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 4a-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: ________________
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
----------------------------
7415 CARROLL ROAD, SUITE C
SAN DIEGO, CALIFORNIA 92121
----------------------------
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 23, 2002
TO THE SHAREHOLDERS OF SPORTS ARENAS, INC.:
The Annual Shareholders' Meeting (the "Meeting") will be held at 10:00 A.M.
on Monday, December 23, 2002, at 7415 Carroll Road, Suite C, 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 8, 2002 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
/S/HAROLD S. ELKAN
-------------------
Harold S. Elkan
President
San Diego, California
November 20, 2002
SPORTS ARENAS, INC.
7415 CARROLL ROAD, SUITE C
SAN DIEGO, CALIFORNIA 92121
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 23, 2002
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 23, 2002, 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 22, 2002. 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 8, 2002 (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 principle 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
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. If a shareholder in attendance at the annual meeting gives proper notice
of an intention to cumulate votes, Management may vote cumulatively all of the
proxies received pursuant hereto in order to cause the election of each 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, 2002. The meeting was attended by all of the incumbent directors.
In September 1988, the Board of Directors appointed Patrick D. Reiley as an
audit committee of one. The audit committee is to oversee the Company's
accounting and financial reporting policies including recommendations to the
Board of Directors regarding appointment of independent auditors, review with
the independent auditors of the accounting principles and practices followed and
the adequacy thereof, review annual audit and financial results, approve any
material change in accounting principles, policies and procedures and to make
recommendations to the Board of Directors with regard to any of the foregoing.
The audit committee met once in the year ended June 30, 2002.
The audit committee has reviewed and discussed the audited financial
statements of the Company for the year ended June 30, 2002 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, 2002.
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:
Directors and Officers Age Position and Tenure with Company
---------------------- --- --------------------------------
Harold S. Elkan 59 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 49 Chief Financial Officer and Treasurer
since May 1987; Director and Assistant
Secretary since August 1, 1989
Secretary since January 1995
Patrick D. Reiley 61 Director since August 21, 1986
James E. Crowley 55 Director since January 10, 1989
Robert A. MacNamara 54 Director since January 9, 1989
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
Page 2
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 Chairman and controlling
shareholder Coast Nissan from 1992 to August 1996; and has been Chairman 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. From 1997 through
2001 Mr. MacNamara was an independent consultant to the real estate development
industry. Since January 2002, Mr. MacNamara has been employed by Sunrise
Development as a senior development officer. Sunrise Development is a developer
and operator of assisted living properties.
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, 2002,
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, .. 2002 $350,000 $ -- $-- $ -- $ --
President ..... 2001 350,000 100,000 -- -- --
2000 350,000 100,000 -- -- --
Steven R. Whitman, 2002 100,000 -- -- -- --
Chief Financial 2001 100,000 -- -- -- --
Officer ... 2000 100,000 10,000 -- -- --
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.
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.
Page 3
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, 2002) 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, 2002.
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.
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 herein provided below 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 $.02 to $.06 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.
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.
Page 4
SCHEDULE OF COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Sports S&P Leisure
Year Ended Arenas, Inc. S&P 500 Time
---------- ----------- ------- -----------
6/1997 100 100 100
6/1998 300 255 128
6/1999 200 309 116
6/2000 200 327 95
6/2001 500 275 118
6/2002 300 223 65
Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth, as of November 6, 2002, certain information with
respect to the beneficial ownership of Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5 percent of its outstanding
Common Stock, (ii) each of the Company's directors, and (iii) all directors and
officers as a group. Except as noted below, to the best of the Company's
knowledge, each of such persons has sole voting and investment power with
respect to the shares beneficially owned.
Shares Nature of
Beneficially Beneficial Percent
Name and Address Owned Ownership of Class
---------------- -------------- ----------------- --------
Harold S. Elkan 21,808,267 (a) Sole investment 80.0%
5230 Carroll Canyon Road and voting power
San Diego, California
All directors and 21,808,267 Sole investment 80.0%
officer as a group and voting power
(a) These shares of stock are owned by Andrew Bradley, Inc., which is
owned by Harold S. Elkan- 88%, Andrew S. Elkan- 6%, and Bradley J.
Elkan- 6%. 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.
Page 5
Certain Relationships and Related Transactions
----------------------------------------------
1. The Company has $398,256 of unsecured loans outstanding to Harold S.
Elkan, (President, Chief Executive Officer, Director and, through his 88% owned
corporation, Andrew Bradley, Inc., the majority shareholder of the Company) as
of June 30, 2002 ($394,339 as of June 30, 2001). The balance at June 30, 2002
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 on demand. The largest amount outstanding during
the year was $403,305 in April 2002. The $50,000 payment due December 31, 2001
was not paid. The Company is in the process of restructuring the repayment
terms.
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 was included in selling, general and administrative
expense. The Company also discontinued recording the interest income on the
loans except to the extent that balance of the loans remained below $390,000. As
of June 30, 2002, $8,256 of interest accrued on the loans was unrecorded ($4,339
as of June 30, 2001).
2. In December 1990, the Company loaned $1,061,009 to the Company's
majority shareholder, Andrew Bradley, Inc. (ABI), which is 88% 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 (6.25 percent at June 30, 2002) and to be added to the
principal balance annually. As of June 30, 2002 and 2001, $1,230,483 of interest
had been accrued and added to the loan balance in the financial statements. 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 $809,735 as of June 30, 2002
($620,007 as of June 30, 2001).
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, 2002, applicable filing requirements under Section 16(a) were
satisfied.
Page 6
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
2003, shareholder proposals must be received by the Company at its principal
office at 7415 Carroll Road, Suite C, San Diego, California 92121, prior to July
29, 2003, and must comply with all legal requirements for the inclusion of such
proposals.
INDEPENDENT AUDITORS
--------------------
The firm of KPMG LLP served as the Company's independent auditors for
fiscal 2002. A representative of KPMG LLP is expected to be at the Meeting.
INDEPENDENT ACCOUNTANT FEES AUDIT FEES
--------------------------------------
Aggregate fees billed to the Company for the fiscal year ended June 30, 2002, by
the Company's principal accounting firm, KPMG LLP were as follows:
Audit Fees (a) .................... 61,700
Financial Information Systems
Design and Implementation Fees . None
All Other Fees .................... None
(a) Audit fees include audit of consolidated financial statements,
quarterly reviews, review of annual report on Form 10-K, attendance at
audit committee and shareholder meetings and review of proxy statement
for annual meeting.
The Audit Committee has concluded that the provision of these services did not
adversely impact the independence of KPMG LLP.
ANNUAL REPORT
-------------
The Company's Annual Report for the fiscal year ended June 30, 2002, 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,
2002, 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
/S/HAROLD S. ELKAN
------------------
Harold S. Elkan
President
San Diego, California
November 20, 2002
Page 7
APPENDIX A
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 2002
Page A-1
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 2002
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 one bowling center, an apartment project (50% owned), and a graphite
golf club shaft manufacturer. 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 7415 Carroll Road,
Suite C, San Diego, California. Overall, the Company and its consolidated
subsidiaries have approximately 76 employees. The following is a summary of the
revenues of each segment stated as a percentage of total revenues for each of
the last three years:
2002 2001 2000
----- ----- -----
Bowling 35 49 54
Real estate operations 4 10 14
Real estate development - - -
Golf 51 34 24
Other 10 7 8
BOWLING CENTERS
---------------
The Company's wholly owned subsidiary, Cabrillo Lanes, Inc. (the Bowl), operated
one 60 lane bowling center during the year ended June 30, 2002 in San Diego,
California. The Company had operated another 50 lane bowling center in San
Diego, California until it was closed on December 21, 2000 in conjunction with
the sale by the Company of the land and building. These two centers were
purchased in August 1993.
The remaining bowling center's operations include food and beverage facilities
and coin operated video and other games. The revenues from these activities have
averaged 33-35 percent of total bowling related revenues for the last three
fiscal years. The bowling center operates the food and beverage operations,
which includes sale of beer, wine and mixed drinks. The Company receives a
negotiated percentage of the gross revenues from the coin operated video games.
The bowling center includes a pro shop, which is leased to an independent
operator for a nominal amount. The center also has a day care facility, which is
provided free of charge to the bowlers. The bowling center has automatic
score-keeping and a computerized cash control system.
On average, approximately 35 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 76 percent of league revenues
annually. Approximately 72 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 Bowl competes with other bowling centers in its market area, as well
as other sports and recreational activities. Further competition is likely at
any time a new center is constructed in the same market area. The Company
continuously markets its league and open play through a combination of
advertising, phone solicitation, direct mail, and a personal sales program.
At June 30, 2002, the bowling center was licensed to sell alcoholic beverages.
