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, 2004
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, 2004 was $283,000 (based on
average of bid and asked prices). The number of shares of common stock
outstanding as of September 25, 2004 was 10,883,467.
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 currently owns a graphite golf club shaft manufacturing
company and an approximate 35% partnership interest in UCV, L.P., a California
limited partnership ("UCV") which owns three commercial real estate. Prior to
the dates indicated below, the Company owned and operated a bowling center and,
owned a 50% partnership interest in UCV which owned a 542-unit apartment
complex. The bowling center closed on May 31, 2003 in conjunction with the
expiration of the lease for its premises and UCV sold the apartment complex on
April 1, 2003. The Company has its principal executive office at 7415 Carroll
Road, Suite C, San Diego, California. The Company presently has approximately 25
employees. The following is a summary of the revenues of each segment (excluding
discontinued operations) stated as a percentage of total revenues for each of
the last three years:
2004 2003 2002
---- ---- ----
Real estate operations 3 2 6
Golf ................. 94 75 79
Other ................ 3 23 15
(a) Real Estate Operations
---------------------------
(1) Real Estate Development - Prior to February 22, 2003, the Company owned
a 60% interest in Vail Ranch Limited Partners (VRLP), a California limited
partnership, which owned a 50% ownership interest in Temecula Creek, LLC (TC), a
California limited liability company. TC owned a 13 acre parcel of undeveloped
land in Temecula, California. TC was in the process of developing the land when
the other member purchased VRLP's interest in TC on February 22, 2003. The
Company received distributions from VRLP from the proceeds of the sale in 2003
and 2004.
(2) Commercial Real Estate Rental - Real estate rental operations during
the year ended June 30, 2004 consisted of a sublease of a portion of the
premises leased by a Company subsidiary in San Diego, California, and a 35%
ownership interest UCV, which owns two commercial real estate properties in San
Diego, California and one commercial real estate property in Los Angeles,
California.
UCVGP, Inc., through its wholly owned subsidiary, UCVNV, Inc., and Sports Arenas
Properties, Inc. (SAPI), wholly-owned subsidiaries of the Company, are a one
percent managing general partner and a 35 percent limited partner, respectively,
in UCV, L.P. (UCV). UCV acquired University City Village, a 542 unit apartment
project (University City Village) located in San Diego, California, in August
1974 and sold it on April 1, 2003. Following the sale, UCV distributed
approximately $3,769,000 to its Company-affiliated partners. These distributions
served to reduce the Company's beneficial ownership of UCV from 50% to 35%.
Following this sale, UCV used the net sale proceeds available after
distributions to its partners as a portion of the total consideration to acquire
three commercial real estate properties in so-called "like-kind" exchange
transactions intended to cause deferral of federal income taxation on the net
sale proceeds used in such acquisitions. On August 28, 2003, 760, LLC, a
California limited liability company wholly owned by UCV, 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 acquired property. On September
25, 2003, 939 LLC, a California limited liability company wholly owned by UCV,
acquired a second 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 acquired property. On September 26, 2003, UCV Media Tech
Center, LLC, a California limited liability company wholly owned UCV, 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 acquired property.
(b) Golf Club Shaft Manufacturing
----------------------------------
On September 16, 2004 the Company committed to a plan of disposal of the
graphite golf club shaft operation owned by Penley Sports, LLC (Penley). The
Company is currently in negotiations to sell Penley to the former owner, Carter
Penley. Carter Penley has verbally agreed to fund any cash flow deficits from
November 1, 2004 until a sale is consummated or until the negotiations end. In
either event, the Company will not be required to repay the advances unless the
Company ceases negotiations without cause.
(c) Other (Bowling Operations)
--------------------------------
The Company's wholly owned subsidiary, Cabrillo Lanes, Inc. (the Bowl), operated
one 60 lane bowling center located in San Diego, California until it closed on
May 31, 2003 in conjunction with the expiration of its lease. 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. The Company purchased these bowling operations in August 1993
2
(d) Industry Segment Information:
------------------------------------
See Note 9 of Notes to Consolidated Financial Statements for required industry
segment financial information.
ITEM 2. Properties
------------------
Penley 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. The Company's corporate offices are located in this space. Penley has
subleased approximately 10,000 square feet to a third party pursuant to a two
year lease that expires in October 2004.
ITEM 3. Legal Proceedings
-------------------------
A lawsuit was filed on January 10, 2003 in the United States District Court for
the Southern District of California by Masterson Marketing, Inc. (Masterson)
against Penley Sports, LLC. Masterson's lawsuit originally asserted claims for
copyright infringement, breach of contract and breach of fiduciary duty, and
sought compensatory damages, punitive damages, statutory damages, and attorney
fees. The Company filed a motion to dismiss all claims. In response to that
motion, Masterson dropped all claims except those for claims of copyright
infringement and breach of contract. Masterson also dropped all prayers for
punitive damages, statutory damages, and attorney fees. 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.
2004 2003
-------------- --------------
High Low High Low
----- ----- ----- -----
First Quarter $ .02 $ .01 $ .03 $ .02
Second Quarter $ .02 $ .01 $ .02 $ .02
Third Quarter $ .04 $ .02 $ .02 $ .02
Fourth Quarter $ .05 $ .02 $ .02 $ .02
(b) The number of holders of record of the common stock of the Company as of
September 25, 2004 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,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues $2,820,865 $4,043,550 $3,295,300 $2,283,151 $2,145,980
Loss from operations (4,296,131) (1,329,173) (2,071,750) (3,015,657) (2,857,218)
Income (loss) from
Continuing operations (2,793,627) 19,098,581 (2,186,520) (399,444) (2,589,187)
Basic and diluted income
(loss) per common share
from continuing operations (0.10) 0.70 (0.08) (0.02) (0.10)
Total assets 7,129,139 12,731,967 2,903,403 3,448,474 6,601,236
Long-term debt,
excluding current portion 67,232 -- 5,456 13,942 1,967,169
See Notes 4, 6(c), 8, and 10 of Notes to Consolidated Financial Statements
regarding disposition of business operations and material uncertainties.
3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The independent auditors' report dated November 15, 2004 on the Company's
consolidated financial statements for the year ended June 30, 2004 included with
this Annual Report on Form 10-K contains 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 11 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 11. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As noted below, the recurring losses and negative cash flows relate to the
Company's golf club shaft manufacturing operations. The Company has not been
successful in its efforts to increase sales, reduce manufacturing costs or
obtain additional investors for this operation. As a result, on September 16,
2004, the Company committed to a plan of disposal of the graphite golf club
shaft operation owned. The Company is currently in negotiations to sell Penley
to the former owner, Carter Penley. Carter Penley has verbally agreed to fund
any cash flow deficits from November 1, 2004 until a sale is consummated or
until the negotiations end. In either event, the Company will not be required to
repay the advances unless the Company ceases negotiations without cause.
The Company is expecting a $500,000 cash flow deficit in the year ending June
30, 2005 from operating activities after estimated distributions from UCV
($420,000, primarily distributions from real estate operations), estimated
capital expenditures ($3,000) and scheduled principal payments on long-term
debt, excluding any estimated payments to be received from the sale of Penley.
This analysis does not include the obligation to pay federal and state income
taxes totaling $979,000 related to the taxable income reported from the sale of
apartment project owned by UCV. Management is currently uncertain about how it
will obtain the funds to pay these tax liabilities.
Management is currently evaluating other sources of working capital including
the proceeds that would become available for distribution to the Company from
refinancing the debt related to one of the properties owned by UCV or selling
one of the properties owned by UCV. 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, other than the tax liabilities noted above, management believes it will
be able to meet its financial obligations for the next twelve months.
The Company had a working capital deficit of $422,329 at June 30, 2004, which is
a $1,483,882 decrease in working capital from the working capital of $1,061,553
at June 30, 2003. Working capital decreased primarily due to cash used by
operations of $3,335,000. The use of funds by operations was partially offset by
$1,712,000 of distributions received from UCV ($1,557,000) and VRLP ($155,000).
4
The cash provided (used) before changes in assets and liabilities segregated by
business segments was as follows:
2004 2003 2002
----------- ----------- -----------
Continuing operations:
Rental $ 5,000 $ (2,000) $ (4,000)
Golf (2,246,000) (1,440,000) (1,647,000)
General corporate expense and other (70,000) 100,000 (111,000)
Income taxes-current (979,000) -- --
----------- ----------- ----------
Total continuing operations (3,290,000) (1,342,000) (1,762,000)
Discontinued operations:
Bowling 166,000 (192,000) 26,000
Development -- -- --
----------- ----------- ----------
Total cash used (3,124,000) (1,534,000) (1,736,000)
Capital expenditures (194,000) (18,000) --
Principal payments on long-term debt (17,000) (8,000) (32,000)
----------- ----------- ----------
(3,335,000) (1,560,000) (1,768,000)
=========== =========== ==========
Distributions received from investees:
From UCV proceeds of refinance -- -- 1,700,000
From UCV sale proceeds of property
April 2003 1,269,000 2,500,000 --
From UCV operations 288,000 526,000 403,000
From VRLP sale proceeds of TC 155,000 592,000 --
----------- ----------- ----------
Total 1,712,000 3,618,000 2,103,000
=========== =========== ==========
Proceeds from sale of assets 110,000 19,000 31,000
=========== =========== ==========
Payments to minority interests (73,000) (371,000) (50,000)
=========== =========== ==========
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 $19,298,000. UCV
distributed approximately $3,769,000 of such proceeds to the Company in partial
liquidation of its partnership interest in UCV, reducing its ownership interest
from 50 percent to 35 percent. UCV used the balance of the proceeds to purchase
three properties as part of tax-deferred like-kind-exchange transactions.
