<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Sports Arenas, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
-----------------------------------
5230 CARROLL CANYON ROAD, SUITE 310
SAN DIEGO, CALIFORNIA 92121
-----------------------------------
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 27, 1995
TO THE SHAREHOLDERS OF SPORTS ARENAS, INC.:
The Annual Shareholders' Meeting (the "Meeting") will be held at 10:00 A.M.
on Wednesday, December 27, 1995, at 5230 Carroll Canyon Road, Suite 310, San
Diego, California 92121, for the purpose of considering and voting upon the
following matters, each of which is described in the annexed Proxy Statement:
1. The election of five directors, to hold office until the next Annual
Meeting of Shareholders, or until their successors are elected and
qualified.
2. Ratification of the selection of KPMG Peat Marwick LLP as the independent
auditors for the fiscal year ending June 30, 1996.
3. Such other matters as may properly come before the Meeting or any
adjournments of it.
December 6, 1995 is the record date for the determination of shareholders
entitled to notice of, and to vote at, the Meeting. A list of shareholders
entitled to vote at the Meeting will be available for inspection at the offices
of the Company for 10 days before the Meeting.
We hope you can attend the Meeting in person; HOWEVER, REGARDLESS OF
WHETHER YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE FILL IN, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED BUSINESS REPLY ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
Harold S. Elkan
President
San Diego, California
December 11, 1995
<PAGE>
SPORTS ARENAS, INC.
5230 CARROLL CANYON ROAD, SUITE 310
SAN DIEGO, CALIFORNIA 92121
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 27, 1995
Proxies in the form enclosed with this Proxy Statement are solicited by the
Management of Sports Arenas, Inc. (the "Company"), in connection with the Annual
Meeting of Shareholders of the Company to be held December 27, 1995, at the
place set forth in the preceding Notice of Annual Meeting of Shareholders.
This Proxy Statement and the form of proxy are being first mailed to the
Company's shareholders on or about December 11, 1995. In addition to mailing
copies of this material to all shareholders, the Company has requested banks and
brokers to forward copies of such material to persons for whom they hold stock
of the Company, and to request authority for execution of the proxies. The
Company will reimburse such banks and brokers for their reasonable out-of-pocket
expenses incurred in connection therewith. Officers and regular employees of
the Company may, without being additionally compensated therefor, solicit
proxies by mail, telephone, telegram or personal contact. All expenses of this
solicitation of proxies will be paid by the Company. The Company does not
expect to employ any other person or entity to assist in the solicitation of
proxies.
Any shareholder giving a proxy pursuant to this solicitation may revoke it
at any time before it is exercised at the meeting by: (a) filing with the
secretary of the Company a written notice revoking it; (b) executing a proxy
bearing a later date; or (c) attending the meeting and voting in person.
All shares represented by valid proxies will be voted in accordance with
the directions specified thereon, and otherwise in accordance with the judgment
of the proxy holders. Any duly executed proxy on which no direction is
specified will be voted for the election of the nominees named herein to the
Board of Directors and in favor of Proposal 2 described in the Notice of Meeting
of Shareholders and this Proxy Statement.
VOTING
Only shareholders of record of the Company's common stock at the close of
business on December 6, 1995 (the "Record Date"), are entitled to vote at the
annual shareholders' meeting. On the Record Date there were 27,250,000 shares
of common stock outstanding, each of which is entitled to one vote on each of
the matters to be presented to the shareholders at the meeting, except that
shareholders may have cumulative voting rights with respect to the election of
Directors. All proxies which are returned will be counted by the Inspector of
Elections in determining each issue to be voted on. An abstention from voting
or a broker non-vote is not counted in the voting process under California law.
In accordance with the California General Corporation Law, as applicable to
the Company, each shareholder entitled to vote for the election of directors may
cumulate such shareholder's votes and give one candidate a number of votes equal
to the number of directors to be elected multiplied by the number of shares
owned, or distribute the shareholder's votes on the same principal among as many
candidates as the shareholder thinks fit.
Page 1
<PAGE>
No shareholder shall be entitled to cumulate votes (i.e., cast for any
candidate a number of votes greater than the number of shares owned) unless such
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice at the meeting prior to the voting
of the shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination.
The form of proxy solicited by the Board of Directors confers discretionary
authority on the proxies to cumulate votes (in the event of cumulative voting)
so as to elect the maximum possible number of nominees identified herein. Any
shareholder executing the form of proxy enclosed herewith may withhold authority
to vote for any one or more nominees by so indicating in the manner described in
the form of proxy. The number of votes authorized by the form of proxy,
however, will not be affected by, and the named proxies would likely be able to
offset the effect of any such action through the use of cumulative voting if
deemed by them to be appropriate.
PROPOSAL 1: ELECTION OF DIRECTORS
----------------------------------
The Company's bylaws provide for a board of five directors. Consequently,
five directors are proposed to be elected at the Meeting, each to hold office
until the next annual shareholders' meeting or until his successor is elected
and qualified. Unless authority is withheld, or any nominee is unable or
unwilling to serve, the persons named in the enclosed form of proxy will vote
such proxy for the election of the nominees listed below. In the event any
nominee is unable or declines to serve as a director at the time of the Meeting,
the proxy will be voted for a substitute selected by the Board of Directors.
The Board of Directors has no reason to believe that any nominee will be
unavailable.
The Board of Directors held one meeting during the fiscal year ended June
30, 1995. The meeting was attended by all of the incumbent directors.
In September 1988, the Board of Directors appointed Patrick D. Reiley as an
audit committee of one. The audit committee is to oversee the Company's
accounting and financial reporting policies including recommendations to the
Board of Directors regarding appointment of independent auditors, review with
the independent auditors of the accounting principles and practices followed and
the adequacy thereof, review annual audit and financial results, approve any
material change in accounting principles, policies and procedures and to make
recommendations to the Board of Directors with regard to any of the foregoing.
The audit committee met once in August 1994.
The following table sets forth certain information about the Directors, each of
whom are nominees, and executive officers of the Company:
<TABLE>
<CAPTION>
Age on
Record Present Position with Director
Name Date the Company since
---- ---- ----------- -----
<S> <C> <C> <C>
HAROLD S. ELKAN 52 Chairman of the Board 1983
President
STEVEN R. WHITMAN 42 Director 1989
Chief Financial Officer
Secretary
PATRICK D. REILEY 54 Director 1986
JAMES E. CROWLEY 48 Director 1989
ROBERT A. MACNAMARA 47 Director 1989
</TABLE>
Harold S. Elkan has served as Chairman of the Board of Directors and
President of the Company since November 1983. At that time, Andrew Bradley,
Inc., of which Mr. Elkan is the sole
<PAGE>
shareholder, acquired 21,808,267 shares of the Company's common stock. For 10
years prior to his involvement with the Company, Mr. Elkan was the controlling
principal of Elkan Realty & Investment Co., a commercial real estate brokerage
firm located in St. Louis, Missouri, and the president of Brandy Properties,
Inc., an owner and operator of commercial real estate.
Steven R. Whitman has been a director and Assistant Secretary of the
Company since 1989 and the Secretary since January 1995. He is a certified
public accountant and has been the Chief Financial Officer of the Company since
May 1987. Before joining the Company, Mr. Whitman practiced public accounting
with the firm of Laventhol & Horwath, Certified Public Accountants, for five
years, four of which were as an audit department manager.
Patrick D. Reiley has been a director of the Company since 1986. From 1978
until May 1995, Mr. Reiley was the chairman of the board and chief executive
officer of Reico Insurance Brokers, Inc., an insurance brokerage firm located in
San Diego, California. Reico Insurance Brokers, Inc. ceased doing business in
May 1995. Reico Insurance Brokers, Inc., was not a parent, subsidiary or
otherwise an affiliate of the Company.
James E. Crowley has been a director of the Company since 1989. Since
1978, Mr. Crowley owned and operated various automobile dealerships. Mr.
Crowley is vice-president Jamar Holdings, Ltd., doing business as "San Diego
Mitsubishi" in San Diego, California (he was the president and controlling
shareholder from 1988 to 1994). Mr. Crowley has also been the president of
Coast Nissan since 1992, the president of Escondido Jeep Eagle/GMC Truck since
March 1994. He was the president of Pacific Beach Ford from 1988 to 1991, and
was the president and controlling owner of the following automobile dealerships:
Anaheim Toyota (1983-1987); Anaheim Mazda (1979-1987); and Anaheim Mitsubishi
(1986-1987). None of the foregoing is a parent, subsidiary or otherwise an
affiliate of the Company.
Robert A. MacNamara has been a director of the Company since 1989. Since
1978, Mr. MacNamara has worked at Daley Corporation, a residential and
commercial real estate developer and general contractor in San Diego,
California, where he has been the Vice President of the Property Division since
1984. Daley Corporation is not a parent, subsidiary or otherwise an affiliate
of the Company.
There are no understandings between any director or executive officer
pursuant to which any director or executive officer was selected as a director
or executive officer. There are no family relationships existing among any of
the directors or executive officers of the Company.
COMPENSATION
- ------------
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, 1994,
exceeded $100,000:
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long-term All Other
--------- ---------
Name and Principal Compen- Compen-
------------------ ------- -------
Position Year Salary Bonus Other sation sation
-------- ---- ------ ----- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Harold S. Elkan, 1995 $250,000 $ - $ - $ - $ -
President 1994 250,000 - - - -
1993 225,000 - - - -
Steven R. Whitman, 1995 100,000 - - - -
Chief Financial 1994 100,000 - - - -
Officer 1993 100,000 - 3,000 - -
</TABLE>
Page 3
<PAGE>
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.
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.
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.
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, 1995) 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 agreement provides that up to $650,000
of loans can be made to Harold S. Elkan at interest rates not to exceed 10
percent.
COMPENSATION COMMITTEE REPORT
- -----------------------------
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 criteria concerning the
performance of the executive and the Company. No bonuses were awarded in the
fiscal year ended June 30, 1995, due to the Company's financial circumstances.
The compensation for Harold S. Elkan through December 31, 1992, had been
based on an employment agreement effective July 1, 1987. This agreement
provided for a base salary not to exceed $20,000 per month and annual bonuses
not to exceed $54,000. This compensation was set after reviewing a special
compensation study performed in 1987 for the Board of Directors by an
independent outside consultant. 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 again referred to
the study performed in 1987. The agreement provides for liquidation damages
equal to twice his annual salary plus $50,000 if he is discharged without cause
or following a change in management or control of the Company. The Company is
also authorized to make loans of up to $650,000 to Harold S. Elkan at interest
rates not to exceed 10 percent..
Outside members of Board of Directors approving the Compensation for
Harold S. Elkan:
Patrick D. Reiley
James E. Crowley
Robert A. MacNamara
Page 4
<PAGE>
Directors' Compensation Committee for Other Employees: Harold S. Elkan
PERFORMANCE GRAPH
The following graph compares the performance of $100 if invested in the
Company's common stock (SAI) with the performance of $100 if invested in each of
the Standard & Poors 500 Index (S&P 500), the Standard & Poors Leisure Time
Index (S&P LT), and American Recreation Centers, Inc. (ARC), a company primarily
operating in the bowling industry.
The performance graph provides information required by regulations of the
Securities and Exchange Commission. However, the Company believes that this
performance graph could be misleading if it is not understood that there is
limited trading of the Company's stock.
The performance is calculated by assuming $100 is invested at the beginning
of the period (July 1990) in the Company's common stock at a price equal to its
market value (the bid price). At the end of each fiscal year, the total value
of the investment is computed by taking the number of shares owned multiplied by
the market price of the shares at the end of each fiscal year.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN FOR SPORTS ARENAS, INC.
