purchased a 29 percent partnership interest (in addition to the 40 percent interest it has owned since 1987) in Redbird Properties, Ltd. from Harold S. Elkan for $446,000. The purchase price is payable in monthly installments of interest at 8 percent per annum plus annual principal payments of $100,000 on January 1, 1996-1999 and $46,000 on January 1, 2000. The agreement provides for an adjustment to the purchase price if the partnership subsequently sells the real estate prior to June 30, 1996. As described in Note 6d of Notes to the Consolidated Financial Statements, Redbird Properties, Ltd. sold the land and building on May 31, 1996 for $2,800,000 and this resulted in an adjustment of the purchase price to $419,744.
3. In December 1990, the Company loaned $1,061,009 to the Company's majority shareholder, Andrew Bradley, Inc. (ABI), which is wholly-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 (10-3/4 percent at June 30, 1996) and to be added to the principal balance annually. At June 30, 1996, $717,013 of interest had been accrued. The loan is due in November 2003. The loan is collateralized by 10,900,000 shares of the Company's stock.
PART IV
ITEM 14.
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 ........................................... 17
Sports Arenas, Inc. and Subsidiaries consolidated financial statements:
Balance sheets as of June 30, 1996 and 1995 ......................... 18-19
Statements of operations for each of the years in the ............... 20 three-year period ended June 30, 1996
Statements of shareholders' equity (deficiency) for each of the years in the three-year period ended June 30, 1996 ............ 21
Statements of cash flows for each of the years in the three-year period ended June 30, 1996 .............................22-23
Notes to financial statements .......................................24-38
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 50 percent owned investee:
Independent Auditors' Report ........................................ 39
Balance Sheets as of March 31, 1996 and 1995 ........................ 40
Statements of income and partners' equity (deficiency) for each of the years in the three-year period ended March 31, 1996.... 41
Statements of cash flows for each of years in the three-year period ended March 31, 1996 ......................................... 42
Notes to financial statements ....................................... 43-44
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 ............................... 46
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.
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 as of June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity (deficiency), and cash flows for each of the years in the three-year period ended June 30, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California September 25, 1996
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995
ASSETS
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
See accompanying notes to consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
See accompanying notes to consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
See accompanying notes to consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
SUPPLEMENTAL CASH FLOW INFORMATION:
1996 1995 1994 --------- -------- --------
Interest paid $ 793,000 $789,000 $900,000 ========= ======== ========
Supplemental schedule of non-cash investing and financing activities:
In addition to the cash expenditures of $196,242 in 1994 and $205,356 in 1993, in 1994 the Company assumed long-term debt of $3,594,939 and borrowed $258,600 from its line of credit to acquire two bowling centers. The purchase price was allocated as follows: Equipment-$585,700; Land-$420,000; Building-$1,687,934; Deferred loan costs-$78,141; Goodwill-$1,345,362; Other assets-$40,000; and Other notes receivable-$98,000.
Long-term debt of $17,751 in 1995 and $167,063 in 1994 were incurred to finance other capital expenditures of $28,750 in 1995, and $190,545 in 1994.
In January 1994, the Company foreclosed on $233,270 of video games, equipment and other collateral related to the Company's guarantee of a bank's loan to a games room operator. The Company also assumed the $233,270 note payable to bank.
Inaddition to the initial cash payment of $50,000 to acquire an additional interest in Old Vail Partners in September 1994, the acquisition resulted in the following items being included in the Company's consolidated balance sheet on the date of acquisition: Cash- $155; Prepaid expense- $85; Undeveloped land- $4,482,867; Investment in Vail Ranch Limited Partners- $1,122,062; Accounts payable- $4,095; Accrued interest- $50,000; Accrued property tax- $182,618; Other liabilities- $62,369; Notes payable- $93,819; Assessment District obligations, in default- $1,760,125; and Minority interest- $2,262,677. As a result of the consolidation of Old Vail Partners in the Company's financial statements, the Company's investment of $1,189,466 in Old Vail Partners was eliminated.
In October 1994, the Company refinanced long term debt of $1,193,800 with a $1,200,000 note payable. The Company also incurred $45,617 of loan costs related to the refinancing, of which $39,417 was a cash expenditure.
In October 1994, the Company extinguished debt of $2,461,942 by the transfer of title to an office building to the lender in complete satisfaction of the liability. The office building cost and accumulated depreciation were $1,856,187 and $721,739, respectively. The Company also wrote off the balance of unamortized loan costs ($19,995), deferred lease commissions ($27,765), and accrued property tax ($3,750) as part of the transactions. The Company incurred transaction costs of $21,659 to consummate the transfer.
During the year ended June 30, 1995, the Company wrote-off $100,000 of fully amortized goodwill and $450,000 of fully amortized covenant-not-to-compete.
See accompanying notes to consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. Summary of significant accounting policies:
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 intercompany balances and transactions have been eliminated. The minority interests' share of the net loss of partially owned consolidated subsidiaries has been recorded to the extent of the minority interests' contributed capital. The Company uses the equity method of accounting for its investments in entities in which it has an ownership interest that 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 equivalents - Cash and equivalents only include highly liquid investments with original maturities of less than 3 months. Cash equivalents totaled $963,169 at June 30, 1996.
