ITEM 2. PROPERTIES - ------------------
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 $1,925,035 note payable. The property was purchased in November 1993 from an unaffiliated third party 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.
REAL ESTATE DEVELOPMENT
Downtown Properties Inc., a wholly-owned subsidiary of the Company, owns 507 acres of undeveloped land in Lake of the Ozarks, Missouri. The land is collateral for a $85,418 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). As described in Note 6c of Notes to Consolidated Financial Statements, the other partner in OVP is entitled to 50 percent of the cash distributions from OVP, not to exceed $2,450,000. OVP owns 33 acres of unimproved land in Temecula, California and a 50 percent limited partnership interest in Vail Ranch Limited Partnership (VRLP). Legal title to the 33 acres of undeveloped land is still in the process of being changed from the former general partnership's (Old Vail Partners) name into the limited partnership's name (OVP).
The 33 acres of land (40 acres as of June 30, 1996) owned by OVP as of June 30, 1997 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 principal balance of the allocated portion of the bonds is $1,384,153. The annual payments (due in semiannual installments) related to the bonded debt are approximately $144,000 for the 33 acres. The payments continue through the year 2014 and include interest at approximately 7-3/4 percent. OVP is delinquent in the payment of property taxes and assessments for over the last five years. The property is currently subject to default judgments to the County of Riverside, California totaling approximately $1,288,898 regarding delinquents assessment district payments ($889,758) and property taxes ($399,140). On March 18, 1997, the County sold the 7-acre parcel owned by OVP at public-sale for delinquent property taxes totaling $22,770 and the buyer assumed the Assessment District obligation of $171,672. OVP recorded a loss from the disposition of the undeveloped land of $468,268 representing the carrying value of the 7 acre parcel ($662,710) less the property tax and assessment district obligations extinguished. The County attempted to sell the 33 acre parcel at public sale on March 18, 1997 for the defaulted property taxes and again on April 22, 1997 for the default under the assessment district obligation, however, the County was not able to obtain any bids to satisfy the obligations and the sale was not completed.
The 33-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, 1997, 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) In November 1993, the City of Temecula adopted a general development plan that designated 40 acres of property owned by Old Vail Partners, a general partnership (the predecessor to Old Vail Partners, L.P., a California limited partnership) (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 acres 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.
On August 3, 1994, 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. 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. OVP suffered adverse judgments in both cases. As part of the state court litigation, Riverside County obtained a judgment for foreclosure of the delinquent assessments allowing it to sell the 40 acre parcel by public sale. The County sold a 7.2 acre parcel in March of 1997. OVP filed appeals at both the Fourth District Court of Appeals for the State of California and the U.S. Court of Appeals, Ninth Circuit. The U.S. District Court entered judgment dismissing OVP's action in a manner that would foreclose OVP from every bringing its claim in federal court. On appeal the U.S. Court of Appeals reversed and ruled the dismissal should preserve OVP's right to bring its action in federal court depending upon the outcome of the state court litigation. The parties are awaiting the United State Supreme Court's ruling on a writ of certiorari. In the state court system the parties are awaiting oral argument and the Fourth District Court of Appeal's subsequent decision. 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 acres of land as a result of an inappropriate calculation and allocation of assessments to the 40 acres 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. The outcome of this litigation is uncertain.
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, as reported on the OTC Bulletin Board, which is a market quotation service for market makers. The over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily reflect actual transactions in shares of the Company's common stock.
1997 1996 ---------- ----------- High Low High Low ---- ---- ----- ---- First Quarter ....................... $.01 $.01 (a) (a) Second Quarter ...................... $.01 $.01 $.01 $.01 Third Quarter ....................... $.25 $.02 $.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 25, 1997 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, 6c, 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 and property taxes in default related to the same property which are included in current liabilities, the Company has a working capital deficit of $136,635 at June 30, 1997, which is a $225,954 decrease from the similarly calculated working capital of $89,319 at June 30, 1996. The $2,085,727 proceeds from sale of assets during the year were offset by $172,071 expended to acquire a golf shaft manufacturer and the $2,162,000 of cash utilized by operations after debt service and distributions received from investees.
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 and bowling center sales to fund these deficits. In the near future, the Company will continue to rely on dispositions of assets and refinancings of existing debt (UCV) to fund operations.
The cash provided (used) before changes in assets and liabilities segregated by business segments was as follows:
1997 1996 1995 ----------- ----------- --------- Bowling .............................. $ (74,000) $ (51,000) $ 276,000 Rental ............................... 185,000 170,000 155,000 Construction ......................... (12,000) 58,000 29,000 Golf ................................. (574,000) -- -- Development .......................... (206,000) (292,000) (113,000) General corporate expense and other .. (184,000) (454,000) (257,000) ----------- ----------- --------- Cash provided (used) by operations ... (865,000) (569,000) 90,000 Capital expenditures, net of financing (314,000) (49,000) (142,000) Acquisition of golf shaft manufacturer (172,000) -- -- Principal payments on long-term debt . (1,392,000) (755,000) (865,000) ----------- ----------- --------- Cash used ............................ (2,743,000) (1,373,000) (917,000) =========== =========== =========
Distributions received from investees 581,000 320,000 263,000 =========== =========== ========= Proceeds from sale of assets ......... 2,086,000 1,836,000 -- =========== =========== =========
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 $1,801,172 was $2,052,185. The cash flow provided by the operations of the three bowling centers was $50,510, $140,189, and $313,094 in 1997, 1996, and 1995, respectively. The principal payments on long-term debt for these bowls were $7,111, $147,171, and $359,175 in 1997, 1996, and 1995, respectively.
The cash distributions the Company received from UCV during the last three years were the Company's proportionate share of distributions from UCV's results of operations. The investment in UCV is classified as a liability because the cumulative distributions received from UCV exceed the sum of the Company's initial investment and the cumulative equity in income of UCV by $10,083,802 at June 30, 1997. Although this amount is presented in the liability section of the balance sheet, the Company has no liability to repay the distributions in excess of basis in UCV. The Company estimates that the current market value of the assets of UCV (primarily apartments) exceeds its liabilities by $15,000,000-$18,000,000. The $19,833,500 note payable of UCV is due in September 1998. UCV is currently evaluating the feasibility of redeveloping the apartment project from 542 units to approximately 1,100 units. UCV has commenced seeking new short-term financing for the property in an amount up to $25,000,000, which if obtained would provide sufficient funds for funding redevelopment planning costs over the next 18 months and for funding distributions to the partners of approximately $2,000,000 each. UCV estimates the annual debt service on the new financing will not exceed its current level of debt service as a result of a reduction in the annual interest rate from 10 percent to current rates of approximately 7-3/4 percent.