[GRAPH]
<TABLE>
X-AXIS 1990 1991 1992 1993 1994 1995
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&P500 100.00 116.73 128.35 141.68 139.71 172.04
S&PLT 100.00 60.67 63.78 83.87 85.29 76.52
SAI 100.00 100.00 100.00 100.00 100.00 100.00
ARC 100.00 100.98 98.51 99.19 114.38 132.00
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 1, 1995, certain information with
respect to the beneficial ownership of Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5 percent of its outstanding
Common Stock, (ii) each of the Company's directors, and (iii) all directors and
officers as a group. Except as noted below, to the best of the Company's
knowledge, each of such persons has sole voting and investment power with
respect to the shares beneficially owned.
SHARES NATURE OF PERCENT
BENEFICIALLY BENEFICIAL OF
NAME AND ADDRESS OWNED OWNERSHIP CLASS
- ---------------- ----- --------- -----
Harold S. Elkan 21,808,267* Sole investment 80.0%
5230 Carroll Canyon Road and voting power
San Diego, California
All directors and officers 21,808,267 Sole investment 80.0%
as a group and voting power
Page 5
<PAGE>
* 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1. The Company has $595,224 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, 1995. The balance at June 30, 1995 bears interest at 8
percent per annum and is due in monthly installments of interest only plus
annual principal payments of $100,000 due on January 1, 1996-1999. The
balance is due January 1, 2001.
2. The Company is a partner in several partnerships with Harold S. Elkan
(including his children) and S. Robert Elkan (the brother of Harold S. Elkan)
or a company controlled by him. In each of these partnerships, the Company's
limited partnership interest is entitled to a priority return over the other
limited partners.
REDBIRD LANES, LTD., which owns a bowling center acquired December 31,
1986, is owned by the Company as a 60-percent combined general and
limited partner, S. Robert Elkan as a 20-percent limited partner, and
Harold S. Elkan as a 20-percent limited partner.
REDBIRD PROPERTIES, LTD., is 30-percent owned as general and limited
partners in combination by S. Robert Elkan and an entity wholly-owned
by him. As of June 30, 1995, Harold S. Elkan owned a 30-percent
limited partnership interest and the remaining 40-percent interest was
owned by the SAPI as a limited partner. Redbird Properties, Ltd. owns
the land and building in which the Red Bird Lanes bowling center is
located. During the year ended June 30, 1995, Red Bird Lanes paid
approximately $111,000 of rent to Redbird Properties, Ltd. S. Robert
Elkan and his wife, Harold S. Elkan, and the Company are guarantors of
the $750,000 loan used to purchase the property. Effective July 1,
1995, the Company purchased a 29 percent partnership interest (in
addition to the 40 percent interest it has owned since 1987) in
Redbird Properties, Ltd. from Harold S. Elkan for $446,000. The
purchase price is payable in monthly installments of interest at 8
percent per annum plus annual principal payments of $100,000 on
January 1, 1996-1999 and $46,000 on January 1, 2000. The agreement
provides for an adjustment to the purchase price if the partnership
subsequently sells the real estate prior to June 30, 1996.
5755 LIMITED was a partnership owned by the SAPI as a 75-percent combined
general and limited partner, Harold S. Elkan and members of his family as
18-percent limited partners, and S. Robert Elkan as a 7-percent limited
partner. In October 1994, 5755 Limited transferred ownership of its only
asset, a 24,500 square foot office building acquired in December 1986, to
the lender in complete satisfaction of a related note payable. The
partnership was then liquidated and dissolved.
3. During the year ended June 30, 1995, the Company paid approximately $268,000
in premiums for various insurance packages in which Reico Insurance Company
served as the agent. Reico Insurance Company was owned by Patrick D. Reiley,
a Director of the Company since 1986. He had served as the Company's
insurance agent for the past 17 years. Reico Insurance Company ceased doing
business in June 1995 and the Company has since engaged an unrelated third-
party as its insurance agent.
4. 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
Page 6
<PAGE>
November 1983. The loan to ABI provides for interest to accrue at an annual
rate of prime plus 1-1/2 percentage points (11-1/2 percent at June 30, 1995)
and to be added to the principal balance annually. At June 30, 1995,
$540,269 of interest had been accrued. The loan is due in November 2003.
The loan is collateralized by 10,900,000 shares of the Company's stock.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE
FOR THE NOMINEES FOR DIRECTORS AS SET FORTH IN PROPOSAL 1 ON YOUR PROXY.
---
PROPOSAL 2: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
--------------------------------------------------------------
KPMG Peat Marwick LLP, 750 B Street, Suite 3000, San Diego, California, was
selected by the Board of Directors of the Company to act as independent auditors
for the purpose of conducting the annual audit for the Company for the fiscal
year ended June 30, 1995.
The Board of Directors has determined that KPMG Peat Marwick LLP should
continue as independent auditors for the Company for the fiscal year ending June
30, 1996, and has recommended such selection be approved by the shareholders.
KPMG Peat Marwick LLP represents that neither its firm nor any of its members
have any direct or indirect financial interest in the Company in any capacity
other than as auditors. A representative of KPMG Peat Marwick LLP is expected
to attend the Meeting and be available to answer questions.
Approval of the selection of KPMG Peat Marwick LLP as independent auditors
requires the affirmative vote of a majority of shares represented at the
meeting.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE RATIFICATION OF THE
SELECTION OF KPMG PEAT MARWICK LLP AS SET FORTH IN PROPOSAL 2 OF YOUR PROXY.
OTHER BUSINESS
- --------------
Management knows of no other business to be presented at the meeting.
However, if any other matters properly come before the meeting, it is the
intention of the persons named in the accompanying proxy to vote pursuant to the
proxies in accordance with their judgment in such matters.
SHAREHOLDER PROPOSALS
- ---------------------
To be eligible for inclusion in the Company's Proxy Statement for the
annual meeting of the Company's shareholders expected to be held in December
1996, shareholder proposals must be received by the Company at its principal
office at 5230 Carroll Canyon Road, Suite 310, San Diego, California 92121,
prior to July 1, 1996, and must comply with all legal requirements for the
inclusion of such proposals.
ANNUAL REPORT
- -------------
The Company's Annual Report for the fiscal year ended June 30, 1995, which
includes the Company's financial statements, is attached hereto as Appendix A.
The Annual Report is not to be regarded as proxy soliciting material or as a
communication by means of which any solicitation is made.
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDING
JUNE 30, 1995, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
PROVIDED WITHOUT CHARGE TO ANY SHAREHOLDER WHO REQUESTS IT FROM THE COMPANY'S
SECRETARY AT THE
Page 7
<PAGE>
ADDRESS GIVEN AT THE BEGINNING OF THIS PROXY STATEMENT. THE EXHIBITS TO THAT
REPORT WILL ALSO BE PROVIDED UPON PAYMENT OF COSTS OF REPRODUCTION.
It is important that all proxies be forwarded promptly in order that a
quorum may be present at the meeting.
Regardless of whether you plan to attend the meeting in person, we
respectfully request you sign, date and return the accompanying proxy at your
earliest convenience.
By order of the Board of Directors
Harold S. Elkan
President
December 11, 1995
Page 8
<PAGE>
APPENDIX A
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 1995
Page A-1
<PAGE>
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 1995
DESCRIPTION OF BUSINESS
GENERAL
- -------
Sports Arenas, Inc. (the "Company") was incorporated as a Delaware
corporation in 1957. The Company, primarily through its subsidiaries, owns and
operates six bowling centers, an apartment project (50% owned), one office
building, a construction company, and undeveloped land. The Company also
performs a minor amount of services in property management and real estate
brokerage related to commercial leasing. The Company has its principal
executive office at 5230 Carroll Canyon Road, San Diego, California.
BOWLING CENTERS
- ---------------
The Company's wholly-owned subsidiaries, Marietta Lanes, Inc. and Cabrillo
Lanes, Inc. and 60 percent owned Redbird Lanes, Ltd. (the "Bowls"), operate six
bowling centers containing 252 lanes in California, Georgia and Missouri. Four
bowling centers have been owned for more than five years, and the other two
centers were acquired in August 1993. Two of the bowling centers lease
facilities under a long-term lease with a third party. One bowling center is
leased from an entity (Redbird Properties, Ltd.) which is partially owned by a
subsidiary of the Company. Two bowling centers lease facilities from wholly-
owned subsidiaries of the Company.
The bowling centers' operations include food and beverage facilities and
coin operated video and other games. The revenues from these activities average
30 percent of total bowling related revenues. The bowling centers operate the
food and beverage operations, which includes sale of beer, wine and mixed
drinks, at all of its bowling centers. The Company receives a negotiated
percentage of the gross revenues from the coin operated video games. The video
game operations at the two California operations are operated by Sports Arenas,
Inc. All of the bowling centers include pro shops which are leased to
independent operators for nominal amounts. All of the centers also have day
care facilities which are provided free of charge to the bowlers. All of the
bowling centers have automatic score-keeping and five of the centers have
computerized cash control systems.
On average, 47 percent of the games bowled are by bowling leagues that
enter into league reservation agreements to use a specified number of lanes at a
specified time and day for a specified period of weeks. On average, the league
reservation agreements are for 35 weeks for the winter season (September through
April) and 15 weeks for the summer season (May through August). League revenues
for September through April average 85 percent of league revenues annually.
Approximately 75 percent of all bowling related revenues are generated in the
months of September through April.
The bowling industry faces substantial competition for the sports and
recreation dollar. The Bowls compete with other bowling centers in their
respective market areas, as well as other sports and recreational activities.
Two of the bowling centers are in the same market area and compete directly with
two major bowling center chains. Further competition is likely at any of the
bowling centers any time a new center is constructed in the same market area.
The Company continuously markets its league and open play through a combination
of advertising (billboard and some television), phone solicitation, direct mail,
and a personal sales program.
At June 30, 1995, all of the bowling centers were licensed to sell alcoholic
beverages. Licenses are generally renewable annually provided there are no
violations of government regulations. The bowling centers employ approximately
150 people.
Page A-2
<PAGE>
COMMERCIAL DEVELOPMENT
- ----------------------
The Company, through its subsidiaries (see PROPERTIES - REAL ESTATE
DEVELOPMENT for ownership), has ownership interests in a 40 acre parcel and a 32
acre parcel of undeveloped land in Temecula, California. Each parcel is
commercially zoned, 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 LEGAL PROCEEDINGS (A) for description). In
September 1994, a partnership was formed with an unrelated developer (Developer)
to develop the 32 acre parcel of which 27 acres is developable. The Developer
has reached agreements with an anchor tenant and other tenants which are
sufficient to support the development of 11 of the 27 developable acres. The
Developer is in the process of obtaining construction financing. Both parcels
of land are located in a area of the City of Temecula that is planned for over
11,000 homes of which approximately 3,000 homes have been built to date. There
is a significant amount of other undeveloped commercially zoned property near
both parcels. Therefore, in addition to the normal risks associated with
development of unimproved land (government approvals, availability of financing,
etc.), there is significant competition from the other property owners with
commercially zoned land for prospective users of the property. The Company is
evaluating alternatives regarding the 40 acres of land it directly owns to
either sell the land or obtaining a joint venture partner to supervise and
provide funding for the development of the property.
Downtown Properties, Inc. (Downtown), a wholly-owned subsidiary of the Company,
owns several undeveloped parcels of land in New Mexico and Missouri. The
investment in these assets is not significant. Downtown has no immediate plans
affecting these assets except for the undeveloped land in New Mexico, which is
subject to a sales agreement that has been in default since 1989. The Company
currently has no plans to cancel the contract due to the default.