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 and 30 years for the buildings and from 3 to 15 years for the other assets.
Investment - 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 in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Amortization of intangible assets - Deferred loan costs are being amortized over the terms of the loans on the straight-line method. Goodwill related to the acquisition of a bowling center is being amortized over 5 years on the straight-line method.
Valuation impairment - The Company records a provision for value impairment of long-lived assets, including goodwill, whenever the sum of the estimated undiscounted future cash flows from operations plus the asset's estimated undiscounted disposition value is less than the current book value. The provision for value impairment, if any, is equal to the excess by which the current book value exceeds the fair value of the asset. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed OF" on April 1, 1996. The Company's previous method of accounting for impairment losses was similar to SFAS No. 121, therefore there was no impact on the Company's financial position or results of operations.
Reclassifications - The Company has reclassified certain prior period amounts in 1995 and 1994 to conform to their classification in 1996.
Concentrations of credit risk - Financial instruments which potentially subject the Company to concentrations of credit risk are the notes receivable described in Note 3.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. Summary of significant accounting policies (continued):
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 and cash equivalents - the carrying amount reported in the balance sheet approximates the fair value due to their short-term maturities.
Notes receivable - the fair value was determined by discounting future cash flows using interest rates for similar types of borrowing arrangements. The carrying value of notes receivable reported in the balance sheet approximates the fair value.
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 and 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 general accepted accounting principles. Actual results could differ from these estimates.
2. Related party transactions:
A director of the Company owned an insurance company that served as the Company's insurance agent for 17 years until it ceased operations in June 1995. The Company paid $268,000 and $246,000 of insurance premiums to this insurance agent in the years ended June 30, 1995 and 1994, respectively.
See notes 3b, 3c, 4a, 6d, 6e, and 8a for other related party transactions.
3. Notes receivable:
(a) Sale of bowling centers - The Company sold two bowling centers in April 1989. Part of the consideration was an $800,000 note receivable from the buyer due in monthly installments of $7,720 beginning October 1, 1989, including principal and interest at 10 percent per annum. The balance is due in September 1997. Under the terms of the note, interest accruing from April 1989 through October 1989 was deferred and is due in September 1997, including interest accruing thereon. The following is the detail of the balance of the note receivable and accrued interest at June 30: 1996 1995 --------- --------- Balance of note receivable due in monthly installments ................................. $ 693,517 $ 708,145 Deferred interest due September 1997 ......... 38,476 34,999 ---------- --------- $ 731,993 $ 743,144 ========= =========
The Company is deferring recognition of $800,000 of the gain from the sale of the bowling centers in the year ended June 30, 1989 until such time as the operations of the two bowling centers become sufficient to support the payment of their obligations or as the principal balance of the note plus accrued and unpaid interest is reduced below $800,000. The Company recognized $21,422, $19,553, and $25,000 of the deferred gain in the years ended June 30, 1996, 1995 and 1994, respectively. The deferred gain is presented as a reduction of the note receivable in the consolidated balance sheets.
(b) 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 $45,812, $43,801, and $39,635 in 1996, 1995, and 1994, respectively. The balance of $552,567 at June 30, 1996 bears interest at 8 percent per annum and is due in monthly installments of interest only plus annual principal payments of $100,000 due in January 1, 1997-1999. The balance is due on January 1, 2001.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
3. Notes receivable (continued):
(c) Shareholder - In December 1990, the Company loaned $1,061,009 to the Company's majority shareholder, Andrew Bradley, Inc. (ABI), which is wholly-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 (10-3/4 percent at June 30, 1996) 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 $717,013 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 $176,744 in 1996, $157,612 in 1995, and $110,128 in 1994.
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. Elkan has agreed to indemnify the Company for any realized decline in value of the land. The carrying value of the land was $281,629 at June 30, 1996 and 1995.
(b) The Company owned approximately 55 acres of undeveloped land in Sierra County, New Mexico which was subject to a contract for sale to a third party at an imputed value of $150,000, which was executed in 1988. Due to the nature of the terms of the contract, the Company was going to record portions of the sale as payments were received. The purchaser defaulted on the contract, but the Company did not cancel the contract. As a result of the defaulted contract and lack of market for sale of the land, the Company had recorded $118,500 of valuation adjustments in prior years to reduce the carrying value to $40,000. In January 1996 the Company received $160,401 as payment in full on the contract and recorded a $120,401 gain from the sale of the land.
