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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, 1999
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.
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
(State of Incorporation) (I.R.S. Employer I.D. No.)
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121
(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
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. Yes X
No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
(5,441,733 shares) of the Registrant as of September 20, 1999 was $163,000
(based on average of bid and asked prices). The number of shares of common
stock outstanding as of September 20, 1999 was 27,250,000.
Documents Incorporated by Reference - None.
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 two bowling centers, an apartment project (50% owned), one
office building, a graphite golf shaft manufacturer, 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. The following is a summary of the revenues of each segment,
excluding construction, stated as a percentage of total revenues for each of
the last three years:
1999 1998 1997
---- ---- ----
Bowling ................ 68 74 79
Real estate operations . 15 13 13
Real estate development - - -
Golf ................... 9 6 2
Other .................. 8 7 6
BOWLING CENTERS
-----------------
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 for cash of $3,950,000 to AMF Bowling Centers,
Inc. Each of the bowling centers sold 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 have averaged
32 percent of total bowling related revenues for the last three fiscal years.
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 were
operated by Sports Arenas, Inc. until December 15, 1996, when the video game
operation was sold to an unaffiliated third party for $55,000. The Company now
receives a percentage of the gross revenues from the video game operations as
part of the concession contract. Both of the bowling centers include pro shops,
which are leased to independent operators for nominal amounts. Both of the
centers also have day care facilities, which are provided free of charge to the
bowlers. Both of the bowling centers have automatic score-keeping and one of the
remaining centers has a computerized cash control system.
On average, 40 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 75 percent of league revenues annually.
Approximately 70 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, phone solicitation, direct mail, and a
personal sales program.
At June 30, 1999, both bowling centers were licensed to sell alcoholic
beverages. Licenses are generally renewable annually provided there are no
violations of government regulations. The two bowling centers employ
approximately 60 people.
2
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REAL ESTATE DEVELOPMENT
------------------------
The Company, through its subsidiaries (see Item 2. Properties (b) Real Estate
Development for ownership), has ownership interests in a 33 acre parcel and a 13
acre parcel of undeveloped land in Temecula, California (Riverside County).
In September 1994, Vail Ranch Limited Partnership (VRLP) was formed as a
partnership between Old Vail Partners, L.P., a California limited partnership,
(OVP), a subsidiary of the Company, and Landgrant Corporation (Landgrant) to
develop a 32 acre parcel of land of which 27 acres was developable. Landgrant is
not affiliated with the Company. VRLP completed construction of a community
shopping center on 10 acres of land in May 1997 and sold approximately 3.6
partially improved acres in the year ended June 30, 1997 and .59 partially
improved acres during the year ended June 30, 1998 to unaffiliated purchasers
for cash of $2,365,000 and $400,000, respectively. The cash proceeds from these
sales were applied to reduce the construction loan balance. On January 2, 1998,
VRLP sold the shopping center to New Plan Excel Realty Trust, Inc. (Excel) for
$9,500,000 cash. On August 7, 1998, VRLP entered into a an operating agreement
(Agreement) with ERT Development Corporation (ERT), an affiliate of Excel, to
form Temecula Creek, LLC, a California limited liability company (TC). TC was
formed for the purpose of developing, constructing and operating the remaining
13 acres of land as part of the community shopping center in Temecula,
California. VRLP contributed the 13 acres of land to TC and TC assumed the
balance of the assessment district obligation payable. For purposes of
maintaining capital account balances in calculating distributions, VRLP's
contribution, net of the liability assumed by TC, was valued at $2,000,000. ERT
contributed $1,000,000 cash which was immediately distributed by TC to VRLP.
VRLP, which is the managing member, and ERT are each 50 percent members. ERT
also advanced approximately $220,000 to TC to reimburse VRLP for certain
predevelopment costs incurred by VRLP for the 13 acres. The Agreement provides
that ERT will advance funds to fund predevelopment costs, other than property
taxes and assessment district costs. Each member is required to advance 50
percent of the property taxes and assessment district costs as they become due
(approximately $163,000 annually). TC is currently in the process of obtaining
construction financing to construct 59,519 square feet of shopping center space.
TC has signed a 15 year lease with a national discount department store for
35,707 square feet of the space. TC currently estimates that the development of
this phase will be completed and ready for occupancy in May-June 2000. The plan
for the balance of the land is to construct an additional 50,000 square feet of
shopping center space once the space is sufficiently pre-leased.
As of June 30, 1999, Old Vail Partners, a California general partnership,
(OVPGP), a subsidiary of the Company, owns a 33 acre parcel which was designated
as commercially-zoned, however, the City of Temecula adopted a general
development plan as a means of down-zoning the property to a lower use 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).
OVPGP has not paid property taxes or annual payments for a county assessment
district obligation for over seven years related to 33 acres owned by OVPGP. On
March 18, 1997, the County of Riverside (the County) sold a 7-acre parcel that
had been owned by OVPGP at public-sale for delinquent property taxes totaling
$22,770 and the buyer assumed the delinquent assessment district obligation of
$171,672. OVPGP has no continuing obligation from this sale. The County had
scheduled the 33 acres for public sale for the defaulted property taxes on
September 27, 1999. OVPGP had unsuccessfully attempted to negotiate a payment
plan with the County subject to the successful resolution of the zoning problems
with the property. On September 23, 1999 OVPGP filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court.
The primary claim affected by this action is the County's secured claim for
delinquent taxes and assessment district payments.
The 33 acres of land is located in an area of the City of Temecula that has
a population within its trade area of approximately 72,000. There is a
significant amount of other undeveloped commercially zoned land near the
property. 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 land. The Company is
evaluating alternatives regarding the 33 acres of land OVPGP owns. The
alternatives include selling the land or obtaining a joint venture partner to
supervise and provide funding for the development of the property. However, the
Company does not believe either scenario is likely as long as the zoning of the
property is disputed.
As of June 30, 1999, Downtown Properties, Inc. (Downtown), a wholly-owned
subsidiary of the Company, owned undeveloped land in Missouri. The land was sold
on September 7, 1999 for $215,000, less selling expenses of $24,549.
COMMERCIAL REAL ESTATE RENTAL
--------------------------------
Real estate rental operations consist of one office building in the Sorrento
Mesa area of San Diego, California, a sublessor interest in land leased to
condominium owners in Palm Springs, California, and a 50 percent ownership
interest in a 542 unit apartment project in San Diego, California.
3
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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. The
Company occupies approximately 14 percent of the office building, which is
currently 100 percent occupied.
The following is a schedule of selected operating information over the last five
years:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Occupancy ............. 99% 97% 98% 92% 93%
Average monthly
rent/square foot..... $.98 $.86 $.87 $.88 $.86
Real property tax ..... $19,000 $18,000 $17,000 $17,000 $17,000
Real Property tax rate. 1.12% 1.12% 1.12% 1.12% 1.12%
DPDC is also the lessee of 15 acres of land in the Palm Springs, California area
under a ground lease expiring in September 2043. The land is subleased to owners
of condominium units which were constructed on the property in 1982. The
development was originally planned by DPDC and then sold to another developer,
but DPDC retained the rights to the sublease. The subleases also expire in
September 2043. The master lease provides for the payment of 85 percent of the
rents collected on the subleases as rent for the master lease.
UCVGP, Inc. and Sports Arenas Properties, Inc. (SAPI), wholly-owned subsidiaries
of the Company, are a one percent managing general partner and a 49 percent
limited partner, respectively, in UCV, L.P. (UCV), which owns an apartment
project (University City Village) located in San Diego, California. University
City Village contains 542 rental units and was acquired in August 1974. UCV
employs approximately 30 persons. The following is a schedule of selected
operating information over the last five years:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Occupancy............. 99% 99% 98% 97% 94%
Average monthly
rent/unit .......... $694 $675 $662 $648 $644
Real property tax..... $110,000 $108,000 $107,000 $105,000 $104,000
Real Property tax rate 1.12% 1.12% 1.12% 1.12% 1.12%
GOLF SHAFT MANUFACTURER
------------------------
On January 22, 1997, the Company purchased the assets of the Power Sports Group
doing business as Penley Power Shaft (PPS) and formed Penley Sports, LLC
(Penley) with the Company as a 90 percent managing member and Carter Penley as a
10 percent member. PPS was a manufacturer of graphite golf shafts that primarily
sold its shafts to custom golf shops. PPSs sales had averaged approximately
$375,000 over the previous two calendar years. PPS marketed its shafts in
limited quantities through phone contact and trade magazine advertisements
directed at golf shops. Although PPS's manufacturing process was not automated,
it had developed a good reputation in the golf industry as a manufacturer of
high performance golf shafts, in addition to maintaining relationships with the
custom golf shops. Penley's plans are to market its products to golf club
manufacturers and golf club component distributors. To compliment the program of
marketing to higher volume purchasers, Penley purchased approximately $498,000
of equipment in the year ended June 30, 1997 to automate some of the production
processes. Currently, Penley's sales continue to be to custom golf shops where
the orders are for 2 to 10 shafts per order at prices averaging $18 per shaft.
Penley has implemented an extensive program to market directly to the golf club
manufacturers through the distribution of direct mail materials and videos and
participation in several large golf shows during the year. Penley is principally
using its internal sales staff in the marketing and sale of its shafts to
manufacturers, distributors and golf shops. Penley is also promoting its shafts
to professional golfers as a means of achieving acceptance with the club
manufacturers as the golfers endorse the shafts. Management estimates it may
take from another six to twelve months before it is successful in entering into
a significant sales contract with a golf club manufacturer of distributor.
However, there can be no assurances that the Company will be able to enter into
any significant sales contracts or that, if it does, the contracts will be
profitable to the Company.
Management believes Penley has been successful in building a reputation as a
leader in new shaft design and concepts. Penley has applied for several patents
on shaft designs, of which one was issued and the others are pending. Although
Penley has developed several new products, no assurance can be given that they
will meet with market acceptance or that Penley will be able to continue to
design and manufacture additional new products.
The primary raw material used in all of Penley's graphite shafts is carbon
fiber, which is combined with epoxy resin to produce sheets of graphite prepreg.
Due to low production levels, Penley currently purchases most of its graphite
prepreg from one supplier. There are numerous alternative suppliers of graphite
prepreg. Although Management believes that it will be able to establish
relationships with other graphite prepreg suppliers to ensure sufficient
supplies of the material at competitive pricing as production increases, there
can be no assurances the unforeseen difficulties will occur that could lead to
an interruption and delays to Penley's production process.
4
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Penley uses hazardous substances and generates hazardous waste in the ordinary
course of its manufacturing of graphite golf shafts and other related products.
Penley is subject to various federal, state, and local environmental laws and
regulations, including those governing the use, discharge and disposal of
hazardous materials. Management believes it is in substantial compliance with
the applicable laws and regulations and to date has not incurred any liabilities
under environmental laws and regulations nor has it received any notices of
violations. However, there can be no assurance that environmental liabilities
will not arise in the future which may affect Penley's business.
Penley is trying to enter a highly competitive environment among established
golf club shaft manufacturers. Although Penley has made significant progress in
establishing its reputation for technology, the unproven production capability
of Penley is making it difficult to attract the golf club manufacturers as
customers. Penley is currently evaluating alternatives to relocate the
manufacturing facility to a larger facility and further automate the production
process.
Penley currently has one patent and another patent pending and several
copyrighted trademarks and logos. Although Management believes these items are
of value to the business and Penley will protect them to the fullest extent
possible, Management does not believe these items are critical to Penley's
ability to develop business with the golf club manufacturers.
Penley currently has approximately 30 full and part-time employees.
Due to Penley's low sales volume, there is currently no impact from the
seasonality of sales (expected to be from April through September), no backlog
of sales orders, or customer concentration.
(B) INDUSTRY SEGMENT INFORMATION:
- ------------------------------------
See Note 11 of Notes to Consolidated Financial Statements for required
industry segment financial information.
ITEM 2. PROPERTIES
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(a) BOWLING CENTERS:
---------------------
The Company's two bowling centers occupy the following facilities:
Name Location Size Expiration Date of Lease
----------- ------------ -------- --------------------------
Grove Bowl San Diego, 60 lanes June 2003- options to 2018
California
Valley Bowl San Diego, 50 lanes October 2003- options to 2013
California
The Valley Bowl real estate is owned by Bowling Properties, Inc., a wholly-owned
subsidiary of the Company and is collateral for a $1,768,583 note payable. The
property was purchased in November 1993 from an unaffiliated third party in
conjunction with the acquisition of the bowling center in August 1993. The Grove
Bowl occupies its facility pursuant to a long-term operating lease described in
Note 8a to the Notes to Consolidated Financial Statements.
(b) REAL ESTATE DEVELOPMENT:
-----------------------------
As of June 30, 1999, Downtown Properties Inc. (DPI), a wholly-owned subsidiary
of the Company, owned 507 acres of undeveloped land in Lake of the Ozarks,
Missouri. The land was collateral for a $75,927 bank loan (first deed of trust).
On September 7, 1999 the property was sold to a third party for $215,000 cash,
less selling expenses of $24,549, and the loan was paid from the proceeds.
RCSA Holdings, Inc. (RCSA) and OVGP, Inc., wholly-owned subsidiaries of the
Company, own a combined 50 percent general and limited partnership interest in
Old Vail Partners, L.P., a California limited partnership (OVP), which owns a 60
percent limited partnership interest in Vail Ranch Limited Partnership (VRLP).
As described in Note 6c of Notes to Consolidated Financial Statements, the other
partner in OVP is entitled to 50 percent of the cash distributions from OVP, not
to exceed $2,450,000, of which $500,000 has been paid as of June 30, 1999.
RCSA and DPI are the general partners of Old Vail Partners (OVPGP), a California
general partnership, which owns 33 acres of unimproved land in Temecula,
California. OVPGP is obligated to contribute the land to OVP once the litigation
regarding the zoning is settled (see below).