COMMERCIAL REAL ESTATE RENTAL
- -----------------------------
Real estate operations consist of one office building in the Sorrento Mesa
area of San Diego, California, a sublessor interest in land leased to
condominium owners in Palm Springs, California, and a 542 unit apartment project
in San Diego, California.
Downtown Properties Development Corporation (DPDC), a wholly-owned
subsidiary of the Company, owns a 36,000 square foot office building. The
building was originally acquired in 1984 by 5230, Ltd., which was 75 percent
owned as a limited and general partner by Sports Arenas Properties, Inc. (SAPI)
, a wholly-owned subsidiary of the Company. DPDC acquired the building at a
foreclosure sale in September 1992, after 5230, Ltd.'s unsuccessful attempts to
re-negotiate the loan terms with the lender. The Company occupies approximately
14 percent of the office building, which was 95 percent leased as of June 30,
1995.
SAPI owned an approximate 75 percent interest in 5755 Limited, which owned
a 24,000 square foot office building (acquired in 1986). In July 1994, 5755
Limited discontinued making payments on the $2,461,942 note payable
collateralized by the office building. The estimated current fair value of the
office building was $1,200,000 as of July 1994, which was considerably less than
the balance of the loan due to a significant decline in the market rents in the
area. For the prior two years, management unsuccessfully attempted to negotiate
a modification of the loan terms with the original lender and then its
successor. On October 5, 1994, pursuant to an agreement with the lender, 5755
Limited transferred title in the office building to the lender in complete
satisfaction of the note payable.
UCVGP, Inc., a wholly-owned subsidiary of the Company, is a one percent
managing general partner and SAPI is a 49 percent limited partner in UCV, L.P.
(UCV), which owns an apartment project (University City Village) located in San
Diego. University City Village contains 542 rental units and was acquired in
August 1974. UCV employs approximately 30 persons. The vacancy rate for the
year ended March 31, 1995 was 6 percent (the vacancy rate was 4 percent in
August 1995), which is consistent with vacancy rates in the area.
As of June 30, 1995, SAPI owned a 40 percent limited partnership interest
in Redbird Properties, Ltd., which owns the real estate leased to one of the
Company's bowling centers (Red Bird Lanes). SAPI acquired this partnership
interest when the building was acquired in 1987. Effective July 1, 1995, SAPI
acquired an additional 29 percent interest in this partnership from an affiliate
of the Company.
In December 1986, SAPI acquired the land and building in which the
Company's Marietta Lanes Bowling Center is located. Marietta Lanes had
previously leased the facility from a third party and now leases the facility
from SAPI.
Page A-3
<PAGE>
In November 1993, Bowling Properties, Inc., a wholly-owned subsidiary of
the Company, acquired the land and building in which the Company's Valley Bowl
(acquired in August 1993) is located.
CONSTRUCTION
- ------------
The Company's wholly-owned subsidiary, Ocean West Builders, Inc., is a
general contractor that primarily constructs tenant improvements for commercial
real estate in the San Diego, California area. Most jobs performed by Ocean
West Builders last 30-60 days and are the result of a bidding process with other
general contractors. This business is primarily dependent on the skill and
reputation of Michael Assof, the President of Ocean West Builders, Inc., which
employs a total of 5 employees. As a general contractor, Ocean West Builders
primarily uses subcontractors to perform most of the work on jobs. There is
intense competition from other general contractors in the tenant improvement
business. Most jobs are awarded as a result of some bidding process. A general
contractor's success in obtaining jobs is the result of having a pool of
reliable and competitive subcontractors to provide bids that are the basis for
Ocean West Builders bid on the overall job. Most jobs start within weeks of
being awarded, therefore there is usually no significant order backlog. There
is no annual seasonality to the business.
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.
(B) The number of holders of record of the common stock of the Company as
of September 30, 1995 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.
SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $10,341,601 $10,553,976 $7,432,706 $ 5,908,306 $ 6,479,055
Income (loss) from
operations (321,718) (2,197,897) (2,094,811) (166,473) 293,276
Loss before extraordinary
gain (809,421) (2,083,286) (2,488,291) (933,516) (513,465)
Loss per common share,
before extraordinary
gain (.03) (.08) (.09) (.03) (.02)
Total assets 15,308,441 13,673,871 11,479,502 14,252,502 15,086,952
Long-term obligations 6,803,635 7,401,805 7,002,996 9,357,593 10,676,093
</TABLE>
Page A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficit of $3,601,144 at June 30, 1995,
which is a $480,059 increase from the deficit at June 30, 1994. The primary
cause of the increase in the deficit was the working capital used by operating
activities after debt service and capital replacements. Working capital used by
operating activities after debt service and capital replacements should not be
considered as an alternative to cash flows from operating activities from
operating, investing and financing activities. The working capital deficit at
June 30, 1995 includes $1,928,403 which represents the principal balance and
delinquent payments on an assessment district obligation in default that relates
to undeveloped land.
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 previously
positive working capital and its share of distributions from UCV to fund these
deficits. The cash provided (used) before changes in assets and liabilities
segregated by business segments was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Bowling $ 275,000 $ 207,000 $ 349,000
Rental 155,000 21,000 (70,000)
Construction 29,000 23,000 25,000
Development (113,000) - -
Brokerage 25,000 23,000 11,000
General corporate expense and other (261,000) (336,000) (346,000)
----------- ----------- -------------
Cash provided (used) by operations 110,000 (62,000) (31,000)
Capital expenditures, net of financing (142,000) (163,000) (160,000)
Acquisition of bowling centers and real estate - (196,000) (255,000)
Principal payments on long-term debt (865,000) (1,267,000) (672,000)
----------- ----------- -------------
Cash used (897,000) (1,688,000) (1,118,000)
----------- ----------- -------------
----------- ----------- -------------
Distributions received from UCV 263,000 1,755,000 746,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
The Company received $1,250,000 from UCV as a distribution from the
proceeds of a refinancing in June 1994. Otherwise, the cash distributions the
Company received from UCV during the last three years were the Company's
proportionate share of distributions from UCV's results of operations. The
Company's share of distributions from UCV declined in 1995 due to UCV's
additional debt service related to the June 1994 refinancing.
The investment in UCV is classified as a liability because the cumulative
distributions received from UCV exceed the sum of the Company's initial
investment and the cumulative equity in income of UCV by $9,559,390 at June 30,
1995. The Company estimates that the current market value of the assets of UCV
(primarily apartments) exceeds its liabilities by $10,000,000-$14,000,000.
As discussed in Results of Operations and in Footnote 7b of Notes to the
Consolidated Financial Statements, in October 1994 the Company transferred title
in an office building to the lender in exchange for the lender extinguishing the
Company's obligations for a $2,461,942 note payable which was collateralized by
the office building. This portion of the rental operations provided (used) cash
flow after debt service and capital replacements of $15,000 in 1995, ($169,000)
in 1994, and ($242,000) in 1993.
At June 30, 1995, the Company owns 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 is
in the process of obtaining financing to develop the first phase (11 acres) of
the shopping center. The Company estimates that the value of the Company's 50
percent interest, based on development of the 11 acre phase of the shopping
center and sale of the remaining acreage, is approximately $2,000,000 to
$4,000,000. The amount and timing of distributions that the Company may receive
from VRLP are uncertain. The most likely source of funds for distributions from
VRLP is either the sale of the 11 acre phase, which is about to commence
construction, and/or sale of the remaining undeveloped land.
Page A-5
<PAGE>
At June 30, 1995, the County of Riverside, California had judgments
totaling approximately $450,000 for delinquent assessment district payments
related to 40 acres of undeveloped land. The annual obligation for the
assessment district is approximately $156,000. The Company estimates the value
of this land is approximately $3,000,000 to $5,000,000 if the property was zoned
"commercial". However, the City of Temecula has adopted a general development
plan as a means of down-zoning the property to a lower use and, if successful,
may significantly impair the value of the property. The Company is contesting
this action (see LEGAL PROCEEDINGS (a) for description). As a result of the
judgment and the down-zoning of the property, the recoverability of the carrying
value of this property is uncertain. If the County of Riverside commences
foreclosure proceedings and the Company does not satisfy the judgments prior to
foreclosure sale, the Company would lose title to the property and the property
would not be subject to redemption.
The Company is expecting a $360,000 cash flow deficit in 1996 from
operating activities after adding estimated distributions from UCV ($337,000)
and deducting capital expenditures and scheduled principal payments on long-term
debt. The Company believes its cash at June 30, 1995 and the Company's line of
credit will be sufficient to fund the expected cash flow deficit. This analysis
does not include consideration of the following due to their uncertainty: any
distributions the Company may receive from its investment in Vail Ranch Limited
Partners or a payment that may be received for the discounted payoff of a note
receivable (see Note 3a of Notes to Consolidated Financial Statements). This
analysis also does not include 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.
RESULTS OF OPERATIONS
The discussion of Results of Operations is primarily by the Company's
business segments. The analysis is partially based on a comparison of and
should be read in conjunction with the business segment operating information in
Note 11 to the Consolidated Financial Statements.
BOWLING OPERATIONS
1995 VS. 1994
The operating loss from bowling operations decreased by $207,000 in 1995 as
a result of decreases in bowl costs and depreciation that exceeded the decrease
in bowling revenues. Bowling revenues decreased by 2.3 percent ($183,000) in
1995 primarily due to a 1.4 percent decline in games bowled, of which most of
the decrease was in open games bowled. Bowling revenues also declined due to a
decrease in the amount of alcoholic beverage sales per game bowled, reflecting a
nationwide trend towards less alcohol consumption. Bowling costs decreased by
4.9 percent ($253,000) primarily due to reductions in payroll and related costs
($73,000 or 3 percent of payroll and related costs) and maintenance expense
($171,000 or 27 percent of maintenance expense). Payroll reductions were made
to reflect the decline in business. Approximately $80,000 of the decrease in
maintenance expense related to higher expenses in the prior year for deferred
maintenance on the two bowls acquired in August 1993. Maintenance expense also
decreased related to a decrease in resurfacing expense ($60,000). Depreciation
and amortization expense related to the bowling segment ($776,000) decreased by
$139,000 primarily due to the expiration of the amortization periods for
leasehold improvements, goodwill and covenant-not-to-compete related to a
bowling center that was acquired in September 1988.
1994 VS. 1993
The Company acquired two bowling centers in August 1993. However, the
results from operations of these two centers have been included in the financial
statements since June 20, 1993, when the Company commenced operations under an
interim management agreement. The following increases in revenues and expenses
in 1994 related to these two bowling centers:
<TABLE>
<S> <C>
Revenues $ 2,827,000
Bowling costs 2,073,000
Selling, general and administrative expense-direct 496,000
Depreciation and amortization 456,000
Operating loss ( 198,000)
Interest expense 235,000
Loss ( 433,000)
</TABLE>
Page A-6
<PAGE>
Same center bowling revenues increased approximately one percent ($55,000)
in 1994. Increases in the average price per game (14% in open play and 4% in
league play) were offset by decreases in games bowled (9% in open play and 6% in
league play). These changes primarily took place at the same two bowling
centers that faced significant price discounting from competitors last year.