Licenses are generally renewable annually provided there are no violations of
government regulations. The bowling center was cited with two violations for
incidents in July 2000 and November 2000. There have been no violations since.
The bowling center served a 15 day suspension of its liquor license in August
2002 related to these two violations. The suspension did not have a material
effect on bowling revenues. If the bowling center receives another citation
prior to July 2003, the bowling center may lose its license permanently. The
bowling center employs approximately 30 people.
Page A-2
REAL ESTATE DEVELOPMENT
------------------------
The Company, through its subsidiaries, has an ownership interest in a 13 acre
parcel of partially developed 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). The development plan is for a 109,910 square
foot shopping center on approximately 13 acres of land. In July 2000, TC
completed development of 54,107 square feet of the shopping center. As of August
31, 2002 a total of 85,000 square feet had been constructed of which 94% is
currently leased. The balance of the construction is expected to be completed
within the next six to twelve months.
COMMERCIAL REAL ESTATE RENTAL
------------------------------
Real estate rental operations during the year ended June 30, 2002 consisted of a
sublessor interest in land leased to condominium owners in Palm Springs,
California, which was sold on March 20, 2002, 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, was the lessee of 15 acres of land in the Palm Springs, California
area under a ground lease expiring in September 2043. The land was 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. On March 20, 2002 the DPDC assigned its interest in the leases to the
condominium association. DPDC received a note receivable of $37,500 as
consideration for the sublessor interest that DPDC then assigned to the master
lessors for a reduction in amounts owed by DPDC to the master lessors. DPDC
still owes the master lessors $66,424 plus interest from November 1, 2001. Once
this amount is paid, the Company will be released from any further liability
under the master lease. As a result of these agreements, the Company recorded a
$44,915 impairment loss for a portion of the unamortized balance ($75,615) of
the deferred lease costs related to this sublessor interest and discontinued
amortizing the deferred lease costs effective October 2001.
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:
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Occupancy 98% 98% 99% 99% 99%
Average monthly rent/unit $816 $772 $728 $694 $675
Real property tax $116,000 $114,000 $112,000 $110,000 $108,000
Real property tax rate 1.12% 1.12% 1.12% 1.12% 1.12%
Page A-3
GOLF CLUB 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. Currently, the Company owns an approximate 81 percent
interest (See Note 7b of Notes to the Consolidated Financial Statements). PPS
was a manufacturer of graphite golf club 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 club
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 over $1,100,000 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 are subleased to another
tenant through October 2002.
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 club shaft sales increased by $735,654 in the year
ended June 30, 2000, $407,660 in the year ended June 30, 2001, and $1,062,176 in
the year ended June 30, 2002. Penley currently has products in testing by
several large golf club manufacturers. However, there can be no assurances that
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 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 three have been issued and one other is pending.
Although Penley has developed several new products, no assurance can be given
they will meet with market acceptance or 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 three suppliers. 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 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 club 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, its unproven production capability
is making it difficult to attract the golf club manufacturers as customers.
Penley currently has three patents and one other patent pending and several
copyrighted trademarks and logos. Although Management believes these items are
of value to the business and Penley will protect them to the fullest extent
possible, Management does not believe these items are critical to Penley's
ability to develop business with the golf club manufacturers.
Penley currently has approximately 41 full and part-time employees.
Page A-4
Due to Penley's low sales volume and lack of a contract with a high volume
purchaser, there is currently no significant backlog of sales orders, or
customer concentration (based on consolidated revenues). Approximately 71
percent of Penley's sales occur in the months of February through July.
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.
2002 2001
------------ -------------
High Low High Low
----- ----- ----- -----
First Quarter $ .05 $ .02 $ .04 $ .04
Second Quarter $ .21 $ .02 $ .04 $ .04
Third Quarter $ .03 $ .03 $ .04 $ .04
Fourth Quarter $ .03 $ .03 $ .06 $ .04
(b) The number of holders of record of the common stock of the Company as of
September 25, 2002 is approximately 4,300. The Company believes there are a
significant number of beneficial owners of its common stock whose shares
are held in "street name".
(c) The Company has neither declared nor paid dividends on its common stock
during the past ten years, nor does it have any intention of paying
dividends in the foreseeable future.
SELECTED CONSOLIDATED FINANCIAL DATA (NOT COVERED BY INDEPENDENT
----------------------------------------------------------------
AUDITORS' REPORT)
-----------------
Year Ended June 30,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Revenues ................... $ 5,078,845 $ 4,492,736 $ 4,724,435 $ 3,957,011 $ 3,642,335
Loss from operations ....... (2,082,369) (3,443,196) (3,424,495) (3,654,212) (2,603,065)
Income (loss) from
continuing operations .... (2,011,407) 3,603,234 (3,625,063) (3,501,933) (895,524)
Basic and diluted income
(loss) per common share
from continuing operations (.07) .13 (.13) (.13) (.03)
Total assets ............... 2,903,403 3,448,474 6,601,236 6,998,820 9,448,653
Long-term debt, excluding
current portion ........ 5,456 13,942 1,967,169 3,911,694 3,287,783
See Notes 4(b), 6(c), and 12 of Notes to Consolidated Financial Statements
regarding disposition of business operations and material uncertainties.
Page A-5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The independent auditors' report dated August 23, 2002 included with this Annual
Report on Form 10-K contained the following explanatory paragraph:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 14 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 14. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
The Company is expecting a $500,000 cash flow deficit in the year ending June
30, 2003 from operating activities after estimated distributions from UCV, and
estimated capital expenditures ($30,000) and scheduled principal payments on
short-term and long-term debt.
The short-term loan from the Company's partner in UCV is due on demand. The
Company is exploring selling its partner a portion of the Company's interest in
UCV in satisfaction of the remaining loan obligations. At this point management
is unable to assess the likelihood a transaction will be consummated.
Management expects continuing cash flow deficits until Penley Sports develops
sufficient sales volume to become profitable. Although, there can be no
assurances that Penley Sports will ever achieve profitable operations,
management estimates that a combination of continued increases in the sales of
Penley Sports and reduction of its operating costs will result in Penley Sports
and the Company achieving a breakeven level of operations at the end of the next
fiscal year.
Management is currently evaluating other sources of working capital including
the sale of assets or obtaining additional investors in Penley Sports.
Management has not assessed the likelihood of any other sources of long-term or
short-term liquidity. 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. However, management believes
it will be able to meet its financial obligations for the next twelve months.
The Company has a working capital deficit of $685,296 at June 30, 2002, which is
a $400,830 decrease from the working capital deficit of $1,086,126 at June 30,
2001. The working capital deficit decreased primarily due to distributions
received from UCV. This source of funds was partially offset by $1,736,488 of
cash used by operations and the repayment of short term debt. The cash provided
(used) before changes in assets and liabilities segregated by business segments
was as follows:
2002 2001 2000
----------- ----------- -----------
Bowling ............................. $ 26,000 $ ( 289,000) $ ( 356,000)
Rental .............................. (4,000) 105,000 219,000
Golf ................................ (1,647,000) (2,594,000) (2,652,000)
Development ......................... -- (177,000) (246,000)
General corporate expense and other . (111,000) (467,000) (217,000)
----------- ----------- -----------
Cash provided (used) by continuing
operations ........................ (1,736,000) (3,422,000) (3,252,000)
Capital expenditures, net of
financing ......................... -- (538,000) (446,000)
Principal payments on long-term debt (32,000) (214,000) (360,000)
----------- ----------- -----------
Cash used ........................... (1,768,000) (4,174,000) (4,058,000)
=========== =========== ===========
Distributions received from investees 2,103,000 1,559,000 2,193,000
=========== =========== ===========
Contributions to investees .......... -- (200,000) (43,000)
=========== =========== ===========
Proceeds from sale of assets ........ 31,000 5,680,000 190,000
=========== =========== ===========
Payments on minority interests ...... (50,000) (2,172,000) --
=========== =========== ===========
The Company received distributions of approximately $1,700,000 in March and
April 2002, $920,000 in March 2001, and $1,757,000 in October 1999 from the
proceeds of refinancing UCV's long term debt in each of those years. Otherwise
the cash distributions the Company received from UCV during the last three years
were the Company's proportionate share of distributions from UCV's results of
operations. The investment in UCV is classified as a liability because the
Page A-6
cumulative distributions received from UCV exceed the sum of the Company's
initial investment and the cumulative equity in income of UCV by $18,008,401 at
June 30, 2002. 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
$20,000,000-$22,000,000 as of June 30, 2002. On October 3, 2000, UCV obtained
approval for plans to redevelop the 542 unit apartment project into 1,109 units
plus an 80 unit assisted living facility. UCV is currently evaluating
alternatives for financing the redevelopment.
At June 30, 2002, 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). TC has completed development of
85,000 square feet of the 110,000 square foot shopping center. The balance of
the build out is expected to be completed within the next six to twelve months.