One of the properties purchased by UCV is subject to a loan agreement that
requires Sports Arenas, Inc. to maintain a minimum net worth of $1,000,000. As
of June 30, 2004, the Company did not meet this requirement. UCV is in the
process of requesting a waiver from the lender regarding this covenant. However,
it is uncertain whether the lender will grant a waiver. If UCV is unable to
obtain a waiver from the lender, the lender could call the loan due.
In February 2003, Vail Ranch Limited Partners (VRLP), a California limited
partnership in which the Company holds a 60% ownership, 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 was sold. $100,000 of
the sales proceeds were 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 in 2003 of which $370,838 was paid
to the holder of the minority interest in Old Vail Partners. In the year ended
June 30, 2004, VRLP received $288,071 as its share of the proceeds from the sale
of the undeveloped land, the balance of the hold back, and final settlement for
allocation of revenues and expenses. The Company received $155,009 of
distributions from VRLP related to these transactions. The Company is not
expecting any further distributions from VRLP. As part of the Company's
obligation to pay approximately one-half of these proceeds to its minority
partner, $73,000 was paid to the minority partner during the year ended June 30,
2004. The remaining balance of the minority interest of $358,839 was adjusted to
$15,000 to reflect the estimate of the final amount due the minority partner.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are more fully described in Note 1 of the Notes to
Consolidated Financial Statements. As disclosed in Note 1, the preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions about future events that affect the amounts reported
in the financial statements and related notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe that of our significant accounting policies, the following may
involve a higher degree of judgment, estimation, or complexity than other
accounting policies.
5
Allowance for Doubtful Accounts: We evaluate the collectibility of accounts
receivable based on a combination of factors. In circumstances where we are
aware of a specific customer's inability to meet its financial obligations, a
specific reserve is recorded against amounts due to reduce the net recognized
receivable to the amount reasonably expected to be collected. Additional
reserves are established based upon our perception of the quality of the current
receivables, the current financial position of our customers and past experience
of collectibility. If the financial condition of our customers were to
deteriorate resulting in an impairment of their ability to make payments,
additional allowances would be required.
Income Taxes: We record the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and amounts reported
in the accompanying Consolidated Balance Sheets, as well as operating loss and
tax credit carryforwards. We evaluate the recoverability of any tax assets
recorded on the balance sheet and provide any necessary allowances as required.
The carrying value of the net deferred tax assets assumes that we will be able
to generate sufficient future taxable income based on estimates and assumptions.
If these estimates and related assumptions change in the future, we may be
required to record additional valuation allowances against our deferred tax
assets resulting in additional income tax expense in our Consolidated Statements
of Operations. In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, carry back
opportunities, and tax planning strategies in making the assessment. We evaluate
the ability to realize the deferred tax assets and assess the need for
additional valuation allowances quarterly. In addition, we are subject to income
tax laws and judgment is required in assessing the future tax consequences of
events that have been recognized in our financial statements or tax returns. The
final outcome of these future tax consequences, tax audits, and changes in
regulatory tax laws and rates could materially impact our financial statements.
Inventory Valuation: Inventories are valued at the lower of cost or market.
Certain items in inventory may be considered impaired, obsolete or excess, and
as such, we may establish an allowance to reduce the carrying value of these
items to their net realizable value.
Long-Lived Assets: We review our long-lived assets for impairment whenever
events or changes in circumstances indicate 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 the assets to the future net cash flows
expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds their fair value. Judgments made by us
related to the expected useful lives of long-lived assets and our ability to
realize any undiscounted cash flows in excess of the carrying amounts of such
assets are affected by factors such as the ongoing maintenance and improvements
of the assets, changes in the expected use of the assets, changes in economic
conditions, changes in operating performance and anticipated future cash flows.
Since judgment is involved in determining the fair value of long-lived assets,
there is risk that the carrying value of our long-lived assets may require
adjustment in future periods. If actual fair value is less than our estimates,
long-lived assets may be overstated on the balance sheet and a charge would need
to be taken against earnings.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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. At the October 29, 2003 FASB Board meeting, the
Board decided to indefinitely defer the effective date of SFAS No. 150 related
to the classification and measurement requirements for mandatorily redeemable
financial instruments that become subject to SFAS No. 150 solely as a result of
consolidation, such as the minority interest in the accompanying financial
statements.
6
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The Company currently does not have any
VIEs in which it has variable interests.
"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 9 to the
Consolidated Financial Statements.
The following is a summary of the changes to the components of the segments in
the years ended June 30, 2004 and 2003:
Real Estate Unallocated
Operation Golf And Other Total
YEAR ENDED JUNE 30, 2004 ----------- --------- ----------- ----------
------------------------
Revenues $3,928 ($381,696) ($844,917) ($1,222,685)
Costs 2,500 (71,659) -- (69,159)
SG&A-direct -- (48,154) 355,169 307,015
SG&A-allocated -- 544,000 (419,000) 125,000
Depreciation and amortization (8,611) 1,927 11,785 5,101
Impairment losses -- -- 1,376,316 1,376,316
Interest expense (5,436) -- (49,422) (54,858)
Equity in investees (26,204,886) -- -- (26,204,886)
Gain (loss) on disposition -- -- 110,241 110,241
Segment profit (loss) (26,189,411) (807,810) (2,009,524) (29,006,745)
Investment income (7,463)
Income tax expense 7,122,000
Income (loss) from continuing
operations (21,892,208)
Discontinued operations 336,571
Change in accounting principle (37,675)
Net income (loss) (21,593,312)
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 -- -- -- --
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
7
RENTAL OPERATIONS
-----------------
This segment includes the operations of 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 complex, which was sold April 1, 2003, and the sublease of a
portion of the Penley factory.
The following is a summary of the changes in rental operations segment for each
of the years ended June 30, 2004 and 2003 compared to the prior year:
Sublease Other Combined
---------- ----------- -----------
JUNE 30, 2004
Revenues $ -- $ 3,928 $ 3,928
Costs -- 2,500 2,500
Depreciation and amortization -- (8,611) (8,611)
Impairment losses -- -- --
Interest expense (5,436) -- (5,436)
Equity in investees -- (26,204,886) (26,204,886)
Segment profit (loss) 5,436 (26,194,847) (26,189,411)
JUNE 30, 2003
Revenues ($119,098) $ 7,821 ($111,277)
Costs (116,458) 2,400 (114,058)
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
Segment profit (loss) 42,299 26,391,862 26,434,161
The changes to the sublease component relate to the sale of the subleasehold
interest in March 2002.
On April 1, 2003, UCV, in which the Company had a 50 percent ownership interest,
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 in 2003 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.
GOLF CLUB SHAFT MANUFACTURING:
------------------------------
The following is a breakdown of the percentage of sales by customer category:
2004 2003 2002
---- ---- ----
Golf equipment distributors 46% 38% 35%
Small golf club manufacturers 29% 32% 26%
Golf shops 21% 24% 33%
Other 4% 6% 6%
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. Prior to the year ended June 30, 2004, golf club shafts sales
increased by approximately $1,062,000 in 2002 and $449,000 in 2003. In 2004 golf
club shaft sales decreased by $382,000. Some of the decrease in 2004 is
attributable to declines in sales to golf club manufacturers. There were several
large golf club manufacturers that placed orders in 2003 that did not place
additional orders in 2004. Sales to golf shops also decreased in 2004 and sales
to distributors did not increase significantly. Management believes the
decreases are likely attributable to both a decrease in advertising in 2004 and
speculation about the uncertainty of the Company's plans for the golf club shaft
manufacturing operation.
8
Operating expenses of the golf segment consisted of the following in 2004, 2003,
and 2002:
2004 2003 2002
---------- ---------- ----------
Costs of sales and manufacturing
overhead $2,487,000 $2,632,000 $2,385,000
Research and development 271,000 198,000 219,000
---------- ---------- ----------
Total golf costs $2,758,000 $2,830,000 $2,604,000
========== ========== ==========
Marketing and promotion $1,008,000 $ 970,000 $1,179,000
Administrative costs- direct 239,000 325,000 212,000
---------- ---------- ----------
Total SG&A-direct $1,247,000 $1,295,000 $1,391,000
========== ========== ==========
Total golf costs decreased in 2004 primarily due to the decrease in direct costs
of goods sold related to the decrease in sales in 2004. Total golf costs
increased in 2003 primarily due to the increase in direct cost of goods sold
related to the increase in sales in 2003. Golf costs also increased in 2003
related to a $113,000 increase in the valuation allowance expense related to
inventory.
In general the Company has not been able to reduce golf costs to a level
commensurate with the Company's level of sales. The manufacturing plant was
designed and equipped to produce large production runs of the same product.
However, the Company has not been able to develop sufficient sales to large golf
shaft manufacturers or increase aftermarket sales sufficiently to make large
production runs. Therefore the units costs to manufacture shafts has been higher
than planned. Additionally, the Company had substantial problems in 2004 with
the quality of the material provided by one of its suppliers that caused
significant additional expense to yield shafts for finished goods.
Marketing and promotion expense decreased in 2003 primarily due to decreases in
advertising and the tour program expenses. Administrative costs decreased in
2004 and 2003 primarily due to a decrease of $163,000 in 2004 in the allowance
for bad debts. This was partially offset by a $68,000 increase in professional
fees related to marketing consultants. Administrative costs increased in 2003
primarily due to a $103,000 increase in the allowance for bad debts related to
two small golf club manufacturers that discontinued business.
Allocated Selling, General and Administrative costs increased in 2004 to reflect
the circumstance that a higher percentage of the corporate segments time is
being spent providing services to the golf club shaft segment.
UNALLOCATED AND OTHER:
----------------------
Other revenues-related party decreased due to sale by UCV of its apartment
property on April 1, 2003. The Company had received management fees ($110,000),
one time sales commission ($350,000), and development fees ($264,000) from UCV
totaling $724,000 in 2003. In 2004 the Company only received management fees
from UCV for the management of the properties acquired in August 2003 and
September 2003 totaling $47,000.