5
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The 33 acres of land owned by OVPGP as of June 30, 1999 are located within a
special assessment district of the County of Riverside, California (the County)
which was created to fund and develop roadways, sewers, and other required
infrastructure improvements in the area necessary for the owners to develop
their properties. Property within the assessment district is collateral for an
allocated portion of the bonded debt that was issued by the assessment district
to fund the improvements. The principal balance of the allocated portion of the
bonds is $1,384,153. The annual payments (due in semiannual installments)
related to the bonded debt are approximately $144,000 for the 33 acres. The
payments continue through the year 2014 and include interest at approximately
7-3/4 percent. OVP is delinquent in the payment of property taxes and
assessments for over the last seven years. The property is currently subject to
default judgments to the County of Riverside, California totaling approximately
$2,038,585 regarding delinquents assessment district payments ($1,455,726) and
property taxes ($582,859).
The County had scheduled the 33 acres for public sale for the defaulted property
taxes on September 27, 1999. OVPGP had unsuccessfully attempted to negotiate a
payment plan with the County subject to the successful resolution of the zoning
problems with the property. On September 23, 1999, OVPGP filed a petition for
relief under Chapter 11 of the federal bankruptcy laws in the United States
Bankruptcy Court. The primary claim affected by this action is the County's
secured claim for delinquent taxes and assessment district payments.
The 33-acre parcel is subject to an action that essentially down-zones the
property to a lower use and, if successful, may significantly impair the value
of the property. The Company is contesting this action (see Item 3. Legal
Proceedings (a) for description).
(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 $25,000,000 note
payable by the partnership as of June 30, 1999.
DPDC owns an approximate 36,000 square foot office building located in San
Diego, California, which was constructed in 1983. As of June 30, 1999, the
property is collateral for a $1,973,715 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.
(d) GOLF OPERATIONS:
---------------------
Penley Sports, LLC leases 8,559 square feet of industrial space in San Diego,
California pursuant to a lease that expires in March 2000. Penley is currently
evaluating options for relocating to a larger leased facility.
ITEM 3. LEGAL PROCEEDINGS
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At June 30, 1999, except as noted below, the Company or its subsidiaries were
not parties to any material legal proceedings other than routine litigation
incidental to the business.
(a) In November 1993, the City of Temecula adopted a general development plan
that designated 33 acres of property owned by Old Vail Partners, a general
partnership (the predecessor to Old Vail Partners, L.P., a California
limited partnership) (OVPGP) as suitable for "professional office" use,
which 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 33 acres from a
"commercial" to "professional office" use. As described in Item 2.
Properties, the parcel is subject to assessment district obligations, which
were allocated in 1989 based on a higher "commercial" use. Since the
assessment district obligations are not subject to reapportionment as a
result of re-zoning, a "professional office" use is not economically
feasible due to the disproportionately high allocation of assessment
district costs.
On May 6, 1998, OVPGP filed suit against the City of Temecula, California
in the California Superior Court for the County of Riverside. OVPGP is
claiming that, if the effective re-zoning is valid, the action would be a
taking and damaging of OVPGP's property without payment of just
compensation. OVPGP is seeking to have the effective re-zoning invalidated
and an unspecified amount of damages. OVPGP has previously suffered adverse
outcomes in other suits filed in relation to this matter. A stipulation was
entered that dismissed this suit without prejudice and agreed to toll all
applicable statute of limitations while OVPGP and the City of Temecula
attempted to informally resolve this litigation. The outcome of this
litigation is uncertain.
6
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(b) On September 23, 1999, OVPGP filed a petition for relief under Chapter 11
of the federal bankruptcy laws in the United States Bankruptcy Court. The
primary claim affected by this action is the County of Riverside,
California's secured claim for delinquent taxes and assessment district
payments. OVPGP's plan is to use the relief from stay to continue its
efforts to negotiate a settlement of the zoning issues described in item
(a), above, and restore the economic value of the property. Once the zoning
is restored, OVPGP expects that it would either be able to develop or sell
the property, using the proceeds from development loans or sale to satisfy
the County's claims.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
NONE
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
(a) There is no recognized market for the Company's common stock except for
limited or sporadic quotations, which may occur from time to time. The
following table sets forth the high and low bid prices per share of the
Company's common stock in the over-the-counter market, as reported on the
OTC Bulletin Board, which is a market quotation service for market makers.
The over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily reflect actual
transactions in shares of the Company's common stock.
1999 1998
-------------- ---------------
High Low High Low
---- --- ---- ---
First Quarter $ .05 $ .02 $ .02 $ .02
Second Quarter $ .03 $ .02 $ .02 $ .02
Third Quarter $ .02 $ .02 $ .44 $ .02
Fourth Quarter $ .02 $ .02 $ .03 $ .03
(b) The number of holders of record of the common stock of the Company as of
September 20, 1999 is approximately 4,300. The Company believes there are a
significant number of beneficial owners of its common stock whose shares
are held in "street name".
(c) The Company has neither declared nor paid dividends on its common stock
during the past ten years, nor does it have any intention of paying
dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (NOT COVERED
- -----------------------------------------------------------
BY INDEPENDENT AUDITORS' REPORT)
--------------------------------
<TABLE>
Year Ended June
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ................... $ 4,097,090 $ 3,813,751 $ 3,951,286 $ 8,146,209 $ 8,547,275
Loss from operations ....... (3,654,212) (2,603,065) (4,327,225) (817,648) (355,628)
Income (loss)
from continuing operations (3,501,933) (895,524) (3,347,008) 517,311 (841,786)
Basic and diluted income
(loss) per common share
from continuing operations (.13) (.03) (.12) .02 (.03)
Total assets ............... 6,998,820 9,448,653 9,933,755 16,445,081 15,308,441
Long-term debt,
excluding current portion 3,911,694 3,287,783 4,061,987 4,387,259 6,803,635
</TABLE>
See Notes 4b, 6c, and 12 of Notes to Consolidated Financial Statements
regarding disposition of business operations and material uncertainties.
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
--------------
LIQUIDITY AND CAPITAL RESOURCES
Excluding the balance of the assessment-district-obligation-in-default and
property taxes in default related to the same property which are included in
current liabilities, the Company has a working capital deficit of $133,548 at
June 30, 1999, which is a $1,121,714 decrease from the similarly calculated
working capital of $988,166 at June 30, 1998. Working capital decreased
primarily from $3,008,969 of cash used by operations after capital expenditures
and debt service. This use of funds was partially offset by $1,419,671 of
distributions received from investees and $718,864 of net proceeds from
refinancing long term debt.
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 investees and proceeds from real estate and bowling center
sales to fund these deficits.
The cash provided (used) before changes in assets and liabilities segregated by
business segments was as follows:
<TABLE>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Bowling ..................................... $ (157,000) $ (173,000) $ (87,000)
Rental ...................................... 207,000 164,000 185,000
Golf ........................................ (2,587,000) (2,027,000) (574,000)
Development ................................. (215,000) (164,000) (206,000)
General corporate expense and other ......... (257,000) (166,000) (171,000)
----------- ----------- -----------
Cash provided (used) by continuing operations (3,009,000) (2,366,000) (853,000)
Capital expenditures, net of financing ...... (148,000) (322,000) (314,000)
Discontinued operations ..................... -- (24,000) (12,000)
Acquisition of golf shaft manufacturer ...... -- -- (172,000)
Principal payments on long-term debt ........ (262,000) (935,000) (1,392,000)
----------- ----------- -----------
Cash used ................................... (3,419,000) (3,647,000) (2,743,000)
=========== =========== ===========
Distributions received from investees ....... 1,420,000 4,259,000 581,000
=========== =========== ===========
Proceeds from sale of assets ................ -- 57,000 2,086,000
=========== =========== ===========
</TABLE>
Other than a $2,000,000 distribution received in May 1998 from the proceeds of
UCV's refinancing of long term debt, the cash distributions the Company received
from UCV during the last three years were the Company's proportionate share of
distributions from UCV's results of operations. The investment in UCV is
classified as a liability because the cumulative distributions received from UCV
exceed the sum of the Company's initial investment and the cumulative equity in
income of UCV by $12,688,808 at June 30, 1999. Although this amount is presented
in the liability section of the balance sheet, the Company has no liability to
repay the distributions in excess of basis in UCV. The Company estimates that
the current market value of the assets of UCV (primarily apartments) exceeded
its liabilities by $15,000,000-$18,000,000 as of June 30, 1999. UCV is currently
evaluating the feasibility of redeveloping the apartment project from 542 units
to approximately 1,100 units. UCV has a loan commitment from its existing lender
to advance up to an additional $4,450,000. The proceeds of this additional
advance, after loan costs and capital replacement reserve holdbacks, will be
used to fund distributions to the partners of which the Company is expected to
receive $1,700,000.
At June 30, 1999, the Company owned a 50 percent limited partnership interest in
Vail Ranch Limited Partnership (VRLP), which was formed to develop 32 acres of
land (of which 27 is developable) into a commercial shopping center. VRLP
obtained construction financing in July 1996 and completed development of the
first phase (14 acres) of the shopping center in May 1997. On January 2, 1998
VRLP sold the completed portion of the development (14 acres) for $9,500,000 to
Excel, which resulted in cash proceeds of approximately $2,929,000. VRLP used
these proceeds for distributions to partners of which the Company received
$1,772,511. On August 7, 1998 VRLP contributed the remaining undeveloped land to
Temecula Creek, LLC (TC), a limited liability company, the other member of which
is ERT Development Corporation (an affiliate of Excel) and received a cash
distribution of $1,220,000. VRLP used these proceeds for distributions to its
partners of which the Company received an additional $575,600 in August 1998. TC
has signed a lease with a national discount department store and is in the
process of obtaining construction financing. The Company estimates that the
value of the Company's 50 percent interest in VRLP at June 30, 1999 is
approximately $1,000,000 to $1,500,000.
8
<PAGE>
As described in Note 4b of the Notes to Consolidated Financial Statements, OVPGP
is delinquent in the payment of special assessment district obligations and
property taxes on 33 acres of undeveloped land. The annual obligation for the
assessment district is approximately $144,000. The County of Riverside obtained
judgments for the default in the delinquent assessment district payments. The
amounts due to cure the judgment for the default under the assessment district
obligation on the 33 acre parcel at June 30, 1999 was approximately $1,456,000
($1,159,000 at June 30, 1998). The principal balance of the allocated portion of
the bonds ($1,384,153 as of June 30, 1999 and 1998), and delinquent interest and
penalties ($1,181,026 as of June 30, 1999 and $935,673 as of June 30, 1998) are
classified as "Assessment district obligation- in default" in the consolidated
balance sheet. In addition, accrued property taxes in the consolidated balance
sheet include $582,859 of delinquent property taxes and late fees as of June 30,
1999 ($487,728 as of June 30, 1998). The Company estimates the value of this
land is approximately $4,000,000 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). The County had
scheduled the 33 acres for public sale for the defaulted property taxes on
September 27, 1999. OVPGP had unsuccessfully attempted to negotiate a payment
plan with the County subject to the successful resolution of the zoning problems
with the property. On September 23, 1999 OVPGP filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court.
The primary claim affected by this action is the County's secured claim for
delinquent taxes and assessment district payments. OVPGP's plan is to use the
relief to continue its efforts to negotiate a settlement of the zoning issues
and restore the economic value of the property. If the zoning is restored,
OVPGP expects that it would either be able to develop or sell the property,
using the proceeds from development loans or sale to satisfy the County's
claims. As a result of the judgment and the down-zoning of the property, the
recoverability of the remaining $1,391,468 carrying value of this property is
uncertain.
The Company is expecting a $450,000 cash flow deficit in the year ending June
30, 2000 from operating activities after estimated distributions from UCV
($319,000 from operations and $1,700,000 from proceeds of refinancing long term
debt), estimated capital expenditures ($119,000) and scheduled principal
payments on long-term debt. The Company's $357,906 of cash as of June 30, 1999
will not be sufficient to fund this estimated cash flow deficit. Management
expects continuing cash flow deficits until Penley Sports develops sufficient
sales volume to become profitable. However, there can be no assurances that
Penley Sports will ever achieve profitable operations. Management is currently
evaluating other sources of working capital from the sale of undeveloped land in
Temecula or obtaining additional investors in Penley Sports to provide
sufficient funds for the expected future cash flow deficits. If the Company is
not successful in obtaining other sources of working capital this could have a
material adverse effect on the Company's ability to continue as a going concern.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and measurement of those
derivative instruments at fair value. SFAS No. 133 was amended by SFAS No. 137
which defers the effective date to all fiscal quarters of fiscal years beginning
after June 15, 2000. Currently, we do not hold derivative instruments or engage
in hedging activities. The adoption of this standard is not expected to have a
material effect on our consolidated financial statements taken as a whole.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Public Accountants issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." In
April 1998, the same committee issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." These standards are effective for the year
ending June 30, 2000. The adoption of these standards are not expected to have a
material effect on our consolidated financial statements taken as a whole.
YEAR 2000 COMPLIANCE
--------------------
The Company has a program to identify, evaluate and implement changes to its
computer systems as necessary to address the Year 2000 issue. The program is
broken down into three separate categories: computer systems, embedded
technologies, and third party relationships.
9
<PAGE>
Computer systems- This category consists primarily of the Company's
software and hardware for its accounting system. The Company is in the
process of evaluating its existing desktop computers and software
systems. Based upon an initial evaluation as well as representations
from some of the software suppliers, the management's best estimate is
that, other than software and equipment upgrades made in the normal
course of business, it will not incur any significant expenses to
become fully Year 2000 compliant.
Embedded Technologies- This category includes company owned or leased
equipment with microprocessors or microcontrollers. This type of
equipment principally consists of phone equipment, automatic
scorekeepers and cash registers at the bowling centers, and
manufacturing equipment at the golf shaft manufacturer. Based upon an
initial evaluation as well as representations from some of the
equipment suppliers, the management's best estimate is that, other
than acquiring a software upgrade for the automatic scorekeeping
equipment, the price of which has not yet been determined, it will not
incur any significant expenses to become fully Year 2000 compliant.