The Company estimates that the value of the Company's 60 percent interest in
VRLP at June 30, 2002 is approximately $700,000 to $900,000.
CRITICAL ACCOUNTING POLICIES
----------------------------
In response to the SEC's release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies", the Company has identified its
most critical accounting policy as that related to the carrying value of its
long-lived assets. Any event or circumstance that indicates to the Company an
impairment of the fair value of any asset is recorded in the period in which
such event or circumstance becomes known to the Company. During the year ended
June 30, 2002 no such event or circumstance occurred that would, in the opinion
of management, signify the need for a material reduction in the carrying value
of any of the Company's assets, except as it relates to the impairment of the
deferred lease costs (See Note 5(a) to Consolidated Financial Statements).
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") SFAS No. 141, Business Combinations.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The Company was required to
adopt the provisions of SFAS No. 141 immediately. The adoption of SFAS No. 141
has not had a material effect on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The Company is required to adopt Statement No. 142 effective
July 1, 2002. As of June 30, 2002, the Company does not have any goodwill,
intangible assets or unamortized negative goodwill. The Company does not believe
SFAS No. 142 will have a material impact on the Company's financial statements.
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 and requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The Company does not believe SFAS No. 143 will have a
material impact on the Company's financial statements.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental provisions
in SFAS 121 for recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS 121. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121. The provisions of the Statement for assets held for sale or other
disposal generally are required to be applied prospectively after the adoption
date to newly initiated disposal activities. Therefore, management cannot
determine the potential effects that adoption of SFAS 144 will have on the
Company's financial statements.
Page A-7
In April of 2002, the FASB issued SFAS No.145, Rescission of SFAS No. 4, 44, and
64, Amendment to SFAS No.13, and Technical Corrections. This Statement rescinds
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Only the
provisions related to SFAS No.4 will have an impact on the presentation of the
Company's financials statement. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The provisions of this Statement related to the
rescission of Statement 4 shall be applied in fiscal years beginning after May
15, 2002.
In June of 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. This
statement will only have an effect on the Company's financial statements to the
extent future exit or disposal activities relevant to SFAS No. 146 occur.
"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.
The following is a summary of the changes to the components of the segments in
the years ended June 30, 2002 and 2001:
Real Estate Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ----------- ---------- ----------- ----------- -----------
YEAR ENDED JUNE 30, 2002
------------------------
Revenues ........................ $ (426,040) $ (287,386) $ -- $ 1,062,176 $ 204,374 $ 553,124
Costs ........................... (447,204) (74,977) (156,688) 419,223 -- (259,646)
SG&A-direct ..................... (153,759) -- -- (253,383) (192,518) (599,660)
SG&A-allocated .................. (64,826) (13,000) (20,000) (57,000) 154,826 --
Depreciation and amortization ... (483) (17,205) -- 20,453 3,923 6,688
Impairment losses ............... -- 44,915 -- -- -- 44,915
Interest expense ................ (91,117) (93,764) (235,208) (4,048) (116,657) (540,794)
Equity in income (loss) of ...... -- (211,244) 177,211 -- -- (34,033)
investees
Gain on sale .................... (482,487) (2,764,483) (5,544,743) -- -- (8,791,713)
Segment profit (loss) ........... (151,138) (3,109,082) (4,955,636) 936,931 354,800 (6,924,125)
Investment income ............... (2,926)
Income from continuing operations (6,927,051)
Page A-8
YEAR ENDED JUNE 30, 2001
------------------------
Revenues ........................ $ (368,870) $ (231,562) $ -- $ 407,660 $ (70,238) $ (263,010)
Costs ........................... (214,662) (39,907) (68,991) 434,793 -- 111,233
SG&A-direct ..................... (103,946) -- -- (59,649) (68,260) (231,855)
SG&A-allocated .................. (53,906) (13,000) -- (7,000) 73,906 --
Depreciation and amortization ... (67,103) (64,306) -- 52,106 (6,458) (85,761)
Impairment losses ............... -- -- -- -- (37,926) (37,926)
Interest expense ................ (50,660) (67,778) (31,814) (9,425) 157,220 (2,457)
Equity in income (loss) of ...... -- (118,443) (99,200) -- -- (217,643)
investees
Gain on sale .................... 482,487 2,764,483 5,544,743 -- -- 8,791,713
Segment profit (loss) ........... 603,894 2,599,469 5,546,348 (3,165) (188,720) 8,557,826
Investment income ............... (17,119)
Income from continuing operations 8,540,707
BOWLING OPERATIONS:
-------------------
The segment includes the operations of two bowling centers, Valley Bowl and
Grove Bowl. On December 21, 2000, the Company closed the operations of Valley
Bowl in conjunction with the sale of the real estate on December 29, 2000. The
following is a summary by bowling center of the changes in the results of
operations:
2002 vs. 2001 2001 vs. 2000
----------------------------------- -----------------------------------
Grove Valley Combined Grove Valley Combined
--------- --------- --------- --------- --------- ---------
Revenues ...................... $ 13,060 $(439,100) $(426,040) $ 256,008 $(624,878) $(368,870)
Costs ......................... (127,284) (319,920) (447,204) 166,375 (381,037) (214,662)
SG&A-direct ................... (76,818) (76,941) (153,759) 6,808 (110,754) (103,946)
SG&A-allocated ................ (31,626) (33,200) (64,826) 2,594 (56,500) (53,906)
Depreciation and
amortization ................ 25,122 (25,605) (483) (84) (67,019) (67,103)
Interest expense .............. -- (91,117) (91,117) -- (50,660) (50,660)
Gain on sale .................. -- (482,487) (482,487) -- 482,487 482,487
Segment profit (loss) ......... 223,666 (374,804) (151,138) 80,315 523,579 603,894
The following is a comparison of the change in operations from each prior year
for only the Grove Bowl.
2002 vs. 2001
-------------
Although there was no significant change in bowling revenues, the number of paid
games bowled decreased by 12 percent. This decrease was offset by a 13 percent
increase in the average price of games bowled.
Bowl costs decreased by 8% primarily due to due to a $98,000 decrease in utility
costs as a result of rate decreases. The direct category of selling general and
administrative costs decreased by $76,818 primarily due to a decrease in
management and administrative payroll and related costs. The allocated category
of selling general and administrative expenses decreased due to a decrease in
allocable corporate expenses.
2001 vs. 2000
-------------
On December 29, 2000 the Company sold the land and building occupied by the
Valley Bowling Center for $2,215,000 cash and recorded a gain of $482,487. The
proceeds of the sale were used to pay the existing loan of $1,650,977 and
selling expenses of $167,671.
The following is a comparison of the operations of the Grove bowling center to
the prior year. Grove's revenues increased 17 percent in 2001 primarily due to
an 8 percent increase in number of games bowled. The average price of games
bowled also increased by 9 percent. This bowling center 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 and league play since the "reopening". Although
management forecasts continued increases in open and league play at the bowling
center, the amount of the increase and how long it will continue is uncertain.
League revenues also increased because of the ability to move league bowlers
from Valley when the bowl was closed in December 2000.
Bowl costs increased $166,000 or 12% primarily due to a $99,000 (106%) increase
in utility costs and a $55,000 (12%) increase in payroll costs. The increase in
utility costs related to the increase in electric rates in San Diego that have
Page A-9
been subsiding since April and May of 2001 but are still substantially higher
than the rates in 2000. Payroll costs increased primarily due to an increase in
staffing related to the increase in customer bowling. There was no significant
change in selling, general and administrative expenses.
RENTAL OPERATIONS
-----------------
This segment includes the operations of the office building (Office) sold
December 28, 2000, a subleasehold interest in land underlying a condominium
project (Sublease) which was sold in March 2002, and other activities which
include the equity in income of the operation of a 542 unit apartment project
(UCV), the sublease of a portion of the Penley factory and other miscellaneous
rents received on undeveloped land which was sold in June 2001.
The following is a summary of the changes in operations:
2002 vs 2001 2001 vs 2000
--------------------------------------------------- ----------------------------------------------
Office Sublease Others Combined Office Sublease Others Combined
----------- ----------- ----------- ----------- ----------- --------- --------- -----------
Revenues ................ $ (243,611) $ (45,685) $ 1,910 $ (287,386) $ (233,259) $ 3,343 $ (1,646) $ (231,562)
Costs ................... (54,425) (46,352) 25,800 (74,977) (57,938) (29,169) 47,200 (39,907)
SG&A-allocated .......... (13,000) -- -- (13,000) (13,000) -- -- (13,000)
Depreciation and
amortization ........... (15,783) (1,422) -- (17,205) (64,306) -- -- (64,306)
Impairment loss ......... -- 44,915 -- 44,915 -- -- -- --
Interest expense ........ (80,993) (12,771) -- (93,764) (85,535) 17,757 -- (67,778)
Equity in income of UCV . -- -- (211,244) (211,244) -- -- 118,443) (118,443)
Gain on sale ............ (2,764,483) -- -- (2,764,483) 2,764,483 -- -- 2,764,483
Segment profit (loss) ... (2,843,893) (30,055) (235,134) (3,109,082) 2,752,003 14,755 (167,289) 2,599,469
On December 28, 2000 the Company sold its office building for $3,725,000 and
recorded a gain of $2,764,483. The consideration consisted of the assumption of
the existing loan with a principal balance of $1,950,478 and cash of $1,662,337.