Other revenues, which primarily consisted of management fees and commissions
earned from a third party, decreased $139,000 in 2004 due to the sale of the
property being managed in October 2002 for which the Company had also received a
one time real estate commission of $100,000.
Unallocated and Other SG&A increased by $355,000 in 2004 and $118,000 in 2003.
The increase in 2004 was primarily due to $373,000 of compensation related to
Company shares issued Harold Elkan and Andrew Bradley, Inc. in recognition of
the value of personal guarantees Harold Elkan provided to lenders on behalf of
the Company and its subsidiaries over the years. The increase in 2003 was
primarily due to an increase in wages related to a $100,000 bonus to Harold
Elkan.
In June 2004, the Company recorded a $1,376,316 impairment loss related to the
foreclosure on the note receivable from Andrew Bradley, Inc. See Note 3b of
Notes to the Consolidated Financial Statements.
Interest expense decreased in 2002 due to the decrease in the balance of short
term borrowings in 2003. 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 utilized the
"like-kind-exchange" rules to defer recognition of a portion of the taxable
income from the sale to the extent it reinvested the proceeds from sale into
like-kind property. Since UCV used some of the sales proceeds to fund
distributions to Company, the Company had a taxable gain from the sale that was
recognized in the year ended June 30, 2004 of approximately $13,295,000 and
recognition of approximately $12,948,000 of gain will be indefinitely deferred.
The taxable portion of this gain recognized in 2004 for federal income tax
purposes was offset by its federal net operating loss carryforwards, except for
approximately $181,000 due for the alternative minimum tax. Since the State of
9
California has temporarily suspended the utilization of net operating losses for
state income tax purposes, the Company has a state income tax liability for the
year ended June 30, 2004 related to the gain from sale of UCV of approximately
$798,000.
DISCONTINUED OPERATIONS:
-----------------------
As discussed in Footnote 10 of Notes to the Consolidated Financial Statements,
the Company has classified its operations in the bowling and real estate
development segments as discontinued operations.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
--------------------------------------------------
The following table summarizes the Company's contractual obligations and other
commitments at June 30, 2004 and the effect such obligations could have on the
Company's liquidity and cash flow in future periods:
Less than 2-3 4-5 Over
one year Years Years 5 years Total
---------- -------- --------- -------- ----------
Notes payable $18,071 $38,688 $28,544 $ -- $85,303
Lease commitments 247,000 494,000 494,000 183,000 1,418,000
Guaranty 75,000 156,000 166,000 198,000 595,000
---------- -------- --------- -------- ----------
$340,071 $688,688 $688,544 $381,000 $2,098,303
========== ======== ========= ======== ==========
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 and its unconsolidated subsidiary, UCV, utilizes both fixed
rate and variable rate debt.
The following table presents scheduled principal payments and related weighted
average interest rates of the Company's long-term fixed rate debt for the fiscal
years ended June 30:
2005 2006 2007 2008 2009 Total Fair Value
------- ------- ------- ------- ------- ------- ---------
(1)
Fixed rate debt $18,000 $19,000 $20,000 $21,000 $8,000 $86,000 $86,000
Weighted average
interest rate 4.6% 4.6% 4.6% 4.9% 4.9% 4.6% 4.6%
The following table presents scheduled principal payments and related weighted
average interest rates of the UCV's long-term fixed rate and variable rate debt
for the fiscal years ended June 30:
2005 2006 2007 2008 2009 Thereafter Total Fair Value
-------- -------- -------- -------- ---------- ----------- ----------- -----------
(1)
Fixed rate debt $282,000 $300,000 $596,000 $336,000 $2,723,000 $18,493,000 $22,730,000 $22,730,000
Weighted average
interest rate 4.6% 4.6% 4.6% 6.1% 6.0% 6.0% 6.1% 4.6%
Variable Rate Debt $188,000 $199,000 $211,000 $223,000 $238,000 $5,487,000 $6,546,000 $6,546,000
Weighted average
interest rate 5.8% 5.8% 5.8% 5.8% 5.8% 5.8% 5.8% 5.8%
(1) The fair value of fixed-rate and variable 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
On June 29, 2004 the Company changed its accountants from KPMG LLP to Peterson &
Co., LLP. The change in independent accountants was recommended and approved by
the Company's Audit Committee. During the Company's fiscal years ended June 30,
2003 and June 30, 2002, and the subsequent interim periods through June 29,
2004, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP,
would have caused KPMG LLP to make reference thereto in their report on the
financial statements for such years. See the Company's Current Report filed on
form 8K dated June 29, 2004 and filed with the Securities and Exchange
Commission on July 6, 2004.
10
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that such
disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.
(b) Changes in Internal Control. There have been no significant changes in
internal controls or in factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
11
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, 2004. 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 & Officers Age Position and Tenure with Company
-------------------- --- ------------------------------------------------
Harold S. Elkan 61 President, Chief Executive Officer and
Director since November 7, 1983
Steven R. Whitman 51 Chief Financial Officer and Treasurer since
May 1987; Director and Assistant Secretary
since August 1, 1989; Secretary since
January 1995
Patrick D. Reiley 63 Director since August 21, 1986, sole member
of audit committee
James E. Crowley 57 Director since January 10, 1989, resigned
November 11, 2003
Gordon L. Gerson 53 Director since June 3, 2003, resigned
November 11, 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. 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
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, 2002
through 2004, all Section 16(a) filing requirements applicable to officers,
directors and greater than ten-percent beneficial owners were complied with.
12
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, 2004 exceeded
$100,000.
Long-term All Other
Name and Principal Compen- Compen-
Position Year Salary Bonus Other sation sation
----------------- ---- ------ -------- ----- ------ --------
Harold S. Elkan, 2004 $350,000 -- $ -- $ -- $322,997 (1)
President 2003 350,000 $100,000 -- -- --
2002 350,000 -- -- -- --
Steven R. Whitman, 2004 100,000 5,000 -- -- --
Chief Financial 2003 100,000 -- -- -- --
Officer 2002 100,000 -- -- -- --
(1) The Other Compensation listed for Harold S. Elkan (Elkan) for 2003 relates
to the value of 5,441,734 restricted shares of the Company's common stock
issued Elkan as extra compensation in recognition of guarantees Elkan has
provided to subsidiaries of SAI. See Item 13 Certain Relationships and
Related Transactions.
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 has not 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, 2004) 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, 2004.
(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.
13
The objectives of the Company's executive compensation program are to:
attract, retain and motivate highly qualified personnel; and recognize and
reward superior individual performance. These objectives are satisfied through
the use of the combination of base salary and discretionary bonuses. The
following items are considered in determining base salaries: experience,
personal performance, responsibilities, and, when relevant, comparable salary
information from outside the Company. Currently, the performance of the Company
is not a factor in setting compensation levels. Annual cash bonus payments are
discretionary and would typically relate to subjective performance criteria. A
bonus of $100,000 was awarded to Harold Elkan for the year ended June 30, 2003.
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.
Patrick D. Reiley, the Company's sole outside director, serves as a
committee of one to approve compensation for Harold S. Elkan: Harold S. Elkan
serves as a committee of one to approve the compensation of all other employees
of the Company.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) - (c):
Nature of
Shares Beneficially Beneficial Percent of
Name and Address Owned Ownership Class
-------------------------- ------------------- ----------------- --------
Ownership
Harold S. Elkan 5,441,734 Sole investment 50.001%
7415 Carroll Road and voting power
San Diego, California
All directors and officer 5,441,734 Sole investment 50.001%
as a group and voting power
ITEM 13. Certain Relationships and Related Transactions
(a) - (c):
1. The Company has $355,672 of unsecured loans outstanding to Harold S.
Elkan, (President, Chief Executive Officer, Director and the majority
shareholder of the Company) as of June 30, 2004 ($360,653 as of June 30, 2003).
These loans were made prior to June 1998 and were in conjunction with the
overall compensation package approved by the compensation committee of the
Company. The balance at June 30, 2004 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 $360,653 in July 2004.
Elkan's primary source of repayment of these loans 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 repayment of these 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, 2004 or
2003 there was no unrecorded accrued interest on the loans.
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 (Elkan), the Company's President. The loan was made to allow Elkan to
maintain ownership of at least a majority of the outstanding stock of the
Company. Failure by Elkan to maintain majority ownership at the time would have
been deemed a change of control of the Company under certain credit agreements
between the Company or its subsidiaries and third party creditors, thereby
constituting an event of default thereunder allowing an acceleration of the
payment obligations under those agreements. The loan was collateralized by
21,808,267 shares of the Company stock held by ABI and provided funds to ABI to
pay its obligation related to its purchase of the Company's stock in November
1983. The loan to ABI provided 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. The loan was due in November 2003.
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 $1,172,566 as of June 30, 2004
($1,001,166 as of June 30, 2003). The balance of the loan, including accrued by
unrecorded interest as of June 30, 2004 was $3,464,058.
14
On June 30, 2004 the Company, Elkan and ABI entered into a Debt Payment & Extra
Compensation Agreement ("Debt Agreement"). Pursuant to the Debt Agreement:
1. The Company agreed to issue 1,360,433 shares of the Company common
stock to ABI as extra compensation in recognition of guarantees
provided to subsidiaries of the Company.
2. ABI agreed to the foreclosure by the Company of the 23,168,700 shares
of Company common stock owned by ABI (including the additional shares
of common stock awarded to ABI) valued at $.03951 per share in partial
satisfaction of the Company's note receivable from ABI.
3. The Company agreed to issue 5,441,734 restricted shares ("Extra
Compensation Shares") of Company common stock to Elkan as extra
compensation in recognition of guarantees he has provided to
subsidiaries of the Company.
4. Elkan and the Company agreed to enter into a Stock Restriction
Agreement.
