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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1944249
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(State of Incorporation) (I.R.S. Employer I.D. No.)
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 587-1060
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates (5,441,733
shares) of the Registrant as of August 25, 1996 was $680,000 (based on average
of bid and asked prices). The number of shares of common stock outstanding as of
August 25, 1996 was 27,250,000.
Documents Incorporated by Reference - None.
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1
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PART I
ITEM I. Business
GENERAL DEVELOPMENT AND NARRATIVE DESCRIPTION OF BUSINESS
Sports Arenas, Inc. (the "Company") was incorporated as a Delaware
corporation in 1957. The Company, primarily through its subsidiaries, owns and
operates five bowling centers (three of which were sold on August 7, 1996), 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.
(1) BOWLING CENTERS - As of August 31, 1996, the Company's wholly-owned
subsidiary, Cabrillo Lanes, Inc. (the "Bowls"), operates two bowling centers
containing 110 lanes in San Diego, California. These two centers were purchased
in August 1993. On August 7, 1996, the Company's wholly owned subsidiary,
Marietta Lanes, Inc. sold its three bowling centers (110 lanes) in Georgia. On
May 7, 1996, Redbird Lanes, Ltd. (32 lanes), a 60 percent owned subsidiary of
the Company, discontinued its operations and sold its equipment in conjunction
with Redbird Properties, Ltd.'s, a 69 percent owned subsidiary of the Company,
sale of the land and building on May 31, 1996. Each of these centers had been
owned over five years. The Company has no plans to sell the remaining two
bowling centers.
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 one of the remaining centers has a computerized cash
control system.
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. 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, 1996, 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 two remaining bowling centers employ
approximately 60 people.
(2) REAL ESTATE DEVELOPMENT - The Company, through its subsidiaries (see
Item 2. Properties (b) Real Estate Development for ownership), has ownership
interests in a 40 acre parcel and a 32 acre parcel of undeveloped land in
Temecula, California. These properties were acquired in 1989 as part of a
purchase of 276 acres of land for $12,135,000 and simultaneous sale of 204 acres
of that land for $13,670,000. The Company's original plan was to also sell the
remaining 72 acres to other developers, however, the Company was not able to
complete any sales due to the subsequent downturn in the Southern California
economy.
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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 a 107,000 square foot shopping
center on 14 of the 27 developable acres. The Developer obtained construction
financing in July 1996 and the project is scheduled for occupancy in March of
1997. The plan for the remaining acreage is to sell some parcels to restaurants
and develop the remaining acreage as tenants sign leases. The Developer is
planning to offer the shopping center for sale once it is complete.
The 40 acre parcel is commercially zoned with no current plans for development
or sale. However, the City of Temecula has adopted a general development plan as
a means of down-zoning the property to a lower use and, if successful, may
significantly impair the value of the property. The Company is contesting this
action (see Item 3. Legal Proceedings (a) for description).
Both the 32 and 40 acre parcels of land are located in an area of the City of
Temecula that is planned for over 13,000 homes of which approximately 5,000
homes had been built through October 1994. 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 undeveloped land in Missouri. The investment in this asset is not
significant and Downtown has no immediate plans affecting this asset.
(3) COMMERCIAL REAL ESTATE RENTAL - Real estate rental operations consist
of one office building in the Sorrento Mesa area of San Diego, California, a
sublessor interest in land leased to condominium owners in Palm Springs,
California, and a 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 in the Sorrento Mesa area
of San Diego, California. The building was originally acquired in 1984 by 5230,
Ltd., which was 75 percent owned as a limited and general partner by Sports
Arenas Properties, Inc. (SAPI) , a wholly-owned subsidiary of the Company. 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 93
percent leased as of June 30, 1996.
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, 1996 was 3 percent, which is consistent with vacancy rates in the
area.
(4) 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 has 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 a 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.
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(b) INDUSTRY SEGMENT INFORMATION: See Note 11 of Notes to Consolidated
Financial Statements for required industry segment financial information.
ITEM 2. PROPERTIES
(a) BOWLING CENTERS:
The Company's two remaining bowling centers occupy the following facilities:
Name Location Size Expiration Date of Lease
Grove Bowl San Diego, California 60 lanes June 2003- options to 2018
Valley Bowl San Diego, California 50 lanes October 2003- options to 2013
The Valley Bowl real estate is owned by Bowling Properties, Inc., a wholly-owned
subsidiary of the Company and is collateral for a $1,994,403 note payable. The
property was purchased in November 1993 in conjunction with the acquisition of
the bowling center in August 1993.
As noted previously the Company sold its three bowling centers and related real
estate in Georgia on August 7, 1996. The real estate for two of the three
bowling centers were owned by Sports Arenas Properties, Inc. and Marietta Lanes,
Inc., both wholly owned subsidiaries of the Company. The real estate for the
third center was leased.
(b) REAL ESTATE DEVELOPMENT:
Downtown owns 507 acres of undeveloped land in Lake of the Ozarks, Missouri. The
land is collateral for a $90,164 bank loan (first deed of trust) and a
$4,368,000 loan (second deed of trust) from Sports Arenas, Inc. (the parent
company).
RCSA Holdings, Inc. (RCSA) and OVGP, Inc. (OVGP), wholly-owned subsidiaries of
the Company, own a combined 50 percent general and limited partnership interest
in Old Vail Partners, L.P. , a California limited partnership (OVP). OVP owns 40
acres of unimproved land in Temecula, California and a 50 percent limited
partnership interest in Vail Ranch Limited Partnership (VRLP). Legal title to
the 40 acres of undeveloped land is still in the process of being changed from
the former general partnership's name into the limited partnership name (OVP).
The 40 acres of land owned by OVP are located within a special assessment
district of the County of Riverside, California (the County) which was created
to fund and develop roadways, sewers, and other required infrastructure
improvements in the area necessary for the owners to develop their properties.
Property within the assessment district is collateral for an allocated portion
of the bonded debt that was issued by the assessment district to fund the
improvements. The annual payments (made in semiannual installments) due related
to the bonded debt are approximately $156,000 for the 40 acres. The payments
continue through the year 2014 and include interest at approximately 7-3/4
percent. OVP is delinquent in the payment of property taxes and assessments for
the last five years. The County has a judgment for the default under the
assessment district obligations but the Company has not yet received
notification that the County has commenced proceedings to enforce these
judgments by judicial sale. The amount due to cure the judgment at June 30, 1996
was approximately $688,000. The principal balance of the allocated portion of
the bonds is $1,513,730.
The 40 acre parcel is subject to an action that essentially down-zones the
property to a lower use and, if successful, may significantly impair the value
of the property. The Company is contesting this action (see Item 3. Legal
Proceedings (a) for description).
VRLP is developing 32 acres of unimproved land in Temecula, California that was
contributed to VRLP by OVP. VRLP was formed in September 1994 by OVP and an
unrelated developer (Developer) to develop 32 acres of commercially zoned
unimproved land in Temecula, California that OVP contributed to VRLP in exchange
for a 50 percent limited partnership interest with a priority right to
distributions for specified amounts based on the acreage being developed. This
property is collateral for a $9,100,000 construction loan that funded on July 3,
1996.
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(c) REAL ESTATE OPERATIONS:
UCVGP, Inc. and SAPI, wholly owned subsidiaries of the Company, own a one
percent managing general partnership interest and a 49 percent limited
partnership interest, respectively, in UCV, L.P. (UCV). UCV owns a 542 unit
apartment project (University City Village) in the University City area of San
Diego, California. The property is collateral for a $19,833,500 note payable by
the partnership.
DPDC owns an approximate 36,000 square foot office building located in San
Diego, California, which was constructed in 1983. As of June 30, 1996, the
property is collateral for a $1,183,093 note payable.
DPDC is the lessee of 15 acres of land in the Palm Springs, California area
under a lease expiring in September 2043. The land is subleased to the owners of
the condominium units constructed on the property. The subleases also expire in
September 2043.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 1996, except as noted below, the Company or its subsidiaries were
not parties to any material legal proceedings other than routine litigation
incidental to the business.
(a) On August 3, 1994, Old Vail Partners, a general partnership (the
predecessor to Old Vail Partners, L.P., a California limited partnership)
(OVP) filed suit against the County of Riverside, California and the City
of Temecula, California in both the California Superior Court for the
County of Riverside and in the U.S. District Court, Central District,
California. OVP suffered adverse judgments in both cases. OVP has filed
appeals at both the California Court of Appeals and the U.S. Court of
Appeals, Ninth Circuit. In November 1993, the City of Temecula adopted a
general development plan that designates 40 acres of property owned by OVP
as suitable for "professional office" use, which is contrary to its zoning
as "commercial" use. As part of the adoption of its general development
plan, the City of Temecula adopted a provision that, until the zoning is
changed on properties affected by the general plan, the general plan shall
prevail when a use designated by the general plan conflicts with the
existing zoning on the property. The result is that the City of Temecula
has effectively down-zoned the 40 acre parcel from a "commercial" to
"professional office" use. As described in Item 2. Properties, the parcel
is subject to Assessment District liens which were allocated in 1989 based
on a higher "commercial" use. Since the Assessment District liens are not
subject to reapportionment as a result of re-zoning, a "professional
office" use is not economically feasible due to the disproportionately
high allocation of Assessment District costs. In its suit, OVP claims that
the City's adoption of a general plan as a means of re-zoning the property
is invalid. Additionally, OVP is claiming that, if the effective re-zoning
is valid, the action would be a taking and damaging of OVP's property
without payment of just compensation. OVP is seeking to have the effective
re-zoning invalidated and an unspecified amount of damages. The outcome of
this litigation is uncertain.
(b) On August 2, 1995, Old Vail Partners filed suit against the County of
Riverside, California, Albert Webb and Associates, and others in
California Superior Court for the County of Riverside claiming breach of
contract, negligence, and other acts related to the services performed by
Albert Webb and Associates as the civil engineer in calculating and
allocating the assessment district costs for Special Assessment District
159. Old Vail Partners is seeking in excess of $10,400,000 as damages,
which represents the value lost on 40 acre parcel of land as a result of
an inappropriate calculation and allocation of assessments to the 40 acre
parcel because of work performed by unlicensed engineers without proper
supervision. On October 5, 1995, the Superior Court dismissed OVP's suit.
OVP is appealing this decision to the California Court of Appeals. This
appeal has been consolidated with the state court appeal described in (a)
above.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) There is no recognized market for the Company's common stock except for
limited or sporadic quotations which may occur from time to time. The
following table sets forth the high and low bid prices per share of the
Company's common stock in the over-the-counter market, are reported by
NASDAQ (National Association of Securities Dealers' Automated Quotation
System):
1996 1995
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High Low High Low
---- ---- ---- -----
First Quarter ....... (a) (a) $.01 $.01
Second Quarter ...... $.01 $.01 $.25 $.01
Third Quarter ....... $.01 $.01 $.01 $.01
Fourth Quarter ...... (a) (a) (a) (a)
(a) No trades reported.
(b) The number of holders of record of the common stock of the Company as of
September 15, 1996 is 4,345. The Company believes there are a
significant number of beneficial owners of its common stock whose shares
are held in "street name".
(c) The Company has neither declared nor paid dividends on its common stock
during the past ten years, nor does it have any intention of paying
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
<TABLE>
<CAPTION>
Year Ended June 30,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Revenues ............ $10,154,282 $10,341,601 $10,553,976 $7,432,706 $5,908,306
Loss from
operations ......... (764,197) (321,718) (2,197,897) (2,094,811) (166,473)
Income (loss) before
extraordinary gain . 568,864 (809,421) (2,083,286) (2,488,291) (933,516)
Income (loss) per
common share,
before extraordinary
gain ............... .02 (.03) (.08) (.09) (.03)
Total assets ........ 16,445,081 15,308,441 13,673,871 11,479,502 14,252,502
Long-term
obligations ........ 4,387,259 6,803,635 7,401,805 7,002,996 9,357,593
</TABLE>
See Notes 4c, 6d and 12 of Notes to Consolidated Financial Statements regarding
disposition of business operations and material uncertainties.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Excluding the balance of the assessment-district-obligation-in-default
included in current liabilities, the Company has a working capital deficit of
$247,697 at June 30, 1996, which is a $1,425,044 decrease from the similarly
calculated deficit at June 30, 1995. The primary cause of the change in working
capital was the cash provided from the sale of the Redbird Properties real
estate ($1,675,142) and the cash provided from the sale of undeveloped land
($160,401).