At June 30, 1997, 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 and completed development of the first phase (14 acres) of the shopping center in May 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 $3,000,000. 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.
As described in Note 4c of the Notes to Consolidated Financial Statements, Old Vail Partners is delinquent in the payment of special assessment district obligations and property taxes on 33 acres of undeveloped land. The annual obligation for the assessment district is approximately $144,000. The County of Riverside obtained judgments for the default in the delinquent assessment district payments. On March 18, 1997, the County sold a 7 acre parcel at public-sale for delinquent property taxes totaling $22,770 and the buyer assumed the Assessment District obligation of $171,672. The County attempted to sell the 33 acre parcel at public sale on March 18, 1997 for the defaulted property taxes and again on April 22, 1997 for the default under the assessment district obligation, however, the County was not able to obtain any bids to satisfy the obligations and the sale was not completed. The amounts due to cure the judgment for the default under the Assessment District obligation on the 33 acre parcel at June 30, 1997 was approximately $890,000 ($688,000 for both parcels at June 30, 1996). The principal balance of the allocated portion of the bonds ($1,208,224 and $1,373,420 as of June 30, 1997 and 1996, respectively), and delinquent interest and penalties ($889,758 for the 33 acre parcel as of June 30, 1997 and $687,670 for both parcels as of June 30, 1996, respectively) are classified as "Assessment district obligation- in default" in the consolidated balance sheet. In addition, accrued property taxes in the balance sheet include $399,140 of delinquent property taxes and late fees related to the 33 acre parcel as of June 30, 1997 ($337,016 for both parcels at June 30, 1996). If the County of Riverside again attempts a public sale of the 33 acre parcel and the judgments are not satisfied prior to the sale, Old Vail Partners could lose title to the property and the property may not be subject to redemption. 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 judgements for defaulted taxes and assessments and the County's sale of the 7 acre parcel in March 1997, the Company recorded a $2,409,000 provision for impairment loss at June 30, 1997 on the 33-acre parcel related to the City of Temecula's effective down-zoning of the property. As a result of the judgment and the down-zoning of the property, the recoverability of the remaining $1,384,014 carrying value of this property is uncertain.
On January 22, 1997, the Company, purchased the assets of Power Sports Group, Inc. (PSG) for $172,071 cash. PSG manufactured premium graphite golf shafts and ski poles and had averaged approximately $375,000 in sales in each of the past two calendar years. On April 28, 1997, the Company obtained a $320,000 loan to finance the acquisition of approximately $458,000 of manufacturing equipment as part of its plan to automate the production process.
The Company is expecting a $1,100,000 cash flow deficit in 1998 from operating activities after adding estimated distributions from UCV operations ($527,000) and deducting capital expenditures and scheduled principal payments on long-term debt. The Company's $821,513 of cash as of June 30, 1997 will not be sufficient to fund this cash flow deficit. However, the Company estimates that a refinance of the long-term debt of UCV in an amount exceeding $22,000,000 will enable UCV to make a distribution to the Company to fund the cash deficiency. 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.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 supercedes Accounting Principles Board Opinion No. 15, Earnings Per Share (APB 15) and specifies the computation, presentation, and disclosure requirements of earnings per share (EPS). SFAS 128 is effective for years ending after December 15, 1997. The Company does not expect that the adoption of this statement will have an impact on the Company's results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 30), and No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). These statements are effective for years beginning after December 15, 1997. The Company does not expect that the adoption of these statements will have a material impact on the Company's financial position or results of operations.
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. The following is a summary of the changes to the components of the segments in the years ended June 30, 1997 and 1996:
BOWLING OPERATIONS: - ------------------- 1997 vs. 1996 -------------
On August 7, 1996, the Company sold its three bowling centers located in Georgia for $3,950,000, which resulted in a $1,099,514 gain. In May 1996 the Company also sold the Redbird Lanes real estate and ceased operations of the bowling center. The Company has two bowling centers remaining that are located in San Diego, California. On December 15, 1996, the Company sold the video game operations that were located in the two San Diego bowling centers, which resulted in a $55,000 gain. The Company has no plans to sell the two remaining bowling centers.
The following is a summary of the changes to the components of the loss from operations of the bowling segment during the year ended June 30, 1997 compared to 1996:
Although the revenues of the San Diego bowls only decreased by 1 percent in 1997, revenues from league bowling declined 10 percent ($111,000) due to a 10 percent decrease in the league games bowled. This decrease was partially offset by an increase in revenues from open play ($40,000 or 7 percent), shoe rentals ($36,000 or 27 percent), and other activities ($19,000). The increase in open play relates to a 6 percent increase in the games bowled and a 1 percent increase in the average price per game. The $34,000 increase in bowl costs represents a 2 percent increase. The $88,000 decrease in selling, general and administrative (SG&A) costs primarily relates to decreases of $63,000 in marketing and promotion expenses and $23,000 in administrative payroll. The decrease in marketing and promotion expenses primarily relates to the discontinuance of the Company's Premiere Pin Club frequent bowler program in 1996. Allocated SG&A costs increased by $44,000 due to the disposition of the other bowling centers in May and August of 1996. Interest expense related to the San Diego bowls decreased by $39,000 due to the declining principal balances of long-term debt. The Company does not anticipate any further significant declines in bowl revenues.
The Company recorded an impairment loss regarding one of the two San Diego bowling centers in 1997 related to the continued operating losses of the bowling center. The Company believes the problems with this center are primarily associated with the decline of the surrounding shopping center, which is essentially 80 percent vacant. The performance of this bowling center is not likely to improve until the shopping center is redeveloped. Although the owners of the shopping center are having discussions with several companies interested in purchasing and redeveloping the shopping center, there are currently no plans for redevelopment.
1996 vs. 1995 -------------
The bowling segment profit before gain on sale decreased by $302,000 in 1996 primarily as a result of a $253,000 decrease in same-center bowling revenues. The acquisition of a controlling interest in Redbird Properties, which owned the real estate occupied by Redbird Lanes and the subsequent closing of the operations of Redbird Lanes on May 7, 1996 and the sale of the related real estate also affected the bowling segment. The following is a summary of the changes to the components of the loss from operations of the bowling segment during the year ended June 30, 1996 compared to 1995:
Same-center bowling revenues (Georgia bowls and other) 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 lower 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 $66,000 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.