The Debt Agreement was approved as fair to the Company and its shareholders by
Director Patrick D. Reiley, the Company's sole independent director, acting as a
Special Committee of one (the "Special Committee"). For such purposes Mr. Reiley
was represented by independent counsel. The fairness to the Company of the Debt
Agreement was based in part upon the valuation of Company common stock
determined in a written report prepared for the Special Committee for such
purpose by an independent investment banking firm. All other parties to the Debt
Agreement were represented by their own respective counsel.
On September 2, 2004, the Company and Elkan entered into the Stock Restriction
Agreement ("Agreement") , with an effective date of June 30, 2004. The Agreement
applies to the 5,441,734 of shares of Company common stock ("Restricted Shares")
issued to Elkan pursuant to the Debt Agreement and provides for, among other
things:
(1) Restrictions on Elkan's ability to transfer the Restricted Shares for
five years;
(2) Elkan's forfeiture to the Company of the Restricted Shares in certain
circumstances, including if there occurs an event of default, if Elkan
is terminated with cause, or if the net fair market value of the
Company's assets shall have failed to increase by at least 2.5 percent
per annum, compounded annually, over the period between the effective
date of the Agreement and the 90th day prior to the fifth anniversary
of such effective date;
(3) the Company's right to purchase any or all of the Restricted Shares
from Elkan at $.05936 per share in limited circumstances; and
(4) the grant of certain anti-dilution and registration rights to Elkan as
set forth in the Agreement.
ITEM 14. Principal Accountants Fees and Services:
KPMG LLP, the Company's principal accounting firm until June 29, 2004, billed
the Company for audit fees totaling $136,581 and $70,683 during the years ended
June 30, 2004 and 2003, respectively. KPMG LLP did not perform any other
services for the Company during those years.
15
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' Reports 17-18
Sports Arenas, Inc. and subsidiaries consolidated
financial statements:
Balance sheets as of June 30, 2004 and 2003 19
Statements of operations for each of the years in the
three-year period ended June 30, 2004 20
Statements of shareholders' equity (deficiency)
for each of the years in the three-year period
ended June 30, 2004 21
Statements of cash flows for each of the years in the
three-year period ended June 30, 2004 22-23
Notes to consolidated financial statements 24-35
2. Financial Statements of Unconsolidated Subsidiaries
UCV, L.P. (a California limited partnership)- 35 percent
owned investee:
Independent Auditors' Reports 36-37
Balance sheets as of June 30, 2004 and 2003 38
Statements of operations and partners' equity (deficit)
for each of the years ended June 30, 2004,
June 30, 2003, March 31, 2002 and the three-month
period ended June 30, 2002 39
Statements of cash flows for each of the years
ended June 30, 2004, June 30, 2003, March 31, 2002
and the three-month period ended June 30, 2002 40
Notes to consolidated financial statements 41-45
3. Financial Statement Schedules
There are no financial statement schedules because they
are either not applicable or the required information
is shown in the financial statement or notes thereto.
4. Exhibits
Index to Exhibits. 47
B. Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report:
16
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sports Arenas, Inc.
We have audited the consolidated balance sheet of Sports Arenas, Inc. and its
subsidiaries ("the Company) as of June 30, 2004, and the related consolidated
statements of operations, shareholders' equity (deficiency), and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Sports Arenas, Inc. and its subsidiaries as of June 30, 2003, were audited by
other auditors whose report dated September 5, 2003, expressed an unqualified
opinion with a going concern explanatory paragraph on those statements.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2004 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sports
Arenas, Inc. and its subsidiaries as of June 30, 2004, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 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 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Peterson & Co., LLP
PETERSON & CO., LLP
November 15, 2004
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Sports Arenas, Inc.:
We have audited the accompanying consolidated balance sheet of Sports Arenas,
Inc. and subsidiaries (the "Company") as of June 30, 2003, and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for each of the years in the two-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 the standards of the Public Company
Accounting Oversight Board (United States). 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 the results of their operations and
their cash flows for each of the years in the two-year period ended June 30,
2003, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 4(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 11 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 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/S/KPMG LLP
KPMG LLP
San Diego, California
September 5, 2003
18
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-JUNE 30, 2004 AND 2003
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 186,716 $ 365,674
Other receivable-affiliate (Note 4b) ............ -- 350,000
Trade receivables, net of allowance for doubtful
accounts of $45,000 and $228,000 respectively . 275,004 402,875
Inventories (Note 2) ............................ 605,843 641,127
Prepaid expenses ................................ 27,005 34,958
------------ ------------
Total current assets ...................... 1,094,568 1,794,634
------------ ------------
Property and equipment, at cost:
Machinery and equipment ......................... 1,600,609 1,492,404
Leasehold improvements .......................... 396,991 396,991
------------ ------------
1,997,600 1,889,395
Less accumulated depreciation and amortization (1,167,688) (1,052,740)
------------ ------------
Net property and equipment ............... 829,912 836,655
------------ ------------
Other assets:
Deferred tax assets (Note 7) .................... 1,330,000 4,661,000
Investments (Note 4) ............................ 3,797,288 5,344,007
Other ........................................... 77,371 95,671
------------ ------------
5,204,659 10,100,678
------------ ------------
$ 7,129,139 $ 12,731,967
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5a) ..... $ 18,071 $ 5,771
Accounts payable ................................ 241,540 441,434
Accrued payroll and related expenses ............ 278,286 282,080
Accrued income taxes ............................ 979,000 --
Other liabilities ............................... -- 3,796
------------ ------------
Total current liabilities ................... 1,516,897 733,081
------------ ------------
Long-term debt, excluding current
portion (Note 5a) .............................. 67,232 --
------------ ------------
Deferred tax liabilities (Note 7) ................ 5,158,000 10,514,000
------------ ------------
Minority interest in consolidated
subsidiary (Note 10b) .......................... 15,000 431,839
------------ ------------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, issued and outstanding: 10,883,467
in 2004 and 27,250,000 in 2003 ................ 340,521 272,500
Additional paid-in capital ...................... 2,038,776 1,730,049
Treasury stock .................................. (915,176) --
Accumulated earnings (deficit) .................. (1,092,111) 1,341,990
------------ ------------
372,010 3,344,539
Less note receivable from shareholder (Note 3b) . -- (2,291,492)
------------ ------------
Total shareholders' equity ................. 372,010 1,053,047
------------ ------------
Commitments and contingencies (Notes 6 and 8)
$ 7,129,139 $ 12,731,967
============ ============
See accompanying notes to consolidated financial statements.
19
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
Revenues:
Golf ....................................................... $ 2,657,050 $ 3,038,746 $ 2,589,293
Rental ..................................................... 82,885 78,957 190,234
Other ...................................................... 33,507 201,618 329,402
Other-related party (Note 4b) .............................. 47,423 724,229 186,371
------------ ------------ ------------
2,820,865 4,043,550 3,295,300
------------ ------------ ------------
Costs and expenses:
Golf ....................................................... 2,758,039 2,829,698 2,604,436
Rental ..................................................... 77,900 75,400 189,458
Selling, general, and administrative ....................... 2,704,417 2,272,402 2,256,918
Depreciation and amortization .............................. 200,324 195,223 271,323
Provision for impairment losses (Note 3b) .................. 1,376,316 -- 44,915
------------ ------------ ------------
7,116,996 5,372,723 5,367,050
------------ ------------ ------------
Loss from operations ........................................ (4,296,131) (1,329,173) (2,071,750)
------------ ------------ ------------
Other income (charges):
Investment income:
Related party (Notes 3a and 3b) .......................... 33,804 40,251 27,890
Other .................................................... 299 1,315 1,807
Interest expense and amortization of finance costs ......... (2,798) (57,656) (84,679)
Equity in income (loss) of investee (Note 4a) .............. 76,958 26,281,844 (59,788)
Gain on sale (Note 4c) ..................................... 110,241 -- --
------------ ------------ ------------
218,504 26,265,754 (114,770)
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes ...................................... (4,077,627) 24,936,581 (2,186,520)
Income tax benefit (expense) ................................ 1,284,000 (5,838,000) --
------------ ------------ ------------
Income (loss) from continuing operations .................... (2,793,627) 19,098,581 (2,186,520)
Income from discontinued operations net of income
tax of $238,000 in 2004 and $15,000 in 2003 (Note 10) . 359,526 22,955 7,592
Cumulative effect of change in accounting principle (Note 4b) -- 37,675 --
------------ ------------ ------------
Net income (loss) ........................................... ($ 2,434,101) $ 19,159,211 ($ 2,178,928)
============ ============ ============
Per common share (based on weighted average shares
outstanding:
Income (loss) from continuing operations ................... ($ 0.10) $ 0.70 ($ 0.08)
Discontinued operations .................................. 0.01 -- --
Cumulative effect of change in accounting principle ...... -- -- --
------- ------- ------
Net income (loss) .......................................... ($ 0.09) $ 0.70 ($ 0.08)
======= ======= =======
Weighted average number of shares outstanding ............... 27,250,000 27,250,000 27,250,000
============ ============ ============
See accompanying notes to consolidated financial statements.
20
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Common Stock Note
------------------- Additional Retained Receivable
Number of Paid-In Treasury Earnings from
Shares Amount Capital Stock (Deficit) Shareholder Total
---------- -------- ---------- --------- ----------- ----------- ------------
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
Foreclosure on
stock (Note 3b) (23,168,700) -- -- (915,176) -- 2,291,492 1,376,316
Issue of
shares (Note 3b) 6,802,167 68,021 308,727 -- -- -- 376,748
Net loss -- -- -- -- (2,434,101) -- (2,434,101)
----------- -------- ---------- ---------- ------------ ---------- -----------
Balance at June 30, 2004 10,883,467 $340,521 $2,038,776 ($915,176) ($1,092,111) $ -- $ 372,010
=========== ======== ========== ========== ============ ========== ============
See accompanying notes to consolidated financial statements.