Third Party Relationships- This category includes critical relationships
with vendors such as graphite manufacturers in the golf shaft segment,
and providers of local utilities (water and electricity). The Company
will implement a program conducting discussions with these types of
suppliers in calendar year 1999. There can be no guarantee that the
systems of other companies that support the Company's operations will
be timely converted or that a failure by these companies to correct
their Year 2000 problems would not have a material adverse effect on
the Company. At the present time, the Company does not have a
contingency plan in place in the event of a Year 2000 failure at one
of the Company's significant suppliers. However, the Company plans to
create a contingency plan by the fourth quarter of calendar year 1999.
If the steps taken by the Company and its vendors to be Year 2000 compliant are
not successful, the most likely worst-case scenario is that the Company could
experience various operational difficulties. These could include, among other
things, processing transactions to an incorrect accounting period, difficulties
in posting general ledger interfaces and lapse of certain services by vendors to
the Company's operations. If the Company's plan to install new systems which
effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed by the Company and does not expect the Year
2000 issue to have a material adverse impact on the financial position, results
of operations or cash flows of the Company in future periods. However, should
the remaining review of the Company's Year 2000 risks reveal potentially
non-compliant computer systems or material third parties, contingency plans will
be developed at that time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company utilizes both fixed rate and variable rate debt. The
following table presents principal cash flows and related weighted average
interest rates of the Company's long-term fixed rate and variable rate debt for
the fiscal years ended June 30.
<TABLE>
2000 2001 2002 2003 2004 Thereafter Total
---------- ------------ --------- ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt .............. $ 211,000 $ 1,795,000 $ 39,000 $21,000 $ 22,000 $ 1,878,000 $ 3,966,000
Weighted average interest rate 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Variable rate debt ........... $ 78,000 $ 78,000 $ 6,000 -- -- -- $ 162,000
Weighted average interest rate 10.8% 10.8% 10.8% -- -- -- 10.8%
</TABLE>
The fixed rate debt information has been adjusted to reflect the effects of
paying a $76,000 note payable on September 7, 1999.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
$25,000,000 as of June 30, 1999 for which the interest rate was 7.4 percent. The
principal cash flows for each of UCV's fiscal years ending March 31 is: 2000-
None; 2001- $365,000; 2002- $24,635,000; and $25,000,000 in total.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
-----------------------------
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements are
based on management's expectations as of the date hereof, and the Company does
not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Business Risks described in Item 1 of this Report
on Form 10-K and elsewhere in the Company's filings with the Securities and
Exchange Commission.
10
<PAGE>
RESULTS OF OPERATIONS
The discussion of Results of Operations is primarily by the Company's business
segments. The analysis is partially based on a comparison of and should be read
in conjunction with the business segment operating information in Note 11 to the
Consolidated Financial Statements. The following is a summary of the changes to
the components of the segments in the years ended June 30, 1999 and 1998:
<TABLE>
Real Estate Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ---------- ----------- ----------- ----------- -----------
Year Ended June 30, 1999
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ (6,918) $ 72,676 $ -- $ 142,167 $ 77,781 $ 285,706
Costs ............................ (44,885) 22,615 24,276 254,521 -- 256,527
SG&A-direct ...................... 71,254 -- -- 396,251 630,681 1,098,186
SG&A-allocated ................... 537 3,000 27,000 60,000 (41,537) 49,000
Depreciation and amortization .... (179,725) 12,985 -- 6,879 2,372 (157,489)
Impairment losses ................ -- -- (389,371) -- -- (389,371)
Interest expense ................. (59,929) 3,954 22,937 (7,713) (67,044) (107,795)
Equity in income (loss)
of investees ................... -- 173,592 (1,395,256) -- -- (1,221,664)
Gain (loss) on disposition ....... -- -- -- -- (716,025) (716,025)
Segment profit (loss) ............ 205,830 203,714 (1,080,098) (567,771) (1,162,716) (2,401,041)
Investment income ................ (205,368)
Net loss from continuing
operations .................... (2,606,409)
Year Ended June 30, 1998
- ------------------------
Revenues ......................... $ (303,154) $ (7,447) $ -- $ 174,376 $ 3,720 $ (132,505)
Costs ............................ (226,467) 12,103 (15,397) 605,287 -- 375,526
SG&A-direct ...................... 31,521 -- -- 944,412 (2,077) 973,856
SG&A-allocated ................... 8,820 3,000 -- 54,000 (38,820) 27,000
Depreciation and amortization .... (218,949) 5,097 -- 78,207 14,114 (121,531)
Impairment losses ................ (234,248) -- (1,929,000) -- -- (2,163,248)
Interest expense ................. (38,831) (1,408) (13,159) 23,232 8,157 (22,009)
Equity in income of investees .... -- 41,643 1,580,846 -- -- 1,622,489
Gain (loss) on disposition ....... (1,154,514) -- 468,268 -- 716,025 29,779
Segment profit (loss) ............ (779,514) 15,404 4,006,670 (1,530,762) 738,371 2,450,169
Investment income ................ 1,315
Net loss from continuing
operations .................... 2,451,484
</TABLE>
BOWLING OPERATIONS:
- -------------------
1999 vs. 1998
-------------
Although there was no overall significant change to bowling revenues, there was
a continued decline in league games bowled (7%) and league bowling revenues
(9%). This was offset by an increase in open games bowled (2%) and open bowling
revenues (13%). The price per game of open games bowled increased 10 percent in
1999. Bowling costs decreased 2 percent in 1999 without any primary cause.
Direct selling, general and administrative costs increased 12 percent primarily
due to a $55,000 increase in marketing and promotion expenses. Depreciation and
amortization expense decreased by $180,000 because most property and equipment
became fully depreciated in 1998. Interest expense decreased by $60,000 because
a significant portion of the debt associated with the acquisition of the bowling
centers was extinguished in 1998.
11
<PAGE>
1998 vs. 1997
-------------
The following is a summary of the changes to the components of the loss from
operations of the bowling segment during the year ended June 30, 1998 compared
to 1997:
Sale of San Diego Combined
Bowls- 1997 Bowls Incr.(Decr.)
---------- --------- ----------
Revenues ......................... (374,000) 71,000 (303,000)
Bowl costs ....................... (273,000) 47,000 (226,000)
Selling, general & administrative:
Direct ......................... 29,000 2,000 31,000
Allocated ...................... (26,000) 35,000 9,000
Depreciation ..................... (19,000) (200,000) (219,000)
Impairment loss .................. (35,000) (199,000) (234,000)
Interest expense ................. (26,000) (13,000) (39,000)
Segment profit (loss) before
gain on sale ................... (24,000) 399,000 375,000
The 3 percent increase in revenues of the San Diego bowls was primarily
attributable to a 13 percent increase in revenues from open play ($76,000) and a
10 percent increase in snack bar revenues ($40,000). These increases were
partially offset by a 2 percent decrease in revenues from league play ($22,000)
and a 4 percent decrease in bar sales ($10,000). The $47,000 increase in bowl
costs represents a 2 percent increase and was primarily attributable to a 10
percent increase in food and beverage costs ($39,000). Allocated SG&A costs
increased by $35,000 due to the disposition of the other bowling centers in May
and August of 1996 resulting in higher corporate overhead costs allocated per
business location. Depreciation expense decreased by $200,000 because most
property and equipment became fully depreciated in 1998. Interest expense
related to the San Diego bowls decreased by $13,000 due to the declining
principal balances of long-term debt. The Company does not anticipate any
further declines in bowl revenues.
The Company recorded an impairment loss regarding one of the two San Diego
bowling centers in 1997 related to the continued operating losses of the bowling
center. The Company believes the problems with this center are primarily
associated with the decline of the surrounding shopping center, which is
essentially 80 percent vacant. The performance of this bowling center is not
likely to improve until the shopping center is redeveloped. Although the owners
of the shopping center are having discussions with several companies interested
in purchasing and redeveloping the shopping center, there are currently no plans
for redevelopment.
RENTAL OPERATIONS
- -----------------
There were no significant changes to the rental segment in 1998 other than the
increase in the equity in income of UCV, LP of $41,643. The equity in income of
UCV increased by $173,592 in 1999 excluding the extraordinary loss of $98,500 in
the year ended June 30, 1999. The rental segments revenues increased by $72,676
in 1999 primarily due to a 14 percent increase in the average rental rate of the
office building. Rental costs increased by $22,615 in 1999 primarily due to
termite treatment of the office building that is non-recurring.
The vacancy rate for the office building was 2%, 3% and 1% for 1997, 1998 and
1999, respectively. The average monthly rent per square foot was $.87, $.86, and
$.98 for 1997, 1998 and 1999, respectively. The Company is currently leasing
space to new tenants and renewing existing leases at monthly rates ranging from
$1.25-$1.30 per square foot.
The following is a summary of the changes in the operations of UCV, LP in 1999
and 1998 compared to the previous years:
1999 1998
--------- ---------
Revenues ................... $ 131,000 $ 137,000
Costs ...................... (9,000) 90,000
Redevelopment planning costs (6,000) (18,000)
Depreciation ............... (147,000) (18,000)
Interest and amortization of
loan costs ............... (54,000) --
Extraordinary loss from debt
extinguishment ........... 197,000 --
Net income ................. 150,000 83,000
Vacancy rates at UCV have averaged 1.8%,1.1% and 1.3% in 1997, 1998 and 1999,
respectively. The increase in revenues is primarily due to increases to the
average rent rates of 2% in 1998 and 3% in 1999. Depreciation decreased in 1999
because the buildings for UCV became fully depreciated in 1998. UCV refinanced
its long-term debt In May of 1998 increasing outstanding debt by $5,166,500 but
also decreasing the average interest rate from 10 percent to 7-1/2 percent. The
refinance resulted in an extraordinary loss of $197,000 related to a prepayment
penalty and the write off of the unamortized loan fees of the previous long-term
debt.
12
<PAGE>
REAL ESTATE DEVELOPMENT:
- ------------------------
The real estate development segment consists primarily of OVPGP's operations
related to undeveloped land in Temecula, California, and an investment in VRLP.
Development costs consist primarily of legal expenses ($62,000 in 1999, $67,000
in 1998, and $80,000 in 1997) related to the litigation regarding the effective
down-zoning of the 33 acres of land and property taxes ($95,000 in 1999, $89,000
in 1998, and $85,000 in 1997). OVPGP also incurred in 1999 $19,000 of expenses
to remove two old building structures from the property. Development interest
primarily represents the interest portion of the assessment district payments
due each year and the interest accrued on the delinquent payments.
The following is a summary of the changes in the operations of VRLP in 1999
and 1998 compared to the previous years:
1999 1998
----------- -----------
Revenues .................... $ (445,000) $ 513,000
Gain on sale ................ (3,107,000) 3,047,000
Operating expenses .......... (396,000) 252,000
Depreciation and amortization (253,000) 145,000
Interest .................... (294,000) 109,000
Equity in loss of investee .. 82,000 --
Net income (loss) ........... (2,691,000) 3,054,000
During the year ended June 30, 1997, VRLP completed construction of a shopping
center on 10 acres of land in May 1997 and sold approximately 3.6 acres of land.
During the year ended June 30, 1998, VRLP sold the completed shopping center for
$9,500,000 and an additional .59 acres of land. As a result, the operating
results only reflect shopping center operations for two months in 1997 and six
months in 1998. The remaining 13 acres of undeveloped land were contributed to a
limited liability company (Temecula Creek) in August 1998. The agreement
provides that the other member will advance funds over the next 12 months to
fund predevelopment expenses and obtain financing for the eventual development.
However, each of the members is required to advance funds equal to 50 percent of
the annual property taxes and assessments ($163,000 annually) until development
commences. The operations for 1999 reflect the results of negotiating property
tax refunds that are non-recurring. The equity in the loss of investee
represents VRLP's share of the property taxes expensed by Temecula Creek during
1999.
The Company recorded a $480,000 provision for impairment loss in the year ended
June 30, 1998 to reduce the carrying value of the Company's investment in VRLP
at June 30, 1998 to reflect the estimated distributions the Company will receive
from VRLP. The Company recorded a $2,409,000 provision for impairment loss at
June 30, 1997 on the 33-acre parcel related to the City of Temecula's effective
down-zoning of the property.
GOLF SHAFT MANUFACTURING:
- -------------------------
Sales during the years 1999 and 1998 were small because Penley has not yet
developed sales with golf club manufacturers or distributors. The sales were
principally to custom golf shops. The Company expects that it will be another
six to twelve months before Penley is able to develop significant sales with
manufacturers or distributors.
Operating expenses of the golf segment consisted of the following in 1999, 1998
and 1997:
1999 1998 1997
---------- ---------- ----------
Costs of sales and
manufacturing overhead ... $ 797,000 $ 643,000 $ 97,000
Research and development ... 234,000 134,000 75,000
---------- ---------- ----------
Total golf costs ....... 1,031,000 777,000 172,000
========== ========== ==========
Marketing and promotion .... 1,511,000 1,151,000 206,000
Administrative costs- direct 174,000 138,000 139,000
---------- ---------- ----------
Total SG&A-direct ........ 1,685,000 1,289,000 345,000
========== ========== ==========
UNALLOCATED AND OTHER:
- ----------------------
Revenues increased by $72,000 in 1997 due to a $47,000 increase in brokerage
commissions earned in 1997.
Unallocated SG&A and Other SG&A combined increased by $590,000 in 1999 primarily
due to increases in wages in the corporate segment in 1999 of which $110,000
related to discretionary bonuses to the officers, and a $390,000 provision for
the uncertainty of the collectibility of the note receivable from affiliate in
1999.
Interest expense declined by $67,000 in 1999 due to the reduction of the
outstanding principal balances of long-term debt.
13
<PAGE>
Investment income decreased by $205,000 in 1999 due to the collection of
$728,000 note receivable in June 1998 and the cessation of accrual of interest
income on the note receivable from shareholder (See Note 3c of the Notes to
Consolidated Financial Statements).
In 1998, the Company recognized a deferred gain of $716,025 related to the sale
of two bowling centers in 1989 because it collected the balance of a note
receivable from the sale.