CONSTRUCTION OPERATIONS - -----------------------
Construction revenues increased 58 percent and 12 percent in 1997 and 1996, respectively, because of the Company's success in bidding for large tenant improvement contracts of $75,000 and higher. In 1997 the Company completed contracts for 8 jobs over $75,000 each that totaled $1,710,000 compared to 6 jobs totaling $899,000 in 1996 and 4 jobs totaling $653,000 in 1995. Construction costs were 88%, 86%, and 84% of construction revenues in 1997, 1996 and 1995, respectively. The increase in the percentages relates to accepting a smaller gross profit margin on larger jobs. Selling, general and administrative (SG&A) expenses directly related to the construction segment were $313,000, $168,000, and $218,000 in 1997, 1996 and 1995, respectively. The $145,000 increase in 1997 construction SG&A expense was primarily attributable to a $39,000 increase in incentive compensation, a $43,000 decrease in the amount of overhead applied to work in process at June 30, 1997 due to a decrease in the amount of jobs in progress, and a $48,000 increase in legal fees and other expenses related to the resolution of two collection problems during the year. The $50,000 decrease in the construction segment SG&A 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 - -----------------
There were no significant changes to the rental segment in 1997 other than the $197,028 increase in the equity in income of UCV, LP. In October 1994, the Company disposed of a 24,000 square foot office building that it had owned since December 1986. The following is a summary of the changes in 1996 from the prior year: Disposition Office Other Total ----------- ------ ----- ----- Rental revenues ................... ( 50,000) 22,000 13,000 ( 15,000) Rental costs ...................... (18,000) 10,000 7,000 (1,000) Allocated SG&A .................... -- (6,000) -- (6,000) Depreciation ...................... (27,000) (1,000) -- (28,000) Interest .......................... (12,000) (18,000) -- (30,000) Equity in investees ............... -- -- (120,000) (120,000) Segment profit .................... 7,000 37,000 (114,000) (70,000)
The vacancy rate for the remaining office building was 7%, 8% and 2% for 1995, 1996 and 1997, respectively. The average monthly rent per square foot was $.86, $.88, and $.87 for 1995, 1996 and 1997, respectively. The Company is currently leasing space to new tenants and renewing existing leases at monthly rates ranging from $.90-$.95 per square foot.
The following is a summary of the changes in the operations of UCV, LP in 1997 and 1996 compared to the previous years: 1997 1996 --------- --------- Revenues ................... $ 184,000 $ 180,000 Costs ...................... (36,000) 36,000 Redevelopment planning costs (162,000) 186,000 Depreciation ............... -- 12,000 Interest ................... (12,000) 186,000 Net income ................. 394,000 (240,000)
Vacancy rates at UCV have averaged 6.3%, 3.1% and 1.2% in 1995, 1996 and 1997, respectively. This was the primary reason for the increase in revenues as the rent rates remained flat in 1996 and increased 2% in 1997. In 1996 UCV wrote-off $186,000 of redevelopment planning costs incurred in 1996 and 1995 related to a plan for redevelopment that was abandoned. Interest expense increased in 1996 as a result of a refinancing which increased long-term debt by approximately $2,800,000 and increased the interest rate by 2-1/2 percent.
REAL ESTATE DEVELOPMENT - -----------------------
The real estate development segment consists primarily of operations related to undeveloped land in Temecula, California, and an investment in Vail Ranch Limited Partners (developing a shopping center in Temecula) which are owned by Old Vail Partners. Development costs consist primarily of legal expenses ($80,000 in 1997, $120,000 in 1996 and $85,000 in 1995) related to the litigation regarding the effective down-zoning of the 40 acres of land and property taxes ($85,000 in 1997, $62,000 in 1996 and $52,000 in 1995). Development interest primarily represents the interest portion of the assessment district payments due each year and the interest accrued on the delinquent payments.
During the year ended June 30, 1997, Vail Ranch Limited Partners (VRLP) completed construction of a shopping center on 10 acres of land in May 1997 and sold approximately 3.6 acres of land. The remaining 13.4 acres are undeveloped. VRLP's $261,000 loss for the year ended June 30, 1997 consisted of: a $160,000 loss from the first month of operation of the shopping center, which is currently 100 percent leased; a $181,000 gain from the sale of the 3.6 acres; and $281,000 of interest expense and property tax expense related to the undeveloped 13.4 acres. Although the shopping center should operate at a profit for the year ending June 30, 1998, the remaining 13.4 acres will continue to generate losses related to $138,000 of annual taxes and assessment district costs until additional acreage is sold or developed.
The Company recorded a $2,409,000 provision for impairment loss at June 30, 1997 on the 33-acre parcel related to the City of Temecula's effective down-zoning of the property.
A subsidiary of the Company accrued amounts in prior years related to a loss contingency which were reversed in 1996 as the loss contingency was no longer considered probable.
GOLF SHAFT MANUFACTURING - ------------------------
Sales during the year ended June 30, 1997 were insignificant because the Company has not yet developed sales with golf club manufacturers or distributors. The sales were principally to custom golf shops. Golf costs during the year ended June 30, 1997 consisted of costs of sales and manufacturing overhead of $97,000 and research and development costs of $75,000. SG&A related to the golf segment consisted of marketing and promotion expenses of $206,000 and other administrative costs of $139,000. Corporate SG&A allocated to the Golf segment totaled $118,000. The Company expects that it will be another six to twelve months before the Company is able to develops sales with these types of customers. In the meantime, the Company will continue to incur marketing expenses similar to the first six months of operations as it continues to develop the foundation for sales to golf club manufacturers and distributors.
UNALLOCATED AND OTHER - ---------------------
Revenues increased by $72,000 in 1997 and decreased by $48,000 in 1996 primarily due to a $47,000 increase and a $31,000 decrease, respectively, in brokerage commissions earned in each of those years.
Unallocated SG&A and Other SG&A decreased by $102,000 in 1997 and increased by $144,000 in 1996. The primary reason for these changes related to the discretionary bonuses of $140,000 awarded in 1996 that were not awarded in 1997. This decrease in 1997 was partially offset by a $50,000 reduction in the allocation of corporate expenses to segments due to the sale of the bowling centers in May and August of 1996.
Interest expense declined by $47,000 in 1997 due to the reduction of the outstanding principal balances of long-term debt and that there were no draws on the Company's line of credit during the year. Interest expense increased by $12,000 during 1996 primarily due to the average outstanding balance of the line of credit during the year.
