SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
SPORTS ARENAS, INC.
--------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:______
2) Aggregate number of securities to which transaction applies:________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):________
4) Proposed maximum aggregate value of transaction:________
5) Total fee paid: ________
[ ] Fee paid previously with preliminary materials. ________
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_______
2) Form, Schedule or Registration Statement No.: ______
3) Filing Party: _____________________
4) Date Filed: ______________
<PAGE>
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
---------------------------------------
5230 CARROLL CANYON ROAD, SUITE 310
SAN DIEGO, CALIFORNIA 92121
---------------------------------------
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 22, 2000
TO THE SHAREHOLDERS OF SPORTS ARENAS, INC.:
The Annual Shareholders' Meeting (the "Meeting") will be held at 10:00 A.M.
on Friday, December 22, 2000, at 5230 Carroll Canyon Road, Suite 310, San Diego,
California 92121, for the purpose of considering and voting upon the following
matters, each of which is described in the annexed Proxy Statement:
1. The election of five directors, to hold office until the next Annual
Meeting of Shareholders, or until their successors are elected and
qualified.
2. Such other matters as may properly come before the Meeting or any
adjournments of it.
November 7, 2000 is the record date for the determination of shareholders
entitled to notice of, and to vote at, the Meeting. A list of shareholders
entitled to vote at the Meeting will be available for inspection at the offices
of the Company for 10 days before the Meeting.
We hope you can attend the Meeting in person; HOWEVER, REGARDLESS OF WHETHER
YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENCLOSED BUSINESS REPLY ENVELOPE. ANY SHAREHOLDER
WHO SIGNS AND SENDS IN A PROXY MAY REVOKE IT BY EXECUTING A NEW PROXY WITH A
LATER DATE; BY WRITTEN NOTICE OF REVOCATION TO THE SECRETARY OF THE COMPANY AT
ANY TIME BEFORE IT IS VOTED; OR BY ATTENDANCE AT THE MEETING AND VOTING IN
PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
Harold S. Elkan
President
San Diego, California
November 21, 2000
<PAGE>
SPORTS ARENAS, INC.
5230 CARROLL CANYON ROAD, SUITE 310
SAN DIEGO, CALIFORNIA 92121
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 22, 2000
Proxies in the form enclosed with this Proxy Statement are solicited by the
Management of Sports Arenas, Inc. (the "Company"), in connection with the Annual
Meeting of Shareholders of the Company to be held December 22, 2000, at the
place set forth in the preceding Notice of Annual Meeting of Shareholders.
This Proxy Statement and the form of proxy are being first mailed to the
Company's shareholders on or about November 21, 2000. In addition to mailing
copies of this material to all shareholders, the Company has requested banks and
brokers to forward copies of such material to persons for whom they hold stock
of the Company, and to request authority for execution of the proxies. The
Company will reimburse such banks and brokers for their reasonable out-of-pocket
expenses incurred in connection therewith. Officers and regular employees of the
Company may, without being additionally compensated therefor, solicit proxies by
mail, telephone, telegram or personal contact. All expenses of this solicitation
of proxies will be paid by the Company. The Company does not expect to employ
any other person or entity to assist in the solicitation of proxies.
Any shareholder giving a proxy pursuant to this solicitation may revoke it at
any time before it is exercised at the meeting by: (a) filing with the secretary
of the Company a written notice revoking it; (b) executing a proxy bearing a
later date; or (c) attending the meeting and voting in person.
All shares represented by valid proxies will be voted in accordance with the
directions specified thereon, and otherwise in accordance with the judgment of
the proxy holders. Any duly executed proxy on which no direction is specified
will be voted for the election of the nominees named herein to the Board of
Directors described in the Notice of Meeting of Shareholders and this Proxy
Statement.
VOTING
------
Only shareholders of record of the Company's common stock at the close of
business on November 7, 2000 (the "Record Date"), are entitled to notice of, and
to vote at the annual shareholders' meeting. On the Record Date there were
27,250,000 shares of common stock outstanding.
Each shareholder of record is entitled to one vote on each of the matters to be
presented to the shareholders at the meeting, except that shareholders may have
cumulative voting rights with respect to the election of Directors. All proxies
which are returned will be counted by the Inspector of Elections in determining
the presence of a quorum and each issue to be voted on. An abstention from
voting or a broker non-vote is not counted in the voting process under
California law.
In accordance with the California General Corporation Law, as applicable to
the Company, each shareholder entitled to vote for the election of directors may
cumulate such shareholder's votes and give one candidate a number of votes equal
to the number of directors to be elected multiplied by the number of shares
owned, or distribute the shareholder's votes on the same principal among as many
candidates as the shareholder thinks fit.
The proxy process does not permit shareholders to cumulate votes. No
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of shares owned) unless the candidate or
candidates' names for which such votes are to be cast have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting prior to the voting of the shareholder's intention to cumulate the
shareholder's votes. If any one shareholder has given such notice, all
shareholders may cumulate their votes for candidates in nomination.
Page - 1
<PAGE>
At this time, Management does not intend to give notice of cumulative voting
or to cumulate votes it may hold pursuant to the proxies solicited herein,
unless the required notice by a shareholder is given in proper format at the
meeting, in which instance Management intends to cumulatively vote all of the
proxies held by it in favor of the nominees as set forth herein.
The shares represented by all properly executed proxies will be voted in
accordance with the shareholder's directions. If the proxy card is properly
executed and returned without direction as to how the shares are to be voted,
the shares will be voted as recommended by the Board of Directors.
PROPOSAL 1: ELECTION OF DIRECTORS
---------------------------------
The Company's bylaws provide for a board of five directors. Consequently,
five directors are proposed to be elected at the Meeting, each to hold office
until the next annual shareholders' meeting or until his successor is elected
and qualified. Unless authority is withheld, or any nominee is unable or
unwilling to serve, the persons named in the enclosed form of proxy will vote
such proxy for the election of the nominees listed below. In the event any
nominee is unable or declines to serve as a director at the time of the Meeting,
the proxy will be voted for a substitute selected by the Board of Directors. The
Board of Directors has no reason to believe that any nominee will be
unavailable.
The Board of Directors held one meeting during the fiscal year ended June 30,
2000. The meeting was attended by all of the incumbent directors.
In September 1988, the Board of Directors appointed Patrick D. Reiley as an
audit committee of one. The audit committee is to oversee the Company's
accounting and financial reporting policies including recommendations to the
Board of Directors regarding appointment of independent auditors, review with
the independent auditors of the accounting principles and practices followed and
the adequacy thereof, review annual audit and financial results, approve any
material change in accounting principles, policies and procedures and to make
recommendations to the Board of Directors with regard to any of the foregoing.
The audit committee did not meet in the year ended June 30, 2000.
The audit committee has reviewed and discussed the audited financial
statements of the Company for the year ended June 30, 2000 with management. The
audit committee has discussed with the independent auditors the matters required
to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU
Section 380), has received the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No.1 and
has discussed the independence of the independent auditors with them. Based on
its review of the audited financial statements and the foregoing discussions,
the audit committee recommended to the Board of Directors that the audited
financial statements be included in the Company's Annual Report and Form 10-K
for the year ended June 30, 2000.
The sole member of the audit committee is Patrick D. Reiley.
The following table sets forth certain information about the Directors, each
of whom are nominees, and executive officers of the Company:
Age on
Record Present Position Director
Name Date with Company since
------------------ ------ ---------------- --------
Harold S. Elkan 57 Chairman of the 1983
Board
President
Steven R. Whitman 47 Director 1989
Chief Financial
Officer
Secretary
Patrick D. Reiley 59 Director 1986
James E. Crowley 53 Director 1989
Robert A. MacNamara 52 Director 1989
Page - 2
<PAGE>
Harold S. Elkan has served as Chairman of the Board of Directors and
President of the Company since November 1983. At that time, Andrew Bradley,
Inc., of which Mr. Elkan is the sole shareholder, acquired 21,808,267 shares of
the Company's common stock. For 10 years prior to his involvement with the
Company, Mr. Elkan was the controlling principal of Elkan Realty & Investment
Co., a commercial real estate brokerage firm located in St. Louis, Missouri, and
the president of Brandy Properties, Inc., an owner and operator of commercial
real estate.