21
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
----------- ------------ -----------
Cash flows from operating activities:
Net income (loss) ....................................... ($2,434,101) $ 19,159,211 ($2,178,928)
Less income from discontinued operations .............. (359,526) (22,955) (7,592)
----------- ------------ -----------
Income (loss) from continuing operations .............. (2,793,627) 19,136,256 (2,186,520)
Adjustments to reconcile net income (loss) to cash
used by operating activities:
Depreciation and amortization ....................... 200,324 195,223 271,323
Equity in income (loss) of investee ................. (76,958) (26,319,519) 59,788
Deferred income ..................................... -- (192,000) 48,000
Provision for impairment losses ..................... 1,376,316 -- 44,915
Gain on sale of assets .............................. (110,241) -- --
Stock compensation expense .......................... 376,748 -- --
Deferred taxes ...................................... (2,263,000) 5,838,000 --
Changes in assets and liabilities:
(Increase) decrease in receivables ................ 463,775 (294,242) (124,339)
(Increase) decrease in inventories ................ 35,284 151,563 (207,579)
(Increase) decrease in prepaid expenses ............ 7,953 20,112 (14,878)
Increase (decrease) in accounts payable ........... (45,515) (456,755) 248,077
Increase (decrease) in accrued expenses and
other liabilities ............................... 987,746 14,744 6,932
Other ............................................... 18,300 37,612 62,284
----------- ------------ -----------
Net cash used by continuing operations ............ (1,822,895) (1,869,006) (1,791,997)
Net cash provided (used) by discontinued operations 9,059 (320,402) 70,104
----------- ------------ -----------
Net cash used by operating activities ............ (1,813,836) (2,189,408) (1,721,893)
----------- ------------ -----------
Cash flows from investing activities:
Additions to property and equipment .................... (193,581) (17,850) --
Proceeds from sale of miscellaneous assets ............. 110,241 19,465 30,700
Distributions to holders of minority interest .......... (73,000) (370,838) (50,000)
Distributions received from investees .................. 1,711,686 3,618,276 2,102,820
----------- ------------ -----------
Net cash provided by investing activities ........... 1,555,346 3,249,053 2,083,520
----------- ------------ -----------
Cash flows from financing activities:
Scheduled principal payments ........................... (16,946) (7,685) (32,486)
Proceeds from short-term borrowings .................... -- 75,000 450,000
Payments on short-term borrowings ...................... -- (800,631) (1,255,000)
Proceeds from long-term debt ........................... 96,478 -- --
----------- ------------ -----------
Net cash provided (used) by financing activities ..... 79,532 (733,316) (837,486)
----------- ------------ -----------
Net increase (decrease) in cash and equivalents .......... (178,958) 326,329 (475,859)
Cash and cash equivalents, beginning of year ............. 365,674 39,345 515,204
----------- ------------ -----------
Cash and cash equivalents, end of year ................... $ 186,716 $ 365,674 $ 39,345
=========== ============ ===========
22
SPORTS ARENAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2004, 2003, AND 2002
SUPPLEMENTAL CASH FLOW INFORMATION:
2004 2003 2002
------- --------- --------
Interest paid $ 8,000 $ 54,000 $ 11,000
======= ========= ========
Supplemental schedule of non-cash investing and financing activities:
During the year ended June 30, 2004, the Company issued stock compensation
totaling $376,748, which increased common stock by $68,021 and
increased additional paid in capital by $308,727.
During the year ended June 30, 2004 the Company foreclosed on the
23,168,700 shares of the Company's stock held by Andrew Bradley, Inc.
(ABI) as collateral for ABI's note payable to the Company. The balance
of the note was $3,464,058 with a related allowance for impairment
loss of $2,548,882. The Company shares, which are being held as
treasury stock, were valued at $915,176.
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.
See accompanying notes to consolidated financial statements.
23
SPORTS ARENAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
1. Summary of significant accounting policies and practices:
Description of business- The Company, primarily through its subsidiaries,
owns and operates a graphite golf club shaft manufacturer and three
commercial real estate properties (35% owned). 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, 2004 and 2003.
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.
24
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 U.S.
generally accepted accounting principles. 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 the years
ended June 30, 2004, June 30, 2003 and June 30, 2002.
2. Inventories:
Inventories consist of the following:
2004 2003
--------- ---------
Raw materials ............ $ 133,102 $ 126,766
Work in process .......... 403,770 561,161
Finished goods ........... 384,971 186,200
--------- ---------
921,843 874,127
Less valuation allowance (316,000) (233,000)
--------- ---------
$ 605,843 $ 641,127
========= =========
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 $33,804, $40,251, and
$27,890 in 2004, 2003, and 2002, 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 collectibility 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, 2004 and June 30, 2003, $4,981 and $29,347 of
the valuation allowance were recovered in the years ended June 30,
2004 and 2003, respectively.
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, 2004 and 2003 no interest accrued on
the loans was unrecorded.
2004 2003
--------- ---------
Balance of note receivable $ 355,672 $ 360,653
Less valuation allowance . (355,672) (360,653)
--------- ---------
$ -- $ --
========= =========
25
(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 provided for
interest to accrue at an annual rate of prime plus 1-1/2 percentage
points and to be added to the principal balance annually. The loan was
due in November 2003. The loan was collateralized by 21,808,267 shares
of the Company's stock. The original loan amount plus accrued interest
of $1,230,483 was presented as a reduction of shareholders' equity as
of June 30, 2003 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 $1,172,566 as of June 30, 2004
($1,001,166 as of June 30, 2003).
On June 30, 2004 the Company, Harold S. Elkan ("Elkan") and ABI
entered into a Debt Payment & Extra Compensation Agreement
("Agreement") whereby:
1. The Company agreed to issue 1,360,433 shares of Company common
stock to ABI as extra compensation in recognition of guarantees
provided to subsidiaries of SAI.
2. ABI agreed to the foreclosure and sale to the Company of the
23,168,700 shares of Company common stock owned by ABI (including
the additional shares of common stock awarded to ABI) valued at
$.03951 per share in partial satisfaction of the Company's note
receivable from ABI.
3. The Company agreed to issue 5,441,734 restricted shares ("Extra
Compensation Shares") of Company common stock to Elkan as extra
compensation in recognition of guarantees Elkan has provided to
subsidiaries of the Company.
4. Elkan and the Company were to negotiate and enter into a Stock
Restriction Agreement.
On September 2, 2004, the Company and Elkan entered into the Stock
Restriction Agreement ("Agreement") , with an effective date of June
30, 2004. The Agreement applies to the 5,441,734 of shares of Company
common stock ("Restricted Shares") issued to Elkan pursuant to the
Debt Payment and Compensation Agreement and provides for, among other
things:
(a) Restrictions on Elkan's ability to transfer the Restricted Shares
for five years;
(b) Elkan's forfeiture to the Company of the Restricted Shares in
certain circumstances, including if there occurs an event of
default, if Elkan is terminated with cause, or if the net fair
market value of the Company's assets shall have failed to
increase by at least 2.5 percent per annum, compounded annually,
over the period between the effective date of the Agreement and
the 90th day prior to the fifth anniversary of such effective
date;
(c) The Company's right to purchase any or all of the Restricted
Shares from Elkan at $.05936 per share in limited circumstances;
and
(d) the grant of certain anti-dilution and registration rights to
Elkan as set forth in the Agreement.
4. Investments:
(a) Investments consist of the following:
2004 2003
----------- -----------
Accounted for on the equity method:
Investment in UCV, L.P. ............ $ 3,797,288 $ 5,277,007
Vail Ranch Limited Partnership
(See Note 10b) .................... -- 67,000
----------- -----------
3,797,288 5,344,007
----------- -----------
Accounted for on the cost basis:
All Seasons Inns, La Paz ........... -- 37,926
Less provision for impairment loss -- (37,926)
----------- -----------
Total investments ............... $ 3,797,288 $ 5,344,007
=========== ===========
The following is a summary of the equity in income (loss) from UCV:
2004 2003 2002
------- ----------- ---------
UCV, L.P. .............. $76,958 $26,281,844 $ (59,788)
The equity in income (loss) from VRLP (see Note 10b) is included in
the income from discontinued operations.
26
(b) Investment in UCV, L.P. (real estate operation segment):
The Company was 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. As a result of the $3,769,000 of
distributions the Company received related to the sale, the Company's
beneficial ownership in UCV was reduced from 50 percent to 35 percent.
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. As of June 30, 3004, UCV distributed a cumulative amount
of approximately $3,769,000 of such proceeds to the Company in partial
liquidation of its partnership interest in UCV. Of this total, UCV
distributed $2,500,000 to the Company in the year ended June 30, 2003
and $1,269,000 in the year ended June 30, 2004. The remaining funds
were 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, 2004 and 2003:
2004 2003
----------- -----------
Total assets .... $44,431,000 $15,617,000
Total liabilities 30,423,000 406,000
The following is summarized financial information of UCV's results of
operations:
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
2004 2003 2002 2002
---------- ---------- ---------- ----------
Revenues ................. $3,611,000 $ -- $ -- $ --
Operating and general
and administrative costs 1,082,000 -- -- --
Depreciation ............. 868,000 -- -- --
Interest and amortization
of loan costs .......... 1,442,000 -- -- --
Income (loss) before
discontinued operations 219,000 -- -- --
Income (loss) from
discontinued operations -- 52,564,000 76,000 (119,000)
Net income (loss) ........ 219,000 52,564,000 76,000 (119,000)
The loan agreement for one of the properties owned by UCV provides a
loan covenant that requires the Company to maintain a minimum net
worth of $1,000,000. As of June 30, 2004, the Company does not meet
this requirement. UCV is in the process of requesting a waiver from
the lender regarding this covenant.