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The Company has been unable to generate sufficient cash flow from operating
activities to meet scheduled principal payments on long-term debt and capital
replacement needs during the last three years. It has used its share of
distributions from UCV and proceeds from real estate sales to fund these
deficits. The cash provided (used) before changes in assets and liabilities
segregated by business segments was as follows:
1996 1995 1994
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Bowling ........................... $ ( 45,000) $ 275,000 $ 70,000
Rental ............................ 170,000 155,000 21,000
Construction ...................... 58,000 29,000 23,000
Development ....................... (300,000) (113,000) --
General corporate expense and other (430,000) (236,000) (176,000)
-------- -------- --------
Cash provided (used) by operations (547,000) 110,000 (62,000)
Capital expenditures, net of
financing ....................... (49,000) (142,000) (163,000)
Acquisition of bowling centers and
real estate .................... -- -- (196,000)
Principal payments on long-term debt (755,000) (865,000) (1,267,000)
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Cash used ......................... (1,351,000) (897,000) (1,688,000)
========== ======== =========
Distributions received from UCV ... 320,000 263,000 1,755,000
======== ======== =========
Proceeds from real estate sales ... 1,835,543 -- --
========= ======== =========
As described in Note 6d of Notes to the Consolidated Financial Statements,
Redbird Properties sold the land and building underlying the Redbird Lanes
bowling center in May 1996. The proceeds to the Company after extinguishing
long-term debt and distributions to partners was $1,675,142. As a result of the
sale, the bowling center ceased operations and the equipment was sold at a
nominal gain. The cash flow provided by the operations of Redbird Lanes was
$25,711, $67,236, and $46,653 in 1996, 1995, and 1994, respectively. The
principal payments on long-term debt for Redbird Lanes was $14,641, $15,056, and
$12,690 in 1996, 1995, and 1994, respectively.
As described in Note 12 of Notes to the Consolidated Financial Statements,
on August 7, 1996, the Company sold its three bowling centers and related real
estate located in Georgia for $3,950,000. The proceeds from sale after expenses
and extinguishing long-term debt of $1,817,361 was approximately $2,050,000. The
cash flow provided by the operations of the three bowling centers was $134,749,
$307,891, and $263,559 in 1996, 1995, and 1994, respectively. The principal
payments on long-term debt for these bowls were $147,171, $359,175, and $468,259
in 1996, 1995, and 1994, respectively.
The Company received $1,250,000 from UCV as a distribution from the
proceeds of a refinancing in June 1994. Otherwise, the cash distributions the
Company received from UCV during the last three years were the Company's
proportionate share of distributions from UCV's results of operations. The
Company's share of distributions from UCV declined in 1995 due to UCV's
additional debt service related to the June 1994 refinancing.
The investment in UCV is classified as a liability because the cumulative
distributions received from UCV exceed the sum of the Company's initial
investment and the cumulative equity in income of UCV by $9,828,360 at June 30,
1996. The Company estimates that the current market value of the assets of UCV
(primarily apartments) exceeds its liabilities by $10,000,000-$14,000,000.
As discussed in Results of Operations and in Footnote 7b of Notes to the
Consolidated Financial Statements, in October 1994 the Company transferred title
in an office building to the lender in exchange for the lender extinguishing the
Company's obligations for a $2,461,942 note payable which was collateralized by
the office building. This portion of the rental operations provided (used) cash
flow after debt service and capital replacements of $15,000 in 1995 and
($169,000) in 1994.
At June 30, 1996, the Company owned a 50 percent limited partnership
interest in Vail Ranch Limited Partnership (VRLP), which is developing 32 acres
of land (of which 27 is developable) into a commercial shopping center. VRLP
obtained construction financing in July 1996 to develop the first phase (14
acres) of the shopping center and construction is projected to be completed in
March 1997. The Company estimates that the value of the Company's 50 percent
interest, based on development of the 14 acre phase of the shopping center and
sale of the remaining acreage, is approximately $2,000,000 to $4,000,000. The
amount and timing of distributions that the Company may receive from VRLP are
uncertain. The most likely source of funds for distributions from VRLP is either
the sale of the 14 acre phase and/or sale of the remaining undeveloped land.
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At June 30, 1996, the County of Riverside, California had judgments
totaling approximately $688,000 for delinquent assessment district payments
related to 40 acres of undeveloped land. The annual obligation for the
assessment district is approximately $156,000. The Company estimates the value
of this land is approximately $3,000,000 to $5,000,000 if the property was zoned
"commercial". However, the City of Temecula has adopted a general development
plan as a means of down-zoning the property to a lower use and, if successful,
may significantly impair the value of the property. The Company is contesting
this action (see Item 3. Legal Proceedings (a) for description). As a result of
the judgment and the down-zoning of the property, the recoverability of the
carrying value of this property is uncertain. If the County of Riverside
commences foreclosure proceedings and the Company does not satisfy the judgments
prior to foreclosure sale, the Company would lose title to the property and the
property would not be subject to redemption.
The Company is expecting a $500,000 cash flow deficit in 1997 from
operating activities after adding estimated distributions from UCV ($340,000)
and deducting capital expenditures and scheduled principal payments on long-term
debt. The Company believes its cash at June 30, 1996 and the proceeds from the
sale of the bowling centers in August 1996 will be sufficient to fund the cash
flow deficit. This analysis does not include consideration of the following due
to their uncertainty: any distributions the Company may receive from its
investment in Vail Ranch Limited Partners, or any payments due for delinquent or
current property taxes and assessments on undeveloped land because these amounts
may not be paid unless the Company is able to obtain an alternative source of
funds or sell the property.
RESULTS OF OPERATIONS
The discussion of Results of Operations is primarily by the Company's
business segments. The analysis is partially based on a comparison of and should
be read in conjunction with the business segment operating information in Note
11 to the Consolidated Financial Statements.
BOWLING OPERATIONS:
1996 vs. 1995
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The operating loss from bowling operations increased by $252,000 in 1996
primarily as a result of a $253,000 decrease in same-center bowling revenues.
The closing of the operations of Redbird Lanes on May 7, 1996 and the sale of
the related real estate caused decreases in the following items related to the
bowling segment: revenues - $94,000; bowl costs - $54,000; selling, general and
administrative expense $9,000; depreciation - $8,000, income from operations -
$23,000 and interest expense - $9,000. The acquisition of a controlling interest
in Redbird Properties, which owned the real estate occupied by Redbird Lanes,
caused the following changes in the bowling segment operation until the property
was sold in May 1996: bowl costs - $92,000 decrease related to elimination of
intercompany rent; selling, general and administrative expense - $18,000
increase; and depreciation - $53,000 increase; income from operations - $21,000
increase; and interest expense - $93,000 increase. Future revenues and expenses
will be lower as a result of the sale of the Redbird Lanes facilities.
Same-center bowling revenues decreased by 3.5% percent ($253,000) in 1996
primarily due to a 2.8 percent decline in games bowled, of which most of the
decrease was in league games bowled (4%). Bowling revenues also declined due to
a decrease in the amount of alcoholic beverage sales per game bowled (6%),
reflecting a nationwide trend towards less alcohol consumption. Same center
bowling costs increased by $15,000, primarily related to some lane maintenance
expense deferred from the prior year. Same-center selling, general and
administrative expense increased by $51,000 primarily due to increases in
marketing and promotion expense ($51,000) and an increase in legal expenses
($30,000) related to litigation that was settled for an immaterial amount in
April 1996. Same-center depreciation and amortization expense related to the
bowling segment decreased by $69,000 primarily due to the expiration of the
amortization periods for leasehold improvements related to a bowling center that
was acquired in September 1988 and the video game equipment acquired in January
1994. Same center interest expense declined by $55,000 primarily due to the
continued decline of the outstanding principal balances of long-term debt
related to the bowling segment.
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1995 vs. 1994
-------------
The operating loss from bowling operations decreased by $305,000 in 1995 as
a result of decreases in bowl costs and depreciation that exceeded the decrease
in bowling revenues. Bowling revenues decreased by 1.9 percent ($149,000) in
1995 primarily due to a 1.4 percent decline in games bowled, of which most of
the decrease was in open games bowled. Bowling revenues also declined due to a
decrease in the amount of alcoholic beverage sales per game bowled, reflecting a
nationwide trend towards less alcohol consumption. Bowling costs decreased by
4.3 percent ($226,000) primarily due reductions in payroll and related costs
($73,000 or 3 percent of payroll and related costs) and maintenance expense
($171,000 or 27 percent of maintenance expense). Payroll reductions were made to
reflect the decline in business. Approximately $80,000 of the decrease in
maintenance expense related to higher expenses in the prior year for deferred
maintenance on the two bowls acquired in August 1993. Maintenance expense also
decreased related to a decrease in resurfacing expense ($60,000). Depreciation
and amortization expense related to the bowling segment ($850,000) decreased by
$98,000 primarily due to the expiration of the amortization periods for
leasehold improvements, goodwill and covenant-not-to-compete related to a
bowling center that was acquired in September 1988.
CONSTRUCTION OPERATIONS
Construction costs were 86%, 84%, and 85% of construction revenues in 1996,
1995 and 1994, respectively. Selling, general and administrative expenses
directly related to the construction segment were $168,000, $218,000, and
$195,000 in 1996, 1995 and 1994, respectively. The $50,000 decrease in the
construction segment selling, general and administrative expense in 1996 was
primarily due to a $27,000 increase in general overhead being charged to
construction in progress due to the larger volume of jobs uncompleted at June
30, 1996. Incentive compensation also decreased in 1996 related to reduced
profitability of jobs. There have been no significant changes to the operations
of the construction segment for the last three years.
RENTAL OPERATIONS
The Company's rental operations in the years ended June 30, 1996 and 1995
principally consisted of ownership and leasing one office building (36,000
square feet of leasable space), a sub-lessor's interest in a land leases to
condominium owners, and a small fruit-market on undeveloped land (starting in
October 1994). Other than the effect of the disposal of an office building in
October 1994, which is noted below, rental revenues and costs increased by
$35,000 and $18,000, respectively. There was no significant change to rental
revenues and costs or operating income in 1996. The market area for the
remaining office building has been stable in terms of occupancy for the past
three years and rent rates have gradually been increasing by 7-8 percent per
year. However, current rent rates are approximately 60 percent of rates that
existed in 1990.
In October 1994, the Company disposed of a 24,000 square foot office building
that it had owned since December 1986. The disposal of the office building
resulted in the following decreases in 1996 and 1995 from prior years:
1996 1995
-------- ---------
Rental revenues ....... $50,000 151,000
Rental costs .......... 18,000 73,000
Depreciation .......... 27,000 80,000
Provision for
impairment loss ...... -- 1,578,000
Operating (income) loss (5,000) 1,580,000
Interest .............. 12,000 144,000
Other than the changes related to the disposal of the office building, rent
revenues in 1995 only changed slightly due to the addition of the rent from the
fruit-market in October 1994 ($28,000) and the indexed increases in the rent
rates of the ground subleases ($14,000) in 1994. Rental costs did not change
significantly in 1995 other than from the disposal of the office building.
The operating loss reported by the rental segment of $1,408,316 in 1994 included
a provision for impairment loss of $1,578,000 in 1994, which related to the
24,000 square foot office building that the Company transferred to the lender in
1995 in exchange for the lender extinguishing the Company's obligations for a
$2,461,942 note payable (See Note 7b of Notes to Consolidated Financial
Statements). The provision for the impairment loss represents the amount by
which the carrying value of the property exceeded its estimated fair value of
$1,200,000. The Company recorded a $1,261,826 extraordinary gain on
extinguishment of debt in 1995 from this transaction.
9
<PAGE>
REAL ESTATE DEVELOPMENT:
The real estate development segment consists primarily of operations
related to undeveloped land in Temecula, California, which is owned by Old Vail
Partners. As a result of a restructuring of the ownership, the activities of
this entity were consolidated effective September 23, 1994. The development
costs consist primarily of legal expenses ($120,000 in 1996 and $85,000 in 1995)
related to the litigation regarding the effective down-zoning of the 40 acre
parcel and property taxes of $62,000 in 1996 and $52,000 in 1995.
OTHER
In addition to the changes in selling, general and administrative expense
related to the bowling, construction, and rental segments noted previously, the
corporate segment, before allocation to the other segments, increased by
$148,000 in 1996 and decreased by $61,000 in 1995 . The increase in 1996
primarily related to discretionary bonuses of $140,000 awarded in 1996. The
decrease in 1995 was primarily due to decreases in payroll and professional
fees.