Steven R. Whitman has been a director and Assistant Secretary of the
Company since 1989 and the Secretary since January 1995. He is a certified
public accountant and has been the Chief Financial Officer of the Company since
May 1987. Before joining the Company, Mr. Whitman practiced public accounting
with the firm of Laventhol & Horwath, Certified Public Accountants, for five
years, four of which were as a manager in the audit department.
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. From 1995 to 1997, Mr. Reiley was an independent business
consultant. Mr. Reiley has been a principal of A.R.I.S., Inc., an international
insurance brokerage company, since 1997.
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 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.
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. Since 1997 Mr.
MacNamara has been an independent consultant to the real estate development
industry.
There are no understandings between any director or executive officer
pursuant to which any director or executive officer was selected as a director
or executive officer. There are no family relationships existing among any of
the directors or executive officers of the Company.
Compensation
------------
The following Summary Compensation Table shows the compensation paid for
each of the last three fiscal years to the Chief Executive Officer of the
Company and to the four most highly compensated executive officers of the
Company whose total annual compensation for the fiscal year ended June 30, 2000,
exceeded $100,000:
SUMMARY COMPENSATION TABLE
Long-term All Other
Name and Compen- Compen-
--------- -------- -------
Principal Position Year Salary Bonus Other sation sation
------------------ ---- ------ ----- ----- ------ ------
Harold S. Elkan, 2000 $350,000 $100,000 $ -- $ -- $ --
President 1999 350,000 $100,000 -- -- --
1998 250,000 -- -- -- --
Steven R. Whitman, 2000 100,000 10,000 -- -- --
Chief Financial 1999 100,000 10,000 -- -- --
Officer 1998 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.
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.
Page - 3
<PAGE>
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.
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, 2000) 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.
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, 2000.
Compensation Committee Report
-----------------------------
The Company's Board of Directors appointed Harold S. Elkan as a
compensation committee of one to review and set compensation for all Company
employees other than Harold S. Elkan. The Board of Directors, excluding Harold
S. Elkan and Steven R. Whitman, set and approve compensation for Harold S.
Elkan.
The objectives of the Company's executive compensation program are to:
attract, retain and motivate highly qualified personnel; and recognize and
reward superior individual performance. These objectives are satisfied through
the use of the combination of base salary and discretionary bonuses. The
following items are considered in determining base salaries: experience,
personal performance, responsibilities, and, when relevant, comparable salary
information from outside the Company. Currently, the performance of the Company
is not a factor in setting base salary compensation levels. Annual cash bonus
payments are discretionary and for 2000 related to subjective criteria
concerning the performance of the executive and the Company. Bonuses of $100,000
and $10,000 were awarded to Harold Elkan and Steven Whitman, respectively, in
the year ended June 30, 2000.
Outside members of Board of Directors approving the Compensation for Harold
S. Elkan are: Patrick D. Reiley, James E. Crowley, and Robert A. MacNamara.
Directors' Compensation Committee for Other Employees: Harold S. Elkan
The foregoing report and the Performance Graph hereinbelow are not "soliciting
material", are not deemed filed with the SEC, and shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent the Company
specifically incorporates this report by reference and shall not otherwise be
deemed filed under such Acts.
Performance Graph
-----------------
The following graph compares the performance of $100 if invested in the
Company's common stock (SAI) with the performance of $100 if invested in each of
the Standard &Poors 500 Index (S&P 500) and the Standard & Poors Leisure Time
Index (S&P LT).
The performance graph provides information required by regulations of the
Securities and Exchange Commission. However, the Company believes that this
performance graph could be misleading if it is not understood that there is
limited trading of the Company's stock. The 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.
Page - 4
<PAGE>
The performance is calculated by assuming $100 is invested at the beginning
of the period (July 1994) 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
---------- ----------- ------- -----------
6/95 100 100 100
6/96 100 152 116
6/97 100 200 160
6/98 300 255 128
6/99 200 309 116
6/2000 200 327 95
Page - 5
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth, as of November 12, 2000, certain information
with respect to the beneficial ownership of Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5 percent of its
outstanding Common Stock, (ii) each of the Company's directors, and (iii) all
directors and officers as a group. Except as noted below, to the best of the
Company's knowledge, each of such persons has sole voting and investment power
with respect to the shares beneficially owned.
Shares
Beneficially Percent
Name and Address Owned of Class
---------------- -------------- --------
Harold S. Elkan 21,808,267 (a) 80.0%
5230 Carroll Canyon Road
San Diego, California
All directors and 21,808,267 80.0%
officer as a group
(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 3(c) of Notes to
Consolidated Financial Statements.
There is no arrangement known by the Company, the operation of which may at a
subsequent date, result in a change in control of the Company.
Certain Relationships and Related Transactions
----------------------------------------------
1. The Company has $463,866 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, 2000 ($494,829 as of June 30, 1999), which were made for
personal purposes. The balance at June 30, 2000 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 December 31 of each year. The balance is due January
1, 2002. The largest amount outstanding during the year was $514,987 in December
1999.
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 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 (12.25 percent at June 30, 2000) and to be added to the
principal balance annually. As of June 30, 2000 and 1999, $1,230,483 of interest
had been accrued and added to the loan balance. 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 cumulative amount of
interest that accrued but was not recorded was $359,797 as of June 30, 2000
($117,494 as of June 30, 1999).
Page - 6
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE NOMINEES FOR DIRECTORS AS SET
FORTH IN PROPOSAL 1 ON YOUR PROXY.
OTHER BUSINESS
--------------
Management knows of no other business to be presented at the meeting.
However, if any other matters properly come before the meeting, it is the
intention of the persons named in the accompanying proxy to vote pursuant to the
proxies in accordance with their judgment in such matters.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and any person holding more than 10% of the Company's
common stock, to file reports of ownership and changes in ownership with the
SEC. Executive officers, directors and greater than 10% stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Specific due dates for these reports have been
established and the Company is required to identify in this Proxy Statement
those persons who failed to timely file these reports.
Based solely on representations from officers and directors that no reportable
transactions were made, the Company believes that during the fiscal year ended
June 30, 2000, applicable filing requirements under Section 16(a) were
satisfied.
SHAREHOLDER PROPOSALS
---------------------
To be eligible for inclusion in the Company's Proxy Statement for the annual
meeting of the Company's shareholders expected to be held in December 2001,
shareholder proposals must be received by the Company at its principal office at
5230 Carroll Canyon Road, Suite 310, San Diego, California 92121, prior to July
29, 2001, and must comply with all legal requirements for the inclusion of such
proposals.
INDEPENDENT AUDITORS
--------------------
The firm of KPMG LLP (formerly KPMG Peat Marwick LLP) served as the Company's
independent auditors for fiscal 2000. A representative of KPMG LLP is expected
to be at the Meeting.
ANNUAL REPORT
-------------
The Company's Annual Report for the fiscal year ended June 30, 2000, which
includes the Company's financial statements, is attached hereto as Appendix A.
The Annual Report is not to be regarded as proxy soliciting material or as a
communication by means of which any solicitation is made.
The Company's annual report on Form 10-K for the fiscal year ended June 30,
2000, as filed with the Securities and Exchange Commission, will be provided
without charge to any shareholder who requests it from the Company's secretary
at the address given at the beginning of this Proxy Statement. The exhibits to
that report will also be provided upon payment of costs of reproduction.
By order of the Board of Directors
Harold S. Elkan
President
San Diego, California
November 21, 2000
Page - 7
<PAGE>
APPENDIX A
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 2000
Page A-1
<PAGE>
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 2000
DESCRIPTION OF BUSINESS
General
Sports Arenas, Inc. (the "Company") was incorporated as a Delaware
corporation in 1957. The Company, primarily through its subsidiaries, owns and
operates 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. Overall, the Company
and its consolidated subsidiaries has 105 employees. 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:
2000 1999 1998
---- ---- ----
Bowling .................... 56 68 74
Real estate operations ..... 13 15 13
Real estate development .... -- -- --
Golf ....................... 23 9 6
Other ...................... 8 8 7
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.
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. 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 has a computerized cash
control system.
On average, 39 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 69 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.
Page A-2
<PAGE>
At June 30, 2000, 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.