The Company performs property management services for UCV and its
subsidiaries. The Company recognized management fee income of $47,423,
$110,229, and $138,371 in the twelve-month periods ended June 30,
2004, 2003, and 2002, 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 in the year ended June 30, 2002. 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.
27
A reconciliation of the investment (distributions received in excess
of basis) in UCV as of June 30 is as follows:
2004 2003
------------ ------------
Balance, beginning ....... $ 5,277,007 $(18,008,401)
Equity in income ......... 76,958 26,319,519
Cash distributions ....... (1,556,677) (3,025,500)
Amortization of purchase
price in excess
of equity in net assets -- (8,611)
------------ ------------
Balance, ending .......... $ 3,797,288 $ 5,277,007
============ ============
(c) Other investment:
The Company owned a 6 percent limited partnership interest in two
partnerships that owned and operated a 109-room hotel (the Hotel) in
La Paz, Mexico (All Seasons Inns, La Paz). The cost basis of this
investment ($162,629) had been reduced by provisions for impairment
loss of $37,926 recorded in the year ended June 30, 2000 and $125,000
recorded in the year ended June 30, 1991. On August 13, 1994, the
partners owning the Hotel agreed to sell their partnership interests
to one of the general partners. The total consideration to the Company
($123,926) was $2,861 cash at closing (December 31, 1994) plus a
$121,065 note receivable bearing interest at 10 percent with
installments of $60,532 plus interest due on January 1, 1996 and 1997.
Due to financial problems, the note receivable was initially
restructured so that all principal was due on January 1, 1997,
however, only an interest payment of $12,106 was received on that
date. Because the cash consideration received at closing was minimal,
the Company had not recorded the sale of its investment at that time.
The cash payments of $27,074 received through June 30, 1997
(representing accrued interest through December 1996) were applied to
reduce the cost of the investment. During the year ended June 30,
2004, the Company accepted $92,240 as payment in full of the note
receivable and recorded a gain from the settlement of $92,240.
5. Long-term and short-term debt:
(a) Long term debt as of June 30, 2004 consisted of two notes payable
totaling $85,303 that are collateralized by automobiles with a cost of
$113,654. The notes provide for monthly payments of $1,802 including
principal and interest (average annual interest rate of 4.6%). The
notes are due in July and December of 2008. The principal payments due
on notes payable during the next five fiscal years are as follows:
$18,071 in 2005, $18,904 in 2006, $19,784 in 2007, $20,698 in 2008 and
$7,846 in 2009.
(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 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.
(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.
28
6. 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: $247,000 in each of the years 2005 through 2009 and $183,000
in 2010. 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 $241,128 in 2004,
$234,105 in 2003, and $227,288 in 2002.
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 $82,885 in 2004,
$78,957 in 2003, and $71,136 in 2002. These amounts are presented as
rental revenues.
The Company was conditionally released by a lender from its remaining
lease obligation for space it occupied in a building sold by the
Company in December 2000. 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: $75,000- 2005;
$77,000- 2006; $79,000 in 2007, $82,000 in 2008, $84,000 in 2009,
$198,000 thereafter and $595,000 in the aggregate.
(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,
2004, his annual salary was $350,000.
(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
originally asserted claims for copyright infringement, breach of
contract, breach of fiduciary duty, and sought compensatory damages,
punitive damages, statutory damages, and attorney fees. The Company
filed a motion to dismiss all claims. In response to that motion,
Masterson dropped all claims except for the claims of copyright
infringement and breach of contract. Masterson also dropped all
prayers for punitive damages, statutory damages, and attorney fees. 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 6(c) will have a material adverse affect on the
Company's financial position.
7. Income taxes
At June 30, 2004, the Company had net operating loss carry-forwards of
$3,913,000 for federal income tax purposes and $5,475,000 for California
state income tax purposes. The federal carryforwards expire from years 2020
to 2022. The state carryforwards expire from 2005 to 2013. 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.
29
The income tax expense attributable to income (loss) from continuing
operations for the years ended June 30, 2004, 2003, and 2002 is as follows:
2004 2003 2002
----------- ----------- ----------
Current ......................... $ 979,000 $ -- $ --
----------- ----------- ----------
Deferred:
Federal ...................... (1,273,000) 4,346,000 --
State ........................ (752,000) 1,507,000 --
----------- ----------- ----------
Total deferred ............ (2,025,000) 5,853,000 --
----------- ----------- ----------
Total current and deferred
tax (benefit) ............. (1,046,000) 5,853,000 --
Tax expense allocated to
discontinued operations ... (238,000) (15,000) --
----------- ----------- ----------
Total income tax expense
(benefit) $(1,284,000) $ 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:
2004 2003 2002
----------- ----------- -----------
Expected federal income tax
expense (benefit) ............. $(1,386,000) $ 8,491,000 $ (743,000)
State tax, net of federal benefit (238,000) 1,457,000 (128,000)
Increase (decrease) in valuation
allowance ..................... 160,000 (4,351,000) 620,000
Federal alternative minimum tax . 181,000 -- --
Expiration of net operating loss
carryforward .................. -- 185,000 191,000
Other ........................... (1,000) 56,000 60,000
----------- ----------- -----------
Provision for income tax expense $(1,284,000) $ 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, 2004 and
2003:
2004 2003
------------ ------------
Deferred tax assets :
Net operating loss carryforwards ........ $ 1,330,000 $ 4,753,000
Accumulated depreciation and amortization 123,000 101,000
Valuation allowance for impairment losses 275,000 919,000
Other ................................... 1,037,000 163,000
------------ ------------
Total deferred tax assets ............ 2,765,000 5,936,000
Less valuation allowance ............. (1,435,000) (1,275,000
------------ ------------
Net deferred tax assets ........... $ 1,330,000 $ 4,661,000
============ ============
Deferred tax liabilities:
Gain on sale to be recognized ........... $ -- $ 5,407,000
Gain on sale to be deferred ............. 5,158,000 5,107,000
------------ ------------
Net deferred tax liabilities ...... $ 5,158,000 $ 10,514,000
============ ============
8. Leasing activities:
The Company was 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 its interests in the
subleases.
9. 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 10).
30
The following is summarized information about the Company's operations by
business segment.
Real Estate Unallocated
Operation Golf And Other Totals
------------ ------------ ------------ ------------
YEAR ENDED JUNE 30, 2004
Revenues ............................... $ 82,885 $ 2,657,050 $ 80,930 $ 2,820,865
Depreciation and amortization .......... -- 169,412 30,912 200,324
Impairment losses ...................... -- -- 1,376,316 1,376,316
Interest expense ....................... -- -- 2,798 2,798
Equity in income of investee ........... 76,958 -- -- 76,958
Gain on disposition .................... -- -- 110,241 110,241
Segment profit (loss) .................. 81,943 (2,415,553) (1,778,120) (4,111,730)
Investment income ...................... 34,103
Loss from continuing operations ........ (4,077,627)
Significant non-cash items ............. (76,958) -- 1,376,316 1,299,358
Segment assets ......................... 3,799,847 1,759,621 1,569,671 7,129,139
Investment in equity of investees ...... 3,797,288 -- -- 3,797,288
Expenditures for segment assets ........ -- 76,005 117,576 193,581
Information for disposed segments:
Assets ............................... --
Expenditures ......................... --
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
Income 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 assets ........ -- 5,210 12,640 17,850
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 ......................... --
Revenues from one customer of the Golf segment represented approximately
$321,000 of the Company's consolidated revenues for the year ended June 30,
2004.
31
10. 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 income tax expense of $238,000
related to 2004 and $15,000 related to 2003:
2004 2003 2002
--------- --------- ---------
Bowling ............... $ 165,678 $(198,164) $ (10,619)
Real estate development 431,848 236,119 18,211
--------- --------- ---------
$ 597,526 $ 37,955 $ 7,592
========= ========= =========
(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.
The following is a summary of the results of operations of the bowling
segment:
2004 2003 2002
----------- ----------- -----------
Revenues ..... $ 165,678 $ 1,441,508 $ 1,783,545
Bowl costs ... -- (1,277,431) (1,404,006)
SG&A-direct .. -- (231,397) (236,068)
SG&A-corporate
allocation .. -- (125,000) (117,465)
Depreciation . -- (22,560) (36,625)
Gain from sale -- 16,716 --
----------- ----------- -----------
Income (loss) $ 165,678 ($ 198,164) ($ 10,619)
=========== =========== ===========
(b) Real estate development segment:
During the three years ended June 30, 2004, 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 $1,853,838
has been paid through June 30, 2004 ($73,000 in 2004, $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. The balance
of the minority interest as of June 30, 2004 was adjusted to the
estimated amount that is likely to be distributed to this partner. The
adjustment of $343,839 is presented in the Consolidated Statement of
Operations as a component of Income from Discontinued Operations
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.
The following is a summary of the results of operations of the real
estate development segment:
2004 2003 2002
--------- --------- ---------
Credit (provision) for
impairment loss ..... $ 88,009 $ (88,881) $ --
Minority interest ..... 343,839 -- --
Equity in income (loss)
of investee ......... -- 325,000 18,211
--------- --------- ---------
Income ................ $ 431,848 $ 236,119 $ 18,211
========= ========= =========
32
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 were 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. In the year ended June 30, 2004,
VRLP received $288,071 as its share of the proceeds from the sale of
the undeveloped land, the balance of the hold back, and final
settlement for allocation of revenues and expenses. The Company
received $155,009 of distributions from VRLP related to these
transactions. The Company is not expecting any further distributions
from VRLP. As part of the Company's obligation to pay approximately
one-half of these proceeds to its minority partner, $73,000 was paid
to the minority partner during the year ended June 30, 2004.
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. This was further
adjusted in March 2004 to reverse $88,009 of the provision to reflect
the amounts actually received.