The cash proceeds were net of selling expenses of $163,197, credits for lender
impounds of $83,676, deductions for security deposits of $26,463 and prepaid
rents of $6,201. The Company has been released from liability under the existing
loan except for those acts, events or omissions that occurred prior to the loan
assumption. The Company had occupied approximately 5,000 square feet of space in
the building since 1984. The existing lease expires in September 2011. In
conjunction with a lease modification with the new owner of the office building,
the Company vacated the premises on April 6, 2001 and moved into the factory
space occupied by its subsidiary, Penley Sports, LLC. However, because the lease
commitment for the office space was a condition to the original loan agreement,
the lender will only allow the Company to be conditionally released from its
remaining lease obligation. In the event there is an uncured event of default by
the new owner of the office building under the existing loan agreement, the
Company's obligations under its lease will be reinstated to the extent there is
not an enforceable lease on the Company's space (see Note 10 to Consolidated
Financial Statements).
The equity in income of UCV decreased by $211,000 in 2002 and $118,000 in 2001
primarily due to increases in interest expense and other costs of UCV that were
only partially offset by increases in revenues. The following is a summary of
the changes in the operations of UCV, LP in 2002 and 2001 compared to the
previous years:
2002 2001
--------- ---------
Revenues .................................. $ 321,000 $ 261,000
Costs ..................................... 61,000 (47,000)
Depreciation .............................. (5,000) (7,000)
Interest and amortization of loan costs ... 707,000 532,000
Other expenses ............................ (20,000) 20,000
Income before extraordinary loss .......... (422,000) (237,000)
Extraordinary loss from debt extinguishment (66,000) 401,000
Net income ................................ (356,000) (638,000)
Vacancy rates at UCV have averaged 1.7%, 2.3% and 1.9% in 2000, 2001 and 2002,
respectively. Total revenues of UCV increased by 6 and 5 percent in 2002 and
2001, respectively, primarily due to increases in the average rental rate.
UCV costs increased in 2002 primarily due to professional fees related to tax
planning and organization structure. UCV costs decreased in 2001 primarily due
to a decrease in repairs and maintenance costs. UCV's interest expense increased
in 2002 and 2001 primarily due to an increase in long-term debt in October 1999
and March 2001. UCV increased its long-term debt in March 2002 by $5,000,000, in
March 2001 by $3,960,510 and in October 1999 by $4,039,490. The refinancings in
March 2002 and March 2001 resulted in an extraordinary loss of $335,000 in 2002
and $401,000 in 2001 related to prepayment penalties and write-offs of the
unamortized loan fees of the previous long-term debt.
Page A-10
REAL ESTATE DEVELOPMENT:
------------------------
The real estate development segment consists primarily of OVP's operations
related to 33 acres of undeveloped land in Temecula, California, and an
investment in VRLP. The 33 acres of land were sold in June 2001.
Development costs consisted primarily of legal expenses ($65,000 in 2001 and
$104,000 in 2000) related to the litigation regarding the effective down-zoning
of the 33 acres of land and property taxes ($88,000 in 2001 and $106,000 in
2000). Development interest primarily represented the interest portion of the
assessment district payments due each year and the interest accrued on the
delinquent payments.
On June 1, 2001, the OVP sold the 33 acres to an unrelated developer for
$6,375,000 cash plus assumption of the non-delinquent balance of the assessment
district obligation ($1,001,274) and recorded a gain of $5,544,743. The cash
proceeds were used to pay $2,459,477 of delinquent taxes and assessments related
to the property and $299,458 of selling expenses. A 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 $1,410,000 has been paid through
June 30, 2002 ($50,000 in 2002, $860,000 in 2001, $50,000 in 1999 and $450,000
in 1998). This limited partner's capital account balance is presented as
"Minority interest" in the consolidated balance sheets. Three other parties were
granted liquidating partnership interests related to either their efforts with
achieving the zoning approval for the 33 acres or making a loan to the Company
that was used to fund payments to the County of Riverside for delinquent taxes.
These partners received distributions totaling $1,312,410 from the sale of the
undeveloped land in the year ended June 30, 2001 and their limited partnership
interests were liquidated. The $1,312,410 paid to these partners is presented as
"Minority interest in consolidated subsidiary" in the Statement of Operations
for the year ended June 30, 2001.
The following is a summary of the changes in the operations of VRLP in 2002 and
2001 compared to the previous years:
2002 2001
--------- ---------
Revenues ................... $ -- $ (10,000)
Operating expenses ......... (1,000) (56,000)
Equity in income of investee 294,000 (225,000)
Net income (loss) .......... 295,000 (179,000)
The equity in income (loss) of investee represents VRLP's share of the results
of operations of Temecula Creek LLC. The equity in income of investee decreased
in 2001 because it was developing a shopping center during all of 1999 and 2000
and a portion of 2001. The results of operations in 2001 represent the first
partial year of operation of the shopping center. The equity in income of
investee increased in 2002 reflecting the lease up and stabilization of the
rental operations.
GOLF CLUB SHAFT MANUFACTURING:
------------------------------
Prior to January 2000, golf club shaft 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. The following is a breakdown of the
percentage of sales by customer category:
2002 2001 2000
---- ---- ----
Golf equipment distributors . 35% 31% 34%
Small golf club manufacturers 26% 12% 8%
Golf shops .................. 39% 57% 58%
Operating expenses of the golf segment consisted of the following in 2002, 2001
and 2000:
2002 2001 2000
---------- ---------- ----------
Costs of sales and manufacturing overhead $2,385,000 $1,922,000 $1,502,000
Research and development ................ 219,000 263,000 248,000
---------- ---------- ----------
Total golf costs .................... $2,604,000 $2,185,000 $1,750,000
========== ========== ==========
Marketing and promotion ................. $1,179,000 $1,407,000 $1,514,000
Administrative costs- direct ............ 162,000 237,000 190,000
---------- ---------- ----------
Total SG&A-direct ..................... $1,341,000 $1,644,000 $1,704,000
========== ========== ==========
Total golf costs increased in 2002 and 2001 primarily due to an increase in the
amount of cost of goods sold related to increased sales. Costs also increased in
2001 due to a $54,000 increase in rent for the factory that was moved into in
June 2000, an increase in the cost of prototype shafts developed during the
periods, and an increase in the payroll for research and development.
Page A-11
Marketing and promotion expense decreased in 2002 primarily due to decreases in
advertising and the tour program expenses. Marketing and promotion expenses
decreased in 2001 primarily due to decreases in player sponsorship costs and
promotional goods. Administrative costs increased in 2001 primarily due to an
increase in professional fees related to filings for trademark and patent
matters. Those costs were not incurred in 2002.
UNALLOCATED AND OTHER:
----------------------
Revenues increased in 2002 primarily due to recovery from an insurance company
for litigation costs on a matter that was settled during the year. The remainder
of the increase in 2002 related to other one time events. Revenues decreased by
$70,000 in 2001 due to a decrease in brokerage commissions.
Unallocated and Other SG&A decreased by $193,000 in 2002 and $68,000 in 2001.
The decrease in 2002 was primarily due to a reduction of corporate office wages.
In December 2000, the Company awarded a $100,000 bonus to Harold Elkan. There
was no bonus in December 2001. The balance of the decrease in 2002 related to a
decrease in rent expense for the corporate office as a result of it locating
into the Penley factory facility in April 2001. The decrease in 2001 primarily
related to a $44,000 reduction in brokerage commission fees.
Interest expense changed in 2002 and 2001 partly due to fluctuations in the
balance of short term borrowings in 2002 and 2001and also due to the decline in
interest rates during 2002.
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 scheduled principal payments 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:
2003 2004 Total Fair Value (1)
-------- ------- -------- --------
Fixed rate debt ......... $ 8,000 $ 5,000 $ 13,000 $ 13,000
Weighted average interest
rate ................ 14.3% 13.1% 14.0% 14.0%
Variable rate debt ...... $445,000 -- $445,000 $445,000
Weighted average interest
rate ................ 5.8% -- 5.8% 5.8%
(1) The fair value of fixed-rate debt and variable-rate debt were estimated
based on the current rates offered for fixed-rate debt and variable-rate
debt with similar risks and maturities.
