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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ______________
Commission File Number 0-2380
SPORTS ARENAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1944249
(State of Incorporation) (I.R.S. Employer I.D. No.)
7415 Carroll Road, Suite C, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 408-0364
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates (5,441,733
shares) of the Registrant as of September 25, 2003 was $109,000 (based on
average of bid and asked prices). The number of shares of common stock
outstanding as of September 25, 2003 was 27,250,000.
Documents Incorporated by Reference - None.
----
1
PART I
ITEM I. Business
- -----------------
General Development and Narrative Description of Business
- ---------------------------------------------------------
Sports Arenas, Inc. (the "Company") was incorporated as a Delaware
corporation in 1957. The Company, primarily through its subsidiaries, owned and
operated one bowling center (closed May 31, 2003), an apartment project (50%
owned) (sold April 1, 2003), 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 46 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:
2003 2002 2001
---- ---- ----
Bowling 26 35 49
Real estate operations 1 4 10
Real estate development - - -
Golf 55 51 34
Other 18 10 7
(1) Bowling Centers - The Company's wholly owned subsidiary, Cabrillo
Lanes, Inc. (the Bowl), operated one 60 lane bowling center located in San
Diego, California until it was closed on May 31, 2003. The closing of the
bowling center coincided with the expiration of the lease for the property in
which the bowl was located. 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.
(2) Real Estate Development - The Company, through its subsidiaries (see
Item 2. Properties (b) Real Estate Development for ownership), had an ownership
interest in a 13 acre parcel of partially developed land in Temecula,
California (Riverside County) until February 22, 2003 when the ownership
interest was sold.
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 were developable. Landgrant
is not affiliated with the Company. VRLP completed construction of a community
shopping center on 10 acres of land in May 1997. 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 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. The development plan was
for a 109,910 square foot shopping center on approximately 13 acres of land. TC
had completed 85,000 square feet of the shopping center. In February 2003, VRLP
sold its membership interest to ERT. The sale price consisted of $1,318,180 cash
and one-half of the sale proceeds from the remaining parcel of undeveloped land
owned by TC when it is sold. $100,000 of the sales proceeds are being held in an
escrow to be applied to any post closing claims ERT may have related to
warranties and normal prorations in the sale contract for the TC interest. The
cash proceeds to VRLP of $1,218,180 were partially offset by $225,000 of fees
paid to one of the VRLP partners. The Company received a distribution of
$592,776 of which $370,838 was paid to the holder of the minority interest in
Old Vail Partners. VRLP recorded a $843,326 gain from the sale of the
partnership interest. This gain was partially offset by VRLP's agreement to pay
its general partner $225,000 of fees related to the sale of the partnership
interest.
(3) Commercial Real Estate Rental - Real estate rental operations during
the year ended June 30, 2003 consisted of a sublease of a portion of the
Company's facilities in San Diego, California and a 50 percent ownership
interest in a 542 unit apartment project in San Diego, California, which was
sold April 1, 2003.
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). UCV owned a 542 unit
apartment project (University City Village) located in San Diego, California.
University City Village, which was acquired in August 1974. The property was
sold April 1, 2003. The following is a schedule of selected operating
information over the last five years:
2
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Occupancy 97% 98% 98% 99% 99%
Average monthly rent/unit $873 $816 $772 $728 $694
Real property tax $118,000 $116,000 $114,000 $112,000 $110,000
Real property tax rate 1.12% 1.12% 1.12% 1.12% 1.12%
The net proceeds from the sale were $19,298,141 after deducting current selling
expenses of $2,495,820, paying the related mortgage loans of $38,000,000 and
receiving a $1,340,348 refund of lender impounds. The Partnership utilized
$4,009,000 of the proceeds to fund cash distributions to the partners and pay
other Partnership obligations. The balance of the funds $15,289,722, were
deposited in a special escrow with a qualified intermediary ("exchange
accommodator") for purposes of meeting the Internal Revenue Service criteria for
purchasing "like-kind" property and thereby qualifying to defer the taxability
of a portion of the gain from the sale of the property on April 1, 2003.
On August 28, 2003, 760, LLC, a single member limited liability company of which
UCV is the sole member, acquired a property in San Diego, California with 50,667
square feet of retail and office space for approximately $9,500,000. The
purchase was financed with loans totaling $6,926,500. Both loans are
collateralized by the land , building and leases. On September 25, 2003, 939
LLC, a single member limited liability company of which UCV is the sole member,
acquired a property in San Diego, California with 23,567 square feet of retail
and office space for approximately $5,000,000. The purchase was financed with
the assumption of an existing $2,636,811 note payable that is collateralized by
the land, building and leases. On September 26, 2003, UCV Media Tech Center,
LLC, a single member limited liability company of which the Partnership is the
sole member, acquired a property in Los Angeles, California with 187,534 square
feet of office and industrial space for approximately $28,670,000. The purchase
was financed with a $20,000,000 note payable, which is collateralized by the
land, building, leases and other assets related to the property.
(4) 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 6b 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
complEment 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
2004.
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 increasing sales to distributors and other small
golf club manufacturers, golf club shaft sales increased each year to: $735,654
in the year ended June 30, 2000, $407,660 in the year ended June 30, 2001,
$1,062,176 in the year ended June 30, 2002, and $449,453 in the year ended June
30, 2003. 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 and equipment, of which four 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.
3
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 four patents and numerous 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.
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 63
percent of Penley's sales occur in the months of February through July.
(b) Industry Segment Information: See Note 10 of Notes to Consolidated
Financial Statements for required industry segment financial information.
ITEM 2. Properties
- ------------------
(a) Bowling Centers: The lease for the Company's only bowling center
expired June 30, 2003. The Company closed operations of the bowling center on
May 31, 2003 and vacated the premises.
(b) Real Estate Development: RCSA Holdings, Inc. (RCSA) and OVGP, Inc.,
wholly-owned subsidiaries of the Company, own a combined 50 percent general and
limited partnership interest in Old Vail Partners, L.P., a California limited
partnership (OVP), which owns a 60 percent limited partnership interest in Vail
Ranch Limited Partnership (VRLP). As described in Note 11(b) of Notes to
Consolidated Financial Statements, there is one other partner in OVP in the form
of liquidating limited partnership interest. This other partner in OVP is
entitled to 50 percent of the cash distributions from OVP, not to exceed
$2,450,000, of which $1,780,838 has been paid as of June 30, 2003. In February
2003, VRLP sold its membership interest in Temecula Creek, LLC, which was the
only remaining real estate development activity of the Company.
(c) Real Estate Operations: UCVNV, Inc. and SAPI, wholly owned subsidiaries
of the Company, own a one percent managing general partnership interest and a 49
percent limited partnership interest, respectively, in UCV, L.P. (UCV). UCV
owned a 542-unit apartment project (University City Village) in the University
City area of San Diego, California which was sold April 1, 2003.
On August 28, 2003, 760, LLC, a single member limited liability company of which
UCV is the sole member, acquired a property in San Diego, California with 50,667
square feet of retail and office space for approximately $9,500,000. The
purchase was financed with loans totaling $6,926,500. Both loans are
collateralized by the land , building and leases. On September 25, 2003, 939
LLC, a single member limited liability company of which UCV is the sole member,
acquired a property in San Diego, California with 23,567 square feet of retail
and office space for approximately $5,000,000. The purchase was financed with
the assumption of an existing $2,636,811 note payable that is collateralized by
the land, building and leases. On September 26, 2003, UCV Media Tech Center,
LLC, a single member limited liability company of which the UCV is the sole
member, acquired a property in Los Angeles, California with 187,534 square feet
of office and industrial space for approximately $28,670,000. The purchase was
financed with a $20,000,000 note payable, which is collateralized by the land,
building, leases and other assets related to the property.
(d) Golf Operations: Penley Sports, LLC leases 38,025 square feet of
industrial space in San Diego, California pursuant to a lease that expires in
March 31, 2010 with options to March 31, 2020. Penley has subleased
approximately 10,000 square feet to a third party pursuant to a two year lease
that expires in October 2004.
4
ITEM 3. Legal Proceedings
- -------------------------
At June 30, 2003 the Company or its subsidiaries were not parties to any
material legal proceedings other than routine litigation incidental to the
business other than the following:
A lawsuit filed on January 10, 2003 in the United States District Court in the
Southern District of California by Masterson Marketing, Inc. (Masterson) against
Penley Sports, LLC. Masterson's lawsuit claims copyright infringement, breach of
contract breach of fiduciary duty, constructive fraud and conversion. Masterson
is seeking damages in excess of $450,000. The Company filed a motion to dismiss
all claims. Masterson dropped all claims except for the claims of copyright
infringement and breach of contract. The balance of the motion to dismiss is
waiting for a court decision. It is not possible at this time to predict the
outcome of this litigation. We intend to vigorously defend against these claims.
ITEM 4. Submissions of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters
- --------------------------------------------------------------------------------
(a) There is no recognized market for the Company's common stock except
for limited or sporadic quotations, which may occur from time to time.
The following table sets forth the high and low bid prices per share
of the Company's common stock in the over-the-counter market, as
reported on the OTC Bulletin Board, which is a market quotation
service for market makers. The over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily reflect actual transactions in shares of the
Company's common stock.
2003 2002
------------ ------------
High Low High Low
----- ----- ----- -----
First Quarter $ .03 $ .02 $ .05 $ .02
Second Quarter $ .02 $ .02 $ .21 $ .02
Third Quarter $ .02 $ .02 $ .03 $ .03
Fourth Quarter $ .02 $ .02 $ .03 $ .03
(b) The number of holders of record of the common stock of the Company as
of September 25, 2003 is approximately 4,300. The Company believes
there are a significant number of beneficial owners of its common
stock whose shares are held in "street name".
(c) The Company has neither declared nor paid dividends on its common
stock during the past ten years, nor does it have any intention of
paying dividends in the foreseeable future.
ITEM 6. Selected Consolidated Financial Data (Not covered by
- -------------------------------------------------------------
Independent Auditors' Report)
-----------------------------
Year Ended June 30,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Revenues ............. $ 4,043,550 $ 3,295,300 $ 2,283,151 $ 2,145,980 $ 1,293,146
Loss from operations . (1,329,173) (2,071,750) (3,015,657) (2,857,218) (3,234,941)
Income (loss) from
continuing operations 19,098,581 (2,186,520) (399,444) (2,589,187) (2,915,160)
Basic and diluted
income (loss) per
common share from
continuing operations 0.70 (0.08) (0.02) (0.10) (0.11)
Total assets ......... 12,731,967 2,903,403 3,448,474 6,601,236 6,698,820
Long-term debt,
excluding current
portion ............ -- 5,456 13,942 1,967,169 3,911,694
See Notes 4(a), 5(b), 7(c), 9, and 11 of Notes to Consolidated Financial
Statements regarding disposition of business operations and material
uncertainties.
5
ITEM 7. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
-------------------------
Liquidity and Capital Resources
-------------------------------
The independent auditors' report dated September 5, 2003 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 13 to the consolidated financial statements, the Company has suffered
recurring losses and is forecasting negative cash flows from operating
activities for the next twelve months. These items raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 13. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company is expecting a $500,000 cash flow deficit in the year ending June
30, 2004 from operating activities after estimated distributions from UCV
($1,400,000, including distributions from real estate operations), and estimated
capital expenditures ($60,000) and scheduled principal payments on long-term
debt.