Investment income increased by $70,000 in 1997 and $24,000 in 1996 primarily due to the investment of cash balances in excess of working capital needs that were generated by the proceeds from the sale of assets in May and August of 1996.
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, 1997. 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 54 Director since November 7, 1983; President since November 11, 1983
Steven R. Whitman 44 Chief Financial Officer and Treasurer since May 1987; Director and Assistant Secretary since August 1, 1989 Secretary since January 1995
Patrick D. Reiley 56 Director since August 21, 1986
James E. Crowley 50 Director since January 10, 1989
Robert A. MacNamara 49 Director since January 9, 1989
There are no understandings between any director or executive officer and any other person pursuant to which any director or executive officer was selected as a director or executive officer.
(d) Family Relationships - None
(e) Business Experience
1. Harold S. Elkan has been employed as the President and Chief Executive Officer of the Company since 1983. For the preceding ten years he was a principal of Elkan Realty and Investment Co., a commercial real estate brokerage firm, and was also President of Brandy Properties, Inc., an owner and operator of commercial real estate.
2. Steven R. Whitman has been employed as the Chief Financial Officer and Treasurer since May 1987. For the preceding five years he was employed by Laventhol & Horwath, CPAs, the last four of which were as a manager in the audit department.
3. Patrick D. Reiley was the Chairman of the Board and Chief Executive Officer of Reico Insurance Brokers, Inc. (Reico) from 1980 until June 1995, when Reico ceased doing business. Reico was an insurance brokerage firm in San Diego, California. Mr. Reiley is currently an independent business consultant.
4. James E. Crowley has been an owner and operator of various automobile dealerships for the last nineteen 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, from 1978 through 1997, the last eleven years of which he served as Vice President of the Property Division. Daley Corporation is a residential and commercial real estate developer and a general contractor. Mr. MacNamara is currently an independent consultant to the real estate development industry.
(f) Involvement in legal proceedings - None
Section 16(a) Compliance -Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on written representations that no other reports were required, during the three fiscal years ended June 30, 1995 through 1997, 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, 1997 exceeded $100,000. Long-term All Other Name and Principal Compen- Compen- Position .... Year Salary Bonus Other sation sation ------------------ ---- ------ ----- ----- ------ ------ Harold S. Elkan, ... 1997 $250,000 $ -- $-- $ -- $ -- President 1996 250,000 100,000 -- -- -- 1995 250,000 -- -- -- --
Steven R. Whitman, . 1997 100,000 -- -- -- -- Chief Financial 1996 100,000 40,000 -- -- -- Officer 1995 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, 1997) 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, 1997.
(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), and the Standard & Poors Leisure Time Index (S&P LT). The Company had included American Recreation Centers, Inc. (ARC), a company primarily operating in the bowling industry, in its performance graph in prior years. ARC was merged with AMF Bowling Centers, Inc. in April 1997 and ceased to be publicly traded.
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 1992) in the Company's common stock at a price equal to its market value (the bid price). At the end of each fiscal year, the total value of the investment is computed by taking the number of shares owned multiplied by the market price of the shares at the end of each fiscal year.
SCHEDULE OF COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN Sports S&P Leisure Year Ended Arenas, Inc. S&P 500 Time ---------- ------------ ------- ---- 6/93 100 100 100 6/94 100 99 134 6/95 100 121 120 6/96 100 149 154 6/97 100 198 214
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
(a) - (c): ---------- Shares Beneficially Nature of Beneficial Percent Name and Address Owned Ownership of Class ---------------- ----- --------- -------- Harold S. Elkan 21,808,267 (a) Sole investment and 80.0% 5230 Carroll Canyon Road voting power San Diego, California
All directors and officer as 21,808,267 Sole investment and 80.0% a group voting power
(a) 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 $539,306 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, 1997 ($552,657 as of June 30, 1996). The balance at June 30, 1997 bears interest at 8 percent per annum and is due in monthly installments of interest only plus annual principal payments of $50,000 due on January 1, 1997-1999. The balance is due January 1, 2001. The largest amount outstanding during the year was $621,758 in November 1996.
2. 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 (11 percent at June 30, 1997) and to be added to the principal balance annually. At June 30, 1997, $909,396 of interest had been accrued ($717,013 as of June 30, 1996). The loan is due in November 2003. The loan is collateralized by 10,900,000 shares of the Company's stock.
3. As of June 30, 1996 the Company was indebted to Harold S. Elkan in the amount of $319,744 related to the July 1995 purchase of his 29 percent partnership interest in Redbird Properties, Ltd. The note was due in monthly installments of interest only and annual principal payments of $100,000. This note was paid in full in December 1996 of which $271,875 was used to pay a portion of Mr. Elkan's note payable to the Company.
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: Page ---- 1. Financial Statements of Registrant
Independent Auditors' Report ...................................... 20
Sports Arenas, Inc. and Subsidiaries consolidated financial statements:
Balance sheets as of June 30, 1997 and 1996 .................... 21-22
Statements of operations for each of the years in the three-year period ended June 30, 1997 .................. 23
Statements of shareholders' equity (deficiency) for each of the years in the three-year period ended June 30, 1997 .... 24
Statements of cash flows for each of the years in the three-year period ended June 30, 1997 ........................ 25-26
Notes to financial statements .................................. 27-41
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 50 percent owned investee:
Independent Auditors' Report ................................... 42
Balance Sheets as of March 31, 1997 and 1996 ................... 43
Statements of income and partners' equity (deficiency) for each of the years in the three-year period ended March 31, 1997 ... 44
Statements of cash flows for each of years in the three-year period ended March 31, 1997 ....................... 45
Notes to financial statements .................................. 46-47
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
21 Subsidiaries of the Registrant .......................... 49
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 13 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency, and is forecasting negative cash flows from operating activities in the next twelve months. These items raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
San Diego, California September 26, 1997
SPORTS ARENAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996
ASSETS
SPORTS ARENAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996 (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, 1997, 1996, AND 1995
See accompanying notes to consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED JUNE 30, 1997, 1996, AND 1995
See notes to accompanying consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996, AND 1995
SPORTS ARENAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996, AND 1995
SUPPLEMENTAL CASH FLOW INFORMATION: 1997 1996 1995 --------- --------- --------- Interest paid .......... $ 469,000 $ 793,000 $ 789,000 ========= ========= =========
Supplemental schedule of non-cash investing and financing activities: - ---------------------------------------------------------------------
Long-term debt of $380,000 in 1997 and $17,751 in 1995 was incurred to finance capital expenditures of $535,963 and $28,750 in 1995.