The variable rate debt includes a $445,000 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, 2003.
The Company's unconsolidated subsidiary, UCV, has two notes payable which mature
April 1, 2003 as a result of a refinancing in March 2002. The first loan is
variable rate debt of $36,000,000 for which the interest rate was 5.4 percent as
of March 31, 2002. However, there is a floor of 5.4% established by the lender
and a cap purchased by UCV which effectively caps the maximum rate on this loan
at 7%. The scheduled principal payments for UCV's fiscal years ending March 31
2003 is $36,000,000. The estimated fair value of this debt is $36,000,000 based
on the current rates offered for this type of loan with similar risks and
maturities. The second loan of $2,000,000 is fixed rate debt at 12.5%. The
scheduled principal payments for UCV's fiscal years ending March 31 2003 is
$2,000,000. The estimated fair value of this debt is $2,000,000 based on the
current rates offered for this type of loan with similar risks and maturities.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
Page A-12
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following were directors and executive officers of the Company during the
year ended June 30, 2002. 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 59 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 49 Chief Financial Officer and Treasurer
since May 1987; Director and Assistant
Secretary since August 1, 1989
Secretary since January 1995
Patrick D. Reiley 61 Director since August 21, 1986
James E. Crowley 55 Director since January 10, 1989
Robert A. MacNamara 54 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.
JamesE. Crowley has been an owner and operator of various automobile
dealerships for the last twenty years. Mr. Crowley was Chairman and
controlling shareholder of Coast Nissan from 1992 to August 1996; and has
been Chairman 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.
From 1997 through 2001 Mr. MacNamara was an independent consultant to the
real estate development industry. Since January 2002, Mr. MacNamara has
been employed by Sunrise Development as a senior development officer.
Sunrise Development is a developer and operator of assisted living
properties.
Page A-13
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-JUNE 30, 2002 AND 2001
ASSETS
2002 2001
----------- -----------
Current assets:
Cash and cash equivalents ....................... $ 39,345 $ 515,204
Trade receivables, net of allowance for doubtful
accounts of $73,000 and $20,000 respectively 444,996 324,912
Note receivable- Affiliate, net (Note 3a) ....... -- --
Inventories (Note 2) ............................ 792,690 585,111
Prepaid expenses ................................ 38,706 61,365
----------- -----------
Total current assets ......................... 1,315,737 1,486,592
----------- -----------
Property and equipment, at cost (Note 10):
Equipment and leasehold and tenant improvements . 2,345,406 2,345,406
Less accumulated depreciation and amortization (1,314,680) (1,060,626)
----------- -----------
Net property and equipment .................. 1,030,726 1,284,780
----------- -----------
Other assets:
Intangible assets, net (Note 5) ................. 37,284 150,657
Investments (Note 6) ............................ 423,657 405,446
Other assets .................................... 95,999 120,999
----------- -----------
556,940 677,102
----------- -----------
$ 2,903,403 $ 3,448,474
=========== ===========
See accompanying notes to consolidated financial statements.
Page A-14
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2002 AND 2001 (CONTINUED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
2002 2001
----------- -----------
Current liabilities:
Notes payable-short term (Note 7b) .............. $ 445,000 $ 1,250,000
Current portion of long-term debt (Note 7a) ..... 8,000 32,000
Accounts payable ................................ 963,402 708,307
Accrued payroll and related expenses ............ 215,093 195,367
Accrued interest ................................ 276,735 203,578
Other liabilities ............................... 92,803 183,466
----------- -----------
Total current liabilities .................... 2,001,033 2,572,718
----------- -----------
Long-term debt, excluding current portion (Note 7a) 5,456 13,942
----------- -----------
Distributions received in excess of basis
in investment (Notes 6a and 6b) ................. 18,008,401 15,792,373
----------- -----------
Other liabilities .................................. 192,000 144,000
----------- -----------
Minority interest in consolidated
subsidiary (Note 6c) ............................. 802,677 852,677
----------- -----------
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 ............................. (17,817,221) (15,638,293)
----------- -----------
(15,814,672) (13,635,744)
Less note receivable from shareholder (Note 3b) . (2,291,492) (2,291,492)
----------- -----------
Total shareholders' deficit ................... (18,106,164) (15,927,236)
----------- -----------
Commitments and contingencies
(Notes 5a, 6c, 8 and 10)
$ 2,903,403 $ 3,448,474
=========== ===========
See accompanying notes to consolidated financial statements.
Page A-15
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000
----------- ----------- -----------
Revenues:
Bowling ........................................... $ 1,783,545 $ 2,209,585 $ 2,578,455
Rental ............................................ 190,234 444,635 644,886
Golf .............................................. 2,589,293 1,527,117 1,119,457
Other ............................................. 329,402 132,442 209,671
Other-related party (Note 6b) ..................... 186,371 178,957 171,966
----------- ----------- -----------
5,078,845 4,492,736 4,724,435
----------- ----------- -----------
Costs and expenses:
Bowling ........................................... 1,404,006 1,851,210 2,065,872
Rental ............................................ 189,458 264,435 304,342
Golf .............................................. 2,604,436 2,185,213 1,750,420
Development ....................................... -- 156,688 225,679
Selling, general, and administrative (Note 3a) .... 2,610,451 3,177,126 3,377,670
Depreciation and amortization ..................... 307,948 301,260 387,021
Provision for impairment losses (Notes 5a and 6d) . 44,915 -- 37,926
----------- ----------- -----------
7,161,214 7,935,932 8,148,930
----------- ----------- -----------
Loss from operations ................................. (2,082,369) (3,443,196) (3,424,495)
----------- ----------- -----------
Other income (expenses):
Investment income:
Related party (Notes 3a and 3b) ................. 27,890 28,926 38,450
Other ........................................... 1,807 3,697 11,292
Interest expense related to development activities -- (235,208) (266,001)
Interest expense and amortization of finance costs (84,679) (390,265) (361,929)
Equity in income of investees (Note 6a) ........... 125,944 159,977 377,620
Gain on sale of office building (Note 10) ......... -- 2,764,483 --
Gain on sale of bowling center building (Note 12) . -- 482,487 --
Gain on sale of undeveloped land (Note 4b) ........ -- 5,544,743 --
----------- ----------- -----------
70,962 8,358,840 (200,568)
----------- ----------- -----------
Income (loss) from continuing operations before
minority interest ................................. (2,011,407) 4,915,644 (3,625,063)
Minority interest in consolidated subsidiary (Note 6c) -- (1,312,410) --
----------- ----------- -----------
(2,011,407) 3,603,234 (3,625,063)
Extraordinary loss from early
extinguishment of investee debt (Note 6a) ........ (167,521) (200,722) --
----------- ----------- -----------
Net income (loss) .................................... ($2,178,928) $ 3,402,512 ($3,625,063)
=========== =========== ===========
Basic and diluted net income (loss) per common
share from:
Continuing operations ............................ ($ 0.07) $ 0.13 ($ 0.13)
Extraordinary items .............................. ( 0.01) ( 0.01) -
------- ------- -------
($ 0.08) $ 0.12 ($ 0.13)
======= ======= =======
See accompanying notes to consolidated financial statements.
Page A-16
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
Note
Common Stock Additional Receivable
Number of paid-in Accumulated From
Shares Amount Capital Deficit Shareholder Total
---------- -------- ---------- ------------ ----------- ------------
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)
Net income .................. -- -- -- 3,402,512 -- 3,402,512
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 2001 .... 27,250,000 272,500 1,730,049 (15,638,293) (2,291,492) (15,927,236)
Net loss .................... -- -- -- (2,178,928) -- (2,178,928)
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 2002 .... 27,250,000 $272,500 $1,730,049 ($17,817,221) ($2,291,492) ($18,106,164)
========== ======== ========== ============ =========== ============
See accompanying notes to consolidated financial statements.