REAL ESTATE DEVELOPMENT
-----------------------
The Company, through its subsidiaries, 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). In July 2000, TC completed development of the
first phase of the shopping center consisting of 60,229 square feet of space (of
which 56,307 square feet is currently leased) on approximately 7 acres of land.
TC is currently in the process of obtaining construction financing to construct
an additional 50,032 square feet of shopping center space on the remaining 6
acres of land.
As of June 30, 2000, 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.
OVPGP has not paid property taxes or annual payments for a county assessment
district obligation for over eight years related to 33 acres currently owned by
OVPGP, other than the $330,000 payment noted below that was made on June 22,
2000. 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 was the County's
secured claim for delinquent taxes and assessment district payments. OVPGP's
plan was to use the relief from stay to continue its efforts to negotiate a
settlement of the zoning issues described in Item 3. Legal Proceedings, and
restore the economic value of the property. The bankruptcy proceeding was
dismissed on February 15, 2000 with the concurrence of OVPGP. This dismissal
allows the County of Riverside to proceed with a public sale of the property
within 45 days after giving notice. On June 23, 2000, the County of Riverside
agreed to remove the property from the planned public sale originally schedule
for June 26, 2000 in exchange for an immediate payment of $330,000 with the
balance of property taxes due on December 29, 2000. Separately, the County of
Riverside stated that a foreclosure sale related to the default judgement for
assessment district payments would not be scheduled until some time after
January 1, 2001.
Page A-3
<PAGE>
OVPGP has applied to the City of Temecula for approval of a development plan
which includes a combination of multi-family and commercial uses. If this plan
is approved or the zoning is otherwise 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 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 $24,638.
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.
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.
The following is a schedule of selected operating information over the last five
years:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Occupancy................ 99% 99% 97% 98% 92%
Average monthly
rent/square foot....... $1.11 $.98 $.86 $.87 $.88
Real property tax........ $19,000 $19,000 $18,000 $17,000 $17,000
Real Property tax rate... 1.12% 1.12% 1.12% 1.12% 1.12%
On September 28, 2000 the Company agreed to sell the office building for
$3,725,000. The sale is contingent on the results of the buyers 10 day due
diligence period and the existing lender's approval of the buyer assuming the
loan (balance of $1,957,592 as of June 30, 2000) related to the office building.
Once the sale is completed, the Company plans to relocate its corporate offices
into the facilities leased by Penley Sports, LLC., as noted below.
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 subleases. The subleases also expire in
September 2043. The master lease provides for the payment of rent equal to the
greater of a minimum rent, which is adjusted for increases in the consumer price
index every five years, or 85 percent of the rents collected on the subleases,
which are also adjusted for increases in the consumer price index every five
years.
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:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Occupancy............. 99% 99% 99% 98% 97%
Average monthly
rent/unit............ $728 $694 $675 $662 $648
Real property tax..... $112,000 $110,000 $108,000 $107,000 $105,000
Real Property tax rate 1.12% 1.12% 1.12% 1.12% 1.12%
Page A-4
<PAGE>
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. PPS's sales had averaged approximately
$375,000 in calendar 1995 and 1996. 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 $1,077,000
of equipment since January 22, 1997 to automate some of the production
processes. Additionally, in June 2000 Penley moved from its 8,559 square foot
facility into a 38,025 square foot facility, of which approximately 10,000
square feet will be subleased to another tenant for a one to two year period.
Until January 2000, Penley's sales were principally to custom golf shops where
the orders are for 2 to 10 shafts per order at prices averaging $18 per shaft.
In January 2000, Penley commenced sales to two of the largest golf component
distributors. As a result of the sales to these two distributors and other small
golf club manufacturers, golf shaft sales increased by $735,654 in the year
ended June 30, 2000. Penley currently has products in testing by several large
golf club manufacturers. However, there can be no assurances that the Penley
will be able to enter into any significant sales contracts or that, if it does,
the contracts will be profitable to Penley.
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 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 not occur that could lead
to interruptions and delays to Penley's production process.
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 currently has one patent and two other patents 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 35 full and part-time employees.
Page A-5
<PAGE>
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
significant backlog of sales orders, or customer concentration (based on
consolidated revenues).
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.
2000 1999
------------ ------------
High Low High Low
----- ----- ----- -----
First Quarter.... $ .02 $ .02 $ .05 $ .02
Second Quarter... $ .02 $ .02 $ .03 $ .02
Third Quarter.... $ .05 $ .02 $ .02 $ .02
Fourth Quarter... $ .06 $ .02 $ .02 $ .02
(b) The number of holders of record of the common stock of the Company as of
September 20, 2000 is 4,345. The Company believes there are a
significant number of beneficial owners of its common stock whose shares
are held in "street name".
(c) The Company has neither declared nor paid dividends on its common stock
during the past ten years, nor does it have any intention of paying
dividends in the foreseeable future.
Selected Financial Data (Not covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ..................... $ 4,839,286 $ 4,097,090 $ 3,813,751 $ 3,951,286 $ 8,146,209
Loss from operations ......... (3,424,495) (3,654,212) (2,603,065) (4,327,225) (817,648)
Income (loss) from
continuing operations ....... (3,625,063) (3,501,933) (895,524) (3,347,008) 517,311
Basic and diluted income
(loss) per common share
from continuing operations .. (.13) (.13) (.03) (.12) .02
Total assets ................. 6,601,236 6,998,820 9,448,653 9,933,755 16,445,081
Long-term debt, excluding
current portion ............. 1,967,169 3,911,694 3,287,783 4,061,987 4,387,259
</TABLE>
See Notes 4(b), 6(c), and 12 of Notes to Consolidated Financial Statements
regarding disposition of business operations and material uncertainties.
Page A-6
<PAGE>
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 $3,640,645 at
June 30, 2000, which is a $3,507,097 increase from the similarly calculated
working capital deficit of $133,548 at June 30, 1999. Working capital decreased
primarily from $3,252,822 of cash used by operations after capital expenditures
and debt service. This use of funds was partially offset by $2,193,000 of
distributions received from investees and $190,000 of proceeds from sale of
assets. Working capital also decreased due to a $1,585,000 increase in current
portion of long-term debt related to a note that matures on December 31, 2000.
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 several 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:
2000 1999 1998
----------- ---------- ----------
Bowling ........................... $ (356,000) $ (157,000) $ (173,000)
Rental ............................ 219,000 207,000 164,000
Golf .............................. (2,652,000) (2,587,000) (2,027,000)
Development ....................... (246,000) (215,000) (164,000)
General corporate expense and other (217,000) (257,000) (166,000)
----------- ----------- -----------
Cash provided (used) by continuing
operations ...................... (3,252,000) (3,009,000) (2,366,000)
Capital expenditures, net of
financing ...................... (446,000) (148,000) (322,000)
Discontinued operations .......... -- -- (24,000)
Principal payments on
long-term debt ................. (360,000) (262,000) (935,000)
----------- ----------- -----------
Cash used ( 4,058,000) ( 3,419,000) ( 3,647,000)
=========== =========== ===========
Distributions received from
investees ...................... 2,193,000 1,420,000 4,259,000
=========== =========== ===========
Contributions to investees ....... (43,000) -- --
=========== =========== ===========
Proceeds from sale of assets ..... 190,000 -- 57,000
=========== =========== ===========
Other than distributions of $2,000,000 received in May 1998 and $1,757,000
received in October 1999 from the proceeds of UCV's 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 $14,498,208 at June 30,
2000. 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
$14,000,000-$17,000,000 as of June 30, 2000. UCV is currently evaluating the
feasibility of redeveloping the apartment project from 542 units to
approximately 1,100 units.
At June 30, 2000, the Company owned a 60 percent limited partnership interest in
Vail Ranch Limited Partnership (VRLP), which is a 50 percent partner in Temecula
Creek, LLC (TC),a limited liability company, the other member of which is ERT
Development Corporation (an affiliate of Excel). In July 2000, TC completed
development of the first phase of a shopping center consisting of 60,229 square
feet of space (of which 56,307 square feet is currently leased) on approximately
7 acres of land. TC is currently in the process of obtaining construction
financing to construct an additional 50,032 square feet of shopping center space
on the remaining 6 acres of land. The Company estimates that the value of the
Company's 60 percent interest in VRLP at June 30, 2000 is approximately
$1,000,000 to $1,500,000.