On March 18, 1997 the County of Riverside foreclosed at public sale on 7 of the 40 acres of the undeveloped land in Temecula, California, which had a carrying value of $662,710. The sale resulted in the extinguishment of $22,770 of accrued property taxes and $171,672 of assessment district obligations.
The sale of the video game business on December 15, 1996 for $10,000 cash and a $45,000 note receivable resulted in a decrease of both property and equipment, and accumulated depreciation by $140,832. Additionally, the sale of another asset for $23,542 cash resulted in a $79,103 decrease of equipment and a $55,561 decrease in accumulated depreciation.
The sale of undeveloped land in January 1996 for cash of $160,401 resulted in a decrease in undeveloped land of $40,000.
The sale of three bowling centers on August 7, 1996 resulted in decreases to the following assets and liabilities: property and equipment- ($6,741,237); accumulated depreciation- ($4,013,747); deferred loan costs-($6,353); prepaid expenses ($20,000); and notes payable- ($1,801,172). See Note 6d regarding supplemental information regarding the proceeds from the sale of bowling center in the year ended June 30, 1996.
On January 22, 1997 the Company purchased the receivables ($8,594), inventories ($119,602) and equipment ($43,875) of the Power Sports Group (Penley Golf) for $172,071.
On March 28, 1997, the proceeds of a $250,000 loan were used to pay $232,995 to the lessor of Grove bowling center for a deferred lease inception fee.
In October 1994, the Company used the proceeds of a $1,200,000 long-term note payable to extinguish a $1,193,800 note payable and partially fund $45,617 of loan costs, 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.
In addition 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.
See accompanying notes to consolidated financial statements.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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 inter-company balances and transactions have been eliminated. The minority interests' share of the net loss of partially owned consolidated subsidiaries have been recorded to the extent of the minority interests' contributed capital. The Company uses the equity method of accounting for 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 CASH EQUIVALENTS - Cash and cash equivalents only include highly liquid investments with original maturities of less than 3 months. Cash equivalents totaled $595,412 and $963,169 at June 30, 1997 and 1996, respectively.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out) or market. At June 30, 1997, inventories consisted of raw materials- $34,398; work in process- $25,106; and finished goods- $29,614.
PROPERTY AND EQUIPMENT - Depreciation and amortization are provided on the straight-line method based on the estimated useful lives of the related assets, which are 20 years for the buildings and 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 adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on April 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk are the notes receivable described in Note 3 and contract receivables.
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.
EARNINGS PER COMMON SHARE - Earnings per common share is computed based on the weighted average number of shares outstanding, which was 27,250,000 for each of the years in the three year period ended June 30, 1997.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior years financial statements to conform to the classifications used in 1997.
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 of insurance premiums to this insurance agent in the year ended June 30, 1995.
See notes 3b, 3c, 4a, 6d, 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 purchaser of the bowling centers (Purchaser) due in monthly installments of $7,720 beginning October 1, 1989, including principal and interest at 10 percent per annum. The balance was due September 1, 1997 but Purchaser was not able to make the payment and the note receivable is currently in default. Under the terms of the note, interest accruing from April 1989 through October 1989 was deferred and was due September 1, 1997, including interest accruing thereon. Purchaser is currently negotiating a sale of all of its bowling centers, which if consummated, would provide sufficient funds to pay its obligation to the Company. The Company has therefore not commenced any negotiations with the buyer to extend the due date of the note receivable. The following is the detail of the balance of the note receivable and accrued interest at June 30:
1997 1996 -------- -------- Balance of note receivable due in monthly installments ............. $688,393 $693,517 Deferred interest due September 1997 . 40,445 38,476 -------- -------- $728,838 $731,993 ======== ========
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
The Company deferred 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, and $19,553 of the deferred gain in the years ended June 30, 1996 and 1995, respectively and none in 1997. 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 $42,267, $45,812, and $43,801 in 1997, 1996, and 1995, respectively. The balance of $539,306 at June 30, 1997 bears interest at 8 percent per annum and is due in annual installments of interest plus principal payments of $50,000 due on December 31 of each year in 1997-2000. The balance is due on January 1, 2001.
(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 (11 percent at June 30, 1997) 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 $909,396 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 $192,383 in 1997, $176,744 in 1996, and $157,612 in 1995.
(d) Other- In the year ended June 30 ,1997 the Company recorded a $35,135 provision for impairment loss related to the balance of a note receivable that is likely to be uncollectible.
4. UNDEVELOPED LAND:
Undeveloped land consisted of the following at June 30, 1997 and 1996: 1997 1996 ---------- ---------- Lake of Ozarks, MO ................. $ 281,629 $ 281,629 Temecula, CA ....................... 3,793,014 4,455,724 Less provision for impairment loss (2,409,000) -- ---------- ---------- $1,665,643 $4,737,353 ========== ==========
(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, 1997 and 1996.
(b) The Company owned approximately 55 acres of undeveloped land in Sierra County, New Mexico that 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.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(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 33 acres (40 acres as of June 30, 1996) of undeveloped land in Temecula, California. The carrying value of the property consists of:
1997 1996 ---- ---- Acres ............................... 33 40 Acquisition cost .................... $2,142,789 $2,615,789 Capitalized assessment district costs 1,434,315 1,577,025 Other development planning costs .... 215,910 262,910 Provision for impairment loss ....... (2,409,000) -- ---------- ---------- $1,384,014 $4,455,724 ========== ==========
The 33 acres of land (40 acres as of June 30, 1996) 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 $144,000 for the 33 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 property is currently subject to default judgments to the County of Riverside, California totaling approximately $1,288,898 regarding delinquent assessment district payments ($889,758) and property taxes ($399,140). On March 18, 1997, the County sold a 7-acre parcel at public-sale for delinquent property taxes totaling $22,770 and the buyer assumed the Assessment District obligation of $171,672. OVP recorded a loss from the disposition of the undeveloped land of $468,268 representing the carrying value of the 7 acre parcel ($662,710) less the property tax and assessment district obligations extinguished. The County attempted to sell the 33 acre parcel at public sale on March 18, 1997 for the defaulted property taxes and again on April 22, 1997 for the default under the assessment district obligation, however, the County was not able to obtain any bids to satisfy the obligations and the sale was not completed.
The principal balance of the allocated portion of the assessment district bonds ($1,208,224), and delinquent principal, interest and penalties ($889,758) are classified as "Assessment district obligation- in default" in the consolidated balance sheet. In addition, accrued property taxes in the balance sheet include $399,140 of delinquent property taxes and late fees related to the 33-acre parcel.