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
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, 1999. 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 ......... 56 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman ....... 46 Chief Financial Officer and Treasurer
since May 1987; Director and
Assistant Secretary since
August 1, 1989, Secretary
since January 1995
Patrick D. Reiley ....... 58 Director since August 21, 1986
James E. Crowley ........ 52 Director since January 10, 1989
Robert A. MacNamara ..... 51 Director since January 9, 1989
There are no understandings between any director or executive officer and any
other person pursuant to which any director or executive officer was selected as
a director or executive officer.
(d) Family Relationships - None
(e) Business Experience
1. Harold S. Elkan has been employed as the President and Chief Executive
Officer of the Company since 1983. For the preceding ten years he was a
principal of Elkan Realty and Investment Co., a commercial real estate brokerage
firm, and was also President of Brandy Properties, Inc., an owner and operator
of commercial real estate.
2. Steven R. Whitman has been employed as the Chief Financial Officer and
Treasurer since May 1987. For the preceding five years he was employed by
Laventhol & Horwath, CPAs, the last four of which were as a manager in the audit
department.
3. Patrick D. Reiley was the Chairman of the Board and Chief Executive
Officer of Reico Insurance Brokers, Inc. (Reico) from 1980 until June 1995, when
Reico ceased doing business. Reico was an insurance brokerage firm in San Diego,
California. Mr. Reiley has been a principal of A.R.I.S., Inc., an international
insurance brokerage company, since 1997.
14
<PAGE>
4. James E. Crowley has been an owner and operator of various automobile
dealerships for the last twenty years. Mr. Crowley was President and controlling
shareholder of Jamar Holdings, Ltd., doing business as San Diego Mitsubishi,
from August 1988 to October 1994, President of Coast Nissan from 1992 to August
1996; and has been President of the Automotive Group since March 1994. The
Automotive Group operates North County Ford, North County Jeep GMC, TAG
Collision Repair, and Lake Elsinore Ford.
5. Robert A. MacNamara had been employed by Daley Corporation, a California
corporation, from 1978 through 1997, the last eleven years of which he served as
Vice President of the Property Division. Daley Corporation is a residential and
commercial real estate developer and a general contractor. Mr. MacNamara is
currently an independent consultant to the real estate development industry.
(f) Involvement in legal proceedings - None
Section 16(a) Compliance -Section 16(a) of the Securities Exchange Act of
1934 requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on written representations that no
other reports were required, during the three fiscal years ended June 30, 1997
through 1999, 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, 1999 exceeded
$100,000.
Long-term All Other
Name and Compen- Compen-
Principal Position Year Salary Bonus Other sation sation
- ----------------- ---- -------- ------- ------ ---------- ----------
Harold S. Elkan, 1999 $350,000 $100,000 $ -- $ -- $ --
President 1998 250,000 -- -- -- --
1997 250,000 -- -- -- --
Steven R. Whitman, 1999 100,000 10,000 -- -- --
Chief Financial 1998 100,000 -- -- -- --
Officer 1997 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.
15
<PAGE>
(h) Employment Contracts, Termination of Employment and Change-in-Control
Arrangements: The employment agreement for Harold S. Elkan (Elkan), the
Company's President, expired in January 1998, however, the Company is continuing
to honor the terms of the agreement until such time as the Compensation
Committee can finish its review and propose a new contract. Pursuant to the
expired employment agreement, Elkan is to receive a sum equal to twice his
annual salary ($350,000 as of June 30, 1999) 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, 1999.
(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 $10,000 were awarded to Harold Elkan and Steven Whitman,
respectively, in the year ended June 30, 1999.
In the fiscal year ended June 30, 1993 the outside members of the Board of
Directors approved a new employment agreement for Harold S. Elkan (Elkan)
effective from January 1, 1993 until December 31, 1997. This agreement provided
for annual base salary of $250,000 plus discretionary bonuses as the Board of
Directors may determine and approve. In setting the compensation levels in this
agreement, the Board of Directors, in addition to utilizing their personal
knowledge of executive compensation levels in San Diego, California, referred to
a special compensation study performed in 1987 for the Board of Directors by an
independent outside consultant. The Board of Directors are currently reviewing
information for purposes of entering into a new employment agreement with Elkan.
In the meantime, the Board of Directors approved an increase in Elkan's base pay
to $350,000 annually effective July 1, 1998
Outside members of Board of Directors approving the Compensation for
Harold S. Elkan:
Patrick D. Reiley
James E. Crowley
Robert A. MacNamara
Directors' Compensation Committee for Other Employees:
Harold S. Elkan
(l) Performance Graph: The following schedule and graph compares the
performance of $100 if invested in the Company's common stock (SAI) with the
performance of $100 if invested in each of the Standard & Poors 500 Index (S&P
500), and the Standard & Poors Leisure Time Index (S&P LT).
The performance graph and schedule provide information required by regulations
of the Securities and Exchange Commission. However, the Company believes that
this performance graph and schedule could be misleading if it is not understood
that there is limited trading of the Company's stock. The Company's common stock
has traded in the range of $.01 to $.02 for most of the past five years. As a
result, a small increase in the per share price results in large percentage
changes in the value of an investment.
16
<PAGE>
The performance is calculated by assuming $100 is invested at the beginning of
the period (July 1992) in the Company's common stock at a price equal to its
market value (the bid price). At the end of each fiscal year, the total value of
the investment is computed by taking the number of shares owned multiplied by
the market price of the shares at the end of each fiscal year.
SCHEDULE OF COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Sports S&P Leisure
Year Ended Arenas, Inc. S&P 500 Time
---------- ----------- ------- -----------
6/94 100 100 100
6/95 100 123 90
6/96 100 152 116
6/97 100 200 160
6/98 300 255 128
6/99 200 309 116
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) - (c):
Shares Nature of
Beneficially Beneficial Percent
Name and Address Owned Ownership of Class
- ------------------------ ------------- -------------- --------
Harold S. Elkan 21,808,267 (a) Sole investment 80.0%
5230 Carroll Canyon Road and voting power
San Diego, California
All directors and 21,808,267 Sole investment 80.0%
officer as a group and voting power
(a) These shares of stock are owned by Andrew Bradley, Inc., which is
wholly-owned by Harold S. Elkan. Andrew Bradley, Inc. has pledged
10,900,000 of its shares of Sports Arenas, Inc. stock as collateral
for its loan from Sports Arenas, Inc. See Note 3c of Notes to
Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
(a) - (c):
1. The Company has $494,829 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, 1999 ($523,408 as of June 30, 1998). The balance at June
30, 1999 bears interest at 8 percent per annum and is due in monthly
installments of interest only plus annual principal payments of $50,000 due on
January 1, 2000. The balance is due January 1, 2001. The largest amount
outstanding during the year was $536,188 in November 1998.
Elkan's primary source of repayment of the unsecured loans from the Company is
withholding from compensation received from the Company. Due to the Company's
financial condition, there is uncertainty about the Company's ability to
continue funding the additional compensation necessary to repay the unsecured
loans. Therefore, during the year ended June 30, 1999, the Company recorded a
$390,000 charge for to reflect the uncertainty of the collectability of the
unsecured loans.
2. In December 1990, the Company loaned $1,061,009 to the Company's
majority shareholder, Andrew Bradley, Inc. (ABI), which is wholly-owned by
Harold S. Elkan, the Company's President. The loan provided funds to ABI to pay
its obligation related to its purchase of the Company's stock in November 1983.
The loan to ABI provides for interest to accrue at an annual rate of prime plus
1-1/2 percentage points (11 percent at June 30, 1998) and to be added to the
principal balance annually. At June 30, 1998, $1,126,197 of interest had been
accrued ($909,396 as of June 30, 1997). The loan is due in November 2003. The
loan is collateralized by 10,900,000 shares of the Company's stock.
Effective January 1, 1999, the Company discontinued recognizing the accrual of
interest income on the note receivable from shareholder. This policy was adopted
in recognition that the shareholder's most likely source of funds for repayment
of the loan is from sale of the Company's stock or dividends from the Company
and that the Company has unresolved liquidity problems. The amount of interest
that accrued from January 1, 1999 through June 30, 1999 but was not recorded was
$117,494.
17
<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................................... 19
Sports Arenas, Inc. and subsidiaries consolidated financial
statements:
Balance sheets as of June 30, 1999 and 1998................. 20-21
Statements of operations for each of the years in the
three-year period ended June 30, 1999..................... 22
Statements of shareholders' deficit for each of the years
in the three-year period ended June 30, 1999............. 23
Statements of cash flows for each of the years in the
three-year period ended June 30, 1999..................... 24-25
Notes to financial statements............................... 26-39
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 50 percent owned
investee:
Independent Auditors' Report................................ 40
Balance sheets as of March 31, 1999 and 1998................ 41
Statements of income and partners' deficit for each of the
years in the three-year period ended March 31, 1999...... 42
Statements of cash flows for each of years in the
three-year period ended March 31, 1999.................... 43
Notes to financial statements............................... 44-45
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........................... 47
B. Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
18
<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 (the "Company") as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for each of the years in the three-year period ended June 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficiency and shareholders' deficit, and
is forecasting negative cash flows from operating activities for the next twelve
months. These items raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 13. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
San Diego, California
September 25, 1999
19
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-JUNE 30, 1999 AND 1998
ASSETS
<TABLE>
1999 1998
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................. $ 357,906 $ 1,416,460
Notes receivable, current ............................. -- 12,105
Current portion of notes receivable-affiliate (Note 3b) 50,000 50,000
Other receivables ..................................... 116,404 166,427
Inventories (Note 2) .................................. 310,160 302,595
Prepaid expenses ...................................... 199,668 246,135
------------ ------------
Total current assets ............................... 1,034,138 2,193,722
------------ ------------
Receivables due after one year:
Note receivable- Affiliate, net (Note 3b) ............. 104,829 523,408
Less current portion ................................ (50,000) (50,000)
------------ ------------
54,829 473,408
------------ ------------
Property and equipment, at cost (Notes 7 and 10):
Land .................................................. 678,000 678,000
Buildings ............................................. 2,461,327 2,461,327
Equipment and leasehold and tenant improvements ....... 2,137,993 1,997,192
------------ ------------
5,277,320 5,136,519
Less accumulated depreciation and amortization ..... (1,968,191) (1,654,521)
------------ ------------
Net property and equipment ........................ 3,309,129 3,481,998
------------ ------------
Other assets:
Undeveloped land, at cost (Note 4) .................... 1,582,468 1,665,643
Intangible assets, net (Note 5) ....................... 294,423 315,015
Investments (Note 6) .................................. 618,853 1,209,944
Other assets .......................................... 104,980 108,923
------------ ------------
2,600,724 3,299,525
------------ ------------
$ 6,998,820 $ 9,448,653
============ ============
</TABLE>
20
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1999 AND 1998 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
1999 1998
------------ ------------
Current liabilities:
<S> <C> <C>
Assessment district obligation-in default (Note 4b) ... $ 2,565,179 $ 2,319,826
Current portion of long-term debt (Note 7a) ........... 289,000 347,000
Accounts payable ...................................... 453,203 577,847
Accrued payroll and related expenses .................. 164,877 108,497
Accrued property taxes, in default (Note 4b) .......... 582,859 478,665
Accrued interest ...................................... 14,395 28,581
Other liabilities ..................................... 246,211 152,694
------------ ------------
Total current liabilities .......................... 4,315,724 4,013,110
------------ ------------
Long-term debt, excluding current portion (Note 7) ....... 3,911,694 3,287,783
------------ ------------
Distributions received in excess of basis in
investment (Notes 6a and 6b) .......................... 12,688,808 12,280,101
------------ ------------
Other liabilities ........................................ 74,602 25,951
------------ ------------
Minority interest in consolidated subsidiary (Note 6c) ... 1,712,677 1,762,677
------------ ------------
Commitments and contingencies (Notes 4b, 5a, 6c, 8 and 10)
Shareholders' deficit:
Common stock, $.01 par value, 50,000,000 shares
authorized, 27,250,000 shares issued and outstanding 272,500 272,500
Additional paid-in capital ............................ 1,730,049 1,730,049
Accumulated deficit ................................... (15,415,742) (11,736,312)
------------ ------------
(13,413,193) (9,733,763)
Less note receivable from shareholder (Note 3c) ....... (2,291,492) (2,187,206)
------------ ------------
Total shareholders' deficit ......................... (15,704,685) (11,920,969)
------------ ------------
$ 6,998,820 $ 9,448,653
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
1999 1998 1997
----------- ----------- -----------
Revenues:
<S> <C> <C> <C>
Bowling ......................................... $ 2,803,944 $ 2,810,862 $ 3,114,016
Rental .......................................... 571,094 500,785 513,262
Golf ............................................ 383,803 241,636 67,260
Other ........................................... 172,996 146,713 144,920
Other-related party (Note 6b) ................... 165,253 113,755 111,828
----------- ----------- -----------
4,097,090 3,813,751 3,951,286
----------- ----------- -----------
Costs and expenses:
Bowling ......................................... 1,952,352 1,997,237 2,223,704
Rental .......................................... 274,010 251,395 239,292
Golf ............................................ 1,031,301 776,780 171,493
Development ..................................... 181,018 156,742 172,139
Selling, general, and administrative (Note 3b) .. 3,840,496 2,695,677 1,699,851
Depreciation and amortization ................... 381,496 538,985 660,516
Loss on disposition of undeveloped
land (Note 4b) ................................ -- -- 468,268
Provision for impairment
losses (Notes 3d, 4a, 4b and 5c) .............. 90,629 -- 2,643,248
----------- ----------- -----------
7,751,302 6,416,816 8,278,511
----------- ----------- -----------
Loss from operations ............................... (3,654,212) (2,603,065) (4,327,225)
----------- ----------- -----------
Other income (expenses):
Investment income:
Related party (Notes 3b and 3c) ............... 145,276 259,936 234,650
Other ......................................... 21,433 112,141 136,112
Interest expense related to development