Management elected to not compete with the discounting of prices in 1994. Same
center bowling costs increased by $251,000 (8%) in 1994 primarily due to
increases in payroll ($71,000 or 6%), repairs and maintenance ($66,000 or 3%)
and payroll related expenses ($97,000 or 36%). The increase in payroll related
expenses primarily related to increases in the Company's health insurance
premiums. The Company has modified its health insurance plan to provide for
larger employee contributions and, as a result, expects this expense to decrease
in 1995. Selling, general and administrative expense directly related to the
bowling segment decreased by $29,000 (3%) primarily due to a $58,000 decrease in
management salaries and bonuses. Most of the decrease related to restructuring
some activities formerly handled by managers.
CONSTRUCTION OPERATIONS
Construction costs were 84%, 85%, and 84% of construction revenues in 1995,
1994 and 1993, respectively. Selling, general and administrative expenses
directly related to the construction segment were $218,000, $195,000, and
$202,000 in 1995, 1994 and 1993, respectively. There have been no significant
changes to the operations of the construction segment for the last three years.
RENTAL OPERATIONS
The Company's rental operations at June 30, 1995 principally consisted of
ownership and leasing one office building (36,000 square feet of leasable
space), a sub-lessor's interest in a land leases to condominium owners, and a
small fruit-market on undeveloped land (starting in October 1994). In October
1994, the Company disposed of a 24,000 square foot office building that it had
owned since December 1986. The disposal of the office building resulted in the
following decreases from the prior year: Rental revenues- $151,000; Rental
costs- $73,000; Depreciation- $80,000; and Interest expense- $144,000. The
market area for the remaining office building has been stable in terms of both
rent rates and occupancy for the past two years. However, rates are at
approximately 50 percent of rent rates that existed in 1990.
Other than the change to rental revenue from the disposal of the office
building, revenues only changed slightly due to the addition of the rent from
the fruit-market in October 1994 ($32,000) and the indexed increases in the rent
rates of the ground subleases ($14,000) in 1994. Rental costs did not change
significantly in 1995 other than from the disposal of the office building.
Rental costs decreased by 17 percent ($67,000) in 1994 due to some non-recurring
repairs in 1993.
The operating losses reported by the real estate rental segment of
$1,408,316 in 1994 and $1,785,833 in 1993 included a provision for impairment
loss of $1,578,000 in 1994 and a loss on disposal of rental property of
$1,869,346 in 1993. The provision for impairment loss in 1994 related to the
24,000 square foot office building that the Company transferred to the lender in
1995 in exchange for the lender extinguishing the Company's obligations for a
$2,461,942 note payable (See Note 7b of Notes to Consolidated Financial
Statements). The provision for the impairment loss represents the amount by
which the carrying value of the property exceeded its estimated fair value of
$1,200,000. The Company recorded a $1,261,826 extraordinary gain on
extinguishment of debt in 1995 from this transaction. The loss on disposal of
rental property in 1993 related to the Company's 36,000 square foot office
building (See Note 7c of Notes to Consolidated Financial Statements) for which
the Company also recorded a $2,395,688 extraordinary gain from extinguishment of
debt in 1993. As part of a restructuring of the debt on this property, the
Company re-purchased the property at a public foreclosure sale by the former
lender for $1,027,000. This property currently has an estimated fair value of
$2,100,000.
REAL ESTATE DEVELOPMENT
The real estate development segment consists primarily of operations
related to undeveloped land in Temecula, California, which is owned by Old Vail
Partners. As a result of a restructuring of the ownership, the activities of
this entity were consolidated effective September 23,1994. The development
costs consist primarily of legal expenses ($85,000) related to the litigation
regarding the effective down-zoning of the 40 acre parcel.
Page A-7
<PAGE>
OTHER
The Company took over operation of a video-game operation in January 1994.
The revenues and costs of this operation are included in other revenues and
selling, general and administrative expense, respectively. The following items
increased (decreased) as a result of this new activity:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Other revenues $ 34,000 $ 65,000
Selling, general, and administrative expense 28,000 55,000
Depreciation 41,000 32,000
Provision for impairment loss ( 133,000) 133,000
Operating loss (127,000) 155,000
Interest expense 1,000 15,000
</TABLE>
In addition to the changes in selling, general and administrative expense
related to the bowling construction, and rental segments noted previously, the
corporate segment, before allocation to the other segments, decreased by $61,000
in 1995 and $30,000 in 1994. The decrease in 1995 was primarily due to
decreases in payroll and professional fees. The decrease in 1994 was primarily
due to a $48,000 decrease in professional fees, which was partially offset by a
$34,000 increase in payroll and related expenses.
Other than the changes to interest expense previously noted in the bowling
and rental segments, interest expense decreased by $62,000 in 1995 and $73,000
in 1994. Interest expense decreased in 1995 primarily due to a refinancing of
the Company's remaining office building in October 1994, which resulted in a
$74,000 decrease in interest paid and amortization of finance costs. Interest
expense decreased in 1994 primarily due to a decrease in the amortization of
loan fees related to the loan used to acquire the same office building at public
sale in September 1992.
The equity in income of investees decreased in 1995 due to a $236,000
decline in the Company's share of income of UCV which was partially offset by a
decline in the equity in net loss of OVP. Net income from UCV declined because
of higher interest expense related to the refinancing of its debt in June 1994.
The equity in net loss of Old Vail declined because the Company commenced
consolidating its results of operations in September 1994. The equity in income
of investees increased by $72,000 in 1994 primarily due to the increase in the
Company's equity in the net income of UCV. The increase in the net income of
UCV in 1994 was primarily attributable to the decline in roof repair expense.
The Company accrued interest (classified as lawsuit settlement) on a
$211,000 lawsuit judgment against the Company charged to operations in 1985.
The judgment expired in April 1994 without being renewed. In the year ended
June 30, 1994, the Company recorded $548,190 of income related to the reversal
of the previously recorded judgment and accrued interest.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," was issued in March 1995 and establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 requires the Company to adopt this statement during
fiscal year 1997, however, earlier adoption is encouraged. The Company believes
its current method of accounting for impairment of assets is in accordance with
the requirements of SFAS No. 121, and therefore, does not anticipate that the
adoption of SFAS No. 121 will have any impact on its financial position or
results of operations.
Page A-8
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following were directors and executive officers of the Company during
the year ended June 30, 1995. All present directors will hold office until the
election of their respective successors. All executive officers are to be
elected annually by the Board of Directors.
<TABLE>
<CAPTION>
Directors and Officers Age Position and Tenure with Company
- ---------------------- ---- --------------------------------
<S> <C> <C>
Harold S. Elkan 52 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 42 Chief Financial Officer and Treasurer since May 1987;
Director and Assistant Secretary since August 1, 1989
Secretary since January 1995
Patrick D. Reiley 54 Director since August 21, 1986
James E. Crowley 48 Director since January 10, 1989
Robert A. MacNamara 47 Director since January 9, 1989
</TABLE>
Brock L. Ladewig, the Company's Secretary and in-house legal counsel since
August 1989, resigned in January 1995
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.
BUSINESS EXPERIENCE
1. Harold S. Elkan has been employed as the President and Chief Executive
Officer of the Company since 1983. For the preceding ten years he was a
principal of Elkan Realty and Investment Co., a commercial real estate
brokerage firm, and was also President of Brandy Properties, Inc., an owner
and operator of commercial real estate.
2. Steven R. Whitman has been employed as the Chief Financial Officer and
Treasurer since May 1987. For the preceding five years he was employed by
Laventhol & Horwath, CPAs, the last four of which were as a manager in the
audit department.
3. Patrick D. Reiley was the Chairman of the Board and Chief Executive Officer
of Reico Insurance Brokers, Inc. (Reico) from 1980 until June 1995, when
Reico ceased doing business. Reico was an insurance brokerage firm in San
Diego, California.
4. James E. Crowley has been an owner and operator of various automobile
dealerships for the last seventeen 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; President of Escondido Jeep Eagle/GMC Truck since
March 1994, and President of Pacific Beach Ford from 1988 to 1991.
5. Robert A. MacNamara has been employed by Daley Corporation, a California
corporation, since 1978, the last ten years of which he has served as Vice
President of the Property Division. Daley Corporation is a residential and
commercial real estate developer and a general contractor.
Page A-9
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 120,027 $ 904,744
Current portion of notes receivable 25,000 25,000
Current portion of notes receivable-affiliate (Note 3b) 100,000 50,000
Construction contract receivables 273,912 324,418
Other receivables 41,346 55,006
Costs in excess of billings on uncompleted contracts 14,471 12,017
Prepaid expenses 148,225 183,471
----------- -----------
Total current assets 722,981 1,554,656
----------- -----------
Receivables due after one year:
Note receivable (Note 3a) 743,144 767,728
Less deferred gain (Note 3a) (737,447) (757,000)
Affiliate (Note 3b) 595,224 512,257
Other 115,100 115,100
----------- -----------
716,021 638,085
Less current portion (125,000) (75,000)
----------- -----------
591,021 563,085
----------- -----------
Property and equipment, at cost (Notes 7 and 10):
Land 1,529,000 2,225,000
Buildings 4,477,544 5,595,974
Equipment and leasehold and tenant improvements 5,702,034 5,616,502
----------- -----------
11,708,578 13,437,476
Less accumulated depreciation and amortization (5,088,774) (5,139,080)
----------- -----------
Net property and equipment 6,619,804 8,298,396
----------- -----------
Other assets:
Undeveloped land, at cost (Notes 4 and 6c) 4,804,496 321,629
Capitalized carrying costs on leased land (Note 5) 87,465 89,361
Goodwill, net of accumulated amortization of $538,146
and $369,073 807,216 1,076,289
Deferred loan costs, net of accumulated
amortization of $71,838 and $228,817 127,002 121,813
Covenants not to compete, net of accumulated
amortization of $437,500 in 1994 - 12,500
Investments (Note 6) 1,416,147 1,481,312
Other 132,309 154,830
----------- -----------
7,374,635 3,257,734
----------- -----------
$15,308,441 $13,673,871
----------- -----------
----------- -----------
</TABLE>
Page A-10
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1995 AND 1994 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Current liabilities:
Long-term debt extinguished (Note 7b) $ - $ 2,461,942
Assessment district obligation- in default (Note 6c) 1,928,403 -
Long-term debt due within one year (Note 7a) 705,000 853,000
Note payable, line of credit (Note 7d) 88,742 -
Accounts payable 663,814 730,642
Accrued payroll and related expenses 130,890 191,825
Accrued property taxes (Note 6c) 249,146 52,200
Accrued interest 93,350 63,994
Accrued frequent bowler program expense 200,292 151,084
Other accrued liabilities 264,488 171,054
------------ ------------
Total current liabilities 4,324,125 4,675,741
------------ ------------
Long-term debt, excluding current portion (Notes 7 and 8a) 6,803,635 7,401,805
------------ ------------
Distributions received in excess of
basis in investment (Notes 6a and 6b) 9,559,390 9,467,693
------------ ------------
Tenant security deposits 24,616 39,427
------------ ------------
Minority interest in consolidated subsidiary (Note 6c) 2,212,677 -
------------ ------------
Commitments and contingencies
(Notes 3a, 4a, 4c, 5, 6c, 6e, 8, and 10)
Shareholders' equity (deficiency):
Common stock, $.01 par value, 50,000,000 shares
authorized, 27,250,000 shares issued and outstanding 272,500 272,500
Additional paid-in capital 1,730,049 1,730,049
Accumulated deficit (8,017,273) (8,469,678)
------------ ------------
(6,014,724) (6,467,129)
Less note receivable from shareholder (Note 3c) (1,601,278) (1,443,666)
------------ ------------