(c) Through its ownership of Old Vail Partners, L.P. and its predecessor Old Vail Partners, a general partnership (collectively referred to as OVP, see Note 6c), the Company owns 40 acres of undeveloped land in Temecula, California. The $4,455,724 ($4,482,867 at June 30, 1995) carrying value of the property consists of: acquisition cost- $2,615,787, capitalized assessment district costs- $1,577,025 (see Note 6c), and other development planning costs $262,910. The property is currently subject to default judgments to the County of Riverside, California totaling approximately $688,000 regarding assessment district obligations. The County has not yet commenced foreclosure proceedings. In November 1993, the City of Temecula adopted a general development plan that designates 40 acres of property owned by OVP 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 is that the City of Temecula has effectively down-zoned the 40 acre parcel from a "commercial" to "professional office" use. The parcel is subject to Assessment District liens which were allocated in 1989 based on a higher "commercial" use. Since the Assessment District liens are not subject to reapportionment as a result of re-zoning, a "professional office" use is not economically feasible due to the disproportionately high allocation of Assessment District costs. OVP has filed suit against the City of Temecula claiming that the City's adoption of a general plan as a means of effectively re-zoning the property is invalid. Additionally, OVP is claiming that, if the effective re-zoning is valid, the action is a taking and damaging of OVP's property without payment of just compensation. OVP is seeking to have the effective re-zoning invalidated and an unspecified amount of damages. The outcome of this litigation is uncertain. If the City of Temecula is successful in its attempt to down-zone the property, the value of the property may be significantly impaired.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
5. Capitalized carrying costs on leased land:
The Company is a sublessor on a parcel of land which 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 capitalized costs are presented net of accumulated amortization of $26,105 in 1996 and $24,209 in 1995. The future minimum rental payments payable by the Company to the lessor on the lease are approximately $128,000 per year for the remaining term of 47 years (aggregate of $6,025,000) based on 85 percent of the minimum rent due from the sublessees. The future minimum rents due to the Company from the sublessees are approximately $151,000 per year for the remaining term of 47 years (aggregate of $7,088,000). The subleases provide for increases every five years based on increases in the Consumer Price Index.
6. Investments:
(a) Investments consist of the following:
1996 1995 ----------- ----------- Accounted for on the equity method: Investment in UCV, L.P. ............... $(9,828,360) $(9,559,390) Vail Ranch Limited Partners ........... 2,182,087 1,219,033 Redbird Properties, Ltd. .............. -- 134,975 ----------- ----------- (7,646,273) (8,205,382) Less Investment in UCV, L.P. classified as liability- Distributions received in excess of basis in investment .... 9,828,360 9,559,390 ----------- ----------- 2,182,087 1,354,008 Accounted for on the cost basis: All Seasons Inns, La Paz .............. 50,032 62,139 ----------- ----------- Total investments ................... $ 2,232,119 $ 1,416,147 =========== ===========
The following is a summary of the equity in income (loss) of the investments accounted for by the equity method: 1996 1995 1994 -------- --------- --------- UCV, L.P. ............... $104,450 $ 224,222 $ 459,776 Old Vail Partners ....... -- (50,256) (117,000) Vail Ranch Limited Partners .............. -- -- -- Redbird Properties, Ltd. -- (2,215) (4,211) -------- --------- ---------
$104,450 $ 171,751 $ 338,565 ======== ========= =========
The following is a reconciliation of the investments, other than UCV, L.P., accounted for on the equity method: Vail Ranch Limited Redbird Partners Properties ---------- --------- Balance, July 1, 1995 ................................ $1,219,033 $ 134,975 Net carrying value of assets transferred upon consolidation ..................................... -- (134,975) Assumption of partnership liability .................. 56,221 -- Reversal of accrued liability......................... 837,190 -- Contributions (distributions) ........................ 69,643 -- ---------- --------- Balance, June 30, 1996 ............................... $2,182,087 $ -- ========== =========
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(b) Investment in UCV, L.P.:
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): 1996 1995 1994 ----------- ----------- ----------- Total assets ............... $ 2,587,000 $ 2,867,000 $ 2,409,000 Total liabilities .......... 20,204,000 20,179,000 17,291,000
Revenues ................... 4,169,000 3,990,000 3,840,000 Operating and general and administrative costs ..... 1,465,000 1,431,000 1,433,000 Redevelopment planning costs 186,000 -- -- Depreciation ............... 194,000 182,000 187,000 Interest expense ........... 2,115,000 1,929,000 1,300,000 Net income ................. 209,000 448,000 920,000
The apartment project is managed by the Company, which recognized management fee income of $108,233, $106,616, and $105,824 in the twelve month periods ended June 30, 1996, 1995, and 1994, respectively.