Page A-7
<PAGE>
As described in Note 4(b) 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, 2000 was
approximately $1,776,000 ($1,456,000 at June 30, 1999). The principal balance of
the allocated portion of the bonds ($1,384,153 as of June 30, 2000 and 1999),
and delinquent interest and penalties ($1,447,027 as of June 30, 2000 and
$1,181,026 as of June 30, 1999) are classified as "Assessment district
obligation- in default" in the consolidated balance sheets. In addition, the
consolidated balance sheets include $356,178 of delinquent property taxes and
late fees as of June 30, 2000 ($582,859 as of June 30, 1999). 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 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
was the County's secured claim for delinquent taxes and assessment district
payments. OVPGP's plan was to use the relief from stay to continue its efforts
to negotiate a settlement of the zoning issues described below, and restore the
economic value of the property. The bankruptcy proceeding was dismissed on
February 15, 2000 with the concurrence of OVPGP. This dismissal allows the
County of Riverside to proceed with a public sale of the property within 45 days
after giving notice. On June 23, 2000, the County of Riverside agreed to remove
the property from the planned public sale originally schedule for June 26, 2000
in exchange for an immediate payment of $330,000 with the balance of the
property taxes due on December 29, 2000. Separately, the County of Riverside
stated that a foreclosure sale related to the default judgement for assessment
district payments would not be scheduled until some time after January 1, 2001.
OVPGP has applied to the City of Temecula for approval of a development plan
which includes a combination of multi-family and commercial uses. If this plan
is approved or the zoning is otherwise 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.
On September 28, 2000 the Company agreed to sell the office building for
$3,725,000. The sale is contingent on the results of the buyers 10 day due
diligence period and the existing lender's approval of the buyer assuming the
loan (balance of $1,957,592 as of June 30, 2000) related to the office building.
The Company is expecting a $1,700,000 cash flow deficit in the year ending June
30, 2001 from operating activities after estimated distributions from UCV,
estimated proceeds from the sale of the office building, estimated capital
expenditures ($422,000) and scheduled principal payments on short-term and
long-term debt. 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 December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No 101B (SAB 101B), Revenue Recognition in Financial
Statements. The Company will be required to adopt SAB 101B effective in the
fourth quarter of the year ending June 30, 2001. SAB 101B requires, among other
things, that license and other up-front fees be recognized over the term of the
agreement unless the fees are in exchange for products delivered or services
performed that represent the culmination of a separate earnings process. The
Company does not expect this to have a material impact on the Company's
financial position or results of operations.
Page A-8
<PAGE>
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>
<CAPTION>
2001 2002 2003 2004 2005 Thereafter Total
--------- ----------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt .. $ 115,000 $ 39,000 $ 21,000 $ 22,000 $ 24,000 $ 1,854,000 $ 2,075,000
Weighted average
interest rate . 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Variable rate debt $3,109,000 $ 6,000 -- -- -- -- $3,115,000
Weighted average
interest rate . 10.0% 11.8% -- -- -- -- 10.0%
</TABLE>
The variable rate debt includes a $1,350,000 short term note payable that is due
on demand, which for purposes of this calculation has been treated as though
paid during the year ending June 30, 2001.
The Company's unconsolidated subsidiary, UCV, has variable rate debt of
$29,039,000 as of March 31, 2000 for which the interest rate is 9.0 percent. The
principal cash flows for each of UCV's fiscal years ending March 31 is: 2001-
$660,000; 2002- $28,432,000; and $29,039,000 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.
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.
Page A-9
<PAGE>
The following is a summary of the changes to the components of the segments in
the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Rental Real Estate Unallocated
YEAR ENDED JUNE 30, 2000 Bowling Operation Development Golf And Other Totals
------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues ....................... $(110,638) $ 76,477 $ -- $ 735,654 $ 43,388 $ 744,881
Costs .......................... 113,520 30,332 44,661 629,528 -- 818,041
SG&A-direct .................... (37,195) -- -- 107,880 (326,384) (255,699)
SG&A-allocated ................. 18,508 5,000 (7,000) 73,000 (89,508) --
Depreciation and amortization .. (4,497) 835 -- 11,349 (2,162) 5,525
Impairment losses .............. -- -- (90,629) -- 37,926 (52,703)
Interest expense ............... (6,329) 29,437 15,049 (8,540) 12,090 41,707
Equity in income (loss)
of investees .................. -- (79,293) (114,880) -- -- (194,173)
Segment profit (loss) .......... (194,645) (68,420) (76,961) (77,563) 411,426 (6,163)
Investment income .............. (116,967)
Loss from continuing operations. (123,130)
</TABLE>
<TABLE>
<CAPTION>
Rental Real Estate Unallocated
YEAR ENDED JUNE 30, 1999 Bowling Operation Development Golf And Other Totals
------------------------ --------- --------- --------- --------- --------- ---------
<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 63,0681 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)
Loss from continuing operations. (2,606,409)
</TABLE>
BOWLING OPERATIONS:
-------------------
2000 vs. 1999
-------------
Bowling revenues decreased by 4 percent. The number of league games bowled
continued to decrease at each of the bowling centers by approximately 15%
(54,000 games in total). This decrease is being partially offset by an increase
in the open-play games bowled at one of the bowling centers (18,000). One of the
bowling centers is located in a shopping center that just completed a major
renovation and "reopened" in April 2000 with two major retail stores. As a
result, the bowling center has experienced a significant increase in open play
since the "reopening". Although management forecasts continued increases in open
play at the bowling center, the amount of the increase and how long it will
continue is uncertain.
Bowl costs increased by 6% primarily due to due to a $76,000 increase in
supplies and maintenance expenses. Approximately $46,000 of the increase in
maintenance expenses related to lane resurfacing or painting the exterior of a
building, which are not indicative of a trend of increases in expenses to be
annualized. There was no significant change in selling, general and
administrative expenses.
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.
Page A-10
<PAGE>
RENTAL OPERATIONS
-----------------
Rental revenues increased in 2000 and 1999 primarily to the continued increases
in the rental rates at the office building. The vacancy rate for the office
building was 3%, 1% and 1% for 1998, 1999 and 2000, respectively. The average
monthly rent per square foot was $.86, $.98, and $1.11 for 1998, 1999 and 2000,
respectively. The Company is currently leasing space to new tenants and renewing
existing leases at monthly rates ranging from $1.40-$1.50 per square foot.
Rental costs increased in 2000 primarily due to the increase in the minimum rent
that is paid for the subleasehold interest in Palm Springs. The master lease
agreement provides for rent expense equal to the greater of the minimum rent or
85 percent of the rents collected on the subleases. The minimum rent increased
from $81,000 to $162,000 annually, which is approximately the amount collected
on the subleases. Rental costs increased by $22,615 in 1999 primarily due to
termite treatment of the office building that was non-recurring. Interest
expense increased in 2000 due to the increase in the loan amount resulting from
the refinance of the office building in May 1999.
The equity in income of UCV decreased by $79,000 in 2000 primarily due to
increases in interest expense and other costs that were only partially offset by
a 4 percent increase in revenues (related to increase in average rental rates).
Interest expense increased primarily due to the increase in financing that
occurred in October 1999. Costs increased primarily due to an increase in water
expense ($60,000) related to increased irrigation of the property. Otherwise,
costs increased 6 percent over the prior year. The equity in income of UCV
increased by $173,592 in 1999 excluding the equity in the extraordinary loss.
The increase in revenues in 1999 was due to a 3% increase in the average rent
rates. 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.
The following is a summary of the changes in the operations of UCV, LP in 2000
and 1999 compared to the previous years:
2000 1999
--------- ---------
Revenues ........................ $ 202,000 $ 132,000
Costs ........................... 148,000 (10,000)
Redevelopment planning costs .... -- ( 6,000)
Depreciation .................... ( 3,000) ( 147,000)
Interest and amortization
of loan costs ................. 216,000 (54,000)
Income before extraordinary loss (159,000) 349,000
Extraordinary loss from
debt extinguishment ........... (197,000) 197,000
Net income ...................... 38,000 152,000
Vacancy rates at UCV have averaged 1.1%,1.3% and 1.7% in 1998, 1999 and 2000,
respectively.