Total shareholders' equity (deficiency) (7,616,002) (7,910,795)
------------ ------------
$ 15,308,441 $ 13,673,871
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-11
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Bowling $ 7,700,410 $ 7,883,605 $ 5,001,839
Rental 523,952 632,862 623,122
Construction 1,785,523 1,752,056 1,560,566
Brokerage 64,490 61,732 69,937
Other 160,610 117,897 72,652
Other-related party (Note 6b) 106,616 105,824 104,590
----------- ----------- -----------
10,341,601 10,553,976 7,432,706
----------- ----------- -----------
Costs and expenses:
Bowling 4,890,606 5,143,890 2,820,320
Rental 250,147 327,429 394,662
Construction 1,501,900 1,495,901 1,305,875
Brokerage 32,253 30,780 53,688
Development 141,391 - -
Selling, general and administrative 2,808,372 2,835,792 2,338,712
Depreciation and amortization 1,038,650 1,207,081 744,914
Provisions for impairment losses (Note 7b) - 1,711,000 -
Loss on disposal of rental property (Note 7c) - - 1,869,346
----------- ----------- -----------
10,663,319 12,751,873 9,527,517
----------- ----------- -----------
Loss from operations (321,718) (2,197,897) (2,094,811)
----------- ----------- -----------
Other income (charges):
Investment income:
Related party (Notes 3b and 3c) 201,413 149,763 146,850
Other 75,610 75,301 82,321
Interest expense and amortization of finance costs (816,567) (1,022,208) (860,344)
Interest expense related to development activities (139,463) - -
Equity in income of investees (Note 6) 171,751 338,565 266,983
Lawsuit settlement (Note 8c) - 548,190 (47,290)
Recognition of deferred gain (Note 3a) 19,553 25,000 18,000
----------- ----------- -----------
(487,703) 114,611 (393,480)
----------- ----------- -----------
Loss before extraordinary gain (809,421) (2,083,286) (2,488,291)
Extraordinary gain from troubled debt
restructuring (Notes 7b and 7c) 1,261,826 - 2,395,688
----------- ----------- -----------
Net income (loss) $ 452,405 $(2,083,286) $ (92,603)
----------- ----------- -----------
----------- ----------- -----------
Per common share (based on weighted average
shares outstanding):
Loss before extraordinary gain $ (.03) $ (.08) $ (.09)
------ ------ ------
------ ------ ------
Net income (loss) $ .02 $ (.08) $ .00
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-12
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Additional
Number of paid-in Accumulated
Shares Amount capital deficit Total
---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1992 27,250,000 $ 272,500 $1,730,049 $(6,293,789) $(4,291,240)
Net loss - - - (92,603) (92,603)
---------- ----------- ---------- ------------ ------------
Balance at June 30, 1993 27,250,000 272,500 1,730,049 (6,386,392) (4,383,843)
Net loss - - - (2,083,286) (2,083,286)
---------- ----------- ---------- ------------ ------------
Balance at June 30, 1994 27,250,000 272,500 1,730,049 $(8,469,678) $(6,467,129)
Net income - - - 452,405 452,405
---------- ----------- ---------- ------------ ------------
Balance at June 30, 1995 27,250,000 $ 272,500 $1,730,049 $(8,017,273) $(6,014,724)
---------- ----------- ---------- ------------ ------------
---------- ----------- ---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-13
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ 452,405 $( 2,083,286) $ ( 92,603)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Amortization of deferred financing costs and discount
41,989 100,389 172,620
Depreciation and amortization 1,038,650 1,207,081 744,914
Undistributed income of investees (171,751) (338,565) (266,983)
Loss on disposal of rental property - - 1,869,346
Extraordinary gain (1,261,826) - (2,395,688)
Interest income accrued on note receivable from
shareholder (157,612) (110,128) (110,083)
Provisions for impairment losses - 1,711,000 -
Interest accrued on assessment district obligation 168,278 - -
Lawsuit settlement accrual - (548,190) 47,290
------------- ------------- --------------
110,133 (61,699) (31,187)
Changes in assets and liabilities:
(Increase) decrease in other receivables, prepaid
expenses, and costs in excess of billings 97,043 (86,134) (194,908)
Increase (decrease) in accounts payable and
accrued expenses (54,151) 566,076 273,953
Other (34,186) (35,521) (41,766)
------------- ------------- --------------
Net cash provided by operating activities 118,839 382,722 6,092
------------- ------------- --------------
Cash flows from investing activities:
Increase in notes receivable (58,383) (6,921) (105,751)
Capital expenditures - other (142,426) (163,435) (159,502)
Purchase of office building - - (49,897)
Contributions to investees (97,571) - (10,700)
Proceeds from sale of investment - 93,000 -
Distributions from investees 302,499 1,754,743 746,000
Acquire additional interest in Old Vail Partners (49,845) - -
Distribution from Ocean West Builders - - 108,933
Purchase of bowling centers - (196,242) (205,356)
------------- ------------- --------------
Net cash provided (used) by investing activities (45,726) 1,481,145 323,727
------------- ------------- --------------
Cash flows from financing activities:
Scheduled principal payments (864,740) (1,007,921) (543,241)
Proceeds from line of credit 303,102 300,000 -
Payments on line of credit (214,360) (558,600) -
Principal payments and loan costs related to
extension of loan due date - - (128,367)
Costs related to troubled debt restructuring (21,659)
Loan costs to refinance long-term debt (39,417) - -
Other (20,756) (12,000) -
------------- ------------- --------------
Net cash used by financing activities (857,830) (1,278,521) (671,608)
------------- ------------- --------------
Net increase (decrease) in cash and equivalents (784,717) 585,346 (341,789)
Cash and equivalents, beginning of year 904,744 319,398 661,187
------------- ------------- --------------
Cash and equivalents, end of year $ 120,027 $ 904,744 $ 319,398
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
Page A-14
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
INTEREST PAID $ 789,000 $ 900,000 $ 682,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In addition to the cash expenditures of $196,242 in 1994 and $205,356 in 1993,
in 1994 the Company assumed long-term debt of $3,594,939 and borrowed
$258,600 from its line of credit to acquire two bowling centers. The
purchase price was allocated as follows: Equipment-$585,700; Land-$420,000;
Building-$1,687,934; Deferred loan costs-$78,141; Goodwill-$1,345,362; Other
assets-$40,000; and Other notes receivable-$98,000.
Long-term debt of $17,751 in 1995, $167,063 in 1994, and long-term debt and
capital lease obligations of $240,798 in 1993 were incurred to finance other
capital expenditures of $28,750 in 1995, $190,545 in 1994 and $321,600 in
1993.
In January 1994, the Company foreclosed on $233,270 of video games, equipment
and other collateral related to the Company's guarantee of a bank's loan to a
games room operator. The Company also assumed the $233,270 note payable to
bank.
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.
In October 1994, the Company refinanced long term debt of $1,193,800 with a
$1,200,000 note payable. The Company also incurred $45,617 of loan costs
related to the refinancing, of which $39,417 was a cash expenditure.
In October 1994, the Company extinguished debt of $2,461,942 by the transfer of
title to an office building to the lender in complete satisfaction of the
liability. The office building cost and accumulated depreciation were
$1,856,187 and $721,739, respectively. The Company also wrote off the
balance of unamortized loan costs ($19,995), deferred lease commissions
($27,765), and accrued property tax ($3,750) as part of the transactions.
The Company incurred transaction costs of $21,659 to consummate the transfer.
The proceeds of a $1,162,800 loan plus cash payments of $49,897 by the Company
funded the $1,031,393 purchase of an office building and $181,304 of
associated loan fees in 1993.
The distribution received by the Company from Ocean West Builders, Ltd. in 1993
consisted of the following non-cash items: Receivables- $111,091; Costs in
excess of billings-$31,213; Prepaid expenses-$3,016; Equipment-$39,822 and
related accumulated depreciation-$25,689; Accounts payable-$38,122; and Note
payable-$11,434.
During the year ended June 30, 1995, the Company wrote-off $100,000 of fully
amortized goodwill and $450,000 of fully amortized covenant-not-to-compete.
See accompanying notes to consolidated financial statements.
Page A-15
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
1. Summary of significant accounting policies:
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Sports Arenas, Inc. and all subsidiaries and
partnerships more than 50 percent owned or in which there is a controlling
financial interest (the Company). All material intercompany balances and
transactions have been eliminated. The minority interests' share of the net
loss of partially owned consolidated subsidiaries has been recorded to the
extent of the minority interests' contributed capital. The Company uses the
equity method of accounting for its investments in entities in which it has
an ownership interest that gives the Company the ability to exercise
significant influence over operating and financial policies of the investee.
The Company uses the cost method of accounting for investments in which it
has virtually no influence over operating and financial policies.
CASH AND EQUIVALENTS - Cash and equivalents only include highly liquid
investments with original maturities of less than 3 months.
PROPERTY AND EQUIPMENT - Depreciation and amortization are provided on the
straight-line method based on the estimated useful lives of the related
assets, which are 20 and 30 years for the buildings and from 3 to 15 years
for the other assets.
INVESTMENT - The Company's purchase price in March 1975 of the one-half interest
in UCV, L.P. exceeded the equity in the book value of net assets of the
project at that time by approximately $1,300,000. The excess was allocated
to land and buildings based on their relative fair values. The amount
allocated to buildings is being amortized over the remaining useful lives of
the buildings and the amortization is included in the Company's depreciation
and amortization expense.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability method in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes." The Company adopted
Statement 109 effective July 1, 1992.
AMORTIZATION OF INTANGIBLE ASSETS - Deferred loan costs are being amortized over
the terms of the loans on the straight-line method. The covenant not to
compete was being amortized over the terms of the agreement on the straight-
line method. Goodwill related to the acquisition of a bowling center is
being amortized over 5 years on the straight-line method.
VALUATION IMPAIRMENT - The Company records a provision for value impairment of
long-lived assets, including goodwill, whenever the sum of the estimated
undiscounted future cash flows from operations plus the asset's estimated
undiscounted disposition value is less than the current book value. The
provision for value impairment, if any, is equal to the excess by which the
current book value exceeds the fair value of the asset.
RECLASSIFICATIONS - The Company has reclassified certain prior period amounts in
1994 and 1993 to conform to their classification in 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.
2. Related party transactions:
During the year ended June 30, 1995, the Company paid $268,000 ($246,000 in
1994 and $196,000 in 1993) of insurance premiums to its insurance agent,
which is owned by an individual who became a director of the Company in
August 1986. The director has served as the Company's insurance agent for
the past 17 years.
See notes 3b, 3c, 4a, 6b, 6e, 6f and 8a for other related party transactions.
Page A-16
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, and 1993
3. Notes receivable:
(a) Sale of bowling centers - The Company sold two bowling centers in April
1989. Part of the consideration was an $800,000 note receivable from the
buyer due in monthly installments of $7,720 beginning October 1, 1989,
including principal and interest at 10 percent per annum. The balance is
due in September 1997. Under the terms of the note, interest accruing
from April 1989 through October 1989 was deferred and is due in September
1997, including interest accruing thereon. The following is the detail
of the balance of the note receivable and accrued interest at June 30:
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Balance of note receivable due in monthly installments $708,145 $732,906
Deferred interest due September 1997 34,999 34,822
-------- ---------
$743,144 $767,728
-------- --------
-------- --------
</TABLE>
The Company is deferring recognition of $800,000 of the gain from the
sale of the bowling centers in the year ended June 30, 1989 until such
time as the operations of the two bowling centers become sufficient to
support the payment of their obligations or as the principal balance of
the note plus accrued and unpaid interest is reduced below $800,000. The
Company recognized $19,553, $25,000 and $18,000 of the deferred gain in
the years ended June 30, 1995, 1994 and 1993, respectively. The deferred
gain is presented as a reduction of the note receivable in the
consolidated balance sheets.