A reconciliation of distributions received in excess of basis in UCV as of June 30 is as follows:
1996 1995 ----------- ----------- Balance, beginning ........ $9,559,390 $9,467,693 Equity in income .......... (104,450) (224,222) Cash distributions ........ 320,000 262,499 Amortization of purchase price in excess of equity in net assets ........... 53,420 53,420 ----------- ----------- Balance, ending ........... $9,828,360 $9,559,390 =========== ===========
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership:
RCSA Holdings, Inc. (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 approximately 40 acres of undeveloped land and a 50 percent limited partnership interest in Vail Ranch Limited Partnership (VRLP). Since September 1988, OVP had been a general partnership with RCSA as 33 percent co-managing general partner and a third-party as a 67 percent co-managing general partner. Effective in September 1994: the general partnership was converted to a limited partnership; RCSA was converted to a 49 percent limited partner; OVGP was admitted as a one percent general partner; and the third-party's interest was converted to a liquidating partnership interest. This transaction effectively resulted in the acquisition of the third-party's partnership interest in OVP for a cash payment of $50,000 and the rights to 50 percent of future distributions up to $2,450,000. Under certain circumstances, which have not yet occurred, the Company may have to make minimum annual distributions of $50,000 or $100,000 until September 1999. Legal title to the 40 acres of undeveloped land is still in the process of being changed from the former general partnership's name to the limited partnership. Prior to September 23, 1994, the Company accounted for its investment in OVP as an unconsolidated subsidiary on the equity method of accounting. Effective September 23, 1994, OVP was consolidated with the Company and the capital account of the other partner is presented as "Minority interest" in the consolidated balance sheet.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership (continued):
The following is summarized balance sheet information of OVP included in the Company's consolidated balance sheet as of June 30, 1996 and 1995: 1996 1995 ---------- ---------- Undeveloped land ........................ $4,455,724 $4,482,867 Investment in Vail Ranch Limited Partnership ........................... 2,182,087 1,219,033 Assessment district obligation-in default 2,061,090 1,928,403 Accounts payable ........................ 5,396 11,384 Accrued interest ........................ -- 44,154 Accrued property taxes .................. 337,016 198,723 Note payable ............................ 340,169 93,820 Minority interest in subsidiary ......... 2,212,677 2,212,677
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. OVP is a 50 percent limited partner with a priority right to distributions for specified amounts based on the acreage being developed. These amounts will be reduced by any amounts expended by VRLP to extinguish approximately $1,259,000 of obligations incurred by OVP prior to the transfer that are liens on the 32 acres of land, primarily relating to delinquent assessments and property taxes. The Developer reached agreements with an anchor tenant and others and obtained construction financing for development of a 14 acre phase, which funded in July 1996. The construction loan provided funds to pay all back taxes and assessments on the 32 acres. The timing and amount of distributions that OVP will receive from the VRLP are uncertain. The following is summarized financial information of VRLP as of June 30, 1996 and 1995 and for the period ended September 23, 1994 (inception) to June 30, 1995: 1996 1995 ---------- ---------- Assets: Land .............................. $2,299,000 $2,283,000 Development costs ................. 2,481,000 1,198,000 Allocated assessments district improvements ..................... 3,664,000 3,664,000 ---------- ---------- Total assets .................... 8,444,000 7,145,000 ---------- ---------- Liabilities: Delinquent assessment district payments and property taxes paid from construction loan ......... 1,316,000 890,000 Other liabilities ................. 1,398,000 1,876,000 Assessment district note payable .. 3,005,000 3,107,000 ---------- ---------- Total liabilities ............. 5,719,000 5,873,000 ---------- ---------- Revenues ............................ -- -- Net loss ............................ -- --
The 40 acres of land owned by OVP are 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 were issued by the assessment district to fund the improvements. The annual payments (made in semiannual installments) due related to the bonded debt are approximately $156,000 for the 40 acres. The payments continue through the year 2014 and include interest at approximately 7-3/4 percent. OVP is delinquent in the payment of property taxes and assessments for the last four years. As of June 30, 1996, the County had obtained judgments for the defaults under the assessment district obligations, however, the County has not yet commenced foreclosure proceedings on these judgments.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership (continued):
The amount due to cure the judgments at June 30, 1996 was approximately $688,000. The principal balance of the allocated portion of the bonds ($1,513,730), and delinquent interest and penalties ($547,360) are classified as "Assessment district obligation- in default" in the consolidated balance sheet. In addition, accrued property taxes in the balance sheet includes $337,016 of delinquent property taxes and late fees related to the 40 acre parcel.
(d) Investment in Redbird Properties, Ltd.:
At June 30, 1995, the Company owned a 40 percent limited partnership interest in Redbird Properties, Ltd. which owns the land and building in which one of the Company's bowling centers (Red Bird Lanes) was located. The other 60 percent interest was owned by Harold S. Elkan as a 30 percent limited partner, and by his brother, directly and indirectly, as a one percent general partner and 29 percent limited partner. Effective July 1, 1995, the Company purchased an additional 29 percent partnership interest in Redbird Properties, Ltd. from Harold S. Elkan for $446,000. The purchase price is payable in monthly installments of interest at 8 percent per annum plus annual principal payments of $100,000 on January 1, 1996-1999 and $46,000 on January 1, 2000. The agreement provides for an adjustment to the purchase price if the partnership subsequently sells the real estate prior to June 30, 1996. The Company's partnership interest is entitled to a priority return over the other limited partners. As described below, the partnership sold the property on May 31, 1996 for an amount that resulted in an adjustment of the purchase price to $419,744.
The Company had accounted for its investment in Redbird Properties using the equity method of accounting through June 30, 1995. As a result of acquiring the additional 29 percent interest, Redbird Properties became a consolidated subsidiary, effective July 1, 1995. This transaction resulted in an increase in the following assets and liabilities: Property and equipment- $1,537,984, Accumulated depreciation- $331,500; Note payable- $713,538; Note payable, related party- $446,000. The effect of this transaction was also to eliminate the Company's $134,975 investment in Redbird Properties and to reduce Minority interests by $93,275, which relates to advances to the other partners in excess of their basis.