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 ($104,000 in 2000, $62,000
in 1999, and $67,000 in 1998) related to the litigation regarding the effective
down-zoning of the 33 acres of land and property taxes ($106,000 in 2000,
$95,000 in 1999, and $89,000 in 1998). OVPGP also incurred expense of $12,000 in
2000 and $19,000 in 1999 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.
Page A-11
<PAGE>
The following is a summary of the changes in the operations of VRLP in 2000 and
1999 compared to the previous years:
2000 1999
---------- ----------
Revenues .................... $( 122,000) $( 508,000)
Gain on sale ................ -- (3,107,000)
Operating expenses 78,000 (447,000)
Depreciation and amortization -- (265,000)
Interest .................... -- ( 294,000)
Equity in loss of investee .. (43,000) 82,000
Net income (loss)............ (157,000) (2,691,000)
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 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 and 2000 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 and
2000.
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 $90,629 provision for impairment loss in the
year ended June 30, 1999 to reduce the carrying value of the undeveloped land in
Missouri to the value realized when it was sold in September 1999.
GOLF SHAFT MANUFACTURING:
-------------------------
Sales during the years 1999 and 1998 were small because Penley had not yet
developed sales with golf club manufacturers or distributors. The sales were
principally to custom golf shops. In January 2000, Penley commenced sales to two
of the largest golf equipment distributors. In addition to increases in sales
related to these two customers, direct sales to the after market also increased,
likely due to the credibility and increased exposure from the Penley products
being included in the catalogs of these two distributors. In the year 2000,
approximately 40 percent of the revenues were from sales to six golf equipment
distributors, 7 percent from small golf club manufacturers, and the remainder
related to sales directly to golf shops.
Operating expenses of the golf segment consisted of the following in 1999, 1998
and 1997:
2000 1999 1998
---------- ---------- ----------
Costs of sales and manufacturing
overhead ....................... $1,412,000 $ 797,000 $ 643,000
Research and development ......... 248,000 234,000 134,000
---------- ---------- ----------
Total golf costs .............. 1,660,000 1,031,000 777,000
========== ========== ==========
Marketing and promotion .......... 1,603,000 1,511,000 1,151,000
Administrative costs- direct ..... 190,000 174,000 138,000
---------- ---------- ----------
Total SG&A-direct .............. 1,793,000 1,685,000 1,289,000
========== ========= =========
Total golf costs increased in 2000 primarily due to an increase in the amount of
cost of goods sold related to increased sales, an increase in the cost of
prototype shafts developed during the periods, and an increase in the payroll
for research and development. Marketing and promotion expenses increased in 2000
primarily due increases in player sponsorship costs and promotional goods.
Page A-12
<PAGE>
UNALLOCATED AND OTHER:
----------------------
Revenues increased by $43,000 in 2000 due to a $37,000 increase in brokerage
commissions. Other revenues increased by $76,000 in 1999 due to an increase in
brokerage commissions of $28,000 and management fees of $51,000.
Unallocated SG&A and Other SG&A combined decreased by $326,000 in 2000 and
increased by $590,000 in 1999 primarily due to a $390,000 provision for the
uncertainty of the collectability of the note receivable from affiliate recorded
in 1999. These expenses also increased in 1999 due to increases in wages in the
corporate segment of which $110,000 related to discretionary bonuses to the
officers.
Interest expense increased in 2000 due to interest related to short term
borrowings. Interest expense declined by $67,000 in 1999 due to the reduction of
the outstanding principal balances of long-term debt.
Investment income decreased by $116,967 in 2000 and $205,000 in 1999 due to the
collection of $728,000 note receivable in June 1998 and the cessation of the
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.
Page A-13
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following were directors and executive officers of the Company during the
year ended June 30, 2000. 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 57 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 47 Chief Financial Officer and Treasurer
since May 1987; Director since August 1,
1989, Secretary since January 1995
Patrick D. Reiley 59 Director since August 21, 1986
James E. Crowley 53 Director since January 10, 1989
Robert A. MacNamara 52 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.
Business Experience
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.
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.
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.
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 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.
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.
Page A-14
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................... $ 13,961 $ 357,906
Current portion of notes
receivable-affiliate (Note 3b) ........................ 50,000 50,000
Other receivables ....................................... 193,510 116,404
Inventories (Note 2) .................................... 304,906 310,160
Prepaid expenses ........................................ 238,719 199,668
----------- -----------
Total current assets ................................. 801,096 1,034,138
----------- -----------
Receivables due after one year:
Note receivable- Affiliate, net (Note 3b) ............... 73,866 104,829
Less current portion .................................. (50,000) (50,000)
----------- -----------
23,866 54,829
----------- -----------
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 ................................... 2,347,767 2,137,993
----------- -----------
5,487,094 5,277,320
Less accumulated depreciation
and amortization ........................................ (2,160,132) (1,968,191)
----------- -----------
Net property and equipment .......................... 3,326,962 3,309,129
----------- -----------
Other assets:
Undeveloped land, at cost (Note 4) ...................... 1,501,318 1,582,468
Intangible assets, net (Note 5) ......................... 246,123 294,423
Investments (Note 6) .................................... 564,446 618,853
Other assets ............................................ 137,425 104,980
----------- -----------
2,449,312 2,600,724
----------- -----------
$ 6,601,236 $ 6,998,820
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-15
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2000 AND 1999 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current liabilities:
Assessment district obligation
-in default (Note 4b) ................................. $ 2,831,180 $ 2,565,179
Notes payable-short term (Note 7d) ...................... 1,350,000 --
Current portion of long-term debt (Note 7a) ............. 1,874,000 289,000
Accounts payable ........................................ 796,483 453,203
Accrued payroll and related expenses .................... 164,170 164,877
Accrued property taxes, in default (Note 4b) ............ 356,178 582,859
Accrued interest ........................................ 41,079 14,395
Other liabilities ....................................... 216,009 246,211
----------- -----------
Total current liabilities ............................ 7,629,099 4,315,724
----------- -----------
Long-term debt, excluding
current portion (Note 7a) ................................ 1,967,169 3,911,694
----------- -----------
Distributions received in excess
of basis in investment (Notes 6a and 6b) .................. 14,498,208 12,688,808
----------- -----------
Other liabilities .......................................... 123,831 74,602
----------- -----------
Minority interest in consolidated
subsidiary (Note 6c) ..................................... 1,712,677 1,712,677
----------- -----------
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 ..................................... (19,040,805) (15,415,742)
----------- -----------
(17,038,256) (13,413,193)
Less note receivable from shareholder (Note 3c) ......... (2,291,492) (2,291,492)
----------- -----------
Total shareholders' deficit ........................... (19,329,748) (15,704,685)
----------- -----------
Commitments and contingencies (Notes 4b, 5a, 6c, 8 and 10)
$ 6,601,236 $ 6,998,820
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-16
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
Revenues:
<S> <C> <C> <C>
Bowling ....................................... $ 2,693,306 $ 2,803,944 $ 2,810,862
Rental ........................................ 644,886 571,094 500,785
Golf .......................................... 1,119,457 383,803 241,636
Other ......................................... 209,671 172,996 146,713
Other-related party (Note 6b) ................. 171,966 165,253 113,755
----------- ----------- -----------
4,839,286 4,097,090 3,813,751
----------- ----------- -----------
Costs and expenses:
Bowling ....................................... 2,065,872 1,952,352 1,997,237
Rental ........................................ 304,342 274,010 251,395
Golf .......................................... 1,660,829 1,031,301 776,780
Development ................................... 225,679 181,018 156,742
Selling, general, and
administrative (Note 3b) .................... 3,582,112 3,840,496 2,695,677
Depreciation and amortization ................. 387,021 381,496 538,985
Provision for impairment
losses (Notes 4a, and 6d) ................... 37,926 90,629 --
----------- ----------- -----------
8,263,781 7,751,302 6,416,816
----------- ----------- -----------
Loss from operations ............................. (3,424,495) (3,654,212) (2,603,065)
----------- ----------- -----------
Other income (expenses):
Investment income:
Related party (Notes 3b and 3c) ............. 38,450 145,276 259,936
Other ....................................... 11,292 21,433 112,141
Interest expense related to