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
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 working capital of $1,061,553 at June 30, 2003, which is a
$1,746,849 increase in working capital from the working capital deficit of
$685,296 at June 30, 2002. The working capital increased primarily due to
distributions received from UCV related to the sale of its real estate on April
1, 2003. This source of funds was partially offset by $371,000 of payments to
minority interests and $1,559,895 of cash used by operations, capital
expenditures, and the repayment of short term debt. The cash provided (used)
before changes in assets and liabilities segregated by business segments was as
follows:
2003 2002 2001
---- ---- ----
Continuing operations:
Rental $ (2,000) $ (4,000) $ 105,000
Golf (1,440,000) (1,647,000) (2,594,000)
General corporate expense and other 100,000 (111,000) (467,000)
---------- ---------- ----------
Total continuing operations (1,342,000) (1,762,000) (2,956,000)
Discontinued operations:
Bowling (192,000) 26,000 (289,000)
Development -- -- (177,000)
---------- ---------- ----------
Total cash used (1,534,000) (1,736,000) (3,422,000)
Capital expenditures (18,000) -- (538,000)
Principal payments on long-term debt (8,000) (32,000) (214,000)
---------- ---------- ----------
(1,560,000) (1,768,000) (4,174,000)
========== ========== ==========
Distributions received from investees 3,618,000 2,103,000 1,559,000
========== ========== ==========
Contributions to investees -- -- (200,000)
========== ========== ==========
Proceeds from sale of assets 19,000 31,000 5,680,000
========== ========== ==========
Payments to minority interests (371,000) (50,000) (2,172,000)
========== ========== ==========
The Company received distributions of approximately $1,700,000 in March and
April of 2002, and $920,000 in March 2001 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 those two years were the Company's
proportionate share of distributions from UCV's results of operations. On April
1, 2003, UCV sold its 542 unit apartment project for $58,400,000 in cash. The
net sale proceeds to UCV was approximately $19,156,000. UCV is planning on
distributing a cumulative amount of approximately $3,500,000 of such proceeds to
the Company in partial liquidation of its partnership interest in UCV. UCV used
the balance of the proceeds to purchase three properties as part of tax-deferred
like-kind-exchange transactions. Of the planned distributions to the Company,
UCV distributed $2,500,000 to the Company during the year ended June 30, 2003.
The balance of the distribution is expected to be made in October 2003, after
the end of the exchange transactions.
6
In February 2003 Vail Ranch Limited Partners (VRLP) sold its interest in
Temecula Creek LLC (TC) to its other partner in TC (ERT). The sale price
consisted of $1,318,180 cash and one-half of the sale proceeds from the
remaining parcel of undeveloped land owned by TC when it is sold. $100,000 of
the sales proceeds are being held in an escrow until to be applied to any post
closing claims ERT may have related to warranties and normal prorations in the
sale contract for the TC interest. The cash proceeds to VRLP of $1,218,180 were
partially offset by $225,000 of fees paid to one of the VRLP partners. The
Company received a distribution of $592,776 of which $370,838 was paid to the
holder of the minority interest in Old Vail Partners.
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, 2003 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 an
investment (See Note 11(b) to Consolidated Financial Statements).
New Accounting Pronouncements
-----------------------------
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires 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 adopted Statement No. 142 effective July 1, 2002. As
of June 30, 2003, the Company does not have any goodwill, intangible assets or
unamortized negative goodwill. The adoption of SFAS No. 142 did not 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 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 adoption of SFAS No. 143 did not 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 retained 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 adoption of SFAS No. 144 for long-lived assets held for use did not 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. However,
the adoption of this statement resulted in certain operations being reported as
discontinued operations.
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 had an impact on the presentation of the
Company's financial statements. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that did not
meet the criteria in Opinion 30 for classification as an extraordinary item was
reclassified.
In June 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 adoption of this
statement did not have an effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 15, 2002 and are not
expected to have a material effect on our consolidated financial statements. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 15, 2002. The adoption of Interpretation
No. 45 did not impact the Company as no guarantees exist.
7
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did
not impact the Company as no stock based compensation currently exists.
Statement of Financial Accounting Standards, No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities, or SFAS No. 149, amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract within an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003, and is not
expected to have a material impact on the Company's consolidated financial
statements.
Statement of Financial Accounting Standards, No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, or
SFAS No. 150, establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 may result in a reclassification of
the minority interest in OVP to a liability and the marking of the resulting
liability to its fair value.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The Interpretation requires certain disclosures
in financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective. The
adoption of Interpretation No. 46 did not have a material impact on the
Company's financial statements.
"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 10 to the
Consolidated Financial Statements.
8
The following is a summary of the changes to the components of the segments in
the years ended June 30, 2003 and 2002:
Real Estate Unallocated
Operation Golf And Other Total
----------- ----------- --------- ------------
YEAR ENDED JUNE 30, 2003
- ------------------------
Revenues ...................... ($ 111,277) $ 449,453 $ 410,074 $ 748,250
Costs ......................... (114,058) 225,262 -- 111,204
SG&A-direct ................... -- (95,386) 118,405 23,019
SG&A-allocated ................ -- 113,000 (120,535) (7,535)
Depreciation and amortization . (45,283) (2,526) (28,291) (76,100)
Impairment losses ............. (44,915) -- -- (44,915)
Interest expense .............. 450 -- (27,473) (27,023)
Equity in investees ........... 26,341,632 -- -- 26,341,632
Gain (loss) on disposition .... -- -- -- --
Minority interest ............. -- -- -- --
Segment profit (loss) ......... 26,434,161 209,103 467,968 27,111,232
Investment income ............. 11,869
Income tax expense ............ (5,838,000)
Income (loss) from continuing
operations .................. 21,285,101
Discontinued operations ....... 15,363
Change in accounting principle. 37,675
Net income (loss) ............. 21,338,139
YEAR ENDED JUNE 30, 2002
- ------------------------
Revenues ...................... ($ 287,386) $ 1,062,176 $ 204,374 $ 979,164
Costs ......................... (74,977) 419,223 -- 344,246
SG&A-direct ................... -- (253,383) (192,518) (445,901)
SG&A-allocated ................ (13,000) (57,000) 154,826 84,826
Depreciation and amortization . (17,205) 20,453 3,923 7,171
Impairment losses ............. 44,915 -- -- 44,915
Interest expense .............. (93,764) (4,048) (116,657) (214,469)
Equity in investees ........... (178,043) -- -- (178,043)
Gain (loss) on disposition .... (2,764,483) -- -- (2,764,483)
Minority interest ............. -- -- -- --
Segment profit (loss) ......... (3,075,881) 936,931 354,800 (1,784,150)
Investment income ............. (2,926)
Income tax expense ............ --
Income (loss) from continuing
operations .................. (1,787,076)
Discontinued operations ....... (3,794,364)
Change in accounting principle. --
Net income (loss) ............. (5,581,440)
9
Rental Operations
- -----------------
This segment includes the operations of an 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), which was sold April 1, 2003, 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 rental operations segment for each
of the years ended June 30, 2003 and 2002 compared to the prior year:
JUNE 30, 2003 Sublease Other Combined
- ------------- --------- ------------ ------------
Revenues .............. ($119,098) $ 7,821 ($ 111,277)
Costs ................. (116,458) 2,400 (114,058)
SG&A-direct ........... -- -- --
SG&A-allocated ........ -- -- --
Depreciation and
amortization ......... (474) (44,809) (45,283)
Impairment losses ..... (44,915) -- (44,915)
Interest expense ...... 450 -- 450
Equity in investees ... -- 26,341,632 26,341,632
Gain (loss) on
disposition ......... -- -- --
Segment profit (loss) . 42,299 26,391,862 26,434,161
JUNE 30, 2002 Sublease Other Office Combined
- ------------- --------- ------------ ------------ -----------
Revenues .............. ($ 45,685) $ 1,910 ($ 243,611) ($ 287,386)
Costs ................. (46,352) 25,800 (54,425) (74,977)
SG&A-direct ........... -- -- -- --
SG&A-allocated ........ -- -- (13,000) (13,000)
Depreciation and
amortization ......... (1,422) -- (15,783) (17,205)
Impairment losses ..... 44,915 -- -- 44,915
Interest expense ...... (12,771) -- (80,993) (93,764)
Equity in investees ... -- (178,043) -- (178,043)
Gain (loss) on
disposition ......... -- -- (2,764,483) (2,764,483)
Segment profit (loss) . (30,055) (201,933) (2,843,893) (3,075,881)
The changes to the sublease component relate to the sale of the subleasehold
interest in March 2002.
On April 1, 2003, the Company's investee (UCV) sold its 542 unit apartment
project for $58,400,000 in cash. After deducting current selling expenses
($2,442,207), paying mortgage loans ($38,000,000), and the refund of lender
impounds ($1,340,348), the net sale proceeds to UCV was $19,298,141 and UCV's
gain from sale was approximately $52,558,000. The Company's equity in this gain
was approximately $26,279,000. The $44,809 decrease in depreciation and
amortization relates to the cessation of amortization of the step up in basis as
a result of the sale of the underlying asset of UCV. Effective April 1, 2003,
UCV changed its fiscal year end from March 31 to June 30 to conform to the
fiscal year end of the Company. This was treated as a change in accounting
principle by the Company and the Company's $37,675 of equity in the net income
of UCV for the three month period ended June 30, 2002 was classified as the
cumulative effect of a change in accounting principle.
10
The equity in income of UCV decreased by $211,000 in 2002 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 compared to the previous years:
2002
---------
Revenues .......................... $ 321,000
Costs ............................. 61,000
Depreciation ...................... (5,000)
Interest and amortization
of loan costs ................... 707,000
Loss from extinguishment of debt .. (66,000)
Other expenses .................... (20,000)
Net income ........................ (356,000)
Vacancy rates at UCV averaged 1.7% and 2.3% in 2001 and 2002, respectively.
Total revenues of UCV increased by 6 percent in 2002 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's interest expense increased in 2002
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 and by 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 losses from debt extinguishment 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.
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 9 to Consolidated
Financial Statements).
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, sales to other golf equipment distributors and 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:
2003 2002 2001
---- ---- ----
Golf equipment distributors 38% 35% 31%
Small golf club manufacturers 32% 26% 12%
manufacturers
Golf shops 24% 33% 48%
Other 6% 6% 9%
Operating expenses of the golf segment consisted of the following in 2003, 2002,
and 2001:
2003 2002 2001
---------- ---------- ----------
Costs of sales and
manufacturing overhead ... $2,632,000 $2,385,000 $1,922,000
Research and development ... 198,000 219,000 263,000
---------- ---------- ----------
Total golf costs ........ $2,830,000 $2,604,000 $2,185,000
========== ========== ==========
Marketing and promotion .... $ 970,000 $1,179,000 $1,407,000
Administrative costs- direct 325,000 212,000 237,000
---------- ---------- ----------
Total SG&A-direct ........ $1,295,000 $1,391,000 $1,644,000
========== ========== ==========
Total golf costs increased in 2003 and 2002 primarily due to an increase in the
amount of cost of goods sold related to increased sales. Golf costs also
increased in 2003 related to a $113,000 increase in the valuation allowance
expense related to inventory.
11
Marketing and promotion expense decreased in 2003 and 2002 primarily due to
decreases in advertising and the tour program expenses. Administrative costs
increased in 2002 primarily due to a $103,000 increase in the allowance for bad
debts related to two small golf club manufacturers that discontinued business.
Unallocated and Other:
- ----------------------
Other revenues increased in 2003 primarily due to one time real estate
commissions earned in 2003 that totaled $450,000. 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.
Unallocated and Other SG&A increased by $118,000 in 2003 and decreased by
$193,000 in 2002. The increase in 2003 was primarily due to an increase in wages
related to a $100,000 bonus to Harold Elkan. 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.
Interest expense changed in 2002 and 2001 partly due to fluctuations in the
balance of short term borrowings in 2003 and 2002 and also due to the decline in
interest rates during 2002. All short term debt was paid in April 2003.
Income Taxes:
- -------------
Income tax expense increased in 2003 due to the income recognized from UCV's
sale of its apartment project. As discussed above, UCV is utilizing the
"like-kind-exchange" rules to defer recognition of taxable income from the sale
to the extent it reinvests the proceeds from sale into like-kind property. Since
UCV used some of the sales proceeds to fund distributions to Company, the
Company estimates that it will have taxable gain to recognize in the year ending
June 30, 2004 of approximately $13,000,000 and that recognition of approximately
$12,800,000 of gain will be indefinitely deferred. The Company estimates that
the amount of gain to be recognized in 2004 for federal income tax purposes will
be offset by its federal net operating loss carryforwards. Since the State of
California has temporarily suspended the utilization of net operating losses for
state income tax purposes, the Company estimates it will have a state income tax
liability for the year ended June 30, 2004 to the extent it will not be offset
by other losses generated in that tax year.