On May 31, 1996, Redbird Properties sold the land and building for $2,800,000 which resulted in a gain of $1,658,463 of which $556,237 was allocable to the other partners in Redbird Properties. As a result of the sale the company ceased operations of the Redbird Lanes bowling center and sold the equipment for a minimal gain. The proceeds from the sale plus the sale proceeds of $130,754 from the sale of bowling equipment were partially used to extinguish $777,079 of long-term debt, pay $15,221 of selling expense, and pay the other partners distributions of $463,312. The following are the combined results of operations of Redbird Lanes and Redbird Properties included in the Company's statements of operations, excluding the gain from the sale:
1996 1995 1994 ----------- ---------- ---------- Revenues ........................ $ 1,154,527 $1,248,438 $1,299,196 Bowling costs ................... 699,475 845,381 855,855 Selling, general and administrative: Direct ........................ 248,899 252,358 306,975 Allocated ..................... 58,000 62,600 65,000 Depreciation .................... 58,681 34,194 31,579 Interest ........................ 93,044 20,862 24,713 Income (loss) excluding gain from sale .......................... (3,572) 33,043 15,074
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(e) Other investments:
The Company owns a 6 percent limited partnership interest in two partnerships (the Hotel) that own and operate a 109-room hotel in La Paz, Mexico (All Seasons Inns, La Paz). The $50,032 carrying value of the Hotel at June 30, 1996 ($62,139 at June 30, 1995) is net of a $125,000 valuation adjustment 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 of the new owner, the note receivable was restructured so that all principal is due on January 1, 1997. Because the cash consideration received at closing was minimal, the Company has not recorded the sale of its investment. The Company will record the $58,926 gain from the sale when the when the note is paid in January 1997. The cash payments of $2,861 received in December 1994 and $12,107 in December 1995 (representing accrued interest through December 1995) were applied to reduce the carrying value of the investment.
In April 1994, the Company sold its investment in Jamar Holdings, Ltd. to James Crowley, a Director of the Company, for $93,000 and recorded a loss of $12,178. The Company purchased the investment in February 1989 from James Crowley for $100,000 plus other costs.
7. Long-term debt:
(a) Long-term debt consists of the following: 1996 1995 -------- -------- 7-3/10% note payable collateralized by $704,000 of real estate and $1,651,000 of equipment at Marietta Lanes bowling center, due in monthly installments of $5,068 including principal and a variable rate of interest (base plus 2-1/2%) adjusted monthly, payment amount is adjusted annually to correspond to the remaining amortization term and the current interest rate, balance due December 1, 1997 ................... $ 641,289 $ 652,992
9-1/2% note payable, collateralized by $998,000 of equipment at Marietta Lanes bowling center, due in average monthly installments of $2,189, including principal and interest, balance due September 2003 ................................. 133,490 146,015
9-3/4% note payable collateralized by $2,161,000 of real property and $845,000 of equipment of American Bowling Center, principal due in monthly installments of $4,605 plus interest at a variable rate (prime plus 1-1/2 points) adjusted monthly, balance due January 2001 ..... 253,235 308,489
9-7/10% note payable collateralized by $2,161,000 of real property and $845,000 of equipment of American Bowling Center, guaranteed by Small Business Administration, due in monthly installments of $4,386 including interest, balance due January 2011 ....................... 410,749 423,407
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. Long-term debt (continued): (a) (continued)
1996 1995 --------- ---------
14-4/10% note payable collateralized by $2,161,000 of real property and $845,000 of equipment of American Bowling Center, due in average monthly installments of $14,220, including interest, balance due October 1995 ........................ -- 19,876
9% note payable collateralized by $2,161,000 of real property and $845,000 of equipment of American Bowling Center, due in monthly installments of $5,846 including interest, balance due August 2003 ......................... 369,519 404,674 --------- Subtotal of Long-Term debt extinguished upon sale of assets (Note 12) .................. 1,808,282 ---------
10-9/10% note payable collateralized by first trust deed on $1,076,000 of land and office building, due in monthly installments of $11,675 including interest, balance due in October 2004 .......... 1,183,093 1,193,602
10-3/4% note payable collateralized by partnership interest in Old Vail Partners, principal is due in monthly payments of $5,223 plus interest at a variable rate (prime plus 1-1/2 points) adjusted monthly. Additional principal payments are due to the extent distributions are received from Old Vail Partners. The balance was due in November 1996 but a $115,000 principal payment was made in July 1996 and the loan was extended to November 1998. The loan is guaranteed by Harold S. Elkan ................................. 868,555 931,711
8-1/2% note payable to bank, collateralized by deed of trust on $282,000 of undeveloped land, principal of $4,745 plus interest is payable annually, balance due February 1999 ............. 90,164 94,909
8% note payable collateralized by $2,108,000 of real estate and $264,000 of equipment at Valley Bowling Center, due in monthly installments of $18,882 including principal and interest, balance due August 2000 ......................... 1,994,403 2,058,019
10% note payable collateralized by $668,000 of equipment at Valley and Grove Bowling Centers, due in monthly installments of $5,197, including principal and interest, balance due June 30, 1997 112,445 160,900
9% note payable collateralized by $66,000 of equipment at Valley and Grove Bowling Centers, due in monthly installments of $2,170, including principal and interest, balance due August 1996 2,304 26,920
9% note payable collateralized by $668,000 of equipment at Valley and Grove Bowling Centers, due in monthly installments of $1,443, including principal and interest, balance due June 1998 This note was paid in full in July 1996 ......... 31,564 45,264
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. Long-term debt (continued):
(a) (continued) 1996 1995 ----------- ----------- 8%-10% notes payable collateralized by $264,000 of equipment at Valley Bowling Center, due in monthly installments of $11,780 including principal and interest, balance due June 1998 . 277,685 383,271
9% note payable, unsecured, due in monthly installments of $2,000 thereafter, including principal and interest, balance due April 1997 The note was originally due in February 1996 . 73,474 90,043
8-1/2% note payable, unsecured, due in monthly installments of $3,060 of principal and interest, balance due October 1996 ............ 73,307 102,337
9-1/2% notes payable collateralized by $141,000 of video game equipment, due in monthly installments of $4,895 including principal and interest, balance due October 1, 1998 ........ 102,439 146,356
10-1/2% note payable collateralized by first trust deed on $4,482,867 of undeveloped land, principal and accrued interest (a variable rate of base plus 1-1/2 points) due June 22, 1997 .. 340,169 93,820
Capitalized lease obligation (Note 8a), paid in June 1996 ..................................... -- 113,439
Other ............................................ 78,913 112,591 ----------- ----------- 7,036,797 7,508,635 Less long-term debt extinguished upon sale ....... (1,808,282) -- Less current maturities .......................... (1,061,000) (705,000) ----------- ----------- $4,167,515 $6,803,635 =========== ===========
The values of property and equipment as collateral for the notes are listed at historical cost less valuation adjustments.