In November 1993, the City of Temecula adopted a general development plan that designated 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 OVP's property from a "commercial" to "professional office" use. The property is subject to Assessment District liens that 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, 1997, 1996 AND 1995
As a result of the County's judgements for defaulted taxes and assessment and the County's sale of the 7 acre parcel at public sale in March 1997, the Company recorded a $2,409,000 provision for impairment loss at June 30, 1997 to reduce the carrying value on the 33-acre parcel to its estimated fair market value related to the City of Temecula's effective down-zoning of the property. The estimated fair market value was determined based on cash flow projections and comparable sales.
5. INTANGIBLE ASSETS:
Intangible assets consisted of the following as of June 30, 1997 and 1996: 1997 1996 ----------- ----------- Deferred lease costs: Subleasehold interest ............ $ 111,674 $ 111,674 Less accumulated amortization .. (28,001) (26,105) Lease inception fee .............. 232,995 -- Less accumulated amortization .. (9,291) -- ----------- ----------- 307,377 85,569 ----------- ----------- Deferred loan costs ................ 137,137 205,090 Less accumulated amortization .. (66,864) (107,929) ----------- ----------- 70,273 97,161 ----------- ----------- Goodwill ........................... 1,345,362 1,345,362 Less accumulated amortization .. (1,076,291) (807,218) Less provision for impairment loss ......................... (199,113) -- ----------- ----------- 69,958 538,144 ----------- ----------- $ 477,608 $ 720,874 =========== ===========
(a) The Company is a sublessor on a parcel of land that is subleased to individual owners of a condominium project. The Company capitalized $111,674 of carrying costs prior to subleasing the land in 1980. The Company is amortizing the capitalized carrying costs over the period of the subleases on the straight-line method. The future minimum rental payments payable by the Company to the lessor on the lease are approximately $129,000 per year for the remaining term of 46 years (aggregate of $5,935,000) 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 46 years (aggregate of $6,982,000). The subleases provide for increases every five years based on increases in the Consumer Price Index.
(b) In March 1997 the Company paid $232,995 to the lessor of the real estate in which the Grove bowling center is located. The payment represented the balance due for a deferred lease inception fee. The fee is being amortized over the remaining lease term of 75 months
(c) Goodwill relates to two bowling centers acquired in August 1993 and is being amortized over 5 years. In the year ending June 30, 1997, the Company has recorded a $199,113 provision for impairment loss related to the unamortized balance of goodwill for one of the bowling centers.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
6. INVESTMENTS:
(a) Investments consist of the following: 1997 1996 ------------ ------------ Accounted for on the equity method: Investment in UCV, L.P. ............... $(10,083,802) $ (9,828,360) Vail Ranch Limited Partners ........... 1,974,193 2,182,087 ------------ ------------ (8,109,609) (7,646,273) Less Investment in UCV, L.P. classified as liability-Distributions received in excess of basis in investment ........ 10,083,802 9,828,360 ------------ ------------ 1,974,193 2,182,087 Accounted for on the cost basis: All Seasons Inns, La Paz .............. 37,926 50,032 ------------ ------------ Total investments .................. $ 2,012,119 $ 2,232,119 ============ ============
The following is a summary of the equity in income (loss) of the investments accounted for by the equity method:
1997 1996 1995 --------- --------- --------- UCV, L.P. ................. $ 301,478 $ 104,450 $ 224,222 Old Vail Partners ......... -- -- (50,256) Vail Ranch Limited Partners (130,510) -- -- Redbird Properties, Ltd. .. -- -- (2,215) --------- --------- --------- $ 170,968 $ 104,450 $ 171,751 ========= ========= =========
The following is a reconciliation of the investment in Vail Ranch Limited Partners: 1997 1996 ----------- ----------- Balance, July 1, 1996 .............. $ 2,182,087 $ 1,219,033 Assumption of partnership liability -- 56,221 Reversal of accrued liability ..... -- 837,190 Contributions (distributions), net. (77,384) 69,643 Equity in net loss ................ (130,510) -- ----------- ----------- Balance, June 30, 1997 ............. $ 1,974,193 $ 2,182,087 =========== ===========
(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):
1997 1996 1996 ----------- ----------- ----------- Total assets ............... $ 2,062,000 $ 2,587,000 $ 2,867,000 Total liabilities .......... 20,169,000 20,204,000 20,179,000
Revenues ................... 4,353,000 4,169,000 3,990,000 Operating and general and administrative costs ..... 1,429,000 1,465,000 1,431,000 Redevelopment planning costs 24,000 186,000 -- Depreciation ............... 194,000 194,000 182,000 Interest expense ........... 2,103,000 2,115,000 1,929,000 Net income ................. 603,000 209,000 448,000
The apartment project is managed by the Company, which recognized management fee income of $111,828, $108,233, and $106,616 in the twelve-month periods ended June 30, 1997, 1996, and 1995, respectively.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
A reconciliation of distributions received in excess of basis in UCV as of June 30 is as follows:
1997 1996 ------------ ----------- Balance, beginning .............. $ 9,828,360 $ 9,559,390 Equity in income ................ (301,478) (104,450) Cash distributions .............. 503,500 320,000 Amortization of purchase price in excess of equity in net assets 53,420 53,420 ------------ ----------- Balance, ending ................. $ 10,083,802 $ 9,828,360 ============ ===========
(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 33 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 in 1994 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 33 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 sheets.
The following is summarized balance sheet information of OVP included in the Company's consolidated balance sheet as of June 30, 1997 and 1996:
1997 1996 ---------- ---------- Assets: Undeveloped land (Note 4c) ................. $1,384,014 $4,455,724 Investment in Vail Ranch Limited Partnership 1,974,193 2,182,087 Liabilities Assessment district obligation-in-default .. 2,097,982 2,061,090 Accrued property taxes ..................... 399,140 337,016 Note payable ............................... -- 340,169 Minority interest in subsidiary ............ 2,212,677 2,212,677
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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. The VRLP partnership agreement provides for allocating 75 percent of cash distributions from sale proceeds to OVP until OVP receives approximately $971,000 and then approximately 50 percent of distributions thereafter. As of June 30, 1997, a 107,749 square foot retail complex is constructed and fully occupied, which utilized approximately 16 of the 29 developable acres. The remaining 13 aces are still undeveloped.