development activities ...................... (266,001) (245,353) (221,844)
Interest expense and amortization
of finance costs ............................ (361,929) (340,870) (472,174)
Equity in income of investees (Note 6a) ....... 377,620 571,793 1,793,457
Provision for impairment
loss - investee (Note 6c) .................... -- -- (480,000)
Recognition of deferred gain (Note 3a) ........ -- -- 716,025
----------- ----------- -----------
(200,568) 152,279 1,707,541
----------- ----------- -----------
Loss from continuing operations .................. (3,625,063) (3,501,933) (895,524)
Net loss from discontinued operations (Note 12d) . -- -- (26,970)
----------- ----------- -----------
(3,625,063) (3,501,933) (922,494)
----------- ----------- -----------
Extraordinary losses from:
Early extinguishment of debt (Note 7a) ........ -- (78,997) --
Early extinguishment of investee debt (Note 6a) -- (98,500) --
----------- ----------- -----------
-- (177,497) --
----------- ----------- -----------
Net loss ......................................... ($3,625,063) ($3,679,430) ($ 922,494)
=========== =========== ===========
Basic and diluted net loss per common share from:
Continuing operations ......................... ($0.13) ($0.13) ($0.03)
Extraordinary items ........................... -- ( 0.01) --
------- ------- -------
($0.13) ($0.14) ($0.03)
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-17
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
Common Stock Note
--------------------------- Additional Receivable
Number paid-in Accumulated From
Of Shares Amount Capital Deficit Shareholder Total
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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)
Net loss .......................... -- -- -- (3,625,063) -- (3,625,063)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 .......... 27,250,000 $ 272,500 $ 1,730,049 ($19,040,805) ($2,291,492) ($19,329,748)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page A-18
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ......................................... ($3,625,063) ($3,679,430) ($ 922,494)
Adjustments to reconcile net loss to the
net cash used by operating activities:
Amortization of deferred financing costs ... 9,120 13,565 23,455
Depreciation and amortization .............. 387,021 381,496 543,178
Equity in income of investees .............. (377,620) (473,293) (1,793,457)
Deferred income ............................ 48,000 48,000 --
Interest income accrued on note
receivable from shareholder .............. -- (104,286) (216,801)
Interest accrued on assessment
district obligations ..................... 266,001 245,353 221,844
Provision for note receivable- affiliate ... -- 390,000 --
Provision for impairment losses ............ 37,926 90,629 480,000
(Gain) loss on sale of assets .............. 1,793 -- (10,279)
Recognition of deferred gain ............... -- -- (716,025)
Extraordinary loss on debt extinguishment .. -- 78,997 --
Changes in assets and liabilities:
(Increase) decrease in other receivables .... (77,106) 50,023 (98,183)
(Increase) decrease in assets
of discontinued operation ................ -- -- 130,607
(Increase) decrease in inventories .......... 5,254 (7,565) (213,477)
(Increase) decrease in prepaid expenses ..... (39,051) 46,467 (121,829)
Increase (decrease) in accounts payable .... 343,280 (124,644) 188,337
Increase (decrease) in accrued expenses
and other liabilities .................... (230,906) 239,905 46,650
Increase (decrease) in liabilities
of discontinued operation ................ -- -- (77,105)
Other ...................................... (8,705) 26,793 2,916
----------- ----------- -----------
Net cash used by operating activities .... (3,260,056) (2,777,990) (2,532,663)
----------- ----------- -----------
Cash flows from investing activities:
Decrease in notes receivable .................. 30,963 40,684 768,108
Additions to property and equipment ........... (335,920) (140,801) (321,483)
Proceeds from sale of discontinued
operation (Note 12d) ........................ -- -- 30,207
Proceeds from sale of other assets ............ -- -- 26,950
Proceeds from sale of undeveloped
land (Note 4a) .............................. 190,362 -- --
Increase in development costs on
undeveloped land ............................ (109,850) (7,454) --
Distributions received from investees ......... 2,193,400 1,419,671 4,258,511
Contributions to investees .................... (43,319) -- --
Distribution to holder of minority interest ... -- (50,000) (450,000)
----------- ----------- -----------
Net cash provided by investing activities 1,925,636 1,262,100 4,312,293
----------- ----------- -----------
Cash flows from financing activities:
Scheduled principal payments .................. (283,598) (261,528) (934,683)
Proceeds from short-term borrowings ........... 1,900,000 -- 400,000
Payments of short-term borrowings ............. (550,000) -- (650,000)
Proceeds from refinancing of long-term debt.... -- 1,975,000 --
Loan costs .................................... -- (62,598) --
Extinguishment of long-term debt .............. (75,927) --
Costs to extinguish long-term debt ............ -- (45,977) --
----------- ----------- -----------
Net cash provided (used) by
financing activities .................... 990,475 457,336 (1,184,683)
----------- ----------- -----------
Net increase (decrease) in cash and equivalents .. (343,945) (1,058,554) 594,947
Cash and cash equivalents, beginning of year ..... 357,906 1,416,460 821,513
----------- ----------- -----------
Cash and cash equivalents, end of year ........... $ 13,961 $ 357,906 $ 1,416,460
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page A-19
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
SUPPLEMENTAL CASH FLOW INFORMATION:
2000 1999 1998
--------- --------- ---------
Interest paid $ 326,000 $ 341,000 $ 451,000
------------- ========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
---------------------------------------------------------------------
Long-term debt of $45,486 was incurred in 1998 to finance capital expenditures
of $70,849 in 1998.
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.
During the year ended June 30, 2000, the Company discarded fully depreciated
equipment with a cost and accumulated depreciation of $112,829.
During the year ended June 30, 2000, the Company abandoned leasehold
improvements with a cost of $13,317 and accumulated depreciation of $12,162.
See accompanying notes to consolidated financial statements.
Page A-20
<PAGE>
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
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 at June 30, 1999 and none at June 30, 2000.
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 range 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.
Page A-21
<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, accounts payable, and notes
payable- short term - 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 generally 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, 2000.
2. Inventories:
Inventories consist of the following:
2000 1999
--------- ---------
Raw materials $ 86,152 $ 99,220
Work in process 100,317 75,651
Finished goods 118,437 135,289
---------- ----------
$304,906 $310,160
========== ==========
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.
Page A-22
<PAGE>
(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 $38,450, $40,990, and $43,135 in 2000,
1999, and 1998, respectively. The outstanding balance of $463,866 at
June 30, 2000 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, 2002.
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. This charge is included in
selling, general and administrative expense.
(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 (12.25 percent at June 30, 2000) 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 and $216,801 in 1998.
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 cumulative amount of interest that accrued but
was not recorded was $359,797 as of June 30, 2000 ($117,494 as of June
30, 1999).
4. Undeveloped land:
Undeveloped land consisted of the following at June 30, 2000 and 1999:
2000 1999
----------- -----------
Lake of Ozarks, MO .................. $ -- $ 281,629
Less provision for impairment loss -- (90,629)
Temecula, CA ........................ 3,910,318 3,800,468
Less provision for impairment loss ( 2,409,000) ( 2,409,000)
----------- -----------
$1,501,318 $1,582,468
=========== ===========
(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 $24,638. 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.
(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).
Page A-23
<PAGE>
The carrying value of the property consists of:
2000 1999
---------- ----------
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 333,214 223,364
---------- ----------
3,910,318 3,800,468
Provision for impairment loss ( 2,409,000) (2,409,000)
---------- ----------
$ 1,501,318 $ 1,391,468
=========== ===========
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 over the last eight years. The property
is currently subject to default judgments to the County of Riverside,
California totaling approximately $2,132,421 regarding delinquent
assessment district payments ($1,776,243) and property taxes ($356,178).
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 was the County's secured claim for
delinquent taxes and assessment district payments. OVPGP's plan was to use
the relief from stay to continue its efforts to negotiate a settlement of
the zoning issues described below, and restore the economic value of the
property. The bankruptcy proceeding was dismissed on February 15, 2000 with
the concurrence of OVPGP. This dismissal allows the County of Riverside to
proceed with a public sale of the property within 45 days after giving
notice. On June 23, 2000, the County of Riverside agreed to remove the
property from the planned public sale originally scheduled for June 26,
2000 in exchange for an immediate payment of $330,000 with the balance of
property taxes due on December 29, 2000. Separately, the County of
Riverside stated that a foreclosure sale related to the default judgement
for assessment district payments would not be scheduled until some time
after January 1, 2001.