activities ................................... (245,353) (221,844) (234,790)
Interest expense and amortization of
finance costs ................................ (340,870) (472,174) (481,237)
Equity in income of investees (Note 6) .......... 571,793 1,793,457 170,968
Provision for impairment loss -
investee (Note 6c) ........................... -- (480,000) --
Recognition of deferred gain (Note 3a) .......... -- 716,025 --
Gain on sale of bowling centers and
other assets (Notes 6d and 12) ............... -- -- 1,154,514
----------- ----------- -----------
152,279 1,707,541 980,217
----------- ----------- -----------
Loss from continuing operations .................... (3,501,933) (895,524) (3,347,008)
Net loss from discontinued operations (Note 12d) ... -- (26,970) (18,401)
----------- ----------- -----------
(3,501,933) (922,494) (3,365,409)
----------- ----------- -----------
Extraordinary losses from:
Early extinguishment of debt (Note 7a) ......... (78,997) -- --
Early extinguishment of investee debt (Note 6a) (98,500) -- --
----------- ----------- -----------
(177,497) -- --
----------- ----------- -----------
Net loss ........................................... ($3,679,430) ($ 922,494) ($3,365,409)
=========== =========== ===========
Basic and diluted net loss per common share from:
Continuing operations .......................... ($ 0.13) ($ 0.03) ($ 0.12)
Extraordinary items ............................ ($ 0.01) -- --
----------- ----------- -----------
($ 0.14) ($ 0.03) ($ 0.12)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
Common Stock Note
--------------------------- Additional Receivable
Number of paid-in Accumulated From
Shares Amount Capital Deficit Shareholder Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 .... 27,250,000 272,500 1,730,049 (7,448,409) (1,778,022) (7,223,882)
Interest accrued ............ -- -- -- -- (192,383) (192,383)
Net loss .................... -- -- -- (3,365,409) -- (3,365,409)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 .... 27,250,000 272,500 1,730,049 (10,813,818) (1,970,405) (10,781,674)
Interest accrued ............ -- -- -- -- (216,801) (216,801)
Net loss .................... -- -- -- (922,494) -- (922,494)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 .... 27,250,000 $ 272,500 $ 1,730,049 ($11,736,312) ($ 2,187,206) ($11,920,969)
Interest accrued ............ -- -- -- -- (104,286) (104,286)
Net loss .................... -- -- -- (3,679,430) -- (3,679,430)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 .... 27,250,000 $ 272,500 $ 1,730,049 ($15,415,742) ($ 2,291,492) ($15,704,685)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ........................................ ($3,679,430) ($ 922,494) ($3,365,409)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs .. 13,565 23,455 31,555
Depreciation and amortization ............. 381,496 543,178 666,967
Equity in income of investees ............. (473,293) (1,793,457) (170,968)
Loss on disposition of undeveloped land ... -- -- 468,268
Deferred income ........................... 48,000 -- --
Interest income accrued on note receivable
from shareholder ........................ (104,286) (216,801) (192,383)
Interest accrued on assessment district
obligations ............................. 245,353 221,844 208,564
Provision for note receivable- affiliate .. 390,000 -- --
Provision for impairment losses ........... 90,629 480,000 2,643,248
Gain on sale of assets .................... -- (10,279) (1,154,514)
Recognition of deferred gain .............. -- (716,025) --
Extraordinary loss on debt extinguishment . 78,997 -- --
Changes in assets and liabilities:
(Increase) decrease in other receivables .. 50,023 (98,183) 61,219
(Increase) decrease in assets of
discontinued operation ................. -- 130,607 219,675
(Increase) decrease in inventories ......... (7,565) (213,477) 30,484
(Increase) decrease in prepaid expenses .... 46,467 (121,829) 25,494
Increase (decrease) in accounts payable ... (124,644) 188,337 19,019
Increase (decrease) in accrued expenses ... 239,905 46,650 (501,620)
Increase (decrease) in liabilities of
discontinued operation ................. -- (77,105) (178,896)
Other ..................................... 26,793 2,916 50,836
----------- ----------- -----------
Net cash used by operating activities ... (2,777,990) (2,532,663) (1,138,461)
----------- ----------- -----------
Cash flows from investing activities:
(Increase) decrease in notes receivable ...... 40,684 768,108 72,500
Additions to property and equipment .......... (140,801) (321,483) (314,134)
Proceeds from sale of discontinued
operation (Note 12d) ...................... -- 30,207 --
Increase in lease inception fee .............. -- -- (232,995)
Proceeds from sale of other assets ........... -- 26,950 33,542
Proceeds from sale of bowling
centers (Notes 6d, 12a and 12b) ........... -- -- 2,052,185
Increase in development costs on
undeveloped land .......................... (7,454) -- --
Distributions received from investees ........ 1,419,671 4,258,511 580,884
Distribution to holder of minority interest .. (50,000) (450,000) --
Acquisition of golf shaft
manufacturer (Note 12c) ................... -- -- (172,071)
----------- ----------- -----------
Net cash provided by investing activities 1,262,100 4,312,293 2,019,911
----------- ----------- -----------
Cash flows from financing activities:
Scheduled principal payments ................. (261,528) (934,683) (1,392,382)
Proceeds from short-term borrowings .......... -- 400,000 250,000
Payments of short-term borrowings ............ -- (650,000) --
Proceeds from refinancing of long-term ....... 1,975,000 -- --
Loan costs ................................... (62,598) -- (11,020)
Extinguishment of long-term debt ............. (1,147,561) -- --
Costs to extinguish long-term debt ........... (45,977) -- --
----------- ----------- -----------
Net cash provided (used) by financing
activities ........................... 457,336 (1,184,683) (1,153,402)
----------- ----------- -----------
Net increase (decrease) in cash and equivalents . (1,058,554) 594,947 (271,952)
Cash and cash equivalents, beginning of year .... 1,416,460 821,513 1,093,465
----------- ----------- -----------
Cash and cash equivalents, end of year .......... $ 357,906 $ 1,416,460 $ 821,513
=========== =========== ===========
</TABLE>
24
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
SUPPLEMENTAL CASH FLOW INFORMATION:
1999 1998 1997
-------- -------- --------
Interest paid $341,000 $451,000 $469,000
------------- ======== ======== ========
Supplemental schedule of non-cash investing and financing activities:
- ---------------------------------------------------------------------
Long-term debt of $45,486 in 1998 and $380,000 in 1997 was incurred to finance
capital expenditures of $70,849 in 1998 and $535,963 in 1997.
On January 1, 1998, the Company sold all of the common stock of Ocean West
Builders, Inc. for $66,678, which after deducting the cash of Ocean West
Builders, Inc., provided net proceeds to the Company of $30,207. The sale
resulted in the following decreases to assets and liabilities: accounts
receivable- $8,847; contracts receivable- $300,175; prepaid expenses-
$13,553; property and equipment- $44,041; accumulated depreciation- $6,687;
accounts payable- $260,446; accrued expenses- $28,286; billings in excess
of costs- $21,983; notes payable- $19,007
During the year ended June 30, 1998, the Company sold miscellaneous assets for
cash proceeds of $26,950 and extinguished an account payable of $23,000.
The sale reduced property and equipment by $77,980 and accumulated
depreciation by $38,309.
On March 18, 1997 the County of Riverside foreclosed at public sale on 7 of
the 40 acres of the undeveloped land in Temecula, California, which had a
carrying value of $662,710. The sale resulted in the extinguishment of
$22,770 of accrued property taxes and $171,672 of assessment district
obligations.
On January 22, 1997 the Company purchased the receivables ($8,594),
inventories ($119,602) and equipment ($43,875) of the Power Sports Group
(Penley Golf) for $172,071.
The sale of the video game business on December 15, 1996 for $10,000 cash and a
$45,000 note receivable resulted in a decrease of both property and
equipment, and accumulated depreciation by $140,832. Additionally, the sale
of another asset for $23,542 cash resulted in a $79,103 decrease of
equipment and a $55,561 decrease in accumulated depreciation.
The sale of three bowling centers on August 7, 1996 resulted in decreases to
the following assets and liabilities: property and equipment- ($6,741,237);
accumulated depreciation- ($4,013,747); deferred loan costs- ($6,353);
prepaid expenses ($20,000); and notes payable- ($1,801,172). See Note 6d
regarding supplemental information regarding the proceeds from the sale of
bowling center in the year ended June 30, 1996.
See accompanying notes to consolidated financial statements.
25
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1. Summary of significant accounting policies and practices:
Description of business- The Company, primarily through its subsidiaries,
owns and operates two bowling centers, an apartment project (50%
owned), one office building, a construction company (sold in January
1998), a graphite golf shaft manufacturer, and undeveloped land. The
Company also performs a minor amount of services in property
management and real estate brokerage related to commercial leasing.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of Sports Arenas, Inc. and all
subsidiaries and partnerships more than 50 percent owned or in which
there is a controlling financial interest (the Company). All material
inter-company balances and transactions have been eliminated. The
minority interests' share of the net loss of partially owned
consolidated subsidiaries have been recorded to the extent of the
minority interests' contributed capital. The Company uses the equity
method of accounting for investments in entities in which its
ownership interest gives the Company the ability to exercise
significant influence over operating and financial policies of the
investee. The Company uses the cost method of accounting for
investments in which it has virtually no influence over operating and
financial policies.
Cash and cash equivalents - Cash and cash equivalents only include highly
liquid investments with original maturities of less than 3 months.
Cash equivalents totaled $299,960 and $1,011,343 at June 30, 1999
and 1998, respectively.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market and relate to golf shaft manufacturing.
Property and equipment - Depreciation and amortization are provided on the
straight-line method based on the estimated useful lives of the
related assets, which are 20 years for the buildings and from 3 to 15
years for the other assets.
Investments - The Company's purchase price in March 1975 of the one-half
interest in UCV, L.P. exceeded the equity in the book value of net
assets of the project at that time by approximately $1,300,000. The
excess was allocated to land and buildings based on their relative
fair values. The amount allocated to buildings is being amortized over
the remaining useful lives of the buildings and the amortization is
included in the Company's depreciation and amortization expense.
Income taxes - The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
Amortization of intangible assets - Deferred loan costs are being amortized
over the terms of the loans on the straight-line method, which
approximates the effective interest method. Unamortized loan costs
related to loans refinanced or paid prior to their contractual
maturity are written off. Goodwill related to the acquisition of a
bowling center was amortized over 5 years on the straight-line method
and was fully amortized as of June 30, 1998.
Valuation impairment - SFAS No. 121,"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
(undiscounted and without interest) expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amounts
of the assets exceed the fair values of the assets.
26
<PAGE>
Concentrations of credit risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are the notes
receivable described in Note 3.
Fair value of financial instruments - The following methods and assumptions
were used to estimate the fair value of each class of financial
instruments where it is practical to estimate that value:
Cash, cash equivalents, other receivables and accounts payable - the
carrying amount reported in the balance sheet approximates the
fair value due to their short-term maturities.
Note receivable-affiliate - It is impractical to estimate the fair
value of the note receivable-affiliate due to the related party
nature of the instrument.
Long-term debt - the fair value was determined by discounting future
cash flows using the Company's current incremental borrowing rate
for similar types of borrowing arrangements. The carrying value
of long-term debt reported in the balance sheet approximates the
fair value.
Use of estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and reported
amounts of revenue and expenses during the reporting period to prepare
these consolidated financial statements in conformity with general
accepted accounting principles. Actual results could differ from these
estimates.
Loss per share- Basic earnings per share is computed by dividing earnings
(loss) by the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed by dividing
the amount of earnings (loss) for the period by each share that would
have been outstanding assuming the issuance of common shares for all
potentially dilutive securities outstanding during the reporting
period. The Company currently has no potentially dilutive securities
outstanding. The weighted average shares used for basic and diluted
earnings per share computation was 27,250,000 for each of the years in
the three-year period ended June 30, 1999.
Segment reporting- On July 1, 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for the way public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. See Note 11 for segment disclosures.
Reclassifications- Certain reclassifications have been made to the prior
years financial statements to conform to the classifications used in
1999.
2. Inventories:
Inventories consist of the following:
1999 1998
---- ----
Raw materials $ 99,220 $121,548
Work in process 75,651 111,837
Finished goods 135,289 69,210
-------- --------
$310,160 $302,595
======== ========
27
<PAGE>
3. Notes receivable:
(a) Sale of bowling centers - The Company sold two bowling centers in April
1989. Part of the consideration was an $800,000 note receivable from the
purchaser of the bowling centers (Purchaser) due in monthly installments of
$7,720 beginning October 1, 1989, including principal and interest at 10
percent per annum. The Company deferred recognition of $800,000 of the gain
from the sale of the bowling centers in the year ended June 30, 1989 until
such time as the operations of the two bowling centers became sufficient to
support the payment of their obligations or as the principal balance was
paid. The note was paid in full in June 1998 and the balance of the
deferred gain of $716,025 was recognized in the year ended June 30, 1998.
(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 $40,990, $43,135, and $42,267 in 1999,
1998, and 1997, respectively. The outstanding balance of $494,829 at June
30, 1999 bears interest at 8 percent per annum and is due in annual
installments of interest plus principal payments of $50,000 due on December
31 of each year until maturity. The balance is due on January 1, 2001.
Elkan's primary source of repayment of unsecured loans from the Company is
withholding from compensation received from the Company. Due to the
Company's financial condition, there is uncertainty about the Company's
ability to continue funding the additional compensation necessary to repay
the unsecured loans. Therefore, during the year ended June 30, 1999, the
Company recorded a $390,000 charge to reflect the uncertainty of the
collectability of the unsecured loans.
(c) Shareholder - In December 1990, the Company loaned $1,061,009 to the
Company's majority shareholder, Andrew Bradley, Inc. (ABI), which is
wholly-owned by Harold S. Elkan, the Company's President. The loan provided
funds to ABI to pay its obligation related to its purchase of the Company's
stock in November 1983. The loan to ABI provides for interest to accrue at
an annual rate of prime plus 1-1/2 percentage points (11 percent at June
30, 1998) and to be added to the principal balance annually. The loan is
due in November 2003. The loan is collateralized by 10,900,000 shares of
the Company's stock. The original loan amount plus accrued interest of
$1,230,483 is presented as a reduction of shareholders' equity because
ABI's only asset is the stock of the Company. The Company recorded interest
income from this note of $104,286 in 1999, $216,801 in 1998, and $192,383
in 1997.