The following is summarized financial information of VRLP as of June 30, 1997 and 1996 and for the 12 months ended June 30, 1997 and 1996:
1997 1996 ----------- ----------- Assets: Undeveloped land ........................ $ 830,000 $ 2,299,000 Development costs ....................... 2,707,000 6,145,000 Property: Land .................................. 765,000 -- Buildings and improvements ............ 5,577,000 -- Accumulated depreciation .............. (19,000) -- Other assets ............................ 976,000 -- Total assets ........................ 10,836,000 8,444,000 Liabilities: Delinquent assessments and property taxes -- 1,316,000 Other liabilities ....................... 710,000 1,398,000 Construction loan payable ............... 5,720,000 -- Assessment district note payable ........ 2,508,000 3,005,000 Total liabilities ................... 9,002,000 5,719,000 Revenues .................................. 104,000 -- Net loss .................................. (261,000) --
(d) Investment in Redbird Properties, Ltd.:
Redbird Properties, Ltd. owned the land and building in which one of the Company's bowling centers (Red Bird Lanes) was located. Effective July 1, 1995, the Company purchased an additional 29 percent partnership interest in Redbird Properties, Ltd. from Harold S. Elkan for $419,744. The purchase price was payable in monthly installments of interest at 8 percent per annum plus annual principal payments of $100,000 on January 1, 1996-1999 and $19,744 on January 1, 2000. 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 as of that date: 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.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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 ----------- ----------- Revenues ............................. $ 1,154,527 $ 1,248,438 Bowling costs ........................ 699,475 845,381 Selling, general and administrative: Direct ............................. 248,899 252,358 Allocated .......................... 58,000 62,600 Depreciation ......................... 58,681 34,194 Interest ............................. 93,044 20,862 Income (loss) excluding gain from sale (3,572) 33,043
(e) Other investment:
The Company owns a 6 percent limited partnership interest in two partnerships that own and operate a 109-room hotel (the Hotel) in La Paz, Mexico (All Seasons Inns, La Paz). The $37,926 carrying value of the Hotel at June 30, 1997 ($50,032 at June 30, 1996) 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, the note receivable was initially restructured so that all principal was due on January 1, 1997, however, only an interest payment of $12,106 was received on that date. Because the cash consideration received at closing was minimal, the Company has not recorded the sale of its investment. The Company will record the $58,926 gain from the sale when the when the note is paid in full. The cash payments of $27,074 received to date (representing accrued interest through December 1996) were applied to reduce the carrying value of the investment.
7. LONG-TERM DEBT:
(a) Long-term debt consists of the following:
The values of property and equipment as collateral for the notes are listed at historical cost less valuation adjustments.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
The principal payments due on notes payable during the next five fiscal years are as follows: $481,000 in 1998, $942,000 in 1999, $205,000 in 2000, $1,791,000 in 2001, and $34,000 in 2002.
(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 carryforwards.
(c) The Company had a $300,000 revolving line of credit that matured September 2, 1996. The line of credit was renewed and increased from $300,000 to $500,000 on November 1, 1996. The line of credit expires on November 1, 1997. On April 8, 1997, the line of credit limit was reduced to $200,000 in conjunction with the bank providing an equipment loan of $320,000. 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, 1997). Payments of interest and $5,000 principal are due monthly if any amounts are outstanding. The Company's borrowings from this line of credit averaged $192,000 during the year ended June 30, 1996 and $40,000 in 1995. The Company did not utilize the line of credit in 1997.
(d) In March 1997 the Company borrowed $250,000 on an unsecured note payable that is due in monthly payments of interest only at 11 percent per annum. The principal is due April 8, 1998.
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 1997, 1996 and 1995.
(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, 1997, his annual salary was $250,000.
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(c) 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.
(d) 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, 1997, 1996 and 1995, the Company did not recorded any income tax expense or benefit due to its utilization of prior loss carryforwards and the uncertainty of the future realizability of deferred tax assets.
At June 30, 1997, the Company had net operating loss carryforwards of $8,034,000 for income tax purposes. The carryforwards expire from years 2000 to 2012. Deferred tax assets are primarily related to these net operating loss carryforwards and certain other temporary differences. Due to the uncertainty of the future realizability of deferred tax assets, a valuation allowance has been recorded for deferred tax assets to the extent they will not be offset by the reversal of future taxable differences. Accordingly, there are no net deferred taxes at June 30, 1997 and 1996.
The following is a reconciliation of the normal expected federal income tax rate of 35 percent to the loss before extraordinary gain reported in the financial statements: 1997 1996 1995 ----------- -------- --------- Expected federal income tax ............ $(1,178,000) $199,000 $(283,000) Increase in valuation allowance ........ 611,000 180,000 94,000 Utilization of net operating loss carryforwards ........................ -- (379,000) -- Losses for which no tax benefits were recognized ..................... 567,000 -- 189,000 ----------- -------- --------- 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, 1997 and 1996:
1996 1996 ---------- ----------- Deferred tax assets: Net operating loss carryforwards ........ $2,732,000 $ 2,597,000 Accumulated depreciation and amortization 494,000 498,000 Deferred gain ........................... 286,000 286,000 Capitalized interest and taxes .......... 24,000 200,000 Valuation for impairment losses ......... 1,058,000 36,000 Other ................................... 104,000 470,000 ---------- ----------- Total gross deferred tax assets ...... 4,698,000 4,087,000 Less valuation allowance ............. (4,698,000) (4,087,000) ---------- ----------- Net deferred tax assets ..................... $ -- $ -- ========== ===========
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
10. LEASING ACTIVITIES:
The Company, as lessor, leases office space in an office building under operating leases that 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 non-cancelable leases on the remaining office building are as follows: $128,000 in 1998, $84,000 in 1999, $37,000 in 2000, $16,000 in 2001, none thereafter, and $265,000 in the aggregate.
The following is a schedule of the Company's investment in rental property as of June 30, 1997 and 1996:
1997 1996 ----------- ----------- Land ................... $ 258,000 $ 258,000 Building ............... 773,393 773,393 Tenant improvements .... 69,483 49,207 ----------- ----------- 1,100,876 1,080,600 Accumulated depreciation (236,740) (186,736) ----------- ----------- $ 864,136 $ 893,864 =========== ===========
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 following is a summary of the results of operations of this office building for the year ended June 30, 1995: -------- Rents ....................... $ 50,000 Rental costs ................ 19,000 Depreciation ................ 27,000 Interest .................... 12,000 Provision for impairment loss -- Net Loss .................... (8,000)
11. BUSINESS SEGMENT INFORMATION:
The Company operates principally in five business segments: bowling centers, golf shaft manufacturer, commercial construction (primarily tenant improvements), commercial real estate rental, real estate development and golf shaft manufacturing. 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. As described in Note 12c, the golf shaft manufacturing segment commenced in January 1997 when the Company acquired the assets of a golf shaft manufacturer. 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, 1997, 1996 AND 1995
The following is summarized information about the Company's operations by business segment.