The following is a schedule of the increases (decreases) to interest
expense in 1996 and 1995, compared to the prior year:
1996 1995
-------- ---------
Increase related to acquisition of controlling
interest in Redbird Properties ............. $93,000 $ --
Increase in Redbird Lanes ..................... 9,000 --
Increase related to purchase of Valley Bowl
real estate ................................ -- 50,000
Other decreases to bowl segment ............... (55,000) (50,000)
Decrease related to sale of office building ... (12,000) (144,000)
Other decreases to rental segment ............. (18,000) (74,000)
Other increases ............................... 13,000 12,000
-------- ---------
Net increase in interest expense .............. $30,000 $(206,000)
======== =========
Other decreases of bowling segment interest expense in 1996 and 1995 both relate
to decreases in the outstanding principal balances of long-term debt related to
the bowling segment. The Company purchased the real estate occupied by Valley
Bowl in November 1993, which resulted in an increase in interest expense in 1995
due to the partial year's interest in 1994. Interest expense of the rental
segment decreased in 1995 primarily due to a refinancing of the Company's
remaining office building in October 1994, which resulted in a $74,000 decrease
in interest paid and amortization of finance costs. Interest expense of the
rental segment also decreased in 1996 and 1995 as a result of the disposition of
an office building in October 1995.
The equity in income of investees decreased in 1996 and 1995 due to a
decline in the Company's share of income of UCV ($110,000 in 1996 and $236,000
in 1995) which was partially offset by a decline in the equity in net loss of
OVP. Net income of UCV declined in 1996 because of the write-off of $186,000 of
redevelopment planning costs incurred in 1996 and 1995. Net income from UCV
declined in 1995 because of higher interest expense related to the refinancing
of its debt in June 1994. The equity in net loss of Old Vail declined because
the Company commenced consolidating its results of operations in September 1994.
A subsidiary of the Company accrued amounts in prior years related to a
a loss contingency which were reversed in 1996 as the loss contingency was no
longer probable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The Financial Statements and Supplementary Data of Sports Arenas,
Inc. and Subsidiaries are listed and included under Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) - (c) The following were directors and executive officers of the
Company during the year ended June 30, 1995. All present directors will hold
office until the election of their respective successors. All executive officers
are to be elected annually by the Board of Directors.
Directors and Officers Age Position and Tenure with Company
- ---------------------- ---- ---------------------------------
Harold S. Elkan 53 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 43 Chief Financial Officer and Treasurer since
May 1987;
Director and Assistant Secretary since
August 1, 1989
Secretary since January 1995
Patrick D. Reiley 55 Director since August 21, 1986
James E. Crowley 49 Director since January 10, 1989
Robert A. MacNamara 48 Director since January 9, 1989
There are no understandings between any director or executive officer and any
other person pursuant to which any director or executive officer was selected as
a director or executive officer.
(d) FAMILY RELATIONSHIPS - None
(e) BUSINESS EXPERIENCE
1. Harold S. Elkan has been employed as the President and Chief Executive
Officer of the Company since 1983. For the preceding ten years he was a
principal of Elkan Realty and Investment Co., a commercial real estate brokerage
firm, and was also President of Brandy Properties, Inc., an owner and operator
of commercial real estate.
2. Steven R. Whitman has been employed as the Chief Financial Officer and
Treasurer since May 1987. For the preceding five years he was employed by
Laventhol & Horwath, CPAs, the last four of which were as a manager in the audit
department.
3. Patrick D. Reiley was the Chairman of the Board and Chief
Executive Officer of Reico Insurance Brokers, Inc. (Reico) from 1980 until
June 1995, when Reico ceased doing business. Reico was an insurance brokerage
firm in San Diego, California.
4. James E. Crowley has been an owner and operator of various automobile
dealerships for the last eighteen years. Mr. Crowley is vice president of Jamar
Holdings, Ltd., doing business as San Diego Mitsubishi (he was the President and
controlling shareholder from 1988 to 1994), President of Coast Nissan since
1992; and President of Escondido Jeep Eagle/GMC Truck since March 1994.
5. Robert A. MacNamara has been employed by Daley Corporation, a California
corporation, since 1978, the last eleven years of which he has served as Vice
President of the Property Division. Daley Corporation is a residential and
commercial real estate developer and a general contractor.
(f) INVOLVEMENT IN LEGAL PROCEEDINGS - None
11
<PAGE>
Section 16(a) Compliance -Section 16(a) of the Securities Exchange Act of
1934 requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on written representations that no
other reports were required, during the three fiscal years ended June 30, 1994
through 1996 all Section 16(a) filing requirements applicable to officers,
directors and greater than ten-percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
(b) The following Summary Compensation Table shows the compensation paid
for each of the last three fiscal years to the Chief Executive Officer of the
Company and to the most highly compensated executive officers of the Company
whose total annual compensation for the fiscal year ended June 30, 1996 exceeded
$100,000.
Long-term All Other
Name and Compen- Compen-
Principal Position Year Salary Bonus Other sation sation
- ----------------- --- ------ ----- ----- --------- ---------
Harold S. Elkan, 1996 $250,000 $100,000 $ - $ - $ -
President 1995 250,000 - - - -
1994 250,000 - - - -
Steven R. Whitman, 1996 100,000 40,000 - - -
Chief Financial 1995 100,000 - - - -
Officer 1994 100,000 - - - -
The Company has no Long-Term Compensation Plans. Although the Company
provides some miscellaneous perquisites and other personal benefits to its
executives, the amount of this compensation did not exceed the lesser of $50,000
or 10 percent of an executive's annual compensation.
(c)-(f) and (i) The Company hasn't issued any stock options or stock
appreciation rights, nor does the Company maintain any long-term incentive plans
or pension plans.
(g) COMPENSATION OF DIRECTORS - The Company pays a $500 fee to each outside
director for each director's meeting attended. The Company does not pay any
other fees or compensation to its directors as compensation for their services
as directors.
(h) EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS: Pursuant to an employment agreement, which expires January 1998,
Harold S. Elkan, the Company's President, is to receive a sum equal to twice his
annual salary ($250,000 as of June 30, 1996) plus $50,000 if he is discharged by
the Company without good cause, or the employment agreement is terminated as a
result of a change in the Company's management or voting control. The agreement
also provides for miscellaneous perquisites which do not exceed either $50,000
or 10 percent of his annual salary. The Board of Directors has authorized that
up to $625,000 of loans can be made to Harold S. Elkan at interest rates not to
exceed 10 percent.
(j) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION:
Harold S. Elkan, the Company's President, was appointed by the Company's Board
of Directors as a compensation committee of one to review and set compensation
for all Company employees other than Harold S. Elkan. The Company's
outside Directors set compensation for Harold S. Elkan. None of the
executive officers of the Company had an "interlock" relationship to report
for the fiscal year ended June 30, 1996.
12
<PAGE>
(k) BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's Board of Directors appointed Harold S. Elkan as
a compensation committee of one to review and set compensation for all
Company employees other than Harold S. Elkan. The Board of Directors,
excluding Harold S. Elkan and Steven R. Whitman, set and approve compensation
for Harold S. Elkan.
The objectives of the Company's executive compensation program are to:
attract, retain and motivate highly qualified personnel; and recognize and
reward superior individual performance. These objectives are satisfied through
the use of the combination of base salary and discretionary bonuses. The
following items are considered in determining base salaries: experience,
personal performance, responsibilities, and, when relevant, comparable salary
information from outside the Company. Currently, the performance of the Company
is not a factor in setting compensation levels. Annual cash bonus payments are
discretionary and would typically relate to subjective performance criteria.
Bonuses of $100,000 and $40,000 were awarded to Harold Elkan and Steven Whitman,
respectively, in the year ended June 30, 1996.
In the fiscal year ended June 30, 1993 the outside members of the Board
of Directors approved a new employment agreement for Harold S. Elkan effective
from January 1, 1993 until December 31, 1997. This agreement provides for annual
base salary of $250,000 plus discretionary bonuses as the Board of Directors may
determine and approve. In setting the compensation levels in this agreement, the
Board of Directors, in addition to utilizing their personal knowledge of
executive compensation levels in San Diego, California, referred to a special
compensation study performed in 1987 for the Board of Directors by an
independent outside consultant.
Outside members of Board of Directors approving the Compensation for
Harold S. Elkan:
Patrick D. Reiley
James E. Crowley
Robert A. MacNamara
Directors' Compensation Committee for Other Employees:
Harold S. Elkan
(l) PERFORMANCE GRAPH: The following schedule and graph compares the
performance of $100 if invested in the Company's common stock (SAI) with the
performance of $100 if invested in each of the Standard & Poors 500 Index (S&P
500), the Standard & Poors Leisure Time Index (S&P LT), and American Recreation
Centers, Inc. (ARC), a company primarily operating in the bowling industry.
The performance graph and schedule provide information required by regulations
of the Securities and Exchange Commission. However, the Company believes that
this performance graph and schedule could be misleading if it is not understood
that there is limited trading of the Company's stock.
The performance is calculated by assuming $100 is invested at the beginning of
the period (July 1990) in the Company's common stock at a price equal to its
market value (the bid price). At the end of each fiscal year, the total value of
the investment is computed by taking the number of shares owned multiplied by
the market price of the shares at the end of each fiscal year.
SCHEDULE OF COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Sports S&P American
Arenas, Leisure Recreation
Year Ended Inc. S&P 500 Time Centers
--------- ------- ------- -------- ----------
6/91 100 100 100 100
6/92 100 114 96 97
6/93 100 126 96 97
6/94 100 124 128 112
6/95 100 153 115 134
6/96 100 188 148 111
13
<PAGE>
[GRAPHIC OMITTED]
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) - (c):
Shares Nature of
Beneficially Beneficial Percent
Name and Address Owned Ownership of Class
---------------- ------------ ----------- --------
Harold S. Elkan 21,808,267 (1) Sole investment 80.0%
5230 Carroll Canyon Road and voting power
San Diego, California
All directors and 21,808,267 Sole investment 80.0%
officer as a group and voting power
(1) These shares of stock are owned by Andrew Bradley, Inc. which is
wholly-owned by Harold S. Elkan. Andrew Bradley, Inc. has pledged
10,900,000 of its shares of Sports Arenas, Inc. stock as collateral for
its loan from Sports Arenas, Inc. See Note 3c of Notes to Consolidated
Financial Statements.
14
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) - (c):
1. The Company has $552,657 of unsecured loans outstanding to Harold S.
Elkan, (President, Chief Executive Officer, Director and, through his
wholly-owned corporation, Andrew Bradley, Inc., the majority shareholder of the
Company) as of June 30, 1996. The balance at June 30, 1996 bears interest at 8
percent per annum and is due in monthly installments of interest only plus
annual principal payments of $100,000 due on January 1, 1997-1999. The balance
is due January 1, 2001.
2. The Company was a partner in several partnerships with Harold S. Elkan
(including his children) and S. Robert Elkan (the brother of Harold S. Elkan) or
a company controlled by him. In each of these partnerships, the Company's
limited partnership interest was entitled to a priority return over the other
limited partners.
Redbird Lanes, Ltd., which owned a bowling center acquired December 31,
1986, was owned by the Company as a 60-percent combined general and
limited partner, S. Robert Elkan as a 20-percent limited partner, and
Harold S. Elkan as a 20-percent limited partner.
Redbird Properties, Ltd., was 30-percent owned as general and limited
partners in combination by S. Robert Elkan and an entity wholly-owned by
him. As of June 30, 1995, Harold S. Elkan owned a 30-percent limited
partnership interest and the remaining 40-percent interest was owned by
the SAPI as a limited partner. Redbird Properties, Ltd. owns the land
and building in which the Red Bird Lanes bowling center is located.
During the year ended June 30, 1995, Red Bird Lanes paid approximately
$111,000 of rent to Redbird Properties, Ltd. S. Robert Elkan and his
wife, Harold S. Elkan, and the Company are guarantors of the $750,000
loan used to purchase the property. Effective July 1, 1995, the Company
purchased a 29 percent partnership interest (in addition to the 40
percent interest it has owned since 1987) in Redbird Properties, Ltd.
from Harold S. Elkan for $446,000. The purchase price is payable in
monthly installments of interest at 8 percent per annum plus annual
principal payments of $100,000 on January 1, 1996-1999 and $46,000 on
January 1, 2000. The agreement provides for an adjustment to the
purchase price if the partnership subsequently sells the real estate
prior to June 30, 1996. As described in Note 6d of Notes to the
Consolidated Financial Statements, Redbird Properties, Ltd. sold the
land and building on May 31, 1996 for $2,800,000 and this resulted in
an adjustment of the purchase price to $419,744.
3. In December 1990, the Company loaned $1,061,009 to the Company's
majority shareholder, Andrew Bradley, Inc. (ABI), which is wholly-owned by
Harold S. Elkan, the Company's President. The loan provided funds to ABI to pay
its obligation related to its purchase of the Company's stock in November 1983.