The following is a reconciliation of the investment in Vail Ranch
Limited Partnership:
2004 2003
--------- ---------
Balance, beginning ....... $ 635,881 $ 903,657
Equity in net income ..... -- 325,000
Distributions received ... (155,009) (592,776)
--------- ---------
Balance, ending .......... 480,872 635,881
Less valuation allowance (480,872) (568,881)
--------- ---------
$ -- $ 67,000
========= =========
33
11. 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 selling the operations of its
subsidiary, Penley Sports, and obtaining funds from additional financing of
the properties owned by UCV and its subsidiaries. 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.
12. Subsequent Events:
On September 16, 2004 the Company committed to a plan of disposal of the
graphite golf club shaft operation owned by Penley Sports, LLC (Penley).
The Company is currently in negotiations to sell Penley to the former
owner, Carter Penley. Carter Penley has verbally agreed to fund any cash
flow deficits from November 1, 2004 until a sale is consummated or until
the negotiations end. In either event, the Company will not be required to
repay the advances unless the Company ceases negotiations without cause
The following is a summary of the results of operations of Penley included
in the financial statements:
2004 2003 2002
----------- ----------- -----------
Revenues ..... $ 2,657,050 $ 3,038,746 $ 2,589,293
Golf costs ... (2,758,039) (2,829,698) (2,604,436)
SG&A-direct .. (1,247,152) (1,295,306) (1,390,692)
SG&A-corporate
allocation . (898,000) (354,000) (241,000)
Depreciation . (169,412) (167,485) (170,011)
----------- ----------- -----------
Loss ......... ($2,415,553) ($1,607,743) ($1,816,846)
=========== =========== ===========
34
13. Quarterly financial data (unaudited):
The following summarizes the condensed quarterly financial information for
the Company:
QUARTERS ENDED 2004
-----------------------------------------------------
September 30 December 31 March 31 June 30
---------- ---------- --------- ----------
Revenue ....................... 640,895 422,785 881,471 875,714
Total costs and expenses ...... 1,348,330 1,225,758 1,607,315 2,935,593
Other income & expense, net ... 30,222 157,128 70,304 (39,150)
Income tax expense (benefit) .. (259,000) (257,000) (198,000) (570,000)
Income (loss) from
Continuing operations ....... (418,213) (388,845) (457,540) (1,529,029)
Income (loss) from
Discontinued operations ..... -- -- 88,009 271,517
Net income (loss) ............. (418,213) (388,845) (369,531) (1,257,512)
Basic and diluted net income
(loss) per common share from:
Continuing operations ...... (0.02) (0.01) (0.02) (0.06)
Net income (loss) .......... (0.02) (0.01) (0.01) (0.05)
QUARTERS ENDED 2003
------------------------------------------------------
September 30 December 31 March 31 June 30
---------- ---------- --------- ----------
Revenue ....................... 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)
Cumulative effect of change
in accounting principle ...... 37,675 -- -- 37,675
Net income (loss) ............. (487,302) (438,889) (199,099) 20,284,501
Basic and diluted net 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
The impact on the fourth quarter of 2003 of the change in accounting
principle described in footnote 4(b) was to record the Company's share of
the gain on the sale of UCV of $26,278,831 ($0.96 per share) in the fourth
quarter of 2003 rather than in the first quarter of 2004.
35
INDEPENDENT AUDITORS' REPORT
General Partners
UCV, L.P., a California limited partnership:
We have audited the accompanying consolidated balance sheet of UCV, L.P., a
California limited partnership, as of June 30, 2004, and the related
consolidated statements of operations and partners' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of UCV, L.P.'s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of UCV, L.P. as of June 30, 2003, were audited by other
auditors whose report dated September 5, 2003 expressed an unqualified opinion
on these statements.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board, (United States). 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
audit provides 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 UCV, L.P., a
California limited partnership, as of June 30, 2004, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Peterson & Co., LLP
PETERSON & CO., LLP
October 15, 2004
36
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 the related statements of
operations and partners' equity (deficit) and cash flows for the years ended
June 30, 2003 and March 31, 2002 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 the results of its operations and its cash
flows for the years ended June 30, 2003 and March 31, 2002 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(l) to the financial statements, effective April 1, 2003
the Partnership changed its year-end to June 30.
/s/ KPMG LLP
KPMG LLP
San Diego, California
September 5, 2003
37
UCV, L.P. AND SUBSIDIARIES
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2004 and 2003
2004 2003
------------ -----------
ASSETS
Property and equipment (Note 3):
Land ................................ $ 14,885,000 $ --
Buildings ........................... 28,322,268 --
------------ -----------
43,207,268 --
Less accumulated depreciation ....... (867,606) --
------------ -----------
42,339,662 --
Cash ..................................... 71,566 119,293
Restricted cash (Note 3) ................. 1,117,935 --
Cash held by accommodator (Note 5) ....... -- 15,123,883
Accounts receivable ...................... 29,018 75,620
Straight-line rent receivable ............ 369,454 --
Prepaid expenses ......................... 84,622 20,728
Deferred acquisition costs ............... -- 77,015
Deferred loan costs, less accumulated
amortization of $52,249 in 2004 ...... 413,402 --
Deposits ................................. -- 200,000
Other .................................... 5,797 --
------------ -----------
$ 44,431,456 $15,616,539
============ ===========
LIABILITIES AND PARTNERS' EQUITY
Debt (Note 3) ............................ $ 29,277,103 $ --
Accounts payable ......................... 82,234 56,333
Accounts payable- affiliate .............. -- 350,000
Accrued interest ......................... 146,995 --
Accrued property tax ..................... 181,569 --
Other accrued expenses ................... 382,569 --
Tenants' security deposits ............... 352,317 --
------------ -----------
30,422,787 406,333
Minority interest ........................ 260 --
Partners' equity ......................... 14,008,409 15,210,206
------------ -----------
$ 44,431,456 $15,616,539
============ ===========
See accompanying notes to financial statements.
38
UCV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003, AND MARCH 31, 2002 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
2004 2003 2002 2002
------------ ------------ ------------ ------------
Rent revenues .............. $ 3,063,738 $ -- $ -- $ --
Tenant reimbursements ...... 474,677 -- -- --
Other rental related ....... 72,783 -- -- --
------------ ------------ ------------ ------------
3,611,198 -- -- --
------------ ------------ ------------ ------------
Operating expenses ......... 1,034,183 -- -- --
Management fees, related
party (Note 2) ........... 47,423 -- -- --
Depreciation ............... 867,606 -- -- --
Interest and amortization
of loan costs ............ 1,442,107 -- -- --
------------ ------------ ------------ ------------
3,391,319 -- -- --
------------ ------------ ------------ ------------
Income before discontinued
operations ............... 219,879 -- -- --
Income (loss) from
discontinued operations ... -- 52,563,687 75,350 (119,577)
------------ ------------ ------------ ------------
Net income (loss) .......... 219,879 52,563,687 75,350 (119,577)
Partners' equity (deficit),
beginning of year ........ 15,210,206 (33,252,981) (32,871,331) (28,370,933)
Cash distributed to partners (1,421,676) (4,100,500) (457,000) (4,380,821)
------------ ------------ ------------ ------------
Partners' equity (deficit),
end of year ............... $ 14,008,409 $ 15,210,206 ($33,252,981) ($32,871,331)
============ ============ ============ ============
See accompanying notes to financial statements.
39
UCV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003, AND MARCH 31, 2002 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Three Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, March 31,
2004 2003 2002 2002
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ....................... $ 219,879 $ 52,563,687 $ 75,350 $ (119,577)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation ......................... 867,606 10,649 3,102 14,399
Amortization of deferred loan costs .. 52,249 777,022 282,387 679,668
Increase in straight-line rent
receivable ....................... (369,454) -- -- --
Loss from extinguishment of debt ..... -- -- -- 335,042
Gain on sale ......................... -- (52,557,662) -- --
Other ................................ -- 48,500 -- --
Changes in assets and liabilities:
Increase in restricted cash .......... (1,117,935) (231,266) (88,074) (38,137)
(Increase) decrease in receivables ... 46,602 (44,247) (695) (18,568)
(Increase) decrease in prepaid
expenses .......................... (63,894) 169,168 (155,262) 62,689
Increase in accounts payable
and other accrued expenses ........ 240,039 19,439 87,783 183,490
Increase (decrease) in accrued
interest .......................... 146,995 -- -- (155,533)
Increase (decrease) in security
deposits .......................... 352,317 (225,930) 12,668 4,729
Other ................................ (5,797) -- -- --
------------ ------------ ------------ ------------
Net cash provided by operating
activities ........................... 368,607 529,360 217,259 948,202
------------ ------------ ------------ ------------
Net cash from investing activities:
Additions to redevelopment costs ...... -- (422,000) (23,163) (354,717)
Additions to property and equipment ... (43,207,268) (5,269) (1,357) (7,424)
Proceeds from sale .................... -- 55,928,702 -- --
(Increase) decrease to purchase escrows 200,000 (200,000) -- --
(Incr.) decr. in cash at accommodator . 15,123,883 (15,123,883) -- --
(Incr.) decr. in deferred acquisition
costs ............................. 77,015 (77,015) -- --
------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities ............ (27,806,370) 40,100,535 (24,520) (362,141)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments on debt ............ (286,278) -- -- --
Extinguishment of debt ................ -- (38,000,000) -- (33,000,000)
Proceeds from debt .................... 29,563,381 -- -- 38,000,000
Refund of restricted cash held by
lender ............................ -- 1,340,348 -- 903,531
Restricted cash funded from loan
proceeds .......................... -- -- -- (1,079,371)
Loan costs ............................ (465,651) -- 298 (1,241,928)
Increase in minority interest ......... 260 -- -- --
Cash distributed to partners .......... (1,421,676) (4,100,500) (457,000) (4,380,821)
------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities ............ 27,390,036 (40,760,152) (456,702) (798,589)
------------ ------------ ------------ ------------
Net decrease in cash .................... (47,727) (130,257) (263,963) (212,528)
Cash, beginning of year ................. 119,293 249,550 513,513 726,041
------------ ------------ ------------ ------------
Cash, end of year ....................... $ 71,566 $ 119,293 $ 249,550 $ 513,513
============ ============ ============ ============
Supplemental cash flow information:
Interest paid ......................... $ 1,242,863 $ 1,949,170 $ 553,900 $ 2,979,509
============ ============ ============ ============
See accompanying notes to financial statements
40
UCV, L.P. AND SUBSIDIARIES
(a California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, JUNE 30, 2003, MARCH 31, 2002, AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
1. Organization and Summary of Significant Accounting Policies:
(a) Organization- UCV, L.P., is a California limited partnership (the
Partnership) which conducts business as University City Village. The
Partnership is the sole member of three California limited liability
companies, 760, LLC, 939, LLC and UCV Media Tech Center, LLC ("UCV
MTC"). 760, LLC owns a 99.99% undivided interest in a commercial real
estate property in San Diego, California. The other .01% undivided
interest is owned by Harold S. Elkan (Elkan), the controlling
shareholder of Sports Arenas, Inc., which is the parent company for
one of the general and limited partners the Partnership. This interest
is presented as Minority Interest in Consolidated Subsidiaries in the
balance sheet.