In July 1995, the Company agreed to accept a discounted payoff of the
note receivable equal to 85 percent of the balance of the note, subject
to the buyer consummating its financial restructuring. This agreement
expires October 31, 1995.
(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 $43,801, $39,635, and $36,767 in 1995,
1994, and 1993, respectively. The balance of $595,224 at June 30, 1995
bears interest at 8 percent per annum and is due in monthly installments
of interest only plus annual principal payments of $100,000 due in
January 1, 1996-1999. 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 (11-1/2 percent at June 30, 1995) 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 $540,269 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 $157,612
in 1995, $110,128 in 1994, and $110,083 in 1993.
4. Undeveloped land:
(a) In August 1984, the Company acquired approximately 500 acres of
undeveloped land in Lake of Ozarks, Missouri from an entity controlled by
Harold S. Elkan (Elkan). The purchase price approximated the affiliate's
original purchase price. Elkan has agreed to indemnify the Company for
any realized decline in value of the land. The carrying value of the
land was $281,629 at June 30, 1995 and 1994.
Page A-17
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, and 1993
4. Undeveloped land (continued):
(b) The Company owns approximately 55 acres of undeveloped land in Sierra
County, New Mexico which is 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 is
in default of the contract, but the Company has not yet canceled the
contract. The $40,000 carrying value of the land at June 30, 1995 and
1994 is net of $118,500 of valuation adjustments recorded in prior years.
(c) Through its ownership of Old Vail Partners, L.P. and its predecessor Old
Vail Partners, a general partnership (collectively referred to as OVP,
see Note 6c), the Company owns 40 acres of undeveloped land in Temecula,
California. The $4,482,867 carrying value of the property consists of:
acquisition cost- $2,615,788, capitalized assessment district costs-
$1,577,025 (see Note 6c), and other development planning costs $290,054.
The property is currently subject to default judgments to the County of
Riverside, California totaling $450,000 regarding assessment district
obligations. The County has not yet commenced foreclosure proceedings.
In November 1993, the City of Temecula adopted a general development plan
that designates 40 acres of property owned by OVP as suitable for
"professional office" use, which is contrary to its zoning as
"commercial" use. As part of the adoption of its general development
plan, the City of Temecula adopted a provision that, until the zoning is
changed on properties affected by the general plan, the general plan
shall prevail when a use designated by the general plan conflicts with
the existing zoning on the property. The result is that the City of
Temecula has effectively down-zoned the 40 acre parcel from a
"commercial" to "professional office" use. The parcel is subject to
Assessment District liens which were allocated in 1989 based on a higher
"commercial" use. Since the Assessment District liens are not subject to
reapportionment as a result of re-zoning, a "professional office" use is
not economically feasible due to the disproportionately high allocation
of Assessment District costs. OVP has filed suit against the City of
Temecula claiming that the City's adoption of a general plan as a means
of effectively re-zoning the property is invalid. Additionally, OVP is
claiming that, if the effective re-zoning is valid, the action is a
taking and damaging of OVP's property without payment of just
compensation. OVP is seeking to have the effective re-zoning invalidated
and an unspecified amount of damages. The outcome of this litigation is
uncertain. If the City of Temecula is successful in its attempt to down-
zone the property, the value of the property may be significantly
impaired.
5. Capitalized carrying costs on leased land:
The Company is a sublessor on a parcel of land which is subleased to
individual owners of a condominium project. The Company capitalized $111,674
of carrying costs prior to subleasing the land in 1980. The Company is
amortizing the capitalized carrying costs over the period of the subleases on
the straight-line method. The capitalized costs are presented net of
accumulated amortization of $24,209 in 1995 and $22,313 in 1994. The future
minimum rental payments payable by the Company to the lessor on the lease are
approximately $124,000 per year for the remaining term of 48 years (aggregate
of $5,952,000) 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 $146,000 per year for the remaining term of 48 years
(aggregate of $7,008,000). The subleases provide for increases every five
years based on increases in the Consumer Price Index.
Page A-18
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, and 1993
6. Investments:
(a) Investments consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accounted for on the equity method:
Investment in UCV, L.P. $( 9,559,390) $( 9,467,693)
Old Vail Partners - 1,279,722
Vail Ranch Limited Partners 1,219,033 -
Redbird Properties, Ltd. 134,975 136,590
---------- ----------
( 8,205,382) ( 8,051,381)
Less Investment in UCV, L.P. classified as liability-
Distributions received in excess of basis in
investment 9,559,390 9,467,693
---------- ----------
1,354,008 1,416,312
Accounted for on the cost basis:
All Seasons Inns, La Paz 62,139 65,000
---------- ----------
Total investments $1,416,147 $1,481,312
---------- ----------
---------- ----------
</TABLE>
The following is a summary of the equity in income (loss) of the investments
accounted for by the equity method:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
UCV, L.P. $ 224,222 $ 459,776 $ 417,456
Old Vail Partners ( 50,256) ( 117,000) ( 146,700)
Vail Ranch Limited Partners - - -
Ocean West Builders, Ltd. - - 1,742
Redbird Properties, Ltd. ( 2,215) ( 4,211) ( 5,515)
--------- --------- ---------
$ 171,751 $ 338,565 $ 266,983
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of the investments, other than UCV, L.P.,
accounted for on the equity method:
<TABLE>
<CAPTION>
Vail Ranch
Old Vail Limited Redbird
Partners Partners Properties
--------- ------------ ------------
<S> <C> <C> <C>
Balance, July 1, 1994 $1,279,722 $ - $ 136,590
Net carrying value of assets
transferred upon consolidation (1,189,466)
Contributions (distributions) ( 40,000) 1,219,033 600
Equity in loss ( 50,256) - ( 2,215)
---------- ---------- ----------
Balance, June 30, 1995 $ - $1,219,033 $ 134,975
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(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 other one percent
general partner and 49 percent limited partner are owned by an individual
related to the former majority shareholder of the Company. The entity was
formerly named University City Village, a joint venture. On June 1, 1994
the joint venture converted the form of entity to a limited partnership and
changed the name to UCV, L.P.
Page A-19
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, and 1993
6. Investments (continued):
(b) Investment in UCV, L.P. (continued):
The following is summarized financial information of UCV as of and for the
years ended March 31 (UCV's fiscal year end):
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Total assets $ 2,867,000 $ 2,409,000 $ 2,687,000
Total liabilities 20,179,000 17,291,000 17,357,000
Revenues 3,990,000 3,840,000 3,858,000
Operating and general
and administrative costs 1,431,000 1,433,000 1,534,000
Depreciation 182,000 187,000 190,000
Interest expense 1,929,000 1,300,000 1,299,000
Net income 448,000 920,000 835,000
</TABLE>
The apartment project is managed by the Company, which recognized management fee
income of $106,616, $105,824, and $104,590 in the twelve month periods ended
June 30, 1995, 1994, and 1993, respectively.
A reconciliation of distributions received in excess of basis in UCV as of June
30 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Balance, beginning $ 9,467,693 $ 8,119,306
Equity in income (224,222) (459,776)
Cash distributions 262,499 1,754,743
Amortization of purchase price in
excess of equity in net assets 53,420 53,420
----------- ----------
Balance, ending $ 9,559,390 $9,467,693
----------- ----------
----------- ----------
</TABLE>
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership:
RCSA Holdings, Inc. (RCSA) and OVGP, Inc. (OVGP), wholly-owned subsidiaries
of the Company, own a combined 50 percent general and limited partnership
interest in Old Vail Partners, L.P. , a California limited partnership
(OVP). OVP owns approximately 40 acres of undeveloped land and a 50
percent limited partnership interest in Vail Ranch Limited Partnership
(VRLP). Since September 1988, OVP had been a general partnership with RCSA
as 33 percent co-managing general partner and a third-party as a 67 percent
co-managing general partner. Effective in September 1994: the general
partnership was converted to a limited partnership; RCSA was converted to a
49 percent limited partner; OVGP was admitted as a one percent general
partner; and the third-party's interest was converted to a liquidating
partnership interest. This transaction effectively resulted in the
acquisition of the third-party's partnership interest in OVP for a cash
payment of $50,000 and the rights to 50 percent of future distributions up
to $2,450,000. Under certain circumstances, which have not yet occurred,
the Company may have to make minimum annual distributions of $50,000 or
$100,000 for five years. Legal title to the 40 acres of undeveloped land
is still in the process of being changed from the former general
partnership's name to the limited partnership. Prior to
September 23, 1994, the Company accounted for its investment in OVP as an
unconsolidated subsidiary on the equity method of accounting. Effective
September 23, 1994, OVP was consolidated with the Company and the capital
account of the other partner is presented as "Minority interest" in the
consolidated balance sheet.
Page A-20
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, and 1993
6. Investments (continued):
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership
(continued):
The following is summarized balance sheet information of OVP included in the
Company's consolidated balance sheet as of June 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Undeveloped land $ 4,482,867
Investment in Vail Ranch Limited Partnership 1,219,033
Assessment district obligation-in default 1,928,403
Accounts payable 11,384
Accrued interest 44,154
Accrued property taxes 198,723
Note payable 93,820
Minority interest in subsidiary 2,212,677
</TABLE>
Operating results of the Company on a pro-forma basis as though the
controlling interest in OVP was acquired July 1, 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues $ 10,352,000 $ 10,597,000
Loss before extraordinary item ( 960,000) ( 2,436,000)
Net income (loss) 452,000 ( 2,436,000)
Earnings (loss) per share $ .02 $ (.09)
</TABLE>
VRLP is a partnership formed in September 1994 between OVP and a third party
(Developer) to develop 32 acres of the land that was contributed by OVP to
VRLP. OVP is a 50 percent limited partner with a priority right to
distributions for specified amounts based on the acreage being developed.
These amounts will be reduced by any amounts expended by VRLP to extinguish
approximately $750,000 of obligations incurred by OVP prior to the transfer
that are liens on the 32 acres of land, primarily relating to delinquent
assessments and property taxes. The Developer has reached agreements with
an anchor tenant and others and is in the process of obtaining construction
financing for development of an 11 acre phase. The timing and amount of
distributions that OVP will receive from the VRLP are uncertain. The
following is summarized financial information of VRLP as of June 30, 1995
and for the period ended September 23, 1994 (inception) to June 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Total assets $7,145,000
Total liabilities 6,024,000
Revenues -
Net loss -
</TABLE>
The 40 acres of land owned by OVP and the 32 acres of land owned by VRLP are
located within a special assessment district of the County of Riverside,
California (the County) which was created to fund and develop roadways,
sewers, and other required infrastructure improvements in the area necessary
for the owners to develop their properties. Property within the assessment
district is collateral for an allocated portion of the bonded debt that were
issued by the assessment district to fund the improvements. The annual
payments (made in semiannual installments) due related to the bonded debt
are approximately $156,000 for the 40 acres and $340,000 for the 32 acres.
The payments continue through the year 2014 and include interest at
approximately 7-3/4 percent. OVP and VRLP are delinquent in the payment of
property taxes and assessments for the last two to four years. As of June
30, 1995, the County had obtained judgments for the defaults under the
assessment district obligations on both properties. However, the County has
not yet commenced foreclosure proceedings on these judgments.