The loan to ABI provides for interest to accrue at an annual rate of prime plus
1-1/2 percentage points (10-3/4 percent at June 30, 1996) and to be added to the
principal balance annually. At June 30, 1996, $717,013 of interest had been
accrued. The loan is due in November 2003. The loan is collateralized by
10,900,000 shares of the Company's stock.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements of Registrant
Independent Auditors' Report ........................................... 17
Sports Arenas, Inc. and Subsidiaries consolidated financial
statements:
Balance sheets as of June 30, 1996 and 1995 ......................... 18-19
Statements of operations for each of the years in the ............... 20
three-year period ended June 30, 1996
Statements of shareholders' equity (deficiency) for each of
the years in the three-year period ended June 30, 1996 ............ 21
Statements of cash flows for each of the years in the
three-year period ended June 30, 1996 .............................22-23
Notes to financial statements .......................................24-38
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 50 percent owned
investee:
Independent Auditors' Report ........................................ 39
Balance Sheets as of March 31, 1996 and 1995 ........................ 40
Statements of income and partners' equity (deficiency) for
each of the years in the three-year period ended March 31, 1996.... 41
Statements of cash flows for each of years in the three-year
period ended March 31, 1996 ......................................... 42
Notes to financial statements ....................................... 43-44
3. Financial Statement Schedules
There are no financial statement schedules because they are either
not applicable or the required information is shown in the financial
statement or notes thereto ..........................................
4. Exhibits
22.1 Subsidiaries of the Registrant ............................... 46
B. Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders
Sports Arenas, Inc.:
We have audited the accompanying consolidated balance sheets of Sports Arenas,
Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficiency), and cash flows for
each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sports Arenas, Inc.
and subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Diego, California
September 25, 1996
17
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents ............................. $ 1,093,465 $ 120,027
Current portion of notes receivable .............. 25,000 25,000
Current portion of notes
receivable-affiliate (Note 3b) ................. 100,000 100,000
Construction contract receivables ................ 623,877 273,912
Other receivables ................................ 134,843 41,346
Costs in excess of billings on
uncompleted contracts .......................... -- 14,471
Prepaid expenses ................................. 182,823 148,225
Property and equipment sold on
August 7, 1996 (Note 12) ....................... 2,745,978 --
------------ ------------
Total current assets ........................... 4,905,986 722,981
------------ ------------
Receivables due after one year:
Note receivable (Note 3a) ........................ 731,993 743,144
Less deferred gain (Note 3a) ..................... (716,025) (737,447)
Affiliate (Note 3b) .............................. 552,567 595,224
Other ............................................ 81,696 115,100
------------ ------------
650,231 716,021
Less current portion ........................... (125,000) (125,000)
------------ ------------
525,231 591,021
------------ ------------
Property and equipment, at cost (Notes 7 and 10):
Land ............................................. 678,000 1,529,000
Buildings ........................................ 2,461,327 4,477,544
Equipment and leasehold and tenant improvements .. 1,234,170 5,702,034
------------ ------------
4,373,497 11,708,578
Less accumulated depreciation and amortization . (1,175,332) (5,088,774)
------------ ------------
Net property and equipment ..................... 3,198,165 6,619,804
------------ ------------
Other assets:
Undeveloped land, at cost (Notes 4 and 6c) ....... 4,737,353 4,804,496
Capitalized carrying costs on leased land (Note 5) 85,569 87,465
Goodwill, net of accumulated amortization of
$807,218 and $538,146 ....................... 538,144 807,216
Deferred loan costs, net of accumulated
amortization of $107,929 and $71,838 ........ 97,161 127,002
Investments (Note 6) ............................. 2,232,119 1,416,147
Other ............................................ 125,353 132,309
------------ ------------
7,815,699 7,374,635
------------ ------------
$ 16,445,081 $ 15,308,441
============ ============
</TABLE>
18
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current liabilities:
Long-term debt subject to extinguishment (Note 12) $ 1,808,282 $ --
Assessment district obligation-in default (Note 6c) 2,061,090 1,928,403
Long-term debt due within one year (Note 7a) ..... 1,061,000 705,000
Long-term debt due within one year,
related party (Note 6d) ....................... 100,000 --
Note payable, line of credit (Note 7c) ........... -- 88,742
Accounts payable ................................. 908,530 663,814
Accrued payroll and related expenses ............. 308,619 130,890
Accrued property taxes (Note 6c) ................. 385,591 249,146
Accrued interest ................................. 33,794 93,350
Accrued frequent bowler program expense .......... 250,506 200,292
Other accrued liabilities 297,361 264,488
------------ ------------
Total current liabilities 7,214,773 4,324,125
------------ ------------
Long-term debt, excluding current portion (Note 7) .. 4,167,515 6,803,635
------------ ------------
Long-term debt, related party, excluding current
portion (Note 6d) ................................. 219,744 --
------------ ------------
Distributions received in excess of
basis in investment (Notes 6a and 6b).............. 9,828,360 9,559,390
------------ ------------
Tenant security deposits ............................ 25,894 24,616
------------ ------------
Minority interest in consolidated
subsidiary (Note 6c) ............................... 2,212,677 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 .............................. (7,448,409) (8,017,273)
------------ ------------
(5,445,860) (6,014,724)
Less note receivable from shareholder (Note 3c) .. (1,778,022) (1,601,278)
------------ ------------
Total shareholders' equity (deficiency) ........ (7,223,882) (7,616,002)
------------ ------------
$ 16,445,081 $ 15,308,441
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Bowling .............................. $ 7,452,834 $ 7,799,991 $ 7,949,200
Rental ............................... 509,004 523,952 632,862
Construction ......................... 2,008,073 1,785,523 1,752,056
Other ................................ 76,138 125,519 114,034
Other-related party (Note 6b) ........ 108,233 106,616 105,824
------------ ------------ ------------
10,154,282 10,341,601 10,553,976
------------ ------------ ------------
Costs and expenses:
Bowling .............................. 4,841,886 4,973,179 5,198,473
Rental ............................... 249,354 250,147 327,429
Construction ......................... 1,734,261 1,501,900 1,495,901
Development .......................... 185,691 141,391 --
Selling, general and administrative .. 2,921,886 2,758,052 2,811,989
Depreciation and amortization ........ 985,401 1,038,650 1,207,081
Provisions for impairment ............
losses (Note 7b) ................... -- -- 1,711,000
------------ ------------ ------------
10,918,479 10,663,319 12,751,873
------------ ------------ ------------
Loss from operations .................... (764,197) (321,718) (2,197,897)
------------ ------------ ------------
Other income (charges):
Investment income:
Related party (Notes 3b and 3c) .... 222,556 201,413 149,763
Other .............................. 78,417 75,610 75,301
Interest expense and amortization of
finance costs ...................... (846,842) (816,567) (1,022,208)
Interest expense related to
development activities ............... (239,190) (139,463) --
Equity in income of investees (Note 6) 104,450 171,751 338,565
Lawsuit settlement (Note 8c) ......... -- -- 548,190
Gain on sale of property and
equipment (Note 6d) ................ 1,658,463 -- --
Minority interest in income of
consolidated subsidiary (Note 6d) .. (556,237) -- --
Gain on sale of undeveloped
land (Note 4b) ..................... 120,401 -- --
Reversal of accrued liability (Note 8d) 769,621 -- --
Recognition of deferred gain (Note 3a) 21,422 19,553 25,000
------------ ------------ ------------
1,333,061 (487,703) 114,611
------------ ------------ ------------
Income (loss) before extraordinary gain . 568,864 (809,421) (2,083,286)
Extraordinary gain from troubled debt
restructuring (Note 7b) .............. -- 1,261,826 --
------------ ------------ ------------
Net income (loss) ....................... $ 568,864 $ 452,405 $ (2,083,286)
============ ============ ============
Per common share (based on weighted
average hares outstanding):
Income (loss) before
extraordinary gain ................... $ .02 $ (.03) $ (.08)
============ ============ ============
Net income (loss) ..................... $ .02 $ .02 $ (.08)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<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, 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)
Net income ........................... -- -- -- 568,864 568,864
---------- -------- ---------- ----------- -----------
Balance at June 30, 1996 ............. 27,250,000 $272,500 $1,730,049 $(7,448,409) $(5,445,860)
========== ======== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................... $ 568,864 $ 452,405 $(2,083,286)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Amortization of deferred financing
costs and discount ................ 38,976 41,989 100,389
Depreciation and amortization ...... 985,401 1,038,650 1,207,081
Undistributed income of investees .. (104,450) (171,751) (338,565)
Gain on sale or real estate and
undeveloped land .................. (1,778,864) -- --
Minority interest in income of
consolidated subsidiary ........... 556,237 -- --
Extraordinary gain ................. -- (1,261,826) --
Interest income accrued on note
receivable from shareholder ....... (176,744) (157,612) (110,128)
Provisions for impairment losses ... -- -- 1,711,000
Interest accrued on assessment
district obligation ............... 132,687 168,278 --
Reversal of accrued liability....... (769,621) -- --
Lawsuit settlement accrual ......... -- -- (548,190)
----------- ----------- -----------
(547,514) 110,133 (61,699)
Changes in assets and liabilities:
(Increase) decrease in other
receivables, prepaid expenses, and
costs in excess of billings ....... (449,572) 97,043 (86,134)
Increase (decrease) in accounts
payable and accrued expenses ...... 718,106 (54,151) 566,076
Other ............................... (23,406) (34,186) (35,521)
----------- ----------- -----------
Net cash provided (used) by
operating activities ............ (302,386) 118,839 382,722
----------- ----------- -----------
Cash flows from investing activities:
Increase in notes receivable ......... 87,212 (58,383) (6,921)
Capital expenditures - other ......... (48,611) (142,426) (163,435)
Contributions to investees ........... (69,643) (97,571) --
Distributions from investees ......... 320,000 302,499 1,754,743
Acquire interest in Redbird
Properties (Note 6d) ............... (5,289) -- --
Acquire additional interest in Old
Vail Partners ...................... -- (49,845) --
Proceeds from sale of undeveloped land 160,401 -- --
Proceeds from sale of real
estate (Note 6d) ................... 1,675,142 -- --
Proceeds from sale of investment ..... -- -- 93,000
Purchase of bowling centers .......... -- -- (196,242)
----------- ----------- -----------
Net cash provided (used) by
investing activities .............. 2,119,212 (45,726) 1,481,145
----------- ----------- -----------
Cash flows from financing activities:
Scheduled principal payments ......... (754,646) (864,740) (1,007,921)
Proceeds from line of credit ......... 510,000 303,102 300,000
Payments on line of credit ........... (598,742) (214,360) (558,600)
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 (843,388) (857,830) (1,278,521)
----------- ----------- -----------
Net increase (decrease) in cash and
equivalents ........................... 973,438 (784,717) 585,346
Cash and equivalents, beginning of year . 120,027 904,744 319,398
----------- ----------- -----------
Cash and equivalents, end of year ....... $ 1,093,465 $ 120,027 $ 904,744
=========== =========== ===========
</TABLE>
22
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
SUPPLEMENTAL CASH FLOW INFORMATION:
1996 1995 1994
--------- -------- --------
Interest paid $ 793,000 $789,000 $900,000
========= ======== ========
Supplemental schedule of non-cash investing and financing activities:
In addition to the cash expenditures of $196,242 in 1994 and $205,356 in 1993,
in 1994 the Company assumed long-term debt of $3,594,939 and borrowed
$258,600 from its line of credit to acquire two bowling centers. The
purchase price was allocated as follows: Equipment-$585,700; Land-$420,000;
Building-$1,687,934; Deferred loan costs-$78,141; Goodwill-$1,345,362;
Other assets-$40,000; and Other notes receivable-$98,000.
Long-term debt of $17,751 in 1995 and $167,063 in 1994 were incurred to
finance other capital expenditures of $28,750 in 1995, and $190,545 in
1994.
In January 1994, the Company foreclosed on $233,270 of video games, equipment
and other collateral related to the Company's guarantee of a bank's loan to
a games room operator. The Company also assumed the $233,270 note payable
to bank.
Inaddition to the initial cash payment of $50,000 to acquire an additional
interest in Old Vail Partners in September 1994, the acquisition resulted
in the following items being included in the Company's consolidated balance
sheet on the date of acquisition: Cash- $155; Prepaid expense- $85;
Undeveloped land- $4,482,867; Investment in Vail Ranch Limited Partners-
$1,122,062; Accounts payable- $4,095; Accrued interest- $50,000; Accrued
property tax- $182,618; Other liabilities- $62,369; Notes payable- $93,819;
Assessment District obligations, in default- $1,760,125; and Minority
interest- $2,262,677. As a result of the consolidation of Old Vail Partners
in the Company's financial statements, the Company's investment of
$1,189,466 in Old Vail Partners was eliminated.
In October 1994, the Company refinanced long term debt of $1,193,800 with a
$1,200,000 note payable. The Company also incurred $45,617 of loan costs
related to the refinancing, of which $39,417 was a cash expenditure.
In October 1994, the Company extinguished debt of $2,461,942 by the transfer
of title to an office building to the lender in complete satisfaction of
the liability. The office building cost and accumulated depreciation were
$1,856,187 and $721,739, respectively. The Company also wrote off the
balance of unamortized loan costs ($19,995), deferred lease commissions
($27,765), and accrued property tax ($3,750) as part of the transactions.