Effective January 1, 1999, the Company discontinued recognizing the accrual
of interest income on the note receivable from shareholder. This policy was
adopted in recognition that the shareholder's most likely source of funds
for repayment of the loan is from sale of the Company's stock or dividends
from the Company and that the Company has unresolved liquidity problems.
The amount of interest that accrued from January 1, 1999 through June 30,
1999 but was not recorded was $117,494.
(d) Other- In the year ended June 30 ,1997 the Company recorded a $35,135
charge to operations related to the balance of a note receivable that
became uncollectible.
4. Undeveloped land:
Undeveloped land consisted of the following at June 30, 1999 and 1998:
1999 1998
----------- -----------
Lake of Ozarks, MO ................. $ 281,629 $ 281,629
Less provision for impairment loss (90,629) --
Temecula, CA ....................... 3,800,468 3,793,014
Less provision for impairment loss (2,409,000) (2,409,000)
----------- -----------
$ 1,582,468 $ 1,665,643
=========== ===========
28
<PAGE>
(a) In August 1984, the Company acquired approximately 500 acres of undeveloped
land in Lake of Ozarks, Missouri from an entity controlled by Harold S.
Elkan (Elkan). The purchase price approximated the affiliate's original
purchase price. On September 7, 1999, the Company sold the land for cash of
$215,000, less selling expenses of $24,549. As a result of the sale, the
Company recorded a provision for impairment loss as of June 30, 1999 of
$90,629 to reduce the carrying value to the net sales proceeds realized.
Elkan had previously signed an agreement indemnifying the Company for any
loss incurred on the sale of the property, however, this agreement expired
in 1994.
(b) RCSA Holdings, Inc. (RCSA), a wholly owned subsidiary of the Company, owns
a 50 percent managing general partnership interest in Old Vail Partners, a
general partnership (OVPGP), which owns 33 acres of undeveloped land in
Temecula, California. On September 23, 1999, the other partner assigned his
partnership interest to Downtown Properties, Inc., a wholly owned
subsidiary of the Company. Once the legal matters described below are
resolved, OVPGP is obligated to assign its interest in the 33 acres of land
to Old Vail Partners, L.P. (see Note 6c). The carrying value of the
property consists of:
1999 1998
----------- -----------
Acres ............................... 33 33
Acquisition cost .................... $ 2,142,789 $ 2,142,789
Capitalized assessment district costs 1,434,315 1,434,315
Other development planning costs .... 223,364 215,910
----------- -----------
3,800,468 3,793,014
Provision for impairment loss ....... (2,409,000) (2,409,000)
----------- -----------
$ 1,391,468 $ 1,384,014
=========== ===========
The 33 acres of land owned by OVPGP 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 (required in
semiannual installments) due related to the bonded debt are approximately
$144,000. The payments continue through the year 2014 and include interest
at approximately 7-3/4 percent. OVPGP has been delinquent in the payment of
property taxes and assessments for the last seven years. The property is
currently subject to default judgments to the County of Riverside,
California totaling approximately $2,038,585 regarding delinquent
assessment district payments ($1,455,726) and property taxes ($582,859).
The County had scheduled the 33 acres for public sale for the defaulted
property taxes on September 27, 1999. OVPGP had unsuccessfully attempted to
negotiate a payment plan with the County subject to the successful
resolution of the zoning problems with the property described below. On
September 23, 1999 OVPGP filed a petition for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court. The
primary claim affected by this action is the County's secured claim for
delinquent taxes and assessment district payments. OVPGP's plan is to use
the relief from stay to continue its efforts to negotiate a settlement of
the zoning issues described in item (a), above, and restore the economic
value of the property. If the zoning is restored, OVPGP expects that it
would either be able to develop or sell the property, using the proceeds
from development loans or sale to satisfy the County's claims.
The following is summarized balance sheet information of OVPGP included in
the Company's consolidated balance sheet as of June 30, 1999 and 1998:
1999 1998
---------- ----------
Assets:
Undeveloped land (Note 4c) .............. $1,391,468 $1,384,014
Liabilities
Assessment district obligation-in default 2,565,179 2,319,826
Accrued property taxes .................. 582,859 487,728
29
<PAGE>
On March 18, 1997, the County sold a 7-acre parcel, which had been owned by
OVPGP and subject to default judgements for delinquent assessment district
and property tax payments, at public-sale for delinquent property taxes
totaling $22,770 and the buyer assumed the delinquent assessment district
obligation of $171,672. OVPGP recorded a loss from the disposition of the
undeveloped land of $468,268 representing the carrying value of the 7 acre
parcel ($662,710) less the property taxes extinguished and assessment
district obligations assumed.
The delinquent principal, interest and penalties ($1,455,726) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,109,453) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at June 30, 1999.
In addition, accrued property taxes in the balance sheet at June 30, 1999
includes $582,859 of delinquent property taxes and late fees related to the
33-acre parcel.
In November 1993, the City of Temecula adopted a general development plan
that designated the property owned by OVPGP as suitable for "professional
office" use, which is contrary to its zoning as "commercial" use. As part
of the adoption of its general development plan, the City of Temecula
adopted a provision that, until the zoning is changed on properties
affected by the general plan, the general plan shall prevail when a use
designated by the general plan conflicts with the existing zoning on the
property. The result is that the City of Temecula has effectively
down-zoned OVPGP's property from a "commercial" to "professional office"
use. The property is subject to assessment district obligations that were
allocated in 1989 based on a higher "commercial" use. Since the assessment
district obligations 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. OVPGP
has filed suit against the City of Temecula claiming that, if the effective
re-zoning is valid, the action is a taking and damaging of OVPGP's property
without payment of just compensation. OVPGP is seeking to have the
effective re-zoning invalidated and an unspecified amount of damages. OVPGP
has previously suffered adverse outcomes in other suits filed in relation
to this matter. A stipulation was entered that dismissed this suit without
prejudice and agreed to toll all applicable statute of limitations while
OVPGP and the City of Temecula attempted to informally resolve this
litigation. 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.
As a result of the County's judgements for defaulted taxes and assessments
and the County's sale of the 7 acre parcel at public sale in March 1997,
the Company recorded a $2,409,000 provision for impairment loss during the
year ended June 30, 1997 to reduce the carrying value on the 33-acre parcel
to its estimated fair market value related to the City of Temecula's
effective down-zoning of the property. The estimated fair market value was
determined based on cash flow projections and comparable sales.
5. Intangible assets:
Intangible assets consisted of the following as of June 30, 1999 and 1998:
1999 1998
--------- ---------
Deferred lease costs:
Subleasehold interest ......... $ 111,674 $ 111,674
Less accumulated amortization (31,793) (29,897)
Lease inception fee ........... 232,995 232,995
Less accumulated amortization (83,859) (46,575)
--------- ---------
229,017 268,197
--------- ---------
Deferred loan costs ............. 87,712 85,137
Less accumulated amortization (22,306) (38,319)
--------- ---------
65,406 46,818
--------- ---------
$ 294,423 $ 315,015
========= =========
30
<PAGE>
(a) The Company is a sublessor of a parcel of land that is subleased to
individual owners of a condominium project. The Company capitalized
$111,674 of carrying costs prior to subleasing the land in 1980. The
Company is amortizing the capitalized carrying costs over the period of the
subleases on the straight-line method. The future minimum rental payments
payable by the Company to the lessor on the lease are approximately
$136,000 per year for the remaining term of 44 years (aggregate of
$5,984,000) 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 $160,000 per year for the remaining term of 44 years
(aggregate of $7,040,000). The subleases provide for increases every five
years based on increases in the Consumer Price Index.
(b) In March 1997 the Company paid $232,995 to the lessor of the real estate in
which the Grove bowling center is located. The payment represented the
balance due for a deferred lease inception fee. The fee is being amortized
over the then remaining lease term of 75 months.
(c) In the year ending June 30, 1997, the Company recorded a $199,113 provision
for impairment loss related to the unamortized balance of goodwill for one
of the bowling centers.
6. Investments:
(a) Investments consist of the following:
1999 1998
------------ ------------
Accounted for on the equity method:
Investment in UCV, L.P. ................ $(12,688,808) $(12,280,101)
Vail Ranch Limited Partnership ......... 580,927 1,172,018
------------ ------------
(12,107,881) (11,108,083)
Less Investment in UCV, L.P. classified
as liability- Distributions received
in excess of basis in investment ... 12,688,808 12,280,101
------------ ------------
580,927 1,172,018
Accounted for on the cost basis:
All Seasons Inns, La Paz ............... 37,926 37,926
------------ ------------
Total investments .................. $ 618,853 $ 1,209,944
============ ============
The following is a summary of the equity in income (loss) before
extraordinary loss of $98,500 related to UCV, L.P. during the year ended
June 30, 1999:
1999 1998 1997
---------- ---------- ----------
UCV, L.P. .................... $ 516,713 $ 343,121 $ 301,478
Vail Ranch Limited Partnership 55,080 1,450,336 (130,510)
---------- ---------- ----------
$ 571,793 $1,793,457 $ 170,968
========== ========== ==========
(b) Investment in UCV, L.P. (real estate operation segment):
The Company is a one percent managing general partner and 49 percent
limited partner in UCV, L.P. (UCV) which owns University City Village, a
542 unit apartment project in San Diego, California. The following is
summarized financial information of UCV as of and for the years ended March
31 (UCV's fiscal year end):
1999 1998 1997
----------- ----------- -----------
Total assets ............... $ 2,556,000 $ 1,765,000 $ 2,062,000
Total liabilities .......... 25,511,000 20,110,000 20,169,000
Revenues ................... 4,622,000 4,491,000 4,353,000
Operating and general and
administrative costs ..... 1,510,000 1,520,000 1,429,000
Redevelopment planning costs -- 6,000 24,000
Depreciation ............... 29,000 176,000 194,000
Interest and amortization
of loan costs ............ 2,049,000 2,103,000 2,103,000
Extraordinary loss from
early debt extinguishment 197,000 -- --
Net income ................. 836,000 686,000 603,000
31
<PAGE>
The apartment project is managed by the Company, which recognized
management fee income of $117,253, $113,755, and $111,828 in the
twelve-month periods ended June 30, 1999, 1998, and 1997, respectively. In
addition, pursuant to a development fee agreement with UCV dated July 1,
1998, the Company received development fees totaling $96,000 in the year
ended June 30, 1999, of which $48,000 was classified as deferred income.
A reconciliation of distributions received in excess of basis in UCV as of
June 30 is as follows:
1999 1998
------------ ------------
Balance, beginning ................ $ 12,280,101 $ 10,083,802
Equity in income .................. (418,213) (343,121)
Cash distributions ................ 773,500 2,486,000
Amortization of purchase price
in excess of equity in net assets 53,420 53,420
------------ ------------
Balance, ending ................... $ 12,688,808 $ 12,280,101
============ ============
(c) Investment in Old Vail Partners and Vail Ranch Limited Partnership (real
estate development segment):
RCSA and OVGP, Inc. (OVGP), wholly-owned subsidiaries of the Company, own a
combined 50 percent general and limited partnership interest in Old Vail
Partners, L.P. , a California limited partnership (OVP). OVP owns a 60
percent limited partnership interest in Vail Ranch Limited Partnership
(VRLP). The other partner in OVP holds a liquidating limited partnership
interest which entitles him to 50 percent of future distributions up to
$2,450,000, of which $500,000 was paid during the years ended June 30, 1998
and 1999. This limited partner's capital account balance is presented as
"Minority interest" in the consolidated balance sheets.
VRLP is a partnership formed in September 1994 between OVP and a third
party (Developer) to develop 32 acres of the land that was contributed by
OVP to VRLP. During the fiscal year ended June 30, 1997, VRLP constructed a
107,749 square foot retail complex which utilized approximately 14 of the
27 developable acres. On January 1, 1998, VRLP sold the retail complex for
$9,500,000. On August 7, 1998, VRLP executed a limited liability company
operating agreement for Temecula Creek, LLC (Temecula Creek) with the buyer
of the retail center to develop the remaining 13 acres. VRLP, as a 50
percent member and the manager, contributed the remaining 13 acres of
developable land at an agreed upon value of $2,000,000 and the other member
contributed cash of $1,000,000, which was distributed to VRLP as a capital
distribution.
The Company recorded a provision for impairment loss of $480,000 in June
1998 to reduce the carrying value of its investment in VRLP to reflect an
amount equal to the estimated distributions the Company would receive based
on the estimated fair market value of VRLP's assets and liabilities as of
June 30, 1998.
As a result of the sale of the property in January 1998, OVP received
distributions totaling $1,772,511 in the year ended June 30, 1998. OVP
received additional distributions totaling $646,171 in 1999 related to the
distribution VRLP received from the limited liability company and
miscellaneous property tax refunds. Hereafter, VRLP's partnership agreement
provides for OVP to receive 60 percent of future distributions, income and
loss.