The principal payments due on notes payable during the next five fiscal years are as follows: $1,061,000 in 1997, $1,163,000 in 1998, $978,000 in 1999, $251,000 in 1999, and $1,826,000 in 2000.
(b) On October 5, 1994, the Company transferred title in an office building to the lender in complete satisfaction of a related note payable with a balance of $2,461,942. The carrying value of the land, office building, and improvements was $1,134,447 (net of a $1,578,000 valuation adjustment recorded in the year ended June 30, 1994). After deducting the $44,010 carrying value of other related assets, transaction costs of $21,659, and the carrying value of the property, the Company recorded a $1,261,826 extraordinary gain from the extinguishment of debt in October 1994. This transaction was part of an agreement with the lender whereby the Company's monthly payments were modified, effective July 1994, to equal the net cash flow of the property until title to the property was transferred to the lender. For the prior two years, the Company unsuccessfully attempted to negotiate a modification of the loan terms with the original lender and then its successor. The $1,200,000 estimated current fair value of the office building was considerably less than the balance of the loan due to significant declines in the market rents since 1989. There was no effect for federal income tax purposes due to utilization of the Company's net operating loss carry-forwards.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. Long-term debt (continued):
(c) The Company has a $300,000 revolving line of credit which matured September 2, 1996. The Company is in the process of getting the line of credit renewed under similar terms. Amounts drawn on the line of credit bear interest on amounts drawn at the bank's base rate plus three percentage points (11% at June 30, 1996). Payments of interest and $5,000 principal are due monthly. The Company's borrowings from this line of credit averaged $192,000 during the year ended June 30, 1996 ($40,000 in 1995 and $140,000 in 1994).
8. Commitments and contingencies:
(a) The Company leased three of its bowling centers (Grove, Redbird, and Village) under operating leases. Redbird Lanes' leased its facility from an entity (Redbird Properties, Ltd.) which became a consolidated subsidiary on July 1, 1995. The Redbird Lanes bowling center was closed on May 7, 1996 and the property was sold on May 31, 1996 (See Note 6d). The Village Lanes bowling center was sold on August 7, 1996 (See Note 12).
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 1997 through 2001 and $720,000 in the aggregate thereafter. 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 1996 and 1995, and $330,000 and in 1994.
The Company is a guarantor of a lease for one of the bowling centers sold in April 1989. The guarantee expires in December 1996 and the remaining minimum rental on the lease subject to the guarantee is $25,300.
(b) The Company has an employment agreement with Harold S. Elkan expiring July 1, 1998, which 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, 1996, his annual salary was $250,000.
(c) The Company had a judgment against it of $211,000 for breach of lease. The litigation was originally initiated by the Company to contest the lessor's cancellation of a lease for failure to meet development criteria on the leased parcel. The Company failed in its litigation after a lengthy appeals process and the lessor was awarded an amount equal to one year's rent. The Company accrued the provision for the judgment in the year ended June 30, 1985 and subsequently accrued annual estimates of interest totaling $309,190 through June 30, 1993 ($47,290 accrued in 1993). The statute of limitations to enforce the judgment expired in April 1994 and the liability was extinguished. Therefore the Company recorded $548,190 of income in the amount of the previously recorded judgment and accrued interest plus another related item for $28,000 in the year ended June 30, 1994.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
8. Commitments and contingencies (continued):
(d) During the year ended June 30, 1996, the Company reversed amounts accrued in prior years totaling $769,621 as the Company determined that the loss contingency was no longer probable.
(e) 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, 1996, 1995, and 1994, the Company has not recorded any income tax expense or benefit due to its utilization of prior loss carry-forwards.
At June 30, 1996, the Company had net operating loss carry-forwards of $7,638,000 for income tax purposes. The carry-forwards expire from years 2000 to 2008. Deferred tax assets are primarily related to these net operating loss carry-forwards and certain other temporary differences. Due to the uncertainty of 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, 1996 and 1995.