The Company incurred transaction costs of $21,659 to consummate the
transfer.
During the year ended June 30, 1995, the Company wrote-off $100,000 of fully
amortized goodwill and $450,000 of fully amortized covenant-not-to-compete.
See accompanying notes to consolidated financial statements.
23
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. Summary of significant accounting policies:
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of Sports Arenas, Inc. and all subsidiaries
and partnerships more than 50 percent owned or in which there is a
controlling financial interest (the Company). All material intercompany
balances and transactions have been eliminated. The minority interests'
share of the net loss of partially owned consolidated subsidiaries has been
recorded to the extent of the minority interests' contributed capital. The
Company uses the equity method of accounting for its investments in entities
in which it has an ownership interest that gives the Company the ability to
exercise significant influence over operating and financial policies of the
investee. The Company uses the cost method of accounting for investments in
which it has virtually no influence over operating and financial policies.
Cash and equivalents - Cash and equivalents only include highly liquid
investments with original maturities of less than 3 months. Cash equivalents
totaled $963,169 at June 30, 1996.
Property and equipment - Depreciation and amortization are provided on the
straight-line method based on the estimated useful lives of the related
assets, which are 20 and 30 years for the buildings and from 3 to 15 years
for the other assets.
Investment - The Company's purchase price in March 1975 of the one-half
interest in UCV, L.P. exceeded the equity in the book value of net assets of
the project at that time by approximately $1,300,000. The excess was
allocated to land and buildings based on their relative fair values. The
amount allocated to buildings is being amortized over the remaining useful
lives of the buildings and the amortization is included in the Company's
depreciation and amortization expense.
Income taxes - The Company accounts for income taxes using the asset and
liability method in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes."
Amortization of intangible assets - Deferred loan costs are being amortized
over the terms of the loans on the straight-line method. Goodwill related to
the acquisition of a bowling center is being amortized over 5 years on the
straight-line method.
Valuation impairment - The Company records a provision for value impairment
of long-lived assets, including goodwill, whenever the sum of the estimated
undiscounted future cash flows from operations plus the asset's estimated
undiscounted disposition value is less than the current book value. The
provision for value impairment, if any, is equal to the excess by which the
current book value exceeds the fair value of the asset. The Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed OF" on April 1, 1996. The Company's
previous method of accounting for impairment losses was similar to SFAS No.
121, therefore there was no impact on the Company's financial position or
results of operations.
Reclassifications - The Company has reclassified certain prior period amounts
in 1995 and 1994 to conform to their classification in 1996.
Concentrations of credit risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are the notes
receivable described in Note 3.
24
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. Summary of significant accounting policies (continued):
Fair value of financial instruments - The following methods and assumptions
were used to estimate the fair value of each class of financial instruments
for which it is practical to estimate that value:
Cash and cash equivalents - the carrying amount reported in the balance
sheet approximates the fair value due to their short-term maturities.
Notes receivable - the fair value was determined by discounting future cash
flows using interest rates for similar types of borrowing arrangements.
The carrying value of notes receivable reported in the balance sheet
approximates the fair value.
Long-term debt - the fair value was determined by discounting future cash
flows using the Company's current incremental borrowing rate for similar
types of borrowing arrangements. The carrying value of long-term debt
reported in the balance sheet approximates the fair value.
Use of estimates - Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and reported amounts of revenue and
expenses during the reporting period to prepare these consolidated
financial statements in conformity with general accepted accounting
principles. Actual results could differ from these estimates.
2. Related party transactions:
A director of the Company owned an insurance company that served as the
Company's insurance agent for 17 years until it ceased operations in June
1995. The Company paid $268,000 and $246,000 of insurance premiums to this
insurance agent in the years ended June 30, 1995 and 1994, respectively.
See notes 3b, 3c, 4a, 6d, 6e, and 8a for other related party transactions.
3. Notes receivable:
(a) Sale of bowling centers - The Company sold two bowling centers in April
1989. Part of the consideration was an $800,000 note receivable from the
buyer due in monthly installments of $7,720 beginning October 1, 1989,
including principal and interest at 10 percent per annum. The balance is
due in September 1997. Under the terms of the note, interest accruing
from April 1989 through October 1989 was deferred and is due in
September 1997, including interest accruing thereon. The following is
the detail of the balance of the note receivable and accrued interest at
June 30:
1996 1995
--------- ---------
Balance of note receivable due in monthly
installments ................................. $ 693,517 $ 708,145
Deferred interest due September 1997 ......... 38,476 34,999
---------- ---------
$ 731,993 $ 743,144
========= =========
The Company is deferring recognition of $800,000 of the gain from the
sale of the bowling centers in the year ended June 30, 1989 until such
time as the operations of the two bowling centers become sufficient to
support the payment of their obligations or as the principal balance of
the note plus accrued and unpaid interest is reduced below $800,000. The
Company recognized $21,422, $19,553, and $25,000 of the deferred gain in
the years ended June 30, 1996, 1995 and 1994, respectively. The deferred
gain is presented as a reduction of the note receivable in the
consolidated balance sheets.
(b) Affiliate - The Company made unsecured loans to Harold S. Elkan, the
Company's President and, indirectly, the Company's majority shareholder,
and recorded interest income of $45,812, $43,801, and $39,635 in 1996,
1995, and 1994, respectively. The balance of $552,567 at June 30, 1996
bears interest at 8 percent per annum and is due in monthly installments
of interest only plus annual principal payments of $100,000 due in
January 1, 1997-1999. The balance is due on January 1, 2001.
25
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
3. Notes receivable (continued):
(c) Shareholder - In December 1990, the Company loaned $1,061,009 to the
Company's majority shareholder, Andrew Bradley, Inc. (ABI), which
is wholly-owned by Harold S. Elkan, the Company's President. The loan
provided funds to ABI to pay its obligation related to its purchase of
the Company's stock in November 1983. The loan to ABI provides for
interest to accrue at an annual rate of prime plus 1-1/2 percentage
points (10-3/4 percent at June 30, 1996) and to be added to the
principal balance annually. The loan is due in November 2003. The loan
is collateralized by 10,900,000 shares of the Company's stock. The
original loan amount plus accrued interest of $717,013 is presented as
a reduction of shareholders' equity because ABI's only asset is the
stock of the Company. The Company recorded interest income from
this note of $176,744 in 1996, $157,612 in 1995, and $110,128 in 1994.
4. Undeveloped land:
(a) In August 1984, the Company acquired approximately 500 acres of
undeveloped land in Lake of Ozarks, Missouri from an entity controlled
by Harold S. Elkan (Elkan). The purchase price approximated the
affiliate's original purchase price. Elkan has agreed to indemnify the
Company for any realized decline in value of the land. The carrying
value of the land was $281,629 at June 30, 1996 and 1995.
(b) The Company owned approximately 55 acres of undeveloped land in Sierra
County, New Mexico which was subject to a contract for sale to a third
party at an imputed value of $150,000, which was executed in 1988. Due
to the nature of the terms of the contract, the Company was going to
record portions of the sale as payments were received. The purchaser
defaulted on the contract, but the Company did not cancel the contract.
As a result of the defaulted contract and lack of market for sale of the
land, the Company had recorded $118,500 of valuation adjustments in
prior years to reduce the carrying value to $40,000. In January 1996 the
Company received $160,401 as payment in full on the contract and
recorded a $120,401 gain from the sale of the land.
(c) Through its ownership of Old Vail Partners, L.P. and its predecessor Old
Vail Partners, a general partnership (collectively referred to as OVP,
see Note 6c), the Company owns 40 acres of undeveloped land in Temecula,
California. The $4,455,724 ($4,482,867 at June 30, 1995) carrying value
of the property consists of: acquisition cost- $2,615,787, capitalized
assessment district costs- $1,577,025 (see Note 6c), and other
development planning costs $262,910. The property is currently subject
to default judgments to the County of Riverside, California totaling
approximately $688,000 regarding assessment district obligations. The
County has not yet commenced foreclosure proceedings. In November 1993,
the City of Temecula adopted a general development plan that designates
40 acres of property owned by OVP as suitable for "professional office"
use, which is contrary to its zoning as "commercial" use. As part of the
adoption of its general development plan, the City of Temecula adopted a
provision that, until the zoning is changed on properties affected by
the general plan, the general plan shall prevail when a use designated
by the general plan conflicts with the existing zoning on the property.
The result is that the City of Temecula has effectively down-zoned the
40 acre parcel from a "commercial" to "professional office" use. The
parcel is subject to Assessment District liens which were allocated in
1989 based on a higher "commercial" use. Since the Assessment District
liens are not subject to reapportionment as a result of re-zoning, a
"professional office" use is not economically feasible due to the
disproportionately high allocation of Assessment District costs. OVP has
filed suit against the City of Temecula claiming that the City's
adoption of a general plan as a means of effectively re-zoning the
property is invalid. Additionally, OVP is claiming that, if the
effective re-zoning is valid, the action is a taking and damaging of
OVP's property without payment of just compensation. OVP is seeking to
have the effective re-zoning invalidated and an unspecified amount of
damages. The outcome of this litigation is uncertain. If the City of
Temecula is successful in its attempt to down-zone the property, the
value of the property may be significantly impaired.
26
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
5. Capitalized carrying costs on leased land:
The Company is a sublessor on a parcel of land which is subleased to
individual owners of a condominium project. The Company capitalized $111,674
of carrying costs prior to subleasing the land in 1980. The Company is
amortizing the capitalized carrying costs over the period of the subleases on
the straight-line method. The capitalized costs are presented net of
accumulated amortization of $26,105 in 1996 and $24,209 in 1995. The future
minimum rental payments payable by the Company to the lessor on the lease are
approximately $128,000 per year for the remaining term of 47 years (aggregate
of $6,025,000) based on 85 percent of the minimum rent due from the
sublessees. The future minimum rents due to the Company from the sublessees
are approximately $151,000 per year for the remaining term of 47 years
(aggregate of $7,088,000). The subleases provide for increases every five
years based on increases in the Consumer Price Index.
6. Investments:
(a) Investments consist of the following:
1996 1995
----------- -----------
Accounted for on the equity method:
Investment in UCV, L.P. ............... $(9,828,360) $(9,559,390)
Vail Ranch Limited Partners ........... 2,182,087 1,219,033
Redbird Properties, Ltd. .............. -- 134,975
----------- -----------
(7,646,273) (8,205,382)
Less Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment .... 9,828,360 9,559,390
----------- -----------
2,182,087 1,354,008
Accounted for on the cost basis:
All Seasons Inns, La Paz .............. 50,032 62,139
----------- -----------
Total investments ................... $ 2,232,119 $ 1,416,147
=========== ===========
The following is a summary of the equity in income (loss) of the
investments accounted for by the equity method:
1996 1995 1994
-------- --------- ---------
UCV, L.P. ............... $104,450 $ 224,222 $ 459,776
Old Vail Partners ....... -- (50,256) (117,000)
Vail Ranch Limited
Partners .............. -- -- --
Redbird Properties, Ltd. -- (2,215) (4,211)
-------- --------- ---------
$104,450 $ 171,751 $ 338,565
======== ========= =========
The following is a reconciliation of the investments, other than UCV, L.P.,
accounted for on the equity method:
Vail Ranch
Limited Redbird
Partners Properties
---------- ---------
Balance, July 1, 1995 ................................ $1,219,033 $ 134,975
Net carrying value of assets transferred upon
consolidation ..................................... -- (134,975)
Assumption of partnership liability .................. 56,221 --
Reversal of accrued liability......................... 837,190 --
Contributions (distributions) ........................ 69,643 --
---------- ---------
Balance, June 30, 1996 ............................... $2,182,087 $ --
========== =========
27
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(b) Investment in UCV, L.P.:
The Company is a one percent managing general partner and 49 percent
limited partner in UCV, L.P. (UCV) which owns University City Village, a
542 unit apartment project in San Diego, California.
The following is summarized financial information of UCV as of and for the
years ended March 31 (UCV's fiscal year end):
1996 1995 1994
----------- ----------- -----------
Total assets ............... $ 2,587,000 $ 2,867,000 $ 2,409,000
Total liabilities .......... 20,204,000 20,179,000 17,291,000
Revenues ................... 4,169,000 3,990,000 3,840,000
Operating and general and
administrative costs ..... 1,465,000 1,431,000 1,433,000
Redevelopment planning costs 186,000 -- --
Depreciation ............... 194,000 182,000 187,000
Interest expense ........... 2,115,000 1,929,000 1,300,000
Net income ................. 209,000 448,000 920,000
The apartment project is managed by the Company, which recognized
management fee income of $108,233, $106,616, and $105,824 in the twelve
month periods ended June 30, 1996, 1995, and 1994, respectively.