32
<PAGE>
The following is summarized financial information of VRLP as of June 30,
1999 and 1998 and for the years then ended:
1999 1998
----------- -----------
Assets:
Land held for development .... $ -- $ 3,454,000
Investment in Temecula Creek . 800,000 --
Other assets ................. 54,000 37,000
Total assets ............. 854,000 3,491,000
Liabilities:
Accounts payable ............. -- 45,000
Assessment district obligation -- 1,508,000
Total liabilities ........ -- 1,553,000
Partners' capital ............ 854,000 1,938,000
Revenues ....................... 133,000 640,000
Gain on sale of property, net .. -- 3,107,000
Equity in loss of Temecula Creek (82,000) --
Net income (loss) .............. 71,000 2,762,000
The following is a reconciliation of the investment in Vail Ranch Limited
Partnership:
1999 1998
----------- -----------
Balance, beginning ............. $ 1,172,018 $ 1,974,193
Distributions .................. (646,171) (1,772,511)
Provision for impairment loss .. -- (480,000)
Equity in net income (loss) .... 55,080 1,450,336
----------- -----------
Balance, ending ................ $ 580,927 $ 1,172,018
=========== ===========
(e) Other investment:
The Company owns 6 percent limited partnership interests in two
partnerships that own and operate a 109-room hotel (the Hotel) in La Paz,
Mexico (All Seasons Inns, La Paz). The $37,926 carrying value of the Hotel
at June 30, 1999 and 1998 is net of a $125,000 valuation adjustment
recorded in the year ended June 30, 1991. On August 13, 1994, the partners
owning the Hotel agreed to sell their partnership interests to one of the
general partners. The total consideration to the Company ($123,926) was
$2,861 cash at closing (December 31, 1994) plus a $121,065 note receivable
bearing interest at 10 percent with installments of $60,532 plus interest
due on January 1, 1996 and 1997. Due to financial problems, the note
receivable was initially restructured so that all principal was due on
January 1, 1997, however, only an interest payment of $12,106 was received
on that date. Because the cash consideration received at closing was
minimal, the Company has not recorded the sale of its investment. The
Company will record the $58,926 gain from the sale if and when the note is
paid. The cash payments of $27,074 received to date (representing accrued
interest through December 1996) were applied to reduce the carrying value
of the investment.
33
<PAGE>
7. Long-term debt:
(a) Long-term debt consists of the following:
<TABLE>
1999 1998
---------- ---------
<S> <C> <C>
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 November 2004............................ -- 1,158,325
8.15% note payable collateralized by first trust deed on
$1,170,000 of land and office building, due in monthly
installments of $14,699 including interest, balance
due in May 2009 ........................................ 1,973,715 --
10-3/4% note payable collateralized by partnership
interest in Old Vail Partners (OVP), principal is due
in monthly payments of $6,458 plus interest at a
variable rate (prime plus 1-1/2 points) adjusted
monthly. The loan is guaranteed by Harold S. Elkan... 161,462 232,506
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 .......................................... 75,927 80,673
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 ................................................... 1,768,583 1,849,921
10-1/2% note payable collateralized by $541,000 of
manufacturing equipment, due in monthly installments
of $8,225, including principal and interest, balance
due May 2001. 164,370 241,063
Other ..................................................... 56,637 72,295
----------- -----------
4,200,694 3,634,783
Less current maturities .............................. ( 289,000) ( 347,000)
----------- -----------
$ 3,911,694 $ 3,287,783
=========== ===========
</TABLE>
Property and equipment held as collateral for the notes are carried at
historical cost less valuation adjustments.
On May 11, 1999 the Company used the proceeds of a $1,975,000 loan to
payoff an existing note payable of $1,147,560. The prepayment of the
existing note resulted in a prepayment penalty of $45,977 and the write-off
of unamortized loan fees of $33,020, both of which were charged to
extraordinary loss from early extinguishment of debt.
The principal payments due on notes payable during the next five fiscal
years are as follows: $289,000 in 2000, $1,873,000 in 2001, $45,000 in
2002, $21,000 in 2003, and $22,000 in 2004.
(b) In November 1997, the Company entered into a short-term loan agreement with
Loma Palisades, Ltd. (Loma), an affiliate of the Company's partner in UCV,
whereby Loma would lend the Company up to $800,000. The loan bore interest
at "Wall Street" prime rate plus 1 percent on the amounts drawn. Interest
was payable monthly , the principal was due within 30 days of demand and
the agreement expired in May 1998. During the year ended June 30, 1998, the
Company borrowed $400,000, which was paid in January and May 1998. The
Company's borrowings from this short term loan averaged $115,000 during the
year ended June 30, 1998.
34
<PAGE>
(c) In March 1997 the Company borrowed $250,000 on an unsecured note payable
that was due in monthly payments of interest only at 11 percent per annum.
The note was paid in full in May 1998.
(d) On August 24, 1999 and September 25, 1999 the Company borrowed a total of
$550,000 on an unsecured note payable. Payments of interest only were due
monthly at a base rate plus 1 percent (9-1/4% at September 25, 1999). The
principal balance was due on demand.
8. Commitments and contingencies:
(a) The Company leases one of its two bowling centers (Grove) under an
operating lease. The lease agreement for the Grove bowling center provides
for approximate annual minimum rentals in addition to taxes, insurance, and
maintenance as follows: $360,000 for each of the years 2000 through 2003
and $1,200,000 in the aggregate. This lease expires in June 2003 and
contains three 5-year options at rates increased by 10-15 percent over the
last rate in the expiring term of the lease. This lease also provides for
additional rent based on a percentage of gross revenues, however, Grove has
not yet exceeded the minimum amount of gross revenue. Rental expense for
Grove bowling center was $360,000 in 1999, 1998 and 1997.
The Company also leases its golf shaft manufacturing plant under an
operating lease it assumed on January 21, 1997 and expires March 31, 2000.
Rental expense for this facility was $53,834 in 1999, $43,822 in 1998 and
19,134 in 1997.
(b) The Company's employment agreement with Harold S. Elkan expired on January
1, 1998, however the Company is continuing to honor the terms of the
agreement until such time as it is able to negotiate a new contract. The
agreement provides that if he is discharged without good cause, or
discharged following a change in management or control of the Company, he
will be entitled to liquidation damages equal to twice his salary at time
of termination plus $50,000. As of June 30, 1999, his annual salary was
$350,000.
(c) The Company is involved in other various routine litigation and disputes
incident to its business. In management's opinion, based in part on the
advice of legal counsel, none of these matters will have a material adverse
affect on the Company's financial position.
9. Income taxes
During the years ended June 30, 1999, 1998 and 1997, the Company has not
recorded any income tax expense or benefit due to its utilization of prior
loss carryforward and the uncertainty of the future realizability of
deferred tax assets.
At June 30, 1999, the Company had net operating loss carry-forwards of
$11,654,000 for federal income tax purposes. The carryforwards expire from
years 2000 to 2019. Deferred tax assets are primarily related to these net
operating loss carryforwards and certain other temporary differences. Due
to the uncertainty of the future realizability of deferred tax assets, a
valuation allowance has been recorded for deferred tax assets to the extent
they will not be offset by the reversal of future taxable differences.
Accordingly, there are no net deferred taxes at June 30, 1999 and 1998.
35
<PAGE>
The following is a reconciliation of the normal expected federal income tax
rate of 34 percent to the income (loss) in the financial statements:
1999 1998 1997
----------- ----------- -----------
Expected federal income tax
benefit ...................... $(1,251,000) $ (314,000) $(1,144,000)
Increase (decrease) in valuation
allowance .................... 1,199,000 284,000 1,171,000
Other ........................... 52,000 30,000 (27,000)
----------- ----------- -----------
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, 1999 and
1998:
1999 1998
----------- -----------
Deferred tax assets (liabilities):
Net operating loss carryforwards ........ $ 3,962,000 $ 3,701,000
Accumulated depreciation and amortization 487,000 505,000
Valuation allowance for impairment losses 1,228,000 1,014,000
Other ................................... 346,000 (396,000)
----------- -----------
Total net deferred tax assets ....... 6,023,000 4,824,000
Less valuation allowance ............ (6,023,000) (4,824,000)
----------- -----------
Net deferred tax assets ..................... $ -- $ --
=========== ===========
10. Leasing activities:
The Company, as lessor, leases office space in an office building under
operating leases that are primarily for periods ranging from one to five
years, occasionally with options to renew. The Company is also a sublessor
of land to condominium owners under operating leases with an approximate
remaining term of 44 years which commenced in 1981 and 1982 (see Note 5).
The approximate future minimum rentals for existing non-cancelable leases
on the office building are as follows: $226,000 in 2000, $134,000 in 2001,
$6,000 in 2002, none thereafter, and $366,000 in the aggregate.
The following is a schedule of the Company's rental property included in
property and equipment as of June 30, 1999 and 1998:
1999 1998
----------- -----------
Land ................... $ 258,000 $ 258,000
Building ............... 773,393 773,393
Tenant improvements .... 138,358 135,975
----------- -----------
1,169,751 1,167,368
Accumulated depreciation (359,505) (292,761)
----------- -----------
$ 810,246 $ 874,607
=========== ===========
11. Business segment information:
The Company operates principally in four business segments: bowling
centers, commercial real estate rental, real estate development, and golf
shaft manufacturing. The golf shaft manufacturing segment commenced in
January 1997 when the Company acquired a small golf shaft manufacturer. A
construction segment was disposed of on January 1, 1998 (see Note 12).
Other revenues, which are not part of an identified segment, consist of
property management and development fees (earned from both a property 50
percent owned by the Company and a property in which the Company has no
ownership) and commercial brokerage.
36
<PAGE>
The following is summarized information about the Company's operations by
business segment.
<TABLE>
Real Real
Estate Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED JUNE 30, 1999
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................ $ 2,803,944 $ 632,705 $ -- $ 383,803 $ 338,249 $ 4,158,701
Depreciation and
amortization .......... 108,708 134,570 -- 86,103 52,115 381,496
Impairment losses ....... -- -- 90,629 -- -- 90,629
Interest expense ........ 148,106 137,091 251,973 22,013 27,040 586,223
Equity in income of
investees ............. -- 516,713 55,080 -- -- 571,793
Recognition of deferred
gain .................. -- -- -- -- -- --
Segment profit (loss) ... (268,730) 582,747 (495,540) (2,673,049) (814,070) (3,668,642)
Investment income ....... -- -- -- -- -- 166,709
Loss from continuing
operations ............ -- -- -- -- -- (3,501,933)
Segment assets .......... 1,997,376 1,054,729 2,644,111 1,157,089 145,515 6,998,820
Expenditures for
segment assets ........ 38,960 2,383 7,454 96,271 3,187 148,255
YEAR ENDED JUNE 30, 1998
- ------------------------
Revenues ................ $ 2,810,862 $ 560,029 $ -- $ 241,636 $ 260,468 $ 3,872,995
Depreciation and
amortization .......... 288,433 121,585 -- 79,224 49,743 538,985
Impairment losses ....... -- -- 480,000 -- -- 480,000
Interest expense ........ 208,035 133,137 229,036 29,726 94,084 694,018
Equity in income of
investees ............. -- 343,121 1,450,336 -- -- 1,793,457
Recognition of deferred
gain .................. -- -- -- -- 716,025 716,025
Segment profit (loss) ... (474,560) 379,033 584,558 (2,105,278) 348,646 (1,267,601)
Investment income ....... -- -- -- -- -- 372,077
Loss from continuing
operations ............ -- -- -- -- -- (895,524)
Segment assets .......... 2,139,412 1,060,142 2,882,781 1,211,407 2,154,911 9,448,653
Expenditures for
segment assets ........ 3,200 66,492 -- 199,121 52,670 321,483
YEAR ENDED JUNE 30, 1997
- ------------------------
Revenues ................ 3,114,016 567,476 -- 67,260 256,748 4,005,500
Depreciation and
amortization .......... 507,382 116,488 -- 1,017 35,629 660,516
Impairment losses ....... 234,248 -- 2,409,000 -- -- 2,643,248
Interest expense ........ 246,866 134,545 242,195 6,494 85,927 716,027
Equity in income
(loss) of investees ... -- 301,478 (130,510) -- -- 170,968
Gain (loss) on
disposition ........... 1,154,514 -- (468,268) -- -- 686,246
Segment profit (loss) ... 304,954 363,629 (3,422,112) (574,516) (389,725) (3,717,770)
Investment income ....... -- -- -- -- -- 370,762
Loss from continuing
operations ............ -- -- -- -- -- (3,347,008)
Segment assets .......... 2,850,122 1,394,357 3,642,459 683,070 829,784 9,399,792
Segment assets-
discontinued .......... -- -- -- -- -- 533,963
Expenditures for
segment assets ........ 20,534 20,276 -- 228,477 88,722 358,009
</TABLE>
1999 1998 1997
----------- ----------- -----------
Revenues per segment schedule $ 4,158,701 $ 3,872,995 $ 4,005,500
Intercompany rent eliminated (61,611) (59,244) (54,214)
----------- ----------- -----------
Consolidated revenues ....... $ 4,097,090 $ 3,813,751 $ 3,951,286
=========== =========== ===========
37
<PAGE>
12. Significant Events:
(a) On August 7, 1996 the Company sold the Village, Marietta and American
Bowling Centers (all located in Georgia) and related real estate for
$3,950,000 cash, which resulted in a gain of $1,099,514 after deducting
$96,643 of sale expenses. The following are the results of operations of
these bowling centers included in the Company's statements of operations
for the year ended June 30, 1997:
1997
-----------
Revenues ........... $ 349,075
Bowling costs ...... 254,846
Selling, general and
administrative:
Direct .......... 10,117
Allocated ....... 20,100
Depreciation ....... 18,488
Interest expense ... 7,511
Income (loss) ...... 38,013
(b) On December 15, 1996, the Company sold its video game operations for
$55,000, resulting in a $55,000 gain. The sale price consisted of $10,000
cash and a $45,000 note receivable. The following are the results of
operations of the video game operations included in the Company's
statements of operations for the year ended June 30, 1997:
Revenues ....... $ 25,603
Bowl costs ..... 18,338
Depreciation ... --
Interest expense 7,977
Income (loss) .. (712)
(c) On January 22, 1997, Penley Sports, LLC (Penley), a limited liability
company for which the Company is the managing member and owner of ninety
percent of the units, purchased the assets of Power Sports Group, Inc.,
which was a manufacturer of graphite golf shafts and ski poles. The cash
purchase price of $172,071 was allocated to accounts receivable ($8,594),
inventories ($119,602), and equipment ($43,875). The following are the
results of operations of Penley included in the Company's statement of
operations for the years ended June 30:
1999 1998 1997
----------- ----------- -----------
Revenues ........... $ 383,803 $ 241,636 $ 67,260
Golf costs ......... 1,031,301 776,780 171,493
Selling, general and
administrative:
Direct .......... 1,685,435 1,289,184 344,772
Allocated ....... 232,000 172,000 118,000
Depreciation ....... 86,103 79,224 1,017
Interest expense ... 22,013 29,726 6,494
Net loss ........... $(2,673,049) $(2,105,278) $ (574,516)
38
<PAGE>
(d) On January 1, 1998, the Company sold the stock of Ocean West Builders, Inc.