1997 1996 1995 ---------- ----------- ----------- Revenues per segment schedule 7,169,355 10,207,466 10,394,785 Intercompany rent eliminated (54,214) (53,184) (53,184) ---------- ----------- ----------- Consolidated revenues ....... 7,115,141 10,154,282 10,341,601 ========== =========== ===========
SPORTS ARENAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
12. SIGNIFICANT EVENTS:
(a) 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 1,099,514 after deducting $96,643 of sale expenses. The property and equipment and the long-term debt extinguished from the sale proceeds were presented as current assets and liabilities, respectively, at June 30, 1996. 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, 1997, 1996, and 1995:
1997 1996 1995 -------- ----------- ---------- Revenues ........................... $349,075 $ 3,469,368 $3,617,868 Bowl costs ......................... 254,846 2,159,023 2,094,923 Selling, general and administrative: Direct ........................... 10,117 787,122 790,245 Allocated ........................ 20,100 212,700 224,700 Depreciation ....................... 18,488 222,370 260,291 Interest expense ................... 7,511 175,774 200,109 Income (loss) ...................... 38,013 (87,621) 47,600
(b) On December 15, 1996, the Company sold its video game operations for $55,000, resulting in a $55,000 gain. The sale price consisted of $10,000 cash and a $45,000 note receivable. 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, 1997, 1996, and 1995:
1997 1996 1995 -------- -------- -------- Revenues ............. $ 25,603 $ 73,948 $ 99,581 Bowl costs ........... 18,338 67,112 82,573 Depreciation ......... -- 38,677 73,797 Interest expense ..... 7,977 12,425 16,542 Income (loss) ........ (712) (42,266) (73,331)
(c) On January 22, 1997, Penley Sports, LLC (Penley), a limited liability company for which the Company is the managing member and owner of ninety percent of the units, purchased the assets of Power Sports Group, Inc., which was a manufacturer of graphite golf shafts and ski poles. The purchase price of $172,071 included accounts receivable ($8,594), inventories ($119,602), and equipment ($43,875). The following are the results of operations of Penley included in the Company's statements of operations for the year ended June 30, 1997:
Revenues ...................................... $ 67,260 Golf costs .................................... 171,493 Selling, general and administrative-direct .... 344,772 Selling, general and administrative-allocated . 118,000 Depreciation .................................. 1,017 Interest expense .............................. 6,494 Net loss ...................................... (574,516)
13. LIQUIDITY:
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations, has a working capital deficiency, and is forecasting negative cash flows for the next twelve months. These items raise substantial doubt about the Company's ability to continue as a going concern. UCV, LP, an investee of the Company, is currently proceeding with plans to refinance its long-term debt. The proceeds from the planned refinance are estimated to be sufficient to make a distribution to the Company that will provide enough funds to cover estimated future cash flow deficits for the next 18 months.
INDEPENDENT AUDITORS' REPORT
General Partners UCV, L.P., a California limited partnership:
We have audited the accompanying balance sheets of UCV, L.P., a California limited partnership, as of March 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 1997, in conformity with generally accepted accounting principles.
KPMG LLP
San Diego, California August 27, 1997
UCV, L.P. (a California Limited Partnership) BALANCE SHEETS - MARCH 31, 1997 and 1996
ASSETS
1995 1996 ------------ ------------ Property and equipment (Note 3): Land ........................................ $ 1,289,565 $ 1,289,565 Buildings ................................... 5,189,188 5,189,188 Equipment ................................... 484,456 473,987 ------------ ------------ 6,963,209 6,952,740 Less accumulated depreciation ............... (5,462,145) (5,268,236) ------------ ------------ 1,501,064 1,684,504
Cash ........................................ 121,795 359,021 Restricted cash (Note 3) .................... 166,728 154,136 Accounts receivable ......................... 31,130 24,171 Prepaid insurance ........................... 71,827 76,542 Deferred loan costs, less accumulated amortization of $328,872 and $209,286 ..... 169,438 289,030 ------------ ------------
$ 2,061,982 $ 2,587,404 ============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY)
Long-term debt (Note 3) ..................... $ 19,833,500 $ 19,833,500 Accounts payable ............................ 128,545 163,393 Other accrued expenses ...................... 35,020 37,308 Tenants' security deposits .................. 172,086 169,828 ------------ ------------
20,169,151 20,204,029
Partners' equity (deficiency) ............... (18,107,169) (17,616,625) ------------ ------------
$ 2,061,982 $ 2,587,404 ============ ============
See accompanying notes to financial statements.
UCV, L.P. (a California Limited Partnership) STATEMENTS OF INCOME AND PARTNERS' EQUITY (DEFICIENCY) YEARS ENDED MARCH 31, 1997, 1996 AND 1995
See accompanying notes to financial statements.
UCV, L.P. (a California Limited Partnership) STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1997, 1996 AND 1995
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. 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, 1997, 1996 AND 1995
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 provided using the straight-line method based on the estimated useful lives of the property and equipment (33 years for real property and 3-10 years for equipment). The depreciable basis of the property and equipment for tax purposes is essentially the same as the financial statement basis.
(d) Income taxes- For income tax purposes, any profit or loss from operations is includable in the income tax returns of the partners and, therefore, a provision for income taxes is not required in the accompanying financial statements.
(e) 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 amortized using the straight-line method over the term of the related loan.
(g) Fair value of financial instruments - The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value:
Cash 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 carrying value of long-term debt reported in the balance sheet approximates the fair value due to the average borrowing rates currently available for a similar note with equivalent remaining maturities.
(h) Use of estimates - Management of 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 adopted the provisions of SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on April 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 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, 1997, 1996 AND 1995
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 $110,731 in 1997, $107,813 in 1996, and $106,622 in 1995. A general contractor that is an affiliate of a partner was paid $28,091 in 1997, $75,446 in 1996, and $41,722 in 1995 for 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 and $117,364 in 1995.
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 $16,081,321 at March 31, 1997) 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 21, 1997
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 21, 1997 --------------------- and Principal Accounting Officer Steven R. Whitman
/s/ Robert A. MacNamara Director October 21, 1997 ----------------------- Robert A. MacNamara
/s/ Patrick D. Reiley Director October 21, 1997 --------------------- Patrick D. Reiley