A reconciliation of distributions received in excess of basis in UCV as of
June 30 is as follows:
1996 1995
----------- -----------
Balance, beginning ........ $9,559,390 $9,467,693
Equity in income .......... (104,450) (224,222)
Cash distributions ........ 320,000 262,499
Amortization of purchase
price in excess of equity
in net assets ........... 53,420 53,420
----------- -----------
Balance, ending ........... $9,828,360 $9,559,390
=========== ===========
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership:
RCSA Holdings, Inc. (RCSA) and OVGP, Inc. (OVGP), wholly-owned subsidiaries
of the Company, own a combined 50 percent general and limited partnership
interest in Old Vail Partners, L.P. , a California limited partnership
(OVP). OVP owns approximately 40 acres of undeveloped land and a 50 percent
limited partnership interest in Vail Ranch Limited Partnership (VRLP).
Since September 1988, OVP had been a general partnership with RCSA as 33
percent co-managing general partner and a third-party as a 67 percent
co-managing general partner. Effective in September 1994: the general
partnership was converted to a limited partnership; RCSA was converted to a
49 percent limited partner; OVGP was admitted as a one percent general
partner; and the third-party's interest was converted to a liquidating
partnership interest. This transaction effectively resulted in the
acquisition of the third-party's partnership interest in OVP for a cash
payment of $50,000 and the rights to 50 percent of future distributions up
to $2,450,000. Under certain circumstances, which have not yet occurred,
the Company may have to make minimum annual distributions of $50,000 or
$100,000 until September 1999. Legal title to the 40 acres of undeveloped
land is still in the process of being changed from the former general
partnership's name to the limited partnership. Prior to September 23, 1994,
the Company accounted for its investment in OVP as an unconsolidated
subsidiary on the equity method of accounting. Effective September 23,
1994, OVP was consolidated with the Company and the capital account of the
other partner is presented as "Minority interest" in the consolidated
balance sheet.
28
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(c) Investment in Old Vail Partners and Vail Ranch Limited
Partnership (continued):
The following is summarized balance sheet information of OVP included in
the Company's consolidated balance sheet as of June 30, 1996 and 1995:
1996 1995
---------- ----------
Undeveloped land ........................ $4,455,724 $4,482,867
Investment in Vail Ranch Limited
Partnership ........................... 2,182,087 1,219,033
Assessment district obligation-in default 2,061,090 1,928,403
Accounts payable ........................ 5,396 11,384
Accrued interest ........................ -- 44,154
Accrued property taxes .................. 337,016 198,723
Note payable ............................ 340,169 93,820
Minority interest in subsidiary ......... 2,212,677 2,212,677
VRLP is a partnership formed in September 1994 between OVP and a third
party (Developer) to develop 32 acres of the land that was contributed by
OVP to VRLP. OVP is a 50 percent limited partner with a priority right to
distributions for specified amounts based on the acreage being developed.
These amounts will be reduced by any amounts expended by VRLP to extinguish
approximately $1,259,000 of obligations incurred by OVP prior to the
transfer that are liens on the 32 acres of land, primarily relating to
delinquent assessments and property taxes. The Developer reached agreements
with an anchor tenant and others and obtained construction financing for
development of a 14 acre phase, which funded in July 1996. The construction
loan provided funds to pay all back taxes and assessments on the 32 acres.
The timing and amount of distributions that OVP will receive from the VRLP
are uncertain. The following is summarized financial information of VRLP as
of June 30, 1996 and 1995 and for the period ended September 23, 1994
(inception) to June 30, 1995:
1996 1995
---------- ----------
Assets:
Land .............................. $2,299,000 $2,283,000
Development costs ................. 2,481,000 1,198,000
Allocated assessments district
improvements ..................... 3,664,000 3,664,000
---------- ----------
Total assets .................... 8,444,000 7,145,000
---------- ----------
Liabilities:
Delinquent assessment district
payments and property taxes paid
from construction loan ......... 1,316,000 890,000
Other liabilities ................. 1,398,000 1,876,000
Assessment district note payable .. 3,005,000 3,107,000
---------- ----------
Total liabilities ............. 5,719,000 5,873,000
---------- ----------
Revenues ............................ -- --
Net loss ............................ -- --
The 40 acres of land owned by OVP are located within a special assessment
district of the County of Riverside, California (the County) which was
created to fund and develop roadways, sewers, and other required
infrastructure improvements in the area necessary for the owners to develop
their properties. Property within the assessment district is collateral for
an allocated portion of the bonded debt that were issued by the assessment
district to fund the improvements. The annual payments (made in semiannual
installments) due related to the bonded debt are approximately $156,000 for
the 40 acres. The payments continue through the year 2014 and include
interest at approximately 7-3/4 percent. OVP is delinquent in the payment
of property taxes and assessments for the last four years. As of June 30,
1996, the County had obtained judgments for the defaults under the
assessment district obligations, however, the County has not yet commenced
foreclosure proceedings on these judgments.
29
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(c) Investment in Old Vail Partners and Vail Ranch Limited
Partnership (continued):
The amount due to cure the judgments at June 30, 1996 was approximately
$688,000. The principal balance of the allocated portion of the bonds
($1,513,730), and delinquent interest and penalties ($547,360) are
classified as "Assessment district obligation- in default" in the
consolidated balance sheet. In addition, accrued property taxes in the
balance sheet includes $337,016 of delinquent property taxes and late fees
related to the 40 acre parcel.
(d) Investment in Redbird Properties, Ltd.:
At June 30, 1995, the Company owned a 40 percent limited partnership
interest in Redbird Properties, Ltd. which owns the land and building in
which one of the Company's bowling centers (Red Bird Lanes) was located.
The other 60 percent interest was owned by Harold S. Elkan as a 30 percent
limited partner, and by his brother, directly and indirectly, as a one
percent general partner and 29 percent limited partner. Effective July 1,
1995, the Company purchased an additional 29 percent partnership interest
in Redbird Properties, Ltd. from Harold S. Elkan for $446,000. The purchase
price is payable in monthly installments of interest at 8 percent per annum
plus annual principal payments of $100,000 on January 1, 1996-1999 and
$46,000 on January 1, 2000. The agreement provides for an adjustment to the
purchase price if the partnership subsequently sells the real estate prior
to June 30, 1996. The Company's partnership interest is entitled to a
priority return over the other limited partners. As described below, the
partnership sold the property on May 31, 1996 for an amount that resulted
in an adjustment of the purchase price to $419,744.
The Company had accounted for its investment in Redbird Properties using
the equity method of accounting through June 30, 1995. As a result of
acquiring the additional 29 percent interest, Redbird Properties became a
consolidated subsidiary, effective July 1, 1995. This transaction resulted
in an increase in the following assets and liabilities: Property and
equipment- $1,537,984, Accumulated depreciation- $331,500; Note payable-
$713,538; Note payable, related party- $446,000. The effect of this
transaction was also to eliminate the Company's $134,975 investment in
Redbird Properties and to reduce Minority interests by $93,275, which
relates to advances to the other partners in excess of their basis.
On May 31, 1996, Redbird Properties sold the land and building for
$2,800,000 which resulted in a gain of $1,658,463 of which $556,237 was
allocable to the other partners in Redbird Properties. As a result of the
sale the company ceased operations of the Redbird Lanes bowling center and
sold the equipment for a minimal gain. The proceeds from the sale plus the
sale proceeds of $130,754 from the sale of bowling equipment were partially
used to extinguish $777,079 of long-term debt, pay $15,221 of selling
expense, and pay the other partners distributions of $463,312. The
following are the combined results of operations of Redbird Lanes and
Redbird Properties included in the Company's statements of operations,
excluding the gain from the sale:
1996 1995 1994
----------- ---------- ----------
Revenues ........................ $ 1,154,527 $1,248,438 $1,299,196
Bowling costs ................... 699,475 845,381 855,855
Selling, general and
administrative:
Direct ........................ 248,899 252,358 306,975
Allocated ..................... 58,000 62,600 65,000
Depreciation .................... 58,681 34,194 31,579
Interest ........................ 93,044 20,862 24,713
Income (loss) excluding gain from
sale .......................... (3,572) 33,043 15,074
30
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
6. Investments (continued):
(e) Other investments:
The Company owns a 6 percent limited partnership interest in two
partnerships (the Hotel) that own and operate a 109-room hotel in La Paz,
Mexico (All Seasons Inns, La Paz). The $50,032 carrying value of the Hotel
at June 30, 1996 ($62,139 at June 30, 1995) is net of a $125,000 valuation
adjustment recorded in the year ended June 30, 1991. On August 13, 1994,
the partners owning the Hotel agreed to sell their partnership interests to
one of the general partners. The total consideration to the Company
($123,926) was $2,861 cash at closing (December 31, 1994) plus a $121,065
note receivable bearing interest at 10 percent with installments of $60,532
plus interest due on January 1, 1996 and 1997. Due to financial problems of
the new owner, the note receivable was restructured so that all principal
is due on January 1, 1997. Because the cash consideration received at
closing was minimal, the Company has not recorded the sale of its
investment. The Company will record the $58,926 gain from the sale when the
when the note is paid in January 1997. The cash payments of $2,861 received
in December 1994 and $12,107 in December 1995 (representing accrued
interest through December 1995) were applied to reduce the carrying value
of the investment.
In April 1994, the Company sold its investment in Jamar Holdings, Ltd. to
James Crowley, a Director of the Company, for $93,000 and recorded a loss
of $12,178. The Company purchased the investment in February 1989 from
James Crowley for $100,000 plus other costs.
7. Long-term debt:
(a) Long-term debt consists of the following:
1996 1995
-------- --------
7-3/10% note payable collateralized by $704,000 of
real estate and $1,651,000 of equipment at
Marietta Lanes bowling center, due in monthly
installments of $5,068 including principal and a
variable rate of interest (base plus 2-1/2%)
adjusted monthly, payment amount is adjusted
annually to correspond to the remaining
amortization term and the current interest rate,
balance due December 1, 1997 ................... $ 641,289 $ 652,992
9-1/2% note payable, collateralized by $998,000 of
equipment at Marietta Lanes bowling center, due
in average monthly installments of $2,189,
including principal and interest, balance due
September 2003 ................................. 133,490 146,015
9-3/4% note payable collateralized by $2,161,000 of
real property and $845,000 of equipment of
American Bowling Center, principal due in
monthly installments of $4,605 plus interest at
a variable rate (prime plus 1-1/2 points)
adjusted monthly, balance due January 2001 ..... 253,235 308,489
9-7/10% note payable collateralized by $2,161,000
of real property and $845,000 of equipment of
American Bowling Center, guaranteed by Small
Business Administration, due in monthly
installments of $4,386 including interest,
balance due January 2011 ....................... 410,749 423,407
31
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. Long-term debt (continued):
(a) (continued)
1996 1995
--------- ---------
14-4/10% note payable collateralized by $2,161,000
of real property and $845,000 of equipment of
American Bowling Center, due in average monthly
installments of $14,220, including interest,
balance due October 1995 ........................ -- 19,876
9% note payable collateralized by $2,161,000 of
real property and $845,000 of equipment of
American Bowling Center, due in monthly
installments of $5,846 including interest,
balance due August 2003 ......................... 369,519 404,674
---------
Subtotal of Long-Term debt extinguished upon
sale of assets (Note 12) .................. 1,808,282
---------
10-9/10% note payable collateralized by first trust
deed on $1,076,000 of land and office building,
due in monthly installments of $11,675 including
interest, balance due in October 2004 .......... 1,183,093 1,193,602
10-3/4% note payable collateralized by partnership
interest in Old Vail Partners, principal is due
in monthly payments of $5,223 plus interest at a
variable rate (prime plus 1-1/2 points) adjusted
monthly. Additional principal payments are due
to the extent distributions are received from
Old Vail Partners. The balance was due in
November 1996 but a $115,000 principal payment
was made in July 1996 and the loan was extended
to November 1998. The loan is guaranteed by
Harold S. Elkan ................................. 868,555 931,711
8-1/2% note payable to bank, collateralized by deed
of trust on $282,000 of undeveloped land,
principal of $4,745 plus interest is payable
annually, balance due February 1999 ............. 90,164 94,909
8% note payable collateralized by $2,108,000 of
real estate and $264,000 of equipment at Valley
Bowling Center, due in monthly installments of
$18,882 including principal and interest,
balance due August 2000 ......................... 1,994,403 2,058,019
10% note payable collateralized by $668,000 of
equipment at Valley and Grove Bowling Centers,
due in monthly installments of $5,197, including
principal and interest, balance due June 30, 1997 112,445 160,900
9% note payable collateralized by $66,000 of
equipment at Valley and Grove Bowling Centers,
due in monthly installments of $2,170, including
principal and interest, balance due August 1996 2,304 26,920
9% note payable collateralized by $668,000 of
equipment at Valley and Grove Bowling Centers,
due in monthly installments of $1,443, including
principal and interest, balance due June 1998
This note was paid in full in July 1996 ......... 31,564 45,264
32
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. Long-term debt (continued):
(a) (continued)
1996 1995
----------- -----------
8%-10% notes payable collateralized by $264,000 of
equipment at Valley Bowling Center, due in
monthly installments of $11,780 including
principal and interest, balance due June 1998 . 277,685 383,271
9% note payable, unsecured, due in monthly
installments of $2,000 thereafter, including
principal and interest, balance due April 1997
The note was originally due in February 1996 . 73,474 90,043
8-1/2% note payable, unsecured, due in monthly
installments of $3,060 of principal and
interest, balance due October 1996 ............ 73,307 102,337
9-1/2% notes payable collateralized by $141,000 of
video game equipment, due in monthly
installments of $4,895 including principal and
interest, balance due October 1, 1998 ........ 102,439 146,356
10-1/2% note payable collateralized by first trust
deed on $4,482,867 of undeveloped land,
principal and accrued interest (a variable rate
of base plus 1-1/2 points) due June 22, 1997 .. 340,169 93,820
Capitalized lease obligation (Note 8a), paid in
June 1996 ..................................... -- 113,439
Other ............................................ 78,913 112,591
----------- -----------
7,036,797 7,508,635
Less long-term debt extinguished upon sale ....... (1,808,282) --
Less current maturities .......................... (1,061,000) (705,000)
----------- -----------
$4,167,515 $6,803,635
=========== ===========
The values of property and equipment as collateral for the notes are
listed at historical cost less valuation adjustments.