Discontinued Operations:
- ------------------------
As discussed in Footnote 11 of Notes to the Consolidated Financial Statements,
the Company has classified its operations in the bowling and real estate
development segments as discontinued operations. The income or loss from these
operations did not change significantly other than related to the sale of
undeveloped land in 2001 which resulted in a $4,232,333 gain, net of minority
interests.
Contractual Obligations and Commercial Commitments:
- ---------------------------------------------------
The following table summarizes the Company's contractual obligations and other
commitments at June 30, 2003 and the effect such obligations could have on the
Company's liquidity and cash flow in future periods:
Less than Over 5
one year 2-3 Years 4-5 Years Years Total
-------- -------- -------- ---------- ----------
Notes payable ...... $ 5,771 $ -- $ -- $ -- $ 5,771
Lease commitments .. 241,000 494,000 494,000 430,000 1,659,000
Contingent lease
obligation......... 72,000 152,000 161,000 283,000 668,000
-------- -------- -------- ---------- ----------
$318,771 $646,000 $655,000 $ 713,000 $2,332,771
======== ======== ======== ========== ==========
12
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company has utilized both fixed rate and variable rate debt, however
at June 30, 2003 there was only fixed rate debt outstanding. 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:
2004 Total Fair Value (1)
-------- -------- --------
Fixed rate debt $ 6,000 $ 6,000 $ 6,000
Weighted average
interest rate 13.1% 13.1% 13.1%
(1) The fair value of fixed-rate debt was estimated based on the current
rates offered for fixed-rate debt with similar risks and maturities.
The Company does not enter into derivative or interest rate transactions for
speculative or trading purposes.
ITEM 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
(a) The Financial Statements and Supplementary Data of Sports Arenas, Inc.
and Subsidiaries are listed and included under Item 15 of this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
- -------------------------------------------------------------------
and Financial Disclosure NONE
------------------------
13
PART III
ITEM 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a) - (c) The following were directors and executive officers of the
Company during the year ended June 30, 2003. 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 60 Director since November 7, 1983;
President since November 11, 1983
Steven R. Whitman 50 Chief Financial Officer and Treasurer since
May 1987; Director and Assistant Secretary
since August 1, 1989,
Secretary since January 1995
Patrick D. Reiley 62 Director since August 21, 1986, sole member of
audit committee
James E. Crowley 56 Director since January 10, 1989
Robert A. MacNamara 54 Director since January 9, 1989, resigned May
27, 2003
Gordon L. Gerson 52 Director since June 3, 2003
There are no understandings between any director or executive officer and any
other person pursuant to which any director or executive officer was selected as
a director or executive officer.
(d) Family Relationships - None
------------------------
(e) Business Experience
-----------------------
1. Harold S. Elkan has been employed as the President and Chief Executive
Officer of the Company since 1983. For the preceding ten years he was a
principal of Elkan Realty and Investment Co., a commercial real estate brokerage
firm, and was also President of Brandy Properties, Inc., an owner and operator
of commercial real estate.
2. Steven R. Whitman has been employed as the Chief Financial Officer and
Treasurer since May 1987. For the preceding five years he was employed by
Laventhol & Horwath, CPAs, the last four of which were as a manager in the audit
department.
3. Patrick D. Reiley was the Chairman of the Board and Chief Executive
Officer of Reico Insurance Brokers, Inc. (Reico) from 1980 until June 1995, when
Reico ceased doing business. Reico was an insurance brokerage firm in San Diego,
California. Mr. Reiley has been a principal of A.R.I.S., Inc., an international
insurance brokerage company, since 1997.
4. James E. Crowley has been an owner and operator of various automobile
dealerships for the last twenty years. Mr. Crowley was President and controlling
shareholder of Coast Nissan from 1992 to August 1996; and has been President of
the Automotive Group since March 1994. The Automotive Group operates North
County Ford, North County Jeep-GMC-Kia, North County Hyundai, Valley Toyota, TAG
Collision Repair, and Lake Elsinore Ford.
5. Robert A. MacNamara had been employed by Daley Corporation, a California
corporation, from 1978 through 1997, the last eleven years of which he served as
Vice President of the Property Division. Daley Corporation is a residential and
commercial real estate developer and a general contractor. Mr. MacNamara was an
independent consultant to the real estate development industry.
6. Gordon L. Gerson has been an attorney with The Gerson Law Firm, APC in
San Diego, California for over the past five years specializing in real estate
transactions and financings and creditors rights litigation.
(f) Involvement in legal proceedings - None
------------------------------------
Section 16(a) Compliance -Section 16(a) of the Securities Exchange Act of
1934 requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
14
securities, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on written representations that no
other reports were required, during the three fiscal years ended June 30, 2001
through 2003, all Section 16(a) filing requirements applicable to officers,
directors and greater than ten-percent beneficial owners were complied with.
ITEM 11. Executive Compensation
- --------------------------------
(b) The following Summary Compensation Table shows the compensation paid
for each of the last three fiscal years to the Chief Executive Officer of the
Company and to the most highly compensated executive officers of the Company
whose total annual compensation for the fiscal year ended June 30, 2003 exceeded
$100,000.
Long-term All Other
Name and Compen- Compen-
Principal Position Year Salary Bonus Other sation sation
- ------------------- ---- -------- -------- ----- ------ ------
Harold S. Elkan, .. 2003 $350,000 $100,000 $-- $ -- $ --
President ..... 2002 350,000 -- -- -- --
2001 350,000 100,000 -- -- --
Steven R. Whitman, 2003 100,000 -- -- -- --
Chief Financial 2002 100,000 -- -- -- --
Officer ... 2001 100,000 -- -- -- --
The Company has no Long-Term Compensation Plans. Although the Company
provides some miscellaneous perquisites and other personal benefits to its
executives, the amount of this compensation did not exceed the lesser of $50,000
or 10 percent of an executive's annual compensation.
(c)-(f) and (i) The Company hasn't issued any stock options or stock
appreciation rights, nor does the Company maintain any long-term incentive plans
or pension plans.
(g) Compensation of Directors - The Company pays a $500 fee to each outside
director for each director's meeting attended. The Company does not pay any
other fees or compensation to its directors as compensation for their services
as directors.
(h) Employment Contracts, Termination of Employment and Change-in-Control
Arrangements: 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 conducts a review and proposes 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, 2003) 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 had previously authorized
that up to $625,000 of loans can be made to Harold S. Elkan at interest rates
not to exceed 10 percent. No loans have been made to Harold S. Elkan in over
three years.
(j) Compensation Committee Interlocks and Insider Participation: Harold S.
Elkan, the Company's President, was appointed by the Company's Board of
Directors as a compensation committee of one to review and set compensation for
all Company employees other than Harold S. Elkan. The Company's outside
Directors set compensation for Harold S. Elkan. None of the executive officers
of the Company had an "interlock" relationship to report for the fiscal year
ended June 30, 2003.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors appointed Harold S. Elkan as a
compensation committee of one to review and set compensation for all Company
employees other than Harold S. Elkan. The Board of Directors, excluding Harold
S. Elkan and Steven R. Whitman, set and approve compensation for Harold S.
Elkan.
The objectives of the Company's executive compensation program are to:
attract, retain and motivate highly qualified personnel; and recognize and
reward superior individual performance. These objectives are satisfied through
the use of the combination of base salary and discretionary bonuses. The
following items are considered in determining base salaries: experience,
personal performance, responsibilities, and, when relevant, comparable salary
information from outside the Company. Currently, the performance of the Company
15
is not a factor in setting compensation levels. Annual cash bonus payments are
discretionary and would typically relate to subjective performance criteria.
Bonuses of $100,000 were awarded to Harold Elkan in each of the years ended June
30, 2003 and 2001.
In the fiscal year ended June 30, 1993 the outside members of the Board of
Directors approved a new employment agreement for Harold S. Elkan (Elkan)
effective from January 1, 1993 until December 31, 1997. This agreement provided
for annual base salary of $250,000 plus discretionary bonuses as the Board of
Directors may determine and approve. In setting the compensation levels in this
agreement, the Board of Directors, in addition to utilizing their personal
knowledge of executive compensation levels in San Diego, California, referred to
a special compensation study performed in 1987 for the Board of Directors by an
independent outside consultant. The Board of Directors is currently reviewing
information for purposes of entering into a new employment agreement with Elkan.
In the meantime, the Board of Directors approved an increase in Elkan's base pay
to $350,000 annually effective July 1, 1998.
Outside members of Board of Directors approving the Compensation for Harold
S. Elkan:
Patrick D. Reiley
James E. Crowley
Robert A. MacNamara, resigned May 27, 2003
Gordon L. Gerson, became director June 3, 2003
Directors' Compensation Committee for Other Employees:
Harold S. Elkan
(l) Performance Graph: The following schedule and graph compares the
performance of $100 if invested in the Company's common stock (SAI) with the
performance of $100 if invested in each of the NASDAQ Industrial Index (Ind
Indx), and Aldila, Inc. (Aldila), a manufacturer of composite golf club shafts.
The performance graph and schedule provide information required by regulations
of the Securities and Exchange Commission. However, the Company believes that
this performance graph and schedule could be misleading if it is not understood
that there is limited trading of the Company's stock. The Company's common stock
has traded in the range of $.01 to $.02 for most of the past five years. As a
result, a small increase in the per share price results in large percentage
changes in the value of an investment.
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.
16
[GRAPHIC OMITTED]
SCHEDULE OF COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Sports NASDAQ
Year Ended Arenas, Inc. Aldila Ind Indx
---------- ----------- ------- -----------
6/1998 100 100 100
6/1999 67 28 122
6/2000 133 24 158
6/2001 167 24 114
6/2002 100 8 90
6/2003 67 9 94
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- -----------------------------------------------------------
AND MANAGEMENT (a) - (c):
-------------------------
Shares Nature of
Beneficially Beneficial Percent
Name and Address Owned Ownership of Class
---------------- -------------- ----------------- --------
Harold S. Elkan 21,808,267 (a) Sole investment 80.0%
7415 Carroll 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(b) of Notes to Consolidated Financial
Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) - (c):
- ------------------------------------------------------------------
1. The Company has $360,653 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, 2003 ($399,256 as of June 30, 2002). The balance at June 30, 2003
bears interest at 8 percent per annum and is due in monthly installments of
interest only. The balance is due on demand. The largest amount outstanding
during the year was $412,685 in April 2003.
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 the balance of the loans remained below
$390,000. As of June 30, 2003 there was no unrecorded accrued interest on the
loans ($8,256 of interest accrued on the loans was unrecorded of June 30, 2002).
17
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 (5.25 percent at June 30, 2003) and to be added to the
principal balance annually. As of June 30, 2003 and 2002, $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 $1,001,166 as of June 30, 2003
($809,735 as of June 30, 2002).
ITEM 14. Controls and Procedures:
We maintain disclosure controls and procedures (as defined in Securities
Exchange Act 1934 Rules 13a-14(c) and 15d-4(c)) that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Within 90 days prior to the date of this
quarterly report, we carried out an evaluation, under the supervision and with
the participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective.
Changes in Internal Controls:
- -----------------------------
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weaknesses,
and therefore no corrective actions were taken.
18
PART IV
-------
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
A. The following documents are filed as a part of this report:
1. Financial Statements of Registrant
Independent Auditors' Report 20
Sports Arenas, Inc. and subsidiaries consolidated financial
statements:
Balance sheets as of June 30, 2003 and 2002 21-22
Statements of operations for each of the years in the
three-year period ended June 30, 2003 23
Statements of shareholders' equity (deficiency) for each of
the years in the three-year period ended June 30, 2003 24
Statements of cash flows for each of the years in the
three-year period ended June 30, 2003 25-26
Notes to financial statements 27-39
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 50 percent owned
investee:
Independent Auditors' Report 40
Balance sheets as of June 30, 2003 and 2002 41
Statements of operations and partners' equity (deficit) for
each of the years ended June 30, 2003, March 31, 2002
and March 31, 2001 and the three-month period
ended June 30, 2002 42
Statements of cash flows for each of the years ended
June 30, 2003, March 31, 2002 and March 31, 2001 and
the three-month period ended June 30, 2002 43
Notes to financial statements 44-48
3. Financial Statement Schedules
There are no financial statement schedules because they are either not
applicable or the required information is shown in the financial
statement or notes thereto.