The following is a reconciliation of the normal expected federal income tax rate to the loss before extraordinary gain reported in the financial statements: 1996 1995 1994 --------- --------- ---------
Expected federal income tax ..... $ 394,000 $(283,000) $(729,000) Increase in valuation allowance . 180,000 94,000 -- Utilization of net operating loss carryforwards ................ (574,000) -- -- Losses for which no tax benefits were recognized .............. -- 189,000 729,000 --------- --------- --------- 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, 1995 and 1994:
1996 1995 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 2,597,000 $ 2,609,000 Accumulated depreciation and amortization .................. 498,000 360,000 Deferred gain ................... 286,000 295,000 Capitalized interest and taxes .. 200,000 200,000 Valuation for impairment loss ... 36,000 83,000 Other ........................... 470,000 360,000 ----------- ----------- Total gross deferred tax assets 4,087,000 3,907,000 Less valuation allowance ...... (4,087,000) (3,907,000) =========== =========== Net deferred tax assets ............ $ -- $ -- =========== ===========
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
10. Leasing activities:
The Company, as lessor, leases office space in an office building (two office buildings in 1994, see below) under operating leases which are primarily for periods ranging from one to five years with options to renew. The Company is also a sublessor of land to condominium owners under operating leases with an approximate remaining term of 65 years which commenced in 1981 and 1982 (see Note 5).
The approximate future minimum rentals for existing noncancellable leases on the remaining office building are as follows: $265,000 in 1997, $80,000 in 1998, $33,000 in 1999, $15,000 in 2000, $15,000 in 2001, none thereafter, and $408,000 in the aggregate.
The following is a schedule of the Company's investment in rental property as of June 30, 1996 and 1995: 1996 1995 ----------- ----------- Land ................... $ 258,000 $ 258,000 Building ............... 773,393 773,393 Tenant improvements .... 49,207 45,043 ----------- ----------- 1,080,600 1,076,436 Accumulated depreciation (186,736) (135,880) ----------- ----------- $ 893,864 $ 940,556 =========== ===========
As described in Note 7b, on October 5, 1994, the Company transferred title in an office building to the lender in complete satisfaction of a related note payable with a balance of $2,461,942. The cost (after reduction for the $1,578,000 provision for impairment loss described in Note 7b) and accumulated depreciation for this building was $1,854,693 and $697,406, respectively, at June 30, 1994. The following is a summary of the results of operations of this office building for the years ended June 30, 1995 and 1994: 1995 1994 -------- ----------- Rents ........... $ 50,000 $ 201,000 Rental costs .... 19,000 92,000 Depreciation .... 27,000 108,000 Interest ........ 12,000 155,000 Provision for impairment loss -- 1,578,000 Net Loss ........ (8,000) (1,732,000)
11. Business segment information:
The Company operates principally in four business segments: bowling centers, commercial construction (primarily tenant improvements), commercial real estate rental, and real estate development. As described in Note 6c, the real estate development segment commenced in September 1994 when the Company acquired a controlling interest in Old Vail Partners. Other revenues, which are not part of an identified segment, consist of property management 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.
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
11. Business segment information (continued):
The following is summarized information about the Company's operations by business segment.
1996 1995 1994 ----------- ----------- ----------- Bowling: Net sales ............... $ 7,452,834 $ 7,799,991 $ 7,949,200 Operating income (loss) . (330,108) (78,560) (383,392) Depreciation ............ 825,196 849,598 947,555 Identifiable assets ..... 5,189,000 6,869,000 6,638,000 Capital expenditures .... 38,000 114,000 4,555,000
Commercial construction: Net sales ............... $ 2,008,073 $ 1,785,523 $ 1,752,056 Operating income ........ 53,451 25,107 19,349 Depreciation ............ 6,285 5,582 5,748 Identifiable assets ..... 661,000 341,000 508,000 Capital expenditures .... 1,000 30,000 --
Real Estate Rental: Net sales ............... $ 562,188 $ 577,136 $ 686,046 Operating income- before valuation adjustment and loss on disposal ....... 233,892 214,493 169,684 Operating income (loss) . 233,892 214,493 (1,408,316) Depreciation ............ 65,942 93,496 169,933 Identifiable assets ..... 1,471,000 1,285,000 2,459,000 Capital expenditures .... 4,000 10,000 27,000
Net sales includes $53,184 of intercompany rental income which was eliminated in consolidation in 1996, 1995 and 1994.