(b) Principles of consolidation - The accompanying consolidated financial
statements include the accounts of UCV, L.P. and its three wholly
owned subsidiaries, 760, LLC, 939 LLC, and UCV MTC. All material
inter-company balances and transactions have been eliminated.
(c) 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 until it was
sold. Rental revenues were recognized when earned.
Commencing August 28, 2003, the Partnership, as a lessor, commenced
leasing commercial real estate under operating leases that are for
periods ranging from one to fifteen years. Base rental income is
recognized on a straight-line basis over the terms of the respective
lease agreements. Differences between rental income recognized and
amounts contractually due under the lease agreements are credited or
charged, as applicable, to straight-line rent receivable. The
difference between straight-line rental income and contractual rental
income increased revenue by $369,000 in 2004 and is listed in the
accompanying balance sheets as Straight-line Rent Receivable. The
leases generally contain provisions under which the tenants reimburse
the Partnership for a portion of property operating expenses, real
estate taxes, and other recoverable costs.
(d) Property and equipment and depreciation- Property and equipment are
stated at cost. Depreciation is provided using the straight-line
method based on the estimated useful lives of the property and
equipment (25 or 33 years for real property and 3-10 years for
equipment). The depreciable basis of the property and equipment for
tax purposes is approximately $40,183,000 less than the basis used for
financial statement purposes.
(e) 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.
(f) Redevelopment planning costs- Prior to April 1, 2003, the Partnership
capitalized engineering, architectural and other costs incurred
related to the planning of the possible redevelopment of the apartment
project.
(g) Deferred loan costs- Costs incurred in obtaining financing were
amortized using the straight-line method over the term of the related
loan.
(h) 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.
41
UCV, L.P. AND SUBSIDIARIES
(a California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, JUNE 30, 2003, MARCH 31, 2002 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
(i) 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. The
terms of a note payable, which was paid in April 2003, had required
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 the related 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.
(j) 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 U.S. generally accepted accounting
principles. Actual results could differ from these estimates.
(k) 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.
(l) 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).
(m) 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 to the Partnership
and was paid a fee equal to 2-1/2 percent of gross revenues, as defined.
This agreement was terminated April 1, 2003 upon the sale of the apartment
project. On August 28, 2003, the same affiliate of a partner commenced
providing management services to the commercial real estate properties
owned by 760, LLC and 939, LLC and is paid a fee equal to four percent of
monthly revenues.
In July 1998 the Partnership entered into development services agreements
with two affiliates of a partner. The agreements were cancelable on 30 days
notice and related 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 agreements were terminated on
April 1, 2003.
As part of the sales transaction described in Note 5, an affiliate of a
partner earned a sales commission of $350,000 in April 2003.
42
UCV, L.P. AND SUBSIDIARIES
(a California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2004, JUNE 30, 2003, MARCH 31, 2002 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
3. Debt:
As of June 30, 2004, debt consisted of the following:
5.819% note payable, collateralized by first deed of
trust on $9,495,998 of land and building and
related leases, provides for monthly payments of
$42,434 including interest based on a base rate
(six month LIBOR) plus 4.25 percent and principal
based on amortization of the principal balance
over 25 years. This balance is due September 1,
2013. The note payable also requires monthly
payments of $5,000 to be held in an impound to be
used for qualified expenditures for leasing
commissions and tenant improvements. Harold S.
Elkan is a co-borrower. $ 6,546,710
5.50% note payable to seller, collateralized by second
deed of trust on $9,495,998 of land and building,
provides for monthly payments of interest only,
balance due August 22, 2006. 76,500
7.15% note payable, collateralized by first deed of
trust on $4,935,774 of land and building and
related leases, provides for monthly payments of
$19,112 including interest based on a fixed rate
of 7.15% and principal. This balance is due
September 1, 2013. The note payable also requires
monthly payments of $6,365 to be held in an
impound to be used for insurance and property
taxes. 2,604,092
5.95% note payable, collateralized by first deed of
trust on $28,775,496 of land and building and
related leases and a $1,250,000 letter of credit,
provides for monthly payments of $119,268
including interest 5.95% and principal based on
amortization of the principal balance over 30
years. This balance is due October 1, 2013. The
note payable requires monthly payments of $24,375
to be held in an impound for property taxes and
insurance and additional payments of $44,008 to be
held in an impound to be used for qualified
expenditures for leasing commissions and tenant
improvements. 19,849,801
------------
Total $ 29,277,103
============
The values of property and equipment as collateral for the notes are listed
at historical cost. The funds being held by the lender in impounds as noted
above, are classified in the accompanying balance sheet as restricted cash.
The $2,604,092 note payable loan agreement contains a provision that Sports
Arenas, Inc., the parent company of two of the partners of the Partnership
and guarantor of certain provisions of the loan agreement, maintain a
minimum net worth of $1,000,000. As of June 30, 2004, Sports Arenas, Inc.
no longer met that requirement. The Partnership is in the process of
requesting a waiver of this covenant.
If the lender does not grant a waiver of the covenant as noted above, the
principal payments due on notes payable during the next five fiscal years
are as follows: $3,032,000 in 2005, $454,000 in 2006, $759,000 in 2007,
$508,000 in 2008, and $543,000 in 2009.
On April 1, 2003, the Partnership sold its 542 unit apartment project and
paid the related debt of $38,000,000.
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.
43
UCV, L.P. AND SUBSIDIARIES
(a California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2004, JUNE 30, 2003, MARCH 31, 2002 AND
THE THREE MONTH PERIOD ENDED 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.
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
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 year ended June 30, 2003 the Partnership recorded a loss of
$48,500 in discontinued operations for the change in the value of the Cap
since inception of the transaction on March 8, 2002.
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.
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.
44
UCV, L.P. AND SUBSIDIARIES
(a California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2004, JUNE 30, 2003, MARCH 31, 2002 AND
THE THREE MONTH PERIOD ENDED JUNE 30, 2002
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
June 30, June 30, March 31,
2003 2002 2002
----------- ----------- -----------
Revenues:
Apartment rentals ............... $ 4,175,467 $ 1,331,324 $ 5,206,822
Other rental related ............ 170,408 44,219 198,896
----------- ----------- -----------
4,345,875 1,375,543 5,405,718
----------- ----------- -----------
Costs and expenses:
Operating ....................... 1,149,604 355,150 1,227,883
General and administrative ...... 294,676 70,326 307,882
Management fees, related party .. 110,229 35,328 136,445
Depreciation .................... 10,649 3,102 14,399
Other expense ................... 48,500 -- --
Interest and amortization of loan 2,726,192 836,287 3,503,644
costs
Loss from extinguishment of debt -- -- 335,042
----------- ----------- -----------
4,339,850 1,300,193 5,525,295
----------- ----------- -----------
Income (loss) before gain on sale .. 6,025 75,350 (119,577)
Gain on sale ....................... 52,557,662 -- --
----------- ----------- -----------
Net income (loss) from discontinued
operations ...................... $52,563,687 $ 75,350 $ (119,577)
=========== =========== ===========
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. Minimum Future Lease Payments:
Minimum future lease payments to be received as of June 30, 2004 are as
follows: 2005: $1,283,000; 2006: $1,319,000; 2007: $1,364,000; 2008:
$1,431,000; 2009: $1,457,000; thereafter: $4,026,000; and in total:
$10,880,000
45
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: December 30, 2004
-----------------
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, December 30, 2004
--------------------- and Principal Accounting Officer ------------------
Steven R. Whitman
/s/ Patrick D. Reiley Director December 30, 2004
--------------------- ------------------
Patrick D. Reiley
46
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
10.19 Debt Payment and Extra Compensation Agreement, dated as of June 30,
2004 by and between Sports Arenas, Inc. and Harold S. Elkan
(filed as Exhibit 99.1 to Sports Arenas, Inc.'s report on Form 8-K,
as filed with the Securities and Exchange Commission on July 7, 2004).
10.20 Statement Confessing Judgement, dated as of June 30, 2004 by and
between Sports Arenas, Inc. as plaintiff and Andrew Bradley, Inc. as
defendant (filed as Exhibit 99.2 to Sports Arenas, Inc.'s report on
Form 8-K, as filed with the Securities and Exchange Commission on July
7, 2004).
10.21 Promissory Note, dated as of December 21, 1990 from Andrew Bradley,
Inc. to Sports Arenas, Inc. (filed as Exhibit 99.1 to Sports Arenas,
Inc.'s report on Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 2004).
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
47
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. (35% 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.
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