4. Exhibits
Index to Exhibits 50
B. Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
1. The report filed April 15, 2003 disclosed the sale of a 542 unit
apartment project by UCV, LP.
2. The report filed June 16, 2003 disclosed the resignation of Robert
MacNamara as a director of the Company on May 27, 2003 and the
appointment of Gordon L. Gerson as his replacement on June 3, 2003.
19
INDEPENDENT AUDITORS' REPORT
The 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, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for each of the years in the three-year period ended June 30,
2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 5(b) to the consolidated financial statements, effective
April 1, 2003, the Company changed its method of accounting for its equity
investment in UCV, L.P.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the Company has suffered recurring
losses, and is forecasting negative cash flows from operating activities for the
next twelve months. These items raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 13. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
San Diego, California
September 5, 2003
20
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-JUNE 30, 2003 AND 2002
ASSETS
2003 2002
----------- -----------
Current assets:
Cash and cash equivalents ........................ $ 365,674 $ 39,345
Other receivable-affiliate (Note 5b) ............. 350,000 --
Trade receivables, net of allowance for doubtful
accounts of $228,000 and $73,000 respectively .. 402,875 444,996
Note receivable- affiliate (Note 3a) ............. -- --
Inventories (Note 2) ............................. 641,127 792,690
Prepaid expenses ................................. 34,958 38,706
----------- -----------
Total current assets ....................... 1,794,634 1,315,737
----------- -----------
Property and equipment, at cost (Note 10):
Machinery and equipment .......................... 1,492,404 1,221,553
Leasehold improvements ........................... 396,991 1,123,853
----------- -----------
1,889,395 2,345,406
Less accumulated depreciation and
amortization ................................ (1,052,740) (1,314,680)
----------- -----------
Net property and equipment ................ 836,655 1,030,726
----------- -----------
Other assets:
Intangible assets, net (Note 4) .................. -- 37,284
Deferred tax assets (Note 8) ..................... 4,661,000 --
Investments (Note 5) ............................. 5,344,007 423,657
Other ............................................ 95,671 95,999
----------- -----------
10,100,678 556,940
----------- -----------
$12,731,967 $ 2,903,403
=========== ===========
21
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)-JUNE 30, 2003 AND 2002
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
2003 2002
----------- -----------
Current liabilities:
Notes payable, short-term (Note 6b) .............. $ -- $ 445,000
Current portion of long-term debt (Note 6a) ...... 5,771 8,000
Accounts payable ................................. 441,434 963,402
Accrued payroll and related expenses ............. 282,080 215,093
Accrued interest ................................. -- 276,735
Other liabilities ............................... 3,796 92,803
----------- -----------
Total current liabilities .................... 733,081 2,001,033
----------- -----------
Long-term debt, excluding current
portion (Note 6a) ................................ -- 5,456
----------- -----------
Distributions received in excess of
basis in investment (Note 5b) .................... -- 18,008,401
----------- -----------
Other liabilities .................................. -- 192,000
----------- -----------
Deferred income taxes (Note 8) ..................... 10,514,000 --
----------- -----------
Minority interest in consolidated
subsidiary (Note 11b) ............................ 431,839 802,677
----------- -----------
Shareholders' equity (deficiency):
Common stock, $.01 par value, 50,000,000
shares authorized, 27,250,000 shares
issued and outstanding .......................... 272,500 272,500
Additional paid-in capital ....................... 1,730,049 1,730,049
Retained earnings (accumulated deficit) .......... 1,341,990 (17,817,221)
----------- -----------
3,344,539 (15,814,672)
Less note receivable from shareholder (Note 3b) .. (2,291,492) (2,291,492)
----------- -----------
Total shareholders' equity (deficiency) ..... 1,053,047 (18,106,164)
----------- -----------
Commitments and contingencies (Notes 7 and 9)
$12,731,967 $ 2,903,403
=========== ===========
See accompanying notes to consolidated financial statements.
22
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Revenues:
Golf ............................................. $ 3,038,746 $ 2,589,293 $ 1,527,117
Rental ........................................... 78,957 190,234 444,635
Other ............................................ 201,618 329,402 132,442
Other-related party (Note 5b) .................... 724,229 186,371 178,957
------------ ------------ ------------
4,043,550 3,295,300 2,283,151
------------ ------------ ------------
Costs and expenses:
Golf ............................................. 2,829,698 2,604,436 2,185,213
Rental ........................................... 75,400 189,458 264,435
Selling, general, and administrative ............. 2,272,402 2,256,918 2,585,008
Depreciation and amortization .................... 195,223 271,323 264,152
Provision for impairment losses (Note 4a) ........ -- 44,915 --
------------ ------------ ------------
5,372,723 5,367,050 5,298,808
------------ ------------ ------------
Loss from operations .................................. (1,329,173) (2,071,750) (3,015,657)
------------ ------------ ------------
Other income (charges):
Investment income:
Related party (Notes 3a and 3b) ................ 40,251 27,890 28,926
Other .......................................... 1,315 1,807 3,697
Interest expense and amortization of finance costs (57,656) (84,679) (299,148)
Equity in income (loss) of investee (Note 5a) .... 26,281,844 (59,788) 118,255
Gain on sale of office building (Note 9) ......... -- -- 2,764,483
------------ ------------ ------------
26,265,754 (114,770) 2,616,213
------------ ------------ ------------
Income (loss) from continuing operations before income
taxes and change in accounting principle ........... 24,936,581 (2,186,520) (399,444)
Income tax expense (Note 8) ........................... (5,838,000) -- --
------------ ------------ ------------
Income (loss) from continuing operations .............. 19,098,581 (2,186,520) (399,444)
Income from discontinued operations net of
income tax expense of $15,000 in 2003 (Note 11) .... 22,955 7,592 3,801,956
Cumulative effect of change in accounting principle ... 37,675 -- --
(Note 5b)
------------ ------------ ------------
Net income (loss) ..................................... $ 19,159,211 ($2,178,928) $3,402,512
============ ============ ============
Per common share (based on weighted average shares
outstanding) basic and diluted:
Income (loss) from continuing operations .......... $ 0.70 ($ 0.08) ($ 0.02)
Discontinued operations ........................... -- -- 0.14
Cumulative effect of change in accounting principle -- -- --
------ ------ ------
Net income (loss) ................................ $ 0.70 ($ 0.08) $ 0.12
====== ====== ======
See accompanying notes to consolidated financial statements.
23
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Common Stock Retained Note
--------------------- Additional Earnings Receivable
Number of Paid-In (Accumulated from
Shares Amount Capital Deficit) Shareholder Total
---------- -------- ---------- ------------ ----------- ------------
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)
Net income .................. -- -- -- 19,159,211 -- 19,159,211
---------- -------- ---------- ------------ ----------- ------------
Balance at June 30, 2003 ........... 27,250,000 $272,500 $1,730,049 $ 1,341,990 ($2,291,492) $ 1,053,047
========== ======== ========== ============ =========== ============
See accompanying notes to consolidated financial statements.
24
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ................................ $19,159,211 ($2,178,928) $3,402,512
Less income from discontinued operations ....... (22,955) (7,592) (3,801,956)
------------ ------------ ------------
Income (loss) from continuing operations ....... 19,136,256 (2,186,520) (399,444)
Adjustments to reconcile net income (loss)
to the net cash used by operating activities:
Amortization of deferred financing costs ..... -- -- 3,132
Depreciation and amortization ................ 195,223 271,323 264,152
Equity in (income) loss of investee .......... (26,319,519) 59,788 (118,255)
Deferred income .............................. (192,000) 48,000 48,000
Provision for impairment losses .............. -- 44,915 --
Gain on sale of assets ....................... -- -- (2,754,007)
Provision for deferred income taxes .......... 5,838,000 -- --
Changes in assets and liabilities:
Increase in receivables .................... (294,242) (124,339) (124,023)
(Increase) decrease in inventories ......... 151,563 (207,579) (280,205)
(Increase) decrease in prepaid expenses ..... 20,112 (14,878) 70,004
Increase (decrease) in accounts payable .... (456,755) 248,077 (31,099)
Increase in accrued expenses and
other liabilities ........................ 14,744 6,932 219,394
Other ........................................ 37,612 62,284 38,317
------------ ------------ ------------
Net cash used by continuing operations ............ (1,869,006) (1,791,997) (3,064,034)
Net cash provided (used) by discontinued operations (320,402) 70,104 (520,472)
------------ ------------ ------------
Net cash used by operating activities ............. (2,189,408) (1,721,893) (3,584,506)
------------ ------------ ------------
Cash flows from investing activities:
Decrease in notes receivable ..................... -- -- 73,866
Additions to property and equipment .............. (17,850) -- (507,336)
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
Proceeds from sale of other assets ............... 19,465 30,700 5,000
Additions to development costs ................... -- -- (30,755)
Distributions to holders of minority interest .... (370,838) (50,000) (2,172,410)
Distributions received from investees ............ 3,618,276 2,102,820 1,559,000
Contributions to investees ....................... -- -- (200,000)
------------ ------------ ------------
Net cash provided by investing activities. 3,249,053 2,083,520 6,053,096
------------ ------------ ------------
Cash flows from financing activities:
Scheduled principal payments ..................... (7,685) (32,486) (213,772)
Proceeds from short-term borrowings .............. 75,000 450,000 1,200,000
Payments on short-term borrowings ................ (800,631) (1,255,000) (1,300,000)
Loan costs ....................................... -- -- (22,598)
Extinguishment of long-term debt ................. -- -- (1,650,977)
Other ............................................ -- -- 20,000
------------ ------------ ------------
Net cash used by financing activities .... (733,316) (837,486) (1,967,347)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .. 326,329 (475,859) 501,243
Cash and cash equivalents, beginning of year .......... 39,345 515,204 13,961
------------ ------------ ------------
Cash and cash equivalents, end of year ................ $ 365,674 $ 39,345 $ 515,204
============ ============ ============
25
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
SUPPLEMENTAL CASH FLOW INFORMATION:
2003 2002 2001
-------- --------- ---------
Interest paid $ 54,000 $ 11,000 $ 196,000
======== ========= =========
Supplemental schedule of non-cash investing and financing activities:
During the year ended June 30, 2003, the Company closed its bowling center
operations and sold the machinery and equipment for $19,465. The cost and
accumulated depreciation of the assets sold were $473,861 and $471,112,
respectively.
During the year ended June 30, 2003, the Company reclassified $280,631 of
principal payments on short-term debt to accrued interest.
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.
See accompanying notes to consolidated financial statements.
26
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
1. Summary of significant accounting policies and practices:
Description of business- The Company, primarily through its subsidiaries, owns
and operates one bowling center (discontinued May 31, 2003), an apartment
project (50% owned) (sold April 1, 2003), 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, 2003 and 2002.
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 - Property and equipment are stated at cost.
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 was being amortized over the remaining useful
lives of the buildings and the amortization was included in the Company's
depreciation and amortization expense until the property was sold April 1,
2003.
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 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 - The Company adopted Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (Statement No. 144), on July
1, 2002. Statement No. 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement requires
that long-lived assets 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
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized
by the amount by which the carrying amount of an asset exceeds the fair
value of the asset. Statement No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or the fair
value less costs to sell. Prior to the adoption of Statement No. 144, the
Company followed the guidance of Statement No. 121.
27
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 and cash equivalents, other receivables-affiliate, trade receivables,
accounts payable, and notes payable-short term - the carrying amount
reported in the balance sheet approximates the fair value due to their
short-term maturities.
Note receivable-affiliate - It is impractical to estimate the fair value
of the note receivable-affiliate due to the related party nature of the
instrument.
Long-term debt - the fair value was determined by discounting future cash
flows using the Company's current incremental borrowing rate for similar
types of borrowing arrangements. The carrying value of long-term debt
reported in the balance sheet approximates the fair value.