Real Estate Development: Net sales ............... $ -- $ -- $ -- Operating income (loss) . 704,331 (141,391) -- Identifiable assets ..... 7,116,000 6,026,000 1,603,000 Capital expenditures .... -- -- --
Unallocated Corporate Overhead and Other Activities: Net sales ............... 184,371 $ 232,135 $ 219,858 Operating loss .......... (482,321) (287,947) (372,118) Depreciation ............ 34,558 36,554 30,425 Identifiable assets ..... 2,634,000 788,000 2,465,000 Capital expenditures .... 6,000 7,000 27,000
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
12. Subsequent Event:
On August 7, 1996 the Company sold the Village, Marietta and American Bowling Centers (all located in Georgia) and related real estate for $3,950,000 cash, which resulted in a gain of approximately $1,125,000. The property and equipment and the long-term debt extinguished from the sale proceeds are presented as current assets and liabilities, respectively. The following are the results of operations of these bowling centers included in the Company's statements of operations for the years ended June 30, 1996, 1995 and 1994:
1996 1995 1994 ----------- ---------- ----------- Revenues ........... $ 3,469,368 $3,617,868 $ 3,722,215 Bowl costs ......... 2,159,023 2,094,923 2,187,531 Selling, general and administrative: Direct ........... 787,122 790,245 807,091 Allocated ........ 212,700 224,700 233,000 Depreciation ....... 222,370 260,291 440,927 Interest expense ... 175,774 200,109 231,034 Income (loss) ...... (87,621) 47,600 (177,368)
INDEPENDENT AUDITORS' REPORT
The 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, 1996 and 1995, and the related statements of income and partners' equity (deficiency) and cash flows for each of the years in the three-year period ended March 31, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California August 30, 1996
UCV, L.P. (a California Limited Partnership)
BALANCE SHEETS - MARCH 31, 1996 and 1995
ASSETS
See accompanying notes to financial statements.
UCV, L.P. (a California Limited Partnership)
STATEMENTS OF INCOME AND PARTNERS' EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
See accompanying notes to financial statements.
UCV, L.P. (a California Limited Partnership)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Supplemental schedule of non-cash investing and financing activities: In June 1994 the Partnership extinguished its existing long-term debt of $16,803,118 with the proceeds of a $19,833,500 note payable. In addition to deferred loan costs of $115,000 incurred in the year ended March 31, 1994, the Partnership incurred an additional $383,316 of deferred loan costs in the year ended March 31, 1995 that were paid from loan proceeds. Fully amortized loan costs of $449,749 were written-off in the year ended March 31, 1995
See accompanying notes to financial statements.
UCV, L.P. (a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
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.
(c) Property and equipment and depreciation- Property and equipment are stated at cost. Depreciation is being provided on 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) Capitalized redevelopment planning cost- The Partnership had capitalized engineering, architectural and other costs incurred related to the planning of the possible redevelopment of the apartment project. The Partnership charged these costs to expense in the year ended March 31, 1996 because the costs were not relevant to the current redevelopment plan being analyzed.
(f) Deferred financing fees- Loan costs incurred in obtaining financing are being amortized on a straight-line basis 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 and restricted cash-the carrying amount reported in the balance sheet approximates the fair value due to their short-term maturities.
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.
(h) Use of estimates - the Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities and 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 general accepted accounting principles. Actual results could differ from these estimates.
(i) Valuation impairment - The Partnership records a provision for value impairment of long-lived assets whenever the sum of the estimated undiscounted future cash flows from operations plus the asset's estimated undiscounted disposition value is less than the current book value. The provision for value impairment, if any, is equal to the excess by which the current book value exceeds the fair value of the asset. The Partnership adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed OF" on January 1, 1996. The Partnership's previous method of accounting for impairment losses was similar to SFAS No. 121, therefore there was no impact on the Partnership's financial position or results of operations.
UCV, L.P. (a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
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. The fees were $107,813 in 1996, $106,622 in 1995, and $105,373 in 1994. A general contractor which is an affiliate of a partner was paid $75,446 in 1996, $41,722 in 1995, and $17,873 in 1994 roof repairs and other maintenance. The Partnership had been using an insurance agent, which was an affiliate of a partner, until the agent ceased operations in June 1995. The Partnership paid the following insurance premiums on policies brokered by this insurance agent: $4,183 in 1996, $117,364 in 1995, and $128,133 in 1994.
3. Long-term debt:
On June 13, 1994, the Partnership obtained a $19,833,500 "all-inclusive-secured-promissory-note" whereby the new lender advanced $3,030,382 to the Partnership representing the difference between $19,833,500, the principal balance of the note, and the existing note payable (First Deed of Trust). The Partnership makes monthly payments of interest only at 10 percent per annum on $19,833,500 to the new lender. The new lender is obligated to use the proceeds of the Partnership's monthly payment to fund the monthly payment ($128,215 including principal and interest at 7-3/4 percent) on the First Deed of Trust, which has not been extinguished (balance of $16,361,690 at March 31, 1996) and matures on September 1, 1998. The all-inclusive-secured-promissory-note is due September 1, 1998 and is collateralized by a second deed of trust on the land, buildings and leases. In addition to a $9,000 monthly payment for a property tax reserve, the Partnership is also required to make monthly payments of $8,334 for a "capital replacement" reserve. The Partnership can make quarterly requests for reimbursement from this reserve for qualifying expenditures, regardless of whether they are capitalized or expensed. The balance of these two cash reserve accounts is classified as restricted cash.
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 2, 1996 ----------------
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 2, 1996 - ----------------------- and Principal Accounting Officer --------------- Steven R. Whitman
/s/ Robert A. MacNamara Director October 2, 1996 - ----------------------- --------------- Robert A. MacNamara
/s/ Patrick D. Reiley Director October 2, 1996 - ---------------------- --------------- Patrick D. Reiley