Page A-17
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) ....................................... ($2,178,928) $ 3,402,512 ($3,625,063)
Adjustments to reconcile net income (loss) to the
net cash used by operating activities:
Amortization of deferred financing costs .......... -- 18,846 9,120
Depreciation and amortization ..................... 307,948 301,260 387,021
Equity in income of investees ..................... (125,944) (159,977) (377,620)
Deferred income ................................... 48,000 48,000 48,000
Interest accrued on assessment district obligations -- 235,208 266,001
Provision for impairment losses ................... 44,915 -- 37,926
(Gain) loss on sale of assets ..................... -- (8,781,237) 1,793
Minority interest in consolidated subsidiary ...... -- 1,312,410 --
Extraordinary loss on debt extinguishment ......... 167,521 200,722 --
Changes in assets and liabilities:
Increase in trade receivables ..................... (120,084) (125,201) (77,106)
(Increase) decrease in inventories ................. (207,579) (280,205) 5,254
(Increase) decrease in prepaid expenses ............ 22,659 93,678 (39,051)
Increase (decrease) in accounts payable ........... 255,095 (88,176) 343,280
Increase (decrease) in accrued expenses and
other liabilities ............................... 2,220 199,337 (230,906)
Other ............................................. 62,284 38,317 (8,705)
----------- ----------- -----------
Net cash used by operating activities ........... (1,721,893) (3,584,506) (3,260,056)
----------- ----------- -----------
Cash flows from investing activities:
Decrease in notes receivable ......................... -- 73,866 30,963
Additions to property and equipment .................. -- (507,336) (335,920)
Proceeds from sale of office building ................ -- 1,662,337 --
Proceeds from sale of bowling center building ........ -- 2,047,328 --
Proceeds from sale of undeveloped land ............... -- 3,616,066 190,362
Proceeds from sale of other assets ................... 30,700 5,000 --
Increase in development costs on undeveloped land .... -- (30,755) (109,850)
Distributions received from investees ................ 2,102,820 1,559,000 2,193,400
Contributions to investees ........................... -- (200,000) (43,319)
Distribution to holders of minority interest ......... (50,000) (2,172,410) --
----------- ----------- -----------
Net cash provided by investing activities ....... 2,083,520 6,053,096 1,925,636
----------- ----------- -----------
Cash flows from financing activities:
Scheduled principal payments ......................... (32,486) (213,772) (283,598)
Proceeds from short-term borrowings .................. 450,000 1,200,000 1,900,000
Payments of short-term borrowings .................... (1,255,000) (1,300,000) (550,000)
Loan costs ........................................... -- (22,598) --
Extinguishment of long-term debt ..................... -- (1,650,977) (75,927)
Other ................................................ -- 20,000 --
----------- ----------- -----------
Net cash provided (used) by financing activities (837,486) (1,967,347) 990,475
----------- ----------- -----------
Net increase (decrease) in cash and equivalents ......... (475,859) 501,243 (343,945)
Cash and cash equivalents, beginning of year ............ 515,204 13,961 357,906
----------- ----------- -----------
Cash and cash equivalents, end of year .................. $ 39,345 $ 515,204 $ 13,961
=========== =========== ===========
See accompanying notes to consolidated financial statements
Page A-18
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
SUPPLEMENTAL CASH FLOW INFORMATION:
2002 2001 2000
-------- --------- ---------
Interest paid $ 11,000 $ 196,000 $ 326,000
======== ========= =========
Supplemental schedule of non-cash investing and financing activities:
During the year ended June 30, 2002 the Company assigned its interests in the
leasehold and the related subleasehold interests for a note receivable of
$37,500. The note receivable was assigned to the master lessor in
satisfaction of a portion of the rent due. There was $75,615 of unamortized
deferred lease costs for which an impairment loss of $44,915 had been
recorded in the year ended June 30, 2002.
During the year ended June 30, 2001 the Company sold equipment for $5,000 which
had a cost of $24,250 and accumulated depreciation of $9,240.
During the year ended June 30, 2001, the Company abandoned leasehold
improvements with a cost of $18,536 and accumulated depreciation of
$18,070.
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-19
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
1. Summary of significant accounting policies and practices:
Description of business- The Company, primarily through its subsidiaries,
owns and operates one bowling center, an apartment project (50% owned),
and a graphite golf club shaft manufacturer. 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. There
were no cash equivalents at June 30, 2002 and 2001.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market and relate to golf club 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 from 3 to 15 years.
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.
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.
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.
Page A-20
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 accounting principles generally
accepted in the United States of America. Actual results could differ from
these estimates.
Loss per share- Basic earnings per share is computed by dividing income
(loss) by the weighted average number of common shares outstanding during
each period. Diluted earnings per share is computed by dividing the amount
of income (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, 2002.
Reclassification- Certain 2001 amounts have been reclassified to conform to
the presentation used in 2002.
2. Inventories:
Inventories consist of the following:
2002 2001
--------- ---------
Raw materials ............ $ 199,255 $ 145,013
Work in process .......... 428,573 200,192
Finished goods ........... 253,862 297,906
--------- ---------
881,690 643,111
Less valuation allowance (89,000) (58,000)
--------- ---------
$ 792,690 $ 585,111
========= =========
3. Notes receivable:
(a)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 $27,890, $28,926, and
$38,450 in 2002, 2001, and 2000, respectively. The loans bear interest
at 8 percent per annum and are due on demand.
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 was included
in selling, general and administrative expense. The Company also
discontinued recording the interest income on the loans except to the
extent that balance of the loans remained below $390,000. As of June
30, 2002, $8,256 of interest accrued on the loans was unrecorded
($4,339 as of June 30, 2001).
(b)Shareholder - In December 1990, the Company loaned $1,061,009 to the
Company's majority shareholder, Andrew Bradley, Inc. (ABI), which is
88% 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 (6.25 percent at June 30, 2002) 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.
Page A-21
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 $809,735 as of June 30, 2002 ($620,007
as of June 30, 2001).
4. Undeveloped land:
(a)In August 1984, the Company acquired approximately 500 acres of
undeveloped land in Lake of Ozarks, Missouri from an entity controlled
by Harold S. Elkan (Elkan). The purchase price approximated the
affiliate's original purchase price. 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 owned 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 (see Note 6c). On June
1, 2001, the Company sold the 33 acres to an unrelated developer for
$6,375,000 cash plus assumption of the non-delinquent balance of the
assessment district obligation ($1,001,274) and recorded a gain of
$5,544,743. The cash proceeds were used to pay $2,459,477 of delinquent
taxes and assessments related to the property and $299,458 of selling
expenses. The land had a carrying value of $1,501,318 at the time of
sale, which was net of a $2,409,000 impairment loss provision recorded
in the year ended June 30, 1997.
The following is a summary of the results from operations of the
development activities related to this undeveloped land included in the
financial statements:
2002 2001 2000
------- -------- --------
Development costs ............. $ -- $ 157,000 $ 226,000
Allocated SG&A ................ -- 20,000 20,000
------- -------- --------
Loss from operations .......... -- (177,000) (246,000)
Interest expense- development . -- 235,000 266,000
------- -------- --------
Loss from continuing operations $ -- $(412,000) $(512,000)
======= ======== ========
5. Intangible assets:
Intangible assets consisted of the following as of June 30, 2002 and 2001:
2002 2001
--------- ---------
Deferred lease costs:
Subleasehold interest ......... $ -- $ 111,674
Less accumulated amortization -- (35,585)
Lease inception fee ........... 232,995 232,995
Less accumulated amortization (195,711) (158,427)
--------- ---------
$ 37,284 $ 150,657
========= =========
(a)Downtown Properties Development Corporation (DPDC), a wholly owned
subsidiary of the Company, was 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 and was amortizing the capitalized carrying costs over the period of
the subleases on the straight-line method.
On March 20, 2002, the DPDC transferred ownership of its sublessor
interests to condominium owners association based on agreements entered
into in October 2001 and approved by the Bureau of Indian Affairs on March
20, 2002. DPDC received a note receivable of $37,500 as consideration for
Page A-22
the sublessor interest that DPDC then assigned to the master lessors for a
reduction in amounts owed by DPDC to the master lessors. DPDC still owes
the master lessors $61,424 plus interest from November 1, 2001. Once this
amount is paid, the Company will be released from any further liability
under the master lease. As a result of these agreements, the Company
recorded a $44,915 impairment loss for a portion of the unamortized
balance ($75,615) of the deferred lease costs related to this sublessor
interest and discontinued amortizing the deferred lease costs effective
October 2001.
The following is a summary of the results from operations of the Palm
Springs sublease included in the financial statements in the three and
nine month periods:
2002 2001 2000
--------- --------- ---------
Rents .................................. $ 119,000 $ 165,000 $ 161,000
Costs .................................. 116,000 163,000 192,000
Impairment loss ........................ 45,000 -- --
Depreciation ........................... -- 2,000 2,000
--------- --------- ---------
Income (loss) from operations .......... (42,000) -- (33,000)
Interest expense ....................... 5,000 18,000 --
--------- --------- ---------
Income (loss) from continuing operations $ (47,000) $ (18,000) $ (33,000)
========= ========= =========
(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:
2002 2001
------------ ------------
Accounted for on the equity method:
Investment in UCV, L.P. ............ $(18,008,401) $(15,792,373)
Vail Ranch Limited Partnership ..... 423,657 405,446
------------ ------------
(17,584,744) (15,386,927)
Less Investment in UCV, L.P. .......
classified as liability-
Distributions received in
excess of basis in investment ..... 18,008,401 15,792,373
------------ ------------
423,657 405,446
------------ ------------
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 .............. $ 423,657 $ 405,446
============ ============
The following is a summary of the equity in income (loss) (before
extraordinary losses of $167,521 and $200,722 related to UCV, L.P. during
the years ended June 30, 2002 and 2001, respectively):
2002 2001 2000
--------- --------- ---------
UCV, L.P. .................... $ 107,733 $ 318,977 $ 437,420
Vail Ranch Limited Partnership 18,211 (159,000) (59,800)
--------- --------- ---------
$ 125,944 $ 159,977 $ 377,620
========= ========= =========
(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.