Page A-21
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, a
6. Investments (continued):
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership
(continued):
The amount due to cure the judgments at June 30, 1995 was approximately
$710,000 for the 32 acres owned by VRLP and $450,000 for the 40 acres
owned by OVP. The principal balance of the allocated portion of the
bonds ($1,513,730), and delinquent interest and penalties ($414,673) are
classified as "Assessment district obligation- in default" in the
consolidated balance sheet. In addition, accrued property taxes in the
balance sheet includes $198,723 of delinquent property taxes and late
fees related to the 40 acre parcel. The judgment related to VRLP's 32
acres will be cured once construction financing is obtained by VRLP.
(d) Investment in Ocean West Builders, Ltd.:
Until July 1, 1992, the Company owned a 50 percent general partnership
interest in Ocean West Builders, Ltd., a limited partnership, which was
a general contractor that primarily constructed tenant improvements.
The Company reported its share of the partnership's income based on the
partnership's December 31 year-end. On July 1, 1992, the operations of
Ocean West Builders, Ltd. were merged with the Company and the net
assets of the partnership were distributed to the partners.
(e) Investment in Redbird Properties, Ltd.:
As of June 30, 1995, the Company owned a 40 percent limited partnership
interest in Redbird Properties, Ltd. which owns the land and building in
which one of the Company's bowling centers (Red Bird Lanes) is located.
The Company advanced $238,000 to the partnership to acquire the property
in December 1986, which has been classified as part of the Company's
investment in the partnership. The other 60 percent interest is owned
by Harold S. Elkan as a 30 percent limited partner, and by his brother,
directly and indirectly, as a one percent general partner and 29 percent
limited partner. The Company's partnership interest is entitled to a
priority return over the other limited partners. The Company and the
other partners are co-guarantors of a loan to the partnership which is
collateralized by the partnership's land and building. The balance of
the loan at June 30, 1995 was $713,538. The following is summarized
financial information of Redbird Properties, Ltd. as of and for the
years ended June 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Assets $ 701,000 $ 742,000
Liabilities 722,000 759,000
Rent from Red Bird Lanes (see Note 8a) 111,000 111,000
Net loss ( 5,000) ( 11,000)
</TABLE>
Effective July 1, 1995, the Company purchased an additional 29 percent
partnership interest in Redbird Properties, Ltd. from Harold S. Elkan
for $446,000. The purchase price is payable in monthly installments of
interest at 8 percent per annum plus annual principal payments of
$100,000 on January 1, 1996-1999 and $46,000 on January 1, 2000. The
agreement provides for an adjustment to the purchase price if the
partnership subsequently sells the real estate prior to June 30, 1996.
Page A-22
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994,
6. Investments (continued):
(f) Other investments:
The Company owns a 6 percent limited partnership interest in two
partnerships (the Hotel) that own and operate a 109-room hotel in La
Paz, Mexico (All Seasons Inns, La Paz). The $62,139 carrying value of
the Hotel at June 30, 1995 ($65,000 at June 30, 1994) 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 the minimal cash consideration received at
closing, the Company has not recorded the sale of its investment. The
Company will record the $58,926 gain from the sale when the first
principal installment is received, which is due in January 1996. The
cash payment of $2,861 received in December 1994 was applied to reduce
the carrying value of the investment.
In April 1994, the Company sold its investment in Jamar Holdings, Ltd.
to James Crowley, a Director of the Company, for $93,000 and recorded a
loss of $12,178. The Company purchased the investment in February 1989
from James Crowley for $100,000 plus other costs.
7. Long-term debt:
(a) Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
7-1/2% note payable collateralized by $704,000 of real estate and
$1,651,000 of equipment at Marietta Lanes bowling center, due
in monthly installments of $5,452 including principal and a variable
rate of interest (base plus 2-1/2%) adjusted monthly, payment amount
is adjusted annually to correspond to the remaining amortization term
and the current interest rate, balance due December 1, 1997 $ 652,992 $ 670,266
10-1/4% notes payable, due in monthly installments of $9,654 including
interest, paid in October 1994, - 28,466
9-1/2% note payable, collateralized by $998,000 of equipment at Marietta
Lanes bowling center, due in average monthly installments of $2,189,
including principal and interest, balance due September 2003 146,015 157,585
8-3/4% note payable collateralized by $2,161,000 of real property and
$845,000 of equipment of American Bowling Center, principal due in monthly
installments of $4,605 plus interest at a variable rate (prime plus 1-1/2
points) adjusted monthly, balance due January 2001 308,489 363,743
9-7/10% note payable collateralized by $2,161,000 of real property and
$845,000 of equipment of American Bowling Center, guaranteed by Small
Business Administration, due in monthly installments of $4,386 including
interest, balance due January 2011 423,407 434,914
</TABLE>
Page A-23
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994,
7. Long-term debt (continued):
(a) (continued)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
14-4/10% note payable collateralized by $2,161,000 of real property and
$845,000 of equipment of American Bowling Center, due in average monthly
installments of $14,220, including interest, balance due October 1995 19,876 172,838
9% note payable collateralized by $2,161,000 of real property and $845,000
of equipment of American Bowling Center, due in monthly installments of
$5,846 including interest, balance due August 2003 404,674 436,816
Non-interest bearing amount due to seller of American Bowling Center related
to covenant-not-to-compete, final annual installment of $50,000 was paid in
September 1994. The payments on this note were originally discounted to their
present value at 10% (unamortized discount of $800 at June 30, 1994) - 49,200
13-3/4% note payable collateralized by first trust deed on $1,076,000 of land
and office building, due in monthly installments of $13,673 of interest only,
balance due and paid in October 1994 - 1,193,800
10-9/10% note payable collateralized by first trust deed on $1,076,000 of land
and office building, due in monthly installments of $11,675 including interest,
balance due in October 2004. 1,193,602 -
11-1/2% note payable collateralized by partnership interest in Old Vail Partners,
principal is due in monthly payments of $5,223 plus interest at a variable rate
(prime plus 1-1/2 points) adjusted monthly. Additional principal payments are
due to the extent distributions are received from Old Vail Partners. The balance
is due November 1996. The loan is guaranteed by Harold S. Elkan. 931,711 1,047,500
8-1/2% note payable to bank, collateralized by deed of trust on $282,000 of
undeveloped land, principal of $4,745 plus interest is payable annually, balance
due February 1999. 94,909 99,655
8% note payable collateralized by $2,108,000 of real estate and $264,000 of
equipment at Valley Bowling Center, due in monthly installments of $18,882
including principal and interest, balance due August 2000 2,058,019 2,117,251
10% note payable collateralized by $668,000 of equipment at Valley and Grove
Bowling Centers, due in monthly installments of $5,197, including principal
and interest, balance due June 30, 1997 160,900 204,762
</TABLE>
Page A-24
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
7. Long-term debt (continued):
(a) (continued)
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
9% note payable collateralized by $66,000 of equipment at Valley
and Grove Bowling Centers, due in monthly installments of
$2,170, including principal and interest, balance due August 1996 26,920 49,425
9% note payable collateralized by $668,000 of equipment at Valley
and Grove Bowling Centers, due in monthly installments of
$1,443, including principal and interest, balance due June 1998 45,264 57,975
8%-10% notes payable collateralized by $264,000 of equipment at
Valley Bowling Center, due in monthly installments of $11,780
including principal and interest, balance due June 1998 383,271 479,458
9% note payable, unsecured, due in monthly installments of $2,500
through November 1, 1994 and monthly installments of $2,000
thereafter, including principal and interest, balance due February
1996 90,043 107,153
8-1/2% note payable, unsecured, due in monthly installments of
$3,060 of principal and interest, balance due October 1996 102,337 129,033
9-1/2% notes payable collateralized by $141,000 of video game
equipment, due in monthly installments of $4,895 including
principal and interest, balance due July 1, 1998 146,356 186,356
10-1/2% note payable collateralized by first trust deed on
$4,482,867 of undeveloped land, principal and accrued interest
(a variable rate of base plus 1-1/2 points) due June 22, 1997 93,820 -
5-9/10% note payable collateralized by first trust deed on
$1,855,000 of land and building (See Note 7b) - 2,461,942
Capitalized lease obligation (Note 8a) 113,439 128,480
Other 112,591 140,129
----------- ----------
7,508,635 10,716,747
Less loan in default, classified as current liability - (2,461,942)
----------- ----------
7,508,635 8,254,805
Less current maturities (705,000) (853,000)
----------- ----------
$6,803,635 $7,401,805
----------- ----------
----------- ----------
</TABLE>
The values of property and equipment as collateral for the notes are
listed at historical cost less valuation adjustments.
The principal payments due on notes payable during the next five
fiscal years are as follows: $705,000 in 1996, $1,576,000 in 1997,
$1,126,000 in 1998, $385,000 in 1999, and $271,000 in 2000.
Page A-25
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
7. Long-term debt (continued):
(a) (continued)
A bank loan agreement of a subsidiary (Marietta Lanes, Inc.) provides
restrictions on the amount of dividends, loans and management fees the
subsidiary may remit to its parent. The restricted net assets of this
subsidiary as of June 30, 1995 totaled $867,000.
(b) On October 5, 1994, the Company transferred title in an office building
to the lender in complete satisfaction of a related note payable with a
balance of $2,461,942. The carrying value of the land, office building,
and improvements was $1,134,447 (net of a $1,578,000 valuation adjustment
recorded in the year ended June 30, 1994). After deducting the $44,010
carrying value of other related assets, transaction costs of $21,659, and
the carrying value of the property, the Company recorded a $1,261,826
extraordinary gain from the extinguishment of debt in October 1994. This
transaction was part of an agreement with the lender whereby the Company's
monthly payments were modified, effective July 1994, to equal the net cash
flow of the property until title to the property was transferred to the
lender. For the prior two years, the Company unsuccessfully attempted to
negotiate a modification of the loan terms with the original lender and
then its successor. The $1,200,000 estimated current fair value of the
office building was considerably less than the balance of the loan due to
significant declines in the market rents since 1989. There was no effect
for federal income tax purposes due to utilization of the Company's net
operating loss carry-forwards.
(c) In October 1991, the Company (on behalf of a subsidiary) commenced
negotiations with the Resolution Trust Corporation (RTC) to modify the
existing $3,800,000 non-recourse note payable collateralized by $4,727,000
(at cost) of land, building and improvements. At that time the RTC, as
receiver for the original lender, held a 20 percent controlling interest
in the loan. The current fair value of the property was considerably less
than the loan amount due to a temporary decline in value; the loan matured
in October 1993; and the property was operating at significant cash flow
deficits. Due to the lack of a timely response from the RTC, the Company
determined it should discontinue making the loan payments effective
November 1, 1991, until a settlement was reached. Subsequent thereto, the
RTC transferred its interest to the holder of the other 80 percent
interest in the note. The holder of the note foreclosed on the property
and sold the property at a scheduled public sale of the property on
September 22, 1992. A separate subsidiary of the Company used $1,027,126
of the proceeds of a loan from a third party to fund the subsidiary's
successful bid at the public sale of the property. Because the property
was foreclosed upon and sold through a public sale (extinguishing all
obligations of the subsidiary to the lender) where the Company could have
been out-bid by a third party, the transaction was treated as though the
property was lost through foreclosure and then purchased for $1,027,126.
The Company's obligations under the $3,800,000 note payable are fully
extinguished.
In the year ended June 30, 1993, the Company recorded an extraordinary
gain from a troubled debt restructuring of $2,395,688 ($.09 per share),
which represented the difference between the $4,095,688 owed on the
foreclosed note less the estimated $1,700,000 fair value of the property.
The Company also recorded an operating loss of $1,869,346, which
represents the difference between the carrying value of the property
(including other unamortized costs) and the $1,700,000 estimated fair
value of the property. There was no effect for federal income tax
purposes due to utilization of the Company's net operating loss
carry-forwards.