Use of estimates - Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and reported amounts of revenue and
expenses during the reporting period to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America. Actual results could differ from these
estimates.
Income (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,
2003.
Losses from Extinguishment of Debt- The Company adopted Statement No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Correction" ("SFAS No. 145") on July 1, 2002.
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
("SFAS No. 4"), required that gains and losses from the extinguishment of
debt that were included in the determination of net income be aggregated
and, if material, classified as an extraordinary item. The provisions of
SFAS No. 145 related to the rescission of SFAS No. 4 require the Company to
reclassify prior period items that do not meet the extraordinary
classification. Accordingly, the Company's equity in an investees losses
from extinguishment of debt recorded in the Company's years ended June 30,
2002 and 2001 that had previously been classified as extraordinary items
have been reclassified and included in the equity in income (loss) from
investees.
Reclassification- Certain 2002 and 2001 amounts have been reclassified to
conform to the presentation used in 2003.
2. Inventories:
Inventories consist of the following:
2003 2002
--------- ---------
Raw materials ............ $ 126,766 $ 199,255
Work in process .......... 561,161 428,573
Finished goods ........... 186,200 253,862
--------- ---------
874,127 881,690
Less valuation allowance (233,000) (89,000)
--------- ---------
$ 641,127 $ 792,690
========= =========
28
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 $40,251, $27,890, and $28,926 in 2003, 2002 and
2001, 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. As a result of the balance of the
unsecured loans decreasing below $390,000 as of June 30, 2003, $29,347 of
the valuation allowance was recovered in the year ended June 30, 2003.
The Company also discontinued recording the interest income on the loans
except to the extent that the balance of the loans remained below $390,000.
As of June 30, 2003 no interest accrued on the loans was unrecorded. At June
30, 2002 and 2001, $8,256 and $4,339, respectively, of interest accrued on
the loans was unrecorded.
2003 2002
--------- ---------
Balance of note receivable $ 360,653 $ 398,256
Unrecorded accrued interest -- (8,256)
Less valuation allowance . (360,653) (390,000)
--------- ---------
$ -- $ --
========= =========
(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 (5.50 percent at June 30,
2003) 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.
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
$1,001,166 as of June 30, 2003 ($809,735 as of June 30, 2002).
4. Intangible assets:
Intangible assets consisted of the following as of June 30, 2003 and 2002:
2003 2002
--------- ---------
Lease inception fee ........... $ -- $ 232,995
Less accumulated amortization -- (195,711)
--------- ---------
$ -- $ 37,284
========= =========
(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 the 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 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.
29
The following is a summary of the results from operations of the Palm
Springs sublease included in the financial statements:
2002 2001
--------- ---------
Rents .................... $ 119,000 $ 165,000
Costs .................... 116,000 163,000
Impairment loss .......... 45,000 --
Depreciation ............. -- 2,000
--------- ---------
Income (loss) from operations (42,000) --
Interest expense ......... 5,000 18,000
--------- ---------
Income (loss) from
continuing operations .. $ (47,000) $ (18,000)
========= =========
(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 was
amortized over the then remaining lease term of 75 months.
5. Investments:
(a) Investments consist of the following:
2003 2002
------------ ------------
Accounted for on the equity method:
Investment in UCV, L.P. .................. $ 5,277,007 $(18,008,401)
Vail Ranch Limited Partnership (Note 11b) 67,000 423,657
------------ ------------
5,344,007 (17,584,744)
Less Investment in UCV, L.P. classified as
liability- Distributions received in
excess of basis in investment .......... -- 18,008,401
------------ ------------
5,344,007 423,657
------------ ------------
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 ...................... $ 5,344,007 $ 423,657
============ ============
The following is a summary of the equity in income (loss) from UCV:
2003 2002 2001
----------- ----------- -----------
UCV, L.P. $26,281,844 $ (59,788) $ 118,255
The equity in income (loss) from VRLP (see Note 11b) is included in the
income from discontinued operations.
(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 owned University City Village, a 542 unit
apartment project in San Diego, California until it was sold April 1, 2003.
Effective April 1, 2003, the Company began recording its equity in the
income (loss) of UCV on a current basis rather than on a 91 day delayed
basis. The Company has treated this as a change in its accounting principle
and accordingly has classified its $37,675 of equity in the net income of
UCV for the period of April 1, 2002 through June 30, 2002 as the cumulative
effect of a change in accounting principle in 2003.
On April 1, 2003, UCV sold the University City Village Apartments for
$58,400,000 in cash. After deducting current selling expenses ($2,495,820),
paying mortgage loans ($38,000,000), and the refund of lender impounds
($1,340,348), the net sale proceeds to UCV was approximately $19,298,141 and
UCV's gain from sale was approximately $52,558,000. UCV is planning on
distributing a cumulative amount of approximately $3,500,000 of such
proceeds to the Company in partial liquidation of its partnership interest
in UCV. Of this total, UCV distributed $1,000,000 to the Company from the
30
proceeds of funds released from escrow on March 17, 2003 and distributed
another $1,500,000 to the Company in April 2003. The balance of the
distribution is expected to be made after the end of the like-kind exchange
transactions. The remaining funds are expected to be reinvested by UCV in
"like-kind" property to defer a portion of the income tax consequences of
the sale. As part of the sales transaction, the Company earned a $350,000
sales commission that was included in UCV' selling expenses.
The following is summarized financial information of UCV's balance sheets as
of June 30, 2003 and 2002:
2003 2002
----------- -----------
Total assets ............. $15,617,000 $ 5,360,000
Total liabilities ........ 406,000 38,613,000
The following is summarized financial information of UCV's results of
operations, which have been classified as discontinued operations in the
financial statements of UCV:
Three Months
Year Ended Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
2003 2002 2002 2001
---------- ---------- ---------- ----------
Revenues .................. $4,346,000 $1,376,000 $5,406,000 $5,085,000
Operating and general
And administrative costs 1,554,000 461,000 1,672,000 1,611,000
Depreciation .............. 11,000 3,000 14,000 19,000
Interest and amortization
of loan costs ........... 2,775,000 836,000 3,504,000 2,797,000
Other expenses ............ -- -- -- 20,000
Loss from extinguishment of
debt .................... -- -- 335,000 401,000
Gain on sale .............. 52,558,000 -- -- --
Income (loss) from
discontinued operations ... 52,564,000 76,000 (119,000) 237,000
Net income (loss) ......... 52,564,000 76,000 (119,000) 237,000
The apartment project was managed by the Company, which recognized
management fee income of $110,229, $138,371, and $130,957 in the
twelve-month periods ended June 30, 2003, 2002, and 2001, respectively. In
addition, pursuant to a development fee agreement with UCV dated July 1,
1998, the Company received development fees totaling $72,000 in the year
ended June 30, 2003 and $96,000 each in the years ended June 30, 2002 and
2001. The Company had been deferring one half of fees it was receiving from
UCV pursuant to a development services agreement. The balance of deferred
income at March 31, 2003 ($228,000) was recognized as revenue on April 1,
2003 upon the sale of the property. The Company believes that the terms of
these agreements were no less favorable to the Company or UCV than could be
obtained with an independent third party.
A reconciliation of the investment (distributions received in excess of
basis) in UCV as of June 30 is as follows:
2003 2002
------------ -------------
Balance, beginning $(18,008,401) $ (15,792,373)
Equity in income (loss), net 26,319,519 (59,788)
Cash distributions (3,025,500) (2,102,820)
Amortization of purchase price in
excess of equity in net assets (8,611) ( 53,420)
------------- ------------
Balance, ending $ 5,277,007 $(18,008,401)
============= ============
(c) Other investment:
The Company owns a 6 percent limited partnership interest 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
31
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.
6. Long-term and short-term debt:
(a) The principal payments due on notes payable during the next five fiscal
years are as follows: $5,771 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 $725,631 (including $280,631 reclassified from accrued interest in
2003), $955,000 and $1,300,000 was paid in 2003, 2002 and 2001,
respectively. The loans were unsecured, due on demand and bore interest
monthly at a base rate plus 1 percent . 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 also provided 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 February 27, 2003 the Company borrowed $75,000 from its partner in OVP,
LP. The loan was unsecured, due on demand and bore interest at the rate of
10 percent. The loan plus accrued interest of $884 was paid on April 11,
2003. Although the terms of this loan is 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.
(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.
7. Commitments and contingencies:
(a) The Company 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: 2004-
$241,000, 2005- $247,000, 2006- $247,000, 2007- $247,000, 2008- $247,000,
thereafter- $430,000. 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. Rental expense for the manufacturing
facilities was $234,105 in 2003, $227,288 in 2002, and $220,688 in 2001.
The Company has subleased a portion of the golf club shaft manufacturing
plant to different tenants since November 1, 2001. The current sublease
commenced November 1, 2002 and continues through October 31, 2004. Rental
income from subleases was $78,957 in 2003, $71,136 in 2002 and $46,400 in
2001. These amounts are presented as rental revenues.
(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 the
time of termination plus $50,000. As of June 30, 2003, his annual salary was
$350,000.
32
(c) A lawsuit was filed on January 10, 2003 in the United States District
Court in the Southern District of California by Masterson Marketing, Inc.
(Masterson) against Penley Sports, LLC. Masterson's lawsuit claims
copyright infringement, breach of contract, breach of fiduciary duty,
constructive fraud and conversion. Masterson is seeking damages in excess
of $450,000. The Company filed a motion to dismiss all claims. Masterson
dropped all claims except for the claims of copyright infringement and
breach of contract. The balance of the motion to dismiss is waiting for a
court decision. It is not possible at this time to predict the outcome of
this litigation. We intend to vigorously defend against these claims.
(d) The Company is involved in other various routine litigation and disputes
incident to its business. In management's opinion, based in part on the
advice of legal counsel, none of these matters, other than as described in
Note 7(c) will have a material adverse affect on the Company's financial
position.
8. Income taxes
At June 30, 2003, the Company had net operating loss carry-forwards of
$13,042,000 for federal income tax purposes and $5,475,000 for California
state income tax purposes. The carryforwards expire from years 2004 to 2022.
Deferred tax assets are primarily related to these net operating loss
carryforwards and certain other temporary differences.
In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all
of the deferred tax assets will not be realized. The Company has recorded a
valuation allowance primarily for impairment losses and state net operating
loss carryforwards which may expire before they can be utilized. The
decrease in the valuation allowance in 2003 primarily related to the
increased likelihood that federal net operating loss carryforwards will be
realized due to taxable income from partnerships to be recognized by the
Company for tax purposes in 2004.
The income tax expense attributable to income (loss) from continuing
operations for the years ended June 30, 2003, 2002, and 2001 is as follows:
2003 2002 2001
----------- ----------- -----------
Current ........................... $ -- $ -- $ --
----------- ----------- -----------
Deferred:
Federal ........................ 4,378,000 -- --
State .......................... 1,460,000 -- --
----------- ----------- -----------
Total deferred ............... 5,838,000
----------- ----------- -----------
Total expense ................ $ 5,838,000 $ -- $ --
=========== =========== ===========
The following is a reconciliation of the normal expected federal income tax
rate of 34 percent to the income (loss) from continuing operations in the
financial statements:
2003 2002 2001
----------- ----------- -----------
Expected federal income tax expense
(benefit) ...................... $ 8,491,000 $ (743,000) $ (136,000)
State tax, net of federal benefit . 1,457,000 (128,000) (23,000)
Increase (decrease) in valuation
allowance ...................... (4,351,000) 620,000 (36,000)
Expiration of net operating loss
carryforward ................... 185,000 191,000 149,000
Other ............................. 56,000 60,000 46,000
----------- ----------- -----------
Provision for income tax expense .. $ 5,838,000 $ -- $ --
=========== =========== ===========
The following is a schedule of the significant components of the Company's
deferred tax assets and deferred tax liabilities as of June 30, 2003 and
2002:
33
2003 2002
------------ ------------
Deferred tax assets :
Net operating loss carryforwards ......... $ 4,753,000 $ 4,275,000
Accumulated depreciation and
amortization ........................... 101,000 270,000
Valuation allowance for impairment
losses ................................. 919,000 765,000
Other .................................... 163,000 316,000
------------ ------------
Total net deferred tax assets .......... 5,936,000 5,626,000
Less valuation allowance ............... (1,275,000) (5,626,000)
------------ ------------
Net deferred tax assets ..................... $ 4,661,000 $ --
============ ============
Deferred tax liabilities:
Gain on sale to be recognized ........ $ 5,407,000 $ --
Gain on sale to be deferred .......... 5,107,000 --
------------ ------------
Total net deferred tax liabilities ......... $ 10,514,000 $ --
============ ============
9. 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 4a).