Page A-23
The following is summarized financial information of UCV as of and for the
years ended March 31 (UCV's fiscal year end):
2002 2001 2000
------------ ------------ ------------
Total assets ............... $ 5,641,000 $ 5,109,000 $ 3,013,000
Total liabilities .......... 38,512,000 33,480,000 29,630,000
Revenues ................... 5,406,000 5,085,000 4,824,000
Operating and general and
administrative costs ...... 1,672,000 1,611,000 1,658,000
Depreciation ............... 14,000 19,000 26,000
Interest and amortization of
loan costs ................ 3,504,000 2,797,000 2,265,000
Other expenses ............. -- 20,000 --
Extraordinary loss from
early debt extinguishment . 335,000 401,000 --
Net income ................. (119,000) 237,000 875,000
The apartment project is managed by the Company, which recognized
management fee income of $138,371, $130,957, and $123,966 in the
twelve-month periods ended June 30, 2002, 2001, and 2000, 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, 2002, 2001 and 2000, of which $48,000 in each year
was recorded as deferred income. The Company believes that the terms of
these agreements are no less favorable to the Company or UCV than could be
obtained with an independent third party.
A reconciliation of distributions received in excess of basis in UCV as of
June 30 is as follows:
2002 2001
------------ ------------
Balance, beginning ......... $ 15,792,373 $ 14,498,208
Equity in (income) loss, net 59,788 (118,255)
Cash distributions ......... 2,102,820 1,559,000
Cash contributions ......... -- (200,000)
Amortization of purchase
price in excess
of equity in net assets .. 53,420 53,420
------------ ------------
Balance, ending ............ $ 18,008,401 $ 15,792,373
============ ============
(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 $1,410,000 has been paid through June 30, 2002
($50,000 in 2002, $860,000 in 2001, $50,000 in 1999 and $450,000 in 1998).
This limited partner's capital account balance is presented as "Minority
interest" in the consolidated balance sheets. Three other parties were
granted liquidating partnership interests related to either their efforts
with achieving the zoning approval for the 33 acres described in Note 4b
or making a loan to the Company that was used to fund payments to the
County of Riverside for delinquent taxes. These partners received
distributions totaling $1,312,410 from the sale of the undeveloped land in
the year ended June 30, 2001 and their limited partnership interests were
liquidated.
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.
Page A-24
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,
2002 and 2001 and for the years then ended:
2002 2001
--------- ---------
Assets:
Investment in Temecula Creek .... $ 588,000 $ 558,000
Other assets .................... 10,000 10,000
Total assets ................ 598,000 568,000
Total liabilities ................. 14,000 14,000
Partners' capital ................. 584,000 554,000
Revenues .......................... -- --
Equity in income (loss) of Temecula
Creek ......................... 30,000 (264,000)
Net income (loss) ................. 30,000 (265,000)
The following is a reconciliation of the investment in Vail Ranch Limited
Partnership:
2002 2001
--------- ---------
Balance, beginning ........ $ 405,446 $ 564,446
Equity in net income (loss) 18,211 (159,000)
--------- ---------
Balance, ending ........... $ 423,657 $ 405,446
========= =========
(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.
Page A-25
7. Long-term and short-term debt:
(a)The principal payments due on notes payable during the next five fiscal
years are as follows: $8,000 in 2003 and $5,500 in 2004.
(b)The Company borrowed a total of $2,700,000 ($150,000 in 2002, $1,200,000
in 2001 and $1,350,000 in 2000) from the Company's partner in UCV (Lender)
of which $955,000 and $1,300,000 was paid in 2002 and 2001, respectively.
The loans are unsecured, due on demand and bear interest at monthly at a
base rate plus 1 percent (5.75% at June 30, 2002). The Company admitted
the Lender and an affiliate of the Lender as partners in Old Vail Partners
with a liquidating partnership interest for which they received combined
distributions of $112,410 in the year ended June 30, 2001 and their
partnership interests were liquidated. The Company's also agreed to
provide the Lender with an ownership interest in Penley Sports that would
provide the Lender with a 10 percent interest in profits and
distributions. Although the terms of these loans are likely to be
comparable to the loan terms from an independent third party, it is
unlikely that the Company could obtain a similar loan from an independent
third party.
(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)On January 11, 2002, the Company borrowed $300,000 from Harold S. Elkan,
the Company's President and, indirectly, the Company's majority
shareholder, pursuant to a short term loan agreement that was paid on
March 27, 2002. During the term of the loan $8,200 of interest (10% per
annum) was paid to Elkan. Although the terms of this note are likely to be
comparable to the loan terms from an independent third party, it is
unlikely that the Company could obtain a similar loan from an independent
third party.
8. Commitments and contingencies:
(a)The Company leases its bowling center (Grove) under an operating lease.
The lease agreement for the Grove bowling center provides for approximate
annual minimum rental of $360,000 in addition to taxes, insurance, and
maintenance. This lease expires in June 2003 and contains three 5-year
options at rates increased by 10-15 percent over the last rate in the
expiring term of the lease. This lease also provides for additional rent
based on a percentage of gross revenues, however, Grove has not yet
exceeded the minimum amount of gross revenue. Rental expense for Grove
bowling center was $360,000 in 2002, 2001 and 2000.
The Company also leases its golf club 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:
2003- $234,000, 2004- $241,000, 2005- $247,000, 2006- $247,000, 2007-
$247,000, thereafter- $677,000. 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 club shaft
manufacturing plant pursuant to an operating lease that expired June 30,
2000. Rental expense for the manufacturing facilities was $227,288 in
2002, $220,688 in 2001, and $112,252 in 2000, of which $66,760 related to
the old plant.
The Company has subleased a portion of the golf club shaft manufacturing
plant. The sublease commenced November 1, 2000 and continues through
October 31, 2002. Rental income from this sublease was $71,136 in 2002 and
$46,400 in 2001.
Page A-26
(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, 2002, 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, 2002, 2001 and 2000, 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, 2002, the Company had net operating loss carry-forwards of
$11,602,000 for federal income tax purposes. The carryforwards expire from
years 2003 to 2021. 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, 2002
and 2001.
The following is a reconciliation of the normal expected federal income
tax rate of 34 percent to the income (loss) in the financial statements:
2002 2001 2000
----------- ----------- -----------
Expected federal income tax
expense (benefit) ............ $ (741,000) $ 1,157,000 $(1,233,000)
Increase (decrease) in valuation
allowance .................... 538,000 (1,312,000) (121,000)
Expiration of net operating
loss carryforward ............ 185,000 150,000 1,340,000
Other .......................... 18,000 5,000 14,000
----------- ----------- -----------
Provision for income tax expense $ -- $ -- $ --
=========== =========== ===========
The following is a schedule of the significant components of the Company's
deferred tax assets and deferred tax liabilities as of June 30, 2002 and
2001:
2002 2001
----------- -----------
Federal deferred tax assets (liabilities):
Net operating loss carryforwards ........ $ 3,944,000 $ 3,694,000
Accumulated depreciation and amortization 230,000 222,000
Valuation allowance for impairment losses 757,000 683,000
Other ................................... 237,000 31,000
----------- -----------
Total net federal deferred tax assets 5,168,000 4,630,000
Less valuation allowance ............ (5,168,000) (4,630,000)
----------- -----------
Net federal deferred tax assets ............. $ -- $ --
=========== ===========
10. Leasing activities:
The Company, as lessor, leased office space in an office building under
operating leases that were primarily for periods ranging from one to five
years, occasionally with options to renew. This office building was sold in
December 2000. The Company was 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. On March 20, 2002, the Company sold it interests
in the subleases (see Note 5).