The principal payments due on notes payable during the next five fiscal
years are as follows: $1,061,000 in 1997, $1,163,000 in 1998, $978,000
in 1999, $251,000 in 1999, and $1,826,000 in 2000.
(b) On October 5, 1994, the Company transferred title in an office building
to the lender in complete satisfaction of a related note payable with a
balance of $2,461,942. The carrying value of the land, office building,
and improvements was $1,134,447 (net of a $1,578,000 valuation
adjustment recorded in the year ended June 30, 1994). After deducting
the $44,010 carrying value of other related assets, transaction costs of
$21,659, and the carrying value of the property, the Company recorded a
$1,261,826 extraordinary gain from the extinguishment of debt in October
1994. This transaction was part of an agreement with the lender whereby
the Company's monthly payments were modified, effective July 1994, to
equal the net cash flow of the property until title to the property was
transferred to the lender. For the prior two years, the Company
unsuccessfully attempted to negotiate a modification of the loan terms
with the original lender and then its successor. The $1,200,000
estimated current fair value of the office building was considerably
less than the balance of the loan due to significant declines in the
market rents since 1989. There was no effect for federal income tax
purposes due to utilization of the Company's net operating loss
carry-forwards.
33
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
7. Long-term debt (continued):
(c) The Company has a $300,000 revolving line of credit which matured
September 2, 1996. The Company is in the process of getting the line of
credit renewed under similar terms. Amounts drawn on the line of credit
bear interest on amounts drawn at the bank's base rate plus three
percentage points (11% at June 30, 1996). Payments of interest and
$5,000 principal are due monthly. The Company's borrowings from this
line of credit averaged $192,000 during the year ended June 30, 1996
($40,000 in 1995 and $140,000 in 1994).
8. Commitments and contingencies:
(a) The Company leased three of its bowling centers (Grove, Redbird, and
Village) under operating leases. Redbird Lanes' leased its facility from
an entity (Redbird Properties, Ltd.) which became a consolidated
subsidiary on July 1, 1995. The Redbird Lanes bowling center was closed
on May 7, 1996 and the property was sold on May 31, 1996 (See Note 6d).
The Village Lanes bowling center was sold on August 7, 1996 (See Note
12).
The lease agreement for the Grove bowling center provides for
approximate annual minimum rentals in addition to taxes, insurance, and
maintenance as follows: $360,000 for each of the years 1997 through 2001
and $720,000 in the aggregate thereafter. This lease expires in June
2003 and contains three 5-year options at rates increased by 10-15
percent over the last rate in the expiring term of the lease. This lease
also provides for additional rent based on a percentage of gross
revenues, however, Grove has not yet exceeded the minimum amount of
gross revenue.
Rental expense for Grove bowling center was $360,000 in 1996 and
1995, and $330,000 and in 1994.
The Company is a guarantor of a lease for one of the bowling centers
sold in April 1989. The guarantee expires in December 1996 and the
remaining minimum rental on the lease subject to the guarantee is
$25,300.
(b) The Company has an employment agreement with Harold S. Elkan expiring
July 1, 1998, which provides that if he is discharged without good
cause, or discharged following a change in management or control of the
Company, he will be entitled to liquidation damages equal to twice his
salary at time of termination plus $50,000. As of June 30, 1996, his
annual salary was $250,000.
(c) The Company had a judgment against it of $211,000 for breach of lease.
The litigation was originally initiated by the Company to contest the
lessor's cancellation of a lease for failure to meet development
criteria on the leased parcel. The Company failed in its litigation
after a lengthy appeals process and the lessor was awarded an amount
equal to one year's rent. The Company accrued the provision for the
judgment in the year ended June 30, 1985 and subsequently accrued annual
estimates of interest totaling $309,190 through June 30, 1993 ($47,290
accrued in 1993). The statute of limitations to enforce the judgment
expired in April 1994 and the liability was extinguished. Therefore the
Company recorded $548,190 of income in the amount of the previously
recorded judgment and accrued interest plus another related item for
$28,000 in the year ended June 30, 1994.
34
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
8. Commitments and contingencies (continued):
(d) During the year ended June 30, 1996, the Company reversed amounts
accrued in prior years totaling $769,621 as the Company determined that
the loss contingency was no longer probable.
(e) The Company is involved in other various routine litigation and disputes
incident to its business. In management's opinion, based in part on the
advice of legal counsel, none of these matters will have a material
adverse affect on the Company's financial position.
9. Income taxes:
During the years ended June 30, 1996, 1995, and 1994, the Company has not
recorded any income tax expense or benefit due to its utilization of prior
loss carry-forwards.
At June 30, 1996, the Company had net operating loss carry-forwards of
$7,638,000 for income tax purposes. The carry-forwards expire from years 2000
to 2008. Deferred tax assets are primarily related to these net operating
loss carry-forwards and certain other temporary differences. Due to the
uncertainty of future realizability of deferred tax assets, a valuation
allowance has been recorded for deferred tax assets to the extent they will
not be offset by the reversal of future taxable differences. Accordingly,
there are no net deferred taxes at June 30, 1996 and 1995.
The following is a reconciliation of the normal expected federal income tax
rate to the loss before extraordinary gain reported in the financial
statements:
1996 1995 1994
--------- --------- ---------
Expected federal income tax ..... $ 394,000 $(283,000) $(729,000)
Increase in valuation allowance . 180,000 94,000 --
Utilization of net operating loss
carryforwards ................ (574,000) -- --
Losses for which no tax benefits
were recognized .............. -- 189,000 729,000
--------- --------- ---------
Provision for income tax expense $ -- $ -- $ --
========= ========= =========
The following is a schedule of the significant components of the Company's
deferred tax assets and deferred tax liabilities as of June 30, 1995 and
1994:
1996 1995
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 2,597,000 $ 2,609,000
Accumulated depreciation and
amortization .................. 498,000 360,000
Deferred gain ................... 286,000 295,000
Capitalized interest and taxes .. 200,000 200,000
Valuation for impairment loss ... 36,000 83,000
Other ........................... 470,000 360,000
----------- -----------
Total gross deferred tax assets 4,087,000 3,907,000
Less valuation allowance ...... (4,087,000) (3,907,000)
=========== ===========
Net deferred tax assets ............ $ -- $ --
=========== ===========
35
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
10. Leasing activities:
The Company, as lessor, leases office space in an office building (two office
buildings in 1994, see below) under operating leases which are primarily for
periods ranging from one to five years with options to renew. The Company is
also a sublessor of land to condominium owners under operating leases with an
approximate remaining term of 65 years which commenced in 1981 and 1982 (see
Note 5).
The approximate future minimum rentals for existing noncancellable leases on
the remaining office building are as follows: $265,000 in 1997, $80,000 in
1998, $33,000 in 1999, $15,000 in 2000, $15,000 in 2001, none thereafter, and
$408,000 in the aggregate.
The following is a schedule of the Company's investment in rental property as
of June 30, 1996 and 1995:
1996 1995
----------- -----------
Land ................... $ 258,000 $ 258,000
Building ............... 773,393 773,393
Tenant improvements .... 49,207 45,043
----------- -----------
1,080,600 1,076,436
Accumulated depreciation (186,736) (135,880)
----------- -----------
$ 893,864 $ 940,556
=========== ===========
As described in Note 7b, on October 5, 1994, the Company transferred title in
an office building to the lender in complete satisfaction of a related note
payable with a balance of $2,461,942. The cost (after reduction for the
$1,578,000 provision for impairment loss described in Note 7b) and
accumulated depreciation for this building was $1,854,693 and $697,406,
respectively, at June 30, 1994. The following is a summary of the results of
operations of this office building for the years ended June 30, 1995 and
1994:
1995 1994
-------- -----------
Rents ........... $ 50,000 $ 201,000
Rental costs .... 19,000 92,000
Depreciation .... 27,000 108,000
Interest ........ 12,000 155,000
Provision for
impairment loss -- 1,578,000
Net Loss ........ (8,000) (1,732,000)
11. Business segment information:
The Company operates principally in four business segments: bowling centers,
commercial construction (primarily tenant improvements), commercial real
estate rental, and real estate development. As described in Note 6c, the real
estate development segment commenced in September 1994 when the Company
acquired a controlling interest in Old Vail Partners. Other revenues, which
are not part of an identified segment, consist of property management fees
(earned from both a property 50 percent owned by the Company and a property
in which the Company has no ownership) and commercial brokerage.
36
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
11. Business segment information (continued):
The following is summarized information about the Company's operations by
business segment.
1996 1995 1994
----------- ----------- -----------
Bowling:
Net sales ............... $ 7,452,834 $ 7,799,991 $ 7,949,200
Operating income (loss) . (330,108) (78,560) (383,392)
Depreciation ............ 825,196 849,598 947,555
Identifiable assets ..... 5,189,000 6,869,000 6,638,000
Capital expenditures .... 38,000 114,000 4,555,000
Commercial construction:
Net sales ............... $ 2,008,073 $ 1,785,523 $ 1,752,056
Operating income ........ 53,451 25,107 19,349
Depreciation ............ 6,285 5,582 5,748
Identifiable assets ..... 661,000 341,000 508,000
Capital expenditures .... 1,000 30,000 --
Real Estate Rental:
Net sales ............... $ 562,188 $ 577,136 $ 686,046
Operating income- before
valuation adjustment and
loss on disposal ....... 233,892 214,493 169,684
Operating income (loss) . 233,892 214,493 (1,408,316)
Depreciation ............ 65,942 93,496 169,933
Identifiable assets ..... 1,471,000 1,285,000 2,459,000
Capital expenditures .... 4,000 10,000 27,000
Net sales includes $53,184 of intercompany rental income which was
eliminated in consolidation in 1996, 1995 and 1994.
Real Estate Development:
Net sales ............... $ -- $ -- $ --
Operating income (loss) . 704,331 (141,391) --
Identifiable assets ..... 7,116,000 6,026,000 1,603,000
Capital expenditures .... -- -- --
Unallocated Corporate
Overhead and Other
Activities:
Net sales ............... 184,371 $ 232,135 $ 219,858
Operating loss .......... (482,321) (287,947) (372,118)
Depreciation ............ 34,558 36,554 30,425
Identifiable assets ..... 2,634,000 788,000 2,465,000
Capital expenditures .... 6,000 7,000 27,000
37
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
12. Subsequent Event:
On August 7, 1996 the Company sold the Village, Marietta and American Bowling
Centers (all located in Georgia) and related real estate for $3,950,000 cash,
which resulted in a gain of approximately $1,125,000. The property and
equipment and the long-term debt extinguished from the sale proceeds are
presented as current assets and liabilities, respectively. The following are
the results of operations of these bowling centers included in the Company's
statements of operations for the years ended June 30, 1996, 1995 and 1994:
1996 1995 1994
----------- ---------- -----------
Revenues ........... $ 3,469,368 $3,617,868 $ 3,722,215
Bowl costs ......... 2,159,023 2,094,923 2,187,531
Selling, general and
administrative:
Direct ........... 787,122 790,245 807,091
Allocated ........ 212,700 224,700 233,000
Depreciation ....... 222,370 260,291 440,927
Interest expense ... 175,774 200,109 231,034
Income (loss) ...... (87,621) 47,600 (177,368)
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
UCV, L.P., a California limited partnership:
We have audited the accompanying balance sheets of UCV, L.P., a California
limited partnership, as of March 31, 1996 and 1995, and the related statements
of income and partners' equity (deficiency) and cash flows for each of the years
in the three-year period ended March 31, 1996. These financial statements are
the responsibility of UCV, L.P.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UCV, L.P., a California limited
partnership, as of March 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended March
31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California
August 30, 1996
39
<PAGE>
UCV, L.P.