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
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: $72,000- 2004; $75,000- 2005; $77,000- 2006; $79,000 in 2007, $82,000 in
2008, $283,000 thereafter and $668,000 in the aggregate.
The following is a summary of the results from operations of the office
building included in the financial statements:
2001
--------
Rents ........................... $243,000
Costs ........................... 54,000
Allocated SG&A .................. 13,000
Depreciation .................... 16,000
--------
Income from operations .......... 160,000
Interest expense ................ 81,000
--------
Income from continuing operations $ 79,000
========
10. Business segment information:
The Company operates principally in two business segments: commercial real
estate rental, 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. Two segments, bowling centers and real estate development, were
disposed of in the fourth quarter of 2003 (Note 11).
The following is summarized information about the Company's operations by
business segment.
34
Real Estate Unallocated
Operation Golf And Other Totals
------------ ----------- ----------- ------------
YEAR ENDED JUNE 30, 2003
- ------------------------
Revenues ................................. $ 78,957 $ 3,038,746 $ 925,847 $ 4,043,550
Depreciation and amortization ............ 8,611 167,485 19,127 195,223
Impairment losses ........................ -- -- -- --
Interest expense ......................... 5,436 -- 52,220 57,656
Equity in income of investee ............. 26,281,844 -- -- 26,281,844
Gain on disposition ...................... -- -- -- --
Segment profit (loss) .................... 26,271,354 (1,607,743) 231,404 24,895,015
Investment income ........................ 41,566
Loss from continuing
operations ............................. 24,936,581
Significant non-cash items ............... (26,319,519) -- -- (26,319,519)
Segment assets ........................... 5,277,908 1,896,012 5,490,999 12,664,919
Investment in equity of
investees .............................. 5,277,007 -- -- 5,277,007
Expenditures for segment ................. -- 5,210 12,640 17,850
assets
Information for disposed
segments:
Assets ............................... 67,000
Expenditures ......................... --
YEAR ENDED JUNE 30, 2002
- ------------------------
Revenues ................................. $ 190,234 $ 2,589,293 $ 515,773 $ 3,295,300
Depreciation and amortization ............ 53,894 170,011 47,418 271,323
Impairment losses ........................ 44,915 -- -- 44,915
Interest expense ......................... 4,986 -- 79,693 84,679
Equity in loss of investee ............... (59,788) -- -- (59,788)
Gain on disposition ...................... -- -- -- --
Segment profit (loss) .................... (162,807) (1,816,846) (236,564) (2,216,217)
Investment income ........................ 29,697
Loss from continuing
operations ............................. (2,186,520)
Significant non-cash items ............... 104,703 -- -- 104,703
Segment assets ........................... 2,296 2,227,595 132,502 2,362,393
Investment in equity of
investees .............................. -- -- -- --
Expenditures for segment
assets ................................. -- -- -- --
Information for disposed
segments:
Assets ............................... 541,010
Expenditures ......................... --
YEAR ENDED JUNE 30, 2001
- ------------------------
Revenues ................................. $ 477,620 $ 1,527,117 $ 311,399 $ 2,316,136
Depreciation and amortization ............ 71,099 149,558 43,495 264,152
Impairment losses ........................ -- -- -- --
Interest expense ......................... 98,750 4,048 196,350 299,148
Equity in income of investee ............. 118,255 -- -- 118,255
Gain on disposition ...................... 2,764,483 -- -- 2,764,483
Segment profit (loss) .................... 2,913,074 (2,753,777) (591,364) (432,067)
Investment income ........................ 32,623
Loss from continuing
operations ............................. (399,444)
Significant non-cash items ............... (2,882,738) -- -- (2,882,738)
Segment assets ........................... 118,785 2,106,825 164,387 2,389,997
Investment in equity of
investees .............................. -- -- -- --
Expenditures for segment
assets ................................. -- 433,043 43,454 476,497
Information for disposed
segments:
Assets ............................... 1,058,477
Expenditures ......................... 61,594
2003 2002 2001
----------- ----------- -----------
Revenues per segment schedule ..... $ 4,043,550 $ 3,295,300 $ 2,316,136
Intercompany rent eliminated ...... -- -- (32,985)
----------- ----------- -----------
Consolidated revenues ............. $ 4,043,550 $ 3,295,300 $ 2,283,151
=========== =========== ===========
35
11. Disposition of business segments:
During the year ended June 30, 2003, the Company ceased operations in two
business segments. The following is a summary of the income (loss) from the
discontinued business segments excluding the $15,000 of income tax expense
related to 2003:
2003 2002 2001
----------- ----------- -----------
Bowling ........................... $ (198,164) $ (10,619) $ 140,519
Real estate development ........... 236,119 18,211 3,661,437
----------- ----------- -----------
$ 37,955 $ 7,592 $ 3,801,956
=========== =========== ===========
(a) Bowling segment:
On May 31, 2003, the Company ceased operations at the leased facility (lease
expired June 2003) occupied by the Grove Bowling Center. The Company sold
the machinery and equipment for $19,465 and recorded a gain of $16,716. The
cost and accumulated depreciation of the assets sold were $473,861 and
$471,112, respectively.
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
segment:
2003 2002 2001
----------- ----------- -----------
Revenues .......................... $ 1,441,508 $ 1,783,545 $ 2,209,585
Bowl costs ........................ (1,277,431) (1,404,006) (1,851,210)
SG&A-direct ....................... (231,397) (236,068) (389,827)
SG&A-corporate allocation ......... (125,000) (117,465) (182,291)
Depreciation ...................... (22,560) (36,625) (37,108)
Amortization of loan fees ......... -- -- (15,714)
Interest expense .................. -- -- (75,403)
Gain from sale .................... 16,716 -- 482,487
----------- ----------- -----------
Income (loss) ..................... ($ 198,164) ($ 10,619) $ 140,519
=========== =========== ===========
(b) Real estate development segment:
During the three years ended June 30, 2003, the Company's real estate
development activities related to undeveloped land that was owned through a
consolidated subsidiary, Old Vail Partners (OVP), and an unconsolidated
subsidiary, Vail Ranch Limited Partnership (VRLP), which was accounted for
using the equity method of accounting. The Company owns 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 $1,780,838 has been paid through June 30, 2003 ($370,838 in 2003,
$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 below 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.
36
The following is a summary of the results of operations of the real estate
development segment:
2003 2002 2001
----------- ----------- -----------
Costs ............................. $ -- $ -- $ (156,688)
SG&A- allocate .................... -- -- (20,000)
Provision for impairment loss ..... (88,881) -- --
Interest expense .................. -- -- (235,208)
Gain on sale ...................... -- -- 5,544,743
Minority interest ................. -- -- (1,312,410)
Equity in income (loss) of
investee......................... 325,000 18,211 (159,000)
----------- ----------- -----------
Income ............................ $ 236,119 $ 18,211 $ 3,661,437
=========== =========== ===========
OVP owned 33 acres of undeveloped land in Temecula, CA which was sold on
June 1, 2001 to an unrelated developer for $6,375,000 cash plus assumption
of the non-delinquent balance of the assessment district obligation
($1,001,274). The transaction resulted in a 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.
VRLP is a partnership formed in September 1994 between OVP (60 percent
ownership interest since 1999) 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.
On February 21, 2003 Vail Ranch Limited Partners (VRLP) sold its interest in
Temecula Creek LLC (TC) to its other partner in TC (ERT). The sale price
consisted of $1,318,180 cash plus one-half of the sale proceeds from the
remaining parcel of undeveloped land owned by TC when it is sold. $100,000
of the sales proceeds are being held in an escrow to be applied to any post
closing claims ERT may have related to warranties and normal prorations in
the sale contract for the TC interest. The cash proceeds to VRLP of
$1,218,180 received in February 2003 were partially offset by $225,000 of
fees paid to one of the VRLP partners. The Company received a distribution
of $592,776 of which $370,838 was paid to the holder of the minority
interest in Old Vail Partners. VRLP recorded a $843,326 gain from the sale
of the partnership interest. This gain was partially offset by VRLP's
agreement to pay its general partner $225,000 of fees related to the sale of
the partnership interest.
The Company recorded provisions for impairment losses of $480,000 in June
1998 and $88,881 in March 2003 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.
37
The following is summarized financial information of VRLP as of June 30,
2003 and 2002 and for the years then ended:
2003 2002
--------- --------
Assets:
Investment in Temecula Creek $ 159,000 $588,000
Other assets ............... 13,000 10,000
Total assets ........... 172,000 598,000
Total liabilities ............ 39,000 14,000
Partners' capital ............ 133,000 584,000
Gain on sale of investment ... 635,000 --
Equity in income (loss) of
Temecula Creek ............ (77,000) 30,000
Net income ................... 541,000 30,000
The following is a reconciliation of the investment in Vail Ranch Limited
Partnership:
2003 2002
--------- --------
Balance, beginning ........... $ 903,657 $885,446
Equity in net income ......... 325,000 18,211
Distributions received ....... (592,776) --
--------- --------
Balance, ending .............. 635,881 903,657
Less valuation allowance ... (568,881) (480,000)
--------- --------
$ 67,000 $423,657
========= ========
12. 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) -- --
13. Liquidity:
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
suffered recurring losses 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 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.
38
15. Quarterly financial data (unaudited):
The following summarizes the condensed quarterly financial information for
the Company:
QUARTERS ENDED 2003
------------------------------------------------------
September 30 December 31 March 31 June 30
---------- ---------- ---------- -----------
Revenues .......................... 743,102 681,857 918,350 1,700,241
Total costs and expenses .......... 1,218,173 1,100,346 1,296,841 1,757,363
Other income & expense, net ....... 15,616 22,347 (78,700) 26,306,491
Income tax expense ................ -- -- -- 5,838,000
Income (loss) from
continuing operations ........... (459,455) (396,142) (457,191) 20,411,369
Income (loss) from
discontinued operations ......... (65,522) (42,747) 258,092 (126,868)
Cummulative effect of change in
accounting principle ............ 37,675 -- -- --
Net income (loss) ................. (487,302) (438,889) (199,099) 20,284,501
Basic and diluted income
(loss) per common share from:
Continuing operations .......... (0.02) (0.01) (0.02) 0.75
Net income (loss) .............. (0.02) (0.02) (0.01) 0.75
QUARTERS ENDED 2002
-----------------------------------------------------
September 30 December 31 March 31 June 30
---------- ---------- ---------- -----------
Revenues .......................... $ 587,290 $ 565,766 $ 981,804 $ 1,160,440
Total costs and expenses .......... 1,186,730 1,147,434 1,443,410 1,589,476
Other income & expense, net ....... 3,295 11,374 (20,853) (108,586)
Income tax expense ................ -- -- -- --
Loss from
continuing operations ........... (596,145) (570,294) (482,459) (537,622)
Income (loss) from
discontinued operations ......... (111,573) 20,187 73,765 25,213
Net loss .......................... (707,718) (550,107) (408,694) (512,409)
Basic and diluted
loss per common share from:
Continuing operations .......... (0.02) (0.02) (0.02) (0.02)
Net loss ....................... (0.03) (0.02) (0.01) (0.02)
Certain amounts in the quarterly financial information for 2002 and the
first three quarters of 2003 have been reclassified to conform to the
classification of the bowling and real estate development segments to
discontinued operations in the fourth quarter of 2003. In addition, the
impact on the fourth quarter of 2003 of the change in accounting principle
described in footnote 5(b) was to record the Company's share of the gain on
the sale of UCV of $26,278,831 in the fourth quarter of 2003 rather than in
the first quarter of 2004.