On December 28, 2000 the Company sold its office building for $3,725,000 and
recorded a gain of $2,764,483. The consideration consisted of the assumption
of the existing loan with a principal balance of $1,950,478 and cash of
$1,662,337. The cash proceeds were net of selling expenses of $163,197,
credits for lender impounds of $83,676, deductions for security deposits of
Page A-27
$26,463 and prepaid rents of $6,201. The Company has been released from
liability under the existing loan except for those acts, events or omissions
that occurred prior to the loan assumption. The Company has occupied
approximately 5,000 square feet of space in the building since 1984. The
existing lease expires in September 2011. In conjunction with a lease
modification with the new owner of the office building, the Company vacated
the premises on April 6, 2001 and moved into the factory space occupied by
its subsidiary, Penley Sports, LLC. However, because the lease commitment was
a condition to the original loan agreement, the lender will only allow the
Company to be conditionally released from its remaining lease obligation. In
the event there is an uncured event of default by the new owner of the office
building under the existing loan agreement, the Company's obligations under
its lease will be reinstated to the extent there is not an enforceable lease
on the Company's space. The future minimum rent payments under the lease
agreement are as follows for the years ending June 30: $70,000- 2003;
$72,000- 2004; $75,000- 2005; $77,000- 2006; $79,000 in 2007, $364,000
thereafter and $737,000 in the aggregate.
The following is a summary of the results from operations of the office
building included in the financial statements:
2001 2000
-------- --------
Rents ........................... $243,000 $477,000
Costs ........................... 54,000 112,000
Allocated SG&A .................. 13,000 26,000
Depreciation .................... 16,000 80,000
-------- --------
Income from operations .......... 160,000 259,000
Interest expense ................ 81,000 167,000
-------- --------
Income from continuing operations $ 79,000 $ 92,000
======== ========
11. Business segment information:
The Company operates principally in four business segments: bowling centers,
commercial real estate rental, real estate development, and golf club shaft
manufacturing. 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-28
The following is summarized information about the Company's operations by
business segment.
Real Estate Real Estate Unallocated
Bowling Operation Development Golf And Other Totals
----------- ----------- ----------- ----------- --------- -----------
YEAR ENDED JUNE 30, 2002
------------------------
Revenues ............................ $ 1,783,545 $ 190,234 $ -- $ 2,589,293 $ 515,773 $ 5,078,845
Depreciation and amortization ....... 36,625 53,894 -- 170,011 47,418 307,948
Impairment loss ..................... -- 44,915 -- -- -- 44,915
Interest expense .................... -- 4,986 -- -- 79,693 84,679
Equity in income of investees ....... -- 107,733 18,211 -- -- 125,944
Segment profit (loss) ............... (10,619) 4,714 18,211 (1,816,846) (236,564) (2,041,104)
Investment income ................... -- -- -- -- -- 29,697
Loss from continuing operations ..... -- -- -- -- -- (2,011,407)
Extraordinary loss .................. -- (167,521) -- -- -- (167,521)
Segment assets ...................... 117,305 2,296 423,705 2,227,595 132,502 2,903,403
Expenditures for segment assets ..... -- -- -- -- -- --
YEAR ENDED JUNE 30, 2001
------------------------
Revenues ............................ $ 2,209,585 $ 477,620 $ -- $ 1,527,117 $ 311,399 $ 4,525,721
Depreciation and amortization ....... 37,108 71,099 -- 149,558 43,495 301,260
Interest expense .................... 91,117 98,750 235,208 4,048 196,350 625,473
Equity in income of investees ....... -- 318,977 (159,000) -- -- 159,977
Gain on sale of assets .............. 482,487 2,764,483 5,544,743 -- -- 8,791,713
Segment profit (loss) ............... 140,519 3,113,796 4,973,847 (2,753,777) (591,364) 4,883,021
Investment income ................... -- -- -- -- -- 32,623
Income (loss) -continuing
operations ........................ -- -- -- -- -- 4,915,644
Extraordinary loss .................. -- (200,722) -- -- -- (200,722)
Segment assets ...................... 217,610 118,785 840,867 2,106,825 164,387 3,448,474
Expenditures for segment assets ..... 30,839 -- 30,755 433,043 43,454 538,091
YEAR ENDED JUNE 30, 2000
------------------------
Revenues ............................ $ 2,578,455 $ 709,182 $ -- $ 1,119,457 $ 381,637 $ 4,788,731
Depreciation and amortization ....... 104,211 135,405 -- 97,452 49,953 387,021
Impairment loss ..................... -- -- -- -- 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 19,440 445,770
2002 2001 2000
---------- ----------- -----------
Revenues per segment schedule $5,078,845 $ 4,525,721 $ 4,788,731
Intercompany rent eliminated -- (32,985) (64,296)
---------- ----------- -----------
Consolidated revenues ....... $5,078,845 $ 4,492,736 $ 4,724,435
========== =========== ===========
Page A-29
12. Significant Event:
On December 29, 2000 the Company sold the land and building occupied by the
Valley Bowling Center for $2,215,000 cash and recorded a gain of $482,487.
The proceeds of the sale were used to pay the existing loan of $1,650,977 and
selling expenses of $167,672. The bowling center discontinued its operations
on December 21, 2000. The following is a summary of the results of operations
of the bowling center included in the financial statements:
2001 2000
--------- -----------
Revenues .............................. $ 439,000 $ 1,064,000
Costs ................................. 320,000 701,000
Direct SG&A ........................... 77,000 188,000
Allocated SG&A ........................ 33,000 89,000
Depreciation .......................... 26,000 93,000
--------- -----------
(17,000) (7,000)
Interest expense ...................... 91,000 142,000
--------- -----------
Income (loss)from continuing operations $(108,000) $ (149,000)
========= ===========
13. Supplementary Non-Cash information:
The following is a summary of the changes to the balance sheet related to the
non-cash portions of the sale of the office building, Valley Bowl real estate
and undeveloped land for the year ended June 30, 2001:
Office Valley Bowl Undeveloped
Building Real estate Land
----------- ----------- -----------
Receivables .................... $ 6,201 $ -- $ --
Prepaid expenses ............... (83,676) -- --
Property and equipment ......... (1,171,699) (2,434,539) --
Accumulated depreciation ....... (438,096) (877,536) --
Undeveloped land ............... -- -- (1,532,073)
Deferred loan costs ............ (52,200) (7,838) --
Other assets ................... (11,516) -- --
Assessment district obligation.. -- -- (3,066,388)
Property taxes in default ...... -- -- (394,392)
Long-term debt ................. (1,950,478) -- --
Other liabilities .............. (26,462) -- --
14. 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, obtaining additional
investors in its subsidiary, Penley Sports, or increases in the sales volume
of Penley Sports. The consolidated financial statements do not contain
adjustments, if any, including diminished recovery of asset carrying amounts,
that could arise from forced dispositions and other insolvency costs.
Page A-30
15. Quarterly financial data (unaudited):
The following summarizes the condensed quarterly financial information for
the Company:
QUARTERS ENDED 2002
---------------------------------------------------------
September 30 December 31 March 31 June 30
----------- ----------- ----------- -----------
Revenue ......................... $ 971,111 $ 1,011,713 $ 1,498,258 $ 1,597,763
Total costs and expenses ........ 1,629,124 1,553,194 1,895,099 2,083,797
Other income & expense, net ..... (49,705) (8,626) (11,853) 141,146
Income (loss) before
extraordinary items ........... (707,718) (550,107) (408,694) (344,888)
Extraordinary loss .............. -- -- -- (167,521)
Net loss ........................ (707,718) (550,107) (408,694) (512,409)
Basic and diluted net income
(loss) per common share from:
Continuing operations ... (.03) (.02) (.01) (.01)
Net income (loss) ....... (.03) (.02) (.01) (.02)
QUARTERS ENDED 2001
---------------------------------------------------------
September 30 December 31 March 31 June 30
----------- ----------- ----------- -----------
Revenue ......................... $ 1,143,386 $ 1,123,479 $ 1,099,100 $ 1,126,771
Total costs and expenses ........ 2,043,891 2,110,485 2,087,440 1,694,116
Gain on sale .................... -- 3,246,970 -- 5,544,743
Other income & expense, net ..... (158,222) (150,023) (42,575) (82,053)
Minority interest ............... -- -- -- (1,312,410)
Income (loss) before
extraordinary items ........... (1,058,727) 2,109,941 (1,030,915) 3,582,935
Extraordinary loss .............. -- -- -- (200,722)
Net income (loss) ............... (1,058,727) 2,109,941 (1,030,915) 3,382,213
Basic and diluted net income
(loss) per common share from:
Continuing operations ... (.04) .08 (.04) .13
Net income (loss) ....... (.04) .08 (.04) .12
Certain 2001 amounts have been reclassified to conform to the presentation
used in these financial statements.
Page A-31
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2002, 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 14 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 14. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
San Diego, California
September 23, 2002
Page A-32
SPORTS ARENAS, INC.
[A DELAWARE CORPORATION]
CORPORATE INFORMATION
Corporate Offices 7415 Carroll Road, Suite C
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 Olmstead, Cramer and Pizzuto
A law corporation
401 West A Street, Suite 2300
San Diego, California 92101
Auditors KPMG LLP
750 B Street
San Diego, California 92101
Page A-33
PROXY FOR 2002 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 23, 2002, 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.
(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.