(d) The Company has a $300,000 revolving line of credit which matures
September 2, 1996. Amounts drawn on the line of credit bear interest
on amounts drawn at the bank's base rate plus three percentage points
(12% at June 30, 1995). Payments of interest and $5,000 principal are
due monthly. The Company's borrowings from this line of credit averaged
$40,000 during the year ended June 30, 1995 ($140,000 in 1994).
Page A-26
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
8. Commitments and contingencies:
(a) The Company leases three of its bowling centers (Grove, Redbird, and
Village) under operating leases. Redbird Lanes' lease is with an entity
(Redbird Properties, Ltd.) in which the Company owns a partial interest and
is cancelable at the option of the Company on six months notice.
In April 1993 the Company entered into a capital lease agreement to finance
the installation of automatic scorekeeping equipment at Redbird. The cost
($173,278) and accumulated amortization ($48,735 at June 30, 1995 and
$27,075 at June 30, 1994) are included in property and equipment.
The lease agreements call for approximate annual minimum rentals in
addition to taxes, insurance, and maintenance as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------------------------
YEAR ENDING CAPITAL RELATED
JUNE 30, LEASE OTHER PARTY TOTAL
----------- ------- --------- -------- --------
<S> <C> <C> <C> <C>
1996 35,880 442,500 110,760 553,260
1997 35,880 442,500 110,760 553,260
1998 35,880 442,500 - 442,500
1999 35,880 442,500 - 442,500
2000 20,930 442,500 - 442,500
After 1999 - 1,348,100 - 1,348,100
-------- ---------- -------- ---------
Total 164,450 $3,560,600 $221,520 $3,782,120
-------- ---------- -------- ---------
-------- ---------- -------- ---------
Less interest (51,011)
--------
Capital lease obligation $113,439
--------
--------
</TABLE>
The renewal option periods for the operating leases are: Village- 25 years
at same lease rate, Redbird- 5 years at same lease rate, and Grove- three
5 year options at rates increased by 10 -15 percent over the last rate in
the expiring term. The lease for Grove provides for additional rent based
on a percentage of gross revenues, however, Grove has not yet exceeded the
minimum amount of gross revenue.
Total rental expense was $523,000 in 1995, $493,000 in 1994, and $193,000
in 1993.
The Company has continued as guarantor of a lease for one of the bowling
centers sold in April 1989. The guaranteed portion of the annual minimum
rentals on the lease is: $50,600 in 1996 and $25,300 in 1997 ($75,900 in
total).
(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, 1995, his annual salary was
$250,000.
(c) The Company had a judgment against it of $211,000 for breach of lease.
The litigation was originally initiated by the Company to contest the
lessor's cancellation of a lease for failure to meet development criteria
on the leased parcel. The Company failed in its litigation after a lengthy
appeals process and the lessor was awarded an amount equal to one year's
rent. The Company accrued the provision for the judgment in the year ended
June 30, 1985 and subsequently accrued annual estimates of interest
totaling $309,190 through June 30, 1993 ($47,290 accrued in 1993). The
statute of limitations to enforce the judgment expired in April 1994 and
the liability was extinguished. Therefore the Company recorded $548,190 of
income in the amount of the previously recorded judgment and accrued
interest plus another related item for $28,000 in the year ended June 30,
1994.
Page A-27
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
8. Commitments and contingencies (continued):
(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, 1995, 1994, and 1993, the Company has not
recorded any income tax expense or benefit due to its utilization of prior
loss carry-forwards.
At June 30, 1995, the Company had net operating loss carry-forwards of
$7,673,000 for income tax purposes. The carry-forwards expire from years 2000
to 2008. Deferred tax assets are primarily related to these net operating
loss carry-forwards and certain other temporary differences. Due to the
uncertainty of future realizability of deferred tax assets, a valuation
allowance has been recorded for deferred tax assets to the extent they will
not be offset by the reversal of future taxable differences. Accordingly,
there are no net deferred taxes at June 30, 1995 and 1994.
The following is a reconciliation of the normal expected federal income tax
rate to the loss before extraordinary gain reported in the financial
statements:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Expected federal income tax $(283,000) $(729,000) $(846,000)
Increase in valuation allowance 94,000 - -
Losses for which no tax benefits
were recognized 189,000 729,000 846,000
--------- ------- -------
Provision for income tax expense $ - $ - $ -
--------- --------- ---------
</TABLE>
The following is a schedule of the significant components of the Company's
deferred tax assets and deferred tax liabilities as of June 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,609,000 $ 2,623,000
Accumulated depreciation and amortization 360,000 92,000
Deferred gain 295,000 303,000
Capitalized interest and taxes 200,000 18,000
Valuation for impairment loss 83,000 714,000
Other 360,000 63,000
---------- ----------
Total gross deferred tax assets 3,907,000 3,813,000
Less valuation allowance (3,907,000) (3,813,000)
---------- ----------
Net deferred tax assets $ - $ -
---------- ----------
</TABLE>
Page A-28
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, and 1993
10. Leasing activities:
The Company, as lessor, leases office space in an office building (two
office buildings in 1994 and 1993, see below) under operating leases which
are primarily over 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 term of 65 years which commenced in
1981 and 1982 (see Note 5).
The approximate future minimum rentals for existing noncancellable leases on
the remaining office building are as follows: $248,000 in 1996, $141,000 in
1997, $29,000 in 1998, none thereafter, and $418,000 in the aggregate.
The following is a schedule of the Company's investment in rental property
as of June 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land $ 258,000 $ 954,000
Building 773,393 1,891,823
Tenant improvements 45,043 77,284
---------- ----------
1,076,436 2,923,107
Accumulated depreciation (135,880) (781,298)
---------- ----------
$ 940,556 $ 2,141,809
---------- ----------
---------- ----------
</TABLE>
As described in Note 7b, on October 5, 1994, the Company transferred title in
an office building to the lender in complete satisfaction of a related note
payable with a balance of $2,461,942. The cost (after reduction for the
$1,578,000 provision for impairment loss described in Note 7b) and accumulated
depreciation for this building was $1,854,693 and $697,406, respectively, at
June 30, 1994. The following is a summary of the results of operations of
this office building for the years ended June 30:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Rents $ 50,000 $ 201,000 $ 185,000
Rental costs 19,000 92,000 116,000
Depreciation 27,000 108,000 102,000
Interest 12,000 155,000 178,000
Provision for impairment loss - 1,578,000 -
Net Loss (8,000) (1,732,000) (211,000)
</TABLE>
11. Business segment information:
The Company operates principally in five business segments: bowling
centers, commercial construction (primarily tenant improvements), commercial
real estate rental, real estate development, and commercial brokerage. As
described in Note 6c, the real estate development segment commenced in
September 1994 when the Company acquired a controlling interest in Old Vail
Partners. Other revenues, which are not part of an identified segment,
consist of property management fees (earned from both a property 50 percent
owned by the Company and a property in which the Company has no ownership)
and a video game operation acquired in February 1994.
Page A-29
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
11. Business segment information (continued):
The following is summarized information about the Company's operations by
business segment.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
BOWLING:
Net sales $7,700,410 $7,883,605 $5,001,839
Operating income (loss) (21,771) (228,928) 115,627
Depreciation 775,801 915,079 487,442
Identifiable assets 6,849,000 6,501,000 4,064,000
Capital expenditures 104,000 2,941,000 221,000
COMMERCIAL CONSTRUCTION:
Net sales $1,785,623 $1,752,056 $1,560,566
Operating income 25,107 19,349 19,901
Depreciation 5,582 5,748 6,997
Identifiable assets 341,000 508,000 423,000
Capital expenditures 30,000 - 29,000
REAL ESTATE RENTAL:
Net sales $ 577,136 $ 686,046 $ 662,122
Operating income- before valuation
adjustment and loss on disposal 214,493 169,684 83,513
Operating income (loss) 214,493 (1,408,316) (1,785,833)
Depreciation 93,496 169,933 167,947
Identifiable assets 1,285,000 2,459,000 4,200,000
Capital expenditures 10,000 27,000 1,067,000
</TABLE>
Net sales includes $53,184 in 1995 and 1994 and $39,000 in 1993 of
intercompany rental income which was eliminated in consolidation.
<TABLE>
<CAPTION>
REAL ESTATE DEVELOPMENT:
<S> <C> <C> <C>
Net sales $ - $ - $ -
Operating income (loss) (141,391) - -
Identifiable assets 6,026,000 1,601,000 1,718,000
Capital expenditures - - -
COMMERCIAL BROKERAGE:
Net sales $ 64,490 $ 61,732 $ 69,937
Operating income (loss) 24,921 22,739 10,574
Identifiable assets - - -
Capital expenditures - - -
UNALLOCATED CORPORATE OVERHEAD AND
OTHER ACTIVITIES:
Net sales $ 267,226 $ 223,721 $ 177,242
Operating loss (369,657) (536,116) (401,660)
Depreciation 110,351 62,901 29,108
Identifiable assets 808,000 2,604,000 1,074,000
Capital expenditures 17,000 295,000 115,000
</TABLE>
Page A-30
<PAGE>
[KPMG-PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
The 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, 1995 and 1994, 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, 1995. In connection
with our audits of the consolidated financial statements schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan an 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Page A-31
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SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
CORPORATE INFORMATION
Corporate Offices 5230 Carroll Canyon Road, Suite 310
San Diego, California 92121
Directors Harold S. Elkan
Steven R. Whitman
James E. Crowley
Robert A. MacNamara
Patrick D. Reiley
Officers Harold S. Elkan, President
Steven R. Whitman, Chief Financial
Officer; Secretary
Legal Counsel Cramer & Zeko, A P.C.
401 West A Street, Suite 2300
San Diego, California 92101
Auditors KPMG Peat Marwick LLP
750 B Street, Suite 3000
San Diego, California 92101
Page A-32
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PROXY FOR 1995 ANNUAL MEETING OF
THE SHAREHOLDERS OF SPORTS ARENAS, INC.
The undersigned shareholder of Sports Arenas, Inc. hereby appoints Harold S.
Elkan and Steven R. Whitman, or any one of them (with full power to act alone
and to designate substitutes) Proxies of the undersigned with authority to vote
and otherwise represent all of the shares of the undersigned at the Annual
Meeting of Shareholders to be held on December 27, 1995, or any adjourned
meeting thereof with all of the powers the undersigned would possess if
personally present, upon matters noted below and upon such other matters as may
properly come before the meeting. All matters intended to be acted upon have
been proposed by the Board of Directors. This Proxy confers authority to vote
"FOR" each proposition unless otherwise indicated.
<TABLE>
<S><C> <C>
(1) To elect as Directors the nominees listed below:
Harold S. Elkan Patrick Reiley
Steven R. Whitman James E. Crowley
Robert A. MacNamara
</TABLE>
/ / WITHHOLD AUTHORITY to vote for all nominees listed above
/ / FOR all nominees listed above (except as marked to the contrary)
Note: To withhold authority to vote for an individual nominee, strike a line
through the nominee's name.
(2) To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors for the year ending June 30, 1996.
FOR / / AGAINST / / ABSTAIN / /
(3) In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
FOR / / AGAINST / / ABSTAIN / /
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SPORTS ARENAS,
INC.
AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
<PAGE>
(Continued from other side)
Dated:
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Signature
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Signature
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Signature
Please sign exactly as
your name appears on your
stock certificate(s). Joint
owners of the shares must each
sign. Persons holding shares
for the benefit of others
(fiduciaries) should indicate
their titles. Please sign,
date and mail this Proxy in
the enclosed envelope.