(OWB) to Michael Assof, its president and licensed contractor. The sale
price of $66,678 equaled the carrying value of the Company's investment in
OWB. The following are the results of operations of OWB for the six months
ended December 31, 1997 and for the year ended June 30, 1997, which are
presented in the consolidated statements of operations as discontinued
operations. Prior year results have been restated to conform to this method
of presentation
1998 1997
----------- -----------
Revenues .................... $ 1,359,879 $ 3,163,855
Costs ....................... 1,215,857 2,785,471
Selling, general and
administrative:
Direct .................. 116,819 312,796
Allocated ............... 49,000 76,000
Depreciation ................ 4,193 6,451
Interest expense ............ 980 1,538
Net income (loss) from
discontinued operations ... (26,970) (18,401)
Basic and diluted net income
(loss) per common share from
discontinued operations .... ($.00) ($.00)
13. Liquidity:
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
suffered recurring losses from operations, has a working capital
deficiency, and is forecasting negative cash flows for the next twelve
months. These items raise substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a going
concern is dependent on either refinancing or selling certain real estate
assets or increases in the sales volume of Penley.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
General Partners
UCV, L.P., a California limited partnership:
We have audited the accompanying balance sheets of UCV, L.P., a California
limited partnership, as of March 31, 1999 and 1998, and the related statements
of income and partners' deficit and cash flows for each of the years in the
three-year period ended March 31, 1999. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
San Diego, California
June 18, 1999
40
<PAGE>
UCV, L.P.
(a California Limited Partnership)
BALANCE SHEETS - MARCH 31, 1999 and 1998
ASSETS
1999 1998
------------ ------------
Property and equipment (Note 3):
Land ........................... $ 1,289,565 $ 1,289,565
Buildings ...................... 5,189,188 5,189,188
Equipment ...................... 512,860 497,640
------------ ------------
6,991,613 6,976,393
Less accumulated depreciation .. (5,644,010) (5,637,660)
------------ ------------
1,347,603 1,338,733
Cash ................................ 338,867 41,676
Restricted cash (Note 3) ............ 110,559 116,367
Accounts receivable ................. 13,977 28,648
Prepaid expenses .................... 104,666 100,540
Deposits ............................ -- 60,000
Redevelopment planning costs ........ 333,113 29,464
Deferred loan costs, less accumulated
amortization of $135,377 in
1999 and $448,470 in 1998 ......... 307,672 49,846
------------ ------------
$ 2,556,457 $ 1,765,274
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt (Note 3) ............. $ 25,000,000 $ 19,833,500
Accounts payable .................... 158,706 81,040
Accrued interest .................... 150,694 --
Other accrued expenses .............. 22,347 19,901
Tenants' security deposits .......... 179,709 175,758
------------ ------------
25,511,456 20,110,199
Partners' deficit ................... (22,954,999) (18,344,925)
------------ ------------
$ 2,556,457 $ 1,765,274
============ ============
See accompanying notes to financial statements.
41
<PAGE>
UCV, L.P.
(a California Limited Partnership)
STATEMENTS OF INCOME AND PARTNERS' DEFICIT
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
1999 1998 1997
------------ ------------ ------------
Revenues:
<S> <C> <C> <C>
Apartment rentals ..................... $ 4,455,235 $ 4,332,273 $ 4,214,110
Other rental related .................. 166,529 158,274 139,325
------------ ------------ ------------
4,621,764 4,490,547 4,353,435
------------ ------------ ------------
Costs and expenses:
Operating ............................. 1,186,348 1,214,612 1,159,172
General and administrative ............ 207,828 191,886 159,650
Management fees, related party (Note 2) 116,088 113,538 110,731
Redevelopment planning costs .......... -- 5,808 24,075
Depreciation .......................... 28,563 175,515 193,909
Interest and amortization of loan costs 2,049,110 2,102,944 2,102,942
------------ ------------ ------------
3,587,937 3,804,303 3,750,479
------------ ------------ ------------
Income before extraordinary loss .......... 1,033,827 686,244 602,956
Extraordinary loss from the early
extinguishment of debt ................. (197,401) -- --
------------ ------------ ------------
Net income ................................ 836,426 686,244 602,956
Partners' deficit, beginning of year ...... (18,344,925) (18,107,169) (17,616,625)
Cash distributed to partners .............. (5,446,500) (924,000) (1,093,500)
------------ ------------ ------------
Partners' deficit, end of year ............ $(22,954,999) $(18,344,925) $(18,107,169)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
UCV, L.P.
(a California Limited Partnership)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ................................... $ 836,426 $ 686,244 $ 602,956
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................. 28,563 175,515 193,909
Amortization of deferred loan costs ...... 145,343 119,592 119,592
Extraordinary loss from extinguishment
of debt ................................ 197,401 -- --
Changes in assets and liabilities:
(Increase) decrease in restricted cash ... 5,808 50,361 (12,592)
(Increase) decrease in accounts receivable 14,671 2,482 (6,959)
(Increase) decrease in prepaid expenses .. (4,126) (28,713) 4,715
Increase (decrease) in accounts payable
and other accrued expenses ............. 80,112 (62,624) (37,136)
Increase in accrued interest ............. 150,694 -- --
Other .................................... 3,951 3,672 2,258
------------ ------------ ------------
Net cash provided by operating activities .... 1,458,843 946,529 866,743
------------ ------------ ------------
Net cash from investing activities:
Additions to redevelopment planning costs .... (303,649) (29,464) --
Additions to property and equipment .......... (37,433) (13,184) (10,469)
------------ ------------ ------------
Net cash used by investing activities ........ (341,082) (42,648) (10,469)
------------ ------------ ------------
Cash flows from financing activities:
Extinguishment of long-term debt ............. (19,833,500) -- --
Costs related to early extinguishment
of long-term debt .......................... (157,521) -- --
Proceeds from refinance of long term debt .... 25,000,000 -- --
Loan costs ................................... (383,049) (60,000) --
Cash distributed to partners ................. (5,446,500) (924,000) (1,093,500)
------------ ------------ ------------
Net cash used by financing activities ........ (820,570) (984,000) (1,093,500)
------------ ------------ ------------
Net increase (decrease) in cash .................. 297,191 (80,119) (237,226)
Cash, beginning of year .......................... 41,676 121,795 359,021
------------ ------------ ------------
Cash, end of year ................................ $ 338,867 $ 41,676 $ 121,795
============ ============ ============
Supplemental cash flow information:
Interest paid ............................ $ 1,753,073 $ 1,983,350 $ 1,983,350
============ ============ ============
</TABLE>
Non-cash investing activities:
------------------------------
In the year ended March 31, 1999 the Partnership disposed of fully
depreciated assets with a cost and accumulated depreciation of $22,213.
See accompanying notes to financial statements.
43
<PAGE>
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1. Organization and Summary of Significant Accounting Policies:
(a) Organization- Effective June 1, 1994 the form of organization was
changed from a joint venture to a limited partnership and the name of
the entity was changed from University City Village to UCV, L.P., a
California limited partnership (the Partnership). The Partnership
conducts business as University City Village.
(b) Leasing arrangements- The Partnership leases apartments under
operating leases that are substantially all on a month-to-month basis.
The apartment operations are the Partnership's only business segment.
(c) Property and equipment and depreciation- Property and equipment are
stated at cost. Depreciation is provided using the straight-line
method based on the estimated useful lives of the property and
equipment (33 years for real property and 3-10 years for equipment).
The depreciable basis of the property and equipment for tax purposes
is essentially the same as the financial statement basis.
(d) Income taxes- For income tax purposes, any profit or loss from
operations is includable in the income tax returns of the partners
and, therefore, a provision for income taxes is not required in the
accompanying financial statements.
(e) Redevelopment planning costs- The Partnership capitalizes engineering,
architectural and other costs incurred related to the planning of the
possible redevelopment of the apartment project. In the years ended
March 31, 1998 and 1997 the Partnership expensed as incurred certain
redevelopment planning expenses that had no future benefit.
(f) Deferred loan costs- Costs incurred in obtaining financing are
amortized using the straight-line method over the term of the related
loan.
(g) Fair value of financial instruments - The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments for which it is practical to estimate that
value:
Cash,restricted cash, accounts receivable, accounts payable, accrued
interest and other accrued expenses- the carrying amount reported
in the balance sheet approximates the fair value due to their
short-term maturities.
Long-term debt - The carrying value of long-term debt reported in the
balance sheet approximates the fair value based on management's
belief that the interest rates and terms of the debt are
comparable to those commercially available to the Partnership in
the marketplace for similar instruments.
(h) Use of estimates - Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue
and expenses during the reporting period to prepare these financial
statements in conformity with general accepted accounting principles.
Actual results could differ from these estimates.
(i) Valuation impairment - SFAS No. 121,"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
(undiscounted and without interest) expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amounts
of the assets exceed the fair values of the assets.
44
<PAGE>
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
2. Related party transactions:
An affiliate of a partner provides management services for an unspecified term
to the Partnership and is paid a fee equal to 2-1/2 percent of gross revenues,
as defined. A general contractor that is an affiliate of a partner was paid
$27,302 in 1998 and $28,091 in 1997 for roof repairs and other maintenance.
In July 1998 the Partnership entered into development services agreements with
two affiliates of a partner. The agreements are cancelable on 30 days notice and
relate to planning for redevelopment of the apartments. During the year ended
March 31, 1999, each affiliate was paid $72,000 for these development services.
3. Long-term debt:
As of March 31, 1998 long-term debt was a $19,833,500 note payable that
originated in June 1994 and was scheduled to mature in September 1998. The note
provided for payments of interest only at a fixed annual rate of 10 percent. On
May 4, 1998 the Partnership paid the existing note with the proceeds of a
$25,000,000 note payable. The new loan provides for monthly payments of interest
only until May 1, 2000 at a variable rate of interest equal to LIBOR plus 2
percentage points (7.3 percent at March 31, 1999). Effective May 1, 2000, the
monthly payment will be adjusted to include a monthly amortization of principal
based on a 25 year amortization period. The note payable matures May 1, 2001 but
may be extended for two 12-month periods upon payment of a 1/4 percent loan fee
and if certain financial criteria are met. The loan may not be prepaid until
after May 5, 1999 and then there is a prepayment penalty of one percent if the
loan is prepaid from May 5, 1999 through November 4, 1999. There is no
prepayment penalty after November 4, 1999. The Partnership is required to make a
monthly payment of approximately $9,000 to a property tax impound account and
may have to pay an amount into a capital replacement and maintenance reserve
annually if the Partnership's qualifying annual expenditures do not exceed
$135,500. Restricted cash represents the balance of the tax impound and
replacement reserve accounts and the bank accounts used for security deposits.
The note payable is collateralized by the land, buildings, leases and security
deposits. The proceeds of the new loan, after extinguishing the $19,833,500 note
payable, were utilized to: pay a prepayment penalty of $157,521, pay loan costs
of $443,049 (of which $60,000 was a deposit as of March 31, 1998), pay
distributions to the partners of $4,000,000, and provide working capital of
$565,930. The refinancing resulted in charges of $197,401 related to the
prepayment penalty of $157,521 and $39,880 of the unamortized portion of
deferred loan costs related to the old note payable. These charges were
classified as an extraordinary loss from extinguishment of debt in the year
ended March 31, 1999.
Principal maturities of long-term debt, based on the interest rate at September
1, 1999, are as follows: 2000 - none; 2001 - $365,000; 2002 - $24,635,000.
45
<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 12, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------------------- ------------------------------ ---------
/s/ Steven R. Whitman Chief Financial Officer, Director, October 12, 1999
- -----------------------
Steven R. Whitman and Principal Accounting Officer
/s/ Robert A. MacNamara Director October 12, 1999
- -----------------------
Robert A. MacNamara
/s/ Patrick D. Reiley Director October 12, 1999
- -----------------------
Patrick D. Reiley
46
<PAGE>
EXHIBIT 22
SPORTS ARENAS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
State of
Incorporation Subsidiary
- ------------------ ----------------------------------------
New York Cabrillo Lanes, Inc.
Delaware Downtown Properties, Inc.
California Old Vail Partners, a California general partnership
(50% general partner)
California Downtown Properties Development Corp.
California UCVGP, Inc.
California UCV, L.P. (1% general partner)
California Sports Arenas Properties, Inc.
California UCV, L.P. (49% limited partner) (formerly known as
University City Village, a joint venture)
California Ocean West, Inc.
California RCSA Holdings, Inc.
California Old Vail Partners, a California general partnership
(50% general partner)
California Old Vail Partners, L.P. (49% limited partner)
California Vail Ranch Limited Partnership (50% limited partner)
California OVGP, Inc.
California Old Vail Partners, L.P. (1% general partner)
California Ocean Disbursements, Inc.
California Bowling Properties, Inc.
California Penley Sports, LLC (90% managing member)
All subsidiaries are 100% owned, unless otherwise indicated, and are included in
the Registrant's consolidated financial statements, except for Vail Ranch
Limited Partnership and UCV, L.P.
47
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SPORTS ARENAS, INC. AND SUBSIDIARIES
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 357,906
<SECURITIES> 0
<RECEIVABLES> 166,404
<ALLOWANCES> 0
<INVENTORY> 310,160
<CURRENT-ASSETS> 1,034,138
<PP&E> 5,277,320
<DEPRECIATION> 1,968,191
<TOTAL-ASSETS> 6,998,820
<CURRENT-LIABILITIES> 4,315,724
<BONDS> 0
0
0
<COMMON> 272,500
<OTHER-SE> 1,730,049
<TOTAL-LIABILITY-AND-EQUITY> 6,998,820
<SALES> 383,803
<TOTAL-REVENUES> 4,097,090
<CGS> 0
<TOTAL-COSTS> 7,751,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 586,223
<INCOME-PRETAX> (3,501,933)
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</TABLE>