39
INDEPENDENT AUDITORS' REPORT
General Partners
UCV, L.P., a California limited partnership:
We have audited the accompanying balance sheets of UCV, L.P., a California
limited partnership, as of June 30, 2003 and 2002, and the related statements of
operations and partners' equity (deficit) and cash flows for the years ended
June 30, 2003, March 31, 2002 and March 31, 2001 and the three-month period
ended June 30, 2002. These financial statements are the responsibility of UCV,
L.P.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of UCV, L.P., a California limited
partnership, as of June 30, 2003 and 2002, and the results of its operations and
its cash flows for the years ended June 30, 2003, March 31, 2002 and March 31,
2001 and the three-month period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1(k) to the financial statements, effective April 1, 2003
the Partnership changed its year-end to June 30.
KPMG LLP
San Diego, California
September 5, 2003, except for Note 7 as to which
the date is September 26, 2003
40
UCV, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS - JUNE 30, 2003 and 2002
2003 2002
------------ ----------
Property and equipment (Note 3):
Land ................................... $ -- $1,289,565
Buildings .............................. -- 5,189,188
Equipment .............................. -- 542,366
------------ ----------
-- 7,021,119
Less accumulated depreciation .......... -- (5,706,722)
------------ ----------
-- 1,314,397
Cash ........................................ 119,293 249,550
Restricted cash (Note 3) .................... -- 1,109,082
Cash held by accommodator (Note 5) .......... 15,123,883 --
Accounts receivable ......................... 75,620 31,373
Prepaid expenses ............................ 20,728 189,896
Redevelopment planning costs ................ -- 1,615,501
Deferred acquisition costs .................. 77,015 --
Deferred loan costs, less accumulated
amortization of $352,224 in 2002 .......... -- 850,044
Deposits to purchase escrows ................ 200,000 --
------------ ----------
$ 15,616,539 $5,359,843
============ ==========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Long-term debt (Note 3) ..................... $ -- $38,000,000
Accounts payable ............................ 56,333 372,273
Account payable- affiliate (Note 5) ......... 350,000 --
Other accrued expenses ...................... -- 14,621
Tenants' security deposits .................. -- 225,930
------------ -----------
406,333 38,612,824
Partners' equity (deficit) .................. 15,210,206 (33,252,981)
------------ -----------
$ 15,616,539 $ 5,359,843
============ ===========
See accompanying notes to financial statements.
41
UCV, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2003, MARCH 31, 2002 AND 2001 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Three
Months
Year Ended Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
2003 2002 2002 2001
------------ ------------ ------------ ------------
Income (loss) from
discontinued operations ............. $ 52,563,687 $ 75,350 $ (119,577) $ 236,509
------------ ------------ ------------ ------------
Net income (loss) ..................... 52,563,687 75,350 (119,577) 236,509
Partners' deficit, beginning of year .. (33,252,981) (32,871,331) (28,370,933) (26,617,542)
Cash distributed to partners .......... (4,100,500) (457,000) (4,380,821) (1,989,900)
------------ ------------ ------------ ------------
Partners' equity (deficit), end of year $ 15,210,206 ($33,252,981) ($32,871,331) ($28,370,933)
============ ============ ============ ============
See accompanying notes to financial statements.
42
UCV, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003, MARCH 31, 2002 AND 2001 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Three
Months
Year Ended Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
2003 2002 2002 2001
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) .......................... $ 52,563,687 $ 75,350 ($ 119,577) $ 236,509
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation ............................ 10,649 3,102 14,399 18,875
Amortization of deferred loan costs ..... 777,022 282,387 679,668 204,837
Loss from extinguishment of debt ........ -- -- 335,042 401,444
Gain on sale ............................ (52,557,662) -- -- --
Other ................................... 48,500 -- -- 20,000
Changes in assets and liabilities:
Increase in restricted cash .............. (231,266) (88,074) (38,137) (57,478)
(Increase) decrease in receivables ........ (44,247) (695) (18,568) 57
(Increase) decrease in prepaid expenses ... 169,168 (155,262) 62,689 11,876
Increase (decrease) in accounts
payable and other accrued expenses ...... 19,439 87,783 183,490 (71,467)
Decrease in accrued interest ............. -- -- (155,533) (52,520)
Increase (decrease) in security deposits . (225,930) 12,668 4,729 12,999
------------ ------------ ------------ ------------
Net cash provided by operating activities .. 529,360 217,259 948,202 725,132
------------ ------------ ------------ ------------
Net cash flows from investing activities:
Additions to redevelopment costs ........... (422,000) (23,163) (354,717) (406,467)
Additions to property and equipment ........ (5,269) (1,357) (7,424) (3,760)
Proceeds from sale ......................... 55,928,702 -- -- --
Deposits to purchase escrows ............... (200,000) -- -- --
Increase in cash at accommodator ........... (15,123,883) -- -- --
Additions to deferred acquisition costs .... (77,015) -- -- --
------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities ................. 40,100,535 (24,520) (362,141) (410,227)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt ....... -- -- -- (560,803)
Extinguishment of long-term debt ........... (38,000,000) -- (33,000,000) (28,478,687)
Costs related to early
extinguishment of debt ................... -- -- -- (295,260)
Proceeds from long term debt ............... -- -- 38,000,000 33,000,000
Refund of restricted cash held by
lender ................................... 1,340,348 -- 903,531 161,907
Funding of restricted cash from
loan proceeds ............................ -- -- (1,079,371) (754,040)
Loan costs ................................. -- 298 (1,241,928) (965,765)
Cash distributed to partners ............... (4,100,500) (457,000) (4,380,821) (1,989,900)
------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities ................. (40,760,152) (456,702) (798,589) 117,452
------------ ------------ ------------ ------------
Net increase (decrease) in cash ............... (130,257) (263,963) (212,528) 432,357
Cash, beginning of period ..................... 249,550 513,513 726,041 293,684
------------ ------------ ------------ ------------
Cash, end of period ........................... $ 119,293 $ 249,550 $ 513,513 $ 726,041
============ ============ ============ ============
Supplemental cash flow information:
Interest paid .............................. $ 1,949,170 $ 553,900 $ 2,979,509 $ 2,644,607
============ ============ ============ ============
See accompanying notes to financial statements
43
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, MARCH 31, 2002, AND MARCH 31, 2001 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
1. Organization and Summary of Significant Accounting Policies:
(a) Organization- Effective June 1, 1994 the form of organization was changed
from a joint venture to a limited partnership and the name of the entity was
changed from University City Village to UCV, L.P., a California limited
partnership (the Partnership). The Partnership conducts business as
University City Village.
(b) Leasing arrangements- Until April 1, 2003, when the apartment project was
sold, the Partnership leased apartments under operating leases that were
substantially all on a month-to-month basis. The apartment operations were
the Partnership's only business segment. Rental revenues were recognized
when earned.
(c) Property and equipment and depreciation- Property and equipment are stated
at cost. Depreciation was provided using the straight-line method based on
the estimated useful lives of the property and equipment (33 years for real
property and 3-10 years for equipment). The depreciable basis of the
property and equipment for tax purposes was essentially the same as the
financial statement basis.
(d) Income taxes- For income tax purposes, any profit or loss from operations
is includable in the income tax returns of the partners and, therefore, a
provision for income taxes is not required in the accompanying financial
statements.
(e) Redevelopment planning costs- The Partnership capitalized engineering,
architectural and other costs incurred related to the planning of the
possible redevelopment of the apartment project.
(f) Deferred loan costs- Costs incurred in obtaining financing were amortized
using the straight-line method over the term of the related loan.
(g) Fair value of financial instruments - The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practical to estimate that value:
Cash, restricted cash, cash held by accommodator, accounts receivable,
accounts payable, accrued interest and other accrued expenses- the
carrying amount reported in the balance sheet approximates the fair
value due to their short-term maturities.
Long-term debt - The carrying value of long-term debt reported in the
balance sheet approximates the fair value based on management's belief
that the interest rates and terms of the debt are comparable to those
commercially available to the Partnership in the marketplace for
similar instruments.
(h) Derivative Financial Instruments- The Partnership adopted Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) on January 1, 2001. As a
result of refinancing the Partnership's long-term debt, the new loan
agreement requires the Partnership to maintain an interest rate cap (the
Cap) on the notional principal amount of the debt. The Partnership used this
derivative financial instrument to effectively manage the interest rate risk
of its variable rate note payable. Accounting for any gains or losses
resulting from changes in the market value of the derivative depend upon the
use of the derivative and whether it qualifies for hedge accounting.
The instrument was negotiated with a high credit quality counterparty,
therefore, the risk of nonperformance by the counterparty is considered to
be negligible. See additional information regarding derivative financial
instruments in Note 4.
44
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2003, MARCH 31, 2002, AND MARCH 31, 2001 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
(i) Use of estimates - Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenue and expenses
during the reporting period to prepare these financial statements in
conformity with accounting principles general accepted in the United States
of America. Actual results could differ from these estimates.
(j) Valuation impairment-Long-lived assets and certain identifiable
intangibles are 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.
(k) Accounting period- effective April 1, 2003 the Partnership changed the
date of its fiscal year end from March 31 to June 30 to conform to the
fiscal year end of one of the partners (See Note 6).
(l) Basis of presentation- As a result of the sale of the sole asset of the
Partnership on April 1, 2003, the results of operations for each of the
periods presented have been classified as discontinued operations.
2. Related party transactions:
An affiliate of a partner provided management services for an unspecified
term to the Partnership and was paid a fee equal to 2-1/2 percent of gross
revenues, as defined.
In July 1998 the Partnership entered into development services agreements
with two affiliates of a partner. The agreements are cancelable on 30 days
notice and relate to planning for redevelopment of the apartments. The
affiliate was paid the following amounts for these development services:
$72,000 for the year ended June 30, 2003; $96,000 for each of the years
ended March 31, 2002 and 2001; and $24,000 for each of the three month
periods ended June 30, 2002 and 2001.
The Partnership paid a $50,000 fee to Harold S. Elkan (Elkan) for his
personal guarantee of certain provisions of the Partnership's long-term debt
(see Note 3). Elkan is the President and, indirectly, the controlling
shareholder of Sports Arenas, Inc., which is the parent company of one of
the partners in UCV.
As part of the sales transaction described in Note 5, an affiliate of a
partner earned a sales commission of $350,000.
3. Long-term debt:
On April 1, 2003, the Partnership sold its 542 unit apartment project and
paid the related debt of $38,000,000. As of June 30, 2002 long-term debt
consisted of the following:
Payable in monthly installments of interest
(5.4% as of June 30, 2002) based on a
variable rate of interest equal to LIBOR
plus 3 percentage points plus principal
based on a 30 year amortization
schedule. Balance due April 1, 2003. $36,000,000
Payable in monthly installments of interest
only based on a fixed rate of 12-1/2%
interest. Balance due April 1, 2003. 2,000,000
-----------
Total $38,000,000
===========
45
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2003, MARCH 31, 2002, AND MARCH 31, 2001 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
On March 8, 2002, UCV refinanced its $33,000,000 note payable with two loans
totaling $38,000,000. Each of the loans matured April 1, 2003 and provided
for a six month extension upon meeting certain financial criteria. The first
deed of trust was $36,000,000 and provided for monthly payments equal to
interest plus principal based on a 30 year amortization schedule. Interest
was based on an annual interest rate of 300 basis points above the greater
of the 30-Day LIBOR rate or 2.4 percent, adjusted monthly. UCV paid a
$48,500 fee to cap the base rate of LIBOR at 4 percent, which effectively
capped the maximum interest rate charged at 7 percent over the term. This
note was collateralized by UCV's land, buildings and leases. The Partnership
was required to make monthly payments of approximately $29,358 to a property
tax and insurance impound account and $15,803 to a replacement reserve
account maintained by the lender. Additionally, $787,198 was deducted from
the loan proceeds and was being held by the lender as funds to be used for
estimates of deferred maintenance. This amount was included in Restricted
Cash in the balance sheet as of June 30, 2002.