OVPGP has applied to the City of Temecula for approval of a development
plan which includes a combination of multi-family and commercial uses. If
this plan is approved or the zoning is otherwise 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, 2000 and 1999:
2000 1999
----------- -----------
Assets:
Undeveloped land (Note 4c) .... $ 1,501,318 $ 1,391,468
Liabilities:
Assessment district
obligation-in default ........ 2,831,180 2,565,179
Accrued property taxes ........ 356,178 582,859
Page A-24
<PAGE>
The delinquent principal, interest and penalties ($1,776,243) and the
remaining principal balance of the allocated portion of the assessment
district bonds ($1,054,937) are classified as "Assessment district
obligation- in default" in the consolidated balance sheet at June 30, 2000.
In addition, accrued property taxes in the balance sheet at June 30, 2000
includes $356,178 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 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, 2000 and 1999:
2000 1999
--------- ---------
Deferred lease costs:
Subleasehold interest ......... $ 111,674 $ 111,674
Less accumulated amortization ( 33,689) ( 31,793)
Lease inception fee ........... 232,995 232,995
Less accumulated amortization (121,143) (83,859)
--------- ---------
189,837 229,017
--------- ---------
Deferred loan costs ............. 82,598 87,712
Less accumulated amortization .. (26,312) (22,306)
--------- ---------
56,286 65,406
--------- ---------
$ 246,123 $ 294,423
========= =========
(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 $162,000 per year for the remaining term of 43 years
(aggregate of $6,966,000). The Company is obligated to pay the greater
of a base rent (currently $162,000), adjusted every five years based on
an increase in a consumer price index, or 85 percent of the minimum rent
Page A-25
<PAGE>
due from the sublessees. The minimum rent had been $81,000 annually
until October 1, 1998. The future minimum rents due to the Company from
the sublessees are approximately $160,000 per year for the remaining
term of 43 years (aggregate of approximately $6,927,000). The subleases
provide for increases every five years based on increases in a 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.
6. Investments:
(a) Investments consist of the following:
2000 1999
------------ ------------
Accounted for on the equity method:
Investment in UCV, L.P. .................. $(14,498,208) $(12,688,808)
Vail Ranch Limited Partnership ........... 564,446 580,927
------------ -----------
(13,933,762) 12,107,881)
Less Investment in UCV, L.P. classified as
liability- Distributions received
in excess of basis in investment ........ 14,498,208 12,688,808
------------ -----------
564,446 580,927
------------ -----------
Accounted for on the cost basis:
All Seasons Inns, La Paz ................. 37,926 37,926
Less provision for impairment loss ..... (37,926) --
------------ -----------
-- 37,926
------------ -----------
Total investments $ 564,446 $ 618,853
============ ===========
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):
2000 1999 1998
--------- --------- ----------
UCV, L.P. ........... $ 437,420 $ 516,713 $ 343,121
Vail Ranch Limited
Partnership ........ (59,800) 55,080 1,450,336
--------- --------- ----------
$ 377,620 $ 571,793 $1,793,457
========= ========= ==========
(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):
2000 1999 1998
---------- ----------- -----------
Total assets ...................... $3,013,000 $ 2,556,000 $ 1,765,000
Total liabilities ................. 29,630,000 25,511,000 20,110,000
Revenues .......................... 4,824,000 4,622,000 4,490,000
Operating and general and
administrative costs .............. 1,658,000 1,510,000 1,520,000
Redevelopment planning costs -- -- 6,000
Depreciation ...................... 26,000 29,000 176,000
Interest and amortization of
loan costs ...................... 2,265,000 2,049,000 2,103,000
Extraordinary loss from early debt
extinguishment .................. -- 197,000 --
Net income ........................ 875,000 837,000 685,000
The apartment project is managed by the Company, which recognized
management fee income of $123,966, $117,253, and $113,755 in the
twelve-month periods ended June 30, 2000, 1999, and 1998, respectively. In
addition, pursuant to a development fee agreement with UCV dated July 1,
1998, the Company received development fees totaling $96,000 each in the
years ended June 30, 2000 and 1999, of which $48,000 in each year was
recorded as deferred income.
Page A-26
<PAGE>
A reconciliation of distributions received in excess of basis in UCV as of
June 30 is as follows:
2000 1999
----------- -----------
Balance, beginning ............... $12,688,808 $12,280,101
Equity in income ................. (437,420) (418,213)
Cash distributions ............... 2,193,400 773,500
Amortization of purchase price in
excess of equity in net assets 53,420 53,420
----------- -----------
Balance, ending .................. $14,498,208 $12,688,808
=========== ===========
(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.
The following is summarized financial information of VRLP as of June 30,
2000 and 1999 and for the years then ended:
2000 1999
-------- --------
Assets:
Investment in Temecula Creek .. $822,000 $800,000
Other assets .................. 14,000 54,000
Total assets ............. 836,000 854,000
Total liabilities .............. 17,000 --
Partners' capital .............. 819,000 854,000
Revenues ....................... 10,000 133,000
Equity in loss of Temecula Creek (39,000) (82,000)
Net income (loss)............... (86,000) 71,000
Page A-27
<PAGE>
The following is a reconciliation of the investment in Vail Ranch Limited
Partnership:
2000 1999
--------- -----------
Balance, beginning $ 580,927 $ 1,172,018
Distributions ............. -- (646,171)
Contributions ............. 43,319 --
Equity in net income (loss) (59,800) 55,080
--------- -----------
Balance, ending $ 564,446 $ 580,927
========= ===========
(d) 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 cost basis of this investment
($162,629) has been reduced by provisions for impairment loss of $37,926
recorded in the year ended June 30, 2000 and $125,000 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 cash payments of
$27,074 received to date (representing accrued interest through December
1996) were applied to reduce the cost of the investment.
7. Long-term and short-term debt:
(a) Long-term debt consists of the following:
2000 1999
--------- ---------
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.................. 1,957,592 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. The balance is due July 2001.... 83,960 161,462
8-1/2% note payable to bank, collateralized by deed
of trust on $282,000 of undeveloped land, paid
September 1999.................................... -- 75,927
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 interest
and varying principal payments, balance
due December 31, 2000. See (e) below............. 1,680,920 1,768,583
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.................... 79,138 164,370
Other................................................ 39,559 56,637
---------- ----------
3,841,169 4,200,694
Less current maturities.............................. (1,874,000) (289,000)
---------- ----------
$1,967,169 $3,911,694
========== ==========
Page A-28
<PAGE>
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: $1,874,000 in 2001, $45,000 in 2002, $21,000 in 2003,
$22,000 in 2004, and $24,000 in 2005.
(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.
(c) On August 24, 1999 and September 25, 1999 the Company borrowed a total of
$550,000 from the Company's partner in UCV 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 loan plus interest of $4,562 was paid
on October 14, 1999.
(d) Through June 30, 2000, the Company has borrowed a total of $1,350,000 from
the Company's partner in UCV. The Company has borrowed an additional
$700,000 through September 11, 2000. The loans are unsecured, due on demand
and bear interest at monthly at a base rate plus 1 percent (9-1/2% at June
30, 2000. The Company has agreed in principal to assign to the Company's
partner in UCV two percent of its right to distributions from OVPGP and
five percent of its right to distributions from Penley Sports.
(e) On September 12, 2000, the Company agreed to terms to extend the due date
of a note payable with a balance of $1,680,920 at June 30, 2000 from August
30, 2000 to December 31, 2000. The Company has the option to extend the due
date to August 31, 2001 by paying a $25,000 extension fee. The interest
rate was modified from a fixed rate of 8% to a rate adjusted monthly equal
to a base rate plus 3 percentage points (approximately 9-1/2 % at September
12, 2000) from August 31 to December 31, 2000 and a base rate plus 3-1/2
percentage points from January 1 through August 30, 2001. In addition to
the monthly payment of interest, monthly principal payments are due as
follows: $5,000 in October through December 2000; $10,000 in January
through March 2001; $20,000 in April through June 2001; and $30,000 in July
and August 2001. In addition to these principal payments, a principal
payment of $250,000 is due by December 31, 2000, $200,000 of which must be
made from the proceeds of any sale of the Company's office building. Due to
the Company's liquidity problems as described in Note 13 and the
uncertainty of the office building sale, the balance of this note is
included in current portion of long-term debt.