(a California Limited Partnership)
BALANCE SHEETS - MARCH 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Property and equipment (Note 3):
Land ...................................................... $ 1,289,565 $ 1,289,565
Buildings ................................................. 5,189,188 5,189,188
Equipment ................................................. 473,987 431,859
------------ ------------
6,952,740 6,910,612
Less accumulated depreciation ............................. (5,268,236) (5,074,126)
------------ ------------
1,684,504 1,836,486
Cash ........................................................... 359,021 243,085
Restricted cash (Note 3) ....................................... 154,136 136,262
Accounts receivable ............................................ 24,171 27,330
Prepaid insurance .............................................. 76,542 75,665
Capitalized redevelopment planning costs ....................... -- 132,575
Deferred loan costs, less accumulated
amortization of $209,286 in 1986 and $83,052 in 1995......... 289,030 415,264
------------ ------------
$ 2,587,404 $ 2,866,667
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY)
Long-term debt (Note 3) ........................................ $ 19,833,500 $ 19,833,500
Accounts payable ............................................... 163,393 151,907
Other accrued expenses ......................................... 37,308 39,458
Tenants' security deposits ..................................... 169,828 153,826
------------ ------------
20,204,029 20,178,691
Partners' equity (deficiency) .................................. (17,616,625) (17,312,024)
------------ ------------
$ 2,587,404 $ 2,866,667
============ ============
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
UCV, L.P.
(a California Limited Partnership)
STATEMENTS OF INCOME AND PARTNERS' EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Apartment rentals ................................... $ 4,057,761 $ 3,896,724 $ 3,709,595
Other rental related ................................ 111,588 92,893 130,544
------------ ------------ ------------
4,169,349 3,989,617 3,840,139
------------ ------------ ------------
Costs and expenses:
Operating ........................................... 1,188,425 1,156,527 1,156,108
General and administrative .......................... 169,461 166,433 171,715
Management fees, related party (Note 2) ............. 107,813 106,622 105,373
Redevelopment planning costs ........................ 185,623 -- --
Depreciation ........................................ 194,110 182,517 187,171
Interest and amortization of loan costs ............. 2,115,018 1,929,074 1,300,223
------------ ------------ ------------
3,960,450 3,541,173 2,920,590
------------ ------------ ------------
Net income ............................................. 208,899 448,444 919,549
Partners' equity (deficiency), beginning of year........ (17,312,024) (14,881,968) (14,669,275)
Cash distributed to partners (513,500) (2,878,500) (1,132,242)
------------ ------------ ------------
Partners' equity (deficiency), end of year $(17,616,625) $(17,312,024) $(14,881,968)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
UCV, L.P.
(a California Limited Partnership)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................. $ 208,899 $ 448,444 $ 919,549
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation ......................... 194,110 182,517 187,171
Amortization of deferred loan costs .. 126,234 83,052 39,893
Write-off redevelopment planning costs 185,623 -- --
----------- ----------- -----------
714,866 714,013 1,146,613
Changes in assets and liabilities:
(Increase) decrease in restricted
cash ............................. (17,874) (75,759) (1,217)
(Increase) decrease in accounts
receivable ........................ 3,159 1,434 (7,523)
(Increase) decrease in prepaid
insurance ......................... (877) 3,810 (9,475)
Increase (decrease) in accounts
payable and accrued expenses ...... 9,336 (117,732) 57,675
Other ................................ 16,002 14,184 9,468
----------- ----------- -----------
Net cash provided by operating
activities ............................ 724,612 539,950 1,195,541
----------- ----------- -----------
Net cash from investing activities:
Additions to redevelopment planning
costs ................................ (53,048) (132,575) --
Additions to property and equipment .... (42,128) (61,006) (10,097)
----------- ----------- -----------
Net cash used by investing activities .. (95,176) (193,581) (10,097)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt ... -- (39,013) (132,654)
Proceeds from refinance of long-term
debt ................................. -- 2,647,066 --
Costs related to refinancing ........... -- -- (115,000)
Cash distributed to partners ........... ( 513,500) (2,878,500) (1,132,242)
----------- ----------- -----------
Net cash used by financing activities .. (513,500) (270,447) (1,379,896)
----------- ----------- -----------
Net increase (decrease) in cash ........... 115,936 75,922 (194,452)
Cash, beginning of year ................... 243,085 167,163 361,615
----------- ----------- -----------
Cash, end of year ......................... $ 359,021 $ 243,085 $ 167,163
=========== =========== ===========
Supplemental cash flow information:
Interest paid .......................... $ 1,988,784 $ 1,846,022 $ 1,260,330
=========== =========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In June 1994 the Partnership extinguished its existing long-term debt of
$16,803,118 with the proceeds of a $19,833,500 note payable. In addition
to deferred loan costs of $115,000 incurred in the year ended March 31,
1994, the Partnership incurred an additional $383,316 of deferred loan
costs in the year ended March 31, 1995 that were paid from loan
proceeds.
Fully amortized loan costs of $449,749 were written-off in the year ended
March 31, 1995
See accompanying notes to financial statements.
42
<PAGE>
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1. Organization and Summary of Significant Accounting Policies:
(a) Organization- Effective June 1, 1994 the form of organization was
changed from a joint venture to a limited partnership and the name of
the entity was changed from University City Village to UCV, L.P., a
California limited partnership (the Partnership). The Partnership
conducts business as University City Village.
(b) Leasing arrangements- The Partnership leases apartments under operating
leases that are substantially all on a month-to-month basis.
(c) Property and equipment and depreciation- Property and equipment are
stated at cost. Depreciation is being provided on the straight-line
method based on the estimated useful lives of the property and equipment
(33 years for real property and 3-10 years for equipment). The
depreciable basis of the property and equipment for tax purposes is
essentially the same as the financial statement basis.
(d) Income taxes- For income tax purposes, any profit or loss from
operations is includable in the income tax returns of the partners and,
therefore, a provision for income taxes is not required in the
accompanying financial statements.
(e) Capitalized redevelopment planning cost- The Partnership had capitalized
engineering, architectural and other costs incurred related to the
planning of the possible redevelopment of the apartment project. The
Partnership charged these costs to expense in the year ended March 31,
1996 because the costs were not relevant to the current redevelopment
plan being analyzed.
(f) Deferred financing fees- Loan costs incurred in obtaining financing are
being amortized on a straight-line basis over the term of the related
loan.
(g) Fair value of financial instruments - The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments for which it is practical to estimate that value:
Cash and restricted cash-the carrying amount reported in the balance
sheet approximates the fair value due to their short-term maturities.
Long-term debt- the fair value was determined by discounting future cash
flows using the Company's current incremental borrowing rate for
similar types of borrowing arrangements. The carrying value of
long-term debt reported in the balance sheet approximates the fair
value.
(h) Use of estimates - the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenue and expenses
during the reporting period to prepare these financial statements in
conformity with general accepted accounting principles. Actual results
could differ from these estimates.
(i) Valuation impairment - The Partnership records a provision for
value impairment of long-lived assets whenever the sum of the
estimated undiscounted future cash flows from operations plus the
asset's estimated undiscounted disposition value is less than the
current book value. The provision for value impairment, if any, is
equal to the excess by which the current book value exceeds the
fair value of the asset. The Partnership adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed OF" on January 1, 1996. The Partnership's
previous method of accounting for impairment losses was similar to
SFAS No. 121, therefore there was no impact on the Partnership's
financial position or results of operations.
43
<PAGE>
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
2. Related party transactions:
An affiliate of a partner provides management services for an unspecified
term to the Partnership and is paid a fee equal to 2-1/2 percent of gross
revenues. The fees were $107,813 in 1996, $106,622 in 1995, and $105,373 in
1994. A general contractor which is an affiliate of a partner was paid
$75,446 in 1996, $41,722 in 1995, and $17,873 in 1994 roof repairs and other
maintenance. The Partnership had been using an insurance agent, which was an
affiliate of a partner, until the agent ceased operations in June 1995. The
Partnership paid the following insurance premiums on policies brokered by
this insurance agent: $4,183 in 1996, $117,364 in 1995, and $128,133 in 1994.
3. Long-term debt:
On June 13, 1994, the Partnership obtained a $19,833,500
"all-inclusive-secured-promissory-note" whereby the new lender advanced
$3,030,382 to the Partnership representing the difference between
$19,833,500, the principal balance of the note, and the existing note payable
(First Deed of Trust). The Partnership makes monthly payments of interest
only at 10 percent per annum on $19,833,500 to the new lender. The new lender
is obligated to use the proceeds of the Partnership's monthly payment to fund
the monthly payment ($128,215 including principal and interest at 7-3/4
percent) on the First Deed of Trust, which has not been extinguished (balance
of $16,361,690 at March 31, 1996) and matures on September 1, 1998. The
all-inclusive-secured-promissory-note is due September 1, 1998 and is
collateralized by a second deed of trust on the land, buildings and leases.
In addition to a $9,000 monthly payment for a property tax reserve, the
Partnership is also required to make monthly payments of $8,334 for a
"capital replacement" reserve. The Partnership can make quarterly requests
for reimbursement from this reserve for qualifying expenditures, regardless
of whether they are capitalized or expensed. The balance of these two cash
reserve accounts is classified as restricted cash.
44
<PAGE>
SIGNATURES
----------
Pursuant to the Requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant) SPORTS ARENAS, INC.
-------------------
By (Signature and Title) /s/ Harold S. Elkan
---------------------
Harold S. Elkan, President & Director
DATE: October 2, 1996
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------- -------------------------- ----------
/s/ Steven R. Whitman Chief Financial Officer, Director, October 2, 1996
- ----------------------- and Principal Accounting Officer ---------------
Steven R. Whitman
/s/ Robert A. MacNamara Director October 2, 1996
- ----------------------- ---------------
Robert A. MacNamara
/s/ Patrick D. Reiley Director October 2, 1996
- ---------------------- ---------------
Patrick D. Reiley
45
<PAGE>
<PAGE>
EXHIBIT 22
----------
SPORTS ARENAS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
State of
Incorporation Subsidiary
------------ -----------------------------------------------------
New York Bradley Lanes, Inc.
New Jersey Americana Lounge, Inc. (100% by Bradley Lanes, Inc.)
New York Cabrillo Lanes, Inc.
New York Marietta Lanes, Inc.
Delaware Downtown Properties, Inc.
California Downtown Properties Development Corp.
California UCVGP, Inc.
California UCV, L.P. (1% general partner)
California Sports Arenas Properties, Inc.
California UCV, L.P. (49% limited partner) (formerly known as
University City Village, a joint venture)
California Redbird Properties, Ltd. (40% limited partner, 69%
limited partner as of July 1, 1995)
Missouri Redbird Acquisition Corporation
California Redbird Lanes, Ltd. (60% general and limited
partnership interest)
California Ocean West, Inc.
California RCSA Holdings, Inc.
California Old Vail Partners, L.P. (49% limited partner)
California Vail Ranch Limited Partnership (50% limited partner)
California OVGP, Inc.
California Old Vail Partners, L.P. (1% general partner)
California Ocean West Builders, Inc.
California Ocean Disbursements, Inc.
California Bowling Properties, Inc.
All subsidiaries are 100% owned, unless otherwise indicated, and are included in
the Registrant's consolidated financial statements, except for Old Vail
Partners, Redbird Properties, Ltd., and UCV, L.P.
46
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SPORTS ARENAS, INC. AND SUBSIDIARIES
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,093,465
<SECURITIES> 0
<RECEIVABLES> 758,720
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,905,986
<PP&E> 4,373,497
<DEPRECIATION> 1,175,332
<TOTAL-ASSETS> 16,445,081
<CURRENT-LIABILITIES> 7,214,773
<BONDS> 4,387,259
0
0
<COMMON> 272,500
<OTHER-SE> 1,730,049
<TOTAL-LIABILITY-AND-EQUITY> 16,445,081
<SALES> 2,008,073
<TOTAL-REVENUES> 10,154,282
<CGS> 1,734,261
<TOTAL-COSTS> 10,918,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,086,032
<INCOME-PRETAX> 568,864
<INCOME-TAX> 0
<INCOME-CONTINUING> 568,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 568,864
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