The second deed of trust was $2,000,000 and provided for monthly payments of
interest only at an annual rate of 12-1/2 percent. This loan was payable in
full at any time subject to a fee equal to the difference between $185,000
and the amount of interest paid from inception to the loan payoff date. This
loan was collateralized by UCV's land, buildings, and leases and the
ownership interests of UCV's partners.
The proceeds of the new loans, after extinguishing the $33,000,000 note
payable were utilized to: pay loan costs of $1,178,044 and pay distributions
to the partners of $3,400,000 in March 2002. The refinancing resulted in
charges of $335,042 related to the unamortized portion of deferred loan
costs related to the old note payable. These charges were classified as loss
from extinguishment of debt in the financial statements of UCV in its fourth
quarter ended March 31, 2002.
On March 8, 2001, the Partnership paid its then existing $28,478,687 note
payable with the proceeds from a $33,000,000 loan due August 2002. The new
loan provided for monthly payments of interest only at a variable rate of
interest equal to LIBOR (not less than 6 percent) plus 2-1/2 percentage
points. UCV paid a $30,000 fee to cap LIBOR at 6 percent. The note payable
was collateralized by the land, buildings, leases and security deposits. The
refinancing resulted in charges of $401,444 related to the prepayment
penalty of $295,260 and $106,184 of the unamortized portion of deferred loan
costs related to the old note payable. These charges were classified as loss
from extinguishment of debt in the financial statements for the year ended
March 31, 2001.
The Partnership adopted Statement No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Correction" ("SFAS No. 145") on July 1, 2002. Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"), required that
gains and losses from the extinguishment of debt that were included in the
determination of net income be aggregated and, if material, classified as an
extraordinary item. The provisions of SFAS No. 145 related to the rescission
of SFAS No. 4 require the Partnership to reclassify prior period items that
do not meet the extraordinary classification. Accordingly, losses from
extinguishment of debt in the years ended March 31, 2002 and 2001 that had
previously been classified as extraordinary items have been reclassified and
included in the income (loss) from discontinued operations.
46
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2003, MARCH 31, 2002, AND MARCH 31, 2001 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
4. Interest Rate Cap:
The Partnership adopted SFAS 133 on January 1, 2001. Due to the extensive
documentation and administration requirements of SFAS 133, the Partnership's
derivative instruments did not currently qualify for hedge accounting
treatment. Although the Partnership's Caps as of March 31, 2002 and 2001
were designed as a cash flow hedge, the Partnership cannot adopt hedge
accounting treatment, until all required documentation is completed and
hedging criteria is met. Since SFAS 133 requires that all unrealized gains
and losses on derivatives not qualifying for hedge accounting be recognized
currently through earnings, the Partnership accounted for the Caps in this
manner. For the years ended March 31, 2001 and June 30, 2003 the Partnership
recorded a loss of $20,000 and $48,500, respectively in other expense in the
statement of operations for the change in the value of the Cap since
inception of the transactions on March 8, 2001 and March 8, 2002,
respectively.
5. Sale of property:
On April 1, 2003 the Partnership sold its property and equipment for
$58,400,000 cash to an unrelated third party. The net proceeds from the sale
were $19,298,141 after deducting current selling expenses of $2,495,820,
paying the related mortgage loans of $38,000,000 and receiving a $1,340,348
refund of lender impounds. The Partnership utilized $4,009,000 of the
proceeds to fund cash distributions to the partners and pay other
Partnership obligations. The balance of the funds $15,289,722, were
deposited in a special escrow with a qualified intermediary ("exchange
accommodator") for purposes of meeting the Internal Revenue Service criteria
for purchasing "like-kind" property and thereby qualifying to defer the
taxability of a portion of the gain from the sale of the property on April
1, 2003 (See Note 7).
The sale resulted in a gain of $52,557,662 after deducting current selling
expenses plus $53,613 of costs deferred from a prior period, cost of
property and equipment of $7,016,738 less accumulated depreciation of
$5,707,721, and the accumulated redevelopment planning costs of $2,037,501.
In accordance with SFAS 66, Accounting for Sales of Real Estate, this gain
was recognized at the time of sale because the profit was determinable and
the earnings process was complete.
The following is a summary of the results of operations of the 542 unit
apartment project for each of the periods presented, which have been
classified as discontinued operations:
Three
Months
Year Ended Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
2003 2002 2002 2001
----------- ----------- ----------- -----------
Revenues:
Apartment rentals .............. $ 4,175,467 $ 1,331,324 $ 5,206,822 $ 4,903,939
Other rental related ........... 170,408 44,219 198,896 180,718
----------- ----------- ----------- -----------
4,345,875 1,375,543 5,405,718 5,084,657
----------- ----------- ----------- -----------
Costs and expenses:
Operating ...................... 1,149,604 355,150 1,227,883 1,243,651
General and administrative ..... 294,676 70,326 307,882 238,152
Management fees, related party . 110,229 35,328 136,445 129,102
Depreciation ................... 10,649 3,102 14,399 18,875
Other expense .................. 48,500 -- -- 20,000
Interest and amortization of
loan costs ................... 2,726,192 836,287 3,503,644 2,796,924
Loss from extinguishment of debt -- -- 335,042 401,444
----------- ----------- ----------- -----------
4,339,850 1,300,193 5,525,295 4,848,148
----------- ----------- ----------- -----------
Income (loss) before gain on sale . 6,025 75,350 (119,577) 236,509
Gain on sale ...................... 52,557,662 -- -- --
----------- ----------- ----------- -----------
Income (loss) from
discontinued operations ........ 52,563,687 75,350 (119,577) 236,509
=========== =========== =========== ===========
47
UCV, L.P.
(a California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2003, MARCH 31, 2002, AND MARCH 31, 2001 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
6. Change in Accounting Period:
Effective April 1, 2003 the Partnership changed the date of its fiscal year
end from March 31 to June 30 to conform to the fiscal year end of one of the
partners. The following unaudited financial statement information for the
three-month period ended June 30, 2001 is for comparative purposes:
Revenues:
Apartment rentals ..................... $1,274,062
Other rental related .................. 54,673
----------
1,328,735
----------
Costs and expenses:
Operating ............................. 314,206
General and administrative ............ 70,141
Management fees, related party ........ 33,402
Depreciation .......................... 3,255
Interest and amortization of loan costs 868,336
----------
1,289,340
----------
Net income .............................. 39,395
==========
7. Subsequent Events:
(a) On August 28, 2003, 760, LLC, a single member limited liability company of
which the Partnership is the sole member, acquired a property for
approximately $9,500,000. The purchase was financed with loans totaling
$6,926,500. Both loans are collateralized by the land, building and leases.
The first note payable for $6,650,000 provides for monthly payments of
interest and principal based on a base rate (six month LIBOR) plus 4.25
percent and amortization of the principal balance based on 25 years. This
note payable is due September 1, 2013. The second note payable for $276,500
is due in monthly payments of interest only at 5.50 percent and the balance
is due August 28, 2006. Elkan is a co-borrower of the first loan and owns a
.1% undivided interest in the property.
(b) On September 25, 2003, 939 LLC, a single member limited liability company
of which the Partnership is the sole member, acquired a property for
approximately $5,000,000. The purchase was financed with the assumption of
an existing $2,636,811 note payable that is collateralized by the land,
building and leases. The note payable is due in monthly payments of $19,112,
including principal and interest at a fixed rate of 7.15 percent. The note
payable is due July 1, 2008.
(c) On September 26, 2003, UCV Media Tech Center, LLC, a single member limited
liability company of which the Partnership is the sole member, acquired a
property for approximately $28,670,000. The purchase was financed with a
$20,000,000 note payable, which is collateralized by the land, building,
leases and other assets related to the property. The note provides for
monthly payments of principal and interest based on a fixed interest rate of
5.95 percent and amortization of the principal balance over 30 years. The
note payable is due October 1, 2013.
48
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) SPORTS ARENAS, INC.
(Registrant) SPORTS ARENAS, INC.
By (Signature and Title) /s/ Harold S. Elkan
------------------------------------
Harold S. Elkan, President & Director
DATE: October 10, 2003
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ----------------------------------- ------------------
/s/ Steven R. Whitman Chief Financial Officer, Director, October 10, 2003
- --------------------- and Principal Accounting Officer ------------------
Steven R. Whitman
/s/ Gordon L. Gerson Director October 10, 2003
- --------------------- ------------------
Gordon L. Gerson
/s/ Patrick D. Reiley Director October 10, 2003
- --------------------- ------------------
Patrick D. Reiley
49
INDEX TO EXHIBITS
Exhibit
No Exhibit Description
- ------- ---------------------------------------------------------------------
3.1 Certificate of Incorporation dated September 30, 1957
3.2 By-Laws of the Company
3.3 Amendment to Certificate of Incorporation dated May 9, 1972
3.4 Amendment to Certificate of Incorporation dated February 21, 1987
10.1 Lease Agreement dated as of April 5, 1994 between the Company and DP
Partnership
10.2 First Amendment to Lease Agreement dated as of November 1, 1996
between the Company and DP Partnership
10.3 Second Amendment to Lease Agreement dated as of November 28, 1998
between the Company and DP Partnership
10.4 Third Amendment to Lease Agreement dated as of December 18, 1998
between the Company and DP Partnership
10.5 Fourth Amendment to Lease Agreement dated as of January 19, 1999
between the Company and DP Partnership
10.6 Fifth Amendment to Lease Agreement dated as of February 29, 1999
between the Company and DP Partnership
10.7 Sixth Amendment to Lease Agreement dated as of March 29, 1999 between
the Company and DP Partnership
10.8 Agreement of Limited Partnership for UCV, L.P. dated June 1, 1994
10.9 First Amendment to Agreement of Limited Partnership for UCV, L.P.
dated February 27, 2001
10.10 Agreement of Limited Partnership for Vail Ranch Limited Partnership
dated April 1, 1994
10.11 Amendment to Limited Partnership Agreement for Vail Ranch Limited
Partnership dated January 25, 1996
10.12 Agreement of Limited Partnership for Old Vail Partners, L.P. dated
September 23, 1994
10.13 Lease Agreement dated February 17, 2000 between the Company and H.G
Fenton Company
10.14 Agreement for Sale of Office Building dated October 23, 2000
10.15 Agreement for Sale of Bowling Center Real Estate dated
October 23, 2000
10.16 Agreement for Sale of Undeveloped Land dated January 11, 2001
10.17 Agreement for Sale of University City Village Apartments dated
February 14, 2003
10.18 Amendment to Agreement for Sale of University City Village
Apartments dated March 6, 2003
18.01 Preferability letter
21.1 Subsidiaries of Registrant
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to Sec. 906
32.2 Certification of Chief Financial Officer pursuant to Sec. 906
50
EXHIBIT 21.1
SPORTS ARENAS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
State of
Incorporation Subsidiary
------------- --------------------------------------------------------
New York Cabrillo Lanes, Inc.
Delaware Downtown Properties, Inc.
California Old Vail Partners, a California general partnership
(50% general partner)
California Downtown Properties Development Corp.
Nevada UCVNV, Inc.
California UCVGP, Inc.
California UCV, L.P. (1% general partner)
California Sports Arenas Properties, Inc.
California UCV, L.P. (49% limited partner) (formerly known as
University City Village, a joint venture)
California 760, LLC, a California limited liability company,
100% owned by UCV, LP
Delaware 939, LLC, a Delaware limited liability company, 100%
owned by UCV, LP
Delaware UCV Media Tech Center, LLC, a Delaware limited
liability Company, 100% owned by UCV, LP
California Ocean West, Inc.
California RCSA Holdings, Inc.
California Old Vail Partners, a California general partnership
(50% general partner)
California Old Vail Partners, L.P. (49% limited partner)
California Vail Ranch Limited Partnership (50% limited partner)
California OVGP, Inc.
California Old Vail Partners, L.P. (1% general partner)
California Ocean Disbursements, Inc.
California Bowling Properties, Inc.
California Penley Sports, LLC (90% managing member)
All subsidiaries are 100% owned, unless otherwise indicated, and are included in
the Registrant's consolidated financial statements, except for Vail Ranch
Limited Partnership and UCV, L.P.
51