(f) 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.
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 2001 through 2003
and $1,080,000 in the aggregate. This lease expires in June 2003 and
contains three 5-year options at rates increased by 10-15 percent over the
Page A-29
<PAGE>
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 2000, 1999 and 1998.
The Company also leases its golf shaft manufacturing plant under a ten year
operating lease agreement, which commenced April 1, 2000. The lease
provides for fixed annual minimum rentals in addition to taxes, insurance
and maintenance for each of the years ending June 30 as follows: 2001-
$221,000, 2002- $227,000, 2003- $234,000, 2004- $241,000, 2005- $247,000,
thereafter- $1,171,000. Commencing April 1, 2005 the lease provides for
adjustments to the rent based on increases in a consumer price index, not
to exceed six percent per annum. The lease also provides for two options
that each extend the lease for an additional five years. The rent for the
first year of the first option will be based on a five percent increase
over the previous year's rent. Subsequent year's rent will be adjusted
based on increases in the consumer price index. The Company had previously
leased facilities for its golf shaft manufacturing plant pursuant to an
operating lease that expired June 30, 2000. Rental expense for the
manufacturing facilities was $112,252 in 2000, of which $66,760 related to
the old plant, $53,834 in 1999, and $43,822 in 1998.
(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, 2000, 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, 2000, 1999 and 1998, 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, 2000, the Company had net operating loss carry-forwards of
$10,745,000 for federal income tax purposes. The carryforwards expire from
years 2001 to 2020. 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, 2000 and 1999.
The following is a reconciliation of the normal expected federal income tax
rate of 34 percent to the income (loss) in the financial statements:
2000 1999 1998
------- ------- ---------
Expected federal income tax benefit $(1,233,000) $(1,251,000) $(314,000)
Increase (decrease) in valuation
allowance ...................... (121,000) 1,199,000 284,000
Expiration of net operating loss
carryforward ................... 1,340,000 -- --
Other ............................. 14,000 52,000 30,000
----------- ----------- ---------
Provision for income tax expense $ -- $ -- $ --
=========== =========== =========
Page A-30
<PAGE>
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:
2000 1999
---------- ----------
Deferred tax assets (liabilities):
Net operating loss carryforwards ..... $3,653,000 $3,962,000
Accumulated depreciation and
amortization ....................... 468,000 487,000
Valuation allowance for impairment
losses ............................. 1,366,000 1,268,000
Other ................................ 455,000 346,000
---------- -----------
Total net deferred tax assets ...... 5,942,000 6,063,000
Less valuation allowance ........... (5,942,000) (6,063,000)
---------- ----------
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: $197,000 in 2001, $109,000 in 2002,
$13,000 in 2003, none thereafter, and $319,000 in the aggregate.
The following is a schedule of the Company's rental property included in
property and equipment as of June 30, 2000 and 1999:
2000 1999
---------- -----------
Land $ 258,000 $ 258,000
Building 773,393 773,393
Tenant improvements 140,306 138,358
---------- -----------
1,171,699 1,169,751
Accumulated depreciation (424,821) (359,505)
----------- -----------
$ 746,878 $ 810,246
========== ===========
On September 28, 2000 the Company agreed to sell the office building for
$3,725,000. The sale is contingent on the results of the buyers day due
diligence period and the existing lender's approval of the buyer assuming
the loan (balance of $1,957,592 as of June 30, 2000) related to the office
building. The following is a summary of the results from operations of the
office building included in the financial statements:
2000 1999 1998
--------- --------- ---------
Rents $ 477,000 $ 424,000 $ 361,000
Costs 112,000 138,000 118,000
Allocated SG&A 26,000 21,000 18,000
Depreciation 80,000 79,000 66,000
--------- --------- ---------
Income from operations 259,000 186,000 159,000
Interest expense 167,000 137,000 133,000
--------- --------- ---------
Income from continuing operations 92,000 49,000 26,000
========= ========= =========
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.
Page A-31
<PAGE>
The following is summarized information about the Company's operations by
business segment.
<TABLE>
<CAPTION>
Real Real Unallocated
Estate Estate And
Bowling Operation Development Golf Other Totals
----------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED JUNE 30, 2000
------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $ 2,693,306 $ 709,182 -- $ 1,119,457 $ 381,637 $ 4,903,582
Depreciation and
amortization ..................... 104,211 135,405 -- 97,452 49,953 387,021
Impairment losses .................. -- -- -- -- 37,926 37,926
Interest expense ................... 141,777 166,528 267,022 13,473 39,130 627,930
Equity in income of
investees ........................ -- 437,420 (59,800) -- -- 377,620
Segment profit (loss) .............. (463,375) 514,327 (572,501) (2,750,612) (402,644) (3,674,805)
Investment income .................. -- -- -- -- -- 49,742
Loss from continuing
operations ....................... -- -- -- -- -- (3,625,063)
Segment assets ..................... 1,846,575 986,767 2,066,888 1,448,947 252,059 6,601,236
Expenditures for
segment assets ................... 20,146 1,948 109,850 294,386 14,940 445,770
YEAR ENDED JUNE 30, 1999
------------------------
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
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
</TABLE>
2000 1999 1998
---------- ---------- ----------
Revenues per segment schedule.. $4,903,582 $4,158,701 $3,872,995
Intercompany rent eliminated... (64,296) (61,611) (59,244)
---------- ---------- ----------
Consolidated revenues ......... $4,839,286 $4,097,090 $3,813,751
========== ========== ==========
Page A-32
<PAGE>
12. Significant Event:
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, which are presented in the consolidated statements
of operations for the year ended June 30, 1998 as discontinued operations.
Revenues ............................. $1,359,879
Costs ................................ 1,215,857
Selling, general and administrative:
Direct ............................. 116,819
Allocated .......................... 49,000
Depreciation ......................... 4,193
Interest expense ..................... 980
Net income (loss) from discontinued
operations ......................... (26,970)
Basic and diluted net income (loss)
per common share from discontinued
operations ......................... ($.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, 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.
Page A-33
<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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States of America.
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, 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 8, 2000
Page A-34
<PAGE>
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
CORPORATE INFORMATION
Corporate Offices 5230 Carroll Canyon Road, Suite 310
San Diego, California 92121
Directors Harold S. Elkan
Steven R. Whitman
James E. Crowley
Robert A. MacNamara
Patrick D. Reiley
Officers Harold S. Elkan, President
Steven R. Whitman, Chief
Financial Officer; Secretary
Legal Counsel Cramer & Egan, A P.C.
401 West A Street, Suite 2300
San Diego, California 92101
Auditors KPMG LLP
750 B Street, Suite 1500
San Diego, California 92101
Page A-35
<PAGE>
PROXY FOR 2000 ANNUAL MEETING OF
THE SHAREHOLDERS OF SPORTS ARENAS, INC.
The undersigned shareholder of Sports Arenas, Inc. hereby appoints Harold S.
Elkan and Steven R. Whitman or any one of them (with full power to act alone and
to designate substitutes) Proxies of the undersigned with authority to vote and
otherwise represent all of the shares of the undersigned at the Annual Meeting
of Shareholders to be held on December 22, 2000,or an adjourned meeting thereof,
with all of the powers the undersigned would possess if personally present, upon
matters noted below, and upon such other matters as may properly come before the
meeting. All matters intended to be acted upon have been proposed by the Board
of Directors. This Proxy confers authority to vote "FOR" each proposition unless
otherwise indicated.
(1) To elect as Directors and nominees listed below:
Harold S. Elkan Patrick Reiley
Steven R. Whitman James E. Crowley
Robert A. MacNamara
[ ] WITHHOLD AUTHORITY to vote for all nominees listed above
[ ] FOR all nominees listed above, except as marked to the contrary
Note: To withhold authority to vote for an individual nominee, strike a line
through the nominee's name.
(2) In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
For [ ] Against [ ] Abstain [ ]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SPORTS ARENAS,
INC. AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
<PAGE>
(Continued from other side)
Dated:__________ ___________________________________
Signature
___________________________________
Signature
___________________________________
Signature
Please sign exactly as your name appears on your stock
certificate(s). Joint owners of the shares must each sign.
Persons holding shares for the benefit of others (fiduciaries)
should indicate their titles. Please sign, date and mail this
Proxy in the enclosed envelope.
